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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 333-06489
INDIANA THE MAJESTIC STAR CASINO, LLC 43-1664986
INDIANA THE MAJESTIC STAR CASINO CAPITAL CORP. 35-2100872
(State or other (Exact name of registrant as (I.R.S. Employer
jurisdiction of specified in its charter) Identification No.)
incorporation or
organization)
ONE BUFFINGTON HARBOR DRIVE
GARY, INDIANA
46406-3000
(219) 977-7823
(Address of principal executive offices and telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes X No
------------ -------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes No X
------------ -------------
Shares outstanding of each of the registrant's classes of common stock:
Class Number of shares
- ----- ----------------
Not applicable Not applicable
THE MAJESTIC STAR CASINO, LLC
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2003 (Unaudited)
and December 31, 2002................................................. 1
Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002 (Unaudited)............................. 2
Consolidated Changes in Member's Deficit for the three months
ended March 31, 2003 (Unaudited) and the Year ended
December 31, 2002..................................................... 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 (Unaudited)............................. 4
Notes to Financial Statements ........................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 30
Item 4. Controls and Procedures............................................... 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings .................................................... 30
Item 6. Exhibits and Reports on Form 8-K ..................................... 31
SIGNATURES..................................................................... 32
CERTIFICATIONS................................................................. 33
i
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 36,079,690 $ 24,547,881
Restricted cash 500,000 250,000
Accounts receivable, less allowance for doubtful accounts
of $ 398,677 and $372,689, respectively 2,126,571 2,974,726
Inventories 976,008 982,486
Prepaid expenses 4,005,791 2,921,064
Note receivable due from affiliate -- 700,000
Due from Buffington Harbor Riverboats, L.L.C 180,885 217,925
------------- -------------
Total current assets 43,868,945 32,594,082
------------- -------------
Property, equipment and improvements, net 162,935,250 164,809,158
Intangible assets, net 17,292,996 17,691,746
Goodwill 5,922,398 5,922,398
Other Assets:
Deferred financing costs, net of accumulated amortization
of $4,925,750 and $4,375,528, respectively 8,824,182 9,372,067
Investment in Buffington Harbor Riverboats, L.L.C 31,229,290 31,833,311
Restricted cash 1,000,000 1,000,000
Other assets, prepaid leases and deposits 12,420,034 12,587,112
------------- -------------
Total other assets 53,473,506 54,792,490
------------- -------------
Total Assets $ 283,493,095 $ 275,809,874
============= =============
LIABILITIES AND MEMBER'S DEFICIT
Current Liabilities:
Current maturities of long-term debt $ 79,406 $ 134,084
Accounts payable 3,370,389 4,048,298
Payroll and related 6,607,064 7,656,515
Accrued interest 9,429,521 1,473,785
Other accrued liabilities 11,800,046 11,895,469
------------- -------------
Total current liabilities 31,286,426 25,208,151
Long-term debt, net of current maturities 274,903,602 274,526,285
------------- -------------
Total Liabilities 306,190,028 299,734,436
Commitments and contingencies 250,000 250,000
Member's Deficit (22,946,933) (24,174,562)
------------- -------------
Total Liabilities and Member's Deficit $ 283,493,095 $ 275,809,874
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
1
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
REVENUES:
Casino $ 74,767,880 $ 73,493,416
Rooms 3,798,785 4,088,511
Food and beverage 5,252,862 5,529,246
Other 1,371,636 1,284,821
------------ ------------
Gross revenues 85,191,163 84,395,994
Less promotional allowances (5,936,582) (6,339,215)
------------ ------------
Net revenues 79,254,581 78,056,779
COSTS AND EXPENSES:
Casino 24,361,788 25,286,436
Rooms 1,545,896 1,768,500
Food and beverage 2,882,062 3,221,727
Other 409,608 378,654
Gaming taxes 14,316,086 13,596,586
Advertising and promotion 4,966,404 4,957,981
General and administrative 12,922,735 12,065,180
Economic incentive - City of Gary 1,060,247 938,260
Depreciation and amortization 5,671,576 5,664,653
Pre-opening expenses -- 7,287
------------ ------------
Total costs and expenses 68,136,402 67,885,264
------------ ------------
Operating income 11,118,179 10,171,515
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 37,100 39,482
Interest expense (7,962,528) (8,164,012)
(Loss) Gain on disposal of assets (109,720) 6,542
Other non-operating expense (47,814) (50,993)
------------ ------------
Total other expense (8,082,962) (8,168,981)
------------ ------------
Net income $ 3,035,217 $ 2,002,534
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
2
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND THE YEAR ENDED DECEMBER 31, 2002
Capital Accumulated Total
Contributions Deficit Members' Deficit
------------ ------------ ----------------
Balance, December 31, 2001 29,000,000 (48,981,487) (19,981,487)
Net income -- 1,315,754 1,315,754
Distribution to Manager -- (5,508,829) (5,508,829)
------------ ------------ ------------
Balance, December 31, 2002 29,000,000 (53,174,562) (24,174,562)
Net income -- 3,035,217 3,035,217
Distribution to Manager -- (1,247,782) (1,247,782)
Equity in property acquired from related party -- (559,806) (559,806)
------------ ------------ ------------
Balance, March 31, 2003 $ 29,000,000 $(51,946,933) $(22,946,933)
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,035,217 $ 2,002,534
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 3,720,735 3,741,344
Amortization 1,346,820 1,317,349
Loss on investment in Buffington Harbor Riverboats, L.L.C 604,021 605,947
Loss (Gain) on sale of assets 109,720 (6,542)
Changes in operating assets and liabilities:
Decrease in accounts receivable 272,243 10,693
Decrease in inventories 6,477 48,819
Increase in prepaid expenses (672,937) (286,483)
Decrease (increase) in other assets 151,342 (605,247)
Decrease in accounts payable (677,909) (743,335)
Decrease in accrued payroll and related expenses (1,049,452) (912,020)
Increase in accrued interest 7,955,736 917,317
(Decrease) increase in other accrued liabilities (95,433) 1,218,383
------------ ------------
Net cash provided by operating activities 14,706,580 7,308,759
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of acquisition related costs -- (796,649)
Acquisition of property, equipment and improvements (1,986,298) (2,344,859)
Equity in property acquired from related party (559,806) --
Decrease (increase) in prepaid lease and deposits 1,000 (5,000)
Increase in restricted cash (250,000) --
Investment in Buffington Harbor Riverboats, L.L.C -- (23,503)
Proceeds from sale of equipment 29,750 6,542
------------ ------------
Net cash used in investing activities (2,765,354) (3,163,469)
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit, net -- (4,800,000)
Payment of 11.653% Senior Secured Notes issuance costs (2,337) (505,136)
Cash paid to reduce long-term debt (75,209) (55,182)
Cash received from loans to related parties 915,911 --
Distribution to Barden Development, Inc. (1,247,782) (468,274)
------------ ------------
Net cash used in financing activities (409,417) (5,828,592)
------------ ------------
Net increase (decrease) in cash and cash equivalents 11,531,809 (1,683,302)
Cash and cash equivalents, beginning of period 24,547,881 25,925,291
------------ ------------
Cash and cash equivalents, end of period $ 36,079,690 $ 24,241,989
============ ============
INTEREST PAID:
Equipment Debt $ 4,981 $ 8,361
Senior Secured Notes - Fixed Interest 10-7/8% $ -- $ 7,068,750
Lines of credit $ 61 $ 169,582
The accompanying notes are an integral part of these
consolidated financial statements.
4
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The Majestic Star Casino, LLC (the "Company") was formed on December 8,
1993 to provide gaming and related entertainment to the public. The Company
commenced gaming operations in the City of Gary ("Gary") at Buffington Harbor,
located in Lake County, in the State of Indiana on June 7, 1996. Majestic
Investor, LLC was formed on September 12, 2000 as an "unrestricted subsidiary"
of the Company under the Indenture relating to the Company's 10-7/8% Senior
Secured Notes. Majestic Investor, LLC was initially formed to satisfy the
Company's off-site development obligations under the Development Agreement with
Gary.
Majestic Investor, LLC entered into a definitive purchase and sale
agreement dated as of November 22, 2000, as amended December 4, 2000, with
Fitzgeralds Gaming Corporation ("Fitzgeralds") and certain of its affiliates to
purchase substantially all of the assets of three of its subsidiaries for
approximately $149.0 million in cash, subject to adjustment in certain
circumstances, plus assumption of certain liabilities. Majestic Investor, LLC
assigned all of its rights and obligations to Majestic Investor Holdings, LLC, a
wholly-owned subsidiary of Majestic Investor, LLC, following the formation of
Majestic Investor Holdings, LLC. Majestic Investor Holdings, LLC completed the
purchase of the Fitzgeralds assets on December 6, 2001 and commenced operations
on December 7, 2001. The three Fitzgeralds brand casinos are "restricted
subsidiaries" of Majestic Investor Holdings, LLC under the Indenture relating to
Majestic Investor Holdings, LLC's 11.653% Senior Secured Notes and "unrestricted
subsidiaries" under the Company's Indenture relating to the Company's 10-7/8%
Senior Secured Notes.
Except where otherwise noted, the words "we," "us," "our" and similar
terms, as well as the "Company" refer to The Majestic Star Casino, LLC and all
of its subsidiaries.
The accompanying consolidated financial statements are unaudited and
include the accounts of the Company and its wholly-owned subsidiary, Majestic
Investor, LLC. All intercompany transactions and balances have been eliminated.
Investments in affiliates in which the Company has the ability to exercise
significant influence, but not control, are accounted for by the equity method.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (which include normal recurring adjustments)
considered necessary for a fair presentation of the results for the interim
periods have been made. The results for the three months ended March 31, 2003,
are not necessarily indicative of results to be expected for the full fiscal
year. The financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002.
The consolidated financial statements and footnotes for prior year
reflect certain reclassifications to conform to the current year presentation,
which have no effect on previously reported net income.
5
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2. NEW ACCOUNTING PRINCIPLES
In April 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 145 ("SFAS 145"). Among
other matters, SFAS 145 addresses the presentation for gains and losses on early
retirements of debt in the statement of operations. SFAS 145 is effective for
fiscal years beginning after May 15, 2003. Adoption of SFAS 145 is not
anticipated to have a material impact on our financial condition, results of
operations or cash flows.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Guarantees of Indebtedness of Others."
FIN 45 elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies (for guarantees issued after January 1,
2003) that a guarantor is required to recognize at the inception of a guarantee,
a liability for the fair value of the obligations undertaken in issuing the
guarantee. At March 31, 2003, the Company did not have any guarantees outside of
its consolidated group and accordingly does not expect the adoption of FIN 45 to
have a material impact on its financial condition, results of operations or cash
flows.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities."
FIN 46 addresses the requirements for business enterprises to consolidate
related entities in which they are determined to be the primary economic
beneficiary as a result of their variable economic interests. FIN 46 is intended
to provide guidance in judging multiple economic interest in an entity and in
determining the primary beneficiary. FIN 46 outlines disclosure requirements for
"Variable Interest Entities ("VIE")" in existence prior to January 31, 2003, and
outlines consolidation requirement for VIEs created after January 31, 2003. The
Company has reviewed its major relationships and its overall economic interests
with other companies consisting of related parties, companies in which it has an
equity position and other suppliers to determine the extent of its variable
economic interest in these parties. The review has not resulted in a
determination that the Company would be judged to be the primary economic
beneficiary in any material relationships, or that any material entities would
be judged to be VIEs of the Company. The Company believes it has appropriately
reported the economic impact and its share of risks of its commercial
relationships through its equity accounting along with appropriate disclosure of
its commitments.
NOTE 3. INVESTMENT IN BUFFINGTON HARBOR RIVERBOATS, L.L.C. ("BHR")
On October 31, 1995, the Company and Trump entered into the First
Amended and Restated Operating Agreement of BHR for the purpose of acquiring and
developing certain facilities for the gaming operations in the City ("BHR
Property"). BHR is responsible for the management, development and operation of
the BHR Property. The Company and Trump have each entered into an agreement with
BHR (the "Berthing Agreement") to use BHR Property for their respective gaming
operations and have committed to pay cash operating losses of BHR as additional
berthing fees. The Company and Trump share equally in the operating expenses
6
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
relating to the BHR Property, except for costs associated with food and
beverage, and valet operations, which are allocated on a percentage of use by
the casino customers of the Company and Trump.
The Company paid approximately $1.3 million in berthing fees for the
three months ended March 31, 2003, compared to $1.6 million for the three months
ended March 31, 2002. Such amounts are recorded in general and administrative
expense in the consolidated statement of operations. In addition, the Company
has paid approximately $203,000 for costs associated with food and beverage in
each of the three month periods ended March 31, 2003 and 2002. Such amounts are
recorded in casino expenses in the Company's consolidated statements of
operations. After the company and Trump reimburse BHR for all cash operational
losses, the remaining net loss of BHR results from depreciation expense
associated with the BHR property. The Company has elected to record its
allocation portion of BHR's net loss within depreciation expense in its
consolidated statement of operations. The allocated net loss recorded in
depreciation expense for the three months ended March 31, 2003 is approximately
$604,000 compared to $606,000 for the three months ended March 31, 2002.
The following represents selected financial information of BHR:
Buffington Harbor Riverboats, L.L.C.
Statements of Operations
(Unaudited)
March 31, March 31,
2003 2002
---- ----
Gross revenue $ 3,377,808 $ 4,217,973
Operating Income $ 3,306 $ 4,990
Net loss $(1,208,041) $(1,211,920)
NOTE 4. INTANGIBLE ASSETS
The Company (Gary property only) has no intangible assets. Intangible
assets at Majestic Investor Holdings, LLC primarily include $9.8 million for
customer relationships, $3.7 million for tradename and $5.2 million for gaming
licenses. Intangible assets for customer relationships and tradenames are being
amortized over a period of 8-10 years. In accordance with SFAS 142, goodwill,
and other indefinite lived intangible assets, such as the Majestic Investor
Holdings, LLC's gaming license, are not amortized but instead are subject to
impairment tests at least annually.
7
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4. INTANGIBLE ASSETS (CONTINUED)
The gross carrying amount and accumulated amortization of the
intangible assets, other than goodwill, as of March 31, 2003, are as follows:
Gross
Carrying Accumulated Net Amount
Amount Amortization March 31, 2003
--------- ------------ --------------
(in thousand) (in thousands) (in thousands)
Amortized intangible assets:
Customer relationships $ 9,800 $ (1,619) $ 8,181
Tradename 3,700 (488) 3,212
Riverboat excursion license 700 -- 700
--------- ------------ -------
Total $ 14,200 $ (2,107) $12,093
========= ============ =======
Unamortized intangible assets:
Gaming license $ 5,200 $ -- $ 5,200
--------- ------------ -------
Total $ 5,200 $ -- $ 5,200
========= ============ =======
The amortization expense recorded on the intangible assets for the
three months ended March 31, 2003 was $0.4 million. The estimated amortization
expense for each of the five succeeding fiscal years is as follows (amounts in
thousands):
For the year ended December 31,
-------------------------------
2003 $1,618
2004 1,642
2005 1,642
2006 1,642
2007 1,642
NOTE 5. GOODWILL
There were no changes in the carrying amount of goodwill for the three
months ended March 31, 2003. The carrying amount of goodwill for the three
months ended March 31, 2003 was approximately $5,922,000. In accordance with
SFAS 142, goodwill is not amortized but instead subject to impairment testing at
least annually.
8
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Various legal proceedings are pending against the Company. Management
considers all such pending proceedings, comprised primarily of personal injury
and equal employment opportunity (EEO) claims, to be routine litigation
incidental to the Company's business. Management believes that the resolution of
these proceedings will not individually or in the aggregate, have a material
effect on the Company's financial condition or results of operations.
There have been no significant changes in legal proceedings previously
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, except for those legal proceedings described below.
On May 11 and 12, 2000, the Company was issued notices of proposed
assessment by the Indiana Department of Revenue for income tax withholding
deficiencies for the years ended December 31, 1996 and 1998. The Indiana
Department of Revenue has taken the position that Indiana gross wagering tax
must be added back to the Company's income for the purpose of determining the
Indiana adjusted gross income tax on the Company's non-resident member, and that
the Company had the duty to withhold and remit adjusted gross income tax payable
by its non-resident member. The tax deficiency assessed for 1996 and 1998 totals
$553,744, plus accrued interest. On February 10, 2003, the Company was issued
notices of proposed assessment by the Indiana Department of Revenue for income
tax withholding deficiencies for the years ended December 31, 1999, 2000 and
2001, concerning the same issue. The tax deficiency assessed for 1999-2001
totals $2,012,397 plus accrued interest. The Company has filed administrative
protests and demands for hearing with the Department of Revenue to protect its
rights with respect to all tax years. However, it is too early to determine the
outcome of these contested tax assessments.
Gaming Regulations
The ownership and operation of riverboat gaming operations in Indiana
are subject to strict state regulation under the Riverboat Gambling Act ("Act")
and the administrative rules promulgated thereunder. The Indiana Gaming
Commission ("IGC") is empowered to administer, regulate and enforce the system
of riverboat gaming established under the Act and has jurisdiction and
supervision over all riverboat gaming operations in Indiana, as well as all
persons on riverboats where gaming operations are conducted. The IGC is
empowered to regulate a wide variety of gaming and nongaming related activities,
including the licensing of supplies to, and employees at, riverboat gaming
operations and to approve the form of entity qualifiers and intermediary and
holding companies. Indiana is a relatively new jurisdiction and the emerging
regulatory framework is not yet complete. The IGC has adopted certain final
rules and has published others in proposed or draft form, which are proceeding
through the review and final adoption process. The IGC has broad rulemaking
power, and it is impossible to predict what effect, if any, the amendment of
existing rules or the finalization of currently new rules might have on the
Company's operations.
A change in the Indiana state law governing gaming took effect on July
1, 2002. The new law enables Indiana's riverboat casinos to operate dockside.
The IGC approved Majestic Star's
9
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
flexible boarding plan that allows the continuous ingress and egress of patrons
for the purpose of gambling while the riverboat is docked. The plan went into
effect on August 5, 2002 and imposes a graduated wagering tax based upon
adjusted gross receipts. The graduated wagering tax has a starting rate of 15%
with a top rate of 35% for adjusted gross receipts in excess of $150 million.
For the period July 1 through August 4, 2002, the wagering tax was raised by
statute to 22.5% of adjusted gross receipts. Prior to July 1, 2002, Indiana
gaming taxes were levied on adjusted gross receipts, as defined by Indiana
gaming laws, at the rate of 20%. In addition to the wagering tax, an admissions
tax of $3 per turnstile count is assessed. Prior to August 5, 2002, Indiana
imposed an admissions tax of $3 per patron turnstile count at every boarding
time plus the count of the patrons that stayed over on the vessel from a
previous boarding time period.
The State of Indiana recently enacted the following legislation:
o 24-Hour Dockside Gaming. Effective July 1, 2003, HEA 1001 authorizes a
licensed riverboat owner who implements flexible scheduling to conduct
gambling operations for up to 24 hours per day. Under the current IGC
ruling, the riverboat casinos must close for three hours daily. The
Company plans to submit its plan to the IGC for 24-Hour Dockside
Gaming.
o Retroactive Dockside Tax. Under an administrative decision by the IGC,
wagering tax rates during the July 1, 2002 through June 30, 2003 tax
period have not been computed for Adjusted Gross Receipts ("AGR")
received after implementation of flexible scheduling based on
cumulative AGR received since July 1, 2002. The starting point for the
computation of cumulative AGR during the tax period was set by the IGC
at August 1, 2002, for seven riverboats that implemented flexible
scheduling on that date; and August 5, 2002, for three riverboats that
implemented scheduling on that date. A noncode provision of HEA 1001,
Section 48, retroactive to July 1, 2002, would waive all penalties and
interest due from a riverboat that underpaid the amount of wagering
tax after June 30, 2002, and before May 1, 2003, because the tax rates
on AGR received by the riverboat after implementation of flexible
scheduling were not based on the cumulative total AGR received by the
riverboat from July 1, 2002, provided the riverboat pays the unpaid
balance in two equal installments on July 1, 2003, and July 1, 2004.
The Company's retroactive wagering tax is estimated to be
approximately $1,036,000, which can be paid in the two equal
installments.
o Second Riverboat License. Effective July 1, 2003, SEA 176 removes the
prohibition on a riverboat owner owning more than a 10% interest in
another riverboat and permits a person to own up to a 100% interest in
not more than two riverboats. HEA 1001, Section 42 imposes a $2.0
million transfer fee upon a person who purchases or otherwise acquires
a controlling interest in a second owner's license.
The ownership and operation of our other casino gaming facilities in
Nevada, Mississippi and Colorado are also subject to various state and local
regulations in the jurisdictions where they
10
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
are located. In Nevada, our gaming operations are subject to the Nevada Gaming
Control Act, and to the licensing and regulatory control of the Nevada Gaming
Commission, the Nevada State Gaming Control Board and various local ordinances
and regulations, including, without limitation, applicable city and county
gaming and liquor licensing authorities. In Mississippi, our gaming operations
are subject to the Mississippi Gaming Control Act, and to the licensing and/or
regulatory control of the Mississippi Gaming Commission, the Mississippi State
Tax Commission and various state and local regulatory agencies, including liquor
licensing authorities. In Colorado, our gaming operations are subject to the
Limited Gaming Act of 1991, which created the Division of Gaming within the
Colorado Department of Revenue and the Colorado Limited Gaming Control
Commission to license, implement, regulate and supervise the conduct of limited
gaming. Our operations are also subject to the Colorado Liquor Code and the
state and local liquor licensing authorities.
The Company's directors, officer, managers and key employees are
required to hold individual licenses, the requirements for which vary from
jurisdiction to jurisdiction. Licenses and permits for gaming operations and of
individual licensees are subject to revocation or non-renewal for cause. Under
certain circumstances, holders of our securities are required to secure
independent licenses and permits.
Other Contingencies
In September of 2000, AMB Parking, LLC, (a limited liability company
indirectly owned by Don. H. Barden, Chairman and CEO of the Company) and Trump
Indiana, Inc. (the "Joint Venture Partner") entered into an Operating Agreement
to form Buffington Harbor Parking Associates, LLC ("BHPA"). The limited
liability company was formed for the purpose of constructing and operating a
2,000 space parking garage. The Company is recognizing $9,462,815 of advances
made on the parking garage construction as prepaid lease expense. The Company
and the Joint Venture Partner have each entered into parallel operating lease
agreements with BHPA, each having a term of until December 31, 2018. The rent
payable under both leases is intended to service the debt incurred by BHPA to
construct the parking garage. The Company is amortizing its prepaid lease over
the term of the operating lease agreement. The lease agreement calls for the
Company and the Joint Venture Partner to make monthly lease payments equal to
100% of BHPA's debt service requirement for the following month, although each
party is entitled to a credit for 50% of such payment if the other party makes
its monthly payment.
Restricted Cash
At March 31, 2003 and December 31, 2002, restricted cash of $1.0
million represents U.S. Treasury Notes held in an escrow account for the benefit
of certain owners of land leased to Fitzgeralds Las Vegas. Also, at December
31, 2002, restricted cash of $250,000 at Majestic Investor Holdings, LLC
represents a letter of credit for self-insured workers compensation at
Fitzgerald Tunica and Fitzgeralds Black Hawk. At March 31, 2003, this amount was
increased to $500,000 when Fitzgeralds Las Vegas was added to the self-insured
workers compensation program.
NOTE 7. SEGMENT INFORMATION
The Company owns and operates four properties as follows: a riverboat
casino located in Gary, Indiana; a casino and hotel located in downtown Las
Vegas, Nevada; a casino and hotel located in Tunica, Mississippi; and a casino
located in Black Hawk, Colorado (collectively, the "Properties").
The Company identifies its business in four segments based on
geographic location. The Properties, in each of their segments, market primarily
to middle-income guests. The major products offered in each segment are as
follows: casino, hotel rooms (except in Gary, Indiana and Black Hawk, Colorado)
and food and beverage.
11
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7. SEGMENT INFORMATION (CONTINUED)
The accounting policies of each business segment are the same as those
described in the summary of significant accounting policies previously described
in Note 1 to the audited financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002. There are minimal
inter-segment sales. Corporate costs are allocated to the business segments
through management fees from Majestic Star, LLC (with respect to the casino in
Gary) to Majestic Investor Holdings, LLC (with respect to the Fitzgeralds
properties) and are reflected in "General and Administrative" expenses.
A summary of the Properties' operations by business segment for the
three months ended March 31, 2003 and March 31, 2002 is presented below:
12
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7. SEGMENT INFORMATION (CONTINUED)
As of and for the Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
(In thousands) (In thousands)
Net revenues:
Majestic Star Casino $ 35,976 $ 31,753
Fitzgeralds Tunica 22,965 24,347
Fitzgeralds Black Hawk 7,916 8,962
Fitzgeralds Las Vegas 12,398 12,995
Unallocated and other (1) -- --
--------- ---------
Total $ 79,255 $ 78,057
--------- ---------
Income (loss) from operations:
Majestic Star Casino $ 5,769 $ 4,683
Fitzgeralds Tunica 4,548 4,628
Fitzgeralds Black Hawk 1,231 1,259
Fitzgeralds Las Vegas 236 240
Unallocated and other (1) (666) (638)
--------- ---------
Total $ 11,118 $ 10,172
--------- ---------
Segment depreciation and amortization
Majestic Star Casino $ 2,018 $ 2,278
Fitzgeralds Tunica 1,905 1,780
Fitzgeralds Black Hawk 412 364
Fitzgeralds Las Vegas 671 617
Unallocated and other (1) 666 626
--------- ---------
Total $ 5,672 $ 5,665
--------- ---------
Expenditures for additions to long-lived assets:
Majestic Star Casino $ 923 $ 1,173
Fitzgeralds Tunica 267 513
Fitzgeralds Black Hawk 249 104
Fitzgeralds Las Vegas 547 555
Unallocated and other (1) -- --
--------- ---------
Total $ 1,986 $ 2,345
--------- ---------
Segment assets:
Majestic Star Casino $ 118,538 $ 121,788
Fitzgeralds Tunica 86,987 89,921
Fitzgeralds Black Hawk 29,953 30,234
Fitzgeralds Las Vegas 38,367 45,597
Unallocated and other (1) 160,021 172,607
--------- ---------
Total $ 433,866 $ 460,147
Less: intercompany (150,373) (172,145)
--------- ---------
Total $ 283,493 $ 288,002
========= =========
(1) Unallocated and other include corporate items and eliminations that are not
allocated to the operation segments.
13
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 8. RELATED PARTY TRANSACTIONS
On March 13, 2003, the Company purchased for $1,016,784, net of
prorated taxes plus closing costs, approximately 3.73 acres of land and a
building, adjacent to the Buffington Harbor Complex from an affiliated company.
The amounts were recorded in the Company's property and equipment accounts at
$406,000 for the land and $110,769 for the building, which was the carrying
value recorded on the affiliate's balance sheet. The remaining consideration
paid in excess of the seller's basis in the amount of $559,806 was recorded as
an adjustment to member's equity. The transaction was the result of an
arms-length negotiation and the purchase price was based on an independent
third-party appraisal.
The Company entered into an LLC Manager agreement on June 18, 1999 with
Barden Development, Inc. ("BDI") to provide for, among other things, BDI to act
as the Managing Member of the LLC. Distribution of profits to BDI are limited
under the indenture for the Majestic Star Senior Secured Notes. The distribution
cannot exceed 5% of the Company's Consolidated Cash Flow (as defined in the
Indenture for the Majestic Star Senior Secured Notes) for the immediately
preceding fiscal quarter and may not be paid if the Company is in default under
the Indenture governing such notes or if the Company does not meet certain
financial ratios as provided in such Indenture. During the three months ended
March 31, 2003, the Company made a distribution of $384,000 to BDI related to
the fourth quarter of 2002.
During the three months ended March 31, 2003, Majestic Investor
Holdings, LLC made a distribution of $864,000 to BDI, related to the fourth
quarter of 2002, in accordance with the LLC Manager Agreement between Majestic
Investor Holdings, LLC and BDI dated December 5, 2001.
In December 2001, the Company made a $300,000 employee loan to Mr.
Barden. This loan bore interest at a rate of 7% per annum and was due and
payable in full on December 12, 2002. On March 17, 2003, $215,911 was paid on
the note. The balance of $84,094 in principal and $29,194 in interest was paid
on April 23, 2003.
On January 31, 2002, the Company made a $200,000 employee loan to Mr.
Kelly. On March 17, 2003, Mr. Kelly paid $67,000 in accordance with the loan
agreement. This loan bears no interest and is due and payable in full on January
31, 2005.
In December 2001, Majestic Investor Holdings, LLC issued a $700,000
note to BDI. The note bears interest at a rate of 7% annum. The principal and
accrued but unpaid interest were due and payable in full on December 12, 2002.
The principal and accrued interest was paid on March 17, 2003.
NOTE 9. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Company's $130.0 million, 10 7/8% Senior Secured Notes are secured
by substantially all of the assets of the Majestic Star Casino, but not the
assets of Majestic Investor Holdings, LLC and its wholly-owned subsidiaries
which include the three Fitzgeralds' casino properties acquired on December 6,
2001.
14
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 9. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
Majestic Investor Holdings, LLC currently has $151.8 million of 11.653%
Senior Secured Notes outstanding (the "Investor Holdings Senior Secured Notes").
The Investor Holdings Senior Secured Notes are unconditionally and irrevocably
guaranteed, jointly and severally, by all of the restricted subsidiaries (the
"Guarantor Subsidiaries") of Majestic Investor Holdings, LLC. The guarantees
rank senior in right of payment to all existing and future subordinated
indebtedness of these restricted subsidiaries and equal in right of payment with
all existing and future senior indebtedness of these restricted subsidiaries.
The following condensed consolidating information presents condensed
consolidating balance sheets, as of March 31, 2003 and December 31, 2002 and
condensed consolidating statements of operations and cash flows for the three
months ended March 31, 2003 and 2002, for The Majestic Star Casino, LLC,
Majestic Investor Holdings, LLC, and the restricted subsidiaries of Majestic
Investor Holdings, LLC (on a combined basis) and the elimination entries
necessary to combine such entities on a consolidated basis. The Majestic Star
Casino Capital Corp. ("MSCCC") and Majestic Investor, LLC, wholly-owned
subsidiaries of The Majestic Star Casino, LLC, and Majestic Investor Capital
Corp. ("MICC"), a wholly-owned subsidiary of Majestic Investor Holdings, LLC, do
not have any material assets, obligations or operations. Therefore, no
information has been presented for these subsidiaries.
15
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEETS AS OF MARCH 31, 2003
(UNAUDITED)
Majestic Star Majestic Investor Guarantor Eliminating Total
Casino, LLC Holdings, LLC Subsidiaries Entries Consolidated
------------- ----------------- ------------ ----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 15,003,471 $ 5,783,064 $ 15,293,155 $ -- $ 36,079,690
Restricted cash -- 500,000 -- -- 500,000
Accounts receivable (net) 1,045,441 -- 1,081,130 -- 2,126,571
Inventories 47,171 -- 928,837 -- 976,008
Prepaid expenses and other
current assets 2,654,528 279,162 1,567,771 (314,785)(a) 4,186,676
------------- ------------- ------------- ------------- -------------
Total current assets 18,750,611 6,562,226 18,870,893 (314,785) 43,868,945
------------- ------------- ------------- ------------- -------------
Property, equipment and vessel
improvements, net 47,163,593 -- 115,771,657 -- 162,935,250
Intangible assets, net -- 5,200,000 12,092,996 -- 17,292,996
Due from related parties -- 115,904,126 -- (115,904,126)(b) --
Investment in Buffington Harbor
Riverboats, L.L.C 31,229,290 -- -- -- 31,229,290
Other assets 13,226,797 6,368,564 8,571,253 -- 28,166,614
Investment in subsidiaries 8,167,346 25,986,523 -- (34,153,869)(b) --
------------- ------------- ------------- ------------- -------------
Total Assets $ 118,537,637 $ 160,021,439 $ 155,306,799 $(150,372,780) $ 283,493,095
============= ============= ============= ============= =============
LIABILITIES AND MEMBER'S DEFICIT
Current Liabilities:
Current maturities of long-term debt $ -- $ -- $ 79,406 $ -- $ 79,406
Accounts payable, accrued and other 12,274,013 6,005,583 13,242,209 (314,785) 31,207,020
------------- ------------- ------------- ------------- -------------
Total current liabilities 12,274,013 6,005,583 13,321,615 (314,785) 31,286,426
------------- ------------- ------------- ------------- -------------
Due to related parties -- -- 115,904,126 (115,904,126)(a)(b) --
Long-term debt, net of current maturities 128,960,557 145,848,510 94,535 274,903,602
------------- ------------- ------------- ------------- -------------
Total Liabilities 141,234,570 151,854,093 129,320,276 (116,218,911) 306,190,028
Commitments and contingencies 250,000 -- -- -- 250,000
Member's Equity (Deficit): (22,946,933) 8,167,346 25,986,523 (34,153,869)(b) (22,946,933)
------------- ------------- ------------- ------------- -------------
Total Liabilities and Member's
Equity $ 118,537,637 $ 160,021,439 $ 155,306,799 $(150,372,780) $ 283,493,095
============= ============= ============= ============= =============
(a) To eliminate intercompany receivables and payables.
(b) To eliminate intercompany accounts and investment in subsidiaries.
16
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEETS AS OF DECEMBER 31, 2002
(UNAUDITED)
Majestic Star Majestic Investor Guarantor Eliminating Total
Casino, LLC Holdings, LLC Subsidiaries Entries Consolidated
------------- ----------------- ------------ ----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 8,564,057 $ 1,007,660 $ 14,976,164 $ -- $ 24,547,881
Restricted cash -- 250,000 -- -- 250,000
Accounts receivable, net 1,733,543 52,695 1,188,488 -- 2,974,726
Inventories 53,360 -- 929,126 -- 982,486
Prepaid expenses and other
current assets 1,778,480 5,573,991 1,575,678 (5,089,160)(a) 3,838,989
------------- ------------- ------------- ------------- -------------
Total current assets 12,129,440 6,884,346 18,669,456 (5,089,160) 32,594,082
------------- ------------- ------------- ------------- -------------
Property, equipment and vessel
improvements, net 47,511,652 -- 117,297,506 -- 164,809,158
Intangible assets, net -- 5,200,000 12,491,746 -- 17,691,746
Due from related parties -- 116,816,043 -- (116,816,043)(b) --
Investment in Buffington Harbor
Riverboats, L.L.C 31,833,311 -- -- -- 31,833,311
Other assets 13,619,918 6,714,902 8,546,757 -- 28,881,577
Investment in subsidiaries 8,082,405 19,959,009 -- (28,041,414)(b) --
------------- ------------- ------------- ------------- -------------
Total Assets $ 113,176,726 $ 155,574,300 $ 157,005,465 $(149,946,617) $ 275,809,874
============= ============= ============= ============= =============
LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt $ -- $ -- $ 134,084 $ -- $ 134,084
Accounts payable, accrued and other 8,221,517 1,960,447 15,215,462 (323,359)(a) 25,074,067
------------- ------------- ------------- ------------- -------------
Total current liabilities 8,221,517 1,960,447 15,349,546 (323,359) 25,208,151
------------- ------------- ------------- ------------- -------------
Due to related parties -- -- 121,581,844 (121,581,844)(a)(b) --
Long-term debt, net of current maturities 128,879,771 145,531,448 115,066 -- 274,526,285
------------- ------------- ------------- ------------- -------------
Total Liabilities 137,101,288 147,491,895 137,046,456 (121,905,203) 299,734,436
Commitments and contingencies 250,000 -- -- -- 250,000
Member's Equity (Deficit): (24,174,562) 8,082,405 19,959,009 (28,041,414)(b) (24,174,562)
------------- ------------- ------------- ------------- -------------
Total Liabilities and Member's
Equity (Deficit) $ 113,176,726 $ 155,574,300 $ 157,005,465 $(149,946,617) $ 275,809,874
============= ============= ============= ============= =============
(a) To eliminate intercompany receivables and payables.
(b) To eliminate intercompany accounts and investment in subsidiaries.
17
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 2003
(UNAUDITED)
MAJESTIC STAR MAJESTIC INVESTOR GUARANTOR ELIMINATING
CASINO, LLC HOLDINGS, LLC SUBSIDIARIES ENTRIES CONSOLIDATED
------------- ----------------- ------------ ----------- -------------
REVENUES:
Casino $ 35,332,173 $ -- $ 39,435,707 $ -- $ 74,767,880
Rooms -- -- 3,798,785 -- 3,798,785
Food and beverage 391,922 -- 4,860,940 -- 5,252,862
Other 570,798 -- 800,838 -- 1,371,636
------------ ------------ ------------ ------------ ------------
Gross revenues 36,294,893 -- 48,896,270 -- 85,191,163
Less promotional allowances (319,471) -- (5,617,111) -- (5,936,582)
------------ ------------ ------------ ------------ ------------
Net revenues 35,975,422 -- 43,279,159 -- 79,254,581
COSTS AND EXPENSES:
Casino 8,803,070 -- 15,558,718 -- 24,361,788
Rooms -- -- 1,545,896 -- 1,545,896
Food and beverage 383,862 -- 2,498,200 -- 2,882,062
Other -- -- 409,608 -- 409,608
Gaming taxes 9,740,773 -- 4,575,313 -- 14,316,086
Advertising and promotion 1,714,985 -- 3,251,419 -- 4,966,404
General and administrative 6,485,042 -- 6,437,693 -- 12,922,735
Economic incentive - City of Gary 1,060,247 -- -- -- 1,060,247
Depreciation and amortization 2,018,116 665,738 2,987,722 -- 5,671,576
------------ ------------ ------------ ------------ ------------
Total costs and expenses 30,206,095 665,738 37,264,569 -- 68,136,402
------------ ------------ ------------ ------------ ------------
Operating income (loss) 5,769,327 (665,738) 6,014,590 -- 11,118,179
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 14,157 18,298 4,645 -- 37,100
Interest expense (3,534,438) (4,421,360) (6,730) -- (7,962,528)
Gain (loss) on sale of assets (124,720) -- 15,000 -- (109,720)
Other non-operating expense (38,335) (9,479) -- -- (47,814)
Equity in net income (loss)
of subsidiaries 949,226 6,027,505 -- (6,976,731)(a) --
------------ ------------ ------------ ------------ ------------
Total other income (expense) (2,734,110) 1,614,964 12,915 (6,976,731) (8,082,962)
------------ ------------ ------------ ------------ ------------
Net income $ 3,035,217 $ 949,226 $ 6,027,505 $ (6,976,731) $ 3,035,217
============ ============ ============ ============ ============
(a) To eliminate equity in net income of subsidiaries.
18
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 2002
(UNAUDITED)
MAJESTIC STAR MAJESTIC INVESTOR GUARANTOR ELIMINATING
CASINO, LLC HOLDINGS, LLC SUBSIDIARIES ENTRIES CONSOLIDATED
------------- ----------------- ------------ ----------- -------------
REVENUES:
Casino $ 31,138,665 $ -- $ 42,354,751 $ -- $ 73,493,416
Rooms -- -- 4,088,511 -- 4,088,511
Food and beverage 433,145 -- 5,096,101 -- 5,529,246
Other 396,331 -- 888,490 -- 1,284,821
------------ ------------ ------------ ------------ ------------
Gross revenues 31,968,141 -- 52,427,853 -- 84,395,994
Less promotional allowances (215,760) -- (6,123,455) -- (6,339,215)
------------ ------------ ------------ ------------ ------------
Net revenues 31,752,381 -- 46,304,398 -- 78,056,779
COSTS AND EXPENSES:
Casino 7,260,277 -- 18,026,159 -- 25,286,436
Rooms -- -- 1,768,500 -- 1,768,500
Food and beverage 451,609 -- 2,770,118 -- 3,221,727
Other -- -- 378,654 -- 378,654
Gaming taxes 8,576,832 -- 5,019,754 -- 13,596,586
Advertising and promotion 1,661,445 -- 3,296,536 -- 4,957,981
General and administrative 5,903,986 4,205 6,156,989 -- 12,065,180
Economic incentive - City of Gary 938,260 -- -- -- 938,260
Depreciation and amortization 2,277,638 626,347 2,760,668 -- 5,664,653
Pre-opening expenses -- 7,287 -- -- 7,287
------------ ------------ ------------ ------------ ------------
Total costs and expenses 27,070,047 637,839 40,177,378 -- 67,885,264
------------ ------------ ------------ ------------ ------------
Operating income (loss) 4,682,334 (637,839) 6,127,020 -- 10,171,515
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 7,874 16,512 15,096 -- 39,482
Interest expense (3,648,625) (4,507,026) (8,361) -- (8,164,012)
Gain on sale of assets -- -- 6,542 -- 6,542
Other non-operating expense (33,501) (17,492) -- -- (50,993)
Equity in net income (loss)
of subsidiaries 994,452 6,140,297 -- (7,134,749)(a) --
------------ ------------ ------------ ------------ ------------
Total other income (expense) (2,679,800) 1,632,291 13,277 (7,134,749) (8,168,981)
------------ ------------ ------------ ------------ ------------
Net income $ 2,002,534 $ 994,452 $ 6,140,297 $ (7,134,749) $ 2,002,534
============ ============ ============ ============ ============
(a) To eliminate equity in net income of subsidiaries.
19
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS
ENDED MARCH 31, 2003
(UNAUDITED)
MAJESTIC STAR MAJESTIC INVESTOR GUARANTOR ELIMINATING CONSOLIDATED
CASINO, LLC HOLDINGS, LLC SUBSIDIARIES ENTRIES TOTAL
------------- ----------------- ------------ ----------- -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES: $ 8,074,222 $ (7,965) $ 6,640,323 $ - $ 14,706,580
------------ ----------- ----------- ---------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (923,175) - (1,063,123) - (1,986,298)
Equity in property acquired from
related party (559,806) - - - (559,806)
Increase in restricted cash - (250,000) - - (250,000)
Decrease in prepaid leases and deposits 1,000 - - - 1,000
Proceeds from sale of equipment 14,750 - 15,000 - 29,750
------------ ----------- ----------- ---------- -------------
Net cash used in investing activities (1,467,231) (250,000) (1,048,123) - (2,765,354)
------------ ----------- ----------- ---------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of 11.653% Senior Secured Notes
issuance costs - (2,337) - - (2,337)
Cash advances to/from affiliates - 5,200,000 (5,200,000) - -
Cash received from loans to related parties 215,911 700,000 - - 915,911
Cash paid to reduce long-term debt - - (75,209) - (75,209)
Distribution to Barden Development, Inc. (383,488) (864,294) - - (1,247,782)
------------ ----------- ----------- ---------- -------------
Net cash provided by (used in) financing
activities (167,577) 5,033,369 (5,275,209) - (409,417)
------------ ----------- ----------- ---------- -------------
Net increase in cash and cash equivalents 6,439,414 4,775,404 316,991 - 11,531,809
Cash and cash equivalents, beginning of period 8,564,057 1,007,660 14,976,164 - 24,547,881
------------ ----------- ----------- ---------- -------------
Cash and cash equivalents, end of period $ 15,003,471 $ 5,783,064 $15,293,155 $ - $ 36,079,690
============ =========== =========== ========== =============
20
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
MAJESTIC STAR MAJESTIC INVESTOR GUARANTOR ELIMINATING CONSOLIDATED
CASINO, LLC HOLDINGS, LLC SUBSIDIARIES ENTRIES TOTAL
------------- ----------------- ------------ ----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: $ 340,025 $ (288,761) $ 7,253,171 $ 4,324 (a) $ 7,308,759
------------ ----------- ----------- --------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of acquisition related costs - (796,649) - - (796,649)
Acquisition of property and equipment (1,173,077) - (1,171,782) - (2,344,859)
Increase in prepaid leases and deposits (5,000) - - - (5,000)
Proceeds from sale of equipment - - 6,542 - 6,542
Investment in Buffington Harbor Riverboats, LLC (23,503) - - - (23,503)
------------ ----------- ----------- --------- ------------
Net cash used in investing activities (1,201,580) (796,649) (1,165,240) - (3,163,469)
------------ ----------- ----------- --------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of 11.653% Senior Secured Notes issuance costs - (505,136) - - (505,136)
Cash advances to/from related parties (161,426) 7,351,278 (7,185,528) (4,324) (a) -
Line of credit, net - (4,800,000) - - (4,800,000)
Cash paid to reduce long-term debt - - (55,182) - (55,182)
Distribution to Barden Development, Inc. (280,032) (188,242) - (468,274)
------------ ----------- ----------- --------- ------------
Net cash provided by (used in) financing activities (441,458) 1,857,900 (7,240,710) (4,324) (5,828,592)
------------ ----------- ----------- --------- ------------
Net increase (decrease) in cash and cash equivalents (1,303,013) 772,490 (1,152,779) - (1,683,302)
Cash and cash equivalents, beginning of period 8,220,476 498,363 17,206,452 - 25,925,291
------------ ----------- ----------- --------- ------------
Cash and cash equivalents, end of period $ 6,917,463 $1,270,853 $16,053,673 $ - $24,241,989
============ =========== =========== ========= ============
(a) To eliminate intercompany receivables and payables.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENT OF FORWARD-LOOKING INFORMATION
This report includes statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the safe harbor provisions of those sections and the Private
Securities Litigation Reform Act of 1995. Words such as "believes",
"anticipates", "estimates", "plans", "intends", "expects", "will" or "could"
used in the Company's reports filed with the Securities and Exchange Commission
are intended to identify forward-looking statements. All forward-looking
statements involve risks and uncertainties. Although the Company believes its
expectations are based upon reasonable assumptions within the bounds of its
current knowledge of its business and operations, there can be no assurances
that actual results will not materially differ from expected results. The
Company cautions that these and similar statements included in this report and
in previously filed periodic reports are further qualified by important factors
that could cause actual results to differ materially from those in the
forward-looking statements. Such factors include, without limitation: the risk
of the Joint Venture Partner not making its lease payments when due in
connection with the parking facility at the Gary property; the ability to fund
planned development needs and to service debt from existing operations and from
new financing; increased competition in existing markets or the opening of new
gaming jurisdictions; a decline in the public acceptance of gaming; the
limitation, conditioning or suspension of our gaming licenses; increases in or
new taxes imposed on gaming revenues, and gaming devices; admission taxes;
finding of unsuitability by regulatory authorities with respect to the Company
or its officers or key employees; loss and/or retirement of key employees;
significant increase in fuel or transportation prices; adverse economic
conditions in the Company's markets; severe and unusual weather in our markets;
adverse results of significant litigation matters; non-renewal of the Company's
gaming license from the appropriate regulatory authorities; and continuing
effects of terrorist attacks and any future occurrences of terrorist attacks or
other destabilizing events.
For more information on these and other factors, see the Company's most
recently filed Form 10-K. We caution readers not to place undue reliance on
forward-looking statements, which speak only as of the date hereof. All
subsequent written and oral forward-looking statements attributable to us are
expressly qualified in their entirety by the cautionary statements and factors
that may affect future results contained throughout this report. The Company
undertakes no obligation to publicly release any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, our financial statements, including the notes
thereto listed in Item 1.
OVERVIEW
The Majestic Star Casino, the Company's riverboat gaming facility
located in Gary, Indiana, ("Majestic Star") has been owned and operated by the
Company since 1996. On December 6, 2001, the Company, through certain
"unrestricted subsidiaries," acquired three Fitzgeralds brand casino-hotels.
The Company's 10 7/8% Senior Secured Notes (the "Notes") are secured
primarily by the assets of the Gary, Indiana, casino and gaming facility. The
Fitzgeralds assets are held by the
22
"unrestricted subsidiaries" of the Company and specifically excluded from the
collateral securing the Notes. As the Company's noteholders have no recourse to
the Fitzgeralds assets, Management's Discussion and Analysis of Financial
Condition and Results of Operations focuses primarily on the results of Majestic
Star as well as the Company and it subsidiaries on a consolidated basis. For a
discussion of the results of the Fitzgeralds properties, please refer to the
Majestic Investor Holdings, LLC Quarterly Report on Form 10-Q for the three
months ended March 31, 2003, as filed with the Securities and Exchange
Commission (the "Investor Holdings 10-Q").
The gaming operations of Majestic Star are affected by inclement
weather in the Chicago metropolitan market. Due to the climate in the Chicago
metropolitan area, Majestic Star's operations are expected to be seasonal with
stronger results generally expected during the period from May through
September. Accordingly, the Company's results of operations are expected to
fluctuate from quarter to quarter and the results for any fiscal quarter may not
be indicative of results for future fiscal quarters.
RESULTS OF OPERATIONS
The following discussion provides a comparison of the results of
operations of Majestic Star, and the Company and its subsidiaries on a
consolidated basis, for the three months ended March 31, 2003, with the three
months ended March 31, 2002. On a consolidated basis, gross revenues increased
approximately $795,000 or 0.9% to approximately $85,191,000 during the three
months ended March 31, 2003, compared to $84,396,000 during the three months
ended March 31, 2002.
The following table sets forth information derived from the Company's
consolidated statements of operations for the three months ended March 31, 2003
and 2002, expressed as a percentage of consolidated gross revenues.
23
CONSOLIDATED STATEMENTS OF OPERATIONS - SUMMARY INFORMATION
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31,
2003 2002
------------------------------------
Gross revenues $ 85,191 $ 84,396
Operating income $ 11,118 $ 10,172
EBITDA (1) $ 16,790 $ 15,836
CONSOLIDATED STATEMENTS OF OPERATIONS - PERCENTAGE OF GROSS REVENUES
FOR THE THREE MONTHS ENDED MARCH 31,
2003 2002
------------------------------------
REVENUES:
Casino 87.8 % 87.1 %
Rooms 4.4 % 4.8 %
Food and beverage 6.2 % 6.6 %
Other 1.6 % 1.5 %
---------- ---------
Gross revenues 100.0 % 100.0 %
Less promotional allowances (7.0)% (7.5)%
---------- ---------
Net revenues 93.0 % 92.5 %
COSTS AND EXPENSES:
Casino 28.6 % 30.0 %
Rooms 1.8 % 2.1 %
Food and beverage 3.4 % 3.8 %
Other 0.5 % 0.4 %
Gaming taxes 16.8 % 16.1 %
Advertising and promotion 5.8 % 5.9 %
General and administrative 15.2 % 14.3 %
Economic incentive - City of Gary 1.2 % 1.1 %
Depreciation and amortization 6.7 % 6.7 %
Pre-opening expenses - % - %
---------- ---------
Total costs and expenses 80.0 % 80.4 %
---------- ---------
Operating income 13.0 % 12.1 %
OTHER INCOME (EXPENSE):
Interest income - % - %
Interest expense (9.3)% (9.7)%
Gain (loss) on disposal of assets (0.1)% - %
Other non-operating expense - % - %
---------- ---------
Total other income (expense) (9.4)% (9.7)%
---------- ---------
Net income 3.6 % 2.4 %
========== =========
EBITDA (1) 19.7 % 18.8 %
(1) EBITDA is defined as earnings from operations before interest, taxes,
depreciation and amortization. EBITDA is presented solely as a supplemental
disclosure because management believes that it is a widely used measure of
operating performance in the gaming industry, and a principal basis for
valuation of gaming companies. Other companies may calculate EBITDA
differently. Management uses EBITDA as a measure of the Company's operating
performance. EBITDA should not be construed as an alternative to operating
income, as an indicator of the Company's operating performance, or as an
alternative to cash flows from operating activities, as a measure of
liquidity, or any other measure determined in accordance with generally
accepted accounting principles. The Company has significant uses of cash
including capital expenditures, interest payments, taxes and debt principal
repayments, which are not reflected in EBITDA. A reconciliation of
operating income to EBITDA follows:
24
Reconciliation of Operating Income to EBITDA
(in millions)
For The Three Months Ended For The Three Months Ended
March 31, March 31,
2003 2002
-------------------------- --------------------------
Operating income $ 11.1 $ 10.2
Depreciation and amortization 5.7 5.6
------- -------
EBITDA $ 16.8 $ 15.8
======= =======
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Consolidated gross revenues for the three months ended March 31, 2003
amounted to approximately $85,191,000, an increase of approximately $795,000, or
0.9% from consolidated gross revenues recorded in the three months ended March
31, 2002. Majestic Star accounted for approximately $36,295,000, or 42.6% of
gross revenues for the three months ended March 31, 2003, which reflects an
increase of $4,327,000 in Majestic Star's revenues on an unconsolidated basis,
or 13.5% compared to the three months ended March 31, 2002. The 13.5% increase
in gross revenues at Majestic Star was primarily attributable to a $2,792,000,
or 10.6% increase in slot revenue and a $1,402,000, or 30.6% increase in table
games revenue. The primary reasons for the increase are the commencement of
dockside gaming at Majestic Star on August 5, 2002, the opening of the 2,000
space parking garage on May 13, 2002 and increased direct mail and promotional
activities.
The Company's business can be separated into four operating
departments: casino, hotel rooms (except Fitzgeralds Black Hawk and Majestic
Star), food and beverage and other. Consolidated casino revenues for the three
months ended March 31, 2003 totaled approximately $74,768,000, or 87.8% of
consolidated gross revenues, of which slot machines accounted for approximately
$63,912,000, or 85.5% and table games accounted for approximately $10,856,000,
or 14.5%. Majestic Star's casino revenues during the three months ended March
31, 2003 totaled approximately $35,332,000, or 97.3% of its gross revenues, an
increase of approximately $4,193,000, or 13.5%, of which slot machines accounted
for approximately $29,352,000, or 83.1%, and table games accounted for
approximately $5,980,000, or 16.9%. The average number of slot machines in
operation at Majestic Star increased to 1,542 during the three months ended
March 31, 2003, from 1,428 during the three months ended March 31, 2002. The
average win per slot machine per day at Majestic Star increased to approximately
$212 for the three months ended March 31, 2003, from approximately $207 during
the three months ended March 31, 2002. The average number of table games in
operation at Majestic Star during the three months ended March 31, 2003 and
2002, was 56 and 51, respectively. The average win per table game per day during
the three months ended March 31, 2003 increased to approximately $1,187 compared
to approximately $991 during the three months ended March 31, 2002. The average
daily win per state passenger count at Majestic Star was approximately $89
during the three months ended March 31, 2003, compared to an average daily win
per state passenger count of $71 for the three months ended March 31, 2002.
Consolidated hotel room revenues totaled $3,799,000, or 4.4% of the
consolidated gross revenues for the three months ended March 31, 2003, and is
attributable to operations of the Fitzgeralds properties. Majestic Star does not
operate a hotel.
Consolidated food and beverage revenues for the three months ended
March 31, 2003 totaled approximately $5,253,000, or 6.2% of consolidated gross
revenues, compared to approximately $5,529,000, or 6.6% of consolidated gross
revenues, for the three months ended March 31, 2002. Majestic Star accounted for
approximately $392,000, or 1.1% of its gross
25
revenues for the three months ended March 31, 2003, which reflects a decrease of
$41,000 in such revenues at Majestic Star, or 9.5%, compared to the three months
ended March 31, 2002.
Consolidated other revenues for the three months ended March 31, 2003
totaled approximately $1,372,000, or 1.6% of consolidated gross revenues,
compared to approximately $1,285,000, or 1.5% of consolidated gross revenues
during the three months ended March 31, 2002. Majestic Star accounted for
approximately $571,000, or 1.6% of its gross revenues for the three months ended
March 31, 2003, an increase of $175,000, or 44.2%, compared to the three months
ended March 31, 2002. Other revenue at Majestic Star consisted primarily of
commission income and the sale of cigars and cigarettes.
Consolidated promotional allowances deducted from the Company's
consolidated gross revenues for the three months ended March 31, 2003 and 2002
were approximately $5,937,000, or 7.0% of consolidated gross revenues, and
$6,339,000, or 7.5% of consolidated gross revenues, respectively. Of this
amount, Majestic Star accounted for approximately $319,000 or 0.9% of its gross
revenues, an increase of $103,000, or 48.2%, compared to the three months ended
March 31, 2002. The increase in promotional allowances is primarily attributable
to an increase in rated slot play and associated incentives.
Consolidated casino operating expenses for the three months ended March
31, 2003 totaled approximately $24,362,000, or 28.6% of consolidated gross
revenues and 32.6% of casino revenues, respectively, compared to approximately
$25,286,000, or 30.0% of consolidated gross revenues and 34.4% of casino
revenues, respectively, for the three months ended March 31, 2002. These
expenses were primarily comprised of salaries, wages and benefits, operating
expenses and cash related marketing activities of the casinos. Majestic Star's
casino operating expenses accounted for approximately $8,803,000, or 24.3% of
Majestic Star gross revenues and 24.9% of Majestic Star casino revenues,
compared to approximately $7,260,000, or 22.7% of Majestic Star gross revenues
and 23.3% of Majestic Star casino revenues, respectively, for the three months
ended March 31, 2002. The dollar increase of $1,543,000, or 21.3%, is primarily
attributed to increased expenses of $952,000 in cash based marketing activities
and $579,000 in payroll and payroll related benefits. Majestic Star provides
meals and services to its gaming patrons at facilities located in and/or owned
by BHR. The cost for these meals and services for the three months ended
March 31, 2003 and March 31, 2002 was $203,000 and are characterized in the
financial statements as casino expense. BHR and other third party operators of
food kiosks invoice the company monthly for these charges.
Consolidated gaming taxes totaled approximately $14,316,000, or 19.1%
of casino revenues for the three months ended March 31, 2003, compared to
approximately $13,597,000, or 18.5% of casino revenues for the three months
ended March 31, 2002. Majestic Star accounted for gaming taxes of approximately
$9,741,000, or 27.5% of its casino revenues for the three months ended March 31,
2003, compared to approximately $8,577,000, or 27.5% of its casino revenues
during the three months ended March 31, 2002. An additional $1,060,000 was paid
during the three months ended March 31, 2003, compared to approximately $938,000
in the three months ended March 31, 2002, to Gary under an agreement whereby
Majestic Star pays 3% of the adjusted gross receipts directly to Gary. The
increase in gaming tax expense is directly related to the increase in casino
revenues.
Advertising and promotion expenses included salaries, wages and
benefits of the marketing and casino service departments, as well as promotions,
advertising and special events. Consolidated advertising and promotion expenses
for the three months ended March 31, 2003 totaled approximately $4,966,000, or
5.8% of consolidated gross revenues, compared to
26
approximately $4,958,000, or 5.9% of consolidated gross revenues during the
three months ended March 31, 2002. Of this amount, Majestic Star accounted for
approximately $1,715,000, or 4.7% of its gross revenues for the three months
ended March 31, 2003 and approximately $1,662,000, or 5.2% of its gross revenues
for the three months ended March 31, 2002.
Consolidated general and administrative expenses for the three months
ended March 31, 2003 were approximately $12,923,000, or 15.2% of consolidated
gross revenues, compared to $12,065,000, or 14.3% of consolidated gross
revenues, during the three months ended March 31, 2002. Majestic Star accounted
for approximately $6,485,000, or 17.9% of its gross revenues for the three
months ended March 31, 2003 and $5,904,000, or 18.5% of its gross revenues for
the three months ended March 31, 2002. These expenses included approximately
$1,285,000 for berthing fees paid to BHR and $1,311,000 for marine operations,
including housekeeping, during the three months ended March 31, 2003. The
$581,000 or 9.8% increase in these expenses is primarily attributed to $516,000
for the parking garage lease and $399,000 for incremental corporate expenses
during the three months ended March 31, 2003.
Consolidated depreciation and amortization for the three months ended
March 31, 2003, were approximately $5,672,000, compared to approximately
$5,665,000, during the three months ended March 31, 2002. Depreciation and
amortization at Majestic Star are inclusive of the Company's loss on investment
in BHR. The loss on investment in BHR is primarily depreciation expense.
Depreciation and amortization attributed to Majestic Star for the three months
ended March 31, 2003 was approximately $1,414,000 compared to approximately
$1,672,000 during the three months ended March 31, 2002. The dollar decrease
totaled approximately $258,000, of which approximately $247,000 is depreciation
expense and approximately $11,000 is amortization expense. The decrease for the
three months ended March 31, 2003 is primarily attributable to machinery and
equipment being fully depreciated. The loss relating to the investment in BHR
for the three months ended March 31, 2003 and 2002 was $604,000 and $606,000,
respectively.
Consolidated operating income for the three months ended March 31, 2003
was $11,118,000, or 13.0% of consolidated gross revenues, compared to an
operating income for the three months ended March 31, 2002 of $10,172,000, or
12.1% of consolidated gross revenues. Operating income attributed to Majestic
Star for the three months ended March 31, 2003 was approximately $5,769,000, or
15.9% of gross Majestic Star revenues, compared to $4,682,000, or 14.6% of gross
revenues, during the three months ended March 31, 2002. The $1,087,000 or 23.2%
increase in operating income is principally attributed to a 13.5% increase in
Majestic Star's gross revenues partially offset by increased expenses as
previously discussed.
The consolidated net interest expense for the three months ended March
31, 2003, was approximately $7,925,000, or 9.3% of consolidated gross revenues,
compared to approximately $8,125,000, or 9.7% of consolidated gross revenues for
the same period last year. Net interest expense attributed to Majestic Star for
the three months ended March 31, 2003 was approximately $3,520,000, or 9.7% of
gross revenues, compared to $3,641,000, or 11.4% of gross revenues for the same
period last year. The $121,000 decrease in net interest expense at Majestic Star
is primarily attributed to a $114,000 decrease in lower interest on the line of
credit.
Other non-operating expenses of $48,000 and $51,000 for the three
months ended March 31, 2003 and 2002, respectively, mainly represent fees
associated with the line of credit.
As a result of the foregoing, the Company realized consolidated net
income of approximately $3,035,000, or 3.6% of consolidated gross revenues for
the three months ended
27
March 31, 2003, compared to $2,003,000 or 2.4% of consolidated gross revenues
during the three months ended March 31, 2002. Majestic Star realized net income
of $2,086,000, or 5.7% of its gross revenues during the three months ended March
31, 2003, compared to $1,008,000 or 3.2% of its gross revenues during the three
months ended March 31, 2002.
Consolidated EBITDA (defined as earnings from operations before
interest, taxes, depreciation and amortization) was approximately $16,790,000,
or 19.7% of consolidated gross revenues during the three months ended March 31,
2003, compared to approximately $15,836,000, or 18.8% of consolidated gross
revenues during the three months ended March 31, 2002. EBITDA for Majestic Star
was approximately $7,787,000, or 21.5% of its gross revenues during the three
months ended March 31, 2003, compared to $6,960,000, or 21.8% of its gross
revenues in the prior year's period, an increase of $827,000, or 11.9%. EBITDA
is presented solely as a supplemental disclosure because management believes
that it is a widely used measure of operating performance in the gaming
industry, and a principal basis for valuation of gaming companies. Other
companies may calculate EBITDA differently. Management uses EBITDA as a measure
of the Company's operating performance. EBITDA should not be construed as an
alternative to operating income, as an indicator of the Company's operating
performance, or as an alternative to cash flows from operating activities, as a
measure of liquidity, or as any other measure determined in accordance with
generally accepted accounting principles. The Company has significant uses of
cash including capital expenditures, interest payments, taxes and debt principal
repayments, which are not reflected in EBITDA. A reconciliation of operating
income/(loss) to EBITDA is included in the Consolidated Statements of
Operations Summary Information.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, the Company had cash and cash equivalents of
$36,080,000. This amount included $21,076,000 at Majestic Investor Holdings, LLC
and $15,004,000 at Majestic Star after paying the coupon on the 10 7/8 % Senior
Secured Notes at Majestic Star, on December 31, 2002. During the three months
ended March 31, 2003, the Company's capital expenditures were $1,986,000, which
included $923,000 at Majestic Star primarily for the purchase of land and a
building for $517,000, software enhancements for $138,000 and slot machines for
$111,000.
The Company, has met its capital requirements to date through net cash
from operating activities. For the three months ended March 31, 2003, net cash
provided by operating activities totaled $14,707,000, compared to $7,309,000
during the three months ended March 31, 2002. At Majestic Star for the three
months ended March 31, 2003, net cash provided by operating activities totaled
approximately $8,074,000 and cash used by investing activities totaled
$1,467,000, compared to approximately $340,000 provided by operating activities
and $1,202,000 used in investing activities, during the three months ended March
31, 2002. At Majestic Star for the three months ended March 31, 2003, cash used
in financing activities totaled approximately $168,000, compared to $441,000
used in financing activities during the three months ended March 31, 2002. This
amount includes a distribution of $383,000 related to the fourth quarter of 2002
made during the three months ended March 31, 2003 by Majestic Star to BDI. As of
May 15, 2003, there are no outstanding borrowings under the $20.0 million
Majestic Star Credit Facility.
Management believes that the Company's cash flow from operations and
its current lines of credit will be adequate to meet the Company's anticipated
future requirements for working capital, its capital expenditures and scheduled
payments of interest and principal on the Notes, lease payments to Buffington
Harbor Parking Associates, LLC and other permitted indebtedness
28
for the year 2003. No assurance can be given, however, that such proceeds and
operating cash flow, in light of increased competition, will be sufficient for
such purposes. Recent legislation in Illinois, that if signed into law, would
increase the number of gaming positions from 1,200 to 2,000 at existing gaming
venues, split 3,200 slot machines among five horse-racing tracks and bring a
4,000 position city owned casino to Chicago. The purchase of certain Indiana
gaming facilities by larger more recognized brand names, could significantly
increase competition for the Company. If necessary and to the extent permitted
under the Indenture, the Company will seek additional financing through
borrowings of debt or equity financing. There can be no assurance that
additional financing, if needed, will be available to the Company, or that, if
available, the financing will be on terms favorable to the Company. In addition,
there is no assurance that the Company's estimate of its reasonably anticipated
liquidity needs is accurate or that unforeseen events will not occur, resulting
in the need to raise additional funds.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 145 ("SFAS 145"). Among
other matters, SFAS 145 addresses the presentation for gains and losses on early
retirements of debt in the statement of operations. SFAS 145 is effective for
fiscal years beginning after May 15, 2003. Adoption of SFAS 145 is not
anticipated to have a material impact on our financial condition, results of
operations or cash flows.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Guarantees of Indebtedness of Others."
FIN 45 elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statement about its obligations under certain guarantees
that it has issued. It also clarifies (for guarantees issued after January 1,
2003) that a guarantor is required to recognize at the inception of a guarantee,
a liability for the fair value of the obligations undertaken in issuing the
guarantee. At March 31, 2003, the Company did not have any guarantees outside of
its consolidated group and accordingly does not expect the adoption of FIN 45 to
have a material impact on its financial condition, results of operations or cash
flows.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities."
FIN 46 addresses the requirements for business enterprises to consolidate
related entities in which they are determined to be the primary economic
beneficiary as a result of their variable economic interests. FIN 46 is intended
to provide guidance in judging multiple economic interest in an entity and in
determining the primary beneficiary. FIN 46 outlines disclosure requirements for
"Variable Interest Entities ("VIE")" in existence prior to January 31, 2003, and
outlines consolidation requirement for VIEs created after January 31, 2003. The
Company has reviewed its major relationships and its overall economic interests
with other companies consisting of related parties, companies in which it has an
equity position and other suppliers to determine the extent of its variable
economic interest in these parties. The review has not resulted in a
determination that the Company would be judged to be the primary economic
beneficiary in any material relationships, or that any material entities would
be judged to be VIEs of the Company. The Company believes it has appropriately
reported the economic impact and its share of risks of its commercial
relationships through its equity accounting along with appropriate disclosure of
its commitments.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information reported in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectives of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 15d-15 of the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are adequate and effective. There have been
no significant changes in the Company's internal controls or in other factors
which could significantly affect internal controls subsequent to the date the
Company carried out its evaluation.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal proceedings are pending against the Company. Management
considers all such pending proceedings, comprised primarily of personal injury
and equal employment opportunity (EEO) claims, to be routine litigation
incidental to the Company's business. Management believes that the resolution of
these proceedings will not individually or in the aggregate, have a material
effect on the Company's financial condition or results of operations.
There have been no significant changes in legal proceedings previously
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, except for those legal proceedings described below.
On May 11 and 12, 2000, the Company was issued notices of proposed
assessment by the Indiana Department of Revenue for income tax withholding
deficiencies for the years ended December 31, 1996 and 1998. The Indiana
Department of Revenue has taken the position that Indiana gross wagering tax
must be added back to the Company's income for the purpose of determining the
Indiana adjusted gross income tax on the Company's non-resident member, and that
the Company had the duty to withhold and remit adjusted gross income tax payable
by its non-resident member. The tax deficiency assessed for 1996 and 1998 totals
$553,744, plus accrued interest. On February 10, 2003, the Company was issued
notices of proposed assessment by the Indiana Department of Revenue for income
tax withholding deficiencies for the years ended December 31, 1999, 2000 and
2001, concerning the same issue. The tax deficiency assessed for 1999-2001
totals $2,012,397 plus accrued interest. The Company has filed administrative
protests and demands for hearing with the Department of Revenue to protect its
rights with respect to all tax years. However, it is too early to determine the
outcome of these contested tax assessments.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
Exhibit No. Description of Document
- ----------- -----------------------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) There were no reports on Form 8-K filed during the three months
ended March 31, 2003.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE MAJESTIC STAR CASINO, LLC
By: /s/ Don H. Barden
______________________________________________ May 15, 2003
Don H. Barden, Member, Chairman, President and Chief Executive Officer
By /s/ Jon S. Bennett
______________________________________________ May 15, 2003
Jon S. Bennett, Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
THE MAJESTIC STAR CASINO CAPITAL CORP.
By: /s/ Don H. Barden
______________________________________________ May 15, 2003
Don H. Barden, Chairman, President and Chief Executive Officer
By: /s/ Jon S. Bennett
______________________________________________ May 15, 2003
Jon S. Bennett, Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
32
CERTIFICATIONS
I, Don H. Barden, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Majestic
Star Casino, LLC and The Majestic Star Casino Capital Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact necessary to make the statements
made, in light of the circumstances under with such statements were
made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Don H. Barden
- -----------------------------------------
Don H. Barden
Member, Chairman, President and Chief Executive Officer
33
I, Jon S. Bennett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Majestic
Star Casino, LLC and The Majestic Star Casino Capital Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact necessary to make the statements
made, in light of the circumstances under with such statements were
made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Jon S. Bennett
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Jon S. Bennett
Vice President and Chief Financial Officer
34
EXHIBIT INDEX
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Exhibit No. Description of Document
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99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002