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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 333-06489
INDIANA THE MAJESTIC STAR CASINO, LLC 43-1664986
INDIANA THE MAJESTIC STAR CASINO CAPITAL CORP. 35-2100872
(State or other (Exact name of registrant as (I.R.S. Employer
jurisdiction of specified in its charter) Identification No.)
incorporation or
organization)
301 FREMONT STREET
LAS VEGAS, NEVADA 89101
(702) 388 - 2224
(Address of principal executive offices and telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes No X
----- -----
As of March 31, 2005, shares outstanding of each of the registrant's classes of
common stock:
Class Number of shares
- ----- ----------------
Not applicable Not applicable
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
Index
PART I FINANCIAL INFORMATION Page No.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2005 (unaudited)
and December 31, 2004 ..........................................................1
Consolidated Statements of Operations for the three months
ended March 31, 2005 and 2004 (unaudited) ......................................2
Consolidated Statements of Changes in Member's Deficit for the
three months ended March 31, 2005 (unaudited) and the year
ended December 31, 2004 ........................................................3
Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and 2004 (unaudited) ............................................4
Notes to the Consolidated Financial Statements .................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...........................................29
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....................46
Item 4. Controls and Procedures .......................................................46
PART II OTHER INFORMATION
Item 1. Legal Proceedings .............................................................47
Item 6. Exhibits ......................................................................47
SIGNATURES .............................................................................S-1
i
PART I
FINANCIAL INFORMATION
Item 1
Consolidated Financial Statements
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
2005 2004
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,412,156 $ 14,327,452
Restricted cash 2,540,008 2,540,008
Accounts receivable, less allowance for
doubtful accounts of $652,234 and
$617,040 as of March 31, 2005 and December
31, 2004, respectively 1,967,199 2,064,981
Inventories 511,293 520,485
Prepaid expenses 3,825,259 2,212,396
Receivable from affiliate - 715,216
Assets held for sale 31,527,150 30,683,526
------------- -------------
Total current assets 56,783,065 53,064,064
------------- -------------
Property, equipment and improvements, net 140,257,245 142,181,216
Intangible assets, net 5,008,925 5,229,904
Goodwill 3,997,904 3,997,904
Other assets:
Deferred financing costs, net of
accumulated amortization of $2,071,675 and
$1,767,700 as of March 31, 2005 and
December 31, 2004, respectively 5,057,750 5,361,723
Note receivable - affiliate 3,586,848 -
Investment in Buffington Harbor Riverboats, LLC 26,826,572 27,432,270
Other assets 9,688,692 9,109,383
------------- -------------
Total other assets 45,159,862 41,903,376
------------- -------------
Total assets $ 251,207,001 $ 246,376,464
============= =============
LIABILITIES AND MEMBER'S DEFICIT
Current liabilities:
Accounts payable $ 1,750,553 $ 1,751,530
Accrued liabilities:
Payroll and related 6,818,225 6,303,165
Interest 12,157,485 5,523,719
Property and franchise taxes 5,625,877 5,329,172
Other accrued liabilities 10,290,104 10,296,594
Liabilities related to assets held for sale 2,869,882 2,713,847
------------- -------------
Total current liabilities 39,512,126 31,918,027
------------- -------------
Long-term debt, net of current maturities 311,891,992 316,857,960
------------- -------------
Total liabilities 351,404,118 348,775,987
------------- -------------
Member's deficit (100,197,117) (102,399,523)
------------- -------------
Total liabilities and member's deficit $ 251,207,001 $ 246,376,464
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
1
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For The Three Months Ended
March 31,
------------------------------
2005 2004
------------ ------------
OPERATING REVENUES:
Casino $ 61,281,711 $ 61,990,824
Rooms 1,794,104 1,873,837
Food and beverage 2,937,839 2,809,318
Other 956,752 968,651
------------ ------------
Gross revenues 66,970,406 67,642,630
Less promotional allowances 9,278,069 8,639,737
------------ ------------
Net operating revenues 57,692,337 59,002,893
------------ ------------
OPERATING COSTS AND EXPENSES:
Casino 14,849,058 15,747,448
Rooms 383,945 465,242
Food and beverage 1,254,277 1,231,092
Other 52,037 70,811
Gaming taxes 13,774,692 13,772,044
Advertising and promotion 2,880,097 3,174,222
General and administrative 9,250,418 12,383,249
Corporate expense 1,197,070 805,606
Economic incentive - City of Gary 1,163,362 1,177,155
Depreciation and amortization 4,635,935 4,041,606
Loss on investment in Buffington Harbor
Riverboats, LLC 605,698 612,841
Loss (gain) on disposal of assets 140 (1,716)
------------ ------------
Total operating costs and expenses 50,046,729 53,479,600
------------ ------------
Operating income 7,645,608 5,523,293
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 12,202 5,114
Interest expense (7,236,375) (7,058,045)
Other non-operating expense (36,954) (28,209)
------------ ------------
Total other expense (7,261,127) (7,081,140)
------------ ------------
Income (loss) from continuing operations 384,481 (1,557,847)
DISCONTINUED OPERATIONS:
Income from discontinued operations 2,971,418 2,042,190
------------ ------------
Net income $ 3,355,899 $ 484,343
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
2
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S DEFICIT
For the Three Months Ended March 31, 2005 and the Year Ended December 31, 2004
Member's Deficit
----------------
Balance, December 31, 2003 $ (102,166,955)
Net income 5,018,526
Distribution to Barden Development, Inc. (5,251,094)
----------------
Balance, December 31, 2004 $ (102,399,523)
Net income (unaudited) 3,355,899
Distributions to Barden Development, Inc. (unaudited) (1,153,493)
----------------
Balance, March 31, 2005 (unaudited) $ (100,197,117)
================
The accompanying notes are an integral part of these
consolidated financial statements.
3
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For The Three Months Ended
March 31,
------------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,355,899 $ 484,343
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,076,951 3,844,304
Amortization 558,984 655,539
Loss on investment in Buffington Harbor
Riverboats, LLC 605,698 612,841
Loss on disposal of assets 140 1,055
Changes in operating assets and liabilities:
(Increase) decrease in accounts
receivable, net (13,886) 1,195,298
Increase in related parties receivables - (91,412)
Decrease in inventories 39,590 7,163
Increase in prepaid expenses (1,601,993) (879,579)
(Increase) decrease in other assets (581,309) 246,079
Increase (decrease) in accounts payable 127,665 (3,096,035)
Increase (decrease) in accrued payroll
and other expenses 539,812 (437,858)
Increase in accrued interest 6,633,766 6,826,412
Increase in other accrued liabilities 599,736 2,795,112
------------ ------------
Net cash provided by operating activities 14,341,053 12,163,262
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (3,147,585) (25,665,295)
Decrease in prepaid leases and deposits 2,000 -
Investment in Buffington Harbor
Riverboats, LLC - (54,104)
Proceeds from disposal of equipment - 106,975
------------ ------------
Net cash used in investing activities (3,145,585) (25,612,424)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance cost for the 9 1/2% senior
secured notes - (73,110)
Issuance cost for the $80.0 million secured
credit facility - (36,997)
Proceeds from line of credit 3,000,000 20,001,293
Repayment of line of credit (8,000,000) (6,959,787)
Repayment of note from related party - 67,000
Advances to affiliates - net (2,871,634) -
Distribution to Barden Development, Inc. (1,153,493) (1,089,392)
------------ ------------
Net cash (used in) provided by
financing activities (9,025,127) 11,909,007
------------ ------------
Net increase (decrease) in cash and
cash equivalents 2,170,341 (1,540,155)
Cash related to discontinued operations (2,479,914) -
Cash and cash equivalents, beginning of period 16,721,729 22,058,016
------------ ------------
Cash and cash equivalents, end of period $ 16,412,156 $ 20,517,861
============ ============
4
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(unaudited)
For The Three Months Ended
March 31,
------------------------------
2005 2004
------------ ------------
INTEREST PAID:
Line of credit $ 602,610 $ 231,193
============ ============
NON-CASH INVESTING ACTIVITIES:
Capital assets acquired from incurring accounts payable $ 989,493 $ -
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
5
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
The Majestic Star Casino, LLC (the "Company") is a wholly owned subsidiary
of Barden Development, Inc. ("BDI") and 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 at
Buffington Harbor, located in Lake County, Indiana on June 7, 1996.
The Company is a multi-jurisdictional gaming company. The Company directly
owns and operates one riverboat gaming facility located in Gary, Indiana
("Majestic Star"). Through its wholly owned subsidiary, Majestic Investor
Holdings, LLC ("Investor Holdings"), the Company also indirectly owns other
subsidiaries that operate two "Fitzgeralds-brand" casino properties during the
periods presented in the accompanying consolidated financial statements:
- - A casino-hotel located in Tunica County, Mississippi ("Fitzgeralds Tunica"
or "Barden Mississippi").
- - A casino located in Black Hawk, Colorado ("Fitzgeralds Black Hawk" or
"Barden Colorado"). On July 12, 2004, the Company entered into an agreement to
sell substantially all of the net assets of Fitzgeralds Black Hawk, which sale
was not yet completed as of March 31, 2005. As a result of the pending sale, the
operating results of Fitzgeralds Black Hawk have been presented in discontinued
operations for each of the three-month periods ended March 31, 2005 and 2004 in
the accompanying statements of operations. See Note 2 - Basis of Presentation
and Note 3 - Discontinued Operations. In April 2005, the Company and the buyer
mutually agreed to terminate the sale agreement. See Note 11 - Subsequent Event.
The Company also has the following subsidiaries, which were formed for the
purpose of facilitating financing transactions:
- - Majestic Star Casino Capital Corp. ("MSCC") was originally formed for the
purpose of facilitating the offering of the Company's $130.0 million 10 7/8%
senior secured notes due 2006 (the "10 7/8% notes"). The 10 7/8% notes were
fully purchased and redeemed on October 7, 2003. MSCC similarly facilitated the
offering of, and is a co-obligor with the Company of, the $260.0 million senior
secured notes due 2010. MSCC has no assets or operations. See Note 7 - Long Term
Debt.
- - Majestic Investor Capital Corp. (a wholly owned subsidiary of Investor
Holdings), was formed specifically to facilitate the offering of Investor
Holdings' $152.6 million 11.653% senior secured notes due 2007 (the "11.653%
notes"). Approximately 89.3%, or $135.5 million, of the 11.653% notes were
purchased and redeemed on October 7, 2003, and this subsidiary has no assets or
operations. See Note 7 - Long Term Debt.
The Company also has a non-controlling 50% interest in a corporate joint
venture
6
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
formed for the purpose of acquiring and developing certain facilities for the
gaming operations in the City of Gary. See Note 6 - Investment in Buffington
Harbor Riverboats, L.L.C.
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 direct and indirect subsidiaries.
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited. 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 principals
generally accepted in the United States of America, or "GAAP" for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements have been condensed or omitted. 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 and
worker's compensation plans, property taxes, slot club point programs, and
litigation, claims and assessments. Actual results could differ from those
estimates.
In the opinion of management, all adjustments (which include normal
recurring adjustments) considered necessary for a fair presentation of the
results for the interim periods have been made. The results for the three-month
period ended March 31, 2005 are not necessarily indicative of results to be
expected for the full fiscal year. The financial statements should be read in
conjunction with the financial statements and notes thereto included in The
Majestic Star Casino, LLC's Annual Report on Form 10-K for the year ended
December 31, 2004.
SUPPLEMENTAL CASH FLOW INFORMATION
Contained within the March 31, 2005 and 2004 consolidated statements of cash
flows are the cash flow activities of Fitzgeralds Black Hawk, for which an
agreement was executed on July 12, 2004 to sell substantially all of its assets
subject to certain of its liabilities. See Note 3 - Discontinued Operations and
Note 11 - Subsequent Event.
7
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROMOTIONAL ALLOWANCES
Cash incentives related to gaming play are recorded as a reduction of gross
revenues. Such amounts totaled $5.7 million and $5.2 million for the three
months ended March 31, 2005 and 2004, respectively. 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 expenses as follows:
For the three months ended March 31,
---------------------------------------
2005 2004
---------------- ------------------
Rooms $ 608,693 $ 563,667
Food and Beverage 1,816,589 1,815,510
Other 112,800 121,422
---------------- ------------------
Total $ 2,538,082 $ 2,500,599
================ ==================
The estimated retail value of such promotional allowances included in
operating revenues for the three-month periods ended March 31, 2005 and 2004 is
$3.6 million and $3.4 million, respectively.
The following schedule lists total cash incentives and the retail costs of
rooms, food, beverage, and other, which comprise the total promotional
allowances for each of the three-month periods ended March 31, 2005 and 2004.
For the three months ended March 31,
--------------------------------------
2005 2004
---------------- ------------------
Cash based promotional activities $ 4,588,218 $ 4,553,175
Slot club and other 1,085,690 666,423
Retail cost of rooms, food, beverage and
other 3,604,161 3,420,139
---------------- -----------------
Total $ 9,278,069 $ 8,639,737
================ =================
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 151, "Inventory Costs-an amendment of ARB
No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). SFAS
151 is effective for financial statements for fiscal years beginning after June
15, 2005. The Company does not anticipate that adoption of SFAS 151 will have a
material impact on its financial position, results of operations or its cash
flows.
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 153, "Exchanges of Nonmonetary Assets-an
8
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends APB Opinion No.
29, "Accounting for Nonmonetary Transactions," to eliminate the exception for
nonmonetary exchanges of similar productive assets and replace it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance (i.e., if the future cash flows of the entity are expected to change
significantly as a result of the exchange). SFAS 153 is effective for financial
statements for fiscal years beginning after June 15, 2005. The Company does not
anticipate that adoption of SFAS 153 will have a material impact on its
financial position, results of operations or its cash flows.
RECLASSIFICATIONS
The consolidated financial statements and footnotes for the prior year
reflect certain reclassifications to conform to the current year presentation,
which have no effect on previously reported net income.
NOTE 3. DISCONTINUED OPERATIONS
FITZGERALDS BLACK HAWK
On July 12, 2004, the Company entered into an agreement to sell
substantially all of the assets subject to certain liabilities of Fitzgeralds
Black Hawk to Legends Gaming, LLC for a purchase price of $66.0 million, which
purchase price was to be subject to adjustments based on working capital and
certain capital expenditures made as of the closing date. The sales agreement
required that the transaction close on or before May 1, 2005. However, on April
14, 2005, Legends Gaming, LLC and Fitzgeralds Black Hawk entered into a mutual
agreement to terminate the sales agreement (see Note 11 - Subsequent Event).
Since the sales agreement was terminated after March 31, 2005, the results
of Fitzgeralds Black Hawk are still reflected in discontinued operations in the
accompanying consolidated statements of operations for both of the three-month
periods presented. Net revenues of Fitzgeralds Black Hawk for the three months
ended March 31, 2005 and 2004 were $9.2 million and $8.4 million, respectively.
Fitzgeralds Black Hawk's net income for the three-month periods ended March 31,
2005 and 2004 was $3.0 million and $2.0 million, respectively.
9
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the assets and liabilities of Fitzgeralds
Black Hawk as of March 31, 2005 and December 31, 2004 included as assets and
liabilities held for sale in the accompanying consolidated balance sheet:
As of As of
March 31, December 31,
2005 2004
----------- ------------
Cash $ 2,479,914 $ 2,394,277
Accounts receivable, net 174,402 62,734
Inventory 138,487 168,885
Prepaid expenses and other 77,078 87,949
----------- -----------
Total current assets 2,869,881 2,713,845
Property and equipment, net 23,672,131 22,984,543
Other assets, net 4,985,138 4,985,138
----------- -----------
Total assets $31,527,150 $30,683,526
----------- -----------
Accounts payable $ 489,184 $ 186,582
Other current liabilities 2,380,698 2,527,265
----------- -----------
Total liabilities 2,869,882 2,713,847
----------- -----------
Net assets $28,657,268 $27,969,679
=========== ===========
NOTE 4. RESTRICTED CASH
As of March 31, 2005 and December 31, 2004, restricted cash consists of
(i) certificates of deposit aggregating $2.1 million which serve as security for
letters of credit supporting various self-insured worker's compensation
programs, and (ii) cash of $0.4 million which serves as security for a bond
relating to the appeal of an award rendered against the Company in the U.S.
District Court for the Northern District of Mississippi (See Note 8 -
Commitments and Contingencies).
NOTE 5. INTANGIBLE ASSETS
Intangible assets at Fitzgeralds Tunica primarily include $5.0 million for
customer relationships, $2.2 million for trade names, and $0.7 million for an
excursion license for a riverboat which commenced full operations on March 18,
2004. Intangible assets for customer relationships and trade names are being
amortized over periods of 8 and 10 years, respectively. The riverboat excursion
license is being amortized over 15 years, the period of the license. In
accordance with SFAS 142, goodwill is not amortized but instead subject to
impairment tests at least annually. The Company conducts its annual test in
December. No additions or impairments of goodwill were recorded in either of the
fiscal quarters ended March 31, 2004 or 2005.
10
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The gross carrying amount and accumulated amortization of the Company's
intangible assets, other than goodwill, as of March 31, 2005 and December 31,
2004 are as follows:
As of March 31, 2005 Gross Carrying Accumulated Net Amount Expected
-------------------- Amount Amortization March 31, 2005 Life
-------------- ------------ ----------------- ---------
Amortized intangible assets: (in thousands)
Customer relationship $ 4,954 $ (2,055) $ 2,899 8 yrs
Trade name 2,180 $ (723) 1,457 10 yrs
Riverboat excursion license 700 (47) 653 15 yrs
-------------- ------------ -----------------
Total intangible assets $ 7,834 $ (2,825) $ 5,009
============== ============ =================
As of December 31, 2004 Gross Carrying Accumulated Net Amount Expected
----------------------- Amount Amortization December 31, 2004 Life
-------------- ------------ ----------------- ---------
(in thousands)
Amortized intangible assets:
Customer relationship $ 4,954 $ (1,900) $ 3,054 8 yrs
Trade name 2,180 (669) 1,511 10 yrs
Riverboat excursion license 700 (35) 665 15 yrs
-------------- ------------ -----------------
Total intangible assets $ 7,834 $ (2,604) $ 5,230
============== ============ =================
The schedule of amortized intangible assets as of March 31, 2005 and
December 31, 2004 excludes our discontinued operation, Fitzgeralds Black Hawk.
Fitzgeralds Black Hawk had intangible assets for customer relations and trade
name, net of accumulated amortization, of $2.9 million at both March 31, 2005
and December 31, 2004.
The amortization expense recorded on the intangible assets, excluding those
of Fitzgeralds Black Hawk, was $0.2 million for both of the three-month periods
ended March 31, 2005 and 2004.
In accordance with Financial Accounting Standards Board Statement Number
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"), Fitzgeralds Black Hawk discontinued amortizing its intangible assets on
July 12, 2004, the date of the sales agreement discussed above in Note 3 -
Discontinued Operations. Consequently, there was no amortization expense
recorded on its intangible assets for the three-month period ended March 31,
2005 and $0.1 million for the same period in 2004. As a result of the
termination of the sale, the Company will record a catch-up adjustment for
amortization in the second quarter of 2005. See Note 11 - Subsequent Event.
NOTE 6. 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 Buffington Harbor Riverboats, LLC ("BHR") for the purpose of
acquiring and developing certain facilities for the gaming operations in the
City of Gary ("BHR Property"). BHR is responsible for the management,
development and operation of the BHR Property. The Company and Trump have each
entered into an agreement with BHR
11
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(the "Berthing Agreement") to use BHR Property for their respective gaming
operations and have committed to pay the 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 to BHR approximately $1.3 million and $1.8 million of
berthing fees for the three-month periods ended March 31, 2005 and 2004,
respectively. Such amounts are recorded in general and administrative expense in
the consolidated statements of operations.
Majestic Star uses the food and beverage operations at BHR to provide its
casino customers with complimentary meals, beverages and services. All of the
restaurants at BHR, which include Passports-A World Class Buffet and Koko
Taylor's Blues Cafe, are run by third party operators. The Company sends guests
to these restaurants and the other food and beverage operators at BHR, and the
proprietors of these businesses charge the Company for the meals served and the
services provided. In addition, the Company reimburses BHR for valet services it
provides to guests of Majestic Star. The Company paid approximately $0.9 million
and $0.5 million to restaurants and other food and beverage operators at BHR and
to BHR for valet services in the three-month periods ended March 31, 2005 and
2004, respectively. Food, beverage and valet costs are recorded in casino
expense in the Company's consolidated statements of operations. After the
Company and Trump reimburse BHR for all cash operating losses, the remaining net
loss of BHR results from depreciation expense associated with the BHR property
and is recorded as a loss on investment in Buffington Harbor Riverboats, LLC on
the Company's consolidated statement of operations. The allocated net losses are
approximately $0.6 million for each of the three-month periods ended March 31,
2005 and 2004, respectively. Because of the nature of the BHR arrangement, the
Company records its equity in the loss of BHR as a component of operating income
in the accompanying financial statements.
12
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following represents selected financial information for BHR as of March
31, 2005 and December 31, 2004 and for the three months ended March 31, 2005
and 2004.
March 31, December 31,
BALANCE SHEETS 2005 2004
----------- -----------
Cash $ 437,046 $ 311,052
Current assets, excluding cash 2,469,246 2,233,904
Property, plant and equipment, net 56,021,249 57,199,307
Other assets 81,346 82,359
----------- -----------
Total assets $59,008,887 $59,826,622
=========== ===========
Current liabilities $ 5,051,037 $ 4,657,377
Capital lease obligation, net of current 304,704 304,704
----------- -----------
Total liabilities 5,355,741 4,962,081
Total members' equity 53,653,146 54,864,541
----------- -----------
Total liabilities and members' equity $59,008,887 $59,826,622
=========== ===========
The Majestic Star Casino, LLC member's equity $26,826,572 $27,432,270
=========== ===========
For The Three Months Ended
March 31,
---------------------------
STATEMENTS OF INCOME 2005 2004
----------- -----------
Gross revenue $ 3,048,670 $ 1,955,021
Operating loss $(1,211,340) $(1,225,545)
Net loss $(1,211,398) $(1,225,679)
13
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. LONG-TERM DEBT
March 31, December 31,
2005 2004
------------ -------------
Long-term debt outstanding at March 31, 2005 and December 31, 2004 is as follows:
$260,000,000 senior secured notes, bearing interest of 9 1/2% payable
semi-annually on October 15 and April 15, with a final payment of principal and
interest due on October 15, 2010; collateralized by The Majestic Star Casino,
LLC's equity interests, and its equity interests in the subsidiary guarantors,
and substantially all of the assets of The Majestic Star Casino, LLC and the
assets of its subsidiary guarantors, other than the excluded assets. $260,000,000 $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 (earnings before interest, income taxes, depreciation,
amortization and other adjustments, as defined in the Loan and Security
Agreement). The credit facility is secured by The Majestic Star Casino, LLC's
equity interests and its equity interests in the subsidiary guarantors, and
substantially all the assets of The Majestic Star Casino, LLC and the assets of
its subsidiary guarantors, other than the excluded assets. 35,965,000 40,965,000
$16,290,000 unsecured notes payable, net of unamortized discount of $363,008
and $397,040 at March 31, 2005 and December 31, 2004, respectively. 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 Investor Holdings. 15,926,992 15,892,960
------------ -------------
Long-term debt $311,891,992 $316,857,960
Less current maturities - -
------------ -------------
Total long-term debt $311,891,992 $316,857,960
============ =============
9 1/2% 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 and have a maturity date of October 15,
2010. The 9 1/2% notes are secured by a pledge of substantially all of the
Company's current and future assets, other than certain excluded assets. The
9 1/2% notes are also collateralized by our equity interests held by BDI and our
equity interests in the subsidiary guarantors.
The indenture governing the 9 1/2% notes contains covenants which, among
other things, restrict the Company's ability to (i) make asset sales; (ii) make
certain payments to, or investments in, third parties; (iii) incur additional
indebtedness or liens on any assets; (iv) enter into transactions with
affiliates; and (v) 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.
14
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LOAN AND SECURITY AGREEMENT
Concurrent with the closing of the 9 1/2% notes, the Company established
the $80.0 million credit facility with Wells Fargo Foothill, Inc. ("Wells
Fargo"). Subject to certain exceptions, the $80.0 million credit facility is
secured by a pledge of our equity held by BDI and the equity of our subsidiary
guarantors and a first priority lien on substantially all of the assets of the
Company. Borrowings under the $80.0 million credit facility bear interest at the
Company's choice of LIBOR plus a range of 3.00% to 3.50% or Wells Fargo's base
rate (which approximates the prime rate) plus a range of 0.25% to 0.75%. The
range is determined based on the Company's EBITDA (earnings before interest,
taxes, depreciation, amortization and other adjustments as defined in the Loan
and Security Agreement and amendments thereto). Full payment of any outstanding
balance under the $80.0 million credit facility is due upon maturity of the
agreement in October 2007. The $80.0 million credit facility includes 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. During the three months ended March 31, the Company
paid interest on borrowings ranging from 5.65% to 6.34%.
At March 31, 2005 and at December 31, 2004, the Company had available
borrowing capacity under the $80.0 million credit facility of approximately
$44.0 million and $39.0 million, respectively.
On May 4, 2004, the Company entered into Amendment Number One to the Loan
and Security Agreement ("Amendment One") with the lenders to the $80.0 million
credit facility. Among other things, Amendment One stipulates that EBITDA may be
adjusted to add back up to $2.5 million of charges related to a retroactive
property tax adjustment at Majestic Star incurred in 2003. The amended
definition of EBITDA is effective as of December 31, 2003. Without Amendment
One, the Company would have not met the required EBITDA covenant for the quarter
ended March 31, 2004 as contained in the Loan and Security Agreement.
On March 17, 2005, the Company entered into Amendment Number Two to the Loan
and Security Agreement ("Amendment Two"). Amendment Two clarifies that the
Company's 2004 purchase of 170 acres of land located adjacent to the Buffington
Harbor gaming complex is not a "Capital Expenditure" under the Loan and Security
Agreement nor is it subject to the fiscal year Capital Expenditure limitations
set forth in the Loan and Security Agreement. Amendment Two is effective as of
March 1, 2005.
11.653% NOTES
At both March 31, 2005 and December 31, 2004, Investor Holdings had debt
outstanding of $15.9 million related to its 11.653% notes, net of unamortized
discount of $0.4 million. 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. There are no guarantees related to the 11.653%
notes, and the notes are unsecured.
15
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
Various legal proceedings are pending against the Company. Management
considers all such pending proceedings, comprised primarily of personal injury
and equal employment opportunity (EEO) claims, to be routine litigation
incidental to the Company's business. Except as described below, 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 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 former owner of Fitzgeralds Tunica was dismissed from the case
in 2003. On May 6, 2004, the Court entered a judgment awarding the plaintiff
$0.3 million, which sum represents back pay, emotional distress and punitive
damages, plus an additional sum for reasonable attorney fees. The Company
appealed the judgment. On April 5, 2005, the United States Court of Appeals for
the Fifth Circuit entered an order affirming the judgment of the District Court.
Our insurance carrier has agreed to extend coverage over the entire award except
for the amount relating to punitive damages and $1,254 of the back pay award.
Our insurance carrier has also agreed to share past and current expenses with
the Company. The Company and the plaintiff intend to execute a settlement
agreement during the second quarter of 2005 pursuant to which the Company will
agree to pay the plaintiff $0.3 million plus agreed upon attorney fees and
expenses in full and final settlement of the judgment. The Company is
responsible for $261,254 of the settlement amount and has recorded a liability
for such amount in the accompanying financial statements.
INCOME TAX MATTERS
The Majestic Star Casino, LLC has been assessed $2.6 million, plus
interest, for the fiscal year 1996 and the period January 1, 1998 through June
18, 2001, by the Indiana Department of Revenue ("Department"). On September 7,
2004, the Department assessed BDI, the Company's parent and member, $1.3
million, plus penalties and interest for the remainder of 2001 and all of fiscal
year 2002. No assessments have been received for fiscal year 2003. The
assessments relate to deductions for payments of taxes on adjusted gross gaming
revenues the Company's member took in computing adjusted gross income for
Indiana state income tax purposes. The Department has taken the position that
the Company had an obligation to withhold and remit tax for the non-resident
shareholder of its member. The Company timely filed protests for all tax years
at issue and those
16
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
protests are currently pending before the Legal Division of the Department. On
April 19, 2004, the Indiana Tax Court ruled in a similar case involving another
Indiana casino, Aztar Indiana Gaming Corporation ("Aztar"), that the gross
wagering tax is a tax based on or measured by income and that it must be added
back to the taxable income base for the purpose of determining adjusted gross
income for Indiana tax purposes. On September 28, 2004, the Indiana Supreme
Court denied Aztar's request to review the Indiana Tax Court's decision, and
thus, the Indiana Tax Court's opinion in the Aztar case is controlling
precedent. On October 5, 2004, the Department sent a letter to the Company
indicating that it considers the matter closed unless the Company's protest
contains new issues not addressed in the Aztar matter. The Majestic Star Casino,
LLC is a limited liability company, and as such, it is a pass through entity for
federal and state tax purposes, and therefore, it is the Company's belief that
it is not liable or obligated to pay the assessment or interest thereon. In
addition, the Company will continue to pursue its protest with the Department on
the grounds that the assessments contain calculation errors and that its protest
sets forth issues not decided in Aztar. Accordingly, no liability has been
accrued by the Company relating to this matter.
The Company's indenture governing the 9 1/2% notes and the loan agreement
related to the $80.0 million credit facility allow the Company to make
distributions to its member for tax purposes. Accordingly, should the Company's
member ultimately be found liable for additional state income taxes to the State
of Indiana, the Company would make distributions sufficient to pay the
additional tax. Any payments would be recorded as distributions in Member's
Deficit. The Company does not intend to make any distributions, for the years in
which an assessment was received, until it has fully evaluated its options with
its member and parent, BDI. In April 2005, BDI's non-resident shareholder paid
Indiana state income tax for fiscal year 2004 pursuant to the Indiana Tax
Court's decision in Aztar. BDI's non-resident shareholder determined that the
arguments to be made by the Company and BDI related to the assessed years were
not applicable to fiscal year 2004.
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.
In April 2005, the Indiana Gaming Commission assessed Majestic Star $265,000
in fines related to regulatory violations. Management self reported the majority
of violations to the regulatory authorities and is taking corrective action to
mitigate against the risk of further violations. The Company expects to take a
charge for these
17
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fines in the second quarter of 2005 to settle all claims by the Indiana Gaming
Commission.
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
The Company and Trump have each entered into parallel operating lease
agreements with Buffington Harbor Parking Associates, LLC ("BHPA"), each having
a term until December 31, 2018. The gross rental payments are designed to
provide BHPA with sufficient funds to service its debt over the life of the
lease agreement. The operating lease agreement calls for the Company and Trump
to make monthly lease payments for the full monthly amount due BHPA, 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 has had to make a payment greater than 50% of the required rent.
On November 22, 2004, Trump Hotels and Casino Resorts, Inc. ("THCR"), the
parent of Trump, entered into a pre-negotiated plan of reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Since that time, THCR has been operating
as a debtor in possession of its assets, and Trump has continued to pay its
monthly obligations under both the BHR operating and BHPA lease agreements. THCR
plans to emerge from bankruptcy on or about May 20, 2005.
LETTER OF CREDIT/SURETY BOND
As part of a self-insured worker's compensation program at Majestic Star,
the Company was required to post a letter of credit in the amount of $0.9
million to secure payment of claims. To collateralize the letter of credit, the
bank required that Majestic
18
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Star purchase a $0.9 million certificate of deposit. Such certificate of deposit
is recorded in restricted cash on the Company's consolidated balance sheets (see
Note 4 - Restricted Cash).
To secure payment of claims under the workers' compensation programs at
Fitzgeralds Tunica, Fitzgeralds Black Hawk and Fitzgeralds Las Vegas, Investor
Holdings was required to post a letter of credit of $1.25 million, which is
secured by a certificate of deposit in a similar amount. Such certificate of
deposit is recorded in restricted cash on the Company's consolidated balance
sheet (see Note 4 - Restricted Cash).
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 $0.6 million 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.
The Company has posted an appeal bond in the amount of $0.4 million
regarding the unfavorable ruling against the Company by the U.S. District Court
for the Northern District of Mississippi (see Legal Proceedings within this Note
8). This bond is secured by a letter of credit. Investor Holdings in turn has
restricted $0.4 million of its cash to secure the letter of credit.
NOTE 9. RELATED PARTY TRANSACTIONS
TRANSACTIONS BY OR WITH AFFILIATES
On February 11, 2004, the Company acquired approximately 170 acres of land
located adjacent to the Buffington Harbor gaming complex from an affiliate (the
"GNC Land"). 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 a naming rights
agreement).
MANAGER AGREEMENT
Distributions to BDI under the Manager Agreement dated October 7, 2003 are
governed and 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 the Company's consolidated net
operating revenue and 5% of the Company's consolidated cash flow (as defined in
the indenture governing the 9 1/2% notes and the Loan and Security Agreement for
the $80.0 million credit facility) for the immediately preceding fiscal quarter.
During the three months ended March 31, 2005 and 2004, Majestic Star made
distributions of $1.2 million and $1.1 million, respectively, to BDI pursuant to
the Manager Agreement.
19
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BARDEN NEVADA EXPENSE SHARING AGREEMENT
The Company has entered into an expense sharing agreement dated October 7,
2003 with Barden Nevada Gaming, LLC ("Barden Nevada"), a subsidiary of Barden
Development, Inc. and a Fitzgeralds branded hotel and casino in Las Vegas,
Nevada ("Fitzgeralds Las Vegas"). The expense sharing agreement provides for a
fee from Barden Nevada to the Company in the amount of the greater of (i) $0.5
million per year or (ii) the actual amount of certain specified expenses
incurred by the Company in connection with providing services to Barden Nevada.
During the three months ended March 31, 2005 and 2004, the expense sharing fees
charged to Barden Nevada were $0.4 million and $0.3 million, respectively.
BARDEN NEVADA REVOLVING PROMISSORY NOTE
On March 9, 2005, Barden Nevada entered into a revolving promissory note
with the Company, whereby Barden Nevada may request advances from time to time
from the Company up to $5.0 million. Interest is calculated based on the prime
rate (as published in the Money Section of the Wall Street Journal), plus the
margin spread paid by the Company under prime rate borrowings with Wells Fargo,
the agent bank under the Company's $80.0 million credit facility (see Note 7 -
Long-Term Debt). Interest is paid quarterly, in arrears. Any costs that are
funded by the Company and not repaid by Barden Nevada within thirty days will be
added to the principal amount outstanding. All amounts outstanding under the
promissory note are due and payable on October 7, 2007, along with accrued and
unpaid interest.
As of March 31, 2005, the principal balance of the note was $3.6 million
NOTE 10. SEGMENT INFORMATION
The Majestic Star Casino, LLC, either directly or indirectly through
wholly-owned subsidiaries, owns and operates three properties as follows: a
riverboat casino located in Gary, Indiana; a casino in Black Hawk, Colorado and
a casino and hotel located in Tunica, Mississippi (collectively, the
"Properties").
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
20
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the summary of significant accounting policies previously described in Note 1 to
the audited financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 2004. There are minimal inter-segment
sales.
A summary of the Properties' operations by business segment for the
three-month periods ended March 31, 2005 and 2004 and a summary of the
Properties' assets as of March 31, 2005 and December 31, 2004 are presented
below:
For The Three Months
Ended March 31,
----------------------
2005 2004
-------- --------
Net revenues: (in thousands)
Majestic Star Casino $ 36,176 $ 36,988
Fitzgeralds Tunica 21,516 22,015
-------- --------
Total $ 57,692 $ 59,003
======== ========
Operating income (loss):
Majestic Star Casino $ 5,608 $ 2,810
Fitzgeralds Tunica 3,305 4,016
Corporate (1) (1,197) (806)
Majestic Investor Holdings (70) (497)
-------- --------
Total $ 7,646 $ 5,523
======== ========
Segment depreciation and amortization:
Majestic Star Casino $ 2,091 $ 1,912
Fitzgeralds Tunica 2,476 2,060
Majestic Investor Holdings 69 70
-------- --------
Total $ 4,636 $ 4,042
======== ========
Expenditure for additions to long-lived assets:
Majestic Star Casino $ 486 $ 25,166
Fitzgeralds Tunica 1,666 444
Fitzgeralds Black Hawk 688 55
-------- --------
Total $ 2,840 $ 25,665
======== ========
As of As of
March 31, December 31,
2005 2004
--------- ---------
Segment assets: (in thousands)
Majestic Star Casino (2) $ 252,970 $ 254,702
Fitzgeralds Tunica 80,348 80,452
Fitzgeralds Black Hawk assets retained 500 348
Fitzgeralds Black Hawk assets held for sale 31,527 30,684
Majestic Investor Holdings 2,209 2,159
--------- ---------
Total 367,554 368,345
Less: Intercompany (116,347) (121,969)
--------- ---------
Total $ 251,207 $ 246,376
========= =========
(1) Corporate expenses reflect payroll, benefits, travel and other costs
associated with our corporate staff and are not allocated to the
properties.
(2) The assets of Majestic Star include intercompany receivables from Investor
Holdings, Fitzgeralds Tunica and Fitzgeralds Black Hawk totaling
approximately $116.3 million at March 31, 2005. At December 31, 2004, the
assets of Majestic Star include intercompany receivables from Investor
Holdings, Fitzgeralds Tunica and Fitzgeralds Black Hawk of $122.0 million.
Intercompany receivables are eliminated in consolidation.
21
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SUBSEQUENT EVENT
On April 14, 2005, Barden Colorado and Legends Gaming, LLC ("Legends")
mutually agreed to terminate the Asset Purchase Agreement dated July 12, 2004,
as amended (the "Purchase Agreement"), pursuant to which Barden Colorado had
agreed to sell and Legends had agreed to purchase the business, assets and
properties of the Fitzgeralds-brand casino located in Black Hawk, Colorado.
In connection with the termination of the Purchase Agreement, the earnest
money deposit originally placed into escrow by Legends at the time of execution
of the Purchase Agreement was returned to Legends. In addition, the Company paid
Legends approximately $2.7 million, consisting of approximately $0.7 million in
reimbursement of certain costs which were incurred in re-routing a storm sewer
easement and certain related transaction costs which the parties had agreed to
share equally together with $2.0 million for liquidated damages. The Company
will take a charge in the second quarter of 2005 for the payment of liquidated
damages and its portion of the shared transaction costs and certain other
transaction expenses. The charge is approximately $2.3 million.
Additionally, the Company will take a charge of approximately $1.5 million
in the second quarter of 2005 for the depreciation and amortization expense that
was not recorded while Barden Colorado was held for sale, during the period July
12, 2004 (the date of the Purchase Agreement) to April 14, 2005 in accordance
with generally accepted accounting principles.
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
Under the indenture governing 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 guarantor subsidiaries.
Our supplemental guarantor financial information contains financial
information for The Majestic Star Casino, LLC, The Majestic Star Casino Capital
Corp (a co-issuer of the 9 1/2% senior secured notes but an entity with no
operations), the guarantor subsidiaries and our discontinued operation and the
eliminating entries necessary to consolidate such entities.
22
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
As of March 31, 2005
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
------------- ------------- ------------ -------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,827,413 $ - $ 6,584,743 $ - $ 16,412,156
Restricted cash 900,000 - 1,640,008 - 2,540,008
Accounts receivable, net 1,190,205 - 776,994 - 1,967,199
Inventories 60,360 - 450,933 - 511,293
Prepaid expenses 2,994,633 - 830,626 - 3,825,259
Receivable from affiliate 48,390 - 14,244 (62,634)(a) -
Assets held for sale - - 31,527,150 - 31,527,150
------------- ------------- ------------ -------------- ------------
Total current assets 15,021,001 - 41,824,698 (62,634) 56,783,065
------------- ------------- ------------ -------------- ------------
Property, equipment and improvements, net 77,344,002 - 62,913,243 - 140,257,245
Intangible assets, net - - 5,008,925 - 5,008,925
Goodwill - - 3,997,904 - 3,997,904
Other assets:
Deferred financing costs, net 4,679,318 - 378,432 - 5,057,750
Investment in Buffington Harbor
Riverboat, LLC 26,826,572 - - - 26,826,572
Note receivable - affiliate 3,586,848 - - - 3,586,848
Long term receivable - related party 116,284,816 - - (116,284,816)(a) -
Other assets 9,226,931 - 461,761 - 9,688,692
------------- ------------- ------------ -------------- ------------
Total other assets 160,604,485 - 840,193 (116,284,816) 45,159,862
------------- ------------- ------------ -------------- ------------
Total assets $ 252,969,488 $ - $114,584,963 $ (116,347,450) $251,207,001
============= ============= ============ ============== ============
LIABILITIES AND MEMBER'S DEFICIT
Current liabilities:
Accounts payable $ 379,545 $ - $ 1,371,008 $ - $ 1,750,553
Payable to related party 59,319 - 3,315 (62,634)(a) -
Accrued liabilities:
Payroll and related 3,223,759 - 3,594,466 - 6,818,225
Interest 11,524,727 - 632,758 - 12,157,485
Property and franchise taxes 5,491,380 - 134,497 - 5,625,877
Other accrued liabilities 6,499,199 - 3,790,905 - 10,290,104
Liabilities related to assets held for sale - - 2,869,882 - 2,869,882
------------- ------------- ------------ -------------- ------------
Total current liabilities 27,177,929 - 12,396,831 (62,634) 39,512,126
------------- ------------- ------------ -------------- ------------
Investment in subsidiaries 30,023,676 - - (30,023,676)(b) -
Due to related parties - - 116,284,816 (116,284,816)(a) -
Long-term debt, net of current maturities 295,965,000 260,000,000 15,926,992 (260,000,000)(c) 311,891,992
------------- ------------- ------------ -------------- ------------
Total liabilities 353,166,605 260,000,000 144,608,639 (406,371,126) 351,404,118
------------- ------------- ------------ -------------- ------------
Member's deficit (100,197,117) (260,000,000) (30,023,676) 290,023,676 (b)(c) (100,197,117)
------------- ------------- ------------ -------------- ------------
Total liabilities and member's deficit $ 252,969,488 $ - $114,584,963 $ (116,347,450) $251,207,001
============= ============= ============ ============== ============
(a) To eliminate intercompany receivables and payables.
(b) To eliminate intercompany accounts and investment in subsidiaries.
(c) As more fully described in Note 7 - 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
sheets.
23
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2004
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
------------- ------------- ------------- --------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,433,545 $ - $ 5,893,907 $ - $ 14,327,452
Restricted cash 900,000 - 1,640,008 - 2,540,008
Accounts receivable, net 1,329,576 - 735,405 - 2,064,981
Inventories 92,303 - 428,182 - 520,485
Prepaid expenses 1,575,936 - 636,460 - 2,212,396
Receivable from affiliate 775,722 - 21,799 (82,305)(a) 715,216
Assets held for sale - - 30,683,526 - 30,683,526
------------- ------------- ------------- --------------- -------------
Total current assets 13,107,082 - 40,039,287 (82,305) 53,064,064
------------- ------------- ------------- --------------- -------------
Property, equipment and improvements, net 78,679,302 - 63,501,914 - 142,181,216
Intangible assets, net - - 5,229,904 - 5,229,904
Goodwill - - 3,997,904 - 3,997,904
Other assets:
Deferred financing costs, net 4,947,983 - 413,740 - 5,361,723
Investment in Buffington Harbor
Riverboat, LLC 27,432,270 - - - 27,432,270
Long term receivable - related party 121,884,816 - - (121,884,816)(a) -
Other assets 8,650,694 - 458,689 - 9,109,383
------------- ------------- ------------- --------------- -------------
Total other assets 162,915,763 - 872,429 (121,884,816) 41,903,376
------------- ------------- ------------- --------------- -------------
Total assets $ 254,702,147 $ - $ 113,641,438 $ (121,967,121) $ 246,376,464
============= ============= ============= =============== =============
LIABILITIES AND MEMBER'S DEFICIT
Current liabilities:
Accounts payable $ 940,307 $ - $ 811,223 $ - $ 1,751,530
Payable to related party - - 82,305 (82,305)(a) -
Accrued liabilities:
Payroll and related 3,216,179 - 3,086,986 - 6,303,165
Interest 5,365,530 - 158,189 - 5,523,719
Property and franchise taxes 4,811,880 - 517,292 - 5,329,172
Other accrued liabilities 6,040,223 - 4,256,371 - 10,296,594
Liabilities related to assets
held for sale - - 2,713,847 - 2,713,847
------------- ------------- ------------- --------------- -------------
Total current liabilities 20,374,119 - 11,626,213 (82,305) 31,918,027
------------- ------------- ------------- --------------- -------------
Investment in subsidiaries 35,762,551 - - (35,762,551)(b) -
Due to related parties - - 121,884,816 (121,884,816)(a) -
Long-term debt, net of current maturities 300,965,000 260,000,000 15,892,960 (260,000,000)(c) 316,857,960
------------- ------------- ------------- --------------- -------------
Total liabilities 357,101,670 260,000,000 149,403,989 (417,729,672) 348,775,987
------------- ------------- ------------- --------------- -------------
Member's deficit (102,399,523) (260,000,000) (35,762,551) 295,762,551 (b)(c) (102,399,523)
------------- ------------- ------------- --------------- -------------
Total liabilities and member's deficit $ 254,702,147 $ - $ 113,641,438 $ (121,967,121) $ 246,376,464
============= ============= ============= =============== =============
(a) To eliminate intercompany receivables and payables.
(b) To eliminate intercompany accounts and investment in subsidiaries.
(c) As more fully described in Note 7 - 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
sheets.
24
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2005
(unaudited)
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operation (b) Entries Consolidated
------------ ------------- ------------ ------------- ----------- ------------
OPERATING REVENUES:
Casino $ 38,697,169 $ - $ 22,584,542 $ - $ - $ 61,281,711
Rooms - - 1,794,104 - - 1,794,104
Food and beverage 442,523 - 2,495,316 - - 2,937,839
Other 665,118 - 291,634 - - 956,752
------------ ------------ ------------ ------------- ----------- ------------
Gross revenues 39,804,810 - 27,165,596 - - 66,970,406
Less promotional allowances 3,629,072 - 5,648,997 - - 9,278,069
------------ ------------ ------------ ------------- ----------- ------------
Net operating revenues 36,175,738 - 21,516,599 - - 57,692,337
------------ ------------ ------------ ------------- ----------- ------------
OPERATING COSTS AND EXPENSES:
Casino 7,131,087 - 7,717,971 - - 14,849,058
Rooms - - 383,945 - - 383,945
Food and beverage 512,287 - 741,990 - - 1,254,277
Other - - 52,037 - - 52,037
Gaming taxes 11,070,263 - 2,704,429 - - 13,774,692
Advertising and promotion 1,724,678 - 1,155,419 - - 2,880,097
General and administrative 6,270,029 - 2,980,389 - - 9,250,418
Corporate expense 1,197,070 - - - - 1,197,070
Economic incentive - City of Gary 1,163,362 - - - - 1,163,362
Depreciation and amortization 2,090,447 - 2,545,488 - - 4,635,935
Loss on investment in Buffington
Harbor Riverboats, LLC 605,698 - - - - 605,698
Gain on disposal of assets - - 140 - - 140
------------ ------------ ------------ ------------- ----------- ------------
Total operating costs and expenses 31,764,921 - 18,281,808 - - 50,046,729
------------ ------------ ------------ ------------- ----------- ------------
Operating income 4,410,817 - 3,234,791 - - 7,645,608
------------ ------------ ------------ ------------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income 4,968 - 7,234 - - 12,202
Interest expense (6,761,807) - (474,568) - - (a) (7,236,375)
Other non-operating expense (36,954) - - - - (36,954)
Equity in net income of subsidiaries 5,738,875 - 2,971,418 - (8,710,293) -
------------ ------------ ------------ ------------- ----------- ------------
Total other (expense) income (1,054,918) - 2,504,084 - (8,710,293) (7,261,127)
------------ ------------ ------------ ------------- ----------- ------------
Income from continuing operations 3,355,899 - 5,738,875 - (8,710,293) 384,481
DISCONTINUED OPERATIONS:
Income from discontinued operation - - - 2,971,418 - 2,971,418
------------ ------------ ------------ ------------- ----------- ------------
Net income $ 3,355,899 $ - $ 5,738,875 $ 2,971,418 $(8,710,293) $ 3,355,899
============ ============ ============ ============= =========== ============
(a) To eliminate equity in net income of subsidiaries.
(b) The Discontinued Operation represents Fitzgeralds Black Hawk for which an
agreement was entered into on July 12, 2004 to sell substantially all of its
assets subject to certain of its liabilities (see Note 3 - Discontinued
Operations).
25
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2004
(unaudited)
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operations (b) Entries Consolidated
------------ ------------ ------------ ------------- ----------- -------------
OPERATING REVENUES:
Casino $ 39,206,159 $ - $ 22,784,665 $ - $ - $ 61,990,824
Rooms - - 1,873,837 - - 1,873,837
Food and beverage 487,193 - 2,322,125 - - 2,809,318
Other 612,898 - 355,753 - - 968,651
------------ ------------ ------------ ------------- ----------- -------------
Gross revenues 40,306,250 - 27,336,380 - - 67,642,630
Less promotional allowances 3,318,657 - 5,321,080 - - 8,639,737
------------ ------------ ------------ ------------- ----------- -------------
Net operating revenues 36,987,593 - 22,015,300 - - 59,002,893
------------ ------------ ------------ ------------- ----------- -------------
OPERATING COSTS AND EXPENSES:
Casino 7,685,752 - 8,061,696 - - 15,747,448
Rooms - - 465,242 - - 465,242
Food and beverage 551,037 - 680,055 - - 1,231,092
Other - - 70,811 - - 70,811
Gaming taxes 11,063,904 - 2,708,140 - - 13,772,044
Advertising and promotion 1,991,066 - 1,183,156 - - 3,174,222
General and administrative 9,184,481 - 3,198,768 - - 12,383,249
Corporate expense 805,606 - - - - 805,606
Economic incentive - City of Gary 1,177,155 - - - - 1,177,155
Depreciation and amortization 1,912,408 - 2,129,198 - - 4,041,606
Loss on investment in Buffington
Harbor Riverboats, LLC 612,841 - - - - 612,841
Gain on disposal of assets (916) - (800) - - (1,716)
------------ ------------ ------------ ------------- ----------- -------------
Total operating costs and expenses 34,983,334 - 18,496,266 - - 53,479,600
------------ ------------ ------------ ------------- ----------- -------------
Operating income 2,004,259 - 3,519,034 - - 5,523,293
------------ ------------ ------------ ------------- ----------- -------------
OTHER INCOME (EXPENSE):
Interest income 1,938 - 3,176 - - 5,114
Interest expense (6,583,476) - (474,569) - - (7,058,045)
Other non-operating expense (28,209) - - - - (28,209)
Equity in net income of subsidiaries 5,089,931 - 2,042,190 - (7,132,121)(a) -
------------ ------------ ------------ ------------- ----------- -------------
Total other (expense) income (1,519,816) - 1,570,797 - (7,132,121) (7,081,140)
------------ ------------ ------------ ------------- ----------- -------------
Income (loss) from continuing
operations 484,443 - 5,089,931 - (7,132,121) (1,557,747)
DISCONTINUED OPERATIONS:
Income from discontinued operation - - - 2,042,190 - 2,042,190
------------ ------------ ------------ ------------- ----------- -------------
Net income $ 484,443 $ - $ 5,089,931 $ 2,042,190 $(7,132,121) $ 484,443
============ ============ ============ ============= =========== =============
(a) To eliminate equity in net income of subsidiaries.
(b) The Discontinued Operations reflects the operations of Fitzgeralds Black
Hawk for which an agreement was entered into on July 12, 2004 to sell
substantially all of its assets subject to certain of its liabilities
(see Note 3 - Discontinued Operations).
26
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2005
(unaudited)
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operations (a) Entries Consolidated
------------ ------------ ------------ ------------- ----------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES: $ 5,708,327 $ - $ 6,140,767 $ 2,491,959 $ - $ 14,341,053
------------ ------------ ------------ ------------- ----------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of property and equipment (891,332) - (1,849,931) (406,322) - (3,147,585)
Decrease in prepaid leases and deposits 2,000 - - - - 2,000
------------ ------------ ------------ ------------- ----------- -------------
Net cash used in investing activities (889,332) - (1,849,931) (406,322) - (3,145,585)
------------ ------------ ------------ ------------- ----------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from line of credit 3,000,000 - - - - 3,000,000
Repayment of line of credit (8,000,000) - - - - (8,000,000)
Advances to affiliate - net (2,871,634) - - - - (2,871,634)
Cash received from (advanced to)
related parties 5,600,000 - (3,600,000) (2,000,000) - -
Distribution to Barden Development, Inc. (1,153,493) - - - - (1,153,493)
------------ ------------ ------------ ------------- ----------- -------------
Net cash used in financing
activities (3,425,127) - (3,600,000) (2,000,000) - (9,025,127)
------------ ------------ ------------ ------------- ----------- -------------
Net increase in cash and cash equivalents 1,393,868 - 690,836 85,637 - 2,170,341
Cash related to discontinued operations - - - (2,479,914) - (2,479,914)
Cash and cash equivalents, beginning
of period 8,433,545 - 5,893,907 2,394,277 - 16,721,729
------------ ------------ ------------ ------------- ----------- -------------
Cash and cash equivalents, end of period $ 9,827,413 $ - $ 6,584,743 $ - $ - $ 16,412,156
============ ============ ============ ============= =========== =============
(a) Contained within the discontinued operations are the cash flow activities
of Fitzgeralds Black Hawk, for which an agreement was entered into on July
12, 2004 to sell substantially all of its assets subject to certain of its
liabilities (see Note 3 - Discontinued Operations).
27
THE MAJESTIC STAR CASINO, LLC
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2004
(unaudited)
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operations (a) Entries Consolidated
------------- ----------- ---------------- --------------- ---------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES: $ 5,580,383 $ - $ 4,577,935 $ 2,004,944 $ - $ 12,163,262
------------- ----------- ---------------- --------------- ---------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of property and equipment (25,166,345) - (444,394) (54,556) - (25,665,295)
Investment in Buffington Harbor
Riverboats, LLC (54,104) - - - - (54,104)
Proceeds from disposal of equipment 106,175 - 800 - - 106,975
------------- ----------- ---------------- --------------- ---------- ------------
Net cash used in investing
activities (25,114,274) - (443,594) (54,556) - (25,612,424)
------------- ----------- ---------------- --------------- ---------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance costs for the 9 1/2% senior
secured notes (73,110) - - - - (73,110)
Issuance costs for credit facility (36,997) - - - - (36,997)
Proceeds from line of credit 20,001,293 - - - - 20,001,293
Repayment of line of credit (6,959,787) - - - - ( 6,959,787)
Cash received from (paid to) related
parties 5,317,000 - (3,250,000) (2,000,000) - 67,000
Distribution to Barden Development,
Inc. (1,089,392) - - - - (1,089,392)
------------- ----------- ---------------- --------------- ---------- ------------
Net cash provided by (used in)
financing activities 17,159,007 - (3,250,000) (2,000,000) - 11,909,007
Net (decrease) increase in cash and cash
equivalents (2,374,884) - 884,341 (49,612) - (1,540,155)
Cash and cash equivalents, beginning
of period 10,929,430 - 8,525,152 2,603,434 - 22,058,016
------------- ----------- ---------------- --------------- ---------- ------------
Cash and cash equivalents, end of period $ 8,554,546 $ - $ 9,409,493 $ 2,553,822 $ - $ 20,517,861
============= =========== ================ =============== ========== ============
(a) Contained within the Discontinued Operations are the cash flow activities of
Fitzgeralds Black Hawk, for which an agreement was entered into on July 12,
2004 to sell substantially all of its assets subject to certain of its
liabilities (see Note 3 - Discontinued Operations).
28
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
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 heading
"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, the 11.653% notes and the 9 1/2% notes;
- changes in our financial condition that may cause us to not be in
compliance with the covenants contained within the Loan and Security
Agreement governing the $80.0 million credit facility, which may permit
acceleration on the debt obligations outstanding;
- changes or developments in laws, regulations or taxes in the casino and
gaming industry including increases or new taxes imposed on gaming
revenues, gaming devices and admission taxes;
- increased competition in existing markets or the opening of new gaming
jurisdictions;
- the inability to fund capital improvements and development needs from
existing operations, available credit, or new financing;
- 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;
29
- adverse determinations of issues related to disputed taxes, particularly
in Indiana, as evidenced by the requirement that deductions previously
taken for taxes paid on gross gaming receipts are disallowed on our
member's Indiana state income tax return;
- other adverse conditions, such as adverse economic conditions in the
company's markets, changes in general customer confidence or spending,
increased tax burdens on our customers negatively impacting their
discretionary spending in our casinos, 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;
- failure to maintain favorable relationships with employees of the
Company including the timely negotiation of fair and economically
prudent labor agreements covering employees subject to collective
bargaining agreements;
- 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;
- the disruption to our casino operations due to acts of nature or God;
- the inability to retain management personnel who are important to our
operations and potential delays in identifying and employing candidates
to fill vacated positions due to a lack of qualified candidates;
- 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.
OVERVIEW
The Company
The Majestic Star Casino, LLC and its subsidiaries (collectively, the
"Company"), operate 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").
The Company receives reimbursement of expenses for services provided to Barden
Nevada Gaming, LLC ("Barden Nevada" or "Fitzgeralds Las Vegas").
On July 12, 2004, the Company announced the sale of substantially all the
assets and certain liabilities of Fitzgeralds Black Hawk to Legends Gaming, LLC
for $66.0 million, subject to a
30
working capital adjustment and an adjustment based on certain capital
expenditures. However, on April 14, 2005, Legends Gaming, LLC and Barden
Colorado entered into a mutual agreement to terminate the agreement. Since the
sale was still pending as of March 31, 2005, the property operations of
Fitzgeralds Black Hawk are reflected in discontinued operations for all periods
in our tables and discussion of results presented below. In the second quarter
of 2005, the Company will record a charge of approximately $2.3 million for
liquidated damages and certain transaction costs in connection with the
termination, and will record catch-up depreciation and amortization, which
charges were suspended while the assets were held for sale. See Note 11 -
Subsequent Event of Notes to Consolidated Financial Statements.
Overall Operating Results
Consolidated gross operating revenues decreased $0.7 million or 1.0% from
$67.6 million in the three-month period ended March 31, 2004 to $67.0 million in
the three-month period ended March 31, 2005. The decrease is primarily due to a
1.7% or $0.6 million decline in our table game win percentage at our Majestic
Star property. Win percentage on our casino games is relatively predictable over
long periods, but can fluctuate significantly over shorter periods, such as a
fiscal quarter. We had consolidated income from continuing operations of $0.4
million during the three-month period ended March 31, 2005 compared to a
consolidated loss from continuing operations of $1.6 million during the same
period in 2004. We had consolidated net income of $3.4 million during the
three-month period ended March 31, 2005 compared to consolidated net income of
$0.5 million during the same period in 2004. Impacting our loss from continuing
operations and net income in the three-month period ended March 31, 2004 is a
$2.2 million charge related to fiscal year 2002 and 2003 retroactive property
taxes at Majestic Star and $0.5 million of depreciation and amortization expense
at Fitzgeralds Black Hawk. On July 12, 2004, Fitzgeralds Black Hawk stopped
depreciating and amortizing its fixed and intangible assets in conjunction with
the sale of substantially all of its assets as discussed previously. After
adjusting for the retroactive property tax charge at Majestic Star and
depreciation and amortization expense at Fitzgeralds Black Hawk, the Company
would have reported income from continuing operations of $0.7 million and net
income of $3.2 million in the three-month period ended March 31, 2004.
An overview of the developments that affected our results during the
three-month period ended March 31, 2005, or that may affect future results are
listed below and discussed in greater detail in our discussion of operating
results:
- Our consolidated casino revenues decreased by $0.7 million or 1.1%
to $61.3 million for the three-month period ended March 31, 2005, as
compared to the same period last year. Consolidated casino revenues
contributed 91.5% of our total consolidated gross revenues. Our
decline in casino revenues is partly attributable to a lower win
percentage in table games at Majestic Star and a comparison against
a strong prior year quarter also at Majestic Star. In the prior year
quarter, Majestic Star kicked off new marketing campaigns and new
restaurants were fully operational at Buffington Harbor. At
Fitzgeralds Tunica, casino revenues were lower by $0.2 million, with
slot revenues declining $0.5 million and table game revenues
increasing $0.3 million. Lower coin-in at Fitzgeralds Tunica
contributed to our lower slot revenue, while an increase in our
table game win percentage generated greater table game revenues.
Also, lower growth in the northwest Indiana market and declining
growth in the Tunica market negatively impacted our casino revenues.
31
- Consolidated promotional allowances increased $0.6 million in 2005
from 2004. Consolidated promotional allowances include the retail
value of hotel rooms (Fitzgeralds Tunica only), food, beverage and
merchandise provided to our casino customers at no charge.
Consolidated promotional allowances also include cash based
promotional activities, including those cash based activities
related to our slot clubs and direct mail program. The increase in
consolidated promotional allowances is attributable to a new slot
club program at Majestic Star, and greater cash giveaways and higher
levels of products and services provided to our casino guests on a
complimentary basis at Fitzgeralds Tunica.
- Consolidated casino expense decreased $0.9 million, primarily due to
the reduction in labor costs at Majestic Star, and lower lease costs
on gaming equipment and wide area progressive participation expenses
at Fitzgeralds Tunica.
- Consolidated general and administrative expense decreased $3.1
million from the first quarter of 2004. The decrease is mostly due
to the first quarter 2004 charge of $2.2 million for fiscal year
2002 and 2003 property tax assessments, along with lower insurance
premiums and claims in the first quarter of 2005 at Majestic Star.
In addition, in the first quarter of 2004, the Company took a charge
or $0.4 million due to an unfavorable judgment on a lawsuit (see
part II, Item 1, Legal Proceedings).
- Consolidated advertising and promotional expenses decreased $0.3
million as Majestic Star had launched new marketing campaigns in
the first quarter of 2004. No new campaigns were launched during the
first quarter of 2005. Majestic Star recognized a quarter over
quarter reduction in expenditures on advertising related to
billboards, TV, print media and direct mail.
- Consolidated depreciation and amortization expense increased by $0.6
million as a result of recent capital expenditures made at our
properties. Depreciation and amortization expense not recorded as a
result of carrying the Black Hawk assets as held for sale was
approximately $0.5 million for the quarter ended March 31, 2005.
- Competition in our markets remains intense. In addition, casino
revenue growth in the markets in which we compete is growing
nominally or declining. In northwest Indiana, market growth was 2.8%
over the same quarter last year. In Mississippi, those casinos
located along the Mississippi River reported a decrease in casino
revenues of 0.9% over the same quarter last year, and in Black Hawk,
casino revenues grew just 1.3% over the same quarter last year. New
Indian casinos in Oklahoma are competing for customers in western
Oklahoma and northern Arkansas. These two regions have been feeder
markets for Tunica casinos. In addition, higher gas prices may be
impacting the frequency of trips to our Fitzgeralds Tunica and
Fitzgeralds Black Hawk properties and negatively impacting the
discretionary gambling budgets of our customers. Fitzgeralds Tunica
is focused on new and enhanced marketing programs, purchasing the
most desirable and entertaining slot machines and upgrading our
casino floor with the latest technology. We have also implemented a
new "elite" level to our slot player's card, which provides greater
rewards to our top players as they increase their gambling
activities, and instituted more aggressive promotions for new player
card sign-ups, food promotions and direct mailings to our casino
guests.
32
- In Black Hawk, the Isle of Capri and Colorado Central Station are
moving past the phases of their remodel projects that have caused
significant disruptions to their casinos. In addition, Ameristar
Casinos Inc. is currently in the process of remodeling and adding
hotel rooms to the Mountain High Casino. These newly remodeled
casinos will increase competition in the Black Hawk market. In order
for Fitzgeralds Black Hawk to remain competitive, the property just
recently completed installation of a new slot player tracking and
marketing system. Once Fitzgeralds Black Hawk obtains approval from
the Colorado gaming regulators, it will begin installing ticket in
ticket out technology, or "TITO", on slot machines. Our goal is to
have 50% of the casino floor operating with TITO by the end of
fiscal year 2005. TITO allows casino customers to play longer, with
fewer interruptions due to the necessity of slot hopper fills, and
allows management to operate its casino floor more efficiently while
providing better service.
- In the first quarter of 2005, we spent approximately $2.8 million on
capital expenditures. Most of this was spent on purchasing the
newest and most entertaining slot machines and implementing TITO.
- We continue the implementation of TITO at Majestic Star. At this
time 1,224, or 75.5%, of Majestic Star's slot machines are equipped
with TITO, with the goal of having 88.0% of our slot machines TITO
operational by year-end. At Fitzgeralds Tunica, we received approval
from the Mississippi Gaming Commission to begin installing TITO on
all of our slot machines. We now have approximately 500 slot
machines that operate with TITO with the goal of having 540 slot
machines TITO operational by the end of 2005.
- Colony Capital recently closed on the purchase of the Harrah's East
Chicago property (which competes directly with Majestic Star) and
two casino properties in Tunica, Mississippi, (Harrah's and
Bally's), which compete directly with Fitzgeralds Tunica. At this
point it is unknown what plans Colony Capital has for these three
properties. Significant capital improvements, a major marketing
campaign, or a combination of both, could have a significant impact
to our operations. We are developing strategies to deal with
possible plans to be implemented by Colony Capital.
- Consolidation of larger casino companies could enhance competition
in the Company's markets. When Harrah's closes on its purchase of
Caesar's, Harrah's will have two additional casinos in the Tunica
market. This will give Harrah's three Tunica casinos overall,
including the market leading Horseshoe property. In addition, MGM
Mirage will be acquiring the Gold Strike Casino Hotel in Tunica as
part of its acquisition of Mandalay Bay. It is unknown what changes
Harrah's and MGM Mirage will make to these properties. However,
additional infusions of capital into these properties or increased
marketing and promotions will enhance the competitive environment in
the already highly competitive Tunica market.
- The Company was recently selected by Blue Sky Casino, LLC ("Blue
Sky") to develop and manage a casino that will be part of a broader
$240.0 million development project by Blue Sky in Orange County,
Indiana. Based on the binding provisions of the letter of intent
signed between the Company and Blue Sky, the
33
Company will receive a development fee during the casino's start-up
and will receive a management fee pursuant to a five-year agreement.
However, the Company still needs to negotiate a final management
agreement with Blue Sky. The Indiana Gaming Commission still has not
awarded the operating agreement for the casino portion of the
development project, and thus the Company's involvement is not
final. However, Blue Sky is the only company that has submitted an
application pursuant to the requirements of the Indiana Gaming
Commission.
34
RESULTS OF OPERATIONS
The following table sets forth information derived from the Company's
statements of operations expressed as a percentage of gross operating revenues.
CONSOLIDATED STATEMENTS OF OPERATIONS - PERCENTAGE OF GROSS OPERATING REVENUES
For The
Three Months Ended
March 31,
------------------------------
2005 2004
------------- --------------
OPERATING REVENUES:
Casino 91.5% 91.6%
Rooms 2.7% 2.8%
Food and beverage 4.4% 4.2%
Other 1.4% 1.4%
------------- --------------
Gross operating revenues 100.0% 100.0%
Less promotional allowances 13.9% 12.8%
------------- --------------
Net operating revenues 86.1% 87.2%
------------- --------------
OPERATING COSTS AND EXPENSES:
Casino 22.2% 23.3%
Rooms 0.6% 0.7%
Food and beverage 1.9% 1.8%
Other 0.1% 0.1%
Gaming taxes 20.5% 20.4%
Advertising and promotion 4.3% 4.7%
General and administrative (1) 13.8% 18.3%
Corporate expenses 1.8% 1.2%
Economic incentive - City of Gary 1.7% 1.7%
Depreciation and amortization 6.9% 6.0%
Loss on investment in the BHR joint venture 0.9% 0.9%
Loss on sale of assets 0.0% 0.0%
------------- --------------
Total operating costs and expenses 74.7% 79.1%
------------- --------------
Operating income 11.4% 8.1%
------------- --------------
OTHER INCOME (EXPENSES):
Interest income 0.0% 0.0%
Interest expense -10.8% -10.4%
Other non-operating expense 0.0% 0.0%
------------- --------------
Total other expenses -10.8% -10.4%
------------- --------------
Income (loss) from continuing operations 0.6% -2.3%
Income from discontinued operations 4.4% 3.0%
------------- --------------
Net income 5.0% 0.7%
============= ==============
(1) General and administrative expenses for the three months ended March 31,
2004 include a $2.2 million retroactive property tax charge.
35
The following table provides certain selected financial information from our
consolidated statements of operations.
Consolidated
For The
Three Months Ended
March 31, Percentage
------------------------ Increase
2005 2004 (Decrease)
---------- ----------- -------------
(in millions)
Casino revenues $ 61.3 $ 62.0 -1.1%
Room revenues 1.8 1.9 -4.3%
Food and beverage revenues 2.9 2.8 4.6%
Other revenues 1.0 0.9 -1.2%
---------- ----------- -------------
Gross operating revenues 67.0 67.6 -1.0%
Less promotional allowances 9.3 8.6 7.4%
---------- ----------- -------------
Net operating revenues 57.7 59.0 -2.2%
Operating expenses 50.0 53.5 -6.4%
---------- ----------- -------------
Operating income 7.7 5.5 38.4%
Other income (expense) (7.3) (7.0) 2.5%
---------- ----------- -------------
Income (loss) from continuing operations 0.4 (1.5) -124.7%
Income from discontinued operation 3.0 2.0 45.5%
---------- ----------- -------------
Net income $ 3.4 $ 0.5 592.9%
========== =========== =============
The following tables provide certain selected segment financial information
for each of the Majestic Star, Fitzgeralds Tunica, and Fitzgeralds Black Hawk,
as well as Majestic Investor Holdings (an intermediate holding company that owns
Fitzgeralds Tunica and Fitzgeralds Black Hawk). All amounts are shown before
corporate overhead. Percentage increase (decrease) calculations are derived
using the whole numbers rather than the rounded numbers.
Majestic Star
For The
Three Months Ended
March 31, Percentage
----------------------- Increase
2005 2004 (Decrease)
---------- ---------- --------------
(in millions)
Casino revenues $ 38.7 $ 39.2 -1.3%
Room revenues - - 0.0%
Food and beverage revenues 0.4 0.5 -9.2%
Other revenues 0.7 0.6 8.5%
---------- ---------- --------------
Gross operating revenues 39.8 40.3 -1.2%
Less promotional allowances 3.6 3.3 9.4%
---------- ---------- --------------
Net operating revenues 36.2 37.0 -2.2%
Operating expenses 30.6 34.2 -10.6%
---------- ---------- --------------
Operating income 5.6 2.8 99.6%
Other income (expense) (6.8) (6.6) 2.8%
---------- ---------- --------------
Net loss $ (1.2) $ (3.8) -68.8%
========== ========== ==============
36
Fitzgeralds Tunica
For The
Three Months Ended
March 31, Percentage
---------------------- Increase
2005 2004 (Decrease)
--------- --------- ------------
(in millions)
Casino revenues $ 22.6 $ 22.8 -0.9%
Room revenues 1.8 1.9 -4.3%
Food and beverage revenues 2.5 2.3 7.5%
Other revenues 0.3 0.3 -18.0%
--------- --------- ------------
Gross operating revenues 27.2 27.3 -0.6%
Less promotional allowances 5.7 5.3 6.2%
--------- --------- ------------
Net operating revenues 21.5 22.0 -2.3%
Operating expenses 18.2 18.0 1.2%
--------- --------- ------------
Operating income 3.3 4.0 -17.7%
Other income (expense) 0.0 0.0 160.4%
--------- --------- ------------
Net income $ 3.3 $ 4.0 -17.6%
========= ========= ============
Fitzgeralds Black Hawk (Discontinued Operation and Not Included in Consolidated
Selected Financial Information)
For The
Three Months Ended
March 31, Percentage
----------------------- Increase
2005 2004 (Decrease)
--------- --------- ------------
(in millions)
Casino revenues $ 9.8 $ 9.1 8.3%
Room revenues - - 0.0%
Food and beverage revenues 0.6 0.5 7.0%
Other revenues 0.1 0.1 11.0%
--------- --------- ------------
Gross operating revenues 10.5 9.7 8.2%
Less promotional allowances 1.3 1.3 4.3%
--------- --------- ------------
Net operating revenues 9.2 8.4 8.8%
Operating expenses 6.2 6.4 -2.9%
--------- --------- ------------
Operating income 3.0 2.0 45.5%
Other income (expense) - - 0.0%
--------- --------- ------------
Net income $ 3.0 $ 2.0 45.5%
========= ========= ============
37
Majestic Investor Holdings
For The
Three Months Ended
March 31, Percentage
----------------------- Increase
2005 2004 (Decrease)
--------- ---------- -----------
(in millions)
Casino revenues $ -- $ -- --
Room revenues -- -- --
Food and beverage revenues -- -- --
Other revenues -- -- --
--------- ---------- -----------
Gross operating revenues -- -- --
Less promotional allowances -- -- --
--------- ---------- -----------
Net operating revenues -- -- --
Operating expenses 0.1 0.5 -86.0%
--------- ---------- -----------
Operating loss (0.1) (0.5) -86.0%
Other income (expense) (0.4) (0.5) 0.1%
--------- ---------- -----------
Net loss $ (0.5) $ (1.0) -43.9%
========= ========== ===========
The following tables reflect selected financial information as a percentage
of consolidated gross operating revenues at Majestic Star, Fitzgeralds Tunica
and Majestic Investor Holdings. All percentage calculations are shown before
corporate overhead.
Majestic Star
For The
Three Months Ended
March 31,
----------------------------
2005 2004
----------- -----------
Casino revenues 57.8% 58.0%
Room revenues -- --
Food and beverage revenues 0.6% 0.7%
Other revenues 1.0% 0.9%
----------- -----------
Gross operating revenues 59.4% 59.6%
Less promotional allowances 5.4% 4.9%
----------- -----------
Net operating revenues 54.0% 54.7%
Operating expenses 45.6% 50.5%
----------- -----------
Operating income 8.4% 4.2%
Other income (expense) -10.2% -9.8%
----------- -----------
Net loss -1.8% -5.6%
=========== ===========
38
Fitzgeralds Tunica
For The
Three Months Ended
March 31,
----------------------------
2005 2004
----------- -----------
Casino revenues 33.7% 33.7%
Room revenues 2.7% 2.8%
Food and beverage revenues 3.7% 3.4%
Other revenues 0.4% 0.5%
----------- -----------
Gross operating revenues 40.5% 40.4%
Less promotional allowances 8.4% 7.9%
----------- -----------
Net operating revenues 32.1% 32.5%
Operating expenses 27.2% 26.6%
----------- -----------
Operating income 4.9% 5.9%
Other income (expense) 0.0% 0.0%
----------- -----------
Net income 4.9% 5.9%
=========== ===========
Majestic Investor Holdings
For The
Three Months Ended
March 31,
-------------------------
2005 2004
--------- ----------
Casino revenues -- --
Room revenues -- --
Food and beverage revenues -- --
Other revenues -- --
--------- ----------
Gross operating revenues -- --
Less promotional allowances -- --
--------- ----------
Net operating revenues -- --
Operating expenses 0.1% 0.7%
--------- ----------
Operating loss -0.1% -0.7%
Other expenses -0.7% -0.7%
--------- ----------
Loss from continuing operations -0.8% -1.4%
Loss from discontinued operation 0.0% 0.0%
--------- ----------
Net loss -0.8% -1.4%
========= ==========
39
FIRST QUARTER 2005 COMPARED TO FIRST QUARTER 2004
Consolidated gross operating revenues for the first quarter of 2005
decreased $0.7 million, or 1.0%, from consolidated gross operating revenues
recorded in the first quarter of 2004. Majestic Star contributed $0.5 million of
the decrease in consolidated gross operating revenues, and Fitzgeralds Tunica
contributed $0.2 million of the decrease. The decrease in consolidated gross
operating revenues resulted from a decrease in consolidated casino revenues,
which comprise almost 91.5% of consolidated gross revenues. Consolidated casino
revenues decreased $0.7 million, or 1.1%, to $61.3 million during the first
quarter of 2005 as compared to the first quarter of 2004. Majestic Star
accounted for $0.5 million of the decrease in consolidated casino revenues,
while Fitzgeralds Tunica accounted for $0.2 million of the decrease. A 1.7%
decline in Majestic Star's table games win percentage resulted in a $0.6 million
decline in table game revenues from the first quarter of 2004. Win percentage on
our casino games is relatively predictable over long periods, but can fluctuate
significantly over shorter periods, such as a fiscal quarter. This decline was
offset slightly by an increase of slot revenues during the first quarter of 2005
due to a 0.1% increase in slot win percentage. Softer market conditions and
strong competition contributed to the decline in consolidated gross revenues.
Majestic Star continues its enhanced marketing and promotional programs,
including the advertising campaign featuring former Chicago Bears player and
coach Mike Ditka as the property's celebrity spokesperson. Fitzgeralds Tunica
has implemented a new "elite" level to its slot club, which offers customers
greater rewards for greater levels of gaming activity, has become more
aggressive with new player sign-ups into its slot club, and has enhanced its
food and direct mail promotions.
Consolidated promotional allowances increased $0.6 million, or 7.4%. A new,
more competitive, slot club program at Majestic Star and increased casino cash
giveaways and complimentary products and services provided to casino customers
at Fitzgeralds Tunica generated our higher promotional allowances.
Total consolidated operating expenses decreased $3.4 million, or 6.4%, due
primarily to decreases in casino expenses of $0.9 million, or 5.7%, advertising
and promotional expenses of $0.3 million, or 9.3%, and general and
administrative expense of $3.1 million, or 25.3%. These reductions were offset
by higher corporate expenses of $0.4 million, or 48.6%, and depreciation and
amortization expenses of $0.6 million, or 14.7%.
Majestic Star and Fitzgeralds Tunica contributed $0.6 million and $0.3
million, respectively, of our decline in consolidated casino expenses. Majestic
Star's declines are attributable to lower payroll costs. At Fitzgeralds Tunica,
the decline is due to lower lease expenses on gaming equipment and lower costs
associated with wide area progressive participations.
Consolidated advertising and promotion expenses are down primarily due to
lower costs at Majestic Star. During the quarter, Majestic Star scaled back its
advertising on television and billboards, and in print media and direct mail.
Consolidated general and administrative expenses were down $3.1 million. The
reduction is primarily due to certain non-recurring charges in the first quarter
of 2004. First, Majestic Star incurred a charge in the first quarter of 2004 of
$2.2 million for retroactive property taxes related to fiscal years 2002 and
2003. In addition, the Company incurred a charge of $0.4 million due to an
unfavorable ruling on a lawsuit (see Part II, Item 1, Legal Proceedings).
40
Corporate expenses increased $0.4 million in the first quarter of 2005 from
the first quarter of 2004. The increase is primarily attributed to $0.3 million
of costs associated with the Company's Sarbanes-Oxley 404 project.
Consolidated depreciation and amortization expense increased in the first
quarter of 2005 as compared to the first quarter of 2004 by $0.6 million to $4.6
million. Majestic Star and Fitzgeralds Tunica recognized increases of $0.2
million and $0.4 million, respectively. The increases resulted from capital
expenditures made at both properties.
Consolidated other income (expense) consists primarily of interest expense,
which increased by $0.2 million to $7.3 million. The increase of interest
expense is the result of advances of funds from the credit facility to make
capital expenditures at the properties and to purchase the 170 acres of property
adjacent to Majestic Star for $21.9 million in the first quarter of the prior
year. Also, generally higher interest rates on our credit facility have
contributed to our higher interest expense.
Income from discontinued operations relates entirely to the operating
results of Fitzgeralds Black Hawk. In the first quarter of 2005, Fitzgeralds
Black Hawk had net income of $3.0 million, compared to net income of $2.0
million in the same quarter last year. In the first quarter of 2004, Fitzgeralds
Black Hawk recognized depreciation and amortization expense of $0.5 million. No
depreciation and amortization expense is being recognized in the first quarter
of 2005. On July 12, 2004, the Company entered into an Asset Purchase Agreement,
as amended (the "Purchase Agreement"), to sell to Legends Gaming, LLC
("Legends") substantially all the assets of Fitzgeralds Black Hawk. Since that
date, the Company has stopped depreciating and amortizing the property's fixed
and intangible assets. Depreciation and amortization expense not recorded as a
result of carrying the Fitzgeralds Black Hawk assets as held for sale, was
approximately $0.5 million for the quarter ended March 31, 2005. Net revenues at
Fitzgeralds Black Hawk increased $0.7 million to $9.2 million in the first
quarter of 2005. Casino revenues increased $0.7 million to $9.8 million. The
increase in casino revenues was due to increases in slot revenues, which
increased $0.8 million. Slot revenues have increased in part due to our
customers moving toward penny and multi-denominational slots that have higher
win percentages.
On April 14, 2005, Barden Colorado and Legends mutually agreed to terminate
the Purchase Agreement. In connection with the termination of the Purchase
Agreement, the earnest money deposit originally placed into escrow by Legends at
the time of execution of the Purchase Agreement was returned to Legends. In
addition, Barden Colorado paid Legends approximately $2.7 million, consisting of
approximately $0.7 million in reimbursement of certain costs which were incurred
in re-routing a storm sewer easement and certain related transaction costs which
the parties had agreed to share equally together with $2.0 million for
liquidated damages. The Company will take a charge in the second quarter of 2005
for the payment of liquidated damages, its portion of the shared transaction
costs and certain other transaction expenses. The charge is approximately $2.3
million.
Additionally, the Company will take a charge of approximately $1.5 million
in the second quarter of 2005 for the depreciation and amortization expense that
was not recorded during the period July 12, 2004 (the date of the Purchase
Agreement) to April 14, 2005 in accordance with generally accepted accounting
principles.
41
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations with internal cash flows from our
operations and borrowings under our $80.0 million credit facility. We generate
substantial cash flows from operating activities. For the three months ended
March 31, 2005 and 2004, we reported cash flows from operating activities,
inclusive of Fitzgeralds Black Hawk for both periods, totaling $14.3 million and
$12.2 million, respectively. We use our cash flows to meet our financial
obligations, which consist principally of financing the daily operations of our
casinos, servicing our debt, funding capital improvements and projects, and
making distributions to BDI under the Manager Agreement.
At March 31, 2005, $36.0 million was outstanding under the $80.0 million
credit facility. The Company had unrestricted cash and cash equivalents of $18.9
million at March 31, 2005, compared to $16.7 million at December 31, 2004,
inclusive of Fitzgeralds Black Hawk for both periods. For the three months ended
March 31, 2005, the Company spent $3.1 million primarily for slot machines at
all of the properties and for a new slot player tracking and marketing system at
Fitzgeralds Black Hawk. During the three months ended March 31, 2004, the
Company spent $25.7 million for property, plant and equipment, which consisted
principally of the purchase of 170 acres of property adjacent to Majestic Star
and the Buffington Harbor facilities, the construction of a new administration
building and integration of slot machines with TITO technology at Majestic Star,
the installation of new slot player tracking and marketing software at
Fitzgeralds Tunica, a partial expansion and remodel of our casino floor at
Fitzgeralds Tunica, and our continued investment in the newest gaming and
related equipment at all of our properties. Inclusive of the capital
expenditures planned for Fitzgeralds Black Hawk, the Company intends to spend up
to an additional $9.2 million on capital expenditures in 2005, which is the
remaining amount allowed under the 2005 capital expenditure covenant contained
within the $80.0 million credit facility. This amount will be primarily directed
toward purchasing new slot machines and integrating slot machines with TITO at
all of our properties. We believe that TITO technology will lead to greater
efficiency on our casino floor, thus providing cost savings, and longer slot
machine playing times by our customers without interruptions, which should
enhance the guest experience and our casino revenues.
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 planned capital expenditures and
its significant contractual obligations with respect to amounts outstanding
under the $80.0 million credit facility, the 11.653% notes, the 9 1/2% notes,
payments to BHR, and lease payments to BHPA. The majority of principal payments
on our senior debt are 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, plus accrued interest thereon, in 2007. No assurance can be
given that our operating cash flows or proceeds from additional financings, if
available, 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. In
addition, our existing debt agreements limit our ability to incur additional
debt unless we can meet certain financial ratios. Should the Company identify an
asset or business acquisition, there is no guarantee that any additional
financing needed by the Company will be available on acceptable terms or at all
in order to allow for the investment in such opportunities.
42
The ultimate resolution of the assessments by the Indiana Department of
Revenue against the Company and the Company's member and parent, BDI, in the
amount of $3.9 million, plus penalties and interest (as more fully described
below) could have a material impact on the Company's liquidity in the period
that the taxes are paid, if any, and to the extent that the Company uses such
liquidity to make distributions to its member for tax purposes.
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
Company and thereby require additional investment by the Company in its
facilities, gaming devices and marketing efforts. If necessary and to the extent
permitted under the indenture governing the 9 1/2% notes, the Company would 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.
On March 1, 2005, the Company entered into Amendment Number Two to Loan and
Security Agreement ("Amendment Two") with the lenders to the $80.0 million
credit facility. Amendment Two clarifies that the 2004 purchase of 170 acres of
land located adjacent to the Buffington Harbor gaming complex is not a "Capital
Expenditure" under the Loan and Security Agreement nor is it subject to the
fiscal year Capital Expenditure limitations set forth in the Loan and Security
Agreement. Amendment Two is effective as of March 1, 2005.
For the quarter ended March 31, 2005, the Company was in compliance with all
covenants to the $80.0 million credit facility.
As of March 31, 2005, the Company had $44.0 million available on its $80.0
million credit facility.
INCOME TAX MATTER
The Majestic Star Casino, LLC has been assessed $2.6 million, plus
interest, for the fiscal year 1996 and the period January 1, 1998 through June
18, 2001, by the Indiana Department of Revenue ("Department"). On September 7,
2004, the Department assessed BDI, the Company's parent and member, $1.3
million, plus penalties and interest for the remainder of 2001 and all of fiscal
year 2002. No assessments have been received for the fiscal year 2003. The
assessments relate to deductions for payments of taxes on adjusted gross gaming
revenues the Company's member took in computing adjusted gross income for
Indiana state income tax purposes. The Department has taken the position that
the Company had an obligation to withhold and remit tax for the non-resident
shareholder of its member. The Company timely filed protests for all tax years
at issue and those protests are currently pending before the Legal Division of
the Department. On April 19, 2004, the Indiana Tax Court ruled in a similar case
involving another Indiana casino, Aztar Indiana Gaming Corporation ("Aztar"),
that the gross wagering tax is a tax based on or measured by income and that it
must be added back to the taxable income base for the purpose of determining
adjusted gross income for
43
Indiana tax purposes. On September 28, 2004, the Indiana Supreme Court denied
Aztar's request to review the Indiana Tax Court's decision and thus the Indiana
Tax Court's opinion in the Aztar case is controlling precedent. On October 5,
2004, the Department sent a letter to the Company indicating that it considers
the matter closed unless the Company's protest contains new issues not addressed
in the Aztar matter. The Majestic Star Casino, LLC is a limited liability
company and therefore it is the Company's belief that it is not liable or
obligated to pay the assessment or interest thereon. In addition, the Company
will continue to pursue its protest with the Department on the grounds that the
assessments contain calculation errors and that its protest sets forth issues
not decided in Aztar. Accordingly, no liability has been accrued by the Company
relating to this matter.
The Company's indenture governing the 9 1/2% notes and the loan agreement
related to the $80.0 million credit facility allow the Company to make
distributions to its member for tax purposes. Accordingly, should the Company's
member ultimately be found liable for additional state income taxes to the State
of Indiana, the Company would make distributions sufficient to pay the
additional tax. Any payments would be recorded as distributions in Member's
Deficit. The Company does not intend to make any distributions, for the years
in which an assessment was received, until it has fully evaluated its options
with its member and parent, BDI. In April 2005, BDI's non resident shareholder
paid Indiana state income tax for fiscal year 2004 pursuant to the Indiana Tax
Court's decision in Aztar. BDI's non-resident shareholder determined that the
arguments to be made by the Company and BDI related to the assessed years were
not applicable to fiscal year 2004.
CONTRACTUAL COMMITMENTS
The following table summarizes our obligations and commitments to make
future payments under certain contracts, including long-term debt obligations,
which include our $80.0 million credit facility at March 31, 2005.
Payments Due By Year
------------------------------------------------------------------------------------------------------
Contractual Obligations 2005 2006 2007 2008 2009 Thereafter Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
Long-Term Debt $ -- $ -- $ 16,290,000 $ -- $ -- $260,000,000 $276,290,000
Credit Facility -- -- 35,965,000 -- -- -- 35,965,000
Operating Leases (1) 2,758,034 2,597,540 2,418,089 2,085,156 1,883,904 2,413,870 14,156,593
Interest on
Long-Term Debt 26,598,274 26,598,274 26,440,084 24,700,000 24,700,000 21,612,500 150,649,132
Credit Facility (2) 2,290,971 2,290,971 1,781,866 -- -- -- 6,363,808
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total $ 31,647,279 $ 31,486,785 $ 82,895,039 $ 26,785,156 $ 26,583,904 $284,026,370 $483,424,533
============ ============ ============ ============ ============ ============ ============
(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. 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.
(2) Variable rate of 6.4% is based on the current three-month LIBOR rate at
March 31, 2005.
On March 26, 1996, the City of Gary and Majestic Star entered into a
development agreement, which requires Majestic Star to pay the City an economic
incentive equal to 3% of Majestic Star's adjusted gross receipts, as defined by
the Riverboat Gambling Act. In both the three-month periods ended March 31, 2005
and 2004, Majestic Star paid $1.2 million to the City of Gary in economic
incentive taxes. For the year ended December 31, 2004, Majestic Star paid the
City of Gary $4.5 million.
44
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 151, "Inventory Costs-an amendment of ARB
No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). SFAS
151 is effective for financial statements for fiscal years beginning after June
15, 2005. The Company does not anticipate that adoption of SFAS 151 will have a
material impact on its financial position, results of operations or its cash
flows.
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 153, "Exchanges of Nonmonetary Assets-an
amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends APB Opinion No.
29, "Accounting for Nonmonetary Transactions," to eliminate the exception for
nonmonetary exchanges of similar productive assets and replace it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance (i.e., if the future cash flows of the entity are expected to change
significantly as a result of the exchange). SFAS 153 is effective for financial
statements for fiscal years beginning after June 15, 2005. The Company does not
anticipate that adoption of SFAS 153 will have a material impact on its
financial position, results of operations or its cash flows.
45
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information reported in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2004.
ITEM 4.
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 during the
quarter ended March 31, 2005 that have materially affected, or are reasonably
likely to materially affect the Company's financial reporting.
46
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal proceedings are pending against the Company. Management
considers all such pending proceedings, comprised primarily of personal injury
and equal employment opportunity (EEO) claims, to be routine litigation
incidental to the Company's business. Except as described below, 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 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 former owner of Fitzgeralds Tunica was dismissed from the case
in 2003. On May 6, 2004, the Court entered a judgment awarded the plaintiff $0.3
million, which sum represents back pay, emotional distress and punitive damages,
plus an additional sum for reasonable attorney fees. The Company appealed the
judgment. On April 5, 2005, the United States Court of Appeals for the Fifth
Circuit entered an order affirming the judgment of the District Court. Our
insurance carrier has agreed to extend coverage over the entire award except for
the amount relating to punitive damages and $1,254 of the back pay award. Our
insurance carrier has also agreed to share past and current expenses with the
Company. The Company and the plaintiff intend to execute a settlement agreement
during the second quarter of 2005 pursuant to which the Company will agree to
pay the plaintiff $0.3 million plus agreed upon attorney fees and expenses in
full and final settlement of the judgment. The Company is responsible for
$261,254 of the settlement amount and has recorded a liability for such amount
as of March 31, 2005.
ITEM 6. EXHIBITS
(a) The following exhibits are filed as part of this report:
Exhibit No. Description of Document
----------- -----------------------
31.1 Certification of Chief Executive Officer pursuant to
Rule 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 of Chief Financial Officer pursuant to
Rule 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 to Section 906 of the Sarbanes-Oxley
Act of 2002
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 16, 2005
THE MAJESTIC STAR CASINO, LLC
/s/ Don H. Barden
- ------------------
Don H. Barden
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jon S. Bennett
- ------------------
Jon S. Bennett
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
THE MAJESTIC STAR CASINO CAPITAL CORP.
/s/ Don H. Barden
- ------------------
Don H. Barden
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jon S. Bennett
- ------------------
Jon S. Bennett
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
S-1
10-Q EXHIBIT INDEX
Exhibit No. Description of Document
----------- -----------------------
31.1 Certification of Chief Executive Officer pursuant to
Rule 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 of Chief Financial Officer pursuant to
Rule 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 to Section 906 of the Sarbanes-Oxley
Act of 2002