**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

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

### ** **

**FORM 10-Q**

 
| **ý** | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**  |
|------------|----------------------------------------------------------------------------------------------------------|
|       |                                                                                                     |
|       | **For the  quarterly period ended June 30, 2005.**                                                  |
|       |                                                                                                     |
| **Or**     |
|       |                                                                                                     |
| **o**      | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |

 

**Commission File Number 1-11853**

 

**ARGOSY GAMING COMPANY**

(Exact name of Registrant as Specified in its Charter)

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

 

**219 Piasa Street**

**Alton, Illinois 62002**

**(618) 474-7500**

(Address, including zipcode, and telephone number, including

area code, of Registrant’sprincipal executive offices)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.     Yes ýNo o

 

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

 

**APPLICABLE ONLY TO CORPORATEISSUERS:**

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock as of the latest practicable date: 29,590,702 shares of Common Stock,$.01 par value per share, as of August 5, 2005.

 

 

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**Item 1.  Financial Statements**

 

**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(In Thousands, Except Share and Per Share Data)

 
| ** **                                                                                                                                                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| ** **                                                                                                                                                                       | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Current  assets:**                                                                                                                                                             |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                       |       | $                 | 74,751     |                  | $          | 80,069 |   |
| Accounts  receivable, net                                                                                                                                                        |       | 3,733             |       | 3,534                 |       |
| Income taxes  receivable                                                                                                                                                         |       | 1,029             |       | 8,705                 |       |
| Deferred income  taxes                                                                                                                                                           |       | 14,560            |       | 14,224                |       |
| Other current  assets                                                                                                                                                            |       | 9,717             |       | 10,064                |       |
| Total current  assets                                                                                                                                                            |       | 103,790           |       | 116,596               |       |
|                                                                                                                                                                             |       |              |       |                  |       |
| **Net  property and equipment**                                                                                                                                                  |       | 556,123           |       | 544,929               |       |
| **Other  assets:**                                                                                                                                                               |       |              |       |                  |       |
| Deferred finance  costs, net                                                                                                                                                     |       | 18,010            |       | 19,576                |       |
| Goodwill, net                                                                                                                                                                    |       | 727,470           |       | 727,470               |       |
| Intangible  assets, net                                                                                                                                                          |       | 23,134            |       | 24,263                |       |
| Other                                                                                                                                                                            |       | 9,066             |       | 5,622                 |       |
| Total other  assets                                                                                                                                                              |       | 777,680           |       | 776,931               |       |
| **Total  assets**                                                                                                                                                                |       | $                 | 1,437,593  |                  | $          | 1,438,456 |   |
| **Current  liabilities:**                                                                                                                                                        |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                 |       | $                 | 12,437     |                  | $          | 10,032 |   |
| Accrued payroll  and related expenses                                                                                                                                            |       | 26,734            |       | 25,447                |       |
| Accrued gaming  and admission taxes                                                                                                                                              |       | 17,324            |       | 12,424                |       |
| Other accrued  liabilities                                                                                                                                                       |       | 58,800            |       | 76,317                |       |
| Accrued interest                                                                                                                                                                 |       | 17,458            |       | 17,627                |       |
| Current  maturities of long-term debt                                                                                                                                            |       | 2,607             |       | 2,512                 |       |
| Total current  liabilities                                                                                                                                                       |       | 135,360           |       | 144,359               |       |
|                                                                                                                                                                             |       |              |       |                  |       |
| **Long-term  debt**                                                                                                                                                              |       | 762,034           |       | 811,615               |       |
| **Deferred  income taxes**                                                                                                                                                       |       | 120,015           |       | 107,794               |       |
| **Other  long-term obligations**                                                                                                                                                 |       | 3,056             |       | 1,926                 |       |
|                                                                                                                                                                             |       |              |       |                  |       |
| **Stockholders’  equity:**                                                                                                                                                  |       |              |       |                  |       |
| Common stock,  $.01 par; 120,000,000 shares authorized; 29,590,702 and 29,553,772 shares  issued and outstanding at June 30, 2005 and December 31, 2004,  respectively |       | 296               |       | 296                   |       |
| Capital in  excess of par                                                                                                                                                        |       | 99,963            |       | 98,580                |       |
| Retained  earnings                                                                                                                                                               |       | 316,869           |       | 273,886               |       |
| Total  stockholders’ equity                                                                                                                                                 |       | 417,128           |       | 372,762               |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                             |       | $                 | 1,437,593  |                  | $          | 1,438,456 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

2

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OFINCOME**

(In Thousands, Except Share and Per Share Data)

 
| ** **                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(unaudited)**                      | ** ** | **(unaudited)**                    | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| **Revenues:**                             |       |                                 |       |                               |       |   |   |   |   |
| Casino                                    |       | $                                    | 274,192    |                               | $          | 258,213 |   | $ | 549,175 |   | $ | 524,220 |   |
| Admissions                                |       | 5,113                                |       | 5,351                              |       | 10,642 |   | 10,711 |   |
| Food, beverage  and other                 |       | 28,590                               |       | 25,958                             |       | 56,888 |   | 52,418 |   |
|                                      |       | 307,895                              |       | 289,522                            |       | 616,705 |   | 587,349 |   |
| Less promotional  allowances              |       | (37,002                              | )          | (34,958                            | )          | (74,795 | ) | (68,696 | ) |
| Net revenues                              |       | 270,893                              |       | 254,564                            |       | 541,910 |   | 518,653 |   |
| ** **                                |       |                                 |       |                               |       |   |   |   |   |
| **Costs  and expenses:**                  |       |                                 |       |                               |       |   |   |   |   |
| Gaming and  admission taxes               |       | 96,007                               |       | 90,013                             |       | 191,833 |   | 181,591 |   |
| Casino                                    |       | 30,875                               |       | 31,179                             |       | 62,406 |   | 63,753 |   |
| Selling, general  and administrative      |       | 44,438                               |       | 37,925                             |       | 88,604 |   | 82,101 |   |
| Food, beverage  and other                 |       | 20,528                               |       | 18,721                             |       | 40,661 |   | 37,322 |   |
| Other operating  expenses                 |       | 10,317                               |       | 9,735                              |       | 21,055 |   | 19,598 |   |
| Depreciation and  amortization            |       | 14,783                               |       | 14,848                             |       | 30,409 |   | 29,073 |   |
|                                      |       | 216,948                              |       | 202,421                            |       | 434,968 |   | 413,438 |   |
| Income from  operations                   |       | 53,945                               |       | 52,143                             |       | 106,942 |   | 105,215 |   |
|                                      |       |                                 |       |                               |       |   |   |   |   |
| **Other  income (expense):**              |       |                                 |       |                               |       |   |   |   |   |
| Interest income                           |       | 99                                   |       | 18                                 |       | 177 |   | 39 |   |
| Interest expense                          |       | (14,298                              | )          | (16,594                            | )          | (28,951 | ) | (34,645 | ) |
| Expense on early  retirement of debt      |       | —                               |       | (763                               | )          | — |   | (26,040 | ) |
|                                      |       | (14,199                              | )          | (17,339                            | )          | (28,774 | ) | (60,646 | ) |
|                                      |       |                                 |       |                               |       |   |   |   |   |
| Income before  income taxes               |       | 39,746                               |       | 34,804                             |       | 78,168 |   | 44,569 |   |
| Income tax  expense                       |       | (18,087                              | )          | (16,221                            | )          | (35,185 | ) | (22,026 | ) |
| ** **                                |       |                                 |       |                               |       |   |   |   |   |
| **Net  income**                           |       | $                                    | 21,659     |                               | $          | 18,583 |   | $ | 42,983 |   | $ | 22,543 |   |
|                                      |       |                                 |       |                               |       |   |   |   |   |
| **Basic  income per share**               |       | $                                    | 0.73       |                               | $          | 0.63 |   | $ | 1.45 |   | $ | 0.77 |   |
|                                      |       |                                 |       |                               |       |   |   |   |   |
| **Diluted  income per share**             |       | $                                    | 0.73       |                               | $          | 0.63 |   | $ | 1.44 |   | $ | 0.76 |   |
|                                      |       |                                 |       |                               |       |   |   |   |   |
| **Weighted  average shares outstanding:** |       |                                 |       |                               |       |   |   |   |   |
|                                      |       |                                 |       |                               |       |   |   |   |   |
| **Basic**                                 |       | 29,582,119                           |       | 29,442,736                         |       | 29,569,146 |   | 29,394,255 |   |
|                                      |       |                                 |       |                               |       |   |   |   |   |
| **Diluted**                               |       | 29,873,947                           |       | 29,666,772                         |       | 29,865,111 |   | 29,629,305 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

(In Thousands, Except Share and Per Share Data)

 
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**                    | ** ** | **(unaudited)** | ** ** |
| **Cash  flows from operating activities:**                                         |       |                               |       |   |   |
| Net income                                                                         |       | $                                  | 42,983     |   | $ | 22,543 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                               |       |   |   |
| Depreciation                                                                       |       | 29,281                             |       | 27,899 |   |
| Amortization                                                                       |       | 2,667                              |       | 3,811 |   |
| Gain on the  disposal of equipment                                                 |       | (32                                | )          | (286 | ) |
| Compensation expense  recognized on issuance of stock                              |       | —                             |       | 101 |   |
| Loss on early  retirement of debt                                                  |       | —                             |       | 26,040 |   |
| Deferred income  taxes                                                             |       | 12,144                             |       | 14,098 |   |
| Changes in  operating assets and liabilities:                                      |       |                               |       |   |   |
| Accounts  receivable and other assets                                              |       | (850                               | )          | (1,211 | ) |
| Accounts  payable, income taxes and other liabilities                              |       | (3,493                             | )          | (1,713 | ) |
| Accrued interest                                                                   |       | (169                               | )          | 6,104 |   |
| Net cash  provided by operating activities                                         |       | 82,531                             |       | 97,386 |   |
|                                                                               |       |                               |       |   |   |
| **Cash  flows from investing activities:**                                         |       |                               |       |   |   |
| Purchases of  property and equipment                                               |       | (39,635                            | )          | (45,971 | ) |
| Other                                                                              |       | 120                                |       | 983 |   |
| Net cash used in  investing activities                                             |       | (39,515                            | )          | (44,988 | ) |
|                                                                               |       |                               |       |   |   |
| **Cash  flows from financing activities:**                                         |       |                               |       |   |   |
| (Repayments)  borrowings on credit facility, net                                   |       | (49,474                            | )          | (15,975 | ) |
| Proceeds from  issuance of senior subordinated notes                               |       | —                             |       | 350,000 |   |
| Payments on  senior subordinated notes, including early redemption premium         |       | —                             |       | (377,961 | ) |
| Increase in  deferred finance costs                                                |       | —                             |       | (7,115 | ) |
| Proceeds from  stock option exercises                                              |       | 1,124                              |       | 1,690 |   |
| Other                                                                              |       | 16                                 |       | (488 | ) |
| Net cash used in  financing activities                                             |       | (48,334                            | )          | (49,849 | ) |
| Net change in  cash and cash equivalents                                           |       | (5,318                             | )          | 2,549 |   |
| Cash and cash  equivalents, beginning of period                                    |       | 80,069                             |       | 67,205 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                  | 74,751     |   | $ | 69,754 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

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

 
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** **   | ** ** | **Total**              | ** ** |
|---------------------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|--------------|------------|------------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | **Common** | ** ** | **Capital in**    | ** ** | **Retained** | ** ** | **Stockholders’** | ** ** |
| ** **                                              | ** ** | **Shares** | ** ** | **Stock**  | ** ** | **Excess of Par** | ** ** | **Earnings** | ** ** | **Equity**             | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** **   | ** ** | ** **             | ** ** |
| Balance,  December 31, 2004                        |       | 29,553,772 |       | $          | 296        |              | $          | 98,580       |       | $                      | 273,886    |   | $ | 372,762 |   |
| Exercise of  stock options, including tax benefit       |       | 36,930     |       | —     |       | 1,383             |       | —       |       | 1,383                  |       |
| Net income for  the six months ended June 30, 2005 |       |       |       | —     |       | —            |       | 42,983       |       | 42,983                 |       |
|                                                    |       |       |       |       |       |              |       |         |       |                   |       |
| Balance,  June 30, 2005                            |       | 29,590,702 |       | $          | 296        |              | $          | 99,963       |       | $                      | 316,869    |   | $ | 417,128 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

5

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# **ARGOSY GAMING COMPANY**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

(Unaudited, in Thousands, Except Share and Per Share Data)

 

**1.****             Basisof Presentation 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.

 

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. Interim results may not necessarily be indicative of results that may beexpected for any other interim period or for the year as a whole.  For further information, refer to thefinancial statements and footnotes thereto for the year ended December 31,2004, included in our Annual Report on Form 10-K (File No. 1-11853).  The accompanying unaudited condensedconsolidated financial statements contain all adjustments, which are, in theopinion of management, necessary to fairly present the financial position andthe results of operations for the periods indicated.

 

The states of Illinois, Indiana andIowa assess gaming taxes on a graduated scale based on casino revenues andthroughout the year we accrue gaming tax expense utilizing an effective annualtax rate. For the three and six months ended June 30, 2005, we haverecorded gaming taxes at our Illinois properties at the current tax rateswithout giving benefit to a statutory rollback in gaming taxes scheduled to rollbackeffective July 1, 2005.  During thesecond quarter of 2005, the Illinois legislature passed legislation which, ifenacted by the Governor, will reduce the overall gaming tax rates including arollback of the top marginal gaming rate from 70% to 50%.  This legislation also established a minimumannual gaming tax for fiscal years ending June 30, 2006.  This minimum annual gaming tax is based onrevenues generated over the twelve months ended June 30, 2005.  Upon the anticipated enactment of this legislationduring the third quarter of 2005, we will record the effect on our gaming taxprovisions for our Illinois properties.

 

*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.

 

On June 20, 2005,Penn entered into an agreement with Columbia Sussex Corporation to sell all ofour interests in the Argosy Casino - Baton Rouge property for $150,000 in cash,immediately following the closing of our merger with Penn.  The sale ofthe Argosy Casino - Baton Rouge is subject to regulatory approvals, the closingof our merger with Penn and other customary closing conditions.

 

6

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**2.   Long-Term Debt**

 

Long-termdebt consists of the following:

 
| ** **                                                                                                                                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2005**          | ** ** | **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 4.82% to 6.5% at  June 30, 2005) |       | $                 | 38,500     |                  | $          | 87,100 |   |
| Term loan,  matures June 30, 2011, principal and interest payments due quarterly at  either LIBOR and/or prime plus a margin (4.85% at June 30, 2005)                              |       | 173,688           |       | 174,562               |       |
|                                                                                                                                                                                         |       | 212,188           |       | 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%                                                                              |       | 2,453             |       | 2,465                 |       |
| Total long-term  debt                                                                                                                                                                        |       | 764,641           |       | 814,127               |       |
| Less: current  maturities                                                                                                                                                                    |       | 2,607             |       | 2,512                 |       |
| Long-term debt,  less current maturities                                                                                                                                                     |       | $                 | 762,034    |                  | $          | 811,615 |   |

 

Wehave borrowings outstanding under two separate Subordinated Notes issuestotaling $550,000 (“Subordinated Notes”). On September 30, 2004, weentered into the Third Amended and Restated Credit Agreement (the “CreditFacility”) with a revolving line of credit for up to $500,000 and a Term Loanof $175,000 maintaining a total facility of $675,000. The Credit Facility issecured by liens on substantially all of our assets and our subsidiaries areco-borrowers.  Substantially all of oursubsidiaries fully and unconditionally guarantee our 9% Subordinated Notes on ajoint and several basis.  All of oursubordinated notes rank junior to all of our senior indebtedness, includingborrowings under the Credit Facility.

 

In 2004, we refinanced a portion ofour existing indebtedness ($350,000 of 10.75% Subordinated Notes due 2009) withnet proceeds from the issuance of $350,000 in new 7% Subordinated Notes due2014, together with borrowings under our Credit Facility.  Related to this refinancing, we incurred apre-tax charge of $26,040 in net premiums and fees.

 

The closing of our pending mergerwith Penn constitutes a change of control as defined under our SubordinatedNote indentures and obligates us to make an offer to repurchase ourSubordinated Notes at a cash price equal to 101% of the principal amount of ouroutstanding Subordinated Notes plus accrued interest. This change of controloffer is required to be made within 30 business days following the change ofcontrol. Alternatively, Penn could choose to retire the Subordinated Notes orseek to obtain a waiver of this requirement. In addition, upon a change of control, all commitments under the CreditFacility terminate. Prior to the closing of the merger, we will retire theCredit Facility or seek to obtain a waiver under the Credit Facility.

 

Penn has commenced cash tenderoffers, subject to completion of the merger between Penn and Argosy, for anyand all of the $200,000 9% Subordinated Notes and any and all of the $350,0007% Subordinated Notes. In conjunction with the tender offers, noteholderconsents are being solicited to effect certain amendments and waivers to theindentures governing these notes. The tender offers and the consentsolicitations are being conducted in connection with Penn’s pending merger withArgosy. Each tender offer is scheduled to expire at 12:00 midnight EST, on August 17,2005, unless extended or earlier terminated by Penn with respect to that issueof Subordinated Notes, including any extension required because the conditionsto the closing of the merger with Argosy have not been satisfied as of thatdate. Each consent solicitation is scheduled to expire at 5:00 p.m. EST,on August 3, 2005, unless extended or earlier terminated by Penn withrespect to that issue.

 

Our Subordinated Notes due in 2011and 2014 contain certain restrictions on the payment of dividends on our commonstock and the incurrence of additional indebtedness, as well as other typicaldebt covenants. In addition, the Credit Facility requires us to maintaincertain financial ratios, based on terms as defined in the Credit Facility,which, as of June 30, 2005, are as follows: (1) Total Funded Debt toEBITDA Ratio of a maximum of 4.75 to 1.0; (2) Senior Funded Debt to EBITDARatio 

 

7

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of a maximum of 3.50 to 1.0; and (3) FixedCharge Coverage Ratio of a minimum of 1.50 to 1.0.  As of June 30, 2005, we are incompliance with these ratios.  At August 2,2005, based upon these financial ratios, additional availability under theCredit Facility was approximately $443,000. We have no off balance sheet debt.

 

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

 

In December 2002, the Financial Accounting Standards Board issuedFAS 148, “Accounting for Stock-Based Compensation – 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 equal to the market value of the underlying common stock on thedate of grant.  The following tablediscloses our pro forma net income and diluted net income per share had weapplied the fair value recognition provisions of FAS 123.

 
| ** **                                              | ** ** | **Three months ended** | ** ** | **Six months ended**   | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **(unaudited, in thousands, except share data)**        | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
| Net income                                              | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| As reported                                             |       | $                      | 21,659     |                   | $          | 18,583 |   | $ | 42,983 |   | $ | 22,543 |   |
| Pro forma  stock-based compensation, net of tax benefit |       | (717                   | )          | (243                   | )          | (1,489 | ) | (490 | ) |
| Pro forma                                               |       | $                      | 20,942     |                   | $          | 18,340 |   | $ | 41,494 |   | $ | 22,053 |   |
|                                                    |       |                   |       |                   |       |   |   |   |   |
| Diluted income  per share                               |       |                   |       |                   |       |   |   |   |   |
| As reported                                             |       | $                      | 0.73       |                   | $          | 0.63 |   | $ | 1.44 |   | $ | 0.76 |   |
| Pro forma  stock-based compensation, net of tax benefit |       | (0.02                  | )          | (0.01                  | )          | (0.05 | ) | (0.02 | ) |
| Pro forma                                               |       | $                      | 0.71       |                   | $          | 0.62 |   | $ | 1.39 |   | $ | 0.74 |   |

 

These pro forma amounts to reflect FAS 123 option expense may not berepresentative of future disclosures because, under FAS 123, the estimated fairvalue of the options is amortized to expense over the vesting period andadditional options may be granted in the future.

 

In April and July 2004, we granted 638,571 and 20,000 sharesof non-qualified stock options, respectively, to certain key employees and40,000 shares of non-qualified stock options to our non-employee directorsunder the Argosy Gaming Company Stock Option Plan and the Argosy Gaming CompanyDirectors Option Plan, respectively. Under the terms of our Merger Agreement with Penn, we are restrictedfrom issuing additional stock options under both the Stock Option Plan and theDirectors Option Plan for the period from the date of the agreement to theeffective time of the merger.

 

In December 2004, the FASB revised SFAS No. 123 (“SFAS 123R”),“Accounting for Stock Based Compensation.” The revision establishes standards for the accounting of transactions inwhich an entity exchanges its equity instruments for goods or services,particularly transactions in which an entity obtains employee services inshare-based payment transactions.  Therevised statement requires a public entity to measure the cost of employeeservices received in exchange for an award of equity instruments based on thegrant-date fair value of the award.  Thatcost is to be recognized over the period during which the employee is requiredto provide service in exchange for the award. Changes in fair value during the requisite service period are to berecognized as compensation cost over that period.  In addition, the revised statement amendsSFAS No. 95, “Statement of Cash Flows,” to require that excess taxbenefits be reported as a financing cash flow rather than as a reduction oftaxes paid.  The provisions of therevised statement are effective for financial statements issued for the firstinterim or annual reporting period beginning after December 15, 2005, withearly adoption encouraged.  We arecurrently evaluating the impact that this statement will have on our financialcondition and results of operations.

 

8

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**4.****             ****Earnings PerShare**

 

Thefollowing table sets forth the computation of basic and diluted earnings pershare:

 
| ** **                                                                                              | ** ** | **Three months ended** | ** ** | **Six months ended**   | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **(unaudited, in thousands, except share data)**                                                        | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
| **Numerator:**                                                                                          |       |                   |       |                   |       |   |   |   |   |
| Numerator for  basic and diluted earnings per share - net income                                        |       | $                      | 21,659     |                   | $          | 18,583 |   | $ | 42,983 |   | $ | 22,543 |   |
|                                                                                                    |       |                   |       |                   |       |   |   |   |   |
| **Denominator:**                                                                                        |       |                   |       |                   |       |   |   |   |   |
| Denominator for  basic earnings per share - weighted average shares outstanding                         |       | 29,582,119             |       | 29,442,736             |       | 29,569,146 |   | 29,394,255 |   |
|                                                                                                    |       |                   |       |                   |       |   |   |   |   |
| Effect of  dilutive securities (computed using the treasury stock method):                              |       |                   |       |                   |       |   |   |   |   |
| Employee and  directors stock options                                                                   |       | 291,828                |       | 215,195                |       | 295,965 |   | 226,518 |   |
| Restricted stock                                                                                        |       | —                 |       | 8,841                  |       | — |   | 8,532 |   |
| Dilutive  potential common shares                                                                       |       | 291,828                |       | 224,036                |       | 295,965 |   | 235,050 |   |
| Denominator for  diluted earnings per share - adjusted weighted-average shares and assumed  conversions |       | 29,873,947             |       | 29,666,772             |       | 29,865,111 |   | 29,629,305 |   |
|                                                                                                    |       |                   |       |                   |       |   |   |   |   |
| Basic earnings  per share                                                                               |       | $                      | 0.73       |                   | $          | 0.63 |   | $ | 1.45 |   | $ | 0.77 |   |
|                                                                                                    |       |                   |       |                   |       |   |   |   |   |
| Diluted earnings  per share                                                                             |       | $                      | 0.73       |                   | $          | 0.63 |   | $ | 1.44 |   | $ | 0.76 |   |

 

Forthe three and six months ended June 30, 2005, all employee and directoroptions were included in the computation of diluted earnings per share.

 

Forthe three months ended June 30, 2004, employee options to purchase 636,237shares of common stock priced at $37.71 per share and director options topurchase 43,000 shares of common stock priced at a range from $37.71-$39.99 pershare, were not included in the computation of diluted earnings per sharebecause the option exercise price was greater than the average market price ofthe underlying common shares and, therefore, the effect would be anti-dilutive.

 

Forthe six months ended June 30, 2004, employee options to purchase 693,145shares of common stock priced at a range of $35.18-$37.71 per share anddirector options to purchase 52,000 shares of common stock priced at a rangefrom $35.15-$39.99 per share, were not included in the computation of dilutedearnings per share because the option exercise price was greater than theaverage market price of the underlying common shares and, therefore, the effectwould be anti-dilutive.

 

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

 

We aresubject to, from time to time, various legal and regulatory proceedings in theordinary course of our business.  Webelieve that current proceedings will not have a material effect on ourfinancial condition or the results of our operations.

 

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

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

 

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

 

*This Report 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*

 

9

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*acquisitions and otherinformation that is not historical information. When used in this document, thewords “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,”“will,” “would,” “could,” and variations of such words or similar expressionsare intended to identify forward-looking statements. All forward-lookingstatements, including, without limitation, our examination of historicaloperating trends, are based upon our current expectations and variousassumptions.  Our expectations, beliefsand 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 anduncertainties that could cause our actual results to differ materially from theforward-looking statements contained in this document.  Such risks, uncertainties and other importantfactors include, but are not limited to: (i) competitive and generaleconomic conditions in our markets, including location of our competitors andthe 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), or joint venture relations or decisions of courts, regulators,accounting standards and governmental bodies (including obtaining the requisiteapproval of regulatory authorities for the proposed merger between Argosy andPenn National Gaming, Inc.); (iii) construction factors relating toour expansion projects, including delays, zoning issues, environmentalrestrictions, weather or other hazards, site access matters and building permitissues; (iv) the ability to effectively implement operational changes atour properties; (v) the effect of economic, credit, and capital marketconditions on the economy in general, and on gaming companies in particular; (vi) ourdependence on our Lawrenceburg, Indiana casino; (vii) our substantialleverage; and (viii) other risks and uncertainties detailed from time totime in our filings with the Securities and Exchange Commission.*

 

*All subsequent written and oralforward-looking statements attributable to us or persons acting on our behalfare expressly qualified in their entirety by our cautionary statements. Theforward-looking statements included in this document are made only as of thedate of this document. We do not intend, and undertake no obligation, to updatethese 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 six months ended June 30, 2005 ascompared to June 30, 2004, our net revenues increased $23.2 million, or4.5%, and our income from operations increased $1.7 million as our operatingmargins decreased to 19.7% from 20.3%. Results were impacted primarily byhigher gaming and admission tax expense ($10.2 million) with the increasedrevenue levels at our properties as well as an increase in our overalleffective gaming and admission tax rate from 35.0% to 35.4%.

 

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 in 2006.  After we opened our new barge-based casino inRiverside in December 2003, we transferred the riverboat to our Sioux Citylocation during 2004 to replace the existing smaller riverboat.  We spent approximately $6 million in 2004 torefurbish this riverboat and it was placed in service in Sioux City in September 2004.We currently hold the former Sioux City riverboat for sale. We have begunconstruction of a major capital expansion project at our Lawrenceburg property.The project includes the replacement of the existing three-level boat with alarger single-level boat adding 1,200 gaming positions to the existing 2,875.The expansion plan also provides a substantial increase in parking by adding anew, 1,500-space garage as well as surface parking for an additional 350 cars.When complete, the plan nearly doubles the available on-site parking. The totalcost of 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. A receivable of $7.5 million for this incentive tax credit isincluded in other assets at June 30, 2005. We expect completion of thegarage near the end of 2006 and of the casino in late 2007.

 

The Company entered into a definitive Merger Agreement(“Merger Agreement”) with Penn National Gaming, Inc. (“Penn”) on November 3,2004.  Under the terms of the MergerAgreement, we have agreed to sell all of the outstanding stock of the Companyto Penn for $47 per share and Penn will assume all of our indebtedness foraggregate consideration of approximately $2.2 billion. Our shareholdersapproved 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.

 

10

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On June 20, 2005, Penn entered into an agreementwith Columbia Sussex Corporation to sell all of our interests in the ArgosyCasino - Baton Rouge property for $150,000 in cash, immediately following theclosing of our merger with Penn.  The sale of the Argosy Casino - BatonRouge is subject to regulatory approvals, the closing of our merger with Pennand other customary closing conditions.

 

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.

 

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.

 

11

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**ARGOSY GAMING COMPANY ANDSUBSIDIARIES**

**SELECTED FINANCIAL INFORMATION**

**(in thousands, unaudited)**

** **
| ** **                         | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                         | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| **CASINO  REVENUES**               |       |                                 |       |                               |       |   |   |   |   |
| Argosy Casino -  Alton             |       | $                                    | 28,022     |                               | $          | 25,901 |   | $ | 56,328 |   | $ | 53,087 |   |
| Argosy Casino -  Riverside         |       | 38,229                               |       | 36,963                             |       | 78,016 |   | 75,201 |   |
| Argosy Casino -  Baton Rouge       |       | 23,506                               |       | 20,939                             |       | 48,027 |   | 42,634 |   |
| Argosy Casino -  Sioux City        |       | 14,241                               |       | 11,397                             |       | 27,987 |   | 23,083 |   |
| Argosy Casino -  Lawrenceburg      |       | 112,000                              |       | 107,671                            |       | 224,371 |   | 219,673 |   |
| Empress Casino  Joliet             |       | 58,194                               |       | 55,342                             |       | 114,446 |   | 110,542 |   |
| Total                              |       | $                                    | 274,192    |                               | $          | 258,213 |   | $ | 549,175 |   | $ | 524,220 |   |
|                               |       |                                 |       |                               |       |   |   |   |   |
| **NET  REVENUES**                  |       |                                 |       |                               |       |   |   |   |   |
| Argosy Casino -  Alton             |       | $                                    | 26,621     |                               | $          | 24,590 |   | $ | 53,830 |   | $ | 50,634 |   |
| Argosy Casino -  Riverside         |       | 35,661                               |       | 35,826                             |       | 72,752 |   | 73,756 |   |
| Argosy Casino -  Baton Rouge       |       | 26,071                               |       | 21,505                             |       | 52,435 |   | 43,856 |   |
| Argosy Casino -  Sioux City        |       | 13,700                               |       | 11,035                             |       | 26,938 |   | 22,381 |   |
| Argosy Casino -  Lawrenceburg      |       | 111,932                              |       | 108,049                            |       | 224,627 |   | 220,982 |   |
| Empress Casino  Joliet             |       | 56,908                               |       | 53,559                             |       | 111,328 |   | 107,044 |   |
| Total                              |       | $                                    | 270,893    |                               | $          | 254,564 |   | $ | 541,910 |   | $ | 518,653 |   |
|                               |       |                                 |       |                               |       |   |   |   |   |
| **INCOME  (LOSS) FROM OPERATIONS** |       |                                 |       |                               |       |   |   |   |   |
| Argosy Casino -  Alton             |       | $                                    | 3,469      |                               | $          | 2,426 |   | $ | 8,043 |   | $ | 5,584 |   |
| Argosy Casino -  Riverside         |       | 7,099                                |       | 8,121                              |       | 15,024 |   | 17,505 |   |
| Argosy Casino -  Baton Rouge       |       | 4,266                                |       | 2,805                              |       | 8,869 |   | 5,430 |   |
| Argosy Casino -  Sioux City        |       | 3,323                                |       | 2,793                              |       | 6,587 |   | 5,212 |   |
| Argosy Casino -  Lawrenceburg      |       | 33,182                               |       | 33,722                             |       | 66,394 |   | 66,838 |   |
| Empress Casino  Joliet             |       | 11,823                               |       | 9,058                              |       | 22,360 |   | 19,413 |   |
| Corporate                          |       | (9,217                               | )          | (6,782                             | )          | (20,335 | ) | (14,767 | ) |
| Total                              |       | $                                    | 53,945     |                               | $          | 52,143 |   | $ | 106,942 |   | $ | 105,215 |   |

 

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**RECONCILIATION OF NET INCOME TOEBITDA (1) (2)**

(In thousands,unaudited)

 
| ** **                              | ** ** | **Three months ended June 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Net income (3)                          |       |                                 |       | $ | 21,659 |   |   |   | $ | 18,583 |   |
| Income tax  expense                     |       |                                 |       | 18,087 |   |   |   | 16,221 |   |
| Interest  expense, net                  |       |                                 |       | 14,199 |   |   |   | 16,576 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |
| Depreciation and  amortization expense: |       |                                 |       |   |   |   |   |   |   |
| Argosy Casino -  Alton                  |       | $                                    | 1,661      |   |   |   | $ | 1,608 |   |   |   |
| Argosy Casino -  Riverside              |       | 2,888                                |       |   |   | 2,588 |   |   |   |
| Argosy Casino -  Baton Rouge            |       | 2,516                                |       |   |   | 2,239 |   |   |   |
| Argosy Casino -  Sioux City             |       | 974                                  |       |   |   | 597 |   |   |   |
| Argosy Casino -  Lawrenceburg           |       | 3,680                                |       |   |   | 3,583 |   |   |   |
| Empress Casino  Joliet                  |       | 2,403                                |       |   |   | 3,587 |   |   |   |
| Corporate                               |       | 661                                  |       |   |   | 646 |   |   |   |
| Depreciation and  amortization expense  |       | 14,783                               |       | 14,783 |   | 14,848 |   | 14,848 |   |
|                                    |       |                                 |       |   |   |   |   |   |   |
| EBITDA  (1) (2):                   |       |                                 |       |   |   |   |   |   |   |
| Argosy Casino -  Alton                  |       | 5,130                                |       |   |   | 4,034 |   |   |   |
| Argosy Casino -  Riverside              |       | 9,987                                |       |   |   | 10,709 |   |   |   |
| Argosy Casino -  Baton Rouge            |       | 6,782                                |       |   |   | 5,044 |   |   |   |
| Argosy Casino -  Sioux City             |       | 4,297                                |       |   |   | 3,390 |   |   |   |
| Argosy Casino -  Lawrenceburg           |       | 36,862                               |       |   |   | 37,305 |   |   |   |
| Empress Casino  Joliet                  |       | 14,226                               |       |   |   | 12,645 |   |   |   |
| Corporate (2)                           |       | (8,556                               | )          |   |   | (6,899 | ) |   |   |
| EBITDA  (1) (2)                    |       | $                                    | 68,728     |   | $ | 68,728 |   | $ | 66,228 |   | $ | 66,228 |   |

 

13

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**RECONCILIATION OF NET INCOME TOEBITDA (1) (2)**

(In thousands,unaudited)

 
| ** **                              | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|
| ** **                              | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Net income (3)                          |       |                               |       | $ | 42,983 |   |   |   | $ | 22,543 |   |
| Income tax  expense                     |       |                               |       | 35,185 |   |   |   | 22,026 |   |
| Interest  expense, net                  |       |                               |       | 28,774 |   |   |   | 34,606 |   |
|                                    |       |                               |       |   |   |   |   |   |   |
| Depreciation and  amortization expense: |       |                               |       |   |   |   |   |   |   |
| Argosy Casino -  Alton                  |       | $                                  | 3,295      |   |   |   | $ | 3,160 |   |   |   |
| Argosy Casino -  Riverside              |       | 6,803                              |       |   |   | 5,049 |   |   |   |
| Argosy Casino -  Baton Rouge            |       | 4,922                              |       |   |   | 4,505 |   |   |   |
| Argosy Casino -  Sioux City             |       | 1,946                              |       |   |   | 1,720 |   |   |   |
| Argosy Casino -  Lawrenceburg           |       | 7,381                              |       |   |   | 6,995 |   |   |   |
| Empress Casino  Joliet                  |       | 4,749                              |       |   |   | 6,387 |   |   |   |
| Corporate                               |       | 1,313                              |       |   |   | 1,257 |   |   |   |
| Depreciation and  amortization expense  |       | 30,409                             |       | 30,409 |   | 29,073 |   | 29,073 |   |
|                                    |       |                               |       |   |   |   |   |   |   |
| EBITDA  (1) (2):                   |       |                               |       |   |   |   |   |   |   |
| Argosy Casino -  Alton                  |       | 11,338                             |       |   |   | 8,744 |   |   |   |
| Argosy Casino -  Riverside              |       | 21,827                             |       |   |   | 22,554 |   |   |   |
| Argosy Casino -  Baton Rouge            |       | 13,791                             |       |   |   | 9,935 |   |   |   |
| Argosy Casino -  Sioux City             |       | 8,533                              |       |   |   | 6,932 |   |   |   |
| Argosy Casino -  Lawrenceburg           |       | 73,775                             |       |   |   | 73,833 |   |   |   |
| Empress Casino  Joliet                  |       | 27,109                             |       |   |   | 25,800 |   |   |   |
| Corporate  (2) (3)                 |       | (19,022                            | )          |   |   | (39,550 | ) |   |   |
| EBITDA  (1) (2)                    |       | $                                  | 137,351    |   | $ | 137,351 |   | $ | 108,248 |   | $ | 108,248 |   |

 

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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 measures reportedby other companies. For a further discussion of such limitations, see ouradditional disclosures in this report under the heading “Non-GAAP FinancialMeasures.”

 

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

 

(3) Includes $763 and $26,040 of pre-taxexpense on early retirement of debt for the three and six months ended June 30,2004.

 

14

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**Threemonths ended June 30, 2005 compared to three months ended June 30,2004**

 

Adiscussion of each of our properties operating results:

 

*Lawrenceburg*– Net revenues increased $3.9 million to $111.9 million as admissions increased1% and win per admission increased 3%. Operating expenses increased $4.4 million to $78.7 million.  Selling, general and administrative (“SG&A”)expense increased $2.9 million due primarily to the timing of recording a $2.5million incentive credit for the first half of 2004 in city development feesdue to the amendment to the development agreement with the City of Lawrenceburgthat reduces our annual fee paid to the City of Lawrenceburg all in the threemonths ended June 30, 2004 (after completion of the agreement in July 2004)compared to $1.2 million of credit taken in the three months ended June 30,2005.  Additionally, gaming and admissiontax expense increased $1.1 million due to the increased revenue levels.

 

*Riverside*– Net revenues decreased $0.1 million to $35.7 million. Casino revenuesincreased $1.3 million, or 3.4%, to $38.2 million and food, beverage and other(“FB&O”) revenue increased $0.1 million. Admissions were up 4% with win per admission remaining constant.Offsetting these revenue increases was an increase in our promotionalallowances of $1.5 million, primarily in our increased coupon offerings.  This increase in promotional allowances wasimplemented as additional incentive to our customers during the construction ofour new garage.  Operating expensesincreased $0.9 million in the following areas: depreciation and amortization expense increased $0.3 million as weaccelerated depreciation on our current parking garage (demolished during thesecond quarter 2005 to allow construction on our new hotel), and gaming andadmission taxes increased $0.3 million corresponding with our increase incasino revenues.

 

*Joliet*– Net revenues increased $3.3 million due primarily to an increase in casinorevenues of $2.9 million, or 5.2%, to $58.2 million and a reduction inpromotional allowances of $0.9 million. Admissions increased 6% and win per admission decreased 1%.  Joliet expanded their hours of operation andeliminated the admission fee effective early June 2005 in response toIllinois passing legislation rolling back admission and gaming taxes toprevious enacted rates while maintaining a minimum gaming tax as of June 30,2005. Such legislation is pending enactment by the Illinois Governor. Operatingexpenses increased $0.6 million due primarily to an increase in gaming andadmission taxes of $1.6 million corresponding to the higher revenue levels anda $0.8 million increase in SG&A expense for increased advertising andpromotions.  Offsetting these increaseswas a decrease in depreciation and amortization expense of $1.2 million as 2004included higher depreciation for accelerated depreciation of slot machines forTITO replacement (completed in 2004).

 

*Alton*– Net revenues increased $2.0 million as casino revenues increased $2.1million, or 8.2%, to $28.0 million due to increases in admissions of 3% and winper admission of 5%. Operating expenses increased $1.1 million due primarily toan increase in gaming and admission taxes of $1.2 million corresponding to theincreased revenue levels.

 

*BatonRouge* – Net revenues increased $4.6 million as casinorevenues increased $2.6 million, or 12.3%, to $23.5 million due primarily to anincrease in admissions of 41% (due to the City of Baton Rouge hosting theAmerican Bowling Congress) and the addition of a poker room.  Because of the mix of these customers, winper admission has decreased 20%. FB&O revenue increased $2.3 million due to a remodeling of ourrestaurant and increased admissions and hotel occupancy due to the bowlingcongress. Operating expenses increased $3.1 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 $1.3 millioncorresponding to the increased FB&O revenues with the remaining increase inexpenses spread throughout our property.

 

*SiouxCity* – Net revenues increased $2.7 million due to an increasein casino revenues of $2.8 million, or 25.0%, to $14.2 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 2%.  Operating expenses increased $2.1 millionprimarily due to an increase in gaming and admissions taxes of $0.9 millioncorresponding to the increase in casino revenues with the remaining increase inexpenses spread throughout our operations due primarily to the increase inoperations with the larger riverboat.

 

*Corporate*– Operating expenses increased $2.4 million to $7.8 million due primarily tocosts associated with our pending merger with Penn and other consulting fees.

 

Other overall company costs were asfollows:

 

15

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*OtherIncome (Expense)*– Net interest expense decreased $2.4million to $14.2 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 $0.8 million in net premiumsand fees for the three months ended June 30, 2004.

 

*IncomeTax Expense –*Income tax expense increased $1.9 million to$18.1 million as pre-tax earnings increased primarily due to increased earningsat our Joliet, Alton, Baton Rouge and Sioux City properties. Our lower overalleffective tax rate for the three months ended June 30, 2005, as comparedto the three months ended June 30, 2004 is primarily due to recording atax benefit (related to the debt refinancing of our 10.75% Notes) at its’marginal effective tax rate which was lower than our recurring tax rate.

 

**Sixmonths ended June 30, 2005 compared to six months ended June 30, 2004**

 

Adiscussion of each of our properties operating results:

 

*Lawrenceburg*– Net revenues increased $3.6 million to $224.6 million due primarily to anincrease in casino revenues of $4.7 million, or 2.1%, as win per admissionincreased 4% and admissions decreased 2%. Operating expenses increased $4.1million to $158.2 million.  Gaming andadmission taxes increased $1.7 million due primarily to the increase in casinorevenues and SG&A expense increased $1.4 million due primarily to a $1.1million increase in city development fees due to the increased revenue levelswith the remaining increase in other operating expenses.

 

*Riverside*– Net revenues decreased $1.0 million. Casino revenues increased $2.8 million,or 3.7%, to $78.0 million and food, beverage and other (“FB&O”) revenueincreased $0.4 million.  Both admissionsand win per admission increased 2%. Offsetting these revenue increases was anincrease in our promotional allowances of $4.2 million, primarily in ourincreased coupon offerings.  This increasein promotional allowances was implemented as additional incentive to ourcustomers during the construction of our new garage. Operating expensesincreased $1.5 million in the following areas: depreciation and amortization expense increased $1.8 million as weaccelerated depreciation on our current parking garage (demolished during thesecond quarter 2005 to allow construction on our new hotel), gaming andadmission taxes increased $0.8 million corresponding with our increase incasino revenues, offset by a reduction in our SG&A expense of $1.5 millionas advertising and promotions were at reduced levels during the six monthsended June 30, 2005, compared to 2004 as our new larger barge-based casinowas newly opened in the first quarter 2004 (officially opened in December 2003).

 

*Joliet*– Net revenues increased $4.3 million due primarily to an increase in casinorevenues of $3.9 million, or 3.5%, to $114.4 million.  Admissions increased 6% and win per admissiondecreased 2%. Joliet expanded their hours of operation and eliminated theadmission fee effective early June 2005 in response to Illinois passinglegislation rolling back admission and gaming taxes to previous enacted rateswhile maintaining a minimum gaming tax as of June 30, 2005.  Such legislation is pending enactment of theIllinois Governor. Operating expenses increased $1.3 million due primarily toan increase in gaming and admission taxes of $2.4 million corresponding to thehigher revenue levels and SG&A expense increased $1.0 million due to increasedadvertising and promotions.  Offsettingthese increases was a decrease in depreciation and amortization expense of $1.6million as 2004 included accelerated depreciation on our slot product foreventual replacement with TITO slot product.

 

*Alton*– Net revenues increased $3.2 million as casino revenues increased $3.2million, or 6.1%, to $56.3 million due primarily to increases in admissions of2% and win per admission of 4%. Additionally, we expanded our hours of operations beginning in early June 2005.  Operating expenses increased slightly by $0.9million due primarily to an increase in gaming and admission taxes of $1.9million corresponding to the increased revenue levels offset by a decrease incasino expenses of $1.0 million due to operational efficiencies.

 

*BatonRouge* – Net revenues increased $8.6 million as casinorevenues increased $5.4 million, or 12.6%, to $48.0 million due primarily to anincrease in admissions of 33% (due to the City of Baton Rouge hosting theAmerican Bowling Congress) and the addition of a poker room.  This customer mix has led to a decrease inwin per admission of 15%.  FB&Orevenue increased $3.8 million due to a remodeling of our restaurant andincreased admissions and hotel occupancy due to the bowling congress. Operatingexpenses increased $5.1 million primarily due to an increase in gaming andadmission taxes of $1.6 million corresponding with the increase in casinorevenues and an increase in FB&O expense of $2.1 million corresponding tothe increased FB&O revenues with the remaining increase in other operatingexpenses.

 

16

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*SiouxCity* – Net revenues increased $4.6 million due to an increasein casino revenues of $4.9 million, or 21.2%, to $28.0 million due to the positiveimpact of the transfer and renovation of our Riverside riverboat to Sioux Citythat was placed in service on September 1, 2004, and provides 125additional slot machines and six additional table games. Additionally,admissions have increased 27% while win per admission decreased 5%.  Operating expenses increased $3.2 millionprimarily due to an increase in gaming and admissions taxes of $1.9 millioncorresponding to the increase in casino revenues with the remaining increase inexpenses spread throughout our operations due primarily to the increase inoperations with the larger riverboat.

 

*Corporate*– Operating expenses increased $5.4 million to $17.3 million due primarily tocosts of $3.5 million associated with our pending merger with Penn and $1.6million of other consulting fees.

 

Other overall company costs were asfollows:

 

*OtherIncome (Expense)*– Net interest expense decreased $5.8million to $28.8 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 $26.0 million in netpremiums and fees for the six months ended June 30, 2004.

 

*IncomeTax Expense –*Income tax expense increased $13.2 million to$35.2 million as pre-tax earnings increased primarily due to increased earningsat our Joliet, Alton, Baton Rouge and Sioux City properties and expensesrelated to the early retirement of our 10.75% Notes in the six months ended June 30,2004. Our lower overall effective tax rate for the six months ended June 30,2005, as compared to the six months ended June 30, 2004 is primarily due torecording a tax benefit related to this debt refinancing at its’ marginaleffective tax rate which was lower than our recurring effective tax rate.

 

**Competition**

 

OurAlton Casino faces competition from four other casino operators in the St.Louis area (two additional casinos have been approved for the St. Louismarket).  One competitor opened a hotelexpansion and facility renovation during the third quarter 2004.  Our Riverside Casino faces competition fromthree casinos in the Kansas City area. Our Baton Rouge Casino faces competition from one casino located indowntown Baton Rouge, a nearby Native American casino and multiple casinosthroughout Louisiana. We face competition in Sioux City, Iowa from video gamingdevices in nearby South Dakota, from two land-based Native American casinosand, to a lesser extent, from slot machines at a pari-mutuel racetrack inCouncil Bluffs, Iowa and from two riverboat casinos in the Council Bluffs,Iowa/Omaha, Nebraska market. Our Lawrenceburg Casino faces competition from tworiverboat casinos in the Cincinnati market. Our Joliet Casino faces competitionfrom seven other casino operators in the Chicago metropolitan area, includingfour casinos in Indiana.

 

Therecould be further unanticipated competition in any market in which we operate asa 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 be highlycompetitive.

 

**Liquidityand Capital Resources**

 

In thesix months ended June 30, 2005, we generated cash flows from operatingactivities of $82.5 million compared to $97.4 million for the six months ended June 30,2004. This decrease is due primarily to differences in the timing of ourinterest payments caused by the refinancing in 2004.

 

In the six months ended June 30,2005, we used cash flows for investing activities of $39.5 million compared to$45.0 million for the six months ended June 30, 2004. During the sixmonths ended June 30, 2005, our investing activities included purchases ofproperty and equipment of $39.6 million (including $20.7 million on our currentRiverside and Lawrenceburg construction projects) compared to $46.0 million inproperty and equipment purchases for the six months ended June 30, 2004($24.4 million in residual payments on our Riverside construction projectcompleted in December 2003).

 

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During the six months ended June 30,2005, we used cash flows of $48.3 million for financing activities, primarilyfor repayments on our Credit Facility, compared to using $49.9 million for thesix months ended June 30, 2004.  Forthe six months ended June 30, 2004, we used cash flows of $378.0 millionfor payments related to the repurchase of our 10.75% Notes offset by cashprovided through the issuance of $350 million of our new 7% Notes.  Additionally, for the six months ended June 30,2004, we incurred $7.1 million in deferred finance fees related to the 7% Notesand used $14.6 million for repayments on our line of credit.

 

On September 30, 2004, weentered 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.

 

Our Subordinated Notes due in 2011and 2014 contain certain restrictions on the payment of dividends on our commonstock and the occurrence of additional indebtedness, as well as other customarydebt covenants.  In addition, the CreditFacility requires us to maintain certain financial ratios, based on terms asdefined in the Credit Facility, which, as of June 30, 2005, are asfollows:  (1) Total Funded Debt toEBITDA Ratio of a maximum of 4.75 to 1.0; (2) Senior Funded Debt to EBITDARatio of a maximum of 3.50 to 1.0; and (3) Fixed Charge Coverage Ratio ofa minimum of 1.50 to 1.0.  As of June 30,2005, we were in compliance with these ratios.

 

Under our Subordinated Notesindentures, our ability to make dividends and other distributions on our commonstock and make investments outside of the Company and its restrictedsubsidiaries is generally limited to 50% of our consolidated net income since July 1,1999.  In addition, we are restrictedfrom incurring additional indebtedness, which, after giving effect of theadditional indebtedness, would cause our Interest Coverage Ratio (ConsolidatedEBITDA to Consolidated Interest Expense for the most recent four fiscalquarters on a pro forma basis) to be less than 2.0 to 1.0. None of these covenantscurrently places any material limitations on our anticipated future operatingor capital plans.

 

We continue to make capitalinvestments at our existing properties for expansion and product enhancement,including continued expansion at Riverside for a new 1,400-space parking garage(estimated to be completed in the third quarter 2005), our Lawrenceburgexpansion project and maintenance capital expenditures. The new garage at ourRiverside property is part of a $75 million expansion project that also includesa new 250-room hotel.  The Lawrenceburgproject includes the replacement of the existing three-level boat with a largersingle-level boat that adds 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.  The Raceway acquisition closedon August 4, 2005.  We have fundedthis acquisition and expect to fund these expenditures from internallygenerated cash and availability under our Credit Facility.

 

Given our significant cashgeneration capabilities, we seek investment opportunities at our existingproperties or into new assets. In addition, we may from time to time seek toretire certain of our outstanding debt through open market cash purchases,privately negotiated transactions or otherwise. Such repurchases, if any, willdepend on prevailing market conditions, our liquidity requirements, contractualrestrictions and other factors. Under the terms of our merger agreement withPenn, we cannot incur, assume or prepay any long-term or short-term debt orissue any debt securities, except for borrowings under existing line of creditand actions taken in the ordinary course of business consistent with pastpractice. At June 30, 2005, we had approximately $74.8 million of cash andcash equivalents; $212.2 million was outstanding on our Credit Facility ($38.5million on our revolving Credit Facility and $173.7 million on our term loan)and $550.0 million of Subordinated Notes (due in September 2011 and January 2014).  As of June 30, 2005, we had outstandingletters of credit of $9.9 million and additional availability under the CreditFacility was approximately $451.6 million.

 

The Board of Directors has approveda stock repurchase program authorizing us to repurchase up to $30.0 million ofour common stock.  As of the filing dateof this report, we have made no stock repurchases under this program.  Additionally, 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 prior to consummation of themerger.

 

Consistent with gaming industrypractice, we conduct our operations with a net working capital deficit. Unliketraditional industrial companies, a gaming company’s balance sheet has limitedaccounts receivable and inventories. In addition, casinos generate significantcash on a daily basis. We generally apply our daily cash flows to fund capitalexpenditures or pay down debt under our revolving Credit Facility and pay ourcurrent liabilities pursuant to their normal 

 

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cycles.  Giventhe significant daily cash flows generated by our operations and the financialflexibility provided by our Credit Facility, the existence of a working capitaldeficit has no impact on our ability to operate our business or meet ourobligations as they become due.  Webelieve that cash on hand, operating cash flows, and funds available under ourCredit Facility will be sufficient to fund our current operating, capitalexpenditure and debt service obligations for the next 12 months.

 

Because we have no directoperations and no significant assets other than ownership of stock in oursubsidiaries, we are dependent on our subsidiaries for payments of dividendsand other distributions to generate the funds necessary to meet our cashneeds.  Although there are currently norestrictions on the flow of funds between our subsidiaries and us, should oursubsidiaries be unable to remit dividends or other payments, our ability tomeet our financial obligations may be impaired.

 

Our long-term debt, as of June 30,2005, matures as follows (in thousands):

 
| One year and less |   | $       | 2,607   |   |
|-------------------|--------|---------|---------|--------|
| 1 - 3 years       |   | 3,931   |    |
| 3 - 5 years       |   | 42,531  |    |
| After 5 years     |   | 715,572 |    |
| Total             |   | $       | 764,641 |   |

 

# **Off Balance SheetArrangements**

# ** **

# **We have not entered into anytransactions with unconsolidated entities whereby we have financial guarantees,subordinated retained interest, derivative instruments or other contingentarrangements that expose us to material continuing risks, contingentliabilities or any other obligation under a variable interest in anunconsolidated entity that provides financing, liquidity, market risk or creditrisk support to us.**

# ** **

# **Critical AccountingEstimates**

# ** **

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

 

*Goodwill–*We have approximately $727 million of goodwill recorded onour balance sheet at June 30, 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 June 30, 2005, we have approximately$556 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.

 

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

 

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*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.

 

For the three and six months ended June 30,2005, we have recorded gaming taxes at our Illinois properties at the currenttax rates without giving benefit to a statutory rollback in gaming taxesscheduled to rollback effective July 1, 2005.  During the second quarter of 2005, theIllinois legislature passed legislation which, if enacted by the Governor, willreduce the overall gaming tax rates including a rollback of the top marginalgaming rate from 70% to 50%.  Thislegislation also established a minimum annual gaming tax for fiscal yearsending June 30, 2006.  This minimumannual gaming tax is based on revenues generated over the twelve months ended June 30,2005. Upon the anticipated enactment of this legislation during the thirdquarter of 2005, we will record the effect on our gaming tax provisions for ourIllinois properties.

 

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

 

# **Non-GAAP FinancialMeasures**

 

EBITDAis a supplemental measure of our performance that is not required by, orpresented in accordance with Generally Accepted Accounting Principles (“GAAP”).EBITDA is not a measurement of our financial performance under GAAP and shouldnot be considered as an alternative to net income, operating income or anyother performance measures derived in accordance with GAAP or as an alternativeto cash flow from operating activities as measures of our liquidity.

 

EBITDA is defined as earningsbefore interest, taxes, depreciation and amortization. Our compensation plansbase incentive compensation payments in part on EBITDA performance measuredagainst targets, and we use it to establish our budgets and analyze ouroperations as compared to our budgets. In addition, our Credit Facility and ourindentures use measures similar to EBITDA (with additional adjustments) tomeasure 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.

 

In addition, in evaluating EBITDA,you should be aware that in the future we will incur expenses such as thoseused in calculating EBITDA. Our presentation of EBITDA should not be construedas an inference that our future results will be unaffected by unusual ornonrecurring items.

 

EBITDA has limitations as ananalytical tool, and you should not consider it in isolation, or as asubstitute for analysis of our results as reported under GAAP. Some of these limitationsare:

 

•                                          it does notreflect our cash expenditures, or future requirements for capital expendituresor contractual commitments;

•                                          it does notreflect changes in, or cash requirements for, our working capital needs;

•                                          it does notreflect the significant interest expense, or the cash requirements necessary toservice interest or principal payments, on our debt;

 

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•                                          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 notadjusted for all non-cash income or expense items that are reflected in ourstatements of cash flows;

•                                          it does notreflect the impact of earnings or charges resulting from matters we considernot to be indicative of our ongoing operations, as discussed in ourpresentation of EBITDA and Management’s Discussion and Analysis of FinancialCondition and Results of Operation; and

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

 

Because of these limitations,EBITDA should not be considered as a measure of discretionary cash available tous to invest in the growth of our business. We compensate for these limitationsby relying primarily on our GAAP results and using EBITDA only supplementally.

 

Property-level EBITDA representsEBITDA attributable to a particular casino property before corporate expense.We present property-level EBITDA as a further supplemental measure of theperformance of our casino properties. Management uses property-level EBITDA asthe primary measure of our properties’ performance, including the evaluation ofoperating personnel at our properties. We also use property-level EBITDA tomake decisions regarding the allocation of capital among our properties. Thesedecisions 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 an analytical tool, property-levelEBITDA is subject to similar limitations as EBITDA. In addition, because we donot include corporate expense in our computation, property-level EBITDA doesnot reflect all the costs of operating the properties as if each were astand-alone business unit. Corporate expense includes significant expensesnecessary to manage a multiple casino operation, certain of which, such ascorporate executive compensation, development, public company reporting,treasury, legal and tax expenses, would also be required of a typical standalone casino property.

 

**Item3.  Quantitative and QualitativeDisclosures about Market Risk**

 

Theinformation called for by this item is provided under the caption “Liquidityand Capital Resources” under Item 2 – Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

 

**Item4.  Controls and Procedures**

 

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

 

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

 

As of the end of the period coveredby this Report, June 30, 2005, (the “Evaluation Date”), we carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including Richard J. Glasier, our President and Chief ExecutiveOfficer and Dale R. Black, our Senior Vice President and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures.  Based upon thatevaluation, the President and Chief Executive Officer and the Senior VicePresident and Chief Financial Officer concluded that our disclosure controlsand procedures were effective as of the Evaluation Date.

 

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

 

Therewas no change in the Company’s internal controls during the period covered bythis Report that could materially affect, or could reasonably be expected tomaterially affect, the Company’s internal control over financial reporting.

 

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

 

**Item 1.**    *Legal Proceedings –*

 

***CapitalHouse Preservation Company, L.L.C. v. Jazz Enterprises, Inc. (“Jazz”) et.al.***

 

On November 26,1997, Capitol House filed an amended petition in the Nineteenth JudicialDistrict Court for East Baton Rouge Parish, State of Louisiana, amending itspreviously filed but unserved suit against Richard Perryman, the personselected by the Louisiana Gaming Division to evaluate and rank the applicantsseeking a gaming license for East Baton Rouge Parish, and now adding its statelaw claims against Jazz, the Former Jazz Shareholders, Argosy Gaming Company,Argosy of Louisiana, Inc. and Catfish Queen Partnership in Commendam,d/b/a the Belle of Baton Rouge Casino. This suit alleges that these partiesviolated the Louisiana Unfair Trade Practices Act in connection with obtainingthe gaming license that was issued to us. The plaintiff, an applicant for agaming license whose application was denied by the Louisiana Gaming Division,seeks to prove that our gaming license was invalidly issued and seeks torecover lost gaming revenues that plaintiff contends it should have earned ifthe gaming license had been properly issued to plaintiff.  In June 2003,the Louisiana trial court dismissed this lawsuit.  The trial court’sdecision was appealed to the First Circuit Court of Appeals, which affirmed thedismissal of the suit by the trial court.  The plaintiff filed a writapplication with the Louisiana Supreme Court on January 10, 2005 seekingto overturn the decision of the lower courts.  The Supreme Court recentlygranted the plaintiff’s writ application on March 24, 2005, reversed thedismissal of the case by the lower courts and remanded the case back to thetrial court for further proceedings.  We believe these claims are withoutmerit and will continue to vigorously defend ourselves in this action before thetrial court.

 

Wehave the right to seek indemnification from the Former Jazz Shareholders forany liability we, Argosy Louisiana, Catfish Queen or Jazz suffers as a resultof such cause of action.  As part of the consideration payable by us tothe Former Jazz Shareholders for the acquisition of Jazz, we agreed at the timeof such acquisition to annual deferred purchase price payments of $1,350,000for each of the first ten years after closing and $500,000 for each of the nextten years. Payments are to be made quarterly by us. The definitive acquisitiondocuments provide us with rights of recoupment and offset rights against suchdeferred purchase price payments for indemnification claims against the FormerJazz Shareholders and for liabilities that the Former Jazz Shareholderscontractually agreed to retain.  There can be no assurance that the FormerJazz Shareholders will have assets sufficient to satisfy any claim in excess ofour offset rights, therefore, an adverse ruling in this matter could have a materialadverse effect on us.  One of the three Former Jazz Shareholders has filedbankruptcy in Reno, Nevada and we are currently involved in litigation in thebankruptcy court with certain creditors who dispute our legal right to recoupand setoff certain indebtedness and obligations owed to us against the deferredpayments otherwise payable to the Former Jazz Shareholders, including our rightto indemnity for legal fees and any possible adverse judgment rendered inconnection with the Capitol House litigation.  We intend to defend ourrights to recoup and setoff any indemnifiable claims arising out of thepurchase agreement.

 

**Item 2.**    *Unregistered Sales 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 withoutprior notice from time to time in the open market or through privatelynegotiated third party transactions in compliance with applicable laws anddepending on market conditions. During the quarter ended June 30, 2005, andinception to date, we have not made any stock repurchases under the program.The stock repurchase program has no expiration date. Under the terms of ourMerger Agreement with Penn, no dividends can be declared, set aside or paid andwe can make no redemptions or repurchases of our stock.

 

**Item 3.**    *Defaults Upon Senior Securities –* None

 

**Item 4.**           *Submission of Matters to aVote of Security Holders –*

 

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TheCompany’s annual meeting of stockholders was held on April 26, 2005.  At the meeting, the stockholders voted onmatters as follows:

 

Electionof Board of Directors –

 
| ** **          | ** ** | **Votes For** | ** ** | **Votes Against** | ** ** | **Votes Withheld** | ** ** |
|---------------------|------------|---------------|------------|-------------------|------------|--------------------|------------|
| William F.  Cellini |       | 24,381,460    |       | —            |       | 257,679            |       |
| Michael W. Scott    |       | 24,063,061    |       | —            |       | 576,078            |       |
| Richard J.  Glasier |       | 24,382,844    |       | —            |       | 256,295            |       |

 

**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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**ARGOSY GAMING COMPANY**

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                                                    | Argosy Gaming  Company                                                 |   |
|---------------------------------------------------------|------------------------------------------------------------------------|--------|
|                                                    |           Registrant |
|                                                    |                                                                   |
|                                                    |                                                                   |
| Date:     August 5,  2005 | /s/ Dale R. Black                                                      |   |
|                                                    | Dale R. Black                                                          |
|                                                    | Senior Vice  President - Chief Financial Officer                       |
|                                                         |                                                                        |        |  |

 

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