UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended June 30, 2012
	OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from_________ to __________

 

Commission File Number 000-53921

 

GREEKTOWN SUPERHOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware		27-2216916
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
555 East Lafayette, Detroit, Michigan (Address of principal executive offices)		48226 (Zip Code)

 

Registrant’s telephone number, including area code: (313) 223-2999

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company x
			(Do not check if a smaller reporting company)

 

 

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No x

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No o

 

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of August 14, 2012, there were 153,387 shares of Series A-1 Common Stock, $0.01 par value, and no shares of Series A-2 Common Stock, $0.01 par value, outstanding.

 

 

TABLE OF CONTENTS

 

PART I –		FINANCIAL INFORMATION
Item 1.		Financial Statements:
		Consolidated Balance Sheets (unaudited)			3
		Consolidated Statements of Operations (unaudited)			5
		Consolidated Statements of Cash Flows (unaudited)			6
		Consolidated Statement of Shareholders’ Equity (unaudited)			7
		Notes to Consolidated Financial Statements (unaudited)			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			44
Item 4.		Controls and Procedures			44
PART II –		OTHER INFORMATION
Item 6.		Exhibits			45
Signatures					46

Table of Contents

 

Part I – FINANCIAL INFORMATION

Greektown Superholdings, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share data)

		June 30,				December 31,
		2012				2011
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	58,437			$	50,754
Accounts receivable – gaming, net			695				734
Accounts receivable – other, net			1,169				1,216
Inventories			353				398
Prepaid expenses			6,151				5,605
Prepaid Michigan Gaming Control Board annual fee			3,695				8,823
Prepaid municipal services fees			1,026				3,346
Deposits			1,631				1,631
Total current assets			73,157				72,507
Property, building, and equipment, net			320,996				317,085
Other assets:
Financing fees – net of accumulated amortization			9,972				11,571
Deposits and other assets			30				30
Casino development rights			117,800				117,800
Trade names			26,300				26,300
Rated player relationships – net of accumulated amortization			41,400				48,300
Goodwill			110,252				110,252
Total assets		$	699,907			$	703,845

 

The accompanying notes are an integral part of the consolidated financial statements.

 

Table of Contents

Greektown Superholdings, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share data)

		June 30,				December 31,
		2012				2011
		(unaudited)
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable			12,416				15,128
Accrued interest			25,082				25,063
Accrued expenses and other liabilities			10,132				9,631
Total current liabilities			47,630				49,822
Long-term liabilities:
Other accrued income taxes			9,018				8,871
Senior secured notes - net			369,723				367,748
Obligation under capital lease			2,480				2,489
Deferred income taxes			13,458				10,094
Total long-term liabilities			394,679				389,202
Total liabilities			442,309				439,024
Shareholders’ equity (members’ deficit):
Series A-1 preferred stock at $0.01 par value;1,688,268 shares authorized, 1,463,535 shares issued and outstanding at June 30, 2012 and December 31, 2011			185,396				185,396
Series A-2 preferred stock at $0.01 par value; 645,065 shares authorized, 162,255 shares issued and outstanding at June 30, 2012 and December 31, 2011			20,551				20,551
Series A-1 preferred warrants at $0.01 par value; 202,511 shares issued and outstanding at June 30, 2012 and December 31, 2011			25,651				25,651
Series A-2 preferred warrants at $0.01 par value; 460,587 shares issued and outstanding at June 30, 2012 and December 31, 2011			58,342				58,342
Series A-1 common stock at $0.01 par value; 4,354,935 shares authorized,146,028 and 142,423 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively			1				1
Series A-2 common stock at $0.01 par value; 645,065 shares authorized, no shares issued			—				—
Additional paid-in capital			13,975				13,652
Accumulated deficit			(46,318	)			(38,772	)
Total shareholders’ equity			257,598				264,821
Total liabilities and shareholders’ equity		$	699,907			$	703,845

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Table of Contents

 

Greektown Superholdings, Inc.

Consolidated Statements of Operations (unaudited)

(In thousands, except share and per share data)

		Three months ended June 30,								Six months ended June 30,
		2012				2011				2012				2011
Revenues
Casino		$	87,861			$	89,616			$	183,229			$	177,919
Food and beverage			5,845				5,782				12,265				11,916
Hotel			3,110				2,740				6,060				5,392
Other			1,361				1,194				2,698				2,494
Gross revenues			98,177				99,332				204,252				197,721
Less promotional allowances			14,646				15,365				28,884				28,277
Net revenues			83,531				83,967				175,368				169,444
Operating expenses
Casino			20,189				19,823				41,430				40,093
Gaming taxes			18,880				19,263				39,444				38,339
Food and beverage			4,007				4,635				8,765				10,250
Hotel			2,493				2,192				5,110				4,630
Marketing, advertising, and entertainment			2,459				1,976				3,794				3,697
Facilities			4,838				4,891				10,107				10,248
Depreciation and amortization			8,548				10,317				17,180				20,587
General and administrative expenses			12,050				11,495				24,390				23,169
Other			166				105				309				186
Operating expenses			73,630				74,697				150,529				151,199
Income from operations			9,901				9,270				24,839				18,245
Other (expenses) income
Interest expense			(12,598	)			(12,631	)			(25,251	)			(25,221	)
Amortization of finance fees and accretion of discount on senior notes			(1,844	)			(1,703	)			(3,681	)			(3,391	)
Other income (expense), net			2				3				57				(9	)
Net loss on Chapter 11 related reorganization items			—				(95	)			—				(1,149	)
Total other expense, net			(14,440	)			(14,426	)			(28,875	)			(29,770	)
Loss before income taxes			(4,539	)			(5,156	)			(4,036	)			(11,525	)
Income tax expense  – current			(73	)			(313	)			(146	)			(864	)
Income tax (expense) benefit – deferred			(1,682	)			2,151				(3,364	)			551
Net loss		$	(6,294	)		$	(3,318	)		$	(7,546	)		$	(11,838	)
Loss per share:
Basic		$	(72.49	)		$	(53.90	)		$	(110.64	)		$	(144.88	)
Diluted		$	(72.49	)		$	(53.90	)		$	(110.64	)		$	(144.88	)
Weighted average common shares outstanding			146,028				141,179				145,786				140,957
Weighted average common and common equivalent shares outstanding			146,028				141,179				145,786				140,957

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Table of Contents

 

Greektown Superholdings, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

		Six months ended June 30,
		2012				2011
Operating activities
Net loss		$	(7,546	)		$	(11,838	)
Adjustments to reconcile net loss net cash provided by (used in) operating activities:
Depreciation and amortization			17,180				20,587
Amortization of finance fees and accretion of discount on senior notes			3,681				3,391
Chapter 11 related reorganization items			—				1,149
Deferred income taxes			3,364				(551	)
Stock based compensation			323				203
Changes in current assets and liabilities:
Accounts receivable - gaming			39				(78	)
Accounts receivable - other			47				499
Property tax refund receivable			—				3,451
Inventories			45				9
Prepaid expenses			6,902				8,346
Accounts payable			(2,712	)			1,208
Unsecured distribution liability			—				(10,000	)
Accrued interest			19				(101	)
Accrued expenses and other liabilities			945				(975	)
Net cash provided by operating activities before reorganization costs			22,287				15,300
Operating cash flows for reorganization costs			—				(799	)
Net cash provided by operating activities			22,287				14,501
Investing activities
Decrease in restricted cash			—				5,000
Capital expenditures			(14,496	)			(5,051	)
Redemption of certificate of deposit			—				534
Net cash (provided by) used in  investing activities			(14,496	)			483
Financing activities
Financing fees paid			(108	)			(84	)
Net cash used in financing activities			(108	)			(84	)
Net increase in cash and cash equivalents			7,683				14,900
Cash and cash equivalents at beginning of period			50,754				30,195
Cash and cash equivalents at end of period		$	58,437			$	45,095
Supplemental disclosure of cash flow information
Cash paid during the period for interest		$	25,101			$	25,438
Cash paid during the period for income taxes		$	—			$	451

The accompanying notes are an integral part of the consolidated financial statements.

 

 

Table of Contents

 

Greektown Superholdings, Inc.

Consolidated Statements of Shareholders’ Equity (unaudited)

(In thousands)

 

			Common Stock A-1				Common Stock A-2				Preferred Stock A-1				Preferred Stock A-2				Preferred Warrants A-1				Preferred Warrants A-2				Additional Paid-in Capital				Accumulated Deficit				Total Shareholders’ Equity
Balance at January 1, 2012		$	1			$	—			$	185,396			$	20,551			$	25,651			$	58,342			$	13,652			$	(38,772	)		$	264,821
Net loss																														$	(1,252	)		$	(1,252	)
Stock based compensation																										$	157								157
Balance at March 31, 2012		$	1			$	—			$	185,396			$	20,551			$	25,651			$	58,342			$	13,809			$	(40,024	)		$	263,726
Net loss																														$	(6,294	)		$	(6,294	)
Stock based compensation																										$	166							$	166
Balance at June 30, 2012		$	1			$	—			$	185,396			$	20,551			$	25,651			$	58,342			$	13,975			$	(46,318	)		$	257,598

 

Table of Contents

 

Note 1. Organization, Background and Bankruptcy Considerations

 

Organization

 

Greektown Holdings, L.L.C. (“Greektown Holdings”) was formed in September 2005 as a limited liability company owned by Kewadin Greektown Casino, L.L.C. (“Kewadin Greektown”), which was 100% owned by the Sault Ste. Marie Tribe of Chippewa Indians (the “Tribe”) and Monroe Partners, L.L.C. (“Monroe”). Greektown Holdings owns Greektown Casino, L.L.C. (“Greektown LLC”), which is engaged in the operation of a hotel and casino gaming facility known as Greektown Casino Hotel (“Greektown Casino”) located in the downtown of the city of Detroit that opened November 10, 2000 under a license granted by the Michigan Gaming Control Board (“MGCB”) and a development agreement with the city of Detroit (the “Development Agreement”).

 

On May 29, 2008, Greektown Holdings, together with its direct and indirect subsidiaries and certain affiliates, filed voluntary petitions to reorganize their businesses under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Michigan. As contemplated by a plan of reorganization (the “Plan”) approved by the Bankruptcy Court, Greektown Superholdings, Inc. (“Greektown Superholdings,” and together with its subsidiaries “we,” “our,” “us,” “the Company,” or “Greektown,” unless the context otherwise required) was incorporated under the laws of the State of Delaware on March 17, 2010. The Plan was confirmed on January 22, 2010 and became effective on June 30, 2010 (the “Effective Date”). Since that date Greektown Superholdings and its wholly-owned subsidiary, Greektown Newco Sub, Inc. (the “Greektown Sub”), have each held 50% of the outstanding membership interests of Greektown Holdings. Greektown Superholdings is a holding company that has no other operating assets. Through its direct and indirect ownership of Greektown Holdings, Greektown Superholdings owns and operates Greektown Casino. Greektown LLC also holds all the ownership interest in Contract Builders Corporation (“Contract Builders”) and Realty Equity Company, Inc. (“Realty Equity”), each of which owns real estate near Greektown Casino. The assets of Trappers GC Partners, LLC (“Trappers”) were transferred to Greektown Casino and Trappers has been dissolved pursuant to the Plan. Unless otherwise indicated or the context otherwise requires, the following discussion describes the business and operations of Greektown Superholdings after the Effective Date. Greektown Superholdings’ corporate headquarters are located at 555 East Lafayette, Detroit, Michigan 48226.

 

On the Effective Date, Greektown Superholdings issued $385 million in 13% Senior Secured Notes (the “Senior Secured Notes”) and entered into a $30 million revolving credit facility with Comerica Bank (the “Revolving Loan” and, together with the Senior Secured Notes, the “Exit Financing”). On May 24, 2012, the Company and Comerica Bank executed an amendment to the company’s Revolving Loan agreement. The amendment, which had been approved by the MGCB, increased the aggregate principal amount available under the facility by $15.0 million to $45.0 million (See Note 5).

 

Also on the Effective Date, the proceeds of a rights offering for shares of our Preferred Stock received from certain holders of notes of Greektown Holdings, who had purchased such notes prior to the bankruptcy filing, the proceeds of the direct purchase of Preferred Stock, and the proceeds from the sale of the Senior Secured Notes were used to pay all outstanding borrowings under our DIP financing facility (the “DIP Facility”), to repay the pre-petition secured claims, and to make other payments required upon exit from bankruptcy. The proceeds from the sale of the Senior Secured Notes remaining after the foregoing payments were made, as well as the Revolving Loan, were used to provide ongoing liquidity to conduct our operations.

 

 

Table of Contents

 

Note 2. Summary of Significant Accounting Policies

 

Presentation and Basis of Accounting

 

The accompanying consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the consolidated financial statements do not include all of the disclosures required by U.S. generally accepted accounting principles. However, they do contain all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods included therein. The interim results reflected in these financial statements are not necessarily indicative of results to be expected for the full fiscal year.

 

Use of Estimates

 

The preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management of the Company to make estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include valuation allowances for receivables, tax obligations and certain other accrued liabilities. Actual results could differ from those estimates.

 

Casino Revenues

 

Greektown Casino recognizes casino revenues as the net win from gaming activities, which is the difference between gaming wins and losses. Revenues from food and beverage and hotel operations are recognized at the time of sale or upon the provision of service.

 

Promotional Allowances

 

The retail value of food, beverage, and other complimentary items furnished to customers without charge is included in revenues and then deducted as promotional allowances. The costs of providing such promotional allowances are included in casino expenses as follows (in thousands):

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Food and beverage		$	2,500			$	2,743			$	5,090			$	5,232
Hotel			722				520				1,533				1,011
		$	3,222			$	3,263			$	6,623			$	6,243

 

 

Table of Contents

 

Note 2. Summary of Significant Accounting Policies (continued)

 

Cash and Cash Equivalents

The Company considers all highly liquid investment instruments with original maturities of three months or less to be cash equivalents.

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of reorganization value over fair value of assets acquired and liabilities assumed in fresh start accounting at June 30, 2010. In accordance with accounting guidance related to goodwill and other intangible assets, the Company tests for impairment of goodwill and indefinite-lived intangible assets annually in the fourth quarter and in certain situations between those annual dates, if interim indicators of impairment arise. During the six months ended June 30, 2012, no indicators of impairment arose. Indefinite-lived intangible assets are not subject to amortization but are tested for impairment annually in the fourth quarter, by comparing the estimated fair value of the indefinite-lived intangible asset to the carrying values using a discounted cash flow approach. No indicators of impairment arose during the six months ended June 30, 2012. Intangible assets with a definite life are amortized over their useful life, which is the period over which the asset is expected to contribute directly or indirectly to future cash flows. Management periodically assesses the amortization period of intangible assets with definite lives based upon estimated future cash flows from related operations and tests for impairment when indicators arise. No impairment indicators arose during the six months ended June 30, 2012.

 

Inherent in the calculation of the fair value of goodwill and indefinite-lived intangible assets are various estimates. Future cash flow estimates are, by their nature, subjective, and actual results may differ materially from the Company’s estimates. If the Company’s ongoing estimates of future cash flows are not met, the Company may have to record impairment charges in future accounting periods. The Company’s estimates of cash flows are based on the current regulatory, political, and economic climates; recent operating information; and forecasts of the properties where it conducts operations. These estimates could be negatively impacted by changes in federal, state, or local regulations; economic downturns; or other events affecting various forms of travel and access to the Company’s properties.

 

Fair Value of Financial Instruments

 

The carrying amount of cash and cash equivalents, accounts receivable, and accounts payable approximates fair value because of the short-term maturity of these instruments. As of June 30, 2012 and December 31, 2011, the fair value of the senior secured notes was approximately $421.6 million and $399.4 million, respectively, as determined by the Company, using available market information. Inputs used to calculate the fair value of the senior secured notes have been derived principally from observable market data and therefore, the Company classifies the estimated fair value of the senior secured notes as a level 2 measurement. In addition, the fair value of the capital lease obligation approximates its carrying value, as determined by the Company, using available market information (See Note 10).

 

Stock-Based Compensation

 

Stock-based compensation awards are determined based on the grant date fair value of the award and are expensed ratably over the service period of the award. Stock-based compensation expense recognized under all share-based arrangements for the three months ended June 30, 2012 and 2011 was $0.2 million and $0.1 million, respectively. Stock-based compensation expense recognized under all share-based arrangements for the six months ended June 30, 2012 and 2011 was $0.3 million and $0.2 million, respectively (See Note 8).

 

Earnings per Share

 

Basic loss per common share (“EPS”) is computed by dividing the net loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from securities that could share in the earnings of the Company. Anti-dilutive securities are excluded from the calculation of diluted EPS (See Note 9).

Table of Contents

 

Note 2. Summary of Significant Accounting Policies (continued)

 

Income and Other Taxes

The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

 

The Company recorded income taxes for the Michigan Business Tax (“MBT”), which is considered an income tax under the provisions of the Income Taxes topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). The MBT had a gross receipts tax component and an income tax component for the period ended June 30, 2011. Based on state of Michigan tax reform, the MBT has been eliminated effective January 1, 2012 and deferred taxes related to the MBT were adjusted in the second quarter of 2011. In lieu of the MBT, the state of Michigan has enacted a six percent corporate income tax. The Company did not record a state deferred income tax benefit, as a valuation allowance was recorded at the federal and state level for the entire deferred asset amount. The Company is in a full valuation allowance during the period ended June 30, 2012. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement.

 

The Company recognizes interest and penalties related to unrecognized tax benefits within the current income tax expense.

 

The Company’s net deferred tax assets were approximately $24.9 million, as of June 30, 2012 and a valuation allowance of approximately $24.9 million was recorded. The Company had a deferred tax liability of approximately $13.5 million as of June 30, 2012 and recorded an estimated income tax contingency of $9.0 million in relation to certain potential taxes that could be assessed in connection with the enactment of the Plan in other accrued income taxes. Included within the income tax contingency are approximately $1.7 million and $0.3 million of penalty and interest, respectively, at June 30, 2012, and $1.7 million and $0.1 million of penalty and interest, respectively, at December 31, 2011. The Company believes it is possible that such uncertainties may be resolved within the next twelve months.

 

Impairment or Disposal of Long-Lived Assets

 

The Company accounts for long-lived assets in accordance with the provisions of the Property, Plant, and Equipment topic of the FASB ASC, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. No events or changes in circumstances indicated that the carrying amount of the assets will not be recoverable based on the Company’s interim assessment for the six months ended June 30, 2012. No impairment was recorded during the six months ended June 30, 2012, and 2011.

 

Reclassification

 

Certain reclassifications, which have no effect on previously reported net loss have been made to the consolidated statements of operations for the three and six months ended June 30, 2011 to conform to the 2012 presentation. Pursuant to the guidance in the AICPA Audit and Accounting Gaming Guide issued during 2011, the Company reclassified certain amounts paid under slot participation agreements from a reduction in casino revenue to casino expense. Slot participation fees reclassified were $1.6 million and $3.3 million for the three and six months ended June 30, 2011, respectively.

 

 

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Note 2. Summary of Significant Accounting Policies (continued)

Recently Adopted Accounting Pronouncements  

The following are accounting standards adopted or issued recently that were evaluated for potential impact on the Company.

 

The Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04 to amend Fair Value Measurements and Disclosures (Topic 820): For assets and liabilities that are measured at fair value on a recurring and nonrecurring basis in the statement of financial position after initial recognition, a reporting entity shall disclose information regarding the valuation techniques and inputs used to develop those measures. For recurring fair value measurements using significant unobservable inputs (Level 3), the entity shall disclose the effect of the measurements on earnings (or changes in net assets) or other comprehensive income for the period. The Company recently adopted ASU No. 2011-04, however the adoption of this Topic did not have a material impact on the consolidated financial statements.

 

Recent Accounting Pronouncements

 

A variety of proposed or otherwise potential accounting standards are currently under consideration by standard setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, the Company has not yet determined the effect, if any, that the implementation of such proposed standards would have on its consolidated financial statements.

 

Note 3. Emergence from Chapter 11

 

Fresh Start Consolidated Balance Sheet

 

In accordance with the Reorganizations topic of the FASB ASC 852, the Company adopted fresh-start reporting upon the Effective Date. The Company was required to apply the provisions of fresh-start reporting to its financial statements because the reorganization value of the assets on the emerging entity immediately before the date of confirmation was less than the total of all post-petition liabilities and allowed claims, and the holders of the existing voting shares of Greektown Holdings, its direct and indirect subsidiaries and certain affiliates (collectively, the “Debtors” or “Predecessor”) common stock immediately before confirmation received less than 50 percent of the voting shares of the emerging entity. Fresh-start reporting is required on the date on which the plan of reorganization is confirmed by the Bankruptcy Court, but should not be applied until all material conditions to the Plan are satisfied. All material conditions to the Plan were satisfied on June 30, 2010, the Effective Date.

 

Fresh-start reporting generally requires resetting the historical net book value of assets and liabilities to fair value by allocating the entity’s enterprise value as set forth in the Plan to its assets and liabilities pursuant to accounting guidance related to business combinations as of the Effective Date. As set forth in the disclosure statement relating to the Plan that was confirmed by the Bankruptcy Court on December 4, 2009, the enterprise value was estimated to be in the range of $626.7 million to $696.2 million, with a mid-point estimate of $662.7 million, based on financial projections. The enterprise value was estimated using various valuation methods, including (i) a calculation of the present value of projected free cash flows and a terminal value, using a range of discount rates (the “Discounted Cash Flow Analysis”); (ii) a comparison of the financial data of the reorganized Debtors with comparable publicly traded gaming companies (the “Comparable Companies Analysis”); and (iii) an analysis of comparable valuations indicated by precedent mergers and acquisitions transactions in the gaming industry (the “Precedent Transactions Analysis”).

 

The enterprise value using the Discounted Cash Flow Analysis was determined using the Predecessor’s financial projections for the periods through 2013.  The four year compounded annual growth rate used in the projections was 2.7%.  These financial projections were provided in the Plan disclosure statement and included anticipated changes associated with the Company’s reorganization plans, general market conditions, as well as other pertinent economic factors.   The discount rate applied was 11% which was calculated using a weighted average cost of capital analysis based on comparable statistics of the Company’s peer group.  The present value of all cash flows after 2013 were calculated using terminal values which were calculated by applying exit multiples ranging from 7.0x to 8.0x the 2013 financial projections which was then discounted 11%.  Exit multiples ranging from 7.0x to 8.0x were based upon comparable company EBITDA multiples of the Company’s peer group.

 

 

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Note 3. Emergence from Chapter 11 (continued)

 

Based upon an evaluation of relevant factors used in determining the range of enterprise value, including an assessment of the Company’s expected future cash flow projections, the Company concluded that the midpoint enterprise value estimate of $662.7 million should be used for fresh start reporting purposes, as it most closely approximated fair value.

 

In accordance with fresh start reporting, at June 30, 2010, the Company’s enterprise value was allocated to existing assets using the measurement guidance provided in accounting guidance related to business combinations. In addition, liabilities, other than deferred taxes, were recorded at the present value of amounts estimated to be paid. Finally, the Predecessor’s accumulated deficit was eliminated and the Company’s new debt and equity were recorded at fair value in accordance with the Plan. Deferred taxes have been determined in accordance with accounting guidance related to income taxes.

 

Estimates of fair value represent the Company’s best estimates, which are based on industry data and trends and by reference to relevant market rates and transactions, and discounted cash flow valuation methods, among other factors. The determination of the fair value of assets and liabilities is subject to significant estimation and assumptions and there can be no assurance that the estimates, assumptions and values reflected in the valuations will be realized and actual results could vary materially.

  

Reorganization Items and Fresh Start Adjustments

 

Reorganization items represent amounts incurred as a direct result of the Chapter 11 cases and were comprised of the following (in thousands):

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2012				2011				2012				2011
Non-cash reorganization items
Discharge of liabilities subject to compromise		$	—			$	470			$	—			$	687
Total non-cash reorganization items			—				470								687
Professional fees and expenses
Legal professional fees			—				(265	)			—				(1,376	)
Consulting professional fees			—				(133	)			—				(170	)
U.S. Trustee fees and other expenses			—				(167	)			—				(290	)
Total professional fees and expenses			—				(565	)			—				(1,836	)
Net loss on reorganization items		$	—				(95	)		$	—			$	(1,149	)

 

Professional fees include financial advisory, consulting, tax, legal, real estate and valuation services, among other items, that are directly associated with the Chapter 11 reorganization process.

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Note 4. Goodwill & Other Identifiable Intangible Assets

 

Goodwill represents the excess of the reorganization value of Greektown Superholdings over the fair value of tangible and identified intangible net assets upon emergence from bankruptcy. Greektown recorded goodwill of $110.3 million upon the application of fresh start reporting.

 

Other identifiable intangible assets as of June 30, 2012 consist of the following (in thousands):

 

Other identifiable intangible assets		Gross Amount				Accumulated Amortization				Net Intangible Asset				Assumed Useful Life
Trade names		$	26,300			$	—			$	26,300			Indefinite
Rated player relationships			69,000				27,600				41,400			5 years
Casino development rights			117,800				—				117,800			Indefinite
Total other identifiable intangible assets		$	213,100			$	24,150			$	185,500

 

 

Amortization expense related to the rated player relationships intangible asset for the three and six months ended June 30, 2012 and 2011 totaled $3.5 million and $7.0 million, respectively. Annual amortization expense for the years ended December 31, 2012, 2013, and 2014 is estimated to be $13.8 million for each of the respective years, and approximately $6.9 million for the year ended December 31, 2015.

 

Upon the Effective Date, in connection with fresh start reporting, the Company recognized Greektown Casino’s trade names, rated player relationships and casino development rights under the Development Agreement at estimated fair value as set forth in the table above. Intangible assets related to Greektown Casino were valued by valuation professionals who used income and cost based methods, as appropriate. The Greektown trade name was valued based on the relief from royalty method, which is a function of projected revenue, the royalty rate that would hypothetically be charged by a licensor of an asset to an unrelated licensee and a discount rate. The royalty rate was based on factors such as age, market competition, absolute and relative profitability, market share and prevailing rates from similar assets to reach a 1% royalty rate. The discount rate applied was 12.5%, based on the weighted average cost of capital of the properties benefiting from the trade name.

  

Note 5. Debt

 

Exit Facility

 

Purchase Agreement; Indenture; Notes

 

On June 25, 2010, the Company entered into a purchase agreement (the “Purchase Agreement”), by and between the Company and Goldman, Sachs & Co. (the “Initial Purchaser”), pursuant to which the Company agreed to issue and sell, and the Initial Purchaser agreed to purchase, $280.2 million principal amount of its Series A 13% Senior Secured Notes due 2015 (the Series A Notes) and $104.8 million principal amount of its Series B 13% Senior Secured Notes due 2015 (the “Series B Notes” and, together with the Series A Notes, the “Senior Secured Notes”), which are guaranteed (the “Guarantees”) by substantially all of the Company’s domestic subsidiaries (the Guarantors and, together with the Company, the “Obligors”), which subsidiaries executed a joinder to the Purchase Agreement on June 30, 2010.

 

On the Effective Date, the Company consummated the issuance and sale of the Senior Secured Notes under the Purchase

Agreement in a private placement to qualified institutional buyers in the United States in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States in reliance on Regulation S under the Securities Act.

 

The Senior Secured Notes were issued pursuant to an indenture, dated as of June 30, 2010 (the “Indenture”), among the

Company, the Guarantors, and Wilmington Trust FSB, as trustee.

 

 

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Note 5. Debt (continued)

 

Maturity: The Senior Secured Notes mature on July 1, 2015, and bear interest at a rate of 13.0% per annum. Interest on the Senior Secured Notes is payable semi-annually on January 1 and July 1 of each year, beginning on January 1, 2011. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months.

 

Guarantees: The obligations of the Obligors under the Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, on a second-priority senior secured basis by all of the Company’s current and future domestic subsidiaries, subject to certain exceptions.

 

Security: The Senior Secured Notes and the related Guarantees are secured by a second-priority lien on (i) substantially all of the properties and assets of the Company and each Guarantor, whether now owned or hereafter acquired, except certain excluded assets and (ii) a pledge of all the capital stock of all the subsidiaries of the Company, subject to certain limitations (in each case subject to certain permitted prior liens and liens securing certain permitted priority lien debt, including borrowings under the Company’s revolving credit facility described below).

 

Optional Redemption: At any time prior to January 1, 2013, the Company may on any one or more occasions redeem all or a part of the Senior Secured Notes, upon not less than 30 or more than 60 days’ notice, at a redemption price equal to 100% of the principal amount of the Senior Secured Notes redeemed, plus a specified premium as of, and accrued and unpaid interest and special interest, if any, to the date of redemption, subject to the rights of holders of Senior Secured Notes on the relevant record date to receive interest due on the relevant interest payment date. On or after January 1, 2013, the Company may redeem some or all of the Senior Secured Notes at any time at the redemption prices specified in the Indenture plus accrued and unpaid interest and special interest, if any, to the applicable redemption date.

 

Mandatory Redemption: The Senior Secured Notes are subject to mandatory disposition or redemption following certain

determinations by applicable gaming regulatory authorities.

 

The Senior Secured Notes are subject to mandatory redemption, at 103% of their principal amount plus accrued and unpaid interest and special interest, if the Company has consolidated excess cash flow, as defined in the Indenture, for any fiscal year commencing with the fiscal year beginning on the date of the Indenture and ending December 31, 2012. For the period ended June 30, 2012, the Company does not anticipate to make any excess cash flow payments as of December 31, 2012.

 

If the Company experiences certain change of control events, the Company must offer to repurchase the Senior Secured Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to the applicable repurchase date. If the Company sells assets or experiences certain events of loss under certain circumstances and does not use the proceeds for specified purposes, the Company must offer to repurchase the Senior Secured Notes at 100% of their principal amount, plus accrued and unpaid interest and special interest, if any, to the applicable repurchase date.

 

Covenants: The Indenture contains covenants limiting the ability of Greektown Superholdings and/or it’s direct and indirect subsidiaries to, among other things, (i) engage in businesses other than the operation of Greektown Casino; (ii) incur or guarantee additional indebtedness; (iii) create liens; (iv) make certain investments; (v) pay dividends on or make payments in respect of capital stock; (vi) consolidate or merge with other companies; (vii) sell certain assets; (viii) enter into transactions with affiliates; (ix) agree to negative pledge clauses and (x) enter into sales and leasebacks. Failure to comply with these covenants could result in a default under the Indenture unless Greektown Superholdings obtains a waiver of, or otherwise mitigates, the default.

 

Events of Default: The Indenture for the Senior Secured Notes contains events of default, including (i) failure to pay principal, interest, fees or other amounts when due; (ii) breach of any covenants which are not cured within a stated cure period; (iii) default under certain other indebtedness; (iv) becoming subject to certain judgments; (v) failure to keep liens or security interests valid; (vi) certain events of bankruptcy or insolvency; (vii) impairment of any collateral to the loans; (viii) ceasing to own the casino complex; or (ix) loss of gaming or certain other licenses or the legal authority to conduct gaming activities. A default could result in an acceleration of the amounts outstanding under the Senior Secured Notes.

 

Revolving Credit Agreement

 

On the Effective Date, the Company entered into a Credit Agreement with Comerica Bank for the Revolving Loan. On July 6, 2011 and May 24, 2012, the Company together with Comerica Bank agreed to certain modifications to the Credit Agreement (as so amended, the “Credit Agreement”).

 

 

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Note 5. Debt (continued)

 

General: The Credit Agreement provides for the Revolving Loan, which expires on December 30, 2013. The Revolving Loan is a revolving credit facility in an aggregate principal amount of up to $30 million (including $5 million for the issuance of standby letters of credit). The maximum expiration of individual letters of credit is twelve months after the issuance thereof or, if earlier, the maturity of the Revolving Loan.

 

Security and Guarantees: The Revolving Loan is secured by a perfected first priority lien and security interest on all the assets of the Company and all its direct and indirect subsidiaries, excluding, among other things, the Company’s gaming license. Additionally, effective July 2011, a requirement for a 45 day annual revolver “clean up period” was added to the Credit Agreement, during which the Company will be required to maintain a zero balance under the revolver for a period of 45 consecutive days.

 

Interest and Fees: Borrowings under the Revolving Loan initially bear interest at an annual rate of LIBOR plus 2.50%, or the higher of Comerica Bank’s prime reference rate and 3.25%. Upon the Trappers Mortgage Release (as defined below), the Revolving Loan will bear interest at an annual rate of LIBOR plus 1.75% (if the Leverage Ratio (as defined below) is less than 4 to 1) or 2.25% (if the Leverage Ratio is greater than or equal to 4 to 1) or at an annual rate of (a) the higher of (i) Comerica Bank’s prime reference rate and (ii) 2.50% minus (b) 0.50% (if the Leverage Ratio is greater than or equal to 4 to 1) or 1% (if the Leverage Ratio is less than 4 to 1). There is a facility fee of 0.50% per annum on the aggregate revolving credit commitment amount payable quarterly in arrears commencing on July 1, 2010 (in respect of the prior fiscal quarter or portion thereof), and on the first day of each fiscal quarter thereafter. There is also a non-refundable letter of credit fee of 3.50% per annum on the face amount of each letter of credit payable quarterly in advance.

 

As a result of revisions made in the May 24, 2012 amendment to the Credit Agreement, interest is equal to LIBOR plus 2.25% (under the LIBOR option set forth in the agreement) or the prime rate less .25% (under the prime rate option set forth in the agreement), provided that the Company’s leverage ratio remains in excess of 4.0:1.0.

 

“Leverage Ratio” means as of the last day of any fiscal quarter of the Company, the ratio of an amount equal to, on a consolidated basis, the sum of all of the funded debt of the Company and its subsidiaries as of such date, excluding all subordinated debt, to EBITDA (as defined below) for the four fiscal quarters then ending. Adjustments to the interest rate and the applicable letter of credit fee rate are implemented quarterly based on the Leverage Ratio.

 

Prepayment: The Revolving Loan requires mandatory prepayments in an amount equal to (i) 100% of the net proceeds of the permitted sale of assets (subject to certain exclusions and permitted reinvestments), (ii) 100% of the net proceeds of any recovery from insurance arising from an event of loss (subject to certain exclusions and permitted reinvestments), and (iii) 100% of the net proceeds for the issuance of any debt or equity securities (subject to certain exclusions). Except with respect to certain asset sales, mandatory prepayments do not reduce revolving credit commitments.

 

Certain Covenants: The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions and materiality thresholds, the ability of the Company and its subsidiaries to sell assets and property, incur additional indebtedness, create liens on assets, make investments, loans, guarantees or advances, make distributions, dividends or payments on account of, or purchase, redeem or otherwise acquire, any of the Company’s capital stock, prepay certain indebtedness, engage in acquisitions, mergers or consolidations, engage in transactions with affiliates, amend agreements governing the Company’s indebtedness, including the Senior Secured Notes, make capital expenditures, enter into negative pledges, change the fiscal year and change the Company’s or any subsidiary’s name, jurisdiction of incorporation, or the location at which any Collateral is stored. The Company had also agreed to complete the Trappers Mortgage Release by June 30, 2012.

 

The May 24, 2012, amendment to the Credit Agreement eliminated the June 30, 2012 outside date for the release of the liens on a small parcel of real property (the “Trapper’s Parcel”) underlying a portion of our casino operations which secure indebtedness owed to Greektown LLC and third parties (the “Trappers Lien”) in favor of an agreement to use commercially reasonable efforts to cause such liens to be released.

 

Trappers Mortgage Release: The Trappers Parcel is encumbered by the Trappers Lien. While the Company believes that these third party liens are discharged pursuant to the terms of the Plan, the liens established by these mortgages were not removed from the title record or insured by the title company prior to the Effective Date. Historical subordination agreements from the third parties holding such mortgages exist whereby such parties have agreed not to exercise remedies until Casino has exercised such remedies under a mortgage in favor of Casino on the same parcel. 

 

 

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Note 5. Debt (continued)

 

In addition, the Credit Agreement contains financial covenants pursuant to which the Company must achieve specified minimum (“EBITDA (as defined below)”) levels during twelve month periods ending on applicable test dates, and as of each fiscal year end, a Fixed Charge Coverage Ratio of not less than 1.05 to 1 (on a trailing twelve month basis).

 

“Fixed Charge Coverage Ratio” means EBITDA divided by Fixed Charges.

 

“Fixed Charges” means for any period, the sum, without duplication, of (i) all cash Interest Expense paid or payable in respect of such period on the Funded Debt of Borrower and its Subsidiaries on a Consolidated basis, plus (ii) all installments of principal or other sums paid or due and payable during such period by Borrower or any of its Consolidated Subsidiaries with respect to Funded Debt (other than the Advances and the original principal payment made with respect to Permitted Refinancing Indebtedness), plus (iii) all Income Taxes paid or payable in cash during such period, plus (iv) all Restricted Payments paid or payable in cash in respect of such period by Borrower (other than dividends on Capital Stock of the Borrower that were accrued and not paid), plus (v) all unfinanced Capital Expenditures of Borrower and its Consolidated Subsidiaries for such period (except certain excluded capital expenditures), plus (vi) all capitalized rent and lease expense of Borrower and its consolidated subsidiaries for such period, all as determined in accordance with GAAP.

 

“EBITDA” means Net Income for the applicable period plus, without duplication and only to the extent deducted in determining Net Income, (i) depreciation and amortization expense for such period, (ii) Interest Expense, whether paid or accrued, for such period, (iii) all Income Taxes for such period, (iv) reasonable legal, accounting, consulting, advisory and other out-of-pocket expenses incurred in connection with on-going bankruptcy court proceedings related to the bankruptcy of Greektown Holdings, L.L.C., and (v) for any fiscal quarter ending on or before June 30, 2012, specified non-recurring expenses may be added back to EBITDA.

 

Event of Default: The Revolving Loan contains certain events of default, including failure to make required payments; breaches of covenants which are not cured within a stated cure period or any representations and warranties in any material adverse respect; defaults under certain other indebtedness; certain judgments against the Company for the payment of money; failure to keep any material provision of any loan document valid, binding and enforceable; a change of control; an event of bankruptcy or insolvency; loss of the Company’s gaming licenses to the extent such loss is reasonably likely to cause a material adverse effect; the Company becomes the subject of certain enforcement actions if such enforcement action has not been dismissed or terminated within 60 days after commencement; or the Company becomes prohibited from conducting gaming activities for a period of greater than thirty consecutive days. A default could result in, among other things, a termination of the revolving credit commitment and acceleration of amounts outstanding under the Revolving Loan.

 

Further, the Company and its subsidiaries have agreed to collaterally assign the mortgage in favor of the Company as well as a mortgage under which a pre-bankruptcy affiliate of the Company is the borrower (but as to which the Company is also the beneficiary of a collateral assignment to secure the mortgage in favor of us) to the lenders under the Revolving Loan on a first-priority basis and to the holders of the Senior Secured Notes on a second-priority basis. However, if the subordination agreements and the collateral assignment of the mortgage in favor of the Company and under which the Company’s pre-bankruptcy affiliate is the borrower were determined not to be enforceable, such mortgages could be deemed to have a higher priority than the mortgage on such property that the Company is granting to holders of the Senior Secured Notes. In the event that the holders of such mortgages are able to exercise their rights under such mortgages, they would be entitled, among other remedies, to foreclose such liens which could result in the Company’s loss of title to such property.

 

The May 24, 2012, amendment to the Credit increased the aggregate principal amount available under the facility by $15.0 million to $45.0 million and provided that any borrowings under the additional $15.0 million commitment are required to fund expenditures relating to the new valet parking facility, and are to be repaid in quarterly installments equal to 1/20^th of the amount advanced, commencing on the earlier of July 1, 2013 and the first month after the parking facility’s completion date. The amendment does not modify the term of the Revolving Loan, which expires on December 30, 2013, unless renewed or extended. The amendment also, among other things, excludes capital expenditures relating to the valet parking facility from the Fixed Charge Coverage Ratio calculation not to exceed $25.7 million.

 

As of June 30, 2012, the Company had approximately $0.9 million of letters of credit outstanding.

 

 

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Note 6. Shareholders’ Equity

 

Common Stock

 

Greektown Superholdings is authorized to issue 5 million shares of Common Stock, of which 146,028 shares were issued and outstanding as of June 30, 2012 and 7,359 unvested restricted shares have been granted. A total of 4,354,935 shares of Greektown Superholdings’ Common Stock are designated as Series A-1 Common Stock, par value $0.01 per share (the “Series A-1 Common Stock”), and a total of 645,065 shares of Greektown Superholdings’ Common Stock are designated as Series A-2 Common Stock, par value $0.01 per share (the “Series A-2 Common Stock”). Each share of Series A-1 Common Stock represents the same economic interest in Greektown Superholdings as each share of Series A-2 Common Stock and such shares differ only with respect to voting rights as set forth below.

 

Preferred Stock

 

Greektown Superholdings is authorized to issue 2,333,333 shares of Preferred Stock. A total of 1,688,268 shares of Greektown Superholdings’ Preferred Stock are designated as Series A-1 Convertible Preferred Stock, par value $0.01 per share (the “Series A-1 Preferred Stock”), of which 1,463,535 were issued and outstanding as of June 30, 2012. A total of 645,065 shares of Greektown Superholdings’ Preferred Stock are designated as Series A-2 Participating Convertible Preferred Stock, par value $0.01 per share (the “Series A-2 Preferred Stock,” and together with the Series A-1 Preferred Stock, the “Series A Preferred Stock”), of which 162,255 shares were issued and outstanding as of June 30, 2012. A holder’s shares of Series A Preferred Stock are voluntarily convertible at the election of such holder and all shares of Series A Preferred Stock are mandatory convertible upon the vote or written consent of 66 2/3% of the then outstanding shares of Series A Preferred Stock voting together as a single class (with each holder of Series A-1 Preferred Stock and each holder of Series A-2 Preferred Stock entitled to cast one vote with respect to each share of Series A-1 Preferred Stock or Series A-2 Preferred Stock held by such holder). Each share of Series A-1 Preferred is convertible into the lesser of (i) such number of fully paid and nonassessable shares of Series A-1 Common Stock as is determined by dividing (A) the sum of $100 per share of Series A Preferred Stock plus an amount equal to the aggregate amount of accrued but unpaid dividends per share of Series A Preferred Stock whether or not declared and subject to certain adjustments (the “Series A Reference Price”) by (B) the Series A Conversion Price (defined below) in effect at the time of conversion, and (ii) the maximum number of shares of Series A-1 Common Stock that can be issued to such holder in accordance with the Certificate of Incorporation of Greektown Superholdings and in compliance with the requirements of the MGCB. Each share of Series A-2 Preferred Stock is convertible into the lesser of (i) such number of fully paid and nonassessable shares of Series A-2 Common Stock as is determined by dividing the Series A Reference Price by the Series A Conversion Price in effect at the time of conversion and (ii) the maximum number of shares of Series A-2 Common Stock that can be issued to such holder in accordance with the Certificate of Incorporation and in compliance with the requirements of the MGCB. The “Series A Conversion Price” means an amount initially equal to $100 but which is subject to adjustment for stock splits, combinations, certain dividends and distributions and with respect to mergers, reorganizations and similar transactions as set forth in the Certificate of Incorporation. Each share of Series A-1 Preferred Stock represents the same economic interest in Greektown Superholdings as each share of Series A-2 Preferred Stock and such shares differ only with respect to voting rights, as set forth below.

 

 

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Note 6. Shareholders’ Equity (continued)

 

Summary of Stock Terms

 

Issuance of Additional Stock. The Board does not have the right to (i) authorize additional shares of Common Stock without the vote of the holders of shares of capital stock of Greektown Superholdings representing a majority of the votes represented by all outstanding shares of capital stock (on an as-converted basis) of Greektown Superholdings entitled to vote, voting together as a single class, (ii) authorize or issue additional shares of Common Stock or Preferred Stock if such authorization or issuance would adversely affect (A) the Series A-1 Preferred Stock in a manner different than it would affect the Series A-2 Preferred Stock without the separate consent of a majority of the outstanding shares of Series A-1 Preferred Stock and (B) the Series A-2 Preferred Stock in a manner different than it would affect the Series A-1 Preferred Stock without the separate consent of a majority of the outstanding shares of Series A-2 Preferred Stock or (iii) cause Greektown Superholdings to issue or sell to any person (including holders of shares of capital stock and affiliates of holders of shares of capital stock) more than five percent (5%) of any Common Stock, Preferred Stock or other voting securities, voting interests or equity interests of Greektown Superholdings except in accordance with the provisions of the Michigan Gaming Control and Revenue Act and the rules promulgated thereunder (the “Act”). Greektown Superholdings may not issue any class of non-voting equity securities unless and solely to the extent permitted by section 1123(a)(6) of the title 11 of the Bankruptcy Code; provided, however that such restriction (A) will have no further force and effect beyond that required under section 1123(a)(6) of the Bankruptcy Code; (B) will have such force and effect, if any, only for so long as section 1123(a)(6) of the Bankruptcy Code is in effect and applicable to Greektown Superholdings; and (C) in all events may be amended or eliminated in accordance with applicable law from time to time in effect.

 

Transfer Restrictions. No stockholder may transfer its shares of Common Stock, Preferred Stock or other voting securities, voting interests or equity interests of Greektown Superholdings unless such transfer is in accordance with the Act and the rules promulgated there under.

 

Voting Rights. The holders of Series A-1 Common Stock are entitled to ten (10) votes for each outstanding share of Series A-1 Common Stock. The holders of Series A-2 Common Stock are entitled to one (1) vote for each outstanding share of Series A-2 Common Stock; provided, however, that, except as otherwise required by law, holders of Common Stock are not entitled to vote on any amendment to the Certificate of Incorporation that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to the Certificate of Incorporation or pursuant to the General Corporation Law of the State of Delaware. Except as provided below, the holders of Series A-1 Preferred Stock are entitled a number of votes equal to ten (10) times the number of shares of Series A-1 Common Stock into which each such share of Series A-1 Preferred Stock is then convertible. Except as provided below, the holders of Series A-2 Preferred Stock are entitled to a number of votes equal to one (1) times the number of shares of Series A-2 Common Stock into which each such share of Series A-2 Preferred Stock is then convertible. Except as provided by law and as set forth below, holders of Series A-1 Preferred Stock and holders of Series A-2 Preferred Stock will vote together with the holders of Common Stock as a single class. The approval of a majority of the votes of Series A-1 Preferred Stock are required in order to amend, alter or repeal any provision of the Certificate of Incorporation or Bylaws of Greektown Superholdings if such amendment, alteration or repeal would adversely affect the Series A-1 Preferred Stock in a manner different than it would affect the Series A-2 Preferred Stock. The approval of a majority of the votes of Series A-2 Preferred Stock are required in order to amend, alter or repeal any provision of the Certificate of Incorporation or Bylaws of Greektown Superholdings if such amendment, alteration or repeal would adversely affect the Series A-2 Preferred Stock in a manner different than it would affect the Series A-2 Preferred Stock. Any of the rights, powers, preferences and other terms of the Series A Preferred Stock set forth in the Certificate of Incorporation may be waived on behalf of all holders of Series A Preferred Stock by the affirmative written consent or vote of the holders of sixty six and two thirds percent (66 2/3%) of the shares of Series A Preferred Stock then outstanding (with each holder of Series A-1 Preferred Stock and each holder of Series A-2 Preferred Stock entitled to cast one vote with respect to each share of Series A-1 Preferred Stock or Series A-2 Preferred Stock held by such holder) voting together as a single class.

 

  

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Note 6. Shareholders’ Equity (continued)

 

Dividends. Each share of Series A Preferred Stock (including unissued shares) accrues dividends on a daily basis at a rate equal to 7.5% per annum of the Series A Reference Price (whether or not declared), subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock. Such dividends are cumulative; provided, however, that such dividends shall be payable only when, as, and if declared by the Board, and for so long as Greektown Superholdings is subject to the jurisdiction of the MGCB, Greektown Superholdings may not pay any dividends unless such dividends are approved by, and issued in compliance with the regulations and restrictions imposed by, the MGCB. Greektown Superholdings may not declare, pay or set aside any dividends on shares of any other class or series of capital stock of Greektown Superholdings (other than dividends on shares of Common Stock payable in shares of Common Stock) unless the holders of the Series A Preferred Stock then outstanding will first receive, or simultaneously receive, a dividend equal to (i) the amount of accrued but unpaid dividends with respect to each share of Series A Preferred Stock plus (ii) either (A) in the case of a dividend on Common Stock or any class or series of capital stock convertible into Common Stock, the amount that would have been payable with respect to each share of Series A Preferred Stock if such share had been converted to Common Stock on the record date for payment of such dividend or (B) in the case of a dividend on any class or series of capital stock that is not convertible into Common Stock, an amount determined by (x) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of each share of such class or series of capital stock and (y) multiplying such fraction by the Series A Reference Price; provided that, if Greektown Superholdings declares, pays or sets aside, on the same date, a dividend on more than one class or series of capital stock, the holders of Series A Preferred Stock will receive an amount calculated based on the dividend on the class or series of capital stock that would result in the highest Series A Preferred Stock dividend.

 

Distributions. All distributions to the shareholders of Greektown Superholdings upon a voluntary or involuntary liquidation, dissolution or winding up of Greektown Superholdings, if any, will be made in accordance with the order and priority set forth in the Certificate of Incorporation.

 

Warrants to Purchase Series A Preferred Stock

 

On the Effective Date, Greektown Superholdings issued warrants to purchase shares of Series A-1 Preferred Stock and warrants to purchase shares of Series A-2 Preferred Stock, in each case, at an initial purchase price per share equal to $0.01 (the “Warrant Shares”), subject to adjustment as set forth in the Warrant to Purchase Series A Convertible Preferred Stock (the “Warrant”), which is the form of warrant used for both warrants to purchase the Series A-1 Preferred Stock and warrants to purchase the Series A-2 Preferred Stock. Greektown Superholdings entered into such warrants with any Put Party and/or holder of Old Senior Notes who elected to purchase Preferred Stock representing more than 4.9% of the capital stock of Greektown Superholdings as of the Effective Date, or if such party that qualified as an “Institutional Investor” under the Act elected to purchase more than 14.9% of the capital stock of Greektown Superholdings as of the Effective Date.

 

Voting Rights. The holders of Warrants have no voting rights prior to exercise of the Warrant.

 

Dividends. The holder of a Warrant is entitled to receive any and all dividends and other distributions paid to the holders of shares of Series A Preferred Stock in accordance with the Certificate of Incorporation. However, such dividends or distributions are payable only upon exercise of the Warrant. In accordance with the Certificate of Incorporation, from the date on which Greektown Superholdings first issues Series A Preferred Stock, each Warrant Share (including unissued Warrant Shares) will accrue dividends on a daily basis at the rate equal to 7.5% per annum of the Series A Reference Price (whether or not declared), subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock.

 

 

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Note 6. Shareholders’ Equity (continued)

 

Early Termination. In the event of any capital reorganization, or any reclassification of the capital stock of Greektown Superholdings (other than a change in par value or from par value to no par value or no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or the consolidation or merger of Greektown Superholdings with or into another corporation (other than a merger solely to effect a reincorporation of Greektown Superholdings into another state), or the sale, lease, transfer, exclusive license or other disposition in a single transaction or series of related transactions of all or substantially all of its assets to any other person and such transaction results in a liquidation, dissolution or winding up of Greektown Superholdings pursuant to Section B.3 of Article 4 of Greektown Superholdings’ Certificate of Incorporation, at any time prior to the earlier of the expiration of a Warrant or the exercise in full of a Warrant, each holder of a Warrant will be entitled to receive, subject to the consummation of such event, the cash, securities and other property that such holder would have received in respect of the Warrant Shares had such holder exercised its Warrant immediately prior to the effective time of such event less an amount equal to (i) the number of Warrant Shares then subject to the applicable Warrant multiplied by (ii) the purchase price per share of such Warrant in effect at the time of such event.

 

Limitations on Exercise. The exercise of each Warrant and the issuance of the Warrant Shares by Greektown Superholdings upon such exercise are subject to Article Twelve of the Certificate of Incorporation, which prohibits the issuance of shares of capital stock of Greektown Superholdings in certain circumstances.

 

Note 7. Gaming Taxes and Fees

 

Under the provisions of the Act, casino licenses are subject to the following gaming taxes and fees on an ongoing basis:

·		An annual licensing fee;
·		Annual payments are due in November, together with the other two casino licensees, of all MGCB regulatory and enforcement costs. The Company prepaid $10.2 million for its portion of the 2012 annual assessment in 2011; the fiscal 2011 annual assessment was paid in 2010.
·		A wagering tax, calculated based on adjusted gross gaming receipts, payable daily, of 19%; and
·		A municipal services fee in an amount equal to the greater of 1.25% of adjusted gross gaming receipts or $4 million annually.

 

These gaming taxes and fees are in addition to the taxes, fees, and assessments customarily paid by business entities conducting business in the state of Michigan and the city of Detroit. The Company recorded $18.9 million and $19.3 million, as gaming tax expense for the three months ended June 30, 2012, and 2011, respectively and $39.4 million and $38.3 million for the six months ended June 30, 2012, and 2011, respectively.

 

The Company is also required to pay a daily fee to the city of Detroit in the amount of 1% of adjusted gross receipts, increasing to 2% of adjusted gross receipts if adjusted gross receipts exceed $400 million in any one calendar year. Additionally, if and when adjusted gross receipts exceed $400 million, the Company will be required to pay $4 million to the city of Detroit. The Company does not anticipate its adjusted gross receipts to exceed $400 million during the calendar year 2012.

 

 

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Note 8. Stock Based Compensation

Certain members of the Company’s executive team are eligible to receive restricted share units under the terms of the Company’s restricted share unit program. On July 1, 2011 under the terms of the restricted share unit program, the Company’s President and Chief Executive Officer was granted 7,000 restricted share units, of which 2,333 restricted share units vest on each of the first two anniversaries of the grant date and the remaining 2,334 restricted share units vest on June 15, 2014. The units will be settled as shares of Series A-1 Common Stock within 30 days of the final vesting date, subject to acceleration in the event of a change of control, or certain other circumstances. On July 1, 2011, the Company’s Executive Chairman was granted 1,333 restricted share units, of which the total 1,333 restricted share units vested on December 31, 2011. On October 1, 2011, the Senior Vice President and Chief Financial Officer was granted 3,000 restricted share units, of which 1,000 restricted share units vest on each of the three anniversaries of the grant date. Additionally, on May 1, 2012, the Vice President and General Counsel was granted 2,000 restricted share units, of which 667 restricted share units vest on each of the three anniversaries of the grant date.

 

All annual retainers to the board of directors will be paid half in cash and half in restricted shares of Series A-1 Common Stock, vesting in quarterly increments over a one year period. Each director may elect annually to receive all or part of the equity portion of the award in cash. Such cash payments will be made when the equity would have vested.

 

The director compensation program provides that each member of the Company’s Board of Directors is entitled to receive restricted shares of the Company’s Series A-1 Common Stock. In addition to the annual retainer, upon joining the Company’s Board of Directors, the Chairman of the Board became entitled to $275,000 of such stock; the Vice Chairman of the Board became entitled to $150,000 of such stock, and all other directors are entitled to $125,000 of such stock. All such restricted shares will vest in three equal annual installments.

 

The Company accounts for its stock based compensation in accordance with FASB ASC Topic 718 Stock Compensation. Stock based compensation expense for the three months ended June 30, 2012, and 2011 totaled $0.2 million and $0.1 million, respectively.

 

The following table summarizes the Company’s restricted shares and restricted share units unvested stock activity for the six months ended June 30, 2012, and 2011:

			Six Months Ended June 30, 2012
			Restricted Shares				Restricted Share Units
Unvested at December 31, 2011				7,843				11,333
Granted				—				2,000
Vested				(484	)			(1,333	)
Unvested at June 30, 2012				7,359				12,000

 

			Six Months Ended June 30, 2011
			Restricted Shares				Restricted Share Units
Unvested at December 31, 2010				8,983				—
Granted				1,388				—
Vested				(888	)			—
Unvested at June 30, 2011				9,483				—

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Note 9. Earnings per share

EPS is computed by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if certain restrictions lapse on restricted stock awards and preferred stock and warrants are converted to common stock. Anti-dilutive securities are excluded from diluted EPS.

 

The following is a reconciliation of the number of shares used in the basic and diluted EPS computations for the three and six months ended June 30, 2012, and 2011 (in thousands, except per share data):

		Three month ended June 30,
		2012				2011
Net loss attributable to common stockholders for basic computation		$	(6,294	)		$	(3,318	)
Less: Preferred stock dividends			(3,048	)			(3,048	)
Less: Preferred stock dividends on shares underlying warrants			(1,243	)			(1,243	)
Adjusted net loss available to common stockholders		$	(10,585	)		$	(7,609	)
Basic loss per common share:
Weighted average common shares outstanding			146,028				141,179
Basic and diluted loss per common share		$	(72.49	)		$	(53.90	)

		Six months ended June 30,
		2012				2011
Net loss attributable to common stockholders for basic computation		$	(7,546	)		$	(11,838	)
Less: Preferred stock dividends			(6,097	)			(6,097	)
Less: Preferred stock dividends on shares underlying warrants			(2,487	)			(2,487	)
Adjusted net loss available to common stockholders		$	(16,130	)		$	(20,422	)
Basic loss per common share:
Weighted average common shares outstanding			145,786				140,957
Basic and diluted loss per common share		$	(110.64	)		$	(144.88	)

 

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Note 9. Earnings per share (continued)

 

Due to the Company’s net losses for the three and six months ended June 30, 2012 and 2011, the dilutive effect of restricted share units, convertible preferred stock, and warrants were not included in the computation of EPS, as their inclusion would have been anti-dilutive.

  

Note 10. Fair Value Measurements

 

The Fair Value Measurements topic of the FASB ASC establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this guidance are described below:

 

Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

 

Level 2: Inputs to the valuation methodology include:

 

·

Quoted prices for similar assets or liabilities in active markets;

·

Quoted prices for identical or similar assets or liabilities in inactive markets;

·

Inputs other than quoted prices that are observable for the asset or liability;

·

Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The assets and liabilities fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The valuation methodologies for these can be found in Note 2.

 

Valuation techniques used are designed to maximize the use of observable inputs and minimize the use of unobservable inputs. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.

 

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Note 11. Michigan Gaming Control Board Covenant

 

On June 28, 2010, the MGCB approved Greektown’s new ownership structure, capitalization and management. The MGCB’s approval order (the “Order”) provides that the Company must demonstrate its continuing financial viability for so long as any indebtedness is outstanding under the Revolving Loan and the Senior Secured Notes by complying with a minimum fixed charge coverage ratio maintenance covenant and a limitation on certain restricted payments.

 

Minimum Fixed Charge Coverage Ratio

 

The Order requires the Company and its subsidiaries to maintain a ratio of EBITDA to Fixed Charges (each as defined below) on the last day of each calendar quarter of not less than:

 

(1)		1.00 to 1.00 (until March 31, 2011); and

(2)

1.05 to 1.00 (after March 31, 2011).

 

The fixed charge coverage ratio will be measured from the Effective Date until the applicable determination date for all fiscal quarters ending on or before March 31, 2011 and on a trailing twelve month basis thereafter.

 

The Order defines the ratio as the ratio of:

 

(1)		EBITDA for the measurement period then ending to

(2)

Fixed Charges for the measurement period.

 

For purposes of the Order:

 

“EBITDA” means, for any period of determination, net income for the applicable period plus, without duplication and only to the extent deducted in determining net income:

 

(1)		depreciation and amortization expense for such period;

(2)		interest expense, whether paid or accrued, for such period;

(3)		all income taxes for such period; and

(4)		for any fiscal quarter ending on or before June 30, 2011, specified non-recurring expenses for such period.

“Fixed Charges” means, for any period, the sum, without duplication, of:

 

(1)		all cash interest expense on funded debt paid or payable in respect of such period; plus

(2)		all installments of principal with respect to funded debt, including excess cash flow recapture payments, or other sums paid or due and payable during such period by the Company with respect to all of its funded debt (other than the repayment of advances under a revolving credit facility and payments of principal in connection with any refinancing of any funded debt); plus

(3)		all preferred dividends paid in cash for such period; plus

(4)		all unfinanced capital expenditures for such period; plus

(5)

all capitalized rent and lease expense for such period.

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Note 11. Michigan Gaming Control Board Covenant (continued)

 

In May of 2012, the MGCB permitted the Company to exclude capital expenditures in relation to the construction of the valet parking facility from the MGCB Fixed Charge Coverage Ratio calculation. The Company was in compliance with the MGCB Fixed Charge Coverage Ratio calculation for the three months ended June 30, 2012.

 

The Company will be permitted to cure any anticipated non-compliance with this ratio with capital raised in an offering of equity securities. The Company may add to EBITDA the net proceeds of any offering of equity securities of the Company or its subsidiaries consummated before the date that a financial audit must be delivered to the MGCB for the applicable period with respect to which the fixed charge coverage ratio is measured under the order to make up the amount of any shortfall in the minimum fixed charge coverage ratio for the applicable period. Any equity proceeds exceeding those necessary to make up the shortfall will be available to make up shortfalls in the minimum fixed charge coverage ratio for any subsequent periods.

 

Limitation on Certain Restricted Payments

 

The MGCB order also prohibits the Company from making any distributions or pay any dividends on account of the Company’s capital stock without the prior written approval of the MGCB, other than repurchases, redemptions or other acquisitions for value of any of the Company’s preferred stock or common stock held by any current or former officer, director or employee of the Company or its subsidiaries pursuant to any equity subscription agreement, stock option agreement, shareholders agreement or similar agreement, not to exceed $1.5 million in any twelve month period.

Note 12. Commitments and Contingencies

The Company is a defendant in various pending litigation matters. In management’s opinion, the ultimate outcome of such litigation will not have a material adverse effect on the results of operations or the financial position of the Company.

 

Under the Revised Development Agreement, should a “triggering event” (as defined therein) occur, the Company must sell its assets, business, and operations as a going concern at their fair market value to a developer named by the city of Detroit. The Company noted that for the six months ended June 30, 2012, no triggering event has occurred. As part of the bankruptcy reorganization process, the Company engaged Moelis & Company, LLC (“Moelis”) to act as investment banker. The Moelis engagement letter provides for a success fee if certain requirements are met. Moelis asserted an administrative claim for fees and expenses totaling approximately $12.9 million, of which approximately $3 million was paid prior to the effective date of the reorganization. The Company believes such amount substantially exceeds the amount to which Moelis is entitled under its engagement letter. The Company has filed an objection to Moelis’s administrative claim, and scheduling of a hearing on that matter before the United States Bankruptcy Court for the Eastern District of Michigan is pending.

 

The Company requested a ruling from the Michigan Department of Treasury regarding certain potential tax liabilities under the MBT arising from the June 30, 2010 restructuring transactions. The Company failed to receive a favorable ruling. Such potential claims include a contingent liability for gross receipts tax under the MBT. Such claims are not recorded as the Company believes there is a more likely than not chance of prevailing in this matter. In response, the Company has asked the Bankruptcy Court to issue a determination as to these matters. A hearing on the Company’s request for a determination was held on March 21, 2011, at which time the Bankruptcy Court requested that the parties submit further briefing. The Bankruptcy Court has not issued a final ruling on this matter.

 

Certain parties to contracts entered into prior to the commencement of the Debtors’ bankruptcy proceedings have asserted claims alleging that the Company assumed those contracts and is responsible for amounts necessary to cure prepetition defaults under such contracts. Certain of such claims have been withdrawn. As of the six months ended June 30, 2012 no claims were asserted. The amount of claims estimated to be approximately $0.6 million as of the six months ended June 30, 2011.

 

Note 13. Subsequent Events

 

On July 2, 2012, the Company paid semi-annual interest payments of $25.1 million on its 13% Senior Secured Notes due in 2015.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Background and Overview

 

Greektown Superholdings was incorporated under the laws of the State of Delaware on March 17, 2010. Greektown Superholdings was formed to hold, directly and indirectly through Greektown Sub, all outstanding membership interests of Greektown LLC, as of the effective date of its emergence from bankruptcy protection. Through Greektown LLC, we own and operate Greektown Casino. Greektown Casino opened in November 2000 within the downtown of the city of Detroit. In February 2009, Greektown Casino completed its Expanded Complex at a cost of approximately $336.3 million. Greektown Casino is one of only three commercial casinos licensed to operate in the state of Michigan and our Expanded Complex offers a full range of gaming, dining and entertainment alternatives, including:

 

·

approximately 100,000 square-feet of gaming space with approximately 2,700 slot machines and 62 table games, including an approximately 12,500 square-foot salon dedicated to high-limit gaming and one of the largest live poker rooms in the Metro Detroit Gaming Market;

·		approximately 2,810 attached and 1,750 unattached parking spaces, including over 600 parking spaces for valet parking services;

·

10,000 square feet of convention space;

·

a 400-room hotel;

·

three restaurants; several food outlets on the gaming floor; and

·

seven bars and three entertainment facilities.

 

Access to Greektown Casino is facilitated by a nearby off-ramp from Interstate 375 and six interstate highways passing through the downtown of the city of Detroit. We estimate that Greektown Casino attracts approximately 17,400 patrons per day on average, and we believe a significant number of these patrons make regular visits to our property. Our players club, known as “Club Greektown,” is a membership/loyalty program that attracts customers by offering incentives to frequent casino visitors. As of June 30, 2012, the Company had approximately 1.5 million people in our database for Club Greektown. We believe the gaming market in the Detroit area, which consists of three commercial casinos in Michigan (the “Detroit Commercial Casinos”), together with the commercial casino in Windsor, Ontario (the “Metro Detroit Gaming Market”), is primarily a “drive-to” gaming market, with over 95% of patrons residing within 100 miles of Greektown Casino.

 

The Company has been engaged in a substantial renovation effort designed to improve the quality of the gaming and entertainment experience. In 2011, we reconfigured our table games area to drive greater excitement and traffic, and improve operational efficiencies. We also introduced two new casino bars, Asteria and The Fringe, which offer video poker as well as an expansive beverage assortment. Asteria also offers a flexible entertainment space and a quick-service food outlet. Numerous other improvements were made in 2011, including a revamped first floor promotions area, cage, and club booth, all designed to enhance the physical appeal of our property.

 

In 2012, our focus is on engaging a broader customer base through higher levels of service and a wider range of amenities. To that end, our renovation efforts will continue throughout the year. In early 2012, we began construction on an 850-space valet parking garage facility. The facility is expected to open during the first quarter of 2013, and will increase the convenience with which our guests can access our property, as well as expand the parking capacity in and around our facility. In addition, we are in the process of enhancing our dining offerings, including the addition of a fine-dining restaurant within the casino and a fresh market-style dining venue.

 

 

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Key Financial Statement Terms

 

Revenues

 

Our gross revenues are derived from casino, food, beverage, hotel, and other revenues. Our largest component of revenues is casino revenues, which represent approximately 90% of our total gross revenues. Gross casino revenues are comprised of revenues from our slot machines and from table games, which are calculated as the difference between the amount wagered and the amount paid to customers.

 

The club point redemption expenses associated with our “Club Greektown” membership/loyalty program are reflected as a reduction of gross casino revenues. In accordance with the Revenue Recognition topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605 applicable to instances where consideration is given by a vendor to a customer, we expense the cash value of points earned by Club Greektown members and recognize a related liability for any unredeemed points.

 

The following table reflects the composition of gross casino revenues for the three and six months ended June 30, 2012, and 2011 (in thousands).

 

		Three months ended June 30,								Six months ended June 30,
		2012				2011				2012				2011
Gross casino revenue:
Slot machines		$	76,616			$	77,203			$	160,137			$	154,398
Table games			12,945				14,130				26,549				26,916
Club point expense			(1,700	)			(1,717	)			(3,457	)			(3,394	)
Total gross casino revenue		$	87,861			$	89,616			$	183,229			$	177,920
Relationship to gross casino revenues:
Slot machines			87.2	%			86.1	%			87.4	%			86.8	%
Table games			14.7	%			15.8	%			14.5	%			15.1	%
Club point expense			-1.9	%			-1.9	%			-1.9	%			-1.9	%
Total gross casino revenue			100.0	%			100.0	%			100.0	%			100.0	%

 

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Other principal components of revenues are our food and beverage, and hotel revenue, each of which is affected by customer volume and price. The following table reflects the composition of food and beverage, and hotel revenue for the three and six months ended June 30, 2012, and 2011 (in thousands).

 

		Three months ended June 30,								Six months ended June 30,
		2012				2011				2012				2011
Gross food and beverage and hotel revenue:
Food and beverage		$	5,845			$	5,782			$	12,265			$	11,916
Hotel			3,110				2,740				6,060				5,392
Total gross food and beverage and hotel revenue		$	8,955			$	8,522			$	18,325			$	17,308
Relationship to gross revenues:
Food and beverage			6.0	%			5.8	%			6.0	%			6.0	%
Hotel			3.2	%			2.8	%			3.0	%			2.7	%
Total gross food and beverage and hotel revenue			9.2	%			8.6	%			9.0	%			8.7	%

 

Promotional Allowances

 

Our gross revenues are reduced by promotional allowances to arrive at net revenues. Promotional allowances consist of the retail value of food, beverage and other complimentary items furnished to customers without charge.

 

 

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Direct Operating Expenses

 

Direct operating expenses are those that directly relate to our gaming, food and beverage, and hotel operations. The following table illustrates the composition of direct operating expenses and their relationships to net revenues for the three and six months ended June 30, 2012, and 2011 (in thousands).

 

		Three months ended June								Six months ended June 30,
		2012				2011				2012				2011
Direct operating expenses:
Casino		$	20,189			$	19,823			$	41,430			$	40,093
Gaming taxes			18,880				19,263				39,444				38,339
Food and beverage			4,007				4,635				8,765				10,250
Hotel			2,493				2,192				5,110				4,630
Depreciation & amortization			8,548				10,317				17,180				20,587
Total direct operating expenses		$	54,117			$	56,230			$	111,929			$	113,899
Relationship to net revenues:
Casino			24.2	%			23.6	%			23.6	%			23.7	%
Gaming taxes			22.6	%			22.9	%			22.5	%			22.6	%
Food and beverage			4.8	%			5.5	%			5.0	%			6.0	%
Hotel			3.0	%			2.6	%			2.9	%			2.7	%
Depreciation & amortization			10.2	%			12.3	%			9.8	%			12.1	%
Total direct operating expenses			64.8	%			67.0	%			63.8	%			67.2	%

 

Casino expenses. Casino expenses consist of employee compensation (labor, taxes and benefits), surveillance costs, gaming supplies, slot participation, casino promotions (including mailing and other ancillary costs), as well as on-site hosting of our casino customers.

 

Gaming taxes. Gaming taxes include gaming taxes paid to the state of Michigan, city of Detroit, and municipal service fees paid to the city of Detroit.

 

Food and beverage. Food and beverage expenses relate to labor, taxes, and benefits, cost of sales, and operating supplies.

 

Hotel. Hotel expenses consist primarily of employee compensation and related expenses, as well as facilities-related expenses, such as maintenance and utilities.

 

Depreciation and amortization. Depreciation and amortization expenses consist primarily of the depreciation expense related to our gaming buildings and improvements, our gaming equipment and furnishings, our non-gaming buildings and improvements, our non-gaming office furniture and equipment, and amortization related to our rated player relationships intangible asset.

 

 

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Indirect Operating Expenses

Indirect operating expenses consist predominantly of general overhead expenses that support our overall business, including marketing, advertising and entertainment, non-hotel facilities expenses and other general and administrative expenses. The following table illustrates the composition of indirect operating expenses and their relationships to net revenues for the three and six months ended June 30, 2012, and 2011 (in thousands).

 

		Three months ended June 30,								Six months ended June 30,
		2012				2011				2012				2011
Indirect operating expenses:
Marketing, advertising and entertainment		$	2,459			$	1,976			$	3,794			$	3,697
Facilities			4,838				4,891				10,107				10,248
General and administrative			12,050				11,495				24,390				23,169
Other			166				105				309				186
Total indirect operating expenses		$	19,513			$	18,467			$	38,600			$	37,300
Relationship to net revenues:
Marketing, advertising and entertainment			2.9	%			2.4	%			2.2	%			2.2	%
Facilities			5.8	%			5.8	%			5.8	%			6.0	%
General and administrative			14.4	%			13.7	%			13.9	%			13.7	%
Other			0.2	%			0.1	%			0.2	%			0.1	%
Total indirect operating expenses			23.4	%			22.0	%			22.0	%			22.0	%

 

Marketing, advertising and entertainment. Marketing, advertising and entertainment expenses primarily reflect the costs of mass media advertising, including television, radio and billboards.

 

Facilities. Facility expenses consist of cleaning and maintaining our non-hotel properties, valet parking, the Private Branch Exchange (PBX) department and wardrobe department, the payroll and benefits to support these activities and casino utilities.

 

General and administrative. General and administrative expenses include the costs of insurance, property taxes, regulatory fees paid to support the MGCB, bonuses paid under union contracts, leases associated with various parking lots, rent, professional fees, donations, and various employee costs relating to executives, security, compliance, finance, purchasing, human resources, and information technology departments.

 

Other indirect operating expenses. Other indirect operating expenses are primarily costs associated with maintaining the various retail parking spaces and garages, including utilities and maintenance, related to rental income.

 

 

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Reorganization Expenses

 

Reorganization expenses consist primarily of gains from the settlement of liabilities subject to compromise net of fees paid to restructuring professionals, as well as other costs directly associated with the bankruptcy process. The following table illustrates the composition of reorganization expenses and the total net loss on reorganization items and fresh start adjustments to net revenues for the three and six months ended June 30, 2012, and 2011 (in thousands).

 

		Three months ended June 30,								Six months ended June 30,
		2012				2011				2012				2011
Non-cash reorganization items
Discharge of liabilities subject to compromise		$	—			$	470			$	—			$	687
Total non-cash reorganization items		$	—			$	470			$	—			$	687
Professional fees and expenses
Legal professional fees			—				(265	)			—				(1,376	)
Consulting professional fees			—				(133	)			—				(170	)
U.S. Trustee fees and other expenses			—				(167	)			—				(290	)
Total professional fees and expenses			—				(565	)			—				(1,836	)
Net loss on reorganization items		$	—			$	(95	)		$	—			$	(1,149	)

 

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Other Expenses 

 

Other expense consists primarily of interest on our indebtedness, the amortization of deferred financing costs, and accretion of discounts on our 13% Senior Secured Notes (the “Senior Secured Notes”). The following table illustrates the components of other expense and their relationships to net revenues for the three and six months ended June 30, 2012, and 2011 (in thousands).

 

		Three months ended June 30,								Six months ended June 30,
		2012				2011				2012				2011
Other expense:
Interest expense		$	(12,598	)		$	(12,631	)		$	(25,251	)		$	(25,221	)
Amortization of finance fees and accretion on senior notes			(1,844	)			(1,703	)			(3,681	)			(3,391	)
Other			2				3				57				(9	)
Total other expenses:		$	(14,440	)		$	(14,331	)		$	(28,875	)		$	(28,621	)
Relationship to net revenues:
Interest expense			-15.1	%			-15.0	%			-14.4	%			-14.9	%
Amortization of finance fees and accretion on senior notes			-2.2	%			-2.0	%			-2.1	%			-2.0	%
Other			0.0	%			0.0	%			0.0	%			0.0	%
Total other expense:			-17.3	%			-17.1	%			-16.5	%			-16.9	%

 

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Provision for Income Taxes

 

The provision for income taxes reflects our current and deferred provisions, which are considered income taxes under Income Taxes topic of the FASB ASC. The following table illustrates the components of the provision for income taxes and its relationship to net revenues for the three and six months ended June 30, 2012, and 2011 (in thousands).

 

		Three months ended June 30,								Six months ended June 30,
		2012				2011				2012				2011
Provision for income taxes:
Tax expense-current		$	(73	)		$	(313	)		$	(147	)		$	(864	)
Tax (expense) benefit -deferred			(1,682	)			2,151				(3,363	)			551
Total provision for income taxes		$	(1,755	)		$	1,838			$	(3,510	)		$	(313	)
Relationship to net revenues:
Tax expense - current			-0.1	%			-0.4	%			-0.1	%			-0.5	%
Tax (expense) benefit - deferred			-2.0	%			2.6	%			-1.9	%			0.3	%
Total provision for income taxes			-2.1	%			2.2	%			-2.0	%			-0.2	%

 

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Results of Operations

 

Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30, 2011

 

Net revenues. Net revenues for the three months ended June 30, 2012 and the three months ended June 30, 2011 were approximately $83.5 million and $84.0 million, respectively. Net revenues are impacted by the general economic condition of the region, the seasonality of our business, sporting and entertainment events simultaneously taking place within the downtown area of the city of Detroit, short-term disruptions related to Casino renovations, and our ability to attract customers within the Detroit Commercial Market, made up of the only three commercial casinos in the state of Michigan, and consist of Greektown Casino (the “Company”), MGM Grand Detroit (“MGM Detroit”), and MotorCity Casino (“MotorCity”). New commercial casinos opened up in Cleveland, Ohio on May 14, 2012 and in Toledo, Ohio on May 29, 2012. Although the openings of these casinos have negatively impacted the Detroit gaming market, they did not materially affect the Company’s net revenues for the three months ended June 30, 2012. Casino revenue represented 89.5% and 90.2% of gross revenues for the three months ended June 30, 2012 and June 30, 2011, respectively. Promotional allowances as a percentage of gross revenue were 14.9% and 15.5% for the three months ended June 30, 2012 and June 30, 2011, respectively.

 

Direct operating expenses. Direct operating expenses decreased by $2.1 million, or 2.2% as a percentage of net revenues, during the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The following is a discussion of the principal drivers of trends in direct operating expenses:

 

·

Casino expenses. Casino-related expenses increased $0.4 million, or 0.6% as a percentage of net revenues, during the three months ended June 30, 2012 compared to the prior year period. The increase in this category was primarily driven by an increase of $0.6 million in promotional expense, offset by a decrease in payroll of $0.2 million.

 

·

Gaming taxes. Gaming taxes decreased $0.4 million during the three months ended June 30, 2012 compared to the prior year period, as a result of the decrease in casino revenue.

 

·

Food and beverage expenses. Food and beverage expenses decreased $0.6 million, or 0.3% as a percentage of net revenues, during the three months ended June 30, 2012 compared to the prior year period, primarily as a result of a decrease in cost of goods sold of $0.2 million and a decrease in payroll compensation expense of $0.4 million, due to the Company’s closure of the its buffet, which is currently being renovated, and the implementation of other operating efficiencies,

 

·

Hotel expenses. Hotel expenses increased $0.3 million, or 0.4% as a percentage of net revenues, during the three months ended June 30, 2012 compared to the prior year period. This increase was primarily driven by an increase in payroll expense of $0.2 million and other operating costs of $0.1 million, in order to service the higher occupancy and revenue levels experienced in the second quarter of 2012 compared to the prior year period.

 

·

Depreciation and amortization expense. Depreciation and amortization expenses decreased by $1.8 million, or 2.1% as a percentage of net revenues, during the three months ended June 30, 2012 compared to the prior year period. This decrease was the result of certain short lived depreciable assets becoming fully depreciated during the three months ended June 30, 2011.

 

Indirect operating expenses. Indirect operating expenses increased by approximately $1.0 million, or 1.4% as a percentage of net revenues, during the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The following is a discussion of the principal drivers of trends in indirect operating expenses:

 

·

Marketing, advertising and entertainment. Marketing, advertising, and entertainment expenses increased by approximately $0.5 million or 0.6% as a percentage of net revenues, during the three months ended June 30, 2012 compared to the prior year period. This was primarily driven by an increase in sponsorships, interactive media, production and artwork expenses.

 

·

Facilities. Facilities expense decreased by approximately $0.1 million during the three months ended June 30, 2012 compared to the prior year period. The decrease was driven by lower payroll costs of $0.1 million and maintenance costs of $0.1 million, offset by an increase in utility costs of $0.1 million.

 

·		General and administrative. General and administrative expenses increased by approximately $0.6 million, or 0.1% as a percentage of net revenues, during the three months ended June 30, 2012 compared to the prior year period. The increase primarily related to expenses resulting from the Detroit Casino Council ratification incentives and professional fees relating to the proxy contest earlier in 2012.

 

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·		Other. Other indirect operating expenses increased by approximately $0.1 million, or 0.1% as a percentage of net revenues, during the three months ended June 30, 2012 compared to the prior period. Chapter 11 related reorganization items decreased by approximately $0.1 million, or 0.1% as a percentage of net revenues during the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The decrease in Chapter 11 related reorganization items during the three months ended June 30, 2012 compared to the three months ended June 30, 2011 was primarily related to the Company not having any reorganization items related to the settlement of liabilities and fees directly related to bankruptcy.

 

Other expense. Other expense increased by approximately $0.1 million, or 0.2% as a percentage of net revenues, during the three months ended June 30, 2012 compared to the prior year period. The following is a discussion of the primary drivers of the trends in other expense.

 

·

Interest expense. Interest expense remained relatively consistent during the three months ended June 30, 2012 compared to the prior year period.

 

·

Amortization of finance fees and accretion of discount on senior notes. Amortization of finance fees and accretion of discount on the Senior Secured Notes increased by approximately $0.1 million during the three months ended June 30, 2012 compared to the prior year period.

 

Provision for income taxes. The provision for income taxes increased by approximately $3.6 million during the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The increase was primarily related to tax reform in the state of Michigan. The Michigan Business Tax (“MBT”) was eliminated, effective January 1, 2012, and all deferred tax liabilities related to MBT were reversed in the second quarter of 2011

 

 

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Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

 

Net revenues. Net revenues for the six months ended June 30, 2012 and the six months ended June 30, 2011 were approximately $175.4 million and $169.4 million, respectively. Net revenues are impacted by the general economic condition of the region, the seasonality of our business, sporting and entertainment events simultaneously taking place within the downtown area of the city of Detroit, short-term disruptions related to Casino renovations, and our ability to attract customers within the Detroit Commercial Market. New commercial casinos opened up in Cleveland, Ohio on May 14, 2012 and in Toledo, Ohio on May 29, 2012. Although the openings of these casinos have negatively impacted the Detroit gaming market, they did not materially affect the Company’s net revenues for the six months ended June 30, 2012. Casino revenue represented 89.7% and 90.0% of gross revenues for the six months ended June 30, 2012 and June 30, 2011, respectively. Promotional allowances as a percentage of gross revenue were 14.1% and 14.3% for the six months ended June 30, 2012 and June 30, 2011, respectively.

 

Direct operating expenses. Direct operating expenses decreased by $2.0 million, or 2.4% as a percentage of net revenues, during the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The following is a discussion of the principal drivers of trends in direct operating expenses:

 

·

Casino expenses. Casino-related expenses increased $1.3 million, during the six months ended June 30, 2012 compared to the prior year period. The increase in this category was primarily driven by an increase of $1.3 million in promotional expense.

 

·

Gaming taxes. Gaming taxes increased $1.1 million during the six months ended June 30, 2012 compared to the prior year period, as a result of the increase in casino revenue.

 

·

Food and beverage expenses. Food and beverage expenses decreased $1.5 million, or 1.1% as a percentage of net revenues, during the six months ended June 30, 2012 compared to the prior year period, primarily as a result of a decrease in cost of goods sold of $0.8 million and a decrease in payroll compensation expense of $0.7 million, due to the implementation of operating efficiencies, and the Company’s closure of its buffet, which is currently being renovated.

  

·

Hotel expenses. Hotel expenses increased $0.5 million, or 0.2% as a percentage of net revenues, during the six months ended June 30, 2012 compared to the prior year period. This increase was primarily driven by an increase in payroll expense of $0.4 million and other operating costs of $0.1 million, in order to service the higher occupancy and revenue levels experienced in the first half of 2012, as compared to the prior year period.

 

·		Depreciation and amortization expense. Depreciation and amortization expenses decreased by $3.4 million, or 2.4% as a percentage of net revenues, during the six months ended June 30, 2012 compared to the prior year period. This decrease was the result of certain short lived depreciable assets becoming fully depreciated during the six months ended June 30, 2011.

 

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Indirect operating expenses. Indirect operating expenses increased by approximately $1.3 million during the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The following is a discussion of the principal drivers of trends in indirect operating expenses:

 

·

Marketing, advertising and entertainment. Marketing, advertising, and entertainment expenses increased by approximately $0.1 million during the six months ended June 30, 2012 compared to the prior year period. This was primarily driven by an increase in payroll of $0.3 million, offset by a decrease of $0.2 million in sponsorships, television, radio, production and artwork expenses.

 

·

Facilities. Facilities expense decreased by approximately $0.1 million during the six months ended June 30, 2012 compared to the prior year period. The decrease is due to lower maintenance costs of $0.2 million, offset by an increase in utility costs of $0.1 million.

 

·

General and administrative. General and administrative expenses increased by approximately $1.2 million, or 0.2% as a percentage of net revenues, during the six months ended June 30, 2012 compared to the prior year period. The increase primarily related to expenses resulting from the Detroit Casino Council ratification incentives and professional fees related to the proxy contest earlier in 2012.

 

·

Other. Other indirect operating expenses increased by approximately $0.1 million, or 0.1% as a percentage of net revenues,  during the six months ended June 30, 2012 compared to the prior period. Chapter 11 related reorganization items decreased  by approximately $1.1 million, or 0.7% as a percentage of net revenues during the six months ended June 30, 2012 compared  to the six months ended June 30, 2011. The decrease in Chapter 11 related reorganization items during the six months ended  June 30, 2012 compared to the six months ended June 30, 2011 was primarily related to the Company not having any  reorganization items related to the settlement of liabilities and fees directly related to bankruptcy.

 

Other expense. Other expense increased by approximately $0.3 million, or 0.4% as a percentage of net revenues, during the six months ended June 30, 2012 compared to the prior year period. The following is a discussion of the primary drivers of the trends in other expense.

 

·

Interest expense. Interest expense remained relatively consistent during the six months ended June 30, 2012 compared to the prior year period.

 

·

Amortization of finance fees and accretion of discount on senior notes. Amortization of finance fees and accretion of discount on the Senior Secured Notes increased by $0.3 million during the six months ended June 30, 2012 compared to the prior year period. The increase is related to the amortization expense in relation to the accretion of discount on the Senior Secured Notes which mature on July 1, 2015.

 

Provision for income taxes. The provision for income taxes increased by approximately $3.2 million during the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The increase was primarily related to tax reform in the state of Michigan. The (“MBT”) was eliminated, effective January 1, 2012, and all deferred tax liabilities related to MBT were reversed in the second quarter of 2011.

 

 

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Liquidity and Capital Resources

 

Overview

 

Our cash requirements are for working capital, obligations under a development agreement with the city of Detroit (the “Development Agreement”), gaming taxes, debt service, and the improvement of our facilities. Cash and cash equivalents were $58.4 million as of June 30, 2012.

 

The Company had $44.1 million of available borrowings under revolving credit facility with Comerica Bank (the “Revolving Loan”) ($45.0 million of commitment less outstanding letters of credit of approximately $0.9 million). During the six months ended June 30, 2012, the Company paid semi-annual interest payments of $25.1 million in relation to the 13% Senior Secured Notes using cash generated from operating activities. Subsequent to the six months ended June 30, 2012, on July 2, 2012, the Company again paid semi-annual interest payments of $25.1 million on its Senior Secured Notes using cash generated from operating activities.

 

For the year ending December 31, 2012, capital expenditures are projected to be approximately $44 million, including expenditures on our new valet parking facility, estimated to be approximately $26 million.

 

On May 24, 2012, the Company and Comerica Bank executed an amendment to the company’s Revolving Loan agreement. The amendment, which had been approved by the MGCB, increased the aggregate principal amount available under the facility by $15.0 million to $45.0 million. Any borrowings under the additional $15.0 million commitment are required to fund expenditures relating to the new valet parking facility. For additional information see the summary below provided under the caption titled “Revolving Credit Agreement”.

 

For the six months ended June 30, 2012, and 2011 the face amount of the outstanding debt was $385 million, due in 2015. During the three months ended June 30, 2012, and 2011 interest expense was $12.6 million and during the six months ended June 30, 2012, and 2011 interest expense was $25.3 million and $25.2 million, respectively.

 

Cash Flows

 

Our cash flows for the six months ended June 30, 2012, and 2011 consisted of the following (in thousands).

 

		Six months ended June 30,
		2012					2011
Cash flows:
Net cash provided by operating activities		$	22,287			$	14,501
Net cash (provided by) used in investing activities			(14,496	)			483
Net cash used in financing activities			(108	)			(84	)
Net increase in cash and cash equivalents		$	7,683			$	14,900

 

Net cash provided by operating activities. Net cash provided by operating activities increased for the six months ended June 30, 2012, as compared to the six months ended June 30, 2011. The increase in operating cash flows was primarily due to a decrease in net loss, the decrease in unsecured distribution liability, and the decrease in chapter 11 related reorganization items.

 

Net cash (provided by) used in investing activities. Net cash (provided by) used in investing activities increased for the six months ended June 30, 2012, as compared to the six months ended June 30, 2011. The increase was primarily related to an increase in capital expenditures, including spending on the new valet garage.

 

Net cash used in financing activities. Net cash used in financing activities decreased for the six months ended June 30, 2012, as compared to the six months ended June 30, 2011. The decrease was primarily to the Company paying Comerica, amendment fees in relation to the Revolving Credit Agreement in the second quarter of 2012.

 

 

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Purchase Agreement; Indenture; Notes

 

On June 25, 2010, the Company entered into a purchase agreement (the “Purchase Agreement”), by and between the Company and Goldman, Sachs & Co. (the “Initial Purchaser”), pursuant to which the Company agreed to issue and sell, and the Initial Purchaser agreed to purchase, $280.2 million principal amount of its Series A 13% Senior Secured Notes due 2015 (the Series A Notes) and $104.8 million principal amount of its Series B 13% Senior Secured Notes due 2015 (the “Series B Notes” and, together with the Series A Notes, the “Senior Secured Notes”), which are guaranteed (the “Guarantees”) by substantially all of the Company’s domestic subsidiaries (the Guarantors and, together with the Company, the “Obligors”), which subsidiaries executed a joinder to the Purchase Agreement on June 30, 2010.

 

On the Effective Date, the Company consummated the issuance and sale of the Senior Secured Notes under the Purchase Agreement in a private placement to qualified institutional buyers in the United States in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States in reliance on Regulation S under the Securities Act.

 

The Senior Secured Notes were issued pursuant to an indenture, dated as of June 30, 2010 (the “Indenture”), among the Company, the Guarantors, and Wilmington Trust FSB, as trustee.

 

Maturity: The Senior Secured Notes mature on July 1, 2015, and bear interest at a rate of 13.0% per annum. Interest on the Senior Secured Notes is payable semi-annually on January 1 and July 1 of each year, beginning on January 1, 2011. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months.

 

Guarantees: The obligations of the Obligors under the Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, on a second-priority senior secured basis by all of the Company’s current and future domestic subsidiaries, subject to certain exceptions.

 

Security: The Senior Secured Notes and the related Guarantees are secured by a second-priority lien on (i) substantially all of the properties and assets of the Company and each Guarantor, whether now owned or hereafter acquired, except certain excluded assets and (ii) a pledge of all the capital stock of all the subsidiaries of the Company, subject to certain limitations (in each case subject to certain permitted prior liens and liens securing certain permitted priority lien debt, including borrowings under the Company’s revolving credit facility described below).

 

Optional Redemption: At any time prior to January 1, 2013, the Company may on any one or more occasions redeem all or a part of the Senior Secured Notes, upon not less than 30 or more than 60 days’ notice, at a redemption price equal to 100% of the principal amount of the Senior Secured Notes redeemed, plus a specified premium as of, and accrued and unpaid interest and special interest, if any, to the date of redemption, subject to the rights of holders of Senior Secured Notes on the relevant record date to receive interest due on the relevant interest payment date. On or after January 1, 2013, the Company may redeem some or all of the Senior Secured Notes at any time at the redemption prices specified in the Indenture plus accrued and unpaid interest and special interest, if any, to the applicable redemption date.

 

Mandatory Redemption: The Senior Secured Notes are subject to mandatory disposition or redemption following certain determinations by applicable gaming regulatory authorities.

 

The Senior Secured Notes are subject to mandatory redemption, at 103% of their principal amount plus accrued and unpaid interest and special interest, if the Company has consolidated excess cash flow, as defined in the Indenture, for any fiscal year commencing with the fiscal year beginning on the date of the Indenture and ending December 31, 2012. For the period ended June 30, 2012, the Company does not anticipate to make any excess cash flow payments as of December 31, 2012.

 

 

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If the Company experiences certain change of control events, the Company must offer to repurchase the Senior Secured Notes at 101% of their principal amount, plus accrued and unpaid interest and special interest, if any, to the applicable repurchase date. If the Company sells assets or experiences certain events of loss under certain circumstances and does not use the proceeds for specified purposes, the Company must offer to repurchase the Senior Secured Notes at 100% of their principal amount, plus accrued and unpaid interest and special interest, if any, to the applicable repurchase date.

 

Covenants: The Indenture contains covenants limiting the ability of Greektown Superholdings and/or it’s direct and indirect subsidiaries to, among other things, (i) engage in businesses other than the operation of Greektown Casino; (ii) incur or guarantee additional indebtedness; (iii) create liens; (iv) make certain investments; (v) pay dividends on or make payments in respect of capital stock; (vi) consolidate or merge with other companies; (vii) sell certain assets; (viii) enter into transactions with affiliates; (ix) agree to negative pledge clauses and (x) enter into sales and leasebacks. Failure to comply with these covenants could result in a default under the Indenture unless Greektown Superholdings obtains a waiver of, or otherwise mitigates, the default.

 

Events of Default: The Indenture for the Senior Secured Notes contains events of default, including (i) failure to pay principal, interest, fees or other amounts when due; (ii) breach of any covenants which are not cured within a stated cure period; (iii) default under certain other indebtedness; (iv) becoming subject to certain judgments; (v) failure to keep liens or security interests valid; (vi) certain events of bankruptcy or insolvency; (vii) impairment of any collateral to the loans; (viii) ceasing to own the casino complex; or (ix) loss of gaming or certain other licenses or the legal authority to conduct gaming activities. A default could result in an acceleration of the amounts outstanding under the Senior Secured Notes.

 

Revolving Credit Agreement

 

On the Effective Date, the Company entered into a Credit Agreement with Comerica Bank for the Revolving Loan. On July 6, 2011 and May 24, 2012, the Company together with Comerica Bank agreed to certain modifications to the Credit Agreement (as so amended, the “Credit Agreement”).

 

General: The Credit Agreement provides for the Revolving Loan, which expires on December 30, 2013. The Revolving Loan is a revolving credit facility in an aggregate principal amount of up to $30 million (including $5 million for the issuance of standby letters of credit). The maximum expiration of individual letters of credit is twelve months after the issuance thereof or, if earlier, the maturity of the Revolving Loan.

 

Security and Guarantees: The Revolving Loan is secured by a perfected first priority lien and security interest on all the assets of the Company and all its direct and indirect subsidiaries, excluding, among other things, the Company’s gaming license. Additionally, effective July 2011, a requirement for a 45 day annual revolver “clean up period” was added to the Credit Agreement, during which the Company will be required to maintain a zero balance under the revolver for a period of 45 consecutive days.

 

Interest and Fees: Borrowings under the Revolving Loan initially bear interest at an annual rate of LIBOR plus 2.50%, or the higher of Comerica Bank’s prime reference rate and 3.25%. Upon the Trappers Mortgage Release (as defined below), the Revolving Loan will bear interest at an annual rate of LIBOR plus 1.75% (if the Leverage Ratio (as defined below) is less than 4 to 1) or 2.25% (if the Leverage Ratio is greater than or equal to 4 to 1) or at an annual rate of (a) the higher of (i) Comerica Bank’s prime reference rate and (ii) 2.50% minus (b) 0.50% (if the Leverage Ratio is greater than or equal to 4 to 1) or 1% (if the Leverage Ratio is less than 4 to 1). There is a facility fee of 0.50% per annum on the aggregate revolving credit commitment amount payable quarterly in arrears commencing on July 1, 2010 (in respect of the prior fiscal quarter or portion thereof), and on the first day of each fiscal quarter thereafter. There is also a non-refundable letter of credit fee of 3.50% per annum on the face amount of each letter of credit payable quarterly in advance.

 

As a result of revisions made in the May 24, 2012 amendment to the Credit Agreement, interest is equal to LIBOR plus 2.25% (under the LIBOR option set forth in the agreement) or the prime rate less .25% (under the prime rate option set forth in the agreement), provided that the Company’s leverage ratio remains in excess of 4.0:1.0.

 

 

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“Leverage Ratio” means as of the last day of any fiscal quarter of the Company, the ratio of an amount equal to, on a consolidated basis, the sum of all of the funded debt of the Company and its subsidiaries as of such date, excluding all subordinated debt, to EBITDA (as defined below) for the four fiscal quarters then ending. Adjustments to the interest rate and the applicable letter of credit fee rate are implemented quarterly based on the Leverage Ratio.

 

Prepayment: The Revolving Loan requires mandatory prepayments in an amount equal to (i) 100% of the net proceeds of the permitted sale of assets (subject to certain exclusions and permitted reinvestments), (ii) 100% of the net proceeds of any recovery from insurance arising from an event of loss (subject to certain exclusions and permitted reinvestments), and (iii) 100% of the net proceeds for the issuance of any debt or equity securities (subject to certain exclusions). Except with respect to certain asset sales, mandatory prepayments do not reduce revolving credit commitments.

 

Certain Covenants: The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions and materiality thresholds, the ability of the Company and its subsidiaries to sell assets and property, incur additional indebtedness, create liens on assets, make investments, loans, guarantees or advances, make distributions, dividends or payments on account of, or purchase, redeem or otherwise acquire, any of the Company’s capital stock, prepay certain indebtedness, engage in acquisitions, mergers or consolidations, engage in transactions with affiliates, amend agreements governing the Company’s indebtedness, including the New Senior Secured Notes, make capital expenditures, enter into negative pledges, change the fiscal year and change the Company’s or any subsidiary’s name, jurisdiction of incorporation, or the location at which any Collateral is stored. The Company has also agreed to complete the Trappers Mortgage Release by June 30, 2012.

 

The May 24, 2012, amendment to the Credit Agreement eliminated the June 30, 2012 outside date for the release of the liens on a small parcel of real property (the “Trapper’s Parcel”) underlying a portion of our casino operations which secure indebtedness owed to Greektown LLC and third parties (the “Trappers Lien”) in favor of an agreement to use commercially reasonable efforts to cause such liens to be released.

 

Trappers Mortgage Release: The Trappers Parcel is encumbered by the Trappers Lien. While the Company believes that these third party liens are discharged pursuant to the terms of the Plan, the liens established by these mortgages were not removed from the title record or insured by the title company prior to the Effective Date. Historical subordination agreements from the third parties holding such mortgages exist whereby such parties have agreed not to exercise remedies until Casino has exercised such remedies under a mortgage in favor of Casino on the same parcel.

 

 In addition, the Credit Agreement contains financial covenants pursuant to which the Company must achieve specified minimum (“EBITDA (as defined below)”) levels during twelve month periods ending on applicable test dates, and as of each fiscal year end, a Fixed Charge Coverage Ratio of not less than 1.05 to 1 (on a trailing twelve month basis).

 

“Fixed Charge Coverage Ratio” means EBITDA divided by Fixed Charges.

 

“Fixed Charges” means for any period, the sum, without duplication, of (i) all cash Interest Expense paid or payable in respect of such period on the Funded Debt of Borrower and its Subsidiaries on a Consolidated basis, plus (ii) all installments of principal or other sums paid or due and payable during such period by Borrower or any of its Consolidated Subsidiaries with respect to Funded Debt (other than the Advances and the original principal payment made with respect to Permitted Refinancing Indebtedness), plus (iii) all Income Taxes paid or payable in cash during such period, plus (iv) all Restricted Payments paid or payable in cash in respect of such period by Borrower (other than dividends on Capital Stock of the Borrower that were accrued and not paid), plus (v) all unfinanced Capital Expenditures of Borrower and its Consolidated Subsidiaries for such period (except certain excluded Capital Expenditures), plus (vi) all capitalized rent and lease expense of Borrower and its Consolidated Subsidiaries for such period, all as determined in accordance with GAAP.

 

“EBITDA” means Net Income for the applicable period plus, without duplication and only to the extent deducted in determining Net Income, (i) depreciation and amortization expense for such period, (ii) Interest Expense, whether paid or accrued, for such period, (iii) all Income Taxes for such period, (iv) reasonable legal, accounting, consulting, advisory and other out-of-pocket expenses incurred in connection with on-going bankruptcy court proceedings related to the bankruptcy of Greektown Holdings, L.L.C., and (v) for any fiscal quarter ending on or before June 30, 2012, specified non-recurring expenses may be added back to EBITDA.

 

 

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Event of Default: The Revolving Loan contains certain events of default, including failure to make required payments; breaches of covenants which are not cured within a stated cure period or any representations and warranties in any material adverse respect; defaults under certain other indebtedness; certain judgments against the Company for the payment of money; failure to keep any material provision of any loan document valid, binding and enforceable; a change of control; an event of bankruptcy or insolvency; loss of the Company’s gaming licenses to the extent such loss is reasonably likely to cause a material adverse effect; the Company becomes the subject of certain enforcement actions if such enforcement action has not been dismissed or terminated within 60 days after commencement; or the Company becomes prohibited from conducting gaming activities for a period of greater than thirty consecutive days. A default could result in, among other things, a termination of the revolving credit commitment and acceleration of amounts outstanding under the Revolving Loan.

  

Further, the Company and its subsidiaries have agreed to collaterally assign the mortgage in favor of the Company as well as a mortgage under which a pre-bankruptcy affiliate of the Company is the borrower (but as to which the Company is also the beneficiary of a collateral assignment to secure the mortgage in favor of us) to the lenders under the Revolving Loan on a first-priority basis and to the holders of the Senior Secured Notes on a second-priority basis. However, if the subordination agreements and the collateral assignment of the mortgage in favor of the Company and under which the Company’s pre-bankruptcy affiliate is the borrower were determined not to be enforceable, such mortgages could be deemed to have a higher priority than the mortgage on such property that the Company is granting to holders of the Senior Secured Notes. In the event that the holders of such mortgages are able to exercise their rights under such mortgages, they would be entitled, among other remedies, to foreclose such liens which could result in the Company’s loss of title to such property.

 

The May 24, 2012, amendment to the Credit increased the aggregate principal amount available under the facility by $15.0 million to $45.0 million and provided that any borrowings under the additional $15.0 million commitment are required to fund expenditures relating to the new valet parking facility, and are to be repaid in quarterly installments equal to 1/20^th of the amount advanced, commencing on the earlier of July 1, 2013 and the first month after the parking facility’s completion date. The amendment does not modify the term of the Revolving Loan, which expires on December 30, 2013, unless renewed or extended. The amendment also, among other things, excludes capital expenditures relating to the valet parking facility from the Fixed Charge Coverage Ratio calculation not to exceed $25.7 million.

 

As of June 30, 2012, the Company had approximately $0.9 million of letters of credit outstanding.

 

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required for smaller reporting companies.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures: We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ( the “Exchange Act”) that are designed to provide reasonable assurance that the information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives. However, any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired controls.

 

As of June 30, 2012, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of that date.

 

Changes in Internal Control Over Financial Reporting: There were no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

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Part II - OTHER INFORMATION

Item 6. Exhibits

 

The following is a list of exhibits filed as part of this Report:

 

	10.1		Third Amendment dated as of May 24, 2012 to Credit Agreement by and between Greektown Superholdings, Inc. and Comerica Bank (Incorporated by reference to Exhibit 10.1 the Registrant’s Periodic Report on Form 8-K (File No. 000-53921), filed on May 24, 2012.
	10.2		Employment Agreement, dated May 1, 2012, by Greektown Superholdings, Inc. and Richard Vitali.
	31.1		Certification Pursuant to Rule 13a-14(a)/15d-14(a).
	31.2		Certification Pursuant to Rule 13a-14(a)/15d-14(a).
	32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101.INS		XBRL Instance Document
	101.SCH		XBRL Taxonomy Extension Schema Document
	101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB		XBRL Taxonomy Extension Label Linkbase Document
	101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

 

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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.

 

	GREEKTOWN SUPERHOLDINGS, INC.
	By:	/s/ Michael Puggi
	Name:	Michael Puggi
	Title:	President and Chief Executive Officer
	By:	/s/ Glen Tomaszewski
	Name:	Glen Tomaszewski
	Title:	Senior Vice President and Chief Financial Officer

 

August 14, 2012

 

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