10-Q 1 form10q_sp051605.txt QUARTERLY REPORT: PEIROD ENDING MARCH 31, 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2005. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________________________ to _______________ Commission File Number: 333-88829

3rd Street Ice Harbor, PO Box 1750 Dubuque, Iowa 52001 (563) 583-7005 (Address, including zip code, and telephone number, including area code, of principal executive offices) Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes [X] No [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X] All of the common equity interests of Peninsula Gaming, LLC (the "Company") are held by Peninsula Gaming Partners, LLC. All of the common equity interests of Diamond Jo, LLC, The Old Evangeline Downs, L.L.C. and Peninsula Gaming Corp. are held by the Company. PENINSULA GAMING, LLC INDEX TO FORM 10-Q

-2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS

-3- PENINSULA GAMING, LLC CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

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-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 holding company with no independent operations whose sole assets are its equity interests in its subsidiaries: (i) Diamond Jo, LLC, a Delaware limited liability company ("DJL"), that owns and operates the Diamond Jo riverboat casino in Dubuque, Iowa; (ii) The Old Evangeline Downs, L.L.C., a Louisiana limited liability company ("OED"), that owns and operates the Evangeline Downs Racetrack and Casino, or racino, in St. Landry Parish, Louisiana and two off-track betting ("OTB") parlors in Louisiana; (iii) Diamond Jo Worth, LLC, a Delaware limited liability company ("DJW"), formed in October 2004 for the purpose of obtaining a gaming license in Worth County, Iowa; and (iv) Peninsula Gaming Corp. ("PGC", formerly known as The Old Evangeline Downs Capital Corp.), a Delaware limited liability company with no assets or operations formed solely to facilitate the offering by OED of its 13% senior secured notes (the "OED Notes") in February 2003 and the Company's 8 3/4% senior secured notes due 2012 (the "Peninsula Gaming Notes") in March 2004. On June 16, 2004, a corporate restructuring occurred, which is retroactively reflected in these consolidated financial statements, pursuant to which the Company became a new direct parent of DJL, OED and Peninsula Gaming Corp. The Company is a wholly owned subsidiary of Peninsula Gaming Partners, LLC ("PGP"), a Delaware limited liability company. In connection with the corporate restructuring, OED Acquisition LLC ("OEDA"), a Delaware limited liability company, became a direct wholly-owned subsidiary of PGP in a corporate spin-off which was recorded as a distribution on June 30, 2004. On May 11, 2005, DJW, in connection with its exclusive agreement with the Worth County Development Authority, was granted a gaming license by the Iowa Racing and Gaming Commission to operate a moored barge in Worth County, Iowa. From the date of its formation through March 31, 2005, DJW did not have any assets or operations. As of March 31, 2005, the Company had capitalized costs of $318,731 related to the design of the proposed facility. The Company, DJL and PGC are co-issuers of 8 3/4 % senior secured notes due 2012 (the "Peninsula Gaming Notes") which are registered with the U.S. Securities and Exchange Commission (the "SEC"). OED and DJW are guarantors of the Peninsula Gaming Notes. The equity of DJL, OED and DJW are pledged as collateral securing obligations under the Peninsula Gaming Notes. The equity of DJL and OED are pledged as collateral securing obligations under the senior secured credit facility. 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, 2004. Accordingly, footnote disclosure which would substantially duplicate the disclosure in the audited financial statements have been omitted in the accompanying unaudited financial statements. -7- 2. Summary of Significant Accounting Policies Goodwill and Licenses and Other Intangible Assets--At March 31, 2005 and December 31, 2004, goodwill and licenses and other intangibles consists of goodwill and the acquired licenses and tradename associated with the purchase of the Diamond Jo riverboat casino and OED. Such assets have indefinite lives. To the extent the purchase price exceeded the fair value of the net identifiable assets acquired, such excess was recorded as goodwill. Goodwill and indefinite lived intangible assets are not amortized but are reviewed at least annually for impairment and written down and charged to income if the recorded value exceeds their estimated fair value. Goodwill relates to the Diamond Jo segment and licenses and other intangibles relates to the Evangeline Downs segment. As of March 31, 2005 and December 31, 2004, the Company had approximately $32.7 million and $32.6 million, respectively, of licenses and other intangibles summarized as follows (in millions): March 31, December 31, 2005 2004 ---------- ------------ Slot Machine and Electronic Video Game Licenses $ 28.9 $ 28.8 Tradename 2.5 2.5 Horse Racing Licenses 1.3 1.3 ----------- ------------ Total $ 32.7 $ 32.6 =========== ============ Each of the identified intangible assets were valued separately when OED was purchased. The methodology employed by an independent valuation specialist to arrive at the initial valuations required evaluating the fair market value of the existing horse racing business on a stand-alone basis without taking into account any right to obtain slot machine and electronic video game licenses. Such valuation was based in part upon other transactions in the industry and OED's historical results of operations. A value was also derived for the trade name using market based royalty rates. A significant portion of the purchase price was attributable to the slot machine and electronic video game license rights, which were valued based upon the market value paid by other operators and upon projected cash flows from operations. On June 25, 2002, PGP entered into an agreement with William E. Trotter, II ("Trotter") and William E. Trotter, II Family L.L.C., ("WET2LLC") to acquire (i) all of Trotter's interests in two promissory notes issued by OED in connection with the Company's acquisition of OED, and (ii) all of Trotter's membership interests owned by WET2LLC (together, the "Trotter Purchase"). On August 30, 2002, the Company consummated the Trotter Purchase for a purchase price consisting of cash of $15,546,000, plus a contingent fee of one half of one percent (0.5%) of the net slot revenues generated by OED's racino located in St. Landry Parish, Louisiana, for a period of ten years commencing on December 19, 2003, the date the racino's casino opened to the general public. This contingent fee is payable monthly in arrears and has been recorded as an adjustment to the purchase price of slot machine and electronic video game licenses of $104,337 and $68,504 for the three months ended March 31, 2005 and March 31, 2004, respectively. Impairment of Long-Lived Assets--Long-lived assets are reviewed for impairment when management plans to dispose of assets or when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Assets held for disposal are reported at the lower of the carrying amount or fair value less cost to sell. Management determines fair value using a discounted future cash flow analysis or other accepted valuation techniques. Long-lived assets held for use are reviewed for impairment by comparing the carrying amount of an asset to the undiscounted future cash flows expected to be generated by the asset over its remaining useful life. If an asset is considered to be impaired, the -8- impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. Goodwill and intangible assets are subject to impairment by, among other factors, significant changes in gaming tax rates, competition and regulatory requirements; lack of license renewals; lack of voter reapproval in Iowa; and changes in the way OED's tradename is used. Goodwill and indefinite lived intangible assets are tested annually for impairment with more frequent tests performed if indications of impairment exist. The Company's annual impairment testing date is in the first quarter of each fiscal year. Impairment for intangible assets with indefinite lives exists if the carrying value of the intangible asset exceeds its fair value. Goodwill is potentially impaired if the carrying value of a "reporting unit" exceeds its estimated fair value. Management determines fair value using a discounted future cash flow analysis and other accepted valuation techniques. The Company's annual impairment testing performed during the quarters ended March 31, 2005 and 2004 resulted in no impairments. Stock Based Compensation--The Company accounts for employee stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). As the Company's incentive plan requires profit interests to be granted at prices equal to or above the fair market value of PGP's units on the grant dates, no compensation expense is recognized in connection with profit interests granted to employees. The fair value method is an alternative method of accounting for stock-based compensation that is permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). Under the fair value method compensation expense is recorded over the vesting periods based on the estimated fair value of the stock-based compensation. The following table illustrates the effect on net loss to common members' interest if the Company had accounted for its stock-based compensation plans using the fair value method (in thousands):

The weighted average fair value of units granted by Company was $6.00 per unit. The fair value of each unit granted by the Company was estimated using the Black-Scholes pricing model and the following weighted average assumptions: 2005 Grants ------- Risk-free interest rate 3.5% Expected dividend yield 0% Expected volatility .40 Expected life 5 years -9- Use of Estimates--The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates involve the periodic review of the carrying value of assets for impairment. In addition, an estimated loss from a loss contingency is recorded when information available prior to issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. Accounting for contingencies such as legal matters requires the use of judgment. Many of these legal contingencies can take years to be resolved. Generally, as the time period increases over which the uncertainties are resolved, the likelihood of changes to the estimate of the ultimate outcome increases. An adverse outcome could have a material impact on financial condition, operating results, and cash flows. Concentrations of Risk-- The Company's customer base is concentrated in eastern Iowa and southwest Louisiana. The Company maintains deposit accounts at three banks. At March 31, 2005 and December 31, 2004, and various times during the periods then ended, the balance at the banks exceeded the maximum amount insured by the Federal Deposit Insurance Corporation. Credit risk is managed by monitoring the credit quality of the banks. Reclassifications--Certain prior year amounts have been reclassified to conform with the current period presentation. These reclassifications did not have any effect on the Company's members' deficit or net loss to common members' interest in 2004. New Accounting Pronouncements--In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of the employee services is recognized as compensation cost over the period that an employee provides service in exchange for the award. The Company will adopt SFAS 123R effective January 1, 2006. SFAS 123R may be adopted using a prospective method or a retrospective method. The Company is currently evaluating the adoption alternatives and expects to complete its evaluation during the first quarter of fiscal 2006. 3. Property and Equipment Property and equipment of the Company and its subsidiaries at March 31, 2005 and December 31, 2004 is summarized as follows:

Depreciation expense for the three months ended March 31, 2005 and 2004 was $3,937,851 and $2,896,063, respectively. 4. Debt The debt of the Company and its subsidiaries consists of the following:

Principal maturities of debt (excluding discount and debt repaid during the period January 1, 2005 through March 31, 2005) for each of the years ended December 31 are summarized as follows (dollars in thousands): 2005 $ 6,511 2006 11,232 2007 6,805 2008 14,917 2009 550 Thereafter 240,460 ------------ $ 280,475 ============ As of March 31, 2005, the Company had $13.7 million outstanding under the revolving line of credit. In addition, as of March 31, 2005, the Company had outstanding letters of credit of approximately $4.0 million resulting in available borrowings under the line of credit of $17.3 million. The Company's 8 3/4% senior secured notes and $35.0 million revolving line of credit contain certain restrictive covenants customary of these debt instruments. The Company was in compliance with such covenants, or had obtained waivers, as of March 31, 2005. 5. Commitments and Contingencies Under the Company's and PGP's operating agreements, the Company and PGP have agreed, subject to a few exceptions, to indemnify and hold harmless 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. In October 2003, OED filed a Petition for Declaratory Judgment in state court in St. Landry Parish, Louisiana, naming the Secretary of the Department of Revenue and Taxation for the State of Louisiana, the St. Landry Parish School Board and the City of Opelousas, seeking a definitive ruling on the extent of its tax liability and seeking to prevent Louisiana state and local governmental authorities from assessing sales taxes in connection with its construction and equipping of the Evangeline Downs casino and racetrack. Louisiana law provides that racetracks are not required to pay taxes other than those provided in the racing statutes and that taxes and fees provided in the racing statutes are in lieu of, among other -12- things, all other state and local taxes, including sales taxes. In response to a request by OED for clarification of its tax status, the State of Louisiana Department of Revenue delivered a letter to OED, dated April 9, 2001, confirming that all purchases of tangible personal property and taxable services by pari-mutuel racetracks and off-track betting facilities are exempt from the payment of sales tax. In a response filed by the City of Opelousas with the district court in February 2005, the City of Opelousas has generally argued that the exemption under the racing statutes should not extend to the purchase of goods, materials and services for non-racing operations, which include, for example, the operation of slot machines, restaurants, lounges and shops. OED has paid all applicable sales taxes relating to the purchase of slot machines at the casino, but has not paid sales taxes relating to the construction of the facility or the purchase of other tangible personal property in connection therewith. OED's motion for summary judgment is currently pending before the district court, and a hearing on the motion is scheduled for July 2005. Based on the advice of outside regulatory counsel, OED is optimistic that the district court will agree with the position articulated by the Department of Revenue and Taxation and render summary judgment in OED's favor. If the issue, however, is ultimately determined adversely to OED, and OED is required to pay sales taxes on its non-racing related activities, based upon current estimates and depending on how the issue is ultimately resolved, such taxes could range from $1.5 million to $8 million. In accordance with legislation passed in 2004, all excursion gambling boat licensees, including the Company, will be assessed an amount based on the licensee's adjusted gross receipts to be deposited into the Rebuild Iowa Infrastructure Fund. The Company's total assessment is $2,105,776, which is to be paid in two equal payments of $1,052,888 on June 1, 2005 and June 1, 2006. Beginning in July 2010, the Company may offset gaming taxes in an amount equal to 20% of the total assessment in each of the succeeding five fiscal years thereafter. Other than as described above, the Company is not a party to, and none of its property is the subject of, any other 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 other litigation would have a material adverse effect on the Company's financial condition, results of operations or cash flows. 6. Related Party Transactions During the three months ended March 31, 2005 and March 31, 2004, the Company distributed $911,201 and $1,154,446, 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 and (iii) tax, accounting, legal and administrative costs and expenses related to PGP. These amounts were recorded as member distributions. In accordance with a management services agreement between OEDA and OED, under which OED pays to OEDA a base management fee of 0.44% of net revenue (less net food and beverage revenue) plus an incentive fee based on earnings before interest, taxes, depreciation, amortization and other non-recurring charges, OED expensed $156,787 and $0 in affiliate management fees payable to OEDA for the three months ended March 31, 2005 and March 31, 2004, respectively. OED is a party to a consulting agreement with a board member of PGP. Under the consulting agreement, OED must pay to the board member a fee equal to 2.5% of OED's earnings before interest, taxes, depreciation, amortization and other non-recurring charges during the preceding calendar year commencing on January 1, 2004. Under the consulting agreement, the board member is also entitled to reimbursement of reasonable business expenses as approved by the board of managers of PGP. OED -13- expensed $150,327 and $212,626 of affiliate management fees for the three months ended March 31, 2005 and 2004, respectively, related to this agreement. A board member of PGP is entitled to receive from OEDA board fees of $175,000 per year for services performed in his capacity as a board member. For the three months ended March 31, 2004, OEDA expensed $43,749 of affiliate management fees related to these board fees. At a meeting of the board of managers of PGP, held on February 25, 2005, PGP approved grants of profits interests under PGP's Amended and Restated 2004 Incentive Unit Plan (the "IUP") to two executive officers of PGL aggregating 2.50% of the outstanding membership units of PGP on a fully diluted basis. The terms of the awards include specified vesting schedules, acceleration of vesting upon the occurrence of certain events, anti-dilution protection, transfer restrictions and other customary terms and provisions. The profits interests awarded under the IUP entitle the holders thereof to receive distributions from operating profits on a pro rata basis with holders of common units of PGP (but only to the extent of profits allocated to holders of profits interests after the date of grant) and distributions on liquidation (but only to the extent of their pro rata share of any undistributed operating profits allocated to holders of profits interests and any further appreciation in the fair market value of PGP after the date of grant). Upon any termination of their employment, the respective officers are entitled at their option to cause the Company to redeem all such vested profits interests granted to them for cash at their fair market value at the time of termination of employment. The board also authorized additional units representing 1.5% of the outstanding membership units of PGP for future grant under the IUP. Quarterly, the Company will estimate the fair value of the units and compare that value to the value of the units at the date of grant. Any appreciation in the value of the units over that period will be expensed and reflected in the Company's consolidated financial statements. As the fair value of PGP's units at March 31, 2005 did not exceed the fair value of the units assigned at the grant date of the units, no expense was recorded during the three months ended March 31, 2005 with respect to these units. 7. Segment Information The Company is organized around geographical areas and operates two reportable segments: (1) Iowa operations, which comprise the Diamond Jo riverboat casino operated by DJL in Iowa and (2) Louisiana operations, which comprise the casino, racetrack and OTBs operated by OED in Louisiana. The accounting policies for each segment are the same as those described in Note 2 above. The Company evaluates performance and allocates resources based upon, among other considerations, segment operating earnings (as defined below). The tables below present information about reported segments as of and for the three months ended March 31, 2005 and 2004 (in thousands):

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8. Fair Value of Financial Instruments The fair value of the Company's financial instruments consisting of cash and cash equivalents, restricted cash, receivables, and payables approximate their recorded amounts due to the short term nature of the instruments. The fair value and recorded amounts for the Company's debt instruments at March 31, 2005 and December 31, 2004 are as follows:

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. -15- 9. Consolidating Financial Statements The following consolidating schedules reflect the financial position and results of operations and cash flows for PGL, DJL, OED and OEDA for the periods presented. Although a subsidiary guarantor under the indenture governing the Peninsula Gaming Notes, DJW had no assets or operations in the periods presented and thus is not reflected in the consolidating schedules appearing below. CONSOLIDATING BALANCE SHEET

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-17- CONSOLIDATING STATEMENTS OF OPERATIONS

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-19- CONSOLIDATING STATEMENTS OF CASH FLOWS

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-21- 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 Some statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include the words "may," "will," "estimate," "intend," "continue," "believe," "expect," or "anticipate" and other similar words. These forward-looking statements generally relate to plans and objectives for future operations and are based upon management's reasonable estimates of future results or trends. Although we believe that the plans and objectives reflected in or suggested by such forward-looking statements are reasonable, such plans or objectives may not be achieved. Actual results may differ from projected results due, but not limited, to unforeseen developments, as set forth in our Annual Report on Form 10-K for the year ended December 31, 2004. Unless the context requires otherwise, references to the "Company," "our," "us" and "we" refer to PGL, DJL, PGC and OED. OVERVIEW We own and operate (i) the Diamond Jo riverboat casino in Dubuque, Iowa with 749 slot machines and 19 table games, (ii) the Evangeline Downs racino development with 1,627 slot machines and a one-mile horse racetrack in Opelousas, Louisiana and (iii) two OTBs, one in Port Allen, Louisiana and one in New Iberia, Louisiana. RESULTS OF OPERATIONS Our results of operations discussed below include the consolidated results of operations of the Company, DJL, and OED for the three months ended March 31, 2005 and March 31, 2004 and the results of operations of OEDA for the three months ended March 31, 2004 as OEDA was spun-off on June 30, 2004. Statement of Operations Data Three Months Ended March 31, 2005 2004 --------------- ------------ General corporate $ (652,566) Diamond Jo 3,183,167 $ 3,106,639 Evangeline Downs (including OEDA for the three months ended March 31, 2004) 4,049,405 1,998,173 --------------- ------------ Income from operations $ 6,580,006 $ 5,104,812 =============== ============= -22-

Three months ended March 31, 2005 Compared to Three months ended March 31, 2004 Net revenues increased $5.6 million, or 15.9%, to $41.2 million for the three months ended March 31, 2005 from $35.6 million for the three months ended March 31, 2004. The majority of this increase is due to an increase in OED's casino revenues of $4.3 million to $22.4 million for the three months ended March 31, 2005 from $18.1 million for the three months ended March 31, 2004. This increase was primarily due to an increase in coin-in of 12.2% over the same period. Refocused -23- promotional efforts along with improvements to OED's slot product at the end of 2004 contributed to the casino revenue growth. Daily casino win per position at OED increased 15.8% to $151 for the three months ended March 31, 2005 from $130 for the three months ended March 31, 2004. Diamond Jo's casino revenues increased $1.0 million, or 8.1% to $13.1 million for the three months ended March 31, 2005 from $12.1 million for the three months ended March 31, 2004. Casino revenues at the Diamond Jo were derived 88.2% from slot machines and 11.8% from table games for the three months ended March 31, 2005 compared to 87.7% from slot machines and 12.3% from table games for the three months ended March 31, 2004. Diamond Jo's slot revenue increased $0.9 million, or 8.7%, for the three months ended March 31, 2005 compared to the three months ended March 31, 2004, primarily due to an increase in coin-in of 6.1% over the same period. Diamond Jo's table game revenue increased $0.1 million, or 3.5%, for the three months ended March 31, 2005 compared to the three months ended December 31, 2004, primarily due to a 4.7% increase in table drop over the same period. Similar to that of OED, management believes that a significant portion of the increase in slot and table game revenues can be attributed to refocused promotional efforts together with improvements to DJL's slot product at the end of 2004. Consistent with an increase in casino revenue, our casino win per gaming position per day at the Diamond Jo increased to $165 for the three months ended March 31, 2005 from $151 for the three months ended March 31, 2004. For the three months ended March 31, 2005, our casino win per admission at the Diamond Jo increased to $56 from $52 for the three months ended March 31, 2004. Casino gaming win in the entire Dubuque market increased 3.0% to $22.8 million for the three months ended March 31, 2005 from $22.1 million for the three months ended March 31, 2004. Our share of the Dubuque market casino gaming win increased to 57.4% for the three months ended December 31, 2005 from 54.7% for the three months ended March 31, 2004. For the three months ended March 31, 2005, our share of the Dubuque market casino admissions increased to 53.2% from 52.2% for the three months ended March 31, 2004. Racing revenues at OED for the three months ended March 31, 2005 were $3.3 million compared to $3.6 million for the three months ended March 31, 2004. The decrease in racing revenues was attributed to an overall decline in industry handle, relocation of our Carencro OTB facility to Opelousas, loss of stall rental income during our relocation and the timing of a 2004 horse sale. Video poker revenues at OED for the three months ended March 31, 2005 were $0.6 million compared to $0.8 million for the three months ended March 31, 2004. The decrease in video poker revenues was attributed to an increase in competition in the video poker market due to the addition of two new truck stop venues offering video poker within one mile of our Port Allen OTB. Net food and beverage revenues, other revenues and promotional allowances increased $0.8 million during the three months ended March 31, 2005 compared to the three months ended March 31, 2004 due primarily to a reduction in complimentary expenses included in promotional allowances of approximately $0.6 million. Casino operating expenses increased $2.6 million to $18.1 million for the three months ended March 31, 2005 from $15.5 million for the three months ended March 31, 2004 due primarily to an increase in casino expenses at OED of $2.0 million primarily related to purse supplements and gaming taxes which are based on net casino revenues and casino related payroll. Casino expenses at the Diamond Jo increased $0.6 million primarily related to an increase in gaming revenues and an increase in the gaming tax rate from 20% to 22% effective July 1, 2004. -24- Racing expenses decreased 8.3% to $2.7 million for the three months ended March 31, 2005 from $3.0 million for the three months ended March 31, 2004 due primarily to a decline in simulcast related purse supplements, racing taxes and signal fee expenses, which management believes is consistent with an overall decline in simulcast racing revenues in the horse racing industry in Louisiana. Video poker expenses remained substantially unchanged at $0.5 million for the three months ended March 31, 2005 and 2004. Food and beverage expenses remained substantially unchanged at $2.3 million for the three months ended March 31, 2005 and 2004. Boat operation expenses at the Diamond Jo remained substantially unchanged at $0.6 million for the three months ended March 31, 2005 and March 31, 2004. Other expenses remained substantially unchanged at $0.1 million for the three months ended March 31, 2005 and 2004. Selling, general and administrative expenses increased $0.8 million to $5.9 million for the three months ended March 31, 2005 from $5.1 million for the three months ended March 31, 2004. This increase was due to an increase in marketing promotions of approximately $450,000 and an increase in professional services expenses of approximately $186,000. Depreciation and amortization expenses increased to $3.9 million for the three months ended March 31, 2005 from $2.9 million for the three months ended March 31, 2004 due primarily to an increase in depreciation related to the purchase of 783 new slot machines by DJL and OED during the fourth quarter of 2004 in addition to depreciation related to the opening of the second phase of OED's racino, dirt horse racetrack and related facilities, which opened to the public on November 22, 2004. During the first quarter of 2005 and 2004, we performed our annual impairment test on goodwill and indefinite lived intangible assets and determined that the estimated fair value exceeded its carrying value as of that date. Based on that review, management determined that there was no impairment of goodwill and indefinite lived intangible assets. Pre-opening expenses of $0.2 million for the three months ended March 31, 2004 relate to payroll and other expenses incurred by OED with respect to start-up activities surrounding the racino project. Development expenses of approximately $0.1 million for the three months ended March 31, 2005 relate to expenses incurred under an exclusive agreement with the Worth County Development Authority pursuant to which the parties agreed to jointly submit an application for a license to operate a gaming facility in Worth County, Iowa. Under this agreement, and subject to certain conditions and limitations contained therein, we have agreed to design, construct, operate and manage a casino with no less than 700 gaming positions (on an approved body of water of sufficient size to meet state requirements) and a two-phase 100-room hotel development (upon obtaining an acceptable third-party investment). Affiliate management fees of $0.3 million for each of the three months ended March 31, 2005 and March 31, 2004 relate to management fees paid to related parties under a consulting agreement at OED. Income from operations increased $1.5 million to $6.6 million for the three months ended March 31, 2005 from $5.1 million for the three months ended March 31, 2004. Income from operations at OED and DJL increased by $2.1 million and $0.1 million, respectively, both primarily due to the increase in casino revenues as discussed above offset by general corporate expenses of $0.7 million. Net interest expense, including interest expense related to DJL's redeemable preferred member interests, decreased $1.0 million to $6.8 million for the three months ended March 31, 2005 from $7.8 million for the three months ended March 31, 2004. This decrease is primarily due to the refinancing of the Company's long term debt with lower interest rates during the second quarter of 2004. Interest expense of approximately $0.2 million was capitalized as part of the racino construction at OED during the three months ended March 31, 2004. -25- LIQUIDITY AND CAPITAL RESOURCES Cash Flows from Operating, Investing and Financing Activities Our cash balance decreased $0.6 million during the three months ended March 31, 2005 to $9.9 million from $10.5 million at December 31, 2004. Cash flows from operating activities increased by $13.1 million to proceeds of $8.7 million for the three months ended March 31, 2005 compared to a use of $4.4 million for the three months ended March 31, 2004. The increase is primarily due to an increase in working capital of $9.8 million due primarily to the timing of interest payments as a result of the refinancing of the Company's long term debt at lower interest rates during the second quarter of 2004 and a decrease in net loss to common members' interest of $2.4 million. Cash flows used in investing activities for the three months ended March 31, 2005 was $5.7 million consisting of cash outflows of (i) payments of approximately $4.0 million for construction, architecture fees and other development costs associated with the racino project at OED and the Worth County development project and (ii) net cash outflows of approximately $1.6 million used for capital expenditures mainly related to the development of our new OTB in Henderson, Louisiana and the acquisition of slot machine conversions. Cash flows used in financing activities for the three months ended March 31, 2005 of $3.7 million reflects proceeds from advances under the revolver portion of the PGL Credit Facility of $1.0 million. These proceeds were offset by (i) aggregate principal payments on borrowings under the revolver portion of the PGL Credit Facility of $1.2 million, (ii) aggregate principal payments under the term loan portion of the PGL Credit Facility of $1.0 million, (iii) aggregate principal payments on notes payable of $1.6 million and (iv) member distributions of approximately $0.9 million. As of March 31, 2005, the Company had $13.7 million and $11.7 million outstanding under the revolver portion and term loan portion of the PGL Credit Facility, respectively. In addition, as of March 31, 2005, the Company had outstanding letters of credit of approximately $4.0 million. Financing Activities Our financing activities will 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, 2004. There have been no significant changes to the Company's financing activities during the three months ended March 31, 2005. Liquidity In addition to our cash on hand, we currently have the following sources of funds for our business: (i) cash flows from OED's casino and racetrack operations, (ii) cash flows from DJL's casino operations and (iii) available borrowings under the PGL Credit Facility. The available borrowing amount at March 31, 2005, after reductions for amounts borrowed and letters of credit outstanding at OED and DJL, was $17.3 million. In April 2005, a $3.2 million letter of credit issued as collateral for the Term Loan portion of the PGL Credit Facility was released which increased the available borrowings under the facility by the same amount. -26- We expect our remaining capital expenditures in 2005, excluding any amounts related to the racino project development, development of a new gaming property in Worth County, Iowa and development of new OTB facilities, to be approximately $2.0 million. Remaining capital expenditures in 2005 include an estimated $0.3 million and $1.0 million relating to the racino project development and the development of our new OTB near Henderson, Louisiana, respectively. Our debt maturities for the next twelve months (excluding discount) are expected to be approximately $8.2 million. Based on our cash on hand, expected cash flows from operations and our available sources of financing, we believe we will have adequate liquidity to satisfy our operating needs and service our outstanding indebtedness for the next twelve months. On May 11, 2005, the Iowa Racing and Gaming Commission granted DJW a gaming license to operate an excursion gambling boat in Northwood, Iowa. We plan to finance the estimated cost of the Worth County project of approximately $40.4 million through a permitted $15 million increase in available borrowings under our senior credit facility for a new gaming facility, equipment financing from manufacturers and lending institutions and cash flows from operations. If cash flows from operations are not sufficient, we may need to seek additional borrowings. Our level of indebtedness will have several important effects on our future operations including, but not limited to, the following: (i) a significant portion of our cash flow from operations will be required to pay interest on our indebtedness and the indebtedness of our subsidiaries; (ii) the financial covenants contained in certain of the agreements governing such indebtedness will require us and/or our subsidiaries to meet certain financial tests and may limit our respective abilities to borrow additional funds or to dispose of assets; (iii) our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; and (iv) our ability to adapt to changes in the gaming industry which affect the markets in which we operate could be limited. Recent Developments On Friday, May 13, 2005, OED temporarily suspended horse racing at its racetrack in Opelousas, Louisiana due to certain track surface irregularities. While the Company is still investigating the matter, based on preliminary internal reports, the Company does not believe that the costs of repair or any lost revenue will have a material adverse effect on its liquidity or financial condition. Additionally, the Company does not expect the temporary suspension to prevent OED from operating the minimum number of racing days required by applicable gaming laws. CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS Our future contractual obligations related to long-term obligations and operating leases at December 31, 2004 updated to include our obligation associated with DJL's Rebuild Iowa Infrastructure Fund assessment as discussed in note 5 to the financial statements, are as follows (in millions of dollars):

The following shows our contingent obligations at December 31, 2004 based on expiration dates (in millions): Less Than 1 - 3 4 - 5 1 Year Years Years Thereafter --------- ----- ------ ---------- Standby letters of credit.......... $ 4.0 -27- CRITICAL ACCOUNTING POLICIES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We periodically evaluate our policies and the estimates and assumptions related to these policies. All of our subsidiary companies operate in a highly regulated industry. In our Iowa and Louisiana operations, we are subject to regulations that describe and regulate operating and internal control procedures. The majority of our casino revenue is in the form of cash, personal checks, credit cards or gaming chips and tokens, which by their nature do not require complex estimates. We estimate certain liabilities including our slot club liabilities, outstanding gaming chip, token and pari-mutuel ticket liability, self-insure medical and workers compensation liabilities. We believe that these estimates are reasonable based on our past experience with the business and based upon our assumptions related to possible outcomes in the future. Future actual results will likely differ from these estimates. Understanding our critical accounting policies and related risks is important in evaluating our financial conditions 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, 2004. 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 three months ended March 31, 2005. -28- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to certain market risks which are inherent in our financial instruments which arise from transactions entered into in the normal course of business. Market risk is the risk of loss from adverse changes in market prices and interest rates. We do not currently utilize derivative financial instruments to hedge market risk. We also do not hold or issue derivative financial instruments for trading purposes. We are exposed to interest rate risk due to changes in interest rates with respect to our long-term variable interest rate debt borrowing under the PGL Credit Facility. As of March 31, 2005, the Company had $25.4 million in outstanding borrowings under the PGL Credit Facility, including borrowings under the term loan portion of such facility, that have variable interest rates. We have estimated our market risk exposure using sensitivity analysis. We have defined our market risk exposure as the potential loss in future earnings and cash flow with respect to interest rate exposure of our market risk sensitive instruments assuming a hypothetical increase in market rates of interest of one percentage point. Assuming we borrow the maximum amount allowed under the PGL Credit Facility (currently an aggregate amount of $46.7 million) and if market rates of interest on our variable rate debt increased by one percentage point, the estimated additional annual interest expense would be approximately $0.5 million. We are also exposed to fair value risk due to changes in interest rates with respect to our long-term fixed interest rate debt borrowings. Our fixed rate debt instruments are not generally affected by a change in the market rates of interest, and therefore, such instruments generally do not have an impact on future earnings. However, future earnings and cash flows may be impacted by changes in interest rates related to indebtedness incurred to fund repayments as such fixed rate debt matures. The following table contains information relating to our fixed rate debt borrowings as of March 31, 2005 (dollars in millions):

-29- ITEM 4. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures. The Company's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Securities Exchange Act of 1934, as amended) as of March 31, 2005, have concluded that as of such date the Company's disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to the Company and its subsidiaries would be made known to such officers on a timely basis. Changes in internal controls. There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting during our first quarter. -30- PART II. OTHER INFORMATION Item 1. Legal Proceedings In October 2003, OED filed a Petition for Declaratory Judgment in state court in St. Landry Parish, Louisiana, naming the Secretary of the Department of Revenue and Taxation for the State of Louisiana, the St. Landry Parish School Board and the City of Opelousas, seeking a definitive ruling on the extent of its tax liability and seeking to prevent Louisiana state and local governmental authorities from assessing sales taxes in connection with its construction and equipping of the Evangeline Downs casino and racetrack. Louisiana law provides that racetracks are not required to pay taxes other than those provided in the racing statutes and that taxes and fees provided in the racing statutes are in lieu of, among other things, all other state and local taxes, including sales taxes. In response to a request by OED for clarification of its tax status, the State of Louisiana Department of Revenue delivered a letter to OED, dated April 9, 2001, confirming that all purchases of tangible personal property and taxable services by pari-mutuel racetracks and off-track betting facilities are exempt from the payment of sales tax. In a response filed by the City of Opelousas with the district court in February 2005, the City of Opelousas has generally argued that the exemption under the racing statutes should not extend to the purchase of goods, materials and services for non-racing operations, which include, for example, the operation of slot machines, restaurants, lounges and shops. OED has paid all applicable sales taxes relating to the purchase of slot machines at the casino, but has not paid sales taxes relating to the construction of the facility or the purchase of other tangible personal property in connection therewith. OED's motion for summary judgment is currently pending before the district court, and a hearing on the motion is scheduled for July 2005. Based on the advice of outside regulatory counsel, OED is optimistic that the district court will agree with the position articulated by the Department of Revenue and Taxation and render summary judgment in OED's favor. If the issue, however, is ultimately determined adversely to OED, and OED is required to pay sales taxes on its non-racing related activities, based upon current estimates and depending on how the issue is ultimately resolved, such taxes could range from $1.5 million to $8 million. Other than as described above, neither we nor our subsidiaries are a party to, and none of our nor our subsidiaries' property is the subject of, any other pending legal proceedings other than litigation arising in the normal course of business. We do not believe that adverse determinations in any or all such other litigation would have a material adverse effect on our financial condition, results of operations or cash flows. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters for a Vote of Security Holders None. Item 5. Other information None. -31- 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- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dubuque, State of Iowa on May 16, 2005. PENINSULA GAMING, LLC By: /s/ M. Brent Stevens -------------------------- M. Brent Stevens Chief Executive Officer By: /s/ Jonathan Swain -------------------------- Jonathan Swain Chief Operating Officer By: /s/ Natalie A. Schramm -------------------------- Natalie A. Schramm Chief Financial Officer 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 DIAMOND JO, LLC By: /s/ M. Brent Stevens -------------------------- M. Brent Stevens Chief Executive Officer By: /s/ Jonathan Swain -------------------------- Jonathan Swain Chief Operating Officer By: /s/ Natalie A. Schramm -------------------------- Natalie A. Schramm Chief Financial Officer THE OLD EVANGELINE DOWNS, L.L.C. By: /s/ M. Brent Stevens -------------------------- M. Brent Stevens Chief Executive Officer By: /s/ Jonathan Swain -------------------------- Jonathan Swain Chief Operating Officer By: /s/ Natalie A. Schramm ------------------------- Natalie A. Schramm Chief Financial Officer -33-

DIAMOND JO, LLC 10-Q