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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended March 31, 2003.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________________________ to _______________
Commission File Number: 333-88829
PENINSULA GAMING COMPANY, LLC/PENINSULA GAMING CORP.
(Exact name of registrant as specified in its charter)
Iowa 42-1483875
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3rd Street Ice Harbor, PO Box 1750, Dubuque, Iowa 52001-1750
- -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(563) 583-7005
---------------------------------------------------
(Registrant's telephone number including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange 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.
PENINSULA GAMING COMPANY, LLC
INDEX TO FORM 10-Q
Part I - Financial Information
Item 1 - Financial Statements
Peninsula Gaming Company, LLC:
Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2003 and
December 31, 2002...................................................................................3
Condensed Consolidated Statements of Operations (Unaudited) for the Three
Months Ended March 31, 2003 and 2002................................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three
Months Ended March 31, 2003 and 2002................................................................5
Notes to Condensed Consolidated Financial Statements (Unaudited).......................................6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................................13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.......................................17
Item 4 - Controls and Procedures..........................................................................17
Part II - Other Information
Item 1 - Legal Proceedings................................................................................19
Item 2 - Changes in Securities and Use of Proceeds........................................................19
Item 3 - Defaults Upon Senior Securities..................................................................19
Item 4 - Submission of Matters to a Vote of Security Holders..............................................19
Item 5 - Other Information................................................................................19
Item 6 - Exhibits and Reports on Form 8-K.................................................................19
Signatures.....................................................................................................21
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENINSULA GAMING COMPANY, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
------------ -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,297,925 $ 10,510,205
Restricted cash - purse settlements 1,767,336 840,366
Restricted cash - racino project 63,799,585
Restricted investments 23,922,971
Accounts receivable, less allowance for doubtful accounts
of $48,169 and $45,648, respectively 961,761 275,822
Interest receivable 66,565
Inventory 124,011 138,405
Prepaid expenses 764,916 395,056
------------ ------------
Total current assets 99,705,070 12,159,854
------------ ------------
PROPERTY AND EQUIPMENT, NET 17,633,349 18,246,857
------------ ------------
PROPERTY AND EQUIPMENT AT ST. LANDRY PARISH 11,703,696 7,455,885
------------ ------------
OTHER ASSETS:
Deferred financing costs, net of amortization
of $3,258,852 and $3,229,782, respectively 13,013,700 4,064,987
Goodwill and other intangible assets 85,238,800 84,413,263
Deposits 111,860 106,938
------------ ------------
Total other assets 98,364,360 88,585,188
------------ ------------
TOTAL $227,406,475 $126,447,784
============ ============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,444,228 $ 4,336,694
Purse settlement payable 1,763,112 846,778
Accrued payroll and payroll taxes 1,411,742 1,340,395
Other accrued expenses 7,097,839 8,109,213
Current maturity - line of credit 600,000 600,000
Notes payable 4,500,000
Term loan payable 8,300,000
Note payable to parent 7,325,000
------------ ------------
Total current liabilities 18,316,921 35,358,080
------------ ------------
LONG-TERM LIABILITIES:
12 1/4% Senior secured notes, net of discount 70,522,502 70,493,155
13% Senior secured notes, net of discount 120,753,818
Line of credit 11,100,000 11,250,000
Capital lease obligations 475,781 475,781
Litigation settlement 800,000 1,200,000
------------ ------------
Total long-term liabilities 203,652,101 83,418,936
------------ ------------
Total liabilities 221,969,022 118,777,016
COMMITMENTS AND CONTINGENCIES
PREFERRED MEMBERS' INTEREST, REDEEMABLE 4,000,000 4,000,000
MEMBERS' EQUITY 1,437,453 3,670,768
------------ ------------
TOTAL $227,406,475 $126,447,784
============ ============
See notes to condensed consolidated financial statements (unaudited).
-3-
PENINSULA GAMING COMPANY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
REVENUES:
Casino $ 11,782,204 $ 11,353,795
Racing 2,615,522 1,261,147
Food and beverage 848,827 740,088
Other 37,415 24,679
Less promotional allowances (654,226) (585,963)
--------------- --------------
Total net revenues 14,629,742 12,793,746
--------------- --------------
EXPENSES:
Casino 5,013,716 5,046,679
Racing 1,899,625 963,519
Food and beverage 816,558 735,529
Boat operations 567,348 583,976
Other 3,174 8,198
Selling, general and administrative 2,345,201 1,801,549
Depreciation and amortization 819,015 705,232
--------------- --------------
Total expenses 11,464,637 9,844,682
--------------- --------------
INCOME FROM OPERATIONS 3,165,105 2,949,064
--------------- --------------
OTHER INCOME (EXPENSE):
Interest income 80,008 14,966
Interest expense (5,031,903) (2,642,231)
Loss on disposal of assets (87,263)
--------------- --------------
Total other expense (5,039,158) (2,627,265)
--------------- --------------
NET INCOME (LOSS) BEFORE PREFERRED MEMBER
DISTRIBUTIONS AND MINORITY INTEREST (1,874,053) 321,799
LESS PREFERRED MEMBER DISTRIBUTIONS (90,544) (93,263)
LESS MINORITY INTEREST (34,581)
--------------- --------------
NET INCOME (LOSS) TO COMMON MEMBERS' INTEREST $ (1,964,597) $ 193,955
============== ==============
See notes to condensed consolidated financial statements (unaudited).
-4-
PENINSULA GAMING COMPANY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2003 2002
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,964,597) $ 193,955
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 819,015 705,232
Provision for doubtful accounts 30,251 32,108
Amortization and write-off of deferred financing costs and discount
on notes 884,020 257,684
Loss on disposal of assets 87,263
Minority interest share of income 34,581
Changes in operating assets and liabilities:
Restricted cash - purse settlement (926,970) (442,234)
Receivables (782,756) 136,778
Inventory 14,394 (5,556)
Prepaid expenses and other assets (375,397) (46,689)
Accounts payable 1,843,247 783,244
Accrued expenses (1,523,398) 2,162,209
------------- ------------
Net cash flows from operating activities (1,894,928) 3,811,312
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary, net of cash acquired (13,729,862)
Business acquisition and licensing costs (1,173,847) (369,461)
Racino project development costs (2,341,650) (80,779)
Restricted cash - racino project (63,799,585)
Restricted investments (23,922,971)
Purchase of property and equipment (511,332) (173,306)
Proceeds from sale of property and equipment 380,156
------------- ------------
Net cash flows from investing activities (91,369,229) (14,353,408)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs (9,140,404) (937,500)
Proceeds from senior credit facility 12,000,000
Proceeds from senior secured notes 120,736,000
Principal payments on notes payable (4,500,000)
Principal payments on senior credit facility (8,450,000)
Principal payments on note payable to parent (7,325,000)
Principal payments on long-term debt to related party (18,379)
Member distributions (268,719) (472,240)
------------- ------------
Net cash flows from financing activities 91,051,877 10,571,881
------------- ------------
NET INCREASE (DECREASE) IN CASH (2,212,280) 29,785
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,510,205 7,523,652
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,297,925 $ 7,553,437
============= ============
See notes to condensed consolidated financial statements (unaudited).
-5-
PENINSULA GAMING COMPANY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Peninsula Gaming Company, LLC (the "Company") is a Delaware limited liability
company formed on January 26, 1999 to own and operate the Diamond Jo riverboat
casino in Dubuque, Iowa, and is a wholly-owned subsidiary of Peninsula Gaming
Partners, LLC, a Delaware limited liability company ("PGP"). Unless the context
requires otherwise, references to the "Company," "we," "us" or "our" refer to
Peninsula Gaming Company, LLC. The Company has two wholly-owned subsidiaries,
(i) Peninsula Gaming Corp., which has no assets or operations and was formed
solely to facilitate the offering of the Company's 12 1/4% Senior Secured Notes
due 2006, and (ii) OED Acquisition, LLC, a Delaware limited liability company
("OEDA"), formed on July 9, 2001 to facilitate the purchase of The Old
Evangeline Downs, LLC ("OED"), a Louisiana limited liability company that
currently owns and operates a horse track in Lafayette, Louisiana. The Old
Evangeline Downs Capital Corp. is a wholly-owned subsidiary of OED which has no
assets or operations and was formed solely to facilitate the offering by OED of
its 13% Senior Secured Notes due 2010 with Contingent Interest.
OED's results of operations and cash flows for the three months ended March 31,
2003 and the period February 15, 2002 (date of acquisition) to March 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 intercompany transactions have been eliminated.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of normal recurring entries
unless otherwise disclosed, necessary to present fairly the financial
information of the Company for the interim periods presented and have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The interim results reflected in the financial
statements are not necessarily indicative of results for the full year or other
periods.
The financial statements contained herein should be read in conjunction with the
audited financial statements and accompanying notes to the financial statements
included in the Company's Annual Report on Form 10-K for the period ended
December 31, 2002. Accordingly, footnote disclosure which would substantially
duplicate the disclosure in the audited financial statements has been omitted in
the accompanying unaudited financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS
RESTRICTED CASH - RACINO PROJECT. "Restricted cash - racino project" represents
unused proceeds from OED's 13% Senior Secured Notes due 2010 with Contingent
Interest (the "OED Notes"), the use and disbursement of which are restricted to
the design, development, construction, equipping and opening of the racino in
accordance with the terms of a Cash Collateral and Disbursement Agreement, dated
February 25, 2003, among OED, US Bank (as trustee and disbursement agent) and an
independent construction consultant (the "Cash Collateral and Disbursement
Agreement"). As of March 31, 2003, OED had $58,519,571 deposited in a
construction disbursement account, $279,691 deposited in an interest reserve
account that will be used toward payment of fixed interest on the OED Notes and
$5,000,323 deposited in a completion reserve account that will be used to fund
potential cost overruns and contingency amounts with respect to the design,
development, construction, equipping and opening of the racino. The funds
deposited in these accounts are invested in securities that are readily
convertible to cash.
-6-
RESTRICTED INVESTMENTS. As of March 31, 2003, OED had $23,922,971 invested in
government securities with original maturities of greater than 90 days from the
date of initial investment. Proceeds from the sale of these investments at
maturity will be used to help pay the first three payments of fixed interest on
the OED Notes in accordance with the Cash Collateral and Disbursement Agreement.
PROPERTY AND EQUIPMENT AT ST. LANDRY PARISH. Included in Property and Equipment
at St. Landry Parish as of March 31, 2003 and December 31, 2002 are land and
land acquisition costs associated with the racino project of approximately $5.9
and $5.4 million, respectively, and architecture fees and construction costs
associated with the design and development of the racino of approximately $5.8
million and $2.1 million, respectively.
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 as of March 31, 2003 and December 31, 2002 was $0.2 million and $0.1
million, respectively.
BUSINESS ACQUISITION AND LICENSING COSTS. As of March 31, 2003, the Company had
recorded approximately $3.9 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 are included as a cost of the
acquisition and have been evaluated under SFAS No. 141 "Business Combinations"
and SFAS No. 142 "Goodwill and Other Intangible Assets." Intangible assets of
$28.4 million acquired as part of the OED acquisition were identified and valued
as follows (in millions):
Slot Machine Gaming License $24.6
Tradename $2.5
Horse Racing Licenses $1.3
-----
Total $28.4
3. PROPERTY AND EQUIPMENT OF THE COMPANY AND ITS SUBSIDIARIES AT
MARCH 31, 2003 AND DECEMBER 31, 2002 ARE SUMMARIZED AS FOLLOWS:
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
Land $ 1,110,000 $ 1,110,000
Buildings and improvements 8,007,252 8,387,134
Riverboats and improvements 8,295,995 8,300,776
Furniture, fixtures and equipment 8,023,043 7,942,095
Computer equipment 990,468 962,700
Vehicles 130,753 130,753
Equipment held under capital lease obligations 704,527 704,527
------------ ------------
Subtotal 27,262,038 27,537,985
Accumulated depreciation (9,628,689) (9,291,128)
------------ ------------
Property and equipment, net $17,633,349 $18,246,857
============ ============
-7-
4. DEBT
The debt of the Company and its subsidiaries consists of the following:
MARCH 31, DECEMBER 31,
2003 2002
------------ -------------
12 1/4% Senior Secured Notes of the Company due July 1, 2006,
net of discount of $477,498 and $506,845, respectively,
secured by assets of the Diamond Jo. $ 70,522,502 $ 70,493,155
13% Senior Secured Notes of OED due March 1, 2010 with
Contingent Interest, net of discount of $2,446,182, secured by
certain assets of OED. 120,753,818
Loans under Loan and Security Agreement of the Company 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% (current rate of 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. 11,700,000 11,850,000
Term loan under Loan and Security Agreement of OED 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. This facility was terminated with proceeds of the
offering of the OED Notes in February 2003. 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.
Obligations under this note were repaid in February 2003 with
proceeds of the offering of the OED Notes. 7,325,000
Note payable to William E. Trotter, II Family LLC (the "WET2
Note"), 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. Obligations under this note were repaid in February
2003 with proceeds of the offering of the OED Notes. 4,500,000
------------- -------------
Total debt 202,976,320 102,468,155
------------- -------------
Less current portion (600,000) (20,725,000)
------------- -------------
Total long term debt $202,376,320 $ 81,743,155
============= =============
On July 15, 1999, the Company completed a private placement of $71 million
aggregate principal amount of 12 1/4% Senior Secured Notes due 2006 (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
-8-
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.
On February 25, 2003, OED completed the 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. Contingent interest will accrue on the OED Notes in the first full
fiscal year after the casino begins operations. The amount of contingent
interest will be equal to 5.0% of OED's cash flow for the applicable period,
subject to certain limitations. OED may defer paying a portion of contingent
interest under certain circumstances set forth in the indenture governing the
OED Notes.
At the end of each six-month period after the casino portion of the racino
begins operations, OED is required under the indenture governing the OED Notes
to offer to purchase the maximum principal amount of OED Notes that may be
purchased, with an amount equal to the sum of (i) 50% of OED's excess cash flow
for such period (if any) and (ii) the then available balance in an excess cash
flow account, which account at any time shall not exceed $10 million. For 45
days following the expiration of each initial excess cash flow offer to
purchase, the holders of the OED Notes have the right to request that OED make
an offer to purchase OED Notes with the funds in the excess cash flow account,
provided, however, that OED shall not be required to make more than one offer at
any one time. All such offers to purchase OED Notes shall be made at 101% of the
principal amount, plus accrued and unpaid interest.
The OED Notes are secured by all of OED's current and future tangible and
intangible assets (with the exception of certain excluded assets). The OED
Notes, which mature on March 1, 2010, are redeemable at OED's option, in whole
or in part at any time or from time to time, on and after March 1, 2007 at
certain specified redemption prices set forth in the indenture governing the OED
Notes. The indenture governing the OED Notes contains a number of restrictive
covenants and agreements, including covenants that limit the ability of OED and
its subsidiaries to, among other things: (1) pay dividends, redeem stock or make
other distributions or restricted payments; (2) incur indebtedness or issue
preferred shares; (3) make certain investments; (4) create liens; (5) agree to
payment restrictions affecting the subsidiary guarantors; (6) consolidate or
merge; (7) sell or otherwise transfer or dispose of assets, including equity
interests of subsidiaries; (8) enter into transactions with affiliates; (9)
designate subsidiaries as unrestricted subsidiaries; (10) use proceeds of
permitted asset sales and (11) change its line of business. 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 OED Notes may declare all unpaid principal and accrued interest on
all of the OED Notes to be immediately due and payable. Upon the occurrence of a
change of control (as defined in the indenture), each holder of OED Notes will
have the
-9-
right to require OED to purchase all or a portion of such holder's OED Notes 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 obligations of the Company under its loan and security agreement with
Foothill Capital Corporation are senior to the Company's obligations under the
Peninsula Notes. The Company's loan and security agreement with Foothill Capital
Corporation contains, 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 March 31, 2003 and December 31, 2002, the Company was in
compliance with all such covenants.
5. COMMITMENTS AND CONTINGENCIES
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 PGP and PGP's
members, as the case may be, from liabilities incurred as a result of their
positions as sole manager of the Company and/or members of PGP.
Neither the Company nor any of its subsidiaries are a party to, and neither the
Company nor any of its subsidiaries' property is the subject of, any pending
legal proceedings other than litigation arising in the normal course of
business. The Company does not believe that adverse determinations in any or all
such other litigation would have a material adverse effect on the financial
condition or results of operations of the Company and its subsidiaries.
6. 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, Iowa; and (2) Louisiana operations, which comprise
the racetrack operated by OED in Lafayette, Louisiana.
The accounting policies for each segment are the same as those described in the
"Summary of Significant Accounting Policies" in the notes to the financial
statements included in the Company's Annual Report on Form 10-K for the period
ended December 31, 2002 and in the "Summary of Significant Accounting Policies
and Recent Accounting Pronouncements" above.
The table below presents information about reported segments for each period
presented (in thousands):
NET REVENUES
THREE MONTHS ENDED MARCH 31,
2003 2002
-------- --------
Diamond Jo (1) $ 11,852 $ 11,463
Evangeline Downs (2) 2,778 1,331
-------- --------
Total $ 14,630 $ 12,794
-10-
EBITDA (3)
THREE MONTHS ENDED MARCH 31,
2003 2002
-------- --------
Diamond Jo (1) $ 3,629 $ 3,425
Evangeline Downs (2) 355 229
-------- --------
Total $ 3,984 $ 3,654
NET INCOME TO COMMON
MEMBERS' INTEREST
THREE MONTHS ENDED MARCH 31,
2003 2002
-------- --------
Diamond Jo (1) $ 58 $ 159
Evangeline Downs (2) (2,023) 35
--------- --------
Total $ (1,965) $ 194
TOTAL ASSETS
MARCH 31, DECEMBER 31,
2003 2002
---------- ------------
Diamond Jo $ 80,843 $ 83,706
Evangeline Downs 146,563 42,742
--------- ---------
Total $ 227,406 $ 126,448
---------------
(1) Reflects results of operations of the Diamond Jo for the three
months ended March 31, 2003 and 2002.
(2) Reflects results of operations of the Evangeline Downs for the
three months ended March 31, 2003 and the period February 15,
2002 (date of acquisition) to March 31, 2002.
(3) EBITDA is defined as net income to common members' interest, plus
depreciation and amortization, net interest expense, loss on
disposal of assets, preferred member distributions and minority
interest. Management believes that EBITDA is useful to investors
as a means to evaluate the Company's ability to service existing
debt, to sustain potential future increases in debt and to satisfy
capital requirements. Furthermore, management uses EBITDA to
determine the Company's compliance with key financial covenants
under its financing agreements, which, among other things, impacts
the amount of indebtedness the Company is permitted to incur. In
addition, because the Company has historically provided EBITDA to
investors, it believes that presenting this non-GAAP financial
measure provides consistency in its financial reporting. However,
EBITDA is not intended to represent cash flows for the period, nor
has it been presented as an alternative to either (a) operating
income (as determined by accounting principles generally accepted
in the United States) as an indicator of operating performance or
(b) cash flows from operating, investing and financing activities
(as determined by accounting principles generally accepted in the
United States) as a measure of liquidity. Given that EBITDA is not
a measurement determined in accordance with accounting principles
generally accepted in the United States and is thus susceptible to
varying calculations, EBITDA may not be comparable to other
similarly titled measures of other companies.
The following table reconciles the Company's EBITDA to net income
to common members' interest for each period presented (in
thousands):
-11-
THREE MONTHS ENDED MARCH 31,
2003 2002
-------- --------
EBITDA $ 3,984 $ 3,654
Less:
Depreciation and amortization (819) (705)
Diamond Jo interest expense, net (2,731) (2,568)
Evangeline Downs interest
expense, net (2,221) (59)
Loss on disposal of assets (87)
Preferred member distributions (91) (93)
Minority interest (35)
-------- --------
Net income to common members' interest $(1,965) $ 194
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES
THERETO APPEARING ELSEWHERE IN THIS REPORT. SOME STATEMENTS CONTAINED IN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
LITIGATION REFORM ACT, WHICH INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THE
RISKS AND UNCERTAINTIES DISCUSSED BELOW, AS WELL AS OTHER RISKS SET FORTH IN OUR
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002. SHOULD THESE
RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE
INCORRECT, OUR FUTURE PERFORMANCE AND ACTUAL RESULTS OF OPERATIONS MAY DIFFER
MATERIALLY FROM THOSE EXPECTED OR INTENDED.
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 such 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.
RESULTS OF OPERATIONS
The results of operations of the Company discussed below include the
combined results of operations of the Diamond Jo casino in Dubuque, Iowa for the
three months ended March 31, 2003 and 2002 and the results of operations of OED
in Lafayette, Louisiana for the three months ended March 31, 2003 and the period
February 15, 2002 through March 31, 2002.
STATEMENT OF OPERATIONS DATA
DIAMOND JO OED
------------------------------- ------------------------------------
PERIOD
THREE MONTHS FEBRUARY 15, 2002
THREE MONTHS ENDED MARCH 31, ENDED MARCH 31, TO MARCH 31,
2003 2002 2003 2002
------------ ------------ --------------- -----------------
REVENUES:
Casino $ 11,782,204 $ 11,353,795
Racing $ 2,615,522 $ 1,261,147
Food and beverage 686,837 670,575 161,990 69,513
Other 37,415 24,679
Less promotional
allowances (654,226) (585,963)
------------ ------------ ----------- -----------
Net revenues 11,852,230 11,463,086 2,777,512 1,330,660
------------ ------------ ----------- -----------
-13-
EXPENSES:
Casino 5,013,716 5,046,679
Racing 1,899,625 963,519
Food and beverage 655,485 654,466 161,073 81,063
Boat operations 567,348 583,976
Other 3,174 8,198
Selling, general and
administrative 1,983,745 1,744,283 361,456 57,266
Depreciation and
amortization 751,905 673,086 67,110 32,146
------------ ------------ ----------- -----------
Total expenses 8,975,373 8,710,688 2,489,264 1,133,994
------------ ------------ ----------- -----------
Income from operations $ 2,876,857 $ 2,752,398 $ 288,248 $ 196,666
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Net revenues increased 14.4% to $14.6 million for the three months
ended March 31, 2003 from $12.8 million for the three months ended March 31,
2002. The majority of this increase is due to an increase in net revenues from
OED of $1.4 million due primarily to the fact that we did not acquire a 50%
interest in OED until February 15, 2002 and, therefore, our results of
operations during the three months ended March 31, 2002 only include one and
one-half months of OED operations compared to a full three months of operations
during the three months ended March 31, 2003. The remaining increase is due to
(i) an increase in Diamond Jo's slot revenue of 2.4%, or $0.2 million, for the
three months ended March 31, 2003 compared to the three months ended March 31,
2002, primarily due to an increase in coin-in of 3% over the same period and
(ii) an increase in table games revenue of 14.1%, or $0.2 million, for the three
months ended March 31, 2003 compared to the three months ended March 31, 2002,
primarily due to a 3.7 percentage point increase in our table game hold
percentage over the same period.
Casino gaming win in the Dubuque market increased 4.5% to $21.5 million
for the three months ended March 31, 2003 from $20.6 million for the three
months ended March 31, 2002. We believe this increase was primarily due to
targeted players club promotions and a continued focus on maintenance of our
slot mix combined with 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 54.8% for the three months ended
March 31, 2003 from 55.2% for the three months ended March 31, 2002. Our casino
revenues increased 3.8% to $11.8 million for the three months ended March 31,
2003 from $11.4 million for the three months ended March 31, 2002. This increase
is due to a 2.4% increase in slot revenues and a 14.1% increase in table game
revenues as discussed above. Casino revenues were derived 87.2% from slot
machines and 12.8% from table games for the three months ended March 31, 2003
compared to 88.4% from slot machines and 11.6% from table games for the three
months ended March 31, 2002. The number of gaming positions at the Diamond Jo at
March 31, 2003 was 858 compared to 828 at March 31, 2002. This increase is due
to the addition of 79 slot machines offset by a decrease in the number of table
games positions resulting from the elimination of five blackjack tables, one
caribbean stud table and one three-card poker table. Consistent with an increase
in casino revenue, our casino win per gaming position per day at the Diamond Jo
increased 0.8% to $153.64 for the three months ended March 31, 2003 from $152.36
for the three months ended March 31, 2002. Admissions to the casinos in the
Dubuque market increased 1.8% to 446,000 for the three months ended March 31,
2003
-14-
from 438,000 for the three months ended March 31, 2002. For the three months
ended March 31, 2003, our share of the Dubuque market casino admissions
decreased to 51.4% from 52.0% for the three months ended March 31, 2002. We
believe this decrease is primarily attributable to our targeted use of marketing
dollars directed primarily towards more profitable market segments. Our
admissions at the Diamond Jo for the three months ended March 31, 2003 increased
slightly to 229,000 from 228,000 for the three months ended March 31, 2002. For
the three months ended March 31, 2003 our casino win per admission at the
Diamond Jo increased 3.0% to $51.34 from $49.84 for the three months ended March
31, 2002.
Racing revenues at OED for the three months ended March 31, 2003 were
$2.6 million compared to racing revenues of $1.3 million for the period February
15, 2002 (date of acquisition) to March 31, 2003. The increase in racing
revenues is directly related to the timing of the acquisition of OED as
discussed above. Net food and beverage revenues, other revenues and promotional
allowances remained substantially unchanged at $0.2 million for the three months
ended March 31, 2003 and 2002.
Casino operating expenses remained substantially unchanged at $5.0
million for the three months ended March 31, 2003 and 2002. Racing expenses
increased to $1.9 million for the three months ended March 31, 2003 from $1.0
million for the three months ended March 31, 2002. Food and beverage expenses
increased 11.0% to $0.8 million from $0.7 million due primarily to an increase
in food and beverage expenses at OED of $0.1 million. The increase in racing
expenses and in food and beverage expenses are directly related to the timing of
the acquisition of OED as discussed above. Boat operation expenses and other
expenses were substantially unchanged at $0.6 million for the three months ended
March 31, 2003 and 2002.
Selling, general and administrative expenses increased to $2.3 million
for the three months ended March 31, 2003 from $1.8 million for the three months
ended March 31, 2002. This increase was due to (i) an increase in selling,
general and administrative expenses at OED of $304,000 which is due to the
timing of the acquisition of OED (as discussed above), (ii) an increase in
salaries and bonuses at the Diamond Jo of $226,000, (iii) an increase in
management salaries at OED of approximately $62,000 and (iv) an increase in
professional fees at OED of approximately $54,000.
Depreciation and amortization expenses increased 16.1% to $0.8 million
for the three months ended March 31, 2003 from $0.7 million for the three months
ended March 31, 2002. This increase is due to property and equipment additions
of approximately $2.0 million over the twelve months ended March 31, 2003, the
majority of which was slot machines and computer equipment with relatively short
depreciable lives. 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. Net interest expense increased 88.5% to $5.0 million for
the three months ended March 31, 2003 from $2.6 million for the three months
ended March 31, 2002. This increase is due to (i) an increase in net interest
expense at OED of $2.2 million primarily associated with interest on the OED
Notes, the amortization and write-off of deferred financing costs associated
with OED's term loan with Foothill Capital Corporation, the PGP Note and the
WET2 Note (all of which were repaid in February 2003) and timing of the OED
acquisition as discussed above and (ii) interest associated with our loans under
our loan and security agreement with Foothill Capital Corporation, $12.0 million
of which was drawn down by the Company on February 15, 2002 to consummate the
acquisition of OED, resulting in three months of interest during the three
months ended March 31, 2003 compared to only one and one-half months of interest
during the three months ended March 31, 2002.
-15-
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING, INVESTING AND FINANCING ACTIVITIES
Our cash balance decreased $2.2 million during the three month period
ended March 31, 2003 to $8.3 million from $10.5 million at December 31, 2001.
Cash flows used in operating activities of $1.9 million for the three
month period ended March 31, 2003 consisted of a net loss of $2.0 million
increased by non-cash charges of $1.8 million, principally depreciation and
amortization and write-off and amortization of deferred financing costs, and a
decrease in working capital of $1.7 million. The change in working capital is
primarily due to a net decrease in accrued interest of approximately $1.0
million, a litigation settlement payment of $400,000 related to the HBPA
settlement and an increase in prepaid expenses of approximately $0.3 million
related to prepaid insurance.
Cash flows used in investing activities for the three months ending
March 31, 2003 was $91.4 million consisting of (i) an increase in restricted
cash - racino project and restricted investments of $87.7 million related to the
investment of proceeds from the OED Notes into interest bearing cash equivalents
and investments whose distribution is restricted as outlined in the Cash
Collateral and Disbursement Agreement, (ii) approximately $2.4 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, (iii) approximately
$1.2 million in development costs related to the OED acquisition and OED's
racing and gaming licenses and (iv) cash outflows of approximately $0.5 million
used for capital expenditures (mainly related to the purchase of new slot
machines). These cash outflows were offset by cash proceeds from the sale of
assets of $0.4 million. We expect our capital expenditures at the Diamond Jo and
OED (other than the capital expenditures related to the racino project) to be
approximately $1.6 million and $1.1 million (including approximately $1.0
million to renovate and equip the OTB at Port Allen, Louisiana with additional
video poker machines), respectively, for the year ended December 31, 2003.
Cash flows from financing activities for the three months ended March
31, 2003 of $91.1 million reflects the net proceeds from the offering of the OED
Notes of $120.7 million. These proceeds were offset by (i) principal payments to
extinguish OED's obligations under OED's term loan with Foothill Capital
Corporation, the PGP Note and the WET2 Note totaling $20.1 million, (ii)
deferred financing costs paid of $9.1 million associated with the OED Notes,
(iii) member distributions of $0.3 million and (iv) aggregate principal payments
on borrowings under our loan and security agreement with Foothill Capital
Corporation of $0.1 million.
We believe that cash on hand and cash generated from operations at the
Company will be sufficient to satisfy our working capital and capital
expenditure requirements, repay borrowings under our loan and security agreement
with Foothill Capital Corporation, and satisfy our other current debt service
requirements. We also believe that cash on-hand and cash generated from
operations at OED will be sufficient to satisfy OED's working capital and debt
service requirements. If cash on-hand, restricted cash, restricted investments
and cash generated from operations at either the Company or OED are insufficient
to meet their respective obligations, we and our subsidiaries may have to
refinance our debt or sell some or all of our respective assets to meet our
respective obligations. We cannot assure you that we would be able to obtain
such financing or sell any or all of such assets on commercially reasonable
terms or at all.
-16-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks which are inherent in our
financial instruments which arise from transactions entered into in the normal
course of business. Market risk is the risk of loss from adverse changes in
market prices and interest rates. We do not currently utilize derivative
financial instruments to hedge market risk. We also do not hold or issue
derivative financial instruments for trading purposes.
We are exposed to interest rate risk due to changes in interest rates
with respect to our long-term variable interest rate debt borrowing under our
senior credit facility. As of March 31, 2003, we had $11.7 million in borrowings
under our loan and security agreement with Foothill Capital Corporation. 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 our loan and security
agreement with Foothill Capital Corporation (currently $12.2 million), if market
rates of interest on our variable rate debt increased by one percentage point,
the estimated market risk exposure under the senior credit facility would be
approximately $0.1 million.
We are also exposed to fair value risk due to changes in interest rates
with respect to our long-term fixed interest rate debt borrowing. Our fixed rate
debt instruments are not generally affected by a change in the market rates of
interest, and therefore, such instruments generally do not have an impact on
future earnings. However, future earnings and cash flows may be impacted by
changes in interest rates related to indebtedness incurred to fund repayments as
such fixed rate debt matures. The following table contains information relating
to our fixed rate debt borrowings which are subject to interest rate risk
(dollars in millions):
FIXED INTEREST
DESCRIPTION MATURITY RATE COST FAIR VALUE
- ----------------------- ------------ -------------- ----- ----------
12 1/4% Senior
Secured Notes July 1, 2006 12 1/4% $71.0 $72.4*
13% Senior Secured
Notes with Contingent
Interest March 1, 2010 13% $123.2 $124.4*
* Represents fair value as of May 3, 2003 based on information provided by an
independent investment banking firm.
ITEM 4. 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-Q, 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.
-17-
(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.
-18-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries are a party to, and none of the
property of the Company or its subsidiaries is the subject of, any 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 or results of
operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
--------
3.1A. Certificate of Formation of Peninsula Gaming Company, LLC
(incorporated by reference from Exhibit 3.1A to the
Company's Form 10-K for the year ended December 31, 2000,
file number 333-88829).
3.1B. Amendment to Certificate of Formation of Peninsula Gaming
Company, LLC (incorporated by reference from Exhibit 3.1B
to the Company's Form 10-K for the year ended December
31, 2000, file number 333-88829).
3.2. Operating Agreement of Peninsula Gaming Company, LLC
(incorporated by reference from Exhibit 3.2 to the
Company's Form 10-K for the year ended December 31, 2000,
file number 333-88829).
3.3. Articles of Incorporation of Peninsula Gaming Corp
(incorporated by reference from Exhibit 3.3 to the
Company's Form 10-K for the year ended December 31, 2000,
file number 333-88829).
3.4. Bylaws of Peninsula Gaming Corp (incorporated by
reference from Exhibit 3.4 to the Company's Form 10-K
for the year ended December 31, 2000, file number
333-88829).
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.
-19-
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.
(b) REPORTS ON FORM 8-K
None.
-20-
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 May 15, 2003.
PENINSULA GAMING COMPANY
By: /s/ M. BRENT STEVENS
----------------------------------
M. Brent Stevens
Chief Executive Officer
By: /s/ GEORGE T. PAPANIER
----------------------------------
George T. Papanier
Chief Operating Officer
By: /s/ NATALIE A. SCHRAMM
----------------------------------
Natalie A. Schramm
Chief Financial Officer
PENINSULA GAMING CORP.
By: /s/ M. BRENT STEVENS
----------------------------------
M. Brent Stevens
President and Treasurer
(principal Financial officer)
-21-