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EXCEL - IDEA: XBRL DOCUMENT - PENINSULA GAMING CORP.Financial_Report.xls
EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 - PENINSULA GAMING CORP.certification.htm
EX-31.2 - CERTIFICATION OF NATALIE SCHRAMM - PENINSULA GAMING CORP.certofnschramm.htm
EX-31.1 - CERTIFICATION OF M. BRENT STEVENS - PENINSULA GAMING CORP.certofbstevens.htm
 



 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 

FORM 10-Q
 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
For the quarterly period ended September 30, 2011.
   
or
   
o
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, LLC
 
PENINSULA GAMING CORP.
 
(Exact name of registrants
as specified in their charter)
 
(Exact name of registrants
as specified in their charter)
       
 
DELAWARE
 
DELAWARE
 
(State or other jurisdiction of
incorporation or organization)
 
(State or other jurisdiction of
incorporation or organization)
       
 
20-0800583
 
25-1902805
 
(I.R.S. Employer
Identification No.)
 
(I.R.S. Employer
Identification No.)

301 Bell Street
Dubuque, Iowa 52001
(563) 690-4975
 (Address, including zip code, and telephone number, including area code, of principal executive offices)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.:

Large Accelerated Filer o        Accelerated Filer o        Non-Accelerated Filer    x    Smaller reporting company o

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x
 
All of the common equity interests of Peninsula Gaming, LLC (the “Company”) are held by Peninsula Gaming Partners, LLC. All of the common equity interests of Diamond Jo, LLC, The Old Evangeline Downs, L.L.C., Diamond Jo Worth, LLC, Belle of Orleans, L.L.C., Kansas Star Casino, LLC and Peninsula Gaming Corp. are held by the Company.



 
 
 
 

 
 
 
 

PENINSULA GAMING, LLC
 
INDEX TO FORM 10-Q
 
 
Page
  3
 
                        
3
   
Peninsula Gaming, LLC:
 
 
                    3
 
                         4
   
                         5
 
 6
 
                        
 7
   
          17
   
        26
   
          27
   
          28
   
          28
   
         28
   
          29
   



 
2

 

 
 
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
PENINSULA GAMING, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
   
September 30, 2011
   
December 31, 2010
 
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
76,823
   
$
19,650
 
Restricted cash—purse settlements
   
4,926
     
4,178
 
Accounts receivable, net
   
2,722
     
1,466
 
Receivables from affiliates
   
124
     
117
 
Inventories
   
1,351
     
1,450
 
Prepaid expenses and other assets
   
6,633
     
4,825
 
Total current assets
   
92,579
     
31,686
 
PROPERTY AND EQUIPMENT, NET
   
345,224
     
271,881
 
OTHER ASSETS:
               
Deferred financing costs, net of amortization of $9,046 and $6,342, respectively
   
28,290
     
23,536
 
Goodwill
   
85,308
     
85,308
 
Licenses and other intangibles
   
106,673
     
78,403
 
Deposits and other assets
   
5,506
     
30,684
 
Investment available for sale
   
19,036
     
18,307
 
Total other assets
   
244,813
     
236,238
 
TOTAL
 
$
682,616
   
$
539,805
 
                 
LIABILITIES AND MEMBER’S DEFICIT
               
CURRENT LIABILITIES:
               
Accounts payable
 
$
4,047
   
$
3,598
 
Construction payable
   
16,191
     
-
 
Purse settlement payable
   
6,280
     
5,803
 
Accrued payroll and payroll taxes
   
7,434
     
6,417
 
Accrued interest
   
8,399
     
20,137
 
Other accrued expenses
   
19,266
     
13,306
 
Payable to affiliates
   
1,213
     
667
 
Current maturities of long-term debt and leases
   
4,202
     
1,643
 
Total current liabilities
   
67,032
     
51,571
 
                 
LONG-TERM LIABILITIES:
               
8 3/8% senior secured notes, net of discount
   
319,632
     
235,535
 
10 3/4% senior notes, net of discount
   
352,250
     
297,997
 
Senior secured credit facilities
   
-
     
3,500
 
Term loans
   
2,284
     
3,567
 
Notes and leases payable, net of discount
   
898
     
28
 
Obligation under Minimum Assessment Agreement
   
18,308
     
18,523
 
Other liabilities
   
976
     
953
 
Total long-term liabilities
   
694,348
     
560,103
 
Total liabilities
   
761,380
     
611,674
 
                 
COMMITMENTS AND CONTINGENCIES (Note 6)
               
MEMBER’S DEFICIT:
               
Common member’s interest
   
9,000
     
9,000
 
Accumulated deficit
   
(92,025)
     
(84,254)
 
Accumulated other comprehensive income
   
4,261
     
3,385
 
Total member’s deficit
   
(78,764)
     
(71,869)
 
TOTAL
 
$
682,616
   
$
539,805
 
See notes to condensed consolidated financial statements.


 
3

 

 
PENINSULA GAMING, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands)
 
     
 
Three Months
Ended
September 30,
2011
     
 Three Months
Ended
September 30,
2010
     
Nine Months
Ended
September 30,
2011
   
Nine Months
Ended
September 30,
2010
 
REVENUES:
                             
Casino
 
$
77,437
   
$
75,480
     
$
229,903
   
$
225,022
 
Racing
   
4,007
     
4,571
       
11,921
     
12,436
 
Video poker
   
1,410
     
1,089
       
4,296
     
3,370
 
Food and beverage
   
7,043
     
6,941
       
20,417
     
20,143
 
Other
   
4,249
     
3,540
       
11,738
     
9,333
 
Less promotional allowances
   
(10,273)
     
(9,673)
       
(29,507)
     
(27,890)
 
Total net revenues
   
83,873
     
81,948
       
248,768
     
242,414
 
                                   
EXPENSES:
                                 
Casino
   
30,830
     
30,304
       
92,924
     
91,969
 
Racing
   
3,922
     
4,223
       
11,295
     
11,435
 
Video poker
   
1,185
     
906
       
3,485
     
2,660
 
Food and beverage
   
4,501
     
4,555
       
13,161
     
13,022
 
Other
   
3,252
     
2,512
       
7,960
     
6,380
 
Selling, general and administrative
   
14,827
     
14,035
       
43,305
     
41,185
 
Depreciation and amortization
   
7,099
     
7,315
       
21,463
     
22,142
 
Pre-opening expense
   
3,923
     
8
       
6,863
     
33
 
Development expense
   
-
     
-
       
-
     
28
 
Affiliate management fees
   
1,565
     
1,535
       
4,708
     
4,493
 
Loss on disposal of assets
   
9
     
17
       
86
     
54
 
Total expenses
   
71,113
     
65,410
       
205,250
     
193,401
 
                                   
INCOME FROM OPERATIONS
   
12,760
     
16,538
       
43,518
     
49,013
 
                                   
OTHER INCOME (EXPENSE):
                                 
Interest income
   
559
     
680
       
1,775
     
1,672
 
Interest expense, net of amounts capitalized
   
(17,079)
     
(14,929)
       
(51,215)
     
(44,684)
 
Gain (loss) from equity affiliate
   
3
     
-
       
(62)
     
-
 
Total other expense
   
(16,517)
     
(14,249)
       
(49,502)
     
(43,012)
 
                                   
NET (LOSS) INCOME
 
$
(3,757)
   
$
2,289
     
$
(5,984)
   
$
6,001
 

 
 
See notes to condensed consolidated financial statements.
 



 
 
 
4

 
 



PENINSULA GAMING, LLC
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN MEMBER’S DEFICIT
AND COMPREHENSIVE LOSS (UNAUDITED)
(in thousands)
 

   
COMMON MEMBER'S INTEREST
   
ACCUMU-LATED DEFICIT
   
ACCUMU-LATED OTHER COMPRE-HENSIVE INCOME
   
TOTAL MEMBER'S DEFICIT
   
COMPRE-HENSIVE LOSS
 
                               
BALANCE, DECEMBER 31, 2010
 
$
9,000
   
$
(84,254)
   
$
3,385
   
$
(71,869)
       
Net loss
           
(5,984)
             
(5,984)
   
$
(5,984)
 
Unrealized gain on available for sale security
                   
876
     
876
     
876
 
Member contributions
           
4,567
             
4,567
         
Member distributions
           
(6,354)
             
(6,354)
         
Comprehensive loss
                                   
(5,108)
 
BALANCE, SEPTEMBER 30, 2011
 
$
9,000
   
$
(92,025)
   
$
4,261
   
$
(78,764)
         


 
See notes to condensed consolidated financial statements.





 
 
 
 
 
 
 
5

 
PENINSULA GAMING, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
  
 
Nine Months
Ended
September 30,
2011
   
Nine Months
Ended
September 30,
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net (loss) income
 
$
(5,984)
   
$
6,001
 
Adjustments to reconcile net (loss) income to net cash flows from operating activities:
               
Depreciation and amortization
   
21,463
     
22,142
 
Non-cash interest
   
2,772
     
3,382
 
(Gain) loss from equity affiliate
   
62
     
 -
 
Non-cash compensation
   
430
     
374
 
Loss on disposal of assets
   
86
     
54
 
Changes in operating assets and liabilities:
               
Restricted cash — purse settlements
   
(748)
     
(470)
 
Receivables
   
(1,268)
     
(1,095)
 
Receivables from affiliates
   
(7)
     
-
 
Inventories
   
99
     
179
 
Prepaid expenses and other assets
   
(1,160)
     
(371)
 
Payables
   
1,302
     
773
 
Accrued expenses
   
(10,964)
     
(15,351)
 
Payable to affiliates
   
546
     
429
 
Net cash flows from operating activities
   
6,629
     
16,047
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Increase in cash value of life insurance for premiums paid
   
(77)
     
(229)
 
Advances under note receivable to related party
   
-
     
 (2,300)
 
Proceeds from sale of investment
   
285
     
-
 
Proceeds from note receivable
   
60
     
-
 
Business acquisition and licensing costs
   
(3,428)
     
(329)
 
Construction project development costs
   
(59,279)
     
(8,265)
 
Purchase of property and equipment
   
(6,700)
     
(6,864)
 
Proceeds from sale of property and equipment
   
73
     
159
 
Net cash flows from investing activities
   
(69,066)
     
(17,828)
 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Deferred financing costs
   
(7,311)
     
(737)
 
Principal payments on debt
   
(1,225)
     
(1,720)
 
Proceeds from senior notes
   
138,000
     
-
 
Proceeds from senior secured credit facilities
   
-
     
16,000
 
Payments on senior secured credit facilities
   
(3,500)
     
 (16,000)
 
Loan to owner
   
-
     
(10)
 
Proceeds from repayment of loan by owner
   
-
     
1,733
 
Member distributions
   
(6,354)
     
(8,450)
 
Net cash flows from financing activities
   
119,610
     
(9,184)
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
   
57,173
     
(10,965)
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   
19,650
     
34,537
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
76,823
   
$
23,572
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid during the period for interest
 
$
58,693
   
$
55,170
 
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
               
Property and equipment acquired, but not paid
 
$
16,398
   
$
91
 
Property and equipment acquired in exchange for obligation under assessment arrangements
   
7,378
     
-
 
Deferred financing costs incurred in exchange for obligation under assessment arrangements
   
147
     
-
 
Unrealized gain on investment available for sale
   
876
     
3,696
 
Property contributions from parent
   
3,803
     
-
 
Gaming license contribution from parent
   
43
     
-
 
Prepaid expense contribution from parent
   
291
     
-
 
Property and equipment acquired in exchange for indebtedness
   
3,371
     
-
 

See notes to condensed consolidated financial statements.
 
 
6

 
 
PENINSULA GAMING, LLC
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
            1. Organization and Basis of Presentation
 
Peninsula Gaming, LLC (“PGL” or the “Company”), a Delaware limited liability company, is a casino entertainment holding company with gaming operations in local markets in Iowa and Louisiana and is currently developing a gaming operation near Wichita, Kansas. PGL’s wholly owned subsidiaries consist of: (i) Diamond Jo, LLC, a Delaware limited liability company (“DJL”), that owns and operates the Diamond Jo casino in Dubuque, Iowa; (ii) Diamond Jo Worth, LLC, a Delaware limited liability company (“DJW”), that owns and operates the Diamond Jo casino in Worth County, Iowa;  (iii) The Old Evangeline Downs, L.L.C., a Louisiana limited liability company (“EVD”), that owns and operates the Evangeline Downs Racetrack and Casino, or racino, in Opelousas, Louisiana and five off-track betting (“OTB”) parlors in Louisiana; (iv) Belle of Orleans, L.L.C., a Louisiana limited liability company (“ABC”), that owns and operates the Amelia Belle Casino in Amelia, Louisiana; (v) Kansas Star Casino, LLC, a Kansas limited liability company (“KSC”), formed to, in accordance with our agreements with the State of Kansas, own and operate the Kansas Star Casino, Hotel and Event Center (“Kansas Star”) in Mulvane, Kansas, which is currently under construction; and (vi) Peninsula Gaming Corp. (“PGC”), a Delaware corporation with no assets or operations.  The Company is a wholly owned subsidiary of Peninsula Gaming Partners, LLC, a Delaware limited liability company (“PGP”).

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring entries unless otherwise disclosed, necessary to present fairly the financial information of the Company for the interim periods presented and have been prepared in accordance with accounting principles generally accepted in the United States of America. The interim results reflected in the financial statements are not necessarily indicative of results expected for the full year or other periods.
 
The financial statements contained herein should be read in conjunction with the audited financial statements and accompanying notes to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Accordingly, footnote disclosure that would substantially duplicate the disclosure in the audited financial statements has been omitted in the accompanying unaudited financial statements.
 
Kansas Star Developments

On January 14, 2011, PGP’s Contract to Serve as Lottery Gaming Facility Manager for the South Central Gaming Zone on behalf of the Kansas Lottery (“Kansas Management Contract”) was approved by the Kansas Racing and Gaming Commission (“KRGC”) and upon such approval, became effective and was then assigned to KSC. In March 2011, KSC purchased two parcels of land in Mulvane, Kansas totaling approximately 202 acres on which the Kansas Star is being constructed. This land effectively gives the Company all the land needed to complete the Kansas Star facility in compliance with the terms of the Kansas Management Contract.  In March 2011, KSC broke ground on the Kansas Star development.

We plan on completing construction of the Kansas Star in two phases. The first phase of the project is expected to include 1,500 slot machines, 40 table games, 5 poker tables, 150 hotel rooms in a third party operated hotel, approximately 2,700 parking spaces, a buffet, steakhouse, deli and a 162,000 square foot indoor event center. While the first phase of the project is not expected to be completed until January 2013, KSC plans to begin operating 1,310 slots machines and 32 table games within the event center with a soft opening in December 2011 and a grand opening in January 2012.  The second phase of the project is expected to include 500 additional slot machines (thus expanding the total to 2,000 slot machines), 10 additional table games (bringing the total to 50 table games), a sports themed bar, the development of an equine complex for events and shows that includes multiple arenas and barn facilities, parking for recreational vehicles, and 150 additional hotel rooms (bringing the total to 300 rooms). The second phase is scheduled for completion by January 2015.

The current budget for the Kansas Star project is approximately $314 million (excluding capitalized interest which is estimated to be approximately $6 million).  Total cost to open the interim casino is expected to be approximately $182 million including approximately $15.4 million for publicly-owned utilities that are being financed by the City of Mulvane, Kansas (“Mulvane”) as described below.  The remaining cost for the first phase of the project is expected to be approximately $78 million, including approximately $20 million to complete the initial 150 hotel rooms of the third party developed hotel as discussed further below.  The second phase of the Kansas Star project is budgeted at $54 million, which include approximately $19 million for the expansion to a third party developed hotel from 150 to 300 rooms.

On March 7, 2011, KSC entered into a Development Agreement with Mulvane (“Mulvane Development Agreement”) related to the provision of water, sewer, and electrical utilities to the Kansas Star site.  This agreement sets forth certain parameters governing the use of public financing for the provision of such utilities, through the issuance of general obligation bonds by Mulvane, paid for through the imposition of a special tax assessment on the Kansas Star site payable over 15 years in an amount equal to Mulvane’s full obligations under the general obligation bonds.  The total cost of sewer and water utilities improvements being financed by Mulvane are expected to be approximately $15.4 million.

 
 
7

 
During the construction period of the infrastructure improvements, Mulvane will issue temporary notes, the proceeds of which will be used to pay for the construction costs of the improvements. Upon completion of the improvements, these temporary notes will be redeemed with proceeds from the issuance of the 15 year general obligation bonds.  As of September 30, 2011, Mulvane has issued $10.0 million of temporary notes.  All temporary notes issued by Mulvane are secured by irrevocable letters of credit issued by the Company in favor of Mulvane.  As of September 30, 2011, the Company has issued $15.4 million in letters of credit under the PGL Credit Facility in favor of Mulvane to secure the current and future issuances of temporary notes related to the infrastructure improvements.  The amount of the outstanding letters of credit supporting these utilities improvements shall be reduced to an amount equal to three times the annual special assessment tax imposed on KSC plus outstanding letters of credit issued related to infrastructure improvements to be completed in future years.  We expect the outstanding letters of credit related to the infrastructure improvements to be reduced to approximately $4.7 million which is expected to occur during the first half of 2012.

On March 23, 2011, KSC and Conlon Construction Co. (“Conlon”) executed an AIA A133-2009 Agreement Between Owner and Construction Manager as Constructor (the “Phase 1A GMP Contract”).  On August 1, 2011, KSC and Conlon Construction Co. (“Conlon”) executed an AIA A133-2009 Agreement Between Owner and Construction Manager as Constructor (the “Phase 1B GMP Contract”, and, together with the Phase 1A GMP Contract, the “GMP Contracts”).  The GMP Contracts provide that Conlon will act as Construction Manager for the construction of the Kansas Star project, and that the project will be completed on a “cost of work plus a fee” basis, with a guaranteed maximum price (the “GMP Amount”), and on a designated construction completion schedule.  The GMP Contracts provide that Conlon will prepare a preliminary GMP Amount based on Conlon’s estimate of the cost of work, including contingencies, and Conlon’s management fee for each phase of the project.  The GMP Amount for Phase 1A has been agreed to at $63.4 million.  The final GMP Amount for Phase 1B of the project is expected to be agreed to between KSC and Conlon in the first quarter of 2012.  The GMP Amount for phase two of the project will be established by the parties as the development of the project proceeds.  

The GMP Contracts effectively limit the total cost of the first phase of the project to the designated GMP Amount, and imposes financial penalties, including liquidated damages for failing to complete construction by the dates set forth in the Kansas Management Contract.  If the total cost of the project falls below the GMP Amount, certain of the cost savings will be shared 60%/40% between KSC and Conlon, respectively. The GMP Amount is subject to amendment by change orders approved by KSC and the dates for completion of construction may be adjusted as a result of the occurrence of certain events, including force majeure.

The GMP Contracts also contain other customary provisions, including provisions relating to the scope of work and responsibilities of the parties, termination, compensation and payment calculations and schedules, indemnification, insurance and bond requirements, dispute resolution and assignment of contract. 

On May 17, 2011, KSC executed an agreement with a third party hotel developer to develop a 300 room hotel at the Kansas Star.  KSC will contribute $1.0 million in cash, land, and certain site work for the project and the hotel developer will finance, construct, own and operate the hotel.
 
 
           2. Summary of Significant Accounting Policies
 
Capitalized Interest— The Company capitalizes interest costs associated with significant construction projects. The Company capitalizes interest on amounts expended on significant construction projects at the average cost of borrowed money. The Company capitalized $0.8 million and $1.3 million during the three and nine months ended September 30, 2011, respectively, related to the development project at KSC.  There was no interest capitalized during the three and nine months ended September 30, 2010.

Deferred Financing Costs— Costs associated with the issuance of financing agreements have been deferred and are being amortized over the life of the related instrument/agreement using the effective interest method. During the nine months ended September 30, 2011, the Company deferred additional costs of $5.7 million related to the $80.0 million tack on offering to its 8 3/8% Senior Secured Notes due 2015 (the “PGL Secured Notes”) consummated on February 9, 2011 and $50.0 million tack on offering to its 10 3/4% Senior Unsecured Notes due 2017 (the “PGL Unsecured Notes” and, together with the PGL Secured Notes, the “PGL Notes”) consummated on February 1, 2011.  During the nine months ended September 30, 2011, the Company also deferred additional costs of $1.5 million under the amended and restated loan and security agreement entered into by PGL, DJL, EVD, ABC, DJW and KSC (collectively, the “Borrowers”) with Wells Fargo Capital Finance, Inc. (“Wells Fargo”) as the arranger and agent on October 22, 2009 (“PGL Credit Facility”) due to the Second Amendment to the Amended and Restated Loan and Security Agreement executed on February 2, 2011 (the “Second Amendment”). During the nine months ended September 30, 2011, the Company also deferred additional costs of $0.1 million under the KSC Term Loan as discussed in Note 4 and $0.1 million under the Mulvane Development Agreement as discussed in Other Accrued Expenses below.
 

 
 
 
8

 
 

Goodwill and Licenses and Other Intangible Assets— There were no changes in the carrying amount of goodwill during the nine months ended September 30, 2011.   Licenses and other intangibles are summarized as follows (in thousands):
 
   
September 30, 2011
 
   
Gross Carrying Value
   
Accumulated Amortization
   
Net Book Value
 
 Intangible assets with indefinite lives:
                       
     Gaming licenses
 
$
72,911
    $
-
    $
72,911
 
     Kansas Management Contract
   
28,135
     
-
     
28,135
 
     Tradename
   
2,454
     
-
     
2,454
 
     Horse racing license
   
1,308
     
-
     
1,308
 
Intangible assets with finite lives:
                       
     Tradename
   
2,135
     
(409)
     
1,726
 
     Customer relationships and customer list
   
242
     
(103)
     
139
 
Total
 
$
107,185
    $
(512)
    $
106,673
 
 
   
December 31, 2010
 
   
Gross Carrying Value
   
Accumulated Amortization
   
Net Book Value
 
 Intangible assets with indefinite lives:
                       
     Gaming licenses
 
$
72,575
   
$
-
   
$
72,575
 
     Tradename
   
2,454
     
-
     
2,454
 
     Horse racing license
   
1,308
     
-
     
1,308
 
Intangible assets with finite lives:
                       
     Tradename
   
2,135
     
(249)
     
1,886
 
     Customer relationships and customer list
   
242
     
(62)
     
180
 
Total
 
$
78,714
   
$
(311)
   
$
78,403
 
 
 
Amortization expense for intangible assets for each of the three months ended September 30, 2011 and 2010 was $0.1 million.  Amortization expense for intangible assets for each of the nine months ended September 30, 2011 and 2010 was $0.2 million.  Annual amortization expense for intangible assets is expected to be $0.3 million for 2011 and $0.2 million per year for 2012 through 2015.

During the nine months ended September 30, 2011, KSC recorded $28.1 million as an indefinite life intangible asset which includes (i) the $25.0 million privilege fee paid to the State of Kansas and (ii) $3.1 million of additional fees required to be paid to KRGC upon approval of the Kansas Management Contract.
 
Deposits— At December 31, 2010, included in Deposits and other assets was a $25.0 million deposit related to the refundable privilege fee paid to the State of Kansas for the Kansas Management Contract.  Upon approval of the Kansas Management Contract the $25.0 million privilege fee was no longer refundable.  As such, the $25.0 million has been included as a cost of the management contract at KSC and is included in Licenses and other intangibles as of September 30, 2011. 

Other Accrued Expenses— Under the Mulvane Development Agreement, KSC is obligated to pay for certain infrastructure improvements constructed by Mulvane ultimately through the imposition of a special tax assessment on the Kansas Star site payable over 15 years in an amount equal to Mulvane’s obligations under the general obligation bonds as discussed in Note 1.  Currently, KSC is obligated to reimburse Mulvane for any funds expended from the proceeds of the temporary bonds issued by Mulvane with such payments secured by letters of credit issued by PGL.  Due to KSC’s use of the infrastructure improvements and its obligations under the letters of credit currently, and ultimately under the special assessment with Mulvane (which will repay the principal and interest on the general obligation bonds), KSC recorded a capital asset and an obligation to Mulvane to the extent proceeds from the temporary bonds were used to construct the infrastructure improvements.  As of September 30, 2011, Mulvane has incurred construction costs of approximately $6.9 million related to the infrastructure improvements and approximately $0.1 million in issue costs associated with the temporary notes.  Accordingly, KSC has recorded an obligation of $7.0 million which is included in Other accrued expenses within current liabilities as the temporary notes that were issued are due within the next twelve months.


 
 
 
9

 
 

Pre-opening Expense— Costs associated with start-up activities for new or expanded operations are expensed as incurred. For the three and nine months ended September 30, 2011, the Company incurred $3.9 million and $6.9 million of start-up costs related to the development project at KSC and consists primarily of pre-opening payroll, professional service fees, and regulatory costs.

Use of Estimates— The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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. Significant estimates involve the fair value of DJW’s investment in $22.7 million in aggregate principal amount of 7.5% Urban Renewal Tax Increment Revenue Bonds, Taxable Series 2007 (“City Bonds”), the periodic review of the carrying value of assets for impairment, the estimated useful lives for depreciable assets, and the estimated liabilities for slot club awards.
 
Recently Issued Accounting Standards— In April 2010, the Financial Accounting Standards Board (“FASB”) issued guidance regarding the accounting for casino base jackpot liabilities.  The Company adopted this guidance in the first quarter of 2011 with no impact to the Company’s financial statements.
 
In May 2011, the FASB amended the guidance regarding fair value measurement and disclosure. The amended guidance clarifies the application of existing fair value measurement and disclosure requirements. The amendment is effective for the Company at the beginning of January 2012, with early adoption prohibited. The adoption of this amendment is not expected to materially affect the Company's financial statements.
 
In June 2011, the FASB amended requirements for the presentation of other comprehensive income (OCI), requiring presentation of comprehensive income in either a single, continuous statement of comprehensive income or on separate but consecutive statements, the statement of operations and the statement of OCI. The amendment is effective for the Company at the beginning of January 2012, with early adoption permitted. The adoption of this guidance will not impact the Company's financial position, results of operations or cash flows and will only impact the presentation of OCI on the financial statements.

In September 2011, the FASB amended the guidance regarding testing of goodwill for impairment.  The amended guidance provides entities with the option of first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would still be required, otherwise no further analysis is required. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance will not have an impact on the Company’s financial statements.


3. Property and Equipment
 
Property and equipment at September 30, 2011 and December 31, 2010 is summarized as follows (in thousands):
 
   
September 30, 2011
   
December 31, 2010
 
Land and land improvements
 
$
19,781
   
$
19,748
 
Buildings, riverboat and improvements
   
255,980
     
254,754
 
Furniture, fixtures and equipment
   
104,904
     
101,046
 
Computer equipment
   
13,448
     
12,988
 
Vehicles
   
848
     
775
 
Construction in progress
   
89,504
     
1,702
 
Subtotal
   
484,465
     
391,013
 
Accumulated depreciation
   
(139,241)
     
(119,132)
 
Property and equipment, net
 
$
345,224
   
$
271,881
 

Depreciation expense during the three months ended September 30, 2011 and 2010 was $7.0 million and $7.2 million, respectively. Depreciation expense during the nine months ended September 30, 2011 and 2010 was $21.3 million and $21.9 million, respectively.
 
 
10

 
4. Debt
 
Long-term debt consists of the following (in thousands):
 
   
September 30, 2011
   
December 31, 2010
 
8 3/8% senior secured notes due August 15, 2015, net of discount of $368 and $4,465, respectively, secured by substantially all the assets of the Company and its subsidiaries and the equity of the Company
 
$
319,632
   
$
235,535
 
10 3/4% senior unsecured notes due August 15, 2017, net of discount of $2,750 and $7,003, respectively
   
352,250
     
297,997
 
$50,000 revolving line of credit under a loan and security agreement of PGL, DJL, EVD, ABC, DJW, and KSC with Wells Fargo, interest rate at prime plus a margin of 2.5% with a floor of 6.0% (rate of 6.0% at September 30, 2011 and December 31, 2010), maturing January 15, 2015, secured by substantially all assets of PGL, DJL, EVD, ABC, DJW, and KSC and is guaranteed up to $5.0 million by the Company’s Chief Executive Officer
     
-
   
3,500
 
Term loan under a loan and security agreement of PGL, DJL and EVD with American Trust & Savings Bank, interest rate at 6.5%, due in installments through December 1, 2013, secured by certain assets of DJL
   
3,981
     
5,183
 
Notes payable and capital lease obligations, net of discount of $163 and $0, respectively, interest rates at 6.0% - 14.4%, due 2011 – 2015
   
3,403
     
55
 
 Total debt
   
679,266
     
542,270
 
Less current portion
   
(4,202)
     
(1,643)
 
 Total long term debt
 
$
675,064
   
$
540,627
 
 
Principal maturities of debt (excluding discount and debt repaid during the period January 1, 2011 through September 30, 2011) for the Company, for each of the years ending December 31 listed below have been updated to include: (1) the $50.0 million PGL Unsecured Notes tack-on issuance; (2) the $80.0 million PGL Secured Notes tack-on issuance; and (3) the Second Amendment under the PGL Credit Facility as discussed below.  Such maturities are summarized as follows (in thousands):
 
       
2011
 
$
         1,643
 
2012
   
1,733
 
2013
   
1,850
 
2014
   
9
 
2015
   
323,503
 
Thereafter
   
355,000
 
   
$
     683,738
 

PGL Notes

On January 27, 2011, the Company commenced a consent solicitation seeking to amend the indenture governing the PGL Secured Notes to allow for the issuance of additional secured notes under that indenture. On February 2, 2011, the Company consummated the consent solicitation and adopted the amendments to the indenture governing the PGL Secured Notes.

On February 1, 2011, the Company issued an additional $50.0 million in aggregate principal amount of PGL Unsecured Notes at an issue price of 108%, plus accrued interest from August 15, 2010.

On February 9, 2011, the Company issued an additional $80.0 million in aggregate principal amount of PGL Secured Notes at an issue price of 105%, plus accrued interest from August 15, 2010.
 
The PGL Secured Notes and the PGL Unsecured Notes are guaranteed on a senior secured basis and senior unsecured basis, respectively, by DJL, EVD, DJW, ABC and KSC (collectively, the “Subsidiary Guarantors”).  The PGL Secured Notes and the related guarantees are secured by a security interest in the Company’s and the Subsidiary Guarantors’ respective existing and future assets (other than certain excluded assets) and by a limited recourse pledge of 100% of the equity interests of PGL by PGP. The security interest on the collateral that secures the PGL Secured Notes and the related guarantees are subject to the prior liens of the PGL Credit Facility. The PGL Unsecured Notes are effectively subordinated to the PGL Credit Facility, the PGL Secured Notes and other secured indebtedness of the Company and the Subsidiary Guarantors to the extent of the collateral securing such indebtedness. The guarantees of the Subsidiary Guarantors are full and unconditional and joint and several.
 
 
11

 
PGL Credit Facility

On January 31, 2011, the Borrowers under the PGL Credit Facility and Wells Fargo executed a Consent agreement that permitted KSC to join the PGL Credit Facility as a Borrower.

On February 2, 2011, the Borrowers under the PGL Credit Facility and Wells Fargo executed the Second Amendment which, among other things, (i) permitted the issuance of up to $80.0 million in aggregate principal amount of additional PGL Secured Notes, (ii) provided for a reduction in the maximum revolver amount under the facility from $58.5 million to $50.0 million, (iii) extended the maturity date of the facility from January 15, 2014 to January 15, 2015, and (iv) permitted certain capital expenditures in connection with the development of the Kansas Star.
 
On May 11, 2011, the Borrowers under the PGL Credit Facility and Wells Fargo executed the Third Amendment to Amended and Restated Loan and Security Agreement which increased the limit on issued and outstanding letters of credit allowed under the PGL Credit Facility from $10.0 million to $25.0 million.
 
As of September 30, 2011, the Company had no outstanding advances under the PGL Credit Facility. In addition, as of September 30, 2011, the Company had outstanding letters of credit under the PGL Credit Facility of $17.1 million, including $15.4 million related to the construction of the infrastructure improvements by Mulvane as discussed in Note 1, resulting in available borrowings thereunder of $32.9 million. 

KSC Term Loan

On June 1, 2011, PGL and KSC (collectively the “KSC FF&E Borrowers”) entered into a Loan and Security Agreement with American Trust and Savings Bank (the “KSC Term Loan”).  The KSC Term Loan allows the KSC FF&E Borrowers to request advances of up to $14.0 million during the period of June 1, 2011 through March 1, 2012 (the “Draw Down Period”) to finance the purchase of certain furniture, fixtures and equipment related to the Kansas Star development. No principal payments are due until January 1, 2012 and interest shall accrue on all advances at a rate equal to 6.5% per annum and is payable the first of each month in arrears.  Commencing on January 1, 2012 and continuing through December 1, 2016 (the “Term Period”), the FF&E Borrowers shall pay principal in equal monthly installments, plus accrued interest, with the first principal payment due on January 1, 2012. Interest during the Term Period shall be calculated at a rate of 6.5% per annum.  As of September 30, 2011, KSC had no outstanding advances under the KSC Term Loan.

Slot Vendor Financing

KSC has agreements with various slot vendors to finance approximately $21.4 million of slot machines over a period of twelve months at zero percent financing for the interim phase of the project.  As of September 30, 2011, KSC has recorded $3.5 million in slot financing for equipment received as of September 30, 2011.

 Compliance

As of September 30, 2011, the Company was in compliance with the terms of the agreements governing its outstanding indebtedness.
 
5. Fair Value Measurements
 
Under GAAP, certain assets and liabilities must be measured at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The Company had one financial instrument that must be measured at fair value in the financial statements, an investment available for sale. The Company currently does not have non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis.

GAAP establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value.  This hierarchy prioritizes these inputs into three broad levels.  The three levels are as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;
 
Level 2-Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs); and

 
 
12

 
Level 3-Unobservable inputs that reflect the Company’s estimate about the assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data.

The Company had no Level 1 or Level 2 financial instruments at September 30, 2011 and December 31, 2010. The Company had one Level 3 financial instrument at September 30, 2011 and December 31, 2010.  

DJW holds an investment in a single municipal bond issuance that is classified as available for sale and is recorded at fair value.  DJW is the only holder of this instrument and there is no quoted market price for this instrument.  The estimate of the fair value of such investment was determined using a combination of current market rates and estimates of market conditions for instruments with similar terms, maturities, and degrees of risk and an estimate from an independent source of what market participants would use in pricing the bonds.  Unrealized gains and losses on this instrument resulting from changes in the fair value of the instrument are not charged to earnings, but rather are recorded as other comprehensive income (loss) in the member’s deficit section of the Company’s balance sheets.  The discount associated with this investment is netted with the investment on the balance sheets and is being accreted over the life of the investment using the effective interest method. The accretion of such discount is included in interest income on the statements of operations.  
 
In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s Level 3 financial asset that is required to be measured at fair value as of September 30, 2011 and December 31, 2010, which is classified as “Investment available for sale” in the balance sheets ($0.3 million is classified in Prepaid and other assets at September 30, 2011 and December 31, 2010) (in thousands):

   
Total Carrying Value
at September 30, 2011
   
Fair Value Measurements at
September 30, 2011
   
Total Carrying Value
at December 31, 2010
 
Fair Value Measurements at
 December 31, 2010
Investment available for sale
 
 $
19,341
   
 $
19,341
 
 $
                                      18,592
 
 $
      18,592

 
The following table summarizes the changes in fair value of the Company’s Level 3 assets and liabilities for the three and nine months ended September 30, 2011 and 2010 (in thousands):
 

 
   
Three Months
Ended
September 30, 2011
   
Three Months
Ended
September 30, 2010
   
Nine Months
Ended
September 30, 2011
   
Nine Months
Ended
September 30, 2010
 
Investment available for sale:                                
Balance at beginning of the reporting period
 
$
19,334
   
$
18,563
   
$
18,592
   
$
14,741
 
Total gains (losses) (realized or unrealized):
                               
   Included in earnings
   
52
     
50
     
158
     
144
 
   Included in other comprehensive income (loss)
   
(45)
     
(32)
 
   
876
     
3,696
 
Transfers in or out of Level 3
   
-
     
-
     
-
     
-
 
Purchases, sales, issuances and settlements:
                               
   Settlements
   
-
 
   
-
     
(285)
 
   
-
 
Ending balance at September 30, 2011 and 2010
 
$
19,341
   
$
18,581
    $
19,341
   
$
18,581
 

   
Three Months Ended September 30, 2011
   
Three Months Ended September 30, 2010
   
Nine Months Ended September 30, 2011
   
Nine Months Ended September 30, 2010
 
Gains included in earnings attributable to the change in unrealized gains relating to assets still held at the reporting date included in interest income
 
$
52
   
$
50
   
$
158
   
$
144
 

 
            6. Commitments and Contingencies
 
Under the Company’s and PGP’s operating agreements, the Company and PGP have agreed, subject to a few exceptions, to indemnify and hold harmless PGP and PGP’s members from liabilities incurred as a result of their positions as sole manager of the Company and as members of PGP, respectively.
 
On May 13, 2011, the State of Iowa moved "in the interest of justice" to dismiss misdemeanor charges filed against PGP, its Chief Executive Officer and Chief Operating Officer for alleged violations of State of Iowa campaign contribution laws. The Court approved the motion and ordered the complete dismissal of all charges.
 
 
13

 
Neither the Company nor its subsidiaries are parties to any pending or probable legal proceedings other than litigation arising in the normal course of business.  Management does not believe that adverse determinations in any or all such litigation would have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
 
The Kansas Management Contract contractually obligates KSC to open certain phases of the project by certain specified dates. With certain exceptions, the interim gaming facility must open for business no later than February 14, 2012, while the permanent gaming facility must be completed by January 14, 2013, and the entire construction project (as set forth in the contract) must be completed no later than January 14, 2015. In addition, as of January 14, 2015, KSC is obligated to have made a minimum investment in infrastructure related to the Kansas Star development of $225.0 million, inclusive of any third party investments but exclusive of the $25.0 million privilege fee as discussed in Note 2.  The Company is currently on-track to meet these completion dates and financial obligations.  See additional discussion of the Kansas Star development in Note 1.
 
 
 7. Related Party Transactions
 
During the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010, the Company distributed $1.5 million, $4.9 million, $6.4 million and $6.7 million, respectively, to PGP primarily for (i) certain consulting and financial advisory services related to PGP development expenses, (ii) board fees and actual out-of-pocket expenses incurred by members of the board of managers of PGP in their capacity as board members and (iii) tax, accounting, licensure, legal and administrative costs and expenses related to PGP. These amounts were recorded as member distributions.  In September 2010, the Company made a $1.7 million cash distribution which was recorded as a member distribution to PGP, the proceeds of which were used by PGP to repay all of the outstanding principal and interest on a loan due to the Company.  Such loan was previously recorded as a note receivable within Total Member’s Deficit.  During the nine months ended September 30, 2011, the Company received contributions of $4.6 million from PGP primarily for land and capitalized costs related to the Kansas Star development project that were paid by PGP.

The Company expensed $0.1 million during each of the three months ended September 30, 2011 and 2010 and $0.4 million during each of the nine months ended September 30, 2011 and 2010, as affiliate management fees, related to other compensation and board fees payable to board members of PGP representing services provided to PGL.
 
In accordance with a management services agreement between OED Acquisition LLC (“OEDA”), a wholly owned subsidiary of PGP, and EVD, under which EVD pays to OEDA (an affiliate) a base management fee of 0.44% of net revenue (less net food and beverage revenue) plus an incentive fee ranging from 0.75% to 1.25% based on earnings before interest, taxes, depreciation, amortization and non-recurring charges, EVD expensed $0.2 million in affiliate management fees payable to OEDA during each of the three months ended September 30, 2011 and 2010 and $0.5 million in affiliate management fees payable to OEDA during each of the nine months ended September 30, 2011 and 2010.
 
In accordance with a management services agreement between DJW and PGP under which DJW pays to PGP a base management fee of 1.75% of net revenue (less net food and beverage revenue) plus an incentive fee ranging from 3% to 5% based on earnings before interest, taxes, depreciation, amortization and non-recurring charges, DJW expensed management fees of $0.8 million, $0.7 million, $2.1 million, and $2.0 million during the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011 and 2010, respectively.
 
EVD and PGP are parties to a consulting agreement with a board member of PGP. Under the consulting agreement, EVD, DJW and ABC must each pay the board member a fee equal to 2.5% of EVD’s, DJW’s and ABC’s earnings before interest, taxes, depreciation, amortization and charges associated with the impairment of assets, development expenses, pre-opening expenses, management and consulting fees, corporate allocations, gains or losses on the disposal of assets and extraordinary gains or losses, in each case, applicable to such period.  EVD expensed $0.2 million of affiliate management fees during each of the three months ended September 30, 2011 and 2010 and $0.6 million of affiliate management fees during each of the nine months ended September 30, 2011 and 2010, related to this agreement.   DJW expensed $0.3 million and $0.2 million of affiliate management fees during the three months ended September 30, 2011 and 2010, respectively and $0.7 million of affiliate management fees during each of the nine months ended September 30, 2011 and 2010, related to this agreement.  ABC expensed $0.1 million of affiliate management fees during each of the three months ended September 30, 2011 and 2010 and $0.3 million of affiliate management fees during each of the nine months ended September 30, 2011 and 2010, related to this agreement.
 
8. Segment Information
 
The Company is organized around geographical areas and has five reportable segments: (1) Diamond Jo Dubuque operations, which comprise the Diamond Jo casino in Dubuque, Iowa, (2) Diamond Jo Worth operations, which comprise the Diamond Jo Worth casino operations in Northwood, Iowa, (3) Evangeline Downs operations, which comprise the casino, racetrack and OTBs operated by EVD in Opelousas, Louisiana and the surrounding area, (4) Amelia Belle operations, which comprise the Amelia Belle casino in Amelia, Louisiana, and (5) Kansas Star, which will operate the Kansas Star Casino, Hotel and Event Center in Mulvane, Kansas and is currently under development.
 
The accounting policies for each segment are the same as those described in Note 2 above and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The Company evaluates performance and allocates resources based upon, among other considerations, segment operating earnings (as defined below).
 
 
14

 
The tables below present information about reported segments as of and for the years ended (in thousands):
 
 
   
Net Revenues From
External Customers
Three Months Ended 
September 30,
   
Net Revenues From
External Customers
Nine Months Ended 
September 30,
   
2011
   
2010
   
2011
   
2010
Diamond Jo Dubuque
 
 $
17,970
   
 $
17,681
   
 $
51,962
   
 $
52,144
Diamond Jo Worth
   
24,607
     
22,792
     
70,687
     
66,158
Evangeline Downs
   
28,799
     
29,071
     
88,850
     
87,409
Amelia Belle
   
12,497
     
12,404
     
37,269
     
36,703
Total
 
 $
83,873
   
 $
81,948
   
 $
248,768
   
 $
242,414

 
   
Segment Operating 
Earnings
Three Months Ended 
September 30, (1)
   
Segment Operating 
Earnings
Nine Months Ended 
September 30, (1)
 
   
2011
   
2010
   
2011
   
2010
 
Diamond Jo Dubuque
 
 $
6,484
   
 $
6,226
   
 $
18,297
   
 $
17,966
 
Diamond Jo Worth
   
10,399
     
9,716
     
29,237
     
27,818
 
Evangeline Downs
   
6,913
     
7,320
     
23,722
     
23,335
 
Amelia Belle
   
3,707
     
3,916
     
11,348
     
11,679
 
Total property segment operating earnings (1)
   
27,503
     
27,178
     
82,604
     
80,798
 
General corporate
   
(2,147)
     
(1,765)
 
   
(6,677)
     
(5,035)
 
Total segment operating earnings (1)
   
25,356
     
 25,413
     
75,927
     
 75,763
 
Gain on settlement (2)
   
-
     
-
     
711
     
-
 
Depreciation and amortization
   
(7,099)
     
 (7,315)
     
(21,463)
     
 (22,142)
 
Pre-opening expense
   
(3,923)
     
(8)
     
(6,863)
     
 (33)
 
Development expense
   
-
     
 -
     
-
     
 (28)
 
Affiliate management fees
   
(1,565)
     
(1,535)
     
(4,708)
     
 (4,493)
 
Loss on disposal of assets
   
(9)
     
 (17)
     
(86)
     
 (54)
 
Gain (loss) from equity affiliate
   
3
     
 -
     
(62)
     
 -
 
Interest income
   
559
     
 680
     
1,775
     
 1,672
 
Interest expense, net of amounts capitalized
   
(17,079)
     
 (14,929)
     
   (51,215)
 
 
 
   (44,684)
 
Net (loss) income
 
 $
(3,757)
   
 $
2,289 
   
 $
(5,984)
   
$
 6,001
 

_______________
(1)  
Segment operating earnings is defined as net (loss) income plus depreciation and amortization, pre-opening expense, development expense, affiliate management fees, loss on disposal of assets, loss from equity affiliate and interest expense, net of amounts capitalized less interest income, gain from equity affiliate and gain on settlement.

(2)  
“Gain on settlement” relates to a one-time gain on a financial settlement with the predecessor owner of ABC during the first quarter of 2011 and is included in Other revenue for the nine months ended September 30, 2011.

 
15

 

   
Interest Expense, net
Three Months Ended
September 30,
   
Interest Expense, net
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
General Corporate
 
 $
(16,516)
   
 $
  (14,219)
   
 $
(49,521)
   
 $
  (42,812)
 
Diamond Jo Dubuque
   
(504)
     
 (574)
     
(1,614)
     
 (1,724)
 
Diamond Jo Worth
   
485
     
  492
     
1,461
     
  1,459
 
Evangeline Downs
   
56
     
  49
     
237
     
  57
 
Amelia Belle
   
2
     
  3
     
7
     
  8
 
Kansas Star
   
(43)
     
-
     
(10)
     
-
 
Total
 
 $
(16,520)
   
 $
  (14,249)
   
 $
(49,440)
   
 $
  (43,012)
 


   
Depreciation and Amortization
Three Months Ended
September 30,
   
Depreciation and Amortization
Nine Months Ended
September 30,
 
   
2011
   
 
2010
   
2011
   
2010
 
General Corporate
 
$
         72
   
$
55
   
$
202
   
$
117
 
Diamond Jo Dubuque
   
2,297
     
2,313
     
6,907
     
6,868
 
Diamond Jo Worth
   
1,369
     
1,433
     
4,206
     
4,719
 
Evangeline Downs
   
1,724
     
1,970
     
5,297
     
5,871
 
Amelia Belle
   
1,637
     
1,544
     
4,851
     
4,567
 
Total
 
$
7,099
   
$
7,315
   
$
21,463
   
$
22,142
 

 
  
 
Total Assets
 
   
September 30, 2011
   
December 31, 2010
 
             
General Corporate
 
$
22,633
   
$
42,581
 
Diamond Jo Dubuque
   
159,741
     
164,660
 
Diamond Jo Worth
   
81,520
     
78,733
 
Evangeline Downs
   
145,428
     
142,377
 
Amelia Belle
   
111,569
     
111,454
 
Kansas Star
   
161,725
     
-
 
Total
 
$
682,616
   
$
539,805
 
 
 
   
Cash Expenditures for Additions to
Long-Lived Assets
 
   
Nine Months Ended 
September 30, 2011
 
Nine Months Ended 
September 30, 2010
 
             
General corporate
$
 
1,458
  $
 
579
 
Diamond Jo Dubuque
   
1,299
     
1,851
 
Diamond Jo Worth
   
1,570
     
1,529
 
Evangeline Downs
   
2,369
     
7,180
 
Amelia Belle
   
1,462
     
4,319
 
Kansas Star
   
61,249
     
-
 
Total
$
 
69,407
  $
 
15,458
 
 
 
16

 
 
9. Fair Value of Financial Instruments
 
The fair value of the Company’s financial instruments consisting of cash and cash equivalents, restricted cash, receivables, payables and current accrued expenses approximate their recorded amounts due to the short term nature of the instruments. The fair value and recorded amounts for the Company’s investment available for sale, note receivable, obligation under minimum assessment agreement and debt instruments at September 30, 2011 and December 31, 2010 are as follows (in thousands):
 
  
 
September 30, 2011
   
December 31, 2010
 
   
Fair Value
   
Recorded
Amount
   
Fair Value
   
Recorded
Amount
 
Investment available for sale
 
$
19,341
   
$
19,341
   
$
18,592
   
$
18,592
 
Note receivable
   
2,467
     
2,382
     
2,536
     
2,302
 
8 3/8% senior secured notes 
   
319,200
     
319,632
     
255,000
     
235,535
 
10 3/4% senior unsecured notes
   
346,125
     
352,250
     
331,688
     
297,997
 
Senior secured credit facility
   
-
     
-
     
3,500
     
3,500
 
Term loans
   
3,981
     
3,981
     
5,183
     
5,183
 
Notes payable, capital lease obligations and other financial instruments
   
4,033
     
3,870
     
591
     
591
 
Obligation under Minimum Assessment Agreement
   
25,938
     
20,224
     
25,012
     
20,458
 
 
Fair value information is based on current market interest rates and estimates of market conditions for instruments with similar terms, maturities, and degrees of risk.
 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the related notes thereto appearing elsewhere in this report.
 
 
Forward Looking Statements
 
We make forward-looking statements in this report. These forward-looking statements relate to our outlook or expectations for earnings, revenues, expenses, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on our business, results of operations or financial condition. Specifically, forward-looking statements may include:

 
·
statements relating to our plans, intentions, expectations, objectives or goals;
 
 
·
statements relating to our future economic performance, business prospects, revenue, income and financial condition, and any underlying assumptions relating to those statements; and
 
 
·
statements preceded by, followed by or that include the words “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “target” or similar expressions.
 
These statements reflect our management’s judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. With respect to these forward-looking statements, our management has made assumptions regarding, among other things, economic trends, customer behaviors, the availability of financing and overall liquidity.

Future performance cannot be ensured.  Actual results may differ materially from those in the forward-looking statements. Some factors that could cause our actual results to differ include, but are not limited to:

 
·
the availability and adequacy of our cash flows to satisfy our obligations, including payment obligations under the PGL Notes and the PGL Credit Facility and additional funds required to support capital improvements, complete the Kansas Star development and pursue future development;
 
 
·
economic, competitive, demographic, business, regulatory, political and other conditions in our local and regional markets;
 
 
·
changes or developments in the laws, regulations or taxes in the gaming and horse racing industry;
 

 
17

 

 
·
actions taken or omitted to be taken by third parties, including customers, suppliers, competitors, members and shareholders, as well as legislative, regulatory, judicial and other governmental authorities;
 
 
·
changes in business strategy, capital improvements, development plans, including those due to environmental remediation concerns, or changes in personnel or their compensation, including federal, state and local minimum wage requirements;
 
 
·
the loss of any license or permit, including the failure to obtain an unconditional renewal of a required gaming license on a timely basis;
 
 
·
the termination of our operating agreement with our “qualified sponsoring organizations,” the Dubuque Racing Association (“DRA”) and/or the Worth County Development Authority (“WCDA”), or the failure of the DRA and/or the WCDA to continue as our “qualified sponsoring organization;”
 
 
·
the loss of our facilities due to casualty, weather, mechanical failure or any extended or extraordinary maintenance or inspection that may be required;
 
 
·
changes in federal or state tax obligations;
 
 
·
potential exposure to environmental liabilities, changes or developments in the laws, regulations or taxes in the gaming or horse racing industry or a decline in the public acceptance of gaming or horse racing and other unforeseen difficulties associated with our operations;

 
·
failure to meet the contractually-obligated construction dates, delays, cost overruns or the imposition of additional costs related to the construction of the Kansas Star, the third party hotel, or the financing of publicly-owned offsite utilities, or delays in obtaining requisite governmental approvals related to the operation of the Kansas Star;

 
·
adverse outcomes of any legal proceedings in which we may become involved from time to time;
 
 
·
adverse circumstances, changes, developments or events relating to or resulting from our ownership and control of DJL, DJW, EVD, ABC and KSC; and
 
 
·
other factors discussed in our other filings with the SEC.

You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this document. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.
 

Executive Summary

We own and operate four casinos located in Iowa and Louisiana.  In addition, we are currently developing the Kansas Star in Mulvane, Kansas.  See Note 1 to the condensed consolidated financial statements for more information on the Kansas Star development project.  Our corporate offices are located in Dubuque, Iowa.  Our current operating properties consist of:

1.  
Diamond Jo Dubuque operations, which comprise the Diamond Jo casino operations in Dubuque, Iowa and serving the eastern Iowa, northwest Illinois and southwest Wisconsin gaming markets;
2.  
Diamond Jo Worth operations, which comprise the Diamond Jo casino operations in Northwood, Iowa serving north central Iowa and south central Minnesota;
3.  
EVD operations, which comprise the casino, racetrack and OTB’s operated by EVD in Louisiana, serving the greater Lafayette, Louisiana area; and
4.  
Amelia Belle operations, which comprise the Amelia Belle Casino in Amelia, Louisiana serving the southern Louisiana markets.

Our properties offer a variety of amenities including various food and beverage outlets and entertainment venues.
 

 
18

 

While we are very excited about the current development project in Kansas, we continue to maintain our focus on our four existing operations and are pleased with the operating results of the third quarter of 2011, especially in Iowa where we saw positive quarter over quarter segment operating earnings growth of 7% and 4% in Worth County and Dubuque, respectively. At Evangeline Downs, results continued to reflect the results of a down turn in the racing industry.  Weakness in simulcast betting as well as the closure of several racetracks throughout the country that historically showed EVD’s live race meets were the primary factors in a 6% decline in segment operating earnings at EVD.  Despite a weak Louisiana economy, segment operating earnings on the casino side of the operations remained substantially flat as compared to the third quarter of 2010.  To combat the continued weakness in the southern Louisiana market, we increased our direct mail and marketing promotions at ABC to attract more visits to the property.  Visitors at ABC increased 3% in the third quarter 2011 over the third quarter 2010.  While we were successful in driving a slight increase in net revenues, our segment operating earnings fell approximately 5% due primarily to these additional costs.
 
 

Recent Developments

In January 2011, PGP’s Kansas Management Contract was approved by the KRGC and upon such approval, became effective.  The Kansas Management Contract was subsequently assigned to KSC and allows KSC to design, develop, and operate the Kansas Star Casino, Hotel and Event Center in Mulvane, Kansas.  

In March 2011, KSC purchased two parcels of land totaling approximately 202 acres on which the Kansas Star will be developed. This land effectively gives the Company all the land needed to develop the Kansas Star facility in compliance with the terms of the Kansas Management Contract.  In March 2011, KSC broke ground on the Kansas Star development project.  See Note 1 to the condensed consolidated financial statement for additional information on the Kansas Star project.

Also in March 2011, a third party developer and operator opened a new 60-room hotel in close proximity to our DJW casino.   
 
On May 13, 2011, the State of Iowa moved "in the interest of justice" to dismiss misdemeanor charges filed against PGP, its Chief Executive Officer and Chief Operating Officer for alleged violations of Iowa State campaign contribution laws. The Polk County District Court approved the motion and ordered the complete dismissal of all charges.
 
            On May 17, 2011, KSC executed an agreement with a third party hotel developer to develop the 300 room hotel at the Kansas Star.  KSC will contribute $1.0 million in cash, land, and certain site work for the project and the hotel developer will finance, construct, own and operate the hotel.

 
 
 
19

 

Results of Operations
 
 The following table sets forth certain information concerning our results of operations for the three and nine months ended September 30, 2011 and 2010.
 
 
Statement of Operations Data
(Dollars in Thousands)
 
 
   
Three 
Months
Ended
September 30, 
2011
   
Three 
Months
Ended
September 30,
 2010
   
Nine 
Months
Ended
September 30, 
2011
   
Nine 
Months
Ended
September 30, 
2010
 
                         
Net Revenues:
                               
Diamond Jo Dubuque
 
$
17,970
   
$
17,681
   
$
51,962
   
$
52,144
 
Diamond Jo Worth
   
24,607
     
22,792
     
70,687
     
66,158
 
Evangeline Downs
   
28,799
     
29,071
     
88,850
     
87,409
 
Amelia Belle
   
12,497
     
12,404
     
37,269
     
36,703
 
Consolidated net revenues
 
$
83,873
   
81,948
   
248,768
   
$
242,414
 
Segment Operating Earnings:
                               
Diamond Jo Dubuque
 
$
6,484
   
$
6,226
   
$
18,297
   
$
17,966
 
Diamond Jo Worth
   
10,399
     
9,716
     
29,237
     
27,818
 
Evangeline Downs
   
6,913
     
7,320
     
23,722
     
23,335
 
Amelia Belle
   
3,707
     
3,916
     
11,348
     
11,679
 
Total property segment operating earnings
   
27,503
     
27,178
     
82,604
     
80,798
 
General corporate
   
(2,147)
     
(1,765)
     
(6,677)
     
(5,035)
 
Total segment operating earnings
   
25,356
     
25,413
     
75,927
     
75,763
 
Gain on settlement (1)
   
-
     
-
     
711
     
-
 
Depreciation and amortization
   
(7,099)
     
(7,315)
     
(21,463)
     
(22,142)
 
Pre-opening expense
   
(3,923)
     
(8)
     
(6,863)
     
(33)
 
Development expense
   
-
     
-
     
-
     
(28)
 
Affiliate management fees
   
(1,565)
     
(1,535)
     
(4,708)
     
(4,493)
 
Loss on disposal of assets
   
(9)
     
(17)
     
(86)
     
(54)
 
Gain (loss) from equity affiliate
   
3
     
-
     
(62)
     
-
 
Interest income
   
559
     
680
     
1,775
     
1,672
 
Interest expense, net of amounts capitalized
   
(17,079)
     
(14,929)
     
(51,215)
     
(44,684)
 
Net (loss) income
 
$
(3,757)
   
$
2,289
   
$
(5,984)
   
$
6,001
 
Segment Operating Earnings Margins:
                               
Diamond Jo Dubuque
   
36.1%
     
35.2%
     
35.2%
     
34.5%
 
Diamond Jo Worth
   
42.3%
     
42.6%
     
41.4%
     
42.0%
 
Evangeline Downs
   
24.0%
     
25.2%
     
26.7%
     
26.7%
 
Amelia Belle
   
29.7%
     
31.6%
     
30.4%
     
31.8%
 
Consolidated segment operating earnings margin
   
30.2%
     
31.0%
     
30.5%
     
31.3%
 
________________________
 
(1)  
“Gain on settlement” relates to a one-time gain on a financial settlement with the predecessor owner of ABC during the first quarter of 2011 and is included in Other revenue for the nine months ended September 30, 2011.

 

 
20

 

       Three months ended September 30, 2011 compared to three months ended September 30, 2010
 
Consolidated net revenues increased $1.9 million, or 2%, to $83.9 million for the three months ended September 30, 2011 from $82.0 million for the three months ended September 30, 2010.  DJW reported net revenue growth of 8% driven primarily by the strong agricultural economy of the surrounding area as well as an increase in other revenues related to gasoline sales due to an increase in the price of gas and the number of gallons sold over the prior year.  Net revenues at DJL and ABC both increased 1% for the three months ended September 30, 2011, over the prior year while net revenues at EVD decreased 1%.
 
Casino revenues increased $1.9 million, or 3%, to $77.4 million for the three months ended September 30, 2011 from $75.5 million for the three months ended September 30, 2010 as casino revenues at all of our properties showed an increase over the prior year period.  In Iowa, casino revenues at DJW increased 5% as a result of the strong agricultural economy in the surrounding area while casino revenues at DJL increased 2% as a result of DJL’s Dubuque, Iowa market share increase up from 53% for the three months ended September 30, 2010 to 55% for the three months ended September 30, 2011.  Casino revenues at EVD and ABC increased 1% and 2%, respectively, over the prior year which were driven by aggressive direct mail and marketing campaigns to help drive visitation in the weak economic conditions of southern Louisiana.  Visitors at ABC increased 3% in the third quarter 2011 over the third quarter 2010.
  
Casino operating expenses increased to $30.8 million for the three months ended September 30, 2011 from $30.3 million for the three months ended September 30, 2010 due primarily to an increase in gaming taxes paid as a result of the increase in casino revenues. 

Promotional allowances as a percentage of casino revenues increased quarter over quarter to 13.3% for the three months ended September 30, 2011 from 12.8% for the three months ended September 30, 2010 due primarily to the increase in promotional allowances at our Louisiana properties as discussed above.
 
Racing revenues at EVD were down quarter over quarter to $4.0 million for the three months ended September 30, 2011 from $4.6 million for the three months ended September 30, 2010.  Weakness in simulcast betting as well as the closure of several racetracks throughout the country that historically showed EVD’s live race meets was the primary reason for the decline in racing revenues.  Consistent with racing revenues, racing expenses decreased quarter over quarter to $3.9 million for the three months ended September 30, 2011 from $4.2 million for the three months ended September 30, 2010.

Video poker revenues at EVD increased 27%, for the three months ended September 30, 2011 to $1.4 million compared to $1.1 million for the three months ended September 30, 2010, which is due primarily to a $0.3 million increase in video poker revenues at our St. Martinville OTB where we began operating video poker machines in September 2010.  Consistent with this increase in revenues, EVD experienced an increase of $0.3 million in video poker expenses to $1.2 million for the three months ended September 30, 2011 from $0.9 million for the three months ended September 30, 2010 due primarily to video poker operations at our St. Martinville OTB.

Food and beverage revenues were essentially flat quarter over quarter at $7.0 million and $6.9 million for the three months ended September 30, 2011 and 2010, respectively.  Consistent with flat revenues, food and beverage expenses were also flat quarter over quarter at $4.5 million and $4.6 million for the three months ended September 30, 2011 and 2010, respectively.
 
Other revenues increased $0.7 million to $4.2 million for the three months ended September 30, 2011 from $3.5 million for the three months ended September 30, 2010 due primarily to a $0.8 million increase in convenience store revenues at DJW resulting from an increase in fuel prices and number of gallons sold in the third quarter of 2011 over the third quarter of 2010.  Consistent with this increase in gasoline sales, DJW realized an increase in other expenses.  

Selling, general and administrative expenses increased 6%, to $14.8 million for the three months ended September 30, 2011 from $14.0 million for the three months ended September 30, 2010 due primarily to a $0.4 million increase at PGL in payroll and related expenses as a result of corporate staffing changes made to support the continued growth of the Company with the current development of the Kansas Star.
  
Depreciation and amortization expense declined quarter over quarter to $7.1 million for the three months ended September 30, 2011 from $7.3 million for the three months ended September 30, 2010 due primarily to certain assets at EVD reaching the end of their depreciable lives.

Affiliate management fees were $1.6 million and $1.5 million for the three months ended September 30, 2011 and 2010, respectively, and relate to management fees paid or accrued to related parties under various management services and consulting agreements at EVD, DJW and ABC.  

Pre-opening expenses of $3.9 million for the three months ended September 30, 2011 relate to start-up costs for the development project at KSC and consist primarily of pre-opening payroll, professional services fees, and regulatory costs.
 
Segment operating earnings margins for the three months ended September 30, 2011 at DJL increased to 36% over the three months ended September 30, 2010 margin of 35% due primarily to a 2% increase in casino revenues as discussed above while maintaining flat operating expenses.  DJW’s segment operating earnings margins remained flat period over period while margins at our Louisiana properties declined 120 basis points and 190 basis points, respectively, due to the decline in racing revenues at EVD and the increase in direct mail and marketing costs at ABC, as discussed above.

 
 
21

 
 
Interest expense, net of interest income, increased $2.3 million to $16.5 million for the three months ended September 30, 2011 from $14.2 million for the three months ended September 30, 2010 primarily due to the Company’s additional financing activities in February 2011 to support the Kansas Star development project, including the $80.0 million PGL Secured Notes tack-on issuance and the $50.0 million PGL Unsecured Notes tack-on issuance offset by capitalized interest costs of $0.8 million during the three months ended September 30, 2011.     

For the third quarter 2011, the Company reported a net loss of $3.8 million.  Net income for the third quarter 2010 was $2.3 million. The decrease in net income is due to (i) an increase in interest expense as a result of the Company’s additional financing activities in February 2011 to support the Kansas Star development project including the $80.0 million PGL Secured Notes tack-on issuance and the $50.0 million PGL Unsecured Notes tack-on issuance and (ii) pre-opening expenses of $3.9 million during the three months ended September 30, 2011 related to the Kansas development project.
  
 
        Nine months ended September 30, 2011 compared to nine months ended September 30, 2010
 
Consolidated net revenues increased $6.4 million, or 3%, to $248.8 million for the nine months ended September 30, 2011 from $242.4 million for the nine months ended September 30, 2010.  DJW reported net revenue growth of 7% driven primarily by a successful outer market direct mail campaign during the second quarter of 2011 and a strong agricultural economy in the surrounding area as well as an increase in other revenues related to gasoline sales due to an increase in the price of gas and the number of gallons sold over the prior year.  Net revenues at EVD increased 2% driven primarily by a 2% increase in casino revenues and a 26% increase in video poker revenues attributable to our new OTB in St. Martinville, Louisiana, which began video poker operations in the third quarter of 2010.  Net revenues at DJL were essentially flat over the prior year due to a strong third quarter of 2011 that helped offset a tough first quarter of 2011, which was impacted by adverse weather conditions in the Eastern Iowa market during the month of February 2011.  A 2% increase in net revenues at ABC is primarily attributed to $0.7 million of other revenue resulting from a gain on a financial settlement with the predecessor owner of ABC, which is included in Other revenue.
 
Casino revenues increased $4.9 million, or 2%, to $229.9 million for the nine months ended September 30, 2011 from $225.0 million for the nine months ended September 30, 2010.  In Iowa, casino revenues at DJW increased 6% as a result of the successful outer market direct mail campaign during the second quarter of 2011 and the strong agricultural economy in the area as discussed above while casino revenues at DJL were essentially flat over the prior year.  In Louisiana, EVD experienced a 2% increase in casino revenues while ABC casino revenues were primarily flat despite an 8% decline in the second quarter of 2011 as a result of the imminent threat of severe flooding with the opening of the Morganza Spillway in May 2011 and weak economic conditions as discussed above.

Casino operating expenses increased 1%, to $92.9 million for the nine months ended September 30, 2011 from $92.0 million for the nine months ended September 30, 2010 due primarily to an increase in gaming taxes paid as a result of an increase in casino revenues.   

Promotional allowances as a percentage of casino revenues increased slightly to 12.8% for the nine months ended September 30, 2011 from 12.4% for the nine months ended September 30, 2010 due primarily to the increase in promotional allowances at DJW related to the outer market direct mail campaign during the second quarter of 2011.
 
Racing revenues at EVD decreased $0.5 million, or 4%, to $11.9 million for the nine months ended September 30, 2011 from $12.4 million for the nine months ended September 30, 2010, while racing expenses decreased slightly to $11.3 million for the nine months ended September 30, 2011 from $11.4 million for the nine months ended September 30, 2010.  Weakness in simulcast betting as well as the closure of several racetracks throughout the country that historically showed EVD’s live race meets was the primary reason for the decline in racing revenues.

Video poker revenues at EVD increased 26%, for the nine months ended September 30, 2011 to $4.3 million compared to $3.4 million for the nine months ended September 30, 2010, which is due primarily to $1.1 million in video poker revenues at our St. Martinville OTB where we began operating video poker machines in September 2010.  Consistent with this increase in revenues, EVD experienced an increase of $0.8 million in video poker expenses to $3.5 million for the nine months ended September 30, 2011 from $2.7 million for the nine months ended September 30, 2010 due primarily to video poker operations at our St. Martinville OTB.

 
22

 
Food and beverage revenues increased slightly to $20.4 million from $20.1 million for the nine months ended September 30, 2011 and 2010, respectively.  Consistent with revenues, food and beverage expenses were also up slightly to $13.2 million from $13.0 million for the nine months ended September 30, 2011 and 2010, respectively.
 
Other revenues increased $2.4 million to $11.7 million for the nine months ended September 30, 2011 from $9.3 million for the nine months ended September 30, 2010 due primarily to a $0.7 million increase at ABC resulting from a gain on a financial settlement with the predecessor owner as discussed above and a $1.6 million increase in convenience store revenues at DJW resulting from an increase in fuel prices and number of gallons sold over 2010.  Consistent with this increase in gasoline sales, DJW realized an increase in other expenses.  

Selling, general and administrative expenses increased 5%, to $43.3 million for the nine months ended September 30, 2011 from $41.2 million for the nine months ended September 30, 2010 due primarily to a $1.6 million increase at PGL in payroll and related expenses as a result of corporate staffing changes made to support the continued growth of the Company with the acquisition of ABC and the current development of the Kansas Star.
  
Depreciation and amortization expense declined to $21.5 million for the nine months ended September 30, 2011 from $22.1 million for the nine months ended September 30, 2010 due to assets reaching the end of their depreciable lives.

Affiliate management fees were $4.7 million and $4.5 million for the nine months ended September 30, 2011 and 2010, respectively, and relate to management fees paid or accrued to related parties under various management services and consulting agreements at EVD, DJW and ABC.  

Pre-opening expenses of $6.9 million for the nine months ended September 30, 2011 relate to start-up costs for the development project at KSC and consist primarily of pre-opening payroll, professional services fees, and regulatory costs.
 
Segment operating earnings margins for the nine months ended September 30, 2011 were consistent with the nine months ended September 30, 2010 at all properties except ABC, which saw a decline in margins as a result of the soft economy in southern Louisiana and the negative impact in the second quarter of 2011 of the imminent threat of severe flooding with the opening of the Morganza Spillway in May 2011.  While ABC was not directly impacted with the flooding, the heavily publicized threat of the magnitude of the flooding had a negative impact on revenues.  ABC’s margin was also negatively impacted by additional hurricane insurance coverage that began late in the second quarter of 2010.

Interest expense, net of interest income, increased $6.4 million to $49.4 million for the nine months ended September 30, 2011 from $43.0 million for the nine months ended September 30, 2010 primarily due to the Company’s additional financing activities in February 2011 to support the Kansas Star development project, including the $80.0 million PGL Secured Notes tack-on issuance and the $50.0 million PGL Unsecured Notes tack-on issuance offset by capitalized interest costs of $1.3 million during the three months ended September 30, 2011.       

For the nine months ended September 30, 2011, the Company reported a net loss of $6.0 million.  Net income for the nine months ended September 30, 2010 was $6.0 million. The decrease in net income is due to (i) an increase in interest expense as a result of the tack-on issuances as discussed above and (ii) pre-opening expenses of $6.9 million during the nine months ended September 30, 2011 related to the Kansas development project.

 
 
23

 
LIQUIDITY AND CAPITAL RESOURCES
 
 
Cash Flows from Operating, Investing and Financing Activities
 
Our cash balance increased $57.2 million to $76.8 million at September 30, 2011 from $19.6 million at December 31, 2010.
 
Cash flows from operating activities were $6.6 million during the nine months ended September 30, 2011, a decrease of $9.4 million when compared to $16.0 million during the nine months ended September 30, 2010.  This decrease is primarily attributed to approximately $6.3 million of pre-opening expenses paid during the nine months ended September 30, 2011 related to the Kansas Star development and an additional $3.5 million of interest paid during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 due primarily to the additional debt incurred to help finance the Kansas Star development.
 
Cash flows used in investing activities during the nine months ended September 30, 2011 was $69.1 million consisting primarily of (i) payments of $59.3 million related to the Kansas Star development project, (ii) payments of $3.1 million related to the Kansas Management Contract and (iii) outflows of $6.7 million primarily related to the acquisition of slot machines and slot machine conversions and general maintenance capital expenditures.  General maintenance capital expenditures are capital expenditures that relate to the replacement of or major renewals and improvements to our existing fixed assets.  Major renewals and improvements are capitalized, while maintenance and repairs are expensed as incurred.  Examples of general maintenance capital expenditures during the nine months ended September 30, 2011, excluding slot machines and slot machine conversions, include improvements to our existing owned and leased buildings and improvements and the replacement of computer equipment.
 
Cash flows from financing activities during the nine months ended September 30, 2011 of $119.6 million reflects $138.0 million in gross proceeds from the issuance of $80.0 million in aggregate principal amount of PGL Secured Notes at an issue price of 105% and the issuance of $50.0 million in aggregate principal amount of PGL Unsecured Notes at an issue price of 108% offset by (i) repayment of the $3.5 million outstanding balance on the senior credit facility as of December 31, 2010, (ii) principal payments on debt of $1.2 million, (iii) payments of deferred financing costs of $7.3 million primarily related to the $80.0 million PGL Secured Notes tack-on issuance, the $50.0 million PGL Unsecured Notes tack-on issuance and the Second Amendment to the PGL Credit Facility and (iv) member distributions of $6.4 million.  A $2.1 million decrease in member distributions during the nine months ended September 30, 2011 over the same period in 2010 relates primarily to a $1.7 million cash distribution in September 2010, the proceeds of which were used by PGP to repay all of the outstanding principal and interest on a loan due to the Company as discussed in Note 7 to the financial statements.
 
As of September 30, 2011, the Company had no outstanding advances under the PGL Credit Facility. In addition, as of September 30, 2011, the Company had outstanding letters of credit under the PGL Credit Facility of $17.1 million, including $15.4 million related to the construction of the off-site utilities by the City of Mulvane as discussed in Note 1 to the financial statements, resulting in available borrowings thereunder of $32.9 million. 
 
     Financing Activities
 
Our financing activities may have several important effects on our future operations and are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.  There have been no significant changes to our financing activities during the nine months ended September 30, 2011 other than that as previously disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and (i) the issuance of $80.0 million in aggregate principal amount of PGL Secured Notes and $50.0 million in aggregate principal amount of PGL Unsecured Notes in February 2011, (ii) the entering into of the Second Amendment to the PGL Credit Facility in February 2011 and (iii) the entering into of the KSC Term Loan and slot vendor financing agreements.
 
 
 
General
 
In addition to our cash on hand, we currently have the following sources of funds for our business: (i) cash flows from operations, (ii) available borrowings under the PGL Credit Facility and (iii) available borrowings under the KSC Term Loan. Contractual restrictions and other provisions contained in the agreements governing our consolidated indebtedness, including the PGL Credit Facility and the indentures governing the PGL Notes, limit or restrict our ability to use the funds available to us through, among other things, limitations on capital expenditures, investments, and distributions.
  
 
24

 
   As of September 30, 2011, capital expenditures for the next 12 months, excluding the Kansas Star development project are expected to be approximately $9.0 million plus payments to a third party related to contingent land payments in an amount equal to 1% of KSC’s segment operating earnings commencing upon opening of the casino to the public. Capital expenditures and pre-opening costs related to the Kansas Star development for the next twelve months are expected to be approximately $83 million (excluding any capitalized interest, capital expenditures to be financed with slot and equipment financing by the Company and financing of the hotel and certain off-site utilities by third parties), including approximately $43 million for the completion of the interim facility which is expected to open with a soft opening in December 2011 and a grand opening in January 2012.
 
 On May 17, 2011, KSC executed an agreement with a third party hotel developer to develop the 300 room hotel at the Kansas Star.  KSC will contribute $1.0 million, land, and certain site work for the project and the hotel developer will finance, construct, own and operate the hotel.  On June 1, 2011, KSC entered into the KSC Term Loan which provides for financing of up to $14.0 million of furniture, fixtures and equipment purchases during the interim phase of the project.  In addition, the Company has agreements with various slot vendors to finance approximately $21.4 million of slot machines over a period of twelve months at zero percent financing for the interim phase of the project.
 
 The Company’s debt maturities for the next 12 months are expected to be approximately $17.9 million, which is comprised of: (i) $4.2 million which is currently recorded in the Company’s financial statements at September 30, 2011, (ii) $12.3 million in slot vendor financing at KSC expected to be incurred in the fourth quarter 2011, and (iii) $1.4 million under the KSC Term Loan due to expected borrowings in the fourth quarter 2011.  The Company’s member distributions to PGP for the next 12 months are expected to be approximately $4.0 million.  
 
 We plan to finance the foregoing expected cash requirements with: (i) a portion of the available cash on hand (excluding amounts needed for normal operations and including the gross proceeds from the $80.0 million and $50.0 million PGL Secured Notes and PGL Unsecured Notes issuances, respectively); (ii) cash generated from operations; (iii) slot vendor financing and available borrowings under the KSC Term Loan for the Kansas Star development of $37.9 million (as allowed under our existing borrowing agreements); and (iv) if necessary, available borrowings under the PGL Credit Facility.  There can be no assurances that such projects will be completed in the estimated time frames or at the estimated costs. 
 
 Based on our cash on hand, expected cash flows from operations and our available sources of financing, we believe we will have adequate liquidity for the next 12 months to (i) satisfy our current operating needs at each of our gaming properties, (ii) pay all development costs associated with the Kansas Star development as they become due and (iii) to service our outstanding indebtedness.
 
 Our level of indebtedness will have several important effects on our future operations including, but not limited to, the following: (i) a significant portion of our cash flow from operations will be required to pay interest on our indebtedness and the indebtedness of our subsidiaries; (ii) the financial covenants contained in the agreements governing such indebtedness will require us to meet certain financial tests and may limit our ability to borrow additional funds or to transfer funds to PGP or dispose of assets; (iii) our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; and (iv) our ability to adapt to changes in the gaming or horse racing industries that affect the markets in which we operate could be limited.
 
CONTRACTUAL OBLIGATIONS
 
A table of our contractual obligations as of December 31, 2010 was included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. There have been no significant changes to our contractual obligations during the nine months ended September 30, 2011, except under the Kansas Management Contract we are obligated to have made a minimum investment in infrastructure related to the Kansas Star development of $225.0 million by January 14, 2015, inclusive of any third party investments but excluding the $25.0 million privilege fee, which was paid in 2010.  Phase 1A of the project is expected to cost approximately $182 million and is expected to be completed by December 2011, Phase 1B is expected to cost approximately $78 million and is expected to be completed by January 2013 and Phase 2 is expected to cost approximately $54 million and is expected to be completed by January 2015. As of September 30, 2011, the Company has incurred $122 million in capitalized and start-up costs, excluding capitalized interest, related to that project. 
 
 
 
25

 
OFF-BALANCE SHEET TRANSACTIONS
 
Other than as described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, we do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, cash flows, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 
CRITICAL ACCOUNTING POLICIES
 
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We periodically evaluate our policies and the estimates and assumptions related to these policies.

Understanding our critical accounting policies and related risks is important in evaluating our financial condition and results of operations. The critical accounting policies used in preparation of the Company’s financial statements involve a significant use of management judgment on matters that are inherently uncertain and are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. If actual results differ significantly from management’s estimates, there could be a material effect on our financial condition, results of operations and cash flows. Management regularly discusses the identification and development of these critical accounting policies with the Audit Committee of the Board of Managers. There have been no significant changes to the Company’s critical accounting policies during the nine months ended September 30, 2011.
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to certain market risks inherent in our financial instruments that 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 market risk sensitive 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 borrowings under the PGL Credit Facility. As of September 30, 2011, the Company had no outstanding borrowings under the PGL Credit Facility.   We have estimated our market risk exposure using sensitivity analysis and have defined our market risk exposure as the potential loss in future earnings and cash flows with respect to interest rate exposure of our market risk sensitive instruments assuming a hypothetical increase in market rates of interest of 100 basis points. Assuming we borrow the maximum amount allowed under the PGL Credit Facility (currently an aggregate amount of $50.0 million at September 30, 2011) and if market rates of interest on our variable rate debt increase by 100 basis points, the estimated additional annual interest expense would be approximately $0.5 million.
 
 
26

 
We are also exposed to fair value risk due to changes in interest rates with respect to our long-term fixed interest rate investment available for sale, note receivable and debt borrowings. Our fixed rate investment available for sale is recorded at fair value, and therefore, is directly impacted by changes in interest rates and market risks. Our fixed rate note receivable and fixed rate debt instruments are not generally affected by a change in the market rates of interest, and therefore, such changes 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 a refinancing of our note receivable and future indebtedness incurred to fund repayments as such fixed rate debt matures. The following table contains information relating to our fixed rate investment available for sale, note receivable, obligation under minimum assessment agreement and debt borrowings as of September 30, 2011 (dollars in thousands):

Description
 
Maturity
 
Interest
Rate
 
Carrying
Value
 
Fair
Value
 
Investment available for sale
 
2011 - 2037
 
7.5
%
$   19,341
 
$    19,341
(1)
Note receivable
 
2011 - 2014
 
14.5
%
2,382
 
2,467
(2)
8 ⅜% senior secured notes
 
Aug 15, 2015
 
8.375
%
       319,632
 
319,200
(2)
10 ¾% senior unsecured notes
 
Aug 15, 2017
 
10.75
%
       352,250
 
346,125
(2)
Senior secured credit facility
 
January 15, 2015
 
   6
% (3)
-
 
-
 
Term loans
 
2013 - 2016
 
6.5
%
3,981
 
    3,981
(2)
Notes payable, capital lease obligations and other financial instruments
 
2011 - 2015
 
6.0% - 14.4
%
3,870
 
4,033
(2)
Obligation under Minimum Assessment Agreement
 
2011 - 2037
 
8
%
20,224
 
25,938
(2)
___________________
 (1)           Our investment available for sale is not traded.  The estimate of the fair value of such investment was determined using a combination of current market rates and estimates of market conditions for instruments with similar terms, maturities, and degrees of risk and an estimate from an independent source of what market participants would use in pricing the bonds.  Due to the illiquid nature of the investment, changes in market risks could have a significant impact on the fair value.

(2)           Represents fair value as of September 30, 2011 based on current market interest rates and estimates of market conditions for instruments with similar terms, maturities, and degrees of risk.

(3)           Such borrowings are made under variable interest rates.  The interest rate listed is as of September 30, 2011.
 
 
 
ITEM 4. CONTROLS AND PROCEDURES
 
As required by Rule 13a-15(b) under the Securities Exchange Act, and in connection with the preparation of this quarterly report on Form 10-Q, our management, including the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer each concluded that the design and operation of the disclosure controls and procedures were effective as of September 30, 2011, in providing assurance that information required to be disclosed in reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and in providing reasonable assurance that the information is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission’s rules and forms.

During the three months ended September 30, 2011, there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
27

 
 
 
PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 

 On May 13, 2011, the State of Iowa moved "in the interest of justice" to dismiss misdemeanor charges filed against PGP, its Chief Executive Officer and Chief Operating Officer for alleged violations of State of Iowa campaign contribution laws. The Polk County District Court approved the motion and ordered the complete dismissal of all charges.
 
Neither the Company nor its subsidiaries are parties to any pending legal proceedings other than litigation arising in the normal course of business.  Management does not believe that adverse determinations in any or all such litigation would have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
 


ITEM 6. EXHIBITS
 
(a)
Exhibits
 
Exhibit
Number
 
Description
     
     
31.1
 
Certification of M. Brent Stevens, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 15d-l4 of the Securities Exchange Act, as amended.
     
31.2
 
Certification of Natalie A. Schramm, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 15d-14 of the Securities Exchange Act, as amended.
     
32.1
 
Certification pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101.INS
 
101.SCH
 
101.CAL
 
101.DEF
 
101.LAB
 
101.PRE
 
 
XBRL Instance Document
 
XBRL Taxonomy Extension Schema
 
XBRL Taxonomy Extension Calculation Linkbase
 
XBRL Taxonomy Extension Definition Linkbase
 
XBRL Taxonomy Extension Label Linkbase
 
XBRL Taxonomy Extension Presentation Linkbase
 
     
 
 
     
 

 
28

 
 
 

 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 10, 2011.
 
 
 
PENINSULA GAMING, LLC
 
     
 
By:
 /s/ M. Brent Stevens
 
   
M. Brent Stevens
   
Chief Executive Officer
     
 
By:
 /s/ Natalie A. Schramm
 
   
Natalie A. Schramm
   
Chief Financial Officer
   
(principal financial and principal accounting officer)
 
               
 
 
By:
 /s/ Jonathan Swain
 
   
Jonathan Swain
   
Chief Operating Officer
     
  
 
PENINSULA GAMING CORP.
 
     
 
By:
 /s/ M. Brent Stevens
 
   
M. Brent Stevens
   
Chief Executive Officer
     
 
By:
 /s/ Natalie A. Schramm
 
   
Natalie A. Schramm
   
 Chief Financial Officer
   
(principal financial and principal accounting officer)
     
 
By:
 /s/ Jonathan Swain
 
   
Jonathan Swain
   
Chief Operating Officer
     
 


 
29

 
 
 
 
 
DIAMOND JO, LLC
 
     
 
By:
 /s/ M. Brent Stevens
 
   
M. Brent Stevens
   
Chief Executive Officer
     
 
By:
 /s/ Natalie A. Schramm
 
   
Natalie A. Schramm
   
 Chief Financial Officer
   
(principal financial and principal accounting officer)
     
 
By:
 /s/ Jonathan Swain
 
   
Jonathan Swain
   
Chief Operating Officer
     
 
  
 
DIAMOND JO WORTH, LLC
 
     
 
By:
 /s/ M. Brent Stevens
 
   
M. Brent Stevens
   
Chief Executive Officer
     
 
By:
 /s/ Natalie A. Schramm
 
   
Natalie A. Schramm
   
 Chief Financial Officer
   
(principal financial and principal accounting officer)
     
 
By:
 /s/ Jonathan Swain
 
   
Jonathan Swain
   
Chief Operating Officer
     
 

 


 
 
 
 
 
 
 
30

 
 

 
 
 
THE OLD EVANGELINE DOWNS, L.L.C.
 
     
 
By:
 /s/ M. Brent Stevens
 
   
M. Brent Stevens
   
Chief Executive Officer
     
 
By:
 /s/ Natalie A. Schramm
 
   
Natalie A. Schramm
   
 Chief Financial Officer
   
(principal financial and principal accounting officer)
     
 
By:
 /s/ Jonathan Swain
 
   
Jonathan Swain
   
Chief Operating Officer
     
 

 
 
BELLE OF ORLEANS, L.L.C.
 
     
 
By:
 /s/ M. Brent Stevens
 
   
M. Brent Stevens
   
Chief Executive Officer
     
 
By:
 /s/ Natalie A. Schramm
 
   
Natalie A. Schramm
   
 Chief Financial Officer
   
(principal financial and principal accounting officer)
     
 
By:
 /s/ Jonathan Swain
 
   
Jonathan Swain
   
Chief Operating Officer
     
 

 
 
 
KANSAS STAR CASINO, LLC
 
     
 
By:
 /s/ M. Brent Stevens
 
   
M. Brent Stevens
   
Chief Executive Officer
     
 
By:
 /s/ Natalie A. Schramm
 
   
Natalie A. Schramm
   
 Chief Financial Officer
   
(principal financial and principal accounting officer)
     
 
By:
 /s/ Jonathan Swain
 
   
Jonathan Swain
   
Chief Operating Officer
     



 
 
 
31

 
 




 
 
 
32