UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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: 333-105587
THE OLD EVANGELINE DOWNS, LLC THE OLD EVANGELINE DOWNS CAPITAL CORP.
(Exact name of registrant (Exact name of registrant
as specified in its charter) as specified in its charter)
LOUISIANA DELAWARE
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
72-1280511 25-1902805
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
P.O. BOX 90270
LAFAYETTE, LOUISIANA 70509-0270
(337) 896-7223
(Address, including zip code, and telephone number, including area code,
of principal executive offices)
- --------------------------------------------------------------------------------
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 [] No [X]
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 The Old Evangeline Downs, LLC are
held by OED Acquisition, LLC. The Old Evangeline Downs Capital Corp. ("OED
Capital") is a wholly-owned subsidiary of The Old Evangeline Downs, LLC.
THE OLD EVANGELINE DOWNS, LLC
INDEX TO FORM 10-Q
Part I - Financial Information
Item 1 - Financial Statements
The Old Evangeline Downs, LLC:
Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2003 and
December 31, 2002...................................................................................3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2003 (Successor) and June 30, 2002 (Predecessor)...........................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months
Ended June 30, 2003 (Successor) and June 30, 2002 (Predecessor).....................................5
Notes to Condensed Consolidated Financial Statements (Unaudited).........................................6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................................................16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.........................................22
Item 4 - Controls and Procedures............................................................................22
Part II - Other Information
Item 1 - Legal Proceedings..................................................................................23
Item 2 - Changes in Securities and Use of Proceeds..........................................................23
Item 3 - Defaults Upon Senior Securities....................................................................23
Item 4 - Submission of Matters to a Vote of Security Holders................................................23
Item 5 - Other Information..................................................................................23
Item 6 - Exhibits and Reports on Form 8-K...................................................................23
Signatures.......................................................................................................24
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE OLD EVANGELINE DOWNS, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
---------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,385,078 $ 962,652
Restricted cash - purse settlements 300,537 840,366
Restricted investments 23,922,971
Accounts receivable 2,328,367 176,120
Interest receivable 157,239
Inventory 44,790 29,736
Prepaid expenses 62,634 48,885
------------ ------------
Total current assets 29,201,616 2,057,759
------------ ------------
RESTRICTED CASH - RACINO PROJECT 53,922,489
------------
PROPERTY AND EQUIPMENT, NET 1,587,751 1,340,383
------------ ------------
PROPERTY AND EQUIPMENT AT ST. LANDRY PARISH 24,176,485 7,455,885
------------ ------------
OTHER ASSETS:
Deferred financing costs, net of amortization
of $481,469 and $306,028, respectively 10,277,051 484,851
Intangible assets 32,249,769 31,329,834
Deposits 76,735 73,131
------------ ------------
Total other assets 42,603,555 31,887,816
------------ ------------
TOTAL $151,491,896 $ 42,741,843
============ ============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,029,835 $ 1,237,603
Construction payable - St. Landry Parish 6,498,119 2,376,494
Purse settlement payable 911,667 846,778
Accrued payroll and payroll taxes 225,759 131,170
Accrued interest 5,516,666 327,953
Other accrued expenses 716,918 187,253
Accounts payable to PGC and OEDA 3,740,204 3,038,992
Notes payable 4,500,000
Term loan payable 8,300,000
Note payable to parent 7,325,000
------------ ------------
Total current liabilities 20,639,168 28,271,243
------------ ------------
LONG-TERM LIABILITIES:
13% Senior secured notes, net of discount 120,808,479
Line of credit 2,284,301
Litigation settlement 800,000
------------ ------------
Total long-term liabilities 123,892,780
------------ ------------
Total liabilities 144,531,948 28,271,243
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY 6,959,948 14,470,600
------------ ------------
TOTAL $151,491,896 $ 42,741,843
============ ============
See notes to condensed consolidated financial statements (unaudited).
-3-
THE OLD EVANGELINE DOWNS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
-------------- -------------- ------------- --------------
REVENUES:
Meet $ 1,787,052 $ 1,735,979 $ 2,188,842 $ 2,076,574
Off-track betting 1,941,944 1,915,711 4,155,675 4,129,161
Food and beverage 497,813 462,644 659,803 608,402
------------- -------------- -------------- --------------
Total net revenues 4,226,809 4,114,334 7,004,320 6,814,137
------------- -------------- -------------- --------------
EXPENSES:
Meet 1,593,274 1,473,629 2,136,080 1,889,448
Off-track betting 1,350,805 1,272,449 2,708,177 2,627,662
Food and beverage 435,953 421,221 597,205 601,323
Selling, general and administrative 453,185 328,387 799,625 565,282
Pre-opening expense 190,638 204,921
Depreciation and amortization 78,784 36,141 145,895 100,433
Management fee 120,000 240,000
Litigation settlement 1,600,000
------------- -------------- -------------- --------------
Total expenses 4,222,639 3,531,827 8,431,903 5,784,148
------------- -------------- -------------- --------------
INCOME (LOSS) FROM OPERATIONS 4,170 582,507 (1,427,583) 1,029,989
------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest income 200,794 3,998 274,523 8,073
Interest expense (including amortization and
write-off of deferred financing costs and
bond discount of $417,099 and $0 for the
three months ended June 30, 2003 and
2002, respectively, and $1,002,758 and
$0 for the six months ended June 30,
2003 and 2002, respectively) (4,062,920) (263,379) (6,357,592) (533,250)
-------------- -------------- -------------- --------------
Total other expense (3,862,126) (259,381) (6,083,069) (525,177)
-------------- -------------- -------------- --------------
NET INCOME (LOSS) TO COMMON MEMBERS' INTEREST $ (3,857,956) $ 323,126 $ (7,510,652) $ 504,812
============== ============== ============== ==============
See notes to condensed consolidated financial statements (unaudited).
-4-
THE OLD EVANGELINE DOWNS, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SUCCESSOR PREDECESSOR
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,510,652) $ 504,812
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 145,895 100,433
Amortization and write-off of deferred financing costs and discount
on notes 1,002,758
Changes in operating assets and liabilities:
Restricted cash - purse settlement 539,829 559,245
Receivables (2,309,486) (1,083,078)
Inventory (15,054) (8,990)
Prepaid expenses and other assets (17,353) (191,796)
Accounts payable 1,912,022 993,092
Accrued expenses 5,059,488 211,112
Litigation settlement 1,200,000
Accounts payable to PGC and OEDA 701,210 719,488
------------- -------------
Net cash flows from operating activities 708,657 1,804,318
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition and licensing costs (1,763,486) (768,551)
Racino project development costs (12,160,548) (233,873)
Restricted cash - racino project (53,922,489)
Purchase of restricted investments (23,922,971)
Purchase of property and equipment (472,842) (52,618)
------------- -------------
Net cash flows from investing activities (92,242,336) (1,055,042)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs (9,939,196)
Proceeds from senior credit facility 2,284,301
Proceeds from senior secured notes 120,736,000
Principal payments on notes payable (4,500,000)
Principal payments on senior credit facility (8,300,000)
Principal payments on note payable to parent (7,325,000)
Principal payments on long-term debt to related party (90,987)
------------- -------------
Net cash flows from financing activities 92,956,105 (90,987)
------------- -------------
NET INCREASE IN CASH 1,422,426 658,289
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 962,652 994,830
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,385,078 $ 1,653,119
============= =============
See notes to condensed consolidated financial statements (unaudited).
-5-
THE OLD EVANGELINE DOWNS, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION, BUSINESS PURPOSE, AND BASIS OF PRESENTATION
Through a series of transactions consummated in 2002, OED Acquisition, LLC
("OEDA"), a wholly-owned subsidiary of Peninsula Gaming Company, LLC ("PGC")
acquired all of the outstanding membership interests of The Old Evangeline
Downs, L.C., later renamed The Old Evangeline Downs, LLC (hereinafter, together
with its consolidated subsidiaries, "OED" or the "Company").
The Company currently owns and operates the Evangeline Downs Racetrack, part of
a 94,200 ft2 pari-mutuel wagering complex located near Lafayette, Louisiana,
which offers pari-mutuel wagering live and simulcast on thoroughbred and quarter
horse races. The pari-mutuel segment consists of pari-mutuel wagering on live
thoroughbred and quarter horse races, seven days a week from the middle of April
through Labor Day in September. The Company 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 two OTBs offer pari-mutuel wagering on
simulcast races seven days per week.
PGC and OEDA, as operators under an existing management services agreement with
the Company, manage the Company's existing racetrack and supervise the design,
development and construction of the Company's new casino and contiguous
racetrack facility (the "racino") offering pari-mutuel wagering and slot
machines in St. Landry Parish, Louisiana (the "racino project"). Under the terms
of the management services agreement, PGC and OEDA will also manage and operate
the racino.
All intercompany balances and transactions have been eliminated in the
consolidated financial statements contained herein.
In the opinion of management, the accompanying unaudited condensed 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 condensed consolidated 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 registration statement filed
on Form S-4 on August 12, 2003. Accordingly, footnote disclosure which would
substantially duplicate the disclosure in the audited financial statements has
been omitted in the accompanying unaudited condensed consolidated financial
statements.
-6-
RACINO DEVELOPMENT
In order to provide funding for the racino project and to repay certain existing
indebtedness, on February 25, 2003, the Company completed a private placement of
$123.2 million of its 13% Senior Secured Notes due 2010 with Contingent Interest
(the "Private OED Notes"). On August 12, 2003 the Company commenced an offer to
exchange the Private OED Notes for registered notes otherwise identical in all
respects to the Private OED Notes (the "Registered OED Notes", and together with
the Private OED Notes, the "OED Notes") pursuant to a registration statement
filed by the Company with the Securities and Exchange Commission, which
registration statement was declared effective on August 12, 2003. The exchange
of the Private OED Notes for the Registered OED Notes was completed on September
10, 2003.
The Company has purchased all of the land necessary to develop the racino
project, and the total cost to design, develop, construct, equip and open the
racino (net of costs incurred prior to the issue date of the OED Notes) is
expected to be approximately $91.0 million (which includes costs of
approximately $2.5 million to widen evacuation routes within the designated
gaming space of the casino as permitted by recent statutory authority). The
construction and development of the racino project is expected to be completed
in two phases. During the first phase, the Company will construct the casino and
related casino amenities, which it expects to open in March 2004, at a total
cost of $71.1 million (net of costs incurred prior to the issue date of the
Private OED Notes). During the second phase, the Company will construct the
horse racetrack and related facilities for a total cost of $19.9 million. The
Company has already commenced the first phase of the project and plans to
commence construction of a portion of the related facilities comprising the
second phase of the project prior to completion of the first phase. The Company
expects to continue to operate its existing horse racetrack until live racing
meets are scheduled at the racino, at which time the Company will cease
operations at its existing horse racetrack. The Company expects to be prepared
to begin scheduling live racing meets in December 2004.
The source of funds to complete construction and development of the racino will
be (i) a portion of the proceeds from the offering of the OED Notes, (ii)
available borrowings under the Company's $15.0 million senior secured credit
facility, (iii) expected furniture, fixtures and equipment financing of up to
approximately $16.0 million which the Company anticipates obtaining prior to
commencement of the Company's casino operations, and (iv) cash flows from
existing racetrack operations and future cash flows from future racino
operations. See Note 5 for further information about the OED Notes and the
Company's senior credit facility.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESTRICTED INVESTMENTS. As of June 30, 2003, the Company had $23,922,971
invested in government securities with original maturities of greater than 90
days from the date of initial investment. The amounts invested in such
securities are partial proceeds from the sale of the OED Notes. 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 terms
of a cash collateral and disbursement agreement, dated February 25, 2003,
currently in effect among OED, US Bank (as trustee and disbursement agent) and
an independent construction consultant (the "Cash Collateral and Disbursement
Agreement").
-7-
RESTRICTED CASH - RACINO PROJECT. "Restricted cash - racino project" represents
unused proceeds from the sale of 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 the Cash Collateral and
Disbursement Agreement. As of June 30, 2003, the Company had $48,632,292 in cash
equivalents deposited in a construction disbursement account, $281,218 in cash
equivalents deposited in an interest reserve account that will be used toward
payment of fixed interest on the OED Notes and $5,008,979 in cash equivalents
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.
PROPERTY AND EQUIPMENT AT ST. LANDRY PARISH. Included in Property and Equipment
at St. Landry Parish as of June 30, 2003 and December 31, 2002 are land and land
acquisition costs associated with the racino project of approximately $6.9 and
$5.4 million, respectively, and architecture fees and construction costs
associated with the design and development of the racino of approximately $17.3
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 June 30, 2003 and December 31, 2002 was $0.6 million and $0.1
million, respectively.
BUSINESS ACQUISITION AND LICENSING COSTS. As of June 30, 2003, the Company had
recorded approximately $3.8 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 and Electronic Video
Game Licenses $24.6
Tradename $2.5
Horse Racing Licenses $1.3
-----
Total $28.4
For purposes of the valuations set forth above, each of the identified
intangible assets were treated as having indefinite lives and valued separately.
The methodology employed by an independent valuation specialist to arrive at
such valuations required evaluating the fair market value of the existing horse
racing business on a stand-alone basis without taking into account any right to
obtain slot machine and electronic video game licenses. Such valuation was based
in part upon other transactions in the industry and the Company's historical
results of operations. A value was also derived for the tradename using market
based royalty rates. A significant portion of the purchase price is attributable
to the slot machine and
-8-
electronic video game license rights, which were valued based upon the market
value paid by other operators and upon projected cash flows from operations.
These valuations and related intangible assets are subject to impairment by,
among other things, significant changes in the gaming tax rates in Louisiana,
significant new competition which could substantially reduce profitability,
non-renewal of the Company's racing or gaming licenses due to regulatory
matters, changes to the Company's tradename or the way the Company's tradename
is used in connection with its business and regulatory changes that could
adversely affect the Company's business by, for example, limiting or reducing
the number of slot machines or video poker machines that they are permitted to
operate.
CONSTRUCTION PAYABLE - ST. LANDRY PARISH. At June 30, 2003 and December 31,
2002, the Company had $6.5 million and $2.4 million, respectively, in payables
and accruals related to construction and development costs associated with the
racino project.
REVENUE RECOGNITION. Included in "Off-track betting" revenue are revenues from
video poker devices at the Company's Port Allen OTB. The Company is subject to
an ongoing requirement to pay a certain percentage of its net device revenues to
supplement purses for horsemen, such as the Louisiana Horsemen's Benevolent and
Protective Association 1993, Inc. ("LHBPA"). Prior to April 2003, this amount
was calculated as (a) 50% of an amount equal to net device revenue minus
franchise fees, less (b) a credit of $116 per machine per month. However, in a
decision rendered on April 9, 2003, the Louisiana Supreme Court ruled that only
the $116 credit per machine per month could be deducted from the net device
revenues in determining the amount owed to the LHBPA.
In an effort to reduce the impact of the Louisiana Supreme Court ruling, the
Louisiana Legislature passed legislation during the 2003 Regular Session that
effectively reduces the amounts that licensed establishments such as the Company
must pay to supplement purses for horsemen, such as the LHBPA. Pursuant to such
legislation, which went into effect on August 15, 2003, such payments shall be
in an amount equal to 20% of net device revenue without any deductions or
credits.
See Note 5 for a discussion of a recent settlement of video poker purse
liabilities prior to the Louisiana Supreme Court ruling.
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 also periodically evaluate the
carrying value of our assets in accordance with generally accepted accounting
principles. 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 estimates. In addition, we 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.
-9-
In addition, contingencies are accounted for in accordance with SFAS No. 5,
"Accounting for Contingencies." SFAS No. 5 requires that we record an estimated
loss from a loss contingency when information available prior to issuance of our
financial statements indicates that it is probable that a liability has been
incurred at the date of the financial statements and the amount of the loss can
be reasonably estimated. Accounting for contingencies such as legal matters
requires us to use judgment. Many of these legal contingencies can take years to
be resolved. Generally, as the time period increases over which the
uncertainties are resolved, the likelihood of changes to the estimate of the
ultimate outcome increases. However, an adverse outcome could have a material
impact on our financial condition and operating results.
RECENTLY ISSUED ACCOUNTING STANDARDS. In November 2002, the Financial Accounting
Standards Board (FASB) issued Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 expands the disclosure requirements
related to certain guarantees, including product warranties, and requires the
Company to recognize a liability for the fair value of all guarantees issued or
modified after December 31, 2002. FIN 45 did not impact the Company's financial
position or net income.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. The Statement
affects the accounting for certain obligations that a reporting entity can or
must settle by issuing its own equity shares. It is effective for financial
instruments entered into or modified after May 31, 2003 and is effective for the
Company's previously existing financial instruments in the fourth quarter of
2003. Statement No. 150 did not impact the Company's financial position or net
income.
CONSOLIDATIONS. The consolidated financial statements include the financial
information of the Company and its wholly-owned subsidiary, The Old Evangeline
Downs Capital Corp. All intercompany transactions have been eliminated.
RECLASSIFICATIONS. Certain 2002 amounts have been reclassified to conform with
2003 presentation.
3. PROPERTY AND EQUIPMENT
The carrying value for property and equipment is as follows:
JUNE 30, DECEMBER 31,
2003 2002
----------- -------------
Land............................................. 310,000 310,000
Building and leasehold improvements.............. 1,714,905 1,822,508
Furniture, fixtures, equipment and vehicles...... $ 1,670,799 $ 1,169,935
------------- -------------
3,695,704 3,302,443
Less: Accumulated depreciation................... (2,107,953) (1,962,060)
------------- -------------
$ 1,587,751 $ 1,340,383
============= =============
Depreciation expense charged to operations for the three months ended June 30,
2003 and 2002 was $78,784 and $36,141, respectively, and for the six months
ended June 30, 2003 and 2002 was $145,895 and $100,433, respectively.
-10-
4. DEBT
The Company's debt consists of the following:
JUNE 30, DECEMBER 31,
2003 2002
------------- ------------
13% Senior Secured Notes due March 1, 2010 with Contingent Interest,
net of discount of $2,391,521, secured by certain assets of the
Company. .................................................................. $120,808,479
Loans under Loan and Security Agreement with Wells Fargo Foothill, Inc.
(formerly known as Foothill Capital Corporation), interest rate at
Prime + 2.50% (current rate of 6.5%), secured by certain assets of the
Company. .................................................................. 2,284,301
Term loan with Wells Fargo Foothill, Inc. (formerly known as Foothill
Capital Corporation), interest at Prime + 3.75%, however, at no time
shall the interest rate be lower than 7.5%, maturing the earlier of (a)
June 30, 2003 or (b) the date on which OED consummates its financing of
the Racino Project. This facility was repaid and terminated in February
2003 with proceeds of the offering of the OED Notes........................ $ 8,300,000
Note payable to 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 WET2, issued by the Company and PGP, 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.................................................................... 123,092,780 20,125,000
Less current portion.......................................................... (0) (20,125,000)
------------ ------------
Total long term debt..........................................................$123,092,780 $ 0
============ ============
-11-
On February 25, 2003, the Company completed the private placement of the Private
OED Notes and completed the exchange offer of the Private OED Notes for the
Registered OED Notes on September 10, 2003. The OED Notes bear interest at a
rate of 13% per year plus contingent interest which is payable semi-annually on
March 1 and September 1 of each year, beginning September 1, 2003. Upon
commencement of casino operations at the racino site, contingent interest, if
any, on the OED Notes will begin to accrue and shall be payable semi-annually in
an amount equal to 5% of the Company's consolidated EBITDA for the preceding two
fiscal quarters, provided that for the purposes of calculating contingent
interest, consolidated EBITDA shall not exceed $50.0 million, which limitation
is subject to reduction in proportion to any reduction in the principal amount
of OED Notes outstanding. As the contingent interest is based on results of
future operations, amounts due will be charged to interest expense in the
corresponding financial reporting period with a corresponding credit to a
current liability. The Company is permitted to defer the payment of accrued
contingent interest if our pro forma interest coverage ratio for the applicable
reference period, including contingent interest, does not exceed 1.5 to 1.0.
At the end of each six-month period after the casino portion of the racino
begins operations, the Company 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 the Company'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
the Company make an offer to purchase OED Notes with the funds in the excess
cash flow account subject to certain limitations, including that the Company
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 the Company's current and future assets
(with the exception of certain excluded assets), including the remaining unused
proceeds from the offering of the OED Notes which have been deposited into the
construction disbursement, interest reserve and completion reserve accounts. The
OED Notes, which mature on March 1, 2010, are redeemable at the Company'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 the Company 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. At June 30, 2003, the Company was in compliance with all such
covenants. 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 right to require the Company
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.
-12-
On June 24, 2003, the Company entered into a new $15.0 million senior secured
credit facility with Wells Fargo Foothill, Inc. (formerly known as Foothill
Capital Corporation) as lender (the "Senior Credit Facility"). The Company's
obligations under the Senior Credit Facility are secured by a lien on
substantially all of its and its subsidiaries' current and future assets, other
than the construction disbursement, interest reserve, completion reserve and
excess cash flow accounts and certain other excluded assets. Pursuant to the
intercreditor agreement described below, the lien on the collateral securing the
Senior Credit Facility is senior to the lien on such collateral securing the OED
Notes and the guarantees.
The Senior Credit Facility is a revolving credit facility that permits the
Company to request advances and letters of credit to finance working capital and
other general corporate needs. Under the Senior Credit Facility, the Company has
the ability to borrow up to $3.0 million at any one time outstanding during the
period before the date that the casino portion of the racino has been completed
and is open for business to the general public and construction costs for the
casino have been paid in full or, if such payments are not yet due on such date,
that sufficient funds remain in the construction disbursement account to satisfy
such payments in full (the "Phase I Completion Date"). For the period after the
Phase I Completion Date but before the second anniversary of the Phase I
Completion Date (the "Second Anniversary"), the total amount of credit that will
be available to the Company will be the lesser of $15.0 million and a specified
borrowing base (the "Borrowing Base"). For the purposes of the Senior Credit
Facility, the Borrowing Base is the lesser of 30% of the amount of certain costs
incurred by the Company in connection with the construction of the racino
project and 20% of the amount of the distressed-sale valuation of its and its
subsidiaries' operations and assets. After the Second Anniversary, the total
amount of credit that will be available to the Company will be the greater of
(i) the aggregate principal amount of all advances outstanding as of the Second
Anniversary and (ii) the lesser of $10.0 million and the Borrowing Base.
All revolving loans incurred under the Senior Credit Facility will mature on
June 24, 2006. Prior to the maturity date, funds borrowed under the Senior
Credit Facility may be borrowed, repaid and reborrowed, without premium or
penalty. The Company's borrowings under the Senior Credit Facility will bear
interest at a base rate (a Wells Fargo prime rate) plus a margin of 2.50%. The
interest rate payable under the Senior Credit Facility will increase by 2% per
annum during the continuance of an event of default. Under the Senior Credit
Facility, the Company is also required to pay to the lender a letter of credit
fee equal to 2% per annum on the daily balance of the undrawn amount of all
outstanding letters of credit and to the institution issuing a letter of credit
a fronting fee, in each case payable in arrears on a monthly basis.
The Senior Credit Facility 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 a
maximum capital expenditure requirement. At June 30, 2003 the Company was in
compliance with all such covenants.
In connection with the Company entering into the Senior Credit Facility and
concurrently with the closing of such credit facility, the trustee under the
indenture for the OED Notes (as secured party) has entered into an intercreditor
agreement with Wells Fargo Foothill, Inc. (formerly known as Foothill Capital
Corporation) as the lender under such credit facility. The intercreditor
agreement provides, among other things, that the lien securing the indebtedness
under the Senior Credit Facility is senior to the lien securing the indebtedness
under the OED Notes and the guarantees (except that the construction
disbursement, interest reserve, completion reserve and excess cash flow accounts
will only be security for the OED Notes and the guarantees).
-13-
5. 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. As of the date of the issuance of the December 31,
2002 financial statements, the potential liability of the Company related to an
adverse outcome was inherently uncertain. As such, no expense or related accrual
was recorded in the financial statements as of December 31, 2002.
In February 2003, the Company entered into a settlement agreement with the LHBPA
for $1.6 million in connection with the lawsuit. The terms of the settlement
agreement require the Company to make payments of $400,000 annually beginning in
March 2003, with additional $400,000 payments, adjusted for inflation, due in
March 2004 through 2006. As part of the settlement, a portion of these payments
will be used to supplement future purses for live horse races at the Company's
facility.
During the first quarter of 2003, the Company recorded an expense and related
accrual of $1.6 million. Of the total $1.6 million accrual, $0.4 million was
paid to the LHBPA in March 2003 and $0.4 million has been included in "Other
accrued expenses" in the "Current Liabilities" section with the remaining $0.8
million recorded under "Litigation settlement" in the "Long-term liabilities"
section of the Condensed Consolidated Balance Sheet as of June 30, 2003.
6. RELATED PARTIES
At June 30, 2003 and December 31, 2002, the Company had accrued interest
recorded of $330,209 payable to OEDA related primarily to OEDA's purchase of a
50% interest in the Company's long-term notes payable on February 15, 2002.
Interest was accrued from the date of purchase of the notes until August 30,
2002, at which time the interest in the notes was converted to members' equity
of the Company.
At June 30, 2003 and December 31, 2002, the Company had an intercompany accounts
payable to PGC of $2,945,351 and $2,484,139, respectively, related to racino
project development costs and business acquisition and licensing costs advanced
by PGC to OEDA and paid by OEDA on behalf of the Company.
At June 30, 2003 and December 31, 2002, the Company had management services fees
payable to PGC and OEDA totaling $464,644 and $224,644, respectively.
7. COMMITMENTS AND CONTINGENCIES
In February 2003, the Company entered into two separate purchase agreements to
purchase approximately 106 acres of land, which transactions are subject to the
satisfaction of certain closing conditions on or prior to December 31, 2003. The
Company paid deposits aggregating $50,000 in connection with these transactions
which are creditable against the purchase price. The Company anticipates funding
the unpaid portions of the aggregate purchase price in these transactions from a
combination of funds available in the construction disbursement account and cash
from operations.
-14-
Since the Company presently does not have a license to operate video gaming
devices at its Port Allen OTB facility, in March 2003, the Company entered into
a participation agreement (the "Participation Agreement") with an unrelated
third party to operate video gaming devices. Under the terms of this agreement,
such third party is allowed to operate 100 video gaming devices at the Port
Allen OTB facility until May 27, 2004, which agreement may be extended by the
parties for an additional one year term. Under such agreement, such third party
is entitled to receive a percentage of the "net location profit" generated by
such video gaming devices. The Company has the right to terminate this agreement
upon providing fourteen days prior written notice.
The Participation Agreement also requires that the Company, immediately upon its
receipt of a valid video gaming operators license from the Louisiana Gaming
Control Board, assume all of the operator's payment obligations with respect to
the purchase of the 100 video gaming devices installed at the Port Allen OTB
facility. The assumption of such purchase obligation would require the Company
to reimburse the operator with respect to payments made under such purchase
agreement, including a $64,364 down payment, and to assume any unpaid
installments out of the twenty four equal monthly installments of $31,250
required to be paid commencing August 1, 2003.
Neither the Company nor any of its subsidiaries are a party to, and none of its
property is the subject of, any other 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 Company's financial condition, results of
operations or cash flows.
8. SUBSEQUENT EVENT
In an effort to reduce the impact of the Louisiana Supreme Court ruling on the
sharing of video poker revenues with the LHBPA (see Note 5), the Louisiana
Legislature passed legislation during the 2003 regular session that effectively
reduces the amounts that are required to be paid to supplement purses for
horsemen. Pursuant to such legislation, which went into effect on August 15,
2003, such payments shall be in an amount equal to 20% of net device revenue,
without any deductions or credits.
-15-
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 Section
21E of the Securities Exchange Act of 1934, as amended, which involve risks and
uncertainties, including the risks and uncertainties discussed below, as well as
other risks set forth in our registration statement filed on Form S-4 on August
12, 2003 and the related prospectus, dated August 12, 2003. 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 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. In addition, we were required to make certain estimates in
determining values assigned to intangible assets in connection with the
application of purchase accounting principles to the acquisition by OEDA of OED.
In addition, contingencies are accounted for in accordance with SFAS
No. 5, "Accounting for Contingencies." SFAS No. 5 requires that we record an
estimated loss from a loss contingency when information available prior to
issuance of our financial statements indicates that it is probable that a
liability has been incurred at the date of the financial statements and the
amount of the loss can be reasonably estimated. Accounting for contingencies
such as legal matters requires us to use judgment. Many of these legal
contingencies can take years to be resolved. Generally, as the time period
increases over which the uncertainties are resolved, the likelihood of changes
to the estimate of the ultimate outcome increases. However, an adverse outcome
could have a material impact on our financial condition and operating results.
In November 2002, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN
45). FIN 45 expands the disclosure requirements related to certain guarantees,
including product warranties, and requires the Company to recognize a liability
for the fair value of all guarantees issued or modified after December 31, 2002.
FIN 45 did not impact the Company's financial position or net income.
-16-
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. The
Statement affects the accounting for certain obligations that a reporting entity
can or must settle by issuing its own equity shares. It is effective for
financial instruments entered into or modified after May 31, 2003 and is
effective for the Company's previously existing financial instruments in the
fourth quarter of 2003. Statement No. 150 did not impact the Company's financial
position or net income.
RESULTS OF OPERATIONS
The results of operations discussed below consist of the consolidated
results of operations for the period January 1 to June 30, 2002 for the
predecessor company and our consolidated results of operations for the period
January 1 to June 30, 2003 for the successor company. As a result of the
substantially different capital structure of the successor company to that of
the predecessor company, and of the application of purchase accounting in
connection with the acquisition of OED by OEDA, results of operations for the
successor company may not be comparable to the results of operations of the
predecessor company.
STATEMENT OF OPERATIONS DATA
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
------------------ ---------------- --------------- ----------------
REVENUES:
Meet 1,787,052 1,735,979 2,188,842 2,076,574
Off-track betting 1,941,944 1,915,711 4,155,675 4,129,161
Food and beverage 497,813 462,644 659,803 608,402
------------------ --------------- --------------- ----------------
Total net revenues 4,226,809 4,114,334 7,004,320 6,814,137
------------------ --------------- --------------- ----------------
EXPENSES:
Meet 1,593,274 1,473,629 2,136,080 1,889,448
Off-track betting 1,350,805 1,272,449 2,708,177 2,627,662
Food and beverage 435,953 421,221 597,205 601,323
Selling, general and administrative 453,185 328,387 799,625 565,282
Pre-opening expense 190,638 204,921
Depreciation and amortization 78,784 36,141 145,895 100,433
Management fee 120,000 240,000
Litigation settlement 1,600,000
------------------ --------------- --------------- ----------------
Total expenses 4,222,639 3,531,827 8,431,903 5,784,148
------------------ --------------- --------------- ----------------
INCOME FROM OPERATIONS 4,170 582,507 (1,427,583) 1,029,989
================== ================ =============== ================
-17-
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
REVENUES
Meet revenues increased slightly to $1.8 million for the three months
ended June 30, 2003 from $1.7 million for the three months ended June 30, 2002,
which is consistent with a 3.2% increase in live meet handle. This increase in
handle is primarily attributed to five more live racing days during the three
months ended June 30, 2003 compared to the three months ended June 30, 2002.
Meet revenues accounted for 42.3% and 42.2% of the total revenues for the three
months ended June 30, 2003 and 2002, respectively.
Off-track betting revenues remained substantially unchanged at $1.9
million for the three months ended June 30, 2003 and 2002 and accounted for
45.9% and 46.6% of the total revenues for the three months ended June 30, 2003
and 2002, respectively.
Food and beverage revenue remained substantially unchanged at $0.5
million for the three months ended June 30, 2003 and 2002 and accounted for
11.8% and 11.2% of the total revenues for the three months ended June 30, 2003
and 2002, respectively.
OPERATING EXPENSES
Meet expense increased 8.1% to $1.6 million for the three months ended
June 30, 2003 from $1.5 million for the three months ended June 30, 2002. This
increase is primarily attributed to increases in (i) insurance expense of
$63,000 and (ii) an increase in utilities of $43,000 due to an increase in
utility rates.
Off-track betting expense increased 6.2% to $1.4 million for the three
months ended June 30, 2003 from $1.3 million for the three months ended June 30,
2002. This increase is primarily attributed to start-up, operating and
advertising expenses related to the installation of 100 video poker machines at
the Port Allen OTB.
Food and beverage expense remained substantially unchanged at $0.4
million for the three months ended June 30, 2003 and 2002.
Selling, general and administrative expense increased 38.0% to $0.5
million for the three months ended June 30, 2003 from $0.3 million for the three
months ended June 30, 2002. This increase is primarily due to (i) an increase in
professional fees of approximately $71,000, (ii) an increase in political
contributions of $46,000 and (iii) an increase in management payroll of
approximately $25,000.
Pre-opening expenses of $0.2 million for the three months ended June
30, 2003 relate to payroll and other expenses incurred by us directly related to
start-up activities surrounding the racino project.
Depreciation and amortization expense increased slightly due to an
increase in depreciable assets at June 30, 2003 compared to June 30, 2002.
Management fees of $0.1 million accrued but not paid during the three
months ended June 30, 2003 relate to a management services agreement we entered
into with the PGC and OEDA.
-18-
OTHER INCOME
Interest income increased to $0.2 million for the three months ended
June 30, 2003 from $0.0 million during the three months ended June 30, 2002 due
primarily to interest earned on the net cash proceeds from the offering of the
OED Notes which were invested in interest bearing government securities.
Interest expense increased to $4.1 million for the three months ended
June 30, 2003 from $0.3 million for the three months ended June 30, 2002. This
change is primarily due to the change in our debt structure. During the three
months ended June 30, 2003, we had outstanding debt of $123.2 million bearing
interest at 13% compared to approximately $10.9 million bearing interest at
approximately 10% during the three months ended June 30, 2002.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
REVENUES
Meet revenues increased slightly to $2.2 million for the six months
ended June 30, 2003 from $2.1 million for the six months ended June 30, 2002.
This increase is primarily attributed to (i) five more live racing days during
the six months ended June 30, 2003 compared to the six months ended June 30,
2002 and (ii) commissions received from a horse sale we held during the first
quarter of 2003 (we did not host a corresponding horse sale during the six
months ended June 30, 2002). Meet revenues accounted for 31.2% and 30.5% of the
total revenues for the six months ended June 30, 2003 and 2002, respectively.
Off-track betting revenues remained substantially unchanged at
approximately $4.1 million for the six months ended June 30, 2003 and 2002 and
accounted for 59.4% and 60.6% of the total revenues for the six months ended
June 30, 2003 and 2002, respectively.
Food and beverage revenue increased slightly to $0.7 million for the
six months ended June 30, 2003 from $0.6 million for the six months ended June
30, 2002 due primarily to the addition of a new, more experienced food and
beverage director and the fact that the track clubhouse was open for five
additional live racing days. Concession revenues accounted for 9.4% and 8.9% of
the total revenues for the six months ended June 30, 2003 and 2002,
respectively.
OPERATING EXPENSES
Meet expense increased 13.1% to $2.1 million for the six months ended
June 30, 2003 from $1.9 million for the six months ended June 30, 2002. This
increase is primarily attributed to increases in (i) insurance expense of
$76,000 and (ii) an increase in payroll expenses of approximately $74,000
partially due to an increase in the number of employees to improve the services
provided to the horsemen for horse training, and (iii) an increase in utilities
of approximately $65,000 due to an increase in utility rates.
Off-track betting expense increased slightly to $2.7 million for the
six months ended June 30, 2003 from $2.6 million for the six months ended June
30, 2002. This increase is primarily attributed to start-up, operating and
advertising expenses related to the installation of 100 video poker machines at
the Port Allen OTB.
Food and beverage expense remained substantially unchanged at $0.6
million for the six months ended June 30, 2003 and 2002.
-19-
Selling, general and administrative expense increased 41.5% to $0.8
million for the six months ended June 30, 2003 from $0.6 million for the six
months ended June 30, 2002. This increase is primarily due to (i) an increase in
professional fees of approximately $125,000, primarily legal expenses related to
the LHBPA video poker settlement, (ii) an increase in political contributions of
$46,000 and (iii) an increase in management payroll of approximately $37,000.
Pre-opening expenses of $0.2 million for the six months ended June 30,
2003 relate to payroll and other expenses incurred by us directly related to
start-up activities surrounding the racino project.
Depreciation and amortization expense remained substantially unchanged
at $0.1 million for the six months ended June 30, 2003 and 2002.
Management fees of $0.2 million accrued but not paid during the six
months ended June 30, 2003 relate to a management services agreement we entered
into with PGC and OEDA.
Litigation settlement expense during the six months ended June 30, 2003
of $1.6 million relates to the litigation settlement in February 2003 of a
lawsuit brought by the Louisiana Horsemen's Benevolent and Protective
Association 1993, Inc. with respect to the sharing of video poker revenues. The
terms of the settlement agreement require the Company to make payments of
$400,000 annually beginning in March 2003, with additional $400,000 payments,
adjusted for inflation, due in March 2004 through 2006. As part of the
settlement, a portion of these payments will be used to supplement future purses
for live horse races at our facility.
OTHER INCOME
Interest income increased to $0.3 million for the six months ended June
30, 2003 from $0.0 million during the six months ended June 30, 2002 due
primarily to interest earned on the net proceeds from the OED Notes which were
deposited into interest bearing government securities.
Interest expense increased to $6.4 million for the six months ended
June 30, 2003 from $0.5 million for the six months ended June 30, 2002. This
change is primarily due to the change in our debt structure. During the period
January 1 through February 25, 2003 and the period February 26 through June 30,
2003, we had outstanding interest bearing debt of approximately $20.0 million
and $123.2 million, respectively, compared to approximately $10.9 million during
the six months ended June 30, 2002.
-20-
LIQUIDITY AND CAPITAL RESOURCES
Financing Activities
On June 24, 2003, we entered into a new $15.0 million senior secured
credit facility with Wells Fargo Foothill, Inc. (formerly known as Foothill
Capital Corporation) as lender (the "Senior Credit Facility"). The Senior Credit
Facility consists of a revolving credit facility which permits us to request
advances and letters of credit to finance working capital and other general
corporate needs. All revolving loans incurred under the Senior Credit Facility
will mature on June 24, 2006. Prior to the maturity date, funds borrowed under
the Senior Credit Facility may be borrowed, repaid and reborrowed, without
premium or penalty. Borrowings under the Senior Credit Facility will bear
interest at a base rate (a Wells Fargo prime rate) plus a margin of 2.50%. As of
June 30, 2003, we had borrowings in the amount of $2,284,301 outstanding under
the Senior Credit Facility.
Cash Flows from Operating, Investing and Financing Activities
Our cash and cash equivalents balance increased $1.4 million to $2.4
million at June 30, 2003 from $1.0 million at December 31, 2002.
Cash flows from operating activities of $0.7 million for the six months
ended June 30, 2003 consisted of net loss of $7.5 million increased by non-cash
charges of $1.1 million, principally amortization and write off of deferred
financing costs, and an increase in working capital of $7.1 million. The change
in working capital is primarily comprised of (i) an increase in accrued interest
of $5.1 million, primarily related to interest on the OED Notes, (ii) an
additional $1.2 million accrual related to the outstanding balance of the LHBPA
litigation settlement and (iii) an increase in intercompany payables of $0.7
million which relate to racino project development costs and business
acquisition and licensing costs advanced by PGC to OEDA and paid by OEDA on
behalf of the Company.
Cash flows used in investing activities for the six months ended June
30, 2003 was $92.2 million consisting of (i) an increase in restricted
cash--racino project and restricted investments of $77.8 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 $12.2 million for the
acquisition of land and construction, architecture fees and development
associated with the racino project, (iii) approximately $1.7 million in
development costs related to our acquisition and our racing and gaming licenses
and (iv) cash outflows of approximately $0.5 million used for capital
expenditures mainly related to the renovation of our OTB at Port Allen,
Louisiana.
Cash flows from financing activities for the six months ended June 30,
2003 of $93.0 million reflects the net proceeds from the offering of the OED
Notes of $120.7 million and the proceeds from borrowings under our Senior Credit
Facility of $2.3 million. These proceeds were offset by (i) principal payments
to repay outstanding debt totaling $20.1 million and (ii) deferred financing
costs paid of $9.9 million associated with the issuance of the OED Notes and the
Credit Facility. As of June 30, 2003, the Company has $2.3 million outstanding
under the Senior Credit Facility.
-21-
Approximately $24.2 million of the net proceeds from the sale of the
notes were deposited into an interest reserve account in order to pay the first
three payments of fixed interest on the notes. Therefore, although our current
earnings are not sufficient to cover our current fixed charges (which consist of
interest on the notes, including capitalized interest), we do not anticipate
satisfying interest payment obligations under the notes out of earnings from
operations until March 1, 2005, at which time we expect to have commenced
operations at the racino.
Subject to the foregoing, we believe that our cash and cash equivalents
on-hand (which includes the remaining net proceeds from the offering of the OED
Notes), available borrowings under the Senior Credit Facility, anticipated
furniture, fixtures and equipment financing of up to $16.0 million and cash
generated from operations will be sufficient to satisfy all of our working
capital and current debt service requirements. If we are unable to obtain such
furniture, fixtures and equipment financing on commercially reasonable terms or
at all or if cash and cash equivalents on-hand (including the remaining net
proceeds from the offering of the OED Notes), available borrowings under the
Senior Credit Facility and cash generated from operations at are insufficient to
meet our obligations, we may have to refinance our debt or sell some or all of
our assets (within the restrictions contained in the indenture governing the OED
Notes) to satisfy our obligations.
-22-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks which are inherent in
financial instruments which arise from transactions entered into in the ordinary
course of business. Market risk is the risk of loss from adverse changes in
market prices and interest rates. The Company does not currently utilize
derivative financial instruments to hedge market risk and does not hold or issue
derivative financial instruments for trading purposes.
The Company is exposed to interest rate risk due to changes in interest
rates with respect to its long-term variable interest rate debt borrowings under
its Senior Credit Facility. As of June 30, 2003, the Company had $2.3 million in
outstanding borrowings under its Senior Credit Facility. The Company has
estimated its market risk exposure using sensitivity analysis and has defined
its market risk exposure as the potential loss in future earnings and cash flow
with respect to interest rate exposure of its market risk sensitive instruments
assuming a hypothetical increase in market rates of interest of one percentage
point. Assuming the Company borrows the maximum amount allowed under the Senior
Credit Facility ($3.0 million as of June 30, 2003), if market rates of interest
on its variable rate debt increased by one percentage point, the estimated
consolidated market risk exposure under the Senior Credit Facility would be less
than $0.1 million.
The Company is also exposed to fair value risk due to changes in
interest rates with respect to its long-term fixed interest rate debt borrowing.
The Company's 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 the Company's fixed rate debt borrowings which are
subject to interest rate risk (dollars in millions):
FAIR
DESCRIPTION MATURITY FIXED INTEREST RATE COST VALUE
- ----------------------- ------------- ------------------- ------ ------
13% Senior Secured
Notes with Contingent
Interest March 1, 2010 13% $123.2 $124.4*
* Represents fair value as of August 6, 2003 based on information provided by an
independent investment banking firm.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Each of the Company's
Chief Executive Officer and Chief Financial Officer, after participating with
the Company's management in an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in the
Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) has concluded that, as of
June 30, 2003, 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.
-23-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to, and none of the property of the Company
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 its 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
3.1 Amended and Restated Articles of Organization of The Old
Evangeline Downs, L.L.C., dated as of February 19, 2003
(incorporated by reference to Exhibit 3.1 filed in
connection with the Company's and OED Capital's
registration statement on Form S-4 (File Nos. 333-105587
and 333-105587-01).
3.2 Amended and Restated Operating Agreement of The Old
Evangeline Downs, LLC, dated as of January 30, 2003,
between The Old Evangeline Downs, LLC and OED
Acquisition, LLC (incorporated by reference to Exhibit
3.2 filed in connection with the Company's and OED
Capital's registration statement on Form S-4 (File Nos.
333-105587 and 333-105587-01)).
3.3 First Amendment to Amended and Restated Operating
Agreement of The Old Evangeline Downs, LLC, dated as of
May 22, 2003 (incorporated by reference to Exhibit 3.3
filed in connection with the Company's and OED Capital's
registration statement on Form S-4 (File Nos. 333-105587
and 333-105587-01).
3.4 Certificate of Incorporation of The Old Evangeline Downs
Capital Corp. (incorporated by reference to Exhibit 3.4
filed in connection with the Company's and OED Capital's
registration statement on Form S-4 (File Nos. 333-105587
and 333-105587-01).
-24-
3.5 By-laws of The Old Evangeline Downs Capital Corp.
(incorporated by reference to Exhibit 3.5 filed in
connection the Company's and OED Capital's registration
statement on Form S-4 (File Nos. 333-105587 and
333-105587-01)).
31.1 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.
31.2 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.
32 Certifications of M. Brent Stevens, Chief Executive
Officer, and Natalie A. Schramm, Chief Financial
Officer, pursuant to 18 USC Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) REPORTS ON FORM 8-K
None.
-25-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, each of the registrants 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 September 17, 2003.
THE OLD EVANGELINE DOWNS, LLC
By: /S/ M. BRENT STEVENS
------------------------------------
M. Brent Stevens
Chief Executive Officer and Manager
(principal executive officer)
By: /S/ GEORGE T. PAPANIER
-------------------------------------
George T. Papanier
Chief Operating Officer
By: /S/ NATALIE A. SCHRAMM
------------------------------------
Natalie A. Schramm
Chief Financial Officer
(principal financial officer)
THE OLD EVANGELINE DOWNS CAPITAL CORP.
By: /S/ M. BRENT STEVENS
------------------------------------
M. Brent Stevens
Chief Executive Officer and Manager
(principal executive officer)
By: /S/ NATALIE A. SCHRAMM
-------------------------------------
Natalie A. Schramm
Chief Financial Officer
(principal financial officer)
-26-