UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
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 ____________
Peninsula Gaming Company, LLC / Peninsula Gaming Corp.
(Exact name of registrant as specified in its charter)
Delaware ______42-1483875______
(State of incorporation) (I.R.S. Employer Identification No.)
3rd Street Ice Harbor, PO Box 1750, Dubuque, Iowa 52004-1683
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 583-7005
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __ No X
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
All of the common equity interests of Peninsula Gaming Company, LLC
(the "Company") are held by Peninsula Gaming Partners, LLC, and all of the
common stock of Peninsula Gaming Corp. is held by Peninsula Gaming Company, LLC.
TABLE OF CONTENTS
PART I .............................................................1
ITEM 1. BUSINESS.....................................................1
ITEM 2. PROPERTIES...................................................7
ITEM 3. LEGAL PROCEEDINGS............................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........9
PART II ............................................................10
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.............................10
ITEM 6. SELECTED FINANCIAL DATA.....................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...........................................16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.....................43
PART III ............................................................44
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT..............44
ITEM 11. EXECUTIVE COMPENSATION......................................47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..........................................48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............50
PART IV ............................................................53
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.....................................53
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PART I
ITEM 1. BUSINESS.
Description of the Business
General
We own and operate the Diamond Jo riverboat casino, one of only two
licensed gaming operations in Dubuque, Iowa. We are organized in Delaware as a
limited liability company and commenced operations upon our acquisition of the
Diamond Jo on July 15, 1999. The acquisition was financed, in part, through the
issuance of $71,000,000 of Series A 12 1/4% Senior Secured Notes due 2006 in a
transaction exempt from the registration requirements of the Securities Act of
1933, as amended, pursuant to Rule 144A promulgated thereunder.
Peninsula Gaming Corp., the co-issuer of the notes, is our wholly-owned
subsidiary and was formed solely to facilitate the offering of the notes in
certain jurisdictions. Peninsula Gaming Corp. has no assets or operations.
Our address is 3rd Street Ice Harbor, PO Box 1750, Dubuque, Iowa
52004-1683, and our telephone number is (319) 583-7005.
The Diamond Jo
The Diamond Jo is a three-story, approximately 51,900 square foot
riverboat casino, replicating a classic 19th century paddlewheel. The riverboat
has the capacity for 1,390 patrons, features a spacious two-story atrium, and
offers 650 slot machines and 39 table games in approximately 17,800 square feet
of gaming space. Adjacent to the Diamond Jo is a two-story, approximately 33,000
square foot dockside pavilion, featuring our 116-seat Lighthouse Grill
restaurant, our 175-seat Lucky Jo Saloon, our 30-seat Java Jo Coffee Bar, our
gift shop, and our 205-seat Harbor View Room, a full service banquet facility.
Approximately 1,000 convenient parking spaces are available to our patrons,
including valet parking. The Diamond Jo is open seven days a week and functions
primarily as a dockside riverboat with continuous boarding. The Diamond Jo is
required by Iowa law to cruise only 100 times per year, for a minimum of two
hours per cruise, which we satisfy by conducting a two-hour cruise at 7:30 a.m.
on weekdays during the spring and summer months.
The Diamond Jo operates from, and the dockside pavilion is located in,
Dubuque's Ice Harbor, a waterfront development on the Mississippi River in
downtown Dubuque. The Diamond Jo is centrally located in the Ice Harbor in
downtown Dubuque and is accessible from each of the major highways in the area.
On average, more than 30,000 vehicles pass our site per day. We share our
dockside pavilion with the Spirit of Dubuque dinner-boat and the Iowa Welcome
Center, featuring a museum, historical exhibits, shops, and an observation deck.
The Mississippi River Museum is located within a five-minute walk from our site.
Several cruise ships that operate on the Mississippi River, such as the Delta
Queen and the Mississippi Queen, stop at the Ice Harbor regularly during the
summer months. We believe that the Diamond Jo is among the principal
entertainment venues for residents in and around Dubuque.
In an effort to revitalize and enhance downtown Dubuque and to honor
and preserve the Mississippi River, the Dubuque County Historical Society's
Mississippi River Museum, the City of Dubuque, and the Dubuque Area Chamber of
Commerce Foundation and numerous private corporations, foundations and
individuals, as well as state and federal agencies, have recently commenced a
redevelopment project around the Ice Harbor in downtown Dubuque. This project is
expected to restore beauty and excitement to the Ice Harbor through the
development of eight different projects. Approximately $21.6 million has been
funded to date for this planned $30 million redevelopment project. The City of
Dubuque expects the redevelopment project to be completed in several phases over
the next four years.
Casino Operations
We regularly adjust our overall game mix to appeal to our target
market, based on, among other factors, the coin-in, hold percentage, location
and age of our various slot machines. Approximately 70% of the Diamond Jo's
gaming positions are slot machines. The 650 slot machines, all of which have
bill validators, include denominations
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of $0.05 to $25.00, with more than 97% of the machines $1.00 or lower in
denomination. At any one time, approximately 20% to 25% of our slot machines are
video poker, video keno, and other electronic games of skill. Since January
1996, the casino has replaced or installed conversion packages on approximately
445 slot machines. Conversion packages are installations of new glass, reels
and, on occasion, other coinhandling equipment to slot machines to update or
replace the game and its appearance without replacing the entire machine. The
recent authorization in Iowa of wide area progressives, networks of slot
machines throughout several casinos resulting in higher jackpots, has allowed us
to further improve our product mix with the introduction of 8 linked slot
machines. The 39 table games offered by the Diamond Jo include three craps, two
roulette, 25 blackjack, two Caribbean Stud, two Let-It-Ride, and five poker
tables, primarily with low betting limits.
Business Strategy
The Diamond Jo is the leading gaming facility in our market, having
captured over half of Dubuque's casino gaming revenues since 1995, the casino's
first full year of operations. We attribute our success to our competitive
position and our unique local gaming operations, offering the most gaming
positions and the only table games, video poker and video keno within 60 miles
of Dubuque. Further, we believe that additional competitors are effectively
precluded from entering our market due to constraints imposed by existing laws
on the availability of gaming licenses.
We anticipate continued growth through a combination of targeted
marketing initiatives, enhanced by our electronic player tracking system, and
locally funded development programs, including the $27 million redevelopment
project in Dubuque's Ice Harbor, where the Diamond Jo is located. This
redevelopment project is designed to enhance the attractiveness of the Ice
Harbor as a community center and tourist destination, which we believe should
lead to increased foot traffic around the site of, and increased admissions to,
the Diamond Jo. To further capitalize on the Ice Harbor redevelopment project
and to comply with requirements imposed by the gaming commission in connection
with the grant of our gaming license, we intend to develop a hotel contiguous to
our riverboat casino and dockside pavilion. The hotel is expected to contain 100
to 150 guest rooms and offer meeting space to attract professional and civic
organizations for conferences, banquets and other events. The hotel should
enable us to extend our geographic reach and target nearby tourist markets,
including more than two million annual visitors to Galena. We believe that these
developments will provide us with opportunities to significantly expand our
customer base, resulting in increased revenues.
Growth Strategy
We have developed marketing and promotional strategies designed to
attract new customers and reward frequent gaming customers. In order to attract
new customers and create a high level of brand recognition, we frequently use
billboard, print, radio, and television advertising throughout the Dubuque area
as well as promotional offerings. In addition, in order to maintain and enhance
goodwill within the Dubuque area, we sponsor numerous community events. We
believe we are Dubuque's largest sponsor of these events, which include the
Dubuque County Fair, rodeos, concerts and holiday celebrations, such as Memorial
Day and 4th of July fireworks. We have also implemented extensive employee
training programs designed to provide a high level of personalized service to
our customers. Patrons of the Diamond Jo are offered membership to our players'
club, known as the Diamond Club, which includes bimonthly mailings, gaming
incentives, and food and beverage discounts. The Diamond Jo uses a
state-of-the-art electronic player tracking system to monitor slot machine
activity in real time, as well as the frequency and level of play of our Diamond
Club members. This system enables us to focus our marketing efforts on our most
valued customers and increase revenues from our existing customer base. With the
help of this system, we can identify customer habits, such as the day of the
week, time of day and dollar denominations our players' club members prefer to
play. We can also store pertinent information for each member, including
birthdates, favorite sports and music preferences. All of this information
allows us to better define our members and gives us the ability to improve our
marketing efforts by tailoring our promotions and direct mail offers.
Competition
General. Riverboat gaming licenses in the State of Iowa are granted to
not-for-profit "qualified sponsoring organizations" which may operate the
riverboats themselves or may enter into agreements with other parties to operate
the riverboats. The granting of new licenses requires regulatory approval, which
includes, among other
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things, satisfactory feasibility studies. The Dubuque Racing Association is the
not-for-profit organization that holds the Diamond Jo's qualified sponsoring
organization gaming license and has contracted with us to operate the Diamond
Jo.
In 1998, the gaming commission adopted a rule that limits the number of
riverboat gaming licenses in Iowa to ten, subject to limited exceptions,
including licenses issued to purchasers of existing licensed facilities and
licenses issued to replace an existing facility if its license is surrendered,
not renewed, or revoked and prohibits the transfer of a license outside the
county in which the riverboat operated on May 1, 1998. There are currently ten
licensed riverboat gaming facilities operating in Iowa. The rule also prohibits
existing licensees from increasing the number of table games or slot machines at
their gaming facilities without prior gaming commission approval. The 1999
legislature considered, but did not adopt, proposals to further limit the number
of riverboats and expansion of existing boats and to make other changes in
Iowa's gaming laws.
The Dubuque gaming market borders other neighboring gaming markets.
These neighboring markets include:
(1) Elgin and Aurora, Illinois to the east;
(2) Marquette, Iowa and Native American gaming in Wisconsin and
Minnesota to the north;
(3) Des Moines, Iowa and Native American gaming in Tama, Iowa to the
west; and
(4) Clinton, Iowa and the Quad Cities (Bettendorf and Davenport, Iowa
and Moline and Rock Island, Illinois) to the south.
We believe that the Diamond Jo competes only indirectly with gaming
facilities in these neighboring markets.
Dubuque. The Diamond Jo's principal competition is the only other
licensed gaming facility in Dubuque, the Dubuque Greyhound Park. The Dubuque
Greyhound Park, which opened its casino in 1995, is located three miles north of
the Diamond Jo and offers 600 slot machines and live greyhound racing from May
through October of each year with simulcasts from other greyhound tracks. The
Dubuque Greyhound Park also offers, on a limited basis, simulcasts of horse
races. The Dubuque Greyhound Park is owned and operated by the Dubuque Racing
Association. As a not-for-profit organization, the Dubuque Racing Association
distributes a percentage of its cash flow to the City of Dubuque and local
charities. The Dubuque Racing Association operating agreement allows us to
restrict the number of slot machines at the Dubuque Greyhound Park to 600 if we
do not increase the number of slot machines at the Diamond Jo to more than 650.
In addition, subject to limited conditions, the Dubuque Racing Association
operating agreement allows us to require that the weighted average theoretical
slot payback percentage at the Dubuque Greyhound Park not exceed ours by more
than 0.5%. We have elected to apply both of these restrictions to the Dubuque
Greyhound Park. Under Iowa law, table games, video poker, video keno and other
electronic games of skill are not permitted at the Dubuque Greyhound Park and,
subject to limited conditions, we may prevent the Dubuque Greyhound Park from
having these games even if they were allowed to operate them under Iowa law.
The Diamond Jo competed with the Silver Eagle, which was located five
miles east of us in East Dubuque, Illinois, through substantially all of 1995
and from May 1996 to July 1997, the date on which the Silver Eagle ceased
operations. We believe the Silver Eagle ceased operations as a result of
competitive pressures from
(1) the Diamond Jo, which commenced operations of a larger riverboat
during 1995,
(2) the Dubuque Greyhound Park, which commenced operations during
1995, and
(3) relaxation of Iowa gaming laws in 1995, permitting riverboat
casinos in Iowa, such as the Diamond Jo, to operate predominately
dockside while Illinois legislation required riverboat casinos in
Illinois, such as the Silver Eagle, to operate only while
cruising.
[Legislation was recently enacted in Illinois to provide for dockside
gaming in Illinois, which dockside gaming is limited to ten licenses, nine of
which are currently active and the tenth of which, we believe, will be located
in Rosemont, Illinois and to relocate the existing but inactive riverboat gaming
license to Cook County, Illinois, outside the city limits of the City of
Chicago. We believe that additional competitors are effectively precluded from
entering our market, due to constraints imposed by existing laws on the
availability of gaming licenses.] -3-
Employees
We maintain a staff of approximately 475 to 500 full-time equivalent
employees, depending upon the time of the year. None of our employees are
covered by a collective bargaining agreement. We have not experienced any labor
problems resulting in a work stoppage, and believe we maintain good relations
with our employees.
Recent Developments
On March 15, 2000, we consummated a registered exchange offer, pursuant
to which all of our issued and outstanding 12 1/4% Senior Secured Notes due 2006
were exchanged for our Series B 12 1/4% Senior Secured Notes due 2006 (the
"Series B Notes).
Regulatory Matters
General. We are subject to regulation by the State of Iowa and, to a
lesser extent, by federal law. We are subject to regulations that apply
specifically to the gaming industry and casinos, in addition to regulations
applicable to businesses generally. Legislative or administrative changes in
applicable legal requirements, including legislation to prohibit casino gaming,
have been proposed in the past. It is possible that the applicable requirements
to operate an Iowa gaming facility will become more stringent and burdensome,
and that taxes, fees and expenses may increase. It is also possible that the
number of authorized gaming licenses in Iowa may increase, which would intensify
the competition that we face. Our failure to comply with detailed regulatory
requirements may be grounds for the suspension or revocation of one or more of
our licenses which would have a material adverse effect on us.
Iowa Riverboat Gaming Regulation. Our operations are subject to Chapter
99F of the Iowa Code and the regulations promulgated under that Chapter and the
licensing and regulatory control of the gaming commission.
Under Iowa law, the legal age for gaming is 21, and wagering on a
"gambling game" is legal when conducted by a licensee on an "excursion gambling
boat." An "excursion gambling boat" is a self-propelled excursion boat, and a
"gambling game" is any game of chance authorized by the gaming commission. While
dockside casino gaming is currently authorized by the gaming commission, a
licensed excursion gambling boat is required to conduct at least one two-hour
excursion cruise each day for at least 100 days during the excursion season to
operate during the off-season. The excursion season is from April 1st through
October 31st of each calendar year. The excursions conducted by the Diamond Jo
during the 1999 cruising season satisfied the requirements of Iowa law for the
conduct of off-season operations.
The legislation permitting riverboat gaming in Iowa authorizes the
granting of licenses to "qualified sponsoring organizations." A "qualified
sponsoring organization" is defined as a nonprofit corporation organized under
Iowa law, whether or not exempt from federal taxation, or a person or
association that can show to the satisfaction of the gaming commission that the
person or association is eligible for exemption from federal income taxation
under Sections 501(c)(3), (4), (5), (6), (7), (8), (10) or (19) of the Internal
Revenue Code. That not-for-profit corporation may operate the riverboat itself,
or it may enter into an agreement with another boat operator to operate the
riverboat on its behalf. A boat operator must be approved and licensed by the
gaming commission. The Dubuque Racing Association, a not-for-profit corporation
organized for the purpose of operating a pari-mutuel greyhound racing facility
in Dubuque, Iowa, first received a riverboat gaming license in 1990 and has
served as the "qualified sponsoring organization" of the Diamond Jo since March
18, 1993. The Dubuque Racing Association subsequently entered into the Dubuque
Racing Association operating agreement with Greater Dubuque Riverboat
Entertainment Company, the previous owner and operator of the Diamond Jo,
authorizing Greater Dubuque Riverboat Entertainment Company to operate riverboat
gaming operations in Dubuque. The Dubuque Racing Association operating agreement
was approved by the gaming commission on March 18, 1993. The term of the Dubuque
Racing Association operating agreement currently runs until March 31, 2002, with
two three-year renewal options afterward, subject to the satisfaction of limited
conditions. We assumed the rights and obligations of Greater Dubuque Riverboat
Entertainment Company under the Dubuque Racing Association operating agreement.
Under Iowa law, a license to conduct gaming may be issued in a county
only if the county electorate has approved the gaming. The electorate of Dubuque
County, Iowa, which includes the City of Dubuque, approved
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gaming on May 17, 1994 by referendum, including gaming conducted by the Diamond
Jo. Approximately 80% of the votes cast approved gaming at that time. However,
the 2002 referendum must be held at the general election in 2002, and a
reauthorization referendum must be held each eight years afterward. Each
referendum requires the vote of a majority of the votes cast. If any
reauthorization referendum is defeated, Iowa law provides that any previously
issued gaming license will remain valid for a total of nine years from the date
of original issuance of the license, subject to earlier nonrenewal or revocation
under Iowa law and regulations applicable to all licenses.
Proposals to amend or supplement Iowa's gaming statutes are frequently
introduced in the Iowa state legislature. In addition, the state legislature
sometimes considers proposals to amend or repeal Iowa law and regulations, which
could effectively prohibit riverboat gaming in the State of Iowa, limit the
expansion of existing operations or otherwise affect our operations. Although we
do not believe that a prohibition of riverboat gaming in Iowa is likely, we can
give no assurance that changes in Iowa gaming laws will not occur or that the
changes will not have a material adverse effect on our business.
The gaming commission adopted in 1998 a rule that prohibits licensees,
including the Diamond Jo, from increasing the number of gaming tables and gaming
machines without gaming commission approval. This approval is based on several
factors, including whether the increase will:
(1) positively impact the community in which the licensee operates,
(2) result in permanent improvements and land-based developments, and
(3) have a detrimental impact on the financial viability of other
licensees operating in the same market. As a result of this rule,
we may be unable to increase the number of gaming positions on
the Diamond Jo.
Substantially all of the Diamond Jo's material transactions are subject
to review and approval by the gaming commission. All contracts or business
arrangements, verbal or written, with any related party or in which the term
exceeds three years or the total value of the contract exceeds $50,000 must be
submitted in advance to the gaming commission for approval. Additionally,
contracts negotiated between the Diamond Jo and a related party must be
accompanied by economic and qualitative justification.
We must submit detailed financial, operating and other reports to the
gaming commission. We must file monthly gaming reports indicating adjusted gross
receipts received from gambling games and the total number and amount of money
received from admissions. Additionally, we must file annual financial statements
covering all financial activities related to our operations for each fiscal
year. We must also keep detailed records regarding our equity structure and
owners.
Iowa has a graduated wagering tax on riverboat gambling equal to five
percent of the first one million dollars of adjusted gross receipts, ten percent
on the next two million dollars of adjusted gross receipts and twenty percent on
adjusted gross receipts of more than three million dollars. In addition, Iowa
riverboats share equally in costs of the gaming commission and related entities
to administer gaming in Iowa, which is currently approximately $316,000 per year
per riverboat. Further, the Diamond Jo pays to the City of Dubuque a fee equal
to $.50 per passenger.
If the gaming commission decides that a gaming law or regulation has
been violated, the gaming commission has the power to assess fines, revoke or
suspend licenses or to take any other action as may be reasonable or appropriate
to enforce the gaming rules and regulations. In addition, renewal is subject to,
among other things, continued satisfaction of suitability requirements.
Regulatory Requirements Applicable to Owners of the Securities and
Others. We are required to notify the gaming commission as to the identity of,
and may be required to submit background information regarding, each director,
corporate officer and owner, partner, joint venturer, trustee or any other
person who has a beneficial interest of five percent or more, direct or
indirect, in Peninsula Gaming Company. The gaming commission may also request
that we provide them with a list of persons holding beneficial ownership
interests in Peninsula Gaming Company of less than five percent. For purposes of
these rules, "beneficial interest" includes all direct and indirect forms of
ownership or control, voting power or investment power held through any
contract, lien, lease, partnership, stockholding, syndication, joint venture,
understanding, relationship, present or reversionary right, title or interest,
or
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otherwise. The gaming commission may determine that holders of the notes,
Peninsula Gaming Company's common membership interests and preferred membership
interests, and Peninsula Gaming Partners' common membership interests and
convertible preferred membership interests have a "beneficial interest" in us.
The gaming commission may limit, make conditional, suspend or revoke the license
of a licensee in which a director, corporate officer or holder of a beneficial
interest in the person includes or involves any person or entity which is found
to be ineligible as a result of want of character, moral fitness, financial
responsibility, or professional qualifications or due to failure to meet other
criteria employed by the gaming commission.
If any gaming authority, including the gaming commission, requires any
person, including a record or beneficial owner of the securities, to be
licensed, qualified or found suitable, the person must apply for a license,
qualification or finding of suitability within the time period specified by the
gaming authority. The person would be required to pay all costs of obtaining the
license, qualification or finding of suitability. If a record or beneficial
owner of any of the notes or any membership interest of Peninsula Gaming
Partners or Peninsula Gaming Company is required to be licensed, qualified or
found suitable and is not licensed, qualified or found suitable by the gaming
authority within the applicable time period, these notes or membership interests
will be subject to regulatory redemption procedures. Notes to be redeemed under
a required regulatory redemption are redeemable by us, in whole or in part, at
any time upon not less than 20 Business Days nor more than 60 days notice, or
such earlier date as may be ordered by any governmental authority.
As of the date of this report, the gaming commission has not required
the securityholders to apply for a finding of suitability to own the securities.
However, the gaming commission could require a holder of the securities to
submit an application in the future.
Federal Regulation of Slot Machines. We are required to make annual
filings with the U.S. Attorney General in connection with the sale, distribution
or operation of slot machines. All requisite filings for the most recent year
and the current year have been made.
Potential Changes in Tax and Regulatory Requirements. In the past,
federal and state legislators and officials have proposed changes in tax law, or
in the administration of the laws, affecting the gaming industry. The gaming
commission and the Iowa legislature sometimes consider limitations on the
expansion of gaming in Iowa and other changes in gaming laws and regulations.
Proposals at the national level have included a federal gaming tax and
limitations on the federal income tax deductibility of the cost of furnishing
complimentary promotional items to customers, as well as various measures which
would require withholding on amounts won by customers or on negotiated discounts
provided to customers on amounts owed to gaming companies. It is not possible to
determine with certainty the likelihood of possible changes in tax or other laws
or in the administration of the laws. The changes, if adopted, could have a
material adverse effect on our financial results.
The United States Congress created a national commission, the National
Gaming Impact Study Commission, which generally has the duty to conduct a
comprehensive legal and factual study of gambling in the United States and
existing federal, state and local policies and practices with respect to the
legalization or prohibition of gambling activities, to formulate and propose
changes in the policies and practices and to recommend legislation and
administrative actions for such changes. The national commission issued its
report to President Clinton, Congress, state governors and Native American
tribal leaders on June 18, 1999. Any of the recommendations made by the national
commission could result in the enactment of new laws and/or the adoption of new
regulations which could have an adverse impact on the gaming industry. While we
are unable at this time to determine the ultimate disposition of any of the
recommendations that the national commission made, management does not believe
that any of the recommendations, if enacted, would be reasonably expected to
have a material adverse effect on our gaming operations.
Liquor Regulations. The sale of alcoholic beverages by us is or will be
subject to the licensing, control and regulation by the liquor agencies, which
include the City of Dubuque and the Alcoholic Beverage Division of the Iowa
Department of Commerce. The applicable liquor laws allow the sale of liquor
during legal hours which are Monday through Saturday from 6 a.m. to 2 a.m. the
next day and Sunday from 8 a.m. to 2 a.m. on Monday. Subject to few exceptions,
all persons who have a financial interest in us, by ownership, loan or
otherwise, must be disclosed in an application filed with, and are subject to
investigation by, the liquor agencies. Persons who have a direct or indirect
interest in any Iowa liquor license, other than hotel or restaurant liquor
licenses, may be prohibited from
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licenses, may be prohibited from purchasing or holding the notes. All licenses
are subject to annual renewal, are revocable and are not transferable. The
liquor agencies have the full power to limit, condition, suspend or revoke any
license or to place a liquor licensee on probation with or without conditions.
Any disciplinary action could, and revocation would, have a material adverse
effect upon the operations of our business. Many of our owners, officers and
managers must be investigated by the liquor agencies in connection with our
liquor permits. Changes in licensed positions must be approved by the liquor
agencies.
United States Coast Guard. The Diamond Jo is also regulated by the
United States Coast Guard, whose regulations affect boat design and stipulate
on-board facilities, equipment and personnel, including requirements that each
vessel be operated by a minimum complement of licensed personnel, in addition to
restricting the number of persons who can be aboard the boat at any one time.
Our riverboat must hold, and currently possesses, a Certificate of Inspection
and a Certificate of Documentation from the United States Coast Guard. Loss of
the Certificate of Inspection would preclude our use of the Diamond Jo as an
operating riverboat. In addition, the riverboat is subject to United States
Coast Guard regulations requiring periodic hull inspections. The United States
Coast Guard, upon our request allowed us to conduct an underwater hull
inspection instead of the traditional out of water dry dock inspection. We
expect to complete the underwater inspection in May 2000. The underwater hull
inspection has not resulted in any loss of services of the riverboat. We will be
required to perform another hull inspection within 30 months from the date of
the completion of the underwater hull inspection. At that time, we may again
seek approval from the Coast Guard for an underwater hull inspection in order to
avoid any loss of services of the riverboat.
All of our shipping employees employed on United States Coast Guard
regulated vessels, even those who have nothing to do with the actual operation
of the vessel, such as dealers, cocktail hostesses and security personnel, may
be subject to maritime law, which, among other things, exempts those employees
from state limits on workers' compensation awards. We maintain workers'
compensation insurance in compliance with applicable Iowa law.
The Shipping Act of 1916; The Merchant Marine Act of 1936. The Shipping
Act of 1916, and the Merchant Marine Act of 1936, and applicable regulations
contain provisions which would prevent persons who are not citizens of the
United States from holding in the aggregate more than 25% of our outstanding
membership interests, directly or indirectly. Peninsula Gaming Company's and
Peninsula Gaming Partners' respective operating agreements contain prohibitions
against any purchase or transfer of Peninsula Gaming Company's or Peninsula
Gaming Partners' respective membership interests to any person or entity if,
following the purchase or transfer, more than 25% of Peninsula Gaming Company's
membership interests are owned, directly or indirectly, by persons who are not
citizens of the United States. Any such purchase or transfer in violation of
Peninsula Gaming Company's or Peninsula Gaming Partners' respective operating
agreements is null and void, and Peninsula Gaming Company and Peninsula Gaming
Partners will not recognize the purchaser, transferee or purported beneficial
owner as a direct or indirect holder of an interest in Peninsula Gaming Company
or Peninsula Gaming Partners, respectively, for any purpose. To the extent
required by maritime laws, the managing member, managers and the officers of
Peninsula Gaming Partners and Peninsula Gaming Company must be citizens of the
United States.
Other Regulations. We are subject to federal, state and local
environmental and safety and health laws, regulations and ordinances that apply
to non-gaming businesses generally, such as the Clean Air Act, Federal Water
Pollution Control Act, Occupational Safety and Health Act, Resource Conservation
Recovery Act, Oil Pollution Act and Comprehensive Environmental Response,
Compensation and Liability Act, each as amended. We have not incurred, and do
not expect to incur, material expenditures with respect to these laws. There can
be no assurances, however, that we will not incur material liability under these
laws in the future.
ITEM 2. PROPERTIES
The properties we acquired upon consummation of the acquisition of the
Diamond Jo are located within the historic Ice Harbor district on the west bank
of the Mississippi River in Dubuque, Iowa. These properties consist of several
parcels of real property previously owned by Harbor Community Investment. We own
a fee interest in the dockside pavilion, consisting of approximately 33,000
square feet, surface parking lots within close proximity to the dockside
pavilion, and the walkway connecting the dockside pavilion to the dock to which
the Diamond Jo is moored.
-7-
The Diamond Jo and its dockside facility are currently pledged as
collateral with respect to the 12 1/4% Senior Secured Notes due 2006, issued on
July 15, 1999 by the Company and Peninsula Gaming Corp. in the original face
amount of $71 million.
In addition to the properties we purchased, we currently lease property
used as a patio located between the dockside pavilion and the Diamond Jo, and
property used as surface parking consisting of approximately 445 parking spaces
that are in close proximity to the Diamond Jo. A portion of this parking area is
expected to be used for construction of the new hotel.
These leased properties are currently owned by the City of Dubuque and
leased to the Dubuque Racing Association, which in turn subleases these
properties to us. The sublease requires us to pay one dollar per year as rent.
In connection with the acquisition of the Diamond Jo, we acquired Greater
Dubuque Riverboat Entertainment Company's interests in this sublease. The terms
of the Dubuque Racing Association lease with the City of Dubuque and our
sublease with the Dubuque Racing Association have each been extended through
December 31, 2008.
The Dubuque Racing Association is also party to a parking agreement by
and among the City of Dubuque, Greater Dubuque Riverboat Entertainment Company
and other parties, which governs the use of the parking spaces we currently
sublease from the Dubuque Racing Association. This parking agreement gives our
patrons the non-exclusive right to use the approximately 445 parking spaces
currently subleased from the Dubuque Racing Association. The agreement also
gives our patrons and employees the non-exclusive right to use approximately 335
additional parking spaces that are owned by the City of Dubuque and are located
in close proximity to the Diamond Jo. In exchange for these parking rights and
the extension of the sublease with the Dubuque Racing Association, we are
required, under some circumstances, to share costs of maintaining the subleased
parking lots. In the future, we may amend the parking agreement to reallocate
parking spaces that may be affected by the construction of our planned hotel.
The gaming commission approved our application for a license to operate
a gaming riverboat on May 20, 1999, effective upon the transfer of the Diamond
Jo to us. As a condition to the grant of our gaming license, we are required by
the gaming commission to spend up to a maximum of $11.5 million to develop and
construct a hotel contiguous to the Diamond Jo and to commence construction of
the hotel by December 2000. If we do not commence construction by December 2000,
the gaming commission may refuse to renew our gaming license, which would
prevent us from conducting gaming operations. It is contemplated that the hotel
will contain 100 to 150 guest rooms and offer meeting space for conferences,
banquets and other events. Although construction of the new hotel is expected to
result in the loss of some existing parking spaces, we believe there will be
adequate alternatives available to address our parking needs. Our ability to
develop and construct the hotel will, among other things, depend upon the
availability of sufficient financing and our receipt of necessary permits and
licenses. We intend to commence construction of the hotel by the end of December
2000. We presently have neither commitments for any financing nor the requisite
permits, licenses or approvals necessary for construction of the proposed hotel,
and no assurance can be given that these financing, permits, licenses and
approvals will be timely received, if at all.
In connection with our commitment to develop and construct the hotel,
we are currently negotiating a lease with the City of Dubuque for a parcel of
real property on which we plan to construct the hotel, and a parcel of real
property presently used as a patio for the dockside pavilion. These properties
are currently subject to the Dubuque Racing Association sublease described above
and, assuming we enter into the city lease, will be excluded from the Dubuque
Racing Association sublease and instead will be leased by us directly from the
City of Dubuque. We can give no assurances that we will be able to enter into
the city lease on terms satisfactory to us. Because, at this time, we have not
entered into such a lease with the City of Dubuque and have not negotiated terms
for such a lease satisfactory to us, we have requested that the gaming
commission release us from our obligation to build the hotel.
-8-
ITEM 3. LEGAL PROCEEDINGS
Except as described below, 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 believe this litigation is either
covered by insurance or not material. We did not assume liability for any
litigation involving the Diamond Jo or any of the related real property in our
acquisition of the Diamond Jo from Greater Dubuque Riverboat Entertainment
Company and of the real property from Harbor Community Investment.
The footnotes to the historical financial statements included herein
contain references to expenses associated with Greater Dubuque Riverboat
Entertainment Company ownership litigation. We are not a party to this
litigation, and, under the terms of our acquisition agreements, we have not
assumed any liabilities in connection with this litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-9-
PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for any of the Company's
common equity securities.
As of March 27, 2000, there was one holder of record of the common
equity of the Company, and the Company was the sole shareholder of Peninsula
Gaming Corp. As of March 27, 2000, the Company has paid approximately $728,000
to Peninsula Gaming Partners, LLC, the Company's parent and sole manager, in
connection with certain consulting services provided to PGP relating to the
business operations of the Company and related organizational costs and expenses
of PGP.
-10-
ITEM 6. SELECTED FINANCIAL DATA
The following table represents selected financial data of the Company
or its predecessor companies, Greater Dubuque Riverboat Entertainment Company
and Harbor Community Investment, L.C., for the five years ended December 31,
1999.
The selected historical financial data for the five years ended
December 31, 1999 are derived from audited financial statements of the Company
or its predecessor combined companies. The three years ended December 31, 1999
have been audited by Deloitte & Touche LLP, independent auditors, and are
included in this form 10-K. The Company acquired the operations of the
predecessor companies on July 15, 1999. The selected financial data set forth
below should be read in conjunction with, and is qualified in its entirety by
reference to, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the Company's and the predecessor companies'
financial statements and the related notes included elsewhere in this document.
As set forth in the table below, the amount of non-recurring expenses
consists of non-recurring charges related to sale of business and litigation
involving the prior owners of the Diamond Jo and Greater Dubuque Riverboat
Entertainment Company, as well as organizational costs and severance expenses
incurred by the Company. For purposes of determining the ratio of earnings to
fixed charges, earnings are defined as income before income taxes plus fixed
charges. Fixed charges include interest expense on all indebtedness and
amortization of bond issuance costs and bond discount. The Company's ratio of
earnings to fixed charges for the period from July 15, 1999, the date of
inception, to December 31, 1999 would have been 1.1x if the start-up and
organizational costs expensed during this period were excluded.
Peninsula Gaming
Predecessor Companies Company
---------------------------------------------------------------- ------------------ --------------------
Period from
January 1,
1999 Period from Period from
to July 14, July 15, 1999 to January 1, 1999 to
1995 1996 1997 1998 1999 December 31,1999 December 31, 1999
------------------------------------------------- -------------- ------------------- --------------------
(Dollars in thousands)
Statement of
Operations Data
Revenues:
Casino 30,493 40,267 40,572 44,167 23,764 21,153 44,917
Food and Beverage 2,167 2,619 2,449 2,469 1,408 1,235 2,643
Other 215 329 406 290 121 122 243
Less: Promotional
allowances (1,142) (963) (806) (1,076) (565) (551) (1,116)
------------------------------------------------- -------------- ------------------- --------------------
Net Revenues 31,733 42,252 42,621 45,850 24,728 21,959 46,687
Expenses:
Casino 14,559 16,430 16,706 17,819 9,797 8,730 18,527
Food and Beverage 1,303 2,586 2,196 2,299 1,408 1,248 2,656
Boat operations 1,505 1,997 2,005 2,056 1,055 936 1,991
Other 43 64 65 54 21 16 37
Selling, general and
administrative 8,076 9,573 6,947 7,515 4,122 4,206 8,328
Depreciation and
amortization 1,133 2,026 1,826 1,895 1,157 1,541 2,698
Non-recurring expenses 101 58 170 928 1,871 3,134 5,005
------------------------------------------------- -------------- ------------------- --------------------
Total expenses 26,720 32,734 29,915 32,566 19,431 19,811 39,242
-11-
Peninsula Gaming
Predecessor Companies Company Pro Forma
---------------------------------------------------------------- ------------------ --------------------
Period from
January 1,
1999 Period from Period from
to July 14, July 15, 1999 to January 1, 1999 to
1995 1996 1997 1998 1999 December 31,1999 December 31, 1999
------------------------------------------------- -------------- ------------------- --------------------
(Dollars in thousands)
Income From Operations 5,013 9,518 12,706 13,284 5,297 2,148 7,445
Other income (expense)
Interest income 16 81 222 142 76 155 231
Interest expense (1,007) (1,813) (1,772) (1,142) (331) (4,383) (4,714)
Loss on sale of assets 0 (6,878) (88) (74) (98) (68) (166)
------------------------------------------------- -------------- ------------------- --------------------
Total other expense (991) (8,610) (1,638) (1,074) (353) (4,296) (4,649)
Preferred member
distributions 0 0 0 0 0 (289) (289)
------------------------------------------------- -------------- ------------------- --------------------
Net income (loss) to
common interests 4,022 908 11,068 12,210 4,944 (2,437) 2,507
================================================= ============== =================== ====================
Ratio of earnings to
fixed charges 4.6x 1.5x 6.5x 10.8x 13.5x .5x
Other Data
Cash flows from
operating activities 6,067 10,140 12,522 14,638 6,134 2,475
Cash flows from
investing activities 3,257 (18,162) 4,196 (1,793) 80 (68,611)
Cash flows from
financing activities 2,760 10,249 (15,114) (12,806) (8,277) 74,055
Distributions to
common members 1,408 1,380 6,583 7,027 5,258 286(1)
(1) Accrued but not paid.
At December 31,
-------------------------------------------------
------------------
Balance Sheet Data: 1995 1996 1997 1998 1999
------------------------------------------------- ------------------
Current assets 2,528 6,661 6,255 6,767 8,765
Total assets 21,713 3,340 28,915 29,252 88,175
Current liabilities 6,607 8,325 6,829 8,133 4,370
Total debt 11,118 23,132 15,100 9,822 74,898
Preferred member
interest, redeemable 0 0 0 0 7,000
Total members' equity 8,000 7,528 11,513 16,697 6,277
-12-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the "Selected Combined Financial Data" and the combined financial
statements and the related notes thereto appearing elsewhere in this report.
Some statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations constitute "forward-looking statements"
within the meaning of the Litigation Reform Act, which involve risks and
uncertainties.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
The results of operations for the twelve months ended December 31, 1999
discussed below include our results of operations for the five and a half months
ended December 31, 1999 and the combined results of operations for the six and a
half months ended July 14, 1999 for the predecessor companies. The results of
operations for the twelve months ended December 31, 1998 discussed below are the
results of operations for the predecessor companies. As a result of the
substantially different capital structure of our company in comparison to that
of the predecessor companies, and of the applications of purchase accounting in
connection with the acquisition, our results of operations may not be entirely
comparable to the results of operations of the predecessor companies. In order
to allow for the transfer of ownership of the Diamond Jo in accordance with the
gaming commission guidelines, the Diamond Jo was closed for 30 business hours on
July 14 and 15.
For the years ended December 31, 1999 and 1998, Dubuque was a
two-casino market consisting of the Diamond Jo and the Greyhound Park. Casino
gaming win in the Dubuque market increased 7% to $78.7 million for the year
ended December 31, 1999 from $73.5 million for the year ended December 31, 1998.
We believe this increase was primarily due to an increase in the number of slot
machines at the Greyhound Park, an increase in popular nickel machines at the
Greyhound Park from 78 to 119 and changes in our game mix. Admissions to casinos
in the Dubuque market decreased .5% to 2,005,452 for the year ended December 31,
1999 from 2,015,017 for the year ended December 31, 1998. For the year ended
December 31, 1999, our share of the Dubuque market casino gaming win decreased
to 57.1% from 60.0% and casino admissions decreased to 55.2% from 56.7%, in each
case, for the year ended December 31, 1998. We believe our market share decrease
was primarily due to the Greyhound Park reconfiguring its floor plan and
increasing the number of its slot machines from 545 to 600 in September 1998. At
600 machines, the Dubuque Greyhound Park has met the limit defined within the
Operating Agreement with Peninsula Gaming Company. This agreement expires in
April 2002.
Net revenues increased 1.8% to $46.7 million for the year ended
December 31, 1999 from $45.8 million for the year ended December 31, 1998 due
primarily to improved marketing efforts, better tracking of, and communication
with our VIP players through our electronic player tracking system and a
continued review and change in our game mix. Our admissions for the year ended
December 31, 1999 decreased 3.1% to 1,106,829 from 1,142,008 for the year ended
December 31, 1998 primarily as a result of unusually inclement weather during
January 1999, closing of the casino for 30 hours during transfer of ownership,
and the change of slot machine mix at the Dubuque Greyhound Park. For the year
ended December 31, 1999, our win per admission increased 4.9% to $40.58 from
$38.67 for the year ended December 31, 1998. Consistent with an increase in net
revenues, win per gaming position increased 2.0% to $130.03 for the year ended
December 31, 1999 from $127.51 for the year ended December 31, 1998. Our casino
revenues also increased 1.7% to $44.9 million for the year ended December 31,
1999 from $44.2 million for the year ended December 31, 1998. Casino revenues
were derived 81.1% from slot machines and 18.9% from table games for the year
ended December 31, 1999 compared to 80.9% from slot machines and 19.1% from
table games, respectively, for the year ended December 31, 1998. The increase in
casino revenues was due primarily to an increase in slot revenues of 2.0% to
$36.4 million for the year ended December 31, 1999 from $35.7 million for the
year ended December 31, 1998. We believe that the increases in slot revenues,
casino revenues, win per admission, and win per gaming position were due
primarily to the same reasons net revenues increased for the year ended December
31, 1999 over the corresponding period of the prior year. Food and beverage
revenues and other revenues increased 4.6% to $2.9 million for the year ended
December 31, 1999 compared to $2.8 million for the year ended December 31, 1998,
primarily due to an increase in complimentary food and beverage sales.
Promotional allowances increased by 3.7% to $1.1 million for the year ended
December 31, 1999 compared to $1.08 million for the year ended December 31, 1998
due to an increase in complimentary food and beverage provided
-13-
to our Diamond Club members. Promotional allowances represent the estimated
value of goods and services provided free of charge to casino patrons under our
various marketing programs.
Casino operating expenses increased 4.0% to $18.5 million or 41.3% of
casino revenues for the year ended December 31, 1999 from $17.8 million or 40.3%
of casino revenues for the year ended December 31, 1998. This increase of $0.7
million was due primarily to increased rental expense related to vendor
participation slot machines of approximately $0.6 million. Food and beverage
expenses increased approximately $.4 million or 15.6% to $2.7 million for the
year ended December 31, 1999 from $2.3 million for the year ended December 31,
1998. We believe this increase was due to an increase in food cost due to
increased patronage at our bars and restaurants, an increase in food product
quality and an increase in payroll expenses of approximately $0.1 million.
Selling, general and administrative expenses increased 10.8% to $8.3 million for
the year ended December 31, 1999 from $7.5 million for the year ended December
31, 1998, primarily due to an increase in nonrecurring litigation and severance
pay of $.5 million involving the separation and release agreement of Jim Rix,
former Chief Operating Officer of Peninsula Gaming, an increase in marketing
promotions of approximately $.2 million as well as an increase in insurance
costs of approximately $.1 million. Included in the year ended December 31, 1999
and 1998 operating expenses were non-recurring expenses of $5.5 million and $.9
million, respectively, related to the sale of the business, litigation involving
the prior owners of the Diamond Jo and Greater Dubuque Riverboat and the
severance pay discussed above.
Depreciation and amortization expense increased 42.4% to $2.7 million
for the year ended December 31, 1999 from $1.9 million for the year ended
December 31, 1998. This increase was due primarily to the amortization of $.6
million for the $56.6 million of goodwill recorded in connection with the July
1999 acquisition. Net interest expense was $4.5 million for the year ended
December 31, 1999 and $1.0 million for the year ended December 31, 1998. The
increase of interest expense was due to the issuance of $71 million senior
secured notes at 12.25% interest rate related to the acquisition in July of
1999. Loss on disposal of assets was $0.2 million for the year ended December
31, 1999 and $0.1 million for the year ended December 31, 1998. These losses
were attributable primarily to the replacement/upgrade of slot machines.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
In 1998, Dubuque was a two-casino market consisting of the Diamond Jo
and the Greyhound Park. In 1997, Dubuque was a three-casino market for the
months of January through June and a two-casino market for the months of July
through December. The third casino, the Silver Eagle, ceased operations in July
1997 due in part, we believe, to competitive pressures and the effects of
restrictive Illinois gaming regulations. Casino gaming win in the Dubuque market
increased 9.6% to $73.5 million in 1998 from $67.1 million in 1997. We believe
this increase was primarily due to increased advertising and promotions by the
Diamond Jo and the Greyhound Park. Admissions to casinos in the Dubuque market
of 2.0 million in 1998 increased 1.9% from admissions in 1997. Our share of the
Dubuque market casino gaming win and admissions were substantially unchanged at
60.0% and 56.7%, respectively, in 1998, and 60.5% and 56.2%, respectively, in
1997.
Net revenues increased 7.6% to $45.8 million from $42.6 million in
1997. Our admissions of 1.1 million in 1998 increased 2.8% from admissions in
1997. In 1998, win per admission increased 5.9% to $38.67 from $36.51 in 1997 as
a result of increased marketing expenditures, our new electronic player tracking
system and change in our game mix including changes to the payout probabilities
on our slot machines. Our gaming positions were 949 at the end of both 1998 and
1997. In 1998, win per gaming position increased 8.9% to $127.51 from $117.13 in
1997 as a result of the foregoing reasons. Our casino revenues increased 8.9% to
$44.2 million in 1998 from $40.6 million in 1997. Casino revenues were derived
80.9% from slot machines and 19.1% from table games in 1998 compared to 79.3%
and 20.7% respectively, in 1997. Slot revenues increased 10.9% to $35.7 million
in 1998 from $32.2 million in 1997. This increase was primarily due to an 18.6%
increase in slot machine coin-in, which was partially offset by a decrease in
the slot machine hold percentage. We lowered the slot machine hold percentages
to encourage longer play from, and to enhance the overall gaming experience for,
our current customer base which we believe has resulted in increased slot
revenue. Table revenues were substantially unchanged at $8.5 million in 1998
compared to $8.4 million in 1997. Food and beverage and other revenues decreased
3.4% to $2.8 million in 1998 from $2.9 million in 1997 due to lower food and
beverage prices designed to attract more gaming customers. Promotional
allowances increased 33.6% to $1.1 million in 1998 from $0.8 million in 1997 due
to increased complimentary food and beverage provided to our Diamond Club
members.
-14-
Casino operating expenses increased 6.7% to $17.8 million in 1998 from
$16.7 million in 1997, but decreased as a percentage of casino revenues to 40.3%
in 1998 from 41.2% in 1997. The increase of $1.1 million was due primarily to
higher gaming taxes associated with the increased casino revenues that we
generated in 1998 as compared to 1997. Food and beverage expense increased $0.1
million in 1998 due to an emphasis on serving high quality food and beverages.
Selling, general and administrative expenses increased 8.2% to $7.5 million in
1998 from $6.9 million in 1997. The increase of $0.6 million was primarily the
result of higher employee benefit costs. Included in 1998 and 1997 operating
expenses were non-recurring expenses of $0.9 million and $0.2 million,
respectively, related to the sale of the business and $0.2 million and $0.1
million, respectively, related to litigation involving the prior owners of the
Diamond Jo and Greater Dubuque Riverboat.
Depreciation and amortization expense increased 3.8% to $1.9 million in
1998 from $1.8 million in 1997. The increase in depreciation and amortization
expense was primarily due to the purchase of our new electronic player tracking
system. Net interest expense was $1.0 million and $1.5 million in 1998 and 1997,
respectively. The reduction of interest expense was due to a decline in
outstanding debt and more favorable interest rates. Loss on disposal of assets,
which was primarily related to the replacement/upgrade of slot machines, was
substantially unchanged at $0.1 million.
Liquidity and Capital Resources
We generated $2.5 million in cash flows from operations for the period
from July 15, 1999 to December 31, 1999. Net cash flows used for investing
activities were $68.6 million, which related primarily to the acquisition of the
Diamond Jo in July. Cash flows generated by financing activities were $74.1
million comprised of the proceeds from the issuance of the senior secured notes
and common equity of $70.2 million and $9 million, respectively, and the payment
of $4.8 million for bond issuance costs.
We believe that cash on hand and cash generated from operations will be
sufficient to satisfy our working capital requirements, maintenance and capital
expenditures and other cash obligations. However, we cannot assure you that this
will be the case. If cash on hand and cash generated from operations are
insufficient to meet these obligations, we may have to refinance our debt or
sell some or all of our assets to meet our obligations.
Under the terms of the indenture governing the notes, we have the
ability to obtain a new credit facility in the future to borrow up to $10.0
million if we determine that the availability of this facility would benefit our
operations. We have engaged in preliminary discussions with lenders, and we
intend to enter into a credit facility in the near future. We expect to finance
the future construction of our planned hotel out of cash from operations and may
secure additional financing through a portion of any new credit facility. We
expect that the total cost to build the hotel will not exceed $11.5 million.
There can be no assurance, however, that, if a credit facility is required for
the hotel development, we will be able to enter into the credit facility on
commercially reasonable terms. In that case, the failure to obtain a credit
facility may materially affect our ability to finance the construction of our
planned hotel, which may result in the revocation of our gaming license or
otherwise negatively affect our operations and cash flows.
Seasonality and Inflation
Our business is subject to seasonal fluctuations in the Iowa gaming
business, which is typically weaker from November through February as a result
of adverse weather conditions, and typically stronger from March through
October. In general, our payroll and general and administrative expenses are
affected by inflation. Although inflation has not had a material effect on our
business to date, we could experience the effects of inflation in future
periods.
Forward-Looking Statements
Throughout this report we make forward-looking statements. These
forward-looking statements generally relate to plans and objectives for future
operations and are based upon management's reasonable estimates of future
results or trends. Although we believe that the plans and objectives reflected
in or suggested by these forward-looking statements are reasonable, the plans or
objectives may not be achieved. You should read this report completely and with
the understanding that actual future results may be materially different from
what we expect. Unless otherwise required by law, we will not update
forward-looking statements even though our situation may change in the future.
-15-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have $71 million principal amount of notes outstanding under our
indenture. We have no variable rate debt. Our fixed debt instruments are not
generally affected by a change in the market rates of interest and therefore,
these instruments generally do not have an impact on future earnings. However,
as our fixed rate debt matures, future earnings and cash flows may be impacted
by changes in interest rates related to debt incurred to fund repayments under
maturing facilities. Additionally, should we assume variable rate debt in the
future, we will be subject to market risk, which is the risk of loss from
changes in market prices and interest rates.
We have no investments in market risk sensitive instruments issued by
others. The only securities owned by Peninsula Gaming Company, LLC are the
shares of common stock of its wholly-owned subsidiary, Peninsula Gaming Corp.
-16-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------
FINANCIAL STATEMENTS OF PENINSULA GAMING COMPANY, LLC
Independent Auditors' Report 18
Balance Sheet at December 31, 1999 19
Statement of Operations for July 15, 1999 (Date of Inception)
to December 31, 1999 20
Statement of Changes in Members' Equity for July 15, 1999
(Date of Inception) to December 31, 1999 21
Statement of Cash Flows for July 15, 1999 (Date of Inception)
to December 31, 1999 22
Notes to Financial Statements 23
FINANCIAL STATEMENTS OF GREATER DUBUQUE RIVERBOAT ENTERTAINMENT COMPANY, L.C.
AND HARBOR COMMUNITY INVESTMENT, L.C.
Independent Auditors' Report 30
Combined Balance Sheet at December 31, 1998 31
Combined Statements of Operations for the Years
Ended December 31, 1997 and 1998 and the Period
from January 1, 1999 through July 14, 1999 32
Combined Statements of Changes in Members' Equity
for the Years Ended December 31, 1997 and 1998
and the Period from January 1, 1999 through July 14, 1999 33
Combined Statements of Cash Flows for the Years
Ended December 31, 1997 and 1998 and the Period
from January 1, 1999 through July 14, 1999 34
Notes to the Combined Financial Statements 35
-17-
INDEPENDENT AUDITORS' REPORT
To the Members of
Peninsula Gaming Company, LLC
Dubuque, Iowa
We have audited the accompanying balance sheet of Peninsula Gaming Company, LLC
(the "Company") as of December 31, 1999, and the related statements of
operations, changes in members' equity, and cash flows for the period July 15,
1999 (date of inception) to December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Peninsula Gaming Company, LLC
as of December 31, 1999 and the results of its operations and its cash flows for
the period July 15, 1999 (date of inception) to December 31, 1999 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE, LLP
Cedar Rapids, Iowa
February 25, 2000
-18-
PENINSULA GAMING COMPANY, LLC
BALANCE SHEET
DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,918,742
Accounts receivable, less allowance of $55,367 115,616
Inventory 99,813
Prepaid expenses 630,754
Total current assets 8,764,925
PROPERTY AND EQUIPMENT, NET (Note 3) 18,950,194
OTHER ASSETS:
Bond issuance costs, net of amortization of $318,945 (Note 13) 4,520,894
Goodwill and other intangible assets, net of amortization of $648,077 55,911,404
Deposits 27,472
Total other assets 60,459,770
TOTAL $88,174,889
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $476,868
Accrued payroll and payroll taxes 1,131,771
Other accrued expenses 2,609,630
Current maturities of capital lease obligations (Note 5) 151,331
Total current liabilities 4,369,600
LONG-TERM LIABILITIES:
Senior secured notes, net of discount (Note 4) 70,203,780
Capital lease obligations, net of current maturities (Note 5) 324,450
Total long-term liabilities 70,528,230
Total liabilities 74,897,830
COMMITMENTS AND CONTINGENCIES (Notes 7 and 9)
PREFERRED MEMBER INTEREST, REDEEMABLE (Note 10) 7,000,000
MEMBERS' EQUITY (Note 11):
Common member interest 9,000,000
Accumulated deficit (2,722,941)
Total members' equity 6,277,059
TOTAL $88,174,889
See notes to financial statements.
-19-
PENINSULA GAMING COMPANY, LLC
STATEMENT OF OPERATIONS
JULY 15, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
- -----------------------------------------------------------------------------------------------------------------
REVENUES:
Casino $ 21,152,879
Food and beverage 1,235,297
Other 122,012
Less promotional allowances (550,816)
----------------
Total net revenues 21,959,372
----------------
EXPENSES:
Casino 8,729,651
Food and beverage 1,247,552
Boat operations 936,076
Other 16,365
Selling, general and administrative 4,206,073
Start-up and organization costs (Note 13) 3,134,095
Depreciation and amortization 1,541,516
----------------
Total expenses 19,811,328
----------------
INCOME FROM OPERATIONS 2,148,044
----------------
OTHER INCOME (EXPENSE):
Interest income 154,737
Interest expense (4,383,143)
Loss on sale of assets (67,659))
----------------
Total other expense (4,296,065)
----------------
NET LOSS BEFORE PREFERRED DIVIDENDS (2,148,021)
LESS PREFERRED MEMBER DISTRIBUTIONS (288,750)
----------------
NET LOSS TO COMMON INTERESTS $ (2,436,771)
================
See notes to financial statements.
-20-
PENINSULA GAMING COMPANY, LLC
STATEMENT OF CHANGES IN MEMBERS' EQUITY
JULY 15, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
- -------------------------------------------------------------------------------------------------------------------
COMMON TOTAL
MEMBER ACCUMULATED MEMBERS'
INTEREST DEFICIT EQUITY
BALANCE, JULY 15, 1999 $ 9,000,000 $ 9,000,000
Net loss to common interest $ (2,436,771) (2,436,771)
Member distributions (286,170) (286,170)
BALANCE, DECEMBER 31, 1999 $ 9,000,000 $ (2,722,941) $ 6,277,059
See notes to financial statements.
-21-
PENINSULA GAMING COMPANY, LLC
STATEMENT OF CASH FLOWS
JULY 15, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,436,771)
Adjustments to reconcile net loss to net cash flows
Provided by operating activities:
Depreciation and amortization 1,541,516
Provision for doubtful accounts 55,367
Amortization of bond issuance costs and bond discount 341,536
Loss on sale of assets 67,659
Changes in operating assets and liabilities:
Receivables (147,305)
Inventory (26,869)
Prepaid expenses and other assets (581,928)
Accounts payable 466,889
Accrued expenses 3,194,760
Net cash provided by operating activities 2,474,854
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 54,900
Purchase of property and equipment (666,192)
Acquisition, net of cash acquired (68,000,000)
Net cash used by investing activities (68,611,292)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior secured notes 70,181,189
Bond issuance costs (4,839,839)
Proceeds from issuance of common membership interest 9,000,000
Member distributions (286,170)
Net cash provided by financing activities 74,055,180
NET INCREASE IN CASH 7,918,742
CASH AND CASH EQUIVALENTS AT --
BEGINNING OF PERIOD --
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 7,918,742
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 4,034,673
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
Issuance of preferred member interest, redeemable (Notes 1 and 10) $ 7,000,000
See notes to financial statements
-22-
PENINSULA GAMING COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION, BUSINESS PURPOSE AND BASIS OF PRESENTATION
Peninsula Gaming Company, LLC (the "Company") is a wholly-owned subsidiary of
Peninsula Gaming Partners, LLC ("PGP"). The Company is a Delaware limited
liability company formed on January 26, 1999 for the purpose of purchasing
assets comprising the Diamond Jo Casino and related real property.
The common membership interests of the Company are wholly-owned by PGP. The
Company and PGP completed the sale of $71,000,000 of 12 1/4% Senior Secured
Notes due 2006 and $3,000,000 in convertible preferred membership interests,
respectively, during July 1999. Concurrently with the sale of the securities,
the Company received a $9.0 million capital contribution from PGP ($6.0 million
of which was contributed to the capital of PGP by common members of PGP and $3.0
million of which was contributed to the capital of PGP through the sale of PGP
of convertible preferred membership interests as previously described). The
proceeds for the above transactions were used to complete the purchase of
certain assets comprising the Diamond Jo casino and related real property. On
July 15, 1999, the Company acquired substantially all of the assets of Greater
Dubuque Riverboat Entertainment Company, L.C. ("GDREC") and Harbor Community
Investment, L.C. ("HCI") for $77,000,000. The purchase price was $70.0 million
cash ($68.0 million net of casino cash acquired of $2.0 million) and $7.0
million in redeemable preferred membership interests (see Note 10). For
financial statement purposes the acquisition was accounted for as a purchase
and, accordingly, included in the Company's results since the date of the
acquisition. The purchase price has been allocated to the assets purchased and
the liabilities assumed based upon the fair values on the date of the
acquisition, as follows (in thousands):
Property and equipment $19,300
Current assets, other than cash 78
Goodwill and other intangibles 56,559
---------------
Total assets 75,937
Liabilities (937)
---------------
Total Purchase Price $ 75,000
===============
The excess of the total acquisition costs over the fair market value of net
assets acquired has been recorded as goodwill and other intangible assets and
will be amortized on a straight-line basis over forty years.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company, GDREC and HCI as if the
acquisition had occurred January 1, 1998.
Pro Forma Information (Unaudited)
(in thousands)
1999 1998
------- -------
Net revenues $46,687 $45,849
Income from Operations 11,335 12,503
Net income to common interests 1,238 2,506
The pro forma results do not include charges of $3,134,095 incurred by the
Company in 1999 for start-up and organization costs. The pro forma results do
not purport to be indicative of results that would have occurred had the
acquisition been in effect for the periods presented, nor do they purport to be
indicative of the results that will be obtained in the future.
-23-
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Concentration of Risks - The Company's management estimates that regular
customers are concentrated within 100 miles of the facility representing
approximately 95% of the Company's customer base at December 31, 1999. The
remaining 5% includes groups, tourists and highway travelers that live beyond
100 miles.
Cash and Cash Equivalents - The Company considers all cash on hand and in banks,
certificates of deposit and other highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
Allowance for Doubtful Accounts - The allowance for doubtful accounts is
maintained at a level considered adequate to provide for possible future losses.
The provision for doubtful accounts of $55,367 was recorded for the period
July 15, 1999 (date of inception) through December 31, 1999.
Inventories - Inventories consisting principally of food, beverage, retail
items, and operating supplies are stated at the lower of first-in, first-out
cost or market.
Property and Equipment - Property and equipment are recorded at cost and
capitalized lease assets are recorded at their fair market value at the
inception of the lease. Major renewals and improvements are capitalized, while
maintenance and repairs are expensed as incurred. Depreciation and amortization
are computed on a straight-line basis over the following estimated useful lives:
Land improvements 20-40 years
Building and portside improvements 9-40 years
Riverboat and improvements 5-20 years
Furniture, fixtures and equipment 3-10 years
Computer equipment 3-5 years
Vehicles 5 years
Bond Issuance Costs - Costs associated with the issuance of the bonds have been
deferred and are being amortized over the life of the bonds using the effective
interest method.
Goodwill and Other Intangible Assets - The excess of total acquisition costs
over the fair market value of net assets acquired is amortized using the
straight-line method over forty years. Management periodically assesses the
recoverability of goodwill and other intangible assets by comparing its carrying
value to the undiscounted cash flows expected to be generated by the acquired
operation during the anticipated period of benefit.
Long-Lived Assets - Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" requires, among other things, that an entity review its
long-lived assets and certain related intangibles for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be fully recoverable. Under the standard, if the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss is recognized. The impairment is measured based on the fair
value of the asset. The Company does not believe that any such events or changes
have occurred.
Financial Instruments - The carrying amount for financial instruments included
among cash and cash equivalents, accounts receivable, accounts payable and
security deposits approximates their fair value based on the short maturity of
those instruments.
Income Taxes - The Company is limited liability company. In lieu of corporate
income taxes, the members of a limited liability company are taxed on their
proportionate share of the Company's taxable income. Therefore, no provision or
liability for federal income taxes has been included in the financial
statements.
Gaming Revenue - Gaming revenue is the net win from gaming activities, which is
the difference between gaming wins and losses.
-24-
Promotional Allowances - Food, beverage, and other items furnished without
charge to customers are included in gross revenues at a value which approximates
retail and then deducted as promotional allowances to arrive at net revenues.
The cost of such complimentary services have been included as casino expenses on
the accompanying statement of operations. Such estimated costs of providing
complimentary services allocated from the food and beverage and other operating
departments to the casino department from July 15, 1999 (date of inception) to
December 31, 1999 were $294,553 and $13,481 for food and beverage and other,
respectively.
Advertising - The Company's policy is to expense all advertising costs as
incurred.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles 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.
Recent Accounting Pronouncements - In June 1998, the FASB issued a new
statement, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), effective for fiscal years beginning after June 15, 2000. SFAS 133
requires, among other things, that derivatives be recorded on the balance sheet
at fair value. Changes in the fair value of derivatives may, depending on
circumstances, be recognized in earnings or deferred as a component of
shareholders' equity until a hedged transaction occurs. In June 1999, the FASB
issued Statement No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133. Under the
new effective date, the Company currently expects to adopt FASB Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, in year 2001.
The effect on the Company's financial position and results of operations is not
expected to be material.
Reporting on the Costs of Start-up Activities - In April 1998, the American
Institute of Certified Public Accountants issued the Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities, ("SOP 98-5"). SOP 98-5 requires
that costs of start-up activities and organization costs be expensed as incurred
and is effective for the Company in 1999. The Company has expensed $3,134,095 of
organizational costs relating to the acquisition during the period ended
December 31, 1999.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 are summarized as follows:
Land $800,000
Building and portside improvement 5,781,495
Riverboats and improvements 7,778,823
Furniture, fixtures and equipment 4,413,878
Computer equipment 198,111
Vehicles 72,181
Equipment held under capital lease obligations 704,527
Subtotal 19,749,015
Accumulated depreciation (798,821)
Property and equipment, net $18,950,194
4. SENIOR SECURED NOTES
Senior Secured Notes at December 31, 1999 are as follows:
Senior Secured Notes $71,000,000
Less: unamortized discount (796,220)
Senior Secured Notes, net $70,203,780
-25-
On July 15, 1999, the Company issued $71 million of 12.25% Senior Secured Notes
(the "Notes") due July 1, 2006. Interest on the Notes is payable semiannually on
July 1 and January 1 of each year, commencing on January 1, 2000. The Notes are
collateralized by certain cash accounts and substantially all fixed assets. The
Notes contain various restrictive covenants, which, among others, restrict the
Company from paying certain dividends and making restricted investments. The
Company was in compliance with such covenants for the period ended December 31,
1999.
The carrying amount of the Notes approximates the estimated fair value based on
the credit, interest rate and the terms of the obligation.
The Notes are not redeemable at the Company's option prior to July 1, 2003.
Thereafter, the Notes may be redeemed at the option of the Company, in whole or
part, upon not less than 30 nor more than 60 day's notice, at the redemption
prices (expressed as percentages of principal amount) set forth below, plus
accrued and unpaid interest thereon, if any, to the applicable date of
redemption, if redeemed during the 12-month period beginning on July 1 of the
years indicated below:
Year Percentage
2003 108.00 %
2004 105.33
2005 102.67
Notwithstanding the foregoing, at any time or from time to time prior to July 1,
2002, the Company may redeem, at their option, up to 35% of the aggregate
principal amount of the Notes then outstanding at a redemption price of 112.25%
of the principal amount thereof, plus accrued and unpaid interest thereon, if
any, through the applicable date of redemption, with the net cash proceeds of
one or more equity offerings; provided, the such redemption shall occur within
60 days of the date of closing of such equity offering and at least 65% of the
aggregate principal amount of Notes issued on or after the issue date remains
outstanding immediately after giving effect to each such redemption. The
restrictions on the optional redemption contained in the Notes do not limit the
Company's right to separately make open market, privately negotiated or other
purchases of the Notes from time to time.
5. CAPITAL LEASE OBLIGATION
Capital lease obligation at December 31, 1999 is as follows:
Liability under capital leases, due in monthly
installments of $21,536 for one month, including
interest at a fixed rate of 9%. Final payment is
due 25 months after the initial payment is made.
Payments are anticipated to begin in May 2000
after final acceptance of the system. The leases
are collateralized by equipment with a net book
value of $639,869 at December 31, 1999. $475,781
Less current portion (151,331)
--------
$324,450
========
Future minimum lease payments under capital lease for the years ended December
31 are as follows:
2000 $ 172,288
2001 258,432
2002 87,150
---------
Total minimum lease payments 517,870
Less amounts representing interest (42,089)
Present value of future minimum lease payments 475,781
Less current portion (151,331)
---------
Long-term capital lease obligation $324,450
=========
-26-
6. EMPLOYEE BENEFIT PLAN
The Company started a qualified defined contribution plan under section 401(k)
of the Internal Revenue Code during December 1999. Under the plan, eligible
employees may elect to defer up to 15% of their salary, subject to Internal
Revenue Service limits. The Company may make a matching contribution to each
participant based upon a percentage set by the Company, prior to the end of each
plan year. Company matching contributions to the plan were $15,632 for the
period ended December 31, 1999.
7. LEASING ARRANGEMENTS
The Company leases various equipment under noncancelable operating leases. The
leases require fixed monthly payments to be made ranging from $135 to $4,468 and
certain other gaming machines and tables require contingent monthly rental
payments based on usage of the equipment. The leases expire on various dates in
2000 and 2002. Rent expense for the period ended December 31, 1999 was $448,041
including contingent rentals of $358,013.
The future minimum rental payments required under these leases for the years
ended December 31 are summarized as follows:
2000 $ 31,494
2001 13,569
2002 7,915
--------------
$ 52,978
==============
8. UNINSURED CASH BALANCES
The Company maintains deposit accounts at a local bank. At December 31, 1999 and
various times during the period then ended, the balance at the bank exceeded the
maximum amount insured by the FDIC. Management believes any credit risk related
to the uninsured balance is minimal.
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions arising in the normal course of
business. In the opinion of management, such matters will not have a material
effect upon the financial position of the Company.
10. PREFERRED MEMBERSHIP INTERESTS--REDEEMABLE
On July 15, 1999, the Company authorized and issued $7.0 million of preferred
membership units. The holders of all of the Company's preferred membership
interests are entitled to receive, subject to certain restrictions contained in
the indenture governing the notes, out of funds legally available therefor,
cumulative preferred distributions payable semiannually at an annual rate of 9%
of the original face amount thereof. Other than certain limited consent rights
and as required by law, holders of the Company's preferred membership interests
have no voting rights.
Subject to certain limitations contained in the indenture governing the notes,
to the extent not used for any indemnification obligations of the holders under
the acquisition agreements, the Company must redeem $3.0 million in original
face amount of its preferred membership interests on January 15, 2001 at a
redemption price of $3.0 million, plus any accrued and unpaid preferred
distributions through the date of redemption. Certain managers of PGP, who
collectively have the ability of control have guaranteed the Company's
obligation to redeem up to $3.0 million of such preferred membership interests,
plus any accrued and unpaid preferred distributions through the date of
redemption. The balance of preferred membership interests not required to be
redeemed by the Company on
-27-
January 15, 2001 must be redeemed by the Company 90 days after the seventh
anniversary of the closing date of the acquisition at a redemption price of $4.0
million, plus any accrued and unpaid preferred distributions through the date of
redemption.
Under the terms of the acquisition agreements, preferred membership interests in
an original face amount of $3.0 million are currently being held in escrow until
January 15, 2001 as security for certain indemnification obligations of the
holders thereunder.
11. MEMBERS' EQUITY
On July 15, 1999, the Company authorized and issued $9.0 million of common
membership units. PGP, as the holder of all of the Company's issued and
outstanding common membership interests, is entitled to vote on all matters to
be voted on by holders of common membership interests of the Company and,
subject to certain limitations contained in the Company's operating agreement
and the indenture governing the notes, is entitled to dividends and other
distributions if, as and when declared by the Company's managers out of funds
legally available therefor.
12. DUBUQUE RACING ASSOCIATION, LTD. CONTRACT
Dubuque Racing Association, Ltd. (the "Association"), a qualified sponsoring
organization, presently holds a license to conduct gambling games under Chapter
99F and other Iowa statutes.
The Association owns Dubuque Greyhound park, a traditional greyhound race track
with 600 slot machines and amenities including a gift shop, restaurant and
clubhouse.
The Company entered into a contract (the "Operating Agreement") with the
Association relating to the operation of an excursion gambling riverboat for
three excursion seasons through March 31, 2002, under gambling licenses held
jointly.
Under the terms of the Operating Agreement, subject to certain conditions, the
Association shall receive the greater of the Association's gaming revenues from
the greyhound park for the period, or a percentage of the total combined gaming
revenues of the Association's from the greyhound park and the Company as
follows:
o 32% of the first $30,000,000 of total combined gaming revenues, plus
o 8% of the total combined gaming revenues of $30,000,000, but less
than $42,000,000
o 8% of total combined gaming revenues between $42,000,000 and
$46,000,000 during any period for which no excursion boat
gambling or land based gambling operation is carried on from
a Wisconsin or Illinois gambling operation in Grant
County, Wisconsin, or Joe Davies County, Illinois.
Gaming revenues under this contract means adjusted gross receipts, less gaming
taxes.
Gaming revenues for the twelve month period ended December 31, 1999 for the
Association were $25,074,718, which is higher than the previously described
thresholds, therefore, no payments have been made to the Association for the
period ended December 31, 1999 under the Operating Agreement.
Commencing April 1, 2000, and continuing thereafter, the Company shall
additionally pay the Association the sum of $.50 for each patron admitted on the
boat, which, based upon recent annual attendance, would approximate $500,000
annually.
In the event the Company shall desire to sell or lease the excursion gambling
boat, its furnishings and gambling equipment and/or its interest in any ticket
sale facility or other buildings located in the Dubuque Ice Harbor used in
connection with the operation of an excursion gambling boat, to a third party
that does not agree to operate said asset subject to the terms and conditions of
the Operating Agreement, and obtains an acceptable offer from said third party
-28-
for the purchase or lease of the excursion gambling boat and its furnishings,
equipment, and/or its interest in said building, the Association shall have the
option to purchase or lease the excursion gambling boat, its furnishings, and/or
the Company's interest in the building or its lease of the same for the amount
of the acceptable offer made by a third party and upon the same terms and
conditions as set forth in a third party offer.
13. TRANSACTIONS WITH RELATED PARTIES
In connection with the sale of the Notes and the purchase of certain
assets comprising the Diamond Jo Casino (Note 1), approximately $750,000 of
expenses related to organizational and bond issuance costs were reimbursed to
various related parties for expenses incurred on behalf of the Company. In
addition, consulting expenses of $90,000 were paid to a unit holder for services
related to the bond issuance. Underwriting expenses of $2,900,000 were paid to
Jefferies & Company, Inc., in which the Company's CEO is a managing director in
the Corporate Finance department, and were included in organizational costs and
bond issuance costs
* * * * *
-29-
INDEPENDENT AUDITORS' REPORT
To the Members of
Greater Dubuque Riverboat Entertainment Company, L.C.
and Harbor Community Investment, L.C.
Dubuque, Iowa
We have audited the accompanying combined balance sheet of Greater Dubuque
Riverboat Entertainment Company, L.C. and Harbor Community Investment, L.C.,
both of which are under common ownership and management, as of December 31,
1998, and the related combined statements of income, changes in members' equity,
and cash flows for the years ended December 31, 1997 and 1998 and the period
from January 1, 1999 to July 14, 1999. These financial statements are the
responsibility of the companies' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Greater Dubuque
Riverboat Entertainment Company, L.C. and Harbor Community Investment, L.C. as
of December 31, 1998, and the results of its operations and its cash flows for
the years ended December 31, 1997 and 1998 and for the period from January 1,
1999 to July 14, 1999 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE, LLP
Cedar Rapids, Iowa
February 25, 2000
-30-
GREATER DUBUQUE RIVERBOAT ENTERTAINMENT COMPANY, L.C.
AND HARBOR COMMUNITY INVESTMENT, L.C.
COMBINED BALANCE SHEET
YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $5,820,717
Investments available for sale (Note 3) 509,363
Accounts receivable 101,289
Inventory 80,242
Prepaid expenses 255,648
----------
Total current assets 6,767,259
----------
PROPERTY AND EQUIPMENT - NET (Note 4) 22,281,527
----------
OTHER ASSETS (Note 5) 203,446
----------
TOTAL $29,252,232
===========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $420,266
Accrued payroll and payroll taxes 935,174
Other accrued expenses 1,377,597
Current maturities of long-term liabilities (Notes 6 and 7) 5,399,565
---------
Total current liabilities 8,132,602
---------
LONG-TERM LIABILITIES:
Notes payable, net of current maturities (Note 6) 4,056,691
Capital lease obligations, net of current maturities (Note 7) 365,931
Total long-term liabilities 4,422,622
----------
Total liabilities 12,555,224
==========
COMMITMENTS AND CONTINGENCIES (Notes 9 and 11)
MEMBERS' EQUITY (Note 12):
Member interest 4,100,000
Unrealized gain on investments available for sale 1,508
Retained earnings 12,595,500
----------
Total members' equity 16,697,008
----------
TOTAL $ 29,252,232
============
See notes to combined financial statements.
-31-
GREATER DUBUQUE RIVERBOAT ENTERTAINMENT COMPANY, L.C.
AND HARBOR COMMUNITY INVESTMENT, L.C.
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE
PERIOD FROM JANUARY 1, 1999 THROUGH JULY 14, 1999
- --------------------------------------------------------------------------------
PERIOD
FROM
JANUARY 1,
THROUGH
JULY 14,
1997 1998 1999
------------------ ----------------- -----------------
REVENUES:
Casino $ 40,571,618 $ 44,166,688 $ 23,763,442
Food and beverage 2,449,302 2,468,526 1,408,046
Other 405,721 290,388 121,360
Less - promotional allowances (805,531) (1,076,116) (565,208)
------------------ ----------------- -----------------
Net revenues 42,621,110 45,849,486 24,727,640
------------------ ----------------- -----------------
EXPENSES:
Casino 16,706,054 17,819,022 9,797,175
Food and beverage 2,196,119 2,298,631 1,408,009
Boat operations 2,005,068 2,056,377 1,054,539
Other 65,271 53,643 20,713
Selling, general and administrative 6,946,529 7,515,115 4,121,942
Depreciation and amortization 1,826,179 1,894,763 1,156,822
Sale of business expenses (Note 13) 93,350 716,655 1,566,761
Ownership litigation (Note 11) 76,833 211,388 304,742
------------------ ----------------- -----------------
Total expenses 29,915,403 32,565,594 19,430,703
------------------ ----------------- -----------------
INCOME FROM OPERATIONS 12,705,707 13,283,892 5,296,937
------------------ ----------------- -----------------
OTHER INCOME (EXPENSE):
Interest income 222,238 141,967 76,119
Interest expense (1,772,165) (1,142,122) (331,101)
Loss on sale of assets (Note 4) (88,014) (73,726) (97,750)
-----------------
------------------ -----------------
Total other expense (1,637,941) (1,073,881) (352,732)
------------------ ----------------- -----------------
NET INCOME $ 11,067,766 $ 12,210,011 $ 4,944,205
================== ================= =================
-32-
GREATER DUBUQUE RIVERBOAT ENTERTAINMENT COMPANY, L.C.
AND HARBOR COMMUNITY INVESTMENT, L.C.
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE
PERIOD FROM JANUARY 1, 1999 THROUGH JULY 14, 1999
- --------------------------------------------------------------------------------
Unrealized Gain
on Investments
Available Retained Total Members'
Member Units Member Interest for Sale Earnings Equity
BALANCE, JANUARY 1, 1997 116 $ 4,600,000 $ 2,928,096 $ 7,528,096
Net income 11,067,766 11,067,766
Member distributions (6,582,900) (6,582,900)
Retired units (4) (500,000) (500,000)
BALANCE, DECEMBER 31, 1997 112 4,100,000 7,412,962 11,512,962
Net income 12,210,011 12,210,011
Member distributions (7,027,473) (7,027,473)
Unrealized gain on securities
available for sale $ 1,508 1,508
BALANCE, DECEMBER 31, 1998 112 4,100,000 1,508 12,595,500 16,697,008
Net income 4,944,205 4,944,205
Member distributions (5,258,468) (5,258,468)
Change in unrealized gain on
securities available for sale (1,508) (1,508)
BALANCE, JULY 14, 1999 112 $ 4,100,000 $ -- $ 12,281,237 $ 16,381,237
==== ============ ============ ============= =============
See notes to combined financial statements.
-33-
GREATER DUBUQUE RIVERBOAT ENTERTAINMENT COMPANY, L.C.
AND HARBOR COMMUNITY INVESTMENT, L.C.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE
PERIOD FROM JANUARY 1, 1999 THROUGH JULY 14, 1999
- --------------------------------------------------------------------------------
PERIOD FROM
JANUARY 1,
THROUGH JULY 14,
1997 1998 1999
------------ ------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 11,067,766 $ 12,210,011 $ 4,944,205
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,826,179 1,894,763 1,156,822
Loss on sale of assets 88,014 73,726 97,750
Changes in assets and liabilities:
Accounts receivable 41,587 74,548 (72,927)
Inventory 1,135 (2,638) 7,298
Prepaid expenses (23,760) (36,193) 89,926
Other assets (454) (7,483)
Accounts payable (51,077) 171,463 (408,484)
Accrued expenses (427,731) 259,595 319,126
------------ ------------- ---------------
Net cash provided by operating activities 12,521,659 14,637,792 6,133,716
------------ ------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 92,798 107,510 35,455
Purchase of property and equipment (918,496) (1,392,968) (467,955)
Payment on notes receivable 4,522,041
Proceeds from sale of available for sale securities 512,000
Purchase of securities available for sale (507,855)
Proceeds from maturity of certificate of deposit 500,000
--------- ------------- -------------
Net cash provided (used) by investing activities 4,196,343 (1,793,313) 79,500
--------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term liabilities (8,031,439) (5,753,666) (3,018,921)
Payments for debt refinancing costs (25,000)
Member units retired (500,000)
Member distributions (6,582,900) (7,027,473) (5,258,468)
------------ ------------ -----------
Net cash provided (used) by financing activities (15,114,339) (12,806,139) (8,277,389)
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH 1,603,663 38,340 (2,064,173)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,178,714 5,782,377 5,820,717
------------- ------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,782,377 $ 5,820,717 $ 3,756,544
============= ============== ===============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION - Cash paid during the $ 1,854,368 $ 1,148,868 $ 365,587
year for interest
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Unrealized gain on sale of securities available for sale 1,508
Change in unrealized gain on securities available for sale 1,508
Capital lease obligation incurred to acquire equipment 475,780
See notes to combined financial statements.
-34-
GREATER DUBUQUE RIVERBOAT ENTERTAINMENT COMPANY, L.C.
AND HARBOR COMMUNITY INVESTMENT, L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------
1. ORGANIZATION AND BUSINESS
Greater Dubuque Riverboat Entertainment Company, L.C. ("Greater Dubuque
Riverboat"), which is licensed by the Iowa Riverboat Gaming Commission ("IRGC"),
is an Iowa limited liability company with 52 members (who collectively own 112
units). Greater Dubuque Riverboat was organized and incorporated during May 1994
for the purpose of developing and holding the ownership interest in a riverboat
gaming operation located in Dubuque, Iowa (the "Diamond Jo Casino"). The same
members own Harbor Community Investment, L.C. ("Harbor Community") which was
formed April 8, 1996 to own and lease land and buildings in an area of Dubuque,
Iowa known as the Ice Harbor. The combined financial statements, therefore,
include the accounts and operations of Greater Dubuque Riverboat and Harbor
Community. These two entities are collectively referred to as the Company. All
material intercompany balances and transactions have been eliminated in
combination.
In January 1999, the membership of the Company approved an agreement to sell all
of the Company's operating assets used in connection with the gaming excursion
riverboat business to Peninsula Gaming Company, LLC for approximately
$77,000,000. The sale was completed in July 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Concentration of Risks - The Company's management estimates that regular
customers are concentrated within 100 miles of the facility representing
approximately 95% of the Company's customer base. The remaining 5% includes
groups, tourists and highway travelers that live beyond 100 miles.
Cash and Cash Equivalents - The Company considers all cash on hand and in banks,
certificates of deposit and other highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
Investments Available for Sale - The Company accounts for its investments using
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). This standard
requires that certain debt and equity securities be adjusted to market value at
the end of each accounting period. Unrealized market value gains and losses are
charged to earnings if the securities are traded for short-term profit.
Otherwise, such unrealized gains and losses are charged or credited to a
separate component of members' equity.
Gains and losses on the sale of available for sale securities are determined
using the specific identification method. The amortization of premiums and the
accretion of discounts are recognized in interest income using the interest
method over the period to maturity.
Accounts Receivable - Bad debts are charged to operations in the year in which
the account is determined uncollectible.
Inventories - Inventories consisting principally of food, beverages, and
operating supplies are stated at the lower of cost (first-in, first-out method)
or market.
-35-
Property and Equipment - Property and equipment is carried at cost and
capitalized lease assets are stated at their fair value at the inception of the
lease. Major renewals are capitalized, while maintenance and repairs are
expensed when incurred. Depreciation and amortization are computed by the
straight-line method over the following estimated useful lives:
Land improvements 20-40 years
Building 40 years
Riverboat and improvements 18-20 years
Leasehold improvements 20-40 years
Furniture, fixtures and equipment 3-10 years
Computer equipment 5 years
Vehicles 5 years
Intangible Assets - Intangible assets subject to amortization include loan
commitment fees and organization costs. Loan commitment fees are being amortized
straight-line over the life of the related loan. Organization costs are being
amortized straight-line over a period of 60 months.
Long-Lived Assets - Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" requires, among other things, that an entity review its
long-lived assets and certain related intangibles for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be fully recoverable. Under the standard, if the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss is recognized. The impairment is measured based on the estimated
fair value of the asset. The Company does not believe that any such events or
changes have occurred.
Financial Instruments - The carrying amount for financial instruments included
among cash and cash equivalents, accounts receivable, accounts payable and
security deposits approximates their fair value based on the short maturity of
those instruments. The carrying amount of notes payable approximates their
estimated fair value based on the credit, interest rate and terms of the
obligations.
Gaming Revenue - Gaming revenue is the net win from gaming activities, which is
the difference between gaming wins and losses.
Promotional Allowances - Food, beverage, and other items furnished without
charge to customers are included in gross revenues at a value which approximates
retail and then deducted as promotional allowances to arrive at net revenues.
The cost of such complimentary services have been included as casino expenses on
the accompanying statement of operations. Such estimated costs of providing
complimentary services allocated from the food and beverage and other operating
departments to the casino department are as follows:
Period from
January 1,
through
1997 1998 July 14, 1999
------------------------------------------------
Food and beverage $ 360,676 $ 531,944 $ 286,835
Other 10,530 14,264 8,411
Advertising - The Company's policy is to expense all advertising costs as
incurred.
-36-
Income Taxes - The Company is a limited liability company. In lieu of corporate
income taxes, the members of a limited liability company are taxed on their
proportionate share of the Company's taxable income. Therefore, no provision or
liability for federal income taxes has been included in the financial
statements.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles 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.
Reclassifications - Certain information has been reclassified to conform with
the current year's presentation.
3. INVESTMENTS AVAILABLE FOR SALE
Investments available for sale consist of shares of a bond fund. These shares
have an original cost of $507,855 and a fair market value of $509,363 as of
December 31, 1998. The unrealized gain for these securities was $1,508 as of
December 31, 1998. These securities are being accounted for in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities".
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
1998
Land $ 1,461,943
Building 3,818,613
Riverboats and improvements 14,018,301
Furniture, fixtures and equipment 6,274,535
Computer equipment 426,738
Vehicles 66,127
Equipment held under
capital lease obligations 775,780
----------------
Subtotal 26,842,037
Accumulated depreciation (4,560,510)
----------------
Property and equipment, net $ 22,281,527
================
Losses on sale of assets in 1997 and 1998 and for the period from January 1,
1999 through July 14, 1999 relate primarily to the sale of slot machines.
5. OTHER ASSETS
Other assets are summarized as follows:
1998
Loan fees $ 410,000
Organizational costs 62,500
Deposits 29,398
----------------
Subtotal 501,898
Accumulated amortization (298,452)
----------------
Other assets, net $ 203,446
================
-37-
6. NOTES PAYABLE
Notes payable is as follows:
1998
------------------
Note payable to bank, due in monthly
installments of $355,000, including interest at
a variable rate of 2% above the 90-day
LIBOR index rate (effective rate
of 7.2% at December 31, 1998). Final
payment is due August 1, 2000. $ 5,376,689
Note payable to bank, due in monthly
installments of $26,630, including interest at a
fixed rate of 8.9% for the first 60 months,
then .75% above the prime interest rate as
noted in the money section of the Wall Street
Journal. The note matures September 18, 2006.
The note payable is secured by a real estate
mortgage dated September 18, 1996. 1,776,394
Note payable, due in monthly installments of
$90,652, including interest at a fixed rate of
11.75% through December 1, 1999. The
note payable is secured by slot machines
financed by the note agreement. 1,021,641
Note payable, interest only payments
due monthly at a fixed rate of 8.5% for the
first six years and for the last four years
1% over prime or 8.5%, whichever is greater
through May 1, 2000, at which time the
remaining balance becomes due. The note
payable is secured by the real estate
purchased. 968,563
Note payable, due in monthly installments of
$5,634, including interest at a fixed rate
of 10.5% through September 1, 1999. 203,120
-----------
9,346,407
Less current maturities (5,289,716)
-----------
Long-term debt $ 4,056,691
===========
During April 1998, the Company refinanced the note payable due August 1, 2000 to
revise the previously stated fixed interest rate of 10% to a variable interest
rate of 2% above the 90-day LIBOR index rate. The note is collateralized by the
Diamond Jo Casino riverboat. The note agreement contains various restrictive and
financial covenants, which, among others, requires the Company to maintain a
tangible net worth of not less than $7.5
-38-
million, restricts the Company's total debt service coverage ratio and facility
debt service coverage ratios to not be greater than 1.5 to 1.0. The Company was
in compliance with these covenants at December 31, 1998.
Principal payments on long-term debt for the years ended December 31 are due as
follows:
1999 $ 5,289,716
2000 1,663,448
2001 203,667
2002 213,723
2003 239,242
Thereafter 1,736,611
------------
$ 9,346,407
============
7. CAPITAL LEASE OBLIGATION
Capital lease obligation at December 31, 1998 is as follows:
Liability under capital lease, due in monthly installments of
$21,536 for 24 months and $5,267 for one month, including
interest at a fixed rate of 9%. Final payment is due
25 months after the initial payment is made. Payments
are anticipated to begin in August 1999 after final
acceptance of the system. The lease is collateralized by
equipment with a net book value of $736,990 at
December 31,1998 $ 475,780
Less current portion (109,849)
-----------
$ 365,931
===========
Future minimum lease payments under capital lease at December 31, 1998
were as follows:
1999 $ 129,217
2000 258,435
2001 134,485
---------
Total minimum lease payments 522,137
Less amounts representing interest (46,357)
---------
Present value of future minimum lease payments 475,780
Less current portion (109,849)
---------
Long-term capital lease obligation $ 365,931
==========
8. EMPLOYEE BENEFIT PLAN
The Company started a qualified defined contribution plan under section 401(k)
of the Internal Revenue Code during 1996. Under the plan, eligible employees may
elect to defer up to 15% of their salary, subject to Internal Revenue Service
limits. The Company may make a matching contribution to each participant based
upon a percentage set by the Company, prior to the end of each plan year.
Company matching contributions to the plan were $191,100 and $240,459 for the
years ended December 31, 1997 and 1998, respectively. Company matching
contributions to the plan for the period ended July 14, 1999 were $127,535.
9. LEASING ARRANGEMENTS
The Company leases various equipment under noncancelable operating leases. The
equipment leases require fixed monthly payments to be made ranging from $351 to
$4,155 and certain other gaming machines and tables require contingent monthly
rental payments based on usage of the equipment. The leases expire on various
dates in 1999 and 2000.
-39-
Rent expense was $262,536 and $403,148 for the years ended December 31, 1997 and
1998, respectively, including contingent rentals of $103,506 and $226,374,
respectively. Rent expense for the period ended July 14, 1999 was $747,493,
including contingent rentals of $613,673.
The future minimum rental payments required under these leases during the years
ended December 31, 1998 are summarized as follows:
1999 $ 21,590
2000 5,478
2001 415
2002 415
2003 415
Thereafter 3,735
-----------
$ 32,048
===========
10. UNINSURED CASH BALANCES
The Company maintains deposit accounts at several local banks. At various times
during the fiscal year and at December 31, 1998, the balances at individual
banks exceeded the maximum amount insured by the FDIC. Management believes
credit risk related to the uninsured balances is minimal.
11. COMMITMENTS AND CONTINGENCIES
During the 1997 fiscal year, the Company underwent a sales and use tax audit by
the Iowa Department of Revenue. At December 31, 1997, a liability of
approximately $178,000 was assessed, including total tax, penalty, and interest
due. This amount was paid during 1998, however, the Company is vigorously
contesting the assessment.
A lawsuit has also been filed by one of the three original "active" unit-holders
(see Note 12) regarding a number of claims, some of which have been narrowed by
the court. The primary claim is in regards to quantum merit for the value of the
services rendered to the Company. The court has narrowed that claim to those
services rendered up to and including the licensure of the Company in the Spring
of 1993. An estimate of potential liability, if any, as a result of the lawsuit
was not possible as of the date of this report.
The Company has incurred various legal expenses related to this lawsuit of
$76,833 and $211,388 for the years ended December 31, 1997 and 1998,
respectively. Legal expenses related to this lawsuit for the period ended July
14, 1999 were $304,742.
The Company is involved in various other legal actions arising in the normal
course of business. In the opinion of management, such matters will not have a
material effect upon the financial position of the Company.
12. MEMBERS EQUITY
Transfers of member interests are limited in that, in accordance with Greater
Dubuque Riverboat Entertainment Co., L.C.'s operating agreement, any sale,
exchange or transfer of a member's interest in the Company shall not be
effective unless the transaction is approved by:
1. The Manager, in writing, and
2. By a vote of the members holding a majority of the remaining units and
by a majority vote of the remaining members at a meeting of the members.
-40-
This limitation does not include the granting of a security interest, pledge,
lien, or encumbrance against any membership interest.
The profits, losses, and distributions of the Company are allocated among the
members in proportion to each member's respective percentage of Units of
Ownership when compared with total Units of Ownership issued. An exception to
this is that there is an initial unequal division of distributions in that 95%
of distributions are paid to non-developer "passive" members, and 5% to
developer "active" members until such time as said non-developer members have
received an amount equal to their original purchase price for Units of Ownership
purchased, plus 10%. Thereafter, any and all distributions are to be
proportionate to Units owned.
13. SALE OF BUSINESS
During 1997, the Company's ownership made a decision to pursue the sale of
Greater Dubuque Riverboat and Harbor Community. The sales process has resulted
in the Company incurring various expenses related to a valuation of the
business, retaining the services of an investment banker, environmental and
market studies, legal and travel.
Sale of business expenses were $93,350 and $716,655 for the years ended December
31, 1997 and 1998, respectively. Sale of business expenses for the period ended
July 14, 1999 were $1,566,761. See Note 1 regarding the sale of the business.
14. DUBUQUE RACING ASSOCIATION LTD., CONTRACT
Dubuque Racing Association, Ltd. (the "Association"), a qualified sponsoring
organization, presently holds a license to conduct gambling games under Chapter
99F and other Iowa statutes.
The Association owns Dubuque Greyhound Park, a traditional greyhound race track
with 600 slot machines and amenities including a gift shop, restaurant and
clubhouse.
In February of 1993, the Company entered into a contract (the "Operating
Agreement") with the Association relating to the operation of an excursion
gambling riverboat for three excursion seasons commencing April 1, 1993, under
gambling licenses held jointly.
In July of 1995, the Operating Agreement with the Association was amended. The
provisions of the amendment are as follows:
1. The Company shall have the option to renew and extend the Operating
Agreement for three consecutive three year terms. The option has
been exercised and the Operating Agreement has been extended to
March 31, 2002.
2. Under the terms of the Operating Agreement, the Association shall
receive the greater of the Association's gaming revenues from the
greyhound park for the period, or a percentage of the total combined
gaming revenues of the Association's from the greyhound park and the
Greater Dubuque Riverboat Entertainment Company, L.C., as follows:
a. 32% of the first $30,000,000 of total combined gaming revenues,
plus
b. 8% of the total combined gaming revenues over $30,000,000, but
less than $42,000,000
c. 8% of the total combined gaming revenues over $42,000,000, but less
than $46,000,000 during any period for which no excursion boat
gambling or land based gambling operation is carried on
-41-
from a Wisconsin or Illinois gambling operation in Grant County,
Wisconsin or Jo Daviess County, Illinois.
Gaming revenues under this contract means adjusted gross receipts
less gaming taxes.
Gaming revenues for the Association were $20,153,796 and
$22,362,156 for December 31, 1997 and 1998, respectively, and
$13,320,489 for the period from January 1, 1999 through July 14,
1999 and therefore payments made to the Association for the years
ended December 31, 1997 and 1998 and the period ended July 14, 1999
under the Operating Agreement were $0.
3. Commencing April 1, 2000, and continuing thereafter, the Company
shall additionally pay the Association the sum of $.50 for each
patron admitted on the boat, which, based upon recent annual
attendance, would approximate $500,000 annually.
4. In the event the Company shall desire to sell or lease the
excursion gambling boat, its furnishings and gambling equipment
and/or its interest in any ticket sale facility or other buildings
located in the Dubuque Ice Harbor used in connection with the
operation of an excursion gambling boat, to a third party that does
not agree to operation said asset subject to the terms and
conditions of the Operating Agreement, and obtains as acceptable
offer from said third party for the purchase or lease of the
excursion gambling boat and its furnishings, equipment, and/or its
interest in said building, the Association shall have the option to
purchase or lease the excursion gambling boat, its furnishings,
equipment, and/or the Company's interest in the building or its
lease of the same for the amount of the acceptable offer made by a
third party and upon the same terms and conditions as set forth in
a third party offer.
* * * * *
-42-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-43-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Officers of Peninsula Gaming Company and Managers of Peninsula Partners
Peninsula Gaming Partners, LLC is our parent and sole manager. The
following table sets forth the names and ages of the executive officers of
Peninsula Gaming Company and of the managers and executive officers of Peninsula
Gaming Partners.
Name Age Position
M. Brent Stevens....................... 39 Manager of Peninsula Partners; Director of Peninsula
Gaming Corp.; Chief Executive Officer of Peninsula
Partners and Peninsula Gaming Company; President and
Treasurer of Peninsula Gaming Corp.
Natalie A. Schramm..................... 29 Chief Financial Officer and Controller of Peninsula
Gaming Company
Michael S. Luzich...................... 45 Manager of Peninsula Partners; Director of Peninsula
Gaming Corp.; Vice President of Corporate Development
and Secretary of Peninsula Partners; Vice President
and Secretary of Peninsula Gaming Corp.; Secretary of
Peninsula Gaming Company
Jerome Grippe.......................... 57 General Manager
Terrance W. Oliver..................... 50 Manager of Peninsula Partners
William L. Westerman................... 67 Manager of Peninsula Partners
Andrew R. Whittaker.................... 37 Manager of Peninsula Partners
Management Profiles
Following is a brief description of the business experience of each of
the executive officers of Peninsula Gaming Company and of the managers and
executive officers of Peninsula Partners listed in the preceding table.
M. Brent Stevens-Manager of Peninsula Partners; Chief Executive Officer of
Peninsula Partners and Peninsula Gaming Company; Director of Peninsula Gaming
Corp.; President and Treasurer of Peninsula Gaming Corp. Since 1990, Mr. Stevens
has been employed by Jefferies & Company, Inc., and presently is a managing
director in the Corporate Finance department. Mr. Stevens joined us in December,
1998.
Natalie A. Schramm-Chief Financial Officer and Controller of Peninsula Gaming
Company. Ms. Schramm has served as our chief financial officer and controller
since July 15, 1999. Ms. Schramm joined our predecessor, Greater Dubuque
Riverboat Entertainment Company, L.C., in November 1996 and was formerly
employed by Aerie Hotels and Resorts in Oak Brook, Illinois as Corporate
Accounting Manager. She was responsible for the corporate accounting functions
of the Silver Eagle, the Eagle Ridge Inn and Resorts, located in Galena,
Illinois and the Essex Hotel, located in Chicago, Illinois. She served as
Internal Audit Manager for the Silver Eagle and was a member of a development
team that successfully pursued a riverboat gaming license in Indiana. Ms.
Schramm has tendered her resignation from the Company, effective April 28, 2000.
Michael S. Luzich-Manager, Vice President of Corporate Development and Secretary
of Peninsula Partners; Director, Vice President and Secretary of Peninsula
Gaming Corp.; Secretary of Peninsula Gaming Company. Mr. Luzich is the founder
and President of the Cambridge Investment Group, L.L.C., an investment and
development company located in Las Vegas, Nevada. Prior to October 1995, Mr.
Luzich was a founding partner and
-44-
director of Fitzgeralds New York, Inc. and Fitzgeralds Arizona Management, Inc.,
which are development companies responsible, respectively, for the Turning Stone
Casino near Syracuse, New York, for the Oneida Tribe and the Cliff Castle Casino
near Sedona, Arizona, for the Yavapai-Apachi Tribe. Mr. Luzich joined us in
December, 1998.
Jerome Grippe - General Manager of Peninsula Gaming Company. Mr. Grippe
serves as our general manager under the terms of an Employee Sharing Agreement
with Riviera Gaming Management, Inc. See "Item 13 --- Certain Relationships and
Related Transactions - Engagement of Management Consultant" for the terms of
Mr. Grippe's engagement. Mr. Grippe joined the staff of the Riviera Hotel and
Casino in July 1990, after a career in the military. With Riviera, he has held
the positions of Special Assistant to the CEO, Vice President of Organizational
Development, Vice President of Operations and Senior Vice President of
Operations. Prior to his duties as our general manager, he served as general
manager of the Four Queens Hotel and Casino in Las Vegas, pursuant to a Riviera
management contract.
Terrance W. Oliver-Manager of Peninsula Partners. Since 1993, Mr. Oliver has
served as a director of and consultant to Mikohn Gaming Corporation, a gaming
equipment manufacturer headquartered in Las Vegas. From 1988 until 1993, Mr.
Oliver served as Chairman of the Board to the predecessor company of Mikohn.
From 1984 until 1996, Mr. Oliver was a founding shareholder, board member and
executive officer of Fitzgeralds Gaming Corporation. Mr. Oliver retired as the
Chief Operating Officer of Fitzgeralds Gaming Corporation in 1996. Mr. Oliver
joined us in September, 1999.
William L. Westerman-Manager of Peninsula Partners. Since 1992, Mr. Westerman
has assumed the positions of Chairman of the Board, Chief Executive Officer and
President of Riviera, Inc. and Chairman of the Board and Chief Executive Officer
of Riviera Operating Corporation. From July 1, 1991 until his appointment as
Chairman of the Board, Mr. Westerman served as a consultant to Riviera, Inc.
From 1973 until June 30, 1991, Mr. Westerman held various positions with
Cellu-Craft Inc. and Alusuisse Flexible Packaging, manufacturers of flexible
packaging used primarily for food products, including serving as President and
Chief Executive Officer of Cellu-Craft Inc. and President of Alusuisse Flexible
Packaging, a wholly owned subsidiary of Alusuisse, which purchased Cellu-Craft
Inc. on June 30, 1989. Mr. Westerman joined us in July, 1999.
Andrew R. Whittaker-Manager of Peninsula Partners. Since 1990 Mr. Whittaker has
been employed by Jefferies & Company, Inc. and presently is an executive vice
president in the Corporate Finance department. Mr. Whittaker joined us in July,
1999.
Employment and Consulting Agreements
James P. Rix, formerly Chief Operating Officer of Peninsula Gaming Company. Mr.
Rix resigned as our Chief Operating Officer, effective November 20, 1999. Under
the terms of his employment agreement, Mr. Rix was paid a signing bonus of
$100,000 and was entitled to receive an annual base salary of $250,000 and,
subject to various conditions, an annual performance based bonus. While
employed, Mr. Rix also was reimbursed for club membership expenses in the amount
of $501.38. Mr. Rix has agreed to restrictions which will limit his ability to
compete with us for a one-year period following the termination of his
employment. In connection with Mr. Rix's resignation, we entered into a
separation and release agreement in December 1999 pursuant to which, among other
things, we agreed to (i) pay Mr. Rix $360,315.95 in full satisfaction of all
amounts due to him upon termination, and (ii) exercise our right under Peninsula
Gaming Partner's operating agreement to repurchase all of Mr. Rix's 46,666.67
common membership interests in Peninsula Gaming Partners for $280,000 (the
amount paid by Mr. Rix for such common membership interests).
Natalie A. Schramm. Ms. Schramm has entered into an employment agreement with us
which has a term of two years commencing July 15, 1999 and which renews
automatically for successive one year terms, unless terminated by her or us for
reasons specified in her employment agreement. Under the terms of her employment
agreement, Ms. Schramm is entitled to a signing bonus of $25,000, an annual base
salary of $82,500 and a yearly performance
-45-
based bonus of at least $20,000. Ms. Schramm is further entitled to at least a
5% annual salary increase, the actual amount of the increase to be determined by
the board of managers of Peninsula Partners. Ms. Schramm has agreed to
restrictions which will limit her ability to compete with us for a one-year
period following her termination of employment.
Michael S. Luzich. Peninsula Partners has entered into a consulting agreement
with Mr. Luzich, under which Mr. Luzich, in consideration for corporate
development and consulting services to be rendered, is entitled to receive
compensation consisting of base salary and incentive payments in an aggregate
annual amount not to exceed $340,000. The consulting agreement has a one year
term and, subject to the occurrence of various termination events, is renewable
automatically for successive one year terms. Mr. Luzich is entitled to
reimbursement of reasonable business expenses as approved by the board of
managers of Peninsula Partners and incurred in connection with the performance
of his services.
ITEM 11. EXECUTIVE COMPENSATION
We were not organized until 1999. Only Mr. Rix and Ms. Schramm received
compensation in excess of $100,000 during 1999 and, based on existing agreements
with members of our senior management, only they are entitled to receive
compensation in excess of $100,000 during 2000.
Subject to the approval of the holders of at least 85% of the voting common
membership interests of Peninsula Gaming Partners, Peninsula Gaming Partners'
board of managers may, issue additional incentive based equity interests in
Peninsula Gaming Partners at no less than fair market value.
Summary Compensation Table
The following table sets forth all compensation awarded to, earned by or paid to
each of our Chief Executive Officer and to each of our executive officers for
all services rendered since the date of consummation of the acquisition on
July 15, 1999 through December 31, 1999.
Securities
Other Annual Underlying All other
Name and Fiscal Salary Compensation Options Compensation
Principal Position Year ($) Bonus ($) ($) (#) ($)
Long-term
Annual Compensation Compensation
M. Brent Stevens............ 1999 - - - - -
Chief Executive Officer
Natalie A. Schramm.......... 1999 36,490.42 25,000 - - -
Chief Financial Officer
James P. Rix................ 1999 91,346.11 - 501.38 - -
Formerly, Chief Operating
Officer
Compensation Committee Interlocks and Insider Participation
We have no standing Compensation Committees. All compensation decisions are made
by Peninsula Gaming Partners, our parent and sole manager. The managers of
Peninsula Partners each participate in the determination of executive officer
compensation.
-46-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of Peninsula Gaming Company's outstanding common membership
interests are owned by Peninsula Gaming Partners, its parent and sole manager.
All of Peninsula Gaming Corp.'s outstanding common stock is owned by Peninsula
Gaming Company.
Greater Dubuque Riverboat Entertainment Company holds 100% of our
issued and outstanding preferred membership interests, which, subject to limited
exceptions, will have no voting rights, except as required by applicable law. On
July 15, 1999, Peninsula Gaming Partners issued 500,000 convertible preferred
membership interests; each of which is initially convertible into one Peninsula
Gaming Partners non-voting common membership interest, representing 33.33% of
the fully diluted common membership interests of Peninsula Gaming Partners on
such date. Peninsula Gaming Partners does not have outstanding any of its
non-voting common membership interests. See "Description of Peninsula Gaming
Company Membership Interests" and "Description of Peninsula Gaming Partners
Membership Interests" for more information about our different classes of
membership interests. Unless otherwise indicated, the address of each manager or
executive officer of Peninsula Gaming Partners is c/o Peninsula Gaming Company,
LLC, 3rd Street Ice Harbor, P.O. Box 1750, Dubuque, IA 52004-1683.
The table below sets forth information regarding the beneficial
ownership of the voting common membership interests of Peninsula Gaming Partners
by
(a) each person or entity known by us to own beneficially 5% or more
of the common membership interests of Peninsula Gaming
Partners,
(b) each manager and executive officer of Peninsula Gaming Partners
and
(c) all managers and executive officers of Peninsula Gaming Partners
as a group.
The following information is helpful to an understanding of, and
qualifies the beneficial ownership data contained in, the table set forth below.
Mr. Stevens holds 225,000 Peninsula Gaming Partners common membership interests
directly and 413,333 Peninsula Gaming Partners common membership interests
indirectly through PGP Investors, LLC. Mr. Stevens is the sole managing member
of PGP Investors and exercises voting and investment power over the Peninsula
Gaming Partners common membership interests owned by PGP Investors. Mr. Stevens
does not own any membership interests in PGP Investors. Mr. Stevens and Mr.
Whittaker, managers of Peninsula Gaming Partners, are a managing director and
executive vice president, respectively, of Jefferies & Company, Inc., the
initial purchaser in the offering of the old notes on July 15, 1999. In
addition, Jefferies Company, Inc. and some of its affiliates, officers and
employees are members of PGP Investors, LLC. Mr. Whittaker holds an economic
interest in 20,000 Peninsula Gaming Partners common membership interests
indirectly through his membership in PGP Investors, but does not exercise voting
or investment power with respect to, and disclaims a beneficial ownership
interest in, these Peninsula Gaming Partners common membership interests. The
total holding of all managers and executive officers as a group includes the
413,333 Peninsula Gaming Partners common membership interests held by PGP
Investors, over which Mr. Stevens exercises voting and investment power.
-47-
Voting Common
Name and Address Membership Interests Percent of
of Beneficial Owner Beneficially Owned Class
- ------------------- -------------------- -----------
M. Brent Stevens....................... 248,333 24.84%
11100 Santa Monica, 10th Floor
Los Angeles, CA 90071
PGP Investors, LLC..................... 413,333 41.33%
11100 Santa Monica, 10th Floor
Los Angeles, CA 90071
Michael S. Luzich...................... 323,333 32.33%
Terrance Oliver........................ 15,000 1.50%
Natalie A. Schramm..................... 0 0%
Jerome Grippe.......................... 0 0%
William L. Westerman................... 0 0%
2901 Las Vegas Blvd., South
Las Vegas, NV 89109
Andrew R. Whittaker.................... 20,000 2.00%
11100 Santa Monica, 10th Floor
Los Angeles, CA 90071
All managers and executive officers as
a group (6 persons)................. 1,000,000 100.00%
-48-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationship with Dubuque Racing Association
The Dubuque Racing Association is a not-for-profit corporation
organized for the purpose of operating the Dubuque Greyhound Park, a pari-mutuel
greyhound racing facility in Dubuque, Iowa. On February 22, 1993, the Dubuque
Racing Association entered into the Dubuque Racing Association operating
agreement which authorizes us to operate riverboat gaming operations in Dubuque.
The Dubuque Racing Association operating agreement has since been amended
several times and expires by its terms on December 31, 2008.
Beginning April 1, 2000, we will be required to make a $0.50 per
admission payment to the Dubuque Racing Association, without regard to our
revenues or profits. Based on 1999 admissions, this payment would have amounted
to approximately $554,000. Under the Dubuque Racing Association operating
agreement, subject to limited conditions, we are required to pay the Dubuque
Racing Association, for the right to operate the Diamond Jo, an amount equal to
the excess of 32% of the first $30 million of the combined gaming revenues of
the Dubuque Racing Association and the Diamond Jo, plus 8% of the next
$12 million of these total gaming revenues, plus, if there are no competing
gaming operations in neighboring counties of Illinois and Wisconsin, 8% of the
next $4 million of total gaming revenues, over the Dubuque Racing Association's
gaming revenues from the Dubuque Greyhound Park. Gaming revenues under this
contract means adjusted gross receipts less gaming taxes. This formula is
subject to change if the Dubuque Racing Association ceases to operate the
Dubuque Greyhound Park or if we operate a riverboat smaller than the current
Diamond Jo. We currently make no payments to the Dubuque Racing Association
because the Dubuque Racing Association's revenues from the Dubuque Greyhound
Park are greater than the specified percentage of our total gaming revenues.
The Dubuque Racing Association operating agreement allows us to
restrict the number of slot machines at the Dubuque Greyhound Park to 600;
provided, that we do not increase the number of slot machines at the Diamond Jo
to more than 650. In addition, we may require that the weighted average
theoretical slot payback percentage at the Dubuque Greyhound Park not exceed
ours by more than 0.5% so long as the rates we set are reasonable and in good
faith. Additionally, we cannot require the Dubuque Racing Association to change
rates on its machines more than four times per contract year. We have elected to
apply both of these restrictions to the Dubuque Greyhound Park. These
restrictions terminate on the earlier of:
(1) our operation of a replacement riverboat that is not of equal or greater
size than the Diamond Jo or on which we operate fewer total gaming
positions than on the Diamond Jo, and
(2) March 31, 2002. Without these restrictions, either we or the Dubuque
Racing Association may,
(a) increase the number of slot machines upon a determination by the
gaming commission, among other things, that the additional slot
machines would not have a detrimental impact on the Dubuque Racing
Association's or our financial viability, as applicable, and
(b) increase the weighted average theoretical slot payback percentage,
either of which actions, if taken by the Dubuque Racing Association,
could result in increased competition from the Dubuque Greyhound
Park. Iowa law currently prohibits pari-mutuels, such as the Dubuque
Greyhound Park, from operating table games, and we believe that
table games will not become permissible at racetracks in Iowa.
If changes to Iowa law prior to April 1, 2000 permit pari-mutuels to
operate table games, under the Dubuque Racing Association operating agreement,
we are entitled to prohibit the Dubuque Racing Association from operating table
games at the Dubuque Greyhound Park. In this case, our ability to prohibit table
games at the Dubuque Greyhound Park will terminate on the earlier of:
(1) our operation of a replacement riverboat that is not of equal or
greater size to the Diamond Jo or on which we
operate fewer total gaming positions than on the Diamond Jo, and
(2) July 11, 2000.
-49-
The above restrictions are subject to the express approval and
regulatory supervision of the gaming commission. Additionally, all of the
restrictions under the Dubuque Racing Association operating agreement will
terminate if we or any of our affiliates operate another gaming facility in
Dubuque County or the adjoining counties in Illinois or Wisconsin. Under the
Dubuque Racing Association operating agreement, we have the right to sell the
Diamond Jo and related facilities, subject to the approval of the gaming
commission, as long as the acquiror agrees to abide by the terms of the Dubuque
Racing Association operating agreement.
Managing Member Indemnification
Under our and Peninsula Gaming Partners' operating agreements, we and
Peninsula Gaming Partners have agreed, subject to few exceptions, to indemnify
and hold harmless our members, Peninsula Gaming Partners and Peninsula Gaming
Partners members, as the case may be, from liabilities incurred as a result of
their positions as our sole manager and as members of us or Peninsula Gaming
Partners, as the case may be.
Equity Contribution
The common members of Peninsula Gaming Partners have made a capital
contribution of $6.0 million to Peninsula Gaming Partners in exchange for their
common membership interests. Peninsula Gaming Partners immediately contributed
this $6.0 million and the $3.0 million raised in the offering of the old notes
through the sale of Peninsula Gaming Partners' convertible preferred membership
interests to Peninsula Gaming Company, in exchange for common membership
interests in Peninsula Gaming Company. Peninsula Gaming Company used this
capital contribution from Peninsula Gaming Partners to finance in part the
acquisition of the Diamond Jo. Additionally, we issued $7.0 million face amount
of preferred membership interests to Greater Dubuque Riverboat Entertainment
Company in connection with the acquisition of the Diamond Jo.
Operating Agreement of Peninsula Gaming Partners
Under Peninsula Gaming Partners' operating agreement, the management
of Peninsula Gaming Partners is vested in a board of managers composed of five
individuals, two of whom must be independent managers. At any time that M. Brent
Stevens, together with any entity controlled by Mr. Stevens, beneficially holds
at least 5% of the voting common membership interests of Peninsula Gaming
Partners, Mr. Stevens is entitled to designate three of Peninsula Gaming
Partners' managers, including one of the two independent managers. The two
independent managers shall serve as members of the independent committee. Under
Peninsula Gaming Partners' operating agreement, PGP Advisors, LLC, a Delaware
limited liability company, of which Mr. Stevens is the sole managing member, may
render financial advisory and consulting services to Peninsula Gaming Partners
and will be entitled to receive commercially reasonable fees for the services
consistent with industry practices. Subject to the terms of the indenture
governing the notes, these fees will be paid by us as distributions to Peninsula
Gaming Partners.
At any time that Michael Luzich, together with any entity controlled
by Mr. Luzich, beneficially holds at least 5% of the voting common membership
interests of Peninsula Gaming Partners, Mr. Luzich is entitled to designate two
of Peninsula Gaming Partners' managers, including the other independent manager.
Presently, Peninsula Gaming Partners' board of managers is composed of
five managers. A manager may resign at any time, and the member who designates a
manager may remove or replace that manager from the board of managers at any
time.
Operating Agreement of Peninsula Gaming Company
Under the terms of Peninsula Gaming Company's operating agreement, if
we repay, redeem or refinance 90% or more of the notes on or prior to July 1,
2003, particular members of management, including Messrs. Luzich and Stevens,
will be entitled to receive, at Mr. Stevens' discretion, an aggregate of $1.5
million, payable by Peninsula Gaming Company.
-50-
Engagement of Management Consultant
Peninsula Gaming Partners has engaged Riviera Gaming Management, Inc.
to assist, on an interim basis, with transitional matters, including the
selection of a new chief operating officer to oversee our riverboat casino
operations. Riviera Gaming Management, Inc., a wholly-owned subsidiary of
Riviera Holdings Corporation, which owns the Riviera Hotel & Casino in Las
Vegas, Nevada, will be paid customary fees and expenses in connection with this
engagement. Mr. Westerman, a manager on the board of managers of Peninsula
Gaming Partners, is Chairman of the Board of Riviera, Inc., an affiliate of
Riviera Gaming Management, Inc.
In addition, we have entered into an Employee Sharing Agreement with
Riviera Gaming Management, Inc. and Jerome Grippe, whereby Mr. Grippe provides
management services to us and serves as our general manager. The initial term of
the agreement expires on August 31, 2000, but renews automatically for
successive 6-month terms. Under this agreement, we pay Riviera a monthly fee of
$7,500, and reimburse Mr. Grippe for his reasonable out-of-pocket expenses.
-51-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements -- see Index to Financial Statements appearing on
Page 17.
(2) Exhibits:
Exhibit Description
Number
*3.1A Certificate of Formation of Peninsula Gaming Company, LLC
*3.1B Amendment to Certificate of Formation of Peninsula Gaming Company, LLC
*3.2 Operating Agreement of Peninsula Gaming Company, LLC
*3.3 Articles of Incorporation of Peninsula Gaming Corp.
*3.4 By-laws of Peninsula Gaming Corp.
*4.1 Specimen Certificate of Common Stock
*4.2 Indenture, dated July 15, 1999, by and among Peninsula Gaming Company, LLC, Peninsula Gaming Corp.
and Firstar Bank of Minnesota, N.A., as trustee
*4.5 Registration Rights Agreement, dated July 15, 1999, by and among Peninsula Gaming Company, LLC,
Peninsula Gaming Corp. and Jefferies & Company, Inc.
*10.1A Asset Purchase Agreement, dated January 15, 1999, by and among Greater Dubuque Riverboat
Entertainment Company, L.C. and AB Capital, L.L.C.
*10.1B Amendment to Asset Purchase Agreement, dated February 1, 1999, by and among Greater Dubuque
Riverboat Entertainment Company, L.C. and AB Capital, L.L.C.
*10.2A Real Property Purchase Agreement, dated January 15, 1999, by and among Harbor Community Investment,
L.C. and AB Capital, L.L.C.
*10.2B First Amendment to Real Property Purchase Agreement, dated July 15, 1999, by and among Harbor
Community Investment, L.C. and AB Capital, L.L.C.
*10.3 Assignment Agreement, dated July 1, 1999, by and among Peninsula Gaming Partners, LLC (formerly AB
Capital, LLC) and Peninsula Gaming Company, LLC
*10.4 Employment Agreement, dated April 15, 1999, by and among James P. Rix, AB Capital, L.L.C. and
Peninsula Gaming Company, LLC
*10.5 Employment Agreement, dated July 15, 1999, by and among Natalie Schramm and AB Capital, L.L.C.
*10.6 Indemnification Agreement, dated June 7, 1999, by and among James P. Rix, AB Capital, L.L.C. and
Peninsula Gaming Company, LLC
*10.7 Indemnification Agreement, dated June 7, 1999, by and among Natalie Schramm and AB Capital, L.L.C.
and Peninsula Gaming Company, LLC
*10.8 Bill of Sale, dated July 15, 1999, by and among Greater Dubuque Riverboat Entertainment Company,
L.C. and Peninsula Gaming Company, LLC
*10.9A Operating Agreement, dated February 22, 1993, by and among Dubuque Racing Association, Ltd. and
Greater Dubuque Riverboat Entertainment Company, L.C.
*10.9B Amendment to Operating Agreement, dated February 22, 1993, by and among Dubuque Racing Association,
Ltd. and Greater Dubuque Riverboat Entertainment Company, L.C.
*10.9C Amendment to Operating Agreement, dated March 4, 1993, by and among Dubuque Racing Association,
Ltd. and Greater Dubuque Riverboat Entertainment Company, L.C.
*10.9D Third Amendment to Operating Agreement, dated March 11, 1993, by and among Dubuque Racing
Association, Ltd. and Greater Dubuque Riverboat Entertainment Company, L.C.
*10.9E Fourth Amendment to Operating Agreement, dated March 11, 1993, by and among Dubuque Racing
Association, Ltd. and Greater Dubuque Riverboat Entertainment Company, L.C.
-52-
*10.9F Fifth Amendment to Operating Agreement, dated April 9, 1993, by and among Dubuque Racing
Association, Ltd. and Greater Dubuque Riverboat Entertainment Company, L.C.
*10.9G Sixth Amendment to Operating Agreement, dated November 29, 1993, by and among Dubuque Racing
Association, Ltd. and Greater Dubuque Riverboat Entertainment Company, L.C.
*10.9H Seventh Amendment to Operating Agreement, dated April 6, 1994, by and among Dubuque Racing
Association, Ltd. and Greater Dubuque Riverboat Entertainment Company, L.C.
*10.9I Eighth Amendment to Operating Agreement, dated April 29, 1994, by and among Dubuque Racing
Association, Ltd. and Greater Dubuque Riverboat Entertainment Company, L.C.
*10.9J Ninth Amendment to Operating Agreement, dated July 11, 1995, by and among Dubuque Racing
Association, Ltd. and Greater Dubuque Riverboat Entertainment Company, L.C.
*10.9K Tenth Amendment to Operating Agreement, dated July 15, 1999, by and among Dubuque Racing
Association, Ltd. and Greater Dubuque Riverboat Entertainment Company, L.C.
*10.10 Operating Agreement Assignment, dated July 15, 1999, by and among Greater Dubuque Riverboat
Entertainment Company, L.C. and Peninsula Gaming Company, LLC
*10.11 First Preferred Ship Mortgage, dated July 15, 1999, by Peninsula Gaming Company, LLC in favor of
Firstar Bank of Minnesota, N.A., as trustee
*10.12 Mortgage, Leasehold Mortgage, Assignment of Rents, Security Agreement and Fixture Financing
Statement dated July 15, 1999, by Peninsula Gaming Company, LLC in favor of Firstar Bank of
Minnesota, N.A., as trustee
*10.13 Ice Harbor Parking Agreement Assignment, dated July 15, 1999, by and among Greater Dubuque
Riverboat Entertainment Company, L.C. and Peninsula Gaming Company, LLC
*10.14 First Amendment to Sublease Agreement, dated July 15, 1999, by and among Dubuque Racing
Association, Ltd. and Greater Dubuque Riverboat Entertainment Company, L.C.
*10.15 Sublease Assignment, dated July 15, 1999, by and among Greater Dubuque Entertainment Company, L.C.
and Peninsula Gaming Company, LLC
*10.16 Iowa Racing and Gaming Commission Gaming License, dated July 15, 1999
*10.17 Assignment of Iowa IGT Declaration and Agreement of Trust, dated July 15, 1999 by and among Greater
Dubuque Riverboat Entertainment Company, L.C. and Peninsula Gaming Company, LLC
10.18 Employee Sharing Agreement, dated as of March 1, 2000, by and among Riviera Gaming Management,
Inc., Jerome Grippe and Peninsula Gaming Company, LLC.
12.1 Computation of ratio of earnings to fixed charges
27.1 Financial Data Schedule
*99.1 Form of Letter of Transmittal
*99.2 Form of Notice of Guaranteed Delivery
**99.3 Form of Letter to Brokers, Dealers and other Nominees
**99.4 Form of Letter to clients
<FN>
___________
* Previously filed as an exhibit to the registration statement on Form S-4 (Registration Number 333-88829) of Peninsula
Gaming Company, LLC and Peninsula Gaming Corp. on October 12, 1999.
</FN>
<FN>
** Previously filed as an exhibit to Amendment No. 2 to registration statement on Form S-4 (Registration Number 333-88829)
of Peninsula Gaming Company, LLC and Peninsula Gaming Corp. on December 13, 1999.
</FN>
-53-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Dubuque, State of Iowa on March 30, 2000.
PENINSULA GAMING COMPANY
By: /s/ M. Brent Stevens
--------------------------
M. Brent Stevens
Chief Executive Officer
By: /s/ Natalie A. Schramm
--------------------------
Natalie A. Schramm
Chief Financial Officer
PENINSULA GAMING CORP.
By: /s/ M. Brent Stevens
-------------------------
M. Brent Stevens
President and Treasurer
By: /s/ Michael S. Luzich
-------------------------
Michael S. Luzich
Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
Date: March 30, 2000 PENINSULA GAMING PARTNERS
Managing Member of Peninsula
Gaming Company, LLC
By: /s/ M. Brent Stevens
----------------------------
M. Brent Stevens
Chief Executive Officer
and Manager
Date: March 30, 2000 By: /s/ Terrance W. Oliver
----------------------------
Terrance W. Oliver
Manager of Peninsula
Gaming Partners
Date: March 30, 2000 By: /s/ William L. Westerman
----------------------------
William L. Westerman
Manager of Peninsula
Gaming Partners
Date: March 30, 2000 By: /s/ Andrew R. Whittaker
----------------------------
Andrew R. Whittaker
Manager of Peninsula
Gaming Partners
-54-
EXHIBIT 10.18
EMPLOYEE SHARING AGREEMENT
Employee Sharing Agreement ("Agreement"), dated as of March 1, 2000, by and
between Riviera Gaming Management, Inc. ("RGM"), Jerome Grippe ("Grippe") and
Peninsula Gaming Company, LLC, a Delaware limited liability company
("Peninsula").
WHEREAS, Peninsula desires to engage the services of Grippe, an employee of RGM,
and RGM and Grippe agree to such employment, in each case, pursuant to the terms
and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth,
for good and valuable consideration, the adequacy and receipt of which are
hereby acknowledged, the parties hereby agree as follows:
1. This Agreement shall have an initial term commencing on the date
hereof through August 31, 2000 (the "Initial Term") and shall automatically
renew for successive six-month terms (the Initial Term, and any successive term,
hereinafter, the "Term") unless this Agreement is terminated earlier as provided
herein. Any party may terminate this Agreement at any time after the Initial
Term for any reason upon 60 days prior written notice to the other party;
provided, however, that Peninsula may terminate Grippe's employment hereunder at
any time for just cause. For purposes of this Section 1, "just cause" means (i)
a material breach of this Agreement by Grippe (after notice and a 10-day cure
period); (ii) a breach of Grippe's duty of loyalty to Peninsula or any act of
dishonesty with respect to Peninsula or its members, customers or suppliers;
(iii) Grippe's continued failure or refusal to perform any material duty to
Peninsula which is normally attached to his position (after notice and a 10-day
cure period); (iv) Grippe's gross negligence or willful misconduct in performing
those duties which are normally attached to his position; (v) the commission by
Grippe of an act of fraud, conversion, misappropriation (including the
unauthorized use or disclosure of confidential or proprietary information of
Peninsula) or embezzlement or crime of moral turpitude; (vi) a conviction of or
guilty plea or confession by Grippe to any fraud, conversion, misappropriation,
embezzlement or felony; (vii) the exposure of Peninsula to any criminal
liability or regulatory sanction or adverse action substantially caused by the
conduct of Grippe which results in a material adverse effect upon Peninsula's
business, operations, financial condition or results of operations or the
exposure of Peninsula to any civil liability caused by Grippe's unlawful
harassment in employment; or (viii) the repeated taking of any action prohibited
(x) by the board of managers or any of the executive officers of Peninsula,
provided that Grippe has received at least one written notice of having taken an
action so prohibited, or (y) by this Agreement; or (ix) Grippe's failure to
obtain and/or maintain an appropriate license to serve as General Manager of the
Diamond Jo riverboat casino located in Dubuque, Iowa (the "Facility").
2. During the Term of this Agreement, Peninsula hereby agrees to
employ Grippe, Grippe agrees to be employed by Peninsula, and RGM agrees to
offer the services of Grippe to Peninsula, in each case, as set forth herein to
carry out such duties and responsibilities as directed by the Chief Executive
Officer of Peninsula, which duties and responsibilities shall include, but are
not limited to, (i) managing the day-to-day operations of the Facility, (ii)
functioning as the General Manager of the Facility with all authority and
responsibility inherent therein; and (iii) assisting Peninsula in the selection
of a permanent General Manager and Chief Financial Officer and coordinating the
integration of such individuals with Peninsula's business operations, all of
which are subject to the further delineation at the
-55-
direction of M. Brent Stevens, President and CEO of Peninsula. Grippe shall
report directly and solely to Mr. Stevens, Peninsula's Chief Executive Officer,
and shall perform his services hereunder at the Facility three (3) days every
two weeks and be available by telephone, email or fax at all other times. RGM
shall have no supervisory or directive control over Grippe while he is
functioning as an employee of Peninsula under the terms of this Agreement.
During the Term of this Agreement, Grippe shall remain an employee of RGM, and
Grippe's employment by Peninsula hereunder shall not otherwise limit or affect
in any manner whatsoever the benefits otherwise accorded Grippe as an employee
of RGM; provided, however, that, except as expressly provided in this Agreement,
Grippe shall not be entitled to any compensation or benefits of any kind as an
employee of Peninsula.
3. During the Term of this Agreement, Peninsula shall pay to RGM the
sum of seven thousand five hundred dollars ($7,500) per month, or a pro-rata
portion thereof in respect of any partial month during which Grippe is employed
hereunder (the "Monthly Fee"), for services performed hereunder, which Monthly
Fee shall be paid in advance on the first day of each month, commencing March 1,
2000. In addition to the Monthly Fee, Grippe and RGM, if advanced by RGM, shall
be entitled to reimbursement of reasonable out-of-pocket expenses incurred by
him or it in connection with his performance under this Agreement, which
payments shall be (i) submitted by Grippe or RGM on a monthly basis (together
with written documentation reasonably acceptable to Peninsula evidencing such
expenses) and (ii) paid by Peninsula within 10 days of receipt thereof.
4. Peninsula hereby agrees that RGM will have no responsibility for
managing the gaming operations of the Diamond Jo riverboat casino or the
management of the business or affairs of Peninsula.
5. Grippe and RGM acknowledge that the information, observations and
data obtained by or available to Grippe during the course of employment with
Peninsula concerning the business and affairs of Peninsula are and will be the
property of Peninsula. Therefore, Grippe and RGM agree, during the Term of this
Agreement and following the termination of Grippe's employment for any reason
whatsoever, not to disclose or induce or assist in the use or disclosure, to any
person or entity, or use for the account of any person or entity other than
Peninsula, any such information, observations or data including, without
limitation, any business secrets or methods, processes, formulas, designs,
inventories, techniques, marketing plans, strategies, forecasts, new products,
blueprints, specifications, maps, computer software programs, promotional ideas,
unpublished financial statements, budget projections, licenses, prices, costs,
policies, manuals or instructions, reports, lists of names and/or addresses of
customers, prospective customers or suppliers, other customer or prospective
customer information or requirements, personnel information, the terms of any
Company contract, lease or other arrangement with any customer or leasing
information (including without limitation, expiration dates, renewal dates,
pricing information, other data used by Peninsula in connection with its gaming
operations, special requirements, referral lists or other data setting forth
names and addresses of customers) or any other of its confidential or
proprietary information, records, observations or data (whether or not patented,
copyrighted or otherwise protected under applicable law) or information created,
discovered, developed, or made known to Peninsula (including, without
limitation, information created, discovered, developed, or made known by Grippe
to Peninsula during his period of employment by Peninsula) along with any
reports, analyses, compilations, memoranda, notes and other writings or
recordings prepared by Grippe or any other employee, agent or representative of
Peninsula, which contain, reflect or are based upon such information,
observations or data (collectively, "Confidential Information") without
Peninsula's prior written consent, unless and to the extent that the
aforementioned matters become generally known to and available for use by the
public other than as a result of RGM's or Grippe's acts or omissions to act, and
except as required by law or legal process. In the event Grippe's employment
with Peninsula is terminated for any reason whatsoever, Grippe and RGM will
promptly return and surrender to Peninsula any and all Confidential Information
made available to either Grippe or RGM by Peninsula or otherwise in the
possession of Grippe or RGM in the course of Grippe's employment with Peninsula.
-56-
6. Grippe and RGM each further agree that, for a period of six months
following any termination of Grippe's employment for any reason whatsoever,
neither Grippe nor RGM will, directly or indirectly, either for themselves or
for any other person, firm, company or corporation, in any capacity, induce or
attempt to induce or call upon or solicit any of Peninsula's employees,
consultants, customers, prospective customers, suppliers, landlords or other
business relations of Peninsula to leave or cease doing business with Peninsula
or in any way interfere with the relationship between Peninsula and any of its
employees, customers, prospective customers, suppliers, landlords or other
business relations thereof or hire or solicit for employment any employee of
Peninsula. If, at the time of enforcement of this Section 6, a court holds that
the restrictions stated herein are unreasonable under circumstances then
existing, the parties hereto agree that the maximum duration, scope and
geographical area reasonable under such circumstances shall be substituted for
the stated period, scope and area and that the court shall be allowed to reduce
the restrictions contained herein to cover the maximum duration, scope and area
permitted by law. Grippe and RGM each acknowledge that a violation of the
provisions of this Agreement will cause irreparable harm to Peninsula's
business, the exact amount of which will be difficult to ascertain, and that the
remedies at law for any such breach will be inadequate. Accordingly, Grippe and
RGM agree that, in the event of such violation or threatened violation by either
of them, Peninsula shall be entitled, in addition to any other remedy which may
be available at law or in equity, to specific performance and injunctive relief,
without posting bond or other security. Grippe and RGM further agree that, in
the event of the voluntary or involuntary termination of Grippe's employment
with Peninsula for any reason whatsoever, Grippe and RGM shall promptly deliver
to Peninsula all documents, photocopies, notes, drawings, data and other
materials of any nature pertaining to Grippe's employment with Peninsula, and
neither Grippe nor RGM shall take with them, or allow any third party to take,
any of the foregoing or any reproduction of any of the foregoing.
7. This agreement shall be governed by and interpreted in accordance
with the laws of the State of Iowa without giving effect to conflicts of law
provisions thereof.
8. Peninsula, RGM and Grippe hereby agree that any dispute arising
under or with respect to this Agreement shall be determined by arbitration in
Las Vegas, Nevada pursuant to the rules of the American Arbitration Association
("AAA") by a panel of three arbitrators with experience in the gaming business,
one of whom shall be appointed by RGM, one of whom shall be appointed by
Peninsula and the third of whom shall be appointed by the first two arbitrators
and shall act as Chairman, provided that if a party shall fail to appoint an
arbitrator within 20 days after commencement of the arbitration or the Chairman
shall not be appointed within 40 days of the commencement of the arbitration,
the same shall be appointed by the AAA. Such arbitrators may award legal fees
and expenses to the party prevailing in such arbitration. The decision of such
arbitrators shall be binding upon the parties hereto.
9. This Agreement represents the entire understanding of the parties
with respect to its subject matter and may be amended or modified only by a
written instrument duly signed by the parties hereto.
10. Any notice required or permitted to be given hereunder shall be
given as follows:
a. Peninsula:
M. Brent Stevens
c/o Jefferies & Company, Inc.
11100 Santa Monica Boulevard, Tenth Floor
Los Angeles, CA 90025
b. RGM:
William L. Westerman
Riviera Hotel & Casino
2901 Las Vegas Boulevard South
Las Vegas, NV 89109
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c. Grippe:
Jerome Grippe
Riviera Hotel & Casino
2901 Las Vegas Boulevard South
Las Vegas, NV 89109
11. Notwithstanding anything to the contrary set forth herein, this
Agreement is subject to, and shall become effective upon, the approval of the
Iowa Racing and Gaming Commission and appropriate licensure by RGM and Grippe
pursuant to the rules and regulations of the Iowa Racing and Gaming Commission.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date written above.
RIVIERA GAMING MANAGEMENT, INC.
By:_________________________________
Name:
Title:
/s/ Jerome Grippe
-----------------
JEROME GRIPPE
PENINSULA GAMING COMPANY, LLC
By: /s/ M. Brent Stevens
--------------------
Name: M. Brent Stevens
Title: President and CEO
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Exhibit 12.1
Computation of Ratio of Earnings to Fixed Charges (amounts in
thousands except ratio information)
7/15/99 - 12/31/99
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Earnings:
Total Earnings $(2,437)
Fixed Charges:
Interest Charges 4,041
Preferred Member Distributions 289
Amortization of bond issuance costs and bond discount 342
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Total Fixed Charges 4,672
Earnings as adjusted $2,235
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Ratio of earnings to fixed charges 0.5
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