UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________________ to _______________________
Commission File Number: 333-88829
PENINSULA GAMING COMPANY, LLC/PENINSULA GAMING CORP.
(Exact name of registrant as specified in its charter)
Iowa 42-1483875
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3rd Street Ice Harbor, PO Box 1750, Dubuque, Iowa 52001-1750
(Address of principal executive offices) (Zip Code)
(563) 583-7005
(Registrant's telephone number including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. Yes [X] No [ ]
All of the common equity interests of Peninsula Gaming Company, LLC (The
"Company") are held by Peninsula Gaming Partners, LLC, and all of the common
stock of Peninsula Gaming Corp. is held by Peninsula Gaming Company, LLC.
PENINSULA GAMING COMPANY, LLC
INDEX TO FORM 10-Q
Part I - Financial Information
Item 1 - Financial Statements
Peninsula Gaming Company, LLC:
Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2002 and
December 31, 2001......................................................................3
Condensed Consolidated Statements of Operations (Unaudited) for the Three
Months Ended March 31, 2002 and 2001 ..................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three
Months Ended March 31, 2002 and 2001...................................................5
Notes to Condensed Consolidated Financial Statements (Unaudited)...........................6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk............................17
Part II - Other Information...........................................................................18
Signatures............................................................................................20
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENINSULA GAMING COMPANY, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31,
2002 2001
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,553,437 $ 7,523,652
Restricted cash 1,922,255
Accounts receivable, less allowance for doubtful accounts
of $53,986 and $56,917, respectively 159,289 105,480
Inventory 149,245 97,677
Prepaid expenses 477,770 307,064
------------ -----------
Total current assets 10,261,996 8,033,873
------------ -----------
PROPERTY AND EQUIPMENT, NET 18,538,869 17,930,643
------------ -----------
OTHER ASSETS:
Deferred financing costs, net of amortization
of $2,076,553 and $1,844,783, respectively 4,393,428 3,687,698
Goodwill and other intangible assets 71,648,784 53,083,429
Development costs 2,134,377 1,602,503
Deposits 105,988 35,405
------------ -----------
Total other assets 78,282,577 58,409,035
------------ -----------
TOTAL $107,083,442 $84,373,551
============ ===========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,175,505 $ 335,416
Purse settlement payable 1,927,472
Accrued payroll and payroll taxes 1,525,380 1,280,177
Other accrued expenses 4,775,124 2,234,922
Current maturity - capital lease obligations 113,552 113,552
Current maturity - notes payable to related party 232,872
------------ -----------
Total current liabilities 9,749,905 3,964,067
------------ -----------
LONG-TERM LIABILITIES:
Senior secured notes, net of discount 70,410,396 70,384,482
Line of credit 12,000,000
Capital lease obligations 362,229 362,229
Notes payable to related party 5,203,370
------------ -----------
Total long-term liabilities 87,975,995 70,746,711
------------ -----------
Total liabilities 97,725,900 74,710,778
COMMITMENTS AND CONTINGENCIES
PREFERRED MEMBERS' INTEREST, REDEEMABLE 4,000,000 4,000,000
MEMBERS' EQUITY 5,357,542 5,662,773
------------ -----------
TOTAL $107,083,442 $84,373,551
============ ===========
See notes to condensed consolidated financial statements (unaudited).
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PENINSULA GAMING COMPANY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Three Months
Ended Ended
March 31, March 31,
2002 2001
-------------- -------------
REVENUES:
Casino $ 11,353,795 $ 11,160,186
Racing 1,553,419
Food and beverage 742,928 607,534
Other 24,679 28,096
Less promotional allowances (585,963) (539,015)
------------- -------------
Total net revenues 13,088,858 11,256,801
------------- -------------
EXPENSES:
Casino 5,022,112 4,973,326
Racing 1,263,175
Food and beverage 729,108 679,320
Boat operations 579,656 554,172
Other 8,198 4,217
Selling, general and administrative 1,886,368 1,372,443
Depreciation and amortization 705,232 954,206
------------- -------------
Total expenses 10,193,849 8,537,684
------------- -------------
INCOME FROM OPERATIONS 2,895,009 2,719,117
------------- -------------
OTHER INCOME (EXPENSE):
Interest income 14,966 52,743
Interest expense (2,642,231) (2,379,821)
Gain on sale of assets 1,000
------------- -------------
Total other expense (2,627,265) (2,326,078)
------------- -------------
NET INCOME BEFORE PREFERRED MEMBER
DISTRIBUTIONS AND MINORITY INTEREST 267,744 393,039
LESS PREFERRED MEMBER DISTRIBUTIONS (93,263) (103,969)
LESS MINORITY INTEREST (7,472)
------------- -------------
NET INCOME TO COMMON MEMBERS' INTEREST $ 167,009 $ 289,070
============= =============
See notes to condensed consolidated financial statements (unaudited).
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PENINSULA GAMING COMPANY, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Three Months
Ended Ended
March 31, March 31,
2002 2001
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 167,009 $ 289,070
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation and amortization 705,232 954,206
Provision for doubtful accounts 32,108 31,255
Amortization of deferred financing costs and bond
discount 257,684 202,946
Minority interest share of income 7,472
Changes in operating assets and liabilities:
Restricted cash (442,234)
Receivables 136,778 (44,272)
Inventory (5,556) 15,521
Prepaid expenses and other assets (46,689) 275,545
Accounts payable 783,244 (225,725)
Accrued expenses 2,216,264 2,313,600
------------ ------------
Net cash flows from operating activities 3,811,312 3,811,146
CASH FLOWS FROM INVESTING ACTIVITIES:
Development costs (450,240)
Acquisition of business, net of cash acquired (13,729,862)
Purchase of property and equipment (173,306) (863,167)
------------- ------------
Net cash flows from investing activities (14,353,408) (863,167)
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred members' interest redeemed (3,000,000)
Deferred financing costs (937,500) (454,977)
Member distributions (472,240) (437,242)
Principal payments on long-term debt to related party (18,379)
Proceeds from line of credit 12,000,000
------------- ------------
Net cash flows from financing activities 10,571,881 (3,892,219)
------------- ------------
NET INCREASE (DECREASE) IN CASH 29,785 (944,240)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,523,652 8,362,122
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,553,437 $ 7,417,882
============ ============
See notes to condensed consolidated financial statements (unaudited).
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PENINSULA GAMING COMPANY, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Organization and Basis of Presentation
Peninsula Gaming Company, LLC (the "Company") is wholly owned by Peninsula
Gaming Partners, LLC, a Delaware limited liability company ("PGP") and our sole
managing member. The Company is a Delaware limited liability company formed on
January 26, 1999 for the purpose of purchasing assets comprised of the Diamond
Jo Casino and related real property. Peninsula Gaming Corp. is a wholly owned
subsidiary of the Company, has no assets or operations and was formed solely to
facilitate the offering of our 12 1/4% Senior Secured Notes due 2006 (the
"Notes") in certain jurisdictions. OED Acquisition, LLC ("OEDA") is a wholly
owned subsidiary of PGC formed on July 9, 2001 to facilitate the purchase of a
50% membership interest in The Old Evangeline Downs, L.C. ("OED"), a Louisiana
limited liability company that currently operates a racetrack that provides both
live thoroughbred horse racing and off-track betting in and around Lafayette,
LA. The financial position of OED as of March 31, 2002 and the results of its
operations and its cash flows for the period February 15, 2002 (date of
acquisition) to March 31, 2002 have been consolidated into the Company's
consolidated financial statements as the Company has substantive control of OED.
All significant intercompany transactions have been eliminated.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of normal recurring entries
unless otherwise disclosed, necessary to present fairly the financial
information of the Company for the interim periods presented and have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The interim results reflected in the financial
statements are not necessarily indicative of results for the full year or other
periods.
The financial statements contained herein should be read in conjunction with the
audited financial statements and accompanying notes to the financial statements
included in the Company's Annual Report on Form 10-K for the period ended
December 31, 2001. Accordingly, footnote disclosure which would substantially
duplicate the disclosure in the audited financial statements has been omitted in
the accompanying unaudited financial statements.
2. Acquisitions
On February 15, 2002, OEDA consummated its acquisition of: (i) 50% of the
membership interests (the "BIM3 Interests") of OED from BIM3 Investments, a
Louisiana partnership ("BIM3"); and (ii) BIM3's one-half (1/2) interest in two
promissory notes in the principal amount of $10,909,244 issued by OED, for an
aggregate purchase price of $15,000,000 in cash. The remaining 50% of the
membership interests in OED will continue to be owned by William E. Trotter, II
Family L.L.C., a Louisiana limited liability company. The acquisition was made
pursuant to a purchase agreement dated June 27, 2001 by and among the Company's
parent, PGP, OED and BIM3 (as amended, the "Purchase Agreement"). Pursuant to
the terms of the Purchase Agreement, PGP paid a cash deposit of $500,000 which
was applied against the purchase price when the acquisition was consummated. The
Purchase Agreement was assigned to OEDA by PGP on October 23, 2001 for a
purchase price of $523,836 which was paid by OEDA in cash. The Company will
manage the existing racetrack and, subject to receipt of required gaming
approvals, is planning to design, construct, manage and operate a new casino and
contiguous racetrack facility with pari-mutuel wagering, slots and OTB parlors
in St. Landry Parish, Louisiana (the "Racino Project").
The Company accounted for its acquisition as a purchase in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets". The
purchase price has been allocated to the underlying assets and liabilities based
on their estimated fair values at the date of acquisition. To the extent the
purchase price exceeded the fair value of the net identifiable assets acquired,
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such excess was recorded as goodwill. As of March 31, 2002, the Company recorded
goodwill of approximately $18.6 million related to the acquisition. Under the
provisions of SFAS No. 142, goodwill arising from the acquisition will not be
amortized but will be reviewed at least annually for impairment and written down
and charged to income when its recorded value exceeds its estimated fair value.
The results of operations of OED are included in the condensed consolidated
financial statements from the date of acquisition through March 31, 2002.
The source of funds for the transaction described above was $3,000,000 of cash
on-hand and $12,000,000 of borrowings under the Company's Credit Agreement with
Foothill Capital Corporation. During the first quarter of 2002, the Company
amended its credit facility to increase the available funds to $12,500,000 and
obtained consents under the indenture governing its Notes to consummate the
acquisition. On March 7, 2002, the Company paid consent fees totaling $887,500
to holders of the Notes related to the above transaction.
It is anticipated that OED will require at least $90 million to finance the
construction and development of the Racino Project. The Company is currently
investigating financing alternatives for the financing of construction and
development costs including, but not limited to, a private placement of debt
securities. The Racino Project is expected to include at least 1,525 slot
machines, dirt and turf thoroughbred racetracks and several dining options. The
Racino Project is one of only three racetracks in the State of Louisiana
currently authorized to conduct casino operations. The successful completion of
the Racino Project is subject to factors beyond the control of OED. The extent
and timing of the development and construction of the Racino Project will depend
on available cash flow or the ability to obtain financing. There can be no
assurance that sufficient cash flow or necessary financing will be available on
satisfactory terms to OED. In addition, the Company and OED will be subject to
comprehensive and stringent government regulations. The Company and OED and
their respective officers, directors, members, significant shareholders and
employees will be subject to the Louisiana Gaming Authority and will need to
submit to a regulatory review process prior to mandatory licensing. There can be
no assurance that all necessary licenses will be issued, or issued on a timely
basis. For the foregoing reasons, there can no assurance that the Racino Project
will be completed, or completed in a timely manner.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company for the three months ended
March 31, 2002 and 2001 as if the acquisition had occurred January 1, 2001.
Pro Forma Information (Unaudited)
(in thousands)
2002 2001
-------- --------
Net revenues $ 14,721 $ 14,682
Income from operations 3,230 3,312
Net income to common interests 229 332
The pro forma adjustments included in the pro forma information above represents
interest on borrowings of $12.0 million under our credit facility with Foothill
Capital Corp. used to finance the purchase of OED, the elimination of
intercompany interest expense and the elimination of amortization of the
reorganization value in excess of amounts allocable to identifiable assets
(included in goodwill) related to OED. The pro forma results do not purport to
be indicative of results that would have occurred had the acquisition been if
effect for the periods presented, nor do they purport to be indicative of the
results that will be obtained in the future.
-7-
3. Summary of Significant Accounting Policies and Recent Accounting
Pronouncements
RESTRICTED CASH - Restricted cash represents amounts for purses to be paid
during the live meet racing season at OED. Additionally, restricted cash
includes entrance fees for two (2) special futurity races during the next racing
season, plus any interest earnings. These funds will be used to pay the purse
for the two races. A separate interest bearing bank account is required for
these funds.
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 leasehold improvements* 9-40 years
Riverboat and improvements 5-20 years
Furniture, fixtures and equipment 3-12 years
Computer equipment 3-5 years
Vehicles 5 years
* The Company leases the land at The Old Evangeline Downs racetrack pursuant
to a land lease which expires on the earlier of December 31, 2004 or the
first day that the Company opens a new racetrack facility for business
in St. Landry Parish, Louisiana. The remaining net book value of the
Company's leasehold improvements at The Old Evangeline Downs racetrack
as of March 31, 2002 is being amortized over the remaining term of the
land lease.
REVENUE RECOGNITION - In accordance with common industry practice, our casino
revenues are the net of gaming wins and losses. Racing revenues include our
share of pari-mutuel wagering on live races after payment of amounts returned as
winning wagers, and our share of wagering from import and export simulcasting as
well as our share of wagering from our off-track betting parlors.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS 142 ("SFAS 142") - SFAS 142 provides
that goodwill and certain indefinite lived intangible assets will no longer be
amortized but will be reviewed at least annually for impairment and written down
and charged to income when their recorded value exceeds their estimated fair
value. During the three months ended March 31, 2002, the Company performed a
transitional impairment test on goodwill in accordance with SFAS 142 and
determined the estimated fair value of the Company exceeded its carrying value.
Based on that review, management determined that there was no impairment of
goodwill. Goodwill amortization during the three months ended March 31, 2001 was
$353,497. Assuming the non-amortization of these standards had been adopted at
the beginning of 2001, the Company's adjusted net income for the three months
ended March 31, 2001 would have been $642,567.
MINORITY INTEREST - Minority interest on the Condensed Consolidated Statement of
Operations represents the 50% portion of net income from OED allocated to
William E. Trotter, II Family L.L.C., a Louisiana limited liability company, who
owns the remaining 50% interest in OED. Due to the deficit balance within
members' equity of approximately $5.8 million as of February 15, 2002 (date of
acquisition), PGC recorded additional goodwill of approximately $2.9 million
related to the minority interest portion of this deficit balance within OED's
members' equity. In accordance with minority interest accounting, no minority
interest liability is recorded until the OED members' equity balance is
positive. Goodwill will continue to be adjusted in future periods until the
minority interest's historical deficit balance exceeds zero.
-8-
4. Property and equipment at March 31, 2002 and December 31, 2001 are
summarized as follows:
March 31, December 31,
2002 2001
----------- --------------
Land $ 1,110,000 $ 800,000
Buildings and leasehold improvements 8,155,513 6,565,735
Riverboats and improvements 8,266,076 8,261,693
Furniture, fixtures and equipment 6,575,586 5,512,717
Computer equipment 642,457 617,538
Vehicles 130,754 65,032
Equipment held under capital lease
obligations 704,527 704,527
------------ ------------
Subtotal 25,584,913 22,527,242
Accumulated depreciation (7,046,044) (4,596,599)
------------ ------------
Property and equipment, net $18,538,869 $17,930,643
============ ============
5. Notes Payable to Related Party
"Notes payable to related party" are notes payable to Mr. William E. Trotter a
50% owner of OED. During the period February 15, 2002 (date of acquisition) to
March 31, 2002, interest of $21,104 was paid to Mr. Trotter. In addition, at
March 31, 2002, interest of $45,302 was accrued in "Other accrued expenses".
Long-term debt to related parties at March 31, 2002 consists of the following:
Note payable in the original amount of $6,579,814,
dated December 1, 1994 and bearing interest at 10%
per annum, due August 1, 2014, payable in monthly
installments of $63,835 including principal and
interest; secured by equipment, building, and land. $5,436,242
Less current portion (232,872)
-----------
Net long-term debt to related parties $5,203,370
===========
Aggregate maturities of long-term debt to related parties for each of
the next five years ending December 31 are as follows:
2002 $ 172,462
2003 250,916
2004 277,190
2005 306,215
2006 338,280
Thereafter 4,091,179
----------
$5,436,242
==========
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6. Operating Leases
GROUND LEASE - LAFAYETTE - The Company leases the land on which the OED
racetrack is located from MT Holdings, LLC, a related party of OED. The ground
lease annual rental is $0 per year and the lease term expires on the earlier of
December 31, 2004 or the first day the Company opens a new racetrack facility
for business in St. Landry Parish, Louisiana.
NEW IBERIA - The Company is under a month-to-month contract for $5,000 per month
to lease the New Iberia off-track betting parlor. The lease requires payment of
property taxes, maintenance and insurance on the property. During the period
February 15, 2002 (date of acquisition) to March 31, 2002, the Company paid
$7,321 in rent for the New Iberia off-track betting parlor.
PARI-MUTUEL PROCESSING EQUIPMENT - OED entered into a five-year lease agreement
commencing on February 15, 2001 for computerized pari-mutuel central processing
equipment, terminals and certain associated equipment at OED. Additionally, the
lease agreement provides the Company with pari-mutuel services whereby the
leased equipment automatically registers and totals the amounts wagered on the
races held at the race track or simulcast to it and to its respective off-track
wagering parlors, and displays the win pool odds, payoffs, and other pertinent
horse racing information needed to operate live meet horse racing and off-track
betting. The Company pays 0.43% of the handle for the services provided during
both live meet racing days and off-track betting racing days. The charges are
subject to a minimum of $1,950 per live meet race day and $1,150 per off-track
betting race day. Additionally, if a race day is not completed, the Company must
pay 50% of the minimum if less than four races are declared official and 100% of
the minimum if four or more races are declared official. In a typical year, the
Company has 82 live meet racing days and 228 off-track betting days. The Company
paid $44,425 during the period February 15, 2002 (date of acquisition) to March
31, 2002 related to the pari-mutuel processing equipment lease.
The total minimum rental payments for the lease mentioned in the preceding
paragraph assuming the Company has 82 live meet racing days and 228 off-track
betting days for each of the years ended December 31 are summarized as follows:
2002 $ 316,575
2003 422,100
2004 422,100
2005 422,100
----------
$1,582,875
==========
OTHER - OED has operating leases for various pieces of equipment under
non-cancelable agreements, which expire in various years through 2006. Total
other rent expense for the period February 15, 2002 (date of acquisition) to
March 31, 2002 was $7,718. The total minimum rental payments for these leases
for the years ended December 31 are summarized as follows:
2002 $ 6,715
2003 2,887
2004 864
2005 864
2006 360
-----------
$ 11,690
===========
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7. Related Parties
LONG TERM DEBT - The Company has $5,436,242 in debt to a related party as of
March 31, 2002, see Note 5. The Company paid principal of $18,379 and interest
of $21,104 to the related party during the period February 15, 2002 (date of
acquisition) to March 31, 2002 related to the debt.
LAND LEASE - The Company leases the land at the OED racetrack from MT Holdings,
LLC for an annual rental of $0 pursuant to a land lease which expires on the
earlier of December 31, 2004 or the first day that the Company opens a new
racetrack facility for business in St. Landry Parish, Louisiana. MT Holdings,
LLC is partially owned by William E. Trotter, a 50% owner of OED. The lease has
been accounted for as an operating lease.
8. Contingencies
The Horseman Benevolent Protection Association ("HBPA") has filed a lawsuit
against all licensed racetracks in the State of Louisiana. The lawsuit alleges
that HBPA is not receiving the appropriate share of net revenues from video
poker devices located at licensed tracks. First Statewide Racing Co., Inc., an
affiliate of The Old Evangeline Downs, L.C., was the holder of the video poker
license at the time the lawsuit was filed and is the named defendant.
HBPA claims that the revenue split from video poker wagering should be
calculated before the tracks deduct the franchise tax owed to the State of
Louisiana. It is the Company's position that this claim is contrary to the state
statutes and to the interpretation applied by the Louisiana State Police Gaming
Division in determining net revenues to be shared. However, should HBPA prevail
in this lawsuit, each track named in the suit could be facing a judgment of
several million dollars plus interest.
On March 12, 2001, the 19th Judicial District Court entered a judgment in favor
of the HBPA against all licensed racetracks in the State of Louisiana, including
the Company. The judgment granted HBPA's motion for summary judgment as to
liability only. The Company's liability has not been determined at this time,
but the final judgment could be in the $3 million to $5 million range. The
damages portion of the litigation will be decided at a later date. The Company
has appealed the verdict. Although the outcome of litigation is inherently
uncertain, management, after consultation with legal counsel, believes the
verdict will be overturned on appeal and does not expect the lawsuit will have a
material adverse effect on the Company's financial position or results of
operations.
Notwithstanding the above mentioned HBPA lawsuit, we are not a party to, and
none of our property is the subject of, any other pending legal proceedings
other than litigation arising in the normal course of business. We do not
believe that adverse determinations in any or all such other litigation
(excluding the HBPA lawsuit) would have a material adverse effect on our
financial condition or results of operations.
9. Segment Information
Pursuant to the provisions of SFAS 131 "Disclosures About Segments of an
Enterprise and Related Information", the Company has determined that, in
connection with the acquisition of OED, the Company currently operates two
reportable segments: (1) Iowa operations, which comprise the Diamond Jo
riverboat casino in Dubuque, IA; and (2) Louisiana operations, which comprise
the racetrack operated by OED in Lafayette, LA.
The accounting policies for each segment are the same as those described in the
"Summary of Significant Accounting Policies" in the notes to the financial
statements included in the Company's Annual Report on Form 10-K for the period
ended December 31, 2001 and in the "Summary of Significant Accounting Policies
and Recent Accounting Pronouncements" above. The Company and the gaming industry
use earnings before interest, taxes, depreciation and amortization ("EBITDA") as
a means to evaluate performance. EBITDA should not be considered as an
-11-
alternative to, or more meaningful than, net income (as determined in accordance
with accounting principles generally accepted in the United States of America)
or as a measure of the Company's limitations.
The table below presents information about reported segments (in thousands):
Net Revenues
Three Months Ended March 31,
2002 2001
--------- --------
Diamond Jo (1) $ 11,466 $ 11,257
OED (2) 1,623
--------- ---------
Total $ 13,089 $ 11,257
EBITDA (3)
Three Months Ended March 31,
2002 2001
--------- ---------
Diamond Jo (1) $ 3,426 $ 3,673
OED (2) 174
-------- ---------
Total EBITDA 3,600 3,673
Depreciation and amortization (705) (954)
Interest expense, net (2,628) (2,327)
Gain on sale of assets 1
Preferred member distributions (93) (104)
Minority interests (7)
---------- --------
Net income to common members' interest $ 167 $ 289
Total Assets
As of March 31,
2002 2001
--------- --------
Diamond Jo $ 99,051 $85,750
OED 8,100
Adjustments (4) (68)
--------- --------
Total $107,083 $85,750
(1) Reflects results of operations for the three months ended March 31, 2002
and 2001.
(2) Reflects results of operations of OED for the period February 15, 2002
(date of acquisition) to March 31, 2002.
(3) EBITDA is defined as income from operations plus depreciation and
amortization.
(4) Reflects the elimination of intercompany balances.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the 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, including the risks and uncertainties
discussed below, as well as other risks set forth in our Annual Report on Form
10-K for the year ended December 31, 2001. Should these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, our future
performance and actual results of operations may differ materially from those
expected or intended.
The results of operations of the Company discussed below include the
combined results of operations of the Diamond Jo casino in Dubuque, IA for the
three months ended March 31, 2002 and the results of operations of OED in
Lafayette, LA for the period February 15, 2002 through March 31, 2002.
STATEMENT OF OPERATIONS DATA
Diamond Jo OED
-------------------------------- --------------------
Period February 15,
Three Months Ended March 31, 2002 to March 31,
2002 2001 2002
---- ---- ----
REVENUES:
Casino $11,353,795 $11,160,186
Racing $1,553,419
Food and beverage 673,414 607,534 69,514
Other 24,679 28,096
Less promotional
allowances (585,963) (539,015)
------------ ------------ ----------
Net revenues 11,465,925 11,256,801 1,622,932
----------- ------------ ----------
EXPENSES:
Casino 5,022,112 4,973,326
Racing 1,263,175
Food and beverage 648,045 679,320 81,063
Boat operations 579,656 554,172
Other 8,198 4,217
Selling, general and
administrative 1,782,267 1,372,443 104,100
Depreciation and
amortization 673,086 954,206 32,142
----------- ------------ -----------
Total expenses 8,713,364 8,537,684 1,480,485
----------- ------------- -----------
Income from operations $ 2,752,561 2,719,117 $ 142,448
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THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Net revenues increased 16.3% to $13.1 million for the three months
ended March 31, 2002 from $11.3 million for the three months ended March 31,
2001 due to net revenues from OED of $1.6 million and an increase in the Diamond
Jo's slot revenue of 5.5%, or $527,000 for the three months ended March 31, 2002
compared to the three months ended March 31, 2001. This increase in slot
revenues was a result of an increased marketing focus on the addition of new
players club members as well as on targeting players club promotions towards
more profitable market segments. This increase in slot revenues was offset by a
decrease in table games revenue at the Diamond Jo of $333,000. This decrease was
a direct result of a 2.3 percentage point decrease in our table game hold
percentage.
Casino gaming win in the Dubuque market increased 2.0% to $20.6 million
for the three months ended March 31, 2002 from $20.2 million for the three
months ended March 31, 2001. We believe this increase was primarily due to
targeted players club promotions and a continued focus on maintenance of our
slot mix as well as a continued focus by operators at the Greyhound Park on
maintenance of their slot mix during such period. Our share of the Dubuque
market casino gaming win decreased slightly to 55.2% for the three months ended
March 31, 2002 from 55.4% for the three months ended March 31, 2001. This
decrease is attributed to a decrease in our table game revenue of $333,000,
resulting from a 2.3 percentage point decrease in our table game hold
percentage. Our casino revenues increased 1.7% to $11.4 million for the three
months ended March 31, 2002 from $11.2 million for the three months ended March
31, 2001. This increase is due to a 5.5% increase in slot revenue offset by a
decrease in table game revenues as discussed above. Casino revenues were derived
88.4% from slot machines and 11.6% from table games for the three months ended
March 31, 2002 compared to 85.2% from slot machines and 14.8% from table games
for the three months ended March 31, 2001. The number of gaming positions at the
Diamond Jo at March 31, 2002 was 828 compared to 868 at March 31, 2001. This
decrease was due to the elimination of four blackjack tables and one craps table
during the three months ended March 31, 2002. Consistent with an increase in
casino revenue, our casino win per gaming position per day at the Diamond Jo
increased 6.6% to $152.36 for the three months ended March 31, 2002 from $142.86
for the three months ended March 31, 2001. Admissions to the casinos in the
Dubuque market increased 2.6% to 438,280 for the three months ended March 31,
2002 from 427,146 for the three months ended March 31, 2001. We believe this
increase is primarily attributable to unusually bad weather during the first two
months of 2001 compared to the same period in 2002. For the three months ended
March 31, 2002, our share of the Dubuque market casino admissions decreased to
52.0% from 53.5% for the three months ended March 31, 2001. We believe this
decrease is primarily attributable to our targeted use of marketing dollars
directed primarily towards more profitable market segments during 2002 compared
to 2001. Our admissions at the Diamond Jo for the three months ended March 31,
2002 remained constant at 228,000 patrons compared to the three months ended
March 31, 2001. For the three months ended March 31, 2002 our casino win per
admission at the Diamond Jo increased 2.1% to $49.84 from $48.83 for the three
months ended March 31, 2001.
Racing revenues of $1.6 million related solely to revenues at OED for
the period February 15, 2002 (date of acquisition) to March 31, 2002. Net food
and beverage revenues, other revenues and promotional allowances increased
slightly to $0.2 million for the three months ended March 31, 2002 from $0.1
million for the three months ended March 31, 2001 related primarily to food and
beverage revenues from OED of $0.1 million.
Casino operating expenses remained substantially unchanged at $5.0
million for the three months ended March 31, 2002 and 2001. Racing expenses of
$1.3 million related solely to expenses at OED for the period February 15, 2002
(date of acquisition) to March 31, 2002. Food and beverage expenses, boat
operation expenses and other expenses were substantially unchanged for the three
months ended March 31, 2002 and 2001. Selling, general and administrative
expenses increased to $1.9 million for the three months ended March 31, 2002
from $1.4 million for the three months ended March 31, 2001. This increase was
-14-
due to (A) selling, general and administrative expenses at OED of $104,000, (B)
an increase in legal expenses of $127,000 (resulting from a credit of $130,000
in legal expense during the corresponding period of the prior year), (C) an
increase in management bonuses of $142,000, and (D) an increase in consulting
and various lobbying expenses of $60,000.
Depreciation and amortization expenses decreased 26.1% to $0.7 million
for the three months ended March 31, 2002 from $1.0 million for the three months
ended March 31, 2001. This decrease is due to adoption of Statement of Financial
Accounting Standards 142 ("SFAS 142") which provides that goodwill and certain
indefinite lived intangible assets will no longer be amortized but will be
reviewed at least annually for impairment and written down and charged to income
when their recorded value exceeds their estimated fair value. During the three
months ended March 31, 2002, the Company evaluated the estimated fair value of
the Company in accordance with SFAS 142 and determined the estimated fair value
exceeded the carrying value of the Company. As a result, no impairment of
goodwill has been recorded during the three months ended March 31, 2002.
Goodwill amortization during the three months ended March 31, 2001 was
approximately $353,000. Net interest expense increased 12.9% to $2.6 million for
the three months ended March 31, 2002 from $2.3 million for the three months
ended March 31, 2001. This increase is due to an increase in interest expense
associated with our senior credit facility with Foothill Capital Corporation
providing for commitments of up to $12.5 million which mature in 2005, $12.0
million of which was drawn down by the Company on February 15, 2002 to
consummate the acquisition of OED.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING, INVESTING AND FINANCING ACTIVITIES
Our cash balance increased $0.1 million during the three month period
ended March 31, 2002 to $7.6 million from $7.5 million at December 31, 2001.
Cash flows from operating activities of $3.8 million for the three
month period ended March 31, 2002 consisted of net income of $0.2 million
increased by non-cash charges of $1.0 million, principally depreciation and
amortization, and an increase in working capital of $2.6 million. The change in
working capital is primarily comprised of an increase in accrued expenses of
$2.2 million, which is principally due to an increase in accrued interest
related to our 12 1/4% Senior Secured Notes due 2006 (the "Senior Secured
Notes").
Cash flows used in investing activities for the three month period
ended March 31, 2002 was $14.4 million including $13.7 million for the purchase
of OED (net of cash acquired) and approximately $0.5 million in development
costs related to the OED acquisition. In addition, cash outflows of
approximately $0.2 million were used for capital expenditures mainly related to
the purchase of replacement slot machines in an effort to improve the gaming
experience of our patrons.
Cash from financing activities for the three month period ended March
31, 2002 of $10.6 million reflects the proceeds of a $12.0 million borrowing
under our $12.5 million senior credit facility with Foothill Capital Corp.
offset by deferred financing costs of $0.9 million, including consent fees
totaling $887,500 paid to holders of our Senior Secured Notes related to our
investment in OED, and distributions to members of $0.5 million.
-15-
RACINO PROJECT
On February 15, 2002, OEDA consummated its acquisition of: (i) 50% of
the membership interests (the "BIM3 Interests") of OED from BIM3 Investments, a
Louisiana partnership ("BIM3"); and (ii) BIM3's one-half (1/2) interest in two
promissory notes in the principal amount of $10,909,244 issued by OED, for an
aggregate purchase price of $15,000,000 in cash. The remaining 50% of the
membership interests in OED will continue to be owned by William E. Trotter, II
Family L.L.C., a Louisiana limited liability company. The acquisition was made
pursuant to a purchase agreement dated June 27, 2001 by and among the Company's
parent, PGP, OED and BIM3 (as amended, the "Purchase Agreement"). Pursuant to
the terms of the Purchase Agreement, PGP paid a cash deposit of $500,000 which
was applied against the purchase price when the acquisition was consummated. The
Purchase Agreement was assigned to OEDA by PGP on October 23, 2001 for a
purchase price of $523,836 which was paid by OEDA in cash. The Company will
manage the existing racetrack and, subject to receipt of required gaming
approvals, is planning to design, construct, manage and operate a new casino and
contiguous racetrack facility with pari-mutuel wagering, slots and OTB parlors
in St. Landry Parish, Louisiana (the "Racino Project").
It is anticipated that OED will require at least $90 million to finance
the construction and development of the Racino Project. The Company is currently
investigating financing alternatives for the financing of construction and
development costs including, but not limited to, a private placement of debt
securities. The Racino Project is expected to include at least 1,525 slot
machines, dirt and turf thoroughbred racetracks and several dining options. The
Racino Project is one of only three racetracks in the State of Louisiana
currently authorized to conduct casino operations. The successful completion of
the Racino Project is subject to factors beyond the control of OED. The extent
and timing of the development and construction of the Racino Project will depend
on available cash flow or the ability to obtain financing. There can be no
assurance that sufficient cash flow or necessary financing will be available on
satisfactory terms to OED. In addition, the Company and OED will be subject to
comprehensive and stringent government regulations. The Company and OED and
their respective officers, directors, members, significant shareholders and
employees will be subject to the Louisiana Gaming Authority and will need to
submit to a regulatory review process prior to mandatory licensing. There can be
no assurance that all necessary licenses will be issued, or issued on a timely
basis. For the foregoing reasons, there can no assurance that the Racino Project
will be completed, or completed in a timely manner.
We believe that cash on hand and cash generated from operations will be
sufficient to satisfy our working capital and capital expenditure requirements
(other than the Racino Project), repay borrowings under our senior credit
facility, and satisfy our other debt service requirements. 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.
-16-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks which are inherent in our
financial instruments which arise from transactions entered into in the normal
course of business. Market risk is the risk of loss from adverse changes in
market prices and interest rates. We do not currently utilize derivative
financial instruments to hedge market risk. We also do not hold or issue
derivative financial instruments for trading purposes.
We are exposed to interest rate risk due to changes in interest rates
with respect to our long-term variable interest rate debt borrowing under our
senior credit facility. As of March 31, 2002, we had $12.0 million in borrowings
under the senior credit facility. We have estimated our market risk exposure
using sensitivity analysis. We have defined our market risk exposure as the
potential loss in future earnings and cash flow with respect to interest rate
exposure of our market risk sensitive instruments assuming a hypothetical
increase in market rates of interest of one percentage point. Assuming we borrow
the maximum amount allowed under the senior credit facility ($12.5 million), if
market rates of interest on our variable rate debt increased by one percentage
point, the estimated market risk exposure under the senior credit facility would
be approximately $0.1 million.
We are also exposed to fair value risk due to changes in interest rates
with respect to our long-term fixed interest rate debt borrowing. Our fixed rate
debt instruments are not generally affected by a change in the market rates of
interest, and therefore, such instruments generally do not have an impact on
future earnings. However, future earnings and cash flows may be impacted by
changes in interest rates related to indebtedness incurred to fund repayments as
such fixed rate debt matures. The following table contains information relating
to our fixed rate debt borrowings which are subject to interest rate risk
(dollars in millions):
Description Contract Terms Interest Rate Cost Fair Value
- ----------- -------------- ------------- ---- ----------
Senior Secured Notes due July 1, 2006 12 1/4% fixed $71.0 $72.4*
* Represents fair value as of May 13, 2002 based on information provided by the
Company's investment banking firm.
-17-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Horseman Benevolent Protection Association ("HBPA") has filed a
lawsuit against all licensed racetracks in the State of Louisiana. The lawsuit
alleges that HBPA is not receiving the appropriate share of net revenues from
video poker devices located at licensed tracks. First Statewide Racing Co.,
Inc., an affiliate of The Old Evangeline Downs, L.C., was the holder of the
video poker license at the time the lawsuit was filed and is the named
defendant.
HBPA claims that the revenue split from video poker wagering should be
calculated before the tracks deduct the franchise tax owed to the State of
Louisiana. It is the Company's position that this claim is contrary to the state
statutes and to the interpretation applied by the Louisiana State Police Gaming
Division in determining net revenues to be shared. However, should HBPA prevail
in this lawsuit, each track named in the suit could be facing a judgment of
several million dollars plus interest.
On March 12, 2001, the 19th Judicial District Court entered a judgment
in favor of the HBPA against all licensed racetracks in the State of Louisiana,
including the Company. The judgment granted HBPA's motion for summary judgment
as to liability only. The Company's liability has not been determined at this
time, but the final judgment could be in the $3 million to $5 million range. The
damages portion of the litigation will be decided at a later date. The Company
has appealed the verdict. Although the outcome of litigation is inherently
uncertain, management, after consultation with legal counsel, believes the
verdict will be overturned on appeal and does not expect the lawsuit will have a
material adverse effect on the Company's financial position or results of
operations.
Notwithstanding the above mentioned HBPA lawsuit, we are not a party
to, and none of our property is the subject of, any other pending legal
proceedings other than litigation arising in the normal course of business. We
do not believe that adverse determinations in any or all such other litigation
(excluding the HBPA lawsuit) would have a material adverse effect on our
financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
-18-
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
(i) Form 8-K filed March 4, 2002, regarding purchase of
The Old Evangeline Downs, L.C.
(ii) Form 8-K/A filed May 1, 2002 amending the
registrant's report on Form 8-K for the event
dated February 15, 2002, as filed on March 4,
2002, to include the historical financial
statements and pro forma financial information
required by Item 7(a) and (b).
-19-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Dubuque, State of Iowa on May 14, 2002.
PENINSULA GAMING COMPANY
By: /s/ M. Brent Stevens
-------------------------
M. Brent Stevens
Chief Executive Officer
By: /s/ George T. Papanier
-------------------------
George T. Papanier
Chief Operating Officer
By: /s/ Natalie A. Schramm
-------------------------
Natalie A. Schramm
Chief Financial Officer
PENINSULA GAMING CORP.
By: /s/ M. Brent Stevens
--------------------------
M. Brent Stevens
President and Treasurer
(principal financial officer)
-20-