UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2012.
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: 333-117800

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 o No x

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
Part I - Financial Information	3
Item 1 - Financial Statements	3
Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2012 and December 31, 2011	3
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2012 and 2011	4
Condensed Consolidated Statement of Changes in Member's Deficit (Unaudited) for the Nine Months Ended September 30, 2012	5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months ended September 30, 2012 and 2011	6
Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3 - Quantitative and Qualitative Disclosures About Market Risk	27
Item 4 - Controls and Procedures	28
Part II - Other Information	28
Item 1 - Legal Proceedings	28
Item 6 - Exhibits	29
Signatures	30

2

             PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PENINSULA GAMING, LLC

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands)

	September 30, 2012		December 31, 2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	35,597	$	68,151
Restricted cash—purse settlements		5,007		4,186
Accounts receivable, net		4,933		2,026
Receivables from affiliates		-		117
Inventories		1,789		1,621
Prepaid expenses and other assets		8,910		6,205
Total current assets		56,236		82,306
PROPERTY AND EQUIPMENT, NET		428,987		400,923
OTHER ASSETS:
Deferred financing costs, net of amortization of $12,959 and $10,055, respectively		24,477		27,285
Goodwill		85,308		85,308
Licenses and other intangibles		106,879		106,713
Deposits and other assets		6,789		5,648
Investment available for sale		20,339		19,047
Total other assets		243,792		244,001
TOTAL	$	729,015	$	727,230
LIABILITIES AND MEMBER’S DEFICIT
CURRENT LIABILITIES:
Accounts payable	$	4,700	$	3,885
Construction payable		7,468		17,535
Purse settlement payable		6,430		5,884
Accrued payroll and payroll taxes		11,551		8,843
Accrued interest		8,402		24,678
Other accrued expenses		23,005		27,471
Payable to affiliates		1,342		1,441
Current maturities of long-term debt and leases		5,904		22,999
Total current liabilities		68,802		112,736
LONG-TERM LIABILITIES:
8 3/8% senior secured notes, net of discount		319,694		319,646
10 3/4% senior notes, net of discount		352,576		352,327
Senior secured credit facilities		-		5,000
Term loans		-		6,135
Notes and leases payable, net of discount		15		346
Obligation under assessment arrangements		31,330		18,742
Other liabilities		832		961
Total long-term liabilities		704,447		703,157
Total liabilities		773,249		815,893
COMMITMENTS AND CONTINGENCIES (Note 6)
MEMBER’S DEFICIT:
Common member’s interest		9,000		9,000
Accumulated deficit		(58,907)		(101,881)
Accumulated other comprehensive income		5,673		4,218
Total member’s deficit		(44,234)		(88,663)
TOTAL	$	729,015	$	727,230

See notes to condensed consolidated financial statements.  

3

PENINSULA GAMING, LLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)

		Three  Months Ended September 30, 2012		Three  Months Ended September 30, 2011	Nine  Months Ended September 30, 2012		Nine  Months Ended September 30, 2011
REVENUES:
Casino	$	124,549	$	77,437	$	381,836	$	229,903
Racing		4,176		4,007		11,580		11,921
Video poker		1,403		1,410		4,476		4,296
Food and beverage		8,299		7,043		25,295		20,417
Other		4,592		4,249		12,356		11,738
Less promotional allowances		(12,738)		(10,273)		(37,331)		(29,507)
Total net revenues		130,281		83,873		398,212		248,768
EXPENSES:
Casino		48,779		30,830		150,847		92,924
Racing		4,049		3,922		11,011		11,295
Video poker		1,120		1,185		3,460		3,485
Food and beverage		5,322		4,501		16,016		13,161
Other		3,264		3,252		8,309		7,960
Selling, general and administrative		20,571		14,827		58,770		43,305
Depreciation and amortization		10,465		7,099		31,239		21,463
Pre-opening expense		153		3,923		156		6,863
Affiliate management fees		2,286		1,565		7,049		4,708
Merger-related expenses		301		-		2,474		-
(Gain) loss on disposal of assets		(9)		9		(46)		86
Total expenses		96,301		71,113		289,285		205,250
INCOME FROM OPERATIONS		33,980		12,760		108,927		43,518
OTHER INCOME (EXPENSE):
Interest income		557		559		1,685		1,775
Interest expense, net of amounts capitalized		(17,306)		(17,079)		(53,704)		(51,215)
Gain (loss) from equity affiliate		(18)		3		(62)		(62)
Total other expense		(16,767)		(16,517)		(52,081)		(49,502)
NET INCOME (LOSS)		17,213		(3,757)		56,846		(5,984)
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gain (loss) on investment available for sale		489		(45)		1,455		876
Total other comprehensive income (loss)		489		(45)		1,455		876
COMPREHENSIVE INCOME (LOSS)	$	17,702	$	(3,802)	$	58,301	$	(5,108)

See notes to condensed consolidated financial statements.

4

PENINSULA GAMING, LLC

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN MEMBER’S DEFICIT (UNAUDITED)

 (in thousands)

	COMMON MEMBER'S INTEREST		ACCUMU-LATED DEFICIT		ACCUMU-LATED OTHER COMPRE-HENSIVE INCOME		TOTAL MEMBER'S DEFICIT
BALANCE, DECEMBER 31, 2011	$	9,000	$	(101,881)	$	4,218	$	(88,663)
Net income				56,846				56,846
Unrealized gain on investment available for sale						1,455		1,455
Member contributions				698				698
Member distributions				(14,570)				(14,570)
BALANCE, SEPTEMBER 30, 2012	$	9,000	$	(58,907)	$	5,673	$	(44,234)

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, 2012		Nine Months Ended September 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	56,846	$	(5,984)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization		31,239		21,463
Non-cash interest		3,267		2,772
Loss from equity affiliate		62		62
Non-cash compensation		698		430
(Gain) loss on disposal of assets		(46)		86
Changes in operating assets and liabilities:
Restricted cash — purse settlements		(821)		(748)
Receivables		(2,912)		(1,268)
Receivables from affiliates		117		(7)
Inventories		(168)		99
Prepaid expenses and other assets		(2,391)		(1,160)
Payables		1,575		1,302
Accrued expenses		(8,010)		(10,964)
Payable to affiliates		(99)		546
Net cash flows from operating activities		79,357		6,629
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in cash value of life insurance for premiums paid		(453)		(77)
Purchase of investment		(1,000)		-
Proceeds from redemption of investment		305		285
Proceeds from note receivable to related party		92		60
Business acquisition and licensing costs		(346)		(3,428)
Construction project development costs		(59,680)		(59,279)
Purchases of property and equipment		(7,219)		(6,700)
Proceeds from sale of property and equipment		376		73
Net cash flows from investing activities		(67,925)		(69,066)
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing costs		-		(7,311)
Principal payments on debt		(28,735)		(1,225)
Proceeds from senior notes		-		138,000
Proceeds from term loan		4,319		-
Proceeds from senior secured credit facilities		10,000		-
Payments on senior secured credit facilities		(15,000)		(3,500)
Member distributions		(14,570)		(6,354)
Net cash flows from financing activities		(43,986)		119,610
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(32,554)		57,173
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		68,151		19,650
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	35,597	$	76,823
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest, net of capitalized interest	$	63,725	$	58,693
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Property and equipment acquired, but not paid	$	8,248	$	16,398
Property and equipment acquired in exchange for obligation under assessment arrangements		3,760		7,378
Deferred financing costs incurred in exchange for obligation under assessment arrangements		454		147
Property and equipment acquired in exchange for indebtedness		854		3,371
Unrealized gain on investment available for sale		1,455		876
Property contributions from parent		-		3,803
Gaming license contribution from parent		-		43
Prepaid expense contribution from parent		-		291

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, Louisiana and 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 four 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"), which owns the assets of the Kansas Star Casino, Hotel and Event Center in Mulvane, Kansas (excluding lottery gaming equipment, which is owned by the State of Kansas) and manages the lottery gaming operations on behalf of the State of Kansas ("Kansas Star"), which opened its interim facility on December 20, 2011 as discussed below in the Kansas Star Developments section; 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 condensed 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, 2011. Accordingly, footnote disclosure that would substantially duplicate the disclosure in the audited financial statements has been omitted in the accompanying unaudited condensed consolidated financial statements.

Merger Agreement

On May 16, 2012, PGP and the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Boyd Gaming Corporation (“Boyd”), Boyd Acquisition II, LLC, a newly formed indirect wholly-owned subsidiary of Boyd (“Holdco”), and Boyd Acquisition Sub, LLC, a newly formed direct wholly-owned subsidiary of Holdco (“Merger Sub”).  The Merger Agreement provides, among other things, that upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into the Company, with the Company surviving as a direct wholly-owned subsidiary of Holdco (the “Merger”).  Following the Merger, the Company will be an indirect wholly-owned subsidiary of Boyd.

Upon the terms and subject to the conditions of the Merger Agreement, which has been approved and adopted by the board of managers of PGP and the board of directors of Boyd, Boyd will acquire the Company for approximately $1.45 billion, net of certain expenses and adjustments, which will consist of (i) cash, (ii) the refinancing of the Company’s existing indebtedness and (iii) a promissory note issued by Holdco to PGP in a principal amount of approximately $144 million, which amount is subject to adjustment based on the Company’s outstanding debt, cash, working capital, certain assets, liabilities and costs, and transaction expenses at the closing of the Merger, as well as any indemnification claims in accordance with the terms of the Merger Agreement. In addition, Holdco is obligated to make an additional payment to PGP in 2016 if KSC’s EBITDA, as defined in the Merger Agreement, for 2015 exceeds $105 million.  The additional payment would be in an amount equal to 7.5 times the amount by which KSC’s 2015 EBITDA exceeds $105 million.

The Merger Agreement contains certain termination rights for both PGP and Boyd and further provides that, in connection with the termination of the Merger Agreement under specified circumstances, Boyd may be required to pay PGP a termination fee of up to $45 million.

The completion of the Merger is subject to various conditions, including, among others, (i) obtaining approval of certain gaming regulators, and (ii) the termination or expiration of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”).  On June 4, 2012 the Federal Trade Commission granted early termination of the applicable waiting periods under the HSR Act.  The transaction was approved on September 27, 2012 by the Iowa Racing and Gaming Commission.  The transaction received the approval of the Louisiana State Racing Commission on September 28, 2012 and was approved by the Louisiana Gaming Control Board on October 18, 2012.

Subject to the satisfaction or waiver of conditions in the Merger Agreement, the Merger is expected to close in November 2012.

7

Kansas Star Developments

The Kansas Star is being developed in two phases.  KSC began casino gaming operations on December 20, 2011 in its interim facility.  Amenities currently include 1,412 slots machines, 35 table games and 5 poker tables.  Completion of the remainder of the first phase of the project is expected to occur in December 2012 and will include 1,829 slot machines, 45 table games, 10 poker tables, 150 hotel rooms in a third party operated hotel (which opened to the public in October 2012), approximately 3,400 parking spaces, a buffet, steakhouse, deli, a casino bar as well as a poker themed bar, followed by the renovation of the 162,000 square foot indoor event center (which currently houses our interim operations) during 2013.

The second phase of the project is expected to include 171 additional slot machines (thus expanding the total to 2,000 slot machines), 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 $331 million (excluding capitalized interest which is estimated to be approximately $6 million).  Total cost to open the interim casino was $179 million including approximately $15 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 $102 million, including approximately $19 million to complete the initial 150 hotel rooms of the third party financed and developed hotel and $5 million of additional publicly-owned utilities being financed by Mulvane as discussed further below.  The second phase of the Kansas Star project is budgeted at $50 million, which includes the cost of the arena renovation discussed above and approximately $19 million for the expansion to the third party 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 $19.5 million, which includes the second phase of improvements to Mulvane’s waste water treatment plant and a new water tower.

During the first quarter 2012, Mulvane completed various infrastructure improvements that were needed to support the Kansas Star development.  The costs to design, construct and finance these improvements were financed with proceeds from temporary notes issued by Mulvane.  In March 2012, these temporary notes were redeemed with proceeds from the issuance of $14.4 million of Mulvane general obligation bonds.  KSC’s special tax assessment related to these bonds is approximately $1.2 million annually.  Payments under the special tax assessment are secured by an irrevocable letter of credit of $3.6 million issued by the Company in favor of Mulvane.  

During 2012 and 2013, Mulvane will perform additional infrastructure improvements that will benefit the Kansas Star site.   Upon completion of the improvements, Mulvane will issue additional 15 year general obligation bonds to repay construction costs of the improvements.  As of September 30, 2012, the Company has issued $5.2 million in letters of credit in favor of Mulvane to secure payments made by Mulvane related to these additional infrastructure improvements.  The amount of the current outstanding letters of credit supporting the construction of these additional utilities improvements will be reduced to an amount equal to three times the annual special assessment tax imposed on KSC upon completion of these additional improvements and issuance of the additional general obligation bonds.

           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. Capitalization of interest ceases when the project is substantially complete.  The Company capitalized $1.0 million and $0.8 million during the three months ended September 30, 2012 and 2011, respectively, and $1.8 million and $1.3 million during the nine months ended September 30, 2012 and 2011, respectively, related to the development project at KSC.  

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, 2012.   Licenses and other intangibles are summarized as follows (in thousands):

	September 30, 2012
	Gross Carrying Value		Accumulated Amortization		Net Book Value
Intangible assets with indefinite lives:
Gaming licenses	$	73,359	$	-	$	73,359
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		(622)		1,513
Customer relationships and customer list		242		(132)		110
Total	$	107,633	$	(754)	$	106,879

	December 31, 2011
	Gross Carrying Value		Accumulated Amortization		Net Book Value
Intangible assets with indefinite lives:
Gaming licenses	$	73,013	$	-	$	73,013
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		(462)		1,673
Customer relationships and customer list		242		(112)		130
Total	$	107,287	$	(574)	$	106,713

Amortization expense for intangible assets for each of the three months ended September 30, 2012 and 2011 was $0.1 million.  Amortization expense for intangible assets for each of the nine months ended September 30, 2012 and 2011 was $0.2 million. Annual amortization expense for intangible assets is expected to be $0.2 million per year for 2012 through 2016.

Obligation Under Assessment Arrangements— 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.  On March 29, 2012, Mulvane issued $14.4 million of general obligation bonds as discussed in Note 1.  The special tax assessment related to these general obligation bonds is approximately $1.2 million per year paid semi-annually in May and December of each year with the first payment due in December 2012.  In addition, KSC is obligated to reimburse Mulvane for any construction costs incurred for which temporary notes have not yet been issued.  At September 30, 2012, Mulvane had incurred $3.2 million of construction costs related to the second phase of the infrastructure improvements for which temporary notes had not yet been issued.  At September 30, 2012 KSC has recorded an obligation of $17.8 million of which $13.3 million is included in Obligation under assessment arrangements within long-term liabilities and $4.5 million is included in Other accrued expenses within current liabilities.

In addition, at September 30, 2012, under the Minimum Assessment Agreement, dated October 1, 2007, among DJL, the City of Dubuque, Iowa (the “City”) and the City Assessor of the City of Dubuque (the “Minimum Assessment Agreement”), in which DJL and the City agreed to a minimum taxable value related to DJL’s new casino of $57.9 million, DJL has recorded an obligation of $19.9 million of which $18.0 million is included in Obligation under assessment arrangements within long-term liabilities and $1.9 million is included in Other accrued expenses within current liabilities.

9

Variable Interest Entity (“VIE”)— On January 19, 2012, KSC contributed $1.0 million in cash to KSC Lodging, L.C. (“KSC Lodging”) in exchange for an additional 22% equity interest in KSC Lodging (bringing KSC’s total equity interest in KSC Lodging, including a 34% equity interest in exchange for entering into a ground lease with KSC Lodging in 2011, to 56%) in accordance with an executed agreement under which KSC Lodging has agreed to finance, construct, own and operate the 300 room hotel at the Kansas Star.  The Company is not considered to be the primary beneficiary and thus the VIE is not consolidated into the financial statements of the Company but, rather, is recorded as an equity investment.  At September 30, 2012 the $1.0 million equity investment is included in Deposits and other assets in the Company’s condensed consolidated balance sheets. The liabilities in the Company’s condensed consolidated balance sheets that relate to KSC’s variable interests in KSC Lodging and the Company’s maximum exposure to loss as a result of its agreements with KSC Lodging at September 30, 2012 and December 31, 2011 are as follows (in thousands):

	2012		2011
Carrying amount of liabilities	$	-	$	-
Maximum exposure to loss		1,000		1,000

Merger-Related Expenses— During the three and nine months ended September 30, 2012, the Company expensed $0.3 million and $2.5 million, respectively, primarily related to legal and other professional services fees incurred in connection with entering into the Merger Agreement.

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 $22.4 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 Adopted Accounting Standards—In May 2011, the Financial Accounting Standards Board (“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 Company adopted this guidance in the first quarter of 2012 with no material impact to 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 Company adopted this guidance in the first quarter of 2012 and has elected to present comprehensive income in a single, continuous statement of comprehensive income. The new guidance was applied retrospectively.  The adoption of this guidance did not impact the Company's financial position, results of operations or cash flows and only impacted 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 Company adopted this amendment in the first quarter of 2012 with no material impact to the Company’s financial statements.

In July 2012, the FASB amended the guidance regarding testing indefinite-lived intangible assets, other than 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 an indefinite-lived intangible asset is less than its carrying amount.  If it is determined, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more likely than not less than the carrying amount, a quantitative impairment test would still be required, otherwise no further analysis is required.  This amendment is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted.  The adoption of this guidance will not have an impact on the Company’s financial statements.

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3. Property and Equipment

Property and equipment at September 30, 2012 and December 31, 2011 is summarized as follows (in thousands):

	September 30, 2012		December 31, 2011
Land and land improvements	$	39,229	$	38,493
Buildings, riverboat and improvements		341,029		340,755
Furniture, fixtures and equipment		137,111		133,509
Computer equipment		15,375		15,450
Vehicles		1,287		1,001
Construction in progress		63,233		15,453
Subtotal		597,264		544,661
Accumulated depreciation		(168,277)		(143,738)
Property and equipment, net	$	428,987	$	400,923

Depreciation expense during the three months ended September 30, 2012 and 2011 was $10.4 million and $7.0 million, respectively.

Depreciation expense during the nine months ended September 30, 2012 and 2011 was $31.1 million and $21.3 million, respectively.

4. Debt

Debt consists of the following (in thousands):

	September 30, 2012		December 31, 2011
8 3/8% senior secured notes due August 15, 2015, net of discount of $306 and $354,         respectively, secured by substantially all the assets of the Company and its subsidiaries         and the equity of the Company	$	319,694	$	319,646
10 3/4% senior unsecured notes due August 15, 2017, net of discount of $2,424 and $2,673,         respectively		352,576		352,327
$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% (current rate of 6.0% at September 30, 2012 and December 31, 2011), 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		-		5,000
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		-		3,567
Term loan under a loan and security agreement of PGL and KSC with American Trust & Savings Bank, interest rate at 6.5%, due in installments through December 1, 2016, secured by certain assets of KSC		-		5,202
Notes payable and capital lease obligations, net of unamortized discount based on imputed interest rates at 6.0% - 14.4% of $64 and $689, respectively, due 2012 – 2015		5,919		20,711
Total debt		678,189		706,453
Less current portion		(5,904)		(22,999)
Total long term debt	$	672,285	$	683,454

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PGL Notes

The Company’s 8 3⁄8% Senior Secured Notes due 2015 (the “PGL Secured Notes”) and 10 3⁄4% Senior Unsecured Notes due 2017 (the “PGL Unsecured Notes” and, together with the PGL Secured Notes, the “PGL 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.  PGL has no significant independent assets or operations and the guarantees of the Subsidiary Guarantors are full and unconditional and joint and several.

The indentures governing the PGL Notes limit the Company’s and the Subsidiary Guarantors’ ability to, among other things, incur more debt, pay dividends or make other distributions to PGP, redeem stock, make certain investments, create liens, enter into transactions with affiliates, merge or consolidate, and transfer or sell assets.

The PGL Notes and the PGL Credit Facility do not limit the Company’s ability to transfer assets between the Company and the Subsidiary Guarantors.  Under the indentures governing the PGL Notes, the Company is allowed, subject to certain conditions and limitations set forth therein, to make payments and distributions to PGP, including in respect of (i) certain consulting and financial advisory services, (ii) board fees and actual out-of-pocket expenses incurred by members of the board of managers of PGP, and (iii) tax, accounting, licensure, legal and administrative costs and expenses of PGP. In addition, the Company may pay dividends or make other distributions to PGP, in addition to the distributions above, if the combined interest coverage ratio of the Company and the Subsidiary Guarantors is not less than 2.0 to 1.0 for the immediately preceding four full fiscal quarters and subject to certain aggregate net income and cash proceeds received from the sale of equity interest limits.  The Company may also pay dividends or make other distributions with Specified Equity Contributions (as defined in the indentures governing the PGL Notes). Substantially all of the Company’s net assets were restricted from distribution to PGP under the PGL Notes and the PGL Credit Facility, subject to the above exceptions and including amounts allowed for certain investments and other restricted payments.

PGL Credit Facility

As of September 30, 2012, the Company had no outstanding advances under its $50.0 million senior secured credit facility (the “PGL Credit Facility”). In addition, as of September 30, 2012, the Company had outstanding letters of credit under the PGL Credit Facility of $10.8 million resulting in available borrowings thereunder of $39.2 million. 

DJL Term Loan

On May 1, 2008, PGL, DJL and EVD entered into a Loan and Security Agreement (“DJL Term Loan”) with American Trust & Savings Bank.  In June 2012, DJL repaid all outstanding advances under the DJL Term Loan and terminated the DJL Term Loan.

KSC Term Loan

From January 1, 2012 through the expiration of the draw down period on March 1, 2012, KSC borrowed an additional $4.3 million to finance the purchase of certain furniture, fixtures and equipment related to the Kansas Star development under a Loan and Security Agreement with PGL and KSC and American Trust and Savings Bank (the “KSC Term Loan”).  In June 2012, KSC repaid all outstanding advances under the KSC Term Loan and terminated the KSC Term Loan.

Notes Payable - Slot Vendor Financing

In January 2012, KSC entered into an agreement with a third party vendor to finance an additional $0.9 million of slot machine purchases over a period of 12 months at zero percent.  As of September 30, 2012, KSC had $5.9 million recorded related to slot machine financings with various vendors.

 Compliance

As of September 30, 2012, the Company was in compliance with the terms of the agreements governing its outstanding indebtedness.

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 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). At September 30, 2012, the Company had one financial instrument that must be measured at fair value in the financial statements, an investment available for sale and at December 31, 2011, the Company had two financial instruments that must be measured at fair value in the financial statements, an investment available for sale and an investment in a money market. 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

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 financial instruments at September 30, 2012 and had one Level 1 financial instrument at December 31, 2011.  The Company held an investment in a money market whose fair value equaled its carrying value of $18.6 million at December 31, 2011.

The Company had no Level 2 financial instruments at September 30, 2012 and December 31, 2011. 

The Company had one Level 3 financial instrument at September 30, 2012 and December 31, 2011.

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 comprehensive income (loss).  

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, 2012 and December 31, 2011, 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, 2012 and December 31, 2011) (in thousands):

	Total Carrying Value at September 30, 2012		Fair Value Measurements at  September 30, 2012		Total Carrying Value at December 31, 2011		Fair Value Measurements at December 31, 2011
Investment available for sale	$	20,669	$	20,669	$	19,352	$	19,352

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The following table summarizes the changes in fair value of the Company’s Level 3 assets for the three and nine months ended September 30, 2012 and 2011 (in thousands):

	Three Months Ended September 30,  2012		Three Months Ended September 30,  2011		Nine Months Ended September 30,  2012		Nine Months Ended September 30,  2011
Balance at beginning of the reporting period	$	20,125	$	19,334	$	19,352	$	18,592
Total gains (losses) (realized or unrealized):
Included in earnings		55		52		167		158
Included in other comprehensive income (loss)		489		(45)		1,455		876
Transfers in or out of Level 3		-		-		-		-
Purchases, sales, issuances and settlements:
Settlements		-		-		(305)		(285)
Ending balance at September 30, 2012 and 2011	$	20,669	$	19,341	$	20,669	$	19,341

	Three Months Ended September 30, 2012		Three Months Ended September 30,  2011		Nine Months Ended September 30,  2012		Nine Months Ended September 30,  2011
Gains included in earnings attributable to the change in unrealized gains relating to assets still held at the reporting date included in interest income	$	55	$	52	$	167	$	158

We are exposed to price valuation risk on our Level 3 financial instruments due to changes in the municipal bond market, interest rates, and the stability of the overall market.  We have estimated our Level 3 unobservable inputs risk exposure using sensitivity analysis and have defined our valuation risk exposure as the potential overstatement or understatement of the DJW investment available for sale asset with respect to changes in market conditions that may affect pricing assuming a hypothetical change in price of 100 basis points. Assuming price was to increase or decrease by 100 basis points, the estimated impact on all Level 3 financial instruments would result in the fair value of the recorded investment available for sale and other comprehensive income (loss) to increase or decrease by approximately $0.2 million at September 30, 2012.

            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.

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 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 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 a $25.0 million privilege fee.  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.

On May 16, 2012, the Company entered into the Merger Agreement as discussed in Note 1.

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 7. Related Party Transactions

During the three months ended September 30, 2012 and 2011 and the nine months ended September 30, 2012 and 2011, the Company distributed $1.2 million, $1.5 million, $5.6 million, and $6.4 million, respectively, to PGP primarily for (i) certain consulting and financial advisory services of 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.  On March 30, 2012, June 29, 2012, and September 28, 2012, PGP repurchased certain previously granted and vested profits interests from certain executive officers of the Company in the amount of $3.0 million for each repurchase date for total repurchases for the nine months ended September 30, 2012 of $9.0 million which were funded by distributions of $9.0 million from PGL to PGP.  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.

During the three months ended September 30, 2012 and 2011 and the nine months ended September 30, 2012 and 2011, the Company expensed $0.2 million, $0.1 million, $0.7 million and $0.4 million, respectively, 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, 2012 and 2011 and $0.5 million in affiliate management fees payable to OEDA during each of the nine months ended September 30, 2012 and 2011.

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 during each of the three months ended September 30, 2012 and 2011, respectively and $2.3 million and $2.1 million during the nine months ended September 30, 2012 and 2011, respectively.

EVD and PGP are parties to a consulting agreement with a board member of PGP. Under the consulting agreement, EVD, DJW, ABC and KSC must each pay the board member a fee equal to 2.5% of EVD’s, DJW’s, ABC’s and KSC’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, 2012 and 2011 and $0.6 million of affiliate management fees during each of the nine months ended September 30, 2012 and 2011, related to this agreement.   DJW expensed $0.3 million of affiliate management fees during each of the three months ended September 30, 2012 and 2011 and $0.8 million and $0.7 million of affiliate management fees during the nine months ended September 30, 2012 and 2011, respectively related to this agreement.  ABC expensed $0.1 million of affiliate management fees during each of the three months ended September 30, 2012 and 2011 and $0.3 million of affiliate management fees during each of the nine months ended September 30, 2012 and 2011, related to this agreement.  KSC expensed $0.6 million of affiliate management fees during the three months ended September 30, 2012 and $1.8 million of affiliate management fees during the nine months ended September 30, 2012 related to this agreement.  KSC had no expense under this agreement during the three and nine months ended September 30, 2011 as 2.5% fee on earnings as detailed above was effective beginning the first full month subsequent to operations, or January 2012.

 8. Segment Information

The Company is organized around geographical areas and operates or manages 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 operations, which comprise the Kansas Star Casino, Hotel and Event Center in Mulvane, Kansas that opened its interim facility on December 20, 2011.

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, 2011. The Company evaluates performance and allocates resources based upon, among other considerations, segment operating earnings (as defined below).

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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,
	2012		2011		2012		2011
Diamond Jo Dubuque	$	17,116	$	17,970	$	52,268	$	51,962
Diamond Jo Worth		25,015		24,607		74,102		70,687
Evangeline Downs		29,305		28,799		91,445		88,850
Amelia Belle		12,475		12,497		38,485		37,269
Kansas Star		46,370		-		141,912		-
Total	$	130,281	$	83,873	$	398,212	$	248,768

	Segment Operating  Earnings Three Months Ended  September 30, (1)				Segment Operating  Earnings Nine Months Ended  September 30, (1)
	2012		2011		2012		2011
Diamond Jo Dubuque	$	6,169	$	6,484	$	18,036	$	18,297
Diamond Jo Worth		10,720		10,399		31,091		29,237
Evangeline Downs		7,009		6,913		24,318		23,722
Amelia Belle		3,524		3,707		12,144		11,348
Kansas Star		23,295		-		73,097		-
Total property segment operating earnings (1)		50,717		27,503		158,686		82,604
General Corporate		(3,541)		(2,147)		(8,887)		(6,677)
Total segment operating earnings (1)		47,176		25,356		149,799		75,927
Gain on settlement (2)		-		-		-		711
Depreciation and amortization		(10,465)		(7,099)		(31,239)		(21,463)
Pre-opening expense		(153)		(3,923)		(156)		(6,863)
Affiliate management fees		(2,286)		(1,565)		(7,049)		(4,708)
Merger-related expenses		(301)		-		(2,474)		-
Gain (loss) on disposal of assets		9		(9)		46		(86)
Gain (loss) from equity affiliate		(18)		3		(62)		(62)
Interest income		557		559		1,685		1,775
Interest expense, net of amounts capitalized		(17,306)		(17,079)		(53,704)		(51,215)
Net income (loss)	$	17,213	$	(3,757)	$	56,846	$	(5,984)

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

(2)   “Gain on settlement” relates to a 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.

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	Interest Income (Expense), net Three Months Ended September 30,				Interest Income (Expense), net Nine Months Ended September 30,
	2012		2011		2012		2011
General Corporate	$	(16,591)	$	(16,516)	$	(50,804)	$	(49,521)
Diamond Jo Dubuque		(467)		(504)		(1,545)		(1,614)
Diamond Jo Worth		478		485		1,449		1,461
Evangeline Downs		78		56		232		237
Amelia Belle		-		2		-		7
Kansas Star		(247)		(43)		(1,351)		(10)
Total	$	(16,749)	$	(16,520)	$	(52,019)	$	(49,440)

	Depreciation and Amortization Three Months Ended September 30,				Depreciation and Amortization Nine Months Ended September 30,
	2012		2011		2012		2011
General Corporate	$	76	$	72	$	228	$	202
Diamond Jo Dubuque		1,683		2,297		5,106		6,907
Diamond Jo Worth		1,347		1,369		4,186		4,206
Evangeline Downs		1,510		1,724		4,713		5,297
Amelia Belle		1,722		1,637		5,045		4,851
Kansas Star		4,127		-		11,961		-
Total	$	10,465	$	7,099	$	31,239	$	21,463

	Total Assets
	September 30, 2012		December 31, 2011
General Corporate	$	19,275	$	21,781
Diamond Jo Dubuque		152,147		156,997
Diamond Jo Worth		75,182		77,449
Evangeline Downs		138,830		143,829
Amelia Belle		103,610		107,308
Kansas Star		239,971		219,866
Total	$	729,015	$	727,230

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	Cash Expenditures  for Additions  to Long-Lived Assets
	Nine Months Ended September 30, 2012		Nine Months Ended September 30, 2011
General Corporate	$	3,359	$	1,458
Diamond Jo Dubuque		1,202		1,299
Diamond Jo Worth		1,337		1,570
Evangeline Downs		2,765		2,369
Amelia Belle		1,612		1,462
Kansas Star		56,970		61,249
Total	$	67,245	$	69,407

 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 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 money market investment, investment available for sale, note receivable, obligation under assessment arrangements and debt instruments at September 30, 2012 and December 31, 2011 are as follows (in thousands):

		September 30, 2012				December 31, 2011
	Fair Value Hierarchy	Fair Value		Recorded Amount		Fair Value		Recorded Amount
Money market investment	Level 1	$	-	$	-	$	18,606	$	18,606
Investment available for sale	Level 3		20,669		20,669		19,352		19,352
Note receivable	Level 3		2,452		2,452		2,400		2,400
8 3/8% senior secured notes	Level 2		335,360		319,694		340,000		319,646
10 3/4% senior unsecured notes	Level 2		402,038		352,576		372,750		352,327
Senior secured credit facility	Level 2		-		-		5,000		5,000
Term loans	Level 2		-		-		8,769		8,769
Notes payable, capital lease obligations and other financial instruments	Level 2		6,387		6,323		21,878		21,189
Obligation under assessment arrangements	Level 3		45,005		34,570		26,416		20,658

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.

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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 and development;

·   economic, competitive, demographic, business, 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;  

· 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, permit or management contract, 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;

·  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, or delays or cost overruns related to the construction of the Kansas Star or delays in obtaining requisite governmental approvals related to the operation of the Kansas Star;

· a material delay or failure to consummate the acquisition of Peninsula Gaming, LLC and its operating subsidiaries by Boyd Gaming Corporation, and the related transaction contemplated in the Merger Agreement;

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·  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 or manage five casinos located in Iowa, Louisiana, and Kansas.  Our corporate offices are located in Dubuque, Iowa.  Our properties consist of:

1. Diamond Jo Dubuque operations, which comprise the Diamond Jo casino operations in Dubuque, Iowa 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. Evangeline Downs operations, which comprise the casino, racetrack, and OTB operations in Louisiana, serving the greater Lafayette, Louisiana area;

4. Amelia Belle operations, which comprise the Amelia Belle Casino in Amelia, Louisiana serving the southern Louisiana markets; and

5. Kansas Star operations, which comprise the Kansas Star casino operations in Mulvane, Kansas that opened on December 20, 2011 serving south central Kansas and is managed on behalf of the State of Kansas.

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

On May 16, 2012, PGP and the Company entered into the Merger Agreement with Boyd, Holdco and Merger Sub.  Upon the terms and subject to the conditions of the Merger Agreement, Boyd will acquire the Company for approximately $1.45 billion, net of certain expenses and adjustments. See Note 1 to the condensed consolidated financial statements for more information on the Merger.

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Results of Operations

 The following table sets forth certain information concerning our results of operations for the three and nine months ended September 30, 2012 and 2011.

Selected Financial Measures by Property

	Three Months Ended September 30, 2012		Three Months Ended September 30, 2011		Nine Months Ended September 30, 2012		Nine Months Ended September 30, 2011
Net Revenues:
Diamond Jo Dubuque	$	17,116	$	17,970	$	52,268	$	51,962
Diamond Jo Worth		25,015		24,607		74,102		70,687
Evangeline Downs		29,305		28,799		91,445		88,850
Amelia Belle		12,475		12,497		38,485		37,269
Kansas Star (1)		46,370		-		141,912		-
Consolidated net revenues	$	130,281	$	83,873	$	398,212	$	248,768
Segment Operating Earnings:
Diamond Jo Dubuque	$	6,169	$	6,484	$	18,036	$	18,297
Diamond Jo Worth		10,720		10,399		31,091		29,237
Evangeline Downs		7,009		6,913		24,318		23,722
Amelia Belle		3,524		3,707		12,144		11,348
Kansas Star (1)		23,295		-		73,097		-
Total property segment operating earnings (2)		50,717		27,503		158,686		82,604
General Corporate		(3,541)		(2,147)		(8,887)		(6,677)
Total segment operating earnings (2)		47,176		25,356		149,799		75,927
Gain on settlement (3)		-		-		-		711
Depreciation and amortization		(10,465)		(7,099)		(31,239)		(21,463)
Pre-opening expense		(153)		(3,923)		(156)		(6,863)
Affiliate management fees		(2,286)		(1,565)		(7,049)		(4,708)
Merger-related expenses		(301)		-		(2,474)		-
Gain (loss) on disposal of assets		9		(9)		46		(86)
Gain (loss) from equity affiliate		(18)		3		(62)		(62)
Interest income		557		559		1,685		1,775
Interest expense, net of amounts capitalized		(17,306)		(17,079)		(53,704)		(51,215)
Net income (loss)	$	17,213	$	(3,757)	$	56,846	$	(5,984)
Segment Operating Earnings Margins (4):
Diamond Jo Dubuque		36.0%		36.1%		34.5%		35.2%
Diamond Jo Worth		42.9%		42.3%		42.0%		41.4%
Evangeline Downs		23.9%		24.0%		26.6%		26.7%
Amelia Belle		28.2%		29.7%		31.6%		30.4%
Kansas Star (1)		50.2%		NA		51.5%		NA
Consolidated segment operating earnings margin		36.2%		30.2%		37.6%		30.5%

________________________

(1)         We opened the Kansas Star interim facility on December 20, 2011.

(2)          Segment operating earnings is defined as net income (loss) plus depreciation and amortization, pre-opening expense,

affiliate management fees, merger-related expenses, loss on disposal of assets, loss from equity affiliate, and interest expense, net of amounts capitalized, less interest income, gain on disposal of assets, gain from equity affiliate, and gain on settlement.

(3)          “Gain on settlement” relates to a 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.

(4)          Segment operating earnings margin is calculated as segment operating earnings divided by net revenue.

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       Three months ended September 30, 2012 compared to three months ended September 30, 2011

Consolidated net revenues increased $46.4 million, or 55%, to $130.3 million for the three months ended September 30, 2012 from $83.9 million for the three months ended September 30, 2011 driven primarily by the opening of the Kansas Star in December 2011.  Consolidated net revenues on a same store basis remained flat at $83.9 million. Net revenues increased at both DJW and EVD over the prior year quarter by 2%. While net revenues at ABC were flat to the prior year quarter at $12.5 million, third quarter operations were negatively impacted by Hurricane Isaac which made landfall along the Louisiana coast in August 2012.  In addition to the closure of the casino for two days, the hurricane impacted ABC’s operations for the days leading up to the actual landfall of the hurricane as well as several days thereafter.  Net revenues at DJL decreased 5% due primarily to a decline in casino revenues as a result of (i) a 170 basis point decline in its share of the Dubuque, Iowa market and (ii) a 250 basis point decline in table games hold percentage which more than offset a 2% increase in table game drop. During the third quarter, DJL’s nearest competitor, Mystique Casino, conducted a very aggressive direct mail campaign to increase its share of the market. As a result, DJL saw a 12% decline in rated play trips during the quarter.  DJL decided not to react with non-profitable offers but, instead, maintained its core marketing programs which we believe will be more effective over the long term. Net revenues at KSC for the three months ended September 30, 2012 were $46.4 million.

Casino revenues increased $47.1 million, or 61%, to $124.5 million for the three months ended September 30, 2012 from $77.4 million for the three months ended September 30, 2011 driven primarily by the opening of the Kansas Star in December 2011. Casino revenues on a same store basis decreased $0.4 million to $77.0 million.  In Iowa, we continued to see steady growth at DJW as its casino revenues increased by $0.7 million, or 3%, to $23.0 million for the three months ended September 30, 2012 from $22.3 million for the three months ended September 30, 2011 while DJL’s casino revenues decreased by $1.1 million, or 6%, to $17.0 million for the three months ended September 30, 2012 from $18.1 million for the three months ended September 30, 2011 for the reasons discussed above.  In Louisiana, we also continued to see steady growth at EVD as its casino revenues increased by $0.3 million, or 1%, to $23.8 million for the three months ended September 30, 2012 from $23.5 million for the three months ended September 30, 2011 while ABC’s casino revenues decreased by $0.3 million, or 2%, to $13.2 million for the three months ended September 30, 2012 from $13.5 million for the three months ended September 30, 2011.  As discussed above, third quarter operations at ABC were negatively impacted by Hurricane Isaac. Casino revenues at KSC for the three months ended September 30, 2012 were $47.5 million.

Casino operating expenses increased 58% to $48.8 million for the three months ended September 30, 2012 from $30.8 million for the three months ended September 30, 2011.  Casino expenses on a same store basis increased $0.3 million, or 1%, to $31.1 million.   Casino expenses at KSC for the three months ended September 30, 2012 were $17.6 million.

Promotional allowances as a percentage of casino revenues on a same store basis were essentially flat quarter over quarter at approximately 13% for each of the three months ended September 30, 2012 and 2011.  Promotional allowances as a percentage of casino revenues at KSC was 6% for the three months ended September 30, 2012.

Racing revenues at EVD increased 5% to $4.2 million for the three months ended September 30, 2012 from $4.0 million for the three months ended September 30, 2011 due primarily to an increase in host fee rates for showing EVD’s live races and one additional live race night over the prior year period.  Consistent with racing revenues, racing expenses increased $0.1 million quarter over quarter.

Video poker revenues remained flat at EVD for the three months ended September 30, 2012 at $1.4 million and related expenses decreased $0.1 to $1.1 million.

Food and beverage revenues increased 19% to $8.3 million for the three months ended September 30, 2012 from $7.0 million for the three months ended September 30, 2011. Food and beverage revenues on a same store basis remained flat at $7.0 million. Consistent with food and beverage revenues, food and beverage expenses on a same store basis also remained flat at $4.5 million.  Food and beverage revenues and expenses at KSC for the three months ended September 30, 2012 were $1.3 million and $0.8 million, respectively.

Other revenues increased $0.4 million to $4.6 million for the three months ended September 30, 2012 from $4.2 million for the three months ended September 30, 2011.  Other revenues and other expenses on a same store basis remained substantially unchanged quarter over quarter.  Other revenues on a same store basis were $4.1 million and $4.2 million for the three months ended September 30, 2012 and 2011, respectively and other expenses on a same store basis were $3.2 million and $3.3 million for the three months ended September 30, 2012 and 2011, respectively. Other revenues and expenses at KSC for the three months ended September 30, 2012 were $0.5 million and less than $0.1 million, respectively.

Selling, general and administrative expenses increased $5.8 million, or 39%, to $20.6 million for the three months ended September 30, 2012 from $14.8 million for the three months ended September 30, 2011.  On a same store basis, selling, general and administrative expenses increased $1.2 million to $16.0 million for the three months ended September 30, 2012 from $14.8 million for the three months ended September 30, 2011 resulting primarily from an increase in corporate payroll due to the incremental operations of the Kansas Star.  Selling, general and administrative expenses at KSC for the three months ended September 30, 2012 were $4.6 million.

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Depreciation and amortization increased 48% to $10.5 million for the three months ended September 30, 2012 from $7.1 million for the three months ended September 30, 2011.  Depreciation and amortization on a same store basis decreased $0.8 million, or 11%, to $6.3 million due primarily to slot machines purchased during the opening of DJL’s land based facility becoming fully depreciated in the fourth quarter of 2011.  Depreciation expense at KSC for the three months ended September 30, 2012 was $4.1 million.

Affiliate management fees were $2.3 million and $1.6 million for the three months ended September 30, 2012 and 2011, respectively, and relate to management fees paid or accrued to related parties under various management services and consulting agreements at EVD, DJW, ABC and KSC with the increase primarily related to the addition of operations at KSC.  Upon consummation of the Merger it is expected that the existing management agreements will be terminated in connection with the change in corporate ownership.

Merger-related expenses of $0.3 million for the three months ended September 30, 2012 relate to legal and other professional fees incurred associated with the Merger as described in Note 1 to the condensed consolidated financial statements.

Pre-opening expenses of $0.2 million for the three months ended September 30, 2012 relate to start-up costs for the remainder of the first phase of the development project at KSC and consist primarily of pre-opening payroll.  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 professional services fees, regulatory costs and payroll.

Segment operating earnings margin at ABC decreased 150 basis points to 28.2% for the three months ended September 30, 2012 due to the impact of Hurricane Isaac in the current period.  Segment operating earnings margins at DJW, EVD and DJL for the three months ended September 30, 2012 did not vary materially from the three months ended September 30, 2011. Segment operating earnings margin at KSC for the three months ended September 30, 2012 was 50.2%.

Interest expense, net of amounts capitalized and interest income, increased $0.2 million to $16.7 million for the three months ended September 30, 2012 from $16.5 million for the three months ended September 30, 2011 primarily due to interest expense associated with slot financing at KSC during the three months ended September 30, 2012.     

         Nine months ended September 30, 2012 compared to nine months ended September 30, 2011

Consolidated net revenues increased $149.4 million, or 60%, to $398.2 million for the nine months ended September 30, 2012 from $248.8 million for the nine months ended September 30, 2011 driven primarily by the opening of the Kansas Star in December 2011.  Consolidated net revenues on a same store basis increased $7.5 million, or 3%, to $256.3 million. All same store properties reported net revenue growth for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.  Net revenue growth for DJL, DJW, EVD, and ABC was 1%, 5%, 3%, and 3%, respectively, for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Net revenue increases at DJL, DJW, and EVD was driven primarily by increases in casino revenues.  ABC’s net revenue increase was driven primarily by a 5% increase in casino revenues compared to the prior period offset, in part, by a $0.7 million gain on a financial settlement with the predecessor owner of ABC during the nine months ended September 30, 2011.  Net revenues at KSC for the nine months ended September 30, 2012 were $141.9 million.

Casino revenues increased $151.9 million, or 66%, to $381.8 million for the nine months ended September 30, 2012 from $229.9 million for the nine months ended September 30, 2011 driven primarily by the opening of the Kansas Star in December 2011. Casino revenues on a same store basis increased $8.3 million, or 4%, to $238.2 million.  In Iowa, we continue to see steady growth at DJW as its casino revenues increased by $3.9 million, or 6%, to $69.5 million for the nine months ended September 30, 2012 from $65.6 million for the nine months ended September 30, 2011 while DJL’s casino revenues increased by $0.3 million, or 1%, to $52.3 million for the nine months ended September 30, 2012 from $52.0 million for the nine months ended September 30, 2011.  Our Iowa properties continued to benefit from a strong agricultural economy in the region, which we believe helped drive an increase in spend per trip at DJW, as well as favorable weather during the first quarter of 2012. In addition, DJL increased its share of the Dubuque, Iowa market by 40 basis points over the prior period to 53.9%.  In Louisiana, both properties experienced period over period growth.  EVD’s casino revenues increased by $2.3 million, or 3%, to $75.4 million for the nine months ended September 30, 2012 from $73.1 million for the nine months ended September 30, 2011 due primarily to an increase in spend per trip by our guests.  ABC’s casino revenues increased by $1.8 million, or 5%, to $41.0 million for the nine months ended September 30, 2012 from $39.2 million for the nine months ended September 30, 2011.  The majority of this increase came during the second quarter where casino revenues increased $2.1 million as a result of enhanced marketing and direct mail efforts at ABC and was offset by a $0.3 million casino revenue decrease in the third quarter as a result of the impact of Hurricane Isaac as discussed above.  Casino revenues at KSC for the nine months ended September 30, 2012 were $143.6 million.

Casino operating expenses increased $57.9 million, or 62%, to $150.8 million for the nine months ended September 30, 2012 from $92.9 million for the nine months ended September 30, 2011.  Casino expenses on a same store basis increased $4.4 million, or 5%, to $97.3 million due primarily to an increase in gaming taxes as a result of an increase in casino revenues as well as enhanced database mailings and offers.   Casino expenses at KSC for the nine months ended September 30, 2012 were $53.5 million.

Promotional allowances as a percentage of casino revenues on a same store basis were essentially flat for the nine months ended September 30, 2012 and 2011 at approximately 13%.  Promotional allowances as a percentage of casino revenues at KSC was 5% for the nine months ended September 30, 2012.

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Racing revenues at EVD decreased 3% to $11.6 million for the nine months ended September 30, 2012 from $11.9 million for the nine months ended September 30, 2011.  This decrease is driven entirely by the closure of our New Iberia OTB in January 2012. EVD was able to capture some of that lost revenue at its St. Martinville OTB which increased its racing revenues by $0.7 million during the nine months ended September 30, 2012. Consistent with racing revenues, racing expenses decreased $0.3 million compared to the prior period.

Video poker revenues increased by 5% to $4.5 million for the nine months ended September 30, 2012 compared to $4.3 million for the nine months ended September 30, 2011 while video poker expenses remained substantially unchanged at $3.5 million for the same periods.

Food and beverage revenues increased 24% to $25.3 million for the nine months ended September 30, 2012 from $20.4 million for the nine months ended September 30, 2011.  Food and beverage revenues on a same store basis increased $0.8 million, or 4%, to $21.2 million due primarily to an increase in comped beverage revenue at our Louisiana properties as we continue to focus on improved service to our guests.  Food and beverage expenses on a same store basis increased 2% to $13.4 million for the nine months ended September 30, 2012.  Food and beverage revenues and expenses at KSC for the nine months ended September 30, 2012 were $4.1 million and $2.6 million, respectively.

Other revenues increased $0.7 million to $12.4 million for the nine months ended September 30, 2012 from $11.7 million for the nine months ended September 30, 2011. Other revenues on a same store basis decreased $0.8 million to $10.9 million due primarily to a $0.7 million gain at ABC on a financial settlement with the predecessor owner during the nine months ended September 30, 2011 as discussed above.  Other expenses on a same store basis increased approximately $0.2 million over the prior year period.  Other revenues and expenses at KSC for the nine months ended September 30, 2012 were $1.5 million and $0.2 million, respectively.

Selling, general and administrative expenses increased 36% to $58.8 million for the nine months ended September 30, 2012 from $43.3 million for the nine months ended September 30, 2011. Selling, general and administrative expenses on a same store basis increased $2.9 million, or 7%, to $46.2 million due primarily to an increase in corporate payroll and travel due to the incremental operations of the Kansas Star and to assist in operations during the opening months of the property.  Selling, general and administrative expenses at KSC for the nine months ended September 30, 2012 were $12.5 million.

Depreciation and amortization increased 45% to $31.2 million for the nine months ended September 30, 2012 from $21.5 million for the nine months ended September 30, 2011.  Depreciation and amortization on a same store basis decreased $2.2 million, or 10%, to $19.3 million due primarily to slot machines purchased during the opening of DJL’s land based facility becoming fully depreciated in the fourth quarter of 2011.  Depreciation expense at KSC for the nine months ended September 30, 2012 was $12.0 million.

Affiliate management fees were $7.0 million and $4.7 million for the nine months ended September 30, 2012 and 2011, respectively, and relate to management fees paid or accrued to related parties under various management services and consulting agreements at EVD, DJW, ABC and KSC with the increase primarily related to the addition of operations at KSC.  Upon consummation of the Merger it is expected that the existing management agreements will be terminated in connection with the change in corporate ownership.

Merger-related expenses of $2.5 million for the nine months ended September 30, 2012 relate to legal and other professional fees incurred associated with the Merger as described in Note 1 to the condensed consolidated financial statements.

Pre-opening expenses of $0.2 million for the nine months ended September 30, 2012 relate to start-up costs for the remainder of the first phase of the development project at KSC and consist primarily of pre-opening payroll.  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 professional services fees, regulatory costs and payroll.

Segment operating earnings margins at DJL, DJW and EVD for the nine months ended September 30, 2012 did not vary materially from the nine months ended September 30, 2011. ABC saw an increase in margins of 120 basis points as a result of the 5% increase in casino revenues.  Segment operating earnings margin at KSC for the nine months ended September 30, 2012 was 51.5%.

Interest expense, net of amounts capitalized and interest income, increased $2.6 million to $52.0 million for the nine months ended September 30, 2012 from $49.4 million for the nine months ended September 30, 2011 primarily due to the timing 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 as well as interest expense associated with the KSC Term Loan during the first and second quarter of 2012 and slot financing at KSC during the nine months ended September 30, 2012.

Our operations are subject to seasonal fluctuations. Our Iowa operations are typically weaker from November through February as a result of adverse weather conditions, and are typically stronger from March through October. Our Louisiana horse racing operations are also subject to seasonal fluctuations. Our horse racing operations are usually stronger during live racing season, which generally runs from April through December. We have not operated in Kansas long enough to observe significant seasonal fluctuations in our Kansas operations. In general, our payroll and general and administrative expenses are affected by inflation. Although inflation has not had a material effect on our business to date, we could experience more significant effects of inflation in future periods.

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LIQUIDITY AND CAPITAL RESOURCES

       Cash Flows from Operating, Investing and Financing Activities

Our cash balance decreased $32.6 million to $35.6 million at September 30, 2012 from $68.2 million at December 31, 2011.

Cash flows from operating activities were $79.4 million during the nine months ended September 30, 2012, compared to $6.6 million during the nine months ended September 30, 2011.  The increase in cash flows from operating activities is due primarily to an increase in cash flows from operations at KSC of $79.6 million during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 offset by a decrease in operating cash flows at PGL due to $5.7 million of additional interest paid related to the timing of the issuance of the tack-on notes in the first quarter of 2011 and merger-related expenses paid of $1.5 million during the nine months ended September 30, 2012.  

Cash flows used in investing activities during the nine months ended September 30, 2012 was $67.9 million consisting primarily of (i) payments of $59.7 million related to the Kansas Star development project, (ii) a $1.0 million investment in KSC Lodging as discussed in Note 2 to the condensed consolidated financial statements and (iii) outflows of $7.2 million primarily related to the acquisition of slot machines and slot machine conversions and general maintenance capital expenditures as well as payments to a third party related to contingent development payments in an amount equal to 1% of KSC’s segment operating earnings.  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, 2012, excluding slot machines, slot machine conversions and the contingent development payment noted above include improvements to our existing owned and leased buildings and improvements and the replacement of computer equipment and racing equipment.

Cash flows used in financing activities during the nine months ended September 30, 2012 of $44.0 million reflects borrowings under the PGL Credit Facility of $10.0 million and $4.3 million in gross proceeds from borrowings under the KSC Term Loan offset by (i) repayment of $15.0 million of borrowings under PGL Credit Facility, (ii) principal payments on debt of $28.7 million, including the payoff of all outstanding amounts under the term loans at DJL and KSC, and (iii) member distributions of $14.6 million. Included in member distributions during the nine months ended September 30, 2012 are distributions related to the repurchase of certain previously granted and vested profits interests from certain executive officers of the Company of $9.0 million.

As of September 30, 2012, the Company had no outstanding advances under the PGL Credit Facility. In addition, as of September 30, 2012, the Company had outstanding letters of credit under the PGL Credit Facility of approximately $10.8 million resulting in available borrowings thereunder of $39.2 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, 2011.  There have been no significant changes to our financing activities during the nine months ended September 30, 2012 other than the Company repaid all outstanding advances under the term loans at DJL and KSC in June 2012 and all outstanding borrowings under the PGL Credit Facility as of December 31, 2011 and 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, 2011.

In addition to our cash on hand, we currently have the following sources of funds for our business: (i) cash flows from operations and (ii) available borrowings under the PGL Credit Facility. 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. We do not anticipate these restrictions will have an impact on our ability to meet our cash obligations.

As of September 30, 2012, capital expenditures for the next 12 months, exclusive of the Kansas Star development project are expected to be approximately $10 million including payments to a third party related to contingent development payments in an amount equal to 1% of KSC’s segment operating earnings.  Capital expenditures and pre-opening costs related to the Kansas Star development for the next twelve months are expected to be $34 million (excluding any capitalized interest and anticipated financing of the hotel and certain off-site utilities by third parties).

The Company’s debt maturities for the next 12 months are expected to be approximately $5.9 million.  During the next 12 months, the Company anticipates making member distributions to PGP through the date of the Merger of approximately $1 million for the following items: (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 in their capacity as board members, and (iii) tax, accounting, licensure, legal, and administrative costs and expenses of PGP.  

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); (ii) cash generated from operations; and (iii) 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. 

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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 (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 for the next 12 months.

Pursuant to the acquisition of PGL and its operating subsidiaries by Boyd, as discussed in Note 1 to the condensed consolidated financial statements, Boyd is expected to refinance our existing senior indebtedness at the time of the Merger. If the Merger is consummated, it is likely that the Company will incur costs related to the early retirement of debt.

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 respective abilities 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, 2011 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, 2011. There have been no significant changes to our contractual obligations other than the Merger Agreement, as discussed in Note 1 to the condensed consolidated financial statements, during the nine months ended September 30, 2012.

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, 2011, 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 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.

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, 2011. 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, 2012.

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 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, 2012, 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, 2012) 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.

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 assessment arrangements, and debt borrowings as of September 30, 2012 (dollars in thousands):

Description	Maturity	Interest Rate		Carrying Value	Fair Value
Investment available for sale	2012 - 2037	7.5	%	$   20,669	$   20,669	(1)
Note receivable	2012 - 2014	14.5	%	2,452	2,452	(2)
8 ⅜% senior secured notes	Aug 15, 2015	8.375	%	319,694	335,360	(2)
10 ¾% senior unsecured notes	Aug 15, 2017	10.75	%	352,576	402,038	(2)
Senior secured credit facility	January 15, 2015	6	% (3)	-	-
Notes payable, capital lease obligations and other financial instruments	2012 - 2015	6.0% - 14.4	%	6,323	6,387	(2)
Obligation under assessment arrangements	2012 - 2037	2.0% - 8.0	%	34,570	45,005	(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, 2012 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, 2012.

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ITEM 4. CONTROLS AND PROCEDURES

As required by Rule 13a-15(b) under the 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, 2012, 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 Securities and Exchange Commission’s rules and forms.

During the three months ended September 30, 2012, there have been no changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

       PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 effect on the Company’s financial condition, results of operations or cash flows.

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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 of Chief Exeutive Officer and Chief Financial Officer 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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, each of the registrants has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 2, 2012.

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

30

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

31

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

32