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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Delaware 42-1483875
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
3rd Street Ice Harbor, PO Box 1750, 52004-1683
Dubuque, Iowa
(Address of principal executive offices) (Zip Code)
(563) 583-7005
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (g) of the Act: None
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 twelve 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 past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes __ No X
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes __ No X
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.
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TABLE OF CONTENTS
Part I
ITEM 1. BUSINESS...................................................1
ITEM 2. PROPERTIES................................................16
ITEM 3. LEGAL PROCEEDINGS.........................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......18
Part II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS...............................19
ITEM 6. SELECTED FINANCIAL DATA...................................19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................30
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT............31
ITEM 11. EXECUTIVE COMPENSATION....................................32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............36
ITEM 14. CONTROLS AND PROCEDURES...................................38
Part IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K...............................................39
-i-
Part I
ITEM 1 BUSINESS
Description of the Business
General
We are wholly owned by Peninsula Gaming Partners, LLC, a Delaware limited
liability company ("PGP") and our sole managing member. Peninsula Gaming Corp.
is our wholly owned subsidiary, has no assets or operations and was formed
solely to facilitate the offering of our 12 1/4% Senior Secured Notes due 2006
(the "Peninsula Notes") in certain jurisdictions. OED Acquisition, LLC, a
Delaware limited liability company ("OEDA"), is a wholly owned subsidiary formed
on July 9, 2001 to facilitate the purchase of The Old Evangeline Downs, L.C., a
Louisiana limited liability company whose name was later changed to The Old
Evangeline Downs, LLC, a Delaware limited liability company ("OED"). OEDA
currently owns 100% of the membership interests of OED. OED currently owns and
operates the Evangeline Downs, a horse track in Lafayette, LA. The Old
Evangeline Downs Capital Corp. is a wholly owned subsidiary of OED, has no
assets or operations and was formed solely to facilitate the offering of OED's
13% Senior Secured Notes due 2010 with Contingent Interest (the "OED Notes") in
certain jurisdictions. Unless otherwise specified herein, references to "us,"
"our," "we" or the "Company" shall mean Peninsula Gaming Company, LLC.
Our address is 3rd Street Ice Harbor, PO Box 1750, Dubuque, Iowa
52004-1750, and our telephone number is (563) 583-7005.
The Diamond Jo
We own and operate the Diamond Jo riverboat casino, one of only two
licensed gaming operations in Dubuque, Iowa. We are organized in Delaware as a
limited liability company and commenced operations upon our acquisition of the
Diamond Jo riverboat casino on July 15, 1999.
The Diamond Jo is a three-story, approximately 51,900 square foot
riverboat casino, replicating a classic 19th century paddlewheel. The riverboat
has the capacity for 1,390 patrons, features a spacious two-story atrium, and
offers 729 slot machines and 17 table games in approximately 17,800 square feet
of gaming space. Adjacent to the Diamond Jo is a two-story, approximately 33,000
square foot dockside pavilion, featuring our 142-seat capacity Lighthouse Grill
restaurant, our 180-seat capacity High Steaks restaurant, our 25-seat capacity
Club Wild players lounge and our 205-seat capacity Harbor View Room, a full
service banquet facility. Approximately 1,100 convenient parking spaces are
available to our patrons, including valet parking. The Diamond Jo is open seven
days a week and functions primarily as a dockside riverboat with continuous
boarding. The Diamond Jo is required by Iowa law to cruise at least 100 times
per year, for a minimum of two hours per cruise, which we satisfy by conducting
a two-hour cruise at 7:30 a.m. on weekdays during the spring and summer months.
The Diamond Jo operates from, and the dockside pavilion is located in, the
Port of Dubuque, a waterfront development on the Mississippi River in downtown
Dubuque and is accessible from each of the major highways in the area. On
average, more than 30,000 vehicles pass our site per day. We believe that the
Diamond Jo is among the principal entertainment venues for residents in and
around Dubuque. We share our dockside pavilion with the Spirit of Dubuque
dinner-boat and the Dubuque County Historical Society, featuring a museum,
historical exhibits, and an observation deck.
Continued growth is also anticipated through locally funded development
programs, including a redevelopment project in the Port of Dubuque, where the
Diamond Jo is located, known as the America's River project. The America's River
project is an estimated $188,000,000 project on a 90-acre site planned for the
Dubuque riverfront that features a Mississippi River Discovery Center, education
and conference center, a river walk and accompanying amenities, a riverfront
hotel and indoor water park and conference center. This redevelopment project is
designed to enhance the attractiveness of the Port of Dubuque as a community
center and tourist destination.
Operations
Our business operations generate revenue from two main sources:
Gaming Operations. We regularly adjust our overall game mix to appeal to
our target market, based on, among other factors, the coin-in, hold percentage,
location and age of our various slot machines. Approximately 85% of the Diamond
Jo's gaming positions are slot machines. Since February 2002, we have increased
the number of slot machines in the casino from 650 to 729 slot machines, all of
which have bill validators. The slot machines include denominations ranging from
$0.01 to $25.00, with more than 97% of the machines $1.00 or lower in
denomination. Approximately 221 of our $0.02 and $0.05 machines have been
converted to coin-free machines in connection with our recent upgrade of our
slot tracking system. At any one time, approximately 15% to 20% of our slot
machines are video poker, video keno, and other electronic games of skill. We
currently replace or install conversion packages on approximately 10% of our
slot machines each year. Conversion packages are installations of new glass,
reels and, on occasion, other coin handling equipment to slot machines to update
or replace the game and its appearance without replacing the entire machine. The
authorization in Iowa of wide area progressives and networks of slot machines
throughout several casinos resulting in higher jackpots has allowed us to
further improve our product mix with the introduction of 4 linked slot machines.
The 17 table games offered by the Diamond Jo include, 11 blackjack, two craps,
one three-card poker, one roulette, one Caribbean Stud, and one Let-It-Ride, all
primarily with low betting limits.
Food and Beverage Operations. The food and beverage operations at the
Diamond Jo include our 142-seat capacity Lighthouse Grill restaurant, our
180-seat capacity High Steaks restaurant and our 205-seat capacity Harbor View
Room, a full service banquet facility.
Business Strategy
The Diamond Jo is the leading gaming facility in our market, having
captured over half of Dubuque's casino gaming revenues since 1995, the casino's
first full year of operations. We attribute our success to our competitive
position and our unique local gaming operations, offering the most gaming
positions and the only table games, video poker and video keno within 60 miles
of Dubuque.
We have developed marketing and promotional strategies designed to attract
new customers and reward frequent gaming customers. Our tag line, "Where the
River Runs Wild" appears in all our advertising, including billboard, print,
radio, and television throughout the Dubuque area, as well as in our promotional
offerings. In addition to our tag line, we have established core-marketing
programs utilizing the "River Runs Wild" theme and have included this theme in
naming our players' club and VIP lounge. We have used our theme to create
core-marketing programs which have allowed us to continue to attract new
customers as well as maintain loyalty within our existing customer base.
We also believe in aggressively using the information in our customer
database obtained through our electronic player tracking system to focus our
marketing efforts on our most valued customers to help increase revenues from
our existing customer base. With the help of this system, we can identify
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customers' habits, such as the day of the week, time of the day and dollar
denominations our players' club members prefer to play. We can also store
pertinent information for each member, including birthdays, favorite sports and
music preferences. These customer preferences allow us to better define our
members and give us the ability to improve our marketing efforts by tailoring
our promotions and direct mail offers.
Competition
General. Riverboat gaming licenses in the State of Iowa are granted to a
not-for-profit "qualified sponsoring organization" and can be issued jointly to
a not-for-profit qualified sponsoring organization and a boat operator. The
granting of new licenses requires regulatory approval, which includes, among
other things, satisfactory feasibility studies. The Dubuque Racing Association
is the not-for-profit qualified sponsoring organization that, pursuant to a
contract between the parties, holds the excursion riverboat gaming license
together with the Company as the boat operator.
In 1998, the Iowa Racing and Gaming Commission adopted a rule that limits
the number of riverboat gaming licenses in Iowa to ten, subject to limited
exceptions, including licenses issued to purchasers of existing licensed
facilities and licenses issued to replace an existing facility if its license is
surrendered, not renewed, or revoked and prohibits the transfer of a license
outside the county in which the riverboat operated on May 1, 1998. There are
currently ten licensed riverboat gaming facilities operating in Iowa. The rule
also prohibits existing licensees from increasing the number of gaming positions
at their gaming facilities without prior gaming commission approval.
The Dubuque gaming market borders other neighboring gaming markets. These
neighboring markets include:
(1) Elgin and Aurora, Illinois to the east;
(2) Marquette, Iowa and Native American gaming in Wisconsin and
Minnesota to the north;
(3) Des Moines, Iowa and Native American gaming in Tama, Iowa to the
west; and
(4) Clinton, Iowa and the Quad Cities (Bettendorf and Davenport, Iowa
and Moline and Rock Island, Illinois) to the south.
We believe that the Diamond Jo competes only indirectly with gaming
facilities in these neighboring markets.
Dubuque. The Diamond Jo's principal competition is the Dubuque Greyhound
Park, the only other licensed gaming facility in Dubuque. The Dubuque Greyhound
Park, which opened its casino in 1995, is located three miles north of the
Diamond Jo and offers 600 slot machines and live greyhound racing from May
through October of each year with simulcasts from other greyhound tracks. The
Dubuque Greyhound Park also offers, on a limited basis, simulcasts of horse
races. The Dubuque Greyhound Park is owned and operated by the Dubuque Racing
Association. As a not-for-profit organization, the Dubuque Racing Association
distributes a percentage of its cash flow to the City of Dubuque and local
charities.
Legislation was enacted in 1999 in Illinois to provide for dockside gaming
in Illinois, which dockside gaming is limited to ten licenses, nine of which are
currently active. We believe that additional competitors are effectively
precluded from entering our market due to constraints imposed by existing laws
on the availability of gaming licenses.
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Employees
We maintain a staff of approximately 400 to 425 full-time equivalent
employees at the Diamond Jo, depending upon the time of the year. None of our
employees are covered by a collective bargaining agreement. We have not
experienced any labor problems resulting in a work stoppage, and believe we
maintain good relations with our employees.
Recent Acquisition
During 2002, the Company, indirectly through its wholly owned subsidiary
OEDA, acquired 100% of the outstanding membership interests in OED through the
following transactions:
On June 27, 2001, BIM3 Investments, a Louisiana partnership and a 50%
owner of OED membership interests, entered into an agreement to sell 50% of OED
membership interests to PGP, our parent. The agreement was assigned by PGP to
OEDA on October 23, 2001. On February 15, 2002, OEDA consummated the acquisition
of 50% of the membership interests in OED and a one-half (1/2) interest in two
promissory notes issued by OED in the aggregate principal amount of $10,909,244
(the "Old OED Notes"), for an aggregate purchase price of $15,000,000 (the "BIM3
Purchase").
The source of funds for the BIM3 Purchase was $3,000,000 of cash on-hand
and $12,000,000 of borrowings under the Company's credit facility with Foothill
Capital Corporation. In connection with the BIM3 Purchase, the Company paid
consent fees totaling $887,500 to holders of the Peninsula Notes.
On June 25, 2002, PGP entered into an agreement with William E. Trotter,
II ("Trotter") and William E. Trotter, II Family L.L.C., a Louisiana limited
liability company ("WET2LLC") to acquire (i) the remaining 50% interest in the
Old OED Notes owned by WET2, and (ii) the remaining 50% membership interest in
OED owned by WET2LLC (the "Trotter Purchase"). On August 30, 2002, OEDA
consummated the Trotter Purchase for a purchase price consisting of cash of
$15,546,000 plus a contingent fee of one half of one percent (0.5%) of the net
slot revenues generated by the new casino to be located in St. Landry Parish for
a period of ten years commencing on the date the casino opens to the public.
The source of funds for the Trotter Purchase described above was (1)
$8,450,000 of borrowings under OEDA's loan and security agreement with Foothill
Capital Corporation entered into and assigned to OED on August 30, 2002 (the
"Term Loan") and (2) proceeds from a $7,325,000 intercompany note issued by OEDA
in favor of PGP due June 30, 2003 (the "PGP Note"). Additionally, in connection
with the Trotter Purchase, OED and PGP issued, as joint obligors, a $4,500,000
note payable to Trotter (the "Trotter Note"), the proceeds of which were used to
purchase the land on which the racino will be operated and to pay certain
deferred financing costs and reimbursable expenses. The source of cash provided
by PGP pursuant to the intercompany note relates to the proceeds from a
$7,325,000 note payable issued by PGP in favor of WET2LLC due June 30, 2003 (the
"WET2LLC Note"). For more information regarding the Term Loan, PGP Note, Trotter
Note and WET2LLC Note, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" below.
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We accounted for OEDA's acquisition of all the membership interests in OED
as a purchase in accordance with 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 has been
recorded as goodwill and other intangible assets. As of December 31, 2002, we
recorded goodwill of approximately $28.4 million related to the acquisition. We
have not yet completed our evaluation of the intangible assets acquired and
contingent liabilities assumed in the acquisition. This evaluation may result in
adjustments to the purchase price allocation. Under the provisions of SFAS 142,
goodwill and other intangible assets with indefinite lives 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 following table summarizes the estimated fair value of the assets
acquired and the liabilities assumed at the acquisition date. Third party
valuations have been obtained for property and equipment.
(in thousands)
Current assets $ 2,317
Property and equipment 1,369
Other assets 1,090
Goodwill and other intangible assets 28,393
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Total assets 33,169
Liabilities assumed (2,623)
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Purchase price $ 30,546
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The Old Evangeline Downs
As a result of the above recent transaction, the Company, through its
wholly owned subsidiary OED, currently owns and operates the Evangeline Downs.
The Evangeline Downs is located five miles north of Lafayette off Interstate 49
and is comprised of a 94,200 square foot pari-mutuel wagering complex, an
approximate 2,000-space parking lot, 7/8-mile dirt track and stables for
approximately 1,000 horses. The complex features an approximate 750-seat
grandstand, an approximate 3,000-person capacity apron and patio, an
approximately 850-seat restaurant, four concession stands and four bars. The
horse racetrack offers live thoroughbred and quarter horse races a minimum of 80
days a year from mid-April through Labor Day in September. The horse racetrack
also offers simulcast wagering six days a week year-round.
OED also operates an OTB in New Iberia, Louisiana, that offers simulcast
pari-mutuel wagering, and an OTB in Port Allen, Louisiana, that offers video
poker gaming and simulcast pari-mutuel wagering.
Operations
OED's business operations generate revenue from three main sources:
Pari-Mutuel Operations. The pari-mutuel segment consists of pari-mutuel
wagering on live thoroughbred and quarter horse races, from the middle of April
through Labor Day in September. OED
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also offers a mixture of simulcast wagering six days per week. The two OTBs
offer six days of pari-mutuel wagering on simulcast races. Pari-mutuel revenues
are a function of wagering handle, or the total amount wagered, without regard
to predetermined deductions. The total amounts wagered form a pool of funds from
which winnings are paid based on odds determined solely by the wagering
activity. In pari-mutuel wagering, patrons bet against each other rather than
against the operator of the facility, or with pre-set odds. The horse racetrack
acts as a stakeholder for the wagering patron and deducts from the amounts
wagered a gross commission. OED also generates revenue from simulcasting its
races to other horse racetracks. The simulcast fees are determined by the
contract agreed upon with the horse racetrack in question. Out of OED's live and
simulcast commission revenues, OED is required by statute to pay taxes to the
state of Louisiana.
Food and Beverage Operations. The food and beverage operations at the main
horse racetrack include a full service 850-seat clubhouse restaurant, four
concession stands and four other bars. The two off-track betting parlors each
include a kitchen that prepares short order food and a bar that serves alcoholic
and non-alcoholic beverages.
Gaming Operations. Currently, only the Port Allen OTB parlor operates
video poker gaming. The machines are currently owned and operated by a third
party. OED is currently expanding the Port Allen OTB from 18 to 100 video poker
machines which will initially be operated by a third party until OED obtains a
license. Under Louisiana's racing and off-track betting laws, OED has a right of
prior approval with respect to any applicant seeking a permit to operate an OTB
within a 55-mile radius of OED's horse racetrack. This effectively gives OED the
exclusive right, at its option, to operate OTBs within a 55-mile radius of OED's
horse racetrack, provided that such OTBs are not also within a 55-mile radius of
another horse racetrack.
Gaming revenues represent net revenues from video poker gaming which is
calculated by taking gross revenues from video poker gaming taken in by the
third party operator, or the total amount wagered, net of winning patron payout,
less: (i) franchise fees (22.5% of the net device revenue) to the Louisiana
Office of State Police, (ii) fees paid to the machine owner (60% of the net
device revenue less the franchise fees), and (iii) $100 fee per machine per
month. The remaining amount is recorded as gaming revenue.
Racino Development and Related Financing
In 1997, the State of Louisiana passed the Pari-Mutuel Act, which
permitted three of the four companies operating pari-mutuel wagering facilities
in Louisiana which offer live horse racing to install slot machines at their
horse racetrack facilities, subject to ratification by the voters of the
individual parishes. The voters of Lafayette Parish, where OED's existing horse
racetrack is located, have not approved the installation of slot machines at
OED's horse racetrack facility. However, in October 1997 the voters of St.
Landry Parish approved the operation of both slot machines and pari-mutuel
wagering. Therefore, OED is currently developing a casino and pari-mutuel horse
racetrack facility, or "racino," in nearby Opelousas, Louisiana within St.
Landry Parish, which will replace OED's existing horse racetrack near Lafayette
and where OED will be permitted to operate slot machines, in addition to
conducting live horse racing. OED's approximately 532-acre racino site is
located approximately 20 miles north of Lafayette, OED's primary market, at the
intersection of Interstate 49 and U.S. Highway 190. On December 19, 2002, OED
received a racing license to operate in St. Landry Parish, and on January 21,
2003, OED received a gaming license to operate slot machines at the racino,
subject to customary conditions.
OED has purchased all the necessary land to develop OED's racino. The
total remaining cost to design, develop, construct, equip and open the racino is
expected to be approximately $88.5 million. On February 26, 2003, OED
consummated a private placement of $123.2 million principal amount of OED Notes.
A portion of the net proceeds from this offering was used to repay certain
existing indebtedness, including termination of the Term Loan and repayment of
all outstanding borrowings thereunder. The balance of the net proceeds from the
offering will be used (1) to fund (together with cash from operations and other
available financing) the cost to design, develop, construct, equip and open the
racino, (2) to pay the first three semi-annual payments of fixed interest on the
OED Notes and (3) upon satisfaction of certain disbursement conditions, to fund
potential cost overruns and contingency amounts with respect to the design,
development, construction and equipping and opening of the racino. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further information about the OED Notes.
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OED has entered into a bonded guaranteed maximum price contract for
approximately $52.0 million with W.G. Yates & Sons Construction Company for the
construction of the racino facility. The approximate $36.5 million remaining
project budget includes the costs of equipment, additional land purchases,
off-site improvements, cage cash, pre-opening expenses and development costs.
Kitrell Garlock and Associates, AIA, Ltd., d/b/a KGA Architecture ("KGA
Architects") has been retained as the racino architect. The design of the horse
racetrack and related facilities has been sub-contracted by KGA Architects to
Foehlich, Kow & Gong Architects. KGA Architects' project management subsidiary
will administer the construction contract on OED's behalf. OED has also engaged
Abacus Project Management, Inc. to act as the independent construction
consultant, on behalf of the holders of OED Notes, who will certify the proper
use of the portion of the net proceeds of the offering of the OED Notes to be
used to develop the racino.
The construction and development of the racino project is expected to be
completed in two phases. During the first phase, OED will construct the casino
and related casino amenities, which OED expects to open in March 2004, at a
total remaining cost of $68.6 million. During the second phase, OED will
construct the horse racetrack and related facilities for a total remaining cost
of $19.9 million. OED expects to be prepared to begin scheduling live racing
meets in December 2004. OED expects to continue to operate its existing horse
racetrack until live racing meets are scheduled at the racino, at which time OED
will cease operations at its existing horse racetrack.
Competition
Under current Louisiana law, there are a total of 15 riverboat gaming
licenses and one land based casino license. In addition, pursuant to the
Pari-Mutuel Act, three of the four existing pari-mutuel horse racetracks in
Louisiana conducting live racing (including the Evangeline Downs) are permitted
to install slot machines. The nearest horse racetrack that is allowed to have
gaming operations is located in Vinton, Louisiana, near Lake Charles, which is
over 100 miles away. In addition, there are three Native American tribes
operating casinos in Louisiana, the closest of which is located approximately 50
miles from its proposed facility. We believe, because of OED's close proximity
to Lafayette and ease of access via major interstates and highways, that OED
will be the primary source of gaming entertainment in its primary market of
Lafayette. The nearest competitor to Lafayette is a Native American casino
approximately 50 miles to the south of Lafayette, including several miles off
the highway. Beyond that, patrons in Lafayette would need to drive approximately
50 miles to reach riverboat casinos in Baton Rouge or more than 70 miles to
reach riverboat casinos in Lake Charles and Native American casinos in
Marksville and Kinder. Because OED's competition in Marksville is inconveniently
situated more than 20 miles off the highway, we believe that patrons of the
Marksville casino may find the ease of highway access to its racino more
convenient.
OED plans to offer its patrons an experience at the racino that cannot be
matched by its casino-only competitors. In addition to approximately 1,600 slot
machines, OED will offer its guests live horse racing a minimum of 80 days per
year and year-round simulcast pari-mutuel racing. Since only two other racinos
are legislatively authorized in Louisiana, with the nearest located over 100
miles to the west, we believe that OED's entertainment offering will be
unrivaled in both its primary market area of Lafayette and secondary markets,
including Baton Rouge which is approximately 50 miles to the east.
Employees
OED currently employs approximately 145 employees. During its racing
season, OED employs up to approximately 325 employees. We anticipate that when
the racino opens OED will require approximately 600 additional employees. None
of OED's current employees are covered by a collective
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bargaining agreement. OED has not experienced any labor problems resulting in a
work stoppage, and we believe OED maintains good relations with its employees.
Regulatory Matters
We and our subsidiaries are subject to regulation by the State of Iowa,
the State of Louisiana and, to a lesser extent, by federal law. We and our
subsidiaries are subject to regulations that apply specifically to the gaming
and pari-mutuel industry, in addition to regulations applicable to businesses
generally. Legislative or administrative changes in applicable legal
requirements, including legislation to prohibit casino gaming, have been
proposed in the past. It is possible that the applicable requirements to operate
an Iowa or Louisiana gaming facility will become more stringent and burdensome,
and that taxes, fees and expenses may increase. It is also possible that the
number of authorized gaming licenses in Iowa and Louisiana may increase, which
would intensify the competition that we face. Our failure and the failure of OED
to comply with detailed regulatory requirements may be grounds for the
suspension or revocation of one or more of our respective licenses which would
have a material adverse effect on our respective businesses.
Iowa Riverboat Gaming Regulation
Our Diamond Jo operations are subject to Chapter 99F of the Iowa Code and
the regulations promulgate under that Chapter and the licensing and regulatory
control of the gaming commission.
Under Iowa law, the legal age for gaming is 21, and wagering on a
"gambling game" is legal when conducted by a licensee on an "excursion gambling
boat." An "excursion gambling boat" is a self-propelled excursion boat, and a
"gambling game" is any game of chance authorized by the gaming commission. While
dockside casino gaming is currently authorized by the gaming commission, a
licensed excursion gambling boat is required to conduct at least one two-hour
excursion cruise each day for at least 100 days during the excursion season to
operate during the off-season. The excursion season is from April 1st through
October 31st of each calendar year. The excursions conducted by the Diamond Jo
during the 2002 cruising season satisfied the requirements of Iowa law for the
conduct of off-season operations.
The legislation permitting riverboat gaming in Iowa authorizes the
granting of licenses to "qualified sponsoring organizations." A "qualified
sponsoring organization" is defined as a nonprofit corporation organized under
Iowa law, whether or not exempt from federal taxation, or a person or
association that can show to the satisfaction of the gaming commission that the
person or association is eligible for exemption from federal income taxation
under ss.ss. 501(c)(3), (4), (5), (6), (7), (8), (10) or (19) of the Internal
Revenue Code. Such nonprofit corporation may operate the riverboat itself, or it
may enter into an agreement with another boat operator to operate the riverboat
on its behalf. A boat operator must be approved and licensed by the gaming
commission. The Dubuque Racing Association, a not-for-profit corporation
organized for the purpose of operating a pari-mutuel greyhound racing facility
in Dubuque, Iowa, first received a riverboat gaming license in 1990 and has
served as the "qualified sponsoring organization" of the Diamond Jo since March
18, 1993. The Dubuque Racing Association subsequently entered into the Dubuque
Racing Association operating agreement with Greater Dubuque Riverboat
Entertainment Company, the previous owner and operator of the Diamond Jo,
authorizing Greater Dubuque Riverboat Entertainment Company to operate riverboat
gaming operations in Dubuque. The Dubuque Racing Association operating agreement
was approved by the gaming commission on March 18, 1993. The term of the Dubuque
Racing Association operating agreement expires on December 31, 2008. We assumed
the rights and obligations of Greater Dubuque Riverboat Entertainment Company
under the Dubuque Racing Association operating agreement.
8
Under Iowa law, a license to conduct gaming may be issued in a county only
if the county electorate has approved the gaming. The electorate of Dubuque
County, Iowa, which includes the City of Dubuque, approved gaming on May 17,
1994 by referendum, including gaming conducted by the Diamond Jo. In addition, a
referendum must be held every eight years in each of the counties where gambling
games are conducted and the proposition to continue to allow gambling games in
such counties must be approved by a majority of the county electorate voting on
the proposition. Such a referendum took place on November 5, 2002 with 79% of
the electorate voting on the proposition favoring continued gaming on riverboats
in Dubuque County. The next referendum is scheduled for 2010. If any
reauthorization referendum is defeated, Iowa law provides that any previously
issued gaming license will remain valid and subject to renewal for a total of
nine years from the date of original issuance of the license, subject to earlier
non-renewal or revocation under Iowa law and regulations applicable to all
licenses.
Proposals to amend or supplement Iowa's gaming statutes are frequently
introduced in the Iowa state legislature. In addition, the state legislature
sometimes considers proposals to amend or repeal Iowa law and regulations, which
could effectively prohibit riverboat gaming in the State of Iowa, limit the
expansion of existing operations or otherwise affect our operations. Although we
do not believe that a prohibition of riverboat gaming in Iowa is likely, we can
give no assurance that changes in Iowa gaming laws will not occur or that the
changes will not have a material adverse effect on our business.
The gaming commission adopted in 1998 a rule that prohibits licensees,
including the Diamond Jo, from increasing the number of gaming positions without
gaming commission approval. This approval is based on several factors, including
whether the increase will:
(1) positively impact the community in which the licensee operates,
(2) result in permanent improvements and land-based developments, and
(3) have a detrimental impact on the financial viability of other
licensees operating in the same market.
As a result of this rule, we may be unable to increase the number of
gaming positions on the Diamond Jo.
Substantially all of the Diamond Jo's material transactions are subject to
review and approval by the gaming commission. All contracts or business
arrangements, verbal or written, with any related party or in which the term
exceeds three years or the total value of the contract exceeds $100,000 are
agreements that qualify for submission to and approval by the gaming commission
subject to certain limited exceptions. The agreement must be submitted within 30
days of execution and approval must be obtained prior to implementation unless
the agreement contains a written clause stating that the agreement is subject to
commission approval. Additionally, contracts negotiated between the Diamond Jo
and a related party must be accompanied by economic and qualitative
justification.
We must submit detailed financial, operating and other reports to the
gaming commission. We must file weekly gaming reports indicating adjusted gross
receipts received from gambling games. Additionally, we must file annual
financial statements covering all financial activities related to our operations
for each fiscal year. We must also keep detailed records regarding our equity
structure and owners.
Iowa has a graduated wagering tax on riverboat gambling equal to five
percent of the first one million dollars of adjusted gross receipts, ten percent
on the next two million dollars of adjusted gross
9
receipts and twenty percent on adjusted gross receipts of more than three
million dollars. In addition, Iowa riverboats share equally in costs of the
gaming commission and related entities to administer gaming in Iowa. For the
fiscal year ended December 31, 2002, our share of such expenses was
approximately $503,000. Further, the Diamond Jo pays to the City of Dubuque a
fee equal to $.50 per passenger.
If the gaming commission decides that a gaming law or regulation has been
violated, the gaming commission has the power to assess fines, revoke or suspend
licenses or to take any other action as may be reasonable or appropriate to
enforce the gaming rules and regulations. In addition, renewal is subject to,
among other things, continued satisfaction of suitability requirements.
We are required to notify the gaming commission as to the identity of, and
may be required to submit background information regarding, each director,
corporate officer and owner, partner, joint venture, trustee or any other person
who has a beneficial interest of five percent or more, direct or indirect, in
the Company. The gaming commission may also request that we provide them with a
list of persons holding beneficial ownership interests in the Company of less
than five percent. For purposes of these rules, "beneficial interest" includes
all direct and indirect forms of ownership or control, voting power or
investment power held through any contract, lien, lease, partnership,
stockholding, syndication, joint venture, understanding, relationship, present
or reversionary right, title or interest, or otherwise. The gaming commission
may determine that holders of the Peninsula Notes, the Company's common
membership interests and preferred membership interests, and PGP's common
membership interests and convertible preferred membership interests have a
"beneficial interest" in us. The gaming commission may limit, make conditional,
suspend or revoke the license of a licensee in which a director, corporate
officer or holder of a beneficial interest in the person includes or involves
any person or entity which is found to be ineligible as a result of want of
character, moral fitness, financial responsibility, or professional
qualifications or due to failure to meet other criteria employed by the gaming
commission.
If any gaming authority, including the gaming commission, requires any
person, including a record or beneficial owner of the securities, to be
licensed, qualified or found suitable, the person must apply for a license,
qualification or finding of suitability within the time period specified by the
gaming authority. The person would be required to pay all costs of obtaining the
license, qualification or finding of suitability. If a record or beneficial
owner of any of the Peninsula Notes or any membership interest of PGP or the
Company is required to be licensed, qualified or found suitable and is not
licensed, qualified or found suitable by the gaming authority within the
applicable time period, these Peninsula Notes or membership interests will be
subject to regulatory redemption procedures. Peninsula Notes to be redeemed
under a required regulatory redemption are redeemable by us, in whole or in
part, at any time upon not less than 20 business days nor more than 60 days
notice, or such earlier date as may be ordered by any governmental authority.
As of the date of this report, the gaming commission has not required the
security holders to apply for a finding of suitability to own the securities.
However, the gaming commission could require a holder of the securities to
submit an application in the future.
Federal Regulation of Slot Machines
We are required to make annual filings with the U.S. Attorney General in
connection with the sale, distribution or operation of slot machines. We are
currently in compliance with such filing requirements.
10
Potential Changes in Tax and Regulatory Requirements
In the past, federal and state legislators and officials have proposed
changes in tax law, or in the administration of the laws, affecting the gaming
industry. Regulatory commissions and state legislatures sometimes consider
limitations on the expansion of gaming in jurisdictions where we operate and
other changes in gaming laws and regulations. Proposals at the national level
have included a federal gaming tax and limitations on the federal income tax
deductibility of the cost of furnishing complimentary promotional items to
customers, as well as various measures which would require withholding on
amounts won by customers or on negotiated discounts provided to customers on
amounts owed to gaming companies. It is not possible to determine with certainty
the likelihood of possible changes in tax or other laws or in the administration
of the laws. The changes, if adopted, could have a material adverse effect on
our financial results.
Liquor Regulations
The sale of alcoholic beverages by us in Iowa is or will be subject to the
licensing, control and regulation by the liquor agencies, which include the City
of Dubuque and the Alcoholic Beverage Division of the Iowa Department of
Commerce. The applicable Iowa liquor laws allow the sale of liquor during legal
hours which are Monday through Saturday from 6 a.m. to 2 a.m. the next day and
Sunday from 8 a.m. to 2 a.m. on Monday.
The sale of alcoholic beverages by OED in Louisiana is or will be subject
to the licensing, control and regulation by the liquor agencies, which include
the City of Carencro, City of New Iberia, Parish of West Baton Rouge, and the
Office of Alcoholic and Tobacco Control of the Louisiana Department of Revenue.
The applicable Louisiana liquor laws allow the sale of liquor during legal hours
which are from 6 a.m. to 2 a.m. the next day, seven days a week.
Subject to few exceptions, all persons who have a financial interest in
us, by ownership, loan or otherwise, must be disclosed in an application filed
with, and are subject to investigation by, the liquor agencies. Persons who have
a direct or indirect interest in any Iowa liquor license, other than hotel or
restaurant liquor licenses, may be prohibited from purchasing or holding the
Peninsula Notes. All licenses are subject to annual renewal, are revocable and
are not transferable. The liquor agencies have the full power to limit,
condition, suspend or revoke any license or to place a liquor licensee on
probation with or without conditions. Any disciplinary action could, and
revocation would, have a material adverse effect upon the operations of our
business. Many of our owners, officers and managers must be investigated by the
liquor agencies in connection with our liquor permits. Changes in licensed
positions must be approved by the liquor agencies.
United States Coast Guard
The Diamond Jo is also regulated by the United States Coast Guard, whose
regulations affect boat design and stipulate on-board facilities, equipment and
personnel, including requirements that each vessel be operated by a minimum
complement of licensed personnel, in addition to restricting the number of
persons who can be aboard the boat at any one time. Our riverboat must hold, and
currently possesses, a Certificate of Inspection and a Certificate of
Documentation from the United States Coast Guard. Loss of the Certificate of
Inspection would preclude our use of the Diamond Jo as an operating riverboat.
In addition, the riverboat is subject to United States Coast Guard regulations
requiring periodic hull inspections. The United States Coast Guard, upon our
request, allowed us to conduct an underwater hull inspection instead of the
traditional out of water dry dock inspection. We completed the underwater
inspection in March 2003. The underwater hull inspection did not result in any
loss of services of the riverboat. We will be required to perform another hull
inspection within 60 months from the date of the completion of the underwater
hull inspection. At that time, we may again seek approval from the Coast Guard
for an underwater hull inspection in order to avoid any loss of services of the
riverboat.
11
All of our marine employees employed on United States Coast Guard
regulated vessels, even those who have nothing to do with the actual operation
of the vessel, such as dealers, cocktail hostesses and security personnel, may
be subject to maritime law at certain times of the year, which, among other
things, exempts those employees from state limits on workers' compensation
awards. We maintain workers' compensation insurance in compliance with
applicable Iowa law.
The Maritime Transportation Security Act and Homeland Security.
The Maritime Transportation Security Act was passed by the Congress of the
United States and signed into law following the September 11 attacks. The Coast
Guard recently completed a series of public hearings with regard to contemplated
regulations pursuant to that Act. It is anticipated that the proposed
regulations will be available for comment by mid-2003. It is not possible to
predict the precise nature of the final regulations and their impact on upon
access to our facility. Further, regulations pursuant to other homeland security
continues to be discussed although there is nothing currently in effect that
substantially negatively impacts our operations.
The Shipping Act of 1916; The Merchant Marine Act of 1936
The Shipping Act of 1916, and the Merchant Marine Act of 1936, and
applicable regulations contain provisions which would prevent persons who are
not citizens of the United States from holding in the aggregate more than 25% of
our outstanding membership interests, directly or indirectly. The Company's and
PGP's respective operating agreements contain prohibitions against any purchase
or transfer of the Company's or PGP's respective membership interests to any
person or entity if, following the purchase or transfer, more than 25% of the
Company's membership interests are owned, directly or indirectly, by persons who
are not citizens of the United States. Any such purchase or transfer in
violation of the Company's or PGP's respective operating agreements is null and
void, and the Company and PGP will not recognize the purchaser, transferee or
purported beneficial owner as a direct or indirect holder of an interest in the
Company or PGP, respectively, for any purpose. To the extent required by
maritime laws, the managing member, managers and the officers of PGP and the
Company must be citizens of the United States.
Louisiana Pari-Mutuel Live Racing Facility Economic Redevelopment and
Gaming Control Act (the "Pari-Mutuel Act") and the Louisiana Horse Racing Act
The Horse Racing Act has been in effect since 1968 and is the basis for
the current statutory scheme regulating live and off-track betting for horse
racing. The Horse Racing Act states, among other things, that certain policies
of Louisiana with respect to horse racing are to encourage the development of
horse racing with pari-mutuel wagering on a high plane; to encourage the
development and ownership of race horses; to regulate the business of racing
horses and to provide the orderly conduct of racing; to provide financial
assistance to encourage the business of racing horses; and to provide a program
for the regulation, ownership, possession, licensing, keeping, breeding and
inoculation of horses.
The Pari-Mutuel Act became effective on July 9, 1997 and provides for
numerous controls and supervision over the operation of slot facilities and
requires us to comply with complex and extensive requirements. Failure to adhere
to these statutes and regulations will result in serious disciplinary action
against us, including monetary fines and suspension or revocation of our
licenses, once issued.
The Pari-Mutuel Act allows only one facility in each of St. Landry Parish,
Bossier Parish and Calcasieu Parish to be licensed to operate slot machines at a
live horse racing facility. OED is presently the only "eligible facility" in St.
Landry Parish under the Pari-Mutuel Act. The Pari-Mutuel Act requires (among
other things) that two conditions be met prior to the opening and operation of a
slot machine
12
casino at a live racing venue. First, a parish-wide election must approve the
operation. In 1997, voters in St. Landry Parish voted to approve the slot
machine casino at the racino site. Secondly, the Pari-Mutuel Act requires that
an appropriate tax be levied on the slot machine operation. In 2000, an 18.5%
license tax was levied upon taxable net slot machine proceeds.
The Pari-Mutuel Act also provides that the "designated gaming space" in
any eligible facility cannot exceed 15,000 square foot, that the licensee will
not allow underage gaming and that notice of toll-free telephone assistance for
compulsive gamblers will be posted at the facility.
The Pari-Mutuel Act requires that licensees supplement horse racing purses
and pay certain other fees from slot machine proceeds. The Pari-Mutuel Act also
levies taxes on the net slot machine proceeds. Licensees must pay fifteen (15%)
percent of gross slot machine proceeds to supplement purses at their facilities,
pay two (2%) percent to the Louisiana Thoroughbred Breeders Association and also
pay one (1%) percent to the Louisiana Quarter Horse Breeders Association. In
addition to these payments, OED will pay eighteen and one-half (18.5%) percent
of the net slot machine proceeds (net of the payments described above) as state
taxes and four (4%) percent as local taxes. The effective rate of total taxes
and fees is therefore approximately 36.5%. Additionally, OED will also have to
pay $0.25 to the Louisiana State Racing Commission for each patron attending a
live race at our horse racetrack and all patrons at our OTBs.
To remain an "eligible facility" under the Pari-Mutuel Act, OED must,
among other things, have a minimum of 80 live racing days in a consecutive
20-week period each year of live horse race meetings.
The Louisiana State Gaming Control Board
In 1996, Louisiana created the Louisiana Gaming Control Board, which was
granted all of the regulatory authority, control and jurisdiction to license and
monitor gaming facilities in Louisiana, including our planned racino. To receive
a gaming license an applicant and its management must apply to the Louisiana
Gaming Control Board and be investigated by the Louisiana State Police prior to
licensing. The Louisiana Gaming Control Board and Louisiana State Police must
determine that the applicant is suitable to conduct the gaming operations,
including that the applicant (and its owners, officers, directors and key
employees) is of good character, honesty and integrity, that its prior
activities, reputation and associations pose no threat to the public interest or
to the effective regulation of the industry and that the applicant is capable of
conducting the operation of the slot machine facility. The Louisiana Gaming
Control Board must also determine that the applicant has adequate financing from
a source suitable and acceptable to the Louisiana Gaming Control Board.
The applicant for a gaming license, its directors, officers, key
personnel, partners, and persons holding a five (5%) percent or greater equity
or economic interest in the applicant will be required to be found suitable by
the Louisiana Gaming Control Board. To receive a license the applicant must file
an extensive application with the Louisiana Gaming Control Board, disclosing
personal, financial, criminal, business and other information. The applicant is
required to pay all costs of investigation. An application for a finding of
suitability of a person may be denied for any cause deemed reasonable by the
Louisiana Gaming Control Board. Any other person who is found to have a material
relationship to or a material involvement with a gaming company also may be
required to be investigated in order to be found suitable or be licensed as a
business associate of an applicant. Key employees, controlling persons or others
who exercise significant influence upon the management or affairs of a gaming
company may be deemed to have such a relationship or involvement.
If the Louisiana Gaming Control Board were to find a director, officer or
key employee of an applicant unsuitable for licensing purposes or unsuitable to
continue having a relationship with an
13
applicant, the applicant would have to dismiss and sever all relationships with
such person. The applicant would have similar obligations with regard to any
person who refuses to file appropriate applications. Each gaming employee must
obtain a gaming employee permit which may be revoked upon the occurrence of
certain specified events.
An applicant must also demonstrate that the proposed gaming operation has
adequate financial resources generated from suitable sources and adequate
procedures to comply with the operating controls and requirements imposed by the
laws and regulations in the State of Louisiana. Additionally, the applicant must
submit plans and specifications of the gaming premises specifying the layout and
design of the gaming space. Proof of tax compliance, both state and federal, is
also required. This submission is followed by a thorough investigation by the
regulatory authorities of the applicant, its business probity, the premises and
other matters. An application for any gaming license, approval or finding of
suitability may be denied for any cause that the regulatory authorities deem
reasonable.
OED received its gaming license to operate slot machines from the
Louisiana Gaming Control Board on January 21, 2003. OED's license has a term of
five years and is renewable for succeeding five year periods upon application
for such renewal. The Louisiana Gaming Control Board retains absolute discretion
over the right to renew such license upon the termination of its initial term.
OED's gaming license authorizes the use of 15,000 square feet of
designated gaming space. On February 18, 2003, OED submitted for approval its
layout for the casino, which incorporated 1,631 slot machines. OED's layout was
approved based on the type of machines which were all upright machines. Should
OED change the manufacturer, type and/or design of its slot machines prior to
installation, it must once again go before the Louisiana Gaming Control Board to
obtain approval for the new machines. Once the machines are installed, they must
be inspected by regulators and tested prior to the approval of their operation.
Maintaining OED's gaming license is contingent in certain respects on the
horse racetrack operations at OED's planned racino. First, OED's failure to
complete construction of the horse racetrack at the racino or to establish a
schedule of live racing meets at the new horse racetrack by January 21, 2005
will result in the cancellation of OED's gaming license. While Louisiana allows
OED to operate slot machines at the racino prior to completion of the new horse
racing facility and the commencement of live racing at the new horse racetrack,
Louisiana gaming regulations and OED's gaming license require that the racino
must be constructed and a schedule of live racing meets at the new horse
racetrack be established by January 21, 2005, which is within two years from the
date of the grant of OED's gaming license. Second, to maintain OED's gaming
license, OED must remain an "eligible facility" under the Pari-Mutuel Act which
includes having a minimum of 80 live racing days in a consecutive 20-week period
each year of live horse race meetings at the new horse racetrack.
Although OED has obtained a license to conduct slot machine operations,
OED continues to be subject to ongoing monitoring and compliance requirements by
the Louisiana Gaming Control Board and the Louisiana State Police. Regulations
require OED to comply with rigorous accounting and operating procedures,
including the submission of detailed financial and operating reports. OED's
accounting records must include accurate, complete and permanent records of all
transactions pertaining to revenue. Detailed ownership records must be kept on
site available for inspection. All records must be retained for a period of five
years. Audited financial statements are required to be submitted to the
Louisiana State Police. Internal controls must be approved and in place
beginning the first day of operation. These controls will include handling of
cash, tips and gratuities, slot operations, count room procedures and management
information systems. Each licensed facility is required by the Gaming Control
Board to maintain cash or cash equivalent amounts on site sufficient to protect
patrons against defaults in gaming
14
debts owed by the licensee. In addition, licensees are be subject to currency
transaction report regulations.
OED must also strictly comply with mandated operating procedures and
supply detailed reports disclosing such compliance. Regulation of a casino's
methods of operations is extensive and will include substantially all aspects of
our casino operation. Operating procedures that are subject to regulation
include slot machine maintenance and operation, cash management and cash
procedures, cage procedures, drop procedures, regulation of weapons in the
casino, parking, access to the premises and records by regulators, gaming credit
and advertising, surveillance and security standards, safeguards against
underage gambling, compulsive gambling programs, physical layout and progressive
jackpots.
The Louisiana Gaming Control Board retains the power to suspend, revoke,
condition, limit or restrict OED's license to conduct slot machine operations as
a sanction for violating licensing terms or for any cause they deem reasonable.
In addition, monetary fines for violations may be levied against OED, and its
gaming operation revenues may be forfeited to the state under certain
circumstances. Initial enforcement actions against a licensee are brought by the
Louisiana State Police and are heard before an administrative law judge to whom
the Louisiana Gaming Control Board has delegated decision making power. Either
party may appeal the ruling of the administrative law judge before the full
Louisiana Gaming Control Board. Either party may further appeal the ruling of
the Louisiana Gaming Control Board in state court. The laws, regulations and
procedures pertaining to gaming are subject to the interpretation of the
regulatory authorities and may be amended. Any changes in such laws or
regulations, or their current interpretations, could have a material adverse
effect on OED's business, financial condition and results of operations.
The Louisiana Gaming Control Board has broad regulatory power over
securities issuances and incurrence of indebtedness by gaming facilities.
Substantially all loans, leases, private sales of securities, extensions of
credit and similar financing transactions entered into by a licensee must be
approved by the Louisiana Gaming Control Board.
At any time, the Louisiana Gaming Control Board may investigate and
require the finding of suitability of any shareholder or beneficial shareholder
(and if the shareholder is a corporate or partnership entity, then the
shareholders or partners of the entity), officer, partner, manager or director
of a licensee if the Gaming Control Board believes such holder exercises a
material influence over the licensee. Furthermore, all holders of more than a 5%
interest in the licensee, or proposed purchasers of more than a 5% interest, are
automatically investigated and are required to submit to suitability
requirements of the Louisiana Gaming Control Board. Any sale or transfer of more
than a 5% interest in any riverboat or slot project is subject to the approval
of the Louisiana Gaming Control Board.
Although the Pari-Mutuel Act does not specifically require debt holders to
be licensed or to be found suitable, the Louisiana Gaming Control Board, in its
sole discretion, may require the holders of debt securities to file applications
and obtain suitability certificates from it. Furthermore, if the Louisiana
Gaming Control Board finds that any holder exercises a material influence over
the gaming operations, a suitability certificate will be required.
Louisiana State Racing Commission
Pari-mutuel betting and the conducting of live horse race meets in
Louisiana are strictly regulated by the Louisiana State Racing Commission, which
was created pursuant to the Horse Racing Act. The Racing Commission is comprised
of ten (10) members and is domiciled in New Orleans, Louisiana. In order to be
approved to conduct a live race meet and to operate pari-mutuel wagering
(including off-track betting), an applicant must show, among other things:
racing experience; financial qualifications; moral
15
and financial qualifications of applicant and applicant's partners, officers and
officials; the expected effect on the breeding and horse industry; and the
expected effect on the State's economy.
In 2000, OED received from the Louisiana State Racing Commission a license
to conduct live race meets and to operate pari-mutuel wagering at its existing
facility. The initial term of this license is ten years subject to renewal in
2010. On December 19, 2002, OED received approval to transfer its operations
under its license from Lafayette Parish to St. Landry Parish for the racing
season commencing in 2005. As a condition to the approval of our racing license,
OED is required to offer pari-mutuel wagering in the defined casino gaming space
at the time OED begins conducting slot machine gaming. OED's current plans for
its new racino include monitors and other equipment to facilitate live and
simulcast wagering within the casino area in compliance with this condition.
The Louisiana State Racing Commission promulgates rules, regulations and
conditions for the holding, conducting and operating of all race tracks in the
state. Failure to adhere to these regulations may result in substantial fines or
the suspension or revocation of our racing license. A revocation or suspension
of the racing license would, in turn, result in the revocation or suspension of
OED's gaming license to conduct slot machine operations. Any alteration in the
regulation of these activities could have a material adverse effect on OED's
operations.
Other Regulations
We and our subsidiaries are subject to federal, state and local
environmental and safety and health laws, regulations and ordinances that apply
to non-gaming businesses generally, such as the Clean Air Act, Federal Water
Pollution Control Act, Occupational Safety and Health Act, Resource Conservation
Recovery Act, Oil Pollution Act of 1990 and Comprehensive Environmental
Response, Compensation and Liability Act, each as amended. We have not incurred,
and do not expect to incur, material expenditures with respect to these laws.
There can be no assurances, however, that we will not incur material liability
under these laws in the future.
ITEM 2. PROPERTIES
The gaming commission approved our application for a license to operate a
gaming riverboat on May 20, 1999, effective upon the acquisition of the Diamond
Jo. The properties we acquired upon consummation of the acquisition of the
Diamond Jo are located within the historic Port of Dubuque on the west bank of
the Mississippi River in Dubuque, Iowa. These properties consist of several
parcels of real property previously owned by Harbor Community Investment. We own
a fee interest in the dockside pavilion, consisting of approximately 33,000
square feet, a surface parking lot within close proximity to the dockside
pavilion, and the walkway connecting the dockside pavilion to the ramp, which
leads to where the Diamond Jo is moored.
The Diamond Jo and its dockside facility are currently pledged as
collateral with respect to the Peninsula Notes.
In addition to the properties we purchased, we currently lease property
used as surface parking consisting of approximately 194 parking spaces that are
in close proximity to the Diamond Jo. This leased property is currently owned by
the City of Dubuque and leased to the Dubuque Racing Association, which in turn
subleases these properties to us. The sublease requires us to pay one dollar per
year as rent. The terms of the Dubuque Racing Association lease with the City of
Dubuque and our sublease with the Dubuque Racing Association have each been
extended through December 31, 2008.
16
We are also party to a parking agreement by and among the City of Dubuque,
the Dubuque Racing Association, the Dubuque County Historical Society and the
Spirit of Dubuque, which governs the use of additional parking spaces we
currently use. This parking agreement gives our patrons the right to use the
approximately 194 parking spaces currently subleased from the Dubuque Racing
Association. The agreement also gives our patrons and employees the
non-exclusive right to use approximately 633 additional parking spaces that are
owned by the City of Dubuque and the Dubuque County Historical Society and are
located in close proximity to the Diamond Jo. In exchange for these parking
rights and the extension of the sublease with the Dubuque Racing Association, we
are required, under some circumstances, to share costs of maintaining the
subleased parking lots.
During 2002, we indirectly through our wholly owned subsidiary OEDA,
acquired 100% of the membership interests in OED, which owns and operates the
Evangeline Downs. The Evangeline Downs is located five miles north of Lafayette,
Louisiana and includes a 94,200 square foot pari-mutuel wagering complex and an
adjacent 7/8-mile dirt track for live horse racing. OED also operates an OTB in
New Iberia, Louisiana, that offers simulcast pari-mutuel wagering, and an OTB in
Port Allen, Louisiana, that offers video poker gaming and simulcast pari-mutuel
wagering.
OED currently leases the land on which the pari-mutuel wagering complex
and leasehold improvements are located. The ground lease annual rental is $0 per
year and the lease term expires on the earlier of (i) December 31, 2004 or (ii)
the first day the Company opens a new horse racetrack facility for business in
St. Landry Parish, Louisiana. OED also leases the building in which its New
Iberia OTB conducts operations for $5,000 per month.
OED currently owns approximately 532 acres of land on which it plans to
build the racino.
See Item 1 "Business" for further information about the properties of the
Company.
ITEM 3. LEGAL PROCEEDINGS
On November 8, 1994, the Louisiana Horsemen's Benevolent and Protective
Association 1993, Inc. ("LHBPA") filed a lawsuit against all licensed horse
racetracks in the State of Louisiana. The lawsuit alleged that LHBPA did not
receive the appropriate share of net revenues from video poker devices located
at licensed horse racetracks. In February 2003, OED entered into a settlement
agreement with LHBPA for $1.6 million. The terms of the settlement agreement
requires OED to make payments of $400,000 annually beginning in March 2003, with
additional $400,000 payments due in March 2004 through 2006.
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 horse racetrack and the development and
management of the racino project. However, in connection with the consummation
of the Trotter Purchase (as discussed above), the Trotter Complaint was
dismissed.
Neither we nor our subsidiaries are a party to, and none of our nor our
subsidiaries' 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 would
have a material adverse effect on our financial condition, results of operations
or cash flows.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
Part II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no established public trading market for any of the Company's
common equity securities.
As of March 15, 2003, PGP was the only holder of record of the common
equity of the Company. The Company paid distributions of $1,260,012, $1,760,908
and $1,917,551 in 2002, 2001 and 2000, respectively, to PGP in respect of (i)
compensation for certain consulting and financial advisory services rendered by
certain executive officers of PGP, (ii) board fees and expenses paid to the
members of the board of managers of PGP, and (iii) tax, accounting, legal and
administrative costs and expenses of PGP.
ITEM 6. SELECTED FINANCIAL DATA
The following table represents selected financial data of the Company or
its predecessor companies, Greater Dubuque Riverboat Entertainment Company and
Harbor Community Investment, L.C., for the five years ended December 31, 2002.
The selected historical financial data for the five years ended December
31, 2002 are derived from audited financial statements of the Company or its
predecessor combined companies. The Company acquired the operations of the
predecessor companies on July 15, 1999. The selected financial data set forth
below should be read in conjunction with, and is qualified in its entirety by
reference to, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the Company's financial statements and the related
notes included elsewhere in this document.
As set forth in the table below, the amount of non-recurring expenses
consists of non-recurring charges related to sale of business and litigation
involving the prior owners of the Diamond Jo and Greater Dubuque Riverboat
Entertainment Company as well as organizational costs and severance expenses
incurred by the Company during the period July 15, 1999 (date of inception) to
December 31, 1999. For purposes of determining the ratio of earnings to fixed
charges, earnings are defined as income before income taxes plus fixed charges.
Fixed charges include interest expense on all indebtedness, amortization of
deferred financing costs and bond discount, preferred member distributions and
minority interest. The Company's ratio of earnings to fixed charges for the
period from July 15, 1999 (date of inception) to December 31, 1999 would have
been 1.1x if the start-up and organizational costs expensed during this period
were excluded.
19
Peninsula
Gaming
Peninsula Gaming Company Pro Forma Company Predecessor Companies
------------------------ --------- ------- ---------------------
Period from Period from
July 15, January 1,
1999 to 1999 to
December July
2002 2001 2000 1999 31,1999 14, 1999 1998
---- ---- ---- ---- ------- -------- ----
(Dollars in thousands)
Statement of Operations Data
Revenues:
Casino $ 48,262 $ 47,710 $ 45,519 $ 44,916 $ 21,153 $ 23,763 $ 44,167
Racing 10,279
Food and beverage 3,886 2,745 2,663 2,643 1,235 1,408 2,469
Other 145 132 169 243 122 121 290
Less: Promotional
allowances (2,615) (2,470) (2,599) (1,927) (1,017) (910) (1,802)
------ ------ ------ ------ ------ ---- ------
Net revenues 59,957 48,117 45,752 45,875 21,493 24,382 45,124
Expenses:
Casino 20,555 20,375 19,517 18,399 8,599 9,800 17,850
Racing 7,881
Food and beverage 3,820 2,857 2,856 2,808 1,328 1,480 2,460
Boat operations 2,296 2,259 2,242 2,100 991 1,109 2,176
Other 27 22 37 37 16 21 54
Selling, general and
administrative 8,278 6,681 6,459 7,383 3,736 3,647 6,477
Depreciation and
amortization 2,950 3,963 3,571 2,698 1,541 1,157 1,895
Litigation settlement 1,600
Referendum 771
State of Wisconsin
government relations 55 147
Non-recurring expenses 5,005 3,134 1,871 928
------ ------ ------ ------ ------ ---- ------
Total expenses 48,234 36,304 34,682 38,430 19,345 19,085 31,840
Income From
Operations 11,723 11,813 11,070 7,445 2,148 5,297 13,284
Other income (expense)
Interest income 46 184 434 231 155 76 142
Interest expense (11,888) (9,640) (9,507) (4,714) (4,383) (331) (1,142)
Loss on sale of assets (8) (152) (122) (166) (68) (98) (74)
------ ------ ------ ------ ------ ---- ------
Total other expense (11,850) (9,608) (9,195) (4,649) (4,296) (353) (1,074)
Preferred member
distributions (373) (386) (630) (289) (289)
Minority interest (232)
------ ------ ------ ------ ------ ---- ------
Net income (loss) to
common interests $ (732) $ 1,819 $ 1,245 $ 2,507 $ (2,437) $ 4,944 $ 12,210
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to
fixed charges 0.9x 1.2x 1.1x .5x 13.5x 10.8x
20
Peninsula
Gaming
Peninsula Gaming Company Pro Forma Company Predecessor Companies
------------------------ --------- ------- ---------------------
Period from Period from
July 15, January 1,
1999 to 1999 to
December July
2002 2001 2000 1999 31,1999 14, 1999 1998
---- ---- ---- ---- ------- -------- ----
(Dollars in thousands)
Other Data
Cash flows from
operating activities $ 11,784 $ 7,250 $ 4,951 $ 2,475 $ 6,134 $ 14,638
Cash flows from
investing activities (37,790) (2,816) (2,409) (68,611) 80 (1,793)
Cash flows from
financing activities (28,993) (5,273) (2,099) 74,055 (8,277) (12,806)
Distributions to
common members 1,260 1,761 1,918 286 5,258 7,027
Balance Sheet Data: 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Current assets $ 12,160 $ 8,034 $ 9,134 $ 8,765 $ 6,767
Total assets 126,448 84,374 86,788 88,175 29,252
Current liabilities 35,358 3,964 3,533 4,370 8,133
Total debt 102,944 70,860 70,764 70,680 9,822
Preferred member
interest, redeemable 4,000 4,000 7,000 7,000
Total members' equity 3,671 5,663 5,604 6,277 16,697
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with,
and is qualified in its entirety by, our "Selected Financial Data" and the
financial statements and the related notes thereto appearing elsewhere in this
report.
Forward Looking Statements
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 Private Securities Litigation Reform Act
of 1995. Forward-looking statements include the words "may," "will," "estimate,"
"intend," "continue," "believe," "expect," or "anticipate" and other similar
words. These forward-looking statements generally relate to plans and objectives
for future operations and are based upon management's reasonable estimates of
future results or trends. Although we believe that the plans and objectives
reflected in or suggested by such forward-looking statements are reasonable,
such plans or objectives may not be achieved. Actual results may differ from
projected results due, but not limited, to unforeseen developments, including
developments relating to the following:
o the availability and adequacy of our cash flow to satisfy our
obligations, including payment of the Peninsula Notes and additional
funds required to support capital improvements and development,
21
o economic, competitive, demographic, business and other conditions in
our local and regional markets,
o changes or developments in the laws, regulations or taxes in the
gaming and horse racing industry,
o actions taken or omitted to be taken by third parties, including
customers, suppliers, competitors, members and shareholders, as well
as legislative, regulatory, judicial and other governmental
authorities,
o changes in business strategy, capital improvements, development
plans, including those due to environmental remediation concerns, or
changes in personnel or their compensation, including federal, state
and local minimum wage requirements,
o the loss of any license or permit, including the failure to obtain
an unconditional renewal of a required gaming license on a timely
basis,
o the termination of our operating agreement with the Dubuque Racing
Association, Ltd. or the failure of the Dubuque Racing Association,
Ltd. to continue as our "qualified sponsoring organization,"
o the loss of our riverboat casino or land-based facilities due to
casualty, weather, mechanical failure or any extended or
extraordinary maintenance or inspection that may be required,
o potential exposure to environmental liabilities, changes or
developments in the laws, regulations or taxes in the gaming or
horse racing industry or a decline in the public acceptance of
gaming or horse racing and other unforeseen difficulties associated
with a new venture,
o adverse circumstances, changes, developments or events relating to
or resulting from our ownership and control of OED,
o other factors discussed in our other filings with the Securities and
Exchange Commission.
Results of Operations
The following discussion of the results of operations is presented for the
years ended December 31, 2002, 2001 and 2000.
2002 Compared to 2001
Net revenues increased 24.6% to $60.0 million for 2002 from $48.1 million
for 2001 primarily due to net revenues from OED of $11.3 million and an increase
in the Diamond Jo's casino revenues of $0.6 million. This increase in casino
revenue is due to an increase in slot revenue of 3.8%, or $1.6 million for 2002
compared to 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 and an
increase in the number of slot machines on the gaming floor. This increase in
slot revenues was offset by a decrease in table games revenue at the Diamond Jo
of $1.0 million. This decrease was a direct result of a 0.9 percentage point
decrease in our table game hold percentage and a 10.4% decrease in table game
drop.
22
Casino gaming win in the Dubuque market increased 2.8% to $88.7 million
for 2002 from $86.3 million for 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 2002 from 55.3% for
2001. This decrease is attributed to a decrease in our table game revenue as
discussed above. Our casino revenues increased 1.2% to $48.3 million for 2002
from $47.7 million for 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 87.8% from slot machines and 12.2% from table games for 2002
compared to 85.6% from slot machines and 14.4% from table games for 2001.
Consistent with an increase in casino revenue, our casino win per gaming
position per day at the Diamond Jo increased 4.0% to $157 for 2002 from $151 for
2001. Admissions to the casinos in the Dubuque market increased slightly to
1,959,709 for 2002 from 1,946,326 for 2001. For 2002, our share of the Dubuque
market casino admissions decreased to 50.5% from 51.7% for 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 2002 decreased slightly to 989,865
for 2002 from 1,006,237 for 2001. For 2002 our casino win per admission at the
Diamond Jo increased 2.8% to $48.76 from $47.41 for 2001.
Racing revenues of $10.3 million related solely to revenues at OED for the
period February 15, 2002 (date of acquisition) to December 31, 2002. Net food
and beverage revenues, other revenues and promotional allowances increased to
$1.4 million for 2002 from $0.4 million for 2001 due to food and beverage
revenues at OED of $1.0 million.
Casino operating expenses at the Diamond Jo increased slightly to $20.6
million for 2002 from $20.4 million for 2001 due mainly to an increase in gaming
taxes paid as a result of an increase in gaming revenues of $106,000 and an
increase in the state admission fee imposed by the State of Iowa of $98,000.
Racing expenses at OED were $7.9 million for the period February 15, 2002 (date
of acquisition) to December 31, 2002. Food and beverage expenses increased to
$3.8 million for 2002 from $2.9 million for 2001 due primarily to food and
beverage expenses from OED of $0.9 million. Boat operation expenses and other
expenses were $2.3 million for 2002 and 2001. Selling, general and
administrative expenses increased to $8.3 million for 2002 from $6.7 million for
2001. This increase in such expenses resulted from selling, general and
administrative expenses at OED of $1.0 million, an increase in legal expenses of
$301,000 (resulting primarily from a credit of $230,000 in legal expense during
the prior year), and an increase in management bonuses of $284,000. Depreciation
and amortization expenses decreased 25.6% to $3.0 million for 2002 from $4.0
million for 2001. This decrease is due to adoption of 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. Goodwill amortization during 2001 was approximately $1.4 million. This
decrease was offset by an increase in depreciation at the Diamond Jo of $0.2
million and at OED of $0.2 million. Litigation settlement of $1.6 million
relates to OED's settlement with the Louisiana Horsemen's Benevolent and
Protective Association 1993, Inc. in February 2003. Although the settlement
occurred after the date of the financial statements, Statement of Financial
Accounting Standards No. 5 "Accounting for Contingencies" requires the Company
to accrue the loss contingency during 2002. During 2002, the Company incurred
various advertising, promotional and other referendum related expenses totaling
$771,000 to promote the approval of continued gaming on riverboats in Dubuque
County. During 2002, the Company incurred expenses of $55,000 related to a
governmental relations services agreement with respect to gaming issues and
developments in the State of Wisconsin which might affect the Company and its
gaming operations. The Company does not plan to incur any additional expenses to
provide such governmental relations services relative to the State of Wisconsin.
23
Net interest expense increased 25.2% to $11.8 million for 2002 from $9.5
million for 2001. This increase is due to an increase in interest expense of
$1.2 million 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 and net interest expense at OED of $1.1
million.
2001 Compared to 2000
Dubuque was a two-casino market consisting of the Diamond Jo and the
Greyhound Park during 2001 and 2000. Casino gaming win in the Dubuque market
increased 6.1% to $86.3 million in 2001 from $81.3 million in 2000. 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. Admissions to casinos in the Dubuque market decreased slightly to
1,946,326 in 2001 from 1,960,915 in 2000. We believe this decrease is primarily
attributable to the Diamond Jo's targeted use of marketing dollars directed
primarily towards more profitable market segments and one less gaming day during
2001 compared to 2000. During 2001, our share of the Dubuque market casino
admissions decreased to 51.7% from 53.9% in 2000. We believe this decrease is
primarily attributable to our targeted use of marketing dollars directed
primarily towards more profitable market segments during 2001 compared to 2000.
Our share of the Dubuque market casino gaming win decreased to 55.3% in 2001
from 56.0% in 2000. This decrease is attributed to a decrease in our table game
revenue of $1,343,000, resulting from a 9.2% decrease in our table game hold
percentage to 19.8% in 2001 from 21.8% in 2000, as well as the elimination of
live poker games which accounted for approximately $315,000 in table game
revenue during 2000.
Net revenues increased 5.2% to $48.1 million in 2001 from $45.8 million in
2000, primarily due to an increase in our casino revenue of $2.2 million. This
increase in casino revenue is due to an increase in our slot revenue of 9.5%, or
$3.5 million in 2001 compared to 2000. This increase was a result of an
increased marketing focus to attract new players club members as well as
targeting players club promotions toward specific market segments. This increase
was offset by a decrease in table games revenue of $1.3 million. This decrease
was a direct result of a 2.0 percentage point decrease in our table game hold
percentage and the elimination of live poker games which accounted for
approximately $315,000 in table game revenue during 2000. Our admissions during
2001 decreased 4.8% to 1,006,237 from 1,057,386 in 2000. We believe this
decrease is primarily attributable to our targeted use of marketing dollars
directed primarily towards more profitable market segments, the elimination of
live poker and one less gaming day during 2001 compared to 2000. During 2001,
our win per admission per day increased 10.1% to $47.41 from $43.05 in 2000.
Consistent with an increase in net revenue, our win per gaming position per day
increased 9.4% to $150.59 in 2001 from $137.68 in 2000. Our casino revenues
increased 4.8% to $47.7 million in 2001 from $45.5 million in 2000. Based on
revenues reported to the Iowa Racing and Gaming Commission, this percentage
increase is above the average among riverboat casinos in the State of Iowa whose
overall average casino revenues increased only 3.0% during 2001 compared to
2000. Casino revenues were derived 85.6% from slot machines and 14.4% from table
games in 2001, compared to 81.9% from slot machines and 18.1% from table games
in 2000. Net food and beverage revenues, other revenues and promotional
allowances increased slightly to $0.4 million in 2001 from $0.2 million in 2000.
Casino operating expenses increased 4.4% to $20.4 million in 2001 from
$19.5 million in 2000. This increase was due primarily to an increase in gaming
taxes of $515,000 primarily due to increased gaming revenue and an increase in
slot lease expense of $458,000. Food and beverage expenses, boat operation
expenses and other expenses were substantially unchanged. Selling, general and
administrative expenses increased 3.4% to $6.7 million in 2001 from $6.5 million
in 2000 due primarily to an increase in marketing promotions and advertising of
$191,000. Depreciation and amortization expenses increased
24
11.0% to $4.0 million in 2001 from $3.6 million in 2000 due primarily to the
construction of a new restaurant and VIP room in the land based pavilion during
the first quarter of 2001. During 2001, the Company incurred expenses of
$147,163 related to a governmental relations services agreement with respect to
gaming issues and developments in the State of Wisconsin which might affect the
Company and its gaming operations. Additional expenses related to this agreement
totaling $55,000 were charged to operating expenses through the first half of
2002 at which time the agreement for such governmental relations services
expired.
Net interest expense increased 4.2% to $9.5 million in 2001 from $9.1
million in 2000 due primarily to a decrease in interest income of $250,000,
which is a direct result of a decrease in short-term interest rates in 2001
compared to 2000, and an increase in interest expense of $95,000 in amortization
of deferred financing costs related to the senior secured credit facility
entered into by the Company in March of 2001.
Liquidity and Capital Resources
At December 31, 2002, we had outstanding current debt of $20.7 million,
outstanding long-term debt of approximately $82.2 million and total members'
equity of $3.7 million.
Financing Activities
On July 15, 1999, we completed the private placement of $71 million
aggregate principal amount of the Peninsula Notes. The Peninsula Notes bear
interest at a rate of 12 1/4% per year which is payable semi-annually on January
1 and July 1 of each year. The Peninsula Notes are secured by all of our current
and future tangible and intangible assets (with the exception of certain
excluded assets). The Peninsula Notes, which mature on July 1, 2006, are
redeemable at our option, in whole or in part at any time or from time to time,
on and after July 1, 2003 at certain specified redemption prices set forth in
our indenture governing these Peninsula Notes. The indenture governing the
Peninsula Notes contains a number of restrictive covenants and agreements,
including covenants that limit our ability to, among other things: (1) incur
more debt; (2) pay dividends, redeem stock or make other distributions; (3)
issue stock of subsidiaries; (4) make investments; (5) create liens; (6) enter
into transactions with affiliates; (7) merge or consolidate; and (8) transfer or
sell assets. The events of default under the indenture include provisions that
are typical of senior debt financings. Upon the occurrence and continuance of
certain events of default, the trustee or the holders of not less than 25% in
aggregate principal amount of outstanding Peninsula Notes may declare all unpaid
principal and accrued interest on all of the Peninsula Notes to be immediately
due and payable. Upon the occurrence of a change of control (as defined in the
indenture), each holder of Peninsula Notes will have the right to require us to
purchase all or a portion of such holder's Peninsula Notes pursuant to the offer
described in the indenture at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of
repurchase.
The Peninsula Notes are guaranteed by all of our existing and future
restricted subsidiaries, other than OED and its subsidiaries. OED and The Old
Evangeline Downs Capital Corp. have been designated as unrestricted subsidiaries
under the indenture governing the Peninsula Notes.
On March 12, 2001, the Company entered into a Loan and Security Agreement
(the "Credit Agreement") with Foothill Capital Corporation providing for
commitments of up to $10 million which mature in 2005. The outstanding loans
will bear interest at a rate equal to (a) the LIBOR rate plus 3.00% with respect
to LIBOR rate loans and (b) the base rate plus 0.75% with respect to base rate
loans, provided that the outstanding obligations shall not at any time bear
interest at a rate per annum less than 8.50%. Indebtedness under the Credit
Agreement is secured by substantially all of the Company's assets (which assets
also secure the Company's obligations under the Peninsula Notes). The Credit
Agreement
25
contains a number of restrictive covenants and agreements similar to (and in
certain cases more restrictive than) those contained in the indenture governing
the Peninsula Notes, including a minimum earnings requirement of maintaining
EBITDA of at least $10 million as of the end of each fiscal quarter (calculated
based upon the immediately preceding 12 month period), and certain events of
default customary for senior secured credit facilities. Under the Credit
Agreement, EBITDA is defined as consolidated net earnings (or loss), minus
extraordinary gains, plus interest expense, income taxes, and depreciation and
amortization. On February 15, 2002, the Company amended its credit facility to
increase aggregate commitments under its revolver to $12,500,000. In October
2002, the Company further amended its credit facility which requires the Company
to begin making principal payments on outstanding borrowings of $50,000 per
month beginning in October 2002 and continuing through February 2005. In
addition, the maximum available funds under the facility are required to be
reduced by the amount of each principal repayment. At December 31, 2002, the
Company had borrowings outstanding under the Credit Agreement of $11,850,000.
On August 30, 2002, OEDA entered into the Term Loan with Foothill Capital
Corporation providing for borrowings of $8,450,000 million. Borrowings under the
Term Loan bear interest at a rate equal to Prime + 3.75%, subject to a minimum
rate of 7.5% (interest rate of 8.0% at December 31, 2002). The Term Loan
contained, among other things, covenants, representations and warranties and
events of default customary for loans of this type, including, but not limited
to certain requirements relative to the financing, construction and development
of the racino project and a minimum EBITDA maintenance covenant. Under the Term
Loan, EBITDA was defined as consolidated net earnings (or loss), excluding
extraordinary gains or losses, plus interest expense, income taxes, and
depreciation and amortization. The obligations under the Term Loan were secured
by substantially all of OED's assets and guaranteed by PGP. In addition, the
Term Loan required OED to make principal payments of $50,000 per month beginning
October 1, 2002. At December 31, 2002, OED had borrowings outstanding under the
Term Loan of $8,300,000. On February 26, 2003, a portion of the net proceeds of
the offering of the OED Notes was used to terminate the Term Loan and repay all
outstanding borrowings thereunder.
On August 30, 2002, OEDA issued a $7,325,000 note in favor of PGP due June
30, 2003 (the "PGP Note"). The source of cash provided by PGP pursuant to the
PGP Note relates to the proceeds from a $7,325,000 note payable issued by PGP in
favor of William E. Trotter, II Family, LLC due June 30, 2003 (the "WET2LLC
Note"). The PGP Note and the WET2LLC Note bear interest at a rate of 7% until
January 31, 2003, thereafter at a rate of 8% until February 28, 2003, thereafter
at a rate of 9% until March 31, 2003 and thereafter at a rate equal to the
greater of (1) 12% or (2) the fixed interest rate on indebtedness evidenced by a
note offering consummated by OED to finance the racino project. On February 26,
2003, a portion of the net proceeds of the offering of the OED Notes was used to
repay all outstanding borrowings under the PGP Note (the proceeds of which in
turn paid off the WET2LLC Note).
On August 30, 2002, OED and PGP, as joint obligors, issued a $4,500,000
note in favor of William E. Trotter, II due June 30, 2003 and bearing interest
at a rate of 7% until March 31, 2003 and thereafter at a rate equal to the
greater of (1) 12% or (2) the fixed interest rate on indebtedness evidenced by a
note offering consummated by OED to finance the racino project (the "Trotter
Note"). On February 26, 2003, a portion of the net proceeds of the offering of
the OED Notes was used to repay all outstanding borrowings under the Trotter
Note.
On February 26, 2003, OED completed a private placement of $123.2 million
aggregate principal amount of OED Notes. The OED Notes bear interest at a rate
of 13% per year which is payable semi-annually on March 1 and September 1 of
each year, beginning on September 1, 2003. Contingent interest is payable after
the casino portion of the racino begins operating on the terms set forth in the
indenture governing the OED Notes. The OED Notes are secured by a security
interest in substantially all of OED's (and OED's subsidiary guarantors')
current and future assets (other than equipment secured by equipment financing
and certain other excluded assets) and a pledge by OEDA of OED's equity
interests. We are not a guarantor under the OED Notes, and none of our assets or
properties secure the obligations of OED under the OED Notes.
26
OED used the net proceeds from the sale of the OED Notes to (a) repay the
then existing indebtedness under the Term Loan, the PGP Note, the WET2LLC Note
and the Trotter Note, (b) fund (together with cash from operations and other
available financing) the design, construction, development, equipping and
opening costs of the racino and (c) fund the first three payments of fixed
interest on the OED Notes. OED deposited the net proceeds from the offering of
the OED Notes, after repaying certain existing indebtedness, into construction
disbursement, interest reserve and completion reserve accounts, from which funds
will be periodically withdrawn. These accounts are pledged as security for the
OED Notes.
Cash Flows from Operating, Investing and Financing Activities
Our level of indebtedness will have several important effects on our
future operations, including, but not limited to, the following: (1) a
significant portion of our cash flow from operations will be required to pay
interest on our indebtedness; (2) the financial covenants contained in certain
of the agreements governing our indebtedness will require us to meet certain
financial tests and may limit our ability to borrow additional funds or to
dispose of assets; (3) our ability to obtain additional financing in the future
for working capital, capital expenditures, or general corporate purposes may be
impaired; and (4) our ability to adapt to changes in the casino gaming and horse
racing industries and to economic conditions in general could be limited.
We generated $11.8 million in cash flows from operations in 2002, which
consisted of a net loss of $0.7 million increased by non-cash charges of $4.8
million, principally depreciation and amortization and amortization of deferred
financing costs, and an increase in working capital of $7.7 million. The change
in working capital is primarily comprised of an increase in accrued expenses of
$5.5 million, an increase in litigation settlement payable of $1.6 million and
an increase in restricted cash of $0.6 million. The increase in accrued expenses
is due to an increase in accrued interest related to the Peninsula Notes of $4.3
million., an increase in accrued referendum related costs of $0.5 million, an
increase in accrued preferred member distributions of $0.4 million and an
increase in accrued interest related to the Term Loan, PGP Note and WET2 Note at
OED of $0.3 million.
Cash flows used in investing activities in 2002 was $37.8 million,
including $29.3 million for the purchase of OED (net of cash acquired), $5.3
million for the purchase of land at St. Landry Parish (the future site of the
racino project) and architecture fees associated with the racino project,
approximately $1.5 million in development costs related to the OED acquisition
and related to OED's racing and gaming license, and cash outflows of
approximately $1.7 million used for capital expenditures in 2002 (mainly related
to the purchase of new slot machines and an upgrade to our current slot tracking
system in an effort to improve the gaming experience of our patrons). Capital
expenditures were $1.6 million and $2.4 million for the years ended December 31,
2001 and 2000, respectively. Capital expenditures are expected to be
approximately $1.6 million for the year ended December 31, 2003.
Cash flows from financing activities in 2002 of $29.0 million reflects the
proceeds of a $12.0 million borrowing under the Credit Agreement, proceeds of an
$8.5 million borrowing under the Term Loan, proceeds from the issuance of the
$7.3 million PGP Note and proceeds from the issuance of the $4.5 million WET2
Note. These proceeds were offset by deferred financing costs paid of $1.7
million, including consent fees totaling $887,500 paid to holders of the
Peninsula Notes and $700,000 paid to Foothill Capital Corporation under the Term
Loan, member distributions of $1.3 million and aggregate principal payments on
borrowings under the Credit Agreement and the Term Loan of $0.3 million.
27
We believe that cash on hand and cash generated from operations will be
sufficient to satisfy our working capital and capital expenditure requirements,
repay borrowings under the Credit Agreement, and satisfy our other current debt
service requirements (which do not include the Term Loan, the PGP Note or the
Trotter Note, which obligations were paid in full in February 2003 from proceeds
related to the issuance of the OED Notes). 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. We cannot assure you
that we would be able to obtain such financing or sell any or all assets on
commercially reasonable terms or at all.
Contractual Obligations and Contingent Liabilities and Commitments
The Company's future contractual obligations related to long-term debt,
capital leases and operating leases at December 31, 2002 were as follows (in
millions of dollars):
Payments due by Period
----------------------
Less Than 1-3
Contractual Obligations Total 1 Year Years 4-5 Years
----------------------- ----- ------ ----- ---------
Long-Term Debt $103.0 $20.7 $11.3 $71.0
Capital Lease Obligations 0.5 - 0.5 -
Operating Leases 1.2 0.4 0.8 -
------ ----- ----- -----
Total Contractual Cash
Obligations $104.7 $21.1 $12.6 $71.0
Off-Balance Sheet Transactions
The Company does not maintain any off-balance sheet transactions,
arrangements, obligations or other relationships with unconsolidated entities or
others that are reasonable likely to have a material current or future effect on
the Company's financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
Seasonality and Inflation
Our Iowa gaming operations are subject to seasonal fluctuations, which are
typically weaker from November through February as a result of adverse weather
conditions, and typically stronger from March through October. Our Louisiana
operations are also subject to seasonal fluctuations, which is usually stronger
during live racing season which runs from April through September. In general,
our payroll and general and administrative expenses are affected by inflation.
Although inflation has not had a material effect on our business to date, we
could experience more significant effects of inflation in future periods.
Recent Accounting Pronouncements
SFAS No. 142 "Goodwill and Other Intangible Assets" - Statement of
Financial Accounting Standards ("SFAS") No. 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.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting
28
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." This new
pronouncement also amends ARB No. 51 "Consolidated Financials Statements," to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. SFAS No. 144 requires that one accounting model be used
for long-lived assets to be disposed of by sale, whether previously held and
used or newly acquired and also broadens the presentation of discontinued
operations to include more disposal transactions. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. Adoption of SFAS No. 144 on January 1, 2002, did not have any
impact on our financial position or results of operations for the year ended
December 31, 2002.
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. Management does not expect the adoption of
SFAS No. 146 to have a material effect on the Company's results of operations or
financial position.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. We periodically evaluate our policies and the estimates and
assumptions related to these policies. We also periodically evaluate the
carrying value of our assets in accordance with generally accepted accounting
principles. We and our subsidiaries operate in a highly regulated industry and
are subject to regulations that describe and regulate operating and internal
control procedures. The majority of our revenues are in the form of cash, which
by its nature, does not require complex estimations. We also made certain
estimates surrounding our application of purchase accounting related to the
acquisition and the related assignment of costs to goodwill and other intangible
assets.
ITEM 7A. 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. Neither we nor our subsidiaries currently utilize derivative
financial instruments to hedge market risk. Also, neither we nor our
subsidiaries 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 facilities. As of December 31, 2002, we and our subsidiaries had $11.9
million in borrowings under the Credit Agreement and $8.3 million in borrowings
under the Term Loan (which was subsequently paid off in February 2003). 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 Credit Agreement
as of March
29
2003 of $12.2 million, if market rates of interest on such variable rate debt
increased by one percentage point, the estimated annual market risk exposure
under our 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 $72.4*
* Represents fair value as of March 21, 2003 based on information provided
by the Company's investment banking firm.
We have no investments in market risk sensitive instruments issued by
others. The only securities owned by the Company are the shares of common stock
of its wholly owned subsidiary, Peninsula Gaming Corp., and the membership
interests of its wholly owned subsidiary, OEDA. In addition, the only securities
owned by OEDA are membership interests in its wholly owned subsidiary, OED,
which holds all the shares of common stock of its wholly owned subsidiary, The
Old Evangeline Downs Capital Corp.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Audited financial statements and the notes thereto are combined in pages
F-1 through F-22.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
PGP is our parent and sole member. The following table sets forth the
names and ages of the executive officers of the Company and of the managers of
PGP.
Name Age Position
---- --- --------
M. Brent Stevens......... 42 Chief Executive Officer of the
Company and Manager of PGP
George T. Papanier....... 45 Chief Operating Officer of the
Company
Natalie A. Schramm....... 32 Chief Financial Officer of the
Company
Michael S. Luzich........ 48 President and Secretary of the
Company and Manager of PGP
Terrance W. Oliver....... 53 Manager of PGP
Andrew R. Whittaker...... 41 Manager of PGP
Management Profiles
Following is a brief description of the business experience of each of the
executive officers of the Company and of the managers of PGP listed in the
preceding table.
M. Brent Stevens. Mr. Stevens has served as our Chief Executive Officer
since December 1998 and has been a manager of PGP since January 1999. Since
1990, Mr. Stevens has been employed by Jefferies & Company, Inc., and presently
is an Executive Vice President in the Investment Banking department. Mr. Stevens
has been a board member of American Restaurant Group, Inc. since 1999.
George T. Papanier. Mr. Papanier has served as our Chief Operating Officer
since July 2000. Prior to joining the Company, Mr. Papanier was employed by
Resorts Casino Hotel in Atlantic City, New Jersey as Executive Vice President
and Chief Operating Officer from May 1997 to March 2000. Prior to that, Mr.
Papanier served as Senior Vice President and Chief Financial Officer for Sun
International since March 1997 and Senior Vice President of Finance and Chief
Financial Officer of Mohegan Sun Casino since October 1995. Mr. Papanier has
been in the casino industry for 20 years working for various casinos including
Sands Hotel and Casino, Golden Nugget Casino Hotel, Bally's Grand, Trump Plaza
Hotel and Casino and Hemmeter Enterprises.
Natalie A. Schramm. Ms. Schramm has served as our Chief Financial Officer
since July 15, 1999 and as our Assistant General Manager from April 1, 2000 to
December 31, 2002. On January 1, 2003, Ms. Schramm was appointed General Manager
of the Company. Ms. Schramm joined our predecessor, Greater Dubuque Riverboat
Entertainment Company, L.C., in November 1996 and was formerly employed by Aerie
Hotels and Resorts in Oak Brook, Illinois as Corporate Accounting Manager since
1992. She was responsible for the corporate accounting functions of the Silver
Eagle, the Eagle Ridge Inn and Resorts, located in Galena, Illinois and the
Essex Hotel, located in Chicago, Illinois. She served as Internal Audit Manager
for the Silver Eagle and was a member of a development team that successfully
pursued a riverboat gaming license in Indiana.
31
Michael S. Luzich. Mr. Luzich has served as our President since October
2000, as our Secretary since April 1999 and as a manager of PGP since January
1999. Mr. Luzich is the founder and President of the Cambridge Investment Group,
LLC., an investment and development company located in Las Vegas, Nevada. Prior
to October 1995, Mr. Luzich was a founding partner and director of Fitzgeralds
New York, Inc. and Fitzgeralds Arizona Management, Inc., which are development
companies responsible for the Turning Stone Casino near Syracuse, New York for
the Oneida Tribe and the Cliff Castle Casino near Sedona, Arizona for the
Yavapai-Apachi Tribe, respectively.
Terrance W. Oliver. Mr. Oliver has been a manager of PGP since September
1999. Since 1993, Mr. Oliver has served as a director of and consultant to
Mikohn Gaming Corporation, a gaming equipment manufacturer headquartered in Las
Vegas. From 1988 until 1993, Mr. Oliver served as Chairman of the Board to the
predecessor company of Mikohn. From 1984 until 1996, Mr. Oliver was a founding
shareholder, board member and executive officer of Fitzgeralds Gaming
Corporation. Mr. Oliver retired as the Chief Operating Officer of Fitzgeralds
Gaming Corporation in 1996.
Andrew R. Whittaker. Mr. Whittaker has been a manager of PGP since
July 1999. Since 1990 Mr. Whittaker has been employed by Jefferies &
Company, Inc., where he is presently a Vice Chairman.
Code of Ethics
The Company has adopted a code of ethics that applies to its chief
executive officer, chief financial officer, controller or persons performing a
similar function. The code of ethics has been filed as an exhibit to this Annual
Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Subject to the approval of the holders of at least 85% of the voting
common membership interests of PGP, PGP's board of managers may issue additional
incentive based equity interests in PGP at no less than fair market value.
Summary Compensation Table
The following table sets forth information for the years indicated
concerning the compensation awarded to, earned by or paid to the persons who
served as Chief Executive Officer of the Company during 2002 and the most highly
paid executive officers, other than the Chief Executive Officer, who served as
executive officers of the Company during 2002, for services rendered in all
capacities to the Company and its subsidiaries during such periods.
32
Other Annual
Name and Fiscal Salary Bonus Compensation Long-term All other
Principal Position Year ($) ($) ($) Compensation Compensation ($)
- -------- ------ ------ ----- ------------ --------- ---------
Annual Compensation
-------------------
M. Brent Stevens(1)......... 2002 - - - - -
Chief Executive Officer
2001 - - - - -
2000 - - - - -
George T. Papanier.......... 2002 $350,046 $190,000 $12,465(2) - $5,500(7)
Chief Operating Officer
2001 299,489 - 13,150(3) - 5,250(7)
2000 109,203 - 19,341(4) - -
Natalie A. Schramm.......... 2002 136,955 40,000 3,408(5) - 5,500(7)
Chief Financial Officer
2001 129,567 19,328 4,200(5) - 5,082(7)
2000 114,207 20,000 3,840(5) - 4,480(7)
Michael S. Luzich .......... 2002 - - -(6) - -
President and Secretary
2001 - - -(6) - -
2000 - - -(6) - -
James P. Rix................ 2000 - - - - 360,316(8)
Formerly, Chief Operating
Officer
__________________
(1) Mr. Stevens receives $125,000 for his services as a manager for the board
of managers of PGP.
(2) Includes $3,115 in club membership fees and $9,350 in automobile
allowances. In 2000, in connection with his relocation, the Company
acquired Mr. Papanier's current residence for which he pays all property
taxes, utility expenses and other out-of-pocket costs related to
maintaining such residence, excluding the fair market value equivalent of
rental expense.
(3) Includes $2,950 in club membership fees and $10,200 in automobile
allowances. In 2000, in connection with his relocation, the Company
acquired Mr. Papanier's current residence for which he pays all property
taxes, utility expenses and other out-of-pocket costs related to
maintaining such residence, excluding the fair market value equivalent of
rental expense.
(4) Includes $6,200 in club membership fees, $4,250 in automobile allowances
and $8,891 for reimbursement of certain out-of-pocket relocation expenses.
Additionally, in connection with his relocation, the Company acquired Mr.
Papanier's current residence for which he pays all property taxes, utility
expenses and other out-of-pocket costs related to maintaining such
residence, excluding the fair market value equivalent of rental expense.
(5) Represents club membership fees.
(6) Cambridge Capital Advisors, LLC, which is 99% owned directly by Mr.
Luzich, received compensation pursuant to the terms of its consulting
agreement with PGP. See "- Employment and Consulting Agreements".
33
(7) Represents matching contributions made by the Company to the Company's
401(k) plan.
(8) In connection with Mr. Rix's resignation in November 1999, we entered into
a separation and release agreement pursuant to which, among other things,
we agreed to pay Mr. Rix $360,316 in full satisfaction of all amounts due
to him upon termination, which amount was paid to Mr. Rix in January 2000.
Employment and Consulting Agreements
In April 2000, Ms. Schramm entered into a new employment agreement with
the Company. Under the terms of this employment agreement, Ms. Schramm is
entitled to receive from the Company a base annual salary that is reviewed on an
annual basis and adjusted upward annually by not less than five percent (5%) of
the prior year's compensation. In addition to the base salary, Ms. Schramm shall
be entitled to receive an annual cash bonus payable by the Company based on her
performance during the previous employment year, which is consistent with the
Company's bonus plan for department directors. The employment agreement has an
initial term of three years and, subject to the occurrence of various
termination events, is renewable automatically for successive one-year terms.
In January 2003, Cambridge Capital Advisors, LLC, which is 99% owned
directly by Mr. Luzich, entered into an amended consulting agreement with PGP.
Under the terms of this amended consulting agreement, Mr. Luzich is entitled to
receive from PGP compensation in an aggregate annual amount equal to (a) 2% of
the Company's unconsolidated earnings before interest, taxes, depreciation,
amortization and other non-recurring charges during the preceding calendar year,
plus (b) 2.5% of OED's earnings before interest, taxes, depreciation,
amortization and other non-recurring charges during the preceding calendar year
commencing on the first day of the month succeeding the month in which OED
commences gaming operations. The consulting agreement has a one-year term and,
subject to the occurrence of various termination events, is renewable
automatically for successive one-year terms. Under this agreement, Mr. Luzich is
also entitled to reimbursement of reasonable business expenses as approved by
the board of managers of PGP. For the years ended 2002, 2001 and 2000, Mr.
Luzich received $336,829, $327,128 and $335,420, respectively, under his
consulting agreement.
Compensation of Managers
All managers of PGP receive an annual payment of $25,000 (other than Mr.
Stevens who receives $125,000) for their services as managers on the board of
managers of PGP and are reimbursed for their travel and related out-of-pocket
expenses for attendance at board of managers meetings.
Compensation Committee Interlocks and Insider Participation
We have no standing Compensation Committees. All compensation decisions
are made by PGP, our parent and sole manager. The managers of PGP each
participate in the determination of executive officer compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the Company's outstanding common membership interests are owned by
PGP, its parent and sole manager. All of Peninsula Gaming Corp.'s outstanding
common stock and all of the outstanding membership interests in OEDA are owned
by the Company. OEDA holds a 100% membership interest in OED, which is the sole
shareholder of The Old Evangeline Downs Capital Corp.
Greater Dubuque Riverboat Entertainment Company holds 100% of our issued
and outstanding preferred membership interests, which, subject to limited
exceptions, has no voting rights, except as required by applicable law. On July
15, 1999, PGP issued 499,982 convertible preferred membership interests,
34
each of which is initially convertible into one PGP non-voting common membership
interest, representing 33.33% of the fully diluted common membership interests
of PGP on such date. PGP does not have outstanding any of its non-voting common
membership interests.
Unless otherwise indicated, the address of each manager or executive
officer of PGP is c/o Peninsula Gaming Company, LLC, 3rd Street Ice Harbor, P.O.
Box 1750, Dubuque, IA 52004-1750.
The table below sets forth information regarding the beneficial ownership
of the voting common membership interests of PGP by:
(a) each person or entity known by us to own beneficially 5% or more of
the common membership interests of PGP;
(b) each manager and executive officer of PGP; and
(c) all managers and executive officers of PGP as a group.
The following information is helpful to an understanding of, and qualifies
the beneficial ownership data contained in, the table set forth below. Mr.
Stevens holds 248,334 PGP common membership interests directly and 413,333 PGP
common membership interests indirectly through PGP Investors, LLC. Mr. Stevens
is the sole managing member of PGP Investors, LLC and exercises voting and
investment power over the PGP common membership interests owned by PGP
Investors, LLC. Mr. Stevens and Mr. Whittaker, managers of PGP, are an Executive
Vice President and a Vice Chairman, respectively, of Jefferies & Company, Inc.,
the initial purchaser in the offering of the Peninsula Notes on July 15, 1999.
In addition, Jefferies & Company, Inc. and some of its affiliates, officers and
employees are members of PGP Investors, LLC. Mr. Whittaker holds an economic
interest in approximately 41,667 PGP common membership interests indirectly
through his membership in PGP Investors, LLC, but does not exercise voting or
investment power with respect to these PGP common membership interests. Mr.
Oliver holds his interest through The Oliver Family Trust. The total holding of
all managers and executive officers as a group includes the 413,333 PGP common
membership interests held by PGP Investors, LLC, over which Mr. Stevens
exercises voting and investment power.
Voting Common
Name and Address Membership Interests Percent of
of Beneficial Owner Beneficially Owned Class
------------------- ------------------ -----
M. Brent Stevens.............. 661,667 66.17%
c/o Peninsula Gaming Company, LLC
3rd Street Ice Harbor
P.O. Box 1750
Dubuque, Iowa 52004
PGP Investors, LLC............ 413,333 41.33%
11100 Santa Monica, 10th Floor
Los Angeles, CA 90071
Michael S. Luzich............. 323,333 32.33%
c/o Peninsula Gaming Company,
LLC
3rd Street Ice Harbor
P.O. Box 1750
Dubuque, Iowa 52004
35
Terrance Oliver............... 15,000 1.50%
c/o Peninsula Gaming Company,
LLC
3rd Street Ice Harbor
P.O. Box 1750
Dubuque, Iowa 52004
Andrew R. Whittaker........... 41,667 4.17%
c/o Peninsula Gaming Company,
LLC
3rd Street Ice Harbor
P.O. Box 1750
Dubuque, Iowa 52004
All managers and executive
officers as a group (6
persons).................... 1,000,000 100.00%
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationship with Dubuque Racing Association
The Dubuque Racing Association is a not-for-profit corporation organized
for the purpose of operating the Dubuque Greyhound Park, a pari-mutuel greyhound
racing facility in Dubuque, Iowa. On February 22, 1993, the Dubuque Racing
Association entered into the Dubuque Racing Association operating agreement
which authorizes us to operate riverboat gaming operations in Dubuque. The
Dubuque Racing Association operating agreement has since been amended several
times and expires by its terms on December 31, 2008.
Beginning April 1, 2000, we were required to make a $0.50 per admission
payment to the Dubuque Racing Association, without regard to our revenues or
profits. Payments made and accrued to the Dubuque Racing Association based on
2002, 2001 and 2000 admissions were approximately $495,000, $503,000 and
$405,000, respectively. Based on 2002 admissions, we anticipate this payment to
be approximately $500,000 in 2003.
Under the Dubuque Racing Association operating agreement, subject to
limited conditions, we are also required to pay the Dubuque Racing Association,
for the right to operate the Diamond Jo, an amount equal to the excess of 32% of
the first $30 million of the combined gaming revenues of the Dubuque Racing
Association and the Diamond Jo, plus 8% of the next $12 million of these total
gaming revenues, plus, if there are no competing gaming operations in
neighboring counties of Illinois and Wisconsin, 8% of the next $4 million of
total gaming revenues, over the Dubuque Racing Association's gaming revenues
from the Dubuque Greyhound Park. Gaming revenues under this contract means
adjusted gross receipts less gaming taxes. This formula is subject to change if
the Dubuque Racing Association ceases to operate the Dubuque Greyhound Park or
if we operate a riverboat smaller than the current Diamond Jo. We are currently
not required to make any such payments to the Dubuque Racing Association because
the Dubuque Racing Association's revenues from the Dubuque Greyhound Park are
greater than the specified percentage of our total gaming revenues.
Managing Member Indemnification
Under our and PGP's operating agreements, we and PGP have agreed, subject
to few exceptions, to indemnify and hold harmless our members, PGP and PGP
members, as the case may be, from liabilities incurred as a result of their
positions as our sole manager and as members of us or PGP, as the case may be.
36
Equity Contribution
The common members of PGP have made a capital contribution of $6.0 million
to PGP in exchange for their common membership interests. PGP immediately
contributed this $6.0 million and the $3.0 million raised in the offering of the
Peninsula Notes through the sale of PGP's convertible preferred membership
interests to the Company, in exchange for common membership interests in the
Company. The Company used this capital contribution from PGP to finance in part
the acquisition of the Diamond Jo. Additionally, we issued $7.0 million face
amount of preferred membership interests to Greater Dubuque Riverboat
Entertainment Company in connection with the acquisition of the Diamond Jo. We
redeemed $3.0 million of the preferred membership interests on January 19, 2001.
Operating Agreement of Peninsula Gaming Partners
Under PGP's operating agreement, the management of PGP is vested in a
board of managers composed of five individuals, two of whom must be independent
managers. At any time that M. Brent Stevens, together with any entity controlled
by Mr. Stevens, beneficially holds at least 5% of the voting common membership
interests of PGP, Mr. Stevens is entitled to designate three of PGP's managers,
including one of the two independent managers. The two independent managers
shall serve as members of the independent committee. Under PGP's operating
agreement, PGP Advisors, LLC, a Delaware limited liability company, of which Mr.
Stevens is the sole managing member, may render financial advisory and
consulting services to PGP and will be entitled to receive commercially
reasonable fees for the services consistent with industry practices. Subject to
the terms of the indenture governing the Peninsula Notes, these fees will be
paid by us as distributions to PGP.
At any time that Michael Luzich, together with any entity controlled by
Mr. Luzich, beneficially holds at least 5% of the voting common membership
interests of PGP, Mr. Luzich is entitled to designate two of PGP's managers,
including the other independent manager.
Presently, PGP's board of managers is composed of four managers. If not
appointed earlier, a fifth manager will be appointed at a future meeting of
managers. A manager may resign at any time, and the member who designates a
manager may remove or replace that manager from the board of managers at any
time.
Operating Agreement of Peninsula Gaming Company
Under the terms of the Company's operating agreement, if we repay, redeem
or refinance 90% or more of the Peninsula Notes on or prior to July 1, 2003,
particular members of management, including Messrs. Luzich and Stevens, will be
entitled to receive, at Mr. Stevens' discretion, an aggregate of $1.5 million,
payable by the Company.
Management Services Agreement
OED has entered into a management services agreement with the Company and
OEDA (together, as the "Operator"). Pursuant to the terms of that agreement, the
Operator will manage and operate OED's existing horse racetrack and design,
develop, construct, manage and operate the new racino and provide certain
pre-opening services in connection therewith. Although the Operator may obtain
services from affiliates to the extent necessary to perform its obligations, the
Operator will be fully responsible for all obligations under the agreement.
Prior to the opening of the racino, the Operator will supervise the
design, development and construction of the racino and perform pre-opening
budgeting, marketing, hiring of personnel, and
37
coordinating of initial inventories and will establish security systems, data
processing systems, accounting and internal controls, and preventive maintenance
programs.
The Operator is entitled to receive a pre-opening service fee equal to
$40,000 per month, retroactive to June 27, 2001, which fee has not yet been
paid. Payments in respect of these pre-opening service fees are not required to
be paid until the earlier to occur of the commencement of operations at the
casino or the operating deadline applicable to the casino under the Cash
Collateral and Disbursement Agreement. The Operator is also entitled to be
reimbursed for all reasonable and documented out-of-pocket expenses permitted to
be incurred under the management services agreement, including, but not limited
to, tax preparation, accounting, legal and administrative fees and expenses
incurred in connection with the Operator's ownership of us. The Operator is also
entitled to receive a basic management fee equal to 1.75% of net revenue (less
net food and beverage revenue) and an incentive fee equal to:
o 3.0% of the first $25.0 million of EBITDA (as defined below);
o 4.0% of EBITDA in excess of $25.0 million but less than $30.0
million of EBITDA; and
o 5.0% of EBITDA in excess of $30.0 million.
"EBITDA" is defined in the management services agreement as earnings before
interest, income taxes, depreciation and amortization; provided, however, that
in calculating earnings, the basic management fee, the incentive fee and
reimbursables payable under the management services agreement shall not be
deducted.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's Chief
Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of
a date within ninety days of the filing date of this Form 10-K, have concluded
that as of such date the Company's disclosure controls and procedures were
adequate and effective and designed to ensure that material information relating
to the Company and its subsidiaries would be made known to such officers on a
timely basis.
(b) Changes in internal controls. There have been no significant changes
(including corrective actions with regard to significant deficiencies or
material weaknesses) in our internal controls or other factors that could
significantly affect these controls subsequent to the date of the evaluation
referenced in paragraph (a) above.
38
Part IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements -- see Index to Financial Statements
appearing on page F-1.
(2) Exhibits:
Exhibit
Number Description
------- -----------
*3.1A Certificate of Formation of Peninsula Gaming Company, LLC
*3.1B Amendment to Certificate of Formation of Peninsula Gaming
Company, LLC
*3.2 Operating Agreement of Peninsula Gaming Company, LLC
*3.3 Articles of Incorporation of Peninsula Gaming Corp.
*3.4 By-laws of Peninsula Gaming Corp.
*4.1 Specimen Certificate of Common Stock of Peninsula Gaming Corp.
*4.2 Indenture, dated July 15, 1999, by and among Peninsula Gaming
Company, LLC, Peninsula Gaming Corp. and Firstar Bank of
Minnesota, N.A., as trustee
***4.3 First Supplemental Indenture, dated January 15, 2002, by and
among Peninsula Gaming Company LLC and Peninsula Gaming Corp., as
Issuers, the Subsidiary Guarantors referred to therein and U.S.
Bank National Association, as trustee
10.1+ Employment Agreement, dated April 1, 2000, by and among Natalie
Schramm and Peninsula Gaming Company, LLC
*10.2 Indemnification Agreement, dated June 7, 1999, by and among
Natalie Schramm and AB Capital, L.L.C. and Peninsula Gaming
Company, LLC
*10.3A Operating Agreement, dated February 22, 1993, by and among
Dubuque Racing Association, Ltd. and Greater Dubuque Riverboat
Entertainment Company, L.C.
*10.3B Amendment to Operating Agreement, dated February 22, 1993, by and
among Dubuque Racing Association, Ltd. and Greater Dubuque
Riverboat Entertainment Company, L.C.
*10.3C Amendment to Operating Agreement, dated March 4, 1993, by and
among Dubuque Racing Association, Ltd. and Greater Dubuque
Riverboat Entertainment Company, L.C.
*10.3D Third Amendment to Operating Agreement, dated March 11, 1993, by
and among Dubuque Racing Association, Ltd. and Greater Dubuque
Riverboat Entertainment Company, L.C.
*10.3E Fourth Amendment to Operating Agreement, dated March 11, 1993, by
and among Dubuque Racing Association, Ltd. and Greater Dubuque
Riverboat Entertainment Company, L.C.
*10.3F Fifth Amendment to Operating Agreement, dated April 9, 1993, by
and among Dubuque Racing Association, Ltd. and Greater Dubuque
Riverboat Entertainment Company, L.C.
39
Exhibit
Number Description
------ -----------
*10.3G Sixth Amendment to Operating Agreement, dated November 29, 1993,
by and among Dubuque Racing Association, Ltd. and Greater Dubuque
Riverboat Entertainment Company, L.C.
*10.3H Seventh Amendment to Operating Agreement, dated April 6, 1994, by
and among Dubuque Racing Association, Ltd. and Greater Dubuque
Riverboat Entertainment Company, L.C.
*10.3I Eighth Amendment to Operating Agreement, dated April 29, 1994, by
and among Dubuque Racing Association, Ltd. and Greater Dubuque
Riverboat Entertainment Company, L.C.
*10.3J Ninth Amendment to Operating Agreement, dated July 11, 1995, by
and among Dubuque Racing Association, Ltd. and Greater Dubuque
Riverboat Entertainment Company, L.C.
*10.3K Tenth Amendment to Operating Agreement, dated July 15, 1999, by
and among Dubuque Racing Association, Ltd. and Greater Dubuque
Riverboat Entertainment Company, L.C.
*10.4 Operating Agreement Assignment, dated July 15, 1999, by and among
Greater Dubuque Riverboat Entertainment Company, L.C. and
Peninsula Gaming Company, LLC
*10.5 First Preferred Ship Mortgage, dated July 15, 1999, by Peninsula
Gaming Company, LLC in favor of Firstar Bank of Minnesota, N.A.,
as trustee
*10.6 Mortgage, Leasehold Mortgage, Assignment of Rents, Security
Agreement and Fixture Financing Statement dated July 15, 1999, by
Peninsula Gaming Company, LLC in favor of Firstar Bank of
Minnesota, N.A., as trustee
*10.7 Ice Harbor Parking Agreement Assignment, dated July 15, 1999, by
and among Greater Dubuque Riverboat Entertainment Company, L.C.
and Peninsula Gaming Company, LLC
*10.8 First Amendment to Sublease Agreement, dated July 15, 1999, by
and among Dubuque Racing Association, Ltd. and Greater Dubuque
Riverboat Entertainment Company, L.C.
*10.9 Sublease Assignment, dated July 15, 1999, by and among Greater
Dubuque Entertainment Company, L.C. and Peninsula Gaming Company,
LLC
*10.10 Iowa Racing and Gaming Commission Gaming License, dated July 15,
1999
*10.11 Assignment of Iowa IGT Declaration and Agreement of Trust, dated
July 15, 1999 by and among Greater Dubuque Riverboat
Entertainment Company, L.C. and Peninsula Gaming Company, LLC
****10.12 Agreement of Sale, dated August 30, 2002, by and among Peninsula
Gaming Partners, LLC, OED Acquisition, LLC, William E. Trotter II
and William E. Trotter II Family, LLC.
10.13+ Loan and Security Agreement, dated February 23, 2001, by and
between Foothill Capital Corporation and Peninsula Gaming
Company, LLC
****10.14 Amendment Number One to Loan and Security Agreement, dated
February 15, 2002, by and between Foothill Capital Corporation
and Peninsula Gaming Company, LLC
****10.15 Amendment Number Two to Loan and Security Agreement, dated
October 16, 2002, by and between Foothill Capital Corporation and
Peninsula Gaming Company, LLC
40
Exhibit
Number Description
------ -----------
***10.16 Purchase Agreement, dated June 27, 2002, by and among Peninsula
Gaming Partners, LLC, a Delaware limited liability company, The
Old Evangeline Downs, L.C., a Louisiana limited company and BIM3
Investments, a Louisiana partnership
***10.17 First Amendment to Purchase Agreement, dated January 1, 2002, by
and among BIM3 Investments, a Louisiana partnership, The Old
Evangeline Downs, L.C., a Louisiana limited company and OED
Acquisition, LLC, a Delaware limited liability company
***10.18 Assignment Agreement, dated October 23, 2001, by and between
Peninsula Gaming Partners and OED Acquisition, LLC
****10.19 Agreement of Sale, dated August 30, 2002, by and among Peninsula
Gaming Partners, LLC, OED Acquisition, LLC, William E. Trotter II
and William E. Trotter II Family, LLC.
12.1+ Computation of ratio of earnings to fixed charges
14.1+ Code of Ethics of Chief Executive Officer and senior financial
officers of Peninsula Gaming Company, LLC
21.1+ Subsidiaries of the Registrant
99.1+ Certification of M. Brent Stevens, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and
Rule 15d-14 of the Securities Exchange Act, as amended.
99.2+ Certification of Natalie A. Schramm, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and
Rule 15d-14 of the Securities Exchange Act, as amended.
+ Filed herewith.
* Previously filed as an exhibit to the registration statement on Form S-4
(Registration Number 333-88829) of Peninsula Gaming Company, LLC and
Peninsula Gaming Corp. on October 12, 1999.
** Previously filed as an exhibit to the Form 10-K (Registration Number
333-88829) of Peninsula Gaming Company, LLC and Peninsula Gaming Corp. on
March 30, 2001.
*** Previously filed as an exhibit to the Form 8-K of Peninsula Gaming
Company, LLC and Peninsula Gaming Corp. on March 4, 2002.
**** Previously filed as an exhibit to the Form 10-Q of Peninsula Gaming
Company, LLC and Peninsula Gaming Corp. on November 14, 2002.
(b) Reports on Form 8-K. None.
41
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 March 31, 2003.
PENINSULA GAMING COMPANY, LLC
By: /s/ M. Brent Stevens
------------------------
M. Brent Stevens
Chief Executive 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
By: /s/ Michael S. Luzich
------------------------
Michael S. Luzich
Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
PENINSULA GAMING PARTNERS, LLC
Managing Member of Peninsula Gaming
Company, LLC
Date: March 31, 2003 By: /s/ M. Brent Stevens
------------------------
M. Brent Stevens
Chief Executive Officer and Manager
Date: March 31, 2003 By: /s/ Michael S. Luzich
------------------------
Michael S. Luzich
President, Secretary and Manager
Date: March 31, 2003 By: /s/ Terrance W. Oliver
------------------------
Terrance W. Oliver
Manager of Peninsula Gaming Partners
Date: March 31, 2003 By: /s/ Andrew R. Whittaker
------------------------
Andrew R. Whittaker
Manager of Peninsula Gaming Partners
42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF PENINSULA GAMING COMPANY, LLC
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 2002 and December 31, 2001 F-3
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Changes in Members' Equity for the Years Ended December 31, 2002, 2001
and 2000 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS F-23
F-1
INDEPENDENT AUDITORS' REPORT
To the Members of
Peninsula Gaming Company, LLC
Dubuque, Iowa
We have audited the accompanying consolidated balance sheets of Peninsula Gaming
Company, LLC (the "Company") as of December 31, 2002 and 2001, and the related
consolidated statements of operations, changes in members' equity, and cash
flows for the years ended December 31, 2002, 2001 and 2000. Our audits also
included the financial statement schedule listed in the Index to the Financial
Statements at item F-22. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Peninsula Gaming Company, LLC as of December
31, 2002 and 2001, and the results of its operations and its cash flows for the
years ended December 31, 2002, 2001 and 2000 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
Cedar Rapids, Iowa
March 14, 2003
F-2
PENINSULA GAMING COMPANY, LLC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 and 2001
2002 2001
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,510,205 $ 7,523,652
Restricted cash 840,366
Accounts receivable, less allowance of $45,648 and $56,917, respectively 275,822 105,480
Inventory 138,405 97,677
Prepaid expenses 395,056 307,064
---------- ---------
Total current assets 12,159,854 8,033,873
---------- ---------
PROPERTY AND EQUIPMENT, NET 18,246,857 17,930,643
---------- ---------
PROPERTY AND EQUIPMENT AT ST. LANDRY PARISH 7,455,885 246,753
---------- ---------
OTHER ASSETS:
Deferred financing costs, net of accumulated amortization of $3,229,782 and 4,064,987 3,687,698
$1,844,783, respectively
Goodwill and other intangible assets, net of accumulated amortization of $3,476,051 84,413,263 53,083,429
and $3,476,051, respectively
Business acquisition and licensing costs 1,355,750
Deposits 106,938 35,405
---------- ---------
Total other assets 88,585,188 58,162,282
---------- ---------
TOTAL $ 126,447,784 $ 84,373,551
============= =============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,336,694 $ 335,416
Purse settlement payable 846,778
Accrued payroll and payroll taxes 1,340,395 1,280,177
Other accrued expenses 8,109,213 2,234,922
Current maturities of capital lease obligations 113,552
Current maturities - line of credit 600,000
Notes payable 4,500,000
Term loan payable 8,300,000
Note payable to parent 7,325,000
---------- ---------
Total current liabilities 35,358,080 3,964,067
---------- ---------
LONG-TERM LIABILITIES:
Senior secured notes, net of discount 70,493,155 70,384,482
Line of credit 11,250,000
Capital lease obligations, net of current maturities 475,781 362,229
Litigation settlement 1,200,000
---------- ---------
Total long-term liabilities 83,418,936 70,746,711
---------- ---------
Total liabilities 118,777,016 74,710,778
---------- ---------
COMMITMENTS AND CONTINGENCIES
PREFERRED MEMBERS' INTEREST, REDEEMABLE 4,000,000 4,000,000
MEMBERS' EQUITY:
Common members' interest 9,000,000 9,000,000
Accumulated deficit (5,329,232) (3,337,227)
---------- ---------
Total members' equity 3,670,768 5,662,773
---------- ---------
TOTAL $ 126,447,784 $ 84,373,551
============= =============
See notes to consolidated financial statements.
F-3
PENINSULA GAMING COMPANY, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
REVENUES:
Casino $ 48,262,485 $ 47,710,208 $ 45,518,772
Racing 10,278,554
Food and beverage 3,886,326 2,745,333 2,663,380
Other 144,817 131,916 169,446
Less promotional allowances (2,615,355) (2,470,310) (2,599,174)
---------- ---------- ----------
Total net revenues 59,956,827 48,117,147 45,752,424
---------- ---------- ----------
EXPENSES:
Casino 20,554,920 20,375,265 19,517,455
Racing 7,880,953
Food and beverage 3,820,365 2,856,568 2,856,151
Boat operations 2,295,771 2,259,314 2,242,392
Other 27,471 21,801 36,826
Selling, general and administrative 8,278,250 6,680,581 6,458,795
Depreciation and amortization 2,950,369 3,963,350 3,571,220
Litigation settlement 1,600,000
Referendum 771,111
State of Wisconsin government relations 55,000 147,163
---------- ---------- ----------
Total expenses 48,234,210 36,304,042 34,682,839
---------- ---------- ----------
INCOME FROM OPERATIONS 11,722,617 11,813,105 11,069,585
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 46,475 183,912 434,283
Interest expense (11,887,979) (9,639,947) (9,506,969)
Loss on sale of assets (8,000) (151,415) (122,207)
---------- ---------- ----------
Total other expense (11,849,504) (9,607,450) (9,194,893)
---------- ---------- ----------
NET INCOME (LOSS) BEFORE PREFERRED MEMBER DISTRIBUTIONS AND
MINORITY INTEREST (126,887) 2,205,655 1,874,692
LESS PREFERRED MEMBER DISTRIBUTIONS (373,050) (386,174) (630,000)
LESS MINORITY INTEREST (232,056)
---------- ---------- ----------
NET INCOME (LOSS) TO COMMON MEMBERS' INTEREST $ (731,993) $ 1,819,481 $ 1,244,692
============ ============ ============
See notes to consolidated financial statements.
F-4
PENINSULA GAMING COMPANY, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
COMMON TOTAL
MEMBERS' ACCUMULATED MEMBERS'
INTEREST DEFICIT EQUITY
-------- ------- ------
BALANCE, JANUARY 1, 2000 $ 9,000,000 $(2,722,941) $ 6,277,059
----------- ----------- -----------
Net income to common members' interest 1,244,692 1,244,692
Member distributions (1,917,551) (1,917,551)
----------- ----------- -----------
BALANCE, DECEMBER 31, 2000 9,000,000 (3,395,800) 5,604,200
Net income to common members' interest 1,819,481 1,819,481
Member distributions (1,760,908) (1,760,908)
----------- ----------- -----------
BALANCE, DECEMBER 31, 2001 9,000,000 (3,337,227) 5,662,773
Net loss to common members' interest (731,993) (731,993)
Member distributions (1,260,012) (1,260,012)
----------- ----------- -----------
BALANCE, DECEMBER 31, 2002 $ 9,000,000 $(5,329,232) $ 3,670,768
=========== =========== ===========
See notes to consolidated financial statements.
F-5
PENINSULA GAMING COMPANY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (731,993) $ 1,819,481 $ 1,244,692
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization 2,950,369 3,963,350 3,571,220
Provision for doubtful accounts 138,751 152,158 107,505
Amortization of deferred financing costs and
bond discount 1,493,671 911,272 795,268
Loss on sale of assets 8,000 151,415 122,207
Minority interest 232,056
Changes in operating assets and liabilities:
Restricted cash 639,655
Receivables (91,398) (183,479) (66,046)
Inventory 5,285 15,906 (13,770)
Prepaid expenses and other assets (27,301) 326,699 (10,941)
Accounts payable 60,088 (375,121) 233,668
Accrued expenses 5,506,627 468,743 (1,032,749)
Litigation settlement 1,600,000
---------- --------- ---------
Net cash flows from operating activities 11,783,810 7,250,424 4,951,054
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary, net of cash acquired (29,275,862) (500,000)
Business acquisition and licensing costs (1,503,944) (518,047)
Racino project development costs (5,315,279) (246,753)
Proceeds from sale of property and equipment 51,378 23,331
Purchase of property and equipment (1,695,075) (1,602,930) (2,432,446)
---------- --------- ---------
Net cash flows from investing activities (37,790,160) (2,816,352) (2,409,115)
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs (1,703,706) (511,634) (181,008)
Preferred members' interest redeemed (3,000,000)
Principal payments on debt (318,379)
Proceeds from notes payable 11,825,000
Proceeds from senior credit facilities 20,450,000
Member distributions (1,260,012) (1,760,908) (1,917,551)
---------- --------- ---------
Net cash flows from financing activities 28,992,903 (5,272,542) (2,098,559)
---------- --------- ---------
NET INCREASE (DECREASE) IN CASH 2,986,553 (838,470) 443,380
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 7,523,652 8,362,122 7,918,742
---------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 10,510,205 $ 7,523,652 $ 8,362,122
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 5,701,057 $ 8,728,788 $ 8,697,500
See notes to consolidated financial statements
F-6
PENINSULA GAMING COMPANY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BUSINESS PURPOSE AND BASIS OF PRESENTATION
Peninsula Gaming Company, LLC (the "Company") 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 comprising 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 in certain
jurisdictions. OED Acquisition, LLC, a Delaware limited liability company
("OEDA") is a wholly owned subsidiary formed on July 9, 2001 to facilitate the
purchase of a 50% membership interest in The Old Evangeline Downs, LLC ("OED"),
a Delaware limited liability company that currently owns and operates a horse
track in Lafayette, LA. On August 30, 2002, OEDA consummated the purchase of the
remaining 50% membership interest in OED. The Old Evangeline Downs Capital Corp
is a wholly owned subsidiary of the OED, has no assets or operations and was
formed solely to facilitate the offering of our 13% Senior Secured Notes due
2010 with Contingent Interest in certain jurisdictions. The financial position
of OED as of December 31, 2002 and the results of its operations and its cash
flows for the period February 15, 2002 (date of acquisition) to December 31,
2002 have been consolidated into the Company's consolidated financial
statements. During the period February 15, 2002 to August 30, 2002, the Company
had substantive control of OED. All significant intercompany transactions have
been eliminated.
The common membership interests of the Company are wholly owned by PGP. The
Company and PGP completed the sale of $71,000,000 of 12 1/4% Senior Secured
Notes due 2006 ("Peninsula Notes") and $3,000,000 in convertible preferred
membership interests, respectively, during July 1999. Concurrently with the sale
of the securities, the Company received a $9.0 million capital contribution from
PGP ($6.0 million of which was contributed to the capital of PGP by common
members of PGP and $3.0 million of which was contributed to the capital of PGP
through the sale of convertible preferred membership interests of PGP as
previously described). The proceeds for the above transactions were used to
complete the purchase of certain assets comprising the Diamond Jo casino and
related real property. On July 15, 1999, the Company acquired substantially all
of the assets of Greater Dubuque Riverboat Entertainment Company, L.C. ("GDREC")
and Harbor Community Investment, L.C. ("HCI") for $77,000,000. The purchase
price was $70.0 million cash ($68.0 million net of casino cash acquired of $2.0
million) and $7.0 million in redeemable preferred membership interests (see Note
11). For financial reporting purposes, the acquisition was accounted for as a
purchase and, accordingly, included in the Company's results since the date of
the acquisition. The purchase price has been allocated to the assets purchased
and the liabilities assumed based upon the fair values on the date of the
acquisition.
2. ACQUISITION OF THE OLD EVANGELINE DOWNS, LLC
During 2002, the Company, indirectly through its wholly owned subsidiary OEDA,
acquired 100% of the membership interests in OED through the following
transactions:
On June 27, 2001, BIM3 Investments, a Louisiana partnership and a 50% owner of
OED membership interests, entered into an agreement to sell 50% of OED
membership interests to PGP, parent company of the Company. The agreement was
assigned by PGP to OEDA on October 23, 2001. On February 15, 2002, OEDA
consummated its acquisition of: (i) 50% of the membership interests in OED and
(ii) a one-
F-7
half (1/2) interest in two promissory notes in the principal amount of
$10,909,244 issued by OED (the "Old OED Notes"), for an aggregate purchase price
of $15,000,000 in cash from the Company. This one-half (1/2) interest in the Old
OED Notes was converted by OEDA into members' equity of OED.
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. On March 7, 2002, the Company paid consent fees
totaling $887,500 to holders of the Peninsula 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 L.L.C., a Louisiana limited liability
company ("WET2LLC") to acquire (i) the 50% interest in the Old OED Notes owned
by WET2, and (ii) the 50% membership interest in OED owned by WET2LLC (the
"Trotter Purchase"). On August 30, 2002, OEDA consummated the Trotter Purchase
for a purchase price of $15,546,000 plus a contingent fee of one half of one
percent (0.5%) 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 sources of funds for the Trotter Purchase described above were (1)
$8,450,000 of borrowings under OEDA's loan and security agreement with Foothill
Capital Corporation entered into on August 30, 2002 and maturing on the earlier
of (a) June 30, 2003 or (b) the date on which OED consummates its financing of
the racino project, which loan and security agreement, upon consummation of the
purchase of the Trotter membership interests, was assigned to OED (the "Term
Loan") and (2) proceeds from a $7,325,000 intercompany note issued by OEDA
payable to PGP due June 30, 2002 (the "PGP Note"). The source of cash provided
by PGP pursuant to the PGP Note relates to the proceeds from a $7,325,000 note
payable issued by PGP payable to WET2LLC due June 30, 2003. The Term Loan
contains, among other things, covenants, representations and warranties and
events of default customary for loans of this type, including, but not limited
to certain requirements relative to the financing, construction and development
of the racino project and a minimum EBITDA maintenance covenant. EBITDA is
defined as net earnings excluding ordinary gains or losses, plus interest
expense, income taxes and depreciation and amortization for the period. The
obligations under the Term Loan are secured by substantially all of OED's assets
and guaranteed by PGP. OEDA's one-half (1/2) interest in the Old OED Notes was
canceled upon OED's assumption of OEDA's obligations under the Term Loan.
Additionally, in connection with the Trotter Purchase, OED and PGP issued, as
joint obligors, a $4,500,000 note payable to WET2 (the "WET2 Note"), the
proceeds of which were used to purchase the land on which OED's racino will be
operated and to pay certain deferred financing costs and reimbursable expenses.
We accounted for OEDA's acquisition of all the membership interests in OED as a
purchase in accordance with SFAS No. 141 "Business Combinations." 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 has been recorded as goodwill and other intangible assets. As of December
31, 2002, we recorded goodwill of approximately $28.4 million related to the
acquisition. We have not yet completed our evaluation of the intangible assets
acquired and contingent liabilities assumed in the acquisition. This evaluation
may result in adjustments to the purchase price allocation. As of December 31,
2002, there were no indications of impairment of any of OED's intangible assets.
Under the provisions of SFAS 142, goodwill and other intangible assets with
indefinite lives 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 following table summarizes the estimated fair value of the assets acquired
and the liabilities assumed at the acquisition date. Third party valuations have
been obtained for property and equipment.
F-8
(in thousands)
Current assets $ 2,317
Property and equipment 1,369
Other assets 1,090
Goodwill and other intangible assets 28,393
-------
Total assets 33,169
Liabilities assumed (2,623)
-------
Purchase price $30,546
=======
As a result of the above recent transaction, the Company, through its
wholly-owned subsidiary OED, currently owns and operates the Evangeline Downs.
The Evangeline Downs is located five miles north of Lafayette off Interstate 49
and is comprised of a 94,200 square foot pari-mutuel wagering complex, an
approximate 2,000-space parking lot, 7/8-mile dirt track and stables for
approximately 1,000 horses. The complex features an approximate 750-seat
grandstand, an approximate 3,000-person capacity apron and patio, an
approximately 850-seat restaurant, four concession stands and four bars. The
horse racetrack offers live thoroughbred and quarter horse races a minimum of 80
days a year from mid-April through Labor Day in September. The horse racetrack
also offers simulcast wagering six days a week year-round. OED also operates an
off-track betting parlor (an "OTB") in New Iberia, Louisiana, that offers
simulcast pari-mutuel wagering, and an OTB in Port Allen, Louisiana, that offers
video poker gaming and simulcast pari-mutuel wagering.
The following unaudited consolidated pro forma information presents a summary of
the consolidated results of operations of the Company for years ended December
31, 2002 and 2001 as if the acquisition of 100% of OED had occurred January 1,
2001.
Consolidated Pro Forma Information (Unaudited)
(in thousands)
2002 2001
-------- ---------
Net revenues $ 61,326 $ 61,395
Income from operations 11,973 8,932
Net income to common interests (620) (4,401)
The consolidated pro forma adjustments included in the consolidated pro forma
information above represents interest on borrowings of $12.0 million under the
Company's credit facility with Foothill Capital Corporation, interest on
borrowings under the Term Loan, the PGP Note and the WET2 Note, all proceeds of
which were used to finance the purchase of OED and land located in St. Landry
Parish, the elimination of interest expense associated with the Old OED Notes
and the elimination of amortization of 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.
Racino Development
In 1997, the State of Louisiana passed the Pari-Mutuel Act, which permitted
three of the four companies operating pari-mutuel wagering facilities in
Louisiana which offer live horse racing to install slot machines at their horse
racetrack facilities, subject to ratification by the voters of the individual
parishes. The voters of Lafayette Parish, where OED's existing horse racetrack
is located, have not approved the installation of slot machines at OED's horse
racetrack facility. However, in October 1997 the voters of
F-9
St. Landry Parish approved the operation of both slot machines and pari-mutuel
wagering. Therefore, OED is currently developing a casino and pari-mutuel horse
racetrack facility, or "racino," in nearby Opelousas, Louisiana within St.
Landry Parish, which facility will replace OED's existing horse racetrack near
Lafayette and where OED will be permitted to operate slot machines, in addition
to conducting live horse racing. OED's approximately 532-acre racino site is
located approximately 20 miles north of Lafayette, OED's primary market, at the
intersection of Interstate 49 and U.S. Highway 190. On December 19, 2002, OED
received its racing license to operate in St. Landry Parish, and on January 21,
2003, OED received a gaming license to operate slot machines at the racino,
subject to customary conditions.
OED purchased all the necessary land to develop OED's racino and the total
remaining cost to design, develop, construct, equip and open the racino is
expected to be approximately $88.5 million. The construction and development of
the racino project is expected to be completed in two phases. During the first
phase, OED will construct the casino and related casino amenities, which OED
expects to open in March 2004, at a total remaining cost of $68.6 million.
During the second phase, OED will construct the horse racetrack and related
facilities for a total remaining cost of $19.9 million. OED expects to be
prepared to begin scheduling live racing meets in December 2004. OED expects to
continue to operate its existing horse racetrack until live racing meets are
scheduled at the racino, at which time OED will cease operations at its existing
horse racetrack.
The source of funds to develop the racino will be proceeds from OED's private
placement of $123.2 million aggregate principal amount of Series A 13% Senior
Secured Notes due 2010 with Contingent Interest (the "OED Notes"). See Note 17
for further information about the OED Notes.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The consolidated financial statements include the financial
information of the Company and its wholly-owned direct and indirect subsidiaries
Peninsula Gaming Corp., OEDA, OED and The Old Evangeline Downs Capital Corp. All
significant intercompany transactions have been eliminated.
Cash and Cash Equivalents - The Company considers all cash on hand and in banks,
certificates of deposit and other highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
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 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.
Allowance for Doubtful Accounts - The allowance for doubtful accounts is
maintained at a level considered adequate to provide for possible future losses.
The provision for doubtful accounts of $138,751, $152,158 and $107,505 were
recorded in 2002, 2001 and 2000, respectively.
Inventories - Inventories consisting principally of food, beverage, retail
items, and operating supplies are stated at the lower of first-in, first-out
cost or market.
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
F-10
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 portside improvements 9-40 years
Riverboat and improvements 5-20 years
Furniture, fixtures and equipment 3-10 years
Computer equipment 3-5 years
Vehicles 5 years
* The Company currently leases the land on which the OED building and
leasehold improvements are located. 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.
Long-Lived Assets - In October 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This new pronouncement also amends ARB No. 51 "Consolidated
Financials Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. SFAS No. 144 requires
that one accounting model be used for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired and also broadens the
presentation of discontinued operations to include more disposal transactions.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and
interim periods within those fiscal years. Adoption of SFAS No. 144 on January
1, 2002, did not have any impact on our financial position or results of
operations for the year ended December 31, 2002.
Property and Equipment at St. Landry Parish - Included in Property and Equipment
at St. Landry Parish as of December 31, 2002 are land and land acquisition costs
associated with the racino project of approximately $5.4 million and
architecture fees associated with the design and development of the racino
project of approximately $2.1 million as of December 31, 2002 and $0.2 million
as of December 31, 2001.
Capitalized Interest - The Company capitalizes interest costs associated with
debt incurred in connection with the racino project. When debt is not
specifically identified as being incurred in connection with the development of
the racino project, the Company capitalizes interest on amounts expended on the
racino project at the Company's average cost of borrowed money. Capitalization
of interest will cease when the project is substantially complete. The amount
capitalized during 2002 was $0.1 million.
Deferred Financing Costs - Costs associated with the issuance of debt (see Note
5) have been deferred and are being amortized over the life of the related
indenture/agreement using the effective interest method.
SFAS 142 "Goodwill and Other Intangible Assets" - Goodwill and Other Intangible
Assets consists of goodwill, business acquisition costs, licensing costs and the
acquired tradename associated with the purchase of the Company and OED as
described in Notes 1 and 2. To the extent the purchase price exceeded the fair
value of the net identifiable assets acquired, such excess has been recorded as
goodwill. SFAS 142 provides that goodwill and certain indefinite lived
intangible assets will no longer be amortized
F-11
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 as of that date.
During the first quarter of 2003, the Company performed its annual impairment
test on goodwill in accordance with SFAS 142 and determined that the estimated
fair value of the Company exceeded its carrying value as of that date. Based on
that review, management determined that there was no impairment of goodwill.
Goodwill amortization during 2001 was $1,413,987. Assuming the non-amortization
provisions of these standards had been adopted at the beginning of 2000, the
Company's adjusted net income for 2001 and 2000 would have been $3,233,468 and
$2,658,679, respectively.
Business Acquisition and Licensing Costs - At December 31, 2001, the Company
recorded approximately $1.4 million on its balance sheet for directly related
legal and other incremental costs associated with the acquisition of OED and
obtaining the relevant gaming licenses to conduct gaming operations associated
with the racino project in Louisiana. These costs, including related costs
incurred during the year ended December 31, 2002, are included as a cost of the
acquisition and will be evaluated under SFAS No. 141 "Business Combinations" and
SFAS No. 142 "Goodwill and Other Intangible Assets." As of December 31, 2002,
the Company has not completed its evaluation of the intangible assets acquired
in the OED acquisition.
Financial Instruments - The carrying amount for financial instruments included
among cash and cash equivalents, accounts receivable, accounts payable and
security deposits approximates their fair value based on the short maturity of
those instruments.
Revenue Recognition - In accordance with common industry practice, our casino
revenue is the net win from gaming activities, which is the difference between
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.
Promotional Allowances - Food, beverage, and other items furnished without
charge to customers are included in gross revenues at a value which approximates
retail and then deducted as promotional allowances to arrive at net revenues.
The cost of such complimentary services have been included as casino expenses on
the accompanying statements of operations. Such estimated costs of providing
complimentary services allocated from the food and beverage and other operating
departments to the casino department were $592,539 and $4,672 for food and
beverage and other, respectively, in 2002, $568,098 and $8,977, respectively, in
2001 and $529,133 and $12,632. respectively, in 2000.
Referendum Expenses - In accordance with Iowa law, a referendum must be held
every eight years in each of the counties where gambling games are conducted and
the proposition to continue to allow gambling games in such counties must be
approved by a majority of the county electorate voting on the proposition. Such
a referendum took place on November 5, 2002. During 2002, the Company incurred
various advertising, promotional and other referendum related expenses totaling
$771,111 to promote the approval of continued gaming in Dubuque County. The
measure was approved on November 5, 2002 with 79% of the electorate voting on
the proposition favoring continued gaming on riverboats in Dubuque County. As
the Company will not be required to be a part of another referendum until 2010,
such referendum related costs are not expected to be incurred in the future
until that time.
State of Wisconsin Government Relations - During 2002 and 2001, the Company
incurred expenses for a governmental relations services agreement with respect
to gaming issues and developments in Wisconsin which might affect the Company
and its gaming operations. Such expenses in 2002 and 2001
F-12
totaled $55,000 and $147,163, respectively. The Company does not plan to incur
any additional expenses to provide such governmental relations services relative
to the State of Wisconsin.
Minority Interest - Minority interest on the Consolidated Statement of
Operations represents the 50% portion of net income from OED allocated to
WET2LLC, who owned the remaining 50% interest in OED during the period February
15, 2002 through August 30, 2002.
Income Taxes - The Company is a limited liability company. In lieu of corporate
income taxes, the members of a limited liability company are taxed on their
proportionate share of the Company's taxable income. Therefore, no provision or
liability for federal income taxes has been included in the financial
statements.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates. We periodically evaluate our policies and the estimates
and assumptions related to these policies. We operate in a highly regulated
industry and are subject to regulations that describe and regulate operating and
internal control procedures. The majority of our revenues are in the form of
cash, which by its nature, does not require complex estimations. We also made
certain estimates surrounding our application of purchase accounting related to
the acquisition and the related assignment of costs to goodwill and other
intangible assets.
Concentrations of Risk - The Company's customer base consists of eastern Iowa
and southwest Louisiana. Although the Company is directly affected by the
economic viability of the area, management does not believe significant risk
exists at December 31, 2002.
The Company maintains deposit accounts at two banks. At December 31, 2002 and
2001, and various times during the years then ended, the balance at the banks
exceeded the maximum amount insured by the FDIC. Management believes any credit
risk related to the uninsured balance is minimal.
Reclassifications - Certain prior year amounts have been reclassified to conform
with current year presentation.
Recently Issued Accounting Standards - 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. Management does not
expect the adoption of SFAS No. 146 to have a material effect on the Company's
results of operations or financial position.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 is summarized as follows:
2002 2001
---- ----
Land $ 1,110,000 $ 800,000
Building and improvements 8,387,134 6,565,735
Riverboats and improvements 8,300,776 8,261,693
F-13
Furniture, fixtures and equipment 7,942,095 5,512,717
Computer equipment 962,700 617,538
Vehicles 130,753 65,032
Equipment held under capital lease obligations 704,527 704,527
---------- ----------
Subtotal 27,537,985 22,527,242
Accumulated depreciation (9,291,128) (4,596,599)
---------- ----------
Property and equipment, net $18,246,857 $17,930,643
----------- -----------
5. DEBT
The Company's debt consists of the following at December 31:
2002 2001
---- ----
12 1/4% Senior Secured Notes due July 1,
2006, net of discount of $506,845 and
$615,518, respectively, secured by
assets of the Diamond Jo. $70,493,155 $70,384,482
Line of Credit with Foothill Capital
Corporation, interest rate at greater
of LIBOR + 3% or Prime + .75%,
however, at no time shall the
interest rate be lower than 8.5%,
principal payments of $50,000 due
monthly beginning October 2002
through February 2005, maturing March
12, 2005, secured by assets of the
Diamond Jo. 11,850,000
Term loan with Foothill Capital
Corporation, interest at Prime +
3.75%, however, at no time shall the
interest rate be lower than 7.5%
(current rate of 8.0%), maturing the
earlier of (a) June 30, 2003 or (b)
the date on which OED consummates its
financing of the racino project,
secured by substantially all the
assets of OED. 8,300,000
Note payable to PGP, issued by OEDA,
interest rate of 7% until January 31,
2003, thereafter 8% until February
28, 2003, thereafter 9% until March
31, 2003, thereafter the greater of
12% or the fixed rate on the notes
expected to be issued to finance the
racino project, maturing on June 30,
2003. 7,325,000
Note payable to WET2, interest rate of
7% until March 31, 2003, thereafter
the greater of 12% or the fixed rate
on the notes expected to be issued to
finance the racino project, maturing
on June 30, 2003. 4,500,000
----------- -----------
Total debt 102,468,155 70,384,482
Less current portion (20,725,000)
----------- -----------
Total long term debt $81,743,155 $70,384,482
=========== ===========
F-14
On July 15, 1999, the Company completed the private placement of $71 million
aggregate principal amount of Peninsula Notes. The Peninsula Notes bear interest
at a rate of 12 1/4% per year which is payable semi-annually on January 1 and
July 1 of each year. The Peninsula Notes are secured by all of our current and
future tangible and intangible assets (with the exception of certain excluded
assets). The Peninsula Notes, which mature on July 1, 2006, are redeemable at
the Company's option, in whole or in part at any time or from time to time, on
and after July 1, 2003 at certain specified redemption prices set forth in the
indenture governing the Peninsula Notes. The indenture governing the Peninsula
Notes contains a number of restrictive covenants and agreements, including
covenants that limit the Company's ability to, among other things: (1) incur
more debt; (2) pay dividends, redeem stock or make other distributions; (3)
issue stock of subsidiaries; (4) make investments; (5) create liens; (6) enter
into transactions with affiliates; (7) merge or consolidate; and (8) transfer or
sell assets. The events of default under the indenture include provisions that
are typical of senior debt financings. Upon the occurrence and continuance of
certain events of default, the trustee or the holders of not less than 25% in
aggregate principal amount of outstanding Peninsula Notes may declare all unpaid
principal and accrued interest on all of the Peninsula Notes to be immediately
due and payable. Upon the occurrence of a change of control (as defined in the
indenture), each holder of Peninsula Notes will have the right to require the
Company to purchase all or a portion of such holder's Peninsula Notes pursuant
to the offer described in the indenture at a purchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of repurchase.
The Company's Line of Credit and Term Loan agreements contain, among other
things, covenants, representations and warranties and events of default
customary for loans of this type. The most significant covenants include a
minimum EBITDA requirement and the maintenance of certain financial ratios that
limit our ability to make distributions and incur debt. At December 31, 2002 and
2001, the Company was in compliance with all such covenants.
As further described in Note 17, our obligations under the Term Loan, the PGP
Note and the WET2 Note were repaid in February 2003.
6. CAPITAL LEASE OBLIGATION
Capital lease obligations at December 31 are as follows:
2002 2001
---------- ----------
Liability under capital leases $ 475,781 $ 475,781
Less current portion (113,552)
---------- ----------
$ 475,781 $ 362,229
========== ==========
* On September 6, 2002, the Company entered into a purchase and license
agreement (the "CDS Agreement") with Casino Data Systems ("CDS"). The
CDS Agreement contains various requirements including upgrades to
Diamond Jo's current slot information system, installation of the CDS
slot information system as part of the racino project and equipment
purchases. If and when such requirements are met, CDS agrees to waive
any claimed liability or responsibility of the Company for payment of
the outstanding capital lease liability of $475,781. The Company has
not met all of the requirements included in the CDS Agreement as of
December 31, 2002 and does not expect such requirements to be met
within the next twelve months.
F-15
7. LITIGATION SETTLEMENT
On November 8, 1994, the Louisiana Horsemen's Benevolent and Protective
Association 1993, Inc. ("LHBPA") filed a lawsuit against all licensed horse
racetracks in the State of Louisiana. The lawsuit alleged that LHBPA did not
receive the appropriate share of net revenues from video poker devices located
at licensed horse racetracks. In February 2003, OED entered into a settlement
agreement with LHBPA for $1.6 million. The terms of the settlement agreement
requires OED to make payments of $400,000 annually beginning in March 2003, with
additional $400,000 payments due in March 2004 through 2006.
In accordance with Statement of Financial Accounting Standards No. 5 "Accounting
for Contingencies", the Company recorded an expense and related accrual of $1.6
million in the financial statements as of December 31, 2002. Of the total $1.6
million accrual, $0.4 million has been included in "Accrued expenses" in the
"Current Liabilities" section with the remaining $1.2 million recorded under
"Litigation settlement" in the "Long-term liabilities" section of the
Consolidated Balance Sheet.
8. EMPLOYEE BENEFIT PLAN
The Company started a qualified defined contribution plan under section 401(k)
of the Internal Revenue Code during December 1999 at the Diamond Jo and a
separate plan during June 2002 at the Evangeline Downs. Under the plan, eligible
employees may elect to defer up to 15% of their salary, subject to Internal
Revenue Service limits. The Company may make a matching contribution to each
participant based upon a percentage set by the Company, prior to the end of each
plan year. Company matching contributions to the plan at the Diamond Jo were
$216,529, $227,596 and $212,766 in 2002, 2001 and 2000, respectively, and
$10,822 during 2002 at Evangeline Downs.
9. LEASING ARRANGEMENTS
Ground Lease - Lafayette - The Company currently leases the land on which the
OED racetrack is located. 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 twelve-month lease which runs from September
1, 2002 through August 31, 2003 with lease payments of $5,000 due each month,
after which the lease will revert to 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
period February 15, 2002 (date of acquisition) to December 31, 2002, OED paid
$52,321 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 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 87
F-16
live meet racing days and 223 off-track betting days. OED paid $378,204 during
the period February 15, 2002 (date of acquisition) to December 31, 2002 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 87 live meet racing days and 223 off-track
betting days for each of the years ended December 31 are summarized as follows:
2003 426,100
2004 426,100
2005 426,100
-------
$ 1,278,300
============
The Company leases various other equipment under noncancelable operating leases.
The leases require fixed monthly payments to be made ranging from $60 to $2,800
and certain other gaming machines and tables require contingent monthly rental
payments based on usage of the equipment. The leases expire on various dates
through 2007. Rent expense in 2002, 2001 and 2000 were $1,236,088, $1,348,670
and $873,949, respectively.
The future minimum rental payments required under these leases for the years
ended December 31 are summarized as follows:
2003 21,415
2004 4,085
2005 3,625
2006 3,121
2007 3,121
---------
$ 35,367
=========
10. COMMITMENTS AND CONTINGENCIES
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 horse racetrack and the development and
management of the racino project. However, in connection with the consummation
of the Trotter Purchase (as discussed in Note 2 above), the Trotter Complaint
was dismissed.
In October 2002, the Company entered into a charitable giving agreement with an
Iowa non-for-profit organization in which the Company has agreed, subject to
certain contingencies, to give such organization a total contribution of
$450,000. The agreement calls for a payment of $50,000 upon the signing of the
agreement and $50,000 on March 1 of each of the next seven years beginning on
March 1, 2003. The first two payments were made by the Company in October 2002
and March 2003, respectively.
Under the Company's and PGP's operating agreements, the Company and PGP have
agreed, subject to few exceptions, to indemnify and hold harmless our members,
PGP and PGP members, as the case may be, from liabilities incurred as a result
of their positions as our sole manager and as members of the Company or PGP, as
the case may be.
F-17
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 would have a material adverse effect on our financial condition,
results of operations or cash flows.
11. PREFERRED MEMBERS' INTEREST--REDEEMABLE
On July 15, 1999, the Company authorized and issued $7.0 million of preferred
membership units. The holders of all of the Company's preferred membership
interests are entitled to receive, subject to certain restrictions contained in
the indenture governing the Notes, out of funds legally available therefor,
cumulative preferred distributions payable semiannually at an annual rate of 9%
of the original face amount thereof. Other than certain limited consent rights
and as required by law, holders of the Company's preferred membership interests
have no voting rights.
The Company redeemed $3.0 million in original face amount of its preferred
membership interests on January 19, 2001 at a redemption price of $3.0 million,
plus a portion of accrued and unpaid interest thereon of $170,000, the balance
of which, in an amount equal to $145,000 plus accrued interest on such amount
(the "Accrued Preferred Distribution"), has agreed to be paid by the Company at
such time that such payment is permitted to be made pursuant to the Company's
existing financing arrangements, but in no event later than January 15, 2003.
The Accrued Preferred Distribution totaling $171,100 was paid on January 15,
2003. The balance of preferred membership interests not redeemed by the Company
must be redeemed by the Company 90 days after the seventh anniversary of the
closing date of the acquisition at a redemption price of $4.0 million, plus any
accrued and unpaid preferred distributions through the date of redemption.
Distributions for the years ended December 31, 2002, 2001 and 2000 (other than
the Accrued Preferred Distribution) were $373,050, $386,174 and $630,000,
respectively.
12. MEMBERS' EQUITY
On July 15, 1999, the Company authorized and issued $9.0 million of common
membership units. PGP, as the holder of all of the Company's issued and
outstanding common membership interests, is entitled to vote on all matters to
be voted on by holders of common membership interests of the Company and,
subject to certain limitations contained in the Company's operating agreement
and the indenture governing the Peninsula Notes, is entitled to dividends and
other distributions if, as and when declared by the Company's managers out of
funds legally available therefor.
13. DUBUQUE RACING ASSOCIATION, LTD. CONTRACT
Dubuque Racing Association, Ltd. (the "Association"), a qualified sponsoring
organization, presently holds a license to conduct gambling games under Chapter
99F and other Iowa statutes. The Association owns Dubuque Greyhound Park, a
traditional greyhound racetrack with 600 slot machines and amenities including a
gift shop, restaurant and clubhouse. The Company entered into a contract (the
"Operating Agreement") with the Association relating to the operation of an
excursion gambling riverboat for excursion seasons through December 31, 2008,
under gambling licenses held jointly. Under the terms of the Operating
Agreement, subject to certain conditions, the Association shall receive the
greater of the Association's gaming revenues from the greyhound park for the
period, or a percentage of the total combined gaming revenues of the Association
from the greyhound park and the Company as follows:
o 32% of the first $30,000,000 of total combined gaming revenues, plus
o 8% of the total combined gaming revenues over $30,000,000, but less
than $42,000,000, plus
F-18
o 8% of total combined gaming revenues between $42,000,000 and
$46,000,000 during any period for which no excursion boat gambling
or land based gambling operation is carried on from a Wisconsin or
Illinois gambling operation in Grant County, Wisconsin, or Joe
Davies County, Illinois.
Gaming revenues under this contract means adjusted gross receipts, less gaming
taxes.
The Association's gaming revenues from the greyhound park in 2002, 2001 and 2000
were $30,041,841, $27,108,884 and $25,912,357, respectively, which are higher
than the previously described thresholds, therefore, no payments have been made
to the Association in 2002, 2001 and 2000 under the Operating Agreement.
Commencing April 1, 2000, the Company had been obligated to pay, and has paid,
the Association the sum of $.50 for each patron admitted on the boat, which,
based upon recent annual attendance, approximates $500,000 annually. During
2002, 2001 and 2000, these payments approximated $495,000, $503,000 and
$405,000, respectively.
In the event the Company elects to sell or lease the excursion gambling boat,
its furnishings and gambling equipment and/or its interest in any ticket sale
facility or other buildings located in the Dubuque Ice Harbor used in connection
with the operation of an excursion gambling boat to a third party that does not
agree to operate these assets subject to the terms and conditions of the
Operating Agreement, and obtains an acceptable offer from such third party for
the purchase or lease thereof, the Association shall have the option to purchase
or lease these assets on the same terms as those offered by such third party.
14. TRANSACTIONS WITH RELATED PARTIES
During the period February 15, 2002 through December 31, 2002, OED paid
principal of $18,379 and interest of $297,536 to WET2 related to WET2's 50%
interest in the Old OED Notes. WET2, through its affiliate WET2LLC, owned 50% of
the membership interests of OED until August 30, 2002.
During 2002 and 2001, the Company paid $1,260,012 and $1,760,908, respectively,
to PGP primarily in respect of (i) certain consulting and financial advisory
services, (ii) board fees and expenses paid to the members of the board of
managers of PGP and (iii) tax, accounting, legal and administrative costs and
expenses of PGP. Additionally, in 2001 OEDA paid $523,826 to PGP for the
assignment of a purchase agreement to purchase OED.
During 2000, expenses related to interim management consulting services of
approximately $37,500 were paid to an affiliate of a board member of the Company
following the resignation in the previous year of the Company's former Chief
Operating Officer. In addition, the Company paid approximately $1,917,551 during
such period to PGP primarily in respect of (i) certain consulting and financial
advisory services, (ii) board fees and expenses paid to the members of the board
of managers of PGP and (iii) tax, accounting, legal and administrative costs and
expenses of PGP.
15. 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 and OTB's operated by OED in Lafayette, LA.
F-19
The accounting policies for each segment are the same as those described in
footnote 3 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 (as determined in accordance with accounting
principles generally accepted in the United States of America).
The table below presents information about reported segments as of and for the
years ended (in thousands):
Net Revenues
------------
2002 2001
---- ----
Diamond Jo (1) $ 48,598 $ 48,117
OED (2) 11,359
--------- ---------
Total $ 59,957 $ 48,117
========= =========
EBITDA (3)
2002 2001
---- ----
Diamond Jo (1) $ 15,782 $ 15,776
OED (2) 1,262
--------- ---------
Total EBITDA 17,044 15,776
Diamond Jo:
Referendum expense (771)
Depreciation and amortization (2,767) (3,963)
Interest expense, net (10,466) (9,457)
Loss on sale of assets (8) (151)
Preferred member distributions (373) (386)
OED:
Litigation settlement (1,600)
Depreciation and amortization (184)
Interest expense, net (1,375)
Minority interests (232)
--------- ---------
Net income to common members' interest $ (732) $ 1,819
========= =========
Total Assets
------------
2002 2001
---- ----
Diamond Jo $ 83,706 $ 84,374
OED 42,742
--------- ---------
Total $ 126,448 $ 84,374
========= =========
(1) Reflects results of operations of the Diamond Jo excluding
referendum and litigation settlement expenses for the years ended
December 31, 2002 and 2001.
(2) Reflects results of operations of OED for the period February 15,
2002 (date of acquisition) to December 31, 2002.
(3) EBITDA is defined as income from operations plus depreciation and
amortization referendum related expenses (see Note 3 for discussion
on referendum expense) and litigation settlement (see Note 7 for
discussion on litigation settlement).
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16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
2002 Quarters Ended
(Dollars in Thousands)
March 31 June 30 September 30 December 31
---------- --------- ------------ ------------
Net revenues $ 12,794 $ 16,367 $ 16,437 $ 14,359
Income from Operations 2,949 3,923 4,201 650
Net income (loss) 322 1,049 1,159 (2,657)
before preferred member
distributions and minority
interest
Net income (loss) $ 194 $ 795 $ 1,029 $ (2,750)(1)
________________
(1) An increase in net loss in the fourth quarter 2002 compared to 2001 is due
to (a) net loss at OED of $2.0 million, including the litigation
settlement of $1.6 million as described in Note 7 and excluding
intercompany charges, and (b) referendum expenses of $0.6 million related
to the Diamond Jo's referendum requirement as described in Note 3.
2001 Quarters Ended
(Dollars in Thousands)
Net revenues $ 11,257 $ 11,998 $ 13,003 $ 11,859
Income from Operations 2,719 2,924 3,793 2,377
Net income (loss) before 393 488 1,376 (51)
preferred member
distributions
Net income (loss) $ 289 $ 393 $ 1,282 $ (145)
17. SUBSEQUENT EVENTS
On February 26, 2003, OED completed a private placement of $123.2 million
aggregate principal amount of Series A 13% Senior Secured Notes due 2010 with
Contingent Interest in a transaction exempt from the registration requirements
of the Securities Act of 1933, as amended, pursuant to Rule 144A promulgated
thereunder (hereinafter referred to as the "OED Notes"). Interest on the OED
Notes is payable semi-annually on March 1 and September 1 of each year,
beginning on September 1, 2003. Contingent interest is payable after the casino
portion of the racino begins operating on the terms set forth in the indenture
governing the OED Notes.
OED used the net proceeds from the sale of the OED Notes to (a) repay the then
existing indebtedness under the Term Loan, the PGP Note and the WET2 Note, (b)
fund (together with cash from operations and other available financing) the
design, construction, development, equipping and opening costs of the racino,
and (c) fund the first three payments of fixed interest on the OED Notes. OED
deposited the net proceeds from the offering of the OED Notes, after repaying
existing indebtedness, into construction disbursement, interest reserve and
completion reserve accounts, from which funds will be periodically withdrawn.
These accounts are pledged as security for the OED Notes.
F-21
As noted in Note 7, in February 2003, OED entered into a settlement agreement
with LHPBA for a total settlement of $1.6 million. The settlement will be paid
by OED in four annual payments of $400,000. The first payment was made on March
7, 2003.
* * * * *
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SCHEDULE II
PENINSULA GAMING COMPANY, LLC
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands)
Balance at Charged to Balance at
Beginning Costs and End of
Description of Year Expenses Deductions (a) Year
- ----------- ------- -------- -------------- ----
Year ended December 31, 2002:
Allowance for doubtful accounts..... $ 57 $ 139 $ (150) $ 46
Year ended December 31, 2001:
Allowance for doubtful accounts..... 43 152 (138) 57
Year ended December 31, 2000:
Allowance for doubtful accounts..... 55 108 (120) 43
______________
(a) Amounts written off.
F-23