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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 September 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: 333-88829
PENINSULA GAMING COMPANY, LLC/PENINSULA GAMING CORP.
(Exact name of registrant as specified in its charter)
Delaware 42-1483875
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3rd Street Ice Harbor, PO Box 1750, Dubuque, Iowa 52001-1750
(Address of principal executive offices) (Zip Code)
(563) 583-7005
(Registrant's telephone number including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. Yes [X] No [_]
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 September 30, 2003 and
December 31, 2002............................................................................3
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine
Months Ended September 30, 2003 and 2002.....................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months Ended September 30, 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........................................................................18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk..................................28
Item 4 - Controls and Procedures.....................................................................28
Part II - Other Information
Item 1 - Legal Proceedings...........................................................................29
Item 2 - Changes in Securities and Use of Proceeds...................................................29
Item 3 - Defaults Upon Senior Securities.............................................................29
Item 4 - Submission of Matters to a Vote of Security Holders.........................................29
Item 5 - Other Information...........................................................................29
Item 6 - Exhibits and Reports on Form 8-K............................................................29
Signatures................................................................................................31
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENINSULA GAMING COMPANY, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,373,609 $ 10,510,205
Restricted cash - purse settlements 58,920 840,366
Restricted investments 15,778,883
Accounts receivable, less allowance for doubtful accounts
of $66,951 and $45,648, respectively 1,966,125 275,822
Interest receivable 154,803
Inventory 136,515 138,405
Prepaid expenses 550,227 395,056
------------ ------------
Total current assets 30,019,082 12,159,854
------------ ------------
RESTRICTED CASH - RACINO PROJECT 44,750,403
------------ ------------
PROPERTY AND EQUIPMENT, NET 16,783,878 18,246,857
------------ ------------
PROPERTY AND EQUIPMENT IN ST. LANDRY PARISH 40,896,080 7,455,885
------------ ------------
OTHER ASSETS:
Deferred financing costs, net of amortization
of $4,578,058 and $3,229,782, respectively 13,295,054 4,064,987
Goodwill and other intangible assets 85,327,513 84,413,263
Deposits and other assets 731,214 106,938
------------ ------------
Total other assets 99,353,781 88,585,188
------------ ------------
TOTAL $231,803,224 $126,447,784
============ ============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,211,678 $ 1,960,200
Construction payable - St. Landry Parish 12,882,728 2,376,494
Purse settlement payable 371,451 846,778
Accrued payroll and payroll taxes 1,857,189 1,340,395
Accrued interest 3,617,349 4,763,919
Other accrued expenses 3,758,674 3,345,294
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 26,299,069 35,358,080
------------ ------------
LONG-TERM LIABILITIES:
12 1/4% Senior secured notes, net of discount 70,584,005 70,493,155
13% Senior secured notes, net of discount 120,864,997
Line of credit 13,404,301 11,250,000
Capital lease obligations 475,781 475,781
Litigation settlement 800,000 1,200,000
------------ ------------
Total long-term liabilities 206,129,084 83,418,936
------------ ------------
Total liabilities 232,428,153 118,777,016
COMMITMENTS AND CONTINGENCIES
PREFERRED MEMBERS' INTEREST, REDEEMABLE 4,000,000 4,000,000
MEMBERS' EQUITY (4,624,929) 3,670,768
------------ ------------
TOTAL $231,803,224 $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 NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------------- ----------------- ----------------- -----------------
REVENUES:
Casino $ 15,220,028 $ 12,762,874 $ 40,199,982 $ 36,291,517
Racing 3,286,851 3,191,913 9,631,368 8,104,750
Food and beverage 1,298,143 1,155,560 3,324,681 3,050,119
Other 235,585 34,513 332,742 90,444
Less promotional allowances (875,776) (707,514) (2,240,189) (1,939,388)
------------------- ----------------- ----------------- -----------------
Total net revenues 19,164,831 16,437,346 51,248,584 45,597,442
------------------- ----------------- ----------------- -----------------
EXPENSES:
Casino 5,626,589 5,065,022 16,086,392 15,315,316
Racing 2,880,293 2,522,535 7,723,388 6,209,034
Food and beverage 1,108,810 1,077,442 3,027,837 2,956,323
Boat operations 591,622 588,865 1,733,970 1,740,137
Other 291,113 7,521 335,476 22,799
Selling, general and administrative 2,989,165 2,081,157 7,966,744 5,953,694
Pre-opening expense 512,445 717,366
Referendum 136,681 136,681
Depreciation and amortization 685,667 756,990 2,334,307 2,190,432
------------------- ----------------- ----------------- -----------------
Total expenses 14,685,704 12,236,213 39,925,480 34,524,416
------------------- ----------------- ----------------- -----------------
INCOME FROM OPERATIONS 4,479,127 4,201,133 11,323,104 11,073,026
------------------- ----------------- ----------------- -----------------
OTHER INCOME (EXPENSE):
Interest income 121,136 6,706 413,802 37,776
Interest expense (including amortization
and write-off of deferred financing
costs and bond discount of $762,763 and
$372,564 for the three months ended
September 30, 2003 and 2002,
respectively, and $2,359,003 and
$928,079 for the nine months ended
September 30, 2003 and 2002,
respectively) (6,680,186) (3,049,134) (18,509,523) (8,580,758)
Gain (loss) on sale of assets 135 (104,549)
------------------- ----------------- ----------------- -----------------
Total other expense (6,558,915) (3,042,428) (18,200,270) (8,542,982)
------------------- ----------------- ----------------- -----------------
NET INCOME (LOSS) BEFORE
PREFERRED MEMBER DISTRIBUTIONS
AND MINORITY INTEREST (2,079,788) 1,158,705 (6,877,166) 2,530,044
LESS PREFERRED MEMBER DISTRIBUTIONS (90,000) (93,263) (270,544) (279,788)
LESS MINORITY INTEREST (96,744) (292,888)
------------------- ----------------- ----------------- -----------------
NET INCOME (LOSS) TO COMMON MEMBERS' INTEREST $ (2,169,788) $ 968,698 $ (7,147,710) $ 1,957,368
=================== ================= ================= =================
See notes to condensed consolidated financial statements (unaudited).
-4-
PENINSULA GAMING COMPANY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,147,710) $ 1,957,368
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 2,334,307 2,190,432
Provision for doubtful accounts 109,838 98,332
Amortization and write-off of deferred financing costs and discount
on notes 2,359,003 928,079
Loss on disposal of assets 104,549
Minority interest share of income 292,888
Changes in operating assets and liabilities:
Restricted cash - purse settlement 781,446 1,477,001
Receivables (1,954,945) (575,648)
Inventory 1,888 15,227
Prepaid expenses and other assets (780,062) (58,191)
Accounts payable 1,062,752 (436,480)
Accrued expenses (1,611,676) 2,567,598
--------------- ---------------
Net cash flows from operating activities (4,740,610) 8,456,606
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary, net of cash acquired (29,275,862)
Business acquisition and licensing costs (1,781,746) (1,045,887)
Racino project development costs (21,011,905) (4,750,352)
Restricted cash - racino project (44,750,403)
Purchase of restricted investments (23,922,971)
Sale of restricted investments 8,144,088
Purchase of property and equipment (1,690,807) (1,005,919)
Proceeds from sale of property and equipment 387,906
--------------- ---------------
Net cash flows from investing activities (84,625,838) (36,078,020)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs (11,387,462) (1,702,500)
Proceeds from senior credit facility 2,604,301 12,000,000
Proceeds from senior secured notes 120,736,000
Principal payments on notes payable (4,500,000) 4,500,000
Principal payments on senior credit facility (8,750,000) 8,450,000
Principal payments on note payable to parent (7,325,000) 7,325,000
Principal payments on long-term debt to related party (18,379)
Member distributions (1,147,987) (1,001,743)
--------------- ---------------
Net cash flows from financing activities 90,229,852 29,552,378
--------------- ---------------
NET INCREASE IN CASH 863,404 1,930,964
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,510,205 7,523,652
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,373,609 $ 9,454,616
=============== ===============
SUPPLEMENTAL DISCLOSURES OF NON-CASH
ACTIVITIES:
Exchange of Private OED Notes for Registered OED Notes $ 123,200,000
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"), a Delaware limited liability
company, owns and operates 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 directly 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 (the "Peninsula Notes"), and (ii) OED Acquisition, LLC, a Delaware limited
liability company ("OEDA"), and the parent company of The Old Evangeline Downs,
LLC ("OED"), a Louisiana limited liability company that currently owns and
operates a horse track in Lafayette, Louisiana and is constructing a new casino
and racetrack facility in St. Landry Parish, Louisiana (the "racino project").
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 (the "OED
Notes").
OED's results of operations and cash flows for the nine months ended September
30, 2003 and the period February 15, 2002 (date of acquisition) to September 30,
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. On August 31, 2002, OED became an indirect
wholly-owned subsidiary of the Company. 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.
RACINO DEVELOPMENT
In order to provide funding for the racino project and to repay certain then
existing indebtedness, on February 25, 2003, OED completed a private placement
of $123.2 million of its 13% Senior Secured Notes due 2010 with Contingent
Interest (the "Private OED Notes"). On September 10, 2003, OED exchanged the
Private OED Notes for notes registered with the Securities and Exchange
Commission otherwise identical in all respects to the Private OED Notes (the
"Registered OED Notes", and together with the Private OED Notes, the "OED
Notes").
OED 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 $93.1 million (which includes costs of approximately $3.0 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
-6-
in two phases. The first phase involves the construction of the casino and
related casino amenities, at a total cost of $73.4 million (net of costs
incurred prior to the issue date of the Private OED Notes) and the second phase
involves the construction of the horse racetrack and related facilities for a
total cost of $19.7 million. OED anticipates completing the first phase of the
racino project and commencing operations at the casino portion of the racino by
the end of 2003 and has already commenced construction of a portion of the
related facilities comprising the second phase of the racino project. OED
expects to begin scheduling live racing meets at the racino in December 2004, at
which time it expects to cease operations at its existing horse racetrack.
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 OED's $15.0 million senior secured credit facility,
(iii) available borrowings under OED's $16.0 million furniture, fixtures and
equipment financing facility 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, the senior credit facility and the
furniture, fixtures and equipment financing facility.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS
RESTRICTED INVESTMENTS. As of September 30, 2003, OED had approximately $15.8
million 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 payments of fixed
interest on the OED Notes due March 1, 2004 and September 1, 2004 in accordance
with the terms of the 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").
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 Cash Collateral and Disbursement
Agreement. As of September 30, 2003, OED had $39.5 million in cash equivalents
deposited in a construction disbursement account, $0.2 million in cash
equivalents deposited in an interest reserve account that will be used toward
payment of fixed interest on the OED Notes and $5.0 million 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.
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 September 30, 2003 and December 31, 2002 was $1.3 million and
$0.1 million, respectively.
BUSINESS ACQUISITION AND LICENSING COSTS. As of September 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):
-7-
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 OED'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 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 OED's racing or gaming licenses due to
regulatory matters, changes to OED's tradename or the way OED's tradename is
used in connection with its business and regulatory changes that could adversely
affect OED'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 September 30, 2003 and December 31,
2002, OED had $12.9 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 OED's off-track betting parlor (an "OTB") in Port Allen,
Louisiana. OED 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 OED 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 are now in
an amount equal to 20% of net device revenue without any deductions or credits.
SELLING, GENERAL AND ADMINISTRATIVE - 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. As all
significant contingencies surrounding the agreement were met during the third
quarter, the Company expensed the remaining unpaid contribution of $350,000
during the three months ended September 30, 2003. Such expense is included in
"Selling, general and administrative" expenses in the Condensed Consolidated
Statement of Operations.
-8-
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.
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 direct and indirect subsidiaries
Peninsula Gaming Corp., OEDA, OED and The Old Evangeline Downs Capital Corp. All
significant intercompany transactions have been eliminated.
RECLASSIFICATIONS--Certain 2002 amounts have been reclassified to conform with
2003 presentation.
-9-
3. PROPERTY AND EQUIPMENT, NET
Property and equipment of the Company and its subsidiaries used in existing
operations at September 30, 2003 and December 31, 2002 are summarized as
follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- --------------
Land $ 1,110,000 $ 1,110,000
Buildings and improvements 8,111,597 8,387,134
Riverboats and improvements 8,303,242 8,300,776
Furniture, fixtures and equipment 8,455,343 7,942,095
Computer equipment 1,054,067 962,700
Vehicles 148,615 130,753
Equipment held under capital lease obligations 704,527 704,527
--------------- ---------------
Subtotal 27,887,391 27,537,985
Accumulated depreciation (11,103,513) (9,291,128)
--------------- ---------------
Property and equipment, net $ 16,783,878 $ 18,246,857
=============== ===============
4. PROPERTY AND EQUIPMENT IN ST. LANDRY PARISH
Property and equipment in St. Landry Parish related to the development of the
racino project at September 30, 2003 and December 31, 2002 are summarized as
follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- ---------------
Land and land improvements $ 7,310,565 $ 5,319,633
Building 33,213,739 2,136,252
Furniture, fixtures and equipment 371,776
--------------- ---------------
Property and equipment at St. Landry Parish $ 40,896,080 $ 7,455,885
=============== ===============
5. DEBT
The outstanding debt of the Company and its subsidiaries consists of the
following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------------- ---------------
12 1/4% Senior Secured Notes of the Company due July 1, 2006,
net of discount of $415,995 and $506,845, respectively,
secured by certain assets of the Company. $ 70,584,005 $ 70,493,155
13% Senior Secured Notes of OED due March 1, 2010 with
Contingent Interest, net of discount of $2,335,003, secured by
certain assets of OED. 120,864,997
Loan and Security Agreement of the Company with Wells Fargo
Foothill, Inc., 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 certain assets of the Company. 11,400,000 11,850,000
-10-
$15.0 million Loan and Security Agreement of OED with
Wells Fargo Foothill, Inc., interest rate at Prime + 2.50%
(current rate of 6.5%), secured by certain assets of OED. 2,604,301
$16.0 million Loan and Security Agreement of OED with
Wells Fargo Foothill, Inc., interest rate at Prime + 2.50%
(current rate of 6.5%), secured by certain assets of OED. 0
Term loan under Loan and Security Agreement of OED with
Foothill Capital Corporation. This facility was repaid and
terminated with proceeds of the offering of the OED Notes
in February 2003. 8,300,000
Note payable to PGP, issued by OEDA. 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. Obligations
under this note were repaid in February 2003 with proceeds
of the offering of the OED Notes. 4,500,000
--------------- ---------------
Total debt 205,453,303 102,468,155
--------------- ---------------
Less current portion (600,000) (20,725,000)
--------------- ---------------
Total long term debt $ 204,853,303 $ 81,743,155
=============== ===============
On July 15, 1999, the Company completed a private placement of $71 million
aggregate principal amount of Peninsula Notes. The Peninsula Notes bear interest
at a rate of 12 1/4% per year which is payable semi-annually oN January 1 and
July 1 of each year. The Peninsula Notes are secured by all of our current and
future tangible and intangible assets (with the exception of certain excluded
assets). OEDA is an unrestricted subsidiary of the Company under the Peninsula
Notes pursuant to the indenture governing the Peninsula Notes, and therefore is
not an obligor with respect to the Peninsula Notes and does not otherwise
provide credit support with respect to the Company's payment obligations under
such notes. 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. At September 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
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 governing the Peninsula Notes),
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.
-11-
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, beginning September 1, 2003. Contingent interest will accrue on the
OED Notes beginning 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. Neither the Company nor any of
its direct subsidiaries is an obligor under the OED Notes or is required to
provide credit support with respect to OED's payment obligations thereunder.
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
subject to certain limitations, including 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 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 OED's
construction disbursement, interest reserve and completion reserve accounts. 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. At September 30,
2003, OED 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 governing the OED Notes), each holder of
OED Notes will have the 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.
In November 2003, the Company entered into a fourth amendment to its senior
secured credit facility with Wells Fargo Foothill, Inc. dated February 23, 2001
(the "PGC Credit Facility"). Under the terms of the amendment, the term of the
PGC Credit Facility was extended by one year to March 12, 2006 and the minimum
interest rate was reduced from 8.5% to 5.5%. In addition, if the Company
permanently reduces its outstanding borrowings to an amount equal to or less
than $10.0 million on or before January 24, 2004, the minimum interest rate will
be reduced to 5.0%. At September 30, 2003, the Company had outstanding
borrowings of $11.4 million under the PGC Credit Facility.
-12-
The obligations of the Company under the PGC Credit Facility are senior to the
Company's obligations under the Peninsula Notes. The PGC 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 the maintenance of certain
financial ratios that limit our ability to make distributions and incur debt. At
September 30, 2003 and December 31, 2002, the Company was in compliance with all
such covenants.
On June 24, 2003, OED entered into a new $15.0 million senior secured credit
facility with Wells Fargo Foothill, Inc. as lender (the "OED Credit Facility").
The OED Credit Facility was amended by the parties thereto on September 22, 2003
(the "OED Credit Facility Amendment"). OED's obligations under the OED 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 as well as a pledge by OEDA of the capital stock of OED.
Pursuant to the intercreditor agreement described below, the lien on the
collateral securing the OED Credit Facility is senior to the lien on such
collateral securing the OED Notes.
The OED Credit Facility consists of a revolving credit facility which permits
OED to request advances and letters of credit to finance working capital and
other general corporate needs. Pursuant to the OED Credit Facility Amendment,
OED has the ability to borrow up to $6.5 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 OED will be (i) prior to the date in which the lender
assigns at least an aggregate amount of $10.0 million of obligations under the
OED Credit Facility and the OED FF&E Facility (as defined below) (the
"Syndication Date"), $9.0 million and (ii) from and after the Syndication Date,
the lesser of $15.0 million and a specified borrowing base (the "Borrowing
Base"). For the purposes of the OED Credit Facility, the Borrowing Base is the
lesser of 30% of the amount of certain costs incurred by OED 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 OED will be the greater of (i) (a) prior to the Syndication Date, $9.0
million and (b) from and after the Syndication Date, the lesser of $10.0 million
and the Borrowing Base or (ii) the aggregate principal amount of all advances
outstanding as of the Second Anniversary. At September 30, 2003, OED had
outstanding borrowings of $2.6 million and outstanding letters of credit of $3.2
million under the OED Credit Facility.
All revolving loans and letters of credit issued under the OED Credit Facility
will mature on June 24, 2006. Prior to the maturity date, funds borrowed under
the OED Credit Facility may be borrowed, repaid and reborrowed, without premium
or penalty. OED's borrowings under the OED 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 OED Credit Facility will increase by 2% per annum during the
continuance of an event of default. Under the OED Credit Facility, OED 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 OED 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 September 30, 2003, OED was in compliance with all
such covenants.
-13-
Concurrently with the closing of the OED Credit Facility, the trustee under the
indenture for the OED Notes (as secured party) entered into an intercreditor
agreement with Wells Fargo Foothill, Inc. as the lender under such credit
facility, providing, among other things, that the lien securing the indebtedness
under the OED Credit Facility is senior to the lien securing the indebtedness
under the OED Notes (except that the construction disbursement, interest
reserve, completion reserve and excess cash flow accounts are security only for
the OED Notes).
On September 22, 2003, OED entered into a new $16.0 million senior secured
credit facility with Wells Fargo Foothill, Inc. as lender (the "OED FF&E
Facility"). Under the OED FF&E Facility, the lender agrees to make a series of
term loans, up to a maximum amount of $16.0 million, to finance the purchase of
gaming equipment and other furniture, fixtures and equipment. OED's obligations
under the OED FF&E Facility are, subject to certain limitations, secured by a
first priority lien on all of the furniture, fixtures and equipment, and all
proceeds and products thereof. At September 30, 2003, OED had no loans
outstanding under the OED FF&E Facility.
Loans under the OED FF&E Facility shall be repayable in 48 equal monthly
installments of principal, commencing on March 1, 2004, and continuing on the
first day of each month thereafter until the unpaid balance of all loans are
paid in full. The outstanding principal balance and all accrued and unpaid
interest under all loans shall also be due and payable in full on March 1, 2008.
Once borrowed, all loans may be prepaid in whole or in part without penalty or
premium at any time during the term of this agreement. Amounts borrowed and
repaid may not be reborrowed. OED's borrowings under the OED FF&E Facility will
bear interest at a base rate (a Wells Fargo prime rate) plus a margin of 2.50%,
but at no time shall the interest rate be less than 6%. The interest rate
payable under the OED FF&E Facility will increase by 2% per annum during the
continuance of an event of default.
The OED FF&E 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 September 30, 2003 OED was in compliance with all
such covenants.
6. COMMITMENTS AND CONTINGENCIES
Since OED presently does not have a license to operate video gaming devices at
its Port Allen OTB facility, in March 2003, OED 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. OED has the right to terminate this agreement upon providing
fourteen days prior written notice.
The Participation Agreement also requires that OED, 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 OED 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.
-14-
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.
7. SUBSEQUENT EVENTS
In November 2003, the Company and Wells Fargo Foothill, Inc. amended the PGC
Credit Facility. Under the terms of the amendment, the term of the PGC Credit
Facility was extended by one year to March 12, 2006 and the minimum interest
rate was reduced from 8.5% to 5.5%. In addition, if the Company permanently
reduces its outstanding borrowings to an amount equal to or less than $10.0
million on or before January 24, 2004, the minimum interest rate will be reduced
to 5.0%.
In October 2003, OED executed two separate purchase agreements to purchase
approximately 106 acres of land adjacent to the new racino. Under the first
purchase agreement, OED purchased approximately 13 acres for a total purchase
price of $550,000. The source of funds for the purchase price included a $50,000
deposit paid from the construction disbursement account in February 2003 and
$500,000 from the construction disbursement account paid on October 24, 2003.
Under the second purchase agreement, OED purchased an additional 93 acres,
divided into seven approximately equal parcels, for a total purchase price of
$3,850,000. The purchase price under this second purchase agreement was financed
by the seller with OED issuing a $3,850,000 note payable to the seller. The note
is payable in seven equal annual installments of $550,000 beginning October 24,
2004 and bears interest at a rate of 4.75% of the unpaid balance due monthly in
arrears on the fifth day of each month beginning on December 5, 2003. The note
is collateralized by a mortgage on the property. Simultaneously with the payment
of each $550,000 annual installment discussed above, seller agrees to release
one of the remaining parcels from the mortgage.
8. 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 NET REVENUES
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2003 2002 2003 2002
----------- ---------- ---------- -----------
Diamond Jo (1) $ 15,451 $ 12,832 $ 40,531 $ 36,547
Evangeline Downs (2) 3,714 3,605 10,718 9,050
----------- ---------- ---------- -----------
Total $ 19,165 $ 16,437 $ 51,249 $ 45,597
-15-
ADJUSTED EBITDA (3) ADJUSTED EBITDA (3)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2003 2002 2003 2002
------------ ----------- ----------- -----------
Diamond Jo (1) $ 5,738 $ 4,663 $ 13,672 $ 12,121
Evangeline Downs (2) (61) 432 703 1,279
------------ ----------- ----------- -----------
Total 5,677 5,095 14,375 13,400
NET INCOME TO COMMON NET INCOME TO COMMON
MEMBERS' INTEREST MEMBERS' INTEREST
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2003 2002 2003 2002
------------ ----------- ----------- -----------
Diamond Jo (1) $ 2,330 $ 1,082 $ 3,023 $ 1,875
Evangeline Downs (2) (4,500) (113) (10,171) 82
------------ ----------- ----------- -----------
Total $ (2,170) $ 969 $ (7,148) $ 1,957
TOTAL ASSETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
Diamond Jo $ 82,973 $ 83,706
Evangeline Downs 148,830 42,742
------------- -------------
Total $ 231,803 $ 126,448
- -------------
(1) Reflects results of operations of the Diamond Jo for the nine months
ended September 30, 2003 and 2002.
(2) Reflects results of operations of the Evangeline Downs for the nine
months ended September 30, 2003 and the period February 15, 2002 (date
of acquisition) to September 30, 2002.
(3) Adjusted EBITDA is defined as net income to common members' interest,
plus racino project pre-opening expenses, referendum expenses,
depreciation and amortization, net interest expense, loss on disposal
of assets, preferred member distributions and minority interest.
Management believes that Adjusted EBITDA is useful 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 Adjusted 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 Adjusted EBITDA to investors, it believes that
presenting this non-GAAP financial measure provides consistency in its
financial reporting. However, Adjusted 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
Adjusted EBITDA is not a measurement determined in accordance with
accounting principles generally accepted in the United States and is
thus susceptible to varying calculations, Adjusted EBITDA may not be
comparable to other similarly titled measures of other companies.
-16-
The following table reconciles the Company's Adjusted EBITDA to
net income to common members' interest for each period presented
(in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
-------- -------- -------- --------
EBITDA $5,677 $ 5,095 $ 14,375 $ 13,400
Less:
Racino project pre-opening expenses (512) (717)
Referendum expenses (137) (137)
Depreciation and amortization (686) (757) (2,334) (2,190)
Diamond Jo interest expense, net (2,711) (2,741) (8,165) (8,060)
Evangeline Downs interest
expense, net (3,848) (301) (9,931) (483)
Loss on disposal of assets (105)
Preferred member distributions (90) (93) (271) (280)
Minority interest (97) (293)
-------- --------- --------- ---------
Net income to common members' interest $(2,170) $ 969 $ (7,148) $ 1,957
-17-
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 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. 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.
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.
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 and nine months ended September 30, 2003 and 2002 and the results of
operations of Evangeline Downs in Lafayette, Louisiana for the three and nine
months ended September 30, 2003, the three months ended September 30, 2002 and
the period February 15, 2002 through September 30, 2002.
-18-
Statement of Operations Data
DIAMOND JO EVANGELINE DOWNS
THREE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
2003 2002 2003 2002
------------- ------------- ------------ -------------
Revenues:
Casino $ 15,220,028 $ 12,762,874
Racing $ 3,286,851 $ 3,191,913
Food and beverage 871,464 742,517 426,679 413,043
Other 235,585 34,513
Less promotional allowances (875,776) (707,514)
------------- ------------- ------------- -------------
Net revenues 15,451,301 12,832,390 3,713,530 3,604,956
------------- ------------- ------------- -------------
Expenses:
Casino 5,626,589 5,065,022
Racing 2,880,293 2,522,535
Food and beverage 740,285 742,093 368,525 335,349
Boat operations 591,622 588,865
Other 291,113 7,521
Selling, general and
administrative 2,464,085 1,765,630 525,080 315,527
Pre-opening expense 512,445
Referendum 136,681
Depreciation and
amortization 606,584 700,619 79,083 56,371
------------- ------------- ------------- -------------
Total expenses 10,320,278 9,006,431 4,365,426 3,229,782
------------- ------------- ------------- -------------
Income from operations $ 5,131,023 $ 3,825,959 $ (651,896) $ 375,174
-19-
DIAMOND JO EVANGELINE DOWNS
NINE MONTHS ENDED PERIOD FEBRUARY 15
NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, TO SEPTEMBER 30,
2003 2002 2003 2002
--------------- -------------- ----------------- ------------------
Revenues:
Casino $ 40,199,982 $ 36,291,517
Racing $ 9,631,368 $ 8,104,750
Food and beverage 2,238,199 2,104,919 1,086,482 945,200
Other 332,742 90,444
Less promotional allowances (2,240,189) (1,939,388)
--------------- -------------- ----------------- ---------------
Net revenues 40,530,734 36,547,492 10,717,850 9,049,950
--------------- -------------- ----------------- ---------------
Expenses:
Casino 16,086,392 15,315,316
Racing 7,723,388 6,209,034
Food and beverage 2,060,945 2,095,591 966,892 860,732
Boat operations 1,733,970 1,740,137
Other 335,476 22,799
Selling, general and
administrative 6,642,039 5,252,513 1,324,705 701,181
Pre-opening expense 717,366
Referendum 136,681
Depreciation and
amortization 2,109,329 2,065,774 224,978 124,658
--------------- -------------- ----------------- ---------------
Total expenses 28,968,151 26,628,811 10,957,329 7,895,605
--------------- -------------- ----------------- ---------------
Income from operations $ 11,562,583 $ 9,918,681 $ (239,479) $ 1,154,345
Three months ended September 30, 2003 Compared to Three months
ended September 30, 2002
Net revenues increased 16.6% to $19.2 million for the three months
ended September 30, 2003 from $16.4 million for the three months ended September
30, 2002. The majority of this increase is due to an increase in Diamond Jo's
slot revenue of 19.5%, or $2.2 million, for the three months ended September 30,
2003 compared to the three months ended September 30, 2002, primarily due to an
increase in coin-in of 16.1% over the same period. We believe this increase in
slot volume is largely attributed to (i) the recent economic development in the
Port of Dubuque, where the Diamond Jo is located, which includes the opening of
a new riverwalk and related amenities, the construction of a new riverfront
hotel, which includes an indoor water park, the construction of the National
Mississippi River Museum and Aquarium and the construction of our new outdoor
entertainment venue featuring nationally recognized musicians weekly from June
through September, (ii) a decrease in competition in the Eastern
-20-
Iowa market due to the temporary closing of a Native American casino
approximately 125 miles southwest of the Diamond Jo and (iii) internal factors
such as targeted promotions to capitalize on opportunities related to the Port
of Dubuque development and the reduced competition noted above as well as our
continued focus on targeted players club promotions and maintenance of our slot
mix, which includes the addition of 31 nickel slot machines at the Diamond Jo.
The remaining increase in net revenues is primarily due to an increase in table
games revenue of 17.6%, or $0.3 million, for the three months ended September
30, 2003 compared to the three months ended September 30, 2002, primarily due to
an 18.8% increase in table games drop over the same period.
Casino gaming win in the Dubuque market increased 16.1% to $27.3
million for the three months ended September 30, 2003 from $23.5 million for the
three months ended September 30, 2002. We believe this increase was primarily
due to the Company's ability to capitalize on the recent economic development in
the Port of Dubuque, a decrease in competition in the Eastern Iowa market,
strategic use of targeted players club promotions and a continued focus on
maintenance of our slot mix as noted above combined with a continued focus by
operators at the Greyhound Park on maintenance of their slot mix during such
period as well as benefiting from the reduced competition in the Eastern Iowa
market as noted above. Our share of the Dubuque market casino gaming win
increased to 55.8% for the three months ended September 30, 2003 from 54.3% for
the three months ended September 30, 2002 which we believe is due to our ability
to capitalize on the factors noted above. Our casino revenues increased 19.3% to
$15.2 million for the three months ended September 30, 2003 from $12.8 million
for the three months ended September 30, 2002. This percentage increase is the
second highest percentage increase in casino revenues for all thirteen casinos
in the State of Iowa as reported to the Iowa Racing and Gaming Commission for
the three months ended September 30, 2003 compared to the three months ended
September 30, 2002. This increase is due to a 19.5% increase in slot revenues
and a 17.6% increase in table game revenues as discussed above. Casino revenues
were derived 87.7% from slot machines and 12.3% from table games for the three
months ended September 30, 2003 compared to 87.6% from slot machines and 12.4%
from table games for the three months ended September 30, 2002. The number of
gaming positions at the Diamond Jo at September 30, 2003 was 858 compared to 848
at September 30, 2002. This increase is due to the addition of 31 slot machines
offset by a decrease in the number of table games positions resulting from the
elimination of two blackjack tables 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 17.7% to $193 for the three months ended September
30, 2003 from $164 for the three months ended September 30, 2002. Admissions to
the casinos in the Dubuque market increased 11.0% to 615,000 for the three
months ended September 30, 2003 from 554,000 for the three months ended
September 30, 2002. Our share of the Dubuque market casino admissions increased
to 51.0% for the three months ended September 30, 2003 from 49.5% for the three
months ended September 30, 2002. Our admissions at the Diamond Jo for the three
months ended September 30, 2003 increased 14.6% to 314,000 from 274,000 for the
three months ended September 30, 2002. For the three months ended September 30,
2003 our casino win per admission at the Diamond Jo increased 4.0% to $48.48
from $46.60 for the three months ended September 30, 2002.
Racing revenues at OED increased 3.0% to $3.3 million for the three
months ended September 30, 2003 from $3.2 million for the three months ended
September 30, 2002 due primarily to an increase in net video poker revenues at
OED's Port Allen OTB of $0.1 million resulting from OED's Port Allen OTB
facility renovation and the installation of 100 video poker machines during the
second quarter of 2003.
Net food and beverage revenues, other revenues and promotional
allowances increased $0.2 million during the three months ended September 30,
2003 compared to the three months ended September 30, 2002 due primarily to
revenues from our new outdoor entertainment venue as discussed above.
-21-
Casino operating expenses increased 11.1% to $5.6 million for the three
months ended September 30, 2003 from $5.1 million for the three months ended
September 30, 2002 due primarily to an increase in gaming taxes of $0.5 million
associated with our increased casino revenues. Racing expenses increased 14.2%
to $2.9 million for the three months ended September 30, 2003 from $2.5 million
for the three months ended September 30, 2002 due primarily to (i) operating and
advertising expenses of $243,000 related to the addition of 100 new video gaming
devices at OED's newly renovated OTB in Port Allen, Louisiana, (ii) an increase
in insurance expense at OED of $88,000 and (iii) an increase in utility expenses
at OED of $27,000 due to an increase in local utility rates.
Food and beverage expenses remained substantially unchanged at $1.1
million for the three months ended September 30, 2003 and 2002. Boat operation
expenses were substantially unchanged at $0.6 million for the three months ended
September 30, 2003 and 2002. Other expenses increased $0.3 million due to costs
associated with our new outdoor entertainment venue as discussed above.
Selling, general and administrative expenses increased to $3.0 million
for the three months ended September 30, 2003 from $2.1 million for the three
months ended September 30, 2002. This increase was due to (i) an increase in
donations of $350,000 related to a charitable giving agreement with an Iowa
non-for-profit organization (ii) an increase in management compensation of
$303,000, (iii) an increase in marketing expenses of $75,000 as part of an
effort to capitalize on the opportunities related to the recent development in
the Port of Dubuque and the temporary closing of an Eastern Iowa Native American
gaming facility as discussed above, (iv) an increase in professional fees at OED
of approximately $50,000 and (v) an increase in insurance expense at the Diamond
Jo of approximately $50,000. Pre-opening expenses of $0.5 million for the three
months ended September 30, 2003 relate to payroll and other expenses incurred by
OED with respect to start-up activities surrounding the racino project.
Referendum costs of $0.1 million during the three months ended September 30,
2002 relate to various advertising and promotional expenses to promote the
approval of continued gaming on riverboats in Dubuque County in 2002.
Depreciation and amortization expenses decreased 9.4% to $0.7 million
for the three months ended September 30, 2003 from $0.8 million for the three
months ended September 30, 2002. This decrease is due to a large number of slot
machines reaching the end of their depreciable lives during the second quarter
of 2003. As a result, no depreciation was expensed during the three months ended
September 30, 2003 for these slot machines. In comparison, approximately $0.1
million was charged to depreciation expense related to these slot machines
during the three months ended September 30, 2002. 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 115.6%
to $6.6 million for the three months ended September 30, 2003 from $3.0 million
for the three months ended September 30, 2002. This increase is primarily due to
an increase in interest expense at OED of $3.6 million primarily associated with
interest on the OED Notes.
Nine months ended September 30, 2003 Compared to Nine months ended
September 30,2002
Net revenues increased 12.4% to $51.2 million for the nine months ended
September 30, 2003 from $45.6 million for the nine months ended September 30,
2002. The majority of this increase is due to an increase in Diamond Jo's slot
revenue of 10.2%, or $3.2 million for the nine months ended September 30, 2003
compared to the nine months ended September 30, 2002, primarily due to an
increase in coin-in of 8.5% over the same period. We believe this increase in
slot volume is largely attributed to (i) the recent economic development in the
Port of Dubuque, where the Diamond Jo is located, which includes
-22-
the opening of a new riverwalk and related amenities, the construction of a new
riverfront hotel, which includes an indoor water park, the construction of the
National Mississippi River Museum and Aquarium and the construction of our new
outdoor entertainment venue featuring nationally recognized musicians weekly
from June through September, (ii) a decrease in competition in the Eastern Iowa
market due to the temporary closing of a Native American casino approximately
125 miles southwest of the Diamond Jo and (iii) internal factors such as
targeted promotions to capitalize on opportunities related to the Port of
Dubuque development and reduced competition noted above as well as our continued
focus on targeted players club promotions and maintenance of our slot mix, which
includes the addition of 31 nickel slot machines at the Diamond Jo. Our increase
in net revenues is also due to an increase in racing revenues at OED of $1.5
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
nine months ended September 30, 2002 only include seven and one-half months of
OED operations compared to a full nine months of operations during the nine
months ended September 30, 2003, as well as an increase in video poker revenues
at OED's newly renovated OTB in Port Allen, Louisiana. The remaining increase in
net revenues is primarily due to an increase in table games revenue of 15.2%, or
$0.7 million, for the nine months ended September 30, 2003 compared to the nine
months ended September 30, 2002, primarily due to a 2.1 percentage point
increase in our table game hold percentage and a 3.4% increase in table games
drop over the same period and an increase in other revenues of $0.2 million
associated with our new outdoor entertainment venue as discussed above.
Casino gaming win in the Dubuque market increased 9.2% to $72.9 million
for the nine months ended September 30, 2003 from $66.7 million for the nine
months ended September 30, 2002. We believe this increase was primarily due to
the Company's ability to capitalize on the recent economic development in the
Port of Dubuque, a decrease in competition in the Eastern Iowa market, strategic
use of targeted players club promotions and a continued focus on maintenance of
our slot mix as noted above combined with a continued focus by operators at the
Greyhound Park on maintenance of their slot mix during such periods as well as
benefiting from the reduced competition in the Eastern Iowa market as noted
above. Our share of the Dubuque market casino gaming win increased to 55.2% for
the nine months ended September 30, 2003 from 54.4% for the nine months ended
September 30, 2002. Our casino revenues increased 10.8% to $40.2 million for the
nine months ended September 30, 2003 from $36.3 million for the nine months
ended September 30, 2002. This percentage increase is the second highest
percentage increase in casino revenues for all thirteen casinos in the State of
Iowa as reported to the Iowa Racing and Gaming Commission for the nine months
ended September 30, 2003 compared to the nine months ended September 30, 2002.
This increase is due to a 10.2% increase in slot revenues and a 15.2% increase
in table game revenues as discussed above. Casino revenues were derived 87.3%
from slot machines and 12.7% from table games for the nine months ended
September 30, 2003 compared to 87.8% from slot machines and 12.2% from table
games for the nine months ended September 30, 2002. Consistent with an increase
in casino revenue, our casino win per gaming position per day at the Diamond Jo
increased 10.6% to $172 for the nine months ended September 30, 2003 from $156
for the nine months ended September 30, 2002. Admissions to the casinos in the
Dubuque market increased 5.5% to 1,580,000 for the nine months ended September
30, 2003 from 1,498,000 for the nine months ended September 30, 2002. For the
nine months ended September 30, 2003, our share of the Dubuque market casino
admissions increased to 50.4% from 50.1% for the nine months ended September 30,
2002. Our admissions at the Diamond Jo for the nine months ended September 30,
2003 increased 6.3% to 797,000 from 750,000 for the nine months ended September
30, 2002. For the nine months ended September 30, 2003 our casino win per
admission at the Diamond Jo increased 4.3% to $50.46 from $48.40 for the nine
months ended September 30, 2002.
-23-
Racing revenues at OED for the nine months ended September 30, 2003
were $9.6 million compared to $8.1 million for the period February 15, 2002
(date of acquisition) to September 30, 2003. The increase in racing revenues is
directly related to the timing of the acquisition of OED as discussed above and
an increase in net video poker revenues of $0.1 million resulting from OED's
Port Allen OTB facility renovation and the installation of 100 video poker
machines during the second quarter of 2003.
Net food and beverage revenues, other revenues and promotional
allowances increased $0.2 million during the nine months ended September 30,
2003 compared to the nine months ended September 30, 2002 due primarily to
revenues from our new outdoor entertainment venue as discussed above.
Casino operating expenses increased 5.0%, or $0.8 million, to $16.1
million for the nine months ended September 30, 2003 from $15.3 million for the
nine months ended September 30, 2002 due primarily to an increase in gaming
taxes of $0.8 million associated with our increased casino revenues. Racing
expenses increased 24.4% to $7.7 million for the nine months ended September 30,
2003 from $6.2 million for the nine months ended September 30, 2002 due
primarily to (i) timing of the acquisition of OED in 2002 as discussed above
(ii) operating and advertising expenses of $292,000 related to the addition of
100 new video gaming devices at OED's newly renovated OTB in Port Allen,
Louisiana, (iii) an increase in insurance expense at OED of $164,000 and (iv) an
increase in utility expenses at OED of $92,000 due to an increase in local
utility rates. Food and beverage expenses remained substantially unchanged at
$3.0 million for the nine months ended September 30, 2003 and 2002. Boat
operation expenses were substantially unchanged at $1.7 million for the nine
months ended September 30, 2003 and 2002. Other expenses increased $0.3 million
due to costs associated with our new outdoor entertainment venue as discussed
above.
Selling, general and administrative expenses increased to $8.0 million
for the nine months ended September 30, 2003 from $6.0 million for the nine
months ended September 30, 2002. This increase was due to (i) an increase in
management compensation of $813,000, (ii) an increase in selling, general and
administrative expenses at OED of $492,000 which is primarily due to the timing
of the acquisition of OED (as discussed above) and an increase in professional
fees, (iii) an increase in donations of $350,000 related to a charitable giving
agreement with an Iowa non-for-profit organization (iv) an increase in insurance
expense at the Diamond Jo of $156,000 and (v) an increase in marketing and group
sales expenses of approximately $134,000. Pre-opening expenses of $0.7 million
for the nine months ended September 30, 2003 relate to payroll and other
expenses incurred by OED with respect to start-up activities surrounding the
racino project. Referendum costs of $0.1 million during the nine months ended
September 30, 2002 relate to various advertising and promotional expenses to
promote the approval of continued gaming on riverboats in Dubuque County in
2002.
Depreciation and amortization expenses increased 6.6% to $2.3 million
for the nine months ended September 30, 2003 from $2.2 million for the nine
months ended September 30, 2002. This increase is due to an increase in
depreciable property and equipment of approximately $1.5 million during the
twelve months ended September 30, 2003, the majority of which were 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 111.8% to $18.1 million for the nine months ended September
30, 2003 from $8.5 million for the nine months ended September 30, 2002. This
increase is due to (i) an increase in net interest expense at OED of $9.4
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
Wells Fargo Foothill, Inc. (formerly Foothill Capital Corporation), the PGP Note
and the WET2 Note (all of which
-24-
were repaid in February 2003 with the proceeds of the offering of the OED Notes)
and timing of the OED acquisition as discussed above and (ii) interest
associated with our loans under our loan and security agreement with Wells Fargo
Foothill, Inc., $12.0 million of which was drawn down by the Company on February
15, 2002 to consummate the acquisition of OED, resulting in nine months of
interest during the nine months ended September 30, 2003 compared to only seven
and one-half months of interest during the nine months ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating, Investing and Financing Activities
Our cash balance increased $0.9 million during the nine month period
ended September 30, 2003 to $11.4 million from $10.5 million at December 31,
2002.
Cash flows used in operating activities of $4.7 million for the nine
month period ended September 30, 2003 consisted of a net loss of $7.1 million
increased by non-cash charges of $4.9 million, principally depreciation and
amortization, write-off and amortization of deferred financing costs and a
decrease in working capital of $2.5 million. The change in working capital is
primarily due to a decrease in accrued interest of approximately $2.1 million
related to the PGC Notes and a litigation settlement payment of $0.4 million
related to the LHBPA settlement entered into in February, 2003.
Cash flows used in investing activities for the nine months ending
September 30, 2003 was $84.6 million consisting of (i) an increase in restricted
cash - racino project and restricted investments of $68.6 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 $21.0 million for
construction, architecture fees and other development costs associated with the
racino project and the purchase of land at St. Landry Parish where the racino is
being developed, (iii) approximately $1.8 million in development costs related
to the OED acquisition and OED's racing and gaming licenses and (iv) cash
outflows of approximately $1.7 million used for capital expenditures mainly
related to the purchase of new slot machines, the construction of our concert
area adjacent to the Diamond Jo which hosts weekly concerts throughout the
summer months and the renovation of OED's Port Allen OTB to accommodate the
installation of 100 video poker machines. These cash outflows were offset by (i)
cash proceeds from the sale of restricted investments of $8.1 million, the
proceeds of which were used to make the first interest payment on the OED Notes
due September 1, 2003 and (ii) cash proceeds from the sale of assets of $0.4
million. We expect additional capital expenditures at the Diamond Jo and OED
(other than the capital expenditures related to the racino project) to be
approximately $0.4 million and $0.1 million, respectively, for the year ended
December 31, 2003.
Cash flows from financing activities for the nine months ended
September 30, 2003 of $90.2 million reflects the net proceeds from the offering
of the OED Notes of $120.7 million and the proceeds from our draw down under the
OED Credit Facility of $2.6 million. These proceeds were offset by (i) principal
payments to extinguish OED's obligations under OED's term loan with Wells Fargo
Foothill, Inc. (formerly Foothill Capital Corporation), the PGP Note and the
WET2 Note totaling $20.1 million, (ii) deferred financing costs paid of $11.4
million associated with the issuance of the OED Notes and the entrance into the
OED Credit Facility and the OED FF&E Facility, (iii) member distributions of
$1.1 million and (iv) aggregate principal payments on borrowings under the PGC
Credit Facility of $0.5 million. As of September 30, 2003, the Company had $11.4
million outstanding under the PGC Credit Facility and OED had $2.6 million
outstanding under the OED Credit Facility. OED had no borrowings under the OED
FF&E Facility as of September 30, 2003.
-25-
Approximately $24.2 million of the net proceeds from the sale of the
OED Notes were deposited into an interest reserve account in order to pay the
first three payments of fixed interest on the OED Notes. Although OED's current
earnings are not sufficient to cover their current fixed charges (which consist
of interest on the OED Notes, including capitalized interest), OED does not
anticipate satisfying interest payment obligations under the OED Notes out of
earnings from operations until March 1, 2005, at which time OED expects to have
commenced operations at the racino. In September 2003, $8.1 of the initial
proceeds deposited into the interest reserve account, along with interest earned
on those proceeds, were used to pay the first fixed interest payment on the OED
Notes.
Financing Activities
In November 2003, the Company entered into a fourth amendment to its
senior secured credit facility with Wells Fargo Foothill, Inc. dated February
23, 2001 (the "PGC Credit Facility"). Under the terms of the amendment, the term
of the PGC Credit Facility was extended by one year to March 12, 2006 and the
minimum interest rate was reduced from 8.5% to 5.5%. In addition, if the Company
permanently reduces its outstanding borrowings to an amount equal to or less
than $10.0 million on or before January 24, 2004, the minimum interest rate will
be reduced to 5.0%. At September 30, 2003, the Company had outstanding
borrowings of $11.4 million under the PGC Credit Facility.
On June 24, 2003, OED entered into a new $15.0 million senior secured
credit facility with Wells Fargo Foothill, Inc. as lender (the "OED Credit
Facility"). The OED Credit Facility was amended by the parties thereto on
September 22, 2003 (the "OED Credit Facility Amendment").
The OED Credit Facility consists of a revolving credit facility which
permits OED to request advances and letters of credit to finance working capital
and other general corporate needs. Pursuant to the OED Credit Facility
Amendment, OED has the ability to borrow up to $6.5 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 OED will be (i) prior to the date in
which the lender assigns at least an aggregate amount of $10.0 million of
obligations under the OED Credit Facility and the OED FF&E Facility (as defined
below) (the "Syndication Date"), $9.0 million and (ii) from and after the
Syndication Date, the lesser of $15.0 million and a specified borrowing base
(the "Borrowing Base"). For the purposes of the OED Credit Facility, the
Borrowing Base is the lesser of 30% of the amount of certain costs incurred by
OED 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 OED will be the greater of (i) (a) prior to the Syndication
Date, $9.0 million and (b) from and after the Syndication Date, the lesser of
$10.0 million and the Borrowing Base or (ii) the aggregate principal amount of
all advances outstanding as of the Second Anniversary. At September 30, 2003,
OED had outstanding borrowings of $2.6 million and outstanding letters of credit
of $3.2 million under the OED Credit Facility.
All revolving loans and letters of credit issued under the OED Credit
Facility will mature on June 24, 2006. Prior to the maturity date, funds
borrowed under the OED Credit Facility may be borrowed, repaid and reborrowed,
without premium or penalty. OED's borrowings under the OED 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 OED Credit Facility will increase by 2% per
annum during the continuance of an event of default. Under the OED Credit
Facility, OED 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.
-25-
On September 22, 2003, OED entered into a new $16.0 million senior
secured credit facility with Wells Fargo Foothill, Inc. as lender (the "OED FF&E
Facility"). Under the OED FF&E Facility, the lender agrees to make a series of
term loans, up to a maximum amount of $16.0 million, to finance the purchase of
gaming equipment and other furniture, fixtures and equipment. At September 30,
2003, OED had no loans outstanding under the OED FF&E Facility.
Loans under the OED FF&E Facility shall be repayable in 48 equal
monthly installments of principal, commencing on March 1, 2004, and continuing
on the first day of each month thereafter until the unpaid balance of all loans
are paid in full. The outstanding principal balance and all accrued and unpaid
interest under all loans shall also be due and payable in full on March 1, 2008.
Once borrowed, all loans may be prepaid in whole or in part without penalty or
premium at any time during the term of this agreement. Amounts borrowed and
repaid may not be reborrowed. OED's borrowings under the OED FF&E Facility will
bear interest at a base rate (a Wells Fargo prime rate) plus a margin of 2.50%,
but at no time shall the interest rate be less than 6%. The interest rate
payable under the OED FF&E Facility will increase by 2% per annum during the
continuance of an event of default.
Subject to the foregoing, we believe that cash and cash equivalents
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 the PGC Credit Facility, and satisfy our other current debt
service requirements. If cash and cash equivalents on-hand and cash generated
from operations at the Company 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 Peninsula Notes) to meet
our obligations. In addition, we believe that OED's cash and cash equivalents
on-hand (which includes the remaining net proceeds from the offering of the OED
Notes), available borrowings under the OED Credit Facility and the OED FF&E
Facility and cash generated from operations at OED will be sufficient to satisfy
OED's working capital and current debt service requirements. If cash and cash
equivalents on-hand (including the remaining net proceeds from the offering of
the OED Notes), available borrowings under the OED Credit Facility and OED FF&E
Facility and cash generated from operations at OED are insufficient to meet its
obligations, OED may have to refinance its debt or sell some or all of its
assets (within the restrictions contained in the indenture governing the OED
Notes) to meet its obligations.
-27-
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
and OED's senior credit facilities. As of September 30, 2003, the Company and
OED had $11.4 million and $2.6 million, respectively, in borrowings under loan
and security agreements with Wells Fargo Foothill, Inc. 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 the Company and OED borrow the maximum amount allowed under the current
loan and security agreements with Wells Fargo Foothill, Inc. (currently an
aggregate amount of $34.4 million), if market rates of interest on our variable
rate debt increased by one percentage point, the estimated consolidated market
risk exposure under the senior credit facilities would be approximately $0.3
million.
We are also exposed to fair value risk due to changes in interest rates
with respect to our long-term fixed interest rate debt borrowing. Our fixed rate
debt instruments are not generally affected by a change in the market rates of
interest, and therefore, such instruments generally do not have an impact on
future earnings. However, future earnings and cash flows may be impacted by
changes in interest rates related to indebtedness incurred to fund repayments as
such fixed rate debt matures. The following table contains information relating
to our fixed rate debt borrowings which are subject to interest rate risk
(dollars in millions):
DESCRIPTION MATURITY FIXED INTEREST RATE COST FAIR VALUE
- ------------------------ ------------- ------------------- ------ ----------
12 1/4% Senior
Secured Notes of the
Company July 1, 2006 12 1/4% $71.0 $75.3*
13% Senior Secured
Notes with Contingent
Interest of OED March 1, 2010 13% $123.2 $127.5*
* Represents fair value as of November 5, 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
September 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.
-28-
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).
10.14 Amendment Number Three to Loan and Security Agreement
dated February 14, 2003, by and between Peninsula Gaming
Company, LLC and Foothill Capital Corporation
10.15 Amended and Restated Management Services Agreement, dated
as of February 25, 2003, by and among The Old Evangeline
Downs, LLC, OED Acquisition, LLC and Peninsula Gaming
Company, LLC.
-29-
10.16 Loan and Security Agreement, dated June 24, 2003, by and
among The Old Evangeline Downs, LLC, The Old Evangeline
Downs Capital Corp., and Wells Fargo Foothill, Inc.
10.17 Loan and Security Agreement, dated September 22, 2003, by
and among The Old Evangeline Downs, LLC, The Old
Evangeline Downs Capital Corp. and Wells Fargo Foothill,
Inc.
10.18 First Amendment, dated September 22, 2003, to Loan and
Security Agreement dated June 24, 2003 by and among The
Old Evangeline Downs, LLC, The Old Evangeline Downs
Capital Corp., and Wells Fargo Foothill, Inc.
10.19 Amendment Number Four to Loan and Security Agreement
dated November 6, 2003, by and between Peninsula Gaming
Company, LLC and Wells Fargo Foothill, Inc.
31.1 Certification of M. Brent Stevens, Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and Rule 5d-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.
(b) Reports on Form 8-K
None.
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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 November 14, 2003.
PENINSULA GAMING COMPANY, LLC
By: /s/ M. Brent Stevens
-------------------------------------
M. Brent Stevens
Chief Executive Officer
(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)
PENINSULA GAMING CORP.
By: /s/ M. Brent Stevens
-------------------------------------
M. Brent Stevens
President and Treasurer
(principal executive officer and
principal financial officer)
-31-