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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
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 jurisdiction of (Exact name of registrant (I.R.S. Employer
incorporation or organization) as specified in its charter) Identification No.)
301 Fremont Street
Las Vegas, NV 89101
(702) 388-2224
(Registrant's address and telephone number, including area code)
Securities registered pursuant to section 12(b) of the act: None
Securities registered pursuant to section 12(g) of the act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes [ ] No [X]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant: Not Applicable. The Company has no publicly
traded equity securities.
The number of shares of common stock issued and outstanding: Not Applicable.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
THE MAJESTIC STAR CASINO, LLC
2003 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business 1
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 22
Item 6. Selected Consolidated Financial Data 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 44
Item 8. Financial Statements and Supplementary Data 45
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 45
Item 9A. Controls and Procedures 45
PART III
Item 10. Directors and Executive Officers of Registrant 46
Item 11. Executive Compensation 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 49
Item 13. Certain Relationships and Related Transactions 50
Item 14. Principal Accountant Fees and Services 52
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 53
Signatures S-1
PART I
ITEM 1. BUSINESS
GENERAL
The Majestic Star Casino, LLC was formed in December 1993 as an Indiana
limited liability company. The Majestic Star Casino, LLC conducts its operations
both directly and through its subsidiaries. In this report, unless indicated
otherwise, "Majestic," the "Company," "we," "us," and "our" refer to The
Majestic Star Casino, LLC, The Majestic Star Casino Capital Corp., and our
subsidiaries who guarantee our principal debt obligations.
We own and operate three casino properties, located in Gary, Indiana,
("Majestic Star"), Tunica County, Mississippi ("Barden Mississippi" or
"Fitzgeralds Tunica"), and Black Hawk, Colorado ("Barden Colorado" or
"Fitzgeralds Black Hawk"). Our properties collectively contain approximately
3,445 slot machines, 90 table games and 507 hotel rooms (Fitzgeralds Tunica
only). Our properties are well established, each having been in operation for at
least seven years, and are well situated within significant drive-in gaming
markets. Within each market, we leverage our strong brand names, experienced
management, value-oriented amenities and emphasis on slot play to target
mid-level gaming customers, who overwhelmingly favor slot play.
On October 7, 2003, we completed a series of refinancing transactions
comprised of the issuance of $260.0 million principal amount of 9 1/2% Senior
Secured Notes due 2010 (the "9 1/2% notes"), the redemption of all of the 10
7/8% Senior Secured Notes due 2006 previously issued by The Majestic Star
Casino, LLC (the "10 7/8% notes"), the purchase of approximately 89.3% of the
11.653% Senior Secured Notes due November 30, 2007 previously issued by Majestic
Investor Holdings, LLC (the "11.653% notes"), the establishment of a new $80.0
million senior secured credit facility and the termination of the previous
credit facilities of The Majestic Star Casino, LLC (the "Old Majestic Star
credit facility") and Majestic Investor Holdings, LLC (the "Old Majestic
Investor Holdings credit facility") (the foregoing transactions collectively
being the "Refinancing").
Effective December 31, 2003, we completed the spin-off of Barden Nevada
Gaming, LLC, the owner and operator of a Fitzgeralds brand casino located in Las
Vegas, Nevada ("Barden Nevada" or "Fitzgeralds Las Vegas") to Barden
Development, Inc. ("BDI"), our parent. We have been retained by BDI to manage
Barden Nevada for a fee. Barden Nevada is not a guarantor of, and none of Barden
Nevada's assets serve as collateral for, the 9 1/2% notes or the $80.0 million
senior secured credit facility.
We are indirectly wholly owned and controlled by Don H. Barden, our
Chairman, President and Chief Executive Officer and the sole shareholders of
BDI. Mr. Barden has an established track record of operating, developing and
acquiring properties in the gaming industry and in other industries.
Our executive offices are located at 301 Fremont Street, 12th Floor, Las
Vegas, Nevada 89101, and our telephone number is (702) 388-2224. Our World Wide
Web site address is http://www.majesticstar.com and http://www.fitzgeralds.com.
The information in our website is not part of this report.
GAMING FACILITIES
Majestic Star. Majestic Star is a riverboat casino located at Buffington
Harbor in Gary, Indiana, approximately 23 miles southeast of downtown Chicago.
The river boat casino is a four-story,
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360 foot long vessel with a contemporary design that accommodates approximately
3,000 passengers plus crew. The casino includes approximately 43,000 square feet
of gaming space across three expansive decks, which contains approximately 1,504
slot machines and 50 table games. From July 2003 to October 2003, a remodeling
was completed that involved new carpeting for the casino, and a new layout for
the slot machine floor as well as an upgrade to our restroom facilities.
Majestic Star also offers its customers on-board food and beverage facilities.
In 2004, Majestic Star has added an entertainment stage on the second floor of
the casino and has closed the onboard VIP lounge that is being remodeled into a
Sports Bar. We anticipate the Sports Bar opening in the second quarter of 2004.
Majestic Star has constructed an outdoor festival area located adjacent to the
2,000-space covered parking garage located at the Buffington Harbor gaming
complex. The festival area is anticipated to open in spring of 2004 and provides
another attraction to bring people to our gaming facility.
Majestic Star operates from the Buffington Harbor gaming complex, which we
share with the Trump Casino and own through a joint venture (the "BHR Joint
Venture") with Trump Indiana, Inc. (our "Joint Venture Partner"). The Buffington
Harbor gaming complex is a two-level, 85,410 square foot structure containing
newly opened Passports World Class Buffet and Koko Taylor's Blues Cafe (the
Skyline Buffet and South Shore Grill were closed and remodeled into the new
restaurants), and three additional food and beverage outlets including Miller
Pizza, Harbor Treats and Jackpot Java. At this time, Buffington Harbor leases
the rights to operate these restaurants to third party operators and does not
operate any of the food and beverage facilities located on its premises. The
Buffington Harbor gaming complex also contains a gift shop, banquet and
entertainment facilities and a recently remodeled VIP lounge, which is available
only to Majestic Star's customers. The Buffington Harbor gaming complex is
situated on an approximately 100-acre site, containing a 2,000-space covered
parking structure and 2,600 surface parking spaces, and offers valet parking and
convenient bus loading and unloading facilities.
Fitzgeralds Tunica. Fitzgeralds Tunica is located in north Tunica County,
Mississippi, approximately 30 miles from downtown Memphis, Tennessee.
Fitzgeralds Tunica has an Irish castle theme and is the focal point of a heavily
wooded, 50-acre site situated adjacent to the Mississippi River. Fitzgeralds
Tunica is a full-service entertainment destination and our customer base has
been increased and diversified by our ability to attract, in addition to local
customers, independent travelers, tour-and-travel customers and guests for
special events and conventions. Fitzgeralds Tunica includes a 507-room hotel
(including 72 suites), a special events center, an indoor swimming pool and a
casino offering approximately 1,347 slot machines and 34 table games, two bars,
three restaurants and a gift shop. Fitzgerald Tunica has 1,264 surface parking
spaces, a 411 space covered parking garage and 120 valet parking spaces. In
2003, we installed new carpeting throughout our casino and relocated the gift
shop to an area more visible to our hotel customers. In February 2004, we
completed a remodel project to the rooms on the first and third floors of our
nine floor hotel. The remodel project affected approximately 100 rooms.
Fitzgeralds Black Hawk. Fitzgeralds Black Hawk is located adjacent to the
entrance to the downtown gaming area of Black Hawk, Colorado. Fitzgeralds Black
Hawk is approximately 25 miles from Denver. The casino offers approximately 594
slot machines, 6 table games, a restaurant and a bar. Fitzgeralds Black Hawk
also has a 392-space, all valet parking garage adjacent to the casino.
OPERATING STRATEGY
Our operating strategy is to further attract middle market guests by
continuing to promote our properties as synonymous with a quality casino
experience and personal service at an affordable price. We intend to accomplish
this by continuing to pursue the following principal elements of our strategy:
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Good Locations in Strong Drive-in Markets. Our properties are located in
significant drive-in gaming markets, which allows our casino patrons to reach us
in short travel times and make repeated trips to our gaming facilities.
- Majestic Star. Majestic Star is located in, and primarily draws from,
the Chicago metropolitan area and is located 23 miles from downtown
Chicago. Majestic Star also attracts drive-in customers from other
areas in Illinois, Indiana, and Michigan. Buffington Harbor has the
highest concentration of gaming positions in the Chicago market,
offering patrons a total of approximately 3,900 gaming positions which
is greater than the number of gaming positions allowed at any
individual Illinois gaming site, which is currently limited to 1,200.
We believe the high concentration of gaming positions, the ability to
park once and play twice (at two casinos) and the amenities offered
provide a strong competitive advantage.
- Fitzgeralds Tunica. Fitzgeralds Tunica primarily draws its gaming
patrons from the Memphis, Tennessee area and also attracts drive-in
customers from Northern Mississippi, Little Rock, Arkansas to the west,
southern Missouri to the north and Birmingham and Huntsville, Alabama
to the east, as well as regional weekend travelers flying into Memphis.
The Tunica market draws most of its customers from within a 200-mile
radius.
- Fitzgeralds Black Hawk. Fitzgeralds Black Hawk is located in the Black
Hawk/Central City market, which includes the City of Black Hawk and
Central City, and attracts drive-in or "day trip" customers from the
population centers of Denver, Boulder, Colorado Springs and Fort
Collins, Colorado as well as Cheyenne, Wyoming. Each of these
population centers is located within a 150-mile radius of the Black
Hawk/Central City market.
Strong Gaming Brands. We believe our strong gaming brands help attract and
retain customers.
- Majestic Star. We utilize a comprehensive integrated marketing campaign
to brand Majestic Star as "the winning place to play" or "this is my
kind of place" in the Chicago metropolitan area for slot customers from
the middle-income segment. On March 1, 2004, Majestic Star began using
Mike Ditka, the former Chicago Bears player and coach, as a celebrity
spokesperson, to promote the property. Our ads with Mike Ditka, along
with other messages about Majestic Star, have appeared in all
advertising venues including television, radio, print and outdoor
media, which we believe will enhance our slot leadership positioning
among Chicago-area gaming facilities. We intend to utilize these and
other similar broad marketing techniques to attract middle-income
customers, who we are then able to qualify and target for direct
marketing activities.
- Fitzgeralds. The Fitzgeralds brand has developed into a nationally
recognized gaming brand by using a consistent Irish Luck theme
throughout the casinos, hotels, restaurants and bars at our properties.
The Irish Luck theme allows us to capitalize on our belief that every
casino guest wants to feel lucky. The Irish Luck theme incorporates
various aspects of Irish folklore, such as leprechauns, horseshoes,
four-leaf clovers, the Blarney Stone and a pot of gold at the end of a
rainbow. We believe that Fitzgeralds customers have come to associate
the Irish Luck theme and the associated trade dress and Fitzgeralds
brand trademarks with strong guest services such as the personal
attention and quality product and gaming experience that we seek to
provide at each of our Fitzgeralds properties.
Strong Ownership and Experienced Management. We are indirectly wholly owned
and controlled by Don H. Barden, our Chairman, President and Chief Executive
Officer. Mr. Barden has an established track record of developing, operating,
and acquiring properties in the gaming industry. Mr. Barden also
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has successfully built, owned, and operated numerous businesses in the cable
television, international trade, and real estate industries and has owned and
operated several radio stations over the past 35 years. Barden Companies, Inc.,
a company wholly owned by Mr. Barden and one of our affiliates, was recently
named "Company of the Year" for 2003 by Black Enterprise magazine. In addition,
Mr. Barden recently received a Trumpet Award as Entrepreneur of the Year.
Trumpet Awards recognize the achievements of African-Americans and salutes them
for their fortitude and persistence. Further, Mr. Barden was recently recognized
as the "Master Entrepreneur" of Eastern Michigan during the Ernst & Young
Entrepreneur of the Year contest. We have a proven management team with
substantial experience in the gaming industry and with our properties in their
respective markets. Our chief operating officer and our chief financial officer,
together with the three general managers at each of our properties, have on
average approximately 25 years of experience in the gaming industry with various
gaming companies throughout the United States.
Emphasize Slot Play. We emphasize slot machine wagering, which we believe
is the fastest growing, most stable and most profitable segment of the casino
entertainment business. The increasing popularity of slot machines is due, in
part, to the continuing rapid technological innovation that is resulting in the
replacement of older devices with advanced interactive electronic games, bill
acceptors and ticket-in ticket-out technology ("TITO"). During 2003, we
converted and/or purchased approximately 400 slot machines at Majestic Star that
will utilize the TITO coinless slot technology. We plan on converting the
majority of our remaining slot machines to the TITO technology in 2004. Also, in
2003, we installed a new slot player tracking and casino management system at
Majestic Star. These new systems provide us with advanced capabilities of
tracking our customers' slot and table game play and allow us to implement new
promotions that we believe will enhance our revenues. At Fitzgerald Tunica, we
installed the same casino management system in February 2004 and we are
currently installing the slot player tracking system. We anticipate the new
Fitzgeralds Tunica slot player tracking system coming on line in mid-2004. We
currently do not intend to install the new player tracking and casino management
systems at Fitzgeralds Black Hawk. In addition, we will be adding or converting
selected slot machines to TITO technology at Fitzgeralds Tunica and Fitzgeralds
Black Hawk during 2004. Newer games offer greater variety, higher frequency
payouts and longer periods of play for the casino entertainment dollar relative
to traditional reel devices. We continue to enhance and modify our mix of slot
machines to meet the demand of our customers. As a result of our continued focus
on slot play, slot revenues generated approximately 87.9% of our gaming revenues
for the twelve months ended December 31, 2003.
Focus on Quality and Service at an Affordable Price. Our casinos provide a
high-quality casino entertainment experience at an affordable price to attract
middle market guests. We believe these middle market guests constitute the
largest segment of potential gaming customers whom we can then identify, qualify
and target for direct marketing activities. Our approach to business at our
three properties focuses on guest service and includes:
- friendly employees;
- trained hosts to personally assist guests;
- quality food and beverages and, at Fitzgeralds Tunica, lodging
operations at a moderate price;
- a mix of gaming machines tailored to our customers; and
- personal attention through direct mail promotions, targeted incentives
and the use of the Majestic Star and Fitzgeralds Cards as part of a
frequent player recognition program.
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We believe that such an approach to business creates a comfortable,
familiar and friendly environment that promotes customer loyalty and
satisfaction, enhances playing time, leads to a high rate of repeat business and
is the basis for the further development of our brands and our reputation for
quality and service at an affordable price.
GROWTH STRATEGIES
Capitalize on Market Growth Opportunities. We believe there are future
growth opportunities within each of the markets where our properties are
located, including the following:
- Majestic Star. We have been able to expand our gaming operations at
Majestic Star through certain changes in the Indiana state laws
governing gaming by riverboat casinos adopted by the IGC ("IGC").
Commencing in August, 2002 Majestic Star has been permitted to operate
dockside which allows the continuous ingress and egress of patrons for
the purpose of gambling while the riverboat is docked. Dockside
operations allow our customers unrestricted access to our gaming
facility and eliminate many of the inconveniences created through
restricted boarding. In advance of the conversion to dockside
operations, we, through an affiliate, opened a new 2,000 space covered
parking garage adjacent to and with direct access to Buffington Harbor
in May 2002. We have been able to further expand our operations
commencing in July 2003, when the IGC began to allow Indiana casinos to
operate 24 hours per day. These extended hours allow our casino players
to stay in action longer and eliminate the inconvenience of having to
interrupt their gaming activities when the casino closed. In addition
to the enhancement of the dining experience at the Buffington Harbor
gaming complex and the investment in casino technology, new slot
machines and TITO as previously described, to attract more patrons, we
have constructed an outdoor festival area, which we anticipate will
begin hosting events in the spring of 2004, and, with our Joint Venture
Partner, recently converted Buffington Harbor's first floor ticketing
area into a 600-person banquet and entertainment facility. These
facilities will be available for weddings, concerts, fairs, social
gatherings, flea markets and other events designed to increase traffic
to our casino.
We believe that Majestic Star is one of only two locations in the
Chicago market with the capacity to significantly expand its land-based
facilities. We, along with our Joint Venture Partner, own approximately
100-acres at the Buffington Harbor gaming complex. In addition, on
February 11, 2004, we acquired approximately 170 acres of land located
adjacent to the Buffington Harbor gaming complex which was owned by
Gary New Century, LLC ("GNC"), an affiliate of ours, for approximately
$21.9 million, which purchase price was based on an appraisal by an
independent third party. We intend to use the land for development
opportunities, which may include possible joint venture opportunities
with the City of Gary and/or private third parties. The City of Gary is
expected to start construction in the spring of 2004 on a new access
road to the casino with possible construction of a marina in the
future. A hotel, conference center and outdoor amphitheater are also
being evaluated which could be constructed with public and private
funds.
- Fitzgeralds Tunica. We believe that the 168-acre, $23.0 million Tunica
River Front Park that is substantially completed adjacent to our
Fitzgeralds Tunica property will attract new customers to our facility.
The park includes a marina and boat dock facility along the Mississippi
River, a historic Mississippi River museum, nature trails, retail
space, and parking. The park began opening in phases in October 2003
with a grand opening on March 18, 2004. Fitzgeralds Tunica has conveyed
approximately 71 acres of adjacent land to Tunica County for the parks
development. As consideration for the conveyance, Tunica County granted
Fitzgeralds Tunica a rent-free lease to use and further sublease the
boat dock for 15 years, from the date of substantial completion of the
marina, as well as a perpetual easement allowing ingress and egress
between
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the Fitzgeralds Tunica property and the boat dock. Fitzgeralds Tunica
has granted Mississippi Riverboat Company LLC, ("MRC") an unrelated
third-party operator, an exclusive license to operate riverboat
excursions along the Mississippi River from the boat dock in return for
monthly license fees and the right to directly promote to all of MRC's
riverboat passengers. MRC began operations in October 2003, but
subsequently shut down for the winter. MRC recommenced operations
during the river park's grand opening. In an effort to increase
customer traffic to the Tunica area, Tunica County also is expanding
its airport into a regional airport. The expansion is to be completed
in phases with the first phase completed in June 2003.
- Fitzgeralds Black Hawk. We believe that the Black Hawk market has
potential for future growth due to various proposals to improve access
to Black Hawk. The State of Colorado Department of Transportation is
currently conducting an Environmental Impact Study regarding an
expansion of the road leading to Black Hawk and the construction of a
tunnel ending approximately four miles from the downtown gaming area
from I-70, the major interstate highway from Denver. In addition, the
Central City Business Improvement District has begun construction of a
new road to Central City, which is anticipated to be completed in late
2004. We believe these projects, if completed, would improve access to
our facility and will increase visits to our casino, and thereby
increase our cash flow. To further capitalize on market growth
opportunities, we completed a partial demolition project on property
adjacent to and owned by Fitzgeralds Black Hawk. The property is
available for expansion if market conditions warrant and we continue to
evaluate the feasibility of such an expansion. One of the issues
concerning such expansion is whether there is adequate infrastructure
in the Black Hawk market. The City of Black Hawk has also notified us
of their plans to install a storm sewer pipe and has requested an
easement. The storm sewer pipe has no impact on the carrying value of
our existing assets, but could possibly impact our future expansion
plans. We have requested that the City of Black Hawk pay one half the
costs to bury the storm sewer pipe. So far, the City has rejected this
offer. The City of Black Hawk has agreed to pay Fitzgeralds Black Hawk
for lost property value which is being determined from an independent
appraisal and to allow our input to final design to accommodate our
future casino expansion.
MARKETING
Direct marketing to our guests is a key component of our customer service.
Each of our properties contains a player tracking system that permits detailed
player tracking at each individual property. We continue to invest in the latest
player tracking technology. In 2003, we installed a new casino management system
and slot player tracking system at Majestic Star. In February 2004, we installed
the same casino management system and we are currently installing the slot
player tracking system at Fitzgeralds Tunica. These new systems will allow us to
obtain better information about our customers and enhance our promotions to our
casino guests. At this time our systems are specific to each individual
property. The systems use Majestic Star and Fitzgeralds Cards, respectively, to
track individual or combined play at slot machines, table games, as well as food
and beverage and hotel expenditures (available only at Fitzgeralds Tunica) at
each individual property. The systems allow us to identify players and their
gaming preferences and practices and to develop a comprehensive customer
database for marketing and guest services purposes. Our player tracking programs
allow us to target our marketing programs to categories of players, including
through advertising programs, promotions, tournaments with substantial cash
prizes, special group and tour packages, direct mail, and other events and
incentives designed to promote customer loyalty and increase repeat business.
Our tracking system also allows us to better tailor our pricing, promotions,
gaming machine selection and other guest services to customer preferences. We
currently have an aggregate of over 869,000 active players in our combined
Majestic Star and Fitzgeralds databases.
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We also use other forms of broad based marketing to attract customers to
our facilities. These other forms include television, radio, newspaper, outdoor
media and direct mail. Our advertising messages are at times image or theme
oriented. We also advertise events and promotions occurring at our facilities.
COMPETITION
We face intense competition in each of the markets in which our gaming
facilities are located. Many of our competitors have significantly greater name
recognition and financial, marketing and other resources than we do. In addition
to regional competitors, we compete with gaming facilities nationwide, including
land-based casinos in Nevada and Atlantic City, not only for customers but also
for employees. We also compete, to some extent, with other forms of gaming on
both a local and national level, including state-sponsored lotteries, Internet
gaming, on- and off-track wagering and card parlors.
The recent and continued expansion of legalized casino gaming within
existing jurisdictions and to new jurisdictions throughout the United States has
increased competition faced by us and such competition will continue to increase
in the future. On March 15, 2004, Isle of Capri Casinos, Inc won the right to
purchase the tenth casino license in Illinois. Isle of Capri plans on building
the casino in Rosemont, near O'Hare International Airport. The proximity of
Rosemont to Majestic Star could potentially adversely effect our operations and
financial performance. In addition, in Indiana, the IGC is authorized to award
up to eleven gaming licenses and ten gaming licenses are currently issued. In
May 2003, the Indiana General Assembly eliminated the license permitted
contiguous to Patoka Lake, and instead, authorized the IGC to enter into a
contract pursuant to which an operating agent may operate a riverboat casino on
behalf of the IGC in Orange County, Indiana, which is located over 250 miles
south of Gary, Indiana. The IGC has commenced the initial steps necessary to
issue an operating agent contract to operate a riverboat casino in Orange
County, Indiana. There are no limits on the number of gaming licenses in
Mississippi and Colorado.
Additionally, if casino gaming were legalized in jurisdictions near our
properties where casino gaming currently is not permitted, we could face
additional competition. For example, our casino in Tunica, Mississippi competes
for customers from Memphis, Tennessee and Little Rock, Arkansas, where casino
gaming activity is currently prohibited. However, in the past, Arkansas voters
and the Arkansas legislature have considered various proposals to approve casino
gaming in Arkansas or slot machines at certain race tracks. Tennessee passed
legislation and commenced a state-sponsored lottery in January 2004. In
addition, there are efforts to open a casino in Memphis, Tennessee at the
Pyramid, a soon to be vacated sports and entertainment facility. Memphis is a
primary feeder market for our Tunica facility. Colorado recently voted on an
initiative that would have allowed slot machines at five racetracks. This
initiative was soundly defeated by a 4 to 1 margin. There has also been
discussion of the Cheyenne-Arapaho Tribes opening a casino in Colorado, possibly
in Central City or east of Denver International Airport ("DIA"). While we
believe it unlikely that a casino will open in the Pyramid in Memphis, Tennessee
or the Cheyenne-Arapaho Tribes will open a casino in Central City, Colorado or
east of DIA, if such events were to occur or if other casinos should open in our
markets or areas that could potentially draw customers from our markets, the
Company could experience a material negative impact to its business and
financial results.
We are also subject to the competitive effects of consolidation and
acquisitions within the gaming industry. Harrahs Entertainment, Inc. ("Harrahs")
and Horseshoe Gaming Holding Corp. ("Horseshoe") announced Harrahs' acquisition
of Horseshoe on September 10, 2003. Harrahs and Horseshoe both operate casinos
in the northwest Indiana and Tunica markets. While it is difficult to determine
the actual effects of the acquisition, the Harrah's organization will have
acquired the top competitor in these markets, will have expanded its database of
players and market share significantly, and may be able to recognize operating
synergies within both markets.
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Competition requires us to continually make substantial capital
expenditures to maintain and enhance the competitive positions of our
properties, including updating slot machines to reflect changing technology,
refurbishing rooms and public service areas periodically, replacing obsolete
equipment on an ongoing basis and making other expenditures to increase the
attractiveness and add to the appeal of our properties. Because we are highly
leveraged, after satisfying our obligations under our outstanding indebtedness,
there can be no assurance that we will have sufficient funds to undertake these
expenditures or that we will be able to obtain sufficient financing to fund such
expenditures. Our debt instruments limit our capital expenditures on an annual
basis, and our ability to incur additional debt. If we are unable to make such
expenditures, our competitive position and our results of operations could be
materially adversely affected.
EMPLOYEES AND UNIONS
As of December 31, 2003, we directly employed approximately 2,449 persons.
Approximately 3.6% of our workforce is unionized. As of December 31, 2003,
Majestic Star and the BHR Joint Venture employed approximately 1,287 people,
approximately 152 of whom are represented by a union. At Majestic Star and the
BHR Joint Venture, 68 employees and 57 employees, respectively, are represented
by Hotel Employees Restaurant Employees International Union, Local No. 1,
AFL-CIO, under a contract which expires in October 2004. The Seafarers
Entertainment and Allied Trades Union represents 20 employees of Majestic Star
under a new contract signed on August 2003. The Seafarers Entertainment and
Allied Trades Union agreement expires in four years. The United Steelworkers of
America held an election in May 2002 to represent 21 full and regular-part time
slot mechanics at Majestic Star. While the United Steelworkers of America
received a majority of the votes, the Company is contesting the results. If the
outcome to our dispute is unfavorable, then the 20 current full and regular-part
time slot mechanics could be represented by the United Steelworkers of America.
An additional 7 employees of the BHR Joint Venture are represented by the
International Union of Operating Engineers, Local No. 399 under a contract which
expires in June 2006. As of December 31, 2003, Fitzgeralds Tunica and
Fitzgeralds Black Hawk employed approximately 1,167 and 317 people,
respectively, none of whom are represented by a union. Management believes that
our overall relations with our employees and unions are good.
In recruiting personnel, Majestic Star is obligated, under the terms of an
agreement with the City of Gary, to use its best efforts to have an employee
base which is comprised of 70% from racial minority groups, 52% females, 67%
residents of the City of Gary and 90% residents of Lake County, Indiana. We
believe that our recruitment efforts and programs meet this obligation.
TRADE NAMES, TRADEMARKS AND SERVICE MARKS
We utilize a comprehensive integrated marketing campaign to brand Majestic
Star as "the winning place to play" or "this is my kind of place" for slot
customers from the middle income segment. We own certain trademarks that are
integral to the business and operation of Majestic Star's riverboat gaming
facility and the Fitzgeralds Casinos. For Majestic Star, "Majestic Star Casino"
(words and design), "Majestic Star," "Club Majestic," "Club Majestic Premier,"
"Change Your Luck!" and "We've Got Your Slots" each are currently registered in
the United States Patent and Trademark Office ("PTO"). Applications for
registrations have been filed in the PTO for the marks "the winning place to
play" and "this is my kind of place."
The Fitzgeralds Casinos have developed a national gaming brand by using a
consistent Irish Luck theme throughout the casinos, hotel, restaurants and bars
at all of its properties. We own proprietary rights in registered and common law
trade names, trademarks and service marks used in connection with the business
and created to enhance the Irish Luck theme and gaming activities, including the
marks "Fitzgeralds," "Fitz", "Get Reel Lucky" and the "Mr. O'Lucky" character
design. Following the Fitzgeralds acquisition, and under a license from us,
Fitzgeralds Reno, Inc. ("Fitzgeralds Reno"), a
8
subsidiary of Fitzgeralds Gaming Corporation retained the right to use the name
"Fitzgeralds" and certain other marks in connection with its operation of its
existing casino property in Reno, Nevada and in connection with any casino
properties it may operate in the future in Northern California, Northern Nevada,
Oregon and Washington. In addition, Fitzgeralds Reno may assign the license to
the first purchaser of the casino in Reno; however any other assignment requires
our prior written consent. We retained all other rights to the Fitzgeralds name
and all Fitzgeralds trademarks, service marks and trade dress for use in
connection with Fitzgeralds Tunica and Fitzgeralds Black Hawk. In connection
with any use of the Fitzgeralds name, the terms of the license require
Fitzgeralds Gaming Corporation to comply with certain requirements, including
operating any casino property using the Fitzgeralds name in accordance with our
current operating standards. In connection with the spin-off of Barden Nevada,
we entered into a license with Barden Nevada to allow Barden Nevada the right to
use the name "Fitzgeralds" in connection with its operation of that property.
ENVIRONMENTAL MATTERS
The Company is subject to certain federal, state and local environmental,
safety and health laws, regulations and ordinances including but not limited to
the Clear Air Act, Clean Water Act, Occupational Safety and Health Act, Oil
Pollution Act, Resource Conservation Recovery Act and the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"). The Company may incur material liability if contamination is
discovered on any of its properties, either during the course of future
development or in connection with the properties designated for investigation or
remediation, as discussed below.
Specifically, the Black Hawk and Central City gaming districts, including
the Fitzgeralds Black Hawk site, are located within a 400-square mile area that
in 1983 was designated by the EPA as the Clear Creek/ Central City National
Priorities List Site Study Area ("Study Area") pursuant to CERCLA. The Study
Area includes numerous specifically identified areas of mine tailings and other
waste piles caused by historical mining activity in the area, which areas are
the subject of ongoing investigation and clean-up by the EPA and the Colorado
Department of Public Health and Environment ("CDPHE"). CERCLA addresses
remediation of sites from which there has been a release or threatened release
of hazardous substances and authorizes the EPA to take any necessary response
actions at Superfund sites, including requiring potentially responsible parties
("PRPs") to clean up or contribute to the clean up of a Superfund site. PRPs are
broadly defined under CERCLA, and include past and present owners and operators
of a site. CERCLA imposes strict liability on PRPs, and courts have commonly
held PRPs to be jointly and severally liable for all remediation costs.
Fitzgeralds Black Hawk is not within any of the specific areas of the Study
Area currently identified by the EPA and CDPHE for investigation or remediation.
The property on which the Fitzgeralds Black Hawk casino is situated was not a
historical mining site but rather was the location for a general store. The
parking complex for the casino and an adjacent vacant lot, however, are situated
near a historical milling area. To date no remediation requirements have been
recommended or required with regard to any portion of the property although test
borings would likely be required in connection with any future construction on
the expansion parcel of the property. Based on the assessments to date, we are
not aware of any environmental problems affecting Fitzgeralds Black Hawk which
are likely to result in material costs to us. No assurance can be given,
however, that environmental problems will not subsequently be discovered.
Furthermore, the EPA or other governmental authorities could broaden their
investigations and identify areas of concern within the site, we could be
identified as a PRP, and any liability related thereto could have a material
adverse effect on us.
9
The 170 acres of land (the "Land") acquired by Majestic Star on February
11, 2004 also contains areas with environmental issues. Within the Land, there
are areas that have been remediated or are in the process of remediation. The
City of Gary has been and continues to be responsible for remediation of all of
the Land, and has agreed to indemnify the Company, by assignment through GNC,
from and against any liability obligation or expense, including attorney and
consultant fees, arising out of or in connection with the environmental
condition of the Land.
FINANCIAL INFORMATION ABOUT SEGMENTS
For financial information regarding the Company's business segments, see
Note 18 of the Notes to Consolidated Financial Statements.
SEASONALITY
The gaming operations of the Company's properties may be seasonal and,
depending on the location and other circumstances, the effects of such
seasonality could be significant. The properties' results are affected by
inclement weather in relevant markets. For example, because of the climate in
the Chicago metropolitan area, Majestic Star's operations revenues are expected
to be stronger during the period from May through September. Fitzgeralds Black
Hawk, located in the Rocky Mountains of Colorado, is subject to snow and icy
road conditions during the winter months. Any such severe weather conditions may
discourage potential customers from visiting the Fitzgeralds Black Hawk
facilities. At Fitzgeralds Tunica and Fitzgeralds Black Hawk, business levels
are typically weaker from Thanksgiving through the end of the winter and
typically stronger from mid-June to mid-November. 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.
GOVERNMENT REGULATION AND LICENSING
General
The ownership and operation of our gaming facilities are subject to various
state and local laws and regulations in the jurisdictions where they are
located. Because of the spin-off of Barden Nevada, we are no longer subject to
Nevada gaming licensing and regulatory control except that we must periodically
report on our gaming operations outside of Nevada to the Nevada gaming
regulators.
The following is a summary of the provisions of the laws and regulations
applicable to the Company's gaming operations and other laws and regulations
applicable to the Company as a registered holding company in Mississippi. The
summary does not purport to be a full description thereof and is qualified in
its entirety by reference to such laws and regulations.
Indiana Gaming Regulation
The ownership and operation of Majestic Star is subject to regulation by
the State of Indiana. In 1993, the State of Indiana passed the Riverboat
Gambling Act that created the IGC (the "IGC"). The IGC is given extensive powers
and duties for the purposes of administering, regulating and enforcing riverboat
gaming in Indiana.
10
The IGC has jurisdiction and supervision over all riverboat gaming
operations in Indiana and all persons on riverboats where gaming operations are
conducted. These powers and duties include authority to (i) investigate all
applicants for riverboat gaming licenses, (ii) select licensees from competing
applicants, (iii) establish fees for licensees and (iv) prescribe all forms used
by applicants. The IGC is authorized to adopt rules for administering the gaming
statute and the conditions under which riverboat gaming in Indiana may be
conducted. The IGC may suspend or revoke the license of a licensee or impose
civil penalties, in some cases without notice or hearing, for any act in
violation of the Riverboat Gambling Act or for any fraudulent act.
The Riverboat Gambling Act requires an extensive disclosure of records and
other information concerning an applicant, including disclosure of all
directors, officers and persons holding a five percent or more direct or
indirect beneficial interest in an applicant. In determining whether to grant or
renew an owner's license to an applicant, the IGC considers a number of factors,
including (i) the character, reputation, experience and financial integrity of
the applicant, (ii) the facilities or proposed facilities for the conduct of
riverboat gaming, (iii) the prospective revenue to be collected by the state
from the conduct of riverboat gaming, (iv) the good faith affirmative action
plan to recruit, train and upgrade minorities in all employment classifications,
(v) the financial ability of the applicant to purchase and maintain adequate
liability and casualty insurance, (vi) whether the applicant has adequate
capitalization to provide and maintain the riverboat for the duration of the
license and (vii) the extent to which the applicant meets or exceeds other
standards adopted by the IGC. The IGC may also give favorable consideration to
applicants for economically depressed areas and applicants who provide for
significant development of a large geographic area. A gaming license is a
revocable privilege and is not a property right.
An owner's initial license expires five years after the effective date of
the license (unless earlier terminated or revoked) and may be renewed for
one-year periods by the IGC upon satisfaction of certain statutory and
regulatory requirements. While the IGC reserves the right to investigate
Riverboat Licensees at any time it deems necessary, after the expiration of the
initial license, each Riverboat Licensee must undergo a complete reinvestigation
every three years. In June 1996, Majestic Star obtained its initial gaming
license from the IGC. After a re-investigation in 2001, its license was renewed.
Applications for the required annual license renewals for 2002 and 2003 were
submitted and approved. In approximately June 2004, Majestic Star will undergo
its requisite three year re-investigation.
A Riverboat Owner's License and Operating Contract entitle the licensee or
the Operating Agent to operate one riverboat. In May 2003, the Riverboat
Gambling Act was amended to allow a person to hold up to one hundred percent of
up to two individual Riverboat Owner's Licenses. A transfer fee of $2.0 million
is imposed on a Riverboat Licensee who purchases or otherwise acquires a
controlling interest in a second Indiana Riverboat Owner's License. If a
Riverboat Licensee or the Operating Agent is a publicly-traded corporation, its
Articles of Incorporation must contain language concerning transfer of
ownership, suitability determinations and possible divestiture of ownership.
The IGC is authorized to conduct investigations into gambling games, the
maintenance of equipment, and violations of the Riverboat Gambling Act as it
deems necessary. Riverboat Licensees and Operating Agents may be subject to
fines, suspension or revocation of its license or Operating Contract for any
conduct that violates the Act, rules promulgated thereunder or that constitutes
a fraudulent act.
11
Additionally, the IGC is authorized to license suppliers and certain
occupations related to riverboat gaming. Gaming equipment and supplies
customarily used in conducting riverboat gaming may be purchased or leased only
from licensed suppliers. By rule promulgated by the IGC, Riverboat Licensees who
employ non-licensed individuals in positions requiring licensure or who purchase
supplies from a non-licensed entity may be subject to a disciplinary action.
A Riverboat Licensee may not enter into or perform any contract or
transaction in which it transfers or receives consideration that is not
commercially reasonable or that does not reflect the fair market value of goods
and services rendered or received. All contracts are subject to disapproval by
the IGC and contracts should reflect the potential for disapproval. The Act
places special emphasis on minority and women business enterprise participation
in the riverboat industry. Riverboat Licensees and Operating Agents must
establish goals of expending ten percent of the total dollars spent on the
majority of goods and services with minority business enterprises and five
percent with women business enterprises. Each riverboat owner licensee is
required to submit annually to the IGC a report that includes the total dollar
value of contracts awarded for goods and services and the percentage awarded to
minority and women's business enterprises. The IGC may suspend, limit or revoke
an owner's gaming license or impose a fine for failure to comply with these
statutory requirements. The Company has compiled and submitted unaudited reports
for the calendar year ended December 31, 2003, which the Company believes
demonstrate it has met these statutory requirements.
Under IGC regulations, minimum and maximum wagers on games are left to the
discretion of the licensee. Wagering is required to be conducted with tokens,
chips or electronic cards instead of cash or coins.
A change in the Indiana state law governing gaming took effect on July 1,
2002, which enabled Indiana's riverboat casinos to operate dockside. The IGC
approved Majestic Star's 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. In connection with dockside
operations, Indiana imposed 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. By statute enacted
in 2003, riverboats had to commence utilization of the graduated tax rate on
July 1, 2002, even though dockside operations at Majestic Star did not commence
until August 5, 2002. The statute further allowed Indiana riverboats to pay the
difference in the tax liability in two installments, one due in 2003 and the
second in 2004. 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%.
Starting on August 5, 2002, Indiana also imposed an admissions tax of $3 per
turnstile count.
Pursuant to legislation enacted in 2003, riverboats may now operate 24
hours per day. Majestic Star commenced 24-hour operations on July 12, 2003.
In May 2003, the Indiana General Assembly adopted legislation that made the
act of providing a complimentary hotel room a retail transaction subject to
state gross retail tax of 6%. In March 2004, the Indiana General Assembly passed
a law repealing the gross retail tax on complimentary hotel rooms effective
April 1, 2004. Riverboats licensed by the IGC are assessed as real property for
property tax purposes and, thus, are taxed at rates determined by local taxing
authorities. All Indiana state excise taxes, use taxes and gross retail taxes
apply to sales made on a riverboat.
Lake County, Indiana is in the process of a general reassessment of
property values for property tax purposes. The reassessments are to be
effective March 1, 2002. The reassessment are the result of a 1998 Indiana
Supreme Court ruling that declared the method of property assessments previously
used was unconstitutional. The reassessment process has created significant
uncertainty for property owners in Lake County, including the Company, the BHR
Joint Venture (for which the Company is a 50% joint venture partner) and
Buffington Harbor Parking Association ("BHPA") (for which the Company is the
leasee of a parking garage). The Company, the BHR Joint Venture and BHPA are
currently appealing assessed values that they believe are inaccurate. In
addition, because of the reassessments and ongoing appeals throughout Lake
County, the State of Indiana has not been able to issue a tax rate on such
reassessed property.
As a result, the Company, the BHR Joint Venture and BHPA have not been
issued tax bills for 2003 and 2004 and the Company has estimated its tax
liability as a loss contingency. Please see our discussion in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Notes 10 and 15 to the Notes of The Majestic Star Casino, LLC's
Consolidated Financial Statements.
As a condition of continued licensure, Majestic Star must maintain a bond
in the amount of $1.0 million to meet general legal and financial obligations to
the local community and the State. The Riverboat Licensee and the Operating
Agent must carry insurance in types and amounts as required by the IGC. Majestic
Star is waiting for the IGC to provide language to be included in the bond. When
the language is finalized the company will post the bond.
12
The IGC has promulgated a rule that prohibits distributions, excluding
distributions for the payment of taxes, by a Riverboat Licensee to its partners,
shareholders, itself or any affiliated entity if the distribution would impair
the financial viability of the riverboat gaming operation. The IGC has also
promulgated a rule mandating Riverboat Licensees to maintain a cash reserve to
protect patrons against defaults in gaming debts. The cash reserve is to be
equal to a Riverboat Licensee's average payout for a three-day period based on
the riverboat's performance the prior calendar quarter. The cash reserve can
consist of cash on hand, cash maintained in Indiana bank accounts and cash
equivalents not otherwise committed or obligated. We are in compliance with the
cash reserve requirement.
The Company and its affiliates are subject to restrictions on the
incurrence of debt. A riverboat licensee and its affiliates may enter into debt
transactions that total one million dollars or more only with the prior approval
of the IGC. Such approval is subject to compliance with request procedures and a
showing that each person with whom the riverboat licensee and its affiliates
enters into a debt transaction would be suitable for licensure under the Act.
Mississippi Gaming Regulation
The ownership and operation of casino gaming facilities in Mississippi are
subject to extensive state and local regulations, but primarily the licensing
and/or regulatory control of the Mississippi Gaming Commission (the "Mississippi
Commission"). The Mississippi Gaming Control Act (the "Mississippi Act"), which
legalized dockside casino gaming in Mississippi, is similar to the Nevada Gaming
Control Act. The Mississippi Commission has adopted regulations which are also
similar in many respects to the Nevada gaming regulations.
The laws, regulations and supervisory procedures of the Mississippi
Commission are based upon declarations of public policy that are concerned with,
among other things:
- the prevention of unsavory or unsuitable persons from having a direct
or indirect involvement with gaming at any time or in any capacity;
- the establishment and maintenance of responsible accounting practices
and procedures;
- the maintenance of effective controls over the financial practices of
licensees, including the establishment of minimum procedures for
internal fiscal affairs and the safeguarding of assets and revenues,
providing for reliable record keeping and requiring the filing of
periodic reports with the Mississippi Commission;
- the prevention of cheating and fraudulent practices;
- providing a source of state and local revenues through taxation and
licensing fees; and
- ensuring that gaming licensees, to the extent practicable, employ
Mississippi residents.
The regulations are subject to amendment and interpretation by the
Mississippi Commission. Changes in Mississippi laws or regulations may limit or
otherwise materially affect the types of gaming that may be conducted and such
changes, if enacted, could have an adverse effect on us and our business,
financial condition and results of operations.
The Mississippi Act provides for legalized dockside gaming in each of the
fourteen counties that border the Gulf Coast or the Mississippi River, but only
if the voters in the applicable county have not
13
voted to prohibit gaming in that county. In recent years, certain anti-gaming
groups proposed for adoption through the initiative and referendum process
certain amendments to the Mississippi Constitution which would prohibit gaming
in the state. The proposals were declared illegal by Mississippi courts on
constitutional and procedural grounds. The latest ruling was appealed to the
Mississippi Supreme Court, which affirmed the decision of the lower court. If
another such proposal were to be offered and if a sufficient number of
signatures were to be gathered to place a legal initiative on the ballot, it is
possible for the voters of Mississippi to consider such a proposal in November
of 2006. While we are unable to predict whether such an initiative will appear
on a ballot or the likelihood of such an initiative being approved by the
voters, if such an initiative were passed and gaming were prohibited in
Mississippi, it would have a significant adverse effect on us and our business,
financial condition and results of operations.
As of January 1, 2004, dockside gaming was permissible in nine of the
fourteen eligible counties in the State of Mississippi and gaming operations had
commenced in seven counties. Under Mississippi law, gaming vessels must be
located on the Mississippi River or on navigable waters in eligible counties
along the Mississippi River, or in the waters lying south of the counties along
the Mississippi Gulf Coast. Fitzgeralds Tunica is located on barges situated in
a specially constructed basin near the Mississippi River. In the past, whether
basins such as the one in which the Fitzgeralds Tunica casino barges are located
constituted "navigable waters" suitable for gaming under Mississippi law was a
controversial issue. The Mississippi Attorney General issued an opinion in July
1993 addressing legal locations for gaming vessels under the Mississippi Act,
and on May 24, 1993, the Mississippi Commission approved the location of the
casino barges on the Fitzgeralds Tunica site as legal under the opinion of the
Mississippi Attorney General. Since 1993, the Mississippi Commission has issued
or renewed licenses to Fitzgeralds Tunica on several separate occasions. We
believe that Fitzgeralds Tunica is in compliance with the Mississippi Act and
the Mississippi Attorney General's "navigable waters" opinion. However, no
assurance can be given that a court would ultimately conclude that our
Fitzgeralds Tunica barges are located on navigable waters within the meaning of
Mississippi law. If the basin in which our Fitzgeralds Tunica casino barges are
presently located were not deemed navigable waters within the meaning of
Mississippi law, such a decision would have a material adverse effect on us and
our business, financial condition and results of operations.
The Mississippi Act permits unlimited stakes gaming on permanently moored
vessels on a 24-hour basis and does not restrict the percentage of space which
may be utilized for gaming. The Mississippi Act permits substantially all
traditional casino games and gaming devices. Only persons who are 21 years of
age or older may wager on games in the state of Mississippi.
We and any subsidiary of ours that owns or operates a casino in Mississippi
(a "Gaming Subsidiary") are subject to the licensing and regulatory control of
the Mississippi Commission. Each of the Company, Majestic Investor, LLC
("Investor"), Majestic Investor Holdings and BDI have registered under the
Mississippi Act as either a publicly traded corporation (a "Registered
Corporation") or a holding company of Barden Mississippi Gaming, LLC ("Barden
Mississippi"), the owner and operator of Fitzgeralds Tunica, a licensee of the
Mississippi Commission. BDI, the Company, Investor and Majestic Investor
Holdings, as registered holding companies or publicly traded corporations, and
Barden Mississippi, as a gaming licensee, are required to submit detailed
financial, operating and other reports to the Mississippi Commission and furnish
any other information which the Mississippi Commission may require. If we are
unable to continue to satisfy the registration requirements of the Mississippi
Act, we, any of our related registered holding companies or publicly traded
corporations and Barden Mississippi cannot own or operate gaming facilities in
Mississippi. No person may become a stockholder of or receive any percentage of
profits from a licensed subsidiary of a registered holding company or publicly
traded corporation without first obtaining licenses and approvals from the
Mississippi Commission. While we
14
have received such approvals in connection with the licensing of Barden
Mississippi, no assurance can be given that we will continue to receive such
approvals in the future.
Barden Mississippi must maintain its gaming license from the Mississippi
Commission in order to continue to operate a casino in Mississippi. Such
licenses are issued by the Mississippi Commission subject to certain conditions,
including continued compliance with all applicable state laws and regulations.
There are no limitations on the number of gaming licenses which may be issued in
Mississippi. Gaming licenses require the payment of periodic fees and taxes, are
not transferable, are issued for a three-year period (and may be continued for
two additional three-year periods) and must be renewed periodically thereafter.
Barden Mississippi's current gaming license expires in December of 2004. There
can be no assurance that any subsequent application for a license will be
approved.
Certain management personnel of BDI, the Company, Investor and Majestic
Investor Holdings, and certain management personnel and key employees of Barden
Mississippi must be found suitable or approved by the Mississippi Commission. We
believe that we have obtained, applied for or are in the process of applying for
all necessary findings of suitability with respect to the companies, although
the Mississippi Commission, in its discretion, may require additional persons to
file applications for findings of suitability. In addition, any person having a
material relationship or involvement with us may be required to be found
suitable, in which case those persons must pay the costs and fees associated
with such investigation. The Mississippi Commission may deny an application for
a finding of suitability for any cause that it deems reasonable. Changes in
certain licensed positions must be reported to the Mississippi Commission. In
addition to its authority to deny an application for a finding of suitability,
the Mississippi Commission has jurisdiction to disapprove a change in any
person's corporate position or title and such changes must be reported to the
Mississippi Commission. The Mississippi Commission has the power to require us,
BDI, Investor, Majestic Investor Holdings and Barden Mississippi to suspend or
dismiss officers, directors, managers, members and other key employees or sever
relationships with other persons who refuse to file appropriate applications or
whom the authorities find unsuitable to act in such capacities. There can be no
assurance that such persons who have filed or will be required to file
applications for findings of suitability will be found suitable by the
Mississippi Commission. Determinations of suitability or questions pertaining to
licensing are not subject to judicial review in Mississippi.
Substantially all material loans, leases, sales of securities and similar
financing transactions by a Registered Corporation or a Gaming Subsidiary must
be reported to or approved by the Mississippi Commission. A Gaming Subsidiary
may not make a public offering of its securities, but may pledge or mortgage
casino facilities. A Registered Corporation may not make a public offering of
its securities without the prior approval of the Mississippi Commission if any
part of the proceeds of the offering is to be used to finance the construction,
acquisition or operation of gaming facilities in Mississippi or to retire or
extend obligations incurred for those purposes.
Under the regulations of the Mississippi Commission, Barden Mississippi may
not guarantee a security issued by us or any other affiliated company pursuant
to a public offering, or pledge the assets of Barden Mississippi to secure
payment or performance of the obligations evidenced by the security issued by
the affiliated company, without the prior approval of the Mississippi
Commission. A pledge of the equity securities of a gaming licensee and the
foreclosure of such a pledge are ineffective without the prior approval of the
Mississippi Commission. Moreover, restrictions on the transfer of an equity
security issued by a Mississippi gaming licensee or a registered holding company
and agreements not to encumber such securities are ineffective without the prior
approval of the Mississippi Commission.
Changes in control of BDI, the Company, Investor, Majestic Investor
Holdings or Barden Mississippi, whether through merger, consolidation,
acquisition of assets, management or consulting
15
agreements or any act or conduct by a person by which he or she obtains control,
may not occur without the prior approval of the Mississippi Commission. Entities
seeking to acquire control of one or more of these companies must satisfy the
Mississippi Commission in a variety of stringent standards prior to assuming
control of any such company. The Mississippi Commission may also require
controlling stockholders, officers, directors, and other persons having a
material relationship or involvement with the entity proposing to acquire
control, to be investigated and licensed as part of the approval process
relating to the transaction.
None of BDI, the Company, Investor, Investor Holdings or Barden Mississippi
may engage in gaming activities in Mississippi while also conducting gaming
operations outside of Mississippi without approval of the Mississippi
Commission. The Mississippi Commission may require determinations that, among
other things, there are means for the Mississippi Commission to have access to
information concerning the out-of-state gaming operations of us and our
affiliates. We have received a waiver of foreign gaming approval from the
Mississippi Commission for our gaming operations in Indiana and Colorado. We
will be required to obtain the approval or a waiver of such approval from the
Mississippi Commission prior to engaging in any additional future gaming
operations outside of Mississippi. There can be no assurance that any such
approvals will be obtained.
If the Mississippi Commission determined that we, BDI, Investor, Majestic
Investor Holdings or Barden Mississippi violated a gaming law or regulation, the
Mississippi Commission could limit, condition, suspend or revoke the approvals
of any such company and the license of Barden Mississippi, subject to compliance
with certain statutory and regulatory procedures. In addition, we, BDI,
Investor, Majestic Investor Holdings, Barden Mississippi and the persons
involved could be subject to substantial fines for each separate violation.
Because of such a violation, the Mississippi Commission could attempt to appoint
a supervisor to operate the casino facilities. Limitation, conditioning or
suspension of any gaming license or approval or the appointment of a supervisor
could (and revocation of any gaming license or approval would) materially
adversely affect us and our business, financial condition and results of
operations.
License fees and taxes are computed in various ways depending on the type
of gaming involved and are payable to the State of Mississippi and to the
counties and cities in which a Gaming Subsidiary's operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable either weekly, monthly, quarterly or annually. Gaming taxes are based
upon:
- a percentage of the gross gaming revenues received by the casino
operation;
- the number of gaming devices operated by the casino; or
- the number of table games operated by the casino.
The license fee payable to the State of Mississippi is based upon "gaming
receipts" (generally defined as gross receipts less payouts to customers as
winnings) and the current maximum tax rate imposed is eight percent of all
gaming receipts in excess of $134,000 per month. The foregoing license fees paid
by Barden Mississippi are allowed as a credit against Barden Mississippi's
Mississippi income tax liability for the year paid. The gross revenue fee
imposed by Tunica County equals approximately four percent of the gaming
receipts.
Colorado Gaming Regulation
Colorado legalized limited gaming by constitutional amendment approved by
Colorado voters on November 6, 1990. The Colorado legislature thereafter enacted
the Limited Gaming Act of 1991 (the
16
"Colorado Act") to implement the provisions of the constitutional amendment, and
limited gaming commenced in Colorado on October 1, 1991. The Colorado Act
authorizes limited gaming only in certain designated commercial districts of
Central City, Black Hawk and Cripple Creek, Colorado. Limited gaming consists of
poker, blackjack and slot machines, all with maximum single bets of five
dollars. Only persons aged 21 or older may participate in limited gaming, and
limited gaming and the sale of alcoholic beverages are prohibited between the
hours of 2:00 a.m. and 8:00 a.m. Limited gaming is only allowed on premises
licensed for that purpose, and the licensed premises of any building may not
exceed 35% of the square footage of the building and no more than 50% of any
floor of such building. There is no limitation on the size of any structure or
total square footage devoted to limited gaming.
Pursuant to the Colorado Act and the rules and regulations promulgated
thereunder (collectively, the "Colorado Gaming Regulations"), the ownership and
operation of limited gaming facilities in Colorado, however acquired, are
subject to extensive regulation. The Colorado Act created the Division of Gaming
(the "Colorado Division") within the Colorado Department of Revenue and the
Colorado Limited Gaming Control Commission (the "Colorado Gaming Commission") to
license, implement, regulate, and supervise the conduct of limited gaming. The
Director of the Colorado Division (the "Colorado Director"), under the general
supervision of the Colorado Gaming Commission, is granted broad powers to ensure
compliance with the Colorado Act and the rules.
The Colorado Act declares public policy on limited stakes gaming to be
that:
- the success of limited stakes gaming is dependent upon public
confidence and trust that licensed limited stakes gaming is conducted
honestly and competitively, the rights of the creditors of licensees
are protected and gaming is free from criminal and corruptive elements;
- public confidence and trust can be maintained only by strict regulation
of all persons, locations, practices, associations and activities
related to the operation of licensed gaming establishments and the
manufacture or distribution of gaming devices and equipment;
- all establishments where limited stakes gaming is conducted and where
gambling devices are operated and all manufacturers, sellers and
distributors of certain gambling devices and equipment must therefore
be licensed, controlled and assisted to protect the public health,
safety, good order and the general welfare of the inhabitants of the
state to foster the stability and success of limited stakes gaming and
to preserve the economy and free competition in Colorado; and
- no applicant for a license or other approval has any right to a license
or to the granting of the approval sought.
The Colorado Gaming Commission may issue: (1) slot machine or distributor;
(2) operator; (3) retail gaming; (4) support; and (5) key employee gaming
licenses. The first three licenses require annual renewal by the Colorado Gaming
Commission. Support and key employee licenses are issued for two-year periods
and are renewable by the Division Director. The license renewal process requires
that the Colorado Division re-certifies to the Colorado Gaming Commission that
the licensee continues to operate in compliance with all statutes, rules and
regulations governing the conduct of casino gaming in Colorado and continues to
be of good moral character and fitness. The Colorado Gaming Commission has broad
discretion to condition, suspend for up to six months, revoke, limit or restrict
a license at any time and also has the authority to impose fines.
A retail gaming license is required for all persons conducting limited
stakes gaming on their premises. In addition, an operator license is required
for all persons who engage in the business of placing and
17
operating slot machines on the premises of a retailer. However, a retailer is
not required to hold an operator license. No person may have an ownership
interest in more than three retail licenses.
In October 2001, the Colorado Gaming Commission issued operator and retail
licenses to Barden Colorado, the owner and operator of Fitzgeralds Black Hawk.
The operator license was effective in October 2001. The retail license became
effective upon assumption of control of Fitzgeralds Black Hawk by Barden
Colorado in December 2001. The operator and retail gaming licenses were renewed
by the Colorado Gaming Commission for a one year period in October 2003.
The Colorado Act requires that every officer, director, and stockholder of
private corporations or equivalent office or ownership holders for non-corporate
applicants, and every officer, director or stockholder holding either a 5% or
greater interest or controlling interest of a publicly traded corporation or
owners of an applicant or licensee, shall be a person of good moral character
and submit to a full background investigation conducted by the Colorado Division
and the Colorado Gaming Commission. The Colorado Gaming Commission may require
any person having an interest in a license or a licensee to undergo a full
background investigation and pay the cost of investigation in the same manner as
an applicant. Limited disclosure forms are required of those persons holding any
equity interest in a non-publicly traded applicant.
In addition, all persons loaning monies, goods, or real or personal
property to a licensee or applicant, or having any interest in a licensee or
applicant, or entering into any agreement with a licensee or applicant, must
provide any information requested by the Colorado Division or Colorado Gaming
Commission, and in the discretion of the Colorado Division or the Colorado
Gaming Commission, these persons must supply all information relevant to a
determination of any such person's suitability for licensure and must submit to
a full background investigation if ordered by the Colorado Gaming Commission.
Failure to promptly provide all information requested, or to submit to a
suitability or background investigation, may result in the denial of a license
application, suspension or revocation of an existing license, termination of any
lease, note arrangement, or agreement between the applicant or licensee and the
person requested to provide the information, and other sanctions. Investigations
for suitability, background, or any other reason may delay a license application
or the operation under any agreement with a licensee. All agreements, contracts,
leases or arrangements in violation of the Colorado Act or the rules are void
and unenforceable.
Persons found unsuitable by the Colorado Gaming Commission may be required
immediately to terminate any interest in, association or agreement with, or
relationship to a licensee. A finding of unsuitability with respect to any
officer, director, employee, associate, lender or beneficial owner of a licensee
or applicant may also jeopardize the licensee's license or applicant's license
application. Licenses may be conditioned upon termination of any relationship
with unsuitable persons.
The Colorado Act and the rules require licensees to maintain detailed books
and records which accurately account for all monies and business transactions.
Books and records must be furnished upon demand to the Colorado Gaming
Commission, the Colorado Division and other law enforcement authorities. The
rules also establish extensive playing procedures, standards, requirements and
rules of play for poker, blackjack and slot machines.
Retail gaming licensees must, in addition, adopt comprehensive internal
control procedures governing their limited gaming operations. Such procedures
include the areas of accounting, internal fiscal control, surveillance,
security, cashier operations, key control, reporting procedures, personnel
procedures and fill and drop procedures, among others. Such procedures must be
approved in advance by the Colorado Division. Licensees are prohibited from
engaging in fraudulent acts which include, among other things, misrepresenting
the probabilities of pay out, improperly canceling a bet, conducting limited
gaming
18
without a valid license and employing an unlicensed person in a position which
requires a licensed employee. Licensees must report to the Colorado Division all
licenses, and all applications for licenses, in foreign jurisdictions.
With limited exceptions applicable to licensees that are publicly traded
entities, no person, including persons who may acquire an interest in a licensee
pursuant to a foreclosure, may sell, lease, purchase, convey or acquire any
interest in a retail gaming or operator license or business without the prior
approval of the Colorado Gaming Commission.
The State of Colorado has enacted an annual tax on the adjusted gross
proceeds ("AGP") from limited gaming. AGP is generally defined as the amounts
wagered minus payments to players. For poker, AGP means those sums wagered on a
hand retained by the licensee as compensation. Currently, the gaming tax on AGP
ranges between 0.25% and 20%. The gaming tax is paid monthly, with licensees
required to file returns by the 15th of the following month. Effective July 1 of
each year, the Colorado Gaming Commission establishes the gaming tax rates for
the following 12 months. Under the Constitution of the State of Colorado, the
Colorado Gaming Commission may increase the gaming tax rate to as much as 40% of
AGP. Since July 1, 1999, the Colorado Commission has set a gaming tax rate of
0.25% on adjusted gross gaming proceeds of up to and including $2 million, 2%
over $2 million up to and including $4 million, 4% over $4 million up to and
including $5 million, 11% over $5 million up to and including $10 million, 16%
over $10 million up to and including $15 million, and 20% over $15 million. The
tax rates were reaffirmed by the Colorado Gaming Commission on June 19, 2003 for
the period July 1, 2003 through June 30, 2004. For the fiscal year starting July
1, 2004, the Colorado Gaming Commission is currently evaluating the tax rates.
There is no assurance that the Colorado Gaming Commission will keep tax rates at
their current levels.
The Colorado Gaming Commission also may impose device fees. Effective July
1, 1999, the Colorado Commission eliminated annual device fees. Despite the
elimination of the annual device fee, casinos are still required to obtain
device stamps from the Colorado Division of Gaming and must follow device
tracking procedures. The City of Black Hawk imposes a monthly device fee on each
slot machine, black jack and poker table in the current amount of $62.50 per
device or table. Black Hawk also imposes taxes and fees on other aspects of the
businesses of gaming licensees, such as parking, liquor license and other
municipal taxes and fees. It is not unreasonable to expect substantial increases
in these fees or the imposition of new taxes and fees.
Violations of the Colorado Act, or any of the rules, is a criminal offense.
Persons violating the Colorado Act or the rules may, in addition to any gaming
license suspension or revocation, or administrative fine be subject to criminal
prosecution resulting in incarceration, fines or both.
Treasury Department Regulations
The Internal Revenue Code and Treasury Regulations require operators of
casinos located in the United States to file information returns for U.S.
citizens, including names and addresses of winners, for keno and slot machine
winnings in excess of prescribed amounts and table game winnings in which the
payout is a certain amount greater than the wager. The Internal Revenue Code and
Treasury Regulations also require operators to withhold taxes on some keno,
bingo, and slot machine winnings of nonresident aliens.
Regulations adopted by the Financial Crimes Enforcement Network ("FinCEN")
of the Treasury Department and the gaming regulatory authorities in the domestic
jurisdictions in which we operate casinos, require the reporting of currency
transactions in excess of $10,000 occurring within a gaming day, including
identification of the patron by name and social security number. On September
26, 2002
19
FinCEN implemented the suspicious activity reporting rule. This reporting
obligation requires casinos to report suspicious monetary transactions when the
casino knows, suspects, or has reason to suspect that the transaction involves
funds derived from illegal activity or is otherwise intended to facilitate
illegal activity.
Fitzgeralds Tunica has been notified by the Treasury Department that the
Treasury Department will conduct an audit of Fitzgeralds Tunica's compliance
with the currency transaction and suspicious activity reporting requirements. We
feel that this audit is routine in nature and not the result of specific
reporting requirement violations. The audit should begin in the spring of 2004.
Compliance with Other Laws and Regulations
Our operations are also subject to extensive state and local regulations in
addition to the regulations described above, and, on a periodic basis, we must
obtain various other licenses and permits, including those required to sell
alcoholic beverages.
ITEM 2. PROPERTIES
We own and operate three casino properties, located in Gary, Indiana,
Tunica County, Mississippi and Black Hawk, Colorado. The 9 1/2% notes and our
$80.0 million senior secured credit facility are secured by a lien on
substantially all of our and our subsidiary guarantors' assets, including the
real property.
SUMMARY OF PROPERTY INFORMATION
Majestic Star Fitzgeralds Tunica Fitzgeralds Black Hawk
---------------------------------------------------------------------
Property Data:
Date Opened........................... June 1996 June 1994 May 1995
Gaming Square Feet.................... 43,000 36,000 10,253
Slot Machines......................... 1,504 1,347 594
Table Games........................... 50 34 6
Hotel Rooms........................... -- 435 standard --
72 suites
Amenities............................. - Buffet - Buffet - Restaurant
- Food Court - Steak house - Bar
- Restaurant - Coffee shop
- Gift shop - 2 bars
- Ballroom - Ballroom
- Bars - Gift shop
Parking............................... 2,000 covered 411 covered 392 covered valet
2,600 surface 1,252 surface
120 valet
ITEM 3. LEGAL PROCEEDINGS
Various legal proceedings are pending against the Company. Other than those
described below, 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, results
of operations or cash flows.
20
In March 1998, a complaint was filed in the Lake County Superior Court in
East Chicago, Indiana, against the BHR Joint Venture, our Joint Venture Partner,
and the Company. The plaintiff, a former employee of the Company, claims to have
been assaulted in the BHR Joint Venture parking lot in June 1997 and requested
compensatory and punitive damages totaling approximately $11.0 million. The suit
alleged that the Joint Venture Partner and the Company failed to provide
adequate security to prevent assaults. On March 2, 2004, the parties agreed to
settle the lawsuit for $57,500. The Company is directly responsible for $7,500
of the settlement with the remainder split-evenly between our Joint Venture
Partner and the BHR Joint Venture. The Company had adequately reserved for this
settlement at December 31, 2003.
In March 2000, the Company was issued a notice of audit findings, and in
May 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 $554,000, plus accrued interest. In
February 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 $2.0 million, plus accrued interest.
The Company believes that the position of the Indiana Department of Revenue is
not valid, and 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. The Company is aware that other casino operators have also filed
similar protests and demands. However, it is too early to determine the outcome
of these contested tax assessments and, accordingly, the accompanying financial
statements do not include any accrual relating to this contingent liability.
In December 2002, a complaint was filed in the U.S. District Court for the
Northern District of Mississippi against Barden Mississippi and the former owner
of Fitzgeralds Tunica, alleging violation of Title VII of the Civil Rights Act
of 1964 and violation of 42 U.S.C. Section 1981, as well as certain other state
law claims. The plaintiff is seeking back pay, front pay, compensatory damages
and punitive damages in excess of $3.5 million. The Company is vigorously
defending the lawsuit. However, it is too early to determine the outcome of this
matter and the effect, if any, on the Company's financial position and results
of operations and, accordingly, the accompanying financial statements do not
include any accrual relating to this contingent liability.
In June 2003, a complaint was filed in the U.S. District Court for the
Northern District of Mississippi against several Tunica-area casino owners and
operators, including Barden Mississippi. The plaintiffs claim the defendants
conspired to agree not to enter into any advertising or other agreements with
the plaintiffs, in violation of federal and state antitrust laws, as well as
various other tort and contract claims. The plaintiffs are seeking treble,
compensatory and punitive damages totaling approximately $33.0 million, plus
interest and attorney's fees. The Company intends to vigorously defend against
this lawsuit. However, it is too early to determine the outcome and the effect,
if any, on the Company's financial position and results of operations and,
accordingly, the accompanying financial statements do not include any accrual
relating to this contingent liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company is a limited liability company and 100% of our membership
interests are indirectly held by Mr. Barden. There is no established public
trading market for the membership interests.
We did not pay any cash dividends during the past three years, and have no
current plan to pay any cash dividends in the near term. We are restricted in
our ability to pay dividends under various covenants of our debt documents.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required by this item is incorporated herein by reference
from the table entitled "Five Year Summary of Selected Financial Data" set forth
in Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
STATEMENT ON FORWARD-LOOKING INFORMATION
Throughout this report we make forward-looking statements. Forward-looking
statements include the words "may," "will," "would," "could," "likely,"
"estimate," "intend," "plan," "continue," "believe," "expect" or "anticipate"
and other similar words and include all discussions about our acquisition and
development plans. We do not guarantee that the transactions and events
described in this report will happen as described or that any positive trends
noted in this report will continue. The forward-looking statements contained in
this report are generally located in the material set forth under the headings
"Business," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," but may be found in other locations as well. These
forward-looking statements generally relate to our plans, objectives and
expectations for future operations and are based upon management's reasonable
estimates of future results or trends. Although we believe that our plans and
objectives reflected in or suggested by such forward-looking statements are
reasonable, we may not achieve such plans or objectives. You should read this
report completely and with the understanding that actual future results may be
materially different from what we expect. We will not update forward-looking
statements even though our situation may change in the future.
Specific factors that might cause actual results to differ from our
expectations, or may cause us to modify our plans and objectives, include, but
are not limited to:
- - the availability and adequacy of our cash flow to meet our requirements,
including payment of amounts due under the $80.0 million credit facility
and the 9 1/2% notes;
- - changes or developments in laws, regulations or taxes in the casino and
gaming industry including increases in new taxes imposed on gaming
revenues, gaming devices or admission taxes;
- - increased competition in existing markets or the opening of new gaming
jurisdictions;
22
- - our failure to obtain, delays in obtaining or the loss of any licenses,
permits or approvals, including gaming and liquor licenses, or the
limitation or conditioning of any such licenses, permits or approvals, or
our failure to obtain an unconditional renewal of any such licenses,
permits or approvals on a timely basis;
- - other adverse conditions, such as adverse economic conditions in the
company's markets, changes in general customer confidence or spending,
increased fuel and transportation costs, or travel concerns that may
adversely affect the economy in general and/or the casino and gaming
industry in particular;
- - the ability to fund capital improvements and development needs from
existing operations, available credit, or new financing;
- - risk of our joint venture partner, Trump Indiana, Inc., not making its
lease payments when due in connection with the parking facility in Gary,
Indiana or failing to fund the joint venture;
- - adverse determinations of issues related to disputed taxes, particularly in
Indiana;
- - factors relating to the current state of world affairs and any further acts
of terrorism or any other destabilizing events in the United States or
elsewhere; and
- - other factors discussed under "Factors that May Affect Future Results" or
elsewhere in this report that may be disclosed from time to time in filings
we make with the SEC or otherwise.
All future written and verbal forward-looking statements attributable to us or
any person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. In light of
these risks, uncertainties and assumptions, the forward-looking events discussed
in this report might not occur.
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 15(a).
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
For The Years Ended December 31,
------------------------------------------------------------------
2003 2002 2001(1) 2000 1999
---------- ---------- -------------- ---------- ----------
(in thousands)
STATEMENT OF OPERATIONS DATA:
Net revenues (2) (5) $ 261,783 $ 263,102 $ 133,095 $ 117,993 $ 118,922
Costs and expenses 230,338 227,452 118,476 109,131 102,839
Operating income 31,445 35,650 14,619 8,862 16,083
Interest expense, net 31,178 32,225 15,626 14,105 14,438
(Loss) gain on bond redemption (31,960) 69 - (382) (15,238)
(Loss) income from continuing
operations (31,879) 3,311 (1,156) (5,750) (13,760)
Loss from discontinued operation (3) (11,973) (1,995) (395) - -
Net (loss) income (43,852) 1,316 (1,551) (5,750) (13,760)
23
As Of December 31,
------------------------------------------------------------------
2003(4) 2002 2001 2000 1999
---------- ---------- -------------- ---------- ----------
(in thousands)
BALANCE SHEET:
Cash and cash equivalents $ 22,058 $ 24,548 $ 25,925 $ 16,120 $ 20,145
Restricted cash 1,400 1,250 1,000 2,000 7,358
Investment in BHR 29,734 31,833 33,899 43,924 38,146
Total assets 233,215 275,810 291,076 126,597 133,150
Current liabilities 33,667 25,458 37,160 21,795 21,311
Long-term debt 301,715 274,527 273,897 128,233 128,922
Total liabilities 335,382 299,985 311,057 150,028 150,233
Member's deficit (102,167) (24,175) (19,981) (23,431) (17,083)
NOTES:
(1) On December 6, 2001, the Company acquired the Fitzgeralds properties (the
"Acquisition") and commenced operations of the Fitzgeralds properties on
December 7, 2001 ("Inception"). Accordingly, the consolidated results of
operations for the year ended December 31, 2001 reflect only 25 days of
operating results for the Fitzgeralds properties.
(2) Net revenues is defined as gross revenues less promotional allowances.
(3) Loss from discontinued operation represents the spin-off of Barden Nevada
to Barden Development Inc. The $12.0 million loss from discontinued
operations in 2003 includes a $10.0 million charge resulting from the
write-down of the value of the Barden Nevada's assets to fair market value
concurrent with the spin-off.
(4) Selected balance sheet data at December 31, 2003 is exclusive of Barden
Nevada, which was spun-out to Barden Development, Inc. effective on
December 31, 2003. For the selected balance sheet data as of December 31,
2002 and 2001, Barden Nevada is included as the assets of Barden Nevada are
being recognized as held for use.
(5) Certain reclassifications were made to classify the costs of promotional
allowances to be consistent with 2003. These reclassifications increased
net revenues with a corresponding increase to operating expenses. Such
reclassifications have no effect on previously reported net income. See
Note 2 of Notes to Consolidated Financial Statements -- The Majestic Star
Casino, LLC.
EXECUTIVE OVERVIEW
The Company
The Majestic Star Casino, LLC and its subsidiaries (collectively, the
"Company"), operates a riverboat gaming facility located in Gary, Indiana
("Majestic Star") and two Fitzgeralds-brand casino-hotels located in Tunica
County, Mississippi ("Barden Mississippi" or "Fitzgeralds Tunica") and Black
Hawk, Colorado (casino only) ("Barden Colorado" or "Fitzgeralds Black Hawk").
Fitzgeralds Tunica and Fitzgeralds Black Hawk are collectively referred to
herein as the "Fitzgeralds Casinos." The Company, for a fee, manages the
operations of Barden Nevada Gaming, LLC ("Barden Nevada" or "Fitzgeralds Las
Vegas"). Fitzgeralds Las Vegas was spun-out to Barden Development, Inc. ("BDI"),
the Company's parent, effective on December 31, 2003. Because the spin-off of
Fitzgeralds Las Vegas was effective December 31, 2003, the discussion of our
historical operating results in this section does not include the financial
results of Fitzgeralds Las Vegas except to the extent it is a discontinued
operation.
Majestic Star has been owned and operated by the Company since 1996. On December
6, 2001, the Company acquired the Fitzgeralds Casinos (the "Acquisition") and
commenced operations of the Fitzgeralds Casinos on December 7, 2001
("Inception"). Accordingly, the consolidated results of operations for the year
ended December 31, 2001 reflect only 25 days of operating results for the
Fitzgeralds Casinos.
24
Overall Operating Results
Our consolidated gross revenues in 2003 of $280.1 million were slightly less
than our consolidated gross revenues in 2002 of $281.3 million, primarily due to
a sluggish economy, intense competition, remodeling projects at both Majestic
Star and Fitzgeralds Tunica, the closure for remodeling of food outlets at the
Buffington Harbor gaming complex, which impacted Majestic Star's operations, and
periods of severe weather that impacted both our Fitzgeralds Black Hawk and
Fitzgeralds Tunica properties. We had a consolidated net loss of $43.9 million
in 2003 compared to a consolidated net income of $1.3 million in 2002, primarily
due to our refinancing activities, higher gaming taxes (primarily at Majestic
Star) and charges and write-downs related to the spin-out of Barden Nevada to
BDI.
The Company derives in excess of 90% of its revenues from its casino operations,
comprised of slot machines and table games. Casino revenues are the difference
between the amount wagered and the amount paid to customers from gaming
activities. In excess of 87% of our casino revenues are from slot machine
revenues. Casino revenues are impacted by wagering volumes and the variability
of win percentages associated with our casino games. The other principal
components of revenues are room revenues from the hotel at Fitzgeralds Tunica
and food and beverage revenues at each of the casino properties. Room revenues
are a function of occupancy rate and average daily rate. Food and beverage
revenues are similarly affected by volume of, and the prices charged by us for,
food and beverage.
Our gross revenues are reduced by our promotional allowances. Promotional
allowances consist of the retail value of hotel (Fitzgeralds Tunica only), food
and beverage and other services and merchandise provided to our customers on a
complimentary basis. In addition, we reduce revenues for the cash based payments
to customers who are members of our slot clubs and other direct gaming
cash-based promotional activities.
The Company's most significant expenses are expenses related to operating the
casinos and the hotel (Fitzgeralds Tunica only), and the furnishing of food and
beverage to our customers. Casino expenses include rental expenses of slot
machines, payroll and benefit expenses, the cost of complimentaries provided to
the casino departments for rooms, food and beverage, expenses for supplies,
repairs and maintenance and various promotional activities.
The Company's other significant expenses relate to advertising and promotional
expenses, gaming taxes, general and administrative, and depreciation and
amortization. Advertising and promotional expenses primarily reflect the costs
of media and production, including television, radio, billboards and direct
mail, hosting and development of our casino customers, sales, and the payroll
and benefits to support these functions. Gaming taxes consist of wagering taxes
and admissions taxes paid to the States of Indiana, Mississippi and Colorado.
The Company pays other forms of taxes including, sales and use taxes, payroll
taxes, property taxes, franchise taxes, etc. These expenses are included in the
expense category most directly related to the tax. General and administrative
expenses include insurance, finance, human resources, information technology,
facilities, utilities, general housekeeping, wardrobe, professional fees,
property taxes, repairs and maintenance, rent and other expenses associated with
the parking garage lease with Buffington Harbor Parking Associates ("BHPA"),
berthing fees paid to the BHR Joint Venture and the payroll and benefits
involved in operating the general and administrative areas.
Depreciation and amortization expense include depreciation on land improvements,
building and building improvements, machinery, and equipment. Amortization
includes the amortization of capitalized fees relating to the issuance costs of
our 9 1/2% notes, our $80.0 million credit facility and the $16.3 million of
unsecured and outstanding 11.653% notes. Prior to our refinancing on October 7,
2003, amortization included the write off of capitalized fees relating to the
issuance of Majestic Star's $130.0 million of 10 7/8% notes, Majestic Investor
Holdings, $151.7 million of 11.653% notes and the $20.0 million and $15.0
million credit facilities which previously existed at Majestic Star and Majestic
Investor Holdings, respectively. In addition, the Fitzgeralds Casinos are
amortizing certain intangible assets that were recognized at the Acquisition
based on the value of the assets that were acquired. Also, the Company is
recognizing a loss for its equity investment in the BHR Joint Venture. After
Majestic Star and the Joint Venture Partner reimburse the BHR Joint Venture for
all operating losses and the costs of services, meals and beverages provided
directly to their customers, the remaining net loss of the BHR Joint Venture
results from depreciation expense associated with the BHR Joint Venture
property.
25
An overview of the events that affected our 2003 results, or that may affect
future results are listed below and discussed in greater detail in our
discussion of operating results and under the section entitled "Factors that
May Affect Future Results":
- - On October 7, 2003, the Company completed a refinancing of substantially
all of its debt. This refinancing resulted in a charge of $32.0 million for
the early extinguishment of debt, which reflects premiums paid and the
write-off of original issue discount and deferred financing costs related
to the redemption and repurchase of previously outstanding notes.
- - The spin-out of Barden Nevada to BDI resulted in a loss from discontinued
operations of $12.0 million in 2003, which included a charge of $10.0
million to write-down the assets of Barden Nevada to their fair market
value.
- - The Company paid higher gaming tax expenses of $6.6 million during 2003,
including $2.1 million in June 2003 for a retroactive gaming tax assessment
in Indiana, which negatively affected net income.
- - Net income also was negatively affected by higher corporate expenses and
lease expenses related to the parking garage at Majestic Star, remodeling
projects at Majestic Star (including the closure of food outlets at the
Buffington Harbor gaming complex) and Fitzgeralds Tunica, and severe
weather that impacted both our Fitzgeralds Black Hawk and Fitzgeralds
Tunica properties.
- - We spent $18.5 million on capital expenditures in 2003, principally for the
purchase of new slot machines, converting slot machines to ticket-in
ticket-out ("TITO") technology and a new player tracking and casino
management systems. We anticipate that we will spend approximately $18.0
million in 2004 for similar items. We believe that the TITO technology
should lead to greater efficiency on our casino floor and greater slot
machine playing times by our customers without interruptions.
- - Majestic Star operated dockside during the entire year and we expanded our
operations to 24 hours per day in July 2003.
- - We see opportunities to increase customers at Majestic Star, Fitzgeralds
Tunica and Fitzgeralds Black Hawk. The City of Gary is expected to start
construction in spring 2004 on a new access road to Majestic Star, which we
expect will have a positive effect on our financial results. Further, on
February 11, 2004, we purchased approximately 170 acres of real property
for $21.9 million from an affiliate. We intend to use the land for
development opportunities, which may include possible joint venture
opportunities with the City of Gary and/or private third parties. The
Tunica River Park had its grand opening on March 18, 2004. The Park is just
south of our Fitzgeralds Tunica property. In addition, a sightseeing
riverboat recommenced operations concurrent with the grand opening.
Fitzgeralds Tunica can promote directly to passengers of the riverboat.
Efforts are underway in Colorado to improve access to the City of Black
Hawk through road improvements and new roads. Better access to Black Hawk
should increase visits to Fitzgeralds Black Hawk.
- - The competitive factors set forth in Item 1. Business under the caption
"Competition," have had and will continue to have an effect on our
operations.
RESULTS OF OPERATIONS
The following table sets forth information derived from the Company's statements
of income expressed as a percentage of gross revenues.
26
CONSOLIDATED STATEMENTS OF OPERATIONS - PERCENTAGE OF GROSS REVENUES
FOR THE YEARS ENDED DECEMBER 31,
2003 2002 2001
----- ----- -----
REVENUES:
Casino 91.2% 91.3% 96.5%
Rooms 2.8% 2.9% 0.4%
Food and beverage 4.6% 4.6% 1.7%
Other 1.4% 1.2% 1.4%
----- ----- -----
Gross revenues 100.0% 100.0% 100.0%
Less promotional allowances 6.5% 6.5% 1.4%
----- ----- -----
Net revenues 93.5% 93.5% 98.6%
COSTS AND EXPENSES:
Casino 30.1% 30.1% 25.3%
Rooms 0.9% 1.0% 0.1%
Food and beverage 1.9% 2.0% 1.6%
Other 0.4% 0.4% 0.1%
Gaming taxes 19.7% 17.3% 25.7%
Advertising and promotion 5.2% 5.7% 5.4%
General and administrative 14.2% 14.6% 17.5%
Corporate Expenses 1.2% 1.0% 0.0%
Economic incentive - City of Gary 1.5% 1.4% 2.7%
Depreciation and amortization 6.2% 6.4% 6.5%
Loss on investment in the BHR Joint Venture 0.9% 0.9% 2.1%
Loss on sale of assets 0.0% 0.0% 0.0%
Pre-opening expenses 0.0% 0.0% 0.8%
----- ----- -----
Total costs and expenses 82.2% 80.8% 87.8%
----- ----- -----
Operating income 11.3% 12.7% 10.8%
----- ----- -----
OTHER INCOME (EXPENSE):
Interest income 0.0% 0.1% 0.3%
Interest expense -11.2% -11.5% -11.9%
(Loss) gain on bond redemption -11.4% 0.0% 0.0%
Other non-operating expense -0.1% -0.1% -0.1%
----- ----- -----
Total other expense -22.7% -11.5% -11.7%
----- ----- -----
Income from continuing operations -11.4% 1.2% -0.9%
Discontinued operations -4.3% -0.7% -0.3%
----- ----- -----
Net income (loss) -15.7% 0.5% -1.2%
===== ===== =====
27
The following table provides certain selected financial information from our
Consolidated Statements of Operations.
Consolidated
- ------------
Percentage
Increase/(Decrease)
---------------------
2003 v. 2002 v.
2003 2002 2001 2002 2001
-------- -------- -------- --------- ---------
(in millions)
Casino Revenues $ 255.4 $ 256.8 $ 130.2 (0.6)% 97.3%
Room Revenues 7.9 8.2 0.5 (2.8)% 1399.4%
Food and Beverage
Revenues 12.8 12.8 2.4 (0.1)% 443.8%
Other Revenues 4.0 3.5 1.8 13.1% 92.3%
-------- -------- -------- --------- ---------
Gross Revenues 280.1 281.3 134.9 (0.4)% 108.5%
Less Promotional
Allowances 18.3 18.2 1.8 0.5% 896.3%
-------- -------- -------- --------- ---------
Net Revenues 261.8 263.1 133.1 (0.5)% 97.7%
Operating Expenses 230.4 227.5 118.5 1.3% 92.0%
-------- -------- -------- --------- ---------
Operating Income 31.4 35.6 14.6 (11.8)% 143.9%
Other Expenses (63.3) (32.3) (15.8) 95.8% 105.0%
-------- -------- -------- --------- ---------
(Loss) Income from
Continuing Operations (31.9) 3.3 (1.2) (1365.0)% 386.5%
Loss from Discontinued
Operation (12.0) (2.0) (0.4) 500.2% 405.1%
-------- -------- -------- --------- ---------
Net (Loss) Income $ (43.9) $ 1.3 $ (1.6) (3432.8)% 184.9%
======== ======== ======== ========= =========
28
The following tables provides certain selected segment financial information for
each of Majestic Star, Fitzgeralds Tunica, and Fitzgeralds Black Hawk, as well
as Majestic Investor Holdings (an intermediate holding company that owns
Fitzgeralds Tunica and Fitzgerald Black Hawk).
Majestic Star
- -------------
Percentage
Increase/(Decrease)
---------------------
2003 v. 2002 v.
2003 2002 2001 2002 2001
-------- -------- -------- --------- ---------
(in millions)
Casino Revenues $ 136.5 $ 132.6 $ 122.2 3.0% 8.5%
Room Revenues -- -- -- -- --
Food And Beverage
Revenues 1.5 1.6 1.6 (7.9)% 0.6%
Other Revenues 2.3 1.9 1.7 17.3% 12.5%
-------- -------- -------- --------- ---------
Gross Revenues 140.3 136.1 125.5 3.1% 8.5%
Less Promotional
Allowances 1.4 1.0 0.6 39.9% 67.6%
-------- -------- -------- --------- ---------
Net Revenues 138.9 135.1 124.9 2.8% 8.2%
Operating Expenses 123.9 117.5 110.4 5.4% 6.4%
-------- -------- -------- --------- ---------
Operating Income 15.0 17.6 14.5 (14.7)% 21.5%
Other Expenses (27.4) (14.4) (14.8) 90.1% (2.6)%
-------- -------- -------- --------- ---------
Net Income (Loss) $ (12.4) $ 3.2 $ (0.3) (483.5)% 1252.1%
======== ======== ======== ========= =========
29
Fitzgeralds Tunica
- ------------------
Percentage
Increase/(Decrease)
---------------------
2003 v. 2002 v.
2003 2002 2001 2002 2001
-------- -------- -------- --------- ---------
(in millions)
Casino Revenues $ 84.4 $ 88.2 $ 5.5 (4.3)% 1505.5%
Room Revenues 7.9 8.2 0.5 (2.8)% 1399.4%
Food and Beverage
Revenues 9.3 9.3 0.6 0.1% 1482.5%
Other Revenues 1.4 1.3 0.1 8.0% 1471.7%
-------- -------- -------- --------- ---------
Gross Revenues 103.0 107.0 6.7 (3.7)% 1494.5%
Less Promotional
Allowances 13.7 14.1 0.9 (2.6)% 1377.9%
-------- -------- -------- --------- ---------
Net Revenues 89.3 92.9 5.8 (3.9)% 1513.8%
Operating Expenses 76.9 78.6 5.1 (2.1)% 1440.5%
-------- -------- -------- --------- ---------
Operating Income 12.4 14.3 0.7 (13.6)% 2085.4%
Other Income (Expenses) 0.0 0.0 0.0 (60.2)% 1750.8%
-------- -------- -------- --------- ---------
Net Income $ 12.4 $ 14.3 $ 0.7 (13.7)% 2084.6%
======== ======== ======== ========= =========
Fitzgeralds Black Hawk
- ----------------------
Percentage
Increase/(Decrease)
---------------------
2003 v. 2002 v.
2003 2002 2001 2002 2001
-------- -------- -------- --------- ---------
(in millions)
Casino Revenues $ 34.5 $ 36.0 $ 2.5 (4.4)% 1335.6%
Room Revenues -- -- -- -- --
Food and Beverage
Revenues 2.0 1.9 0.2 5.7% 1124.5%
Other Revenues 0.3 0.3 0.0 8.0% 1791.8%
-------- -------- -------- --------- ---------
Gross Revenues 36.8 38.2 2.7 (3.8)% 1325.5%
Less Promotional
Allowances 3.1 3.1 0.3 1.6% 1101.8%
-------- -------- -------- --------- ---------
Net Revenues 33.7 35.1 2.4 (4.3)% 1348.9%
Operating expenses 27.2 28.4 1.7 (4.4)% 1524.8%
-------- -------- -------- --------- ---------
Operating Income 6.5 6.7 0.7 (3.5)% 892.4%
Other income (expenses) 0.0 0.0 0.0 (100.0)% 810.3%
-------- -------- -------- --------- ---------
Net Income $ 6.5 $ 6.7 $ 0.7 (3.6)% 892.3%
======== ======== ======== ========= =========
30
Majestic Investor Holdings
- --------------------------
Percentage
Increase/(Decrease)
------------------
2003 v. 2002 v.
2003 2002 2001 2002 2001
-------- -------- -------- ------- ------
a. (in millions)
Casino Revenues - - - - -
Room Revenues - - - - -
Food and Beverage
Revenues - - - - -
Other Revenues - - - - -
-------- -------- -------- ----- -----
Gross Revenues - - - - -
Less Promotional
Allowances - - - - -
-------- -------- -------- ----- -----
Net Revenues - - - - -
Operating Expenses $ 2.4 $ 2.9 $ 1.2 (19.2)% 143.6%
-------- -------- -------- ----- -----
Operating loss (2.4) (2.9) (1.2) (19.2)% 143.6%
Other expenses (35.9) (18.0) (1.0) 100.0% 1710.0%
-------- -------- -------- ----- -----
Loss from Continuing
Operations (38.3) (20.9) (2.2) 83.2% 848.5%
Loss from Discontinued
Operation (12.0) (2.0) (0.4) 500.2% 405.1%
-------- -------- -------- ----- -----
Net loss $ (50.3) $ (22.9) $ (2.6) 119.5% 781.1%
======== ======== ======== ===== =====
31
The following tables reflect selected financial information as a
percentage of consolidated gross revenues at Majestic Star, Fitzgerald Tunica,
Fitzgeralds Black Hawk and Majestic Investor Holdings.
Majestic Star
- -------------
2003 2002 2001
------ ------ ------
Casino Revenues 48.8% 47.1% 90.6%
Room Revenues - - -
Food and Beverage
Revenues 0.5% 0.6% 1.2%
Other Revenues 0.8% 0.7% 1.3%
------ ------ ------
Gross Revenues 50.1% 48.4% 93.1%
Less Promotional
Allowances 0.5% 0.4% 0.5%
------ ------ ------
Net Revenues 49.6% 48.0% 92.6%
Operating Expenses 44.2% 41.7% 81.8%
------ ------ ------
Operating Income 5.4% 6.3% 10.8%
Other Expenses (9.8)% 5.1% (11.0)%
------ ------ ------
Net Income (Loss) (4.4)% 1.2% (0.2)%
====== ====== ======
32
Fitzgeralds Tunica
- ------------------
2003 2002 2001
------ ------ ------
Casino Revenues 30.1% 31.3% 4.1%
Room Revenues 2.9% 2.9% 0.4%
Food and Beverage
Revenues 3.3% 3.3% 0.4%
Other Revenues 0.5% 0.5% 0.1%
------ ------ ------
Gross Revenues 36.8% 38.0% 5.0%
Less Promotional
Allowances 4.9% 5.0% 0.7%
------ ------ ------
Net Revenues 31.9% 33.0% 4.3%
Operating Expenses 27.5% 27.9% 3.8%
------ ------ ------
Operating Income 4.4% 5.1% 0.5%
Other Expenses 0.0% 0.0% 0.0%
------ ------ ------
Net Income 4.4% 5.1% 0.5%
====== ====== ======
Fitzgeralds Black Hawk
- ----------------------
2003 2002 2001
------ ------ ------
Casino Revenues 12.3% 12.8% 1.9%
Room Revenues - - -
Food and Beverage
Revenues 0.7% 0.7% 0.1%
Other Revenues 0.1% 0.1% 0.0%
------ ------ ------
Gross Revenues 13.1% 13.6% 2.0%
Less Promotional
Allowances 1.1% 1.1% 0.2%
------ ------ ------
Net Revenues 12.0% 12.5% 1.8%
Operating Expenses 9.7% 10.1% 1.3%
------ ------ ------
Operating Income 2.3% 2.4% 0.5%
Other Expenses 0.0% 0.0% 0.0%
------ ------ ------
Net Income 2.3% 2.4% 0.5%
====== ====== ======
33
Majestic Investor Holdings
- --------------------------
2003 2002 2001
------ ------ ------
Casino Revenues - - -
Room Revenues - - -
Food and Beverage
Revenues - - -
Other Revenues - - -
------ ------ ------
Gross Revenues - - -
Less Promotional
Allowances - - -
------ ------ ------
Net Revenues - - -
Operating Expenses 0.9% 1.0% 0.9%
------ ------ ------
Operating Loss (0.9)% (1.0)% (0.9)%
Other Expenses (12.8)% (6.4)% (0.7)%
------ ------ ------
Loss from Continuing
Operations (13.7)% (7.4)% (1.6%)
Loss from Discontinued
Operation (4.3)% (0.7)% (0.3)%
------ ------ ------
Net loss (18.0)% (8.1)% (1.9)%
====== ====== ======
2003 compared to 2002
- ---------------------
Consolidated gross revenues declined $1.2 million or 0.4% to $280.1 million in
2003 from 2002 primarily due to soft economic conditions, intense competition
remodeling projects at both Majestic Star and Fitzgeralds Tunica, which
disrupted our casino floors, the closure for remodeling of food outlets at the
Buffington Harbor gaming complex, which impacted Majestic Star's casino
operations, and periods of severe weather that impacted both our Fitzgeralds
Black Hawk and Fitzgeralds Tunica properties. Since consolidated casino revenues
represents 91.2% of our consolidated gross revenues, the items that impacted our
consolidated gross revenues also impacted our consolidated casino revenues.
Nevertheless, casino revenues increased at Majestic Star during 2003. Majestic
Star's increased casino revenues came primarily from table games, as table games
drop increased $19.6 million during 2003. Supporting overall gaming activity at
Majestic Star was the opening of the 2,000 space parking garage at Buffington
Harbor in May 2002, the implementation of dockside gaming in August 2002 and the
provision for around the clock gaming which began in July 2003. At Fitzgeralds
Tunica, slot revenues declined $3.1 million and table game revenues declined
$700,000, primarily due to lower volumes. At Fitzgeralds Black Hawk slot
revenues declined $1.6 million, also primarily due to lower volumes. At
Fitzgeralds Black Hawk management focused marketing and promotional efforts on
higher margin guests, thus generating lower revenue from lower margin and
unprofitable guests. With respect to Fitzgeralds Black Hawk, the maximum wager
is $5.00.
Total consolidated operating costs and expenses increased $2.9 million or 1.3%
to $230.4 million in 2003 from 2002. Fitzgeralds Tunica and Fitzgerald Black
Hawk experienced lower casino and room (Fitzgeralds Tunica only) expenses due to
lower business volumes. The expense reductions were offset by Majestic Star's
slight increase in casino expenses due to increased casino volumes and cash
based
34
marketing programs. Consolidated food and beverage expenses decreased 9.6%
during 2003 compared to 2002 primarily because all of our properties focused on
cost containment.
One of the more significant differences between results of operations in 2003
and 2002 is the higher consolidated gaming taxes paid in 2003, principally
attributed to Majestic Star. The increase is primarily due to the higher tiered
tax structure in Indiana imposed in connection with the implementation of
dockside gaming in August 2002. The tiered tax structure for the year ended
December 31, 2003 resulted in $4.5 million of additional taxes paid by Majestic
Star. In addition, Majestic Star took a one-time charge of $2.1 million in June
2003 for "retroactive dockside taxes." At Fitzgeralds Black Hawk gaming taxes
increased by $0.8 million or 16.5% primarily due to a higher effective tax rate
during 2003 versus 2002. Under Colorado's tiered tax-structure, the tax year
starts on July 1 and ends on June 30. Since we acquired Fitzgeralds Black Hawk
on December 6, 2001 and commenced operations on December 7, 2001, our overall
effective tax rate was lower for the year than normal because we did not operate
the property during the full gaming tax year, July 1 to June 30, and did not hit
the higher tax levels in the tiered structure. Starting July 1, 2002, we began
paying gaming taxes again starting at the bottom of Colorado's tiered tax
structure. During the period July 1, 2002 to December 31, 2002 we expensed the
amounts actually paid to the state of Colorado for gaming taxes and trued up our
2002 annual expense based upon the effective tax rate calculated from January 1,
2002 to December 31, 2002 at December 31, 2002. The increases in gaming taxes at
Majestic Star and Fitzgeralds Black Hawk during 2003 were offset by a decrease
in gaming taxes at Fitzgeralds Tunica of $0.8 million during 2003 due to lower
casino revenues. For a more detailed discussion on the gaming tax structures in
the states in which we operate, see "Government Regulations and Licensing."
Consolidated general and administrative expenses decreased $1.5 million or 3.7%
to $39.7 million in 2003 from 2002. The decrease in general and administrative
expenses is primarily due to reduced payroll and benefit expenses, lower costs
associated with the operations of the BHR Joint Venture (down $0.3 million), and
reduced insurance premiums and bonus expenses. Offsetting these lower expenses
was an increase in parking garage lease expenses paid by Majestic Star
attributable to a full year of lease payments in 2003 compared to only seven
months of payments in 2002, when the garage opened. Parking garage lease
expenses were 2.1 million in 2003 compared to 1.0 million in 2002.
Property taxes are also included in general and administrative expenses. Lake
County, Indiana is in the process of a general reassessment of property values
for purposes of property taxes. Majestic Star's riverboat vessel and parcels of
land, along with improvements to that land, owned by the BHR Joint Venture and
BHPA are all located in Lake County, and were recently notified of an increase
in assessed values. Majestic Star, in consultation with legal counsel, believes
that the assessed values are excessive based on recent independent appraisals of
similar land parcels and the original acquisition costs for the property. In
addition, in the case of the riverboat vessel, Majestic Star believes that the
assessed value was determined using an incorrect assessment guideline and
incorrect reproduction cost multipliers, which fact has been confirmed by a
third-party contractor who conducted the assessments. County officials have
publicly acknowledged that the process is taking longer than expected and that
many of the assessments of property value are being appealed by taxpayers, as is
the case with Majestic Star. Until the process of assessment is complete and an
accurate property base is established, a rate of tax cannot be determined.
Accordingly, while Majestic Star has received notification of assessed values,
it has not received a property tax bill nor can it reasonably determine a rate
of tax to estimate its liability.
In accordance with procedures set by Lake County, pending the final
determination of the property tax issue, Majestic Star has paid 70% of its 2002
tax liability as a deposit against the tax. Majestic Star has recorded an
accrual for the remaining 2002 tax liability and the 2003 tax liability, which
is equivalent to the full year 2002 tax liability, plus a factor for inflation,
pending additional information from Lake County. In total, Majestic Star's
property taxes, plus its share of taxes passed-through from the BHR Joint
Venture and BHPA were approximately $3.4 million on an annual basis. A
significant increase in the property tax above what Majestic Star has recorded
would likely be material to the Company's results of operations.
Consolidated corporate expenses increased $0.7 million or 25.0% to $3.5 million
in 2003 from 2002. The higher corporate expenses resulted from higher payroll,
benefits, travel and relocation expenses associated with building our corporate
staff.
35
Consolidated depreciation and amortization decreased to $17.5 million in 2003
from $18.1 million in 2002 due principally to the fact that the machinery and
equipment at Majestic Star has been fully depreciated. In addition, since our
refinancing on October 7, 2003, we are no longer amortizing deferred financing
costs associated with all of the 10 7/8% notes and 89.3% of the 11.653% notes
as these costs were written off on such date.
Consolidated net interest expense for the year ended December 31, 2003 was $31.2
million compared to $32.2 million for the same period in 2002. The decrease of
$1.0 million is attributable to the lower interest cost from refinancing our
debts in October 2003.
In October 2003, the Company recognized a loss of $32.0 million from the
redemption and retirement of all of its 10 7/8% notes and the purchase of
approximately 89.3% of its 11.653% notes. The loss on the retirement of debt is
comprised of the premium paid to redeem or purchase and retire the old notes,
and the write-off of the unamortized deferred debt issuance costs and the
original issue discount related to the old notes.
The Company is recognizing a loss on discontinued operations of $12.0 million
for the twelve-month period ended December 31, 2003 related to the spin-out of
Barden Nevada to BDI. This compares to a loss on discontinued operations of $2.0
million for the twelve-month period ended December 31, 2002. Concurrent with the
spin-out, Majestic Investor Holdings wrote down the assets of Barden Nevada to
their fair market value. The writedown resulted in a $10.0 million charge. The
remaining loss represents the net loss from operations of Barden Nevada for the
period January 1, 2003 to the time of the spin-out, December 31, 2003, and for
the twelve-month period ended December 31, 2002.
2002 compared to 2001
Consolidated gross revenues for 2002 increased $146.4 million or 108.5% over
consolidated gross revenues recorded in 2001. Majestic Star accounted for $10.6
million of the increase. The balance of the increase is due to the acquisition
of the Fitzgeralds Casinos. The Fitzgeralds Casinos were acquired on December 6,
2001 and commenced operations on December 7, 2001. As a result, the Fitzgeralds
Casinos only had 25 days of operations in 2001 versus a full year in 2002. The
increase in gross revenue at Majestic Star is primarily a result of the parking
structure, which opened in May 2002, that provides customers with approximately
2,000 covered parking spaces and the commencement of dockside gaming in August
2002. Consolidated casino revenues, room revenues (Fitzgeralds Tunica only),
food and beverage revenues, and other revenues also increased significantly
during 2002 from 2001. The primary reasons for such increase are attributable to
the full year of operation of the Fitzgeralds Casinos in 2002.
Consolidated promotional allowances increased $16.4 million in 2002. Majestic
Star's promotional allowances increased $418,000 or 67.6% compared to 2001. The
Fitzgeralds Casinos comprised the remainder of the increase, or $16.0 million,
which is attributable to the full year of operation of the Fitzgeralds Casinos
in 2002.
Total consolidated operating expenses increased $109.0 million or 92.0% to
$227.5 million in 2002 from 2001, primarily attributable to the full year of
operations of the Fitzgeralds casinos in 2002. An increase in Majestic Star's
casino expenses also contributed to the increase in consolidated operating
expenses. Majestic Star's casino expenses increased $4.2 million or 13.8%
primarily because of an increase of $1.1 million for cash related coupons and
$1.0 million in payroll and related benefits.
Consolidated other expenses were $1.0 million in 2002, an increase of $962,000
or 1503.2% from 2001. Consolidated other expenses are attributable to the
Fitzgeralds Casinos and the increase is because of the full year of operation of
the Fitzgeralds casinos in 2002. Other expenses represent the cost of
merchandise related to our gift shop operations, labor and benefits to operate
our gift shops, and labor and benefits to provide other services at our
properties.
36
Consolidated gaming taxes increased $14.0 million or 40.3% to $48.7 million in
2002 from 2001. Majestic Star accounted for $33.6 million of consolidated gaming
taxes for 2002 compared to $34.0 million of consolidated gaming taxes for 2001.
For the six months ended June 30, 2002, Indiana gaming taxes were levied on
adjusted gross receipts, as defined by Indiana gaming laws, at the rate of 20%
plus $3 per admission. For the period July 1, 2002 through August 4, 2002,
gaming taxes were levied on adjusted gross receipts, at a flat rate of 22.5%.
Beginning August 5, 2002, in connection with the commencement of dockside
gaming, Majestic Star began to pay taxes under a graduated tax structure with a
starting rate of 15% and a top rate of 35% for adjusted gross receipts in excess
of $150 million. Majestic Star trued up its gaming tax liability to actual at
December 31, 2002. In 2001, gaming taxes were paid at a flat 20% of gross
receipts. The Fitzgeralds Casinos comprised the remaining increase in gaming
taxes, or $14.4 million, which is attributable to the full year of operations of
the Fitzgeralds Casinos in 2002.
Consolidated general and administrative expenses increased $17.6 million or
74.2% to $41.2 million in 2002 from 2001, primarily because of a full year of
operations of the Fitzgeralds casinos in 2002. Majestic Star's general and
administrative expenses increased $2.5 million in 2002 from 2001, primarily
because of increased expenses associated with the BHPA parking garage, various
legal claims and fees, increased property taxes, and increased insurance costs.
Majestic Investor Holdings accounted for $0.3 million of consolidated general
and administrative expenses compared to $26,000 in 2001. During 2002, Majestic
Investor Holdings expensed $0.2 million of retention bonuses to various members
of management which bonuses were paid for in the fourth quarter of 2002. The
retention bonuses were negotiated prior to the acquisition of the Fitzgeralds
Casinos and were given to certain members of the predecessor company's
management team if they would stay with the successor company for a period of
one year after the Acquisition.
The Company had consolidated corporate expenses of $2.8 million for the year
ended December 31, 2002. The Company had no corporate expenses in 2001.
Corporate expenses were incurred as a result of developing our corporate staff
after the acquisition of the Fitzgeralds Casinos. Corporate expenses primarily
comprise salary, benefits, travel and relocation expenses for our corporate
staff.
Consolidated depreciation and amortization increased to $18.1 million in 2002
from $8.8 million in 2001. Majestic Star accounted for $6.6 million of
consolidated depreciation and amortization for 2002 compared to $8.1 million for
2001. The decrease is attributable to machinery and equipment being fully
depreciated. Majestic Investor Holdings accounted for $2.6 million of
consolidated depreciation and amortization expense compared to $0.2 million for
2001. The increase at Majestic Investor Holdings is the result of the issuance
of the 11.653% notes on December 6, 2001. The Company recognized 25 days of
amortization on its deferred financing costs in 2001 versus a full year in 2002.
The Fitzgeralds Casinos comprised the remainder of the increase, or $8.3
million, which is attributable to the full year of operation of the Fitzgeralds
Casinos in 2002.
Loss on investment in the BHR Joint Venture totaled $2.4 million for 2002,
compared to $2.8 million for 2001. The loss on investment represents our equity
pick-up of the BHR Joint Venture's net loss, and is comprised primarily of
depreciation, as Majestic Star and its Joint Venture Partner reimburse the BHR
Joint Venture for all cash operating expenses and capital expenditures. The loss
on investment declined due to property and equipment being fully depreciated.
Consolidated pre-opening costs for 2002 and 2001 were $13,000 and $1.0 million,
respectively. These expenses were incurred prior to the Acquisition and
represents costs including salaries and wages, professional fees and other
administrative expenses.
Consolidated net interest expense for 2002 was $32.2 million compared to $15.7
million for 2001. The significant increase is attributable to interest expense
recognized on the 11.653% notes for all of 2002 versus twenty-five days in 2001.
Interest expense on the 11.653% notes increased $16.9 million. Net
37
interest expense attributed to Majestic Star for 2002 was $14.3 million compared
to $14.6 million for 2001. The $0.4 million decrease in net interest expense at
Majestic Star is primarily attributed to a $0.1 million decrease in interest
income, offset by lower interest paid on the line of credit and to the Indiana
Department of Revenue.
In 2002, Majestic Investor Holdings purchased $0.8 million of the 11.653% notes
with a face value of $0.9 million plus accrued interest. The notes, net of
unamortized original discount, were being carried at a value of $0.8 million.
The result was a $0.1 million gain.
The Company is recognizing a loss on discontinued operations of $2.0 million for
2002. This compares to a loss on discontinued operations of $0.4 million for the
short 2001 operating period of the Fitzgeralds Casinos. Majestic Investor
Holdings spun-out its equity interests in Fitzgeralds Las Vegas to BDI on
December 31, 2003. As a result of the spin-out, the operating performance for
Fitzgeralds Las Vegas has been classified as a discontinued operation for 2002
and 2001.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations with internal cash flow from our
operations and borrowings from the issuance of senior secured notes and under
our line of credit. We generate substantial cash flows from operating
activities. For 2003, we reported cash flows from operating activities of $32.0
million, a 50.2% increase over the $21.3 million reported in 2002. We use our
cash flows to meet our cash requirements which consist principally of financing
the operating expenses described above, meeting our debt service requirements,
making distributions to BDI under the management agreement, and financing
capital expenditures, including the remodeling projects at Majestic Star and
Fitzgeralds Tunica in 2003.
During the year ended December 31, 2003, we entered into our $80.0 million
credit facility of which $26.0 million was outstanding at year end and issued
the 9 1/2% notes, the proceeds of which were utilized to refinance our
previously existing 10 7/8% notes and 89.3% of the 11.653% notes of Investor
Holdings. At December 31, 2003, the Company had unrestricted cash and cash
equivalents of $22.1 million, compared to $24.6 million at December 31, 2002.
For the year ended December 31, 2003, the Company spent $18.5 million for
property, plant and equipment which consisted principally of remodeling projects
at Majestic Star and Fitzgeralds Tunica, new slot machines, conversion to TITO
technology, the acquisition of approximately 50 acres of land and a warehouse
from an affiliate of ours and the acquisition of new casino management systems
and a slot player tracking system at Majestic Star. During 2002, the Company
spent $10.4 million primarily on slot machines. In 2004, the Company anticipates
spending $40.0 million, of which $21.9 million was spent on acquiring
approximately 170 acres of property from Gary New Century, LLC, an affiliated
company, and the balance of approximately $18.0 million to be spent primarily on
installing new slot machines and converting slot machines to TITO. In 2002, the
Company received cash of $3.8 million from a purchase price adjustment related
to the purchase of the Fitzgeralds Casinos.
Management believes that the Company's cash flow from operations and its current
line of credit will be adequate to meet the Company's anticipated normal
operating requirements for working capital, its required capital expenditures
and its significant contractual obligations with respect to amounts outstanding
under the $80.0 million credit facility, the 11.653% notes, and the 9 1/2%
notes, payments to the BHR Joint Venture, and lease payments to BHPA,. The
majority of principal payments on our senior debt is not due until October 2010.
However, the Company will be required to pay $16.3 million still outstanding on
the 11.653% notes, plus accrued interest thereon, and any amounts outstanding on
the $80.0 million credit facility in 2007. No assurance can be given, however,
that such proceeds and operating cash flow, in light of increased competition,
will be sufficient for such purposes.
While we continue to evaluate potential opportunities to expand our existing
casinos or to pursue other growth opportunities, we may not have sufficient
funds to finance such strategic projects under our existing debt agreements,
which also limits our ability to incur additional debt. The purchase of certain
gaming facilities by larger more recognized brand names or the expansion of
gaming in jurisdictions in which gambling is already legal or currently illegal
could significantly increase competition for the
38
Company. If necessary and to the extent permitted under the indenture governing
the 9 1/2% notes, the Company will seek additional financing through borrowings
of debt or equity financing, subject to any governmental approvals. 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. As of March 30,
2004, the Company had $41.0 million available on its $80.0 million credit
facility.
REFINANCING TRANSACTIONS
On October 7, 2003, the Company consummated the refinancing of substantially all
of its debt, including 100% of its 10 7/8% notes and 89.3% of Investor Holding's
11.653% notes. The refinancing was financed with the proceeds of the 9 1/2%
notes plus $28.0 million from the $80 million credit facility along with cash on
hand. In October 2003, the Company recognized a loss of $32.0 million in
connection with the refinancing which is comprised of the premium paid to redeem
or purchase and retire the old notes, and the write-off of the deferred debt
issuance costs and of the original issue discount related to the old notes.
The 9 1/2% notes bear interest at a fixed annual rate of 9.5% payable on April
15 and October 15 of each year, commencing on April 15, 2004. The 9 1/2% notes
will mature on October 15, 2010. The 9 1/2% notes are secured by a pledge of our
equity interests held by BDI, our equity interests in the subsidiary guarantors,
and substantially all of our current and future assets, excluding the assets of
Fitzgeralds Las Vegas and certain other excluded assets.
The indenture governing the 9 1/2% notes contains covenants which, among other
things, restricts the Company's ability to (i) make certain payments to, or
investments in, third parties; (ii) incur additional indebtedness or liens on
any assets; (iii) enter into transactions with affiliates; and (iv) sell any
restricted subsidiaries' assets. In addition, upon a Change of Control as
defined in the indenture governing the 9 1/2% notes, the Company will be
required to offer to repurchase all of the outstanding 9 1/2% notes at a cash
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, to the date of repurchase.
Concurrent with the closing of the 9 1/2% notes, the Company established an $80
million credit facility with Wells Fargo Foothill, Inc., and terminated the two
existing credit facilities with Wells Fargo Foothill, Inc. Subject to certain
exceptions, the $80 million Credit Facility is secured by a first priority lien
on substantially all of the assets of the Company (which excludes the assets of
Fitzgeralds Las Vegas). Borrowings under the $80 million credit facility bear
interest at the Company's choice of LIBOR plus a range of 3.00% to 3.50% or
Wells Fargo Foothill, Inc.'s base rate plus a range of 0.25% to 0.75%. The range
is based on the Company's EBITDA (defined in the credit agreement, as earnings
before interest, taxes, depreciation and amortization) plus losses that occur
from the early retirement of debt during the three-month period ended December
31, 2003. The Wells Fargo Foothill, Inc. base rate approximates the prime rate.
Full payment of any outstanding balance under the $80 million credit facility is
due upon maturity in October 2007. The credit agreement includes restrictive
covenants similar to those set forth in the indenture governing the 9 1/2% notes
and also requires the Company to maintain, as defined in the covenants, minimum
EBITDA and Interest Coverage Ratios, which increase periodically, and an annual
limit on capital expenditures.
NEW ACCOUNTING PRINCIPLES
For information regarding New Accounting Principles, see Note 3 of the Notes to
Consolidated Financial Statements. Presented below are New Accounting Principles
that upon adoption had a material impact to our Consolidated Financial
Statements.
In April 2002, the Financial Accounting Standards Board issued statement 145
("SFAS 145"). 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, 2002. The Company adopted SFAS 145
39
and as a result, reclassified $69,000 in a gain from the early extinguishment of
debt, which item had previously been reported as an extraordinary item in 2002.
In the fourth quarter of 2003, the Company recognized a loss on the retirement
of debt of $32.0 million. The loss on the retirement of debt is comprised of the
premium on the offers to purchase, the write-off of the deferred debt issuance
costs and the original issue discount on the 10 7/8% notes and 89.3% of the
11.653% notes.
In June 2002, the Financial Accounting Standard Board issued Statement 146
("SFAS 146") "Accounting for Costs Associated with Exit or Disposal Activities."
The provisions of SFAS 146 became effective for exit or disposal activities
commenced subsequent to December 31, 2002. The Company recognized a $10.0
million charge as a result of the write-down of Barden Nevada's assets to fair
market value concurrent with the spin-out of Barden Nevada to Barden
Development, Inc. on December 31, 2003.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which requires
our management to make estimates and assumptions about the effects of matters
that are inherently uncertain including those matters related to property taxes
at Majestic Star. We have summarized our significant accounting policies in Note
2 to our consolidated financial statements. Of our accounting policies, we
believe the following may involve a higher degree of judgment and complexity.
Revenue Recognition -- Casino revenues is the net win from gaming activities,
which is the difference between the amount wagered by our gaming patrons and the
amount paid out to our patrons as a result of those wagers. Hotel, food and
beverage and other revenue are recognized at the time the related service is
performed.
Goodwill and Other Intangible Assets -- We have approximately $5.9 million of
goodwill and $9.2 million of other intangibles assets recorded on our balance
sheet at December 31, 2003, related to the acquisition of the Fitzgeralds
properties. We regularly evaluate our acquired businesses for potential
impairment indicators. Additionally, we adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets," in January 2002, that require us to
perform impairment testing at least annually. Our judgments regarding the
existence of impairment indicators are based on, among other things, the
regulatory and market status and operational performance of each of our acquired
businesses. Future events could significantly impact our judgments and any
resulting impairment loss could have a material adverse impact on our financial
condition and results of operations.
Property and Equipment -- At December 31, 2003, we have approximately $142.2
million of net property and equipment recorded on our balance sheet. We
depreciate our assets on a straight-line basis over their estimated useful
lives. The estimate of the useful lives is based on the nature of the asset as
well as our current operating strategy. Future events, such as property
expansions, new competition and new regulations, could result in a change in the
manner in which we are using certain assets requiring a change in the estimated
useful lives of such assets. In assessing the recoverability of the carrying
value of property and equipment, we must make assumptions regarding estimated
future cash flows and other factors. If these estimates or the related
assumptions change in the future, we may be required to record impairment
charges for these assets.
Casino Club Liability -- The Fitzgeralds Casinos offer a program whereby
participants can accumulate points for casino wagering that can currently be
redeemed for cash, lodging, food and beverages and merchandise. A liability is
recorded for the estimate of unredeemed points based upon the Fitzgeralds
Casinos' redemption history. Changes in the program, increases in membership and
changes in the redemption patterns of the participants can impact this
liability.
40
Self-Insurance -- The Company maintains accruals for self-insured health
program, which are classified in payroll and related liabilities in the
consolidated balance sheet. Management and consultants determine the estimates
of these accruals by periodically evaluating the historical expenses and
projected trends related to these accruals. Actual results may differ from those
estimates.
Litigation, Claims and Assessments -- We also utilize estimates for litigation,
claims and assessments. These estimates are based upon our knowledge and
experience about past and current events and also upon reasonable future events.
Actual results may differ from those estimates.
CONTRACTUAL COMMITMENTS
The following table summarizes our obligations and commitments to make future
payments under certain contracts, including long-term debt obligations, which
includes our $80.0 million credit facility at December 31, 2003.
Payments Due By Year
Contractual Obligations 2004 2005 2006 2007 2008 Thereafter Total
----------- ----------- ----------- ------------ ----------- ------------- -------------
Long Term Debt $ - $ - $ - $ 16,290,000 $ - $ 260,000,000 $ 276,290,000
Credit Facility - - - 25,958,000 - - $ 25,958,000
Purchase obligations 4,472,828 - - - - - $ 4,472,828
Operating Leases (1) 1,643,402 1,563,229 1,480,125 1,480,125 1,478,605 9,467,982 $ 17,113,468
----------- ----------- ----------- ------------ ----------- ------------- -------------
Total $ 6,116,230 $ 1,563,229 $ 1,480,125 $ 43,728,125 $ 1,478,605 $ 269,467,982 $ 323,834,296
(1) The Majestic Star Casino, LLC and Trump Indiana have each entered into
parallel operating lease agreements with BHPA. Each of the lease agreements
call for The Majestic Star Casino, LLC and Trump Indiana to make monthly
lease payments equal to 100% of BHPA's debt service requirement for the
following month. However, each party is entitled to a credit of 50% of such
payment if the other party makes its monthly payment. In the above
Contractual Commitments schedule the BHPA operating lease is shown net of
the 50% credit.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Significant Leverage
We have a significant amount of debt. We currently have outstanding $276.3
million of long-term debt, $260.0 million, of which is represented by the 9 1/2%
notes and $16.3 million ($15.8 million, net of original issue discount) of which
is represented by the 11.653% notes issued by Majestic Investor Holdings, LLC in
December 2001. We also have an $80.0 million senior secured credit facility,
under which $39.0 million is currently outstanding. In addition, the indenture
governing the notes permits us to incur additional debt in certain
circumstances.
Our high level of debt could have important consequences and significant adverse
effects on our business. For example, it could, among other things:
- - require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, development projects, acquisitions and other general
corporate purposes;
41
- - limit our ability to fund or obtain additional financing for future working
capital, or capital expenditures necessary to keep our casinos competitive
or to finance expansions of our existing facilities or consummate
acquisitions;
- - increase our vulnerability to adverse economic and industry conditions or a
downturn in our business; and
- - result in an event of default if we fail to comply with the financial and
other restrictive covenants contained in the indenture or our senior
secured credit facility, which event of default could result in all of our
indebtedness becoming immediately due and payable and would permit some or
all of our lenders to foreclose on our assets securing such indebtedness.
The occurrence of any one of these events could have a material adverse effect
on our business, financial condition, results of operations, and/or prospects as
well as our ability to satisfy our obligations under the notes.
Competition.
We face intense competition in each of the markets in which our gaming
facilities are located. In some of the jurisdictions in which we operate,
competition is expected to intensify as new gaming operations enter these
markets and existing competitors consolidate with one another or expand or
enhance their operations. Our competitors have engaged in aggressive market
strategies. In addition, expansion of legalized gaming to new jurisdictions
throughout the United States also has increased competition faced by us and will
continue to do so in the future.
Competition requires us to make substantial capital expenditures to maintain and
enhance the competitive positions of our properties. Because we are highly
leveraged, after satisfying our obligations under our outstanding indebtedness,
there can be no assurance that we will have sufficient funds to undertake these
expenditures, that we will be able to obtain sufficient financing to fund such
expenditures or that our senior secured credit facility will permit such capital
expenditures to be made.
Government Regulation and Taxes.
Government regulations require us to, among other things:
- - pay gaming fees and taxes in each state where we operate a casino,
including retroactive taxes when and if enacted, such as the $2.1 million
retroactive dockside tax in Indiana;
- - obtain a gaming license in each state where we operate a casino, which we
must have renewed periodically and which may be suspended or revoked if we
do not meet detailed regulatory requirements; and
- - receive and maintain local licenses to sell alcoholic beverages in our
casinos.
No assurances can be given that any new gaming licenses, liquor licenses,
registrations, findings of suitability, permits and approvals, will be given or
that existing ones will be renewed when they expire.
The compliance costs associated with these laws, regulations and licenses are
significant. A change in the laws, regulations and licenses applicable to our
business or a violation of any current or future laws or regulations or our
gaming licenses could require us to make material expenditures or could
otherwise materially adversely affect our business or financial results.
Further, because the casino industry can provide a significant source of tax
revenues, changes in tax laws or the interpretation of existing laws can
adversely affect the Company. Certain expanded opportunities for the Company,
such as dockside
42
gaming, have been combined with increased taxation. In addition, the Company is
challenging certain tax assessments, including those related to the
deductibility of gaming tax expense when computing income taxes and real
property taxes in Indiana, which if ultimately determined adversely to the
Company could have a material adverse effect on our financial results.
Legislation or local referenda on gaming may restrict or adversely impact our
operations.
The casino entertainment industry is subject to political and regulatory
uncertainty. In some of the jurisdictions in which we currently operate or from
which we attract customers, or in which we may expand, gaming is subject to
local referenda and there have been a number of initiatives to ban or expand to
new venues gaming in the jurisdictions in which our casinos are located or to
expand gaming to new venues competitive with our properties For example, there
have been three prior attempts to ban gaming in Mississippi. If the results of a
referendum held in a jurisdiction in which we operate were to restrict gaming in
whole or in part or if the results of a referendum in a nearby non-gaming
jurisdiction were to permit gaming, our results of operations could be
negatively impacted.
Economic Factors.
The economic health of the casino industry is affected by a number of macro
economic factors that are beyond our control, including: (i) general economic
conditions and economic conditions specific to our primary markets; (ii) levels
of disposable income of casino patrons; (iii) increased transportation costs
resulting in decreased travel by patrons; and, (iv) increased energy costs. We
believe that one or more of the foregoing economic conditions did have an
adverse impact on our results of operation in 2003 and any of these factors
could negatively impact our revenues and results of operations in the future.
43
Political Factors.
Continuing military action, the prospects of extended military action and the
fear of domestic terrorism has resulted in a decline in vacation travel and
tourism. The magnitude and duration of these effects is unknown and cannot be
predicted. Any decline in vacation travel and tourism could adversely affect our
revenues. Continued or even worsening negative market conditions related to any
future occurrences of terrorist actions or other destabilizing events, and other
actions that perpetuate a climate of war could cause existing and potential
customers to delay and cancel travel, convention and vacation plans, could
decrease wagering and increase energy or other costs, and as a result could
adversely affect our revenues and cash flow in the future.
Joint Venture Partner.
Efficient operation of the BHR Joint Venture to support our casino will depend
upon our continuing ability, as well as that of our Joint Venture Partner, to
fund day-to-day operations and agree on related business matters. In addition,
both we and our Joint Venture Partner are jointly and severally liable to make
lease payments related to the Buffington Harbor parking facility. When our Joint
Venture Partner makes its share of the lease payment, we receive a 50% credit
towards our lease obligations. Any failure by the Joint Venture Partner to fund
operations of the BHR Joint Venture when required or to make the lease payments
related to the Buffington Harbor parking facility (including its obligations
under the BHPA lease), or any significant conflict in this relationship that is
not promptly resolved, would adversely affect the operations of the gaming
complex. A significant disruption in the business of the gaming complex is
likely to adversely affect the operations of Majestic Star and our ability to
generate revenues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any financial instruments held for trading or
other speculative purposes, and does not hedge any of its market risks with
derivative instruments.
The Company's primary market risk exposure relates to interest risk
exposure through its borrowings and third-party financing, including the $80.0
million senior secured credit facility, under which interest accrues on a
floating rate basis. These sources of credit, along with cash flow from
operations, are used to maintain liquidity and fund business operations. The
Company typically replaces borrowings under its third-party vendor financing, as
necessary, with shorter termed variable rate financing generally secured by the
assets being acquired. The nature and amount of the Company's debt may vary as a
result of future business requirements, market conditions and other factors.
The senior secured credit facility has a maximum credit line of $80.0
million. Assuming we have borrowed against the maximum available under the
senior secured credit facility, a one-half percentage point change in the
underlying variable rate would result in a change in related interest expense of
$400,000 on an annual basis. Additionally, should we assume variable rate debt
in the future, we will be subject to market risk, which is the risk of loss from
changes in market prices and interest rates.
At December 31, 2003, we had outstanding borrowings of $26.0 million under
our credit facility. The amount increased to $39.0 million at March 30, 2004,
primarily as a result of our $21.9 million acquisition of 170 acres of land in
February 2004, part of which was financed using our credit facility.
In addition, we have approximately $260.0 million principal amount of
9 1/2% notes outstanding under the indenture governing the notes and $15.8
million principal amount (net of original issue discount) of the 11.653% notes
outstanding. Interest expense on our fixed rate debt instruments are not
affected by a change in the market rates of interest and therefore, such changes
generally do not have an impact on future earnings. While our $260.0 million of
9 1/2% notes are not actively traded, we believe, based up information received
from brokers, that our $260.0 million of 9 1/2% note were priced at 106% for a
value of $275.6 million at December 31, 2003. The $15.8 million of 11.653% notes
to our knowledge are not publicly traded. We believe the fair value of this debt
to be $15.8 million since these notes are no longer secured by the equity
interests and assets of Investor Holdings or its restricted subsidiaries.
44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15(a) of this Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by 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 effectiveness 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 effective to cause the material information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 to be recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives.
There have been no changes in the Company's internal controls over
financial reporting during the quarter ended December 31, 2003 that have
materially affected, or are reasonably likely to materially affect the Company's
internal controls over financial reporting.
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company as of December 31, 2003. The Company does not
have directors since it is a limited liability company.
NAME AGE POSITION(S)
---- --- -----------
Don H. Barden 60 Chairman, President and Chief Executive Officer
Michael E. Kelly 42 Executive Vice President, Chief Operating
Officer and Secretary
Jon S. Bennett 43 Vice President and Chief Financial Officer
Don H. Barden is the Manager, Chairman, President and Chief Executive
Officer of the Company and, since November 1993, Chairman and President of BDI,
with responsibility for key policy-making functions. Since their formations, Mr.
Barden is also President and Chief Executive Officer of Investor and Manager of
Investor Holdings; Barden Colorado; Barden Mississippi; and Chairman, President
and Chief Executive Officers of Majestic Investor Capital Corp. ("Investor
Capital"), Barden Colorado, and Barden Mississippi. Mr. Barden also has served
as a director of Investor Capital since its formation. Additionally, he is the
President and Chief Executive Officer of a group of other companies he owns
and/or operates. Over the past 35 years, Mr. Barden has successfully developed,
owned and operated many business enterprises in various industries including
real estate development, casino gaming, broadcasting, cable television and
international trade. Barden Companies, Inc., a company wholly owned by Mr.
Barden and one of our affiliates, was recently named "Company of the Year" for
2003 by Black Enterprise Magazine. In 2004 Mr. Barden received a Trumpet Award
as "Entrepreneur of the Year." The Trumpet Awards recognize the achievements of
African-Americans and salutes them for their fortitude and persistence. Further,
Mr. Barden was recently recognized as the "Master Entrepreneur" of Eastern
Michigan during the Ernst & Young "Entrepreneur of the Year" contest.
Michael E. Kelly is the Manager, Executive Vice President, Chief Operating
Officer and Secretary of the Company since January 1999, with overall
responsibility for the daily operations. Mr. Kelly also served as Chief
Financial Officer from April 1996 to October 2002. From April 1996 through
December 1998, Mr. Kelly was the Vice President and Chief Financial Officer of
the Company with overall responsibility for the Company's financial reporting
and investor relation functions. Mr. Kelly assumed the responsibility for
management of daily operations and related activities of the Company effective
October 1998. From October 1998 through October 2001, Mr. Kelly also served as
General Manager of Majestic Star. Mr. Kelly is a Vice President of BDI since
April 1996 and director of Investor Capital since its formation. Since their
formation, Mr. Kelly is also Executive Vice President, Chief Operating Officer
of Investor; Manager of Investor Holdings, and Barden Mississippi; Executive
Vice President, Chief Operating Officer and Secretary of Investor Holdings,
Investor Capital, Barden Colorado, and Barden Mississippi, and Director of
Investor Capital. From 1982 to 1996, Mr. Kelly was employed in various senior
finance and administrative functions by Harrah's Hotel & Casino in New Jersey
and Nevada, by Fitzgeralds Gaming Corporation and by Empress River Casino
Corporation and its affiliates.
Jon S. Bennett is the Vice President and Chief Financial Officer of the
Company since October 2002 with overall responsibility for all aspects of the
Company's financial management, accounting and reporting processes. Mr. Bennett
is also the Vice President and Chief Financial Officer for Investor, Investor
Holdings, The Majestic Star Casino Capital Corp., Investor Capital, Barden
Mississippi and Barden Colorado. Prior to Mr. Bennett's appointment as Vice
President and Chief Financial Officer, Mr.
46
Bennett was Vice President of Finance and Administration for Barden Mississippi
from the acquisition in December 2001 to his promotion in October 2002. Mr.
Bennett has held various positions with Fitzgeralds Gaming Corporation,
including Vice President of Finance and Administration for Fitzgeralds Tunica
from April 1997 to December 2001 and Director of Finance for three Fitzgeralds
Gaming Corporation properties located in Reno, Nevada. Mr. Bennett was also
Chief Financial Officer for Peppermill Casinos, Inc. from May 1995 to April
1997.
We have adopted a code of ethics that applies to our Chief Executive
Officer, Chief Operating Officer and Chief Financial Officer and any other
person performing similar functions. This code of ethics has been posted to our
website at www.majesticstar.com and www.fitzgeralds.com.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation earned for services
performed for The Majestic Star Casino, LLC, Majestic Investor, LLC and,
following its formation in September 2001, Majestic Investor Holdings, LLC and
its subsidiaries, during the years shown below by our Chief Executive Officer
and our remaining executive officers. All compensation is paid by The Majestic
Star Casino, LLC.
ANNUAL COMPENSATION (1) ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION
----------------- ---- ------ ----- ------------
Don H. Barden (2) 2003 $ 390,096 $ - $ 169,742
Chairman, President and 2002 370,000 - 124,533
Chief Executive Officer 2001 332,788 - 1,271
Michael E. Kelly (3) 2003 $ 400,000 $ 271,498 $ 23,892
Executive Vice President 2002 423,077 292,570 72,370
Chief Operating Officer and Secretary 2001 296,635 150,000 24,901
Jon. S. Bennett (4) 2003 $ 256,731 $ 25,000 $ 68,164
Vice President and 2002 212,716 43,000 3,433
Chief Financial Officer 2001 - - -
1. Majestic Star pays all compensation for Messrs. Barden, Kelly and Bennett,
but a portion of such compensation was reimbursed by Majestic Investor
Holdings, LLC through an expense sharing agreement. See Item 13-"Certain
Relationships and Related Transactions."
2. For the year 2003, the amounts reflected in "All Other Compensation" for
Mr. Barden represents life insurance premiums paid by the Company of
$123,435 and an auto allowance of $46,307. For the years 2002 and 2001,
"All Other Compensation" reflects life insurance premiums paid by the
Company of $124,533 and $1,271, respectively.
3. For the year 2003, the amounts reflected in "All Other Compensation" for
Mr. Kelly represent life insurance premiums paid by the Company of $670, an
auto allowance of $13,722, reimbursement for un-reimbursed medical plan
expenditures of $5,000 and $4,500 for a 401(k) match for which Mr. Kelly is
fully vested. Mr. Kelly's salary in 2002 includes $23,077 for unused
vacation for 2001. The amounts in "All Other Compensation" for Mr. Kelly in
2002 includes a 401(k) match of $12,900, reimbursement of $5,000 for
un-reimbursed medical plan expenditures, $38,511 for relocation expenses,
$12,635 for an automobile allowance, and $3,324 of life insurance premiums
paid by the Company on Mr. Kelly's behalf. The amounts in "All Other
Compensation" for Mr. Kelly in 2001 includes a 401(k) match of $17,530,
reimbursement of $4,647 for un-reimbursed medical plan
47
expenditures, and $2,724 of life insurance premiums paid by the Company on
Mr. Kelly's behalf. Bonuses reflected in the Executive Compensation
Schedule are for the year earned, not paid.
4. For the year 2003, Mr. Bennett's salary includes the payment of $6,731 of
unused vacation relating to 2002 while Mr. Bennett was the Vice President
of Finance and Administration at Barden Mississippi. The amounts shown in
"All Other Compensation" reflect $58,569 of taxable relocation and housing
allowance costs, reimbursement of $5,000 for unreimbursed medical plan
expenditures, a 401(k) match of $4,500 for which Mr. Bennett is fully
vested and $95 of life insurance premiums paid by the Company on Mr.
Bennett's behalf. The amount in "All Other Compensation" for Mr. Bennett in
2002 includes a 401(k) match of $3,433. Bonuses reflected in the Executive
Compensation Schedule are for the year earned, not paid.
EMPLOYMENT AGREEMENTS
Mr. Barden serves as our Chairman, President and Chief Executive Officer
and currently receives annual compensation of $425,000 as an employee, pursuant
to a letter agreement dated October 22, 2001 with the Company. The Company pays
life insurance premiums on policies with a value of $5.0 million and provides
Mr. Barden with an auto allowance.
Mr. Kelly serves as our Executive Vice President, Chief Operating Officer
and Secretary pursuant to a three-year employment agreement with the Company
dated October 22, 2001. Under such employment agreement, Mr. Kelly will receive
base compensation of $400,000 per year and can also earn annual incentive
compensation based upon his performance and the consolidated Company's
performance. In addition to such compensation, Mr. Kelly is entitled to term
life insurance in an amount equal to $2.5 million and other customary employee
benefits, including participation in the Company's 401(k) plan, together with a
$100,000 signing bonus and an interest-free loan in the amount of $200,000 to be
repaid in three equal annual installments. Mr. Kelly is also entitled to
additional compensation, upon a change in control, equal to his base salary and
incentive compensation for the remainder of the term of the agreement, plus 12
months thereafter. Mr. Kelly's employment agreement contains certain
non-competition provisions with duration of 12 months following termination of
his employment.
Mr. Bennett serves as our Vice President and Chief Financial Officer
pursuant to a two-year employment agreement with the Company dated October 21,
2002. Under this agreement, Mr. Bennett will receive base compensation of
$250,000, subject to annual reviews, and can also earn bonuses subject to the
discretion of the President and Chief Executive Officer and Executive Vice
President and Chief Operating Officer. In addition to such compensation, Mr.
Bennett is entitled to term life insurance in an amount equal to $1.0 million
and other customary employee benefits, including participation in the Company's
401(k) plan and reimbursement of relocation expenses. Mr. Bennett is also
entitled to additional compensation upon a change in control, equal to the
remaining amount due under his employment agreement plus six months of his
annual salary following the expiration of his current employment agreement. Mr.
Bennett's employment agreement contains certain non-competition provisions with
duration of 12 months if Mr. Bennett should voluntarily terminate his employment
within 18 months of the commencement date of his employment agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has no standing Compensation Committee. All compensation
decisions are made by BDI, the sole manager of the Company.
48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
We are indirectly wholly owned by Don H. Barden, our Chairman,
President and Chief Executive Officer.
The following table sets forth the beneficial ownership of each of The
Majestic Star Casino, LLC and The Majestic Star Casino Capital Corp., and its
direct and indirect subsidiaries, as of the date hereof.
THE
THE MAJESTIC MAJESTIC MAJESTIC BARDEN BARDEN
MAJESTIC STAR CASINO MAJESTIC INVESTOR INVESTOR MISSISSIPPI COLORADO
NAME AND ADDRESS OF STAR CASINO, CAPITAL INVESTOR, HOLDINGS, CAPITAL GAMING, GAMING,
BENEFICIAL OWNER LLC CORP. LLC LLC CORP. LLC LLC
---------------- --- ----- --- --- ----- --- ---
Don H. Barden...................... 100%(1) 100%(2) 100%(3) 100%(4) 100%(5) 100%(6) 100%(7)
163 Madison Avenue
Suite 2000
Detroit, MI 48226
(1) Includes the membership interests in The Majestic Star Casino, LLC, all of
which are beneficially owned directly by BDI. Mr. Barden is the beneficial
owner of 100% of BDI.
(2) Includes the common stock of The Majestic Star Casino Capital Corp., all of
which is beneficially owned directly by The Majestic Star Casino, LLC,
which is beneficially owned directly by BDI. Mr. Barden is the beneficial
owner of 100% of BDI.
(3) Includes the membership interests of Majestic Investor, LLC, all of which
are beneficially owned directly by The Majestic Star Casino, LLC, which is
beneficially owned directly by BDI. Mr. Barden is the beneficial owner of
100% of BDI.
(4) Includes the membership interests of Majestic Investor Holdings, LLC, all
of which are beneficially owned directly by Majestic Investor, LLC, which
is beneficially owned directly by The Majestic Star Casino, LLC, which is
beneficially owned directly by BDI. Mr. Barden is the beneficial owner of
100% of BDI.
(5) Includes the common stock of Majestic Investor Capital Corp., all of which
is beneficially owned directly by Majestic Investor Holdings, LLC, which is
beneficially owned directly by Majestic Investor, LLC, which is
beneficially owned directly by The Majestic Star Casino, LLC, which is
beneficially owned directly by BDI. Mr. Barden is the beneficial owner of
100% of BDI.
(6) Includes the membership interests of Barden Mississippi Gaming, LLC, all of
which are beneficially owned directly by Majestic Investor Holdings, LLC,
which is beneficially owned directly by Majestic Investor, LLC, which is
beneficially owned directly by The Majestic Star Casino, LLC, which is
beneficially owned directly by BDI. Mr. Barden is the beneficial owner of
100% of BDI.
(7) Includes the membership interests of Barden Colorado Gaming, LLC, all of
which are beneficially owned directly by Majestic Investor Holdings, LLC,
which is beneficially owned directly by Majestic Investor, LLC, which is
beneficially owned directly by The Majestic Star Casino, LLC, which is
beneficially owned directly by BDI. Mr. Barden is the beneficial owner of
100% of BDI.
49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOANS TO RELATED PARTIES
In December 2001, The Majestic Star Casino, LLC made a $300,000 employee
loan to Mr. Barden. This loan was paid in full, with interest, in April 2003.
In January 2002, The Majestic Star Casino, LLC made a $200,000 employee
loan to Mr. Kelly. This loan bears no interest and is due and payable in full in
January 2005. In both March 2003 and March 2004, Mr. Kelly paid $67,000, in
accordance with the loan agreement. As of March 11, 2004, the outstanding
balance was $66,000.
In December 2001, Majestic Investor Holdings, LLC, issued a $700,000 note
to BDI. The Note bore interest at a rate of 7% per annum and was paid in full,
with interest, in March 2003.
TRANSACTIONS BY OR WITH AFFILIATES
On February 11, 2004, we acquired approximately 170 acres of land located
adjacent to the Buffington Harbor gaming complex from an affiliate of ours (the
"GNC Land"). The purchase price for the GNC Land was not greater than eighty
percent (80%) of the appraised value as evidenced by the written appraisal of an
independent appraiser dated not more than ninety (90) days prior to the closing.
The purchased price was approximately $21.9 million (net of a deposit of $2.0
million and a credit of $1.5 million related to the Naming Rights Agreement,
which was terminated).
In March 2003, we purchased for $1.0 million, net of prorated taxes plus
closing costs, approximately 50 acres of land and a warehouse adjacent to the
Buffington Harbor gaming complex from an affiliated company. The purchase price
was based on an independent third-party appraisal.
During the twelve months ended December 31, 2003, we made distributions
totaling $1.7 million to BDI pursuant to the Majestic Star Manager Agreement and
the new Manager Agreement. The distributions relate to the fourth quarter of
2002 and the first three quarters of 2003. See "Manager Agreements."
During the twelve months ended December 31, 2003, Majestic Investor
Holdings made distributions totaling $3.3 million to BDI pursuant to the
Investor Holdings Manager Agreement and the new Manager Agreement. The
distributions relate to the fourth quarter of 2002 and the first three quarters
of 2003. See "Manager Agreements."
In April 2003, we, in accordance with the indenture relating to the 10 7/8%
notes, made a $710,000 distribution to its sole beneficial owner for income
taxes. The calculation for the distribution was based on The Majestic Star
Casino, LLC's net income during the three-month period ended March 31, 2003.
In April 2003, Majestic Investor Holdings, LLC, in accordance with the
indenture relating to the 11.653% notes, made a $338,000 distribution to its
sole beneficial owner for income taxes. The calculation for the distribution was
based on Majestic Investor Holdings, LLC's, net income during the three-month
period ended March 31, 2003.
MANAGER AGREEMENTS
On October 7, 2003, concurrent with the consummation of the offering of
the 9 1/2% notes, we entered into a new Manager Agreement (the "new Manager
Agreement") with BDI. Distributions to BDI
50
under the new Manager Agreement are limited by the terms of the indenture
governing the 9 1/2% notes and by the terms of the $80.0 million credit
facility. The distributions for each fiscal quarter may not exceed 1% of
consolidated net revenue and 5% of our consolidated cash flow (as defined in the
indenture governing the 9 1/2% notes and the $80.0 million credit facility) for
the immediately preceding fiscal quarter. The new Manager Agreement supercedes
the Majestic Star Manager Agreement and the Majestic Investor Holdings Manager
Agreement which are described below.
We make distributions to BDI as a return on the investment capital
contributed to us by BDI, for corporate oversight and governance services and as
an inducement for Mr. Barden, the sole stockholder of BDI, to continue using his
visibility in the gaming industry to promote us. The distributions are
subordinated to the payment in full of principal, interest, and liquidated
damages, if any, then due on the 9 1/2% notes and to obligations under the $80.0
million credit facility, and may not be paid if the Company is in default under
the indenture governing the 9 1/2% notes or under the $80.0 million credit
facility or if the Company does not meet certain financial ratios as provided in
the indenture.
In June 1999, Majestic Star entered into a LLC Manager Agreement with BDI
to provide for, among other things, BDI to act as our manager (the "Majestic
Star Manager Agreement"). This agreement was terminated on October 7, 2003 for
the quarter ended effective June 30, 2003. All subsequent distributions were
made in accordance with the new Manager Agreement.
In December 2001, Majestic Investor Holdings entered into a LLC Manager
Agreement with BDI to provide for, among other things, BDI to act as our manager
(the "Majestic Investor Holdings Manager Agreement"). This agreement was
terminated on October 7, 2003 for the quarter ended effective June 30, 2003. All
subsequent distributions were made in accordance with the new Manager Agreement.
BARDEN NEVADA EXPENSE SHARING AGREEMENT
Concurrent with the consummation of the offering of the 9 1/2 % notes, we
entered into an expense sharing agreement with Barden Nevada. The expense
sharing agreement provides for a fee from Barden Nevada to us in the amount of
the greater of (i) $500,000 per year or (ii) the actual amount of certain
specified expenses incurred by us in connection with providing management
services to Barden Nevada.
51
NAMING RIGHTS AGREEMENT
Gary New Century, LLC ("GNC"), a company wholly owned by Mr. Barden,
intended to develop an outdoor amphitheater on property it owned adjacent to
Majestic Star. The Company entered into a Naming Rights Agreement with GNC
effective in October 2001. Pursuant to the Naming Rights Agreement, GNC agreed
to use the name "The Majestic Star Amphitheater" as the name of the amphitheater
and the Company paid GNC $1.5 million during 2001 for such rights. The initial
term of the Naming Rights Agreement was three years commencing on the opening of
the amphitheater. The Naming Rights Agreement was terminated in connection with
the acquisition of the GNC Land and the Company received a credit of $1.5
million against the purchase price of the GNC Land at closing.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PricewaterhouseCoopers LLP ("PWC") acted as our independent public
accountants during 2003 and 2002. Below is a breakdown of the fees paid to them.
AUDIT FEES
The aggregate fees billed by PWC for professional services rendered for
audit services in fiscal years 2003 and 2002 were $459,980 and $443,100,
respectively. Services performed included:
- Audit of the Company's annual financial statements, including the audits of
various subsidiaries conducting gaming operations as required by the
regulations of the respective jurisdictions.
- Reviews of the Company's quarterly financial statements.
- Statutory and regulatory audits, consents and other services related to
Security and Exchange Commission ("SEC") matters.
AUDIT-RELATED FEES
The aggregate fees billed by PWC for professional services rendered for
audit-related services in fiscal years 2003 and 2002 were zero and $252,907,
respectively. In fiscal year 2002, these fees were associated with employee
benefit plan audits and services related to the acquisition of the Fitzgeralds
properties.
TAX FEES
The aggregate fees billed by PWC for professional services rendered
tax-related services in fiscal years 2003 and 2002 were $45,500 and $63,460,
respectively. These fees were associated with federal and state tax compliance,
tax advice, tax planning and tax return preparation.
ALL OTHER FEES
The aggregate fees billed by PWC for professional services rendered for
engagements other than Audit Fees, Audit-Related Fees and Tax Fees were $8,596
in fiscal year 2003 and zero in 2002. These fees related to engagements
associated with human resources services.
52
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements as listed on Page F-1.
2. Financial Statement Schedule as listed on Page F-1.
3. Exhibits: The exhibits included as part of this report are
listed in the attached Exhibit Index on Page E-1, which is
incorporated herein by reference.
(b) The following reports on Form 8-K were filed during the fourth quarter:
Form 8-K, filed on November 12, 2003, reporting that it had moved its
executive offices and further reporting issuance of a press release
announcing third quarter 2003 financial results.
Form 8-K/A, filed on November 18, 2003, reporting issuance of a press
release adjusting third quarter 2003 financial results.
Form 8-K, filed on November 25, 2003, reporting issuance of a press
release providing third quarter 2003 investor information.
(c) The exhibits included as part of this report are listed in the attached
Exhibit Index on Page E-1, which is incorporated herein by reference.
(d) The response to this portion of Item 15 is submitted as a separate
section of this report.
53
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 March 30, 2004
---------------------------------------------------
Don H. Barden
Manager, Chairman, President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Jon S. Bennett March 30, 2004
---------------------------------------------------
Jon S. Bennett
Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
THE MAJESTIC STAR CAPITAL CORPORATION
By: /s/ Don H. Barden March 30, 2004
---------------------------------------------------
Don H. Barden
President and Chief Executive Officer (Principal
Executive Officer)
By: /s/ Jon S. Bennett March 30, 2004
---------------------------------------------------
Jon S. Bennett
Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrants and
in the capacities and on the date indicated.
Signature Title
- --------- -----
/s/ Don H. Barden Manager, Chairman, President and Chief March 30, 2004
- ----------------- Executive Officer of the Company and
Don H. Barden The Majestic Star Casino Capital Corp.,
and Sole Director of The Majestic Star
Casino Capital Corp. (Principal Executive
Officer)
/s/ Jon S. Bennett Vice President and Chief Financial Officer March 30, 2004
- ------------------ of the Company and The Majestic Star
Jon S. Bennett Casino Capital Corp. (Principal Financial
and Accounting Officer)
S-1
EXHIBIT INDEX
Certain of the following exhibits have been previously filed with the
Securities and Exchange Commission by the Company pursuant to the requirements
of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such
exhibits are identified by the parenthetical references following the listing of
each such exhibit and are incorporated herein by reference. The Company's
Commission file number is 333-06489.
EXHIBIT NO. DESCRIPTION OF EXHIBITS
2.1 Assignment of Interest by Barden Development, Inc. and Majestic
Investor Holdings, LLC dated as of December 31, 2003
3.1 Amended and Restated Articles of Organization of The Majestic Star
Casino, LLC (filed as Exhibit 3.1 to the Company's Registration
Statement, No. 333-06489)
3.2 Third Amended and Restated Operating Agreement of The Majestic Star
Casino, LLC dated as of March 29, 1996(filed as Exhibit 3.2 to the
Company's Registration Statement, No. 333-06489)
3.3 First Amendment of Third Amended and Restated Operating Agreement of
The Majestic Star Casino, LLC, dated as of June 18, 1999 (filed as
Exhibit 3.3 to the Company's Registration Statement, No. 333-85089)
3.4 Articles of Incorporation of The Majestic Star Casino Capital Corp.
(filed as Exhibit 3.4 to the Company's Registration Statement, No.
333-85089)
3.5 Bylaws of The Majestic Star Casino Capital Corp. (filed as Exhibit 3.5
to the Company's Registration Statement, No. 333-85089)
3.6 Certificate of Formation of Majestic Investor Holdings, LLC (filed as
Exhibit 3.6 to the Company's Registration Statement, No. 333-110993)
3.7 Limited Liability Company Agreement of Majestic Investor Holdings, LLC
dated September 25, 2001 (filed as Exhibit 3.7 to the Company's
Registration Statement, No. 333-110993)
3.8 Certificate of Incorporation of Majestic Investor Capital Corp. (filed
as Exhibit 3.8 to the Company's Registration Statement, No. 333-110993)
3.9 Bylaws of Majestic Investor Capital Corp. (filed as Exhibit 3.9 to the
Company's Registration Statement, No. 333-110993)
4.1 Indenture, dated as of October 7, 2003, among The Majestic Star Casino,
LLC and Majestic Star Casino Capital Corp., as issuers, and the
subsidiary guarantors, as subsidiary guarantors and The Bank of New
York, as trustee (filed as Exhibit 4.1 to the Company's Registration
Statement, No. 333-110993)
4.2 Indenture, dated as of December 6, 2001, between Majestic Investor
Holdings, LLC and Majestic Investor Capital Corp., as issuers, Barden
Colorado Gaming, LLC, Barden Nevada Gaming, LLC, and Barden Mississippi
Gaming, LLC, as guarantors, and The Bank of New York, as trustee (filed
as Exhibit 4.2 to the Company's Registration Statement, No. 333-110993)
4.4 Supplemental Indenture, dated as of September 25, 2003, by and among
Majestic Investor Holdings, Majestic Investor Capital Corp. and The
Bank of New York, (filed as Exhibit 4.4 to the Company's Registration
Statement, No. 333-110993)
4.5 Registration Rights Agreement, dated as of October 7, 2003, among The
Majestic Star Casino, LLC, The Majestic Star Casino Capital Corp.,
Jefferies & Company, Inc., and Wells Fargo Securities, LLC (filed as
Exhibit 4.5 to the Company's Registration Statement, No. 333-110993)
4.6 Intercreditor Agreement, dated as of October 7, 2003, between The Bank
of New York and Wells Fargo Foothill, Inc. (filed as Exhibit 4.6 to the
Company's Registration Statement, No. 333-110993)
10.1 Loan and Security Agreement dated as of October 7, 2003, by and among
The Majestic Star Casino, LLC, certain subsidiaries signatory thereto,
the lenders signatories thereto and Wells Fargo Foothill, Inc., as
Agent (filed as Exhibit 10.1 to the Company's Registration Statement,
No. 333-110993)
10.2* Letter Agreement, dated October 22, 2001, between Don H. Barden and The
Majestic Star Casino, LLC (filed as Exhibit 10.2 to the Company's
Registration Statement, No. 333-110993)
10.3* Employment Agreement, dated October 22, 2001, between Michael E. Kelly
and The Majestic Star Casino, LLC (filed as Exhibit 10.3 to the
Company's Registration Statement, No. 333-110993)
10.4* Employment Agreement, dated October 21, 2002, between Jon Bennett and
The Majestic Star Casino, LLC (filed as Exhibit 10.4 to the Company's
Registration Statement, No. 333-110993)
10.5 Management Agreement dated as of October 7, 2003, between The Majestic
Star Casino, LLC and Barden Development, Inc. (filed as Exhibit 10.8 to
the Company's Registration Statement, No. 333-110993)
10.6 Expense Reimbursement Agreement, dated as of October 7, 2003, between
Barden Nevada Gaming, LLC and The Majestic Star Casino, LLC (filed as
Exhibit 10.9 to the Company's Registration Statement, No. 333-110993)
10.7 Berthing Agreement dated as of April 23, 1996 between The Majestic Star
Casino, LLC and Buffington Harbor Riverboats (filed as Exhibit 10.5 to
the Company's Registration Statement, No. 333-06489)
10.8 First Amended and Restated Operating Agreement of Buffington Harbor
Riverboats, LLC made as of October 31, 1995 by and between Trump
Indiana, Inc. and The Majestic Star Casino, LLC, as amended by
Amendment No. 1 to First Amended and Restated Operating Agreement of
Buffington Harbor Riverboats, LLC, dated as of April 23, 1996 (filed as
Exhibit 10.6 to the Company's Registration Statement No. 333-06489)
10.9 Second Amendment to The First Amended and Restated Operating Agreement
of Buffington Harbor Riverboats, LLC (filed as Exhibit 10.12 to the
Company's Registration Statement, No. 333-110993)
10.10 Development Agreement, dated March 26, 1996, by and between the Company
and the City of Gary, Indiana (filed as Exhibit 10.8 to the Company's
Registration Statement, No. 333-06489)
21 List of Subsidiaries of The Majestic Star Casino, LLC
31.1 Certification pursuant to Section 15d-14 of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification pursuant to Section 15d-14 of the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
Section 906 of the Sarbanes-Oxley Act of 2002
* Indentifies current management contracts or compensatory plans or
arrangements.
THE MAJESTIC STAR CASINO, LLC
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS
Page
----
THE MAJESTIC STAR CASINO, LLC
Report of Independent Auditors F-3
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-4
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001 F-5
Consolidated Statements of Changes in Member's Deficit for the years ended December 31, 2003, F-6
2002 and 2001
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 F-7
Notes to the Consolidated Financial Statements F-9
Schedule II- Valuation and Qualifying Accounts F-43
MAJESTIC INVESTOR HOLDINGS, LLC (1)
Report of Independent Auditors F-44
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-45
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001 F-46
Consolidated Statements of Changes in Member's Equity (Deficit) for the years ended F-47
December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 F-48
Notes to the Consolidated Financial Statements F-49
Schedule II- Valuation and Qualifying Accounts F-72
BUFFINGTON HARBOR RIVERBOATS, LLC (2)
Report of Independent Auditors F-73
Balance Sheet as of December 31, 2003 and 2002 F-74
Statements of Operations for the years ended December 31, 2003, and 2002 F-75
Statements of Members' Capital for the years ended December 31, 2003, and 2002 F-76
Statements of Cash Flows for the years ended December 31, 2003, and 2002 F-77
Notes to Financial Statements F-78
F-1
Page
----
INDEX TO HISTORICAL COMBINED FINANCIAL STATEMENTS OF FITZGERALDS LAS VEGAS, INC., FITZGERALDS
MISSISSIPPI, INC. AND 101 MAIN STREET LIMITED LIABILITY COMPANY (DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION) (3)
Report of Independent Accountants F-83
Combined Balance Sheets as of December 31, 2000 and December 6, 2001 F-85
Combined Statements of Operations for the years ended December 31, 1999, 2000 and for the period F-86
ended December 6, 2001
Combined Statements of Stockholder's Deficiency for the years ended December 31, 1999, 2000 and F-87
for the period ended December 6, 2001
Combined Statement of Cash Flows for the years ended December 31, 1999, 2000 and for the period F-88
ended December 6, 2001
Notes to Combined Financial Statements F-90
Supplemental Combining Schedules:
Combining Statement of Operations Information for the year ended December 31, 1999 F-108
Combining Statement of Cash Flows Information for the year ended December 31, 1999 F-109
Combining Balance Sheet Information at December 31, 2000 F-110
Combining Statement of Operations Information for the year ended December 31, 2000 F-111
Combining Statement of Cash Flows Information for the year ended December 31, 2000 F-112
Combining Balance Sheet Information at December 6, 2001 F-113
Combining Statement of Operations Information for the Period from January 1, 2001 through F-114
December 6, 2001
Combining Statement of Cash Flows Information for the Period from January 1, 2001 through F-115
December 6, 2001
Schedule II- Valuation and Qualifying Accounts F-116
- ---------
(1) The financial statements of Majestic Investor Holdings, LLC are included in
this 10-K in order to comply with Rule 3-16 of Regulation S-X.
(2) The financial statements of Buffington Harbor Riverboats, LLC are included
in this 10-K in order to comply with Rule 3-09 of Regulation S-X.
(3) The Registrant completed the acquisition of the assets of three
subsidiaries of Fitzgeralds Gaming Corporation on December 6, 2001. In
order to comply with Rule 3-02, 3-05 and 3-16 of Regulation S-X, the
historical predecessor financial statements for Fitzgeralds Las Vegas,
Inc., Fitzgeralds Mississippi, Inc. and 101 Main Street Limited Liabiltiy
Company are included in this 10-K.
F-2
REPORT OF INDEPENDENT AUDITORS
To the Member of
The Majestic Star Casino, LLC:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page F-1 present fairly, in all material
respects, the financial position of The Majestic Star Casino, LLC and its
subsidiaries at December 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(a)(2) on page F-1 presents
fairly in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement and financial
statement schedule presentation. We believe that our audits provide a reasonable
basis for our opinion.
As more fully described in Note 2, the Company changed its method of
accounting for losses on early retirement of debt in connection with its
adoption of Financial Accounting Standards Board Statement No. 145.
/s/ PricewaterhouseCoopers LLP
Las Vegas, Nevada
March 2, 2004
F-3
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------------
2003 2002
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 22,058,016 $ 24,547,881
Restricted cash 1,400,000 250,000
Accounts receivable, less allowance for doubtful accounts of $258,546 and
$372,689 as of December 31, 2003 and December 31, 2002, respectively 2,212,546 2,474,726
Inventories 707,685 982,486
Prepaid expenses 2,126,583 2,921,064
Receivable from affiliate 210,135 --
Note receivable from related parties 133,000 1,200,000
Due from Buffington Harbor Riverboats, L.L.C -- 217,925
------------- -------------
Total current assets 28,847,965 32,594,082
------------- -------------
Property, equipment and improvements, net 142,167,931 164,809,158
Intangible assets, net 9,249,247 17,691,746
Goodwill 5,922,398 5,922,398
Other assets:
Deferred financing costs, net of accumulated amortization
of $552,079 and $4,375,528 as of December 31, 2003 and
December 31, 2002 , respectively 6,289,187 9,372,067
Investment in Buffington Harbor Riverboats, L.L.C 29,733,594 31,833,311
Restricted cash -- 1,000,000
Other assets 11,004,456 12,587,112
------------- -------------
Total other assets 47,027,237 54,792,490
------------- -------------
Total Assets $ 233,214,778 $ 275,809,874
============= =============
LIABILITIES AND MEMBER'S DEFICIT
Current Liabilities:
Accounts payable $ 6,387,955 $ 4,048,298
Current maturities of long-term debt -- 134,084
Payable to related party 247 --
Accrued liabilities:
Payroll and related 6,487,107 7,656,515
Interest 6,023,703 1,473,785
Progressive jackpots 2,673,662 3,189,626
Slot club liability 498,070 738,559
Other accrued liabilities 11,595,665 8,217,284
------------- -------------
Total current liabilities 33,666,409 25,458,151
Long-term debt, net of current maturities 301,715,324 274,526,285
------------- -------------
Total Liabilities 335,381,733 299,984,436
------------- -------------
Member's Deficit (102,166,955) (24,174,562)
------------- -------------
Total Liabilities and Member's Deficit $ 233,214,778 $ 275,809,874
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------------
2003 2002 2001
------------- ------------- -------------
REVENUES:
Casino $ 255,385,819 $ 256,828,271 $ 130,198,059
Rooms 7,932,811 8,160,611 544,249
Food and beverage 12,799,586 12,812,763 2,356,253
Other 3,966,417 3,506,074 1,823,531
------------- ------------- -------------
Gross revenues 280,084,633 281,307,719 134,922,092
Less promotional allowances 18,301,474 18,205,607 1,827,297
------------- ------------- -------------
Net revenues 261,783,159 263,102,112 133,094,795
------------- ------------- -------------
COSTS AND EXPENSES:
Casino 84,211,678 84,616,731 34,076,663
Rooms 2,552,127 2,684,354 187,507
Food and beverage 5,262,936 5,824,733 2,093,725
Other 1,179,893 1,030,061 68,523
Gaming taxes 55,252,255 48,671,035 34,695,363
Advertising and promotion 14,666,285 16,137,600 7,392,116
General and administrative 39,652,734 41,179,508 23,643,118
Corporate expense 3,456,161 2,759,744 --
Economic incentive - City of Gary 4,103,010 3,980,501 3,667,100
Depreciation and amortization 17,488,800 18,124,835 8,823,218
Loss on investment in Buffington Harbor Riverboats, LLC 2,395,436 2,424,392 2,797,740
Loss on disposal of assets 117,097 5,470 12,114
Pre-opening expenses -- 13,391 1,018,234
------------- ------------- -------------
Total costs and expenses 230,338,412 227,452,355 118,475,421
------------- ------------- -------------
Operating income 31,444,747 35,649,757 14,619,374
------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest income 104,331 181,287 399,752
Interest expense (31,282,788) (32,406,270) (16,025,993)
(Loss) gain on bond redemption (31,960,083) 68,957 --
Other non-operating expense (185,574) (183,200) (148,690)
------------- ------------- -------------
Total other expense (63,324,114) (32,339,226) (15,774,931)
------------- ------------- -------------
(Loss) income from continuing operations (31,879,367) 3,310,531 (1,155,557)
------------- ------------- -------------
DISCONTINUED OPERATION
Loss on discontinued operation, including $10,000,000 for
the write-down of assets to fair market value at spin-off (2003) (11,972,607) (1,994,777) (394,957)
------------- ------------- -------------
Net (loss) income $ (43,851,974) $ 1,315,754 $ (1,550,514)
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Member's Deficit
----------------
BALANCE, DECEMBER 31, 2000 $ (23,430,973)
Member's contribution 5,000,000
Net loss (1,550,514)
-------------
BALANCE, DECEMBER 31, 2001 (19,981,487)
Net income 1,315,754
Distribution to Barden Development, Inc. (5,508,829)
-------------
BALANCE, DECEMBER 31, 2002 (24,174,562)
Net loss (43,851,974)
Distribution to Barden Development, Inc. (6,065,213)
Spin-off of Barden Nevada Gaming, LLC to Barden
Development, Inc. (27,515,400)
Appreciated value of land purchased from a related party (559,806)
-------------
BALANCE, DECEMBER 31, 2003 $(102,166,955)
=============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------
2003 2002 2001
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (43,851,974) $ 1,315,754 $ (1,550,514)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation 12,950,562 15,287,877 6,987,173
Amortization 4,538,238 5,789,308 2,003,444
Loss on investment in Buffington Harbor Riverboats, L.L.C 2,395,436 2,424,392 2,797,740
Loss on disposal of assets 117,097 5,219 12,114
Loss (gain) on bond redemption 31,960,083 (68,957) --
Loss on disposal of discontinued operation 11,972,607 -- --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (330,599) 224,482 (440,012)
Increase in related party receivables (707,110) -- --
(Increase) decrease in inventories (44,228) 13,222 36,221
Increase in prepaid expenses (7,297) (1,259,507) (539,246)
Decrease (increase) in other assets 455,542 1,511,208 (470,733)
Increase in accounts payable 3,444,422 873,426 637,465
Increase in accrued payroll and related expenses 845,510 1,375,464 203,763
Increase (decrease) in accrued interest 4,549,918 (6,820,527) 1,187,254
Increase in other accrued liabilities 3,688,690 633,362 1,546,616
------------- ------------- -------------
Net cash provided by operating activities 31,976,897 21,304,723 12,411,285
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of Fitzgeralds, net of cash received -- -- (143,758,152)
Acquisition related costs -- (986,158) --
(Increase) decrease in restricted cash (1,150,000) (250,000) 2,000,000
Proceeds from seller for purchase price adjustment -- 3,800,000 --
Acquisition of property and equipment (18,462,990) (10,396,222) (5,089,848)
Distribution of cash to Barden Development, Inc. from spin-off of Barden
Nevada (4,395,606) -- --
Cash paid in excess of cost for land purchased from a related party (559,806) -- --
Decrease (increase) in prepaid leases and deposits 102,417 (113,186) 2,287,437
Purchase of naming rights -- -- (1,500,000)
Investment in Buffington Harbor Riverboats, L.L.C (295,719) (358,918) (214,665)
Proceeds from sale of equipment 77,154 53,117 1,850
------------- ------------- -------------
Net cash used in investing activities (24,684,550) (8,251,367) (146,273,378)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of 9 1/2% senior secured notes 260,000,000 -- --
Issuance cost for the 9 1/2% senior secured notes (4,420,000) -- --
Proceeds from issuance of 11.653% senior secured notes -- -- 145,000,400
Issuance cost for the 11.653% senior secured notes -- (1,523,568) (5,349,230)
Cash paid for purchase of 11.653% senior secured notes (135,477,000) (759,038) --
Cash paid for redemption of 10 7/8% senior secured notes (130,000,000) -- --
Payment of premium on early extinguishment of debt (19,262,330) -- --
Issuance cost for the $80.0 million secured credit facility (1,583,162) -- --
Proceeds from line of credit 28,000,000 2,500,000 6,500,000
Repayment of line of credit (2,041,507) (9,000,000) (7,800,000)
Issuance of loan to Barden Development, Inc. -- -- (700,000)
Repayment of notes from related parties 1,067,000 -- 2,000,000
Repayment of long-term debt -- (139,331) (983,298)
Member's equity contribution -- -- 5,000,000
Distribution to Barden Development, Inc. (6,065,213) (5,508,829) --
------------- ------------- -------------
Net cash (used in) provided by financing activities (9,782,212) (14,430,766) 143,667,872
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (2,489,865) (1,377,410) 9,805,779
Cash and cash equivalents, beginning of period 24,547,881 25,925,291 16,119,512
------------- ------------- -------------
Cash and cash equivalents, end of period $ 22,058,016 $ 24,547,881 $ 25,925,291
============= ============= =============
Continued on next page
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------------------
< 2003 2002 2001
------------- ------------- -------------
INTEREST PAID:
Equipment Debt $ -- $ 44,667 $ 35,898
Senior Secured Notes - Fixed Interest 10 7/8% 11,288,794 21,206,250 14,137,500
Senior Secured Notes - Fixed Interest 11.653% 15,317,338 17,702,015 --
Lines of credit 92,238 303,878 423,831
Indiana Department of Revenue -- -- 260,374
------------- ------------- -------------
$ 26,698,370 $ 39,256,810 $ 14,857,603
============= ============= =============
SUPPLEMENTAL CASH INVESTING ACTIVITIES:
Spin out of equity interests in Barden Nevada,
net of cash, to Barden Development, Inc. $ 23,938,044 $ -- $ --
============= ============= =============
SUPPLEMENTAL CASH FINANCING ACTIVITIES:
Elimination of slot based progressive $ -- $ 400,000 $ --
Elimination of slot club -- 1,300,000 --
Conversion of investment in Buffington Harbor
Riverboats, LLC to prepaid lease -- -- 6,213,615
------------- ------------- -------------
$ -- $ 1,700,000 $ 6,213,615
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
The Majestic Star Casino, LLC (the "Company") was formed on December 8,
1993 as an Indiana limited liability company to provide gaming and related
entertainment to the public. The Company commenced gaming operations in the City
of Gary (the "City") at Buffington Harbor, located in Lake County, in the State
of Indiana on June 7, 1996. Majestic Investor, LLC ("Investor") was formed in
September 2000 to satisfy the Company's off-site development obligations under
the Development Agreement with the City of Gary.
Investor entered into a definitive purchase and sale agreement dated as of
November 22, 2000, as amended December 4, 2000, with Fitzgeralds Gaming
Corporation and certain of its affiliates (the "Seller") 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. Investor assigned all of its rights and
obligations to Majestic Investor Holdings, LLC ("Majestic Investor Holdings" or
"Investor Holdings"), a wholly-owned subsidiary of Investor, following the
formation of Investor Holdings. Investor Holdings completed the purchase of the
Fitzgeralds assets on December 6, 2001.
As a result of the acquisition of the Fitzgerald assets, The Majestic Star
Casino, LLC is a multi-jurisdictional gaming company that directly owns and
operates one riverboat gaming facility located in Gary, Indiana (the "Majestic
Star Casino") and through its wholly owned subsidiary, Investor Holdings, owns
two Fitzgeralds-brand casino-hotels located in Tunica County, Mississippi
("Barden Mississippi Gaming, LLC" or "Fitzgeralds Tunica"), Black Hawk, Colorado
(casino only) ("Barden Colorado Gaming, LLC" or "Fitzgeralds Black Hawk"), and
prior to January 1, 2004, owned a third Fitzgeralds-brand casino-hotel located
in Las Vegas, Nevada ("Barden Nevada Gaming, LLC" or "Fitzgeralds Las Vegas").
See Note 7 for further discussion of the spin-off of Fitzgeralds Las Vegas in
2003.
The Majestic Star Casino Capital Corp., a wholly owned subsidiary of the
The Majestic Star Casino, LLC, was originally formed for the purpose of
facilitating the offering of The Majestic Star Casino, LLC's $130.0 million 10
7/8% senior secured notes due 2006 (the "10 7/8% notes") and Majestic Investor
Capital Corp., a wholly-owned subsidiary of Investor Holdings, was formed
specifically to facilitate the offering of Majestic Investor Holding's $152.6
million 11.653% senior secured notes due 2007 (the "11.653% notes"). Both The
Majestic Star Casino Capital Corp. and Majestic Investor Capital Corp. do not
have any assets or operations. All of the 10 7/8% notes and approximately 89.3%,
or $135.5 million, of the 11.653% notes have been redeemed, purchased or
retired. Please see our discussion below and in Note 12 to the Notes to
Consolidated Financial Statements for more information about the issuance of the
9 1/2% senior secured notes and the establishment of a new $80.0 million Credit
Facility.
On August 26, 2003, The Majestic Star Casino, LLC and Investor Holdings
commenced cash offers and consent solicitations for Majestic Star Casino's 10
7/8% notes and Investor Holdings' 11.653% notes, respectively, in connection
with a refinancing of such notes. On October 7, 2003, The Majestic Star Casino,
LLC and its restricted subsidiary, The Majestic Star Casino Capital Corp.,
issued $260.0 million of 9 1/2% senior secured notes due 2010 (the "9 1/2%
senior secured notes") and entered into a new $80.0 million credit facility
(the "$80 million Credit facility") with Wells Fargo Foothill, Inc. The proceeds
from the issuance of the 9 1/2% senior secured notes and approximately $28.0
million of the $80 million Credit Facility were used to redeem and retire all of
the 10 7/8% notes and approximately 89.3% of the 11.653% notes. As a result of
the consent solicitations to purchase and the purchase of the 11.653% notes,
there are $16.3 million of unsecured 11.653% notes (the "11.653% unsecured
notes") still outstanding. As part of the refinancing, the operating
subsidiaries of Fitzgeralds Tunica and Fitzgeralds Black Hawk are guarantors
under both the 9 1/2% senior secured notes and the $80 million Credit Facility.
On October 7, 2003, Fitzgeralds Las Vegas became an unrestricted subsidiary of
The Majestic Star Casino, LLC. On December 18, 2003, Investor Holdings, the
direct owner of Fitzgeralds Las Vegas, and Barden
F-9
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Development, Inc. ("BDI"), our parent, received final regulatory approval to
spin-off Fitzgeralds Las Vegas to BDI. The spin-off to BDI was completed on
December 31, 2003. In connection with the spin-off, Investor Holdings recorded
an impairment loss on discontinued operations of $10.0 million. The loss
represents the difference between the estimated fair market value and the book
carrying value of Fitzgeralds Las Vegas at the date of spin-off. In addition,
Investor Holdings, in conjunction with the spin-off of the equity interests in
Fitzgeralds Las Vegas, transferred the remaining $27.5 million of Fitzgeralds
Las Vegas net assets to BDI and forgave intercompany balances due from
Fitzgeralds Las Vegas.
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 remaining subsidiaries.
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
The Majestic Star Casino, LLC and its wholly owned subsidiary, Investor
Holdings. All inter-company 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 accounting
principles generally accepted in the United States of America, or "GAAP". The
preparation of financial statements in conformity with 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 period. Significant estimates incorporated into our
consolidated financial statements include the estimated useful lives of
depreciable and amortizable assets, the estimated allowance for doubtful
accounts receivable, estimated cash flow in assessing the recoverability of long
lived assets, and estimated liabilities for our self insured medical plan, slot
club point programs and litigation, claims and assessments. Actual results could
differ from those estimates.
The spin-off of Fitzgeralds Las Vegas to BDI occurred on December 31, 2003.
As such, the assets, liabilities and equity of Fitzgeralds Las Vegas are not
included in our consolidated balance sheet as of December 31, 2003. However, the
assets of Fitzgeralds Las Vegas are being recognized as held for use in our
consolidated balance sheet as of December 31, 2002. The consolidated statement
of operations recognizes Fitzgeralds Las Vegas as a discontinued operation for
the years ended December 31, 2003, 2002 and 2001. The Company owned and operated
Fitzgeralds Las Vegas for the last 25 days of 2001, and therefore, the
consolidated statement of operations for 2001 includes the results of the
discontinued operation for only 25 days. The consolidated statement of cash
flows for the year ended December 31, 2003 reflects the distribution of cash
from Fitzgeralds Las Vegas to BDI. The remaining spin-off of our equity
interests in Fitzgeralds Las Vegas involved no cash. The statement of cash flows
for the years ended December 31, 2002 and 2001 fully reflect the cash activities
of Fitzgeralds Las Vegas.
RECLASSIFICATIONS - The consolidated financial statements and footnotes for the
prior years reflect certain reclassifications to conform to the current year
presentation. Included in such reclassifications is an increase in net revenues
(and a corresponding increase in operating expenses) of approximately $15.3
million and $5.9 million for the twelve month periods ended December 31, 2002
and 2001, respectively, to classify the cost of certain promotional allowances
to be consistent with the 2003 presentation. Such reclassifications have no
effect on previously reported net income.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in the consolidation.
F-10
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS - The Company considers cash equivalents to include
short-term investments with original maturities of ninety days or less. Cash
equivalents are carried at cost plus accrued interest, which approximates fair
value. The Company places its cash primarily in checking and money market
accounts with high credit quality financial institutions, which, at times, have
exceeded federally insured limits.
RESTRICTED CASH -- As of December 31, 2003, restricted cash relating to the
self-insured workers compensation programs increased to $1.4 million. The
increase relates to additional security for a larger Investor Holdings letter of
credit. Our letter of credit increased by $250,000 as a result of Fitzgeralds
Las Vegas being added to the self-insured workers compensation program. In
addition, the Majestic Star Casino was required to purchase a $900,000
certificate of deposit to secure a letter of credit related to the Majestic Star
Casino workers compensation program. The certificate of deposit is recorded as
restricted cash. As of 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 Investor Holdings secures a letter of
credit for self-insured workers compensation at Fitzgeralds Tunica and
Fitzgeralds Black Hawk.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of casino
accounts receivable. The Company extends credit to approved casino customers
following background checks and investigations of creditworthiness. An estimated
allowance for doubtful accounts is maintained to reduce the Company's
receivables to their carrying amount, which approximates fair value. Management
believes that as of December 31, 2003, no significant concentrations of credit
risk existed for which an allowance had not already been determined and
recorded.
INVENTORIES - Inventories consisting principally of food, beverage, operating
supplies and gift shop items are stated at the lower of cost or market value.
Cost is determined by the first-in, first-out method.
OTHER ASSETS - The estimated cost of normal operating quantities (base stock) of
china, silverware, glassware, linen, uniforms and utensils has been recorded as
an asset and is not being depreciated. Costs of base stock replacements are
expensed as incurred. Other assets in the accompanying consolidated balance
sheets include $649,000 and $1.0 million of base stock inventories at December
31, 2003 and 2002, respectively. The base stock inventory at December 31, 2002
was inclusive of $290,000 of base stock inventory of Fitzgeralds Las Vegas, our
discontinued operation. The base stock inventory as of December 31, 2003 did not
include any of the base stock inventory of our discontinued operation.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
expense is computed utilizing the straight-line method over the estimated useful
lives of the depreciable assets. Certain equipment held under capital leases is
classified as property and equipment and amortized using the straight-line
method over the lease terms and the related obligations are recorded as
liabilities. Costs of major improvements are capitalized; costs of normal
repairs and maintenance are charged to expense as incurred. Gains or losses on
dispositions of property and equipment are recognized in the consolidated
statement of operations when incurred.
CAPITALIZED INTEREST - The Company capitalizes interest costs associated with
debt incurred in connection with major construction projects. When no debt is
specifically identified as being incurred in connection with such construction
projects, the Company capitalizes interest on amounts expended on the project at
the Company's average cost of borrowed money. There was no interest capitalized
in any of the three years in the period ended December 31, 2003.
DEFERRED FINANCING COSTS - Deferred financing costs represent underwriter's and
agent's fees
F-11
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and commissions, closing costs and professional fees incurred in connection with
the issuance of the Company's 9 1/2% senior secured notes and $80.0 million
Credit Facility and $16.3 million of outstanding 11.653% unsecured notes. Prior
to October 7, 2003, the Company recognized deferred financing costs on Majestic
Star Casino's 10 7/8% notes and its $20.0 million credit facility with Wells
Fargo Foothill Inc. and Investor Holdings' 11.653% notes and its $15.0 million
credit facility with Wells Fargo Foothill Inc. Such costs were written off when
such debt was retired in 2003. Deferred financing costs are amortized over the
terms of the related notes and lines of credit using the effective interest
method.
GOODWILL - Goodwill represents the cost of the Fitzgeralds assets acquired in
excess of their fair value. Goodwill for acquisitions after June 30, 2001 is not
subject to amortization but is subject to impairment testing at least annually.
INTANGIBLE ASSETS - Intangible assets are amortized over their estimated useful
lives, generally eight to ten years.
INVESTMENT IN BUFFINGTON HARBOR RIVERBOATS, L.L.C. - The Company accounts for
its 50 percent interest in Buffington Harbor Riverboats, L.L.C. ("BHR") under
the equity method, whereby the initial investments are recorded at cost and then
adjusted for the Company's share of BHR's net income or loss.
CASINO REVENUE - Casino revenue is the net win from gaming activities, which is
the difference between gaming wins and losses. Hotel, food and beverage, and
other revenue are recognized at the time the related service is performed.
PROMOTIONAL ALLOWANCES - Cash discounts and other cash incentives related to
gaming play are recorded as a reduction of gross casino revenues. In addition,
the retail value of accommodations, food and beverage, and other services
furnished to hotel/casino guests without charge is included in gross revenue and
then deducted as promotional allowances. The estimated departmental cost of
providing such promotional allowances is included primarily in casino operating
expenses as follows:
For the years ended December 31,
------------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Hotel $ 1,464,915 $ 1,604,384 $ 159,106
Food and Beverage 8,679,521 9,157,958 930,300
Other 314,346 278,341 11,489
----------- ----------- -----------
Total $10,458,782 $11,040,683 $ 1,100,895
=========== =========== ===========
The estimated retail value of such promotional allowances is included in
operating revenues as follows:
For the years ended December 31,
------------------------------------------------------
2003 2002 2001
----------- ----------- -----------
Hotel $ 3,439,367 $ 3,683,398 $ 271,320
Food and Beverage 9,903,652 9,583,491 1,166,896
Other 412,830 349,650 27,922
----------- ----------- -----------
Total $13,755,849 $13,616,539 $ 1,466,138
=========== =========== ===========
F-12
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRE-OPENING EXPENSES - Pre-opening expenses are expensed as incurred.
FEDERAL INCOME TAXES - The Company has historically been treated as a
partnership for U.S. federal income tax purposes. As a result of a change in the
Company's ownership structure in June 2001, the Company ceased to be a
partnership for U.S. federal income tax purposes, and is now an entity
disregarded for U.S. federal income tax purposes. At all times during each of
the three years in the period ended December 31, 2003, income of the Company was
taxed directly to its member, and, accordingly, no provision for federal income
taxes is reflected in the financial statements.
ADVERTISING COSTS - Costs for advertising are expensed as incurred, except costs
for direct-response advertising, which are capitalized and amortized over the
period of the related program. Direct-response advertising consists primarily of
mailing costs associated with the direct-mail programs. Capitalized advertising
costs, included in prepaid expense, were immaterial at December 31, 2003 and
2002. Consolidated advertising costs included in advertising and promotion
expenses were $3.9 million, $5.0 million and $2.6 million for the years ended
December 31, 2003, 2002 and 2001, respectively.
LONG-LIVED ASSETS - Long-lived assets and certain identifiable intangibles held
and used by the Company are reviewed for impairment when events or changes in
circumstances warrant such a review. The carrying value of a long-lived or
intangible asset is considered impaired when the anticipated undiscounted cash
flow from such asset is less than its carrying value. In that event, an
impairment loss is recognized. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that fair values are reduced for the cost
of disposition. Concurrent with the spin-off of Fitzgeralds Las Vegas, the
Company wrote down the value of Fitzgeralds Las Vegas's assets to fair market
value, resulting in a $10.0 million charge. SFAS 142 requires annual impairment
review of all intangible assets with indefinite lives. The Company performed an
impairment test of its intangible assets with indefinite lives during the year
2003 and concluded that there was no impairment. See Notes 8 and 9.
CASINO CLUB LIABILITY - The Fitzgeralds properties have accrued for the
liability of points earned but not redeemed by its casino club members, less the
points of inactive players and expired points. The liability is calculated based
on average historical redemption rate.
PROGRESSIVE LIABILITY - The Company maintains a number of progressive slot
machines and table games. As wagers are made on the respective progressive
games, the amount available to win (to be paid out when the appropriate jackpots
are hit) increases. The Company has recorded the progressive jackpots as a
liability.
SELF INSURANCE LIABILITY -- The Company maintains accruals for self-insured
health costs, which are classified in payroll and related accrued liabilities in
the consolidated balance sheet. Management determines the estimate of these
accruals by periodically evaluating the historical experience and projects
trends related to these accruals. Actual results could differ from these
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company believes, based upon current
information, that the carrying value of the Company's cash and cash equivalents,
restricted cash, accounts receivable and accounts payable approximates fair
value. The Company estimates the fair value of its long-term debt is greater
than its carrying value based on quoted market prices for the same or similar
issues (see Note 13).
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
EARLY RETIREMENT OF DEBT - In April 2002, the Financial Accounting Standards
Board issued statement 145 ("SFAS 145"). SFAS 145 addresses the presentation for
gains and losses on early retirements of debt in the statement of operations.
The provisions of SFAS 145 related to the recission of Statement 4 are effective
for fiscal years beginning after May 15, 2002. The Company adopted SFAS 145 and
as a result, reclassified $69,000 in a gain from the early extinguishment of
debt, which item had previously been reported as an extraordinary item in 2002.
In 2003, the Company recognized a loss on the retirement of debt of $32.0
million on October 7, 2003. The loss on the retirement of debt is comprised of
the premium on the offers to purchase, the write-off of the deferred debt
issuance costs and the original issue discount on the 10 7/8% notes and 89.3% of
the 11.653% notes.
F-13
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standard Board issued Statement 146
("SFAS 146") "Accounting for Costs Associated with Exit or Disposal Activities."
The provisions of SFAS 146 became effective for exit or disposal activities
commenced subsequent to December 31, 2002. Adoption of SFAS 146 did not have any
material impact on the Company's financial position, 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 December 31, 2003, the Company did not have any guarantees outside
of its consolidated group. Adoption of FIN 45 did not have a material impact on
the Company's 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 interests in an entity and in
determining the primary beneficiary. FIN 46 outlines disclosure requirements for
Variable Interest Entities ("VIEs") in existence prior to January 31, 2003, and
outlines consolidation requirements 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. Adoption of FIN 46 did not have a material
impact on the Company's financial condition, results of operations or cash
flows.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149 ("SFAS 149") "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." Provisions of SFAS 149 became
effective for contracts and hedging relationships entered into or modified after
June 30, 2003. Adoption of SFAS 149 did not have any material impact on our
financial position, results of operations or cash flows as the Company has not
entered into or modified any agreements that contain derivative instrument or
involve hedging activities.
F-14
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 ("SFAS 150") "Accounting for Certain
Financial Instruments with Characteristic of both Liabilities and Equity."
Provisions of SFAS 150 became effective for financial instruments entered into
or modified after May 31, 2003. The Company is considered a non-public entity,
as defined by SFAS 150, and is not required to adopt SFAS 150.
4. CERTIFICATE OF SUITABILITY AND LICENSES
On December 9, 1994, the Indiana Gaming Commission (the "Commission")
awarded the Company one of two certificates (the "Certificate") for a riverboat
owner's license for a riverboat casino to be docked in the City. Having complied
with certain statutory and regulatory requirements and other conditions of the
Commission, the Company received a five-year riverboat owner's license on June
3, 1996. While the Commission reserves the right to investigate riverboat
licensees at any time it deems necessary, after expiration of the initial
license, each riverboat licensee must undergo a complete reinvestigation every
three years. On May 13, 2002, the Company's riverboat ownership license was
renewed for a one-year period beginning June 2, 2002. On June 1, 2003, the
Company's riverboat ownership license was again renewed by the IGC for another
one-year period beginning June 2, 2003. In June 2004, the Majestic Star Casino
will undergo its requisite three year-investigation. There can be no assurance
that Majestic Star Casino's license will be renewed.
Trump Indiana, Inc. ("Trump") also has a Certificate of Suitability issued
by the Commission. The Company and Trump jointly developed and operate a docking
location from which the entities are conducting their respective riverboat
gaming operations in the City.
Barden Mississippi must maintain its gaming license from the Mississippi
Commission in order to continue to operate a casino in Mississippi. Such
licenses are issued by the Mississippi Commission subject to certain conditions,
including continued compliance with all applicable state laws and regulations.
Gaming licenses require the payment of periodic fees and taxes, are not
transferable, are issued for a three-year period (and may be continued for two
additional three-year periods) and must be renewed periodically thereafter.
Barden Mississippi's current gaming license expires in December of 2004. There
can be no assurance that any subsequent application for a license will be
approved.
On October 18, 2001, the Colorado Gaming Commission issued operator and
retail licenses to Barden Colorado Gaming, LLC, the owner and operator of
Fitzgeralds Black Hawk. The operator license was effective as of October 18,
2001. The retail license became effective upon assumption of control of
Fitzgeralds Black Hawk by Barden Colorado Gaming, LLC on December 7, 2001. The
operator and retail gaming licenses were renewed by the Colorado Gaming
Commission in October 2002 and again on October 16, 2003 for a period of one
year. There can be no assurance that any subsequent application for a license
will be approved.
5. CITY OF GARY, INDIANA DEVELOPMENT OBLIGATION
On March 26, 1996, the City and the Company entered into a development
agreement ("Development Agreement") which required the Company, among other
things, (1) to invest $116 million in various on-site improvements over the
succeeding five years, (2) pay the City an economic incentive equal to 3% of the
Company's adjusted gross receipts, as defined by the Riverboat Gambling Act and
(3) pay a default payment in the amount of damages for failure to complete
certain on-site developments, which amount is capped at $12 million.
F-15
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company fulfilled all investment commitments with respect to the
Development Agreement as of September 2000 and continues to pay the 3% economic
incentive in accordance with the terms of the agreement.
6. ACQUISITIONS
On December 6, 2001, the Company, through certain wholly-owned
subsidiaries, completed the acquisition of substantially all of the assets and
assumed certain liabilities of Fitzgeralds Las Vegas, Inc., Fitzgeralds
Mississippi, Inc. and 101 Main Street Limited Liability Company (the
"Fitzgeralds assets") for approximately $152.7 million in cash. We accounted for
the acquisition under the purchase method. Accordingly, the purchase price was
allocated to the underlying assets acquired and liabilities assumed based upon
their estimated fair values at the date of acquisition. We determined the
estimated fair value of property and equipment and intangible assets based upon
third-party valuations. The purchase price was determined based upon estimates
of future cash flows and the net worth of the assets acquired. Investor Holdings
funded the acquisition through the issuance of its 11.653% notes (see Note 12).
Pursuant to the terms of the purchase and sale agreement, the parties agreed to
a $3.8 million reduction in the purchase price on May 9, 2002, based upon a
negotiated settlement of the value of working capital at December 6, 2001. The
$3.8 million was taken against goodwill.
The results of operations for the twenty-five days ended December 31,
2001, since the acquisition on December 6, 2001, are included in our
consolidated statement of operations. The following unaudited pro forma
consolidated financial information has been prepared assuming our acquisition
had occurred on January 1, 2001.
For the year ended
December 31, 2001
----------------------------
(unaudited)
Net revenue $ 291,114,248
Income from operations 36,724,595
Net income 167,824
These unaudited pro forma results are presented for comparative purposes
only. The pro forma results are not necessarily indicative of what our actual
results would have been had the acquisition been completed as of the beginning
of the year, or of future results. In addition, the above pro forma results
include the results of operations of Fitzgeralds Las Vegas, which was spun-off
to BDI on December 31, 2003. (See Note 7.)
As a result of the acquisition of the Fitzgeralds assets, the Company
recognized intangible assets primarily consisting of $9.8 million for customer
relationships, $3.7 million for trade name and $5.2 million for the Nevada
gaming license. Intangible assets for customer relationships and trade names are
being amortized over a period of 8-10 years. In accordance with SFAS No. 142,
goodwill and other indefinite lived intangible assets, such as the gaming
license, are not amortized but instead subject to impairment tests at least
annually.
7. SPIN-OFF OF FITZGERALDS LAS VEGAS
Concurrent with the refinancing of all of the Company's debt as more fully
explained in Note 12, Fitzgeralds Las Vegas became an unrestricted subsidiary of
the Company. None of the assets or equity interests of Fitzgeralds Las Vegas
were pledged as collateral benefiting the 9 1/2% senior secured notes or the
$80.0 million Credit Facility. On December 18, 2003, Investor Holdings, the
direct owner of Fitzgeralds Las Vegas, and BDI received final regulatory
approval to spin-off Fitzgeralds Las Vegas. The spin-off to BDI was completed on
December 31, 2003. In connection with the spin-off, Investor Holdings
F-16
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recorded an impairment loss on discontinued operations of $10.0 million. The
loss represents the difference between the estimated fair market value and the
book carrying value of Fitzgeralds Las Vegas at the date of spin-off. In
addition, Investor Holdings, in conjunction with the spin-off of the equity
interests in Fitzgeralds Las Vegas, transferred the remaining $27.5 million of
Fitzgeralds Las Vegas assets net of liabilities, to BDI and forgave
intercompany balances due from Fitzgeralds Las Vegas of $36.7 million.
The following represents selected operational information of Fitzgeralds Las
Vegas:
For the years ended December 31,
----------------------------------------------
2003 2002 2001(a)
------------ ------------ ------------
Gross Revenues $ 53,403,324 $ 54,617,588 $ 3,445,137
Net Revenues $ 47,613,298 $ 48,812,435 $ 3,065,077
Operating Expenses $ 49,568,878 $ 50,789,174 $ 3,457,953
Operating Loss $ (1,955,580) $ (1,976,739) $ (392,876)
Net Income $ (1,972,607) $ (1,994,777) $ (394,957)
(a) From inception date of December 7, 2001--See Note 6.
8. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2003 and 2002 consist of the
following:
Estimated
Service Life
2003 2002 (Years)
-------------- ------------- ------------
Land used in casino operations $ 3,823,375 $ 6,403,375 -
Vessel, buildings & improvements 96,783,613 116,749,218 25-39
Site improvements 17,596,240 17,596,240 9-15
Barge and improvements 16,030,350 15,798,767 13-15
Leasehold improvements 409,389 395,886 5
Furniture, fixtures and equipment 55,767,797 50,566,918 4-10
Construction in progress 3,948,889 1,513,320
-------------- -------------
194,359,653 209,023,724
Less accumulated depreciation and amortization (52,191,722) (44,214,566)
-------------- -------------
Property and equipment, net $ 142,167,931 $ 164,809,158
============== =============
Substantially all property and equipment are pledged as collateral on
long-term debt. See Note 12.
F-17
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. OTHER INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of the Company's
intangible assets, other than goodwill, as of December 31, 2003 and 2002 are as
follows:
Estimated
Gross Carrying Accumulated Net Amount Expected
Amount Amortization December 31, 2003 Life
-------------- ------------ ----------------- ----------
Amortized intangible assets: (in thousands)
Customer relationship $ 7,840 $(2,033) $ 5,807 8 yrs
Tradename 3,450 (708) 2,742 10 yrs
Riverboat excursion license 700 - 700 15 yrs
------- ------- -------
Total intangible assets $11,990 $(2,741) $ 9,249
======= ======= =======
Estimated
Gross Carrying Accumulated Net Amount Expected
Amount Amortization December 31, 2002 Life
-------------- ------------ ----------------- ----------
Amortized intangible assets: (in thousands)
Customer relationship $ 7,840 $ (1,053) $ 6,787 8 yrs
Tradename 3,450 (363) 3,087 10 yrs
Riverboat excursion license 700 - 700 15 yrs
Intangible asset of discontinued operation 2,210 (292) 1,918
-------- -------- --------
14,200 (1,708) 12,492
Unamortized intangible assets:
Intangible asset of discontinued operation 5,200 - 5,200
-------- -------- --------
Total intangible assets $ 19,400 $ (1,708) $ 17,692
======== ======== ========
The amortization expense recorded on the intangible assets for the year
ended December 31, 2003, December 31, 2002 and for the period from inception of
Investor Holdings (September 14, 2001) through December 31, 2001 was $1.3
million, $1.3 million and $0.1 million, respectively. The $700,000 intangible
asset, represents a riverboat excursion license for a riverboat, which commenced
full operations in March of 2004. Consequently, the $700,000 will be amortized
at the rate of approximately $4,000 per month beginning in April 2004. The
estimated amortization expense for all amortized intangible assets for each of
the five succeeding fiscal years is as follows:
For the Years Ended December 31, (in thousands)
2004 $ 1,360
2005 1,372
2006 1,372
2007 1,372
2008 1,372
Under SFAS No. 142, goodwill and other indefinite lived intangible assets
are no longer subject to amortization over their useful lives; rather, they are
subject to assessments for impairment at least annually. Also, under SFAS No.
142, an intangible asset should be recognized if the benefit of the intangible
asset is obtained through contractual or other legal rights or if the intangible
asset can be sold, transferred, licensed, rented or exchanged. Such intangibles
will be amortized over their useful lives. Under SFAS No. 142, Investor
Holdings' acquisition of the Fitzgeralds assets was immediately subject to the
provision of SFAS No. 142.
10. INVESTMENT IN BUFFINGTON HARBOR RIVERBOATS, L.L.C.
On October 31, 1995, the Company and Trump Indiana, Inc., our Joint
Venture Partner ("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
F-18
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. All expenditures requiring a cash outlay by BHR are
billed to Trump and the Company at cost. Accordingly, BHR records as expenses
the cost of providing such services and records as other revenues the amounts
billed to Trump and the Company.
The Company has paid approximately $5.7 million, $6.0 million and $6.3
million of berthing fees for the years 2003, 2002 and 2001, respectively. Such
amounts are recorded in general and administrative expense in the consolidated
statement of operations. In addition, the Company has paid approximately
$682,000, $979,000 and $805,000 of costs associated with food and beverages, and
valet services, and such amounts are recorded in casino expense in the Company's
consolidated statements of operations, for the years 2003, 2002 and 2001,
respectively. 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 allocated net losses are approximately
$2.4 million, $2.4 million and $2.8 million for the years 2003, 2002 and 2001,
respectively.
During January 2004, BHR received a property tax reassessment notice
that increased the valuation of BHR's real property in Lake County, Indiana
where BHR is located. The valuation assessments were part of a countywide
reassessment, and these reassessments are to be effective as of March 1, 2002.
The reassessment was a result of a 1998 Indiana Supreme Court ruling that
declared the method of property assessment previously used was unconstitutional.
The reassessments throughout the county have created significant uncertainty for
all property owners in Lake County, including BHR, and there are various appeals
occurring on the matter, including those made by BHR, which remain pending.
Although the valuation was received by BHR, the tax-rate has not been set by the
State of Indiana for Lake County and BHR has not received a tax bill. Until the
assessment process is finalized and tax rates issued, BHR will not receive a
bill. Instead, BHR has followed administrative policies of the taxing
authorities and has paid Lake County an amount equal to 70% of its 2001 property
tax liability, with the balance due (and an increase, if any) for 2002 and 2003
at the time tax rates are formally established. Accordingly, it is only possible
to estimate the remaining tax liability for BHR using information that is
currently available, and such estimate is subject to significant uncertainty.
BHR, within its financial statements, has accrued the retroactive tax
liability by taking the new assessed valuations for BHR, multiplied by the last
legislatively issued tax rate for Lake County. As a result, BHR has accrued an
additional $4.0 million of retroactive property taxes of which one half, or $2.0
million, has been established by BHR as a receivable from Majestic Star as of
December 31, 2003. This approach to recording an accrual for property taxes
differs from the treatment used by the Company in preparing its own financial
statements for the year ended December 31, 2003. As more fully disclosed in Note
15, the Company has consulted with legal counsel and tax experts, and has
determined that the Company's potential share of BHR's property tax liability is
likely to range from $0.7 million to $2.7 million. The lower end of the range is
based on the Company's share of BHR'S property tax liability in prior years,
plus a factor for inflation (to take into consideration increases in operating
costs of the County), and less payments already made to Lake County. The upper
end of the range is the amount calculated by BHR. Given the current status of
the County's tax rate-setting process, there is no amount in the range of
potential tax liabilities that is a better estimate than any other amount in the
range. Therefore, in accordance with Financial Accounting Standard No. 5,
"Accounting for Contingencies," the Company has recorded a payable to BHR at the
low end of the likely range, or approximately $0.7 million. As more information
about tax rates becomes available, or the status of assessment appeals change,
the Company will adjust its accrual for amounts due to BHR. Such adjustments
could result in a material negative adjustment to earnings in future periods.
F-19
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following represents selected financial information for BHR as of
December 31, 2003 and 2002 and for each of the three years in the period ended
December 31, 2003:
December 31, 2003 December 31, 2002
----------------- -----------------
BALANCE SHEET
Cash $ 82,639 $ 50,505
Current assets excluding cash 5,013,217 391,030
Property, plant and equipment, net 61,881,975 65,616,042
Other assets 101,248 108,414
----------- -----------
Total assets 67,079,079 66,165,991
=========== ===========
Current liabilities 7,223,402 2,499,369
Capital lease obligations, net of current portion 388,491 -
----------- -----------
Total liabilities 7,611,893 2,499,369
Total members' equity 59,467,186 63,666,622
----------- -----------
Total liabilities and members' equity $67,079,079 $66,165,991
=========== ===========
The Majestic Star Casino, LLC - member's equity $29,733,593 $31,833,311
=========== ===========
Years Ended December 31,
------------------------
STATEMENTS OF INCOME 2003 2002 2001
---- ---- ----
Gross revenue $ 18,434,627 $ 16,095,365 $ 16,468,581
Operating loss $ (4,785,459) $ (4,794,560) $ (5,981,620)
Net loss $ (4,790,868) $ (4,848,863) $ (5,595,475)
11. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 2003 and 2002 were comprised of:
As of December 31,
-------------------------
2003 2002
----------- -----------
Property/franchise taxes $ 3,849,464 $ 2,625,958
Gaming taxes 2,390,077 1,295,627
Other taxes 185,676 348,872
Chip & token liability 1,270,260 773,091
Accrued trade payables 2,232,981 1,563,904
Professional fees 235,141 241,317
Accrued rent 656,489 58,542
Other 775,577 1,309,943
----------- -----------
$11,595,665 $ 8,217,254
=========== ===========
F-20
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. LONG - TERM DEBT
Long-term debt outstanding at December 31 is as follows: 2003 2002
------------- -----------
$260,000,000 senior secured notes, bearing interest of 9 1/2% payable on
October 15 and April 15 beginning April 15, 2004 and due October 15, 2010;
collateralized by The Majestic Star Casino, LLC's equity interests, The
Majestic Star Casino, LLC's equity interests in the subsidiary guarantors, and
substantially all of The Majestic Star Casino, LLC's and The Majestic Star
Casino, LLC's subsidiary guarantors' assets, other than certain excluded assets. $ 260,000,000 $ -
$80,000,000 credit facility which expires in October 2007, bears interest at
the Company's choice of LIBOR plus a range of 3.00% to 3.50% or Wells Fargo
Foothill, Inc.'s base rate plus a range of 0.25% to 0.75%. The range is based
on the Company's EBITDA (as defined in the loan and security agreement). The
credit facility is secured by The Majestic Star Casino, LLC's equity interests,
The Majestic Star Casino, LLC's equity interests in the subsidiary guarantors,
and substantially all of The Majestic Star Casino, LLC's and The Majestic Star
Casino, LLC's subsidiary guarantors' assets, other than the excluded assets. 25,958,493 -
$16,290,000 unsecured notes payable, net of unamortized discount of $533,169 at
December 31, 2003 and $151,767,000 senior secured notes payable, net of
unamortized discount of $6,235,552 at December 31, 2002. During 2003, Majestic
Investor Holdings purchased 89.3% of its 11.653% senior secured notes. In
addition, in 2002, Majestic Investor Holdings purchased $865,000 of its senior
secured notes. Majestic Investor Holdings pays interest at a rate of 11.653% on
the notes. Interest is paid semi-annually on May 31 and November 30, with a
final payment of principal and interest due on November 30, 2007. On October 7,
2003, the notes became unsecured obligations of Majestic Investor Holdings. 15,756,831 145,531,448
$130,000,000 senior secured notes, net of unamortized discount of $1,120,229
at December 31, 2002. During 2003, The Majestic Star Casino, LLC redeemed
and retired all of its 10 7/8% senior secured notes. - 128,879,771
Equipment and software financing payable at Barden Nevada Gaming, LLC including
related use taxes; collateralized by gaming equipment; interest rates from 7.5%
to 12.0%; due in aggregate monthly installments of $13,526 with varying
maturity dates through 2005. These debt obligations were spun-off to BDI. - 249,150
------------- -------------
301,715,324 274,660,369
Less current maturities - (134,084)
------------- -------------
Long-term debt, net of current maturities $ 301,715,324 $ 274,526,285
============= =============
The scheduled maturities of long-term debt are as follows:
For the Years Ended December 31, (In thousands)
2004 -
2005 -
2006 -
2007 $ 41,715
2008 -
Thereafter 260,000
----------
$ 301,715
==========
REFINANCING OF DEBT
On August 26, 2003, The Majestic Star Casino, LLC commenced a cash tender
offer and consent
F-21
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
solicitation at a price of 105.438% for its 10 7/8% notes. The solicitation of
consents sought approval for amendments to the Indenture governing the 10 7/8%
notes (the "Majestic Indenture") in order to (i) eliminate substantially all
restrictive covenants and (ii) to release the liens on the collateral that
secured the 10 7/8% notes. Upon expiration of the consent solicitation on
September 25, 2003, $74.6 million or 57.4% of the aggregate outstanding
principal amount of the 10 7/8% notes had been tendered. The Majestic Star
Casino, LLC funded the payment of the tendered 10 7/8% notes, along with accrued
and unpaid interest, from the proceeds of the issuance of the 9 1/2% senior
secured notes, which closed on October 7, 2003. Also, on October 7, 2003, The
Majestic Star Casino, LLC called the remaining $55.4 million outstanding
principal amount of the 10 7/8% notes which were redeemed on November 6, 2003 at
a price of 105.438%, plus accrued and unpaid interest.
Also, on August 26, 2003, Majestic Investor Holdings commenced a cash
tender offer and consent solicitation at a price of 109.0% for its 11.653%
notes. The solicitation of consents sought approval for amendments to the
Indenture governing the 11.653% notes (the "Majestic Investor Holdings
Indenture") in order to (i) eliminate substantially all restrictive covenants,
(ii) terminate the guarantees of the restricted subsidiaries of Majestic
Investor Holdings and (iii) release the liens on the collateral that secured the
11.653% notes. Upon expiration of the consent solicitation on September 25,
2003, $135.5 million or 89.3% of the aggregate outstanding principal amount of
the 11.653% notes had been tendered. The Company funded the payment of the
tendered 11.653% notes, along with accrued and unpaid interest, from the
proceeds of the issuance of the 9 1/2% senior secured notes, which closed on
October 7, 2003. After the expiration of the offer and consent solicitation
related to the 11.653% notes, Majestic Investor Holdings has $16.3 million in
11.653% unsecured notes still outstanding. The 11.653% notes are now unsecured
obligations of Majestic Investor Holdings.
Upon the closing of the 9 1/2% senior secured notes, the Company used
approximately $153.2 million to purchase 89.3% of its 11.653% notes, along with
accrued and unpaid interest, and approximately $80.9 million to redeem 57.4% of
its 10 7/8% notes, along with accrued and unpaid interest. $4.2 million was used
for expenses related to the 9 1/2% senior secured notes offering as well as
expenses related to the establishment of a new $80 million Credit Facility.
Approximately $21.7 million from the 9 1/2% senior secured notes plus $28.0
million from the $80 million Credit Facility, along with the Company's cash were
used to redeem the remaining 10 7/8% notes on November 6, 2003. The Company
recognized a loss on the retirement of debt of $32.0 million on October 7, 2003.
The loss on the retirement is comprised of premiums on the offers to purchase,
the write-off of deferred issuance costs and the write-off of original issuance
discount on the 10 7/8% notes and 11.653% notes which amounts are reflected in
the computation of net income for the year ended December 31, 2003.
The 9 1/2% senior secured notes bear interest at a fixed annual rate of
9.5% payable on April 15 and October 15 of each year, commencing April 15, 2004.
The 9 1/2% senior secured notes will mature on October 15, 2010. The 9 1/2%
senior secured notes are secured by a pledge of substantially all of the
Company's current and future assets, other than the assets of Fitzgeralds Las
Vegas (which became an unrestricted and non-guarantor subsidiary effective
October 7, 2003 and was subsequently spun-off to BDI on December 31, 2003) and
certain other excluded assets. The 9 1/2% senior secured notes are also
collateralized by The Majestic Star Casino, LLC's equity interests and the
equity interests in the subsidiary guarantors.
Prior to October 15, 2006, the Company may redeem up to 35% of the
original aggregate principal amount of the 9 1/2% senior secured notes at a
redemption price of 109.5% of the principal amount of the notes, plus accrued
and unpaid interest, with the net cash proceeds of certain equity offerings made
by the Company. On or after October 15, 2007, the Company may redeem all or a
portion of the 9 1/2% senior secured notes at a price of 104.75%, declining
thereafter to 100.0% after October 15, 2009.
Upon a Change of Control as defined in the Indenture governing the 9 1/2%
senior secured notes (the "9 1/2% Indenture"), the Company will be required to
offer to repurchase all of the outstanding 9 1/2% senior secured notes at a cash
price equal to 101% of the principal amount thereof, plus accrued and
F-22
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unpaid interest, to the date of repurchase.
The 9 1/2% Indenture contains covenants which, among other things,
restrict the Company's ability to (i) make certain payments to, or investments
in, third parties; (ii) incur additional indebtedness or liens on any assets;
(iii) enter into transactions with affiliates; and (iv) sell any restricted
subsidiaries' assets.
Concurrently with the closing of the 9 1/2% senior secured notes, the
Company established the $80 million Credit Facility with Wells Fargo Foothill,
Inc., and terminated two existing credit facilities with Wells Fargo Foothill,
Inc. Subject to certain exceptions, the $80 million Credit Facility is secured
by a pledge of our equity and the equity of our subsidiary guarantors and a
first priority lien on substantially all of the assets of the Company except the
assets of Fitzgeralds Las Vegas. Borrowings under the $80 million Credit
Facility bear interest at the Company's choice of LIBOR plus a range of 3.00% to
3.50% or Wells Fargo Foothill, Inc.'s base rate plus a range of 0.25% to 0.75%.
The range is based on the Company's EBITDA (as defined in the loan and security
agreement). The Wells Fargo Foothill, Inc. base rate approximates the prime
rate. Full payment of any outstanding balance under the $80 million Credit
Facility is due upon maturity of the agreement in October 2007. The credit
agreement includes covenants, which among other things, (i) require the Company
to maintain minimum EBITDA (as defined in the loan and security agreement) and
Interest Coverage Ratios (as defined in the covenant), which increase
periodically, (ii) restrict the Company's ability to incur, assume, or guarantee
any indebtedness, (iii) restrict the Company's ability to transfer or sell
assets, including the equity interest of the restricted subsidiaries and (iv)
limit on an annual basis capital expenditures.
At December 31, 2003, the Company had available borrowing capacity under
the $80.0 million Credit Facility of approximately $54.0 million. This amount
was reduced to $41.0 million at March 30, 2004. The reduction is primarily the
result of the amounts borrowed in part to pay for the GNC Land acquisition. See
Note 16.
INTERCREDITOR AGREEMENTS
In connection with the Company entering into the $80 million Credit
Facility, the trustee under the 9 1/2% Indenture (as collateral agent) entered
into an intercreditor agreement with Wells Fargo Foothill, Inc., the agent under
the $80 million Credit Facility. The intercreditor agreement provides for the
contractual subordination of the liens on the collateral securing the 9 1/2%
senior secured notes (and the related guarantees) to the liens on the collateral
securing the indebtedness under the $80 million Credit Facility.
The intercreditor agreement, among other things, limits the trustee's
rights in an event of default under the 9 1/2% senior secured notes. Under the
intercreditor agreement, if the 9 1/2% senior secured notes become due and
payable prior to the stated maturity or are not paid in full at the stated
maturity at a time during which there is indebtedness outstanding under the $80
million Credit Facility, the trustee will not have the right to foreclose upon
the collateral unless and until the lenders under the $80 million Credit
Facility fail to take steps to exercise remedies with respect to or in
connection with the collateral within up to 190 days following notice to such
lenders of the occurrence of an event of default under the 9 1/2% Indenture. In
addition, the intercreditor agreement prevents the trustee and the holders of
the 9 1/2% senior secured notes from pursuing certain remedies with respect to
the collateral in an insolvency proceeding. The intercreditor agreement also
provides that the net proceeds from the sale of the collateral will first be
applied to repay indebtedness outstanding under the $80 million Credit Facility
and thereafter to the holders of the 9 1/2% senior secured notes.
OLD MAJESTIC STAR AND MAJESTIC INVESTOR HOLDINGS NOTES
At December 31, 2003, The Majestic Star Casino, LLC, had no debt
outstanding under its 10 7/8% notes, compared to debt of $128.9 million, net of
unamortized discount of $1.1 million at December 31, 2002. The 10 7/8% notes
bore interest at a fixed rate of 10 7/8% per annum payable January 1 and July 1
each year. As explained above, these notes were fully redeemed and retired in
2003. At December 31, 2003, Majestic Investor Holdings, had debt outstanding of
$15.8 million related to its 11.653% notes, net
F-23
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of unamortized discount of $0.5 million. This compares to debt of $145.5
million, net of unamortized discount of $6.3 million at December 31, 2002.
Approximately $135.5 million of the 11.653% notes were purchased and retired as
previously explained. The 11.653% notes bear interest at a fixed rate of 11.653%
per annum payable May 31 and November 30 each year. The 11.653% notes will
mature on November 30, 2007. Majestic Investor Holdings (nor any other
subsidiary of the Company) no longer guarantees the notes and the liens on the
collateral have been released.
In 2002, Majestic Investor Holdings was required to pay liquidated damages
related to the unregistered 11.653% notes. The registration statement was not
declared effective by the date required pursuant to the registration rights
agreement. Majestic Investor Holdings paid liquidated damages of $176,000 during
2002.
During the fourth quarter of 2002, Majestic Investor Holdings purchased
for $759,000, plus accrued interest, its 11.653% notes with a face value of
$865,000. The notes, net of unamortized original issue discount, were being
carried at a value of $828,000; the resulting gain was $69,000.
OLD CREDIT FACILITIES
At December 31, 2002, The Majestic Star Casino, LLC had a $20.0 million
credit facility (the "Majestic Credit Facility") and Majestic Investor Holdings
had a $15.0 million credit facility (the "Majestic Investor Holdings Credit
Facility"). These credit facilities were replaced during 2003 with the $80
million Credit Facility. There were no borrowings on the Majestic Credit
Facility or the Majestic Investor Holdings Credit Facility as of December 31,
2002 or on the date that both facilities were terminated, October 7, 2003.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying value and estimated fair value
as of December 31, 2003 of the Company's financial instruments. (Refer to notes
2 and 12).
Carrying Estimated
Value Fair Value
------------ ------------
Assets:
Cash and equivalents $ 22,058,016 $ 22,058,016
Restricted Cash $ 1,400,000 $ 1,400,000
Liabilities:
Long-term debt and line of credit borrowings $301,715,324 $317,315,324
While our $260.0 million of 9 1/2% senior secured notes are not actively
traded, we believe, based upon information received from brokers, that our
$260.0 million of 9 1/2% senior secured notes were priced at 106% of face value
for a value of $275.6 million at December 31, 2003. The $15.8 million of 11.653%
notes, net of original issue discount of $0.5 million, to our knowledge are not
publicly traded. We believe the fair value of this debt to be $15.8 million
since these notes are no longer secured by the equity interests and assets of
Majestic Investor Holdings and its restricted subsidiaries.
14. SAVINGS PLAN
The Company contributes to a defined contribution plan, which provides for
contributions in accordance with the plan document. The plan is available to
certain employees with at least one year of service. The Company contributes a
matching contribution up to a maximum of 3% of an employee's salary limited to a
specified dollar amount as stated in the plan document. The Company's
contributions to the plan amounted to $1.0 million, $1.2 million and $0.4
million during 2003, 2002 and 2001, respectively. The $0.8 million increase
between 2002 and 2001 is directly related to the acquisition of the Fitzgeralds
properties on December 6, 2001. There were no matching contributions made to the
Fitzgerald employees in 2001. The matching contribution made during 2002 is
inclusive of $185,000 in contributions made to the employees of Fitzgeralds Las
Vegas, our discontinued operation. The 2003 matching contributions do not
include matching contributions made by our discontinued operation.
F-24
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has operating leases that cover various office and gaming
equipment. Future minimum lease payments for operating leases with initial terms
in excess of one year as of December 31, 2003 are as follows:
For the Years Ended December 31,
2004 $ 1,643,402
2005 1,563,229
2006 1,480,125
2007 1,480,125
2008 1,478,605
Thereafter 9,467,982
-------------
$ 17,113,468
=============
Rent expense for the years ended December 31, 2003, 2002 and 2001 was $8.0
million, $7.9 million and $3.6 million, respectively.
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, results of operations or cash
flows.
In March 1998, a complaint was filed in the Lake County Superior Court in
East Chicago, Indiana, against the BHR Joint Venture, Trump and the Company. The
plaintiff, a former employee of the Company, claimed to have been assaulted in
the BHR Joint Venture parking lot in June 1997 and requested compensatory and
punitive damages totaling approximately $11.0 million. The suit alleged that
Trump and the Company failed to provide adequate security to prevent assaults.
On March 2, 2004, the parties agreed to settle the lawsuit for $57,500. Majestic
Star is responsible for $7,500, with the balance split between Trump and the BHR
Joint Venture. The Company had adequately reserved for this settlement at
December 31, 2003.
In March 2000, the Company was issued a notice of audit findings, and in
May 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 $554,000 plus accrued interest. In
February 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 $2.0 million, plus accrued interest.
The Company believes that the position of the Indiana Department of Revenue is
not valid, and the Company has filed administrative protests and demands for a
hearing with the Department of Revenue to protect its rights with respect to all
tax years. The Company is aware that other casino operators have also filed
similar protests and demands. However, it is too early to determine the outcome
of these contested tax assessments and, accordingly, the accompanying financial
statements do not include any accrual relating to their contingent liability.
In December 2002, a complaint was filed in the U.S. District Court for the
Northern District of
F-25
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mississippi against Barden Mississippi and the former owner of Fitzgeralds
Tunica, alleging violation of Title VII of the Civil Rights Act of 1964 and
violation of 42 U.S.C. Section 1981, as well as certain other state law claims.
The plaintiff is seeking back pay, front pay, compensatory damages and punitive
damages in excess of $3.5 million. The Company is vigorously defending the
lawsuit. However, it is too early to determine the outcome of this matter and
the effect, if any, on the Company's financial position and results of
operations and, accordingly, the accompanying financial statements do not
include any accrual relating to the contingent liability.
In June 2003, a complaint was filed in the U.S. District Court for the
Northern District of Mississippi against several Tunica-area casino owners and
operators, including Barden Mississippi. The plaintiffs claim the defendants
conspired to agree not to enter into any advertising or other agreements with
the plaintiffs, in violation of federal and state antitrust laws, as well as
various other tort and contract claims. The plaintiffs are seeking treble,
compensatory and punitive damages totaling approximately $33.0 million, plus
interest and attorney's fees. The Company intends to vigorously defend against
this lawsuit. However, it is too early to determine the outcome and the effect,
if any, on the Company's financial position and results of operations and,
accordingly, the accompanying financial statements do not include any accrual
relating to this contingent liability.
PROPERTY TAXES
During January 2004, Majestic Star received a property tax reassessment
notice that increased the valuation of its riverboat vessel in Lake County,
Indiana where Majestic Star is located. The valuation assessment was part of a
countywide reassessment, and these reassessments are to be effective as of March
1, 2002. The reassessment was a result of a 1998 Indiana Supreme Court ruling
that declared the method of property assessment previously used was
unconstitutional. The reassessments throughout the county have created
significant uncertainty for all property owners in Lake County, including
Majestic Star, and there are various appeals occurring on the matter, including
those made by Majestic Star, which remain pending. Although an assessed
valuation was received by Majestic Star, the tax-rate has not been set by the
State of Indiana for Lake County and Majestic Star has not received a tax bill.
Until the assessment process is finalized and tax rates issued, Majestic Star
will not receive a tax bill. Instead, Majestic Star has followed administrative
policies of the taxing authorities and has paid Lake County an amount equal to
70% of its 2001 property tax liability, with the balance due (and an increase,
if any) for 2002 and 2003 at the time tax rates are formally established.
Accordingly, it is only possible to estimate the remaining property tax
liability for Majestic Star using information that is currently available, and
such estimate is subject to significant uncertainty.
As more fully described in Note 10, the Company's joint venture with
Trump, BHR, also has received a notice of an increase in assessed value of its
real property. Similarly BHPA, the owner of a parking garage for which Majestic
Star is a lessee under an operating lease, has received a notice reflecting
assessed values. Majestic Star, through the joint venture agreement and the
operating lease agreement, would be liable for its portion of BHR's and BHPA's
property tax liabilities.
The Company has met with the third party hired by Lake County, which
conducted the assessments of the Majestic Star vessel and the parking garage
(the "Assessor"). Management of BHR has similarly met with the Assessor
regarding the assessment of the joint venture's real property. While any change
in assessed values is subject to State of Indiana approval, tentatively, it
appears that the value of Majestic Star's vessel will be reduced to an amount
that approximates its previous assessed valuation due to the misapplication by
the Assessor of property tax rules affecting riverboat vessels. In addition, it
appears that the Assessor is considering a lower assessed valuation than that
previously issued to BHPA and BHR, based on information provided by Majestic
Star and BHR regarding the actual purchase price of the property, recent
appraisals and land sales activity.
The Company has consulted with legal counsel and tax experts, and
believes that its liability for property taxes (including amounts due directly
by Majestic Star and indirectly through BHR and BHPA) is likely to range from
approximately $4.2 million to approximately $11.6 million. The lower end of the
range is based on the Company's property tax liabilities for these entities in
prior years (or similar property in the case of the new BHPA parking garage),
plus a factor for inflation (to take into consideration increases in operating
costs of the County), and less payments already made to Lake County. The upper
end of the range is the amount calculated by taking the current assessed values
(ignoring the likelihood of reductions through pending appeals), multiplied by
the last legislatively issued tax rate for Lake County. Management believes it
is remote that the liability would reach the upper end of the range. However,
since the State of Indiana has yet to determine a tax rate for Lake County,
Indiana, there is no amount in the range of potential property tax liabilities
that is a better estimate than any other amount an the range at the present
time. Therefore, in accordance with Financial Accounting Standard No. 5,
"Accounting for Contingencies," the Company has established an accrual for real
property taxes on the Majestic Star vessel, and its proportionate share of
liability for BHPA and BHR, at the low end of the likely range, or approximately
$4.2 million.
Depending on the outcome of the recent meetings with the Assessor, the
Company will vigorously pursue the adjustment of what it believes to be
incorrectly assessed valuations. However, no assurance can be given regarding
the timing or outcome of any resolution of these matters. As more information
about tax rates becomes available, the Company will adjust its accrual for
property taxes. If assessed valuations are not reduced or tax rates issued are
unfavorable to Majestic Star, then Majestic Star could be required to increase
its accrual for property taxes which could result in a material negative
adjustment to earnings in future periods.
F-26
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GAMING REGULATIONS
The ownership and operation of riverboat gaming operations in Indiana are
subject to strict state regulation under the Riverboat Gambling Act (the "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 over all
persons on riverboats where gaming operations are conducted. The IGC is
empowered to regulate a wide variety of gaming and non-gaming related
activities, including the licensing of suppliers to, and employees at, riverboat
gaming operations and to approve the form of entity qualifiers and intermediary
and holding companies. 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 proposed 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 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. As discussed below in
"Retroactive Dockside Tax," 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, but, as discussed below
in "Retroactive Dockside Tax," has been modified. 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.
Effective July 1, 2003, a licensed riverboat owner who implements flexible
scheduling can conduct gambling operations for up to 24 hours per day upon
receiving IGC approval. Under prior IGC rules, riverboat casinos were required
to close for three hours daily. The Majestic Star Casino's plan for 24-Hour
Dockside Gaming was submitted to the IGC and approved. The Majestic Star Casino
began operating on 24-hour basis on July 12, 2003.
In June 2003, the Indiana legislature clarified the start date of the
graduated wagering tax structure associated with the implementation of dockside
gaming. Previously, the start date for the computation of cumulative adjusted
gross receipts from gaming revenues ("AGR") under the graduated tax structure
was August 1, 2002 for seven riverboat casinos that implemented dockside gaming
with flexible scheduling on that date; and August 5, 2002, for three riverboat
casinos that implemented dockside gaming with flexible scheduling on that date.
The Indiana legislature's clarification requires riverboat casinos to begin
recognizing gaming tax liabilities for cumulative AGR under the graduated tax
structure starting on July 1, 2002 irrespective of when they implemented
dockside gaming. In addition, the State of Indiana's position is that no credit
be provided to the casino riverboats for taxes paid at the 22.5% rate. As a
result of the "Retroactive Dockside Tax," the Indiana Department of Revenue has
assessed an additional $2.1 million of gaming taxes due from the Majestic Star
Casino. The Majestic Star Casino took a charge in June 2003 for this assessment.
The $2.1 million assessment is required to be paid in two equal installments on
July 1, 2003 and July 1, 2004. The Majestic Star Casino paid 50% of the $2.1
million assessment to Indiana Department of Revenue on July 1, 2003.
F-27
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The ownership and operation of our casino gaming facilities in Mississippi
and Colorado are also subject to various state and local regulations in the
jurisdictions where they are located. 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 which is empowered to license, implement, regulate and supervise the
conduct of limited gaming. Our Colorado operations are also subject to the
Colorado Liquor Code and the state and local liquor licensing authorities.
The Company's directors, officers, managers and key employees are required
to hold individual licenses. These requirements vary from jurisdiction to
jurisdiction. Licenses and permits for gaming operations and for 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
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. Both the
Company and Trump, each advanced prepaid rent of $9.7 million. The Company is
amortizing its prepaid rent over the term of the lease agreement. The Company
and Trump have each entered into parallel operating lease agreements with BHPA,
each having a term until December 31, 2018. The rent payable under the leases is
intended to service the debt incurred by BHPA to construct the parking garage.
The operating lease agreement calls for the Company and Trump 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. Since the inception of the
lease neither the Company nor Trump have had to make a payment equal to 100% of
BHPA's debt service cost.
EMPLOYMENT AGREEMENTS
Mr. Don H. Barden serves as the Company's Manager, Chairman, President and
Chief Executive Officer and currently receives annual compensation of $425,000
as an employee, pursuant to a letter agreement dated October 22, 2001 with The
Majestic Star Casino, LLC. The Company pays life insurance premiums on policies
with a value of $5.0 million and provides Mr. Barden with an auto allowance.
Mr. Michael E. Kelly serves as the Company's Manager, Executive Vice
President and Chief Operating Officer and Secretary pursuant to a three-year
employment agreement with The Majestic Star
F-28
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Casino, LLC dated October 22, 2001. Under this agreement, Mr. Kelly will receive
base compensation of $400,000 per year and can also earn annual incentive
compensation based upon his performance and the consolidated performance of the
Company. In addition to such compensation, Mr. Kelly is entitled to term life
insurance in an amount equal to $2.5 million and other customary employee
benefits, including participation in The Majestic Star Casino, LLC's 401(k)
plan, together with a $100,000 signing bonus and an interest-free loan in the
amount of $200,000 to be repaid in three equal annual installments. Mr. Kelly is
also entitled to additional compensation, upon a change in control, equal to his
base salary and incentive compensation for the remainder of the term of the
agreement, plus 12 months thereafter. Mr. Kelly's employment agreement contains
certain non-competition provisions with a duration of 12 months following
termination of his employment.
Mr. Bennett serves as our Vice President and Chief Financial Officer
pursuant to a two-year employment agreement dated October 21, 2002. Under this
agreement, Mr. Bennett will receive base compensation of $250,000, subject to
annual reviews, and can also earn bonuses subject to the discretion of the
President and Chief Executive Officer and Executive Vice President and Chief
Operating Officer. In addition to such compensation, Mr. Bennett is entitled to
term life insurance in an amount equal to $1.0 million and other customary
employee benefits, including participation in the Company's 401(k) plan and
reimbursement of relocation expenses. Mr. Bennett is also entitled to additional
compensation upon a change in control, equal to the remaining amount due under
his employment agreement plus six months of his annual salary following the
expiration of his current employment agreement. Mr. Bennett's employment
agreement contains certain non-competition provisions with a duration of 12
months if Mr. Bennett should voluntarily terminate his employment within 18
months of the commencement date of his employment agreement.
The amounts payable pursuant to the agreements with Messrs. Barden, Kelly,
and Bennett are the responsibility of the Company. As indicated in Note 16, the
Company entered into an Expense Reimbursement/Sharing Agreement with Investor
Holdings whereby Investor Holdings reimbursed the Company for a specified
percentage of expenses paid by the Company for Investor Holdings' corporate
overhead. The Expense Reimbursement/Sharing Agreement was in place for the years
ended December 31, 2001 and 2002, but was terminated effective with the
refinancing on October 7, 2003.
LETTER OF CREDIT/SURETY BOND
In May 1996, the Company was required by the City of Gary, to maintain a
Surety Bond in the amount of $12.5 million to guarantee the remaining $10.0
million of its off-site development obligation and $2.5 million to satisfy state
and local regulatory obligations. The Surety Bond was secured by a $3.5 million
letter of credit issued by a bank, which was collateralized by $3.6 million in
cash. In September 2000, the Company met its development obligation,
concurrently the Surety Bond was reduced from $12.5 million to $2.5 million and
the bank released $1.0 million of the cash collateral. In March 2001, the
Company replaced its existing Surety Bond with a new $2.5 million unsecured
Surety Bond. In conjunction with the release of the original Surety Bond, the
letter of credit was canceled and the remaining $2.6 million of cash collateral
was released to the Company.
Effective August 23, 2001, in accordance with an order of the Indiana
Gaming Commission, the Company's riverboat owner's license was renewed subject
to certain conditions. Pursuant to the license renewal, the Company was required
to post a bond in the amount of $1.0 million to secure its regulatory
obligations. The $2.5 million bond previously posted was released on the
effective date. The $1.0 million bond has yet to be provided. The Indiana Gaming
Commission is currently reviewing language to be included in the bond. When the
language is finalized, the Company will post the new bond.
During the year ended December 31, 2002, a $250,000 letter of credit was
issued to secure payment
F-29
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of self-insured workers compensation claims at Fitzgeralds Black Hawk and
Fitzgeralds Tunica. In order to collateralize the letter of credit the bank,
through which the letter of credit was issued, restricted $250,000 of Investor
Holdings' cash in bank. In 2003, Fitzgeralds Las Vegas joined the self-insured
workers compensation program. When this occurred, Investor Holdings was required
to increase its letter of credit to $500,000. As collateral, the bank increased
restricted cash by an additional $250,000.
As part of a self insured workers compensation program at Majestic Star,
Majestic Star was required to secure a letter of credit in the amount of
$900,000 to secure payment of claims. To collateralize the letter of credit, the
bank required that Majestic Star purchase a $900,000 certificate of deposit.
Such certificate of deposit is recorded in restricted cash on the Company's
consolidated balance sheet.
The State of Mississippi has required Fitzgeralds Tunica to post surety
bonds as security for current and future sales and gaming revenue tax
obligations. Fitzgeralds Tunica has four surety bonds: a $600,000 bond in place
with the Mississippi State Tax Commission and three $5,000 bonds with the
Mississippi Alcoholic Beverage Control. These surety bonds are secured only by
personal guaranties of Don H. Barden. If Mr. Barden is required to make payments
to the bonding companies as a result of the guaranties, the Company will be
obligated to reimburse Mr. Barden for any such payments.
16. RELATED PARTY TRANSACTIONS
LOANS TO RELATED PARTIES
In December 2001, Majestic Star made a $300,000 employee loan to Mr.
Barden. This loan bore interest at a rate of 7% per annum and was paid in full
with interest in April 2003.
In January 2002, Majestic Star made a $200,000 employee loan to Mr. Kelly.
This loan bears no interest and is due and payable in full in January 2005. In
both March 2003 and March 2004, Mr. Kelly paid $67,000 in accordance with the
loan agreement. As of March 11, 2004 the outstanding balance was $66,000.
In December 2001, Majestic Investor Holdings issued a $700,000 note to
BDI. The Note bore interest at a rate of 7% per annum and was paid in full, with
interest, in March 2003.
TRANSACTIONS BY OR WITH AFFILIATES
On February 11, 2004, we acquired approximately 170 acres of land located
adjacent to the Buffington Harbor gaming complex from an affiliate of ours (the
"GNC Land"). The purchase price for the GNC Land was not greater than eighty
percent (80%) of the appraised value as evidenced by the written appraisal of an
independent appraiser dated not more than ninety (90) days prior to the closing.
The purchase price was approximately $21.9 million (net of a deposit of $2.0
million and a credit of $1.5 million related to the Naming Rights Agreement,
which was terminated).
In March 2003, Majestic Star purchased for $1.0 million, net of prorated
taxes plus closing costs, approximately 50 acres of land and a building adjacent
to the Buffington Harbor gaming complex from an affiliated company. The purchase
price was based on an independent third-party appraisal.
During the twelve months ended December 31, 2003, Majestic Star made
distributions totaling $1.7 million to BDI pursuant to the Majestic Star Manager
Agreement and the new Manager Agreement related to the fourth quarter of 2002
and the first three quarters of 2003. Majestic Star made distributions of $3.0
million and $0.3 million for the twelve months ended December 31, 2002 and 2001,
respectively, related to the Majestic Star Manager Agreement. See "Manager
Agreements."
F-30
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the twelve months ended December 31, 2003, Majestic Investor
Holdings made distributions totaling $3.3 million to BDI pursuant to the
Investor Holdings Manager Agreement and the new Manager Agreement related to the
fourth quarter of 2002 and the first three quarters of 2003. Majestic Investor
Holdings made distributions of $2.5 million and for the twelve months ended
December 31, 2002 related to the Investor Holdings Manager Agreement. See
"Manager Agreements."
In April 2003, Majestic Star, in accordance with the indenture relating to
the 10 7/8% notes, made a $710,000 distribution to its sole member for income
taxes. The calculation for the distribution was based on Majestic Star's net
income during the three-month period ended March 31, 2003.
In April 2003, Majestic Investor Holdings, in accordance with the indenture
relating to the 11.653% notes, made a $338,000 distribution to its sole
beneficial owner for income taxes. The calculation for the distribution was
based on Majestic Investor Holdings' net income during the three-month period
ended March 31, 2003.
MANAGER AGREEMENTS
On October 7, 2003, concurrently with the consummation of the offering of
the 9 1/2% senior secured notes, the Company entered into a new Manager
Agreement with BDI. Distributions to BDI under the new Manager Agreement are
limited by the terms of the 9 1/2% Indenture and by the terms of the $80.0
million Credit Facility. The distributions for each fiscal quarter may not
exceed 1% of consolidated net revenue and 5% of the Company's consolidated cash
flow (as defined in the 9 1/2% Indenture and the loan and security agreement for
the $80.0 million Credit Facility) for the immediately preceding fiscal quarter.
The new Manager Agreement supercedes the Majestic Star Manager Agreement and the
Majestic Investor Holdings Manager Agreement described below.
The Company makes distributions to BDI as a return on the investment
capital contributed to us by BDI, for corporate oversight and governance
services and as an inducement for Mr. Barden, the sole stockholder of BDI, to
continue using his visibility in the gaming industry to promote us. The
distributions are subordinated to the payment in full of principal, interest,
and liquidated damages, if any, then due on the 9 1/2% senior secured notes and
to obligations under the $80.0 million Credit Facility and may not be paid if
the Company does not meet certain financial ratios as provided in the indenture.
In June 1999, Majestic Star entered into a LLC Manager Agreement with BDI
to provide for, among other things, BDI to act as our manager (the "Majestic
Star Manager Agreement"). Distributions to BDI under the Majestic Star Manager
Agreement were limited under the terms of the Majestic Indenture. The
distributions for each fiscal quarter could not exceed 5% of Majestic Star's
consolidated cash flow (as defined in the Majestic Indenture) for the
immediately preceding fiscal quarter and could not be paid if Majestic Star was
in default under the Majestic Indenture or if Majestic Star did not meet certain
financial ratios as provided in such indenture.
During the nine months ended September 30, 2003, Majestic Star Casino made
distributions totaling $1.0 million to BDI in accordance with the Majestic Star
Manager Agreement, related to the fourth quarter of 2002 and the six months
ended June 30, 2003.
In December 2001, Majestic Investor Holdings entered into a LLC Manager
Agreement with BDI to provide for, among other things, BDI to act as our manager
(the "Majestic Investor Holdings Manager Agreement"). Distributions to BDI under
the Majestic Investor Holdings Manager Agreement were limited under the terms of
the Majestic Investor Holdings Indenture. The distributions for each fiscal
quarter could not exceed 1% of net revenues plus 5% of Majestic Investor
Holdings' consolidated cash
F-31
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
flow (as defined in the Majestic Investor Holdings Indenture) for the
immediately preceding fiscal quarter and could not be paid if Majestic Investor
Holdings was in default under the Majestic Investor Holdings Indenture or if
Majestic Investor Holdings did not meet certain financial ratios as provided in
such indenture.
During the nine months ended September 30, 2003, Majestic Investor Holdings
made distributions totaling $2.6 million to BDI in accordance with the Majestic
Investor Holdings Manager Agreement related to the fourth quarter of 2002 and
the six months ended June 30, 2003.
BARDEN NEVADA EXPENSE SHARING AGREEMENT
Concurrent with the consummation of the offering of the 9 1/2% senior
secured notes, we entered into an expense sharing agreement with Barden Nevada.
The expense sharing agreement provides for a fee from Barden Nevada to us in the
amount of the greater of (i) $500,000 per year or (ii) the actual amount of
certain specified expenses incurred by us in connection with providing
management services to Barden Nevada.
NAMING RIGHTS AGREEMENT
Gary New Century, LLC ("GNC"), a company wholly owned by Mr. Barden,
intended to develop an outdoor amphitheater on property it owned adjacent to
Majestic Star. The Company entered into a Naming Rights Agreement with GNC
effective in October 2001. Pursuant to the Naming Rights Agreement, GNC agreed
to use the name "The Majestic Star Amphitheater" as the name of the amphitheater
and the Company paid GNC $1.5 million during 2001 for such rights. The initial
term of the Naming Rights Agreement was three years commencing on the opening of
the amphitheater. The Naming Rights Agreement was terminated in connection with
the acquisition of the GNC Land by the Company and the Company received a credit
of $1.5 million against the purchase price of the GNC Land at closing.
FITZGERALDS ACQUISITION AND EXPENSE REIMBURSEMENT/SHARING AGREEMENT
In September 2000, Majestic Investor, LLC was capitalized by the Company
with $9.0 million of capital contributions, including interest thereon. Majestic
Investor, LLC subsequently contributed this $9.0 million to Investor Holdings in
connection with the assignment of its rights and obligations under the
Fitzgeralds purchase and sale agreement to Investor Holdings.
Prior to the consummation of the offering of the Investor Holdings 11.653%
notes, Investor Holdings issued a 35.71% membership interest to BDI in exchange
for the contribution by BDI of a note for $5.0 million. BDI subsequently
contributed the 35.71% membership interest to Majestic Investor, LLC as
additional paid-in-equity. Majestic Investor, LLC currently owns 100% of the
member interests of Investor Holdings. BDI, upon closing of the offering of the
11.653% notes, contributed $5.0 million in repayment of the promissory note.
On October 22, 2001, Investor Holdings entered into an Expense
Reimbursement/Sharing Agreement with the Majestic Star Casino, pursuant to which
Investor Holdings and its restricted subsidiaries would each reimburse the
Majestic Star Casino for sixty percent (60%) of the documented out-of-pocket
expenses paid by the Majestic Star Casino for Investor Holdings' corporate
overhead, including (i) the costs and expenses of executives and certain other
employees, including, but not limited to, salaries, bonuses, benefit payments,
insurance, and supplies, (ii) rent and (iii) other similar costs and expenses.
These executives and employees provided services to Investor Holdings, its
subsidiaries and Majestic Star. For the twelve months ended December 31, 2002
and 2001 the reimbursement percentage was
F-32
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
capped at fifty percent (50%) up to an aggregate of $1.7 million due to
restrictions set forth in the Majestic Investor Holdings Indenture. Upon
completion of the refinancing and elimination of the restrictive covenants, the
Expense Reimbursement/Sharing Agreement was terminated.
17. SUBSEQUENT EVENT
On February 11, 2004, the Company acquired approximately 170 acres of land
located adjacent to the Buffington Harbor gaming complex from an affiliate of
ours (the "GNC Land"). The purchase price for the GNC Land was not greater than
eighty percent (80%) of the appraised value as evidenced by the written
appraisal of an independent appraiser dated not more than ninety (90) days prior
to the closing. The purchase price was approximately $21.9 million (net of a
deposit of $2.0 million and a credit of $1.5 million related to the Naming
Rights Agreement, which was terminated).
18. SEGMENT INFORMATION
The Majestic Star Casino, LLC either directly or indirectly through a
wholly subsidiary owns and operates three properties as follows: a riverboat
casino located in Gary, Indiana; a casino and hotel located in Tunica,
Mississippi; and a casino located in Black Hawk, Colorado (collectively, the
"Properties"). As previously discussed, prior to the spin-off to BDI, the
Company owned an additional casino and hotel located in Las Vegas, Nevada.
The Company identifies its business in three 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 (in Tunica, Mississippi only), and food and beverage.
The accounting policies of each business segment are the same as those
described in the summary of significant accounting policies. There are minimal
inter-segment sales. Corporate costs were allocated to the business segments
through an expense sharing agreement, that was terminated on October 7, 2003,
upon consummation of our refinancing transactions.
A summary of the Properties' operations by business segment for the years
ended December 31, 2003, 2002 and 2001 is presented below:
For the Years Ended
December 31,
-----------------------------------------
2003 2002 2001
--------- --------- ---------
(in thousands)
Net revenues:
Majestic Star Casino $ 138,890 $ 135,129 $ 124,917
Fitzgeralds Tunica 89,249 92,835 5,753
Fitzgeralds Black Hawk 33,644 35,138 2,425
--------- --------- ---------
Total $ 261,783 $ 263,102 $ 133,095
========= ========= =========
Operating income (loss):
Majestic Star Casino $ 15,030 $ 17,624 $ 14,505
Fitzgeralds Tunica 12,341 14,288 654
Fitzgeralds Black Hawk 6,462 6,694 674
Majestic Investor Holdings (2,388) (2,956) (1,214)
--------- --------- ---------
Total $ 31,445 $ 35,650 $ 14,619
========= ========= =========
F-33
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended
December 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
(in thousands)
Segment depreciation and amortization:
Majestic Star Casino $ 5,834 $ 6,617 $ 8,070
Fitzgeralds Tunica 7,820 7,373 485
Fitzgeralds Black Hawk 1,730 1,538 99
Majestic Investor Holdings 2,105 2,597 169
--------- --------- ---------
Total $ 17,489 $ 18,125 $ 8,823
========= ========= =========
Expenditure for additions to long-lived assets:
Majestic Star Casino $ 12,205 $ 5,189 $ 4,967
Fitzgeralds Tunica 4,395 2,549 100
Fitzgeralds Black Hawk 1,863 1,177 --
--------- --------- ---------
Total $ 18,463 $ 8,915 $ 5,067
========= ========= =========
As of December 31,
----------------------
2003 2002
--------- ---------
Segment assets:
Majestic Star Casino $ 269,926 $ 113,177
Fitzgeralds Tunica 84,458 88,307
Fitzgeralds Black Hawk 30,498 30,468
Fitzgeralds Las Vegas (1) -- 38,231
Majestic Investor Holdings 64,639 155,574
--------- ---------
Total 449,521 425,757
Less: Intercompany (216,306) (149,947)
--------- ---------
Total 233,215 275,810
========= =========
(1) The equity interests in Fitzgeralds Las Vegas were spun-off to BDI on
December 31, 2003.
19. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The proceeds from the issuance of the 9 1/2% senior secured notes and
approximately $28.0 million of the $80 million Credit Facility were used to
retire all of the 10 7/8% notes and substantially all of the 11.653% notes.
Under the Indenture for the 9 1/2% senior secured notes and the Loan and
Security Agreement for the $80 million Credit Facility, Fitzgeralds Tunica and
Fitzgeralds Black Hawk remain as guarantors; however, Fitzgeralds Las Vegas
became an unrestricted and non-guarantor subsidiary and was subsequently
spun-off to BDI on December 31, 2003.
The following condensed consolidating information presents condensed
consolidating balance sheets as of December 31, 2003 and 2002, condensed
consolidating statements of operations for the years ended December 31, 2003,
2002 and 2001 and condensed consolidating statements of cash flows for the years
ended December 31, 2003, 2002 and 2001 for The Majestic Star Casino, LLC, The
Majestic Star Casino Capital Corp. (a co-issuer of the 9 1/2% senior secured
notes), the guarantor subsidiaries, our discontinued operation, and eliminating
entries necessary to consolidate such entities.
F-34
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE. 19 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2003
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 10,929,430 $ - $ 11,128,586 $ - $ 22,058,016
Restricted cash 900,000 - 500,000 - 1,400,000
Accounts receivable, net 1,544,483 - 668,063 - 2,212,546
Inventories 77,312 - 630,373 - 707,685
Prepaid expenses 1,628,044 - 498,539 - 2,126,583
Receivables from affiliate 587,254 - - (377,119)(a) 210,135
Note receivable from related party 133,000 - - - 133,000
------------- ------------- ------------- ------------- -------------
Total current assets 15,799,523 - 13,425,561 (377,119) 28,847,965
------------- ------------- ------------- ------------- -------------
Property, equipment and improvements, net 54,849,742 - 87,318,189 - 142,167,931
Intangible assets, net - - 9,249,247 - 9,249,247
Goodwill - - 5,922,398 - 5,922,398
Other assets:
Deferred financing costs, net 5,734,214 - 554,973 - 6,289,187
Investment in Buffington Harbor
Riverboat, LLC 29,733,594 - - - 29,733,594
Long term receivable - related party 144,395,427 - - (144,395,427)(a) -
Other assets 10,412,477 - 591,979 - 11,004,456
------------- ------------- ------------- ------------- -------------
190,275,712 - 1,146,952 (144,395,427) 47,027,237
------------- ------------- ------------- ------------- -------------
Total Assets $ 260,924,977 $ - $ 117,062,347 $(144,772,546) $ 233,214,778
============= ============= ============= ============= =============
LIABILITIES AND MEMBER'S DEFICIT
Current Liabilities:
Accounts payable $ 5,457,108 $ - $ 930,847 $ - $ 6,387,955
Payable to related party - - 377,366 (377,119)(a) 247
Accrued liabilities:
Payroll and related 2,588,039 - 3,899,068 - 6,487,107
Interest 5,865,514 - 158,189 - 6,023,703
Progressive jackpot 608,234 - 2,065,428 - 2,673,662
Slot club liabilities - - 498,070 - 498,070
Other accrued liabilities 8,003,123 - 3,592,542 - 11,595,665
------------- ------------- ------------- ------------- -------------
Total current liabilities 22,522,018 - 11,521,510 (377,119) 33,666,409
------------- ------------- ------------- ------------- -------------
Investment in subsidiaries 54,611,421 - - (54,611,421)(b) -
Due to related parties - - 144,395,427 (144,395,427)(a) -
Long-term debt, net of current maturities 285,958,493 260,000,000 15,756,831 (260,000,000)(c) 301,715,324
------------- ------------- ------------- ------------- -------------
Total Liabilities 363,091,932 260,000,000 171,673,768 (459,383,967) 335,381,733
------------- ------------- ------------- ------------- -------------
Member's Deficit (102,166,955) (260,000,000) (54,611,421) 314,611,421 (b)(c)(102,166,955)
------------- ------------- ------------- ------------- -------------
Total Liabilities and Member's Deficit $ 260,924,977 $ - $ 117,062,347 $(144,772,546) $ 233,214,778
============= ============= ============= ============= =============
(a) To eliminate intercompany receivable and payables.
(b) To eliminate intercompany accounts and investment in subsidiaries.
(c) As more fully described in Note 12, Long Term Debt, The Majestic Star
Casino Capital Corp. is a co-obligor of the 9 1/2% senior secured notes
issued by the Company. Accordingly, such indebtedness has been presented as
an obligation of both the issuer and the co-obligor in the above balance
sheet.
F-35
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE. 19 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2002
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operation (d) Entries Consolidated
------------- ------------- ------------- ------------- ------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 8,564,057 $ - $ 11,588,218 $ 4,395,606 $ - $ 24,547,881
Restricted cash - - 250,000 - - 250,000
Accounts receivable, net 1,233,543 - 648,404 592,779 - 2,474,726
Inventories 53,360 - 610,097 319,029 - 982,486
Prepaid expenses 1,237,196 - 707,424 976,444 - 2,921,064
Receivable from affiliate 323,359 - - 1,760 (325,119)(a) -
Notes receivable from related
parties 500,000 - 700,000 - - 1,200,000
Due from Buffington Harbor
Riverboat, LLC 217,925 - - - - 217,925
------------- ------------- ------------- ------------- ------------- -------------
Total current assets 12,129,440 - 14,504,143 6,285,618 (325,119) 32,594,082
------------- ------------- ------------- ------------- ------------- -------------
Property, equipment and improvements,
net 47,511,652 - 89,302,527 27,994,979 - 164,809,158
Intangible assets, net - - 15,774,246 1,917,500 - 17,691,746
Goodwill - - 5,922,398 - - 5,922,398
Other assets:
Deferred financing costs, net 2,657,165 - 6,714,902 - - 9,372,067
Investment in Buffington Harbor
Riverboat, LLC 31,833,311 - - - - 31,833,311
Investment in subsidiaries 8,082,405 - - - (8,082,405)(b) -
Long term receivable - related
party - - 36,173,404 - (36,173,404)(a) -
Restricted cash - - - 1,000,000 - 1,000,000
Other assets 10,962,753 - 591,979 1,032,380 - 12,587,112
------------- ------------- ------------- ------------- ------------- -------------
53,535,634 - 43,480,285 2,032,380 (44,255,809) 54,792,490
------------- ------------- ------------- ------------- ------------- -------------
Total Assets $ 113,176,726 $ - $ 168,983,599 $ 38,230,477 $ (44,580,928) $ 275,809,874
============= ============= ============= ============= ============= =============
LIABILITIES AND MEMBER'S
DEFICIT
Current Liabilities:
Accounts payable $ 1,911,929 $ - $ 1,031,604 $ 1,104,765 $ - $ 4,048,298
Current maturities of
long-term debt - - - 134,084 - 134,084
Accrued liabilities:
Payroll and related 1,707,240 - 3,914,357 2,034,918 - 7,656,515
Interest - - 1,473,785 - - 1,473,785
Progressive jackpots 713,083 - 2,236,782 239,761 - 3,189,626
Slot club liabilities - - 611,785 126,774 - 738,559
Other accrued liabilities 4,139,265 - 3,711,696 691,442 (325,119)(a) 8,217,284
------------- ------------- ------------- ------------- ------------- -------------
Total current liabilities 8,471,517 - 12,980,009 4,331,744 (325,119) 25,458,151
------------- ------------- ------------- ------------- ------------- -------------
Due to related parties - - - 36,173,404 (36,173,404)(a) -
Long-term debt, net of current
maturities 128,879,771 128,879,771 145,531,448 115,066 (128,879,771)(c) 274,526,285
------------- ------------- ------------- ------------- ------------- -------------
Total Liabilities 137,351,288 128,879,771 158,511,457 40,620,214 (165,378,294) 299,984,436
------------- ------------- ------------- ------------- ------------- -------------
Member's Equity (Deficit) (24,174,562) (128,879,771) 10,472,142 (2,389,737) 120,797,366 (b)(c) (24,174,562)
------------- ------------- ------------- ------------- ------------- -------------
Total Liabilities and
Member's Equity (Deficit) $ 113,176,726 $ - $ 168,983,599 $ 38,230,477 $ (44,580,928) $ 275,809,874
============= ============= ============= ============= ============= =============
(a) To eliminate intercompany receivable and payables.
(b) To eliminate intercompany accounts and investment in subsidiaries.
(c) As more fully described in Note 12, Long Term Debt, The Majestic Star
Casino Capital Corp. is a co-obligor of the 10 7/8% notes issued by the
Company. Accordingly, such indebtedness has been presented as an obligation
of both the issuer and the co-obligor in the above balance sheet.
(d) Discontinued Operations reflects the balance sheet accounts of Fitzgeralds
Las Vegas, which is not a guarantor and was spun-off to BDI on December 31,
2003.
F-36
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE. 19 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2003
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operation (b) Entries Consolidated
------------- ------------- ------------- ------------- ------------- -------------
REVENUES:
Casino $ 136,568,073 $ - $ 118,817,746 $ - $ - $ 255,385,819
Rooms - - 7,932,811 - - 7,932,811
Food and beverage 1,494,793 - 11,304,793 - - 12,799,586
Other 2,277,143 - 1,689,274 - - 3,966,417
------------- ------------- ------------- ------------- ------------- -------------
Gross revenues 140,340,009 - 139,744,624 - - 280,084,633
Less promotional allowances 1,449,791 - 16,851,683 - - 18,301,474
------------- ------------- ------------- ------------- ------------- -------------
Net revenues 138,890,218 - 122,892,941 - - 261,783,159
------------- ------------- ------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Casino 36,530,051 - 47,681,627 - - 84,211,678
Rooms - - 2,552,127 - - 2,552,127
Food and beverage 1,632,438 - 3,630,498 - - 5,262,936
Other - - 1,179,893 - - 1,179,893
Gaming taxes 40,167,015 - 15,085,240 - - 55,252,255
Advertising and promotion 6,837,262 - 7,829,023 - - 14,666,285
General and administrative 24,130,282 - 15,522,452 - - 39,652,734
Corporate expense 2,105,224 - 1,350,937 - - 3,456,161
Economic incentive - City of Gary 4,103,010 - - - - 4,103,010
Depreciation and amortization 5,834,078 - 11,654,722 - - 17,488,800
Loss on investment in Buffington
Harbor Riverboats, LLC 2,395,436 - - - - 2,395,436
Loss (gain) loss on disposal
of assets 125,919 - (8,822) - - 117,097
------------- ------------- ------------- ------------- ------------- -------------
Total costs and expenses 123,860,715 - 106,477,697 - - 230,338,412
------------- ------------- ------------- ------------- ------------- -------------
Operating income 15,029,503 - 16,415,244 - - 31,444,747
------------- ------------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 62,023 - 42,308 - - 104,331
Interest expense (17,280,924) - (14,001,864) - - (31,282,788)
Loss on bond redemption (10,007,703) - (21,952,380) - - (31,960,083)
Other non-operating expense (156,362) - (29,212) - - (185,574)
Equity in net loss of subsidiaries (31,498,511) - (1,972,607) - 33,471,118(a) -
------------- ------------- ------------- ------------- ------------- -------------
Total other income (expense) (58,881,477) - (37,913,755) - 33,471,118 (63,324,114)
------------- ------------- ------------- ------------- ------------- -------------
Loss from continuing operations (43,851,974) - (21,498,511) - 33,471,118 (31,879,367)
Loss from discontinued operation - - (10,000,000) (1,972,607) - (11,972,607)
------------- ------------- ------------- ------------- ------------- -------------
Net loss $ (43,851,974) $ - $ (31,498,511) $ (1,972,607) $ 33,471,118 $ (43,851,974)
============= ============= ============= ============= ============= =============
(a) To eliminate equity in net loss of subsidiaries.
(b) The Discontinued Operation reflects the operations of Fitzgeralds Las
Vegas, which is not a guarantor and was spun-off to BDI on December 31,
2003.
F-37
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE. 19 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2002
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operation (b) Entries Consolidated
------------- ------------- ------------- ------------- ------------- -------------
REVENUES:
Casino $ 132,599,608 $ - $ 124,228,663 $ - $ - $ 256,828,271
Rooms - - 8,160,611 - - 8,160,611
Food and beverage 1,623,621 - 11,189,142 - - 12,812,763
Other 1,941,880 - 1,564,194 - - 3,506,074
------------- ------------- ------------- ------------- ------------- -------------
Gross revenues 136,165,109 - 145,142,610 - - 281,307,719
Less promotional allowances 1,036,121 - 17,169,486 - - 18,205,607
------------- ------------- ------------- ------------- ------------- -------------
Net revenues 135,128,988 - 127,973,124 - - 263,102,112
------------- ------------- ------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Casino 34,904,409 - 49,712,322 - - 84,616,731
Rooms - - 2,684,354 - - 2,684,354
Food and beverage 1,861,665 - 3,963,068 - - 5,824,733
Other - - 1,030,061 - - 1,030,061
Gaming taxes 33,621,349 - 15,049,686 - - 48,671,035
Advertising and promotion 7,319,494 - 8,818,106 - - 16,137,600
General and administrative 25,158,762 - 16,020,746 - - 41,179,508
Corporate expense 1,626,416 - 1,133,328 - - 2,759,744
Economic incentive - City of Gary 3,980,501 - - - - 3,980,501
Depreciation and amortization 6,616,863 - 11,507,972 - - 18,124,835
Loss on investment in Buffington
Harbor Riverboats, LLC 2,424,392 - - - - 2,424,392
(Gain) loss on disposal of assets (8,850) - 14,320 - - 5,470
Pre-opening expenses - - 13,391 - - 13,391
------------- ------------- ------------- ------------- ------------- -------------
Total costs and expenses 117,505,001 - 109,947,354 - - 227,452,355
------------- ------------- ------------- ------------- ------------- -------------
Operating income 17,623,987 - 18,025,770 - - 35,649,757
------------- ------------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 57,962 - 123,325 - - 181,287
Interest expense (14,318,995) - (18,087,275) - - (32,406,270)
Gain on bond redemption - - 68,957 - - 68,957
Other non-operating expense (141,516) - (41,684) - - (183,200)
Equity in net loss of subsidiaries (1,905,684) - (1,994,777) - 3,900,461(a) -
------------- ------------- ------------- ------------- ------------- -------------
Total other income (expense) (16,308,233) - (19,931,454) - 3,900,461 (32,339,226)
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) from
continuing operations 1,315,754 - (1,905,684) - 3,900,461 3,310,531
Loss from discontinued operation - - - (1,994,777) - (1,994,777)
------------- ------------- ------------- ------------- ------------- -------------
Net income (loss) $ 1,315,754 $ - $ (1,905,684) $ (1,994,777) $ 3,900,461 $ 1,315,754
============= ============= ============= ============= ============= =============
(a) To eliminate equity in net loss of subsidiaries.
(b) The Discontinued Operation reflects the operations of Fitzgeralds Las
Vegas, which is not a guarantor and was spun-off to BDI on December 31,
2003.
F-38
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE. 19 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2001
The Majestic The Majestic Majestic
Star Casino, Star Casino Investor Guarantor Discontinued Eliminating Total
LLC Capital Corp. LLC Subsidiaries Operation (b) Entries Consolidated
------------- ------------ ----------- ------------- ------------- ------------- -------------
REVENUES:
Casino $ 122,194,707 $ - $ - $ 8,003,352 $ - $ - $ 130,198,059
Rooms - - - 544,249 - - 544,249
Food and beverage 1,613,902 - - 742,351 - - 2,356,253
Other 1,726,703 - - 96,828 - - 1,823,531
------------- ----------- ----------- ------------- ------------- ------------- -------------
Gross revenues 125,535,312 - - 9,386,780 - - 134,922,092
Less promotional
allowances 618,126 - - 1,209,171 - - 1,827,297
------------- ----------- ----------- ------------- ------------- ------------- -------------
Net revenues 124,917,186 - - 8,177,609 - - 133,094,795
------------- ----------- ----------- ------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Casino 30,679,057 - - 3,397,606 - - 34,076,663
Rooms - - - 187,507 - - 187,507
Food and beverage 1,806,678 - - 287,047 - - 2,093,725
Other - - - 68,523 - - 68,523
Gaming taxes 34,026,160 - - 669,203 - - 34,695,363
Advertising and promotion 6,682,550 - - 709,566 - - 7,392,116
General and administrative 22,671,083 - - 972,035 - - 23,643,118
Economic incentive -
City of Gary 3,667,100 - - - - - 3,667,100
Depreciation and
amortization 8,069,968 - - 753,250 - - 8,823,218
Loss on investment in
Buffington Harbor
Riverboats, LLC 2,797,740 - - - - - 2,797,740
Loss on disposal of assets 12,114 - - - - - 12,114
Pre-opening expenses - - - 1,018,234 - - 1,018,234
------------- ----------- ----------- ------------- ------------- ------------- -------------
Total costs and expenses 110,412,450 - - 8,062,971 - - 118,475,421
------------- ----------- ----------- ------------- ------------- ------------- -------------
Operating income 14,504,736 - - 114,638 - - 14,619,374
------------- ----------- ----------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 181,551 - - 218,201 - - 399,752
Interest expense (14,817,214) - - (1,208,779) - - (16,025,993)
Other non-operating expense (148,690) - - - - - (148,690)
Equity in net loss of
subsidiaries (1,270,897) - - (394,957) - 1,665,854(a) -
------------- ----------- ----------- ------------- ------------- ------------- -------------
Total other income
(expense) (16,055,250) - - (1,385,535) - 1,665,854 (15,774,931)
------------- ----------- ----------- ------------- ------------- ------------- -------------
Loss from continuing
operations (1,550,514) - - (1,270,897) - 1,665,854 (1,155,557)
Loss from discontinued
operation - - - - (394,957) - (394,957)
------------- ----------- ----------- ------------- ------------- ------------- -------------
Net loss $ (1,550,514) $ - $ - $ (1,270,897) $ (394,957) $ 1,665,854 $ (1,550,514)
============= =========== =========== ============= ============= ============= =============
(a) To eliminate equity in net loss of subsidiaries.
(b) The Discontinued Operation reflects the operations of Fitzgeralds Las
Vegas, which is not a guarantor and was spun-off to BDI on
December 31, 2003.
F-39
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE. 19 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2003
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operation (a) Entries Consolidated
------------- ------------- ------------- ------------- ------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES: $ 19,736,325 $ - $ 12,240,572 $ - $ - $ 31,976,897
------------- ------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Increase in restricted cash (900,000) - (250,000) - - (1,150,000)
Distribution of cash to BDI from
spin-off of Barden Nevada
Gaming, LLC - - - (4,395,606) - (4,395,606)
Acquisition of property and equipment (12,204,798) - (6,258,192) - - (18,462,990)
Cash paid in excess of cost for
land purchased from a
related party (559,806) - - - - (559,806)
Decrease in prepaid leases and
deposits 102,417 - - - - 102,417
Investment in Buffington Harbor
Riverboats, L.L.C (295,719) - - - - (295,719)
Proceeds from sale of equipment 14,750 - 62,404 - - 77,154
------------- ------------- ------------- ------------- ------------- -------------
Net cash used in investing
activities (13,843,156) - (6,445,788) (4,395,606) - (24,684,550)
------------- ------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of the 9 1/2%
senior secured notes 260,000,000 - - - - 260,000,000
Payment of bond redemption of
subsidiary (153,195,427) - 153,195,427 - - -
Payment of premium on note
redemption (7,069,400) - (12,192,930) - - (19,262,330)
Issuance cost for the 9 1/2% senior
secured notes (4,420,000) - - - - (4,420,000)
Issuance cost for credit facility (1,583,162) - - - - (1,583,162)
Payment for purchase of the 11.653%
senior secured notes - - (135,477,000) - - (135,477,000)
Payment for redemption of the 10 7/8%
senior secured notes (130,000,000) - - - - (130,000,000)
Proceeds from line of credit 28,000,000 - - - - 28,000,000
Repayment of line of credit (2,041,507) - - - - (2,041,507)
Cash received from/(advanced to)
affiliates and related parties 9,167,000 - (8,100,000) - - 1,067,000
Distribution to Barden
Development, Inc. (2,385,300) - (3,679,913) - - (6,065,213)
------------- ------------- ------------- ------------- ------------- -------------
Net cash used in financing
activities (3,527,796) - (6,254,416) - - (9,782,212)
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 2,365,373 - (459,632) (4,395,606) - (2,489,865)
Cash and cash equivalents, beginning
of period 8,564,057 - 11,588,218 4,395,606 - 24,547,881
------------- ------------- ------------- ------------- ------------- -------------
Cash and cash equivalents, end of period $ 10,929,430 $ - $ 11,128,586 $ - $ - $ 22,058,016
============= ============= ============= ============= ============= =============
(a) The Discontinued Operation reflects the cash activities of Fitzgeralds Las
Vegas, which is not a guarantor and was spun-off to BDI on December 31,
2003.
F-40
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE. 19 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2002
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operation (a) Entries Consolidated
------------ ------------ ------------ ------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES: $ 8,960,224 $ - $ 11,286,678 $ 1,057,821 $ - $ 21,304,723
------------ ------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition related costs - - (986,158) - - (986,158)
Increase in restricted cash - - (250,000) - (250,000)
Proceeds from seller for purchase
price adjustment - - 3,800,000 - - 3,800,000
Acquisition of property and equipment (5,188,766) - (3,725,786) (1,481,670) - (10,396,222)
Increase in prepaid leases and deposits (113,186) - - - (113,186)
Investment in Buffington Harbor
Riverboats, L.L.C (358,918) - - - - (358,918)
Proceeds from sale of equipment 8,850 - 43,867 400 - 53,117
------------ ------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (5,652,020) - (1,118,077) (1,481,270) - (8,251,367)
------------ ------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance cost for the 11.653% senior
secured notes - - (1,523,568) - - (1,523,568)
Cash paid for redemption of 11.653%
senior secured notes - - (759,038) - - (759,038)
Proceeds from line of credit - - 2,500,000 - - 2,500,000
Repayment of line of credit - - (9,000,000) - - (9,000,000)
Repayment of long term debt - - - (139,331) - (139,331)
Distribution to Barden Development, Inc. (2,964,623) - (2,544,206) - - (5,508,829)
------------ ------------ ------------ ------------ ------------ ------------
Net cash used in financing activities (2,964,623) - (11,326,812) (139,331) - (14,430,766)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 343,581 - (1,158,211) (562,780) - (1,377,410)
Cash and cash equivalents, beginning
of period 8,220,476 - 12,746,429 4,958,386 - 25,925,291
------------ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 8,564,057 $ - $ 11,588,218 $ 4,395,606 $ - $ 24,547,881
============ ============ ============ ============ ============ ============
(a) The Discontinued Operation reflects the cash activities of Fitzgeralds Las
Vegas, which is not a guarantor and was spun-off to BDI on December 31,
2003.
F-41
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2001
The Majestic The Majestic Majestic
Star Casino, Star Casino Investor Guarantor Discontinued Eliminating Total
LLC Capital Corp. LLC Subsidiaries Operation (b) Entries Consolidated
------------ ------------- ------------- ------------- ------------- ------------- -------------
NET CASH PROVIDED BY
(USED IN)
OPERATING
ACTIVITIES: $ 8,840,041 $ - $ 18,500 $ (2,352,439) $ 4,986,910 $ 918,273(a) $ 12,411,285
------------ ------------- ------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Payment for
Fitzgeralds, net
of cash acquired - - - (143,758,152) - - (143,758,152)
Decrease in restricted
cash - - 2,000,000 - - 2,000,000
Acquisition of
property and
equipment (4,967,152) - - (99,754) (22,942) - (5,089,848)
Decrease in prepaid
leases and
deposits 2,287,437 - - - - 2,287,437
Purchase of naming
rights (1,500,000) - - - - - (1,500,000)
Investment in
Buffington Harbor
Riverboats, L.L.C (214,665) - - - - - (214,665)
Proceeds from sale of
equipment 1,850 - - - - - 1,850
------------ ------------- ------------- ------------- ------------- ------------- -------------
Net cash (used in)
provided by
investing
activities (4,392,530) - 2,000,000 (143,857,906) (22,942) - (146,273,378)
------------ ------------- ------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance
of 11.653% senior
secured notes - - - 145,000,400 - - 145,000,400
11.653% note issuance
costs - - 1,465,860 (6,815,090) - - (5,349,230)
Proceeds from member's
equity contribution - - - 5,000,000 - - 5,000,000
Contribution from
Majestic Investor,
LLC - - (8,803,191) 8,803,191 - - -
Proceeds from line of
credit - - - 6,500,000 - - 6,500,000
Repayment of line of
credit (7,800,000) - - - - - (7,800,000)
Cash received from
loans to Barden
Development, Inc. - - 2,000,000 - - 2,000,000
Cash advance to/from
related party - - (250,000) 1,168,273 - (918,273)(a) -
Issuance of loan to
Barden Development,
Inc. - - - (700,000) - - (700,000)
Repayment of long term
debt (977,716) - - - (5,582) - (983,298)
------------ ------------- ------------- ------------- ------------- ------------- -------------
Net cash (used in)
provided by
financing
activities (8,777,716) - (5,587,331) 158,956,774 (5,582) (918,273) 143,667,872
------------ ------------- ------------- ------------- ------------- ------------- -------------
Net (decrease) increase in
cash and cash
equivalents (4,330,205) - (3,568,831) 12,746,429 4,958,386 - 9,805,779
Cash and cash equivalents,
beginning of period 12,550,681 - 3,568,831 - - - 16,119,512
------------ ------------- ------------- ------------- ------------- ------------- -------------
Cash and cash equivalents,
end of period $ 8,220,476 $ - $ - $ 12,746,429 $ 4,958,386 $ - $ 25,925,291
============ ============= ============= ============= ============= ============= =============
(a) To eliminate cash transfers and payments between affiliates.
(b) The Discontinued Operation reflects the cash activities of Fitzgeralds Las
Vegas, which is not a guarantor and was spun-off to BDI on December 31,
2003.
F-42
THE MAJESTIC STAR CASINO, LLC
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002, AND 2003
Balance at Charged to Charged to Balance at
Descriptions of year expenses Other Accounts Deductions of year
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended December 31, 2001 120,000 400,685 35,704 196,687 359,702
Year ended December 31, 2002 359,702 449,335 50,358 486,706 372,689
Year ended December 31, 2003 372,689 205,709 4,758 324,610 (a) 258,546
(a) Fitzgeralds Las Vegas' Allowance for Doubtful Account balances and
transactions are included in the amounts listed above for the years ended
December 31, 2002 and 2001, but are not included for the year ended December 31,
2003, since the spin-off of Fitzgeralds Las Vegas to BDI occurred on December
31, 2003. The Allowance for Doubtful Accounts 2003 beginning balance totaling
$100,938 for Fitzgeralds Las Vegas, our discontinued operation, was adjusted off
of the above schedule and is included in the $324,610 in the deductions column
for the year 2003.
F-43
REPORT OF INDEPENDENT AUDITORS
To the Member of
Majestic Investor Holdings, LLC:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page F-1 present fairly, in all material
respects, the financial position of Majestic Investor Holdings, LLC and its
subsidiaries at December 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(a)(2) on page F-1 presents
fairly in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement and
financial statement schedule presentation. We believe that our audits provide a
reasonable basis for our opinion.
As more fully described in Note 2, the Company changed its method of
accounting for losses on early retirement of debt in connection with its
adoption of Financial Accounting Standards Board Statement No. 145.
/s/ PricewaterhouseCoopers LLP
Las Vegas, Nevada
March 2, 2004
F-44
MAJESTIC INVESTOR HOLDINGS, LLC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2003 2002
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 11,128,586 $ 15,983,824
Restricted cash 500,000 250,000
Accounts receivable, less allowance for doubtful accounts of $87,801 and
$239,066 as of December 31, 2003 and 2002, respectively 668,063 1,241,183
Inventories 630,373 929,126
Prepaid expenses 467,089 1,644,735
Note receivable due from related party -- 700,000
Other 31,450 39,133
------------- -------------
Total current assets 13,425,561 20,788,001
------------- -------------
Property, equipment and improvements, net 87,318,189 117,297,506
Intangible assets, net 9,249,247 17,691,746
Goodwill 5,922,398 5,922,398
Other assets:
Deferred financing costs, net of accumulated amortization of $283,131 and
$1,407,041 as of December 31, 2003 and 2002, respectively 554,973 6,714,902
Restricted cash -- 1,000,000
Other assets 591,979 1,624,359
------------- -------------
Total other assets 1,146,952 9,339,261
------------- -------------
Total Assets $ 117,062,347 $ 171,038,912
============= =============
LIABILITIES AND MEMBER'S (DEFICIT) EQUITY
Current Liabilities:
Accounts payable $ 930,847 $ 2,136,369
Current maturities of long-term debt -- 134,084
Due to related party 377,366 --
Accrued liabilities:
Payroll and related 3,899,068 5,949,275
Interest 158,189 1,473,785
Progressive jackpots 2,065,428 2,476,543
Slot club liabilities 498,070 738,559
Other accrued liabilities 3,592,542 4,401,378
------------- -------------
Total current liabilities 11,521,510 17,309,993
Due to related parties 144,395,427 --
Long-term debt, net of current maturities 15,756,831 145,646,514
------------- -------------
Total Liabilities 171,673,768 162,956,507
------------- -------------
Member's (deficit) equity (54,611,421) 8,082,405
------------- -------------
Total Liabilities and Member's (Deficit) Equity $ 117,062,347 $ 171,038,912
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-45
MAJESTIC INVESTOR HOLDINGS, LLC
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD
FOR THE FOR THE FROM INCEPTION
YEAR ENDED YEAR ENDED (SEPTEMBER 14, 2001)
DECEMBER 31, DECEMBER 31, THROUGH
2003 2002 DECEMBER 31, 2001
------------------------------------------------------------
REVENUES
Casino $ 118,817,746 $ 124,228,663 $ 8,003,352
Rooms 7,932,811 8,160,611 544,249
Food and beverage 11,304,793 11,189,142 742,351
Other 1,689,274 1,564,194 96,828
-------------- ------------- ----------------
Gross revenues 139,744,624 145,142,610 9,386,780
Less promotional allowances 16,851,683 17,169,486 1,209,171
-------------- ------------- ----------------
Net revenues 122,892,941 127,973,124 8,177,609
-------------- ------------- ----------------
COSTS AND EXPENSES
Casino 47,681,627 49,712,322 3,397,606
Rooms 2,552,127 2,684,354 187,507
Food and beverage 3,630,498 3,963,068 287,047
Other 1,179,893 1,030,061 68,523
Gaming taxes 15,085,240 15,049,686 669,203
Advertising and promotion 7,829,023 8,818,106 709,566
General and administrative 15,522,452 16,020,746 972,035
Corporate expense 1,350,937 1,133,328 -
Depreciation and amortization 11,654,722 11,507,972 753,250
(Gain) loss on disposal of assets (8,822) 14,320 -
Pre-opening expenses - 13,391 1,018,234
-------------- ------------- ----------------
Total costs and expenses 106,477,697 109,947,354 8,062,971
-------------- ------------- ----------------
Operating income 16,415,244 18,025,770 114,638
-------------- ------------- ----------------
OTHER INCOME (EXPENSE)
Interest income 42,308 123,325 218,201
Interest expense (14,001,864) (18,087,275) (1,208,779)
(Loss) gain on bond redemption (21,952,380) 68,957 -
Other non-operating expense (29,212) (41,684) -
-------------- ------------- ----------------
Total other expense (35,941,148) (17,936,677) (990,578)
-------------- ------------- ----------------
(Loss) income from continuing operations (19,525,904) 89,093 (875,940)
-------------- ------------- ----------------
DISCONTINUED OPERATION
Loss on Barden Nevada Gaming, LLC, including
$10,000,000 write-down of assets to fair market
value at spin-off (2003) (11,972,607) (1,994,777) (394,957)
-------------- ------------- ----------------
Net loss $ (31,498,511) $ (1,905,684) $ (1,270,897)
============== ============= ================
The accompanying notes are an integral part of these consolidated
financial statements.
F-46
MAJESTIC INVESTOR HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 14, 2001) THROUGH DECEMBER 31, 2001
Total
Member's
Equity (Deficit)
----------------
BALANCE SEPTEMBER 14, 2001 $ -
Member's contribution 13,803,192
Net loss (1,270,897)
------------
BALANCE, DECEMBER 31, 2001 12,532,295
Net loss (1,905,684)
Distribution to Barden Development, Inc. (2,544,206)
------------
BALANCE, DECEMBER 31, 2002 8,082,405
Net loss (31,498,511)
Distribution to Barden Development, Inc. (3,679,913)
Spin-off of Barden Nevada Gaming, LLC to Barden
Development, Inc. (27,515,402)
------------
BALANCE, DECEMBER 31, 2003 $(54,611,421)
============
The accompanying notes are an integral part of these consolidated
financial statements.
F-47
MAJESTIC INVESTOR HOLDINGS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCEPTION
(SEPTEMBER 14, 2001)
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001
------------- ------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (31,498,511) $ (1,905,684) $ (1,270,897)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation 8,224,524 9,843,712 642,472
Amortization 3,430,199 4,616,610 278,176
(Gain) loss on disposal of assets (8,822) 14,069 -
Loss (gain) on bond redemption 21,952,380 (68,957) -
Loss on disposal of discontinued operation 11,972,607 - -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (19,659) 325,118 (532,843)
Increase in related party receivables (443,215) (836,249) (8,665)
(Increase) decrease in inventories (20,276) 28,438 20,886
Decrease (increase) in prepaid expenses 165,626 (817,442) (296,365)
Decrease (increase) in other assets 7,683 788,685 (24,503)
(Decrease) increase in accounts payable (100,757) (6,733) 394,988
(Decrease) increase in accrued payroll and related expenses (35,289) 856,711 -
(Decrease) increase in accrued interest (1,315,596) 265,006 1,208,779
(Decrease) increase in other accrued liabilities (70,322) (758,785) 2,222,443
------------- ------------- -------------
Net cash provided by operating activities 12,240,572 12,344,499 2,634,471
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchase of Fitzgeralds, net of cash acquired - - (143,758,152)
Acquisition related costs - (986,158) -
Increase in restricted cash (250,000) (250,000) -
Proceeds from seller for purchase price adjustment - 3,800,000 -
Distribution of cash to Barden Development, Inc. from spin-off
of Barden Nevada (4,395,606) - -
Acquisition of property and equipment (6,258,192) (5,207,456) (122,696)
Proceeds from sale of equipment 62,404 44,267 -
------------- ------------- -------------
Net cash used in investing activities (10,841,394) (2,599,347) (143,880,848)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of 11.653% senior secured notes - - 145,000,400
Issuance costs for 11.653% notes - (1,523,568) (6,815,090)
Member's equity contribution - - 5,000,000
Contribution from Majestic Investor - - 8,803,191
Payment (issuance) of loan to Barden Development, Inc. 700,000 - (700,000)
Payment of bond purchase by parent 153,195,427 - -
Payment of premium on early extinguishment of debt (12,192,930) - -
Cash paid for purchase of 11.653% notes (135,477,000) (759,038) -
Proceeds from line of credit - 2,500,000 6,500,000
Repayment of line of credit - (9,000,000)
Cash advances (to) from affiliates (8,800,000) - 1,168,273
Repayment of long-term debt - (139,331) (5,582)
Distribution to Barden Development, Inc (3,679,913) (2,544,206) -
------------- ------------- -------------
Net cash (used in) provided by financing activities (6,254,416) (11,466,143) 158,951,192
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (4,855,238) (1,720,991) 17,704,815
Cash and cash equivalents, beginning of period 15,983,824 17,704,815 -
------------- ------------- -------------
Cash and cash equivalents, end of period $ 11,128,586 $ 15,983,824 $ 17,704,815
============= ============= =============
INTEREST PAID:
Equipment Debt $ - $ 8,391 $ 2,081
Senior Secured Notes--fixed interest 11.653% 15,317,338 17,702,015 -
Lines of credit 119 98,168 -
------------- ------------- -------------
$ 15,317,457 $ 17,808,574 $ 2,081
============= ============= =============
SUPPLEMENTAL NONCASH INVESTING ACTIVITIES:
Spin-off of equity interest in Barden Nevada Gaming, LLC, net of
cash, to Barden Development, Inc. $ 23,938,044 $ - $ -
============= ============= =============
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Elimination of slot based progressive $ - $ 400,000 $ -
Elimination of slot club - 1,300,000 -
------------- ------------- -------------
$ - $ 1,700,000 $ -
============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-48
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Majestic Investor Holdings, LLC ("Investor Holdings" or "Majestic Investor
Holdings") was formed on September 14, 2001 as a Delaware limited liability
company. Investor Holdings is a wholly-owned subsidiary of Majestic Investor,
LLC ("Investor"). Investor is a wholly-owned subsidiary of The Majestic Star
Casino, LLC ("Majestic Star"), the owner and operator of the Majestic Star
Casino, a riverboat casino located at Buffington Harbor in Gary, Indiana.
Investor Holdings is a multi-jurisdictional gaming company that owns and
operates two Fitzgeralds-brand casinos located in Tunica County, Mississippi and
Black Hawk, Colorado. Investor Holdings is indirectly wholly-owned and
controlled by Don H. Barden, Investor Holdings' Manager, Chairman, President and
Chief Executive Officer.
On December 6, 2001, Investor Holdings completed the acquisition of
substantially all of the assets and assumed certain liabilities of Fitzgeralds
Las Vegas, Inc., Fitzgerald's Mississippi, Inc., and 101 Main Street Limited
Liability Company (collectively the "Fitzgeralds Assets") for approximately
$152.7 million (the "Acquisition") (See Note 4). In connection with the
Acquisition, Investor Holdings formed three new subsidiaries that held the
respective Fitzgeralds Assets: Barden Mississippi Gaming, LLC ("Fitzgeralds
Tunica"), Barden Colorado Gaming, LLC ("Fitzgeralds Black Hawk"), and Barden
Nevada Gaming, LLC ("Fitzgeralds Las Vegas").
Majestic Investor Capital Corp. ("Majestic Investor Capital"), a
wholly-owned subsidiary of Investor Holdings, was formed specifically to serve
as a co-issuer to facilitate the offering of Investor Holdings $152.6 million
11.653% senior secured notes due 2007 (the "11.653% notes") which proceeds were
used to purchase the Fitzgeralds Assets (See Note 4). Majestic Investor Capital
continues as a co-issuer of the 11.653% notes that remain outstanding after the
refinancing transactions as discussed below and in Note 8. Majestic Investor
Capital Corp. does not have any assets or operations.
On August 26, 2003, Investor Holdings commenced a cash tender offer and
consent solicitation for all of the 11.653% notes, in connection with a
refinancing transaction of such notes. On October 7, 2003, Majestic Star and its
restricted subsidiary, The Majestic Star Casino Capital Corp., issued $260.0
million of 9 1/2% senior secured notes due 2010 (the "9 1/2% senior secured
notes") and entered into a new $80.0 million credit facility (the "$80 million
Credit Facility") with Wells Fargo Foothill, Inc. Also, on October 7, 2003, a
portion of the proceeds from the issuance of the 9 1/2% senior secured notes
were used to purchase $135.5 million or 89.3% of the 11.653% notes that had been
tendered through the offer and consent solicitation. Please see Note 8 to the
Notes to Consolidated Financial Statements for more information about the
issuance of the 9 1/2% senior secured notes and the establishment of the $80.0
million Credit Facility.
As part of the refinancing, Investor Holdings and its operating subsidiaries
Fitzgeralds Tunica and Fitzgeralds Black Hawk (the "Guarantor Subsidiaries") are
guarantors under both the 9 1/2% senior secured notes and the $80 million Credit
Facility; however, Fitzgeralds Las Vegas, formerly owned by Investor Holdings,
became an unrestricted subsidiary of Majestic Star and Investor Holdings. On
December 18, 2003, Investor Holdings and Barden Development, Inc. ("BDI"),
Majestic Star's parent, received final regulatory approval to spin-off
Fitzgeralds Las Vegas. The spin-off to BDI was completed on December 31, 2003.
Concurrent with the spin-off, Investor Holdings recorded an impairment loss on
Fitzgeralds Las Vegas in the amount of $10.0 million. The loss represents the
difference between the estimated fair market value and the book carrying value
of Fitzgeralds Las Vegas at the date of spin-off. In conjunction with the
spin-off of the equity interests in Fitzgeralds Las Vegas, Investor Holdings,
transferred the remaining $27.5 million of Fitzgeralds Las Vegas assets, net of
liabilities, to BDI and forgave intercompany balances due from Fitzgeralds Las
Vegas (see Note 5).
Except where otherwise noted, the words "we," "us," "our" and similar terms
refer to Majestic Investor Holdings, LLC and all of its remaining subsidiaries.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Investor Holdings and all of its direct and indirect subsidiaries. All
inter-company transactions and balances have been eliminated. Investments in
affiliates in which Investor Holdings has the ability to exercise significant
influence, but not control, are accounted for by the equity
F-49
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
method. These financial statements have been prepared in accordance with
accounting principals generally accepted in the United States of America, or
"GAAP". The preparation of financial statements in conformity with 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 period. Significant estimates incorporated into
our consolidated financial statements include the estimated useful lives of
depreciable and amortizable assets, the estimated allowance for doubtful
accounts receivable, estimated cash flow in assessing the recoverability of long
lived assets, estimated liabilities for our self insured medical plan, slot club
point programs and litigation, claims and assessments. Actual results could
differ from those estimates.
The spin-off of Fitzgeralds Las Vegas to BDI occurred on December 31, 2003,
the assets, liabilities and equity of Fitzgeralds Las Vegas are not included in
our consolidated balance sheet as of December 31, 2003. However, the assets of
Fitzgerald Las Vegas are being recognized as held for use in our consolidated
balance sheet as of December 31, 2002. The consolidated statement of operations
recognizes Fitzgeralds Las Vegas as a discontinued operation for the years ended
December 31, 2003, 2002 and 2001. The consolidated statement of cash flows for
the year ended December 31, 2003 reflects the distribution of cash from
Fitzgeralds Las Vegas to BDI. The remaining spin-off of the equity interests in
Fitzgeralds Las Vegas involved no cash. The statement of cash flows for the
years ended December 31, 2002 and 2001 fully reflect the cash activities of
Fitzgeralds Las Vegas.
RECLASSIFICATIONS - The consolidated financial statements and footnotes for the
prior years reflect certain reclassifications to conform to the current year
presentation. Included in such reclassifications is an increase in net revenues
(and a corresponding increase in operating expenses) of approximately $7.5
million and $737,000 for the twelve month periods ended December 31, 2002 and
2001, respectively, to classify the cost of certain promotional allowances to be
consistent with the 2003 presentation. Such reclassifications have no effect on
previously reported net income.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Investor Holdings and its wholly-owned subsidiaries. All
intercompany balances and transactions have been eliminated in the
consolidation.
CASH AND CASH EQUIVALENTS - Investor Holdings considers cash equivalents to
include short-term investments with original maturities of ninety days or less.
Cash equivalents are carried at cost plus accrued interest, which approximates
fair value. Investor Holdings places its cash primarily in checking and money
market accounts with high credit quality financial institutions, which, at
times, have exceeded federally insured limits.
RESTRICTED CASH -- As of December 31, 2002, restricted cash of $250,000 at
Investor Holdings secured a letter of credit for self insured workers
compensation at Fitzgeralds Tunica and Fitzgeralds Black Hawk. As of December
31, 2003, restricted cash relating to the self-insured workers compensation
program increased to $500,000. The increase relates to additional security for a
larger Investor Holdings' letter of credit. Our letter of credit increased as a
result of Fitzgeralds Las Vegas being added to the self-insured workers
compensation program.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
Investor Holdings to concentrations of credit risk consist principally of casino
accounts receivable. Investor Holdings extends credit to approved casino
customers following background checks and investigations of creditworthiness. An
estimated allowance for doubtful accounts is maintained to reduce Investor
Holdings' receivables to their carrying amount, which approximates fair value.
Management believes that as of December 31, 2003, no significant concentrations
of credit risk existed for which an allowance had not already been determined
and recorded.
INVENTORIES - Inventories consisting principally of food, beverage, operating
supplies and gift shop items are stated at the lower of cost or market value.
Cost is determined by the first-in, first-out method.
OTHER ASSETS - The estimated cost of normal operating quantities (base stock) of
china, silverware, glassware, linen, uniforms and utensils has been recorded as
an asset and is not being depreciated. Costs of base stock replacements are
expensed as incurred. Other assets in the accompanying consolidated balance
sheets include $372,000 and $662,000 of base stock inventories at December 31,
2003 and 2002, respectively. The base stock inventory balance at December 31,
2002 was inclusive of $290,000 of base stock inventory of Fitzgeralds Las Vegas,
our discontinued operation. The base
F-50
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock inventory balance at December 31, 2003 did not include any of the base
stock inventory of our discontinued operation.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
expense is computed utilizing the straight-line method over the estimated useful
lives of the depreciable assets. Certain equipment held under capital leases is
classified as property and equipment and amortized using the straight-line
method over the lease terms and the related obligations are recorded as
liabilities. Costs of major improvements are capitalized; costs of normal
repairs and maintenance are charged to expense as incurred. Gains or losses on
dispositions of property and equipment are recognized in the consolidated
statement of operations when incurred.
CAPITALIZED INTEREST - Investor Holdings capitalizes interest costs associated
with debt incurred in connection with major construction projects. When no debt
is specifically identified as being incurred in connection with such
construction projects, Investor Holdings capitalizes interest on amounts
expended on the project at the average cost of borrowed money. There was no
interest capitalized in any of the three years in the period ended December 31,
2003.
DEFERRED FINANCING COSTS - Deferred financing costs represent underwriter's and
agent's fees and commissions, closing costs and professional fees incurred in
connection with the issuance of the remaining $16.3 million of Investor Holdings
11.653% notes. Such costs are being amortized over the terms of the related
notes, using the effective interest method.
GOODWILL - Goodwill represents the cost of the Fitzgeralds assets acquired in
excess of their fair value. Goodwill for acquisitions after June 30, 2001 is not
subject to amortization but is subject to impairment testing at least annually.
INTANGIBLE ASSETS - Intangible assets are amortized over their estimated useful
lives, generally eight to ten years.
CASINO REVENUE - Casino revenue is the net win from gaming activities, which is
the difference between gaming wins and losses. Hotel, food and beverage, and
other revenue are recognized at the time the related service is performed.
PROMOTIONAL ALLOWANCES - Cash discounts and other cash incentives related to
gaming play are recorded as a reduction of gross casino revenues. In addition,
the retail value of accommodations, food and beverage, and other services
furnished to hotel/casino guests without charge is included in gross revenue and
then deducted as promotional allowances. The estimated departmental cost of
providing such promotional allowances is included primarily in casino operating
expenses as follows:
For the years ended December 31,
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
Hotel $ 1,464,915 $ 1,604,384 $ 159,106
Food and Beverage 8,193,721 8,337,113 592,093
Other 314,346 278,341 11,489
----------- ----------- -----------
$ 9,972,982 $10,219,838 $ 762,688
=========== =========== ===========
The estimated retail value of such promotional allowances is included in
operating revenues as follows:
For the years ended December 31,
-------------------------------------------
2003 2002 2001
----------- ----------- -----------
Hotel $ 3,439,367 $ 3,683,398 $ 271,320
Food and Beverage 8,726,011 8,481,640 548,769
Other 412,830 349,650 27,922
----------- ----------- -----------
$12,578,208 $12,514,688 $ 848,011
=========== =========== ===========
F-51
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRE-OPENING EXPENSES - Pre-opening expenses are expensed as incurred.
FEDERAL INCOME TAXES - Investor Holdings is a limited liability corporation
which results in the tax attributes of Investor Holdings passing through to its
Member. Accordingly, no provision for federal or state income taxes is reflected
in the financial statements during each of the three years in the period ended
December 31, 2003.
ADVERTISING COSTS - Costs for advertising are expensed as incurred, except costs
for direct-response advertising, which are capitalized and amortized over the
period of the related program. Direct-response advertising consists primarily of
mailing costs associated with the direct-mail programs. Capitalized advertising
costs, included in prepaid expense, were immaterial at December 31, 2003 and
2002. Consolidated advertising costs included in advertising and promotion
expenses were $2.3 million, $2.9 million and $0.2 million for the years ended
December 31, 2003 and 2002 and the interim period (September 14, 2001 through
December 31, 2001), respectively.
LONG-LIVED ASSETS - Long-lived assets and certain identifiable intangibles held
and used by Investor Holdings are reviewed for impairment when events or changes
in circumstances warrant such a review. The carrying value of a long-lived or
intangible asset is considered impaired when the anticipated undiscounted cash
flow from such asset is less than its carrying value. In that event, an
impairment loss is recognized. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that fair values are reduced for the cost
of disposition. Concurrent with the spin-off of Fitzgeralds Las Vegas, Investor
Holdings wrote down the value of Fitzgeralds Las Vegas's assets to fair market
value, resulting in a $10.0 million charge. SFAS 142 requires annual impairment
review of all intangible assets with indefinite lives. Investor Holdings
performed an impairment test of its intangible assets with indefinite lives
during the year 2003 and concluded that there was no impairment. See notes 6 and
7.
CASINO CLUB LIABILITY - The Fitzgeralds properties have accrued for the
liability of points earned but not redeemed by its casino club members, less the
points of inactive players and expired points. The liability is calculated based
on average historical redemption rate.
SELF INSURANCE LIABILITY -- Investor Holdings maintains accruals for
self-insured health costs, which is classified in payroll and related accrued
liabilities in the consolidated balance sheet. Management determines the
estimate of these accruals by periodically evaluating the historical experience
and projects trends related to these accruals. Actual results could differ from
these estimates.
PROGRESSIVE LIABILITY - Investor Holdings maintains a number of progressive slot
machines and table games. As wagers are made on the respective progressive
games, the amount available to win (to be paid out when the appropriate jackpots
are hit) increases. Investor Holdings has recorded the progressive jackpots as a
liability.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Investor Holdings believes, based upon
current information, that the carrying value of Investor Holdings' cash and cash
equivalents, restricted cash, accounts receivable and accounts payable
approximates fair value. Investor Holdings estimates that the fair value of its
long-term debt approximates its carrying value (see Note 9).
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
EARLY RETIREMENT OF DEBT - In April 2002, the Financial Accounting Standards
Board issued statement 145 ("SFAS 145"). SFAS 145 addresses the presentation for
gains and losses on early retirements of debt in the statement of operations.
The provisions of SFAS 145 related to the recission of Statement 4 are effective
for fiscal years beginning after May 15, 2002. Investor Holdings adopted SFAS
145 and as a result, reclassified $69,000 in a gain from the early
extinguishment of debt, which item had previously been reported as an
extraordinary item in 2002. In 2003, Investor Holdings recognized a loss on the
retirement of debt of $22.0 million on October 7, 2003. The loss on the
retirement of debt is comprised of the premium on the offers to purchase, the
write-off of the deferred debt issuance costs and the original issue discount on
89.3% of the 11.653% notes.
F-52
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standard Board issued Statement 146
("SFAS 146") "Accounting for Costs Associated with Exit or Disposal Activities."
The provisions of SFAS 146 became effective for exit or disposal activities
commenced subsequent to December 31, 2002. Adoption of SFAS 146 did not have any
material impact on Majestic Investor Holdings, LLC's financial position, 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 December 31, 2003, Investor Holdings did not have any guarantees
outside of its consolidated group. Adoption of FIN 45 did not have a material
impact on Investor Holdings' 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 interests in an entity and in
determining the primary beneficiary. FIN 46 outlines disclosure requirements for
Variable Interest Entities ("VIEs") in existence prior to January 31, 2003, and
outlines consolidation requirements for VIEs created after January 31, 2003.
Investor Holdings 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. Adoption of FIN 46 did not have a
material impact on Investor Holdings' financial condition, results of operations
or cash flows.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149 ("SFAS 149") "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." Provisions of SFAS 149 became
effective for contracts and hedging relationships entered into or modified after
June 30, 2003. Adoption of SFAS 149 did not have any material impact on our
financial position, results of operations or cash flows as Investor Holdings has
not entered into or modified any agreements that contain derivative instrument
or involve hedging activities.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 ("SFAS 150") "Accounting for Certain
Financial Instruments with Characteristic of both Liabilities and Equity."
Provisions of SFAS 150 became effective for financial instruments entered into
or modified after May 31, 2003. Investor Holdings is considered a non-public
entity, as defined by SFAS 150 and is not required to adopt SFAS 150.
4. FITZGERALDS ACQUISITION
On December 6, 2001, Investor Holdings completed the acquisition of
substantially all of the assets and assumed certain liabilities of Fitzgeralds
Las Vegas, Inc., Fitzgeralds Mississippi, Inc. and 101 Main Street Limited
Liability Company (the "Fitzgeralds Assets") for approximately $152.7 million.
We accounted for the acquisition under the purchase method. Accordingly, the
purchase price was allocated to the underlying assets acquired and liabilities
assumed based upon their estimated fair values at the date of acquisition. We
determined the estimated fair value of property and equipment and intangible
assets based upon third-party valuations. The purchase price was determined
based upon estimates of future cash flows and the net worth of the assets
acquired. Investor Holdings funded the acquisition through
F-53
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the issuance of its 11.653% notes (see Note 8). Pursuant to the terms of the
purchase and sale agreement, the parties agreed to a $3.8 million reduction in
the purchase price on May 9, 2002, based upon a negotiated settlement of the
value of working capital at December 6, 2001. The $3.8 million was taken against
goodwill.
Our 2001 operations reflect twenty-five days, since the acquisition occurred
on December 6, 2001, and are included in our consolidated statement of
operations. The following unaudited pro forma consolidated financial information
has been prepared assuming our acquisition had occurred on January 1, 2001.
For the year ended
December 31, 2001
-----------------
(unaudited, in
thousands)
Net revenue $168,260
Income from operations 14,482
--------
Net income (loss) $ (3,542)
========
These unaudited pro forma results are presented for comparative purposes
only. The pro forma results are not necessarily indicative of what our actual
results would have been had the acquisition been completed as of the beginning
of the year, or of future results. In addition, the above pro forma results
include the results of operations of Fitzgeralds Las Vegas, which was spun off
to BDI on December 31, 2003 (see Note 5).
As a result of the acquisition of the Fitzgeralds assets, Investor Holdings
recognized intangible assets primarily consisting of $9.8 million for customer
relationships, $3.7 million for trade name and $5.2 million for the Nevada
gaming license. Intangible assets for customer relationships and trade names are
being amortized over a period of 8-10 years. In accordance with SFAS No. 142,
goodwill and other indefinite lived intangible assets, such as the gaming
license, are not amortized but instead subject to impairment tests at least
annually.
5. SPIN-OFF OF FITZGERALDS LAS VEGAS
Concurrent with the refinancing of all of the Majestic Star's and Investor
Holdings' debt as more fully explained in Note 8, Fitzgeralds Las Vegas became
an unrestricted subsidiary of Investor Holdings. None of the assets or equity
interests of Fitzgeralds Las Vegas were pledged as collateral benefiting the
9 1/2% senior secured notes or the $80.0 million Credit Facility. On December
18, 2003, Investor Holdings, the direct owner of Fitzgeralds Las Vegas, and
BDI received final regulatory approval to spin-off Fitzgeralds Las Vegas. The
spin-off to BDI was completed on December 31, 2003. In connection with the
spin-off, Investor Holdings recorded an impairment loss on discontinued
operations of $10.0 million. The loss represents the difference between the
estimated fair market value and the book carrying value of Fitzgeralds Las Vegas
at the date of spin-off. In addition, Investor Holdings, in conjunction with the
spin-off of the equity interests in Fitzgeralds Las Vegas, transferred the
remaining $27.5 million of Fitzgeralds Las Vegas assets net of liabilities, to
BDI and forgave intercompany balances due from Fitzgeralds Las Vegas of $36.7
million.
F-54
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following represents selected operational information of Fitzgeralds Las
Vegas:
For the Period
For the Years Ended December 31, December 7, 2001
to
2003 2002 December 31, 2001
------------ ------------ -----------------
Gross Revenues $ 53,403,324 $ 54,617,588 $ 3,445,137
Net Revenues $ 47,613,298 $ 48,812,435 $ 3,065,077
Operating Expenses $ 49,568,878 $ 50,789,174 $ 3,457,953
Operating Loss $ (1,955,580) $ (1,976,739) $ (392,876)
Net Income $ (1,972,607) $ (1,994,777) $ (394,957)
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
As of December 31, Estimated
-------------------------------- Service Life
2003 2002 (Years)
------------- ------------- ------------
Land used in casino operations $ 3,823,375 $ 6,403,375 -
Vessel, buildings & improvements 48,689,960 69,812,270 25-39
Site improvements 15,971,805 15,971,805 9-15
Barge and improvements 14,696,168 14,691,854 13-15
Furniture, fixtures and equipment 16,999,798 20,050,973 4-10
Construction in progress 3,378,937 900,221
------------ -------------
103,560,043 127,830,498
Less accumulated depreciation and amortization (16,241,854) (10,532,992)
------------ -------------
Property and equipment, net $ 87,318,189 $ 117,297,506
============ =============
Substantially all property and equipment are pledged as collateral on
long-term debt. See Note 8.
F-55
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. OTHER INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of Investor Holdings'
intangible assets, other than goodwill, as of December 31, 2003 and 2002 are as
follows:
Estimated
Gross Carrying Accumulated Net Amount Expected
Amount Amortization December 31, 2003 Life
-------------- ------------ ----------------- ---------
Amortized intangible assets: (in thousands)
Customer relationship $ 7,840 $(2,033) $ 5,807 8 yrs
Tradename 3,450 (708) 2,742 10 yrs
Riverboat excursion license 700 - 700 15 yrs
------- ------- -------
Total intangible assets $11,990 $(2,741) $ 9,249
======= ======= =======
Estimated
Gross Carrying Accumulated Net Amount Expected
Amount Amortization December 31, 2002 Life
-------------- ------------ ----------------- ---------
Amortized intangible assets: (in thousands)
Customer relationship $ 7,840 $(1,053) $ 6,787 8 yrs
Tradename 3,450 (363) 3,087 10 yrs
Riverboat excursion license 700 - 700 15 yrs
Intangible asset of discontinued
operation 2,210 (292) 1,918
------- ------- -------
14,200 (1,708) 12,492
Unamortized intangible assets:
Intangible asset of discontinued
operation 5,200 -- 5,200
------- ------- -------
Total intangible assets $19,400 $(1,708) $17,692
======= ======= =======
The amortization expense recorded on the intangible assets for the year ended
December 31, 2003, December 31, 2002 and for the period from inception of
Investor Holdings, (September 14, 2001), through December 31, 2001 was $1.3
million, $1.3 million and $0.1 million, respectively. The $700,000 intangible
asset represents a riverboat excursion license for a riverboat, which commenced
full operations in March of 2004. Consequently, the $700,000 will be amortized
at the rate of approximately $4,000 per month beginning in April 2004. The
estimated amortization expense for all amortized intangible assets for each of
the five succeeding fiscal years is as follows:
For the Years Ended December 31, (in thousands)
2004 $ 1,360
2005 1,372
2006 1,372
2007 1,372
2008 1,372
Under SFAS No.142, goodwill and other indefinite lived intangible assets are
no longer subject to amortization over their useful lives; rather, they are
subject to assessments for impairment at least annually. Also, under SFAS No.
142, an intangible asset should be recognized if the benefit of the intangible
asset is obtained through contractual or other legal rights or if the intangible
asset can be sold, transferred, licensed, rented or exchanged. Such intangibles
will be amortized over their useful lives. Under SFAS No. 142, Investor
Holdings' acquisition of the Fitzgeralds assets was immediately subject to the
provision of SFAS No. 142.
F-56
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT
Long-term debt outstanding at December 31 is as follows: 2003 2002
---- ----
$16,290,000 unsecured notes payable, net of unamortized discount of $533,169 at
2003 and $151,767,000 notes payable, net of unamortized discount of $6,235,552
at 2002. During 2003 Investor Holdings purchased 89.3% of its 11.653% notes. In
addition, in 2002, Investor Holdings purchased $865,000 of its notes. Investor
Holdings pays interest at the rate of 11.653% on the notes. Interest is paid
semi-annually on May 31 and November 30, with a final payment of principal and
interest due on November 30, 2007. The notes are not secured. $15,756,831 $ 145,531,448
Equipment and software financing payable at Barden Nevada Gaming, LLC including
related use taxes; collateralized by gaming equipment; interest rates from 7.5%
to 12.0% due in aggregate monthly installments of $13,526 with varying maturity
dates through 2005. These debt obligations were spun-off to BDI. -- 249,150
----------- -------------
15,756,831 145,780,598
Less current maturities -- (134,084)
----------- -------------
Long-term debt, net of current maturities $15,756,831 $ 145,646,514
=========== =============
The schedules maturities of long-term debt are as follows:
For the Years Ended December 31,
(In Thousands)
2004 $ -
2005 -
2006 -
2007 15,757
-------
$15,757
=======
REFINANCING OF DEBT
On August 26, 2003, Investor Holdings commenced a cash tender offer and
consent solicitation at a price of 109.0% for its 11.653% notes. The
solicitation of consents sought approval for amendments to the Indenture
governing the 11.653% notes (the "Indenture") in order to (i) eliminate
substantially all restrictive covenants, (ii) terminate the guarantees of the
restricted subsidiaries of Investor Holdings and (iii) release the liens on the
collateral that secured the 11.653% notes. Upon expiration of the consent
solicitation on September 25, 2003, $135.5 million or 89.3% of the aggregate
outstanding principal amount of the 11.653% notes had been tendered. After the
expiration of the offer and consent solicitation related to the 11.653% notes,
Investor Holdings has $16.3 million in 11.653% notes still outstanding which are
no longer secured (the "11.653% unsecured notes").
Upon the closing of the 9 1/2% senior secured notes on October 7, 2003,
Investor Holdings used approximately $153.2 million of the proceeds to fund the
payment of 89.3% of its 11.653% notes, along with accrued and unpaid interest.
The remaining proceeds from the issuance of the 9 1/2% senior secured notes were
used to redeem a portion of Majestic Star's 10 7/8% senior secured notes and pay
certain fees associated with the issuance of the 9 1/2% senior secured notes.
Investor Holdings recognized a loss on the retirement of debt of approximately
$22.0 million on October 7, 2003. The loss on the retirement is comprised of
premiums on the offer to purchase, the write-off of deferred issuance costs and
the write-off of original issuance discount on 89.3% of the 11.653% notes, which
amounts are reflected in the computation of net income for the year ended
December 31, 2003.
F-57
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 9 1/2% senior secured notes bear interest at a fixed annual rate of 9.5%
payable on April 15 and October 15 of each year, commencing April 15, 2004. The
9 1/2% senior secured notes will mature on October 15, 2010. The 9 1/2% senior
secured notes are secured by a pledge of the equity interests of Investor
Holdings and substantially all of Investor Holdings' current and future assets,
including the current and future assets of the Guarantor Subsidiaries, except
for the assets of Fitzgeralds Las Vegas, which became an unrestricted and
non-guarantor subsidiary effective October 7, 2003 and was subsequently spun-off
to BDI on December 31, 2003.
The Indenture governing the 9 1/2% senior secured notes contains covenants
which, among other things, restricts Majestic Star's and Investor Holdings'
ability to (i) make certain payments to, or investments in, third parties; (ii)
incur additional indebtedness or liens on any assets; (iii) enter into
transactions with affiliates; and (iv) sell any restricted subsidiaries' assets.
OLD MAJESTIC INVESTOR HOLDINGS NOTES
At December 31, 2003, Investor Holdings had debt outstanding of $15.8
million related to its 11.653% unsecured notes, net of unamortized discount of
$0.5 million. This compares to $145.6 million of notes, net of unamortized
discount of $6.2 million at December 31, 2002. $135.5 million of notes were
purchased and retired on October 7, 2003, as previously explained. The 11.653%
unsecured notes bear interest at a fixed rate of 11.653% per annum payable May
31 and November 30 each year. The 11.653% unsecured notes will mature on
November 30, 2007. Investor Holdings and its restricted subsidiaries no longer
guarantee the 11.653% unsecured notes and the liens on the collateral have been
released. For the years ended December 31, 2003 and 2002, Investor Holdings had
interest expense of $14.0 million and $18.1 million, respectively.
In 2002, Majestic Investor Holdings, LLC was required to pay liquidated
damages related to the unregistered 11.653% notes. Because the registration
statement was not declared effective by the Securities and Exchange Commission
by the date required by the registration rights agreement, Investor Holdings
paid liquidated damages of $176,000 during 2002.
During the fourth quarter of 2002, Investor Holdings purchased for $759,000,
plus accrued interest, its 11.653% notes with a face value of $865,000. The
notes, net of unamortized original issue discount, were being carried at a value
of $828,000; the resulting gain was $69,000.
OLD CREDIT FACILITIES
At October 7, 2003, Investor Holdings had a $15.0 million credit facility
(the "Majestic Investor Holdings Credit Facility"). This credit facility was
terminated on October 7, 2003 when Majestic Star entered into the new $80.0
million Credit Facility. Investor Holdings and its restricted subsidiaries are
guarantors of the $80.0 million Credit Facility and their assets are pledged as
collateral. There were no borrowings on the Majestic Investor Holdings Credit
Facility as of the termination date, October 7, 2003, and December 31, 2002.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying value and estimated fair value as
of December 31, 2003 of the Company's financial instruments. (Refer to Notes 2
and 8).
Carrying Estimated
Value Fair Value
----------- -----------
Assets:
Cash and equivalents $11,128,586 $11,128,586
Restricted Cash $ 500,000 $ 500,000
Liabilities:
Long-term debt $15,756,831 $15,756,831
The remaining $15.8 million of 11.653% notes, net of original issue discount
of $0.5 million, to our knowledge are not publicly traded. We believe the fair
value of this debt to be approximately $15.8 million since these notes are no
longer secured by the equity interests and assets of Investor Holdings and its
restricted subsidiaries.
F-58
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SAVINGS PLAN
Investor Holdings contributes to a defined contribution plan, as part of a
larger Majestic Star defined contribution plan, which provides for contributions
in accordance with the plan document. The plan is available to certain employees
with at least one year of service. Investor Holdings contributes a matching
contribution up to a maximum of 3% of an employee's salary limited to a
specified dollar amount as stated in the plan document. Investor Holdings'
contributions to the plan amounted to $562,000, 714,000 and $0 during 2003, 2002
and 2001, respectively. There were no matching contributions made to the
Fitzgerald employees in 2001. The matching contribution made during 2002 is
inclusive of $185,000 in contributions made to the employees of our discontinued
subsidiary.
11. COMMITMENTS AND CONTINGENCIES
Leases
Investor Holdings has operating leases that cover various office and gaming
equipment. Future minimum lease payments for operating leases with initial terms
in excess of one year as of December 31, 2003 are as follows:
For the Years Ended December 31,
2004 $ 266,500
2005 96,904
2006 18,212
2007 18,212
2008 16,692
Thereafter 15,932
----------
$ 432,452
==========
Rent expense for years ended December 31, 2003, 2002 and 2001 was $3.6
million, $4.6 million and $0.3 million, respectively.
Legal Proceedings
Various legal proceedings are pending against Investor Holdings. Management
considers all such pending proceedings, comprised primarily of personal injury
and equal employment opportunity (EEO) claims, to be routine litigation
incidental to Investor Holdings' business. Management believes that the
resolution of these proceedings will not individually or in the aggregate, have
a material effect on Investor Holdings' financial condition, results of
operations or cash flows.
In December 2002, a complaint was filed in the U.S. District Court for the
Northern District of Mississippi against Barden Mississippi Gaming, LLC and the
former owner of Fitzgeralds Tunica, alleging violation of Title VII of the Civil
Rights Act of 1964 and violation of 42 U.S.C. ss.1981, as well as certain other
state law claims. The plaintiff is seeking back pay, front pay, compensatory
damages and punitive damages in excess of $3.5 million. Investor Holdings is
vigorously defending the lawsuit. However, it is too early to determine the
outcome of this matter and the effect, if any, on Investor Holdings' financial
position and results of operations and accordingly, the accompanying financial
statements do not include any accrual relating to this contingent liability.
In June 2003, a complaint was filed in the U.S. District Court for the
Northern District of Mississippi against several Tunica area casino owners and
operators, including Barden Mississippi Gaming, LLC. The plaintiffs claim the
defendants conspired to agree not to enter into any advertising or other
agreements with the plaintiffs, in violation of federal and state antitrust
laws, as well as various other tort and contract claims. The plaintiffs are
seeking treble, compensatory and punitive damages totaling approximately $33.0
million, plus interest and attorney's fees. Investor Holdings intends to
vigorously defend against this lawsuit. However, it is too early to determine
the outcome and the effect, if any, on Investor Holdings' financial position and
results of operations and accordingly, the accompanying financial statements do
not include any accrual relating to this contingent liability.
F-59
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GAMING REGULATIONS
The ownership and operation of our casino gaming facilities in Mississippi
and Colorado are subject to various state and local regulations in the
jurisdictions where they are located. 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, which is empowered 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.
Investor Holdings' directors, officers, managers and key employees are
required to hold individual licenses. These requirements vary from jurisdiction
to jurisdiction. Licenses and permits for gaming operations and for 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.
Barden Mississippi must maintain its gaming license from the Mississippi
Commission in order to continue to operate a casino in Mississippi. Such
licenses are issued by the Mississippi Commission subject to certain conditions,
including continued compliance with all applicable state laws and regulations.
Gaming licenses require the payment of periodic fees and taxes, are not
transferable, are issued for a three-year period (and may be continued for two
additional three-year periods) and must be renewed periodically thereafter.
Barden Mississippi's current gaming license expires in December of 2004. There
can be no assurance that any subsequent application for a license will be
approved.
On October 18, 2001, the Colorado Gaming Commission issued operator and
retail licenses to Barden Colorado Gaming, LLC, the owner and operator of
Fitzgeralds Black Hawk. The operator license was effective as of October 18,
2001. The retail license became effective upon assumption of control of
Fitzgeralds Black Hawk by Barden Colorado Gaming, LLC on December 7, 2001. The
operator and retail gaming licenses were renewed by the Colorado Gaming
Commission in October 2002 and again on October 16, 2003 for a period of one
year. There can be no assurance that any subsequent application for a license
will be approved.
F-60
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LETTER OF CREDIT/SURETY BOND
During the year ended December 31, 2002, a $250,000 letter of credit was
issued to secure payment of workers compensation claims at Barden Colorado
Gaming, LLC and Barden Mississippi Gaming, LLC. In order to collateralize the
letter of credit the bank, through which the letter of credit was issued,
restricted $250,000 of Investor Holdings' cash in bank. In 2003, Fitzgeralds Las
Vegas joined the self-insured workers compensation program. When this occurred,
Investor Holdings was required to increase its letter of credit to $500,000. As
collateral, the bank increased restricted cash by an additional $250,000.
The State of Mississippi has required Barden Mississippi Gaming, LLC to post
surety bonds as security for current and future sales and gaming revenue tax
obligations. Barden Mississippi Gaming, LLC has four surety bonds; a $600,000
bond in place with the Mississippi State Tax Commission and three $5,000 bonds
with the Mississippi Alcoholic Beverage Control. These surety bonds are secured
only by personal guaranties of Don H. Barden. If Mr. Barden is required to make
payments to the bonding companies as a result of the guaranties, Investor
Holdings and Barden Mississippi Gaming, LLC will be obligated to reimburse Mr.
Barden for any such payments.
12. RELATED PARTY TRANSACTIONS
LOANS TO RELATED PARTIES
In December 2001, Investor Holdings issued a $700,000 note to BDI. The note
bore interest at a rate of 7% per annum and was paid in full, with interest, in
March 2003.
TRANSACTIONS BY OR WITH AFFILIATES
In December 2001, Investor Holdings entered into a LLC Manager Agreement
with BDI to provide for, among other things, BDI to act as our manager (the
"Investor Holdings Manager Agreement"). Distributions to BDI under the Investor
Holdings Manager Agreement were limited under the terms of the indenture
governing the 11.653% notes. The distributions for each fiscal quarter could not
exceed 1% of net revenues plus 5% of Investor Holdings' consolidated cash flow
(as defined in the indenture for the 11.653% notes) for the immediately
preceding fiscal quarter and could not be paid if Investor Holdings was in
default under the indenture relating to the 11.653% notes or if Investor
Holdings did not meet certain financial ratios as provided in such indenture.
The Investor Holdings Manager Agreement was terminated concurrent with the
refinancing transactions and a new Manager Agreement (the "new Manager
Agreement") was entered into between Majestic Star and BDI, and became effective
on October 7, 2003. Under the new Manager Agreement, distributions for each
fiscal quarter, starting with the quarter ended September 30, 2003, can not
exceed 1% of Majestic Star's consolidated net revenues plus 5% of Majestic
Star's consolidated cash flow (as defined in the indenture for the 9
F-61
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1/2% senior secured notes) for the immediately preceding fiscal quarter and may
not be paid if Majestic Star is in default under the indenture relating to the 9
1/2% senior secured notes.
During the twelve months ended December 31, 2003, Investor Holdings made
distributions totaling $3,342,000 to BDI pursuant to the Investor Holdings
Manager Agreement and the new Manager Agreement related to the fourth quarter of
2002 and the first three quarters of 2003. Investor Holdings made distributions
of $2,544,000 and for the twelve months ended December 31, 2002 related to the
Investor Holdings Manager Agreement.
In April 2003, Investor Holdings, in accordance with the indenture relating
to the 11.653% notes, made a $338,000 distribution to its sole beneficial owner
for income taxes. The calculation for the distribution was based on Investor
Holdings' net income during the three-month period ended March 31, 2003.
FITZGERALDS ACQUISITION AND EXPENSE REIMBURSEMENT/SHARING AGREEMENT
In September 2000, Investor was capitalized by Majestic Star with $9.0
million of capital contributions, including interest thereon. Investor
subsequently contributed this $9.0 million to Investor Holdings in connection
with the assignment of its rights and obligations under the Fitzgeralds purchase
and sale agreement to Investor Holdings.
Prior to the consummation of the offering of the Investor Holdings 11.653%
notes, Investor Holdings issued a 35.71% membership interest to BDI (a company
wholly-owned by Mr. Barden and a member of Majestic Star) in exchange for the
contribution by BDI of a note for $5.0 million. BDI subsequently contributed the
35.71% membership interest to Investor as additional paid-in-equity. Investor
currently owns 100% of the member interests of Investor Holdings. BDI, upon
closing of the offering of the 11.653% notes, contributed $5.0 million in
repayment of the promissory note.
On October 22, 2001, Investor Holdings entered into an Expense
Reimbursement/Sharing Agreement with Majestic Star, pursuant to which Investor
Holdings and its restricted subsidiaries reimbursed Majestic Star for sixty
percent (60%) of the documented out-of-pocket expenses paid by Majestic Star for
Investor Holdings' corporate overhead, including (i) the costs and expenses of
executives and certain other employees, including, but not limited to, salaries,
bonuses, benefit payments, insurance, and supplies, (ii) rent and (iii) other
similar costs and expenses.
These executives and employees provided services to Investor Holdings, its
subsidiaries and Majestic Star. The reimbursement percentage was capped at fifty
percent (50%) up to an aggregate of $1.7 million due to restrictions set forth
in the Investor Holdings Indenture. The Expense Reimbursement/Sharing Agreement
was in effect from December 7, 2001 through December 31, 2001, for the twelve
months ended December 31, 2002 and for the period January 1, 2003 through
October 7, 2003. Upon completion of the refinancing and elimination of the
restrictive covenants, the Expense Reimbursement/Sharing Agreement was
terminated.
13. SEGMENT INFORMATION
As of December 31, 2003, Investor Holdings owns and operates two properties
as follows: a casino and hotel located in Tunica, Mississippi and a casino
located in Black Hawk, Colorado (collectively, the "Properties"). Prior to the
spin-off as previously discussed, Investor Holdings owned an additional casino
and hotel located in Las Vegas, Nevada.
Investor Holdings identifies its business in two 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 (in Tunica, Mississippi) and food and beverage.
The accounting policies of each business segment are the same as those
described in the summary of significant accounting policies. There are minimal
inter-segment sales. Corporate costs are allocated to the business segments
through expense reimbursement under Majestic Star, which was terminated on
October 7, 2003 upon consummation of our refinancing transactions.
A summary of the Properties' operations by business segment as of and for
the years ended December 31, 2003, 2002 and for the period from inception
(September 14, 2001) through December 31, 2001 is presented below:
F-62
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period
For the years ended from Inception
December 31, (September 14, 2001)
------------------------ through December 31,
2003 2002 2001
--------- --------- -------------------
(in thousands)
Net revenues:
Fitzgeralds Tunica 89,249 92,835 5,753
Fitzgeralds Black Hawk 33,644 35,138 2,425
--------- --------- ---------
Total $ 122,893 $ 127,973 $ 8,178
========= ========= =========
Operating income (loss):
Fitzgeralds Tunica 12,341 14,288 654
Fitzgeralds Black Hawk 6,462 6,694 675
Majestic Investor Holdings (2,388) (2,956) (1,214)
--------- --------- ---------
Total $ 16,415 $ 18,026 $ 115
========= ========= =========
Segment depreciation and amortization:
Fitzgeralds Tunica 7,820 7,373 485
Fitzgeralds Black Hawk 1,730 1,538 99
Majestic Investor Holdings 2,105 2,597 169
--------- --------- ---------
Total $ 11,655 $ 11,508 $ 753
========= ========= =========
Expenditure for additions to long-lived assets:
Fitzgeralds Tunica 4,395 2,549 100
Fitzgeralds Black Hawk 1,863 1,177 --
--------- --------- ---------
Total $ 6,258 $ 3,726 $ 100
========= ========= =========
As of December 31,
-------------------------
2003 2002
---------- ---------
Segment assets:
Fitzgeralds Tunica 84,458 88,307
Fitzgeralds Black Hawk 30,498 30,468
Fitzgeralds Las Vegas (1) -- 38,231
Majestic Investor Holdings 64,639 155,574
--------- ---------
Total 179,595 312,580
Less: Intercompany (62,533) (141,541)
--------- ---------
Total 117,062 171,039
========= =========
(1) On December 31, 2003, Fitzgeralds Las Vegas was spin-off to BDI.
14. GUARANTOR FINANCIAL INFORMATION
A portion of the proceeds from the issuance of the 9 1/2% notes were used to
purchase substantially all of the 11.653% notes. Under the Indenture for the
9 1/2% senior secured notes and the Loan and Security Agreement for the $80.0
million Credit Facility, Investor Holdings, Fitzgeralds Tunica and Fitzgeralds
Black Hawk are guarantors; however, Fitzgeralds Las Vegas became an unrestricted
and non-guarantor subsidiary and was subsequently spun-off to BDI on December
31, 2003. The remaining $16.3 million of 11.653% unsecured notes are no longer
guaranteed by Investor Holdings or its restricted subsidiaries.
The following condensed consolidating information presents condensed
consolidating balance sheets as of December 31, 2003 and December 31, 2002 and
condensed consolidating statements of operations and condensed consolidating
statements of cash flows for the years ended December 31, 2003 and 2002 and for
the period of inception (September 14, 2001) through December 31, 2001 for
Investor Holdings, Majestic Investor Capital Corp., the guarantor subsidiaries,
our discontinued subsidiary, and eliminating entries necessary to consolidate
such entities.
F-63
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2003
Majestic Majestic
Investor Investor
Holdings, Capital Guarantor Eliminating Total
LLC Corp. Subsidiaries Entries Consolidated
------------- ------------- -------------- ------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,006,253 - $ 10,122,333 $ - $ 11,128,586
Restricted cash 500,000 - - - 500,000
Accounts receivable, net - - 668,063 - 668,063
Inventories - - 630,373 - 630,373
Prepaid expenses and other current 45,000 - 453,539 - 498,539
assets
Receivable from related party 190,016 - 70 (190,086) (a) -
------------- ------------ -------------- ------------- -------------
Total current assets 1,741,269 - 11,874,378 (190,086) 13,425,561
------------- ------------ -------------- ------------- -------------
Property, equipment and improvements,
net - - 87,318,189 - 87,318,189
Intangible assets, net - - 9,249,247 - 9,249,247
Goodwill - - 5,922,398 - 5,922,398
Other assets:
Deferred financing costs, net 554,973 - - - 554,973
Due from related parties 62,342,454 - - (62,342,454) (a) -
Other assets - - 591,979 - 591,979
Investment in Subsidiaries 41,162,785 - - (41,162,785) (b) -
------------- ------------ -------------- ------------- -------------
Total Assets $ 105,801,481 - $ 114,956,191 $ (103,695,325) $ 117,062,347
============= ============ ============== ============= =============
LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ - - $ 930,847 $ - $ 930,847
Payable to related party 102,455 464,997 (190,086) 377,366
Accrued liabilities:
Payroll and related - - 3,899,068 - 3,899,068
Interest 158,189 - - - 158,189
Progressive jackpot - - 2,065,428 - 2,065,428
Slot club liabilities - - 498,070 - 498,070
Other accrued liabilities - - 3,592,542 3,592,542
------------- ------------ --------------- ------------- -------------
Total current liabilities 260,644 - 11,450,952 (190,086) 11,521,510
------------- ------------ -------------- ------------- -------------
Due to related parties 144,395,427 - 62,342,454 (62,342,454) (a) 144,395,427
Long-term debt, net of current
maturities 15,756,831 15,756,831 - (15,756,831) (c) 15,756,831
------------- ------------ -------------- ------------- -------------
Total Liabilities 160,412,902 15,756,831 73,793,406 (78,289,371) 171,673,768
Member's equity (deficit) (54,611,421) (15,756,831) 41,162,785 (25,405,954) (54,611,421)
------------- ------------ -------------- ------------- -------------
Total Liabilities and Member's
Equity (Deficit) $ 105,801,481 $ - $ 114,956,191 $(103,695,325) $117,062,347
============= ============ ============== ============= ============
(a) To eliminate intercompany receivables and payables.
(b) To eliminate investment in subsidiaries.
(c) As more fully described in Note 8, Long Term Debt, Majestic Investor
Capital Corp is a co-obligor of the 11.653% notes issued by Majestic
Investor Holdings, LLC. Accordingly, such indebtedness has been presented
as an obligation of both the issuer and the co-obligor in the above balance
sheet.
F-64
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002
Majestic Majestic
Investor Investor
Holdings, Capital Guarantor Discontinued Eliminating Total
LLC Corp. Subsidiaries Operation (d) Entries Consolidated
------------ ------------- ------------- --------------- --------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,007,660 $ -- $ 10,580,558 $ 4,395,606 $ -- $ 15,983,824
Restricted cash 250,000 -- -- -- -- 250,000
Accounts receivable, net 52,695 -- 595,709 592,779 -- 1,241,183
Inventories -- -- 610,097 319,029 -- 929,126
Prepaid expenses and other current
assets 125,620 -- 581,804 976,444 -- 1,683,868
Receivable from related party 4,748,371 -- 15,670 1,760 (4,765,801)(a) --
Note receivable from related party 700,000 -- -- -- -- 700,000
------------- ------------- ------------- ------------- ------------- -------------
Total current assets 6,884,346 -- 12,383,838 6,285,618 (4,765,801) 20,788,001
------------- ------------- ------------- ------------- ------------- -------------
Property, equipment and
improvements, net -- -- 89,302,527 27,994,979 -- 117,297,506
Intangible assets, net 5,200,000 -- 10,574,246 1,917,500 -- 17,691,746
Goodwill -- -- 5,922,398 -- -- 5,922,398
Other assets:
Deferred financing costs, net 6,714,902 -- -- -- -- 6,714,902
Restricted cash -- -- -- 1,000,000 -- 1,000,000
Due from related parties 116,816,043 -- -- -- (116,816,043)(a) --
Investment in Subsidiaries 19,959,009 -- -- -- (19,959,009)(b) --
Other assets -- -- 591,979 1,032,380 1,624,359
------------- ------------- ------------- ------------- ------------- -------------
Total Assets $ 155,574,300 $ -- $ 118,774,988 $ 38,230,477 $(141,540,853) $ 171,038,912
============= ============= ============= ============= ============= =============
LIABILITIES AND MEMBER'S EQUITY
(DEFICIT)
Current Liabilities:
Accounts payable $ -- $ -- $ 1,031,604 $ 1,104,765 $ -- $ 2,136,369
Current maturities of long-term
debt -- -- -- 134,084 -- 134,084
Accrued Liabilities:
Payroll and related -- -- 3,914,357 2,034,918 -- 5,949,275
Interest 1,473,785 -- -- -- -- 1,473,785
Progressive jackpot -- -- 2,236,782 239,761 -- 2,476,543
Slot club liabilities -- -- 611,785 126,774 -- 738,559
Other accrued liabilities 486,662 -- 3,223,274 691,442 -- 4,401,378
------------- ------------- ------------- ------------- ------------- -------------
Total current liabilities 1,960,447 -- 11,017,802 4,331,744 -- 17,309,993
------------- ------------- ------------- ------------- ------------- -------------
Due to related parties -- -- 85,408,440 36,173,404 (121,581,844)(a) --
Long-term debt, net of current
maturities 145,531,448 145,531,448 -- 115,066 (145,531,448)(c) 145,646,514
------------- ------------- ------------- ------------- ------------- -------------
Total Liabilities 147,491,895 145,531,448 96,426,242 40,620,214 (267,113,292) 162,956,507
Member's Equity (Deficit) 8,082,405 (145,531,448) 22,348,746 (2,389,737) 125,572,439 8,082,405
------------- ------------- ------------- ------------- ------------- -------------
Total Liabilities and Member's
Equity (Deficit) $ 155,574,300 $ -- $ 118,774,988 $ 38,230,477 $(141,540,853) $ 171,038,912
============= ============= ============= ============= ============= =============
(a) To eliminate intercompany receivables and payables.
(b) To eliminate investment in subsidiaries.
(c) As more fully described in Note 8, Long Term Debt, Majestic Investor
Capital Corp is a co-obligor of indebtedness issued by Majestic Investor
Holdings, LLC. Accordingly, such indebtedness has been presented as an
obligation of both the issuer and the co-obligor in the above balance
sheet.
(d) Discontinued Operations reflects the balance sheet accounts of Fitzgeralds
Las Vegas, which is not a guarantor of The Majestic Star Casino, LLC's
9 1/2% senior secured notes and was spun-off to BDI on December 31, 2003.
F-65
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
MAJESTIC MAJESTIC
INVESTOR INVESTOR DISCONTINUED
HOLDINGS, CAPITAL GUARANTOR OPERATION ELIMINATING TOTAL
LLC CORP. SUBSIDIARIES (B) ENTRIES CONSOLIDATED
------------- ------------- ------------- ------------- ------------- -------------
REVENUES:
Casino $ -- $ -- $ 118,817,746 $ -- $ -- $ 118,817,746
Rooms -- -- 7,932,811 -- -- 7,932,811
Food and beverage -- -- 11,304,793 -- -- 11,304,793
Other -- -- 1,689,274 -- -- 1,689,274
------------- ------------- ------------- ------------- ------------- -------------
Gross revenues -- -- 139,744,624 -- -- 139,744,624
Less promotional allowances -- -- 16,851,683 -- -- 16,851,683
------------- ------------- ------------- ------------- ------------- -------------
Net revenues -- -- 122,892,941 -- -- 122,892,941
------------- ------------- ------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Casino -- -- 47,681,627 -- -- 47,681,627
Rooms -- -- 2,552,127 -- -- 2,552,127
Food and beverage -- -- 3,630,498 -- -- 3,630,498
Other -- -- 1,179,893 -- -- 1,179,893
Gaming taxes -- -- 15,085,240 -- -- 15,085,240
Advertising and promotion -- -- 7,829,023 -- -- 7,829,023
General and administrative 282,350 -- 15,240,102 -- -- 15,522,452
Corporate expense -- -- 1,350,937 -- -- 1,350,937
Depreciation and amortization 2,105,199 -- 9,549,523 -- -- 11,654,722
Gain on disposal of assets -- (8,822) -- -- (8,822)
------------- ------------- ------------- ------------- ------------- -------------
Total costs and expenses 2,387,549 -- 104,090,148 -- -- 106,477,697
------------- ------------- ------------- ------------- ------------- -------------
Operating income (loss) (2,387,549) -- 18,802,793 -- -- 16,415,244
------------- ------------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 31,062 -- 11,246 -- -- 42,308
Interest expense (14,001,864) -- -- -- -- (14,001,864)
Loss on bond redemption (21,952,380) -- -- -- -- (21,952,380)
Other non-operating expense (29,212) -- -- -- -- (29,212)
Equity in net income (loss)
of subsidiaries 6,841,432 -- (11,972,607) -- 5,131,175(a) --
------------- ------------- ------------- ------------- ------------- -------------
Total other income
(expense) (29,110,962) -- (11,961,361) -- 5,131,175 (35,941,148)
------------- ------------- ------------- ------------- ------------- -------------
(Loss) income from
continuing operations (31,498,511) -- 6,841,432 -- 5,131,175 (19,525,904)
Discontinued operations -- -- -- (11,972,607) -- (11,972,607)
------------- ------------- ------------- ------------- ------------- -------------
Net (loss) income $ (31,498,511) $ -- $ 6,841,432 $ (11,972,607) $ 5,131,175 $ (31,498,511)
============= ============= ============= ============= ============= =============
(a) To eliminate equity in net income of subsidiaries.
(b) Discontinued Operations reflects the operating accounts of Fitzgeralds
Las Vegas, which is not a guarantor of The Majestic Star Casino, LLC's
9 1/2% senior secured notes and was spun-off to BDI on December 31,
2003.
F-66
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
Majestic Majestic
Investor Investor Discontinued
Holdings, Capital Guarantor Operations Eliminating Total
LLC Corp. Subsidiaries (b) Entries Consolidated
------------- ------------- ------------- ------------- ------------- -------------
Revenues:
Casino $ -- $ -- $ 124,228,663 $ -- $ -- $ 124,228,663
Rooms -- -- 8,160,611 -- -- 8,160,611
Food and beverage -- -- 11,189,142 -- -- 11,189,142
Other -- -- 1,564,194 -- -- 1,564,194
------------- ------------- ------------- ------------- ------------- -------------
Gross revenues -- -- 145,142,610 -- -- 145,142,610
Less promotional allowances -- -- 17,169,486 -- -- 17,169,486
------------- ------------- ------------- ------------- ------------- -------------
Net revenues -- -- 127,973,124 -- -- 127,973,124
------------- ------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Casino -- -- 49,712,322 -- -- 49,712,322
Rooms -- -- 2,684,354 -- -- 2,684,354
Food and beverage -- -- 3,963,068 -- -- 3,963,068
Other -- -- 1,030,061 -- -- 1,030,061
Gaming taxes -- -- 15,049,686 -- -- 15,049,686
Advertising and promotion -- -- 8,818,106 -- -- 8,818,106
General and administrative 345,443 -- 15,675,303 -- -- 16,020,746
Corporate expense -- -- 1,133,328 -- -- 1,133,328
Depreciation and amortization 2,597,154 -- 8,910,818 -- -- 11,507,972
(Gain) loss on disposal of
assets -- -- 14,320 -- -- 14,320
Pre-opening expenses 13,391 -- -- -- -- 13,391
------------- ------------- ------------- ------------- ------------- -------------
Total costs and expenses 2,955,988 -- 106,991,366 -- -- 109,947,354
------------- ------------- ------------- ------------- ------------- -------------
Operating income (loss) (2,955,988) -- 20,981,758 -- -- 18,025,770
------------- ------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 86,401 -- 36,924 -- -- 123,325
Interest expense (18,086,650) -- (625) -- -- (18,087,275)
Gain on bond redemption 68,957 -- -- -- -- 68,957
Other non-operating expenses (41,684) -- -- -- -- (41,684)
Equity in net income (loss) of
subsidiaries 19,023,280 -- (1,994,777) -- (17,028,503)(a) --
------------- ------------- ------------- ------------- ------------- -------------
Total other income (expense) 1,050,304 -- (1,958,478) -- (17,028,503) (17,936,677)
------------- ------------- ------------- ------------- ------------- -------------
(Loss) income from continuing
operations (1,905,684) -- 19,023,280 -- (17,028,503) 89,093
Discontinued operation -- -- -- (1,994,777) (1,994,777)
------------- ------------- ------------- ------------- ------------- -------------
Net (loss) income $ (1,905,684) $ -- $ 19,023,280 $ (1,994,777) $ (17,028,503) $ (1,905,684)
============= ============= ============= ============= ============= =============
(a) To eliminate equity in net income of subsidiaries.
(b) Discontinued Operations reflects the operating accounts of Fitzgeralds
Las Vegas, which is not a guarantor of The Majestic Star Casino, LLC's
9 1/2% senior secured notes and was spun-off to BDI on December 31,
2003.
F-67
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FROM (INCEPTION) SEPTEMBER 14, 2001 THROUGH DECEMBER 31, 2001
Majestic Majestic
Investor Investor
Holdings, Capital Guarantor Discontinued Eliminating Total
LLC Corp. Subsidiaries Operation (b) Entries Consolidated
----------- ----------- ------------ ------------ ----------- ------------
Revenues:
Casino $ -- $ -- $ 8,003,352 $ -- $ -- $ 8,003,352
Rooms -- -- 544,249 -- -- 544,249
Food and beverage -- -- 742,351 -- -- 742,351
Other -- -- 96,828 -- -- 96,828
----------- ----------- ----------- ----------- ----------- -----------
Gross revenues -- -- 9,386,780 -- -- 9,386,780
Less promotional allowances -- -- 1,209,171 -- -- 1,209,171
----------- ----------- ----------- ----------- ----------- -----------
Net revenues -- -- 8,177,609 -- -- 8,177,609
----------- ----------- ----------- ----------- ----------- -----------
Costs and Expenses:
Casino -- -- 3,397,606 -- -- 3,397,606
Rooms -- -- 187,507 -- -- 187,507
Food and beverage -- -- 287,047 -- -- 287,047
Other -- -- 68,523 -- -- 68,523
Gaming taxes -- -- 669,203 -- -- 669,203
Advertising and promotion -- -- 709,566 -- -- 709,566
General and administrative 26,476 -- 945,559 -- -- 972,035
Depreciation and amortization 168,930 -- 584,320 -- -- 753,250
Pre-opening expenses 1,018,234 -- -- -- -- 1,018,234
----------- ----------- ----------- ----------- ----------- -----------
Total costs and expenses 1,213,640 -- 6,849,331 -- -- 8,062,971
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) (1,213,640) -- 1,328,278 -- -- 114,638
----------- ----------- ----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 215,791 -- 2,410 -- -- 218,201
Interest expense (1,208,779) -- -- -- -- (1,208,779)
Equity in net income (loss) of
subsidiaries 935,731 -- (394,957) -- (540,774)(a) --
----------- ----------- ----------- ----------- ----------- -----------
Total other income (expense) (57,257) -- (392,547) -- (540,774) (990,578)
----------- ----------- ----------- ----------- ----------- -----------
(Loss) income from
continuing operations (1,270,897) -- 935,731 -- (540,774) (875,940)
Discontinued operation -- -- -- (394,957) -- (394,957)
----------- ----------- ----------- ----------- ----------- -----------
Net (loss) income $(1,270,897) $ -- $ 935,731 $ (394,957) $ (540,774) $(1,270,897)
=========== =========== =========== =========== =========== ===========
(a) To eliminate equity in net income of subsidiaries.
(b) Discontinued Operations reflects the operating accounts of Fitzgeralds
Las Vegas, which is not a guarantor of The Majestic Star Casino, LLC's
9 1/2% senior secured notes and was spun-off to BDI on December 31,
2003.
F-68
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003
Majestic Majestic
Investor Investor Discontinued
Holdings, Capital Guarantor Operation Eliminating Total
LLC Corp. Subsidiaries (a) Entries Consolidated
------------- -------- ------------- ------------- ------------- -------------
Net cash (used in) provided by
operating activities: $ (15,896,991) $ -- $ 28,137,563 $ -- $ -- $ 12,240,572
------------- -------- ------------- ------------- ------------- -------------
Cash Flows From Investing
Activities:
Increase in restricted cash (250,000) -- -- -- -- (250,000)
Distribution of cash to
Barden Development, Inc.
from spin-off of Barden
Nevada Gaming, LLC -- -- -- (4,395,606) -- (4,395,606)
Acquisition of property and
equipment -- -- (6,258,192) -- -- (6,258,192)
Proceeds from sale of
equipment -- -- 62,404 -- -- 62,404
------------- -------- ------------- ------------- ------------- -------------
Net cash used in investing
activities (250,000) -- (6,195,788) (4,395,606) -- (10,841,394)
------------- -------- ------------- ------------- ------------- -------------
Cash Flows From Financing
Activities:
Cash provided by parent for
purchase of 11.653% notes 153,195,427 -- -- -- -- 153,195,427
Payment of premium on early
extinguishment of debt (12,192,930) -- -- -- -- (12,192,930)
Cash paid for purchase of
11.653% notes (135,477,000) -- -- -- -- (135,477,000)
Payment of note from related
party 700,000 -- -- -- -- 700,000
Cash received from (advanced
to) related party 13,600,000 -- (22,400,000) -- -- (8,800,000)
Distribution to Barden
Development, Inc (3,679,913) -- -- -- -- (3,679,913)
------------- -------- ------------- ------------- ------------- -------------
Net cash provided by (used
in) financing
activities 16,145,584 -- (22,400,000) -- -- (6,254,416)
------------- -------- ------------- ------------- ------------- -------------
Net decrease in cash and
cash equivalents (1,407) -- (458,225) (4,395,606) -- (4,855,238)
Cash and cash equivalents,
beginning of period 1,007,660 -- 10,580,558 4,395,606 -- 15,983,824
------------- -------- ------------- ------------- ------------- -------------
Cash and cash equivalents, end
of period $ 1,006,253 $ -- $ 10,122,333 $ -- $ -- $ 11,128,586
============= ======== ============= ============= ============= =============
(a) Discontinued Operations reflects the cash activities of Fitzgeralds Las
Vegas, which is not a guarantor of The Majestic Star Casino, LLC's
9 1/2% senior secured notes and was spun-off to BDI on December 31,
2003.
F-69
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
Majestic Majestic
Investor Investor Discontinued
Holdings, Capital Guarantor Operations Eliminating Total
LLC Corp. Subsidiaries (b) Entries Consolidated
------------ ------------ ------------ ------------ ---------------- ------------
Net cash (used in) provided by
operating activities: $(21,143,727) $ -- $ 29,394,903 $ 1,057,821 $ 3,035,502(a)$ 12,344,499
------------ ------------ ------------ ------------ ---------------- ------------
Cash Flows From Investing
Activities:
Acquisition of property and
equipment -- -- (3,725,786) (1,481,670) -- (5,207,456)
Increase in restricted cash (250,000) -- -- -- -- (250,000)
Proceeds from seller for
purchase price adjustment 3,800,000 -- -- -- -- 3,800,000
Payment of acquisition
related costs (986,158) -- -- -- -- (986,158)
Proceeds from sale of
equipment -- -- 43,867 400 -- 44,267
------------ ------------ ------------ ------------ ---------------- ------------
Net cash provided by (used
in) investing activities 2,563,842 -- (3,681,919) (1,481,270) -- (2,599,347)
------------ ------------ ------------ ------------ ---------------- ------------
Cash Flows From Financing
Activities:
Proceeds from line of credit 2,500,000 2,500,000
Repayment of line of credit (9,000,000) (9,000,000)
Payment of 11.653% senior
secured notes issuance costs (1,523,568) -- -- -- -- (1,523,568)
Cash paid for purchase of
11.653% senior secured notes (759,038) -- -- -- -- (759,038)
Cash paid to reduce
long-term debt -- (139,331) (139,331)
Cash received from (advanced
to) affiliates and related
parties 30,415,994 -- (27,380,492) -- (3,035,502)(a)
Distributions to Barden
Development, Inc (2,544,206) -- -- -- -- (2,544,206)
------------ ------------ ------------ ------------ ---------------- ------------
Net cash provided by (used
in) financing activities 19,089,182 -- (27,380,492) (139,331) (3,035,502) (11,466,143)
------------ ------------ ------------ ------------ ---------------- ------------
Net increase (decrease) in
cash and cash equivalents 509,297 -- (1,667,508) (562,780) -- (1,720,991)
Cash and cash equivalents,
beginning of period 498,363 -- 12,248,066 4,958,386 -- 17,704,815
------------ ------------ ------------ ------------ ---------------- ------------
Cash and cash equivalents, end
of period $ 1,007,660 $ -- $ 10,580,558 $ 4,395,606 $ -- $ 15,983,824
============ ============ ============ ============ ================ ============
(a) To eliminate intercompany receivables and payables.
(b) The Discontinued Operation reflects the cash activities of Fitzgeralds
Las Vegas, which is not a guarantor of The Majestic Star Casino, LLC's
9 1/2% senior secured notes and was spun-off to BDI on December 31,
2003.
F-70
MAJESTIC INVESTOR HOLDINGS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM SEPTEMBER 14, 2001 THROUGH DECEMBER 31, 2001
Majestic Majestic
Investor Investor Discontinued
Holdings, Capital Guarantor Operation Eliminating Total
LLC Corp. Subsidiaries (a) Entries Consolidated
------------- -------- ------------- ------------- ------------- -------------
Net cash (used in) provided by
operating activities: $ (14,700,259) $ -- $ 12,347,820 $ 4,986,910 $ -- $ 2,634,471
------------- -------- ------------- ------------- ------------- -------------
Cash Flows From Investing
Activities:
Payments for Fitzgeralds,
net of cash acquired (143,758,152) -- -- -- (143,758,152)
Acquisition of property and
equipment -- -- (99,754) (22,942) -- (122,696)
------------- -------- ------------- ------------- ------------- -------------
Net cash (used in)
provided by investing
activities (143,758,152) -- (99,754) (22,942) -- (143,880,848)
------------- -------- ------------- ------------- ------------- -------------
Cash Flows From Financing
Activities:
Proceeds from issuance of
11.653% senior secured
notes 145,000,400 -- -- -- -- 145,000,400
Payment of 11.653% senior
secured notes issuance
costs (6,815,090) -- -- -- -- (6,815,090)
Member's equity contribution 5,000,000 -- -- -- -- 5,000,000
Contribution from Majestic
Investor 8,803,191 -- -- -- -- 8,803,191
Cash received from (advances
to) affiliates 1,168,273 -- -- -- -- 1,168,273
Issuance of loan to Barden
Development, Inc. (700,000) -- -- -- -- (700,000)
Proceeds from line of credit 6,500,000 -- -- -- -- 6,500,000
Cash paid to reduce
long-term debt -- -- -- (5,582) -- (5,582)
------------- -------- ------------- ------------- ------------- -------------
Net cash provided by (used
in) financing activities 158,956,774 -- -- (5,582) -- 158,951,192
------------- -------- ------------- ------------- ------------- -------------
Net increase (decrease) in
cash and cash equivalents 498,363 -- 12,248,066 4,958,386 -- 17,704,815
Cash and cash equivalents,
beginning of period -- -- -- -- -- --
------------- -------- ------------- ------------- ------------- -------------
Cash and cash equivalents, end
of period $ 498,363 $ -- $ 12,248,066 $ 4,958,386 $ -- $ 17,704,815
============= ======== ============= ============= ============= =============
(a) The Discontinued Operation reflects the cash activities of Fitzgeralds Las
Vegas, which is not a guarantor of The Majestic Star Casino, LLC's 9 1/2%
senior secured notes and was spun-off to BDI on December 31, 2003.
F-71
MAJESTIC INVESTOR HOLDINGS, LLC
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
Balance at Charged to Charged to Balance at
beginning costs and Other end
Descriptions of year expenses Accounts Deductions of year
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year ended December 31, 2001 -- 15,463 232,579(a) -- 248,042
Year ended December 31, 2002 248,042 203,811 28,534 241,321 239,066
Year ended December 31, 2003 239,066 89,738 (5,493) 235,510(b) 87,801
(a) Related to acquisition of Fitzgeralds Las Vegas, Inc., Fitzgeralds
Mississippi, Inc., and 101 Main Street Limited Liability Company.
(b) Fitzgeralds Las Vegas' Allowance for Doubtful Account balances and
transactions are included in the amounts listed above for the years ended
December 31, 2002 and 2001, but are not included for the year ended
December 31, 2003, since the spin-off of Fitzgeralds Las Vegas to BDI
occurred on December 31, 2003. The Allowance for Doubtful Accounts 2003
beginning balance totaling $101,356 for Fitzgeralds Las Vegas, our
discontinued operation, was adjusted off of the above schedule and is
included in the $235,510 in the deductions column for the year 2003.
F-72
Report of Independent Auditors
Members
Buffington Harbor Riverboats, L.L.C.
We have audited the accompanying balance sheets of Buffington Harbor Riverboats,
L.L.C. as of December 31, 2003 and 2002, and the related statements of
operations, members' capital, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Buffington Harbor Riverboats,
L.L.C. at December 31, 2003 and 2002, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.
/S/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 23, 2004
F-73
Buffington Harbor Riverboats, L.L.C.
Balance Sheets
December 31,
2003 2002
------------ ----------
ASSETS
Current Assets:
Cash $ 82,639 $ 50,505
Trade Receivables 56,626 92,787
Inventory 186,768 181,292
Prepaid expenses and other current assets 241,824 116,951
Due from members 4,527,999 --
----------- -----------
Total current assets 5,095,856 441,535
Property, plant, and equipment, net 61,881,975 65,616,042
Other assets 101,248 108,414
----------- -----------
Total assets $67,079,079 $66,165,991
=========== ===========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Current portion of capital lease obligaitons $ 71,152 $ --
Account payable 1,414,654 712,876
Accrued expense 390,012 596,419
Accrued property taxes 5,347,584 838,907
Due to members -- 351,167
----------- -----------
Total current liabilities 7,223,402 2,499,369
Capital lease obligations, net of current portion 388,491 --
Members' capital 59,467,186 63,666,622
----------- -----------
Total liabilities and memebers capital $67,079,079 $66,165,991
=========== ===========
See accompanying notes
F-74
Buffington Harbor Riverboats, L.L.C.
Statements of Operations
Years ended December 31
2003 2002
-----------------------------------------
Revenues:
Food and beverage $ 757,381 $ 1,343,800
Other -- related party 17,677,246 14,751,565
------------ ------------
Net revenues 18,434,627 16,095,365
Costs and expenses:
Food and beverage 1,732,499 2,646,737
General and administrative 16,495,832 13,026,312
Depreciation 4,788,031 4,848,501
Other 203,724 368,375
------------ ------------
Total costs and expenses 23,220,086 20,889,925
------------ ------------
Loss from operations (4,785,459) (4,794,560)
Interest (expense) income, net (5,409) (54,303)
------------ ------------
Net loss $ (4,790,868) $ (4,848,863)
============ ============
See accompanying notes
F-75
Buffington Harbor Riverboats, L.L.C.
Statements of Members' Capital
Member Retained
Contributions Deficit Total
---------------------------------------------------------
Balance, December 31, 2001 $101,316,444 $(33,518,795) $ 67,797,649
Capital contributions made by Trump Trump Indiana, Inc. 358,918 -- 358,918
Capital contributions made by The Majestic Star Casino, LLC 358,918 -- 358,918
Net loss -- (4,848,863) (4,848,863)
------------ ------------ ------------
Balance, December 31, 2002 102,034,280 (38,367,658) 63,666,622
Capital contributions made by Trump Trump Indiana, Inc. 295,716 -- 295,716
Capital contributions made by The Majestic Star Casino, LLC 295,716 -- 295,716
Net loss -- (4,790,868) (4,790,868)
------------ ------------ ------------
Balance, December 31, 2003 $102,625,712 $(43,158,526) $ 59,467,186
============ ============ ============
See accompanying notes
F-76
Buffington Harbor Riverboats, L.L.C.
Statements of Cash Flows
Year ended December 31,
2003 2002
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,790,868) $(4,848,863)
Adjustments to reconcile net loss to net cash flows
provided by (used in) operating activities:
Depreciation 4,788,031 4,848,501
Loss on disposal of fixed assets -- 10,861
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables 36,161 (66,773)
(Increase) decrease in inventory (5,476) 129,056
(Increase) decrease in prepaid expenses and other
current assets (124,873) 11,042
Decrease in other assets 7,166 3,064
Increase in accounts payable 701,778 277,551
(Decrease) increase in accrued expenses 4,302,270 (316,779)
Decrease in due to members (4,879,166) (207,302)
----------- -----------
Net cash flows provided by (used in) operating
activities 35,023 (159,642)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment, net (594,321) (825,335)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions, net 591,432 717,836
----------- -----------
Net increases (decrease) in cash 32,134 (267,141)
Cash at beginning of year 50,505 317,646
----------- -----------
Cash at end of year $ 82,639 $ 50,505
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION
Equipment obtained through capital lease $ 459,643 $ --
=========== ===========
See accompanying notes.
F-77
Buffington Harbor Riverboats, L.L.C.
Notes to Financial Statements
1. ORGANIZATION AND OPERATIONS
Trump Indiana, Inc. (Trump Indiana) and The Majestic Star Casino, LLC
(Barden), the two holders of certificates of suitability for the Gary,
Indiana riverboats casinos, formed Buffington Harbor Riverboats, L.L.C.
(BHR) on September 27, 1995 and have entered into an agreement (the BHR
Agreement) relating to the joint ownership, development, and operation
of all common land-based and waterside operations in support of the
Trump Indiana and Barden riverboat casinos. Under the BHR Agreement, BHR
acquired property and constructed common roadways, utilities, and other
infrastructure improvements on BHR's property.
The BHR Agreement terminates on December 31, 2035, but may be extended
through Trump Indiana's and Barden's mutual consent.
The BHR Agreement provides the framework for the operations of BHR. BHR
relies on the continued financial support of Trump Indiana and Barden in
order to support its operating activities and to meet its current
working capital obligations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 period. Actual
results could differ from those estimates.
INVENTORY
Inventory consists of food, souvenirs, clothing, and other miscellaneous
items. Inventory is stated at cost on the first-in, first-out method.
REVENUE RECOGNITION
Under the terms of the BHR Agreement, all expenditures requiring a cash
outlay by BHR are billed to Trump Indiana and Barden at cost.
Accordingly, BHR records as expense the cost of providing such services
and records as other revenues the amounts billed to Trump Indiana and
Barden.
Included in the land-based and waterside operations is the advertising
of joint venture interests. BHR expenses advertising costs as incurred.
Advertising costs were approximately $252,000 and $291,000 for the years
ended December 31, 2003 and 2002, respectively.
F-78
Buffington Harbor Riverboats, L.L.C.
Notes to Financial Statements (continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is carried at cost. Property, plant, and
equipment is depreciated on the straight-line method over the following
useful lives:
Land improvements 15 years
Building 40 years
Building improvements 5- 10 years
Harbor improvements 10- 15 years
Furniture, fixtures, and equipment 5 years
INCOME TAXES
BHR makes no provision (benefit) for income taxes since taxable income
(loss) is allocated to the members for inclusion in their respective
income tax returns.
LONG-LIVED ASSETS
BHR accounts for long-lived assets under the provisions of Statement of
Financial Accounting Standard No. 144, Accounting for the Impairment of
Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 requires,
among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in
circumstances indicate that the carrying amount of an assets may not be
fully recoverable. BHR took a loss on impairment charge of $18,694 in
2002 to record the disposal of assets no longer operable and in use, in
compliance with SFAS No. 144.
RECLASSIFICATIONS
Certain amounts in the prior-year financial statements have been
reclassified to conform to the current-year presentation.
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is comprised of the following:
F-79
Buffington Harbor Riverboats, L.L.C.
Notes to Financial Statements (continued)
3. PROPERTY, PLANT, AND EQUIPMENT (CONTINUED)
2003 2002
------------ ------------
Land and land improvements $ 34,500,080 $ 34,469,021
Building and building improvements 41,205,469 40,475,757
Harbor improvements 19,564,697 19,628,473
Furniture, fixtures, and equipment 8,625,177 8,439,418
Construction-in-progress 50,476 44,009
------------ ------------
103,945,899 103,056,678
Less accumulated depreciation 42,063,924 37,440,636
------------ ------------
Total property, plant, and equipment, net $ 61,881,975 $ 65,616,042
============ ============
Depreciation expense, which includes amortization of assets recorded
under capital lease obligations, was $4,788,031 and $4,848,501 for the
years ended December 31, 2003 and 2002, respectively.
4. LEASES
During the year ended December 31, 2003, BHR acquired equipment through
a capital lease with a vendor. The lease had no stated interest rate so
the Company has imputed interest rate at a rate of 8%. A summary of
payments due under the capital lease obligation is as follows:
2004 $ 102,519
2005 111,839
2006 111,839
2007 111,839
2008 111,839
Thereafter 9,319
---------
559,194
Amounts representing interest (99,551)
---------
459,643
Current portion (71,152)
---------
Long-term portion $ 388,491
=========
5. EMPLOYEE BENEFIT PLAN
BHR sponsors a defined contribution benefit plan for substantially all
employees who meet certain eligibility criteria. BHR matches employee
contributions up to 50% of the first 5% of base compensation that a
participant
F-80
Buffington Harbor Riverboats, L.L.C.
Notes to Financial Statements (continued)
5. EMPLOYEE BENEFIT PLAN (CONTINUED)
contributes to the plan. Total contributions to the plan were $31,000 and
$124,000 for the years ended December 31, 2003 and 2002, respectively.
6. COMMITMENTS AND CONTINGENCIES
INDIANA GAMING REGULATIONS
The ownership and operation of riverboat gaming operations in Indiana are
subject to state regulation under the Riverboat Gaming 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
suppliers to, and employees at, riverboat gaming operations and to approve the
form of ownership and financial structure of not only riverboat owner supplier
licensees, but also their entity qualifiers and intermediary and holding
companies. Indiana regulations continue to be revised and adopted by the IGC.
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 operations of BHR, Trump Indiana, and Barden.
OTHER
BHR is currently undergoing a sales and use tax examination by the Indiana
Department of Revenue for the tax years 1998 to 2001 and although the outcome of
this examination is not complete, BHR believes there will be no material impact
to its financial condition or results of operations.
During January 2004, BHR received a reassessment notice that increased the
valuation of its property in Lake County, Indiana where BHR is located. The
valuation assessments were a part of a county-wide reassessment, and these
reassessments were effective as of March 1, 2002. The reassessment was a result
of a 1998 Indiana Supreme Court ruling that declared the method of property
assessment previously used as unconstitutional.
The reassessments throughout the county have created significant turmoil for all
property owners in Lake County, and there are various appeals occurring on the
matter. Although the valuation was received by BHR, the tax rate has not been
set by Lake County. Due to these matters, it is difficult for BHR to estimate
the amount of the property tax to record in the 2003 financial statements
related to this retroactive tax valuation reassessment. For financial statements
purposes, BHR has calculated its property tax liability by multiplying the new
valuation by the 2001 tax rate which is the most recent legislative rate in
place. This resulted in a substantially larger amount of property tax as the
estimated tax billings under this method were approximately $2,900,000 for each
of the years ended December 31, 2003 and 2002, respectively, compared to
approximately $925,000 for the year ended
F-81
Buffington Harbor Riverboats, L.L.C.
Notes to Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER (CONTINUED)
December 31, 2001. As a result of the above, BHR recorded a charge of
approximately $4,000,000 to operations for the year ended December 31, 2003
related to the retroactive reassessment.
Management intends to appeal the assessment as management believes that the
reassessments are excessive and not reflective of the value of the assets being
assessed. If BHR were successful on the appeal, any credit received would be
recognized in BHR's operating statement in the period in which the credit is
realized.
The majority of BHR's employees are covered by a collective bargaining
agreement. Such agreement expires on October 2004, and management believes the
agreement will be renewed with no material impact to its financial condition or
results of operations.
F-82
To the Board of Directors and Stockholders of
Fitzgeralds Gaming Corporation:
We have audited the accompanying combined balance sheets of Fitzgeralds
Las Vegas, Inc., Fitzgeralds Mississippi, Inc., and 101 Main Street Limited
Liability Company (collectively, the "Properties") (wholly owned subsidiaries of
Fitzgeralds Gaming Corporation, the "Parent") (Debtors-in-Possession) as of
December 6, 2001 and December 31, 2000, and the related combined statements of
operations, stockholder's deficiency, and cash flows for the period from January
1, 2001 through December 6, 2001 and for the years ended December 31, 2000 and
1999. Our audits also included the financial statement schedule of combined
valuation and qualifying accounts listed in the Index on page F-1. These
financial statements and financial statement schedule are the responsibility of
the Properties' management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in
all material respects, the financial position of the Properties as of December
6, 2001 and December 31, 2000, and the results of their operations and their
cash flows for the period from January 1, 2001 through December 6, 2001 and for
the years ended December 31, 2000 and 1999 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic combined financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 2, the Properties have filed for reorganization
under Chapter 11 of the Federal Bankruptcy Code. The accompanying combined
financial statements do not purport to reflect or provide for the consequences
of the bankruptcy proceedings. In particular, such combined financial statements
do not purport to show (a) as to assets, their realizable value on a liquidation
basis or their availability to satisfy liabilities; (b) as to prepetition
liabilities, the amounts that may be allowed for claims or contingencies, or the
status and priority thereof; (c) as to stockholder accounts, the effect of any
changes that may be made in the capitalization of the Properties; or (d) as to
operations, the effect of any changes that may be made in their business.
The accompanying combined financial statements have been prepared
assuming that the Properties will continue as a going concern. As discussed in
Note 1 to the combined financial statements, the Parent's event of default on
its senior secured registered notes, which are guaranteed by the Properties,
along with the Properties' recurring losses and stockholder's deficiency raise
substantial doubt about the Properties' ability to continue as a going concern.
Parent management's plans concerning these matters are discussed in Note 2. The
combined financial statements do not include adjustments that might result from
the outcome of this uncertainty.
As discussed in Note 1, on December 6, 2001, the Parent sold
substantially all of the assets and related liabilities of the Properties.
F-83
Our audits were conducted for the purpose of forming an opinion on the
basic combined financial statements taken as a whole. The supplemental combining
schedules on pages F-108 through F-115 are presented for purposes of additional
analysis of the basic combined financial statements rather than to present the
financial position, results of operations, and cash flows of the individual
properties, and are not a required part of the basic combined financial
statements. These schedules are the responsibility of the Properties'
management. Such schedules have been subjected to the auditing procedures
applied in our audit of the basic combined financial statements and, in our
opinion, are fairly stated in all material respects when considered in relation
to the basic combined financial statements taken as a whole.
/s/ DELOITTE & TOUCHE LLP
Las Vegas, Nevada
April 8, 2002
F-84
HISTORICAL COMBINED FINANCIAL STATEMENTS
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
(DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION)
COMBINED BALANCE SHEETS
AT DECEMBER 31, AT DECEMBER 6,
2000 2001
----------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................................. $ 2,840,011 $ 3,762,56
Accounts receivable, net................................................................ -- 225,495
Prepaid expenses:
Gaming taxes.......................................................................... 265,381 817,590
Other................................................................................. 366,312 780,238
--------------- ---------------
Total current assets.............................................................. 3,471,704 5,585,889
--------------- ---------------
OTHER ASSETS:
Net assets held for sale................................................................ 143,342,890 --
Restricted cash......................................................................... 500,000 --
Accounts receivable -- related parties................................................... 5,309 16,762,294
Other assets............................................................................ -- 25,000
--------------- ---------------
Total other assets................................................................ 143,848,199 16,787,294
--------------- ---------------
TOTAL.................................................................................... $ 147,319,903 $ 22,373,183
=============== ===============
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES:
Accounts payable....................................................................... $ -- $ 166,073
Due to Majestic......................................................................... -- 3,800,000
Accrued and other:
Payroll and related................................................................... 491,255 919,143
Other................................................................................. -- 264,732
--------------- ---------------
Total current liabilities......................................................... 491,255 5,149,948
NOTES PAYABLE, related party.............................................................. -- 228,825
--------------- ---------------
Total liabilities not subject to compromise....................................... 491,255 5,378,773
LIABILITIES SUBJECT TO COMPROMISE......................................................... 225,873,496 70,680,462
--------------- ---------------
Total liabilities................................................................. 226,364,751 76,059,235
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 13)
STOCKHOLDER'S DEFICIENCY
Common stock -- Fitzgeralds Mississippi, Inc., $.01 par value;
8,000,000 shares authorized; 8,000,000 shares issued and outstanding.................. 80,000 80,000
Common stock -- Fitzgeralds Las Vegas, Inc., $.01 par value;
25,000 shares authorized; 10,000 shares issued and outstanding........................ 100 100
Additional paid-in-capital.............................................................. 7,586,667 7,586,667
Accumulated deficit..................................................................... (86,711,615) (61,352,819)
--------------- ---------------
Total stockholder's deficiency.................................................... (79,044,848) (53,686,052)
--------------- ---------------
TOTAL.................................................................................... $ 147,319,903 $ 22,373,183
=============== ===============
F-85
HISTORICAL COMBINED FINANCIAL STATEMENTS
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
(DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION)
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, FOR THE PERIOD FROM
-------------------------------------- JANUARY 1, 2001 TO
1999 2000 DECEMBER 6, 2001
------------------ ------------------ -------------------
OPERATING REVENUES:
Casino................................................................ $ 138,928,815 $ 148,776,855 $ 150,670,567
Food and beverage..................................................... 18,729,064 19,586,213 18,365,243
Rooms................................................................. 16,293,618 16,600,072 15,042,200
Other................................................................. 3,285,207 3,530,032 3,545,338
--------------- --------------- ---------------
Total.......................................................... 177,236,704 188,493,172 187,623,348
Less promotional allowances......................................... 24,460,048 28,755,624 29,964,002
--------------- --------------- ---------------
Net............................................................ 152,776,656 159,737,548 157,659,346
--------------- --------------- ---------------
OPERATING COSTS AND EXPENSES:
Casino................................................................ 64,146,974 69,113,279 69,757,787
Food and beverage..................................................... 11,793,071 11,508,965 10,625,017
Rooms................................................................. 10,701,241 10,904,351 9,818,552
Other................................................................. 1,877,030 1,717,182 1,657,265
Selling, general and administrative................................... 40,808,792 39,370,958 37,852,210
Depreciation and amortization......................................... 11,726,085 11,687,964 --
Write-down of assets.................................................. -- -- 13,005,582
Reorganization items.................................................. -- 38,967 (10,499,075)
--------------- --------------- ---------------
Total.......................................................... 141,053,193 144,341,666 132,217,338
--------------- --------------- ---------------
INCOME FROM OPERATIONS.................................................. 11,723,463 15,395,882 25,442,008
OTHER INCOME (EXPENSE):
Interest income....................................................... 129,654 167,446 38,407
Interest expense...................................................... (210,314) (71,382) (39,959)
Interest expense -- related party (contractual interest of $29,279,747
for the year ended December 31, 2000 and $28,549,207 for 2001)...... (27,989,851) (26,031,023) --
Other, net............................................................ 99,012 4,493 (81,660)
--------------- --------------- ---------------
NET INCOME (LOSS)....................................................... $ (16,248,036) $ (10,534,584) $ 25,358,796
=============== =============== ===============
See notes to historical combined financial statements.
F-86
HISTORICAL COMBINED FINANCIAL STATEMENTS
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND \
101 MAIN STREET LIMITED LIABILITY COMPANY
(DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION)
COMBINED STATEMENTS OF STOCKHOLDERS DEFICIENCY
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT DEFICIENCY
---------- --------- ------------ --------------- --------------
BALANCE, JANUARY 1, 1999.................................. 8,010,000 $ 80,100 $ 7,586,667 $ (59,928,995) $ (52,262,228)
Net loss.................................................. -- -- -- (16,248,036) (16,248,036)
---------- --------- ------------ --------------- --------------
BALANCE, DECEMBER 31, 1999................................ 8,010,000 80,100 7,586,667 (76,177,031) (68,510,264)
Net loss.................................................. -- -- -- (10,534,584) (10,534,584)
---------- --------- ------------ --------------- --------------
BALANCE, DECEMBER 31, 2000................................ 8,010,000 80,100 7,586,667 (86,711,615) (79,044,848)
Net income................................................ -- -- -- 25,358,796 25,358,796
---------- --------- ------------ --------------- --------------
BALANCE, DECEMBER 6, 2001................................. 8,010,000 $ 80,100 $ 7,586,667 $ (61,352,819) $ (53,686,052)
========== ========= ============ =============== ==============
See notes to historical combined financial statements.
F-87
HISTORICAL COMBINED FINANCIAL STATEMENTS
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
(DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS
ENDED DECEMBER 31, FOR THE PERIOD
---------------------------------- JANUARY 1, 2001
1999 2000 TO DECEMBER 6, 2001
---------------- --------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................... $ (16,248,036) $ (10,534,584) $ 25,358,796
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization............................................. 11,726,085 11,687,964 --
Write-down of assets................................................... -- -- 13,005,582
Gain on sale of assets to Majestic..................................... -- -- (11,121,811)
Reorganization items incurred in connection with
Chapter 11 and related legal proceedings............................. -- 38,967 622,736
Other.................................................................. (58,032) 36,487 116,439
Changes in working capital, net of assets sold
and liabilities assumed:
(Increase) decrease in accounts receivable, net........................ 136,090 (233,359) (42,071)
(Increase) decrease in inventories..................................... (135,666) 98,529 66,048
(Increase) decrease in prepaid expenses................................ (401,108) (492,966) 255,985
(Increase) decrease in other assets.................................... (130,091) (139,028) 27,115
Increase (decrease) in accounts payable................................ (2,511,838) (1,408,119) 240,806
Increase in due to Majestic............................................ -- -- 3,800,000
Increase (decrease) in accrued and other liabilities................... 450,505 (2,124,978) 624,469
Increase (decrease) in amounts due to related parties, net............. 15,945,345 15,134,274 (40,404,341)
Increase in liabilities subject to compromise.......................... -- 106,677 149,835
--------------- --------------- ----------------
Net cash provided by (used in) operating
activities before reorganization items............................... 8,773,254 12,169,864 (7,300,412)
Reorganization items:
Interest received on cash accumulated because of the
bankruptcy proceedings................................................. -- -- 171,442
Professional fees paid for services rendered in
connection with the bankruptcy proceedings............................. -- -- (38,392)
Other reorganization items incurred in connection
with Chapter 11 and related legal proceedings.......................... -- (38,967) (755,786)
--------------- --------------- ---------------
Net cash provided by (used in) operating activities.................... 8,773,254 12,130,897 (7,923,148)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets............................................... 77,726 8,463 28,250
Acquisition of property and equipment...................................... (4,345,588) (9,011,942) (1,054,131)
-------------- --------------- --------------
Net cash used in investing activities................................... (4,267,862) (9,003,479) (1,025,881)
-------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt................................................ (2,975,622) (453,560) (240,288)
-------------- --------------- --------------
Net cash used in financing activities...................................... (2,975,622) (453,560) (240,288)
-------------- --------------- --------------
F-88
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 1,529,770 2,673,858 (9,189,317)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD................................ 8,748,255 10,278,025 2,840,011
(INCREASE) DECREASE IN CASH AND CASH EQUIVALENTS
INCLUDED IN NET ASSETS HELD FOR SALE....................................... -- (10,111,872) 10,111,872
-------------- --------------- --------------
CASH AND CASH EQUIVALENTS END OF PERIOD.....................................$ 10,278,025 $ 2,840,011 $ 3,762,566
=============== =============== ==============
See notes to historical combined financial statements.
F-89
HISTORICAL COMBINED FINANCIAL STATEMENTS
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
(DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND FINANCIAL STATEMENT PRESENTATION
Fitzgeralds Las Vegas, Inc., Fitzgeralds Mississippi, Inc. and 101 Main
Street Limited Liability Company (collectively, the "Properties") are wholly
owned subsidiaries of Fitzgeralds Gaming Corporation (the "Parent")
(Debtors-in-Possession). Until December 6, 2001 the Properties owned and
operated the Fitzgeralds-brand casino-hotels in downtown Las Vegas, Nevada
("Fitzgeralds Las Vegas"), Tunica, Mississippi ("Fitzgeralds Tunica"), and Black
Hawk, Colorado ("Fitzgeralds Black Hawk"). On December 6, 2001, the Parent sold
substantially all of the assets and related liabilities of Fitzgeralds Las
Vegas, Fitzgeralds Tunica and Fitzgeralds Black Hawk to Majestic Investor
Holdings, LLC ("Majestic"). The Properties are marketed primarily to
middle-market customers, emphasizing their Fitzgeralds brand and their
"Fitzgeralds Irish Luck" theme.
As described in Note 13, the Properties are guarantors, and substantially
all of their assets serve as collateral, under various debt agreements that the
Parent has entered into with outside lenders. The Parent generated net income
during 2001 and experienced net losses during 2000 and 1999, is highly
leveraged, and has a stockholders' deficiency at December 6, 2001 and at the end
of 2000.
On May 13, 1999, the Parent's Board of Directors determined that, pending a
restructuring of its indebtedness, it would not be in the best interest of the
Parent to make the regularly scheduled interest payments on its 10 7/8% senior
secured registered notes due 2004 (the "Notes"). Accordingly, the Parent has not
paid the regularly scheduled interest payments of $12.5 million that were due
and payable on June 15, 1999, December 15, 1999 and June 15, 2000. Accordingly,
an event of default under the indenture (the "Indenture"), dated December 30,
1997, governing the Notes occurred on July 15, 1999, and continued until the
Parent and the Properties filed a petition for relief under Chapter 11 of the
Bankruptcy Code (the "Petition"). The Parent's contractual interest on the Notes
was $31,390,852 for the period from January 1, 2001 through December 6, 2001 and
was $33,699,003 for the year ended December 31, 2000. No action has been taken
by either the Indenture trustee or the holders of at least 25 percent of the
Notes, as permitted under the Indenture, to accelerate the Notes and declare the
unpaid principal and interest to be due and payable. Failure to make the
scheduled payment on June 15, 1999 resulted in a 1 percent increase in the
interest rate to 13.25 percent, effective June 16, 1999 until the Parent and the
Properties filed the Petition. In accordance with the Indenture, the Parent
began accruing interest on the unpaid interest at 13.25 percent, effective June
16, 1999 until the Parent and the Properties filed the Petition. See Note 2.
The accompanying financial statements have been prepared on a going concern
basis. Such 2001 financial statements are as of and for the period ended
December 6, 2001, the date of the sale of substantially all of the assets and
related liabilities of the Properties to Majestic. At December 6, 2001,
stockholder's deficiency was $53.7 million. The Parent's inability to meet the
interest payments on the Notes, which are guaranteed by the Properties, along
with the Properties' recurring losses in prior years and stockholder's
deficiency, raise substantial doubt about their ability to continue as a going
concern.
F-90
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
2. PETITION FOR RELIEF UNDER CHAPTER 11
GENERAL
On December 5, 2000, the Parent and the Properties commenced cases under
Chapter 11 of the Bankruptcy Code (collectively, the "Bankruptcy Cases") in the
United States Bankruptcy Court for the Northern District of Nevada (the
"Bankruptcy Court"). The Bankruptcy Cases are jointly administered and
coordinated under Case No. BK-N-00-33467 GWZ. The Bankruptcy Cases were
commenced in accordance with an Agreement Regarding Pre-Negotiated
Restructuring, dated as of December 1, 2000 (the "Restructuring Agreement"),
with the holders (the "Consenting Noteholders") of a majority in interest of the
Notes. The Restructuring Agreement contemplates an expeditious and orderly sale
of all of the Parent's operating assets and properties as going concerns.
Under the terms of the Restructuring Agreement, the Parent is required to
seek buyers for each of its operating businesses. In order to effectuate this
liquidation, the Parent commenced the Bankruptcy Cases and has received approval
from the Bankruptcy Court to sell its operating businesses through negotiated
sales agreements either by way of motion to sell free and clear of liens under
section 363 of the Bankruptcy Code, or under one or more plans of
reorganization.
As part of the restructuring contemplated in the Restructuring Agreement,
the Parent, as debtor-in-possession, sought and obtained Bankruptcy Court
approval to: (i) sell free and clear of liens pursuant to section 363 of the
Bankruptcy Code substantially all of its assets; and (ii) assume and assign
pursuant to section 365 of the Bankruptcy Code contracts used in its operations
in Las Vegas, Nevada, Black Hawk, Colorado and Tunica, Mississippi to an
affiliate of The Majestic Star Casino, LLC, an Indiana limited liability company
("Majestic"), pursuant to a Purchase and Sale Agreement, dated as of November
22, 2000, as amended on December 4, 2000 and November 1, 2001 (the "Purchase
Agreement"). On March 19, 2001, the Bankruptcy Court entered an order approving
the Purchase Agreement with Majestic.
The Restructuring Agreement provides a vehicle for liquidating the assets
of the Parent in the Bankruptcy Court through Chapter 11 of the Bankruptcy Code.
Upon execution of the Restructuring Agreement and before commencement of the
Bankruptcy Cases, the Parent distributed $13.0 million in Excess Cash (as that
term is defined in the Restructuring Agreement) to the trustee under the
Indenture (the "Indenture Trustee") to be applied to unpaid and accrued
Indenture Trustee's fees and expenses incurred and as partial payment of accrued
and unpaid interest and principal as provided in the Indenture. Pursuant to the
Restructuring Agreement and an order entered by the Bankruptcy Court, the Parent
was required to distribute unrestricted cash (which includes cash in net assets
held for sale) in excess of $24.8 million to holders of its Notes within 45 days
after the end of each quarter. In May, August and November 2001, the Parent
distributed $1.8 million, $7.7 million and $7.2 million, respectively, in Excess
Cash to the Indenture Trustee to be applied to accrued and unpaid interest and
principal as provided in the Indenture. On December 6, 2001, approximately
$133.3 million was distributed to the Indenture Trustee from the proceeds of the
December 6, 2001 sale to Majestic. The Parent and the Informal Committee are
currently engaged in discussions to establish a new threshold for cash reserves
subsequent to the December 6, 2001 sale to Majestic. As part of the
Restructuring Agreement, the Consenting Noteholders and the Indenture Trustee
agree to forbear from exercising certain of their rights otherwise allowable
under the Notes and the Indenture.
F-91
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
The parties to the Restructuring Agreement have each concluded that the
fair market value of the Parent's real and personal property given as collateral
for the Notes is less than the total outstanding principal and interest due
under the Notes, and that the fair market value of the real and personal
property not securing the Notes is less than the amount of the unsecured
deficiency claim of the holders of the Notes. As a result, it is not expected
that any distribution will be made to holders of the existing capital stock of
the Parent or the Properties. The Restructuring Agreement requires that as part
of the liquidation process, all of the existing common stock of Fitzgeralds
Tunica and Fitzgeralds Las Vegas is to be canceled and extinguished without
payment therefor.
Under the terms of the Restructuring Agreement, upon the closing of each
sale of the Parent's assets, the net proceeds of the collateral for the Notes,
less certain reserves for management incentives and other liabilities, must be
distributed to the Indenture Trustee for the benefit of and distribution to the
holders of the Notes in accordance with the Indenture. All of the Parent's
assets remaining after such sales, including any registered notes received as
part of the consideration for the sales of the Parent's assets and payment of
remaining liabilities of the Parent, will be transferred to a liquidating trust
created for the benefit of the holders of the Notes and others under the terms
of the Restructuring Agreement.
In light of the regulatory approvals needed to accomplish the liquidations,
and recognizing the need to retain senior management in order to insure
continuity and compliance with all gaming regulations and licensing requirements
in the Parent's operations during the process, the Restructuring Agreement
required implementation of a senior management incentive and retention program.
After obtaining Bankruptcy Court approval in December 2000, this program was
adopted by the Parent in order to retain Philip D. Griffith, Michael E.
McPherson, Max L. Page and Paul H. Manske (the "Senior Management"), each an
officer, director and/or senior executive of the Parent, as key executives and
to compensate them for their continued employment with the Parent during the
process.
Pursuant to the Purchase Agreement, the Parent has agreed to: (i) sell free
and clear of liens pursuant to section 363 of the Bankruptcy Code substantially
all of the Properties' assets; and (ii) assume and assign pursuant to section
365 of the Bankruptcy Code contracts used in its operations at the Properties,
as well as the Parent's interest in the Fremont Street Experience Limited
Liability Company (collectively, the "Assets") to Majestic for $149.0 million in
cash, subject to certain holdbacks and adjustments, plus the assumption of
certain liabilities relating to the Assets.
The transactions contemplated by the Purchase Agreement were consummated on
December 6, 2001. The purchase price for the Assets was $149.0 million, subject
to certain adjustments and holdbacks specified in the Purchase Agreement, which
resulted in net proceeds prior to distributions of approximately $146.9 million.
Of such amount, $7.7 million was retained by the Parent for cash reserves,
approximately $5.9 million was distributed to Senior Management, in
consideration of non-competition and sales incentives pursuant to the
Restructuring Agreement, and approximately $133.3 million was distributed to
holders of the Notes (on account of the $205.0 million aggregate principal
amount of Notes outstanding and approximately $44.8 million in accrued
pre-petition interest). In addition, during 2001 the Parent distributed
approximately $16.8 million to holders of the Notes in accordance with the
provisions of the Restructuring Agreement.
F-92
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
REORGANIZATION ITEMS
For the period from January 1, 2001 through December 6, 2001 and for the
year ended December 31, 2000, the Properties incurred the following expenses
subsequent to the filing of the Bankruptcy Cases:
2000 2001
--------------- ---------------
Reorganization items:
Post-petition professional fees.........................................................$ -- $ 38,392
Pre-petition expenses recorded post-petition............................................ 38,967 --
U.S. trustee fees....................................................................... -- 120,000
Other................................................................................... -- 635,786
Gain on sale of assets to Majestic...................................................... -- (11,121,811)
Interest earned on accumulated cash resulting from the
bankruptcy proceedings............................................................... -- (171,442)
--------------- ---------------
$ 38,967 $ (10,499,075)
=============== ===============
LIABILITIES SUBJECT TO COMPROMISE
At December 6, 2001 and December 31, 2000, liabilities subject to compromise
consisted of the following:
2000 2001
--------------- ---------------
Liabilities subject to compromise:
Due to related parties............................................................... $ 225,774,418 $ 70,414,353
Unsecured creditors.................................................................. 99,078 266,109
-------------- ---------------
$ 225,873,496 $ 70,680,462
============== ===============
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combined Financial Statements -- The combined financial statements of the
Properties include the accounts of Fitzgeralds Las Vegas, Inc., Fitzgeralds
Mississippi, Inc. and 101 Main Street Limited Liability Company. All
inter-company balances and transactions have been eliminated.
Cash and Cash Equivalents -- Cash includes cash required for gaming
operations. The Properties consider cash equivalents to include short-term
investments with original maturities of ninety days or less at the date of
purchase.
Inventories -- Inventories consist principally of food and beverage and
operating supplies and are stated at the lower of first-in, first-out cost or
market.
The estimated cost of normal operating quantities (base stock) of china,
silverware, glassware, linen, uniforms and utensils has been recorded as an
asset and is not being depreciated. Costs of base stock replacements are
expensed as incurred.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated service lives of the assets. Leasehold improvements are amortized
over the life of the lease or the life of the asset, whichever is shorter. Costs
of major improvements are capitalized; costs of normal repairs and maintenance
are charged to expenses as incurred.
F-93
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
Gains or losses on disposals are recognized. Certain of the assets of the
Properties were classified as held for sale upon consummation of the Purchase
Agreement with Majestic in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of. This standard requires that assets
to be disposed of shall be reported at the lower of carrying amount or fair
value less costs to sell and shall not be depreciated or amortized while they
are held for disposal. The Properties discontinued recording depreciation and
amortization expense on property and equipment subsequent to the filing of the
Bankruptcy Cases and consummation of the Purchase Agreement with Majestic based
on the requirements of SFAS No. 121.
Restricted Cash -- At December 31, 2000, restricted cash represents U.S.
Treasury Notes of $1,000,000 held in an escrow account for the benefit of
certain land lessors related to Fitzgeralds Las Vegas. In 2000, $500,000 of this
amount was reclassified as net assets held for sale. See Note 6.
Goodwill -- Goodwill represents the cost in excess of fair value of the net
assets acquired in purchase transactions. Goodwill is being amortized using the
straight-line method over 40 years and is recorded net of accumulated
amortization. The Properties discontinued the amortization of their goodwill
included in net assets held for sale subsequent to the filing of the Bankruptcy
Cases on December 5, 2000. Furthermore, the Company wrote down $13.0 million of
the asset as of December 6, 2001 due to the sale of Fitzgeralds Black Hawk to
Majestic.
Revenue Recognition -- Casino revenue is the net win from gaming
activities, which is the difference between gaming wins and losses. The majority
of our casino revenue is counted in the form of cash, chips and tokens and
therefore is not subject to any significant or complex estimation procedures.
Food and beverage and room revenues are recognized at retail value at the time
the related service is performed.
Operating revenues include the retail value of rooms, food and beverage,
and other items provided to customers without charge; corresponding charges have
been deducted from revenue in the accompanying combined statements of operations
as promotional allowances in the determination of net operating revenues.
Promotional allowances also include cash-back incentives earned in our Slot
Club. The Properties provide cash-back incentives to patrons who earn a
percentage of their cash wagered using their slot card provided by the
Properties.
The retail value of the complimentaries and the cash-back incentives
included in promotional allowances are as follows:
1999 2000 2001
-------------- -------------- --------------
Hotel rooms................................................................... $ 4,509,181 $ 4,863,935 $ 4,527,788
Food and beverage............................................................. 9,849,482 10,831,067 10,401,400
Other......................................................................... 498,476 756,761 819,329
Cash-back incentives.......................................................... 9,602,909 12,303,861 14,215,485
-------------- -------------- --------------
$ 24,460,048 $ 28,755,624 $ 29,964,002
============== ============== ==============
The estimated costs of providing the complimentary services are charged to
the casino department and are as follows:
F-94
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
1999 2000 2001
-------------- -------------- --------------
Hotel rooms................................................................... $ 2,441,182 $ 2,528,282 $ 2,925,396
Food and beverage............................................................. 10,141,593 10,935,259 10,638,710
Other......................................................................... 280,998 524,426 572,390
-------------- -------------- --------------
$ 12,863,773 $ 13,987,967 $ 14,136,496
============== ============== ==============
Advertising Costs -- Advertising expenditures are expensed in the period
the advertising initially takes place. Advertising costs included in selling,
general and administrative expenses were $3,860,890 and $3,649,524 for the years
ended December 31, 1999 and 2000, respectively and $3,157,440 for the period
from January 1, 2001 through December 6, 2001.
Federal Income Taxes -- The Properties account for income taxes in
accordance with SFAS No. 109, Accounting for Income Taxes, which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards.
101 Main Street Limited Liability Company is a limited liability company
formed under the laws of the state of Colorado, and, as such, is classified as a
partnership for federal income tax purposes. Accordingly, no provision for
federal or state income taxes was recorded because any taxable income or loss is
included in the corporate income tax return of the Parent.
Financial Reporting Period -- The Properties have adopted a "4-4-5" (weeks)
financial reporting period which maintains a December 31 year-end. This method
of reporting results in 13 weeks in each quarterly accounting period. The first
and fourth accounting periods will have a fluctuating number of days resulting
from the maintenance of a December 31 year-end, whereas the second and third
periods will have the same number of days each year.
Fair Value of Financial Instruments -- The Properties believe, based on
current information, that the carrying value of the Properties' cash and cash
equivalents, restricted cash, accounts receivable, advances, and accounts
payable approximates fair value because of the short maturity of those
instruments.
Impairment of Long Lived Assets -- The Properties review long-lived assets
and certain identifiable intangibles for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows, undiscounted and
without interest charges, is less than the carrying amount of the asset, an
impairment charge is recognized in the amount by which the carrying value of the
asset exceeds its fair market value. The fair value of assets is determined
using the present value of the estimated future cash flows or the expected
selling price less selling costs for assets expected to be disposed of.
Recently Issued Accounting Standards -- On June 30, 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities and is effective
F-95
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
for the period ended December 6, 2001. Adoption of this statement did not have a
material impact on the Properties' financial condition or results of operation.
On January 1, 2001, the Properties implemented Emerging Issues Task Force
("EITF") No. 00-14 Accounting for Certain Sales Incentives, EITF No. 00-21,
Accounting for Multiple-Element Revenue Arrangements, EITF No. 00-22, Accounting
for "Points" and Certain Other Time-Based or Volume-Based Sales Incentive
Offers, and Offers for Free Products or Services to Be Delivered in the Future,
and EITF No. 00-25, Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products, requiring
cash coupons or rebates to be classified as a reduction of revenue. Prior to
implementation, the Properties had expensed the cash coupons, players club
reward program and other cash back programs as a casino or marketing expense. In
2001, the Properties reclassified their 2000 and 1999 statements of operations
to reflect such expenses as promotional expense thereby reducing net revenue.
This reclassification did not have any effect on the Properties' income from
operations and net income for the current year and previously reported net
losses.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS 141"), Business Combinations, which requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
prohibits the use of the pooling-of-interest method. The Properties do not
believe that the adoption of SFAS 141 will have a significant impact on their
financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142") Goodwill and Other Intangible Assets, which is effective
January 1, 2002. SFAS 142 requires that goodwill and other intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. The Properties discontinued recording the
amortization of goodwill included in net assets held for sale subsequent to
filing the Bankruptcy Cases. Amortization expense related to goodwill was $0.3
million for 2000. As of December 6, 2001, the Properties wrote-down $13.0
million of goodwill due to the sale of Fitzgeralds Black Hawk to Majestic.
Also, in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations, which is
effective for financial statements issued for fiscal years beginning after June
15, 2002. This statement establishes accounting standards for recognition and
measurement of a liability for an asset retirement obligation and the associated
asset retirement cost. The Properties are currently evaluating the impact that
this standard will have on its financial condition and results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
is effective for financial statements issued for fiscal years beginning after
December 15, 2001, and the interim periods within those fiscal years. This
statement addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of, and supersedes
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Asset to be Disposed of. The
Properties are currently evaluating the impact that this standard will have on
its financial condition and results of operations.
Bankruptcy Related Accounting -- The Properties have accounted for all
transactions related to the Bankruptcy Cases in accordance with Statement of
Position 90-7 ("SOP 90-7"), Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code, which was issued by the American Institute of
Certified Public
F-96
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
Accountants in November 1990. Accordingly, liabilities subject to compromise
under the Bankruptcy Cases have been segregated on the Combined Balance Sheets
and are recorded for the amounts that are expected to be allowed under the
Restructuring Agreement (see Note 2). In addition, the Combined Statements of
Operations and the Combined Statements of Cash Flows for the year ended December
31, 2000 and for the period from January 1, 2001 through December 6, 2001
disclose expenses related to the Bankruptcy Cases under "Reorganization Items."
The Properties will continue to present their Combined Statements of Cash Flows
using the indirect method.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of certain assets and
liabilities at the date of the financial statements. These estimates also affect
the disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of certain revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications -- Certain amounts in the 1999 and 2000 combined
financial statements have been reclassified to conform to the 2001 method of
presentation.
4. STATEMENTS OF CASH FLOWS INFORMATION
The following supplemental disclosure is provided as part of the Combined
Statements of Cash Flows for the years ended December 31, 1999 and 2000 and for
the period from January 1, 2001 through December 6, 2001:
Cash paid for interest, net of amounts capitalized, during the years ended
December 31, 1999 and 2000 and for the period from January 1, 2001 through
December 6, 2001 was $225,072, $67,600 and $48,824, respectively.
Certain non-cash operating, investing and financing activities were as
follows:
Long-term contracts payable of $368,888 in 1999 and $368,420 in 2000 were
incurred with the acquisition of new equipment. In 2001, no additional new
equipment was acquired through long-term contracts payable.
See Note 2 and Note 6 for a summary of Liabilities Subject to Compromise
and Net Assets Held for Sale.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2000 and
December 6, 2001:
ESTIMATED
2000 2001 SERVICE LIFE
-------------- ---------- ------------
Land used in casino operations............................................. $ 10,748,949 $ -- --
Buildings and improvements................................................. 94,646,085 -- 7--40 years
Site improvements.......................................................... 20,930,897 -- 20 years
Barge and improvements..................................................... 12,896,235 -- 15 years
Furniture, fixtures and equipment.......................................... 55,288,988 -- 3--12 years
-------------- ---------
F-97
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
194,511,154 --
Less accumulated depreciation and amortization............................. (70,612,350) --
-------------- ---------
123,898,804 --
Construction in progress................................................... 760,878 --
-------------- ---------
124,659,682 --
Less net assets held for sale.............................................. (124,659,682) --
-------------- ---------
Total...................................................................... $ -- $ --
============== =========
Substantially all property and equipment is pledged as collateral on the
Parent's long-term debt.
6. NET ASSETS HELD FOR SALE
On December 1, 2000, the Parent entered into the Restructuring Agreement
with the Consenting Noteholders. The Restructuring Agreement contemplates an
expeditious and orderly sale of all of the Parent's operating assets and
properties. The transactions contemplated by the Purchase Agreement were
consummated on December 6, 2001. The purchase price for the Assets was $149.0
million, subject to certain adjustments and holdbacks specified in the Purchase
Agreement, which resulted in net proceeds prior to distributions of
approximately $146.9 million.
The components of the net assets held for sale as of December 31, 2000 are
as follows:
FITZGERALDS FITZGERALDS FITZGERALDS
LAS VEGAS TUNICA BLACK HAWK TOTAL
------------- ------------- ------------- -------------
Assets:
Cash and cash equivalents................................ $ 3,082,396 $ 5,274,598 $ 1,754,878 $ 10,111,872
Accounts receivable, net of allowance for doubtful
accounts of $210,586.................................. 696,054 539,510 55,420 1,290,984
Inventories.............................................. 445,572 445,722 153,204 1,044,498
Prepaid gaming taxes..................................... 566,788 -- 48,052 614,840
Other current assets..................................... 1,506,705 366,376 109,802 1,982,883
Property and equipment, net.............................. 37,162,537 62,708,013 24,789,132 124,659,682
Goodwill, net of accumulated amortization of
$1,173,579............................................ -- -- 13,005,582 13,005,582
Restricted cash.......................................... 500,000 -- -- 500,000
Other non-current assets................................. 320,251 461,361 141,363 922,975
Current portion of long term debt........................ (167,273) (73,015) -- (240,288)
Accounts payable......................................... (514,831) (809,013) (227,676) (1,551,520)
Accrued expenses:
Payroll and related...................................... (1,336,852) (2,349,516) (667,094) (4,353,462)
Progressive jackpots..................................... (269,561) (322,665) (387,602) (979,828)
Outstanding chips and tokens............................. (104,175) (91,247) (39,152) (234,574)
Other.................................................... (788,550) (1,095,992) (1,152,148) (3,036,690)
Long-term debt............................................. (394,064) -- -- (394,064)
-------------- -------------- ------------ -------------
$ 40,704,997 $ 65,054,132 $ 37,583,761 $ 143,342,890
============== ============== ============ =============
F-98
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
7. LONG-TERM DEBT
Long-term debt outstanding at December 31, 2000 and December 6, 2001 is as
follows:
2000 2001
------------ ------------
Contracts payable secured by certain equipment due in maximum aggregate monthly
installments of $32,842, with varying maturity dates through 2005.............. $ 634,352 $ --
------------ ------------
Total debt....................................................................... 634,352 --
Less net assets held for sale.................................................... (634,352) --
------------ ------------
Long-term debt................................................................... $ -- $ --
============ ============
8. COMMITMENTS
Operating Leases -- In connection with the sale of assets to Majestic, the
Properties' commitments under operating leases were assumed by Majestic.
Such operating lease commitments primarily related to equipment, signs,
warehouses and ground leases on which the Properties' buildings and equipment
reside. Rent expense for the years ended December 31, 1999 and 2000 was
$2,183,428 and $1,732,028, respectively and for the period from January 1, 2001
through December 6, 2001 was $1,164,417.
Employment Agreements -- Consistent with industry practice, the Properties
have entered into employment agreements with certain of their executives and
departmental directors. In accordance with the Restructuring Agreement, the
Properties have agreed not to assume these employment agreements as provided in
Section 365 of the Bankruptcy Code.
9. RELATED PARTY TRANSACTIONS
Amounts due to/from the Parent and other wholly owned subsidiaries of the
Parent at December 6, 2001 includes receivables for $16,762,294, registered
notes payable of $70,414,353 and notes payable of $228,825. Amounts due to/from
the Parent and other wholly owned subsidiaries of the Parent at December 31,
2000 include receivables for $5,309 and registered notes payable of
$225,774,418. The registered notes due to Parent have an effective interest rate
of approximately 15.0 percent for 2001 and 2000 and are due December 15, 2004,
the due date of the Notes. Accounts receivable -- related parties of $16,762,294
at December 6, 2001 represents advances made to the Parent by the Properties.
These advances will be used to offset the notes due to the Parent as described
above.
During the period from January 1, 2001 through December 6, 2001 and during
the years ended December 31, 2000 and 1999, the Parent allocated approximately
$1,000,000 to Fitzgeralds Las Vegas, Fitzgeralds Tunica, and Fitzgeralds Black
Hawk for corporate overhead allocations. These costs are accounted for as
general and administrative expenses. These corporate overhead allocations have
been made in order that the Properties absorb a portion of the expenses incurred
by the Parent on their behalf including, but not limited to, internal audit,
risk management, legal and corporate accounting services. The allocation method
used is based on an
F-99
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
equal distribution to each of the Fitzgeralds operating properties. Management
believes that the allocation method used is reasonable. Specific identification
of these expenses to each of the properties is not practicable.
10. PROFIT SHARING PLAN
The Parent has a contributory profit-sharing plan for eligible employees.
The Parent's contribution to the plan for any year, as determined by the Board
of Directors, is discretionary. Contributions to the plan are allocated among
eligible participants in the proportion of their salaries to the total salaries
of all participants.
The Parent amended the plan to include a 401(k) savings plan whereby
eligible employees may contribute up to 20% of their salary, which is matched by
the Properties at 25 cents per employee dollar contributed, up to a maximum of
6% of their salary. The Properties' matching contributions were $218,912 and
$221,140 for the years ended December 31, 1999 and 2000 and $231,975 for the
period from January 1, 2001 through December 6, 2001.
Each employee age 21 or older completing 1,000 or more hours of service
during the twelve-month period preceding the entry dates, January 1, April 1,
July 1 or October 1, is eligible to participate in the plan.
In addition, the Properties contribute to multi-employer defined
contribution pension plans under various union agreements. Contributions, based
on wages paid to covered employees, were $537,998 and $351,847 for the years
ended December 31, 1999 and 2000 and $342,172 for the period from January 1,
2001 through December 6, 2001.
11. STOCKHOLDER'S DEFICIENCY
The Restructuring Agreement requires that all of the existing common stock
of Fitzgeralds Tunica and Fitzgeralds Las Vegas be canceled and extinguished
without payment therefor. It is not expected that any distribution will be made
to holders of the existing capital stock of the Properties.
As stated above, 101 Main Street Limited Liability Company is a limited
liability company formed under the laws of the state of Colorado. Included in
total stockholder's deficiency on the combined balance sheets is a total
member's equity of $4,663,213 as of December 6, 2001 and total member's
deficiency of $2,331,468 as of December 31, 2000 for 101 Main Street Limited
Liability Company.
12. INCOME TAXES
The Properties are included in Fitzgeralds Gaming Corporation's
consolidated tax return. The information below appears as if the Properties were
filing separate tax returns.
A reconciliation of the income tax benefit with amounts determined by
applying the statutory U.S. Federal income tax rate to combined income (loss)
before taxes is as follows:
F-100
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
1999 2000 2001
-------------- ------------- --------------
Tax benefit at U.S. statutory rate............................................ $ 5,524,332 $ 3,687,104 $ (8,774,424)
(Increase) decrease in valuation allowance.................................... (5,489,867) (3,553,559) 8,738,172
Other......................................................................... (34,465) (133,545) 36,252
-------------- -------------- --------------
Total......................................................................... $ -- $ -- $ --
============== ============== ==============
The following summarizes the effect of deferred income tax items and the
impact of "temporary differences" between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws.
The tax items comprising the Properties' net deferred tax asset as of
December 31, 2000 are as follows:
CURRENT NONCURRENT TOTAL
------------ --------------- --------------
Deferred tax assets:
Accrued and other liabilities............................................... $ 588,486 $ -- $ 588,486
Bad debt reserve............................................................ 31,285 -- 31,285
FICA credits not utilized................................................... -- 400,836 400,836
NOL carryforward............................................................ -- 25,795,441 25,795,441
Other....................................................................... -- 66,826 66,826
------------ --------------- --------------
619,771 26,263,103 26,882,874
------------ --------------- --------------
Deferred tax liabilities:
Difference between book and tax basis of property........................... -- (4,548,554) (4,548,554)
Intangibles................................................................. -- (710,827) (710,827)
Deferred state taxes........................................................ -- (5,552,056) (5,552,056)
Prepaid expenses............................................................ (681,523) -- (681,523)
Differences from flow through entity........................................ -- (98,482) (98,482)
------------ --------------- --------------
(681,523) (10,909,919) (11,591,442)
------------ --------------- --------------
(61,752) 15,353,184 15,291,432
Less: valuation allowance..................................................... 61,752 (15,353,184) (15,291,432)
------------ --------------- --------------
Net........................................................................... $ -- $ -- $ --
============ =============== ==============
The tax items comprising the Properties' net deferred tax asset as of
December 6, 2001 are as follows:
CURRENT NONCURRENT TOTAL
------------ --------------- --------------
Deferred tax assets:
Accrued and other liabilities............................................ $ 101,787 $ -- $ 101,781
FICA credits not utilized................................................ -- 462,862 462,862
NOL carryforward......................................................... -- 6,232,200 6,232,200
Other.................................................................... -- 1,743 1,743
------------ --------------- --------------
101,781 6,696,805 6,798,586
------------ --------------- --------------
Deferred tax liabilities:
Deferred state taxes..................................................... -- (143,546) (143,546)
Prepaid expenses......................................................... (245,326) -- (245,326)
------------ --------------- --------------
(245,326) (143,546) (388,872)
------------ --------------- --------------
(143,545) 6,553,259 6,409,714
F-101
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
Less: valuation allowance.................................................. 143,545 (6,553,259) (6,409,714)
------------ --------------- --------------
Net........................................................................ $ -- $ -- $ --
============ =============== ==============
Due to the uncertainty of the realization of certain tax carry forward
items, a valuation allowance has been established in the amount of $6.4 million
at December 6, 2001. Realization of a significant portion of the assets offset
by the valuation allowance is dependent on the Properties generating sufficient
taxable income prior to expiration of the loss and credit carryforwards.
As of December 6, 2001, the Properties had a combined net operating loss
carryforward of approximately $17.8 million and a tax credit carryforward of $.7
million, which are available to offset future tax through 2020. The availability
of the loss and credit carryforwards may be subject to limitations under
sections 382 and 383 of the Internal Revenue Code in the event of a significant
change of ownership.
13. CONTINGENCIES
Guarantee -- The Properties are guarantors under various credit agreements,
including the Parent's Notes totaling approximately $99.7 million in outstanding
principal amount. In addition, substantially all of the Properties' assets serve
as collateral under such agreements. Subject to certain exceptions, the
guarantee of the Notes is secured by a lien on substantially all assets of the
Properties other than certain excluded assets, as defined. Such excluded assets
include, among other things, (i) cash, deposit accounts and other cash
equivalents; (ii) furniture, fixtures and equipment securing certain
non-recourse indebtedness; and (iii) any agreements, permits, licenses or the
like that cannot be subjected to a lien without the consent of third parties,
which consent is not obtainable by the Parent (including all gaming licenses of
the Parent and its restricted subsidiaries as defined), provided that excluded
assets does not include the proceeds of the assets under clauses (ii) or (iii)
or any other collateral to the extent such proceeds do not constitute excluded
assets under clause (i) above. Assets not transferred upon the close of the sale
with Majestic will continue to serve as collateral after the sale.
LEGAL MATTERS
Central City Litigation -- On or about May 25, 2001, City of Central,
Colorado ("Central City"), and certain businesses claiming to do business in
Central City commenced an action, Civil Action No. 01-D-0964, in the United
States District Court for the District of Colorado against the City of Black
Hawk, Colorado ("Black Hawk"), certain companies alleged to do business in or
about Black Hawk and various individuals.
101 Main Street Limited Liability Company ("101 Main"), a wholly owned
subsidiary of Fitzgeralds Black Hawk, Inc.-II, was named defendant in the
action. The claims against all defendants, including 101 Main, are predicated on
15 U.S.C. section 1 (Restraint of Trade), 15 U.S.C. section 2 (Monopolization),
15 U.S.C. section 2 (Attempted Monopolization), Colorado Revised Statute section
6-4-104 (Restraint of Trade), violation of Colorado Revised Statute section
6-4-105 (Monopolization), Colorado Revised Statute section 6-4-105 (Attempted
Monopolization), 18 U.S.C. section 1962 (Racketeering), Colorado Revised Statute
section 18-17-104 (Colorado Organized Crime Control Act), intentional
interference with prospective economic advantage, civil conspiracy, tortuous
interference with contractual relations and inducing breach of contract. The
plaintiffs in the action are seeking judgment by jury against all defendants for
an amount in excess of $100.0 million. The principal cause of the action
relating to 101 Main is that the defendants, including 101 Main Street Limited
F-102
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
Liability Company, engaged in certain conduct to prevent the construction of a
highway defined as the "Southern Access Road" that would provide access to
travelers directly to Central City from Interstate 70 instead of requiring
passage through Black Hawk.
The complaint was filed after the commencement of the Bankruptcy Cases, and
101 Main has asserted that the action was commenced in violation of the
automatic stay, Section 362(a) of the Bankruptcy Code. On June 21, 2001, the
Parent filed a Notice of Pending Bankruptcy Cases and Existence of the Automatic
Stay.
101 Main then obtained an order to show cause why Plaintiffs and their
attorneys should not be held in contempt. Before the hearing, Plaintiffs amended
the complaint to omit 101 Main as a defendant, and Plaintiffs filed two motions
with the Bankruptcy Court, which sought (i) leave to file a late claim in the
101 Main bankruptcy case and (ii) relief from the automatic stay to add 101 Main
as a party defendant to the amended complaint. The amended complaint sought
damages, in an amount alleged to exceed $300,000,000, against the defendants
for, among other matters, RICO and conspiracy.
At a December 10, 2001 hearing, the Bankruptcy Court found that Plaintiffs
had violated the automatic stay and denied Plaintiffs' motion for leave to file
a late claim with the Bankruptcy Court. Furthermore, at this hearing the
Bankruptcy Court denied Plaintiffs' motion for relief from the automatic stay to
add 101 Main as a party defendant to the amended complaint, although it did
allow Plaintiffs to obtain discovery from 101 Main, its agents and
representatives in conjunction with the prosecution of the amended complaint
against other named defendants. On March 28, 2002, the Bankruptcy Court entered
its orders in this regard, which orders are now final and non-appealable.
Other Legal Matters -- The Properties are a party to various lawsuits
relating to routine matters incidental to its business. Except as noted below,
the Properties do not believe that the outcome of such litigation, individually
or in the aggregate, will have any material adverse effect on its financial
condition.
Reliance -- From April 1, 1998 through September 30, 1999, the Properties'
general liability insurance and worker's compensation insurance carrier was
Reliance Insurance Company ("Reliance"). On May 29, 2001, a Pennsylvania court
placed Reliance under the control of the Pennsylvania Insurance Department for
rehabilitation. Thereafter, on October 3, 2001, the Reliance Insurance Company
was declared insolvent and placed under an order of liquidation by the
Pennsylvania Commonwealth Court at the request of the Pennsylvania Insurance
Department. The Properties have not incurred any material amounts for liability
claims or workers compensation claims that would be subject to reimbursement by
Reliance.
However, the statute of limitation has not expired for filing claims and it
is unclear at this time what the insurance coverage would be from Reliance, if
any, in the event that a future claim is filed that would be large enough to
result in an insurance reimbursement from Reliance, or if there is insurance
coverage for an existing claim that is currently under the threshold level for
reimbursement, but increases in the future to an amount eligible for
reimbursement. The reimbursement threshold per claim is $25,000 and $100,000 for
liability claims and worker compensation claims, respectively. At the present
time, the Properties are unable to determine what effect this action may have on
liability and worker's compensation claims which arose during the coverage
period for which Reliance was the Properties' insurance carrier or whether any
limitations on coverage would have a material adverse effect on the Properties'
financial condition.
F-103
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
Holiday Inn -- Upon notification by Majestic of its intent to not enter
into a new franchise agreement with Holiday Inn Franchising, Inc. ("Inns"), the
Parent filed a motion with the Bankruptcy Court on October 26, 2001 to remove
its pre-petition franchise and other agreements with Inns from the list of
agreements to be assumed and assigned to Majestic. On October 26, 2001, the
Bankruptcy Court granted the motion. Since the transactions contemplated by the
Purchase Agreement were consummated on December 6, 2001, the Parent believes
Inns will assert an unsecured claim in the Bankruptcy Cases based upon the
liquidated damages provision of the franchise agreement (approximately $1.6
million). While the Parent would contest the allowance of such a claim by the
Bankruptcy Court, the Parent cannot predict the Bankruptcy Court's ultimate
resolution of such a claim.
14. SEGMENT INFORMATION
Until December 6, 2001, the Properties owned and operated three Fitzgeralds
casino-hotels: downtown Las Vegas, Nevada; Tunica, Mississippi; and Black Hawk,
Colorado. The Properties identify their business in three segments based on
geographic location. The Properties market in each of their segments primarily
to middle-market customers, emphasizing their Fitzgeralds brand and their
"Fitzgeralds Irish Luck" theme. The major products offered in each segment are
as follows: casino, hotel (except for Fitzgeralds Black Hawk) and food and
beverage.
The accounting policies of each business segment are the same as those
described in the summary of significant accounting policies. There are minimal
inter-segment sales. The Properties evaluate business segment performance based
on EBITDA (defined below). Corporate costs are allocated to the business segment
through management fees.
Assets are principally cash and cash equivalents, property and equipment
and goodwill related to the acquisition of the remaining 78% membership interest
in 101 Main Street Limited Liability Company. No single customer accounts for
more than 10% of revenue.
A summary of the Properties' operations by business segment for 1999, 2000
and 2001 is presented below:
FOR THE
PERIOD JANUARY 1,
YEAR ENDED DECEMBER 31, 2001 THROUGH
---------------------------- DECEMBER 6,
1999 2000 2001
------------- ---------- ----------------
(IN THOUSANDS)
Net operating revenues:
Fitzgeralds Las Vegas....................................................... $ 50,910 $ 52,139 $ 49,435
Fitzgeralds Tunica.......................................................... 69,582 75,062 76,713
Fitzgeralds Black Hawk...................................................... 32,284 32,537 31,511
------------ ---------- -----------
Total.................................................................... $ 152,776 $ 159,738 $ 157,659
============ ========== ===========
Income (loss) from operations:
Fitzgeralds Las Vegas....................................................... $ (1,115) $ (7) $ (23,618)
Fitzgeralds Tunica.......................................................... 5,321 9,018 42,033
Fitzgeralds Black Hawk(1)................................................... 7,517 6,385 7,027
------------ ---------- -----------
Total.................................................................... $ 11,723 $ 15,396 $ 25,442
============ ========== ===========
F-104
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
Reconciliation of total business segment operating income to combined net
income (loss) before income tax and extraordinary item:
Total segment operating income........................................... $ 11,723 $ 15,396 $ 25,442
Interest income.......................................................... 130 167 38
Interest expense......................................................... (210) (71) (40)
Interest expense -- related party........................................ (27,990) (26,031) --
Other, net............................................................... 99 4 (81)
------------ ---------- -----------
Net income (loss) before income tax................................... $ (16,248) $ (10,535) $ 25,359
============ ========== ===========
EBITDA(2):
Fitzgeralds Las Vegas(3)................................................. $ 2,594 $ 3,692 $ (23,618)
Fitzgeralds Tunica....................................................... 11,553 15,253 42,198
Fitzgeralds Black Hawk................................................... 9,303 8,138 7,027
------------ ---------- -----------
Total................................................................. $ 23,450 $ 27,083 $ 25,607
============ ========== ===========
FOR THE
PERIOD JANUARY 1,
YEAR ENDED DECEMBER 31, 2001 THROUGH
---------------------------- DECEMBER 6,
1999 2000 2001
------------- ---------- ----------------
(IN THOUSANDS)
Segment depreciation and amortization:
Fitzgeralds Las Vegas.................................................... $ 3,709 $ 3,698 $ --
Fitzgeralds Tunica....................................................... 6,231 6,235 --
Fitzgeralds Black Hawk................................................... 1,786 1,755 --
------------ ---------- -----------
Total................................................................. $ 11,726 $ 11,688 $ --
============ ========== ===========
Expenditures for additions to long-lived assets:
Fitzgeralds Las Vegas.................................................... $ 1,635 $ 1,619 $ 249
Fitzgeralds Tunica....................................................... 2,393 6,199 627
Fitzgeralds Black Hawk................................................... 687 1,518 178
------------ ---------- -----------
Total................................................................. $ 4,715 $ 9,336 $ 1,054
============ ========== ===========
AS OF AS OF
DECEMBER 31, DECEMBER 6,
2000 2001
------------ -----------
(IN THOUSANDS)
Segment assets:
Fitzgeralds Las Vegas.................................................... $ 42,657 $ 1,789
Fitzgeralds Tunica....................................................... 65,943 15,547
Fitzgeralds Black Hawk................................................... 38,728 5,024
------------ ----------
Total................................................................. 147,328 22,360
Less: inter-company...................................................... (8) 13
------------ ----------
Total................................................................. $ 147,320 $ 22,373
============ ==========
- ------------
(1) Includes write-down of assets of $13.0 million in 2001 at Fitzgeralds Black
Hawk.
(2) EBITDA is a supplemental financial measurement used by the Company in the
evaluation of its gaming business and by many gaming industry analysts.
EBITDA is calculated by adding depreciation and amortization expense to
income from operations. At any property, EBITDA is calculated after the
allocation of corporate costs. However, EBITDA should only be read in
conjunction with all of the Properties' financial data summarized above and
its financial statements prepared in accordance with generally accepted
accounting principles ("GAAP") appearing elsewhere herein, and should not
be construed as an alternative either to
F-105
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS - (CONTINUED)
income from operations (as determined in accordance with GAAP) as an
indication of the Properties' operating performance or to cash flows from
operating activities (as determined in accordance with GAAP) as a measure
of liquidity. This presentation of EBITDA may not be comparable to
similarly titled measures reported by other companies.
(3) Fitzgeralds Las Vegas invested $0.8 million, $0.9 million and $0.9 million
in 2001, 2000 and 1999, respectively, in FSE. Such investment was charged
against earnings as a selling, general and administrative expense.
F-106
HISTORICAL COMBINED FINANCIAL STATEMENTS
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
(DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION)
SUPPLEMENTAL COMBINING SCHEDULE--STATEMENT OF OPERATIONS
INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1999
101 MAIN STREET
FITZGERALDS FITZGERALDS LIMITED ELIMINATING
LAS VEGAS, INC MISSISSIPPI, INC. LIABILITY CO. ENTRIES COMBINED TOTAL
-------------- ------------------ ------------- ----------- --------------
OPERATING REVENUES:
Casino ............................ $ 38,129,610 $ 65,676,465 $ 35,122,740 $-- $ 138,928,815
Food and beverage ................. 8,502,928 7,936,527 2,289,609 -- 18,729,064
Rooms ............................. 8,465,897 7,827,721 -- -- 16,293,618
Other ............................. 1,808,135 1,195,908 281,164 -- 3,285,207
------------- ------------- ------------- ----- -------------
Total ...................... 56,906,570 82,636,621 37,693,513 -- 177,236,704
Less promotional allowances ....... 5,996,339 13,054,629 5,409,080 -- 24,460,048
------------- ------------- ------------- ----- -------------
Net ........................ 50,910,231 69,581,992 32,284,433 -- 152,776,656
------------- ------------- ------------- ----- -------------
OPERATING COSTS AND EXPENSES:
Casino ............................ 19,583,057 31,027,932 13,535,985 -- 64,146,974
Food and beverage ................. 7,695,608 2,929,046 1,168,417 -- 11,793,071
Rooms ............................. 6,101,345 4,599,896 -- -- 10,701,241
Other ............................. 906,070 386,663 584,297 -- 1,877,030
Selling, general and administrative 14,029,853 19,085,794 7,693,145 -- 40,808,792
Depreciation and amortization ..... 3,709,225 6,231,109 1,785,751 -- 11,726,085
------------- ------------- ------------- ----- -------------
Total ...................... 52,025,158 64,260,440 24,767,595 -- 141,053,193
------------- ------------- ------------- ----- -------------
INCOME (LOSS) FROM OPERATIONS ....... (1,114,927) 5,321,552 7,516,838 -- 11,723,463
OTHER INCOME (EXPENSE):
Interest income ................... 43,422 67,221 19,011 -- 129,654
Interest expense .................. (120,596) (65,291) (24,427) -- (210,314)
Interest expense-- related party .. (7,951,662) (12,722,660) (7,315,529) -- (27,989,851)
Other, net ........................ 100,606 -- (1,594) -- 99,012
------------- ------------- ------------- ----- -------------
INCOME (LOSS) BEFORE INCOME TAXES ... (9,043,157) (7,399,178) 194,299 -- (16,248,036)
INCOME TAX (PROVISION) BENEFIT ...... -- -- -- -- --
------------- ------------- ------------- ----- -------------
NET INCOME (LOSS) ................... $ (9,043,157) $ (7,399,178) $ 194,299 $-- $ (16,248,036)
============= ============= ============= ===== =============
F-108
HISTORICAL COMBINED FINANCIAL STATEMENTS
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
(DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION)
SUPPLEMENTAL COMBINING SCHEDULE--STATEMENT OF CASH FLOWS
INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1999
101 MAIN STREET
FITZGERALDS FITZGERALDS LIMITED ELIMINATING
LAS VEGAS, INC MISSISSIPPI, INC. LIABILITY CO. ENTRIES COMBINED TOTAL
-------------- --------------- ------------- ---------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................. $ (9,043,157) $ (7,399,178) $ 194,299 $-- $(16,248,036)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization ................. 3,709,225 6,231,109 1,785,751 -- 11,726,085
Other ......................................... (59,626) -- 1,594 -- (58,032)
(Increase) decrease in accounts
receivable, net ............................. 100,735 113,972 (78,617) -- 136,090
Increase in inventories ....................... (80,012) (23,278) (32,376) -- (135,666)
(Increase) decrease in prepaid expenses ....... (380,727) (54,012) 33,631 -- (401,108)
(Increase) decrease in other assets ........... 41,423 (190,879) 19,365 -- (130,091)
Increase (decrease) in accounts payable ....... (1,096,585) (1,453,520) 38,267 -- (2,511,838)
Increase (decrease) in accrued and other
liabilities ................................. (355,418) 1,031,932 (226,009) -- 450,505
Increase (decrease) in amounts due to
related parties, net ........................ 10,196,712 5,808,510 (59,877) -- 15,945,345
------------ ------------ ------------ ----- ------------
Net cash provided by operating
activities ............................. 3,032,570 4,064,656 1,676,028 -- 8,773,254
------------ ------------ ------------ ----- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets .................... 59,626 -- 18,100 -- 77,726
Acquisition of property and equipment ........... (1,568,093) (2,090,648) (686,847) -- (4,345,588)
------------ ------------ ------------ ----- ------------
Net cash used in investing activities..... (1,508,467) (2,090,648) (668,747) -- (4,267,862)
------------ ------------ ------------ ----- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ..................... (1,511,339) (891,606) (572,677) -- (2,975,622)
------------ ------------ ------------ ----- ------------
Net cash used in financing activities (1,511,339) (891,606) (572,677) -- (2,975,622)
------------ ------------ ------------ ----- ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS ..................................... 12,764 1,082,402 434,604 -- 1,529,770
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR ......................................... 3,113,838 4,104,073 1,530,344 -- 8,748,255
------------ ------------ ------------ ----- ------------
CASH AND CASH EQUIVALENTS, END OF
YEAR ............................................ $ 3,126,602 $ 5,186,475 $ 1,964,948 $-- $ 10,278,025
============ ============ ============ ===== ============
F-109
HISTORICAL COMBINED FINANCIAL STATEMENTS
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
(DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION)
SUPPLEMENTAL COMBINING SCHEDULE--BALANCE SHEET
AT DECEMBER 31, 2000
101 MAIN STREET
FITZGERALDS FITZGERALDS LIMITED ELIMINATING
LAS VEGAS, INC. MISSISSIPPI, INC. LIABILITY CO. ENTRIES COMBINED TOTAL
------------- ---------------- ------------- ------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................ $ 1,068,324 $ 684,394 $ 1,087,293 $ -- $ 2,840,011
Prepaid expenses: ........................ --
Gaming taxes ........................... 237,196 28,185 -- -- 265,381
Other .................................. 133,269 176,266 56,777 -- 366,312
------------- ------------- ------------- ------------- -------------
Total current assets .............. 1,438,789 888,845 1,144,070 -- 3,471,704
------------- ------------- ------------- ------------- -------------
OTHER ASSETS:
Net assets held for sale ................. 40,704,997 65,054,132 37,583,761 -- 143,342,890
Restricted cash .......................... 500,000 -- -- -- 500,000
Long-term accounts receivable -- related
parties ................................ 13,033 -- -- (7,724)(a) 5,309
------------- ------------- ------------- ------------- -------------
Total other assets ................ 41,218,030 65,054,132 37,583,761 (7,724) 143,848,199
------------- ------------- ------------- ------------- -------------
TOTAL ...................................... $ 42,656,819 $ 65,942,977 $ 38,727,831 $ (7,724) $ 147,319,903
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES:
Payroll and related ...................... $ 118,409 $ 305,652 $ 67,194 $ -- $ 491,255
------------- ------------- ------------- ------------- -------------
Total liabilities not subject to
compromise ...................... 118,409 305,652 67,194 -- 491,255
LIABILITIES SUBJECT TO COMPROMISE .......... 88,396,939 96,492,176 40,992,105 (7,724)(b) 225,873,496
------------- ------------- ------------- ------------- -------------
Total liabilities ................. 88,515,348 96,797,828 41,059,299 (7,724) 226,364,751
------------- ------------- ------------- ------------- -------------
STOCKHOLDER'S DEFICIENCY ................... (45,858,529) (30,854,851) (2,331,468) -- (79,044,848)
------------- ------------- ------------- ------------- -------------
TOTAL ...................................... $ 42,656,819 $ 65,942,977 $ 38,727,831 $ (7,724) $ 147,319,903
============= ============= ============= ============= =============
- ------------
(a) To eliminate intercompany accounts and notes receivable.
(b) To eliminate intercompany accounts and notes payable.
F-110
HISTORICAL COMBINED FINANCIAL STATEMENTS
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
(DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION)
SUPPLEMENTAL COMBINING SCHEDULE--STATEMENT OF OPERATIONS
INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2000
101 MAIN STREET
FITZGERALDS FITZGERALDS LIMITED ELIMINATING
LAS VEGAS, INC. MISSISSIPPI, INC. LIABILITY CO. ENTRIES COMBINED TOTAL
-------------- ---------------- ------------- ----------- --------------
OPERATING REVENUES:
Casino ............................ $ 38,476,427 $ 73,506,899 $ 36,793,529 $-- $ 148,776,855
Food and beverage ................. 8,541,003 8,658,645 2,386,565 -- 19,586,213
Rooms ............................. 8,452,168 8,147,904 -- -- 16,600,072
Other ............................. 2,246,343 977,444 306,245 -- 3,530,032
------------- ------------- ------------- ----- -------------
Total ..................... 57,715,941 91,290,892 39,486,339 -- 188,493,172
Less promotional allowances .... 5,576,597 16,229,247 6,949,780 -- 28,755,624
------------- ------------- ------------- ----- -------------
Net ....................... 52,139,344 75,061,645 32,536,559 -- 159,737,548
------------- ------------- ------------- ----- -------------
OPERATING COSTS AND EXPENSES:
Casino ............................ 19,945,222 34,163,968 15,004,089 -- 69,113,279
Food and beverage ................. 7,487,388 3,241,141 780,436 -- 11,508,965
Rooms ............................. 6,672,465 4,231,886 -- -- 10,904,351
Other ............................. 756,129 377,204 583,849 -- 1,717,182
Selling, general and administrative 13,586,618 17,757,582 8,026,758 -- 39,370,958
Depreciation and amortization ..... 3,698,468 6,234,911 1,754,585 -- 11,687,964
Reorganization items .............. -- 37,015 1,952 -- 38,967
------------- ------------- ------------- ----- -------------
Total ..................... 52,146,290 66,043,707 26,151,669 -- 144,341,666
------------- ------------- ------------- ----- -------------
INCOME (LOSS) FROM OPERATIONS ....... (6,946) 9,017,938 6,384,890 -- 15,395,882
OTHER INCOME (EXPENSE):
Interest income ................... 49,433 88,699 29,314 -- 167,446
Interest expense .................. (52,923) (16,561) (1,898) -- (71,382)
Interest expense-- related party .. (7,386,790) (11,848,387) (6,795,846) -- (26,031,023)
Other, net ........................ 48,943 (44,450) -- -- 4,493
------------- ------------- ------------- ----- -------------
NET LOSS ............................ $ (7,348,283) $ (2,802,761) $ (383,540) $-- $ (10,534,584)
============= ============= ============= ===== =============
F-111
HISTORICAL COMBINED FINANCIAL STATEMENTS
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
(DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION)
SUPPLEMENTAL COMBINING SCHEDULE--STATEMENT OF CASH FLOWS
INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2000
101 MAIN STREET
FITZGERALDS FITZGERALDS LIMITED ELIMINATING
LAS VEGAS, INC. MISSISSIPPI, INC. LIABILITY CO. ENTRIES COMBINED TOTAL
--------------- ----------------- --------------- ----------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................... $ (7,348,283) $ (2,802,761) $ (383,540) $-- $(10,534,584)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depreciation and amortization ............... 3,698,468 6,234,911 1,754,585 -- 11,687,964
Reorganization items incurred in connection
with Chapter 11 and related legal
proceedings ............................... -- 37,015 1,952 -- 38,967
Other ....................................... (7,963) 44,450 -- -- 36,487
(Increase) decrease in accounts receivable,
net ....................................... (295,349) (13,680) 75,670 -- (233,359)
(Increase) decrease in inventories .......... 146,770 (57,423) 9,182 -- 98,529
(Increase) decrease in prepaid expenses ..... (365,739) 6,734 (133,961) -- (492,966)
(Increase) decrease in other assets ......... 17,285 (14,950) (141,363) -- (139,028)
Decrease in accounts payable ................ (746,909) (429,695) (231,515) -- (1,408,119)
Decrease in accrued and other liabilities ... (232,349) (1,864,197) (28,432) -- (2,124,978)
Increase in amounts due to related parties,
net ........................................ 7,599,558 6,067,908 1,466,808 -- 15,134,274
Increase in liabilities subject to compromise 33,677 65,267 7,733 -- 106,677
------------ ------------ ------------ --- ------------
Net cash provided by operating activities
before reorganization items ................ 2,499,166 7,273,579 2,397,119 -- 12,169,864
Reorganization items incurred in connection
with Chapter 11 and related legal proceedings .. -- (37,015) (1,952) -- (38,967)
------------ ------------ ------------ --- ------------
Net cash provided by operating activities.. 2,499,166 7,236,564 2,395,167 -- 12,130,897
------------ ------------ ------------ --- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets .................. 7,963 -- 500 -- 8,463
Acquisition of property and equipment ......... (1,250,139) (6,243,359) (1,518,444) -- (9,011,942)
------------ ------------ ------------ --- ------------
Net cash used in investing activities .. (1,242,176) (6,243,359) (1,517,944) -- (9,003,479)
------------ ------------ ------------ --- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ................... (232,872) (220,688) -- -- (453,560)
------------ ------------ ------------ --- ------------
Net cash used in financing activities .. (232,872) (220,688) -- -- (453,560)
------------ ------------ ------------ --- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....... 1,024,118 772,517 877,223 -- 2,673,858
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR ............................. 3,126,602 5,186,475 1,964,948 -- 10,278,025
INCREASE IN CASH AND CASH EQUIVALENTS
INCLUDED IN NET ASSETS HELD FOR SALE .......... (3,082,396) (5,274,598) (1,754,878) -- (10,111,872)
------------ ------------ ------------ --- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR .......... $ 1,068,324 $ 684,394 $ 1,087,293 $-- $ 2,840,011
============ ============ ============ === ============
F-112
HISTORICAL COMBINED FINANCIAL STATEMENTS
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
(DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION)
SUPPLEMENTAL COMBINING SCHEDULE--BALANCE SHEET
AT DECEMBER 6, 2001
101 MAIN STREET
FITZGERALDS FITZGERALDS LIMITED ELIMINATING
LAS VEGAS, INC. MISSISSIPPI, INC. LIABILITY CO. ENTRIES COMBINED TOTAL
--------------- ----------------- --------------- ----------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 726,021 $ 2,388,390 $ 648,155 $ -- $ 3,762,566
Accounts receivable, net ...................... 3,963 192,532 29,000 -- 225,495
Prepaid expenses:
Gaming taxes ................................ 783,392 32,360 1,838 -- 817,590
Other ....................................... 275,749 309,651 194,838 -- 780,238
------------ ------------ ------------ ------------ ------------
Total current assets ...................... 1,789,125 2,922,933 873,831 -- 5,585,889
------------ ------------ ------------ ------------ ------------
OTHER ASSETS:
Accounts receivable-- related parties ......... -- 12,599,516 4,149,702 13,076(a) 16,762,294
Other assets .................................. -- 25,000 -- 25,000
------------ ------------ ------------ ------------ ------------
Total other assets ........................ -- 12,624,516 4,149,702 13,076 16,787,294
------------ ------------ ------------ ------------ ------------
TOTAL ........................................... $ 1,789,125 $ 15,547,449 $ 5,023,533 $ 13,076 $ 22,373,183
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES:
Accounts payable .............................. $ 166,073 $ -- $ -- $ -- $ 166,073
Due to Majestic ............................... 2,405,289 1,716,150 (321,439) -- 3,800,000
Accrued and other:
Payroll and related ......................... 204,835 486,628 227,680 -- 919,143
Other ....................................... 76,034 98,912 89,786 -- 264,732
------------ ------------ ------------ ------------ ------------
Total current liabilities ................. 2,852,231 2,301,690 (3,973) -- 5,149,948
------------ ------------ ------------ ------------ ------------
NOTE PAYABLE-- RELATED PARTY .................... 215,749 -- -- 13,076(a) 228,825
------------ ------------ ------------ ------------ ------------
Total liabilities not subject to compromise 3,067,980 2,301,690 (3,973) 13,076 5,378,773
LIABILITIES SUBJECT TO COMPROMISE ............... 68,245,167 2,071,002 364,293 -- 70,680,462
------------ ------------ ------------ ------------ ------------
Total liabilities ......................... 71,313,147 4,372,692 360,320 13,076 76,059,235
------------ ------------ ------------ ------------ ------------
STOCKHOLDER'S DEFICIENCY ........................ (69,524,022) 11,174,757 4,663,213 -- (53,686,052)
------------ ------------ ------------ ------------ ------------
TOTAL ........................................... $ 1,789,125 $ 15,547,449 $ 5,023,533 $ 13,076 $ 22,373,183
============ ============ ============ ============ ============
- ------------
(a) To eliminate intercompany accounts and notes receivable/payable.
F-113
HISTORICAL COMBINED FINANCIAL STATEMENTS
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
(DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION)
SUPPLEMENTAL COMBINING SCHEDULE--STATEMENT OF OPERATIONS
INFORMATION FOR THE PERIOD FROM JANUARY 1, 2001 THROUGH DECEMBER 6, 2001
101 MAIN STREET
FITZGERALDS FITZGERALDS LIMITED ELIMINATING COMBINED
LAS VEGAS, INC. MISSISSIPPI, INC. LIABILITY CO. ENTRIES TOTAL
--------------- ----------------- ------------- --------------- -------------
OPERATING REVENUES:
Casino ............................ $ 37,401,549 $ 77,462,357 $ 35,806,661 -- $ 150,670,567
Food and beverage ................. 7,619,373 8,480,323 2,265,547 -- 18,365,243
Rooms ............................. 7,421,444 7,620,756 -- -- 15,042,200
Other ............................. 2,150,660 1,114,620 280,058 -- 3,545,338
------------- ------------- ------------- ----- -------------
Total ......................... 54,593,026 94,678,056 38,352,266 -- 187,623,348
Less promotional allowances ......... 5,157,564 17,965,548 6,840,890 -- 29,964,002
------------- ------------- ------------- ----- -------------
Net ........................... 49,435,462 76,712,508 31,511,376 -- 157,659,346
------------- ------------- ------------- ----- -------------
OPERATING COSTS AND EXPENSES:
Casino ............................ 19,802,333 35,536,411 14,419,043 -- 69,757,787
Food and beverage ................. 6,692,684 3,041,117 891,216 -- 10,625,017
Rooms ............................. 6,357,318 3,461,234 -- -- 9,818,552
Other ............................. 582,166 440,179 634,920 -- 1,657,265
Selling, general and administrative.. 13,792,262 16,194,550 7,865,398 -- 37,852,210
Depreciation and amortization ..... -- -- -- -- --
Reorganization items .............. 25,826,705 (23,994,013) (12,331,767) -- (10,499,075)
Write-down of assets .............. -- -- 13,005,582 13,005,582
------------- ------------- ------------- ----- -------------
Total ......................... 73,053,468 34,679,478 24,484,392 -- 132,217,338
------------- ------------- ------------- ----- -------------
INCOME (LOSS) FROM OPERATIONS ....... (23,618,006) 42,033,030 7,026,984 -- 25,442,008
OTHER INCOME (EXPENSE)
Interest income ................... 38,407 -- -- -- 38,407
Interest expense .................. (34,637) (5,322) -- -- (39,959)
Other, net ........................ (51,258) 1,900 (32,302) -- (81,660)
------------- ------------- ------------- ----- -------------
NET INCOME (LOSS) ................... $ (23,665,494) $ 42,029,608 $ 6,994,682 $-- $ 25,358,796
============= ============= ============= ===== =============
F-114
HISTORICAL COMBINED FINANCIAL STATEMENTS
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
(DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION)
SUPPLEMENTAL COMBINING SCHEDULE--STATEMENT OF CASH FLOWS
INFORMATION FOR THE PERIOD FROM JANUARY 1, 2001 THROUGH DECEMBER 6, 2001
101 MAIN STREET
FITZGERALDS FITZGERALDS LIMITED ELIMINATING COMBINED
LAS VEGAS, INC. MISSISSIPPI, INC. LIABILITY CO. ENTRIES TOTAL
--------------- ---------------- ------------ ----------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ (23,665,494) $ 42,029,608 $ 6,994,682 $-- $ 25,358,796
Adjustments to reconcile net income (loss) to
net cash used in operating activities
Write-down of assets .............................. -- -- 13,005,582 -- 13,005,582
(Gain) loss on sale of assets to Majestic ......... 25,290,831 (24,079,205) (12,333,437) -- (11,121,811)
Reorganization items incurred in connection
with Chapter 11 and related legal
proceedings ..................................... 535,874 85,192 1,670 -- 622,736
Other ............................................. 89,632 (1,900) 28,707 -- 116,439
(Increase) decrease in accounts receivable,
net ............................................. 36,093 (24,085) (54,079) -- (42,071)
Decrease in amounts due to related parties,
net ............................................. (8,418,141) (22,898,876) (9,087,324) -- (40,404,341)
(Increase) decrease in inventories ................ 66,699 28,960 (29,611) -- 66,048
(Increase) decrease in prepaid expenses ........... 424,323 (65,417) (102,921) -- 255,985
(Increase) decrease in other assets ............... 34,204 (7,089) -- -- 27,115
Increase (decrease) in accounts payable ........... 799,009 (451,016) (107,187) -- 240,806
Increase (decrease) in due to Majestic ............ 2,405,290 1,716,150 (321,440) -- 3,800,000
Increase (decrease) in liabilities subject to
compromise ...................................... 16,298 125,805 7,732 -- 149,835
Increase (decrease) in accrued and other
liabilities ..................................... (87,589) 756,736 (44,678) -- 624,469
------------ ------------ ------------ --- ------------
Net cash used in operating activities before
reorganizational items .......................... (2,472,971) (2,785,137) (2,042,304) -- (7,300,412)
Reorganization items:
Interest received on cash accumulated because
of the bankruptcy proceedings ................... -- 119,848 51,594 -- 171,442
Professional fees paid for services rendered
in connection with the bankruptcy
proceedings ..................................... (25,128) -- (13,264) -- (38,392)
Other reorganization items incurred in
connection with Chapter 11 and related
legal proceedings ............................... (510,746) (205,040) (40,000) -- (755,786)
------------ ------------ ------------ --- ------------
Net cash used in operating activities ............. (3,008,845) (2,870,329) (2,043,974) -- (7,923,148)
------------ ------------ ------------ --- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets ..................... -- -- 28,250 -- 28,250
Acquisition of property and equipment ............. (248,581) (627,258) (178,292) -- (1,054,131)
------------ ------------ ------------ --- ------------
Net cash used in investing activities ............. (248,581) (627,258) (150,042) -- (1,025,881)
------------ ------------ ------------ --- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ....................... (167,273) (73,015) -- -- (240,288)
------------ ------------ ------------ --- ------------
Net cash used in financing activities ............. (167,273) (73,015) -- -- (240,288)
------------ ------------ ------------ --- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ......... (3,424,699) (3,570,602) (2,194,016) -- (9,189,317)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD .......................................... 1,068,324 684,394 1,087,293 -- 2,840,011
INCREASE IN CASH AND CASH EQUIVALENTS
INCLUDED IN NET ASSETS HELD FOR SALE ............ 3,082,396 5,274,598 1,754,878 -- 10,111,872
------------ ------------ ------------ --- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......... $ 726,021 $ 2,388,390 $ 648,155 $-- $ 3,762,566
============ ============ ============ === ============
F-115
SCHEDULE II
FITZGERALDS LAS VEGAS, INC., FITZGERALDS MISSISSIPPI, INC. AND
101 MAIN STREET LIMITED LIABILITY COMPANY
(DEBTORS-IN-POSSESSION)
(WHOLLY OWNED SUBSIDIARIES OF FITZGERALDS GAMING CORPORATION)
COMBINED VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION PERIOD EXPENSES DEDUCTIONS(1) END OF PERIOD
------------ ----------- -------------- -------------
Allowance for doubtful accounts receivable
Period from January 1, 2001 to December 6, 2001............................ $ 210,586 $ 209,983 $ (223,670) $ 196,899
Year ended December 31, 2000............................................... 356,397 98,242 (244,053) 210,586
Year ended December 31, 1999............................................... 291,925 414,716 (350,244) 356,397
- ------------
(1) Write-offs of uncollectible accounts receivable, net of recoveries
F-116