UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________________ to ____________________
Commission File Number: 333-88829
PENINSULA GAMING COMPANY, LLC/PENINSULA GAMING CORP.
(Exact name of registrant as specified in its charter)
IOWA 42-1483875
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
3rd STREET ICE HARBOR, PO BOX 1750, DUBUQUE, IOWA 52001-1750
(Address of principal executive offices) (Zip Code)
(563) 583-7005
(Registrant's telephone number including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. Yes [X] No []
All of the common equity interests of Peninsula Gaming Company, LLC
(The "Company") are held by Peninsula Gaming Partners, LLC, and all of the
common stock of Peninsula Gaming Corp. is held by Peninsula Gaming Company, LLC.
1
PENINSULA GAMING COMPANY, LLC
INDEX TO FORM 10-Q
Part I - Financial Information
Item 1 - Financial Statements
Peninsula Gaming Company, LLC:
Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2002 and
December 31, 2001.......................................................................3
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six
Months Ended June 30, 2002 and 2001 ....................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six
Months Ended June 30, 2002 and 2001 ....................................................5
Notes to Condensed Consolidated Financial Statements (Unaudited)...........................6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................................14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk...............................21
Part II - Other Information...............................................................................22
Signatures................................................................................................24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENINSULA GAMING COMPANY, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,465,356 $ 7,523,652
Restricted cash 542,511
Accounts receivable, less allowance for doubtful accounts
of $56,640 and $56,917, respectively 1,300,412 105,480
Inventory 146,213 97,677
Prepaid expenses 664,932 307,064
------------ ------------
Total current assets 13,119,424 8,033,873
------------ ------------
PROPERTY AND EQUIPMENT, NET 18,288,497 17,930,643
------------ ------------
OTHER ASSETS:
Deferred financing costs, net of amortization
of $2,076,553 and $1,844,783, respectively 4,122,330 3,687,698
Goodwill and other intangible assets 71,451,925 53,083,429
Development costs 2,724,175 1,602,503
Deposits 106,838 35,405
------------ ------------
Total other assets 78,405,268 58,409,035
------------ ------------
TOTAL $109,813,189 $ 84,373,551
============ =============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,915,310 $ 335,416
Purse settlement payable 1,241,598
Accrued payroll and payroll taxes 1,183,979 1,280,177
Other accrued expenses 7,167,659 2,234,922
Current maturity - capital lease obligations 113,552 113,552
Current maturity - notes payable to related party 294,804
------------ ------------
Total current liabilities 11,916,902 3,964,067
------------ ------------
LONG-TERM LIABILITIES:
Senior secured notes, net of discount 70,437,129 70,384,482
Line of credit 12,000,000
Capital lease obligations 362,229 362,229
Notes payable to related party 5,141,438
------------ ------------
Total long-term liabilities 87,940,796 70,746,711
------------ ------------
Total liabilities 99,857,698 74,710,778
COMMITMENTS AND CONTINGENCIES
PREFERRED MEMBERS' INTEREST, REDEEMABLE 4,000,000 4,000,000
MEMBERS' EQUITY 5,955,491 5,662,773
------------ ------------
TOTAL $109,813,189 $ 84,373,551
============ ============
See notes to condensed consolidated financial statements (unaudited).
3
PENINSULA GAMING COMPANY, LLC
CONDENSED CONSOIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
------------------- ----------------- ----------------- ---------------
REVENUES:
Casino $ 12,174,849 $ 12,010,185 $ 23,528,643 $ 23,170,371
Racing 3,651,690 4,912,837
Food and beverage 1,154,471 653,974 1,894,559 1,261,507
Other 31,252 32,323 55,931 60,419
Less promotional allowances (645,911) (698,638) (1,231,874) (1,257,858)
------------------- ----------------- ----------------- ---------------
Total net revenues 16,366,351 11,997,844 29,160,096 23,234,439
------------------- ----------------- ----------------- ---------------
EXPENSES:
Casino 5,203,614 5,172,860 10,250,293 10,146,657
Racing 2,773,780 3,737,299
Food and beverage 1,092,551 726,614 1,828,080 1,407,045
Boat operations 567,295 579,715 1,151,271 1,133,886
Other 7,080 5,601 15,278 9,819
Selling, general and administrative 2,070,991 1,631,732 3,872,540 2,982,387
Depreciation and amortization 728,210 957,802 1,433,442 1,912,008
------------------- ----------------- ----------------- ----------------
Total expenses 12,443,521 9,074,324 22,288,203 17,591,802
------------------- ----------------- ----------------- ----------------
INCOME FROM OPERATIONS 3,922,830 2,923,520 6,871,893 5,642,637
------------------- ----------------- ----------------- ----------------
OTHER INCOME (EXPENSE):
Interest income 16,105 58,044 31,070 110,788
Interest expense (including amortization
of deferred financing costs and bond
discount of $297,830 and $232,975
for the three months ended June 30,
2002 and 2001, respectively,
and $555,514 and $435,921 for the
six months ended June 30, 2002
and 2001, respectively)
(2,889,395) (2,416,546) (5,531,624) (4,796,367)
Loss on sale of assets (76,765) (75,765)
------------------- ----------------- ----------------- ----------------
Total other expense (2,873,290) (2,435,267) (5,500,554) (4,761,344)
------------------- ----------------- ----------------- ----------------
NET INCOME BEFORE PREFERRED
MEMBER DISTRIBUTIONS
AND MINORITY INTEREST 1,049,540 488,253 1,371,339 881,293
LESS PREFERRED MEMBER
DISTRIBUTIONS (93,263) (95,680) (186,525) (199,649)
LESS MINORITY INTEREST (161,563) (196,144)
------------------- ----------------- ----------------- ----------------
NET INCOME TO COMMON MEMBERS'
INTEREST $ 794,714 $ 392,573 $ 988,670 $ 681,644
=================== ================= ================= ================
See notes to condensed consolidated financial statements (unaudited).
4
PENINSULA GAMING COMPANY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2002 2001
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 988,670 $ 681,644
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 1,433,442 1,912,008
Provision for doubtful accounts 67,374 77,966
Amortization of deferred financing costs and bond
discount 555,515 435,921
Loss on sale of assets 75,765
Minority interest share of income 196,144
Changes in operating assets and liabilities:
Restricted cash 937,510
Receivables (1,044,611) (130,718)
Inventory (2,513) 6,455
Prepaid expenses and other assets (297,076) 334,628
Accounts payable 817,788 (491,859)
Accrued expenses 4,304,339 4,289,260
--------------- ----------------
Net cash flows from operating activities 7,956,582 7,191,070
CASH FLOWS FROM INVESTING ACTIVITIES:
Development costs (1,003,014)
Acquisition of business, net of cash acquired (13,729,862)
Proceeds from sale of property and equipment 27,133
Purchase of property and equipment (630,170) (1,111,039)
--------------- ----------------
Net cash flows from investing activities (15,363,046) (1,083,906)
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred members' interest redeemed (3,000,000)
Deferred financing costs (937,500) (475,446)
Member distributions (695,953) (876,558)
Principal payments on long-term debt to related party (18,379)
Proceeds from line of credit 12,000,000
--------------- ---------------
Net cash flows from financing activities 10,348,168 (4,352,004)
--------------- ---------------
NET INCREASE IN CASH 2,941,704 1,755,160
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,523,652 8,362,122
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,465,356 $ 10,117,282
=============== ===============
See notes to condensed consolidated financial statements (unaudited).
5
PENINSULA GAMING COMPANY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Basis of Presentation
Peninsula Gaming Company, LLC (the "Company" or "PGC") is wholly owned by
Peninsula Gaming Partners, LLC, a Delaware limited liability company ("PGP") and
our sole managing member. The Company is a Delaware limited liability company
formed on January 26, 1999 for the purpose of purchasing assets comprised of the
Diamond Jo Casino and related real property. Peninsula Gaming Corp. is a wholly
owned subsidiary of the Company, has no assets or operations and was formed
solely to facilitate the offering of our 12 1/4% Senior Secured Notes due 2006
(the "Notes") in certain jurisdictions. OED Acquisition, LLC ("OEDA") is a
wholly owned subsidiary of PGC formed on July 9, 2001 to facilitate the purchase
of a 50% membership interest in The Old Evangeline Downs, L.C. ("OED"), a
Louisiana limited liability company that currently operates a racetrack that
provides both live thoroughbred horse racing and off-track betting in and around
Lafayette, LA. The financial position of OED as of June 30, 2002 and the results
of its operations and its cash flows for the period February 15, 2002 (date of
acquisition) to June 30, 2002 have been consolidated into the Company's
consolidated financial statements as the Company has substantive control of OED.
All significant intercompany transactions have been eliminated.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of normal recurring entries
unless otherwise disclosed, necessary to present fairly the financial
information of the Company for the interim periods presented and have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The interim results reflected in the financial
statements are not necessarily indicative of results for the full year or other
periods.
The financial statements contained herein should be read in conjunction with the
audited financial statements and accompanying notes to the financial statements
included in the Company's Annual Report on Form 10-K for the period ended
December 31, 2001. Accordingly, footnote disclosure which would substantially
duplicate the disclosure in the audited financial statements has been omitted in
the accompanying unaudited financial statements.
2. Acquisitions
On February 15, 2002, OEDA consummated its acquisition of: (i) 50% of the
membership interests (the "BIM3 Interests") of OED from BIM3 Investments, a
Louisiana partnership ("BIM3"); and (ii) BIM3's one-half (1/2) interest in two
promissory notes in the principal amount of $10,909,244 issued by OED (the "OED
Notes"), for an aggregate purchase price of $15,000,000 in cash. The remaining
50% of the membership interests in OED are currently owned by William E.
Trotter, II Family L.L.C., a Louisiana limited liability company. The
acquisition was made pursuant to a purchase agreement dated June 27, 2001 by and
among the Company's parent, PGP, OED and BIM3 (as amended, the "Purchase
Agreement"). Pursuant to the terms of the Purchase Agreement, PGP paid a cash
deposit of $500,000 which was applied against the purchase price when the
acquisition was consummated. The Purchase Agreement was assigned to OEDA by PGP
on October 23, 2001 for a purchase price of $523,836 which was paid by OEDA in
cash.
The Company accounted for its acquisition as a purchase in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". The
purchase price has been allocated to the underlying assets and liabilities based
on their estimated fair values at the date of acquisition. To the extent the
purchase price exceeded the fair value of the net identifiable assets acquired,
such excess was recorded as goodwill. As of June 30, 2002, the Company recorded
goodwill of approximately $18.3 million related to the acquisition. Under
6
the provisions of SFAS No. 142, goodwill arising from the acquisition will not
be amortized but will be reviewed at least annually for impairment and written
down and charged to income when its recorded value exceeds its estimated fair
value. The results of operations of OED are included in the condensed
consolidated financial statements from the date of acquisition through June 30,
2002.
The source of funds for the transaction described above was $3,000,000 of cash
on-hand and $12,000,000 of borrowings under the Company's Credit Agreement with
Foothill Capital Corporation. During the first quarter of 2002, the Company
amended its credit facility to increase the available funds to $12,500,000 and
obtained consents under the indenture governing its Notes to consummate the
acquisition. On March 7, 2002, the Company paid consent fees totaling $887,500
to holders of the Notes related to the above transaction.
On June 25, 2002 PGP entered into an agreement with William E. Trotter, II
("WET2") and William E Trotter, II Family LLC, a Louisiana limited liability
company ("WET2LLC") to acquire (i) the 50% interest in the OED Notes owned by
WET2, and (ii) the 50% membership interest in OED, owned by WET2LLC, for a
purchase price of $15,000,000, plus a contingent fee of one half of one percent
(.5%) of the net slot revenues from the date of opening of a new casino, located
in St. Landry Parish, until the date that is ten years after the opening of the
casino to the public. The Company is currently pursuing financing for the above
transaction through various sources.
The Company will manage the existing racetrack and, subject to receipt of
required gaming approvals, is planning to design, construct, manage and operate
a new casino and contiguous racetrack facility with pari-mutuel wagering, slots
and OTB parlors in St. Landry Parish, Louisiana (the "Racino Project").
It is anticipated that OED will require at least $90 million to finance the
construction and development of the Racino Project. The Company is currently
investigating financing alternatives for the financing of construction and
development costs including, but not limited to, a private placement of debt
securities. The Racino Project is expected to include at least 1,525 slot
machines, dirt and turf thoroughbred racetracks and several dining options. The
Racino Project is one of only three racetracks in the State of Louisiana
currently authorized to conduct casino operations. The successful completion of
the Racino Project is subject to factors beyond the control of OED. The extent
and timing of the development and construction of the Racino Project will depend
on available cash flow or the ability to obtain financing. There can be no
assurance that sufficient cash flow or necessary financing will be available on
satisfactory terms to OED. In addition, the Company and OED will be subject to
comprehensive and stringent government regulations. The Company and OED and
their respective officers, directors, members, significant shareholders and
employees will be subject to the Louisiana Gaming Authority and will need to
submit to a regulatory review process prior to mandatory licensing. There can be
no assurance that all necessary licenses will be issued, or issued on a timely
basis. For the foregoing reasons, there can be no assurance that the Racino
Project will be completed, or completed in a timely manner.
The following unaudited consolidated pro forma information presents a summary of
the consolidated results of operations of the Company for the six months ended
June 30, 2002 and 2001 as if the acquisition of 50% of OED had occurred January
1, 2001.
Consolidated Pro Forma Information (Unaudited)
(in thousands)
2002 2001
-------- --------
Net revenues $ 30,529 $ 30,180
Income from operations 7,123 6,691
Net income to common interests 967 685
The consolidated pro forma adjustments included in the consolidated pro forma
information above represents interest on borrowings of $12.0 million under our
credit facility with Foothill Capital Corp. used
7
to finance the purchase of OED, the elimination of intercompany interest expense
and the elimination of amortization of the reorganization value in excess of
amounts allocable to identifiable assets (included in goodwill) related to OED.
The pro forma results do not purport to be indicative of results that would have
occurred had the acquisition been in effect for the periods presented, nor do
they purport to be indicative of the results that will be obtained in the
future.
3. Summary of Significant Accounting Policies and Recent Accounting
Pronouncements
RESTRICTED CASH - Restricted cash represents amounts for purses to be paid
during the live meet racing season at OED. Additionally, restricted cash
includes entrance fees for a special futurity race during the current racing
season, plus any interest earnings. These funds will be used to pay the purse
for the race. A separate interest bearing bank account is required for these
funds.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost and
capitalized lease assets are recorded at their fair market value at the
inception of the lease. Major renewals and improvements are capitalized, while
maintenance and repairs are expensed as incurred. Depreciation and amortization
are computed on a straight-line basis over the following estimated useful lives:
Land improvements 20-40 years
Building and leasehold improvements* 9-40 years
Riverboat and improvements 5-20 years
Furniture, fixtures and equipment 3-12 years
Computer equipment 3-5 years
Vehicles 5 years
* The Company leases the land at The Old Evangeline Downs racetrack pursuant
to a land lease which expires on the earlier of December 31, 2004 or the
first day that the Company opens a new racetrack facility for business in
St. Landry Parish, Louisiana. The remaining net book value of the Company's
leasehold improvements at The Old Evangeline Downs racetrack as of June 30,
2002 is being amortized over the remaining term of the land lease.
REVENUE RECOGNITION -- In accordance with common industry practice, our casino
revenues are the net of gaming wins and losses. Racing revenues include our
share of pari-mutuel wagering on live races after payment of amounts returned as
winning wagers, and our share of wagering from import and export simulcasting as
well as our share of wagering from our off-track betting parlors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Included in selling, general and
administrative expenses for the three and six months ended June 31, 2002 are
consulting and lobbying expenses of $57,500 related to the proposed Racino
Project. In addition, during the three and six months ended June 30, 2002, the
Company incurred selling, general and administrative expenses totaling $25,000
and $55,000, respectively, related to a governmental relations services
agreement with respect to gaming issues and developments in Wisconsin which
might affect the Company and its gaming operations in Iowa. The Company does not
plan to incur any significant additional expenses in this regard.
SFAS 142 "GOODWILL AND OTHER INTANGIBLE ASSETS" -- SFAS 142 provides that
goodwill and certain indefinite lived intangible assets will no longer be
amortized but will be reviewed at least annually for impairment and written down
and charged to income when their recorded value exceeds their estimated fair
value. During the first quarter of 2002, the Company performed a transitional
impairment test on goodwill in accordance with SFAS 142 and determined the
estimated fair value of the Company exceeded its carrying value. Based on that
review, management determined that there was no impairment of goodwill. Goodwill
amortization during the three and six months ended June 30, 2001 was $353,497
and $706,994, respectively. Assuming the non-amortization of these standards had
been adopted at the
8
beginning of 2001, the Company's adjusted net income for the three and six
months ended June 30, 2001 would have been $746,070 and $1,388,638,
respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS -- In April 2002, the FASB issued SFAS No.
145, Recission of FASB Statements Nos. 4, 44, and 64, amendment of FASB
Statement No. 13, and Technical Corrections. This Statement requires gains and
losses from extinguishment of debt to be classified as an extraordinary item
only if the criteria in Opinion 30 has been met. Further, lease modifications
with economic effects similar to sale-leaseback transactions must be accounted
for in the same manner as sale-leaseback transactions.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
the previous guidance on the subject. This statement requires, among other
things, that a liability for a cost associated with an exit or disposal activity
be recognized when the liability is incurred. The provisions for this statement
are effective for exit or disposal activities that are initiated after December
31, 2002.
MINORITY INTEREST -- Minority interest on the Condensed Consolidated Statement
of Operations represents the 50% portion of net income from OED allocated to
WET2LLC, who owns the remaining 50% interest in OED. Due to the deficit balance
within members' equity of approximately $5.8 million as of February 15, 2002
(date of acquisition), PGC recorded additional goodwill of approximately $2.9
million related to the minority interest portion of this deficit balance within
OED's members' equity. In accordance with minority interest accounting, no
minority interest liability is recorded until the OED members' equity balance is
positive. Goodwill will continue to be adjusted for net income in future periods
until the minority interest's historical deficit balance exceeds zero.
4. Property and equipment at June 30, 2002 and December 31, 2001 are summarized
as follows:
June 30, December 31,
2002 2001
------------ ------------
Land $ 1,110,000 $ 800,000
Buildings and leasehold improvements 8,312,147 6,565,735
Riverboats and improvements 8,277,346 8,261,693
Furniture, fixtures and equipment 6,840,047 5,512,717
Computer equipment 687,929 617,538
Vehicles 130,753 65,032
Equipment held under capital lease
obligations 704,527 704,527
------------ ------------
Subtotal 26,062,749 22,527,242
Accumulated depreciation (7,774,252) (4,596,599)
------------ ------------
Property and equipment, net $18,288,497 $17,930,643
============ ===========
5. Notes Payable to Related Party
"Notes payable to related party" are two promissory notes payable to WET2.
During the three months ended June 30, 2002 and the period February 15, 2002
(date of acquisition) to June 30, 2002, interest of $135,441 and $156,545,
respectively, was paid to WET2. In addition, at June 30, 2002, interest of
$44,835 was accrued in "Other accrued expenses".
9
Notes payable to related party at June 30, 2002 consists of the following:
Notes payable in the original amount of $6,579,814,
dated December 1, 1994 and bearing interest at 10%
per annum, due August 1, 2014, payable in monthly
installments of $63,835 including principal and interest;
through February, 2002 secured by equipment,
building, and land.* $ 5,436,242
Less current portion (294,804)
------------
Net long-term debt to related party $ 5,141,438
============
* Beginning March 2002, OED has been making interest only payments related
to the notes. Principal amounts due for the period March through June 2002
have been included in the current portion of debt to related party.
Contractual aggregate maturities of long-term debt to related parties for
each of the next five years ending December 31 are as follows:
2002 $ 172,462
2003 250,916
2004 277,190
2005 306,215
2006 338,280
Thereafter 4,091,179
------------
$ 5,436,242
============
6. Operating Leases
GROUND LEASE - LAFAYETTE -- The Company leases the land on which the OED
racetrack is located from MT Holdings, LLC, a related party of OED. The ground
lease annual rental is $0 per year and the lease term expires on the earlier of
December 31, 2004 or the first day the Company opens a new racetrack facility
for business in St. Landry Parish, Louisiana.
NEW IBERIA -- The Company is under a month-to-month contract for $5,000 per
month to lease the New Iberia off-track betting parlor. The lease requires
payment of property taxes, maintenance and insurance on the property. During the
three months ended June 30, 2002 and the period February 15, 2002 (date of
acquisition) to June 30, 2002, the Company paid $15,000 and $22,321,
respectively, in rent for the New Iberia off-track betting parlor.
PARI-MUTUEL PROCESSING EQUIPMENT -- OED entered into a five-year lease agreement
commencing on February 15, 2001 for computerized pari-mutuel central processing
equipment, terminals and certain associated equipment at OED. Additionally, the
lease agreement provides the Company with pari-mutuel services whereby the
leased equipment automatically registers and totals the amounts wagered on the
races held at the race track or simulcast to it and to its respective off-track
wagering parlors, and displays the win pool odds, payoffs, and other pertinent
horse racing information needed to operate live meet horse racing
10
and off-track betting. The Company pays 0.43% of the handle for the services
provided during both live meet racing days and off-track betting racing days.
The charges are subject to a minimum of $1,950 per live meet race day and $1,150
per off-track betting race day. Additionally, if a race day is not completed,
the Company must pay 50% of the minimum if less than four races are declared
official and 100% of the minimum if four or more races are declared official. In
a typical year, the Company has 82 live meet racing days and 228 off-track
betting days. The Company paid $125,399 and $172,124 during the three months
ended June 30, 2002 and the period February 15, 2002 (date of acquisition) to
June 30, 2002, respectively, related to the pari-mutuel processing equipment
lease.
The total minimum rental payments for the lease mentioned in the preceding
paragraph assuming the Company has 82 live meet racing days and 228 off-track
betting days for each of the years ended December 31 are summarized as follows:
2002 $ 211,050
2003 422,100
2004 422,100
2005 422,100
-----------
$ 1,477,350
===========
OTHER - OED has operating leases for various pieces of equipment under
non-cancelable agreements, which expire in various years through 2006. Total
other rent expense for the three months ended June 30, 2002 and the period
February 15, 2002 (date of acquisition) to June 30, 2002 was $9,894 and $10,493,
respectively. The total minimum rental payments for these leases for the years
ended December 31 are summarized as follows:
2002 $ 3,358
2003 2,887
2004 864
2005 864
2006 360
----------
$ 8,333
==========
7. Related Parties
LONG TERM DEBT -- The Company has $5,436,242 in debt to a related party as of
June 30, 2002, see Note 5. The Company paid interest of $135,441 to the related
party during the three months ended June 30, 2002 and principal of $18,379 and
interest of $156,545 to the related party during the period February 15, 2002
(date of acquisition) to June 30, 2002 related to the debt.
LAND LEASE -- The Company leases the land at the OED racetrack from MT Holdings,
LLC for an annual rental of $0 pursuant to a land lease which expires on the
earlier of December 31, 2004 or the first day that the Company opens a new
racetrack facility for business in St. Landry Parish, Louisiana. MT Holdings,
LLC is partially owned by WET2, an indirect 50% owner of OED. The lease has been
accounted for as an operating lease.
11
8. Contingencies
The Horseman Benevolent Protection Association ("HBPA") has filed a lawsuit
against all licensed racetracks in the State of Louisiana. The lawsuit alleges
that HBPA is not receiving the appropriate share of net revenues from video
poker devices located at licensed tracks. First Statewide Racing Co., Inc., an
affiliate of The Old Evangeline Downs, L.C., was the holder of the video poker
license at the time the lawsuit was filed and is the named defendant.
HBPA claims that the revenue split from video poker wagering should be
calculated before the tracks deduct the franchise tax owed to the State of
Louisiana. It is the Company's position that this claim is contrary to the state
statutes and to the interpretation applied by the Louisiana State Police Gaming
Division in determining net revenues to be shared. However, should HBPA prevail
in this lawsuit, each track named in the suit could be facing a judgment of
several million dollars plus interest.
On March 12, 2001, the 19th Judicial District Court entered a judgment in favor
of the HBPA against certain licensed racetracks in the State of Louisiana,
including the Company. The judgment granted HBPA's motion for summary judgment
as to liability only. The Company's liability was not determined at the time of
the grant of summary judgment, but the final judgment could be, based on
discussions with legal counsel, in the $3 million to $5 million range. The
Company appealed the verdict and the First Circuit Court of Appeal of Louisiana
reversed the judgment of the District Court on June 21, 2002. The HBPA
subsequently appealed the reversal to the Louisiana Supreme Court. Although the
outcome of litigation is inherently uncertain, management, after consultation
with legal counsel, believes the reversal of the District Court verdict will be
upheld and does not expect the lawsuit will have a material adverse effect on
the Company's financial position or results of operations.
On June 21, 2002, PGP filed a complaint with the United States District Court in
the Western District of Louisiana (the "Trotter Complaint") alleging breach of
contract by WET2LLC for failing to honor its previous agreement to, among other
things, enter into a management services agreement with the Company for the
management of the existing OED racetrack and the development and management of
the Racino Project. However, in accordance with the agreement among PGP and WET2
and WET2LLC dated June 25, 2002 (as discussed in Note 2 above), PGP has agreed
to dismiss the complaint upon closing of the acquisition by PGP of (i) the 50%
interest in the OED Notes owned by WET2, and (ii) the 50% membership interest in
OED, owned by WET2LLC.
Notwithstanding the above mentioned HBPA lawsuit and the Trotter Complaint, we
are not a party to, and none of our property is the subject of, any other
pending legal proceedings other than litigation arising in the normal course of
business. We do not believe that adverse determinations in any or all such other
litigation (excluding the HBPA lawsuit) would have a material adverse effect on
our financial condition or results of operations.
9. Segment Information
Pursuant to the provisions of SFAS 131 "Disclosures About Segments of an
Enterprise and Related Information", the Company has determined that, in
connection with the acquisition of OED, the Company currently operates two
reportable segments: (1) Iowa operations, which comprise the Diamond Jo
riverboat casino in Dubuque, IA; and (2) Louisiana operations, which comprise
the racetrack operated by OED in Lafayette, LA.
The accounting policies for each segment are the same as those described in the
"Summary of Significant Accounting Policies" in the notes to the financial
statements included in the Company's Annual Report on Form 10-K for the period
ended December 31, 2001 and in the "Summary of Significant Accounting Policies
and Recent Accounting Pronouncements" above. The Company and the gaming industry
use earnings before interest, taxes, depreciation and amortization ("EBITDA") as
a means to evaluate performance. EBITDA should not be considered as an
alternative to, or more meaningful than, net income
12
(as determined in accordance with accounting principles generally accepted in
the United States of America) or as a measure of the Company's limitations.
The table below presents information about reported segments (in thousands):
Net Revenues Net Revenues
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Diamond Jo (1) $ 12,252 $ 11,998 $ 23,715 $ 23,234
OED (2) 4,114 5,445
-------- -------- -------- --------
Total $ 16,366 $ 11,998 $ 29,160 $ 23,234
EBITDA (3) EBITDA (3)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Diamond Jo (1) $ 4,032 $ 3,881 $ 7,458 $ 7,555
OED (2) 619 847
--------- --------- -------- --------
Total EBITDA 4,651 3,881 8,305 7,555
Depreciation and amortization (728) (958) (1,433) (1,912)
Interest expense, net (2,873) (2,358) (5,501) (4,685)
Gain on sale of assets (77) (77)
Preferred member distributions (93) (95) (186) (199)
Minority interests (162) (196)
-------- -------- -------- --------
Net income to common members'
interest $ 795 $ 393 $ 989 $ 682
Total Assets
As of June 30, At December 31,
2002 2001
---- ----
Diamond Jo $ 101,250 $ 84,374
OED 8,827
Adjustments (4) (264)
--------- ---------
Total $ 109,813 $ 84,374
_________
(1) Reflects results of operations for the three and six months ended
June 30, 2002 and 2001.
(2) Reflects results of operations of OED for the three months ended
June 30, 2002 and the period February 15, 2002 (date of acquisition)
to June 30, 2002.
(3) EBITDA is defined as income from operations plus depreciation and
amortization.
(4) Reflects the elimination of intercompany balances.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMBINED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO APPEARING ELSEWHERE
IN THIS REPORT. SOME STATEMENTS CONTAINED IN MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE LITIGATION REFORM ACT,
WHICH INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THE RISKS AND UNCERTAINTIES
DISCUSSED BELOW, AS WELL AS OTHER RISKS SET FORTH IN OUR ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 2001. SHOULD THESE RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, OUR FUTURE
PERFORMANCE AND ACTUAL RESULTS OF OPERATIONS MAY DIFFER MATERIALLY FROM THOSE
EXPECTED OR INTENDED.
The results of operations of the Company discussed below include the combined
results of operations of the Diamond Jo casino in Dubuque, IA for the three and
six months ended June 30, 2002 and 2001 and the results of operations of OED in
Lafayette, LA for the three months ended June 30, 2002 and the period February
15, 2002 through June 30, 2002.
STATEMENT OF OPERATIONS DATA
DIAMOND JO OED
THREE MONTHS
THREE MONTHS ENDED JUNE 30, ENDED JUNE
2002 2001 2002
---- ---- ----
REVENUES:
Casino $12,174,849 $12,010,185
Racing $3,651,690
Food and beverage 691,827 653,974 462,644
Other 31,252 32,323
Less promotional
allowances (645,911) (698,638)
------------ ------------ -----------
Net revenues 12,252,017 11,997,844 4,114,334
------------ ------------ -----------
EXPENSES:
Casino 5,203,614 5,172,860
Racing 2,773,780
Food and beverage 699,032 726,614 393,519
Boat operations 567,295 579,715
Other 7,080 5,601
Selling, general and
administrative 1,742,604 1,631,732 328,387
Depreciation and
amortization 692,069 957,802 36,141
------------ ------------ -----------
Total expenses 8,911,694 9,074,324 3,531,827
------------ ------------ -----------
Income from
operations $ 3,340,323 $ 2,923,520 $ 582,507
============ ============ ==========
14
DIAMOND JO OED
PERIOD FEBRUARY 15,
SIX MONTHS ENDED JUNE 30, 2002 TO JUNE 30,
2002 2001 2002
---- ---- ----
REVENUES:
Casino $23,528,643 $23,170,371
Racing $4,912,837
Food and beverage 1,362,402 1,261,507 532,157
Other 55,931 60,419
Less promotional
allowances (1,231,874) (1,257,858)
------------ ------------ ----------
Net revenues 23,715,102 23,234,439 5,444,994
------------ ------------ ----------
EXPENSES:
Casino 10,250,293 10,146,657
Racing 3,737,299
Food and beverage 1,353,497 1,407,045 474,583
Boat operations 1,151,271 1,133,886
Other 15,278 9,819
Selling, general and
administrative 3,486,886 2,982,387 385,654
Depreciation and
amortization 1,365,155 1,912,008 68,287
------------ ------------ ----------
Total expenses 17,622,380 17,591,802 4,665,823
------------ ------------ ----------
Income from
operations $ 6,092,722 $ 5,642,637 $ 779,171
============ ============ ==========
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Net revenues increased 36.4% to $16.4 million for the three months ended June
30, 2002 from $12.0 million for the three months ended June 30, 2001 due to net
revenues from OED of $4.1 million and an increase in the Diamond Jo's slot
revenue of 4.2%, or $433,000 for the three months ended June 30, 2002 compared
to the three months ended June 30, 2001. This increase in slot revenues was a
result of an increased marketing focus on the addition of new players club
members as well as on targeting players club promotions towards more profitable
market segments. This increase in slot revenues was offset by a decrease in
table games revenue at the Diamond Jo of $269,000. This decrease was a direct
result of a 1.5 percentage point decrease in our table game hold percentage and
an 8.0% decrease in table game drop.
Casino gaming win in the Dubuque market increased 3.7% to $22.7 million for the
three months ended June 30, 2002 from $21.9 million for the three months ended
June 30, 2001. We believe this increase was primarily due to targeted players
club promotions and a continued focus on maintenance of our slot mix as well as
a continued focus by operators at the Greyhound Park on maintenance of their
slot mix during such period. Our share of the Dubuque market casino gaming win
decreased slightly to
15
53.7% for the three months ended June 30, 2002 from 55.0% for the three months
ended June 30, 2001. This decrease is attributed to a decrease in our table game
revenue as discussed above. Our casino revenues increased 1.4% to $12.2 million
for the three months ended June 30, 2002 from $12.0 million for the three months
ended June 30, 2001. This increase is due to an increase in slot revenue offset
by a decrease in table game revenues as discussed above. Casino revenues were
derived 87.5% from slot machines and 12.5% from table games for the three months
ended June 30, 2002 compared to 85.1% from slot machines and 14.9% from table
games for the three months ended June 30, 2001. The number of gaming positions
at the Diamond Jo at June 30, 2002 was 852 compared to 868 at June 30, 2001.
This decrease was due to the elimination of four blackjack tables and one craps
table during the first quarter of 2002 offset by the addition of 24 slot
machines in April 2002. Consistent with an increase in casino revenue, our
casino win per gaming position per day at the Diamond Jo increased 3.6% to
$157.57 for the three months ended June 30, 2002 from $152.05 for the three
months ended June 30, 2001. Admissions to the casinos in the Dubuque market
increased slightly to 505,848 for the three months ended June 30, 2002 from
502,065 for the three months ended June 30, 2001. For the three months ended
June 30, 2002, our share of the Dubuque market casino admissions decreased to
49.1% from 50.3% for the three months ended June 30, 2001. We believe this
decrease is primarily attributable to our targeted use of marketing dollars
towards more profitable market segments during 2002 compared to 2001. Our
admissions at the Diamond Jo for the three months ended June 30, 2002 decreased
slightly to 248,108 for the three months ended June 30, 2002 from 252,708 for
the three months ended June 30, 2001. For the three months ended June 30, 2002
our casino win per admission at the Diamond Jo increased 3.2% to $49.07 from
$47.53 for the three months ended June 30, 2001.
Racing revenues of $3.7 million related solely to revenues at OED for the three
months ended June 30, 2002. Net food and beverage revenues, other revenues and
promotional allowances increased to $0.5 million for the three months ended June
30, 2002 from $0.0 million for the three months ended June 30, 2001 related to
food and beverage revenues at OED.
Casino operating expenses at the Diamond Jo remained substantially unchanged at
$5.2 million for the three months ended June 30, 2002 and 2001. Racing expenses
at OED were $2.8 million for the three months ended June 30, 2002. Food and
beverage expenses increased to $1.1 million for the three months ended June 30,
2002 from $0.7 million for the three months ended June 30, 2001 due primarily to
food and beverage expenses from OED of $0.4 million. Boat operation expenses and
other expenses were substantially unchanged for the three months ended June 30,
2002 and 2001. Selling, general and administrative expenses increased to $2.1
million for the three months ended June 30, 2002 from $1.6 million for the three
months ended June 30, 2001. This increase in such expenses resulted from (A)
selling, general and administrative expenses at OED of $328,000, (B) an increase
in legal expenses of $90,000 (resulting from a credit of $100,000 in legal
expense during the corresponding period of the prior year) and (C) an increase
in consulting and various lobbying expenses of $50,000.
Depreciation and amortization expenses decreased 24.0% to $0.7 million for the
three months ended June 30, 2002 from $1.0 million for the three months ended
June 30, 2001. This decrease is due to adoption of Statement of Financial
Accounting Standards 142 ("SFAS 142"), which provides that goodwill and certain
indefinite lived intangible assets will no longer be amortized but will be
reviewed at least annually for impairment and written down and charged to income
when their recorded value exceeds their estimated fair value. During the first
quarter of 2002, the Company evaluated the estimated fair value of the Company
in accordance with SFAS 142 and determined the estimated fair value exceeded the
carrying value of the Company. As a result, no impairment of goodwill has been
recorded during the three months ended June 30, 2002. Goodwill amortization
during the three months ended June 30, 2001 was approximately $353,000. Net
interest expense increased 21.8% to $2.9 million for the three months ended June
30, 2002 from $2.4 million for the three months ended June 30, 2001. This
increase is due to an increase in interest expense associated with our senior
credit facility with Foothill Capital Corporation providing for commitments of
up to $12.5 million which mature in 2005, $12.0 million of which was drawn down
by the Company on February 15, 2002 to consummate an investment in OED.
16
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net revenues increased 25.5% to $29.2 million for the six months ended June 30,
2002 from $23.2 million for the six months ended June 30, 2001 due to net
revenues from OED of $5.4 million and an increase in the Diamond Jo's slot
revenue of 4.9%, or $960,000 for the six months ended June 30, 2002 compared to
the six months ended June 30, 2001. This increase in slot revenues was a result
of an increased marketing focus on the addition of new players club members as
well as on targeting players club promotions towards more profitable market
segments. This increase in slot revenues was offset by a decrease in table games
revenue at the Diamond Jo of $602,000. This decrease was a direct result of a
1.9 percentage point decrease in our table game hold percentage and an 8.6%
decrease in table game drop.
Casino gaming win in the Dubuque market increased 2.9% to $43.2 million for the
six months ended June 30, 2002 from $42.0 million for the six months ended June
30, 2001. We believe this increase was primarily due to targeted players club
promotions and a continued focus on maintenance of our slot mix as well as a
continued focus by operators at the Greyhound Park on maintenance of their slot
mix during such period. Our share of the Dubuque market casino gaming win
decreased slightly to 54.4% for the six months ended June 30, 2002 from 55.2%
for the six months ended June 30, 2001. This decrease is attributed to a
decrease in our table game revenue as discussed above. Our casino revenues
increased 1.5% to $23.5 million for the six months ended June 30, 2002 from
$23.2 million for the six months ended June 30, 2001. This increase is due to an
increase in slot revenue offset by a decrease in table game revenues as
discussed above. Casino revenues were derived 87.9% from slot machines and 12.1%
from table games for the six months ended June 30, 2002 compared to 85.2% from
slot machines and 14.8% from table games for the six months ended June 30, 2001.
The number of gaming positions at the Diamond Jo at June 30, 2002 was 852
compared to 868 at June 30, 2001. This decrease was due to the elimination of
four blackjack tables and one craps table during the first quarter of 2002
offset by the addition of 24 slot machines in April 2002. Consistent with an
increase in casino revenue, our casino win per gaming position per day at the
Diamond Jo increased 5.1% to $155.01 for the six months ended June 30, 2002 from
$147.48 for the six months ended June 30, 2001. Admissions to the casinos in the
Dubuque market increased slightly to 944,128 for the six months ended June 30,
2002 from 929,211 for the six months ended June 30, 2001. For the six months
ended June 30, 2002, our share of the Dubuque market casino admissions decreased
to 50.4% from 51.8% for the six months ended June 30, 2001. We believe this
decrease is primarily attributable to our targeted use of marketing dollars
directed primarily towards more profitable market segments during 2002 compared
to 2001. Our admissions at the Diamond Jo for the six months ended June 30, 2002
decreased slightly to 475,894 for the six months ended June 30, 2002 from
481,271 for the six months ended June 30, 2001. For the six months ended June
30, 2002 our casino win per admission at the Diamond Jo increased 2.7% to $49.44
from $48.14 for the six months ended June 30, 2001.
Racing revenues of $4.9 million related solely to revenues at OED for the period
February 15, 2002 (date of acquisition) to June 30, 2002. Net food and beverage
revenues, other revenues and promotional allowances increased to $0.7 million
for the six months ended June 30, 2002 from $0.1 million for the six months
ended June 30, 2001 related to food and beverage revenues at OED.
Casino operating expenses at the Diamond Jo remained substantially unchanged at
$10.2 million for the six months ended June 30, 2002 and 2001. Racing expenses
at OED were $3.7 million for the period February 15, 2002 (date of acquisition)
to June 30, 2002. Food and beverage expenses increased to $1.8 million for the
six months ended June 30, 2002 from $1.4 million for the six months ended June
30, 2001 due primarily to food and beverage expenses from OED of $0.5 million.
Boat operation expenses and other expenses were substantially unchanged for the
six months ended June 30, 2002 and 2001. Selling, general and administrative
expenses increased to $3.9 million for the six months ended June 30, 2002 from
$3.0 million for the six months ended June 30, 2001. This increase in such
expenses
17
resulted from (A) selling, general and administrative expenses at OED of
$386,000, (B) an increase in legal expenses of $284,000 (resulting from a credit
of $230,000 in legal expense during the corresponding period of the prior year)
and (C) an increase in consulting and various lobbying expenses of $105,000.
Depreciation and amortization expenses decreased 25.0% to $1.4 million for the
six months ended June 30, 2002 from $1.9 million for the six months ended June
30, 2001. This decrease is due to adoption of Statement of Financial Accounting
Standards 142 ("SFAS 142") which provides that goodwill and certain indefinite
lived intangible assets will no longer be amortized but will be reviewed at
least annually for impairment and written down and charged to income when their
recorded value exceeds their estimated fair value. During the first quarter of
2002, the Company evaluated the estimated fair value of the Company in
accordance with SFAS 142 and determined the estimated fair value exceeded the
carrying value of the Company. As a result, no impairment of goodwill has been
recorded during the six months ended June 30, 2002. Goodwill amortization during
the six months ended June 30, 2001 was approximately $707,000. Net interest
expense increased 17.4% to $5.5 million for the six months ended June 30, 2002
from $4.7 million for the six months ended June 30, 2001. This increase is due
to an increase in interest expense associated with our senior credit facility
with Foothill Capital Corporation providing for commitments of up to $12.5
million which mature in 2005, $12.0 million of which was drawn down by the
Company on February 15, 2002 to consummate an investment in OED.
Recent Accounting Pronouncements
SFAS 142 "GOODWILL AND OTHER INTANGIBLE ASSETS" -- SFAS 142 provides that
goodwill and certain indefinite lived intangible assets will no longer be
amortized but will be reviewed at least annually for impairment and written down
and charged to income when their recorded value exceeds their estimated fair
value. During the first quarter of 2002, the Company performed a transitional
impairment test on goodwill in accordance with SFAS 142 and determined the
estimated fair value of the Company exceeded its carrying value. Based on that
review, management determined that there was no impairment of goodwill. Goodwill
amortization during the three and six months ended June 30, 2001 was $353,497
and $706,994, respectively. Assuming the non-amortization of these standards had
been adopted at the beginning of 2001, the Company's adjusted net income for the
three and six months ended June 30, 2001 would have been $746,070 and
$1,388,638, respectively.
In April 2002, the FASB issued SFAS No. 145, Recission of FASB Statements Nos.
4, 44, and 64, amendment of FASB Statement No. 13, and Technical Corrections.
This statement, among other things, significantly limits the situations whereby
the extinguishment of debt is treated as an extraordinary item in the statement
of operations.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
the previous guidance on the subject. This statement requires, among other
things, that a liability for a cost associated with an exit or disposal activity
be recognized when the liability is incurred. The provisions for this statement
are effective for exit or disposal activities that are initiated after December
31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating, Investing and Financing Activities
-------------------------------------------------------------
Our cash balance increased $2.9 million during the six month period ended June
30, 2002 to $10.5 million from $7.5 million at December 31, 2001.
18
Cash flows from operating activities of $8.0 million for the three month period
ended June 30, 2002 consisted of net income of $1.0 million increased by
non-cash charges of $2.3 million, principally depreciation and amortization, and
an increase in working capital of $4.7 million. The change in working capital is
primarily comprised of an increase in accrued expenses of $4.3 million, which is
principally due to an increase in accrued interest related to our 12 1/4% Senior
Secured Notes due 2006 (the "Senior Secured Notes").
Cash flows used in investing activities for the six month period ended June 30,
2002 was $15.4 million including $13.7 million for the purchase of OED (net of
cash acquired) and approximately $1.0 million in development costs related to
the OED acquisition. In addition, cash outflows of approximately $0.6 million
were used for capital expenditures mainly related to the purchase of replacement
slot machines in an effort to improve the gaming experience of our patrons.
Cash from financing activities for the six month period ended June 30, 2002 of
$10.3 million reflects the proceeds of a $12.0 million borrowing under our $12.5
million credit agreement with Foothill Capital Corp. offset by deferred
financing costs of $0.9 million, including consent fees totaling $887,500 paid
to holders of our Senior Secured Notes related to our investment in OED, and
distributions to members of $0.7 million.
Racino Project
--------------
On February 15, 2002, OEDA consummated its acquisition of: (i) 50% of the
membership interests (the "BIM3 Interests") of OED from BIM3 Investments, a
Louisiana partnership ("BIM3"); and (ii) BIM3's one-half (1/2) interest in two
promissory notes in the principal amount of $10,909,244 issued by OED (the "OED
Notes"), for an aggregate purchase price of $15,000,000 in cash. The remaining
50% of the membership interests in OED is currently owned by William E. Trotter,
II Family L.L.C., a Louisiana limited liability company. The acquisition was
made pursuant to a purchase agreement dated June 27, 2001 by and among the
Company's parent, PGP, OED and BIM3 (as amended, the "Purchase Agreement").
Pursuant to the terms of the Purchase Agreement, PGP paid a cash deposit of
$500,000 which was applied against the purchase price when the acquisition was
consummated. The Purchase Agreement was assigned to OEDA by PGP on October 23,
2001 for a purchase price of $523,836 which was paid by OEDA in cash.
On June 25, 2002 PGP entered into an agreement with William E. Trotter, II
("WET2") and William E Trotter, II Family LLC, a Louisiana limited liability
company ("WET2LLC") to acquire (i) the 50% interest in the OED Notes owned by
WET2, and (ii) the 50% membership interest in OED, owned by WET2LLC, for a
purchase price of $15,000,000, plus a contingent fee of one half of one percent
(.5%) of the net slot revenues from the date of opening of a new casino, located
in St. Landry Parish, until the date that is ten years after the opening of the
casino to the public. The Company is currently pursuing financing for the above
transaction through various sources.
The Company will manage the existing racetrack and, subject to receipt
of required gaming approvals, is planning to design, construct, manage and
operate a new casino and contiguous racetrack facility with pari-mutuel
wagering, slots and OTB parlors in St. Landry Parish, Louisiana (the "Racino
Project").
It is anticipated that OED will require at least $90 million to finance the
construction and development of the Racino Project. The Company is currently
investigating financing alternatives for the financing of construction and
development costs including, but not limited to, a private placement of debt
securities. The Racino Project is expected to include at least 1,525 slot
machines, dirt and turf thoroughbred racetracks and several dining options. The
Racino Project is one of only three racetracks in the State of Louisiana
currently authorized to conduct casino operations. The successful completion of
the Racino Project is subject to factors beyond the control of OED. The extent
and timing of the development and construction of the Racino Project will depend
on available cash flow or the ability to
19
obtain financing. There can be no assurance that sufficient cash flow or
necessary financing will be available on satisfactory terms to OED. In addition,
the Company and OED will be subject to comprehensive and stringent government
regulations. The Company and OED and their respective officers, directors,
members, significant shareholders and employees will be subject to the Louisiana
Gaming Authority and will need to submit to a regulatory review process prior to
mandatory licensing. There can be no assurance that all necessary licenses will
be issued, or issued on a timely basis. For the foregoing reasons, there can no
assurance that the Racino Project will be completed, or completed in a timely
manner.
We believe that cash on hand and cash generated from operations will be
sufficient to satisfy our working capital and capital expenditure requirements
(other than the Racino Project), repay borrowings under our senior credit
facility, and satisfy our other debt service requirements. However, we cannot
assure you that this will be the case. If cash on hand and cash generated from
operations are insufficient to meet these obligations, we may have to refinance
our debt or sell some or all of our assets to meet our obligations.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks which are inherent in our financial
instruments which arise from transactions entered into in the normal course of
business. Market risk is the risk of loss from adverse changes in market prices
and interest rates. We do not currently utilize derivative financial instruments
to hedge market risk. We also do not hold or issue derivative financial
instruments for trading purposes.
We are exposed to interest rate risk due to changes in interest rates with
respect to our long-term variable interest rate debt borrowing under our senior
credit facility. As of June 30, 2002, we had $12.0 million in borrowings under
the senior credit facility. We have estimated our market risk exposure using
sensitivity analysis. We have defined our market risk exposure as the potential
loss in future earnings and cash flow with respect to interest rate exposure of
our market risk sensitive instruments assuming a hypothetical increase in market
rates of interest of one percentage point. Assuming we borrow the maximum amount
allowed under the senior credit facility ($12.5 million), if market rates of
interest on our variable rate debt increased by one percentage point, the
estimated market risk exposure under the senior credit facility would be
approximately $0.1 million.
We are also exposed to fair value risk due to changes in interest rates with
respect to our long-term fixed interest rate debt borrowing. Our fixed rate debt
instruments are not generally affected by a change in the market rates of
interest, and therefore, such instruments generally do not have an impact on
future earnings. However, future earnings and cash flows may be impacted by
changes in interest rates related to indebtedness incurred to fund repayments as
such fixed rate debt matures. The following table contains information relating
to our fixed rate debt borrowings which are subject to interest rate risk
(dollars in millions):
Description Contract Terms Interest Rate Cost Fair Value
- ----------- -------------- ------------- ---- ----------
Senior Secured Notes due July 1, 2006 12-1/4% fixed $71.0 $71.0*
* Represents fair value as of August 7, 2002 based on information provided by
the Company's investment banking firm.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Horseman Benevolent Protection Association ("HBPA") has filed a lawsuit
against all licensed racetracks in the State of Louisiana. The lawsuit alleges
that HBPA is not receiving the appropriate share of net revenues from video
poker devices located at licensed tracks. First Statewide Racing Co., Inc., an
affiliate of The Old Evangeline Downs, L.C., was the holder of the video poker
license at the time the lawsuit was filed and is the named defendant.
HBPA claims that the revenue split from video poker wagering should be
calculated before the tracks deduct the franchise tax owed to the State of
Louisiana. It is the Company's position that this claim is contrary to the state
statutes and to the interpretation applied by the Louisiana State Police Gaming
Division in determining net revenues to be shared. However, should HBPA prevail
in this lawsuit, each track named in the suit could be facing a judgment of
several million dollars plus interest.
On March 12, 2001, the 19th Judicial District Court entered a judgment in favor
of the HBPA against certain licensed racetracks in the State of Louisiana,
including the Company. The judgment granted HBPA's motion for summary judgment
as to liability only. The Company's liability was not determined at the time of
the grant of summary judgment, but the final judgment could be, based on
discussions with legal counsel, in the $3 million to $5 million range. The
Company appealed the verdict and the First Circuit Court of Appeal of Louisiana
reversed the judgment of the District Court on June 21, 2002. The HBPA
subsequently appealed the reversal to the Louisiana Supreme Court. Although the
outcome of litigation is inherently uncertain, management, after consultation
with legal counsel, believes the reversal of the District Court verdict will be
upheld and does not expect the lawsuit will have a material adverse effect on
the Company's financial position or results of operations.
On June 21, 2002 PGP filed a complaint with the United States District Court in
the Western District of Louisiana (the "Trotter Complaint") alleging breach of
contract by WET2LLC for failing to honor its previous agreement to, among other
things, enter into a management services agreement with the Company for the
management of the existing OED racetrack and the development and management of
the Racino Project. However, in accordance with the agreement among PGP and WET2
and WET2LLC dated June 25, 2002 (as discussed in Note 2 to the financial
statements), PGP has agreed to dismiss the complaint upon closing of the
acquisition by PGP of (i) the 50% interest in the OED Notes owned by WET2, and
(ii) the 50% membership interest in OED, owned by WET2LLC.
Notwithstanding the above mentioned HBPA lawsuit and the Trotter Complaint, we
are not a party to, and none of our property is the subject of, any other
pending legal proceedings other than litigation arising in the normal course of
business. We do not believe that adverse determinations in any or all such other
litigation (excluding the HBPA lawsuit) would have a material adverse effect on
our financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Item 5. Other Information
Since the Company does not have securities registered under Section 12
of the Securities Exchange Act of 1934 and is not required to file periodic
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company is not an "issuer" as defined in the Sarbanes-Oxley Act of 2002, and
therefore the Company is not filing the written certification statement pursuant
to Section 906 of such Act. The Company files periodic reports with the
Securities and Exchange Commission because it is required to do so by the terms
of the indenture governing its notes.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
(i) Form 8-K filed March 4, 2002, regarding purchase of
The Old Evangeline Downs, L.C.
(ii) Form 8-K/A filed May 1, 2002 amending the registrant's
report on Form 8-K for the event dated February 15, 2002,
as filed on March 4, 2002, to include the historical
financial statements and pro forma financial information
required by Item 7(a) and (b).
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Dubuque, State of
Iowa on August 13, 2002.
PENINSULA GAMING COMPANY, LLC
By: /S/ M. BRENT STEVENS
--------------------------------
M. Brent Stevens
Chief Executive Officer
By: /S/ GEORGE T. PAPANIER
--------------------------------
George T. Papanier
Chief Operating Officer
By: /S/ NATALIE A. SCHRAMM
--------------------------------
Natalie A. Schramm
Chief Financial Officer
PENINSULA GAMING CORP.
By: /S/ M. BRENT STEVENS
--------------------------------
M. Brent Stevens
President and Treasurer
(principal financial officer)
24