**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

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

### ** **

**FORM 10-Q**

 
| **ý** | **Quarterly Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934**  |
|------------|----------------------------------------------------------------------------------------------------|
|       |                                                                                               |
|       | **For the quarterly  period ended March 31, 2004.**                                           |
|       |                                                                                               |
| **or**     |
|       |                                                                                               |
| **o**      | **Transition Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934** |

 

**CommissionFile Number 1-11853**

 

**ARGOSYGAMING COMPANY**

(Exact name of Registrant as Specified in itsCharter)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.   Yes ý  No o

 

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

 

**APPLICABLEONLY TO CORPORATE ISSUERS:**

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock as of the latest practicable date: 29,452,265 shares ofCommon Stock, $.01 par value per share, as of May 4, 2004.

 

 

----

 

**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(In Thousands, Except Share and Per Share Data)

 
|                                                                                                                                                                              |   | **March 31,  2004** |      | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-----------|-----------------------------|------------|
|                                                                                                                                                                              |   | **(unaudited)**          |      |                        | ** ** |
| **Current assets:**                                                                                                                                                               |   |                     |      |                        |       |
| Cash and cash equivalents                                                                                                                                                         |   | $                        | 71,779    |                        | $          | 67,205 |   |
| Accounts receivable, net                                                                                                                                                          |   | 3,832                    |      | 4,292                       |       |
| Income taxes receivable                                                                                                                                                           |   | 2,675                    |      | 1,015                       |       |
| Deferred income taxes                                                                                                                                                             |   | 12,924                   |      | 13,295                      |       |
| Other current assets                                                                                                                                                              |   | 7,309                    |      | 7,196                       |       |
| Total current assets                                                                                                                                                              |   | 98,519                   |      | 93,003                      |       |
|                                                                                                                                                                              |   |                     |      |                        |       |
| **Net property and  equipment**                                                                                                                                                   |   | 551,179                  |      | 548,120                     |       |
| **Other assets:**                                                                                                                                                                 |   |                     |      |                        |       |
| Deferred finance costs, net                                                                                                                                                       |   | 17,513                   |      | 16,748                      |       |
| Goodwill, net                                                                                                                                                                     |   | 727,470                  |      | 727,470                     |       |
| Intangible assets, net                                                                                                                                                            |   | 25,501                   |      | 26,092                      |       |
| Other                                                                                                                                                                             |   | 569                      |      | 439                         |       |
| Total other assets                                                                                                                                                                |   | 771,053                  |      | 770,749                     |       |
| **Total assets**                                                                                                                                                                  |   | $                        | 1,420,751 |                        | $          | 1,411,872 |   |
|                                                                                                                                                                              |   |                     |      |                        |       |
| **Current  liabilities:**                                                                                                                                                         |   |                     |      |                        |       |
| Accounts payable                                                                                                                                                                  |   | $                        | 15,924    |                        | $          | 26,955 |   |
| Accrued payroll and related expenses                                                                                                                                              |   | 22,072                   |      | 24,125                      |       |
| Accrued gaming and admission taxes                                                                                                                                                |   | 31,957                   |      | 44,570                      |       |
| Other accrued liabilities                                                                                                                                                         |   | 41,229                   |      | 39,986                      |       |
| Accrued interest                                                                                                                                                                  |   | 5,760                    |      | 9,296                       |       |
| Current maturities of long-term debt                                                                                                                                              |   | 3,748                    |      | 4,648                       |       |
| Total current liabilities                                                                                                                                                         |   | 120,690                  |      | 149,580                     |       |
|                                                                                                                                                                              |   |                     |      |                        |       |
| **Long-term debt**                                                                                                                                                                |   | 890,827                  |      | 865,510                     |       |
| **Deferred income  taxes**                                                                                                                                                        |   | 99,461                   |      | 93,119                      |       |
| **Other long-term  obligations**                                                                                                                                                  |   | 416                      |      | 419                         |       |
|                                                                                                                                                                              |   |                     |      |                        |       |
| **Stockholders’  equity:**                                                                                                                                                   |   |                     |      |                        |       |
| Common stock, $.01 par; 120,000,000 shares  authorized;  29,399,845 and 29,314,542 shares issued and outstanding at March 31,  2004 and December 31, 2003, respectively |   | 294                      |      | 293                         |       |
| Capital in excess of par                                                                                                                                                          |   | 94,146                   |      | 92,551                      |       |
| Accumulated other comprehensive loss                                                                                                                                              |   | (1,384                   | )         | (1,941                      | )          |
| Retained earnings                                                                                                                                                                 |   | 216,301                  |      | 212,341                     |       |
| Total stockholders’ equity                                                                                                                                                   |   | 309,357                  |      | 303,244                     |       |
| **Total liabilities  and stockholders’ equity**                                                                                                                              |   | $                        | 1,420,751 |                        | $          | 1,411,872 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

2

----

 

 

**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

(In Thousands, Except Share and Per Share Data)

 
|                                |   | **Three  Months Ended March 31,** |    |
|-------------------------------------|--------|----------------------------------------|---------|
|                                |   | **2004**                               |    | **2003** |   |
|                                |   | **(unaudited)**                        |    | **(unaudited****)** |   |
| **Revenues:**                       |   |                                   |    |   |   |
| Casino                              |   | $                                      | 266,007 |   | $ | 240,857 |   |
| Admissions                          |   | 5,360                                  |    | 3,005 |   |
| Food, beverage and other            |   | 26,460                                 |    | 24,760 |   |
|                                |   | 297,827                                |    | 268,622 |   |
| Less promotional allowances         |   | (33,738                                | )       | (32,290 | ) |
| Net revenues                        |   | 264,089                                |    | 236,332 |   |
|                                |   |                                   |    |   |   |
| **Costs and expenses:**             |   |                                   |    |   |   |
| Gaming and admission taxes          |   | 91,578                                 |    | 79,857 |   |
| Casino                              |   | 32,574                                 |    | 34,146 |   |
| Selling, general and administrative |   | 44,176                                 |    | 35,789 |   |
| Food, beverage and other            |   | 18,601                                 |    | 17,798 |   |
| Other operating expenses            |   | 9,863                                  |    | 10,506 |   |
| Depreciation and amortization       |   | 14,225                                 |    | 12,683 |   |
|                                |   | 211,017                                |    | 190,779 |   |
| Income from operations              |   | 53,072                                 |    | 45,553 |   |
|                                |   |                                   |    |   |   |
| **Other income  (expense):**        |   |                                   |    |   |   |
| Interest income                     |   | 21                                     |    | 51 |   |
| Interest expense                    |   | (18,051                                | )       | (18,947 | ) |
| Expense on early retirement of debt |   | (25,277                                | )       | — |   |
|                                |   | (43,307                                | )       | (18,896 | ) |
|                                |   |                                   |    |   |   |
| Income before income taxes          |   | 9,765                                  |    | 26,657 |   |
|                                |   |                                   |    |   |   |
| Income tax expense                  |   | (5,805                                 | )       | (11,996 | ) |
|                                |   |                                   |    |   |   |
| Net income                          |   | $                                      | 3,960   |   | $ | 14,661 |   |
|                                |   |                                   |    |   |   |
| Basic income per share              |   | $                                      | 0.13    |   | $ | 0.51 |   |
|                                |   |                                   |    |   |   |
| Diluted income per share            |   | $                                      | 0.13    |   | $ | 0.50 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

3

----

 

**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In Thousands, Except Share and Per Share Data)

 
|                                                                               |   | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                               |   | **2004**                              |       | **2003** | ** ** |
|                                                                               |   | **(unaudited)**                       |       | **(unaudited****)** |   |
| **Cash flows from  operating activities:**                                         |   |                                  |       |   |   |
| Net income                                                                         |   | $                                     | 3,960      |   | $ | 14,661 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                  |       |   |   |
| Depreciation                                                                       |   | 13,635                                |       | 12,092 |   |
| Amortization                                                                       |   | 1,871                                 |       | 1,577 |   |
| (Gain) loss on sale of fixed assets                                                |   | (87                                   | )          | 48 |   |
| Compensation expense recognized on issuance  of stock                              |   | 50                                    |       | 24 |   |
| Loss on early retirement of debt                                                   |   | 25,277                                |       | — |   |
| Deferred income taxes                                                              |   | 6,963                                 |       | 5,023 |   |
| Changes in operating assets and  liabilities, net of effect from acquisitions:     |   |                                  |       |   |   |
| Accounts receivable and other current  assets                                      |   | (1,443                                | )          | 6,663 |   |
| Accounts payable and other current  liabilities                                    |   | (13,397                               | )          | (8,277 | ) |
| Net cash provided by operating activities                                          |   | 36,829                                |       | 31,811 |   |
|                                                                               |   |                                  |       |   |   |
| **Cash flows from  investing activities:**                                         |   |                                  |       |   |   |
| Purchases of property and equipment                                                |   | (30,740                               | )          | (32,834 | ) |
| Other                                                                              |   | 465                                   |       | 92 |   |
| Net cash used in investing activities                                              |   | (30,275                               | )          | (32,742 | ) |
|                                                                               |   |                                  |       |   |   |
| **Cash flows from  financing activities:**                                         |   |                                  |       |   |   |
| Proceeds from issuance of long-term debt                                           |   | 350,000                               |       | — |   |
| Payments on long-term debt                                                         |   | (330,236                              | )          | (886 | ) |
| Redemption payments on early retirement of  debt                                   |   | (26,850                               | )          | — |   |
| Increase in deferred finance costs                                                 |   | (6,700                                | )          | — |   |
| Proceeds from line of credit, net                                                  |   | 10,900                                |       | 3,400 |   |
| Proceeds from stock option exercises                                               |   | 925                                   |       | — |   |
| Other                                                                              |   | (19                                   | )          | — |   |
| Net cash (used in) provided by financing  activities                               |   | (1,980                                | )          | 2,514 |   |
| Net change in cash and cash equivalents                                            |   | 4,574                                 |       | 1,583 |   |
| Cash and cash equivalents, beginning of  period                                    |   | 67,205                                |       | 59,720 |   |
| Cash and cash equivalents, end of period                                           |   | $                                     | 71,779     |   | $ | 61,303 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

4

----

 

**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY**

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

 
|                                                                         |   | **Shares** |   | **Common  Stock** | ** ** | **Capital in  Excess of Par** | ** ** | **Accumulated  Other  Comprehensive  (Loss) Income** |   | **Retained  Earnings** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|------------------------------------------------------------------------------|--------|------------|--------|-------------------|------------|-------------------------------|------------|------------------------------------------------------|--------|------------------------|------------|---------------------------------------|------------|
|                                                                         |   |       |   |              |       |                          |       |                                                 |   |                   |       |                                  |       |
| Balance, December 31, 2003                                              |   | 29,314,542 |   | $                 | 293        |                          | $          | 92,551                                               |   | $                      | (1,941     | )                                     | $          | 212,341 |   | $ | 303,244 |   |
| Exercise of stock options and restricted  stock award, including tax benefit |   | 85,303     |   | 1                 |       | 1,545                         |       |                                                 |   |                   |       | 1,546                                 |       |
| Restricted stock compensation expense                                        |   |       |   |              |       | 50                            |       |                                                 |   |                   |       | 50                                    |       |
| Comprehensive income:                                                        |   |       |   |              |       |                          |       |                                                 |   |                   |       |                                  |       |
| Other comprehensive income - interest rate  swaps                            |   |       |   |              |       |                          |       | 557                                                  |   |                   |       | 557                                   |       |
| Net income for the three months ended  March 31, 2004                   |   |       |   |              |       |                          |       |                                                 |   | 3,960                  |       | 3,960                                 |       |
| Comprehensive income                                                         |   |       |   |              |       |                          |       |                                                 |   |                   |       | 4,517                                 |       |
|                                                                         |   |       |   |              |       |                          |       |                                                 |   |                   |       |                                  |       |
| Balance, March 31, 2004                                                 |   | 29,399,845 |   | $                 | 294        |                          | $          | 94,146                                               |   | $                      | (1,384     | )                                     | $          | 216,301 |   | $ | 309,357 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

5

----

 

**ARGOSYGAMING COMPANY**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

(In Thousands, Except Share and Per ShareData)

 

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

 

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

 

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

 

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

 

Long-term debt consists of the following:

 
|                                                                                                                                                |   | **March 31,  2004** |    | **December 31,  2003** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|------------|
|                                                                                                                                                |   | **(unaudited)**          |    |                        | ** ** |
| Senior secured line of credit, expires  July 31, 2006, interest payable at least quarterly at either LIBOR or  prime plus a margin             |   | $                        | 53,100  |                        | $          | 42,200 |   |
| Term loan, matures July 31, 2008,  principal and interest payments due quarterly at either LIBOR and/or prime  plus a margin                   |   | 267,438                  |    | 268,125                     |       |
| Subordinated notes, including unamortized  premium of $377 at March 31, 2004, due June 1, 2009, interest  payable semi-annually at 10.75% |   | 21,051                   |    | 356,623                     |       |
| Subordinated notes, due September 2011,  interest payable semi-annually at 9.0%                                                                |   | 200,000                  |    | 200,000                     |       |
| Subordinated notes, due  September 2014, interest payable semi-annually at 7.0%                                                                |   | 350,000                  |    | —                      |       |
| Notes payable, principal and interest  payments due quarterly through September 2015, discounted at 10.5%                                      |   | 2,986                    |    | 3,210                       |       |
|                                                                                                                                                |   | 894,575                  |    | 870,158                     |       |
| Less:   current maturities                                                                                                                     |   | 3,748                    |    | 4,648                       |       |
| Long-term debt, less current maturities                                                                                                             |   | $                        | 890,827 |                        | $          | 865,510 |   |

 

At March 31, 2004, the line of credit allows for borrowings up to$345,000 and is subject to reductions on a quarterly basis.  Our line of credit and Term Loan (the“Credit Facility”) is secured by liens on substantially all of our assets andour subsidiaries are co-borrowers. Substantially all of our subsidiaries fully and unconditionally guaranteeour 9% Subordinated Notes on a joint and several basis. The subordinated notesrank junior to all of our senior indebtedness, including borrowings under theCredit Facility.

 

In February 2004, we refinanced a portion of our existingindebtedness with net proceeds from the issuance of $350 million in new 7%Subordinated Notes due 2014, together with funds from our Credit Facility.These funds were used to repurchase $329.3 million, approximately 94%, of our10.75% Subordinated Notes due 2009. Related to this refinancing, we paidapproximately $26.9 million in premiums. All of our remaining outstanding 10.75% Subordinated Notes due 2009 willbe redeemed in full on June 1, 2004 (“redemption date”) at a redemptionprice of 105.375% plus accrued interest from the most recent interest paymentdate through the redemption date.

 

The subordinated notes and the Credit Facility contain certainrestrictions on the payment of dividends on our common stock and the incurrenceof additional indebtedness, as well as other customary debt covenants.   In addition, the credit facility requiresus to maintain certain financial ratios which, as of March 31, 2004, areas follows: (1) Total Funded

 

6

----

 

Debt to EBITDA Ratio of a maximum of 4.25 to 1.0; (2) Senior LeverageRatio of a maximum of 2.50 to 1.0; and (3) Fixed Charge Ratio of a minimum of1.50 to 1.0.  As of March 31, 2004,we are in compliance with these ratios. At March 31, 2004, based upon these financial ratios, additionalavailability under the Credit Facility was $116,932.

 

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

 

In December 2002, the FinancialAccounting Standards Board issued FAS 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure”. We have a stock-based employee compensation plan and a stock-baseddirector compensation plan.  As wecontinue to follow APB 25 for stock options granted to employees and directors,no stock-based compensation cost is reflected in net income, as all optionsgranted under those plans had an exercise price equal to the market value ofthe underlying common stock on the date of grant.  The following table discloses our pro forma net income anddiluted net income per share had we applied the fair value recognitionprovisions of FAS 123.

 
|                                                         |   | **For the  three months ended  March 31,** |   |
|--------------------------------------------------------------|--------|-------------------------------------------------|--------|
| **(in thousands, except share data)**                        |   | **2004**                                        |   | **2003** |   |
|                                                         |   |                                            |   |   |   |
| Net income                                                   |   |                                            |   |   |   |
| As reported                                                  |   | $                                               | 3,960  |   | $ | 14,661 |   |
| Pro forma stock-based compensation cost,  net of tax benefit |   | (247                                            | )      | (211 | ) |
| Pro forma                                                    |   | $                                               | 3,713  |   | $ | 14,450 |   |
|                                                         |   |                                            |   |   |   |
| Diluted net income per share                                 |   |                                            |   |   |   |
| As reported                                                  |   | $                                               | 0.13   |   | $ | 0.50 |   |
| Pro forma stock-based compensation cost,  net of tax benefit |   | (0.01                                           | )      | (0.01 | ) |
| Pro forma                                                    |   | $                                               | 0.12   |   | $ | 0.49 |   |

 

These pro forma amounts to reflect FAS 123option expense may not be representative of future disclosures because theestimated fair value of the options is amortized to expense over the vestingperiod and additional options may be granted in the future.

 

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

 

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

 
|                                                                                                   |   | **Three  months ended March 31,** |   |
|--------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                   |   | **2004**                               |   | **2003** |   |
|                                                                                                   |   | **(unaudited)**                        |   | **(unaudited****)** |   |
| Numerator:                                                                                             |   |                                   |   |   |   |
| Numerator for basic and diluted earnings  per share - Net income                                       |   | $                                      | 3,960  |   | $ | 14,661 |   |
|                                                                                                   |   |                                   |   |   |   |
| Denominator:                                                                                           |   |                                   |   |   |   |
| Denominator for basic earnings per share -  weighted average shares outstanding                        |   | 29,345,773                             |   | 28,946,229 |   |
|                                                                                                   |   |                                   |   |   |   |
| Effect of dilutive securities (computed  using the treasury stock method):                             |   |                                   |   |   |   |
| Employee and directors stock options                                                                   |   | 202,832                                |   | 251,849 |   |
| Restricted stock                                                                                       |   | 13,202                                 |   | 1,306 |   |
| Dilutive potential common shares                                                                       |   | 216,034                                |   | 253,155 |   |
| Denominator for diluted earnings per share  - adjusted weighted-average shares and assumed conversions |   | 29,561,807                             |   | 29,199,384 |   |
| Basic earnings per share                                                                               |   | $                                      | 0.13   |   | $ | 0.51 |   |
| Diluted earnings per share                                                                             |   | $                                      | 0.13   |   | $ | 0.50 |   |

 

7

----

 

For the three months ended March 31, 2004, employee options topurchase 58,755 shares of common stock priced at $35.18 per share and directoroptions to purchase 12,000 shares of common stock priced at a range from $35.18- $39.99 per share, were not included in the computation of diluted earningsper share because the option exercise price was greater than the average marketprice of the underlying common shares and, therefore, the effect would beanti-dilutive.

 

For the three months ended March 31, 2003, employee options topurchase 409,773 shares of common stock priced at a range from $18.00 - $35.18per share and director options to purchase 20,500 shares of common stock pricedat a range from $22.30 - $39.99 per share, were not included in the computationof diluted earnings per share because the option exercise price was greaterthan the average market price of the underlying common shares and, therefore,the effect would be anti-dilutive.

 

In February 2003, we issued 25,000 shares of restricted commonstock to a new employee of which 50% vested in February 2004 and theremaining 50% vest in February 2005. Compensation expense of $409 is being amortized over the vesting period.In April 2004, we issued 637,239 shares of non-qualified stock options tocertain key employees and 40,000 shares of non-qualified stock options to ournon-employee directors under the Argosy Gaming Company Stock Option Plan andthe Argosy Gaming Company Directors Option Plan, respectively.

 

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

 

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

 

**ARGOSYGAMING COMPANY**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL**

**CONDITIONAND RESULTS OF OPERATIONS**

 

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

 

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

 

*This Report includes “forward-looking” statements within the meaning ofthe Private Securities Litigation Reform Act of 1995. Forward-lookingstatements include statements concerning our business outlook, plans, objectives,goals, strategies, future events, future revenues or performance, capitalexpenditures, financing needs, plans or intentions relating to acquisitions andother information that is not historical information. When used in thisdocument, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,”“intends,” “believes,” “will,” “would,” “could,” and variations of such wordsor similar expressions are intended to identify forward-looking statements. Allforward-looking statements, including, without limitation, our examination ofhistorical operating trends, are based upon our current expectations andvarious assumptions.  Our expectations,beliefs and projections are expressed in good faith and we believe there is areasonable basis for them, but there can be no assurance that our expectations,beliefs and projections will be realized.*

 

*There are a number of risks and uncertainties that could cause ouractual results to differ materially from the forward-looking statementscontained in this document.  Such risks,uncertainties and other important factors include, but are not limited to: (i)increased competition and general economic conditions in our markets, includingthe legalization of gaming in states adjacent to our operations; (ii) changesin, or failure to comply with, laws or regulations (including increases inexisting taxes or the imposition of new taxes on gaming revenues or gamingdevices), joint venture relations or decision of courts, regulators, accountingstandards and governmental bodies; (iii) construction factors relating to ourexpansion projects, including delays, zoning issues, environmentalrestrictions, weather or other hazards, site access matters and building permitissues; (iv) the timing of the transition to cashless slots at our properties;(v) the ability to effectively implement operational changes at our properties;(vi) the effect of economic, credit and capital market conditions on theeconomy in general, and on gaming companies in particular; (vii) the effect offuture legislation or regulatory changes on our operations (includinglegalization of gaming in new jurisdictions); (viii) our dependence on ourLawrenceburg, Indiana casino; (ix) our substantial leverage; and (x) otherrisks and uncertainties detailed from time to time in our filings with theSecurities and Exchange Commission.*

 

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

 

8

----

 

**Overview**

 

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

 

In 2004 and 2003, we invested capital to enhance our product offeringand expand our capacity in our products. We opened our approximately $105million casino facility in Riverside on December 11, 2003 and have seen asignificant increase in revenues. Net revenues for the three months endedMarch 31, 2004 for Riverside increased $14.6 million, or 62.3% compared tothe three months ended March 31, 2003. In May 2003, we opened anapproximately $43 million barge-based facility in Joliet.  In spite of this investment, Joliet netrevenues decreased 3.6% for three months ended March 31, 2004 over thethree months ended March 31, 2003 due to the increase in gaming taxes inthe state of Illinois and the subsequent operating measures taken by theCompany as described below. In February 2003, we completed anapproximately $6 million renovation in Sioux City which helped lead to anincrease in their net revenues of 12.3% for three months ended March 31,2004 over the three months ended March 31, 2003.

 

Year over year results are impacted by the enactment of higher gamingand admission tax rates in Illinois effective July 1, 2003.  Our consolidated effective gaming andadmission tax rates (as a percent of net revenues) for the three months ended March 31,2004 and 2003 were 34.7% and 33.8%, respectively. For the three months endedMarch 31, 2004, our income from operations increased 16.5%, or $7.5million, and our operating margins improved from 19.3% to 20.1% as compared tothe three months ended March 31, 2003. These increases were the result of increased revenues at all of ourfacilities except our Illinois locations. For example, Riverside net revenues increased 62.3% as we opened our newexpanded casino in December 2003 and our Lawrenceburg casino’s netrevenues increased 14.8%.  Our Illinoisfacilities’ net revenues were lower due to implementation of reduced hours ofoperation of both casinos and restaurants, changes in product mix, significantrevisions to certain marketing programs and Joliet implementing an admissionfee to minimize the impact of increased gaming and admission tax rates inIllinois.  Our operating expensesincreased due primarily to higher state gaming and admission taxes due to increasedrevenues and rate increases in Illinois.

 

We also continue to invest in coinless or “TITO” slot machines, which,when implemented, are more convenient to our customers and result inoperational efficiencies. As of March 31, 2004, approximately 85% of ourtotal slot machines are TITO-capable and approximately 60% of our total slotmachines are TITO-operational.  Webelieve that going forward the convenience and efficiency of TITO machines willhave a positive impact on our casino revenues as well as on operatingexpenses.  Pending final regulatoryapprovals, we expect to be substantially TITO operational in 2004.

 

In February 2004, we refinanced a portion of our existingindebtedness with net proceeds from the issuance of $350 million in new 7%Senior Subordinated Notes (“7% Notes”) due 2014, together with funds from ourCredit Facility.  These funds were usedto repurchase  $329.3 million,approximately 94%, of our 103⁄4% Senior Subordinated Notes (“103⁄4% Notes”) due2009.  We have called the remaining$20.7 million of 103⁄4% Notes and will retire them on June 1, 2004.Associated with this refinancing, we incurred a pretax charge in the firstquarter of 2004 of $25.3 million for costs associated with the early redemptionof our 103⁄4% Notes. We will incur approximately $1.1 million in premiums relatedto calling the remaining 103⁄4% Notes.

 

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

 

9

----

 

**ARGOSY GAMING COMPANY AND SUBSIDIARIES**

**SELECTED FINANCIAL INFORMATION**

 
|                         |   | **Three  months ended March 31,** |       |
|------------------------------|--------|----------------------------------------|------------|
| **(in thousands)**           |   | **2004**                               | ** ** | **2003** | ** ** |
|                         |   | **(unaudited)**                        |       | **(unaudited****)** |   |
| **CASINO REVENUES**          |   |                                   |       |   |   |
| Alton Belle Casino           |   | $                                      | 27,186     |   | $ | 29,387 |   |
| Argosy Casino - Riverside    |   | 38,238                                 |       | 24,458 |   |
| Argosy Casino - Baton Rouge  |   | 21,695                                 |       | 20,059 |   |
| Argosy Casino - Sioux City   |   | 11,686                                 |       | 10,389 |   |
| Argosy Casino - Lawrenceburg |   | 112,002                                |       | 97,061 |   |
| Empress Casino Joliet        |   | 55,200                                 |       | 59,503 |   |
| Total                        |   | $                                      | 266,007    |   | $ | 240,857 |   |
|                         |   |                                   |       |   |   |
| **NET REVENUES**             |   |                                   |       |   |   |
| Alton Belle Casino           |   | $                                      | 26,044     |   | $ | 28,225 |   |
| Argosy Casino - Riverside    |   | 37,930                                 |       | 23,364 |   |
| Argosy Casino - Baton Rouge  |   | 22,351                                 |       | 20,835 |   |
| Argosy Casino - Sioux City   |   | 11,346                                 |       | 10,100 |   |
| Argosy Casino - Lawrenceburg |   | 112,933                                |       | 98,338 |   |
| Empress Casino Joliet        |   | 53,485                                 |       | 55,470 |   |
| Total                        |   | $                                      | 264,089    |   | $ | 236,332 |   |

 

**RECONCILIATION OF INCOME FROM OPERATIONS TO EBITDA (1)**

 
|                         |   | **Three  months ended March 31, 2004** |   |
|------------------------------|--------|---------------------------------------------|--------|
| **(In Thousands)**           |   | **Income  (loss)  from operations**         |   | **Depreciation  and  amortization  expense** | ** ** | **EBITDA (1****)** |   |
| Alton Belle Casino           |   | $                                           | 3,158  |   | $ | 1,552 |   | $ | 4,710 |   |
| Argosy Casino - Riverside    |   | 9,384                                       |   | 2,461 |   | 11,845 |   |
| Argosy Casino - Baton Rouge  |   | 2,625                                       |   | 2,266 |   | 4,891 |   |
| Argosy Casino - Sioux City   |   | 2,419                                       |   | 1,123 |   | 3,542 |   |
| Argosy Casino - Lawrenceburg |   | 33,116                                      |   | 3,412 |   | 36,528 |   |
| Empress Casino Joliet        |   | 10,355                                      |   | 2,800 |   | 13,155 |   |
| Corporate (2)                |   | (7,985                                      | )      | 611 |   | (7,374 | ) |
| Total                        |   | $                                           | 53,072 |   | $ | 14,225 |   | $ | 67,297 |   |

 
|                         |   | **Three  months ended March 31, 2003** | ** ** |
|------------------------------|--------|---------------------------------------------|------------|
| Alton Belle Casino           |   | $                                           | 6,714      |   | $ | 1,771 |   | $ | 8,485 |   |
| Argosy Casino - Riverside    |   | 3,994                                       |       | 1,445 |   | 5,439 |   |
| Argosy Casino - Baton Rouge  |   | 1,789                                       |       | 2,062 |   | 3,851 |   |
| Argosy Casino - Sioux City   |   | 1,759                                       |       | 1,046 |   | 2,805 |   |
| Argosy Casino - Lawrenceburg |   | 26,066                                      |       | 3,237 |   | 29,303 |   |
| Empress Casino Joliet        |   | 10,708                                      |       | 2,610 |   | 13,318 |   |
| Corporate (2)                |   | (5,477                                      | )          | 512 |   | (4,965 | ) |
| Total                        |   | $                                           | 45,553     |   | $ | 12,683 |   | $ | 58,236 |   |

 

----

(1)   “EBITDA” is defined as earnings before interest(including expense on early retirement of debt), taxes, depreciation and amortization.  EBITDA is presented solely as a supplementaldisclosure because management believes it is 1) a widely used measure ofoperating performance in the gaming industry, 2) a principal basis forvaluation of gaming companies and 3) is used as a basis for determiningcompliance with our credit facility. Management uses property-level EBITDA (EBITDA before corporate expense)and EBITDA margin (EBITDA as a percent of net revenues) as the primary

 

10

----

 

measures of our properties’ performance, including the evaluation ofoperating 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 the consolidatedlevel and we file a consolidated income tax return.  We do not consider EBITDA in isolation.  Our calculation of EBITDA may not be comparable to similarlytitled measures reported by other companies. For a further discussion of such limitations, see our additionaldisclosures in this report under the heading “Non-GAAP Financial Measures.”

 

(2)   Because we do not include corporate 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 expense includes significantexpenses necessary to manage a multiple casino operation, certain of which,such as corporate executive compensation, development, public companyreporting, treasury, legal and tax expenses, would also be required of atypical stand-alone casino property.

 

**Three months endedMarch 31, 2004 compared to three months ended March 31, 2003**

 

**Revenues**

 

Net revenues increased $27.8 million, or 11.7%, to $264.1 million.  Casino revenues generated the majority ofthis improvement, increasing $25.1 million, or 10.4% to $266.0 million.  Admissions revenues increased $2.4 millionto $5.4 million and Food, Beverage and Other (FB&O) revenue increased $1.7million to $26.5 million. Offsetting these revenue increases was an increase inpromotional allowances of $1.4 million.

 

Lawrenceburg casino revenues increased $14.9 million, or 15.4%, to$112.0 million from $97.1 million and admission revenues increased $0.3 milliondue to an increase in admissions of 11.2% and win/admission of 4%.  In addition, revisions to our marketingprograms have increased revenues. Lawrenceburg’s promotional allowances increased $1.4 million across alllines of complimentary programs due to changes in marketing programs and overallincreases in casino revenues. Riverside’s casino revenues increased $13.7million, or 56.3% to $38.2 million from $24.5 million due to our renovation ofthe property that opened in December 2003 which included a 53% increase ingaming capacity, renovation of the pavilion and increased food and beveragefacilities.  Riverside’s admissionsincreased 48% and win/admission increased 6%. Riverside’s FB&O revenue increased $2.1 million to $4.1 million dueto our new restaurants, the increase in admissions with the opening of our newcasino and limited food service during the first quarter 2003 due torenovations in our buffet.  With thisincrease in revenues and patrons, Riverside’s promotional allowances increased$1.5 million (ratably less than our revenue increase), primarily in ourcomplimentary food program.  Baton Rougecasino revenues increased $1.6 million, or 8.2%, to $21.7 million from $20.1million.  Sioux City casino revenuesincreased $1.3 million, or 12.5%, to $11.7 million from $10.4 million as SiouxCity underwent renovations in the first quarter 2003, which has positivelyimpacted their results.

 

Joliet casino revenues decreased $4.3 million, or 7.2%, to $55.2million from $59.5 million. Joliet’s casino revenues decreased since ourimplementation of reduced hours of operations, the implementation of anadmission fee and changes in marketing efforts commencing in August 2003in response to Illinois tax legislation increasing gaming and admission taxrates effective July 2003.  AsJoliet is now charging an admission fee, admission revenues for Joliet were$2.0 million compared to no admission revenues for the three months endedMarch 31, 2003.  In addition, thishas led to a change in our promotional allowances as, in total, Joliet’sallowances decreased $1.7 million, consisting of decreases in our marketing andfood programs of $3.1 million and an increase in complimentary admissions of$1.6 million.  We had no complimentaryadmissions for the three months ended March 31, 2003, as we did not chargeadmission. Alton’s casino revenues decreased $2.2 million, or 7.5%, to $27.2million compared to $29.4 million as increased competitive pressures and theimplementation of reduced hours commencing in August 2003 in response toIllinois tax legislation have negatively impacted our results.

 

**Operating Expenses**

 

Gaming and admission taxes increased $11.7 million to $91.6 millionfrom $79.9 million.  An increase in theIllinois tax rates effective July 1, 2003 and the full year impact ofthese rates increased our annual effective tax rates at both our Illinoiscasinos.  Although casino revenues atour Joliet and Alton casinos were down $4.3 million and $2.2 million,respectively, gaming and admission taxes increased a combined $2.6 million atthese properties due to the increased tax rates in Illinois.  The remaining portion of this increase isdue to increased gaming and admission taxes of $4.9 million at our

 

11

----

 

Lawrenceburg casino due to increased casino revenues and $3.5 millionat our Riverside casino due to increased casino revenues and admissionscorresponding with the opening of our new expanded casino inDecember 2003.

 

Joliet’s casino expenses have decreased $1.4 million due to reducedpayroll and other casino operating expenses associated with our operatingchanges as discussed above.  Thisreduction along with the positive impact from continued implementation of TITOand improved facility layouts account for our overall casino expense decreaseof $1.5 million to $32.6 million even though we had a 10.4% increase inconsolidated casino revenues.  Selling,general and administrative expenses increased $8.4 million to $44.2 million.The factors contributing to this increase are primarily a $2.1 million increasein costs at Riverside associated with our expanded casino operation, a $2.8million increase at Lawrenceburg ($1.6 million in city development feescorresponding to the increase in revenues), with the remaining increase spreadthroughout our other properties and the corporate office.

 

FB&O expenses have increased $0.8 million as Riverside’s expenseshave increased $1.5 million due to our expanded restaurant operations and theincrease in patrons with our expanded overall facility.  This increase is offset by a $1.0 milliondecrease in Joliet due to operational changes implemented inAugust 2003.  Other operatingexpenses have decreased $0.6 million to $9.9 million due primarily to areduction at Joliet of $0.8 million associated with our operational changes.Depreciation and amortization increased $1.5 million to $14.2 million dueprimarily to depreciation on project capital placed in service during 2003 atour Riverside, Joliet and Sioux City facilities and accelerated depreciation onplanned asset retirements.

 

**Other expenses**

 

Interest expense decreased $0.8 million to $18.1 million, which isprimarily attributable to the refinancing, in February 2004, of our 103⁄4%Notes with new 7% Notes due 2014.  Wealso had capitalized interest of $0.8 million related to our casinoconstruction projects for the three months ended March 31, 2003 comparedto no capitalized interest for the three months ended March 31, 2004 asthese assets were placed in service during 2003. Associated with this debtrefinancing, we incurred $25.3 million in net premiums and fees for the threemonths ended March 31, 2004.

 

**Income taxes**

 

Income tax expense decreased $6.2 million to $5.8 million as pre-taxearnings declined primarily due to the expense incurred related to the earlyretirement of our 103⁄4% Notes.  Ouroverall effective tax rate is higher for the three months ended March 31,2004 compared to the three months ended March 31, 2003 due to recording atax benefit related to this debt refinancing at a rate lower than our overall effectivetax rate.  Our effective tax rate wouldhave been the same in both years had this debt refinancing not occurred.

 

**Competition**

 

Our Alton Casino faces competition from four other riverboat casinooperators in the St. Louis area.  Onecompetitor plans to open a $75 million hotel expansion and facility renovationmid-to-late 2004.  In addition, twocompanies have applied to put new casinos in the St. Louis market. OurRiverside Casino faces competition from three barge-based casinos in the KansasCity area.  Our Baton Rouge Casino facescompetition from one casino located in downtown Baton Rouge, a nearby NativeAmerican casino and multiple casinos throughout Louisiana. We face competitionin Sioux City, Iowa from video gaming devices in nearby South Dakota, from twoland-based Native American casinos and, to a lesser extent, from slot machinesat a pari-mutuel racetrack in Council Bluffs, Iowa and from two riverboatcasinos in the Council Bluffs, Iowa/Omaha, Nebraska market.  The Lawrenceburg casino faces competitionfrom two riverboat casinos in the Cincinnati market.  Our Joliet casino faces competition from eight other riverboatcasino operators in the Chicago area in addition to four casinos in Indiana,which allowed dockside gaming beginning in 2002.

 

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

 

12

----

 

**Liquidity and CapitalResources**

 

In the three months ended March 31, 2004, we generated cash flowsfrom operating activities of $36.8 million compared to $31.8 million for thethree months ended March 31, 2003. This increase is due to an overall increase in our operating performance.

 

In the three months ended March 31, 2004, we used cash flows forinvesting activities of $30.3 million compared to $32.7 million for the threemonths ended March 31, 2003. During the three months ended March 31, 2004, our investing activitiesincluded purchases of property and equipment of $30.7 million ($20.6 millionfor residual payments on the Riverside construction project (including $13.6million on our payable at December 31, 2003) with the remaining formaintenance capital), compared to $32.8 million in property and equipmentpurchases for the three months ended March 31, 2003 ($23.9 million forconstruction projects at our Riverside, Joliet and Sioux City facilities withthe remaining for maintenance capital).

 

During the three months ended March 31, 2004, we used cash flowsof $2.0 million for financing activities compared to providing $2.5 million forthe three months ended March 31, 2003. For the three months ended March 31, 2004, we used $356.2 millionrelated to the repurchase of our 103⁄4% Notes offset by cash provided of $350 millionon our new 7% Notes.  Additionally, forthe three months ended March 31, 2004, we used $6.7 million for deferredfinance fees related to the 7% Notes. For the three months ended March 31,2004 and 2003, we borrowed $10.9 million and $3.4 million, respectively, on ourline of credit.

 

In February 2004, we refinanced a portion of our existingindebtedness with net proceeds from the issuance of $350 million in new 7%Notes due 2014, together with funds from our Credit Facility.  These funds were used to repurchase $329.3million, approximately 94%, of our 103⁄4% Notes due 2009.  Related to this refinancing, we paidapproximately $26.9 million in premiums. We have called the remaining $20.7 million of 103⁄4% Notes and will retirethem on June 1, 2004 with a call premium of approximately $1.1million.  Funding of this debt purchase,call premium and accrued interest will be from funds available under our CreditFacility.

 

During October 2001, we effectively fixed the interest rate onapproximately $200.0 million of our term loan through three interest rate swapagreements expiring on September 30, 2004.  For each swap agreement, we agreed to receive a floating rate ofinterest on the notional principal amount based upon a three month LIBOR rate(plus a 2.75% spread) in exchange for fixed rates ranging from 6.19% to6.27%.  As of March 31, 2004, thenotional principal amounts were $197.8 million.  These notional amounts do not represent amounts exchanged by theparties and, thus, are not a measure of our exposure to credit loss.  In accordance with SFAS 133, “Accounting forDerivative Instruments and Hedging Activities,” we recorded, as ofMarch 31, 2004, the fair value of these interest rate swap agreements inthe consolidated balance sheet in other current obligations ($2.3 millionpretax) and the related change in fair value of these agreements is deferred instockholders’ equity as a component of accumulated other comprehensive income($1.4 million, net of a current deferred tax asset of $0.9 million).

 

Our Subordinated Notes due in 2011 and 2014 and the Credit Facilitycontain certain restrictions on the payment of dividends on our common stockand the occurrence of additional indebtedness, as well as other customary debtcovenants.  In addition, the Credit Facilityrequires us to maintain certain financial ratios as of March 31, 2004, asfollows:  (1) Total Funded Debt toEBITDA Ratio of a maximum of 4.25 to 1.0; (2) Senior Leverage Ratio of amaximum of 2.50 to 1.0; and (3) Fixed Charge Ratio of a minimum of 1.50 to1.0.  As of March 31, 2004, we arein compliance with these ratios.

 

During May 2003, we announced Board of Directors approval of a stockrepurchase program authorizing us to repurchase up to $30.0 million of ourcommon stock.  The repurchases can bemade at management’s discretion without prior notice from time to time in theopen market or through privately negotiated third party transactions incompliance with applicable laws and depending on market conditions.  As of April 30, 2004, we have made nostock repurchases under this program.

 

We continue to make capital investments at our existing properties forexpansion and product enhancement.  Inthe twelve months ended March 31, 2004, we completed major expansionprojects at our Riverside and Joliet properties. Our approximately $105 millionRiverside casino opened in December 2003 and our new approximately $43million barge-based casino in Joliet was completed and opened in May 2003.  For the remainder of 2004, we expect tospend approximately $40-$45 million, including final payments for the newcasino in Riverside, maintenance capital expenditures (including the

 

13

----

 

continuing implementation of our coinless TITO slot product) and therenovation and transfer of the Riverside boat to Sioux City. We expect to fundthese expenditures from internally generated cash and availability under ourcredit facility.

 

Given our significant cash generation capabilities, we seek investmentopportunities at our existing properties, including but not limited toadditional capital investments at our Riverside and Lawrenceburg properties, orinto new assets. Should we decide to make additional investments at ourexisting properties or acquire new assets, we may amend our existing CreditFacility or issue additional debt or equity securities.  At March 31, 2004, we had approximately$71.8 million of cash and cash equivalents; $320.5 million was outstanding onour senior secured credit facility ($53.1 million on our revolving creditfacility and $267.4 million on our term loan) and $571.1 million ofSubordinated Notes (due in June 2009, September 2011 andJanuary 2014), including $0.4 million of unamortized premium.  As of March 31, 2004, we hadoutstanding letters of credit of $8.8 million and additional availability underthe credit facility was approximately $116.9 million.  We have no off-balance sheet debt.

 

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

 

Our long-term debt, as of March 31, 2004 matures as follows:

 

 
| One year and less |   | $       | 3,748   |   |
|-------------------|--------|---------|---------|--------|
| 1 - 3 years       |   | 59,186  |    |
| 4 - 5 years       |   | 259,655 |    |
| After 5 years     |   | 571,986 |    |
| Total             |   | $       | 894,575 |   |

 

# **OffBalance Sheet Arrangements**

# ** **

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

# ** **

# **CriticalAccounting Estimates**

# ** **

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

 

*Goodwill –*We have approximately $727 millionof goodwill recorded on our balance sheet at March 31, 2004, related toacquisitions.  We regularly evaluate ouracquired businesses for potential impairment indicators.  Additionally, we adopted the provisions ofSFAS No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002,that requires us to perform impairment testing at least annually.  Our judgments regarding the existence ofimpairment indicators are based on, among other things, the regulatory andcompetitive status and operational performance of each of our acquiredbusinesses.  Future events couldsignificantly impact our judgments and any resulting impairment loss could havea material adverse impact on our financial condition and results of operations.

 

*Property and Equipment –*Our operations arecapital intensive and we have made significant capital investments in each ofour properties.  At March 31, 2004,we have approximately $551 million of net property and equipment recorded onour balance sheet.  We depreciate ourassets on a straight-line basis over their estimated useful lives.  The estimates of the useful lives are basedon the nature of the assets as well as our current operating strategy.  Future events, such as property expansions,new competition and new regulations, could result in a change in the manner inwhich we are using certain assets requiring a change in the estimated usefullives of such assets.  In assessing therecoverability of the carrying value of property

 

14

----

 

and equipment, we must make assumptions regarding estimated future cashflows and other factors.  If theseestimates or the related assumptions change in the future, we may be requiredto record impairment charges for these assets.

 

*Insurance Accruals –*Our insurance policiesfor employee health, workers’ compensation and general patron liability havesignificant deductible levels on an individual claim basis.  We accrue a liability for known workers’compensation and general patron liability based upon claims reservesestablished by the third party administrator processing our claims.  Additionally, we accrue an amount forincurred but not reported claims based on our historical experience and otherfactors.  Our employee health insurancebenefit accrual is based on our historical claims experience rate including anestimated lag factor.  These accrualsinvolve complex estimates and could be significantly affected should currentclaims vary from historical levels. Management reviews our insurance accruals for adequacy at the end ofeach reporting period.

 

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

 

*Income Taxes*– We are subject to income taxesin the United States and in several states.  We account for income taxes in accordance with SFAS Statement 109,“Accounting for Income Taxes.”  Ourincome tax returns are subject to examination by various taxing authorities. Weregularly assess the potential outcomes of these examinations in determiningthe adequacy of our provision for income taxes and our income taxliabilities.  Inherent on ourdetermination of any necessary reserves are assumptions based on pastexperiences and judgments about potential actions by taxing authorities.  Our estimate of the potential outcome forany uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonable andforeseeable outcome related to uncertain tax matters.  When actual results of tax examinations differ from our estimates,we adjust the income tax provision in the period in which the examinationissues are settled.

 

We have received proposed assessments from the Indiana Department ofRevenue (“IDR”) in connection with our Indiana income tax returns for the years1997 through 2001.  Those assessmentsare based on the IDR’s position that state gaming taxes are based on gamingrevenues and are not deductible for Indiana income tax purposes.  We have filed a formal protest of theproposed assessment with the IDR. Additionally, another company and the IDR have litigated this matter inIndiana Tax Court during 2001.  DuringApril 2004, the court issued an opinion in this case finding for the IDR.Plaintiffs have announced their intent to appeal this decision.  At March 31, 2004, we have accruedapproximately $17.3 million, net of federal tax benefit, for the proposed IDRassessments including amounts for additional pending assessments for the periodJanuary 1, 2002 through March 31, 2004.  For the three months ended March 31, 2004, we expensed $1.7million related to this issue.  Wecontinue to review the facts and circumstances leading to our determination ofthe probability the IDR will prevail in their proposed assessments.  Should our evaluation of the IDR prevailingin their proposed and pending assessments change, we could be required torecord additional expense for penalties that could be assessed by the IDR.

 

# **Non-GAAPFinancial Measures**

# ** **

EBITDA is a supplemental measure of our performance that is notrequired by, or presented in accordance with Generally Accepted AccountingPrinciples (“GAAP”). EBITDA is not a measurement of our financial performanceunder GAAP and should not be considered as an alternative to net income,operating income or any other performance measures derived in accordance withGAAP or as an alternative to cash flow from operating activities as measures ofour liquidity.

 

EBITDA represents income from operations plus depreciation andamortization. Our compensation plans base incentive compensation payments inpart on EBITDA performance measured against targets, and we use it to establishour budgets and analyze our operations as compared to our budgets. In addition,our credit facility and our indentures use measures similar to EBITDA (withadditional adjustments) to measure our compliance with covenants such asinterest coverage and debt incurrence. We believe EBITDA facilitates operatingperformance comparisons from period to period and company to company by backingout potential differences caused by variations in capital structures (affectinginterest expense), tax positions (such as the impact on periods or companies ofchanges in 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 vast majorityof which present EBITDA when reporting their results.

 

15

----

 

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

 

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

 

•              it does not reflectour cash expenditures, or future requirements for capital expenditures orcontractual commitments;

•              it does not reflectchanges in, or cash requirements for, our working capital needs;

•              it does not reflectthe significant interest expense, or the cash requirements necessary to serviceinterest or principal payments, on our debt;

•              althoughdepreciation and amortization are non-cash charges, the assets being depreciatedand amortized will often have to be replaced in the future, and EBITDA does notreflect any cash requirements for such replacements;

•              it is not adjustedfor all non-cash income or expense items that are reflected in our statementsof cash flows;

•              it does not reflectthe impact of earnings or charges resulting from matters we consider not to beindicative of our ongoing operations, as discussed in our presentation ofEBITDA and Management’s Discussion and Analysis of Financial Condition and Resultsof Operation; and

•              other companies inour industry may calculate EBITDA differently than we do, limiting itsusefulness as a comparative measure.

 

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

 

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

 

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

 

**Controls andProcedures**

 

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

 

We maintain disclosure controls and procedures that are designed toensure that information required to be disclosed in our Exchange Act reports isrecorded, processed, summarized and reported within the time periods specifiedin the Commission’s rules and forms, and that such information is accumulatedand communicated to our management including our President and Chief ExecutiveOfficer and Senior Vice President and Chief Financial Officer, as appropriate,to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this Report, March 31,2004, (the “Evaluation Date”), we carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingRichard J. Glasier, our President and Chief Executive Officer and Dale R.Black, our Senior Vice President and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures.  Based upon that evaluation,the President and Chief Executive Officer and the Senior Vice President andChief Financial Officer concluded that our disclosure controls and procedureswere effective as of the Evaluation Date.

 

16

----

 

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

 

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

 

**ARGOSYGAMING COMPANY**

**OTHERINFORMATION**

 

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

 

Item 1.    *Legal Proceedings –*

 

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

 

Item 2.    *Changes in Securities and Use of Proceeds*–

 

(a)           OnJanuary 30, 2004, we commenced an offer to purchase our $350.0 millionaggregate principal amount of 103⁄4% Senior Subordinated Notes due 2009, and, inconjunction therewith, we solicited consents that permitted us to eliminate thesubsidiary guarantee provisions, substantially all of the restrictive covenantsand certain of the event of default provisions under the indenture governingthe 103⁄4% Notes.  In February 2004,we repurchased $329.3 million, or approximately 94%, of our 103⁄4% Notes andamended the indenture to implement the terms of the consent solicitation.  We have called for redemption all remainingoutstanding 103⁄4% Notes on the earliest optional redemption date, June 1,2004, pursuant to the terms and conditions of the indenture.

 

(b)           None.

 

(c)           None.

 

(d)           None.

 

(e)           OnMay 6, 2003, we announced Board of Directors approval of a stock repurchaseprogram authorizing us to repurchase up to $30.0 million of our commonstock.  The repurchases may be made atmanagement’s discretion without prior notice from time to time in the openmarket or through privately negotiated third party transactions in compliancewith applicable laws and depending on market conditions.  During the quarter ended March 31,2004, we did not make any stock repurchases under the program.

 

Item 3.    *Defaults Upon Senior Securities –* None

 

Item 4.    *Submission of Matters to a Vote of Security Holders –*None

 

Item 5.    *Other Information –*None

 

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

 

(a)           *Exhibits*

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

 

17

----

 

(b)           *Reports on Form 8-K*

 

Report on Form 8-K dated February 3, 2004, filed with theSecurities and Exchange Commission, furnishing the press release datedFebruary 3, 2004, announcing the Company’s fourth quarter operatingresults for the three months and year ended December 31, 2003.

 

Report on Form 8-K dated February 3, 2004, filed with theSecurities and Exchange Commission, furnishing the press release datedFebruary 3, 2004, announcing $350 million private placement of theCompany’s Senior Subordinated Notes.

 

Report on Form 8-K dated February 3, 2004, filed with theSecurities and Exchange Commission, furnishing certain financial informationregarding the Company’s Consolidated Financial Statements as ofDecember 31, 2003 and 2002, and for each of the three years in the periodended December 31, 2003, including the notes thereto and Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

 

18

----

 

**ARGOSYGAMING COMPANY**

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                                                   |   | Argosy Gaming Company                           |   |
|--------------------------------------------------------|--------|-------------------------------------------------|--------|
|                                                   |   | Registrant                                      |   |
|                                                   |   |                                            |
|                                                   |   |                                            |
| Date:       May  7, 2004 |   | /s/ Dale R. Black                               |   |
|                                                   |   | Dale R. Black                                   |
|                                                   |   | Senior Vice President - Chief Financial Officer |
|                                                        |        |                                                 |        |  |

 

19

----