-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OxxPZvk/duiHy/pZRBT3K+q2Hj6fwj+PJRg+D8sxOU2gImyEImwwuBoBP26ns59b QOvFvxUOBGIkKH9lRhkWpg== 0000902561-04-000529.txt : 20041115 0000902561-04-000529.hdr.sgml : 20041115 20041115165041 ACCESSION NUMBER: 0000902561-04-000529 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENINSULA GAMING CORP. CENTRAL INDEX KEY: 0001235662 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-RACING, INCLUDING TRACK OPERATION [7948] IRS NUMBER: 251902805 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-105587-01 FILM NUMBER: 041146195 BUSINESS ADDRESS: STREET 1: P O BOX 90270 CITY: LAFAYETTE STATE: LA ZIP: 705090270 BUSINESS PHONE: 3378967223 MAIL ADDRESS: STREET 1: P O BOX 90270 CITY: LAFAYETTE STATE: LA ZIP: 705090270 FORMER COMPANY: FORMER CONFORMED NAME: OLD EVANGELINE DOWNS CAPITAL CORP DATE OF NAME CHANGE: 20030523 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Peninsula Gaming, LLC CENTRAL INDEX KEY: 0001299109 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-AMUSEMENT & RECREATION SERVICES [7900] IRS NUMBER: 200800583 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-117800 FILM NUMBER: 041146193 BUSINESS ADDRESS: STREET 1: 400 EAST 3RD STREET CITY: DUBUQUE STATE: IA ZIP: 52001 BUSINESS PHONE: 563-583-7005 MAIL ADDRESS: STREET 1: 400 EAST 3RD STREET CITY: DUBUQUE STATE: IA ZIP: 52001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENINSULA GAMING CO LLC CENTRAL INDEX KEY: 0001095997 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 421483875 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-88829 FILM NUMBER: 041146196 BUSINESS ADDRESS: STREET 1: 3RD STREET ICE HARBOR STREET 2: P O BOX 1750 CITY: DUBUQUE STATE: IA ZIP: 52004 BUSINESS PHONE: 3195837005 MAIL ADDRESS: STREET 1: 3RD STREE ICE HARBOR STREET 2: P O BOX 1750 CITY: DUBUQUE STATE: IA ZIP: 52004 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OLD EVANGELINE DOWNS LLC CENTRAL INDEX KEY: 0001235660 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-RACING, INCLUDING TRACK OPERATION [7948] IRS NUMBER: 721280511 STATE OF INCORPORATION: LA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-105587 FILM NUMBER: 041146194 BUSINESS ADDRESS: STREET 1: P O BOX 90270 CITY: LAFAYETTE STATE: LA ZIP: 705090270 BUSINESS PHONE: 3378967223 MAIL ADDRESS: STREET 1: P O BOX 90270 CITY: LAFAYETTE STATE: LA ZIP: 705090270 10-Q 1 form10q_wb111504.txt FORM 10-Q 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, 2004. 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 Diamond Jo, LLC Peninsula Gaming, LLC Peninsula Gaming Corp. The Old Evangeline (Exact name of registrants (Exact name of registrants as (formerly known as Downs, L.L.C. as specified in their specified in their charter) The Old Evangeline Downs (Exact name of charter) Capital Corp.) registrants as specified (Exact name of in their charter) registrants as specified in their charter) Delaware Delaware Delaware Louisiana (State or other (State or other jurisdiction of (State or other (State or other jurisdiction of incorporation or organization) jurisdiction of jurisdiction of incorporation or incorporation or incorporation or organization) organization) organization) 42-1483875 20-0800583 25-1902805 72-1280511 (I.R.S. Employer (I.R.S. Employer (I.R.S. Employer (I.R.S. Employer Identification No.) Identification No.) Identification No.) Identification No.)
3rd Street Ice Harbor, PO Box 1750 Dubuque, Iowa 52001 (563) 583-7005 (Address, including zip code, and telephone number, including area code, of principal executive offices) Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 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, LLC (the "Company") are held by Peninsula Gaming Partners, LLC. All of the common equity interests of Diamond Jo, LLC, The Old Evangeline Downs, L.L.C. and Peninsula Gaming Corp. are held by the Company. PENINSULA GAMING, LLC INDEX TO FORM 10-Q Part I - Financial Information Item 1 - Financial Statements
Peninsula Gaming, LLC: Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2004 and December 31, 2003...................................................................................3 Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2004 and 2003............................................................4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2004 and 2003............................................................5 Notes to Condensed Consolidated Financial Statements (Unaudited).........................................7 Pro Forma Condensed Consolidated Statement of Operations (Unaudited) for the Nine Months Ended September 30, 2004....................................................................18 The Old Evangeline Downs, L.L.C. (guarantor of registered debt): Condensed Balance Sheets (Unaudited) as of September 30, 2004 and December 31, 2003..................................................................................19 Condensed Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2004 and 2003...........................................................20 Condensed Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2004 and 2003...........................................................21 Notes to Condensed Financial Statements (Unaudited).....................................................23 Pro Forma Condensed Statement of Operations (Unaudited) for the Nine Months Ended September 30, 2004....................................................................32 Diamond Jo, LLC (co-issuer of registered debt): Condensed Balance Sheets (Unaudited) as of September 30, 2004 and December 31, 2003..................................................................................33 Condensed Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2004 and 2003...........................................................34 Condensed Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2004 and 2003...........................................................35 Notes to Condensed Financial Statements (Unaudited).....................................................36 Pro Forma Condensed Statement of Operations (Unaudited) for the Nine Months Ended September 30, 2004....................................................................43 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................................................44 Item 3 - Quantitative and Qualitative Disclosures About Market Risk.........................................54 Item 4 - Controls and Procedures............................................................................54 Part II - Other Information Item 1 - Legal Proceedings..................................................................................56 Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities...................56 Item 3 - Defaults Upon Senior Securities....................................................................56 Item 4 - Submission of Matters to a Vote of Security Holders................................................56 Item 5 - Other Information..................................................................................56 Item 6 - Exhibits and Reports on Form 8-K...................................................................56 Signatures.......................................................................................................62
-2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PENINSULA GAMING, LLC CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 2004 2003 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 16,862,504 $ 21,158,295 Restricted cash - purse settlements 2,210,673 1,589,125 Restricted investments 15,778,883 Accounts receivable, less allowance for doubtful accounts of $51,148 and $61,922, respectively 1,627,823 482,222 Receivable from affiliate 15,270 Inventory 335,704 403,376 Prepaid expenses 1,376,752 815,009 ------------- ------------- Total current assets 22,428,726 40,226,910 ------------- ------------- RESTRICTED CASH - RACINO PROJECT 20,013,291 ------------- ------------- PROPERTY AND EQUIPMENT, NET 116,176,383 102,477,345 ------------- ------------- OTHER ASSETS: Deferred financing costs, net of amortization of $934,985 and $5,288,572, respectively 13,617,266 12,702,387 Goodwill 53,083,429 53,083,429 Other intangibles 32,480,528 32,257,963 Deposits and other assets 397,681 757,789 ------------- ------------- Total other assets 99,578,904 98,801,568 ------------- ------------- TOTAL $ 238,184,013 $ 261,519,114 ============= ============= LIABILITIES AND MEMBERS' DEFICIT CURRENT LIABILITIES: Accounts payable $ 3,086,430 $ 2,972,608 Construction payable - St. Landry Parish 3,774,374 20,156,591 Purse settlement payable 3,277,445 1,589,125 Accrued payroll and payroll taxes 2,056,758 2,788,224 Accrued interest 9,624,126 9,904,778 Other accrued expenses 5,957,070 4,811,106 Current maturity of long-term debt 4,822,009 4,098,222 ------------- ------------- Total current liabilities 32,598,212 46,320,654 ------------- ------------- LONG-TERM LIABILITIES: 8 3/4% Senior secured notes, net of discount 229,871,701 12 1/4% Senior secured notes, net of discount 70,616,221 13% Senior secured notes, net of discount 6,792,829 120,923,436 Senior secured credit facilities 11,887,764 15,754,301 Term loan 9,666,667 FF&E credit facility 9,921,557 Notes payable 3,300,000 3,511,654 Other accrued expenses 650,000 1,100,000 Preferred members' interest, redeemable 4,000,000 4,000,000 ------------- ------------- Total long-term liabilities 266,168,961 225,827,169 ------------- ------------- Total liabilities 298,767,173 272,147,823 COMMITMENTS AND CONTINGENCIES MEMBERS' DEFICIT (60,583,160) (10,628,709) ------------- ------------- TOTAL $ 238,184,013 $ 261,519,114 ============= =============
See notes to condensed consolidated financial statements (unaudited). -3- PENINSULA GAMING, 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, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- REVENUES: Casino $ 30,088,557 $ 15,220,028 $ 89,095,029 $ 40,199,982 Racing 5,685,045 5,081,518 16,544,688 14,536,243 Food and beverage 3,143,626 1,293,510 8,919,141 3,310,429 Other 504,824 309,003 1,114,023 495,215 Less promotional allowances (2,131,165) (888,309) (6,250,930) (2,252,722) ------------- ------------- ------------- ------------- Total net revenues 37,290,887 21,015,750 109,421,951 56,289,147 ------------- ------------- ------------- ------------- EXPENSES: Casino 14,490,417 5,762,110 44,800,738 16,487,222 Racing 4,859,240 4,413,576 13,790,426 11,922,832 Food and beverage 2,362,853 1,071,510 7,167,439 2,942,214 Boat operations 563,585 591,622 1,682,631 1,733,970 Other 445,467 302,690 1,033,263 383,741 Selling, general and administrative 5,652,111 3,196,909 15,940,193 8,441,222 Depreciation and amortization 2,989,628 685,667 8,844,842 2,334,307 Pre-opening expense 512,445 257,448 717,366 Development expense 70,472 129,703 Management severance and recruiting 569,983 569,983 Affiliate management fees 276,186 676,186 ------------- ------------- ------------- ------------- Total expenses 32,279,942 16,536,529 94,892,852 44,962,874 ------------- ------------- ------------- ------------- INCOME FROM OPERATIONS 5,010,945 4,479,221 14,529,099 11,326,273 ------------- ------------- ------------- ------------- OTHER INCOME (EXPENSE): Interest income 21,368 121,042 150,970 410,633 Interest expense, net of amounts capitalized (6,107,209) (6,680,187) (20,308,621) (18,509,523) Loss on early retirement of debt (37,566,234) Interest expense related to preferred members' interest, redeemable (90,000) (90,000) (270,000) (90,000) Gain (loss) on disposal of assets (17,493) 135 (17,685) (104,549) ------------- ------------- ------------- ------------- Total other expense (6,193,334) (6,649,010) (58,011,570) (18,293,439) ------------- ------------- ------------- ------------- NET LOSS BEFORE PREFERRED MEMBER DISTRIBUTIONS (1,182,389) (2,169,789) (43,482,471) (6,967,166) LESS PREFERRED MEMBER DISTRIBUTIONS (180,544) ------------- ------------- ------------- ------------- NET LOSS TO COMMON MEMBERS' INTEREST $ (1,182,389) $ (2,169,789) $ (43,482,471) $ (7,147,710) ============= ============= ============= =============
See notes to condensed consolidated financial statements (unaudited). -4- PENINSULA GAMING, LLC CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended Nine months ended September 30, 2004 September 30, 2003 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (43,482,471) $ (7,147,710) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization 8,844,842 2,334,307 Provision for doubtful accounts 84,794 109,838 Amortization and write-off of deferred financing costs and discount on notes 15,731,156 2,359,003 Loss on disposal of assets 17,685 104,549 Changes in operating assets and liabilities: Restricted cash - purse settlements (621,548) 781,446 Receivables (1,104,311) (1,954,945) Inventory 67,672 1,888 Prepaid expenses and other assets (201,635) (780,062) Accounts payable 1,393,774 1,062,752 Accrued expenses (830,382) (1,611,676) ----------- ---------- Net cash flows from operating activities (20,100,424) (4,740,610) ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisition and licensing costs (217,542) (1,781,746) Racino project development costs (35,359,358) (21,011,905) Proceeds from (deposits to) restricted cash - racino project, net 20,013,291 (44,750,403) Maturity and sale of restricted investments 15,778,883 8,144,088 Purchase of restricted investments (23,922,971) Purchase of property and equipment (3,447,190) (1,690,807) Proceeds from sale of property and equipment 1,800 387,906 ----------- ---------- Net cash flows from investing activities (3,230,116) (84,625,838) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Deferred financing costs (13,349,121) (11,387,462) Principal payments on debt (224,921,232) (20,575,000) Proceeds from senior credit facilities 15,887,764 2,604,301 Proceeds from term loan 14,666,667 Proceeds from FF&E credit facility 3,467,507 Proceeds from senior secured notes 229,728,680 120,736,000 Member distributions (6,445,516) (1,147,987) ----------- ---------- Net cash flows from financing activities 19,034,749 90,229,852 ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,295,791) 863,404 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,158,295 10,510,205 ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,862,504 $ 11,373,609 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 20,046,208 $ 18,455,907 -5- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Property additions acquired on construction payable which were accrued, but not paid $ 3,774,374 $ 12,882,728 Deferred financing costs which were accrued, but not paid 610,725 42,475 Member distributions which were accrued but not paid 161,669 Spin-off of OED Acquisition, LLC 135,205 Exchange of Private OED Notes for Registered OED Notes 123,200,000 See notes to condensed consolidated financial statements (unaudited).
-6- PENINSULA GAMING, LLC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Basis of Presentation Diamond Jo, LLC, a Delaware limited liability company ("DJL"), owns and operates the Diamond Jo riverboat casino in Dubuque, Iowa, and, prior to the corporate restructuring described below, was a wholly owned subsidiary of Peninsula Gaming Partners, LLC, a Delaware limited liability company ("PGP"). DJL had two direct wholly owned subsidiaries, (i) Peninsula Gaming Corp., which had no assets or operations and was formed solely to facilitate the offering of DJL's 12 1/4% Senior Secured Notes due 2006 (the "DJL Notes"), and (ii) OED Acquisition, LLC, a Delaware limited liability company ("OEDA"), and the parent company of The Old Evangeline Downs, L.L.C., a Louisiana limited liability company ("OED"), 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. was 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"). Following the redemption of the DJL Notes in April 2004, Peninsula Gaming Corp. was dissolved. On June 16, 2004, a corporate restructuring occurred, which is reflected in these consolidated financial statements, pursuant to which Peninsula Gaming, LLC, a Delaware limited liability company (the "Company"), became a new direct parent company of DJL, OED and Peninsula Gaming Corp. ("PGC", formerly known as The Old Evangeline Downs Capital Corp.), a Delaware limited liability company. The Company is a wholly owned subsidiary of PGP. In connection with the corporate restructuring, OEDA became a sister company to the Company and a wholly owned subsidiary of PGP in a corporate spin-off which was recorded as a distribution on June 16, 2004. Peninsula Gaming, LLC; DJL and PGC are co-issuers of 8 3/4 % Senior Secured Notes (the "Peninsula Gaming Notes") which are registered with the U.S. Securities and Exchange Commission (the "SEC"). Also, OED is a guarantor of the Peninsula Gaming Notes and has pledged its stock as collateral. The separate financial statements of DJL, as a co-issuer, and OED, as guarantor, are required to be filed with the SEC and are included in this 10-Q filing. Peninsula Gaming, LLC and PGC have no independent assets or operations of their own and, therefore, no separate financial statements of these entities have been provided. 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 expected 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 year ended December 31, 2003. Accordingly, footnote disclosure which would substantially duplicate the disclosure in the audited financial statements have been omitted in the accompanying unaudited financial statements. 2. Summary of Significant Accounting Policies Restricted Investments--As of December 31, 2003, OED had approximately $15.8 million, net of discount, invested in government securities with original maturities of greater than 90 days from the date -7- of initial investment. These investments were classified as held-to-maturity and had contractual maturities of $8.0 million on both February 15, 2004 and August 15, 2004. Proceeds from the maturity of the investments on February 15, 2004 were used to help make the payment of interest on the OED Notes due March 1, 2004 in accordance with the terms of the Cash Collateral and Disbursement Agreement, dated February 25, 2003, among OED, U.S. Bank National Association (as trustee and disbursement agent) and an independent construction consultant (the "Cash Collateral and Disbursement Agreement"). As a result of the refinancing of the OED Notes on April 16, 2004 (see Note 4), the Cash Collateral and Disbursement Agreement was cancelled and, therefore, the restricted investments were no longer required. Therefore, during May 2004, the remaining restricted investments of approximately $7.9 million were redeemed. Restricted Cash--Racino Project--"Restricted cash--racino project" represented unused proceeds from the sale of the OED Notes, the use and disbursement of which were restricted to the design, development, construction, equipping and opening of the racino in accordance with the Cash Collateral and Disbursement Agreement. As of December 31, 2003, OED had $14.4 million in cash equivalents deposited in a construction disbursement account, $0.2 million in cash equivalents deposited in an interest reserve account that were to be used toward payment of interest on the OED Notes, $5.0 million in cash equivalents deposited in a completion reserve account that were to be used to fund potential cost overruns and contingency amounts with respect to the design, development, construction, equipping and opening of the racino and $0.4 million in cash in a local financial institution. The funds deposited in these accounts were invested in cash or securities that were readily convertible to cash. As a result of the refinancing of the OED Notes on April 16, 2004 (see Note 4), the Cash Collateral and Disbursement Agreement was terminated and, therefore, the restricted cash - Racino Project was no longer required. Deferred Financing Costs - As of September 30, 2004, the Company incurred approximately $12.6 million of fees and expenses related to the refinancing of the DJL Notes and the OED Notes and approximately $1.4 million of fees and expenses related to the refinancing of (i) DJL's senior secured credit facility with Wells Fargo Foothill, Inc. dated February 23, 2001 (as amended, the "DJL Credit Facility"), (ii) OED's $15.0 million senior secured credit facility with Wells Fargo Foothill dated June 24, 2003 (as amended, the "OED Credit Facility"), and (iii) OED's $16.0 million FF&E credit facility with Wells Fargo Foothill dated September 22, 2003 (the "OED FF&E Facility"), which refinancings were consummated in the second quarter (see Note 4 for further discussion on the refinancings). Goodwill and Other Intangible Assets--At September 30, 2004 and December 31, 2003, "Goodwill" and "Other intangibles" consists of goodwill, licensing costs and the acquired trade name associated with the purchase of the Diamond Jo and OED. To the extent the purchase price exceeded the fair value of the net identifiable assets acquired, such excess has been recorded as goodwill. Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" provides that goodwill and indefinite lived intangible assets will no longer be amortized but will be reviewed at least annually for impairment and written down and charged to income when their recorded value exceeds their estimated fair value. During the first quarter of 2004 and 2003, the Company performed its annual impairment test on goodwill in accordance with SFAS No. 142 and determined that the estimated fair value of the Diamond Jo exceeded its carrying value as of that date. Based on that review, management determined that there was no impairment of goodwill. -8- As of September 30, 2004 and December 31, 2003, the Company had "Other intangibles" on its balance sheet summarized as follows (in millions):
September 30, December 31, 2004 2003 ------------- ------------ Slot Machine and Electronic Video Game Licenses $ 28.7 $ 28.5 Tradename 2.5 2.5 Horse Racing Licenses 1.3 1.3 ------------- ------------ Total $ 32.5 $ 32.3 ============= ============
Each of the identified intangible assets have indefinite lives and were valued separately. The methodology employed by an independent valuation specialist to arrive at the initial 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 trade name 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. The initial valuations were updated by management in the first quarter of 2004 indicating no impairment. These 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 trade name or the way OED's trade name 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. On June 25, 2002, PGP entered into an agreement with William E. Trotter, II ("Trotter") and William E. Trotter, II Family L.L.C., a Louisiana limited liability company ("WET2LLC") to acquire (i) all of Trotter's interests in two promissory notes issued by OED in connection with DJL's acquisition of OED, and (ii) all of Trotter's membership interests owned by WET2LLC (together, the "Trotter Purchase"). On August 30, 2002, OEDA consummated the Trotter Purchase for a purchase price consisting of cash of $15,546,000, plus a contingent fee of one half of one percent (0.5%) of the net slot revenues generated by OED's racino located in St. Landry Parish, Louisiana, for a period of ten years commencing on December 19, 2003, the date the racino's casino opened to the general public. This contingent fee is payable monthly in arrears and has been recorded as an adjustment to the purchase price of "Other intangibles" on the Condensed Consolidated Balance Sheet of $222,565 for the nine months ended September 30, 2004. 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 acquisitions and the related assignment of costs to goodwill and other intangible assets. Concentrations of Risk--The Company maintains deposit accounts at three banks. At September 30, 2004 and December 31, 2003, and various times during the periods then ended, the balance at the banks exceeded the maximum amount insured by the Federal Deposit Insurance Corporation. Credit risk is managed by monitoring the credit quality of the banks. -9- The Company's customer base is concentrated in eastern Iowa and southwest Louisiana. Reclassifications--Certain prior year amounts have been reclassified to conform with the current period presentation. 3. Property and Equipment Property and equipment of the Company and its subsidiaries at September 30, 2004 and December 31, 2003 is summarized as follows: September 30, December 31, 2004 2003 -------------- -------------- Land and land improvements $ 13,609,711 $ 13,686,570 Buildings and improvements 54,798,462 51,991,698 Riverboats and improvements 8,307,001 8,305,022 Furniture, fixtures and equipment 31,175,807 28,472,602 Computer equipment 5,405,923 5,196,966 Vehicles 176,235 176,235 Construction in progress 22,477,202 6,034,867 ------------- ------------- Subtotal 135,950,341 113,863,960 Accumulated depreciation (19,773,958) (11,386,615) ------------- ------------- Property and equipment, net $ 116,176,383 $ 102,477,345 ============= ============= Depreciation expense for the three months ended September 30, 2004 and 2003 was $2,989,628 and $685,667, respectively. Depreciation expense for the nine months ended September 30, 2004 and 2003 was $8,844,842 and $2,334,307, respectively. In September 2004, the Company entered into agreements with various slot machine manufacturers to purchase approximately 783 slot machines, of which 366 are to be installed during the fourth quarter 2004 at the Diamond Jo for a total purchase price of approximately $4.3 million and 417 are to be installed at OED for a total purchase price of approximately $5.2 million. No loss on disposal of the existing slot machines is expected. Of the purchase price for the DJL slot machines, approximately $3.9 million will be financed through a slot machine vendor with equal principal payments due over thirty-six months with zero percent interest for the first twenty-four months and 7.4% interest for the remaining twelve months. Approximately $0.1 million of the purchase price of the DJL slot machines will be financed through another slot machine vendor with equal principal payments over twelve months and zero percent interest. The remaining purchase price of the DJL slot machines of approximately $0.3 million will be paid with cash on hand. Of the purchase price for the OED slot machines, approximately $4.1 million will be financed through a slot machine vendor with equal principal payments due over thirty-six months with zero percent interest for the first twenty-four months and 7.4% interest for the remaining twelve months. The remaining purchase price of the OED slot machines of approximately $1.1 million will be financed through another slot machine vendor with equal principal payments over twelve months and zero percent interest. 4. Debt The debt of the Company and its subsidiaries consists of the following:
September 30, December 31, 2004 2003 ------------- ------------ 8 3/4% Senior Secured Notes due April 15, 2012, net of discount of $3,128,299, secured by assets and stock of DJL and OED. $ 229,871,701
-10- 12 1/4% Senior Secured Notes due July 1, 2006, net of discount of $383,779, secured by assets of DJL $ 70,616,221 13% Senior Secured Notes of OED due March 1, 2010 with Contingent Interest, net of discount of $117,171 and $2,276,564, secured by certain assets of OED 6,792,829 120,923,436 $35.0 million revolving line of credit under a Loan and Security Agreement of DJL and OED with Wells Fargo Foothill, Inc. dated June 16, 2004, interest rate at Prime + a margin of 0.5 - 1.0% (current rate of 5.75%), maturing June 16, 2008, secured by substantially all assets of DJL and OED 11,887,764 Term Loan under a Loan and Security Agreement of DJL and OED with Wells Fargo Foothill, Inc. dated June 16, 2004, interest rate at Prime + 2.5% (current rate of 7.25%), due in equal monthly installments of $333,333 beginning July 1, 2004, maturing June 16, 2008, secured by certain assets of OED. 13,666,667 Line of Credit with Wells Fargo Foothill, Inc. ("DJL Credit Facility"), interest rate at greater of LIBOR + 3% or Prime + .75%, however, at no time shall the interest rate be lower than 5.5% on outstanding balances of $10.0 million or less and 8.5% on outstanding balances greater than $10.0 million, secured by assets of DJL 11,250,000 $15.0 million Loan and Security Agreement of OED with Wells Fargo Foothill, Inc. ("OED Credit Facility"), interest rate at Prime + 2.50%, secured by certain assets of OED 5,104,301 $16.0 million Loan and Security Agreement of OED with Wells Fargo Foothill, Inc. ("FF&E Credit Facility"), interest rate at Prime + 2.50%, due in 48 equal monthly principal payments beginning on March 1, 2004, secured by certain assets of OED 12,532,493 Promissory note payable to third party, interest at 4.75% payable monthly in arrears, annual principal payments of $550,000 due each October beginning in 2004, secured by mortgage on certain real property of OED 3,850,000 3,850,000 Note payable to third party, interest rate at 9.5%, monthly payments of principal and interest of $31,250, with final payment due July 1, 2005, secured by certain assets of OED 272,009 548,940
-11- Preferred membership interests-redeemable, interest at 9%, due October 13, 2006 4,000,000 4,000,000 ------------- ------------- Total debt 270,340,970 228,825,391 Less current portion (4,822,009) (4,098,222) ------------- ------------- Total long term debt $ 265,518,961 $ 224,727,169 ============= =============
On March 9, 2004, OED commenced a tender offer and consent solicitation to repurchase all of its outstanding OED Notes and to solicit consents to certain proposed amendments to the indenture governing the OED Notes as set forth in OED's Offer to Purchase and Consent Solicitation Statement, dated March 9, 2004. On March 19, 2004, the expiration date of the consent solicitation, OED received the requisite consents and tenders from holders of a majority of the aggregate principal amount of the outstanding OED Notes. The tender offer expired on April 5, 2004, and OED redeemed approximately $116.3 million principal amount of the OED Notes. On April 16, 2004, DJL and PGC completed a Rule 144A private placement of $233 million principal amount of the Peninsula Gaming Notes. The Peninsula Gaming Notes were issued at a discount of approximately $3.3 million. Interest on the Peninsula Gaming Notes is payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2004. Upon the corporate restructuring, PGL became a co-issuer of the Peninsula Notes. The Company used the net proceeds from the sale of the Peninsula Gaming Notes as follows (all payments based on outstanding balances as of April 16, 2004): (1) to irrevocably deposit funds into an escrow account to redeem all of the DJL Notes in an amount (including call premium and accrued interest) of approximately $79.9 million; (2) to repurchase approximately $116.3 million principal amount of OED Notes for an aggregate amount (including tender premium, accrued interest and contingent interest) of approximately $134.6 million; (3) to pay accrued distributions on DJL's outstanding preferred membership interests-redeemable of approximately $1.1 million; (4) to pay related fees and expenses of approximately $13.4 million; and (5) for general corporate purposes. As a result of the issuance of the Peninsula Gaming Notes, DJL incurred a loss of approximately $8.7 million consisting of the write-off of deferred financing fees of approximately $2.0 million, the payment of a call premium on the DJL Notes of approximately $5.7 million, interest on the DJL Notes of approximately $0.7 million and write-off of bond discount of approximately $0.3 million. In connection therewith, OED also incurred a loss of approximately $27.9 million consisting of the write-off of deferred financing fees of approximately $8.4 million, the payment of a tender premium on the OED Notes of approximately $16.3 million, write-off of bond discount of approximately $2.1 million and consent fees of approximately $1.1 million. In addition, OED and DJL wrote off $0.9 million of deferred financing fees related to the refinancing of the credit facilities discussed below. The indenture governing the Peninsula Gaming Notes limits the Company's ability and the ability of its restricted subsidiaries to, among other things: o incur more debt; o pay dividends or make other distributions to PGP; o redeem stock; o issue stock of restricted subsidiaries; o make investments; o create liens; o enter into transactions with affiliates; -12- o merge or consolidate; and o transfer or sell assets. The Peninsula Gaming Notes are full and unconditional obligations of DJL as a co-issuer. Peninsula Gaming, LLC and PGC, also co-issuers, have no independent assets (other than Peninsula Gaming, LLC's investment in its subsidiaries) or operations. The Peninsula Gaming Notes are also guaranteed, subject to the prior lien of the Company's credit facility discussed below, by OED. Further, OED and DJL have pledged their equity interests as collateral. The Peninsula Gaming Notes do not limit DJL's or OED's ability to transfer net assets to Peninsula Gaming, LLC. On June 16, 2004, DJL and OED jointly entered into a Loan and Security Agreement with Wells Fargo Foothill, Inc. as the Arranger and Agent (the "PGL Credit Facility"). The PGL Credit Facility consists of a revolving credit facility which permits DJL and OED to request advances and letters of credit up to the lesser of the maximum revolver amount of $35 million (less amounts outstanding under letters of credit) and a specified borrowing base (the "Borrowing Base"). For the purposes of the PGL Credit Facility, the Borrowing Base is the lesser of the Combined EBITDA (as defined in the PGL Credit Facility) of OED and DJL for the twelve months immediately preceding the current month end multiplied by 150% and the Combined EBITDA of OED and DJL for the most recent quarterly period annualized multiplied by 150%. At September 30, 2004, the maximum revolver amount was $35.0 million. Immediately upon the closing of the PGL Credit Facility, the Company borrowed approximately $15.9 million to refinance outstanding obligations under the DJL Credit Facility and the OED Credit Facility and pay financing related fees and expenses. Advances under the PGL Credit Facility bear an interest rate based on the borrower's option of LIBOR plus a margin 3.0% -3.5% or Wells Fargo prime rate plus a margin of 0.5% -1.0% (current rate of 5.75%) however, at no time shall the interest rate be lower than 4.0%. The PGL Credit Facility also contains a Term Loan in the amount of $14,666,667. The proceeds from the Term Loan were used to repay outstanding obligations under the FF&E Credit Facility. The Term Loan is secured by certain assets of OED and requires monthly payments of $333,333 starting July 1, 2004 until the full balance is paid, with a maturity no later than June 16, 2008. The Term Loan has an interest rate equal to the Wells Fargo prime rate plus 2.5% (current rate of 7.25%) however, at no time shall the interest rate be lower than 6.0%. Under the terms of the PGL Credit Facility, at closing the Company was required to issue a letter of credit in the amount of $3.2 million in favor of Wells Fargo Foothill, Inc. related to the Term Loan. DJL and OED are jointly and severally liable under the PGL Credit Facility, other than borrowings under the Term Loan for which OED is solely liable. Borrowings under the PGL Credit Facility, other than borrowings under the Term Loan, are collateralized by substantially all assets of OED and DJL. Borrowings under the Term Loan are collateralized by a separate lien on the furniture, fixtures and equipment of OED financed pursuant to the terms of the OED FF&E Facility. Borrowings under the PGL Credit Facility are guaranteed by Peninsula Gaming, LLC and PGC. The PGL Credit Facility contains a number of restrictive covenants and agreements, including covenants that limit DJL's and OED's ability to, among other things: (1) incur more debt; (2) create liens; (3) enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its capital stock; (4) dispose of certain assets; (5) guarantee debt of others; (6) pay dividends or make other distributions; (7) make investments; and (8) enter into transactions with affiliates. The PGL Credit Facility also contains financial covenants including a minimum Combined EBITDA (as defined by the PGL Credit Facility) of OED and DJL and limitations on capital expenditure amounts at OED and DJL. Specifically, the PGL Credit Facility prohibits DJL and OED from making loans to PGL except on an arm's length basis and pursuant to an exception that permits DJL and OED to make unsecured loans to -13- PGL in an aggregate principal amount not exceeding $10.0 million. In addition, DJL and OED are prohibited from making any dividends or other distributions to PGL, subject to certain limited exceptions. For example, so long as no default or event of default under the PGL Credit Facility has occurred and is continuing, and immediately after giving effect to such dividend or other distribution the Interest Coverage Ratio (as defined in the PGL Credit Facility) for the immediately preceding four fiscal quarter period would not have been less than 2.0 to 1.0, DJL and OED can pay dividends and other distributions to PGL in an aggregate amount, when taken together with all other such payments made after the date of the closing of the PGL Credit Facility not exceeding the sum of (a) 50% of the sum of DJL's and OED's Combined Net Income and Combined Non-Cash Charges (as each such term is defined in the PGL Credit Facility) for the period from the beginning of the first full fiscal quarter immediately following the closing date of the PGL Credit Facility to the end of DJL's or OED's, as applicable, most recently ended fiscal quarter for which internal financial statements are available at the time of the dividend or other distribution, (b) cash proceeds from sales of equity of DJL or OED or a cash contribution of a holder of equity of DJL or OED, (c) cash proceeds from the sale of convertible or exchangeable debt securities that have been converted or exchanged into equity of DJL or OED after the closing date of the PGL Credit Facility and prior to the time of such dividend or other distribution, and (d) the aggregate Return from Unrestricted Subsidiaries (as each such term is defined in the PGL Credit Facility) of DJL or OED, if any. In addition, DJL and OED are permitted to make dividends or other distributions to PGL or pay certain tax obligations. Further, DJL and OED can make dividends and other distributions to PGL to pay costs related to certain tax preparation, accounting, legal and administrative fees and expenses. Additionally, DJL and OED may make dividends and other distributions to PGL in respect of certain payments under management agreements and to pay reasonable directors' or managers' fees and expenses, so long as any payments with respect to any management agreement or employee, consulting or similar agreement do not, in the aggregate, in any fiscal year exceed the lesser of (a) 4.0% of DJL and OED's Combined EBITDA (as defined in the PGL Credit Facility) and (b) $4.0 million. DJL and OED may also make dividends or other distributions to PGL so that PGL, subject to certain limitations, can repurchase, redeem or otherwise acquire equity interests in PGL or its Restricted Subsidiaries (as defined in the PGL Credit Facility) from its respective employees, members or managers. Finally, PGL and OED can make dividends and other distributions not to exceed (a) in 2004, $7.5 million, (b) in 2005, $3.75 million plus any unused portion of the amount available in 2004, if any, (c) in 2006, $3.75 million plus the unused portion of the amount available in 2005, if any, (d) in 2007, the unused portion of the amount available in 2006, if any, and (e) in 2008, the unused portion of the amount available in 2007, if any. Subject to the foregoing provisions, all of the net assets of DJL and OED are restricted assets. The Company was in compliance with such covenants, or had obtained waivers, as of September 30, 2004. As of September 30, 2004, the Company had $11.9 million and $13.7 million outstanding under the revolver portion and Term Loan portion of the PGL Credit Facility, respectively. In addition, as of September 30, 2004, the Company had outstanding letters of credit of approximately $4.0 million. The DJL Credit Facility, the OED Credit Facility and the FF&E Credit Facility were terminated in connection with the refinancing discussed above. In September 2004, the Company entered into agreements with various slot manufacturers to purchase 783 slot machines which will be financed through the respective slot vendor. See further discussion in Note 3. 5. Commitments and Contingencies Under the Company's and PGP's operating agreements, the Company and PGP have agreed, subject to a few exceptions, to indemnify and hold harmless our members, PGP and PGP members, as the case may be, from liabilities incurred as a result of their positions as our sole manager and as members of the Company or PGP, as the case may be. -14- As discussed in Note 2, in connection with the Trotter Purchase, OED is obligated to pay a contingent fee of one half of one percent (0.5%) of the net slot revenues generated by OED's racino located in St. Landry Parish, Louisiana, for a period of ten years commencing on December 19, 2003, the date the racino's casino opened to the general public. OED incurred $222,565 related to this contingent fee during the nine months ended September 30, 2004 and increased "Other intangibles" as an adjustment to the purchase price of such assets. The Company was involved in a lawsuit with a former employee. The Company reached a settlement with the former employee during the third quarter of 2004. The settlement did not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. We are not a party to, and none of our property 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 litigation would have a material adverse effect on our financial condition, results of operations or cash flows. 6. Related Party Transactions In May 2004, PGP repurchased 147,553 units of its convertible preferred membership interests from an unrelated third party for approximately $4.5 million. The repurchase was funded by a distribution of cash to PGP from DJL. During the three months ended September 30, 2004 and 2003, the Company distributed $456,231 and $683,946, respectively, and during the nine months ended September 30, 2004 and 2003, the Company distributed $2,106,819 and $1,147,987, respectively, to PGP primarily for (i) certain consulting and financial advisory services related to PGP development expenses, (ii) board fees and actual out of pocket expenses incurred by members of the board of managers of PGP in their capacity as a board member and (iii) tax, accounting, legal and administrative costs and expenses of PGP. These amounts were recorded as member distributions and are included in "Accumulated Deficit" on the Condensed Consolidated Balance Sheet. In accordance with a management services agreement between DJL, OEDA and OED, OED expensed approximately $119,934 in affiliate management fees payable to OEDA for the three months ended September 30, 2004 (the period subsequent to the spin-off of OEDA). A board member of PGP was entitled to receive from OEDA board fees of $175,000 per year for services performed in his capacity as an OEDA board member. For the three and nine months ended September 30, 2004, OEDA expensed $0 and $87,500, respectively, related to these board fees which have been included in "Affiliate management fees" in the Condensed Consolidated Statement of Operations (for the period prior to the spin-off of OEDA). OED is a party to a consulting agreement with a board member of PGP. Under the consulting agreement, OED must pay to the board member a fee equal to 2.5% of OED's earnings before interest, taxes, depreciation, amortization and other non-recurring charges during the preceding calendar year commencing on January 1, 2004. Under the consulting agreement, the board member is also entitled to reimbursement of reasonable business expenses as approved by the board of managers of PGP. OED has expensed $156,252 and $468,752 in "Affiliate management fees" in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2004, respectively, related to this agreement. -15- 7. Segment Information Pursuant to the provisions of SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information," the Company has determined that it currently has two reportable segments: Iowa operations, which comprise the Diamond Jo riverboat casino in Iowa and Louisiana operations, which comprise the casino, racetrack and off-track betting facilities operated by OED in Louisiana. The Company evaluates performance and allocates resources based upon, among other considerations, segment operating earnings (as defined below). The table below presents information about reported segments for the periods ended (in thousands):
Net Revenues Net Revenues Three Months Ended September 30, Nine Months Ended September 30, 2004 2003 2004 2003 -------- -------- -------- -------- Diamond Jo $ 13,853 $ 15,474 $ 38,368 $ 40,597 Evangeline Downs 23,438 5,542 71,054 15,692 -------- -------- -------- -------- Total $ 37,291 $ 21,016 $109,422 $ 56,289 ======== ======== ======== ======== Segment Operating Earnings Segment Operating Earnings Three Months Ended September 30, Nine Months Ended September 30, 2004 2003 2004 2003 -------- -------- -------- -------- General corporate ............ $ (413) $ (131) $ (500) $ (131) Diamond Jo ................... 4,962 5,738 12,371 13,672 Evangeline Downs ............. 4,368 70 13,137 837 -------- -------- -------- -------- Total Segment Operating Earnings (1) ............... 8,917 5,677 25,008 14,378 General corporate: Management severance and recruiting .............. (101) (101) Diamond Jo: Depreciation and amortization ............ (633) (607) (1,797) (2,109) Development expense ....... (70) (130) Management severance and recruiting .............. (290) (290) Interest expense, net ..... (2,387) (2,801) (16,669) (8,255) Loss on sale of assets .... (17) (18) (105) Preferred member distributions ........... (181) Evangeline Downs: Depreciation and amortization ............ (2,357) (79) (7,048) (225) Pre-opening expense ....... (512) (257) (717) Management severance and recruiting .............. (179) (179) Affiliate management fees . (276) (676) Interest expense, net ..... (3,789) (3,848) (41,325) (9,934) -------- -------- -------- -------- Net loss to common members' interest ................ (1,182) (2,170) (43,482) (7,148) ======== ======== ======== ========
-16- (1) Segment operating earnings is defined as net loss to common members' interest plus depreciation and amortization, pre-opening expense, development expense, management severance and recruiting expense, affiliate management fees, interest expense (net) (including loss on early retirement of debt), loss on disposal of assets and preferred member distributions. 8. Subsequent Event The PGL Credit Facility was amended on November 10, 2004 to provide that the obligations under the Term Loan portion of the PGL Credit Facility be secured by the assets of DJL in addition to those of OED and, as a result, the minimum OED EBITDA covenant is no longer applicable. -17- PENINSULA GAMING, LLC PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) The following pro-forma condensed statement of operations (unaudited) sets forth our results of operations for the nine months ended September 30, 2004 on an actual basis and on a pro-forma basis to give effect to the offering of the Peninsula Gaming Notes and the application of the net proceeds therefrom as set forth under the section entitled "Use of Proceeds" and the consummation of the other Transactions as set forth in the section entitled "The Transactions" as if such transactions had occurred on December 31, 2003.
Nine Months Ended September 30, 2004 ------------------------------------ Pro Forma Historical Adjustments Pro Forma ---------- ----------- --------- NET REVENUES ............................................. $ 109,421,951 $ 109,421,951 EXPENSES ................................................. 94,892,852 94,892,852 ------------- ------------- ------------- INCOME FROM OPERATIONS ................................... 14,529,099 14,529,099 ------------- ------------- ------------- OTHER INCOME (EXPENSE): Interest income ....................................... 150,970 150,970 Interest expense, net of amounts capitalized .......... (20,308,621) $ 1,228,514(1) (19,080,107) Loss on early retirement of debt ...................... (37,566,234) 37,566,234(2) Interest expense related to preferred members' interest, redeemable .................................. (270,000) (270,000) Loss on disposal of assets ............................ (17,685) (17,685) ------------- ------------- ------------- Total other expense ................................... (58,011,570) 38,794,748 (19,216,822) ------------- ------------- ------------- NET LOSS TO COMMON MEMBERS' INTEREST ..................... $ (43,482,471) $ 38,794,748 $ (4,687,723) ============= ============= =============
(1) Represents elimination of (a) $2.5 million of contractual, fixed rate interest on the DJL Notes at 12 1/4% (b) $4.4 million of contractual, fixed rate interest on the OED Notes at 13% and (c) $0.8 million of amortization of deferred financing costs and bond discount related to redeemed DJL Notes and OED Notes, offset by (y) $5.9 million of contractual, fixed rate interest on the PGL Notes at 8 3/4% and (z) $0.6 million of amortization of deferred financing costs and bond discount on the PGL Notes. (2) Represents elimination of loss on early retirement of debt (including call and tender premiums and write-off of deferred financing costs and bond discounts) related to the early redemption of the DJL Notes and OED Notes. -18- THE OLD EVANGELINE DOWNS, L.L.C. CONDENSED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 2004 2003 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 10,845,830 $ 8,502,654 Restricted cash - purse settlements 2,210,673 1,589,125 Restricted investments 15,778,883 Accounts receivable 1,543,532 402,133 Inventory 238,457 290,107 Prepaid expenses 778,220 244,446 ------------- ------------- Total current assets 15,616,712 26,807,348 ------------- ------------- RESTRICTED CASH - RACINO PROJECT 20,013,291 ------------- ------------- PROPERTY AND EQUIPMENT, NET 101,003,334 87,463,052 ------------- ------------- OTHER ASSETS: Deferred financing costs, net of amortization of $606,353 and $1,335,172, respectively 8,017,847 10,185,806 Other intangibles 32,480,528 32,257,963 Deposits and other assets 53,407 87,767 ------------- ------------- Total other assets 40,551,782 42,531,536 ------------- ------------- TOTAL $ 157,171,828 $ 176,815,227 ============= ============= LIABILITIES AND MEMBERS' DEFICIT CURRENT LIABILITIES: Accounts payable $ 2,608,938 $ 2,168,027 Construction payable - St. Landry Parish 3,774,374 20,156,591 Purse settlement payable 3,277,445 1,589,125 Accrued payroll and payroll taxes 835,913 1,219,000 Accrued interest 6,043,670 5,472,306 Other accrued expenses 3,881,414 2,067,312 Current maturity of long-term debt 4,822,009 3,498,222 Payables to affiliates 6,293,433 4,855,204 ------------- ------------- Total current liabilities 31,537,196 41,025,787 ------------- ------------- LONG-TERM LIABILITIES: 8 3/4% Senior secured notes, net of discount 143,159,615 13% Senior secured notes, net of discount 6,792,829 120,923,436 Senior secured credit facilities 4,770,074 5,104,301 Term loan 9,666,667 FF&E credit facility 9,921,557 Notes payable 3,300,000 3,511,654 Other accrued expenses 400,000 800,000 ------------- ------------- Total long-term liabilities 168,089,185 140,260,948 ------------- ------------- Total liabilities 199,626,381 181,286,735 COMMITMENTS AND CONTINGENCIES MEMBERS' DEFICIT (42,454,553) (4,471,508) ------------- ------------- TOTAL $ 157,171,828 $ 176,815,227 ============= =============
See notes to condensed financial statements (unaudited). -19- THE OLD EVANGELINE DOWNS, L.L.C. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- REVENUES: Casino $ 16,493,276 $ 51,155,601 Racing 5,685,045 $ 5,081,518 16,544,688 $ 14,536,243 Food and beverage 2,324,143 409,884 6,702,254 1,039,754 Other 231,549 62,741 677,487 128,207 Less promotional allowances (1,295,564) (12,532) (4,026,117) (12,532) ------------ ------------ ------------ ------------ Total net revenues 23,438,449 5,541,611 71,053,913 15,691,672 ------------ ------------ ------------ ------------ EXPENSES: Casino 8,931,444 28,238,876 Racing 4,859,240 4,413,576 13,790,426 11,922,832 Food and beverage 1,660,285 327,223 5,165,898 865,641 Other 178,828 6,262 623,551 18,518 Selling, general and administrative 3,440,054 723,574 10,185,450 2,047,397 Depreciation and amortization 2,356,984 79,083 7,047,532 224,978 Litigation settlement 1,600,000 Pre-opening expense 512,445 257,448 717,366 Management severance and recruiting 179,409 179,409 Affiliate management fees 635,988 120,000 1,930,433 360,000 Corporate expense allocation 112,014 112,014 ------------ ------------ ------------ ------------ Total expenses 22,354,246 6,182,163 67,531,037 17,756,732 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS 1,084,203 (640,552) 3,522,876 (2,065,060) ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest income 16,765 107,488 114,572 378,936 Interest expense, net of amounts capitalized (3,806,006) (3,955,704) (12,713,051) (10,313,296) Loss on early retirement of debt (28,726,539) ------------ ------------ ------------ ------------ Total other expense (3,789,241) (3,848,216) (41,325,018) (9,934,360) ------------ ------------ ------------ ------------ NET LOSS TO COMMON MEMBERS' INTEREST $ (2,705,038) $ (4,488,768) $(37,802,142) $(11,999,420) ============ ============ ============ ============
See notes to condensed financial statements (unaudited). -20- THE OLD EVANGELINE DOWNS, L.L.C. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended Nine months ended September 30, 2004 September 30, 2003 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (37,802,142) $ (11,999,420) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization 7,047,532 224,978 Amortization and write-off of deferred financing costs and discount on notes 12,451,344 1,469,444 Changes in operating assets and liabilities: Restricted cash - purse settlements (621,548) 781,446 Receivables (1,141,399) (1,852,597) Inventory 51,650 (10,968) Prepaid expenses and other assets (499,414) (75,318) Accounts payable 1,434,001 1,064,251 Accrued expenses 1,528,434 1,407,982 Payable to affiliate 1,613,229 821,210 ------------- ------------- Net cash flows from operating activities (15,938,313) (8,168,992) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisition and licensing costs (217,542) (1,781,746) Racino project development costs (35,359,358) (21,011,905) Proceeds from (deposits to) restricted cash - racino project, net 20,013,291 (44,750,403) Maturity and sale of restricted investments 15,778,883 8,144,088 Purchase of restricted investments (23,922,971) Purchase of property and equipment (1,181,276) (492,830) ------------- ------------- Net cash flows from investing activities (966,002) (83,815,767) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Deferred financing costs (7,861,978) (11,387,462) Principal payments on debt (138,671,232) (20,125,000) Proceeds from senior credit facilities 4,770,074 2,604,301 Proceeds from term loan 14,666,667 Proceeds from FF&E credit facility 3,467,507 Proceeds from senior secured notes 143,070,687 120,736,000 Member distributions (194,234) ------------- ------------- Net cash flows from financing activities 19,247,491 91,827,839 ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,343,176 (156,920) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,502,654 962,652 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,845,830 $ 805,732 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 11,830,354 $ 8,974,200
-21- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Property additions acquired on construction payable which were accrued, but not paid $ 3,774,374 $ 12,882,728 Deferred financing costs which were accrued, but not paid 173,088 42,475 Exchange of Private OED Notes for Registered OED Notes 123,200,000
See notes to condensed financial statements (unaudited) -22- THE OLD EVANGELINE DOWNS, L.L.C. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Basis of Presentation The Old Evangeline Downs, L.L.C., a Louisiana limited liability company ("OED" or the "Company"), 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. was 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"). Prior to the corporate restructuring described below, OED was a wholly owned subsidiary of OED Acquisition, LLC, a Delaware limited liability company ("OEDA"). OEDA was a wholly owned subsidiary of Diamond Jo, LLC, a Delaware limited liability company ("DJL"), which owns and operates the Diamond Jo riverboat casino in Dubuque, Iowa. Prior to the corporate restructuring described below, DJL was a wholly owned subsidiary of Peninsula Gaming Partners, LLC, a Delaware limited liability company ("PGP"). On June 16, 2004, a corporate restructuring occurred, which is reflected in these financial statements, pursuant to which Peninsula Gaming, LLC, a Delaware limited liability company ("PGL"), became a new direct parent company of DJL, OED and Peninsula Gaming Corp. ("PGC", formerly known as The Old Evangeline Downs Capital Corp.), a Delaware limited liability company. PGL is a wholly owned subsidiary of PGP. In connection with the corporate restructuring, OEDA became a sister company to PGL and a wholly owned subsidiary of PGP in a corporate spin-off which was recorded as a distribution on June 16, 2004. In the opinion of management, the accompanying unaudited 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 expected 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 PGL's Annual Report on Form 10-K for the year ended December 31, 2003. Accordingly, footnote disclosure which would substantially duplicate the disclosure in the audited financial statements has been omitted in the accompanying unaudited financial statements. 2. Summary of Significant Accounting Policies Restricted Investments--As of December 31, 2003, OED had approximately $15.8 million, net of discount, invested in government securities with original maturities of greater than 90 days from the date of initial investment. These investments were classified as held-to-maturity and had contractual maturities of $8.0 million on both February 15, 2004 and August 15, 2004. Proceeds from the maturity of the investments on February 15, 2004 were used to help make the payment of fixed interest on the OED Notes due March 1, 2004 in accordance with the terms of the Cash Collateral and Disbursement Agreement, dated February 25, 2003, among OED, U.S. Bank National Association (as trustee and disbursement agent) and an independent construction consultant (the "Cash Collateral and Disbursement Agreement"). As a result of the refinancing of the OED Notes on April 16, 2004 (see Note 4), the Cash Collateral and Disbursement Agreement was cancelled and, therefore, the restricted investments were no longer required. Therefore, during May 2004, the remaining restricted investments of approximately $7.9 million were redeemed. -23- Restricted Cash--Racino Project--As of December 31, 2003, OED had $14.4 million in cash equivalents deposited in a construction disbursement account, $0.2 million in cash equivalents deposited in an interest reserve account that were to be used toward payment of fixed interest on the OED Notes, $5.0 million in cash equivalents deposited in a completion reserve account that were to be used to fund potential cost overruns and contingency amounts with respect to the design, development, construction, equipping and opening of the racino and $0.4 million in cash in a local financial institution. The funds deposited in these accounts were invested in cash or securities that are readily convertible to cash. As a result of the refinancing of the OED Notes on April 16, 2004 (see Note 4), the Cash Collateral and Disbursement Agreement was terminated and, therefore, the restricted cash--Racino Project was no longer required. Deferred Financing Costs - As of September 30, 2004, OED incurred approximately $7.3 million of fees and expenses related to the refinancing of the OED Notes and approximately $0.8 million of fees and expenses related to the refinancing of (i) OED's $15.0 million senior secured credit facility with Wells Fargo Foothill dated June 24, 2003 (as amended, the "OED Credit Facility") and (ii) OED's $16.0 million FF&E credit facility with Wells Fargo Foothill dated September 22, 2003 (the "OED FF&E Facility"), which refinancings were consummated in the second quarter (see Note 4 for further discussion on the refinancings). Other Intangibles--At September 30, 2004 "Other intangibles" consists of licensing costs and the acquired trade name associated with the purchase of OED. Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" provides that goodwill and indefinite lived intangible assets will no longer be amortized but will be reviewed at least annually for impairment and written down and charged to income when their recorded value exceeds their estimated fair value. As of September 30, 2004 and December 31, 2003, the Company had approximately $32.5 and $32.3 million, respectively, of "Other intangibles" on its balance sheet summarized as follows (in millions):
September 30, December 31, 2004 2003 ------------- ------------ Slot Machine and Electronic Video Game Licenses $ 28.7 $ 28.5 Tradename 2.5 2.5 Horse Racing Licenses 1.3 1.3 ------------- ------------ Total $ 32.5 $ 32.3 ============= ============
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 the initial 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 trade name 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. The valuations were updated by management in the first quarter of 2004 indicating no impairment. 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 trade name or the way OED's trade name 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. -24- On June 25, 2002, PGP entered into an agreement with William E. Trotter, II ("Trotter") and William E. Trotter, II Family L.L.C., a Louisiana limited liability company ("WET2LLC") to acquire (i) all of Trotter's interests in two promissory notes issued by OED in connection with DJL's acquisition of OED, and (ii) all of Trotter's membership interests owned by WET2LLC (together, the "Trotter Purchase"). On August 30, 2002, OEDA consummated the Trotter Purchase for a purchase price consisting of cash of $15,546,000, plus a contingent fee of one half of one percent (0.5%) of the net slot revenues generated by OED's racino located in St. Landry Parish, Louisiana, for a period of ten years commencing on December 19, 2003, the date the racino's casino opened to the general public. This contingent fee is payable monthly in arrears and is recorded as an adjustment to the purchase price of "Other intangibles" on the Condensed Balance Sheet of $222,565 for the nine months ended September 30, 2004. 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 other intangible assets. Concentrations of Risk--The Company maintains deposit accounts at three banks. At September 30, 2004 and December 31, 2003, and various times during the periods then ended, the balance at the banks exceeded the maximum amount insured by the Federal Deposit Insurance Corporation. Credit risk is managed by monitoring the credit quality of the banks. The Company's customer base is concentrated in southwest Louisiana. Reclassifications--Certain prior year amounts have been reclassified to conform with the current period presentation. 3. Property and Equipment Property and equipment of the Company at September 30, 2004 and December 31, 2003 is summarized as follows: September 30, December 31, 2004 2003 ------------- ------------- Land and land improvements $ 12,806,731 $ 12,886,570 Buildings and improvements 48,417,782 45,611,018 Furniture, fixtures and equipment 22,666,689 21,212,716 Computer equipment 4,830,412 4,603,839 Vehicles 70,571 70,571 Construction in progress 22,044,683 5,864,340 ------------- ------------- Subtotal 110,836,868 90,249,054 Accumulated depreciation (9,833,534) (2,786,002) ------------- ------------- Property and equipment, net $ 101,003,334 $ 87,463,052 ============= ============= -25- Depreciation expense for the three months ended September 30, 2004 and 2003 was $2,356,984 and $79,083, respectively. Depreciation expense for the nine months ended September 30, 2004 and 2003 was $7,047,532 and $224,978, respectively. In September 2004, the Company entered into agreements with various slot machine manufacturers to purchase approximately 417 slot machines for a total purchase price of approximately $5.2 million. Of the purchase price for the slot machines, approximately $4.1 million will be financed through a slot machine vendor with equal principal payments due over thirty-six months with zero percent interest for the first twenty-four months and 7.4% interest for the remaining twelve months. The remaining purchase price of the slot machines of approximately $1.1 million will be financed through another slot machine vendor with equal principal payments over twelve months and zero percent interest. 4. Debt The debt of the Company consists of the following:
September 30, December 31, 2004 2003 -------------- ----------- 8 3/4% Senior Secured Notes due April 15, 2012, net of discount of $1,948,389, secured by assets and stock of DJL and OED $ 143,159,615 13% Senior Secured Notes of OED due March 1, 2010 with Contingent Interest, net of discount of $117,171 and $2,276,564, respectively, secured by certain assets of OED 6,792,829 $ 120,923,436 $35.0 million revolving line of credit under a Loan and Security Agreement of DJL and OED with Wells Fargo Foothill, Inc. dated June 16, 2004, interest rate at Prime + a margin of 0.5 - 1.0% (current rate of 5.75%), maturing June 16, 2008, secured by certain assets of DJL and OED 4,770,074 Term Loan under a Loan and Security Agreement of DJL and OED with Wells Fargo Foothill, Inc. dated June 16, 2004, interest rate at Prime + 2.5% (current rate of 7.25%), due in equal monthly installments of $333,333 beginning July 1, 2004, maturing June 16, 2008, secured by certain assets of OED 13,666,667 $15.0 million Loan and Security Agreement of OED with Wells Fargo Foothill, Inc., interest rate at Prime + 2.50%, secured by certain assets of OED 5,104,301 $16.0 million Loan and Security Agreement of OED with Wells Fargo Foothill, Inc. ("FF&E Credit Facility"), interest rate at Prime + 2.50%, due in 48 equal monthly principal payments beginning on March 1, 2004, secured by certain assets of OED 12,532,493 Promissory note payable to third party, interest at 4.75% payable monthly in arrears, annual principal payments of $550,000 due each October beginning in 2004, secured by mortgage on certain real property of OED 3,850,000 3,850,000
-26- Note payable to IGT, interest rate at 9.5%, monthly payments of principal and interest of $31,250, with final payment due July 1, 2005, secured by certain assets of OED 272,009 548,940 ------------- ------------- Total debt 172,511,194 142,959,170 Less current portion (4,822,009) (3,498,222) ------------- ------------- Total long term debt $ 167,689,185 $ 139,460,948 ============= =============
On March 9, 2004, OED commenced a tender offer and consent solicitation to repurchase all of its outstanding OED Notes and to solicit consents to certain proposed amendments to the indenture governing the OED Notes as set forth in OED's Offer to Purchase and Consent Solicitation Statement, dated March 9, 2004. On March 19, 2004, the expiration date of the consent solicitation, OED received the requisite consents and tenders from holders of a majority of the aggregate principal amount of the outstanding OED Notes. The tender offer expired on April 5, 2004, and OED redeemed approximately $116.3 million principal amount of OED Notes. On April 16, 2004, DJL and PGC completed a Rule 144A private placement of $233 million principal amount of 8 3/4% Senior Secured Notes due 2012 (the "Peninsula Gaming Notes"). The Peninsula Gaming Notes were issued at a discount of approximately $3.3 million. Interest on the Peninsula Gaming Notes is payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2004. Upon the corporate restructuring, PGL became a co-issuer of the Peninsula Gaming Notes. PGL used the net proceeds from the sale of the Peninsula Gaming Notes as follows (all payments based on outstanding balances as of April 16, 2004): (1) to irrevocably deposit funds into an escrow account to redeem all of the DJL Notes in an amount (including call premium and accrued interest) of approximately $79.9 million; (2) to repurchase approximately $116.3 million principal amount of OED Notes for an aggregate amount (including tender premium, accrued interest and contingent interest) of approximately $134.6 million; (3) to pay accrued distributions on DJL's outstanding preferred membership interests-redeemable of approximately $1.1 million; (4) to pay related fees and expenses of approximately $13.4 million; and (5) for general corporate purposes. As a result of the issuance of the Peninsula Gaming Notes, OED incurred a loss of approximately $27.9 million consisting of the write-off of deferred financing fees of approximately $8.4 million, the payment of a tender premium on the OED Notes of approximately $16.3 million, write-off of bond discount of approximately $2.1 million and consent fees of approximately $1.1 million. In addition, OED wrote off $0.8 million of deferred financing fees related to the refinancing of the credit facilities discussed below. The indenture governing the Peninsula Gaming Notes limits the Company's ability to, among other things: o incur more debt; o redeem stock; o pay dividends or make other distributions to PGP o issue stock of restricted subsidiaries; o make investments; o create liens; o enter into transactions with affiliates; o merge or consolidate; and o transfer or sell assets. -27- The Peninsula Gaming Notes are guaranteed, subject to the prior lien of the senior credit facility discussed below, by the Company and the Company has pledged its equity interests as collateral. The Peninsula Gaming Notes do not limit the Company's or DJL's ability to transfer net assets to PGL. Proceeds received from the issuance of the Peninsula Gaming Notes were allocated between the Company and DJL, based on each company's respective amount of senior debt refinanced and their respective shares of financing related fees and expenses. The Company was allocated approximately $143.0 million, net of $2.0 million discount and DJL was allocated approximately $86.7 million, net of $1.3 million discount. On June 16, 2004, DJL and OED jointly entered into a Loan and Security Agreement with Wells Fargo Foothill, Inc. as the Arranger and Agent (the "PGL Credit Facility"). The PGL Credit Facility consists of a revolving credit facility which permits DJL and OED to request advances and letters of credit up to the lesser of the maximum revolver amount of $35 million (less amounts outstanding under letters of credit) and a specified borrowing base (the "Borrowing Base"). For the purposes of the PGL Credit Facility, the Borrowing Base is the lesser of the Combined EBITDA (as defined in the PGL Credit Facility) of OED and DJL for the twelve months immediately preceding the current month end multiplied by 150% and the Combined EBITDA of OED and DJL for the most recent quarterly period annualized multiplied by 150%. At September 30, 2004, the maximum revolver amount was $35.0 million. Immediately upon the closing of the PGL Credit Facility, the Company and DJL borrowed approximately $15.9 million to refinance outstanding obligations under the OED Credit Facility and DJL Credit Facility and pay financing related fees and expenses. Of the initial borrowings under the PGL Credit Facility, OED was allocated approximately $4.8 million and DJL was allocated approximately $11.1 million, based on each company's respective amounts being refinanced and their respective shares of financing related fees and expenses. Advances under the PGL Credit Facility bear an interest rate based on the borrower's option of LIBOR plus a margin 3% -3.5% or Wells Fargo prime rate plus a margin of 0.5% -1.0% (current rate of 5.75%) however, at no time shall the interest rate be lower than 4.0%. The PGL Credit Facility also contains a Term Loan in the amount of $14,666,667. The proceeds from the Term Loan were used to repay outstanding obligations under the FF&E Credit Facility. The Term Loan is secured by certain assets of OED and requires monthly payments of $333,333 starting July 1, 2004 until the full balance is paid, with a maturity of June 16, 2008. The Term Loan has an interest rate equal to the Wells Fargo prime rate plus 2.5% (current rate of 7.25%), however, at no time shall the interest rate be lower than 6.0%. Under the terms of the PGL Credit Facility, at closing the Company was required to issue a letter of credit in the amount of $3.2 million in favor of Wells Fargo related to the Term Loan. The Company and DJL are jointly and severally liable under the PGL Credit Facility, other than borrowings under the Term Loan for which OED is solely liable. Borrowings under the PGL Credit Facility, other than borrowings under the Term Loan, are collateralized by substantially all assets of the Company and DJL. Borrowings under the Term Loan are collateralized by a separate lien on the furniture, fixtures and equipment of the Company financed pursuant to the terms of the OED FF&E Facility. Borrowings under the PGL Credit Facility are guaranteed by PGL and PGC. The PGL Credit Facility contains a number of restrictive covenants and agreements, including covenants that limit DJL's and OED's ability to, among other things: (1) incur more debt; (2) create liens; (3) enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its capital stock; (4) dispose of certain assets; (5) guarantee debt of others; (6) pay dividends or make other distributions; (7) make investments; (8) enter into transactions with affiliates. The PGL Credit Facility also contains financial covenants including a minimum Combined EBITDA (as defined in the PGL Credit Facility) of the Company and DJL and limitations on capital expenditure amounts. -28- Specifically, the PGL Credit Facility prohibits DJL and OED from making loans to PGL except on an arm's length basis and pursuant to an exception that permits DJL and OED to make unsecured loans to PGL in an aggregate principal amount not exceeding $10.0 million. In addition, DJL and OED are prohibited from making any dividends or other distributions to PGL, subject to certain limited exceptions. For example, so long as no default or event of default under the PGL Credit Facility has occurred and is continuing, and immediately after giving effect to such dividend or other distribution the Interest Coverage Ratio (as defined in the PGL Credit Facility) for the immediately preceding four fiscal quarter period would not have been less than 2.0 to 1.0, DJL and OED can pay dividends and other distributions to PGL in an aggregate amount, when taken together with all other such payments made after the date of the closing of the PGL Credit Facility not exceeding the sum of (a) 50% of the sum of DJL's and OED's Combined Net Income and Combined Non-Cash Charges (as each such term is defined in the PGL Credit Facility) for the period from the beginning of the first full fiscal quarter immediately following the closing date of the PGL Credit Facility to the end of DJL's or OED's, as applicable, most recently ended fiscal quarter for which internal financial statements are available at the time of the dividend or other distribution, (b) cash proceeds from sales of equity of DJL or OED or a cash contribution of a holder of equity of DJL or OED, (c) cash proceeds from the sale of convertible or exchangeable debt securities that have been converted or exchanged into equity of DJL or OED after the closing date of the PGL Credit Facility and prior to the time of such dividend or other distribution, and (d) the aggregate Return from Unrestricted Subsidiaries (as each such term is defined in the PGL Credit Facility) of DJL or OED, if any. In addition, DJL and OED are permitted to make dividends or other distributions to PGL or pay certain tax obligations. Further, DJL and OED can make dividends and other distributions to PGL to pay costs related to certain tax preparation, accounting, legal and administrative fees and expenses. Additionally, DJL and OED may make dividends and other distributions to PGL in respect of certain payments under management agreements and to pay reasonable directors' or managers' fees and expenses, so long as any payments with respect to any management agreement or employee, consulting or similar agreement do not, in the aggregate, in any fiscal year exceed the lesser of (a) 4.0% of DJL and OED's Combined EBITDA (as defined in the PGL Credit Facility) and (b) $4.0 million. DJL and OED may also make dividends or other distributions to PGL so that PGL, subject to certain limitations, can repurchase, redeem or otherwise acquire equity interests in PGL or its Restricted Subsidiaries (as defined in the PGL Credit Facility) from its respective employees, members or managers. Finally, PGL and OED can make dividends and other distributions not to exceed (a) in 2004, $7.5 million, (b) in 2005, $3.75 million plus any unused portion of the amount available in 2004, if any, (c) in 2006, $3.75 million plus the unused portion of the amount available in 2005, if any, (d) in 2007, the unused portion of the amount available in 2006, if any, and (e) in 2008, the unused portion of the amount available in 2007, if any. Subject to the foregoing provisions, all of the net assets of DJL and OED are restricted assets. The Company was in compliance with such covenants, or had obtained waivers, as of September 30, 2004. As of September 30, 2004, combined borrowings under the PGL Credit Facility were $11.9 million, of which approximately $4.8 million related to the Company and approximately $7.1 million related to DJL. In addition, as of September 30, 2004, the Company had outstanding letters of credit of approximately $3.5 million. The OED Credit Facility and the FF&E Credit Facility were terminated in connection with the refinancing discussed above. In September 2004, the Company entered into agreements with various slot manufacturers to purchase 417 slot machines which will be financed through the respective slot vendor. See further discussion in Note 3. -29- 5. Commitments and Contingencies As discussed in Note 2, in connection with the Trotter Purchase, OED is obligated to pay a contingent fee of one half of one percent (0.5%) of the net slot revenues generated by OED's racino located in St. Landry Parish, Louisiana, for a period of ten years commencing on December 19, 2003, the date the racino's casino opened to the general public. OED incurred $222,565 related to this contingent fee during the nine months ended September 30, 2004 and increased "Other intangibles" as an adjustment to the purchase price of such assets. On November 8, 1994, the Louisiana Horsemen's Benevolent and Protective Association 1993, Inc. ("LHBPA") filed a lawsuit against all licensed horse racetracks in the State of Louisiana. The lawsuit alleged that LHBPA did not receive the appropriate share of net revenues from video poker devices located at licensed horse racetracks. In February 2003, OED entered into a settlement agreement with LHBPA for $1.6 million. The terms of the settlement agreement requires OED to make payments of $400,000 annually beginning in March 2003, with additional $400,000 payments due in March 2004 through 2006. In accordance with Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies," the Company recorded an expense and related accrual of $1.6 million in the financial statements as of December 31, 2003. Of the total $1.6 million accrual, $0.4 million was paid in March 2003 and 2004, $0.4 million has been included in "Other accrued expenses" in the "Current Liabilities" section with the remaining $0.4 million recorded under "Other accrued expenses" in the "Long-term liabilities" section of the Balance Sheet. We are not a party to, and none of our property is the subject of, any other pending legal proceedings other than litigation arising in the normal course of business. We do not believe that adverse determinations in any or all such other litigation would have a material adverse effect on our financial condition, results of operations or cash flows. 6. Related Party Transactions The Company is a party to a consulting agreement with a board member of PGP. Under the consulting agreement, the Company must pay to the board member a fee equal to 2.5% of the Company's earnings before interest, taxes, depreciation, amortization and other non-recurring charges during the preceding calendar year commencing on January 1, 2004. Under the consulting agreement, the board member is also entitled to reimbursement of reasonable business expenses as approved by the board of managers of PGP. During the three and nine months ended September 30, 2004, the board member received $99,875 and $525,125, respectively under his consulting agreement. Approximately $56,375 of this amount has been included in "Prepaid expenses" in the "Condensed Balance Sheet" as of September 30, 2004 and $156,252 and $468,752 has been included in "Management fees" in the "Condensed Statement of Operations" for the three and nine months ended September 30, 2004, respectively. Management Services Agreement--In 2002, OED entered into a management services agreement ("MSA") with DJL and OEDA (together the "Operator"). Pursuant to the terms of that agreement, the Operator will manage and operate OED's existing horse racetrack and design, develop, construct, manage and operate the new racino and provide certain pre-opening services in connection therewith. Under the management services agreement, the Operator is entitled to receive a pre-opening service fee equal to $40,000 per month, retroactive to June 27, 2001 which is not required to be paid until the earlier to occur of commencement of the operations of the casino or the Operating Deadline (as defined in the MSA and applicable to the casino). The Operator is also entitled to be reimbursed for all reasonable and documented out-of-pocket expenses permitted to be incurred under the management services agreement, including, but not limited to tax preparation, accounting, legal and administrative fees and expenses -30- incurred in connection with the Operator's ownership of us. The Operator will also receive a basic management fee equal to 1.75% of net revenue (less net food and beverage revenue) and an incentive fee equal to: o 3.0% of the first $25.0 million of EBITDA (as defined below); o 4.0% of EBITDA in excess of $25.0 million but less than $30.0 million of EBITDA; and o 5.0% of EBITDA in excess of $30.0 million. "EBITDA" is defined in the management services agreement as earnings before interest, income taxes, depreciation and amortization; provided, however, that in calculating earnings, the basic management fee, the incentive fee and reimbursables payable under the management services agreement shall not be deducted. The management services agreement will terminate on the later of (i) the date that is eight years after the first date a revenue paying customer is admitted to the new racino and (ii) the date of sale by DJL of its beneficial ownership of OED's membership interests. During the three month periods ended September 30, 2004 and 2003 the Company accrued management fee expenses of $479,736 and 120,000, respectively. During the nine month periods ended September 30, 2004 and 2003 the Company accrued management fee expenses of $1,461,681 and 360,000, respectively. In accordance with the management services agreement, the Company expensed and accrued approximately $119,934 in related party management fees payable to OEDA for the three months ended September 30, 2004 (the period subsequent to the spin-off of OEDA). During the three and nine months ended September 30, 2004, the Company distributed $93,404 to PGL primarily in respect to general corporate administrative costs and expenses of PGL. These amounts were recorded as member distributions and are included in "Accumulated Deficit" on the Balance Sheet. At September 30, 2004, the Company had payables to an affiliate of $4,127,109 primarily related to development costs paid by the affiliate on behalf of the Company. At September 30, 2004, the Company had payables to affiliates of $2,166,324 related to a management services agreement for which DJL and OEDA together manage and operate the Company's existing horse racetrack and the design, development, construction and operation of the Company's racino that opened on December 19, 2003. Certain members of the Company are also managers of PGP. Due to these relationships, those individuals may indirectly receive money from the Company for management fees and other amounts paid by the Company to PGP. 7. Subsequent Event The PGL Credit Facility was amended on November 10, 2004 to provide that the obligations under the Term Loan portion of the PGL Credit Facility be secured by the assets of DJL in addition to those of OED and, as a result, the minimum OED EBITDA covenant is no longer applicable. -31- THE OLD EVANGELINE DOWNS, LLC PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) The following pro-forma condensed statement of operations (unaudited) sets forth our results of operations for the nine months ended September 30, 2004 on an actual basis and on a pro-forma basis to give effect to the offering of the Peninsula Gaming Notes and the application of the net proceeds therefrom as set forth under the section entitled "Use of Proceeds" and the consummation of the other Transactions as set forth in the section entitled "The Transactions" as if such transactions had occurred on December 31, 2003.
Nine Months Ended September 30, 2004 ------------------------------------ Pro Forma Historical Adjustments Pro Forma ---------- ----------- --------- NET REVENUES .................................. $ 71,053,913 $ 71,053,913 EXPENSES ...................................... 67,531,037 67,531,037 ------------ ------------ ------------ INCOME FROM OPERATIONS ........................ 3,522,876 3,522,876 ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest income ............................ 114,572 114,572 Interest expense, net of amounts capitalized (12,713,051) $ 899,825(1) (11,813,226) Loss on early retirement of debt ........... (28,726,539) 28,726,539(2) ------------ ------------ ------------ Total other expense ........................ (41,325,018) 29,626,364 (11,698,654) ------------ ------------ ------------ NET LOSS TO COMMON MEMBERS' INTEREST .......... $(37,802,142) $ 29,626,364 $ (8,175,778) ============ ============ ============
(1) Represents elimination of (a) $4.4 million of contractual, fixed rate interest on the OED Notes at 13% and (b) $0.6 million of amortization of deferred financing costs and bond discount related to redeemed OED Notes, offset by (y) $3.7 million of contractual, fixed rate interest on the PGL Notes at 8 3/4% and (z) $0.4 million of amortization of deferred financing costs and bond discount on the PGL Notes. (2) Represents elimination of loss on early retirement of debt (including tender premium and write-off of deferred financing costs and bond discount) related to the early redemption of the OED Notes. -32- DIAMOND JO, LLC CONDENSED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 2004 2003 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 6,032,570 $ 12,655,641 Accounts receivable, less allowance for doubtful accounts of $51,148 and $61,922, respectively 84,291 80,089 Receivables from affiliates 6,308,703 5,060,894 Inventory 97,247 113,269 Prepaid expenses 583,532 570,563 ------------- ------------- Total current assets 13,106,343 18,480,456 ------------- ------------- PROPERTY AND EQUIPMENT, NET 15,173,049 15,014,293 ------------- ------------- OTHER ASSETS: Deferred financing costs, net of amortization of $328,633 and $3,953,400, respectively 5,599,419 2,516,581 Goodwill 53,083,429 53,083,429 Deposits and other assets 344,274 670,022 ------------- ------------- Total other assets 59,027,122 56,270,032 ------------- ------------- TOTAL $ 87,306,514 $ 89,764,781 ============= ============= LIABILITIES AND MEMBERS' DEFICIT CURRENT LIABILITIES: Accounts payable $ 458,365 $ 804,581 Accrued payroll and payroll taxes 1,050,459 1,569,224 Accrued interest 3,580,456 4,432,472 Other accrued expenses 2,075,656 2,568,794 Current maturity of long-term debt 600,000 ------------- ------------- Total current liabilities 7,164,936 9,975,071 ------------- ------------- LONG-TERM LIABILITIES: 8 3/4% Senior secured notes, net of discount 86,712,086 12 1/4% Senior secured notes, net of discount 70,616,221 Senior secured credit facilities 7,117,690 10,650,000 Other accrued expenses 250,000 300,000 Preferred members' interest, redeemable 4,000,000 4,000,000 ------------- ------------- Total long-term liabilities 98,079,776 85,566,221 ------------- ------------- Total liabilities 105,244,712 95,541,292 COMMITMENTS AND CONTINGENCIES MEMBERS' DEFICIT (17,938,198) (5,776,511) ------------- ------------- TOTAL $ 87,306,514 $ 89,764,781 ============= =============
See notes to condensed financial statements (unaudited). -33- DIAMOND JO, LLC CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- REVENUES: Casino $ 13,595,281 $ 15,220,028 $ 37,939,428 $ 40,199,982 Food and beverage 819,483 883,626 2,216,887 2,270,675 Management fees from affiliates 359,802 90,000 1,096,261 270,000 Other 273,275 246,262 436,536 367,008 Less promotional allowances (835,601) (875,777) (2,224,813) (2,240,190) ------------ ------------ ------------ ------------ Total net revenues 14,212,240 15,564,139 39,464,299 40,867,475 ------------ ------------ ------------ ------------ EXPENSES: Casino 5,558,973 5,762,110 16,561,862 16,487,222 Food and beverage 702,568 744,287 2,001,541 2,076,573 Boat operations 563,585 591,622 1,682,631 1,733,970 Other 266,639 296,428 409,712 365,223 Selling, general and administrative 1,798,886 2,342,085 5,341,572 6,262,575 Depreciation and amortization 632,644 606,584 1,797,310 2,109,329 Development expense 70,472 129,703 Management severance and recruiting 290,000 290,000 Corporate expense allocation 142,701 142,701 ------------ ------------ ------------ ------------ Total expenses 10,026,468 10,343,116 28,357,032 29,034,892 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 4,185,772 5,221,023 11,107,267 11,832,583 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest income 4,603 13,554 36,398 31,697 Interest expense (2,301,203) (2,724,483) (7,595,570) (8,196,227) Loss on early retirement of debt (8,839,695) Interest expense related to preferred members' interest, redeemable (90,000) (90,000) (270,000) (90,000) Gain (loss) on disposal of assets (17,493) 135 (17,685) (104,549) ------------ ------------ ------------ ------------ Total other expense (2,404,093) (2,800,794) (16,686,552) (8,359,079) ------------ ------------ ------------ ------------ NET INCOME (LOSS) BEFORE PREFERRED MEMBER DISTRIBUTIONS 1,781,679 2,420,229 (5,579,285) 3,473,504 LESS PREFERRED MEMBER DISTRIBUTIONS (180,544) ------------ ------------ ------------ ------------ NET INCOME (LOSS) TO COMMON MEMBERS' INTEREST $ 1,781,679 $ 2,420,229 $ (5,579,285) $ 3,292,960 ============ ============ ============ ============
See notes to condensed financial statements (unaudited). -34- DIAMOND JO, LLC CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine months ended Nine months ended September 30, 2004 September 30, 2003 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (5,579,285) $ 3,292,960 Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization 1,797,310 2,109,329 Provision for doubtful accounts 84,794 109,838 Amortization and write-off of deferred financing costs and discount on notes 3,279,812 889,559 Loss on disposal of assets 17,685 104,549 Changes in operating assets and liabilities: Receivables (82,846) (102,348) Receivables from affiliates (1,247,809) (731,210) Inventory 16,022 12,856 Prepaid expenses and other assets 312,779 (704,744) Accounts payable (59,354) (1,499) Accrued expenses (2,354,202) (1,550,908) ------------ ------------ Net cash flows from operating activities (3,815,094) 3,428,382 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (2,265,914) (1,197,977) Proceeds from sale of property and equipment 1,800 387,906 ------------ ------------ Net cash flows from investing activities (2,264,114) (810,071) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Deferred financing costs (5,487,143) Principal payments on debt (86,250,000) (450,000) Proceeds from senior credit facilities 11,117,690 Proceeds from senior secured notes 86,657,993 Member distributions (6,582,403) (1,147,987) ------------ ------------ Net cash flows from financing activities (543,863) (1,597,987) ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,623,071) 1,020,324 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,655,641 9,547,553 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,032,570 $ 10,567,877 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 8,215,854 $ 9,481,706 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Deferred financing costs which were accrued, but not paid $ 437,637 $ 0
See notes to condensed financial statements (unaudited). -35- DIAMOND JO, LLC NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization and Basis of Presentation Diamond Jo, LLC, a Delaware limited liability company ("DJL" or the "Company"), owns and operates the Diamond Jo riverboat casino in Dubuque, Iowa, and, prior to the corporate restructuring described below, was a wholly owned subsidiary of Peninsula Gaming Partners, LLC, a Delaware limited liability company ("PGP"). DJL had two direct wholly owned subsidiaries, (i) Peninsula Gaming Corp., which had no assets or operations and was formed solely to facilitate the offering of DJL's 12 1/4% Senior Secured Notes due 2006 (the "DJL Notes"), and (ii) OED Acquisition, LLC, a Delaware limited liability company ("OEDA"), and the parent company of The Old Evangeline Downs, L.L.C., a Louisiana limited liability company ("OED"), 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. was 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"). Following the redemption of the DJL Notes in April 2004, Peninsula Gaming Corp. was dissolved. On June 16, 2004, a corporate restructuring occurred, which is reflected in these financial statements, pursuant to which Peninsula Gaming, LLC, a Delaware limited liability company ("PGL"), became a new direct parent company of DJL, OED and Peninsula Gaming Corp. ("PGC", formerly known as The Old Evangeline Downs Capital Corp.), a Delaware limited liability company. PGL is a wholly owned subsidiary of PGP. In connection with the corporate restructuring, OEDA became a sister company to PGL and a wholly owned subsidiary of PGP in a corporate spin-off which was recorded as a distribution on June 16, 2004. In the opinion of management, the accompanying unaudited 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 expected 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 PGL's Amendment No.3 to Form S-4 Registration Statement filed on November 12, 2004. Accordingly, footnote disclosure which would substantially duplicate the disclosure in the audited financial statements have been omitted in the accompanying unaudited financial statements. 2. Summary of Significant Accounting Policies Deferred Financing Costs - As of September 30, 2004, the Company incurred approximately $5.3 million of fees and expenses related to the refinancing of the DJL Notes and approximately $0.6 million of fees and expenses related to the refinancing of the Company's senior secured credit facility with Wells Fargo Foothill, Inc. dated February 23, 2001 (as amended, the "DJL Credit Facility"), which refinancing was consummated in the second quarter (see Note 4 for further discussion on the refinancing). -36- Goodwill --At September 30, 2004, "Goodwill" consists of goodwill associated with the purchase of the Diamond Jo. To the extent the purchase price exceeded the fair value of the net identifiable assets acquired, such excess has been recorded as goodwill. Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" provides that goodwill and indefinite lived intangible assets will no longer be amortized but will be reviewed at least annually for impairment and written down and charged to income when their recorded value exceeds their estimated fair value. During the first quarter of 2004 and 2003, the Company performed its annual impairment test on goodwill in accordance with SFAS No. 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. 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. Concentrations of Risk--The Company maintains deposit accounts at one bank. At September 30, 2004 and December 31, 2003, and various times during the period then ended, the balance at the bank exceeded the maximum amount insured by the Federal Deposit Insurance Corporation. Credit risk is managed by monitoring the credit quality of the bank. The Company's customer base is concentrated in eastern Iowa. Reclassifications--Certain prior year amounts have been reclassified to conform with the current period presentation. 3. Property and Equipment Property and equipment of the Company and its subsidiaries at September 30, 2004 and December 31, 2003 is summarized as follows: September 30, December 31, 2004 2003 ------------- -------------- Land and land improvements $ 802,980 $ 800,000 Buildings and improvements 6,380,680 6,380,680 Riverboats and improvements 8,307,001 8,305,022 Furniture, fixtures and equipment 8,509,118 7,259,886 Computer equipment 575,511 593,127 Vehicles 105,664 105,664 Construction in progress 432,519 170,527 ------------- ------------- Subtotal 25,113,473 23,614,906 Accumulated depreciation (9,940,424) (8,600,613) ------------- ------------- Property and equipment, net $ 15,173,049 $ 15,014,293 ============= ============= -37- Depreciation expense for the three months ended September 30, 2004 and 2003 was $632,644 and $606,584, respectively. Depreciation expense for the nine months ended September 30, 2004 and 2003 was $1,797,310 and $2,109,329, respectively. In September 2004, the Company entered into agreements with various slot machine manufacturers to purchase approximately 366 slot machines for a total purchase price of approximately $4.3 million. Of the purchase price for the slot machines, approximately $3.9 million will be financed through a slot machine vendor with equal principal payments due over thirty-six months with zero percent interest for the first twenty-four months and 7.4% interest for the remaining twelve months. Approximately $0.1 million of the purchase price of the slot machines will be financed through another slot machine vendor with equal principal payments over twelve months and zero percent interest. The remaining purchase price of the slot machines of approximately $0.3 million will be paid with cash on hand. 4. Debt The debt of the Company consists of the following:
September 30, December 31, 2004 2003 ------------- ------------ 8 3/4% Senior Secured Notes due April 15, 2012, net of discount of $1,179,911, secured by assets and stock of DJL and OED. $ 86,712,086 12 1/4% Senior Secured Notes due July 1, 2006, net of discount of $383,779, secured by assets of DJL. $ 70,616,221 $35.0 million revolving line of credit under a Loan and Security Agreement of DJL and OED with Wells Fargo Foothill, Inc. dated June 16, 2004, interest rate at Prime + a margin of 0.5 - 1.0% (current rate of 5.75%), maturing June 16, 2008, secured by certain assets of DJL and OED. 7,117,690 Line of Credit 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 5.5% on outstanding balances of $10.0 million or less and 8.5% on outstanding balances greater than $10.0 million, secured by assets of the Diamond Jo. 11,250,000 Preferred membership interests-redeemable, interest at 9%, due October 13, 2006. 4,000,000 4,000,000 ------------ ------------ Total debt 97,829,776 85,866,221 Less current portion (0) (600,000) ------------ ------------ Total long term debt $ 97,829,776 $ 85,266,221 ============ ============
On April 16, 2004, DJL and PGC completed a Rule 144A private placement of $233 million principal amount of 8 3/4% Senior Secured Notes due 2012 (the "Peninsula Gaming Notes"). The Peninsula Gaming Notes were issued at a discount of approximately $3.3 million. Interest on the Peninsula Gaming Notes is payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2004. Upon the corporate restructuring, PGL became a co-issuer of the Peninsula Notes. -38- PGL used the net proceeds from the sale of the Peninsula Gaming Notes as follows (all payments based on outstanding balances as of April 16, 2004): (1) to irrevocably deposit funds into an escrow account to redeem all of the DJL Notes in an amount (including call premium and accrued interest) of approximately $79.9 million; (2) to repurchase approximately $116.3 million principal amount of OED Notes for an aggregate amount (including tender premium, accrued interest and contingent interest) of approximately $134.6 million; (3) to pay accrued distributions on DJL's outstanding preferred membership interests-redeemable of approximately $1.1 million; (4) to pay related fees and expenses of approximately $13.4 million; and (5) for general corporate purposes. As a result of the issuance of the Peninsula Gaming Notes, DJL incurred a loss of approximately $8.7 million consisting of the write-off of deferred financing fees of approximately $2.0 million, the payment of a call premium on the DJL Notes of approximately $5.7 million, interest on the DJL Notes of approximately $0.7 million and write-off of bond discount of approximately $0.3 million. In addition, OED and the Company wrote off $0.9 million of deferred financing fees related to the refinancing of the credit facilities discussed below of which approximately $0.1 million was written off by the Company and $0.8 million was written off by OED. The indenture governing the Peninsula Gaming Notes limits the Company's ability and the ability of its restricted subsidiaries to, among other things: o incur more debt; o pay dividends or make other distributions to PGP; o redeem stock; o issue stock of restricted subsidiaries; o make investments; o create liens; o enter into transactions with affiliates; o merge or consolidate; and o transfer or sell assets. The Peninsula Gaming Notes are full and unconditional obligations of the Company as a co-issuer. PGL and PGC, also co-issuers, have no independent assets (other than PGL's investment in its subsidiaries) or operations. The Peninsula Gaming Notes are also guaranteed, subject to the prior lien of the Company's credit facility discussed below, by OED. Further, OED and the Company have pledged their equity interests as collateral. The Peninsula Gaming Notes do not limit the Company's or OED's ability to transfer net assets to PGL. Proceeds received from the issuance of the Peninsula Gaming Notes were allocated between the Company and OED, based on each company's respective amount of senior debt refinanced and their respective shares of financing related fees and expenses. The Company was allocated approximately $86.7 million of debt, net of $1.3 million discount and OED was allocated approximately $143.0 million, net of $2.0 million discount. On June 16, 2004, DJL and OED jointly entered into a Loan and Security Agreement with Wells Fargo Foothill, Inc. as the Arranger and Agent (the "PGL Credit Facility"). The PGL Credit Facility consists of a revolving credit facility which permits the Company and OED to request advances and letters of credit -39- up to the lesser of the maximum revolver amount of $35 million (less amounts outstanding under letters of credit) and a specified borrowing base (the "Borrowing Base"). For the purposes of the PGL Credit Facility, the Borrowing Base is the lesser of the Combined EBITDA (as defined in the PGL Credit Facility) of OED and the Company for the twelve months immediately preceding the current month end multiplied by 150% and the Combined EBITDA of OED and the Company for the most recent quarterly period annualized multiplied by 150%. At September 30, 2004, the maximum revolver amount was $35.0 million. Immediately upon the closing of the PGL Credit Facility, the Company and OED borrowed approximately $15.9 million to refinance outstanding obligations under the DJL Credit Facility and the OED Credit Facility and pay financing related fees and expenses. Of the initial borrowings under the PGL Credit Facility, the Company was allocated approximately $11.1 million and OED was allocated approximately $4.8 million based on each company's respective amounts being refinanced and their respective shares of financing related fees and expenses. Advances under the PGL Credit Facility bear an interest rate based on the borrower's option of LIBOR plus a margin 3.0% -3.5% or Wells Fargo prime rate plus a margin of 0.5% - -1.0% (current rate of 5.75%) however, at no time shall the interest rate be lower than 4.0%. The Company and OED are jointly and severally liable under the PGL Credit Facility for advances under the revolver portion of the facility and such borrowings are collateralized by substantially all assets of OED and the Company. Borrowings under the PGL Credit Facility are guaranteed by PGL and PGC. The PGL Credit Facility contains a number of restrictive covenants and agreements, including covenants that limit the Company's and OED's ability to, among other things: (1) incur more debt; (2) create liens; (3) enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its capital stock; (4) dispose of certain assets; (5) guarantee debt of others; (6) pay dividends or make other distributions; (7) make investments; (8) enter into transactions with affiliates. The PGL Credit Facility also contains financial covenants including a minimum Combined EBITDA (as defined by the PGL Credit Facility) of the Company and OED and limitations to capital expenditure amounts at the Company and OED. Specifically, the PGL Credit Facility prohibits DJL and OED from making loans to PGL except on an arm's length basis and pursuant to an exception that permits DJL and OED to make unsecured loans to PGL in an aggregate principal amount not exceeding $10.0 million. In addition, DJL and OED are prohibited from making any dividends or other distributions to PGL, subject to certain limited exceptions. For example, so long as no default or event of default under the PGL Credit Facility has occurred and is continuing, and immediately after giving effect to such dividend or other distribution the Interest Coverage Ratio (as defined in the PGL Credit Facility) for the immediately preceding four fiscal quarter period would not have been less than 2.0 to 1.0, DJL and OED can pay dividends and other distributions to PGL in an aggregate amount, when taken together with all other such payments made after the date of the closing of the PGL Credit Facility not exceeding the sum of (a) 50% of the sum of DJL's and OED's Combined Net Income and Combined Non-Cash Charges (as each such term is defined in the PGL Credit Facility) for the period from the beginning of the first full fiscal quarter immediately following the closing date of the PGL Credit Facility to the end of DJL's or OED's, as applicable, most recently ended fiscal quarter for which internal financial statements are available at the time of the dividend or other distribution, (b) cash proceeds from sales of equity of DJL or OED or a cash contribution of a holder of equity of DJL or OED, (c) cash proceeds from the sale of convertible or exchangeable debt securities that have been converted or exchanged into equity of DJL or OED after the closing date of the PGL Credit Facility and prior to the time of such dividend or other distribution, and (d) the aggregate Return from Unrestricted Subsidiaries (as each such term is defined in the PGL Credit Facility) of DJL or OED, if any. In addition, DJL and OED are permitted to make dividends or other distributions to PGL or pay certain tax obligations. Further, DJL and OED can make dividends and other distributions to PGL to pay costs related to certain tax preparation, accounting, legal and administrative fees and expenses. Additionally, DJL and OED may make dividends and other distributions to PGL in respect of certain payments under -40- management agreements and to pay reasonable directors' or managers' fees and expenses, so long as any payments with respect to any management agreement or employee, consulting or similar agreement do not, in the aggregate, in any fiscal year exceed the lesser of (a) 4.0% of DJL and OED's Combined EBITDA (as defined in the PGL Credit Facility) and (b) $4.0 million. DJL and OED may also make dividends or other distributions to PGL so that PGL, subject to certain limitations, can repurchase, redeem or otherwise acquire equity interests in PGL or its Restricted Subsidiaries (as defined in the PGL Credit Facility) from its respective employees, members or managers. Finally, PGL and OED can make dividends and other distributions not to exceed (a) in 2004, $7.5 million, (b) in 2005, $3.75 million plus any unused portion of the amount available in 2004, if any, (c) in 2006, $3.75 million plus the unused portion of the amount available in 2005, if any, (d) in 2007, the unused portion of the amount available in 2006, if any, and (e) in 2008, the unused portion of the amount available in 2007, if any. Subject to the foregoing provisions, all of the net assets of DJL and OED are restricted assets. The Company was in compliance with such covenants, or had obtained waivers, as of September 30, 2004. As of September 30, 2004, combined borrowings under the PGL Credit Facility were $11.9 million, of which approximately $7.1 million related to the Company and approximately $4.8 million related to OED. In addition, as of September 30, 2004, the Company had outstanding letters of credit of approximately $0.5 million. The DJL Credit Facility was terminated in connection with the refinancing discussed above. In September 2004, the Company entered into agreements with various slot manufacturers to purchase 366 slot machines which will be financed through the respective slot vendor. See further discussion in Note 3. 5. Commitments and Contingencies Under the Company's and PGP's operating agreements, the Company and PGP have agreed, subject to few exceptions, to indemnify and hold harmless its members, PGP and PGP members, as the case may be, from liabilities incurred as a result of their positions as our sole manager and as members of the Company or PGP. The Company was involved in a lawsuit with a former employee. The Company reached a settlement with the former employee during the third quarter of 2004. The settlement did not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. We are not a party to, and none of our property 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 litigation would have a material adverse effect on our financial condition, results of operations or cash flows. 6. Related Party Transactions In May 2004, PGP repurchased 147,553 units of its convertible preferred membership interests from an unrelated third party for approximately $4.5 million. The repurchase was funded by a distribution of cash to PGP from DJL, one of its wholly-owned subsidiaries. During the three months ended September 30, 2004 and 2003, the Company distributed $431,448 and $683,946, respectively, and during the nine months ended September 30, 2004 and 2003, the Company distributed $2,082,036 and $1,147,987, respectively, to PGP and PGL primarily in respect of (i) certain -41- consulting and financial advisory services related to PGP development expenses, (ii) board fees and actual out of pocket expenses incurred by members of board of managers of PGP in their capacity as a board member (iii) tax, accounting, legal and administrative costs and expenses. These amounts were recorded as member distributions and are included in "Accumulated Deficit" on the Balance Sheet. At September 30, 2004, the Company had receivables from affiliates of $4,127,109 primarily related to development costs paid by the Company on behalf of the affiliates. At September 30, 2004, the Company had receivables from affiliates of $2,181,594 related to a management services agreement for which the Company and OEDA together manage and operate OED's existing horse racetrack and the design, development, construction and operation of OED's racino that opened on December 19, 2003. 7. Subsequent Event The PGL Credit Facility was amended on November 10, 2004 to provide that the obligations under the Term Loan portion of the PGL Credit Facility be secured by the assets of DJL in addition to those of OED and, as a result, the minimum OED EBITDA covenant is no longer applicable. -42- DIAMOND JO, LLC PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) The following pro-forma condensed statement of operations (unaudited) sets forth our results of operations for the nine months ended September 30, 2004 on an actual basis and on a pro-forma basis to give effect to the offering of the Peninsula Gaming Notes and the application of the net proceeds therefrom as set forth under the section entitled "Use of Proceeds" and the consummation of the other Transactions as set forth in the section entitled "The Transactions" as if such transactions had occurred on December 31, 2003.
Nine Months Ended September 30, 2004 ------------------------------------ Pro Forma Historical Adjustments Pro Forma ---------- ----------- --------- NET REVENUES ............................................. $ 39,464,299 $ 39,464,299 EXPENSES ................................................. 28,357,032 28,357,032 ------------ ------------ ------------ INCOME FROM OPERATIONS ................................... 11,107,267 11,107,267 ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest income ....................................... 36,398 36,398 Interest expense, net of amounts capitalized .......... (7,595,570) $ 328,689(1) (7,266,881) Loss on early retirement of debt ...................... (8,839,695) 8,839,695(2) Interest expense related to preferred members' (270,000) (270,000) interest, redeemable Loss on disposal of assets ............................ (17,685) (17,685) ------------ ------------ ------------ Total other expense ................................... (16,686,552) 9,168,384 (7,518,168) ------------ ------------ ------------ NET INCOME (LOSS) TO COMMON MEMBERS' INTEREST $ (5,579,285) $ 9,168,384 $ 3,589,099 ============ ============ ============
(1) Represents elimination of (a) $2.5 million of contractual, fixed rate interest on the DJL Notes at 12 1/4% and (b) $0.2 million of amortization of deferred financing costs and bond discount related to redeemed DJL Notes, offset by (y) $2.2 million of contractual, fixed rate interest on the PGL Notes at 8 3/4% and (z) $0.2 million of amortization of deferred financing costs and bond discount on the PGL Notes. (2) Represents elimination of loss on early retirement of debt (including call premium and write-off of deferred financing costs and bond discount) related to the early redemption of the DJL Notes. -43- 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 as well as other risks set forth in our Annual Report on Form 10-K for the year ended December 31, 2003. Should these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our future performance and actual results of operations may differ materially from those expected or intended. Unless the context requires otherwise, references to the "Company", "our", "us" and "we" refer to PGL, DJL, PGC and OED. Peninsula Gaming, LLC; DJL and PGC are co-issuers of 8 3/4 % Senior Secured Notes (the "Peninsula Gaming Notes") which are registered with the U.S. Securities and Exchange Commission (the "SEC"). Also, OED is a guarantor of the Peninsula Gaming Notes and has pledged its stock as collateral. The separate financial statements of DJL, as a co-issuer, and OED, as guarantor, are required to be filed with the SEC and are included in this 10-Q filing. Peninsula Gaming, LLC and PGC have no independent assets or operations of their own and, therefore, no separate financial statements of these entities have been provided. Critical Accounting Policies 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 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. The critical accounting policies used in preparation of the Company's financial statements are described in Managements Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and in the Company's Amendment No.3 to Form S-4 Registration Statement filed with the Securities and Exchange Commission on November 12, 2004. Actual results in these areas could differ from management's estimates. There have been no significant changes to the Company's critical accounting policies during the nine months ended September 30, 2004. Results of Operations Our results of operations are discussed below on a consolidated basis and by our two segments, Diamond Jo (Iowa operations) and OED (Louisiana operations). The following is a reconciliation of our results of operations by segment to our consolidated statements of operations: Three Months Ended September 30, 2004 2003 ------------ ------------ General corporate $ (513,745) $ (131,250) Diamond Jo 3,968,671 5,131,023 OED 1,556,019 (520,552) ------------ ------------ Income from operations $ 5,010,945 $ 4,479,221 ============ ============ -44-
Diamond Jo OED -------------------------------- -------------------------------- Three Months Ended September 30, Three Months Ended September 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Revenues: Casino $ 13,595,281 $ 15,220,028 $ 16,493,276 Racing 5,685,045 $ 5,081,518 Food and beverage 819,483 883,626 2,324,143 409,884 Other 273,275 246,262 231,549 62,741 Less promotional allowances (835,601) (875,777) (1,295,564) (12,532) ------------ ------------ ------------ ------------ Net revenues 13,852,438 15,474,139 23,438,449 5,541,611 ------------ ------------ ------------ ------------ Expenses: Casino 5,558,973 5,762,110 8,931,444 Racing 4,859,240 4,413,576 Food and beverage 702,568 744,287 1,660,285 327,223 Boat operations 563,585 591,622 Other 266,639 296,428 178,828 6,262 Selling, general and administrative 1,798,886 2,342,085 3,440,054 723,574 Depreciation and amortization 632,644 606,584 2,356,984 79,083 Pre-opening expense 512,445 Development expense 70,472 Management severance and recruiting 290,000 179,409 Affiliate management fees 276,186 ------------ ------------ ------------ ------------ Total expenses 9,883,767 10,343,116 21,882,430 6,062,163 ------------ ------------ ------------ ------------ Income (loss) from operations $ 3,968,671 $ 5,131,023 $ 1,556,019 $ (520,552) ============ ============ ============ ============
Three months ended September 30, 2004 Compared to Three months ended September 30, 2003 Net revenues increased 77.4% to $37.3 million for the three months ended September 30, 2004 from $21.0 million for the three months ended September 30, 2003. Net revenues at OED increased $17.9 million to $23.4 million for the three months ended September 30, 2004 from $5.5 million for the three months ended September 30, 2003. Net revenues at OED increased due primarily to casino revenues of -45- $16.5 million derived from OED's new racino which opened on December 19, 2003 and an increase in racing revenues of $0.6 million due to an increase in video poker revenues of approximately $0.4 million at OED's renovated off-track betting ("OTB") facility in Port Allen, Louisiana. Net revenues at the Diamond Jo decreased $1.6 million to $13.9 million for the three months ended September 30, 2004 from $15.5 million for the three months ended September 30, 2003. This decrease in net revenues at the Diamond Jo is due to a decrease in slot revenue of 9.1%, or $1.2 million, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003, primarily due to a decrease in coin-in of 7.9% over the same period. In addition, table game revenues at the Diamond Jo decreased 22.1%, or $0.4 million, for the three months ended September 30, 2004 compared to the three months ended September 30, 2003, primarily due to a decrease in hold percentage to 17.5% for the three months ended September 30, 2004 compared to 19.7% during the three months ended September 30, 2003. Had our hold percentage remained consistent with the prior year, table game revenues would have decreased 12.6%, or $0.2 million based on our actual drop during the three months ended September 30, 2004. Management believes that a significant portion of the decrease in slot and table game revenues can be attributed to the re-opening of a Native American casino approximately 125 miles southwest of the Diamond Jo on January 1, 2004. This casino was closed from mid May 2003 through December 2003. Overall casino revenues increased $14.9 million to $30.1 million for the three months ended September 30, 2004 from $15.2 million for the three months ended September 30, 2003. Casino revenues of $16.5 million at OED consisted solely of revenues from slot machines at OED's recently opened racino. Casino win per gaming position per day at OED was $112 for the three months ended September 30, 2004. Casino revenues at the Diamond Jo decreased 10.7% to $13.6 million for the three months ended September 30, 2004 from $15.2 million for the three months ended September 30, 2003. This decrease was due to a 9.1% decrease in slot revenues and a 22.1% decrease in table game revenues which is primarily attributed to the re-opening of a nearby Native American casino as discussed above. Casino revenues at the Diamond Jo were derived 89.3% from slot machines and 10.7% from table games for the three months ended September 30, 2004 compared to 87.7% from slot machines and 12.3% from table games for the three months ended September 30, 2003. Our slot win per unit per day at the Diamond Jo decreased 11.5% to $176 for the three months ended September 30, 2004 from $199 for the three months ended September 30, 2003. Our admissions at the Diamond Jo for the three months ended September 30, 2004 decreased 5.0% to 298,000 from 314,000 for the three months ended September 30, 2003. For the three months ended September 30, 2004 our casino win per admission at the Diamond Jo decreased 6.0% to $46 from $48 for the three months ended September 30, 2003. Management believes this decrease in admissions and related win per admission is primarily attributed to the re-opening of a nearby Native American casino noted above. Racing revenues at OED increased $0.6 million to $5.7 million for the three months ended September 30, 2004 from $5.1 million for the three months ended September 30, 2003. The increase in racing revenues is due to an increase in video poker revenues of $0.4 million at OED's Port Allen OTB facility and an increase in revenues generated from out-of-state signal fees. Net food and beverage revenues, other revenues and promotional allowances increased $0.8 million during the three months ended September 30, 2004 compared to the three months ended September 30, 2003 due primarily to food and beverage revenues generated from OED's new racino. Overall casino expenses increased $8.7 million to $14.5 million for the three months ended September 30, 2004 from $5.8 million for the three months ended September 30, 2003. Casino expenses of $8.9 million at OED were primarily related to purse supplements and gaming taxes, which are based on net casino revenues, and casino related payroll. Casino operating expenses at the Diamond Jo decreased 3.5%, or $0.2 million, to $5.6 million for the three months ended September 30, 2004 from $5.8 million for the three months ended September 30, 2003 due primarily to a decrease in gaming taxes at the Diamond Jo of approximately $0.1 million associated with our decrease in casino revenues partially offset by an increase in the gaming tax rate from 20% to 22% effective July 1, 2004. -46- Racing expenses increased 10.1% to $4.9 million for the three months ended September 30, 2004 from $4.4 million for the three months ended September 30, 2003 due primarily to an increase in franchise fees and operating expenses of $0.2 million related to OED's video gaming devices at its renovated OTB in Port Allen, Louisiana and an increase in purse expenses associated with an increase in out-of-state signal fees generated by OED of approximately $0.1 million. Food and beverage expenses increased $1.3 million to $2.4 million for the three months ended September 30, 2004 from $1.1 million for the three months ended September 30, 2003 due primarily to an increase in food and beverage expenses at OED of $1.3 million primarily related to the opening of OED's new racino. Boat operation expenses at the Diamond Jo were substantially unchanged at $0.6 million for the three months ended September 30, 2004 and 2003. Other expenses increased $0.1 million due primarily to costs associated with OED's new outdoor entertainment venue. Selling, general and administrative expenses increased $2.5 million to $5.7 million for the three months ended September 30, 2004 from $3.2 million for the three months ended September 30, 2003. This increase was due primarily to an increase in general and administrative expenses at OED of $2.7 million due primarily to payroll, marketing and other general and administrative expenses associated with the new racino. Depreciation and amortization expenses increased $2.3 million to $3.0 million for the three months ended September 30, 2004 from $0.7 million for the three months ended September 30, 2003 due to depreciation of property and equipment at OED's racino of approximately $2.2 million during the three months ended September 30, 2004. Pre-opening expenses of $0.5 million for the three months ended September 30, 2003 relate to expenses incurred by OED with respect to start-up activities surrounding the racino project. Management severance and recruiting expenses of $0.6 million relate to severance costs incurred by the Company in relation to turnover of upper management and various fees and expenses incurred in finding new management personnel. Affiliate management fees of $0.3 million during the three months ended September 30, 2004 relate to management fees paid to related parties primarily related to a consulting agreement at OED for the racino. Income from operations increased $0.5 million to $5.0 million for the three months ended September 30, 2004 from $4.5 million for the three months ended September 30, 2003. OED's increase of $2.1 million is primarily due to the new racino operation as discussed above partially offset by lower net revenues of $1.6 million at Diamond Jo as described above. Net interest expense, including interest expense related to DJL's redeemable preferred member interests, decreased $0.4 million to $6.2 million for the three months ended September 30, 2004 from $6.7 million for the three months ended September 30, 2003. This decrease is primarily due to the refinancing of the Company's long term debt with lower interest rates during the second quarter of 2004. Interest expense of approximately $0.4 million and $0.7 million was capitalized as part of our construction of the racino during the three months ended September 30, 2004 and 2003, respectively. -47- Our results of operations are discussed below on a consolidated basis and by our two segments, Diamond Jo (Iowa operations) and OED (Louisiana operations). The following is a reconciliation of our results of operations by segment to our consolidated statements of operations: Nine Months Ended September 30, 2004 2003 ------------ ------------ General corporate $ (601,245) $ (131,250) Diamond Jo 10,153,707 11,562,583 OED 4,976,637 (1,705,060) Litigation settlement * 1,600,000 ------------ ------------ Income from operations $ 14,529,099 $ 11,326,273 ============ ============ * Income from operations at OED includes a litigation settlement with the Louisiana Horsemen's Benevolent and Protective Association 1993, inc. of $1.6 million which is eliminated in consolidation as the amount was expensed on the Company's consolidated financial statements for the year ended December 31, 2002.
Diamond Jo OED -------------------------------- -------------------------------- Nine Months Ended September 30, Nine Months Ended September 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Revenues: Casino $ 37,939,428 $ 40,199,982 $ 51,155,601 Racing 16,544,688 $ 14,536,243 Food and beverage 2,216,887 2,270,675 6,702,254 1,039,754 Other 436,536 367,008 677,487 128,207 Less promotional allowances (2,224,813) (2,240,190) (4,026,117) (12,532) ------------ ------------ ------------ ------------ Net revenues 38,368,038 40,597,475 71,053,913 15,691,672 ------------ ------------ ------------ ------------ Expenses: Casino 16,561,862 16,487,222 28,238,876 Racing 13,790,426 11,922,832 Food and beverage 2,001,541 2,076,573 5,165,898 865,641 Boat operations 1,682,631 1,733,970 Other 409,712 365,223 623,551 18,518 Selling, general and administrative 5,341,572 6,262,575 10,185,450 2,047,397 Depreciation and amortization 1,797,310 2,109,329 7,047,532 224,978 Litigation settlement 1,600,000 Pre-opening expense 257,448 717,366 Development expense 129,703
-48- Management severance and recruiting 290,000 179,409 Affiliate management fees 588,686 ------------ ------------ ------------ ------------ Total expenses 28,214,331 29,034,892 66,077,276 17,396,732 ------------ ------------ ------------ ------------ Income (loss) from operations $ 10,153,707 $ 11,562,583 $ 4,976,637 $ (1,705,060) ============ ============ ============ ============
Nine months ended September 30, 2004 Compared to Nine months ended September 30, 2003 Net revenues increased 94.4% to $109.4 million for the nine months ended September 30, 2004 from $56.3 million for the nine months ended September 30, 2003. Net revenues at OED increased $55.4 million to $71.1 million for the nine months ended September 30, 2004 from $15.7 million for the nine months ended September 30, 2003. Net revenues at OED increased due primarily to casino revenues of $51.2 million derived from OED's new racino which opened on December 19, 2003 and an increase in racing revenues of $2.0 million due primarily to an increase in video poker revenues of approximately $1.8 million at OED's renovated OTB in Port Allen, Louisiana. Net revenues at the Diamond Jo decreased $2.2 million to $38.4 million for the nine months ended September 30, 2004 from $40.6 million for the nine months ended September 30, 2003. This decrease in net revenues at the Diamond Jo is due to a decrease in slot revenue of 3.9%, or $1.4 million, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003, primarily due to a decrease in coin-in of 4.3% over the same period. In addition, table game revenues at the Diamond Jo decreased 17.7%, or $0.9 million, for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003, primarily due to a decrease in hold percentage to 18.5% for the nine months ended September 30, 2004 compared to 20.6% during the nine months ended September 30, 2003. Had our hold percentage remained consistent with the prior year, table game revenues would have decreased 8.5%, or $0.4 million based on our actual drop during the nine months ended September 30, 2004. Management believes that a significant portion of the decrease in slot and table game revenues can be attributed to the re-opening of a Native American casino approximately 125 miles southwest of the Diamond Jo on January 1, 2004. This casino was closed from mid May 2003 through December 2003. Overall casino revenues increased $48.9 million to $89.1 million for the nine months ended September 30, 2004 from $40.2 million for the nine months ended September 30, 2003. Casino revenues of $51.2 million at OED consisted solely of revenues from slot machines at OED's recently opened racino. Casino win per gaming position per day at OED was $118 for the nine months ended September 30, 2004. Casino revenues at the Diamond Jo decreased 5.6% to $37.9 million for the nine months ended September 30, 2004 from $40.2 million for the nine months ended September 30, 2003. This decrease was due to a 3.9% decrease in slot revenues and a 17.7% decrease in table game revenues which is primarily attributed to the re-opening of a nearby Native American casino as discussed above. Casino revenues at the Diamond Jo were derived 88.9% from slot machines and 11.1% from table games for the nine months ended September 30, 2004 compared to 87.3% from slot machines and 12.7% from table games for the nine months ended September 30, 2003. Our slot win per unit per day at the Diamond Jo decreased 6.8% to $164 for the nine months ended September 30, 2004 from $176 for the nine months ended September 30, 2003. Our admissions at the Diamond Jo for the nine months ended September 30, 2004 decreased 1.4% to 786,000 from 797,000 for the nine months ended September 30, 2003. For the nine months ended September 30, 2004 our casino win per admission at the Diamond Jo decreased 4.3% to $48 from $50 for the nine months ended September 30, 2003. Management believes this decrease in admissions and related win per admission is primarily attributed to the re-opening of a nearby Native American casino noted above. -49- Racing revenues at OED increased $2.0 million to $16.5 million for the nine months ended September 30, 2004 from $14.5 million for the nine months ended September 30, 2003. The increase in racing revenues is due primarily to an increase in video poker revenues of $1.8 million at OED's Port Allen OTB facility. Net food and beverage revenues, other revenues and promotional allowances increased $2.2 million during the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 due primarily to food and beverage revenues generated from OED's new racino. Overall casino expenses increased $28.3 million to $44.8 million for the nine months ended September 30, 2004 from $16.5 million for the nine months ended September 30, 2003. Casino expenses of $28.2 million at OED were primarily related to purse supplements and gaming taxes, which are based on net casino revenues, and casino related payroll. Racing expenses increased 15.7% to $13.8 million for the nine months ended September 30, 2004 from $11.9 million for the nine months ended September 30, 2003 due primarily to (i) an increase in franchise fees, purse supplements and operating expenses of $1.4 million related to OED's video gaming devices at its renovated OTB in Port Allen, Louisiana, (ii) an increase in payroll at our racetrack of approximately $0.2 million related to a live quarterhorse meet that was held beginning September 16, 2004 and running through October 31, 2004 (OED did not conduct this live quarterhorse meet during 2003) and (iii) admission fees related to the OTB located at the racino of approximately $0.2 million (under current Louisiana law, OED must pay $0.25 to the Louisiana State Racing Commission per patron entering a building in which OED has an OTB, including the new racino). Food and beverage expenses increased $4.3 million to $7.2 million for the nine months ended September 30, 2004 from $2.9 million for the nine months ended September 30, 2003 due primarily to an increase in food and beverage expenses at OED of $4.3 million related to the opening of OED's new racino. Boat operation expenses at the Diamond Jo were substantially unchanged at $1.7 million for the nine months ended September 30, 2004 and 2003. Other expenses increased $0.6 million due primarily to costs associated with OED's new outdoor entertainment venue. Selling, general and administrative expenses increased $7.5 million to $15.9 million for the nine months ended September 30, 2004 from $8.4 million for the nine months ended September 30, 2003. This increase was due primarily to an increase in general and administrative expenses at OED of $8.1 million due primarily to payroll, marketing and other general and administrative expenses associated with the new racino, offset by a decrease in accrued management bonuses of approximately $0.3 million. Depreciation and amortization expenses increased $6.5 million to $8.8 million for the nine months ended September 30, 2004 from $2.3 million for the nine months ended September 30, 2003 due to depreciation of property and equipment at OED's racino of approximately $6.2 million during the nine months ended September 30, 2004. During the first quarter of 2004, we performed our annual impairment test on goodwill and indefinite life intangible assets in accordance with SFAS No. 142. Based on that review, management determined that there was no impairment of goodwill and indefinite life intangible assets. Pre-opening expenses of $0.3 million and $0.7 million for the nine months ended September 30, 2004 and 2003, respectively, relate to expenses incurred by OED with respect to start-up activities surrounding the racino project, including pre-opening costs associated with the continued construction of -50- the racetrack portion of the project. Management severance and recruiting expenses of $0.6 million relate to severance costs incurred by the Company in relation to turnover of upper management and various fees and expenses incurred in finding new management personnel. Affiliate management fees of $0.7 million during the nine months ended September 30, 2004 relate to management fees to related parties primarily related to a consulting agreement at OED for the racino. Income from operations increased $3.2 million to $14.5 million for the nine months ended September 30, 2004 from $11.3 million for the nine months ended September 30, 2003. OED's income from operations increased by $6.7 million due to the new racino operation as discussed above partially offset by lower net revenues of $2.2 million at Diamond Jo as described above. Net interest expense, including loss on early retirement of debt and interest expense related to DJL's redeemable preferred member interests, increased $39.8 million to $58.0 million for the nine months ended September 30, 2004 from $18.2 million for the nine months ended September 30, 2003. This increase is primarily due to the loss on early retirement of debt of $37.6 million related to our debt refinancing activities discussed below under Liquidity and Capital Resources. The remaining difference is primarily related to the timing of the offering of the OED Notes, which occurred on February 25, 2003. Interest expense of approximately $0.9 million and $1.2 million was capitalized as part of our construction of the racino during the nine months ended September 30, 2004 and 2003, respectively. Liquidity and Capital Resources Cash Flows from Operating, Investing and Financing Activities Our cash balance decreased $4.3 million during the nine months ended September 30, 2004 to $16.9 million from $21.2 million at December 31, 2003. Cash flows from operating activities declined by $15.4 million to a use of $20.1 million for the nine months ended September 30, 2004 compared to a use of $4.7 million for the nine months ended September 30, 2003. The decline is primarily due to tender and call premiums paid on early retirement of debt of $22.0 million, partially offset by cash generated from OED's racino operation. Cash flows used in investing activities for the nine months ended September 30, 2004 was $3.2 million consisting of cash inflows of (i) draws from restricted cash accounts held by the trustee of the OED Notes of approximately $20.0 million and (ii) cash proceeds from the maturity and sale of restricted investments of $15.8 million. These cash inflows were offset by (i) payments of approximately $35.4 million for construction, architecture fees and other development costs associated with the racino project and (ii) cash outflows of approximately $3.4 million used for capital expenditures mainly related to the purchase of new slot machines at DJL and conversions of slot machines at OED to incorporate ticket-in, ticket-out technology, which we believe enhances customer service, produces operating efficiencies and eliminates hopper fills and the down time associated with them. In September 2004, we entered into agreements with various slot machine manufacturers to purchase approximately 783 slot machines, of which 366 are to be installed at the Diamond Jo for a total purchase price of approximately $4.3 million and 417 are to be installed at OED for a total purchase price of approximately $5.2 million, all during the fourth quarter of 2004. The slot machine purchases will be financed by the manufacturers over a thirty-six month period. All of the new slot machines will be equipped with ticket-in, ticket-out technology which, upon installations, will result in having ticket-in, ticket-out technology installed in 100% of the slot machines at the Diamond Jo and in over 95% of the slot machines at OED, thus further enhancing customer service and operating efficiencies associated with this technology. We expect additional capital expenditures at DJL and OED (other than the capital expenditures related to the racino project and the slot purchase noted above) to be approximately $0.6 million and $0.8 million, respectively, for the year ended December 31, -51- 2004. We expect to meet our regulatory requirements for the racino project for fiscal 2004 with related additional capital expenditures of approximately $2.5 million. Consistent with our regulatory requirements, we also expect to continue construction on our turf track during fiscal 2005. Cash flows from financing activities for the nine months ended September 30, 2004 of $19.0 million reflects (i) net proceeds from the offering of the Peninsula Gaming Notes of approximately $229.7 million, (ii) proceeds from advances under the revolver portion of the PGL Credit Facility of approximately $15.9 million, (iii) proceeds from the initial draw under the Term Loan portion of the PGL Credit Facility of approximately $14.7 million and (iv) proceeds from OED's draws under the OED FF&E Facility of $3.5 million. These proceeds were offset by (i) redemption of $71.0 million aggregate principal amount of DJL Notes, (ii) redemption of $116.3 million aggregate principal amount of OED Notes, (iii) aggregate principal payments on borrowings under the OED FF&E Facility of $16.0 million, (iv) aggregate principal payments on borrowings under the DJL Credit Facility of $11.3 million, (v) aggregate principal payments on borrowings under the OED Credit Facility of $5.0 million, (vi) aggregate principal payments on borrowings under the revolver portion of the PGL Credit Facility of $4.0 million, (vii) aggregate principal payments under the Term Loan of $1.0 million, (viii) aggregate principal payments on notes payable of $0.3 million, (ix) payment of fees and expenses associated with the offering of the Peninsula Gaming Notes and the consummation of the PGL Credit Facility of approximately $13.3 million and (x) member distributions of approximately $6.4 Million. As of September 30, 2004, the Company had $11.9 million and $13.7 million outstanding under the revolver portion and Term Loan portion of the PGL Credit Facility, respectively. In addition, as of September 30, 2004, the Company had outstanding letters of credit of approximately $4.0 million. Financing Activities On March 9, 2004, OED commenced a tender offer and consent solicitation to repurchase all of its outstanding OED Notes and to solicit consents to certain proposed amendments to the indenture governing the OED Notes as set forth in OED's Offer to Purchase and Consent Solicitation Statement, dated March 9, 2004. On March 19, 2004, the expiration date of the consent solicitation, OED received the requisite consents and tenders from holders of a majority of the aggregate principal amount of the outstanding OED Notes. The tender offer expired on April 5, 2004, and OED redeemed approximately $116.3 million principal amount of the OED Notes. On April 16, 2004, DJL and PGC completed a Rule 144A private placement of $233 million principal amount of 8 3/4% Senior Secured Notes due 2012 (the "Peninsula Gaming Notes"). The Peninsula Gaming Notes were issued at a discount of approximately $3.3 million. Interest on the Peninsula Gaming Notes is payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2004. Upon the corporate restructuring, PGL became a co-issuer of the Peninsula Notes. The Company used the net proceeds from the sale of the Peninsula Gaming Notes as follows (all payments based on outstanding balances as of April 16, 2004): (1) to irrevocably deposit funds into an escrow account to redeem all of the DJL Notes in an amount (including call premium and accrued interest) of approximately $79.9 million; (2) to repurchase approximately $116.3 million principal amount of OED Notes for an aggregate amount (including tender premium, accrued interest and contingent interest) of approximately $134.6 million; (3) to pay accrued distributions on DJL's outstanding preferred membership interests-redeemable of approximately $1.1 million; (4) to pay related fees and expenses of approximately $13.4 million; and (5) for general corporate purposes. As a result of the issuance of the Peninsula Gaming Notes, DJL incurred a loss of approximately $8.7 million consisting of the write-off of deferred financing fees of approximately $2.0 million, the payment of a call premium on the DJL Notes of approximately $5.7 million, interest on the DJL Notes of approximately $0.7 million and write-off of -52- bond discount of approximately $0.3 million. In connection therewith, OED also incurred a loss of approximately $27.9 million consisting of the write-off of deferred financing fees of approximately $8.4 million, the payment of a tender premium on the OED Notes of approximately $16.3 million, write-off of bond discount of approximately $2.1 million and consent fees of approximately $1.1 million. In addition, OED and DJL wrote off $0.9 million of deferred financing fees related to the refinancing of the credit facilities discussed below. On June 16, 2004, DJL and OED jointly entered into a Loan and Security Agreement with Wells Fargo Foothill, Inc. as the Arranger and Agent (the "PGL Credit Facility"). The PGL Credit Facility consists of a revolving credit facility which permits DJL and OED to request advances and letters of credit up to the lesser of the maximum revolver amount of $35 million (less amounts outstanding under letters of credit) and a specified borrowing base (the "Borrowing Base"). For the purposes of the PGL Credit Facility, the Borrowing Base is the lesser of the Combined EBITDA (as defined in the PGL Credit Facility) of OED and DJL for the twelve months immediately preceding the current month end multiplied by 150% and the Combined EBITDA of OED and DJL for the most recent quarterly period annualized multiplied by 150%. At September 30, 2004, the maximum revolver amount was $35.0 million. Immediately upon the closing of the PGL Credit Facility, the Company borrowed approximately $15.9 million to refinance outstanding obligations under the DJL Credit Facility and the OED Credit Facility and pay financing related fees and expenses. Advances under the PGL Credit Facility bear an interest rate based on the borrower's option of LIBOR plus a margin 3.0% -3.5% or Wells Fargo prime rate plus a margin of 0.5% - -1.0% (current rate of 5.75%) however, at no time shall the interest rate be lower than 4.0%. The PGL Credit Facility also contains a Term Loan in the amount of $14,666,667. The proceeds from the Term Loan were used to repay outstanding obligations under the FF&E Credit Facility. The Term Loan is secured by certain assets of OED and requires monthly payments of $333,333 starting July 1, 2004 until the full balance is paid, with a maturity no later than June 16, 2008. The Term Loan has an interest rate equal to the Wells Fargo prime rate plus 2.5% (current rate of 7.25%) however, at no time shall the interest rate be lower than 6.0%. Under the terms of the PGL Credit Facility, at closing the Company was required to issue a letter of credit in the amount of $3.2 million in favor of Wells Fargo Foothill, Inc. related to the Term Loan. We currently have the following sources of funds for our business: (i) cash flows from OED's existing racetrack operations and casino operations, (ii) cash flows from DJL's existing casino operations, and (iii) available borrowings under the PGL Credit Facility of $19.1 million as of September 30, 2004. Our level of indebtedness will have several important effects on our future operations including, but not limited to, the following: (i) a significant portion of our cash flow from operations will be required to pay interest on our indebtedness and the indebtedness of our subsidiaries; (ii) the financial covenants contained in certain of the agreements governing such indebtedness will require us and/or our subsidiaries to meet certain financial tests and may limit our respective abilities to borrow additional funds or to dispose of assets; (iii) our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; and (iv) our ability to adapt to changes in the gaming industry which affect the markets in which we operate could be limited. Subject to the foregoing, we believe that cash and cash equivalents, cash generated from operations and available borrowings under our existing credit facility will be sufficient to satisfy our working capital and capital expenditure requirements, and satisfy our other current debt service requirements, including interest payments on the Peninsula Gaming Notes and the OED Notes, for the next twelve months. If cash and cash equivalents on-hand or cash we are able to generate or borrow are insufficient to meet our obligations, we may have to refinance our debt or sell some or all of our assets to meet our obligations. -53- 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 the PGL Credit Facility. As of September 30, 2004, the Company had $25.6 million in borrowings under the PGL Credit Facility, including borrowings under the Term Loan, that have variable interest rates. 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 borrows the maximum amount allowed under the PGL Credit Facility (currently an aggregate amount of $48.7 million), if market rates of interest on our variable rate debt increased by one percentage point, the estimated additional annual interest expense would be approximately $0.5 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 borrowings. 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 as of September 30, 2004 (dollars in millions):
Fixed Interest Carrying Description Maturity Rate Value Fair Value - ----------- -------- ---- ----- ---------- 8 3/4% Senior Secured Notes of PGL April 15, 2012 8 3/4% $ 229.9 $ 223.0* 13% Senior Secured Notes with Contingent Interest of OED March 1, 2010 13% 6.8 6.9 Note Payable October 1, 2010 4 3/4% 3.9 3.9 Note Payable July 1, 2005 9 1/2% 0.3 0.4 Preferred Membership Interests - Redeemable October 13, 2006 9% 4.0 4.0
- ------------------ * Represents fair value as of September 30, 2004 based on information provided by an independent investment banking firm. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. The Company's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15) as of September 30, 2004, have concluded that as of such date the Company's disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to the Company and its subsidiaries would be made known to such officers on a timely basis. -54- (b) Changes in internal controls. There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above. -55- PART II. OTHER INFORMATION Item 1. Legal Proceedings Neither we nor our subsidiaries are a party to, and none of our nor our subsidiaries' property 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, results of operations or cash flows. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters for a Vote of Security Holders None. Item 5. Other information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description - -------- --------------------------------------------------------------------- 2.1 Certificate of Dissolution of Peninsula Gaming Corporation, dated June 17, 2004 - incorporated herein by reference to Exhibit 2.1 of the Company's Form S-4 filed July 30, 2004. 3.1A Certificate of Formation of Peninsula Gaming Company, LLC - incorporated herein by reference to Exhibit 3.1A of Peninsula Gaming Company, LLC's Form S-4 filed October 12, 1999. (With regard to applicable cross-references in this registration statement, Peninsula Gaming Company, LLC's Form S-4, Current, Quarterly and Annual Reports were filed with the SEC under File No. 333-88829). 3.1B Amendment to Certificate of Formation of Peninsula Gaming Company, LLC - incorporated herein by reference to Exhibit 3.1B of Peninsula Gaming Company, LLC's Form S-4 filed October 12, 1999. 3.1C Certificate of Amendment to the Certificate of Formation of Peninsula Gaming Company, LLC, dated March 10, 2004 - incorporated herein by reference to Peninsula Gaming Company, LLC's Quarterly Report on Form 10-Q filed May 14, 2004. 3.2 Amended and Restated Operating Agreement of Peninsula Gaming Company, LLC - incorporated herein by reference to Exhibit 3.2 of Peninsula Gaming Company, LLC's Form S-4 filed on October 12, 1999. -56- 3.3A Certificate of Formation of Peninsula Casinos, LLC, dated February 27, 2004- incorporated herein by reference to Exhibit 3.3A of the Company's Form S-4 filed July 30, 2004. 3.3B Certificate of Amendment to the Certificate of Formation of Peninsula Casinos, LLC, dated March 10, 2004- incorporated herein by reference to Exhibit 3.3B of the Company's Form S-4 filed July 30, 2004. 3.4 Operating Agreement of Peninsula Gaming, LLC (formerly known as Peninsula Casinos, LLC), dated June 14, 2004- incorporated herein by reference to Exhibit 3.4 of the Company's Form S-4 filed July 30, 2004. Certificate of Incorporation of The Old Evangeline Downs Capital Corp., dated January 20, 2003- incorporated herein by reference to Exhibit 3.4 of The Old Evangeline Downs Capital Corp.'s Form S-4 3.5A filed May 28, 2003. (With regard to applicable cross-references in this registration statement, The Old Evangeline Downs Capital Corp.'s Form S-4, Current, Quarterly and Annual Reports were filed with the SEC under File No. 333-105587). 3.5B Certificate of Amendment to the Certificate of Incorporation of The Old Evangeline Downs Capital Corp., dated June 17, 2004- incorporated herein by reference to Exhibit 3.5B of the Company's Form S-4 filed July 30, 2004. 3.6 By-laws of The Old Evangeline Downs Capital Corp. - incorporated herein by reference to Exhibit 3.5 of The Old Evangeline Downs Capital Corp.'s Form S-4 filed May 28, 2003. 3.7 Amended and Restated Articles of Organization of The Old Evangeline Downs, L.L.C. (formerly The Old Evangeline Downs, L.C.), dated February 19, 2003- incorporated herein by reference to Exhibit 3.1 of The Old Evangeline Downs, L.L.C.'s Form S-4 filed May 28, 2003. (With regard to applicable cross-references in this registration statement, The Old Evangeline Downs, L.L.C.'s Form S-4 was filed with the SEC under File No. 333-105587). 3.8A Amended and Restated Operating Agreement of The Old Evangeline Downs, L.L.C., dated as of January 30, 2003- incorporated herein by reference to Exhibit 3.2 of The Old Evangeline Downs, L.L.C.'s Form S-4 filed May 28, 2003. 3.8B First Amendment to Amended and Restated Operating Agreement of The Old Evangeline Downs, L.L.C., dated as of May 21, 2003- incorporated herein by reference to Exhibit 3.3 of The Old Evangeline Downs, L.L.C.'s Form S-4 filed May 28, 2003. 4.1 Specimen Certificate of Common Stock of Peninsula Gaming Corp. (formerly known as The Old Evangeline Downs Capital Corp.) -- incorporated herein by reference to Exhibit 4.1 of the Company's Form S-4 filed July 30, 2004. 4.2A Indenture, dated July 15, 1999, by and among Peninsula Gaming Company, LLC, Peninsula Gaming Corporation and Firstar Bank of Minnesota, N.A., as trustee - incorporated herein by reference to Exhibit 4.2 of Peninsula Gaming Company, LLC's Form S-4 filed October 12, 1999. 4.2B First Supplemental Indenture, dated January 14, 2002, by and among Peninsula Gaming Company, LLC and Peninsula Gaming Corporation, as Issuers, the Subsidiary Guarantors referred to therein and U.S. Bank National Association, as trustee - incorporated herein by reference to Exhibit 4.3 of Peninsula Gaming Company, LLC's Form S-4 filed October 21, 1999. -57- 4.3A Indenture, dated February 25, 2003, by and among The Old Evangeline Downs, L.L.C., The Old Evangeline Downs Capital Corp. and U.S. Bank National Association- incorporated herein by reference to Exhibit 4.1 of The Old Evangeline Downs, L.L.C.'s Form S-4 filed May 28, 2003. 4.3B Supplemental Indenture, dated as of March 25, 2004, by and among The Old Evangeline Downs, L.L.C., The Old Evangeline Downs Capital Corp. and U.S. Bank National Association --incorporated herein by reference to Exhibit 4.3B of the Company's Form S-4 filed July 30, 2004. 4.4A Indenture, dated as of April 16, 2004, by and among Diamond Jo, LLC (formerly known as Peninsula Gaming Company, LLC), The Old Evangeline Downs Capital Corp., the Subsidiary Guarantors named therein and U.S. Bank National Association -- incorporated herein by reference to Exhibit 4.4A of the Company's Form S-4 filed July 30, 2004. 4.4B Supplemental Indenture among Peninsula Gaming, LLC, Diamond Jo, LLC (formerly known as Peninsula Gaming Company, LLC), The Old Evangeline Downs Capital Corp. and U.S. Bank National Association, dated as of June 16, 2004 -- incorporated herein by reference to Exhibit 4.4B of the Company's Form S-4 filed July 30, 2004. 4.5A Registration Rights Agreement, dated April 16, 2004, by and among Diamond Jo, LLC (formerly known as Peninsula Gaming Company, LLC), The Old Evangeline Downs Capital Corp., the Guarantors named therein and Jefferies & Company, Inc. -- incorporated herein by reference to Exhibit 4.5A of the Company's Form S-4 filed July 30, 2004. 4.5B Joinder of Peninsula Gaming, LLC, dated June 16, 2004, to the Registration Rights Agreement, dated April 16, 2004, by and among Diamond Jo, LLC (formerly known as Peninsula Gaming Company, LLC), The Old Evangeline Downs Capital Corp., the Guarantors named therein and Jefferies & Company, Inc. -- incorporated herein by reference to Exhibit 4.5B of the Company's Form S-4 filed July 30, 2004. 4.6A Pledge and Security Agreement, dated as of April 16, 2004, among Diamond Jo, LLC (formerly known as Peninsula Gaming Company, LLC), The Old Evangeline Downs Capital Corp., OED Acquisition, LLC, Peninsula Gaming Corporation, The Old Evangeline Downs, L.L.C. and U.S. Bank National Association -- incorporated herein by reference to Exhibit 4.6A of the Company's Form S-4 filed July 30, 2004. 4.6B Supplement to Security Agreement by Peninsula Gaming, LLC, dated June 16, 2004 -- incorporated herein by reference to Exhibit 4.6B of the Company's Form S-4 filed July 30, 2004. 4.7 Trademark Security Agreement, dated April 16, 2004, by Diamond Jo, LLC in favor of U.S. Bank National Association -- incorporated herein by reference to Exhibit 4.7 of the Company's Form S-4 filed July 30, 2004. 4.8 Form of 8 3/4% Senior Secured Notes due 2012 -- incorporated herein by reference to Exhibit 4.8 of the Company's Form S-4 filed July 30, 2004. 4.9A Intercreditor Agreement between U.S. Bank National Association and Wells Fargo Foothill, Inc., dated April 16, 2004 -- incorporated herein by reference to Exhibit 4.9A of the Company's Form S-4 filed July 30, 2004. -58- 4.9B Acknowledgement of Peninsula Gaming, LLC, dated June 16, 2004, to the Intercreditor Agreement between U.S. Bank National Association and Wells Fargo Foothill, Inc., dated April 16, 2004 -- incorporated herein by reference to Exhibit 4.9B of the Company's Form S-4 filed July 30, 2004. 10.1A Employment Agreement, dated July 29, 2004 by and among Natalie Schramm and Peninsula Gaming, LLC - incorporated herein by reference to Exhibit 10.1 of the Company's Form S-4 filed July 30, 2004. 10.1B Employment Agreement, dated July 14, 2004, by and among Jonathan Swain and Peninsula Gaming, LLC - incorporated herein by reference to Exhibit 10.1A of the Company's Form S-4 filed July 30, 2004. 10.19 Loan and Security Agreement, dated as of June 16, 2004, by and among Diamond Jo, LLC (formerly known as Peninsula Gaming Company, LLC), The Old Evangeline Downs, L.L.C. and Wells Fargo Foothill, Inc. - incorporated herein by reference to Exhibit 10.19 of the Company's Form S-4 filed July 30, 2004. 10.20 Guarantor Security Agreement, dated as of June 16, 2004, by and among Peninsula Gaming, LLC, The Old Evangeline Downs Capital Corp. and Wells Fargo Foothill, Inc. - incorporated herein by reference to Exhibit 10.20 of the Company's Form S-4 filed July 30, 2004. 10.21 Intercompany Subordination Agreement, dated as of June 16, 2004, by and among The Old Evangeline Downs, L.L.C., Diamond Jo, LLC (formerly known as Peninsula Gaming Company, LLC), The Old Evangeline Downs Capital Corp., Peninsula Gaming, LLC and Wells Fargo Foothill, Inc. - incorporated herein by reference to Exhibit 10.21 of the Company's Form S-4 filed July 30, 2004. 10.22 Management Fees Subordination Agreement, dated as of June 16, 2004, by and among The Old Evangeline Downs, L.L.C., The Old Evangeline Downs Capital Corp., Diamond Jo, LLC (formerly known as Peninsula Gaming Company, LLC), OED Acquisition, LLC and Wells Fargo Foothill, Inc. - incorporated herein by reference to Exhibit 10.22 of the Company's Form S-4 filed July 30, 2004. 10.23 Post Closing Letter, dated June 16, 2004, from Wells Fargo Foothill, Inc. to The Old Evangeline Downs, L.L.C. and Diamond Jo, LLC (formerly known as Peninsula Gaming Company, LLC) - incorporated herein by reference to Exhibit 10.23 of the Company's Form S-4 filed July 30, 2004. 10.25 Guaranty by The Old Evangeline Downs Capital Corp. in favor of Wells Fargo Foothill, Inc., dated June 16, 2004 - incorporated herein by reference to Exhibit 10.25 of the Company's Form S-4 filed July 30, 2004. 31.1 Certification of M. Brent Stevens, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 15d-l4 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. -59- (b) Reports on Form 8-K (1) Form 8-K, filed by Diamond Jo, LLC and Peninsula Gaming Corp., April 19, 2004. Item 7(c). Exhibits. Item 9.Regulation FD Disclosure. Press release, dated April 16, 2004, announcing.(i) the issuance by Diamond Jo, LLC's $233 million aggregate principal amount of 8 3/4% Senior Secured Notes due 2012, (ii) Diamond Jo, LLC's election to redeem all of its 12 1/4% Senior Secured Notes due 2006, and (iii) the purchase by The Old Evangeline Downs, LLC ("OED") for cash of $116,290,000 aggregate principal amount of its 13% Senior Secured Notes due 2010 tendered in its tender offer commenced on March 9, 2004. (2) Form 8-K, filed by Diamond Jo, LLC and Peninsula Gaming Corp. (formerly known as The Old Evangeline Downs Capital Corp.), May 13 2004. Item 7. Financial Statements and Exhibits. Item 9. Regulation FD Disclosure. Press release, dated May 13, 2004, announcing the financial results of Diamond Jo, LLC for the quarter ended March 31, 2004. -60- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dubuque, State of Iowa on August 16, 2004. PENINSULA GAMING, LLC By: /s/ M. Brent Stevens -------------------------- M. Brent Stevens Chief Executive Officer By: /s/ Jonathan Swain -------------------------- Jonathan Swain Chief Operating Officer By: /s/ Natalie A. Schramm -------------------------- Natalie A. Schramm Chief Financial Officer ENINSULA GAMING CORP. By: /s/ M. Brent Stevens -------------------------- M. Brent Stevens Chief Executive Officer By: /s/ Natalie A. Schramm -------------------------- Natalie A. Schramm Chief Financial Officer DIAMOND JO, LLC By: /s/ M. Brent Stevens -------------------------- M. Brent Stevens Chief Executive Officer By: /s/ Jonathan Swain -------------------------- Jonathan Swain Chief Operating Officer By: /s/ Natalie A. Schramm -------------------------- Natalie A. Schramm Chief Financial Officer -62- THE OLD EVANGELINE DOWNS, L.L.C. By: /s/ M. Brent Stevens -------------------------- M. Brent Stevens Chief Executive Officer By: /s/ Jonathan Swain Jonathan Swain Chief Operating Officer By: /s/ Natalie A. Schramm -------------------------- Natalie A. Schramm Chief Financial Officer -61- EX-31 2 form10q_exh31-1wb111504.txt EXHIBIT 31.1 - CERTIFICATIONS EXHIBIT 31.1 CERTIFICATIONS I, M. Brent Stevens, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Peninsula Gaming, LLC, Peninsula Gaming Corp., Diamond Jo, LLC and The Old Evangeline Downs, L.L.C.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrants' other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrants and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrants, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrants' disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrants' internal control over financial reporting that occurred during the registrants' most recent fiscal quarter (the registrants' fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants' internal control over financial reporting; and 5. The registrants' other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants' auditors and the audit committee of the registrants' board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants' ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants' internal control over financial reporting. /s/ M. BRENT STEVENS ------------------------ M. Brent Stevens Chief Executive Officer Date: August 16, 2004 EX-31 3 form10q_exh31-2wb111504.txt EXHIBIT 31.2 - CERTIFICATIONS EXHIBIT 31.2 CERTIFICATIONS I, Natalie A. Schramm, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Peninsula Gaming, LLC, Peninsula Gaming Corp., Diamond Jo, LLC and The Old Evangeline Downs, L.L.C.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrants' other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrants and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrants, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrants' disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrants' internal control over financial reporting that occurred during the registrants' most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants' internal control over financial reporting; and 5. The registrants' other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants' auditors and the audit committee of the registrants' board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants' ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants' internal control over financial reporting. /s/ NATALIE A. SCHRAMM ---------------------------- Natalie A. Schramm Chief Financial Officer Date: August 16, 2004 -----END PRIVACY-ENHANCED MESSAGE-----