Attached files
| UNITED STATES SECURITIES AND EXCHANGE COMMISSION |
| WASHINGTON, DC 20549 |
| FORM 10-K |
| (Mark One) |
| S ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012
OR
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| £ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| GREEKTOWN SUPERHOLDINGS, INC. |
| (Exact name of registrant as specified in its charter) |
| Delaware | 27-2216916 |
| (State or other jurisdiction of | (I.R.S. employer |
| incorporation or organization) | identification no.) |
Commission file number: 000-53921
555 East Lafayette
Detroit, Michigan 48226
(Address of principal executive offices and zip code)
(313) 223-2999
(Registrant’s telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Preferred Stock, par value $0.01 per share
Warrants
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes £ No S
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes £ No S
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes S No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes S No £
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes £ No S
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer £ | Accelerated filer £ | Non-accelerated filer £ | Smaller reporting company S |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes £ No S
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 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 S No £
As of April 12, 2013, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $13,684,860. As of December 31, 2012, there were 152,054 shares of Series A-1 Common Stock, $0.01 par value, and 0 shares of Series A-2 Common Stock, $0.01 par value, outstanding.
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Disclosure Regarding Forward-Looking Statements
This report contains statements that we believe are, or may be considered to be, “forward-looking statements.” All statements other than statements of historical fact included in this report regarding the prospects of our industry or our prospects, plans, financial position or business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as “may,” “will,” “expect,” “intend,” “estimate,” “foresee,” “project,” “anticipate,” “believe,” “plan,” “forecast,” “continue” or “could” or the negative of these terms or variations of them or similar terms. Furthermore, forward-looking statements may be included in various filings that we make with the SEC or press releases or oral statements made by or with the approval of one of our authorized executive officers. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this report, which reflect management’s opinions only as of the date hereof. Except as required by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any additional disclosures we make in our reports to the SEC. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.
Background
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 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 area 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.
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, each of 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.
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The Company’s Board of Directors (the “Board of Directors”) adopted a shareholders rights plan on December 30, 2012 (the “Rights Agreement”), subject to approval by the Michigan Gaming Control Board (“MGCB”). Pursuant to the Rights Agreement, a rights distribution was to have been made to each equity holder of the Company on January 24, 2013, but such distribution was subject to delay or suspension as required by the MGCB. The rights were intended to protect the Company and its stockholders from efforts to obtain control of the Company that the Board of Directors determines are not in the best interests of the Company and its stockholders, and to enable all stockholders to realize the long-term value of their investment in the Company. In general terms, the plan would have imposed a significant penalty upon any person or group that acquires 25% or more of the Company voting stock without approval of the Board of Directors or without entering a Stockholders Agreement (described below). On January 16, 2013, the Company announced that the January 24, 2013 distribution date of the rights would be delayed pending approval of the MGCB.
On January 16, 2013, the Company received a letter from Athens Acquisition, LLC (“Athens”), a company owned by Dan Gilbert, who owns Rock Gaming, which in conjunction with Caesars Entertainment Corporation operates Horseshoe Casinos in Cleveland and Cincinnati. The letter from Athens stated it “acquired a small position” in the Company in mid-2012 and that it “entered into an agreement to purchase a large block of the Company’s shares on December 20, 2012.” Athens also stated in the letter that it was willing to acquire the capital stock held by all remaining Company shareholders for a purchase price of $81 per share. Athens requested in the letter that the Board of Directors terminate the Rights Agreement.
On January 17, 2013, the Company announced that its Board of Directors formed a Special Committee of the Board of Directors to review the letter from Athens and that the Special Committee’s mandate is to assess Athens’ position and make a recommendation to the Board of Directors on this and other strategic alternatives. On January 30, 2013, the Company announced that the Special Committee had engaged counsel and financial advisors to assist it in this process.
On January 29, 2013, Athens sent a letter to the Company withdrawing its proposal to acquire the remaining capital stock of Greektown for $81 per share.
On February 8, 2013, Athens filed a Schedule 13D with the Securities and Exchange Commission disclosing that it had entered into an agreement to acquire additional shares from two other shareholders, and in such disclosure, Athens stated that if it consummates all such transactions (entered into through January 31, 2013), it may be deemed to have beneficial ownership representing 76.8% of the voting power of all securities of the Company. Athens further disclosed that, with the exception of the small position it had acquired in mid-2012, the purchase of all such shares was subject to certain conditions, including the approval of the MGCB.
On April 8, 2013, the Company and Athens executed a definitive agreement regarding Athens’ provision of minority protections (the “Stockholders Agreement”) to the non-Athens stockholders of the Company, as more fully described below.
On April 8, 2013, pursuant to the previous approval of the Board of Directors (which was conditioned on the execution of the Stockholders Agreement), (i) the Rights Agreement was terminated and the conditional rights distribution that had been declared on December 30, 2012 was suspended and (ii) the Company’s Bylaws were amended to repeal the December 30, 2012 amendments and restore the Bylaws to their form prior to December 30, 2012. The Rights Agreement and rights distribution had not, in any event, become effective because their effectiveness had been made expressly dependent upon approval of the MGCB and such approval has not been obtained.
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On April 9, 2013, the MGCB determined that
Athens was eligible, qualified, and suitable under the standards and criteria of the Michigan Gaming Control and Revenue Act,
as amended, and the rules promulgated thereunder, and approved the requested transfers of interest in Greektown to Athens. In
addition, the MGCB approved the request for qualifier licenses of Daniel Gilbert, chief executive officer of Athens and chairman
of Rock Gaming LLC, and Matthew Cullen, president and chief operating officer of Rock Gaming LLC.
Stockholders Agreement
On April 8, 2013, the Company entered into the Stockholders Agreement with Athens. The Stockholders Agreement will become effective upon the date that Athens consummates certain transactions to purchase a majority of the Company’s shares under its existing contracts (the “Agreement Effective Date”), which transactions are listed in Annex 1 to the Stockholders Agreement (the “Securities Purchases”). Athens’ consummation of the Securities Purchases is subject to approval by the MGCB. The MGCB granted such approval at a meeting of the MGCB held on April 9, 2013, and the Company anticipates that Athens will promptly consummate the Securities Purchases.
The Stockholders Agreement provides for certain minority rights and protections to current non-Athens stockholders of the Company (the “Minority Stockholders”) and certain other matters.
Minority Director Representation
Pursuant to the Stockholders Agreement, the Board of Directors will contain at least two (2) independent directors, one of which will be a representative of the Minority Stockholders (the “Minority Independent Director”). The independent directors must qualify as independent under the New York Stock Exchange listing rules and have no material past or present commercial or personal relationship or ties with any affiliate of the Company.
The first Minority Independent Director will be Freman Hendrix and the first replacement Minority Independent Director will be Darrell Burks, both of whom are current members of the Board of Directors. Upon the resignation or removal of Darrell Burks as the first replacement Minority Independent Director in accordance with the terms of the Stockholders Agreement, the then-serving members of the Board of Directors will designate a successor Minority Independent Director. A majority of the Minority Stockholders will have a veto right over any such successor designation of the Minority Independent Director.
Liquidity Rights—Generally
The Stockholders Agreement requires that Athens provide each Minority Stockholder with at least two (2) opportunities for liquidity in respect of each Minority Stockholder’s Company securities (each such opportunity, a “Liquidity Event”) from the Agreement Effective Date until the later to occur of (i) six (6) months after the Agreement Effective Date and (ii) December 31, 2013 (the “Liquidity Period”). The first Liquidity Event must occur as soon as reasonably practicable after the Agreement Effective Date and the second during the last month of the Liquidity Period.
The price to be paid to participating holders during each Liquidity Event will be $90 per share on an unconverted basis (the “Liquidity Price”). The Liquidity Price payable to any participating Minority Stockholder will be adjusted downward to the extent such Minority Stockholder has elected to convert its shares of the Company’s preferred stock into shares of the Company’s common stock (i.e., the Liquidity Price does not provide Minority Stockholders with any credit for accrued and unpaid dividends on shares of the Company’s preferred stock).
So long as the economic result described in the immediately preceding paragraph is the same, each Liquidity Event may be provided by any means, at the election of Athens, including by merger or otherwise. If any Liquidity Event is effectuated by merger, Athens must permit each Minority Stockholder with the right to elect to receive cash or securities in the surviving entity of the merger.
Rights in respect of the Liquidity Events are enforceable by the Minority Stockholders and are not transferrable.
Until the expiration of the Liquidity period, Athens is required to own and retain at least $145 million of Company securities, which amount will be calculated on the basis of the purchase price paid by Athens for those securities.
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Liquidity Rights—Standard General and Brigade
In order to participate in any Liquidity Event offered pursuant to the Stockholders Agreement, certain affiliated funds of Standard General L.P. (“Standard General”) and Brigade Leveraged Capital Structured Fund Ltd. (“Brigade”) are each required to first (i) execute an Investor Rights Agreement in the form attached to the Stockholders Agreement as Annex 2 and (ii) deliver such executed Investor Rights Agreement to the Company and Athens within ten (10) business days following the Agreement Effective Date.
The form of Investor Rights Agreement provides that the executing investor (Standard General and/or Brigade) will release all existing claims against the Company, Athens and their respective subsidiaries and affiliates. In addition, the executing investor will agree to not disparage the Company, Athens or any of their respective subsidiaries and affiliates until Athens effectuates a short-form merger between it (or any of its wholly-owned subsidiaries) and the Company in accordance with the Delaware General Corporation Law (a “Short-Form Merger”), unless the Investor Rights Agreement is earlier terminated in accordance with its terms.
The form of Investor Rights Agreement also provides that, in addition to any rights Standard General or Brigade may have with respect to any Liquidity Event under the Stockholders Agreement, an executing investor (Standard General and/or Brigade) will have a right to put all of its Company securities owned as of the date of the Investor Rights Agreement to Athens (the “Sale Right”) until the later to occur of (i) six (6) months after the Agreement Effective Date and (ii) December 31, 2013. The price to be paid by Athens upon a proper exercise of the Sale Right will be $90 per share on an unconverted basis (the “Sale Price”). The Sale Price will be adjusted downward to the extent Standard General or Brigade, as applicable, has elected to convert its shares of the Company’s preferred stock into shares of the Company’s common stock (i.e., the Sale Price does not provide any credit for accrued and unpaid dividends on shares of the Company’s preferred stock).
On the closing date of any proper exercise of the Sale Right, Standard General or Brigade, as applicable, must reaffirm certain release, waiver and representation provisions of the Investor Rights Agreement. In addition, Standard General or Brigade, as applicable, will be prohibited from exercising any Sale Right if it or any of its subsidiaries or affiliates has asserted claims against the Company, Athens or any of their respective subsidiaries or affiliates. The Sale Right is not transferrable.
The form of Investor Rights Agreement requires that an executing investor (Standard General and/or Brigade) agree that its sole remedy will be to seek appraisal under Section 262 of the Delaware General Corporation Law in the event that the Company and Athens engage in a “long-form” merger pursuant to Section 251, Section 252, Section 263 or Section 264 of the Delaware General Corporation Law.
Co-Sale (Tag-Along) Rights
The Stockholders Agreement provides all Minority Stockholders with a “co-sale” or “tag-along” right to participate in any sale or transfer by Athens of Company securities to any person (other than a transfer of a direct or indirect interest in Athens representing a less than 40% beneficial ownership interest in the Company or transfers by Athens to any of its subsidiaries or affiliates). Any Minority Stockholder may elect to exercise its co-sale right by sending a notice to the Company and Athens within 30 days after the Company delivers a notice regarding a proposed sale by Athens for which the co-sale right applies under the terms of the Stockholders Agreement. A Minority Stockholder will be deemed to have waived its co-sale right if it fails to give notice to the Company within the required time period specified in the immediately preceding sentence. The co-sale right is not transferrable and will remain in effect until Athens effectuates a Short-Form Merger, unless the Stockholders Agreement is earlier terminated in accordance with its terms as described in “Stockholders Agreement—Term” below.
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Preemptive Rights
The Stockholders Agreement provides all Minority Stockholders with preemptive rights with respect to (i) Company equity issuances and (ii) Company debt issuances to Athens and/or its affiliates, subject in both cases to certain enumerated exceptions. If the Company proposes an issuance subject to the preemptive rights, it will give written notice to each Minority Stockholder at least fifteen (15) days prior to the proposed issuance. Each Minority Stockholder will then have fifteen (15) days from receipt of any such notice to irrevocably elect to exercise its preemptive rights. The preemptive rights are not transferrable and will remain in effect until Athens effectuates a Short-Form Merger, unless (i) the Stockholders Agreement is earlier terminated in accordance with its terms as described in “Stockholders Agreement—Term” below or (ii) the preemptive rights are waived by the written approval of the Minority Independent Director (or, if there is no Minority Independent Director then serving, a majority of the independent directors of the Board), if such waiver is deemed to be in the best interest of the Company.
Minority Independent Director Consent Rights
The Stockholders Agreement requires that the Minority Independent Director (or, if there is no Minority Independent Director then serving, a majority of the independent directors of the Board of Directors) approve certain actions, including:
| · | Any amendment to the Company’s Certificate of Incorporation or Bylaws, or the organizational documents of any subsidiary of the Company, that would disproportionately adversely affect the Minority Stockholders; |
| · | Any transaction between the Company, on the one hand, and Athens or its affiliates, on the other hand, in excess of $1,000,000 individually or $4,000,000 in the aggregate, other than actions contemplated by the Stockholders Agreement and de minimis incidental usage of the Company’s facilities at prevailing market rates; and |
| · | Any issuance of Company securities in connection with any joint venture or strategic partnership entered into by the Company. |
The consent rights with respect to the matters described above will remain in effect until Athens effectuates a Short-Form Merger, unless the Stockholders Agreement is earlier terminated in accordance with its terms as described in “Stockholders Agreement—Term” below.
U.S. Securities and Exchange Commission Registration
The Stockholders Agreement provides that (i) the Company stock will continue to be registered under the Securities Act of 1933, as amended, and (ii) the Company will continue to file periodic reports pursuant to the Securities Exchange Act of 1934, as amended. The registration and reporting requirements will remain in effect until Athens effectuates a Short-Form Merger, unless (i) the Stockholders Agreement is earlier terminated in accordance with its terms as described in “Stockholders Agreement—Term” below or (ii) such registration and reporting requirements are waived by the approval of the Minority Independent Director (or, if there is no Minority Independent Director then serving, a majority of the independent directors of the Board of Directors).
Termination of Rights Agreement and Amendment Bylaws
As disclosed above, pursuant to the terms of the Stockholders Agreement, the Rights Agreement was terminated and the Company’s Bylaws were amended to repeal the December 30, 2012 amendments and restore the Bylaws to their form prior to December 30, 2012.
Term
The Stockholders Agreement will terminate upon the earliest to occur of (i) Athens effectuating a Short-Form Merger, (ii) the consummation of a sale or transfer of Company securities whereby neither Athens nor any of its affiliates beneficially owns a majority of Company securities, and (iii) the time when all Company securities are owned by Athens and/or its affiliates.
Other Miscellaneous Matters
Releases
The Stockholders Agreement provides that each of the Company and Athens agrees to release the other party and its subsidiaries and affiliates from all existing claims. The release does not apply to any claims in respect of performance of the parties’ respective obligations under the Stockholders Agreement.
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Short-Form Merger
The Stockholders Agreement requires Athens to promptly effectuate the Short-Form Merger once Athens owns 90% or more of the outstanding shares of each class of stock of the Company. Pursuant to the Short-Form Merger, all remaining Minority Stockholders will be required to sell their stock for cash consideration.
Board Member Changes after the Agreement Effective Date
After the Agreement Effective Date, the Company will file with the U.S. Securities and Exchange Commission a Schedule 14F-1 Information Statement, relating to the change in a majority of the members of the Board of Directors. Within ten (10) days after the Company’s filing of a Schedule 14F-1, the Company will cause the Board of Directors to consist solely of Daniel Gilbert, Matthew Cullen, Freman Hendrix and Darrell Burks.
Amendments and Modifications to the Stockholders Agreement
Any amendment, modification or supplement to the Stockholders Agreement must be in writing and approved by the Minority Independent Director (or, if there is no Minority Independent Director then serving, a majority of the independent directors of the Board of Directors), and signed by the Company and Athens.
Indemnification of Directors and Officers
The Stockholders Agreement requires the Company and Athens to indemnify all of the Company’s present and former directors and officers (the “Indemnified Parties”), and if indemnification is not available, to provide contribution (if legally permissible). Athens has the right to elect to control the defense and the settlement of all claims for which the Indemnified Parties may request indemnification or contribution. Athens and the Company will purchase a tail directors and officers insurance policy covering all Indemnified Parties for a period of six (6) years, and the Indemnified Parties will have third-party beneficiary rights to enforce the indemnification provisions of the Stockholders Agreement.
Athens’ Access Rights
The Stockholders Agreement permits Athens to meet with the management of the Company to discuss matters relating to the transition of ownership in the Company and to participate in discussions with lenders regarding the Company’s previously-announced refinancing proposal.
Business 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. Through Greektown LLC, we own and operate Greektown Casino which opened in November 2000 within the downtown of the city of Detroit. In February 2009, Greektown Casino completed an expansion, including a 400 room hotel (the “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 2,900 slot machines and 62 table games, including a 12,500 square-foot salon dedicated to high-limit gaming, and a live poker room; |
| • | approximately 3,709 attached and 1,750 unattached parking spaces, including 899 parking spaces for valet parking services; |
| • | 10,000 square feet of convention space; |
| • | a 400-room hotel; |
| • | two restaurants and several food outlets on the gaming floor; and |
| • | multiple bars and 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. Our players club, known as “Club Greektown,” is a membership/loyalty program that attracts customers by offering incentives to frequent casino visitors. As of December 31, 2012, we had approximately 1.2 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 our 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 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. In mid-2011, we began construction on an 899 space valet parking garage facility. The facility opened February 7, 2013, increasing the convenience with which our guests can access our property, as well as expanding the parking capacity in and around our facility. In addition, we enhanced our dining offerings, including the addition of a fine-dining restaurant, Brizola, which opened December 21, 2012, and a fresh market-style dining venue, the Market District, which opened February 2, 2013.
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Marketing
Advertising efforts include casino, food, and beverage promotions, and hotel packages. These efforts are complemented by extensive database marketing, to drive loyalty from our Club Greektown members. Efforts also include property enhancements that are designed to encourage existing patrons to frequent our property, while attracting new patrons to our property. The goals of all our efforts are designed to increase customer loyalty, and increase visits from the casual customer who is in the Greektown district for dining, entertainment and sporting events.
In January 2012, the Company announced a marketing alliance with Tropicana Las Vegas, Inc. (“Tropicana Las Vegas”). The agreement aligns Greektown with one of the best-known brands in the gaming and hospitality industry in the world, and affords our guests expanded player’s club offers and benefits with exciting gaming opportunities at the newly transformed Tropicana Las Vegas. Highlights of the agreement between Greektown and Tropicana Las Vegas include travel/lodging amenities, entertainment packages, and expanded player rewards.
Competition
The Detroit Commercial Casinos are the only three commercial casinos in the state of Michigan and consist of Greektown Casino, MGM Grand Detroit (“MGM Detroit”) and MotorCity Casino (“MotorCity”). An additional competitor, Caesars Windsor, is located across the Detroit River in Canada. Caesars Windsor is owned by the Ontario government and is accessible from Detroit via bridge or tunnel. Collectively, the three Detroit Commercial Casinos and Caesars Windsor make up the Metro Detroit Gaming Market.
The gaming market in the state of Michigan, which contains both commercial and tribal casinos, consists of the Detroit Commercial Casinos and twenty-two Native American-owned gaming facilities that operate under compacts. Four racetracks are also located in the state of Michigan, each of which offer horse betting, but are not authorized to offer slot machine or table gaming. There is also a racetrack in Windsor that operated over 750 slot machines; however, at the order of the Ontario Lottery and Gaming Corporation (“OLG”), such slot machines were removed from the racetrack on April 30, 2012.
In addition to the Metro Detroit Gaming Market, the state of Ohio has opened three commercial casinos in 2012, which include the Horseshoe Casino in Cleveland, Hollywood Casino in Toledo, and Hollywood Casino in Columbus. In addition, a Horseshoe Casino in Cincinnati opened on March 4, 2013 and a race track in Cleveland is scheduled to open in spring 2013 with approximately 1,150 slot machines.
Overview of direct competition
The direct competitors of Greektown Casino are the two other Detroit Commercial Casinos and Caesars Windsor. The Detroit Commercial Casinos operate as commercial entities under the Michigan Gaming Control & Revenue Act and Administrative Rules – promulgated 1998 & amended 2008 (the “Michigan Gaming Act”). The Detroit Commercial Casinos are licensed to offer gaming, with no specific limit on the number of gaming positions that they may operate within their authorized gaming square footage. MGM Detroit, MotorCity and Caesars Windsor may each have greater name recognition and financial, marketing and other resources than Greektown Casino. For instance, MGM Detroit benefits from the use of a national player database. Caesars Windsor is managed by a consortium that includes Caesars Entertainment, Inc. and Hilton Hotels Corporation, both of which have a national presence. By comparison, we have the area’s most recently completed casino hotel complex and numerous significant renovations. The Company believes these property enhancements will enable us to cater to the casual customer who is in the Greektown district for dining, entertainment, and sporting events that we believe would not otherwise be served by our primary competitors.
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The table below illustrates Greektown Casino’s percentage of the total adjusted gross gaming revenues of the Detroit Commercial Casinos for years ended December 31, 2012 and 2011. The total adjusted gross receipts for the Detroit Commercial Casinos decreased approximately 0.5% in 2012. For more information, see Part II Item 7 – “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”
| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
| Detroit Commercial Casinos (1) | ||||||||
| MGM Detroit | 42.7 | % | 42.1 | % | ||||
| MotorCity | 32.4 | % | 33.1 | % | ||||
| Greektown Casino | 24.9 | % | 24.8 | % | ||||
| Total | 100.0 | % | 100.0 | % | ||||
| (1) | Market share values for the Detroit Commercial Casinos in the above table and elsewhere in this statement were obtained from the MGCB website: http://www.michigan.gov/mgcb. |
Below is a more detailed summary of the gaming amenities offered by MGM Detroit, MotorCity and Caesars Windsor.
MGM Detroit. MGM Detroit was the first casino to open in Detroit, in July 1999, and since 2001 has generally been the market leader based on share of adjusted gross gaming revenues. In October 2007, MGM Detroit completed construction of a new, permanent casino. The new facility houses approximately 100,000 square feet of gaming space with an estimated 4,000 slot machines and 100 table games including poker, 400 hotel rooms, 12 restaurants/bars and entertainment venues. The property also offers a 30,000-square-foot meeting facility, which includes a 14,000-square-foot ballroom. For the year ended December 31, 2012, MGM Detroit’s adjusted gross casino revenues were $604.9 million, representing a 0.9% increase over the comparable period in the prior year. MGM Resorts International owns a controlling interest in MGM Detroit, with the remaining interest held by Detroit Partners, LLC, a group of local residents and businesses. MGM Detroit benefits from the use of a national player database.
MotorCity. MotorCity was the second casino to open in Detroit, in December 1999, and since 2001 has generally maintained a second-place market position based on share of adjusted gross gaming revenues behind MGM Detroit. In 2008, MotorCity completed its expanded complex. The renovated facility has 100,000 square feet of gaming space with an estimated 2,900 slot machines and 71 table games including poker, 7 restaurants/bars, four entertainment venues, a 400 room hotel, a spa and a 1,500 seat theater. For the year ended December 31, 2012, MotorCity’s adjusted gross casino revenues were $459.8 million, representing a 2.6% decrease over the comparable period in the prior year. The facility is privately owned by its sole stockholder, Marian Ilitch.
Caesars Windsor. Caesars Windsor opened in May 1994. Caesars Windsor is the largest casino-resort in Canada and is owned by the government of Ontario and operated by a consortium that includes Caesars Entertainment, Inc. and Hilton Hotels Corporation. At its peak in the late 1990s, the casino attracted in excess of six million visitors annually. In 2008, Caesars Windsor completed an expansion of its casino costing approximately CAD $400 million, which resulted in a complex of approximately 100,000 square feet of gaming space, 90 table games, 2,500 slot machines and 3,000 parking spaces. Caesars Windsor also offers 758 hotel rooms, a 5,000 seat entertainment center and approximately 100,000 square feet of convention space. Caesars Windsor’s adjusted gross gaming revenues for the year ended December 31, 2012 were not publicly available prior to the issuance of this report.
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Ohio Casinos
On November 3, 2009, a casino initiative passed in the state of Ohio authorizing casino-style gaming at four locations within the state: Cincinnati, Cleveland, Columbus and Toledo. Hollywood Casino in Toledo and Horseshoe Casino in Cleveland opened in May 2012. Hollywood Casino in Columbus opened in October 2012. The Toledo, Cleveland and Columbus casinos are approximately 60 miles, 180 miles, and 210 miles from the city of Detroit, respectively. Construction began on the Cincinnati casino in November 2011 and opened March 4, 2013. Below is a more detailed summary of amenities offered by Horseshoe Cleveland, Hollywood Toledo, and Hollywood Columbus:
Horseshoe Cleveland. Horseshoe Cleveland was the first casino to open in Ohio, in May 2012. The new smoke-free facility has approximately: 96,000 square feet of gaming space; 1900 slots; 117 table games and 4 restaurants. For the year ended December 31, 2012, Horseshoe Cleveland’s reported adjusted gross revenues were $176.4 million. Rock Ohio Caesars, a joint venture between Caesars Entertainment and Rock Gaming, owns and operates Horseshoe Cleveland.
Hollywood Toledo. Hollywood Toledo was the second casino to open in Ohio, in May 2012. The new smoke-free facility has approximately: 125,000 square feet of gaming space; 2,000 slots; 60 table games including a 20 table poker room, 4 restaurants and 2,450 parking spaces. For the year ended December 31, 2012, Hollywood Toledo’s reported adjusted gross revenues were $117.9 million. Penn National Gaming owns and operates Hollywood Toledo.
Hollywood Columbus. Hollywood Columbus opened in Columbus in October 2012. The new smoke-free facility has approximately: 160,000 square feet of gaming space; 3,000 slots; 70 table games; 30 tables of live poker; 4 restaurants and 3,700 parking spaces. For the year ended December 31, 2012, Hollywood Columbus’s reported adjusted gross revenues were $56.2 million. Penn National Gaming owns and operates Hollywood Columbus.
Michigan tribal gaming
Twenty-two Native American-owned casinos are currently operating in western, central and northern Michigan, the closest of which is 113 miles from Greektown Casino. A number of additional Native American casinos are in various stages of the planning process:
| • | A tribe has entered into a land settlement agreement with the state of Michigan and is currently seeking U.S. Congressional approval to construct a casino in Monroe County, Flint, or Romulus, which would be within 20 to 75 miles of Greektown Casino. |
| • | Another tribe has also entered into a land settlement agreement with the state of Michigan and is currently seeking U.S. Congressional approval for a casino in Port Huron, which would be within 75 miles of Greektown Casino. |
| • | Another tribe re-submitted an application in October 2009 to the U.S. Department of the Interior to construct a $300 million casino development, including a 200 room hotel and retail space, in Romulus, Michigan after having a previous application dismissed in 2008. The proposed development would be within 20 miles of Greektown Casino. In February 2011, the tribe partnered with a developer to again seek Congressional and state approvals to build a casino. |
| • | Another tribe has publicly announced an agreement with the state of Michigan to amend an existing compact. The amendments to the compact would allow the tribe to seek to place land in trust with the United States Department of Interior to construct a new casino in northern Michigan. Certain proposed amendments to the compact must be approved by the Michigan Legislature and the tribe must submit an application to the United States Department of Interior to place certain land in trust in order to construct the casino in northern Michigan. |
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| • | A tribe has publicly announced its intentions to construct a $245 million casino development in the city of Lansing, Michigan, which would be approximately 90 miles from Greektown Casino. The tribe is required to comply with federal statutory and regulatory requirements, including the Indian Gaming Regulatory Act and the Michigan Indian Land Claim Settlement Act, or seek U.S. Congressional approval before it can operate a casino in Lansing as tribal casinos are generally restricted to their own reservations. On March 5, 2013 a federal judge granted a preliminary injunction requested by the state of Michigan which prevents the tribe from asking the federal government to put the land in trust for the casino. |
The opening of additional Native American-owned casinos near the city of Detroit or elsewhere in state of Michigan could have a detrimental effect on Greektown Casino’s revenues.
Proposal 1
In November 2004, Michigan voters passed Proposal 1, which requires a voter referendum before new forms of gambling are permitted within the state of Michigan. This limits the government’s ability to enact changes to the state of Michigan laws permitting incremental forms of gaming within the state of Michigan. Proposal 1 does not apply to tribal gaming or to the Detroit Commercial Casinos, but applies to new lottery games, consisting of table games and player-operated mechanical or electronic devices or other forms of gaming or additional casinos.
Lottery
We also compete with the state of Michigan’s Lottery Division, which offers a variety of lottery tickets and drawings. Additionally, the MGCB began overseeing and licensing charitable gaming for nonprofit organizations throughout the state of Michigan in April 2012. In 2004, the state of Michigan also introduced new “Club Games,” including keno and various pull-tab games, in licensed bars and restaurants.
Internet Gaming
The Department of Justice (“DOJ”) under the current federal administration had originally expressed the view that the U.S. Wire Act of 1961 applied to all forms of Internet gambling, and therefore all Internet gambling was illegal under the existing law. However, the DOJ has since concluded that the Wire Act of 1961 is limited only to sports betting. The Unlawful Internet Gambling Enforcement Act (“UIGEA”) was passed into law in 2006. The UIGEA attacks the payment mechanisms used to place bets, and pay off winners, through the thousands of offshore online gambling sites currently in operation. The statute makes it illegal for banks, credit card companies or similar institutions to collect on a debt incurred through an online gambling site. However, the UIGEA did not update the federal Wire Act of 1961 to specifically apply to all forms of online gambling. There are ongoing efforts at the federal level to legalize internet gaming, including, but not limited to, internet poker, but no such efforts have yet been successful. Should online poker or other forms of internet gambling become legal in the United States, it would not only increase the level of competition we face but also increase the number of gaming opportunities.
Other Competition
We also compete, to some extent, with other forms of gaming on both a local and national level, including state of Michigan-sponsored lotteries, Internet gaming, on- and off-track wagering, card parlors, and charity casinos. The expansion of legalized gaming to new jurisdictions throughout the United States has also increased competition and will continue to do so in the future. If gaming facilities in our markets were purchased by entities with more recognized brand names or larger capital resources, or if gaming were legalized in jurisdictions near Greektown Casino where gaming currently is not permitted, we would face additional competition.
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Employees and Unions
As of December 31, 2012, we employed approximately 1,800 people, of which approximately 1,410 or 78% are unionized full-time employees, across various functional areas. Our unionized employees are members of two union groups: (i) the Detroit Casino Council (the “DCC”), which is made up of five unions, the UAW, HERE, Teamsters, Carpenters and Operating Engineers, and (ii) the International Union, Security, Police, Fire Professionals of America (the “SPFPA”), which consists of security personnel. The DCC union which represents the majority of our employees ratified a four year labor agreement with Greektown Casino on October 24, 2011. The SPFPA ratified a four year labor agreement with Greektown Casino on June 16, 2012. We consider our relationships with our employees and the labor unions to be good.
Business Seasonality
Our gaming operations are affected by the weather. We have experienced downturns in customer volume during the summer months and increases in volume during winter months, although we do experience lower volume during winter storms and harsh weather. These seasonal and adverse weather conditions in the Detroit metropolitan area may discourage potential customers from visiting us. We believe we have also experienced downturns in customer volume as a consequence of nearby road repairs and construction, which generally occur in the spring, summer and fall, as well as during various sporting or entertainment events simultaneously taking place within the downtown area of the city of Detroit.
Environmental Matters
We are subject to federal, state of Michigan and local environmental, safety and health laws, regulations and ordinances that apply to non-gaming businesses generally, such as the Clean Air Act, Clean Water Act, Occupational Safety and Health Act, Oil Pollution Act, Resource Conservation Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act of 1980. We have not made, and do not anticipate making, material expenditures with respect to these environmental laws, regulations and ordinances. However, the attendant compliance costs associated with them may result in future additional costs to our operations.
Intellectual Property
We believe it is important to protect our significant trademarks and service marks by registering them for use in connection with the underlying goods and services, as appropriate at the federal or state of Michigan level. Some, but not all of the significant trademarks include “GREEKTOWN CASINO,” “GREEKTOWN CASINO (& DESIGN),” “LET THE PARTY BEGIN AT GREEKTOWN!”, “GREEKTOWN CASINO-HOTEL”, “GAME ON”, and “CLUB GREEKTOWN” are registered in the U.S. Patent and Trademark Office. The restaurant and bar trademarks “ASTERIA,” “BISTRO 555,” “TRAPPER’S PATIO,” “TRAPPER’S SNACK BAR,” “SUPER PIT” and “THE FRINGE” are registered with the state of Michigan. Finally, the advertising marks “BONU$ PLAY,” “BONU$ BUCKS,” “BONU$ BET,” “BONU$ POINTS,” “GREEKTOWN CASINO-HOTEL (NEW logo),” and “DETROIT’S WINNING ADDRESS” are registered with the state of Michigan.
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Government Regulation
The ownership and operation of our gaming facility is subject to various state of Michigan and city of Detroit laws, rules and regulations in the jurisdiction in which we are located. We are subject to the provisions of the Michigan Gaming Act and rules promulgated thereunder (the “Michigan Rules”), the MGCB, including the MGCB rules (the “MGCB Rules”) and MGCB orders and resolutions (“MGCB Orders and Resolutions”) and various local ordinances and regulations, and are subject to the regulatory control of the MGCB, the city of Detroit and the Michigan Liquor Control Commission. Additionally, we must comply with a variety of federal regulations (i.e. Bank Secrecy Act, U.S. Patriot Act, Office of Foreign Assets and Control, and others). The following is a summary of the provisions of the material laws and regulations applicable to our gaming operations and other laws and regulations applicable to us. The summary does not purport to be a comprehensive description and is qualified in its entirety by reference to the appropriate laws and regulations.
Michigan Gaming Regulation
Greektown LLC is licensed to operate in the state of Michigan pursuant to the Michigan Gaming Act. The Michigan Gaming Act and Michigan Rules subject the ownership and operation of commercial casino gaming facilities to extensive licensing and regulatory requirements and require the licensee to have a development agreement in effect with the city of Detroit and the Economic Development Corporation (“Detroit EDC”) of the city of Detroit.
The Michigan Gaming Act created the MGCB and authorizes it to grant casino licenses to not more than three applicants that have entered into development agreements with the city of Detroit. The MGCB is granted extensive authority to conduct background investigations and determine the suitability and eligibility of casino license applicants, affiliated companies, officers, directors and managerial employees of applicants and affiliated companies, persons and entities holding a one percent or greater direct or indirect interest in an applicant or affiliated company, and anyone else the MGCB deems to be a “qualifier.” The Michigan Gaming Act and Michigan Rules restrict direct communication with the MGCB members.
Any person who supplies goods or services to a casino licensee that are directly related to, used in connection with or affect gaming must obtain a supplier’s license from the MGCB. Any person who supplies other goods or services of a non-gaming nature to a casino licensee on a regular and continuing basis must also obtain a supplier’s license from the MGCB or demonstrate eligibility for an exemption from this requirement. In addition, any individual employed by a casino licensee, or by a supplier licensee whose work duties are related to or involved in the gambling operation or are performed in a restricted area or gaming area of a casino, or who hold certain other positions, must obtain an occupational license from the MGCB. The MGCB Rules permit the MGCB to exempt any person or field of commerce from the supplier licensing requirements. The MGCB has adopted the MGCB Orders and Resolutions that outline the process for persons and entities to apply to be exempt from supplier licensing requirements.
The Michigan Gaming Act imposes the burden of proof on the applicant for a casino license to establish its suitability to receive and hold the license. The applicant must establish its suitability as to:
| • | integrity; |
| • | moral character and reputation; |
| • | business probity; |
| • | financial ability and experience; |
| • | responsibility; and |
| • | other criteria deemed appropriate by the MGCB. |
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The Michigan Rules and Michigan Gaming Act provide systems for administrative and judicial review of various decisions of the MGCB. These appeals are governed by the Michigan Administrative Procedures Act of 1969.
The MGCB may refuse to renew a license upon a determination that the licensee no longer meets the requirements for licensure. In addition to restriction, suspension or revocation of a casino license, the MGCB may impose substantial fines or forfeiture of assets upon licensees for violation of gaming or liquor laws or rules or other violations of law. The Michigan Rules provide for an appeal process from decisions made by the MGCB concerning violations outlined above. These appeals are governed by the Michigan Administrative Procedures Act of 1969.
The Michigan Gaming Act includes provisions that restrict certain casino owners and managers, along with supplier licensees and their key managers, from giving political contributions to Michigan elected officials. The Michigan Gaming Act and Michigan Rules also restrict gift giving to the state of Michigan-elected officials and certain key employed state of Michigan officials. The MGCB has adopted the MGCB Orders and Resolutions that establish criteria through which a supplier license applicant who has made political contributions during the application period may be granted waivers to reapply for licensing.
The Michigan Gaming Act and Michigan Rules provide for annual license renewal as long as the MGCB determines that the casino licensee continues to meet the requirements established by the Michigan Gaming Act and Michigan Rules. Greektown LLC’s original license was issued on November 10, 2000. As of year ended December 31, 2012, the Company was in compliance in all material respects with the MGCB licensing requirements.
In connection with our emergence from Chapter 11, the MGCB issued an order granting approval of our new ownership structure, capitalization and management which provides that we must comply with certain covenants, including a minimum fixed charge coverage ratio maintenance covenant. The Company was out of compliance with such covenant for the twelve month measurement period ended March 31, 2013 based upon current estimates. At the April 9, 2013 meeting of the MGCB, the MGCB approved the Company’s request for suspension of the covenant for the measurement period ending March 31, 2013. Refer to Item 1A. Risk Factors “We are subject to compliance with a regulatory fixed charge coverage maintenance covenant required by the MGCB”.
The Michigan Rules implement the terms of the Michigan Gaming Act. Among other things, the Michigan Rules outline more detailed substantive and procedural requirements with respect to casino licensing and operations, including, but not limited to, requirements regarding things such as licensing investigations and hearings, record keeping and retention, contracting, reports to the MGCB, internal control and accounting procedures, security and surveillance operations, extension of credit to gaming patrons, conduct of gaming and transfers of ownership interests in licensed casinos. The Michigan Rules also establish numerous MGCB procedures regarding licensing, disciplinary and other hearings and similar matters. The Michigan Rules have the force of law and are binding on the MGCB as well as on applicants for or holders of casino licenses, their vendors and employees.
The Michigan Rules prohibit a casino licensee or a holding company or affiliate that has control of a casino licensee in Michigan from entering into a debt transaction affecting the capitalization or financial viability of its Michigan casino operation without prior approval from the MGCB. The Michigan Rules outline requirements and procedures for casino licensees or holding companies that make a public offering of debt or equity.
Violations of MGCB requirements may result in fines and penalties. While the Company believes it takes protective steps to operate in compliance with MGCB regulations, there can be no assurance that future violations will not occur.
The Michigan Liquor Control Commission licenses, controls and regulates the sale of alcoholic beverages pursuant to the Michigan Liquor Control Act. The Michigan Gaming Act also requires that casinos sell and distribute alcoholic beverages in conformity with the Michigan Liquor Control Act. The city of Detroit also issues certain approvals in connection with the sale of alcoholic beverages.
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Michigan Gaming Taxation and Fees
Under the provisions of the Michigan Gaming Act, we must pay a combined state of Michigan and city of Detroit wagering tax equal to 19% of adjusted gross receipts payable daily and a municipal services fee in an amount equal to the greater of 1.25% of adjusted gross receipts or $4.0 million annually. For the years ended December 31, 2012 and December 31, 2011, we paid gaming taxes of $74.8 million and $75.0 million, respectively. These gaming taxes are included in Greektown Casino’s operating expenses. In addition to gaming taxes, we are required to make an annual payment for certain costs to the MGCB. During the years ended December 31, 2012 and December 31, 2011, the Company paid a fee of approximately $10.6 million and $10.2 million, respectively, to the MGCB. The Company recorded expense of approximately $10.3 million and $10.2 million related to the amortization of the annual fees for the years ended December 31, 2012 and December 31, 2011, respectively. The MGCB fees are included in Greektown Casino’s general and administrative expenses. 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.
If the Michigan Lottery Act is amended to allow casino operations to be conducted at racetracks in Michigan, the state wagering tax rate will be reduced to 18%. Any amendment would require voter approval, as mandated by Proposal 1.
City of Detroit Regulation
The Detroit City Council has enacted several ordinances affecting the Detroit Commercial Casinos. One, entitled “Casino Gaming Authorization and Casino Development Agreement Certification and Compliance,” authorizes casino gaming only by operators who are licensed by the MGCB and are parties to a development agreement that has been approved and certified by the City Council and is currently in effect, or are acting on behalf of parties to a development agreement. Our development agreement has been so approved and certified and is currently in effect. The ordinance requires each casino operator to submit to the Mayor of Detroit and to the Detroit City Council annual reports regarding the operator’s compliance with its development agreement or, in the event of non-compliance, reasons for non-compliance and an explanation of efforts to comply. The ordinance requires the Mayor of Detroit to monitor each casino operator’s compliance with its development agreement, to take appropriate enforcement action in the event of default and to notify the Detroit City Council of defaults and enforcement action taken; and, if a development agreement is terminated, it requires the Detroit City Council to transmit notice of enforcement action to the MGCB within five business days along with the City of Detroit’s request that the MGCB revoke the relevant operator’s certificate of suitability or casino license. If a development agreement is terminated, the Michigan Gaming Act requires the MGCB to revoke the relevant operator’s casino license upon the request of the city of Detroit.
City of Detroit Development Agreement
In March 1998, Greektown LLC entered into the initial development agreement with the city of Detroit and the Detroit EDC. In August 2002, Greektown LLC entered into the Development Agreement, which amended and restated the initial development agreement and authorized the construction and operation of the existing casino.
From March 1998 through December 31, 2012, the city of Detroit has been paid approximately $128.2 million under the terms of the Development Agreement, excluding casino gaming taxes.
In addition to gaming taxes, we are also obligated to pay 1% of our adjusted gross receipts to the city of Detroit, to be increased to 2% of our adjusted gross receipts in any calendar year in which adjusted gross receipts exceed $400 million, beginning on the day our adjusted gross receipts exceed $400 million and continuing until the end of that calendar year. In addition, when adjusted gross receipts exceed $400 million, we would be required to pay $4 million to the city of Detroit. We did not exceed the $400 million in adjusted gross receipts for the calendar year ending December 31, 2012.
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The Development Agreement includes a number of additional provisions with which we must comply. The key provisions include those listed below:
| • | Various indemnification obligations for certain judgments, fines, liabilities, losses, damages, costs, expenses, claims, obligations and penalties of the city of Detroit, the Detroit EDC and each of their respective officers, agents and employees. |
| • | Various social commitments regarding, for example, employment of Detroit residents, procurement of financing and goods and services from Detroit-based businesses, Detroit resident businesses and business concerns and/or minority- or women-owned businesses. |
| • | Transfer of ownership restrictions prohibiting certain direct and indirect owners of Greektown LLC from transferring their equity interests without the consent of the city of Detroit. |
U.S. Department of the Treasury Regulations
The U.S. Internal Revenue Code and the U.S. Treasury Regulations promulgated thereunder require operators of casinos located in the United States to file information returns for U.S. citizens, including, but not limited to, names, addresses and social security numbers of winners, for bingo, table games and slot machine winnings in excess of prescribed amounts and keno winnings in which the payout equals or exceeds a specified amount more than the amount wagered. The U.S. Internal Revenue Code and the U.S. Treasury Regulations promulgated thereunder also require operators to withhold taxes on some keno, bingo table games and slot machine winnings of nonresident aliens. We are unable to predict the extent to which these requirements, if extended, might impede or otherwise adversely affect operations of, and/or income from, these and/or other games.
Regulations adopted by the Financial Crimes Enforcement Network of the U.S. Department of the Treasury and the MGCB require the reporting of patron’s currency transactions in excess of $10,000 occurring within a gaming day, including identification of the patron by name and social security number, which regulations were subsequently modified to include a suspicious activity reporting rule. Casinos are required to report suspicious monetary transactions when the casino suspects or has reason to suspect that the transaction involves funds derived from illegal activity or is otherwise intended to facilitate illegal activity.
Other Laws and Regulations
Our operations are also subject to extensive Federal, state of Michigan and city of Detroit regulations in addition to the regulations described above, and, on a periodic basis, we must obtain various other licenses and permits, including those required to sell alcoholic beverages.
Available Information
You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
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Risks Related to Our Business
We face significant competition in the market in which we operate and other markets, which could impair our revenues, increase our expenses and hinder our ability to generate sufficient cash flows.
We face significant competition principally from two other casinos in Detroit, MGM Detroit and MotorCity (collectively with Greektown Casino, the “Detroit Commercial Casinos”), as well as Caesars Windsor, which is located directly across the Detroit River from Detroit. MGM Detroit, MotorCity and Caesars Windsor may each have greater name recognition and financial, marketing and other resources than we do, and all three casinos completed major renovations/expansion projects in the past several years that have the potential to increase their respective market share of the Metro Detroit Gaming Market.
In addition, we compete with other gaming facilities throughout the state of Michigan and surrounding states as well as nationwide, including casinos located on Native American reservations and other land-based casinos. Twenty-two Native American-owned casinos are currently operating in western, central and northern Michigan, the closest of which is 113 miles from Greektown. Furthermore, two tribes have entered into land settlement agreements with the state of Michigan, and both tribes are currently seeking U.S. Congressional approval of the agreements to take the land into trust for new land-based casinos. One tribe is seeking to locate a casino in Michigan in one of Monroe County, Flint or Romulus, while the other tribe is seeking to locate a casino in Port Huron, and both proposed casinos would be within 20-75 miles of Greektown Casino. No U.S. Congressional approval has yet been obtained, but one tribe has partnered with a developer to seek Congressional and state approvals. Also, another tribe has been federally recognized and is seeking to enter into a compact with the state of Michigan for a casino in western Michigan, and an additional tribe has indicated that it intends to apply to the Bureau of Indian Affairs for trust status for a site in Romulus. Furthermore, a tribe has publicly announced its intentions to construct a $245 million casino development in Lansing, Michigan outside of its reservation, which would be approximately 90 miles from Greektown Casino. The tribe is required to comply with federal statutory and regulatory requirements, including the Indian Gaming Regulatory Act and the Michigan Indian Land Claim Settlement Act, or seek U.S. Congressional approval before it can operate a casino in Lansing as tribal casinos are generally restricted to their own reservations. Michigan also features four racetracks which offer horse betting but are not authorized to offer slot machines or table gaming, and there is an additional racetrack in Windsor, Ontario, Canada, which had over 750 slot machines, at the order of the Ontario Lottery and Gaming Corporation (“OLG”), such slot machines were removed from the racetrack on April 30, 2012.
In 2012, an organization introduced a ballot proposal to expand commercial gaming in the state of Michigan. Although the proposal failed to be placed on the state ballot, future attempts at expanding commercial gaming in Michigan may be successful, and may increase the level of competition that we face.
We also compete, to some extent, with other forms of gaming on both a local and national level, including state-sponsored lotteries, Internet gaming, on- and off-track wagering, card parlors, and charity casinos. The expansion of legalized gaming to new jurisdictions throughout the United States also has increased competition faced by us and will continue to do so in the future. Additionally, if gaming facilities in our markets were purchased by entities with more recognized brand names and capital, or if gaming were legalized in jurisdictions near our property where gaming currently is not permitted, we would face additional competition.
On November 3, 2009, a casino initiative passed in the state of Ohio authorizing casino-style gaming at four locations within the state: Cincinnati, Cleveland, Columbus and Toledo. Hollywood Casino in Toledo and Horseshoe Casino in Cleveland opened in May 2012. Hollywood Casino in Columbus opened in October 2012. The Toledo, Cleveland and Columbus casinos are approximately 60 miles, 180 miles, and 210 miles from the city of Detroit, respectively. Construction began on the Cincinnati casino in November 2011 and opened on March 4, 2013.
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The Department of Justice (“DOJ”) under the current federal administration had originally expressed the view that the U.S. Wire Act of 1961 applied to all forms of Internet gambling, and therefore all Internet gambling was illegal under the existing law. However, the DOJ has since concluded that the Wire Act of 1961 is limited only to sports betting. The Unlawful Internet Gambling Enforcement Act (“UIGEA”) was passed into law in 2006. The UIGEA attacks the payment mechanisms used to place bets, and pay off winners, through the thousands of offshore online gambling sites currently in operation. The statute makes it illegal for banks, credit card companies or similar institutions to collect on a debt incurred through an online gambling site. However, the UIGEA did not update the federal Wire Act of 1961 to specifically apply to all forms of online gambling. Therefore, during the 111th Congress (2009-2010), several bills pertaining to Internet gambling were introduced.
There are ongoing efforts at the federal level to legalize internet gaming, including, but not limited to, internet poker, but no such efforts have yet been successful. Should online poker or other forms of internet gambling become legal in the United States, it would not only increase the level of competition we face but also increase the number of gaming opportunities.
We have incurred net losses in recent periods. We may continue to incur losses in the future.
We recorded a net loss of $23.8 million and $24.9 million for the year ended December 31, 2012 and December 31, 2011, respectively. We expect to continue to incur losses in fiscal 2013 and may incur losses in future periods. Our future profitability depends on our ability to generate enough revenues to pay regulatory fees and gaming taxes and other mostly variable expenses, such as payroll and marketing, as well as mostly fixed expenses such as our property taxes and interest expense. For more information, see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Given that our operations are dependent upon one property for all of our cash flows, we are subject to greater risks, many of which are beyond our control, than a gaming company with more operating properties.
We do not currently have operations other than Greektown Casino, and therefore, we are entirely dependent upon Greektown Casino, and dependent upon the patronage of persons living in and visiting the Detroit metropolitan area, for our revenues and cash flows. Because we are entirely dependent on a single gaming site, we are subject to greater risks than a geographically diversified gaming operation, including, but not limited to:
| • | risks related to the economic conditions in southeastern Michigan or nearby regions, including a loss of residents, layoffs, increased fuel and transportation costs or a decrease in discretionary income or spending; |
| • | a decline in the size of the local gaming market; |
| • | an increase in gaming competition in the surrounding area; |
| • | changes in local and state governmental laws and regulations; |
| • | damage or interruption of gaming activities by fire, flood, power loss, technology failure, break-ins, terrorist attacks, war or similar events; |
| • | the relative popularity of local and regional entertainment alternatives to casino gaming that compete for the leisure dollar; |
| • | adverse weather conditions, which could deter customer visits; and |
| • | inaccessibility to the property due to road construction or closures of primary access routes. |
The occurrence of any one of the events described above could cause a material disruption in our business.
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Reductions in discretionary consumer spending as a result of downturns in the general economy may have a material adverse effect on our business.
Our business has been and may continue to be adversely affected by the economic downturn experienced in the United States, and more particularly in the Detroit metropolitan area, as we are highly dependent on discretionary spending by our patrons. Changes in discretionary consumer spending or consumer preferences brought about by factors such as continued unemployment, perceived or actual deterioration in general economic conditions, the housing and credit market crises, increases in fuel costs, bank failures and the potential for additional bank failures, perceived or actual decline in disposable consumer income and wealth, the global economic recession and changes in consumer confidence in the economy may continue to reduce customer demand for the leisure activities we offer and may adversely affect our revenues and operating cash flow.
We have significant working capital needs, and if we are unable to satisfy those needs from cash generated from our operations or indebtedness, we may not be able to meet our obligations.
We require significant amounts of working capital to operate our business. In addition to our Revolving Loan facility, we rely on the operation of our facilities as a source of cash. If we experience a significant and sustained drop in operating profits, or if there are unanticipated reductions in cash inflows or increases in cash outlays, we may be subject to cash shortfalls. If such a shortfall were to occur for even a brief period of time, it may have a significant adverse effect on our business. We cannot assure you that our business will generate sufficient cash flow from operations or that we will be able to draw under our Revolving Loan or otherwise, in an amount sufficient to fund our liquidity needs.
Our operations are highly taxed and may be subject to higher taxes in the future, which could adversely impact our profitability.
In virtually all gaming jurisdictions, state and local governments raise considerable revenues from taxes based on casino revenues and operations. We believe that the prospect of significant additional tax revenue is one of the primary reasons why the state of Michigan and other jurisdictions have legalized gaming. We also pay property taxes, payroll taxes, franchise taxes and income taxes.
Our profitability depends on generating enough revenues to pay regulatory fees and gaming taxes and other mostly variable expenses, such as payroll and marketing, as well as mostly fixed expenses such as our property taxes and interest expense. From time to time, state and local governments have increased gaming taxes, and gaming tax increases can significantly impact the profitability of gaming operations. Future changes in the Michigan gaming tax rates that will have a negative impact on our profitability may occur.
The federal government has also previously considered a federal tax on casino revenues and may again consider a federal tax on casino revenues in the future. Any material increase in or the adoption of additional taxes or fees could have a material adverse effect on our future financial results.
Energy and fuel price increases may adversely affect our revenues and our profitability.
Our casino uses significant amounts of electricity and natural gas. Substantial increases in the cost of electricity will negatively affect our results of operations. In addition, energy and fuel price increases in cities that constitute a significant source of customers for our property could result in a decline in disposable income of potential customers and a corresponding decrease in visitation to our property, which would negatively impact our revenues. The extent of the impact is subject to the magnitude and duration of the energy and fuel price increases, but this impact could be material to our results of operations.
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Extensive government regulation materially impacts our operations, and any new gaming laws or regulations may adversely impact our operations.
The ownership, management and operation of gaming facilities is subject to extensive laws, regulations and ordinances that are administered by various federal, state and local governmental entities and agencies. The MGCB has broad authority and discretion to require us and our officers, directors, managers, members, employees, vendors and holders of certain of our debt to obtain and maintain various licenses, registrations, permits, findings of suitability and other approvals. To enforce applicable gaming regulations, gaming authorities may, among other things, limit, suspend or revoke the licenses, registrations, permits, findings of suitability and any other approvals of any gaming entity, vendor or individual, and may levy fines or cause a forfeiture of assets against us or individuals for violations of gaming laws or regulations. Any of these actions would have a material adverse effect on us.
Government regulations require us to, among other things:
| • | pay gaming fees, assessments and taxes to the state of Michigan and the city of Detroit; |
| • | periodically renew our gaming license in Michigan, which may be suspended or revoked if we do not meet detailed regulatory requirements; |
| • | receive and maintain federal and state environmental approvals; and |
| • | receive and maintain state and local licenses and permits to sell alcoholic beverages in our facilities. |
We are subject to the Michigan Gaming Act and the Michigan Rules, and to local regulation by the city of Detroit, including a Development Agreement with the city of Detroit. Under the state of Michigan Rules, we may not make a public offering of our securities or enter into a debt transaction affecting the capitalization or financial viability of our gaming operations without the prior approval of the MGCB and compliance with our Development Agreement.
Our directors, officers and most employees, and many of our vendors and their employees performing services for us, must also be approved by the MGCB. If the MGCB were to find a director, officer, employee or vendor to be unsuitable, we would be required to sever our relationship with that person. In addition, our existing gaming licenses, liquor licenses, registrations, findings of suitability, permits and approvals may be revoked, suspended or limited or not renewed when they expire. Any failure to renew or maintain our licenses or receive new licenses when necessary would harm our business and revenues. The compliance costs associated with these laws, regulations and licenses are significant.
The casino entertainment industry is generally subject to political, legislative and regulatory uncertainty. If additional gaming laws and regulations are adopted, or if current gaming laws or regulations are modified in the state of Michigan, any newly imposed restrictions or costs could have a significant adverse effect on us. From time to time, various proposals are introduced in the state of Michigan legislature that, if enacted, could adversely affect the regulatory, operational or other aspects of the gaming industry and our company. Legislation of this type may be enacted in the future that may impact our operations.
We are subject to compliance with a regulatory fixed charge coverage ratio maintenance covenant required by the MGCB.
In connection with our emergence from Chapter 11, the MGCB issued an order granting approval of our new ownership structure, capitalization and management which provides that we must comply with a minimum fixed charge coverage ratio maintenance covenant. The covenant requires us to maintain a ratio of EBITDA to fixed charges (each as defined in the order) on the last day of each calendar quarter of not less than 1.05 to 1.00.
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The fixed charge coverage ratio is measured on a trailing four quarter basis. We are required to comply with this covenant for so long as any indebtedness is outstanding under our Revolving Loan facility and the Senior Secured Notes. Although we were in compliance with this covenant as of December 31, 2012, the Company does not anticipate being able to maintain the required minimum ratio of EBITDA to fixed charges for the twelve month measurement period ending March 31, 2013, based upon current estimates. At the April 9, 2013 meeting of the MGCB, the MGCB approved the Company’s request for suspension of the covenant for the measurement period ending March 31, 2013. The MGCB order also contains a limitation on certain restricted payments. See “Regulatory Covenants.”
If we fail to comply with these requirements and we are not able to obtain a waiver from the MGCB, we could be subject to additional restrictions on our ability to operate our casino business, fines and suspension or revocation of our gaming license. The revocation of our gaming license or its suspension for more than a short time could result in an event of default under the credit agreement governing the Revolving Loan facility and an event of default under the indenture governing the Senior Secured Notes and could materially adversely affect or eliminate our ability to generate revenue from our casino operations. Even though we obtained a suspension of the covenant for the measurement period ending March 31, 2013, the MGCB may impose additional covenants or other restrictions on our ability to incur indebtedness, which could materially adversely affect our business.
A smoking ban in casinos located in the state of Michigan or the city of Detroit could have a negative impact on our business and operations.
From time to time, individual jurisdictions have considered legislation or referendums, such as bans on smoking in casinos and other entertainment and dining facilities. Such bans have been implemented in jurisdictions in which gaming facilities are located and such bans have had a negative impact on business and operations. Although the smoking ban adopted by the state of Michigan on December 10, 2009, which became effective May 1, 2010, exempts the gaming area (the smoking ban applies to our bars and restaurants) of the Detroit Commercial Casinos, if a more expansive ban were implemented in the state of Michigan or the city of Detroit, such a ban could adversely impact our business and operations.
We are subject to all operating risks common to the hotel business, which may adversely affect our hotel occupancy and rental rates.
The hotel built in connection with the Expanded Complex is the first hotel at Greektown Casino. The hotel business is highly competitive and generally will be subject to greater volatility than our gaming business. Operating risks common to the hotel business could adversely affect hotel occupancy and the rates that can be charged for hotel rooms, as well as increase our operating expenses, and generally include:
| • | competition from existing hotels in our market and new hotels entering our market; |
| • | reduced business and leisure travel due to energy costs and other travel expenses, or geo-political uncertainty, including terrorism; |
| • | adverse effects of a decline in general and in local economic activity; |
| • | adverse weather; |
| • | the quality and performance of the managers and other staff of our hotel; and |
| • | risks generally associated with the ownership of hotels and real estate. |
MGM Detroit, MotorCity, and Caesars Windsor all have hotels connected to their gaming facilities and other new hotel projects in our vicinity have recently opened. This competition may adversely affect our occupancy and rental rates.
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We face the risk of fraud or cheating commonly faced by the gaming business, which could adversely affect our revenues and profitability.
Players in our casino may commit fraud or cheat in order to increase their winnings. Acts of fraud or cheating could involve the use of counterfeit chips or other tactics, possibly in collusion with our employees. Internal acts of cheating could also be conducted by employees through collusion with dealers, surveillance staff, floor managers or other casino or gaming area staff. Failure to discover such acts or schemes in a timely manner would negatively impact our gaming revenues. In addition, negative publicity related to such schemes could have an adverse effect on our reputation, thereby materially and adversely affecting our business, financial condition and results of operations.
Our business may be adversely affected by our ability to retain key personnel.
We depend on the continued performance of our entire executive management team. If we lose the services of any of our key personnel and cannot replace such persons in a timely manner, it could have an adverse effect on our business.
Our business and results of operations could be adversely affected by weather-related factors and seasonality.
Our gaming operations and results of operations may be adversely affected by weather-related and seasonal factors. We have experienced downturns in customer volume during the summer months and increases in volume during winter months, although we do experience lower volume during winter storms and harsh winter weather. Adverse weather conditions in the Detroit metropolitan area may discourage potential customers from visiting us. We believe we have also experienced downturns in customer volume as a consequence of nearby road repairs and construction, which generally occur in the spring, summer and fall, as well as various sporting or entertainment events simultaneously taking place within the downtown of the city of Detroit.
We are subject to non-gaming regulation, and any instances of non-compliance with these laws and regulations could have a material adverse effect on our business, financial condition and results of operations.
We are subject to certain federal, state and local environmental laws, regulations and ordinances that apply to non-gaming businesses generally, including the Clean Air Act, the Clean Water Act, the Resource Conservation Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act and the Oil Pollution Act of 1990. Under various federal, state and local laws and regulations, an owner or operator of real property may be held liable for the costs of removal or remediation of certain hazardous or toxic substances or wastes located on its property, regardless of whether or not the present owner or operator knows of, or is responsible for, the presence of hazardous or toxic substances or wastes. In addition, if we discover any significant environmental contamination affecting any of our properties, we could face material remediation costs or additional development costs for future expansion activities. The existence or discovery of an environmental hazard on any of our properties could have a significant adverse effect on our business, results of operations, financial condition and cash flows.
Regulations adopted by the Financial Crimes Enforcement Network of the U.S. Treasury Department require us to report currency transactions in excess of $10,000 occurring within a gaming day, including identification of the patron by name and social security number. U.S. Treasury Department regulations also require us to report certain suspicious activity, including any transaction that exceeds $5,000 if we know, suspect or have reason to believe that the transaction involves funds from illegal activity or is designed to evade federal regulations or reporting requirements. Substantial penalties can be imposed against us if we fail to comply with these regulations.
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We are also subject to a variety of other federal, state and local laws and regulations, including those relating to zoning, construction, land use, employment, advertising and the sale of alcoholic beverages. If we are not in compliance with these laws and regulations, it could have a material adverse effect on our business, financial condition and results of operations.
The imposition of a substantial penalty or the loss of service of a gaming facility for a significant period of time could have a material adverse effect on our business.
We are or may become involved in legal or regulatory proceedings that if adversely adjudicated or settled, could impact our financial condition.
From time to time, we are defendants in various lawsuits and gaming regulatory proceedings relating to matters incidental to our business. The nature of our business also subjects us to the risk of lawsuits filed by customers, past and present employees, competitors, business partners, Native American tribes and others in the ordinary course of business. As with all litigation, no assurance can be provided as to the outcome of these matters and in general, litigation can be expensive and time consuming. We may not be successful in the defense or prosecution of these lawsuits, which could result in settlements or damages that could significantly impact our business, financial condition and results of operations.
Our revenues may be negatively impacted by volatility in our hold percentage. Our revenues may be further adversely affected by high-end players’ winnings.
Casino revenue is recorded as the difference between gaming wins and losses or net win from gaming activities. Net win is impacted by variations in the hold percentage (the ratio of net win to total amount wagered), or actual outcome, on our slot machines and table games and all other games we provide to our customers. We use the hold percentage as an indicator of a game’s performance against its expected outcome. Although each game generally performs within a defined statistical range of outcomes, actual outcomes may vary for any given period. The hold percentage and actual outcome on our games can be impacted by errors made by our employees, the number of games played, faults within the computer programs that operate our slot machines and the random nature of slot machine payouts. If our games perform below their expected range of outcomes, our cash flow may suffer. In addition, although not the major focus of our marketing efforts, we have selectively targeted high-end players. Should one or more of these high-end players win large sums in our casino, or should a material amount of credit extended to players not be repaid, our revenues could be adversely affected.
Cybersecurity risks to operational systems, security systems, or infrastructure owned by the Company, or a third-party vendor or supplier.
Interruptions, outages, or breaches of operational systems (including business, financial, accounting, and data processing), security systems, or infrastructure, as a result of cyber incidents, could materially disrupt critical operations, disclose confidential intellectual property, and/or give rise to allegations of or result in a breach of data privacy or other regulations within the United States.
Failure to maintain the integrity of internal customer information could result in damage of reputation and/or subject us to fines, payment of damages, lawsuits or restrictions on our use or transfer of data.
We collect information relating to our guests for various business purposes, including marketing and promotional purposes. The collection and use of personal data are governed by privacy laws and regulations enacted in the United States. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to market our products, properties and services to our guests. In addition, non-compliance with applicable privacy regulations by us (or in some circumstances non-compliance by third parties engaged by us) or a breach of security on systems storing our data may result in damage of reputation and/or subject us to fines, payment of damages, lawsuits or restrictions on our use or transfer of data.
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Work stoppages and other labor problems could have an adverse effect on our business.
The collective bargaining agreements for the SPFPA and DCC unions are effective until June 16, 2016 and October 16, 2015, respectively. A lengthy strike or work stoppage at our casino or increases in our labor costs resulting from any new agreement could have an adverse effect on our business and results of operations.
Our insurance coverage may not be adequate to cover all possible losses we could suffer, and, in the future, our insurance costs may increase significantly or we may not be able to obtain the same level of insurance coverage.
We may suffer damage to our property caused by a casualty loss (such as fire, natural disasters, acts of war or terrorism), that could severely disrupt our business or subject us to claims by third parties who are injured or harmed. Although we maintain insurance customary in our industry (including property, casualty, terrorism and business interruption insurance), that insurance may not be adequate or available to cover all the risks to which our business and assets may be subject. The lack of sufficient insurance for these types of acts could expose us to heavy losses if any damages occur, directly or indirectly, that could have a significant adverse impact on our operations.
We renew our insurance policies on an annual basis. If the cost of coverage becomes too high, we may need to reduce our policy limits or agree to certain exclusions from our coverage in order to reduce the premiums to an acceptable amount. Among other factors, homeland security concerns, other catastrophic events, or any change in the current U.S. statutory requirement that insurance carriers offer coverage for certain acts of terrorism could materially adversely affect available insurance coverage and result in increased premiums on available coverage (which may cause us to elect to reduce our policy limits) and additional exclusions from coverage. Among other potential future adverse changes, in the future we may elect to not, or may not be able to, obtain any coverage for losses due to acts of terrorism.
Some of our material agreements require us to maintain a certain minimum level of insurance. Failure to satisfy these requirements could result in an event of default under these agreements, which, depending on the nature of the agreement, could cause cross-defaults to other agreements, any of which could materially and adversely affect our business and results of operations.
Athens will own a large amount of our stock and therefore can exert significant influence over our management and policies.
Upon completion of its purchase of shares which it has contracted to purchase, Athens will own approximately 76.8% of the voting power of all securities of the company. In view of its large percentage of voting power, Athens will have the ability to exert significant influence over management and the approval of any other action requiring the approval of our stockholders, including any amendments to our certificate of incorporation, a sale of all or substantially all of our assets, a merger or a going private transaction. Under the Stockholders Agreement, Athens is required to effect a Short-Form Merger within twenty business days of it becoming the owner of 90% of the Company’s shares.
We might not have sufficient funds to cover potential mandatory repurchase costs due to the change of control.
The acquisition by Athens of the shares it has contracted to purchase, which was approved by the MGCB on April 9, 2013,will constitute a change of control under the Indenture (as defined below) governing our Senior Secured Notes (as defined below). As such, we would be required to 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. It is possible that we will not have sufficient funds at the time of such payment date to make the required repurchase of the Senior Secured Notes from holders of the Senior Secured Notes who elect to have their share repurchased. If we are required to repurchase any meaningful amount of such notes, we are likely to require third party financing. Neither Athens nor any other third party is obligated to purchase the Senior Secured Notes that are tendered. Further, we have not obtained any commitment to provide financing for any such purchase and there can be no assurance that we would be able to obtain such third party financing within in a timely manner, or at all.
Further, as reported in December, 2012, we had priced credit facilities intended to replace our outstanding Senior Secured Notes and revolving credit facility in their entirety. The closing under such credit facilities did not occur due in part to the Athens acquisition and its effect on us and on the proposed financing. We will continue to revisit our capital structure to provide greater flexibility and reduce our annual cash interest expense. In connection with any such refinancing, we may redeem the Senior Secured Notes in accordance with the terms set forth in the Indenture at the price specified in the Indenture (106.5% through December 31, 2013; 103.5% from January 1, 2014 through December 31, 2014; and par thereafter). There is no assurance when or whether any such refinancing will be consummated as it will be dependent upon, among other factors, general economic and market conditions. Further, we may, in our sole discretion, from time to time, purchase any outstanding Senior Secured Notes through open market or privately negotiated transactions, one or more additional tender or exchange offers or otherwise which may result in consideration that is more or less than the price paid in the Change of Control offer. Any such redemption or purchase would be subject to receipt of the required approvals under our Revolving Loan agreement and from the MGCB.
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Risks Related to our Emergence from Bankruptcy
Certain contingent claims against the Debtors in bankruptcy remain outstanding and additional claims may be filed and are subject to adjustment before we are able to satisfy such claims.
On May 29, 2008 (the “Petition Date”), Greektown Holdings, its direct and indirect subsidiaries and certain affiliates (collectively, the “Debtors”) filed voluntary petitions to reorganize their businesses under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Michigan (the “Bankruptcy Court”). A number of contingent claims were filed against the Debtors in their bankruptcy proceedings. The deadline to file administrative claims, professional claims and substantial contribution claims occurred on August 14, 2010. In particular, the Debtors engaged Moelis & Company, LLC (“Moelis”) to act as investment banker as part of the bankruptcy reorganization process. Moelis has asserted a claim for $12.9 million in fees and expenses of which approximately $3 million was paid prior to the Effective Date. 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 & Company LLC’s administrative claim, and a hearing on that matter before the United States Bankruptcy Court for the Eastern District of Michigan is scheduled for May 21, 2013.
Our historical consolidated financial information will not be comparable to financial information for future periods due to our emergence from bankruptcy.
During the course of the Chapter 11 proceedings, our financial results were volatile as asset impairments, government regulations, reductions in discretionary consumer spending as a result of the downturns in the general economy, bankruptcy professional fees, contract terminations and rejections and claims assessments, among other things, significantly impacted our consolidated financial statements. The amounts reported in consolidated financial statements subsequent to our emergence from bankruptcy will materially change relative to historical consolidated financial statements.
The Plan may cause us to be subject to significant federal, state, local and other taxes and the taxes actually payable may exceed the amount of applicable reserves.
The income taxation of Greektown under federal law and laws of the state of Michigan in connection with the Plan will depend upon, among other things, the precise structure and implementation of the Plan. We may have significant tax liabilities by reason of the restructuring transactions, and also by reason of our holding structure. Greektown Holdings was subject to the Michigan Business Tax (“MBT”) for the year ended December 31, 2011 and, it is possible that we may owe significant amounts of state taxes with respect to the Plan. Any such tax liabilities could have material adverse financial consequences to us.
In addition, significant judgment is required to determine our provision for our reserves for state taxes. There may be matters for which the ultimate tax outcome is uncertain. Although we believe our approach to determining the tax treatment in connection with the Plan is appropriate, no assurance can be given that the final tax authority review will not be materially different than that reflected in our tax reserves. Such differences could have a material adverse effect on our tax reserves in the period in which such determination is made and, if taxes in excess of such reserves are ultimately payable, on our results of operations for such period.
Based on the state of Michigan tax reform, the MBT was eliminated effective January 1, 2012, and deferred taxes related to the MBT were adjusted in 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 income tax benefit on deferred tax positions, as a valuation allowance was recorded at the federal and state level for the entire deferred tax amount.
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The Company has an estimated income tax contingency of $9.2 million, including interest and penalty, related to certain potential taxes that could be assessed in connection with the enactment of the Plan. The Company requested a ruling from the Michigan Department of Treasury regarding certain potential tax liabilities under the Michigan Business Tax (principally related to the survival of certain Michigan tax attributes such as net operating loss carryforwards and the tax basis of assets) arising from the June 30, 2010 restructuring transactions. The Company failed to receive a favorable ruling. 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. Such briefing was submitted and the Bankruptcy Court has not yet ruled.
The indenture governing the Senior Secured Notes and the credit agreement governing our Revolving Loan impose significant operating and financial restrictions on us and our restricted subsidiaries, which may prevent us from capitalizing on business opportunities.
The indenture governing the Senior Secured Notes and the credit agreement governing our Revolving Loan impose significant operating and financial restrictions on us and our restricted subsidiaries. These restrictions limit our ability, among other things, to:
| • pay dividends, redeem stock or make other distributions or restricted payments; | |
| • incur indebtedness or issue preferred shares; | |
| • create liens; | |
| • enter into sale-leaseback transactions; | |
| • agree to dividend or payment restrictions affecting the restricted subsidiaries; | |
| • consolidate or merge; | |
| • sell or otherwise transfer or dispose of substantially all of the properties or assets of Greektown Superholdings and our restricted subsidiaries; | |
| • enter into transactions with our affiliates; | |
| • make certain investments, including in unrestricted subsidiaries; | |
| • change our line of business; | |
| • designate our subsidiaries as unrestricted subsidiaries; | |
| • make payments for consent; and | |
| • use the proceeds of permitted sales of our assets. |
As a result of these covenants and restrictions, we and our restricted subsidiaries are limited in how we conduct our business, and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.
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Our failure to comply with the restrictive covenants described above, including our failure as a result of events beyond our control, could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition could be adversely affected. Our assets and cash flow would likely be insufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default. Further, if we are unable to repay, refinance or restructure our indebtedness under our Revolving Loan or other indebtedness secured by first-priority liens, the holders of such debt could proceed against the collateral securing that indebtedness.
In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments.
General economic conditions, industry conditions and other events beyond our control may impact our ability to comply with the above provisions. As a result, we cannot assure you that we will be able to comply with these covenants.
To service our indebtedness, we require a significant amount of cash, our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could harm our business, financial condition and results of operations.
Our ability to make scheduled payments on and to refinance our indebtedness, including the Senior Secured Notes, and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future. This is subject to general economic and competitive conditions and to certain financial, competitive, business, legislative, regulatory and other factors that are beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to fund our day-to-day operations or to pay the principal, premium, if any, and interest on our indebtedness.
If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us to pay our indebtedness, including the Senior Secured Notes, or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before the maturity thereof, sell assets, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse effect on our operations. In addition, we may not be able to affect any of these actions, if necessary, on commercially reasonable terms or at all. Our ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on commercially reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, would have an adverse effect, which could be material, on our business, financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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We own the land on which Greektown Casino (including the Expanded Complex) is located through Greektown LLC, except with respect to a portion of the Expanded Complex known as the St. Mary’s School Building which we lease from Allen Vigneron, Roman Catholic Archbishop of the Archdiocese of Detroit. We also own various parking lots and garages that we own through Greektown LLC, Contract Builders or Realty Equity. We believe that all of our current facilities are in good condition and are suitable and adequate for the purposes for which they are used.
In the past, we have also entered into non-cancelable operating leases, primarily for office and for warehouse space, equipment and vehicles; certain of these leases include escalation clauses relating to the Consumer Price Index, utilities, taxes and other operating expenses. However, the Company did not enter into any of these agreements for the year ended December 31, 2012.
We lease certain portions of our owned facilities to third parties under operating leases, primarily for retail use. Rental income under these leases for the year ended December 31, 2012 was $0.5 million.
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 a hearing on that matter before the United States Bankruptcy Court for the Eastern District of Michigan is scheduled for May 21, 2013.
The Company requested a ruling from the Michigan Department of Treasury regarding certain potential tax liabilities under the Michigan Business Tax (principally related to the survival of certain Michigan tax attributes such as net operating loss carryforwards and the tax basis of assets) arising from the June 30, 2010 restructuring transactions. The Company failed to receive a favorable ruling. 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. Such briefing was submitted and the Bankruptcy Court has not yet ruled.
The Company is a defendant in various other pending litigations. 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.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
No established public trading market exists for the Company’s common equity. There are no current plans, proposals, arrangements or understandings with any person with regard to the development of a trading market in the Company’s equity.
Holders
As of December 31, 2012, the Company had seven, zero, eighteen, three, one, and two holders of record of its Series A-1 Common Stock, Series A-2 Common Stock, Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-1 Preferred Warrants, and Series A-2 Preferred Warrants, respectively.
Dividends
We have never paid a dividend and do not anticipate paying one in the foreseeable future. The Company may not pay any dividends unless such dividends are approved by, and issued in compliance with the regulations and restrictions imposed by the MGCB.
For information relating to Stock Based Compensation, see Part III, Item 12 – Security Ownership of Certain Beneficial Owners and Management.
For additional information relating to Common Stock, Preferred Stock, and Preferred Warrants, see Part III, Item 8 – Financial Statements and Supplementary Data.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements, and the accompanying notes presented in Item 8 of this report. Except for historical information, the discussion in this section contains forward-looking statements that involve risks and uncertainties. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this report, which reflect management’s opinions only as of the date hereof.
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 which opened in November 2000 within the downtown area 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 2,900 slot machines and approximately 60 table games, including a 12,500 square-foot salon dedicated to high-limit gaming, and a live poker room; |
| • | approximately 3,709 attached and 1,750 unattached parking spaces, including 899 parking spaces for valet parking services; |
| • | approximately 10,000 square feet of convention space; |
| • | a 400-room hotel; |
| • | two restaurants and several food outlets on the gaming floor; and |
| • | multiple bars and 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. Our players club, known as “Club Greektown,” is a membership/loyalty program that attracts customers by offering incentives to frequent casino visitors. As of December 31, 2012, the Company had approximately 1.2 million people in our database for Club Greektown. We believe the gaming market in the Detroit area, which consists of 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 our patrons residing within 100 miles of Greektown Casino.
The following significant factors and trends should be considered in analyzing our operating performance:
Business Strategy: Our business strategy is designed to increase our market share and profitability through strengthening our relationship with current guests, attracting new customers, and improving access to our property.
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We renovated substantial portions of the casino in 2011 to improve the quality of the gaming and entertainment experience. In particular, we reconfigured our table games area to drive greater entertainment 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, to engage a broader customer base through higher levels of service and a wider range of amenities, we introduced a new fine-dining restaurant, Brizola, which offers cuts of prime beef, fresh seafood, varied side dishes and desserts, and a progressive wine menu. Also in 2012, we opened Café Mix, which serves specialty coffees and cocktails, as well as breakfast and lunch items.
Our renovation efforts have continued in 2013, and include the February 2013 opening of the Market District, a multi-outlet casual dining venue offering a wide variety of cuisine located on the main floor of the casino. On February 7, 2013, we opened an 899 space valet parking garage facility. This facility, which is connected to the casino’s main floor via a moving walkway, increases the convenience with which our guests can access our property. In addition, it expands the parking capacity in and around our facility.
Our strategy also improves our ability to address the current and future competitive environment, which includes the possibility of new land-based casinos as well as the introduction of Internet gaming.
Economic Downturn: Our business has been and may continue to be adversely affected by the economic downturn experienced in the United States, and more particularly in the Detroit metropolitan area, as we are highly dependent on discretionary spending by our patrons. Factors such as continued unemployment, population decline, the housing and credit market crises, perceived or actual decline in disposable consumer income and wealth, the global economic recession and changes in consumer confidence in the economy may continue to reduce customer demand for the leisure activities we offer and may continue to adversely affect our business.
Competition: We face significant competition, principally from two other casinos in the city of Detroit, MGM Detroit and MotorCity, as well as Caesars Windsor, which is located directly across the Detroit River from Detroit. MGM Detroit, MotorCity, and Caesars Windsor may each have greater name recognition and financial, marketing and other resources than we do, and all three casinos completed major renovations/expansion projects in the past several years that have the potential to increase their respective market share of the Metro Detroit Gaming Market. In addition, on November 3, 2009, a casino initiative passed in the state of Ohio authorizing casino-style gaming at four locations within the state: Cincinnati, Cleveland, Columbus and Toledo. Hollywood Casino in Toledo and Horseshoe Casino in Cleveland opened in May 2012. Hollywood Casino in Columbus opened in October 2012. The Toledo, Cleveland and Columbus casinos are approximately 60 miles, 180 miles, and 210 miles from the city of Detroit, respectively. Construction began on the Cincinnati casino in November 2011 and opened March 4, 2013. The Metro Detroit Gaming Market experienced an overall gross gaming revenue decrease in 2012 of approximately $7.7 million or 0.5%, as compared to 2011.
In addition, we compete with other gaming facilities throughout the state of Michigan and surrounding states as well as nationwide, including casinos located on Native American reservations and other land-based casinos. Twenty-two Native American-owned casinos are currently operating in western, central and northern Michigan, the closest of which is 113 miles from Greektown.
We also compete, to some extent, with other forms of gaming on both a local and national level, including state of Michigan-sponsored lotteries, Internet gaming, on- and off-track wagering, card parlors, and charity casinos. The expansion of legalized gaming to new jurisdictions throughout the United States also has increased competition faced by us and will continue to do so in the future. Additionally, if gaming facilities in our markets were purchased by entities with more recognized brand names and capital, or if gaming were legalized in jurisdictions near our property where gaming currently is not permitted, we would face additional competition.
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The Department of Justice (“DOJ”) under the current federal administration had originally expressed the view that the U.S. Wire Act of 1961 applied to all forms of Internet gambling, and therefore all Internet gambling was illegal under the existing law. However, the DOJ has since concluded that the Wire Act of 1961 is limited only to sports betting. The Unlawful Internet Gambling Enforcement Act (“UIGEA”) was passed into law in 2006. The UIGEA attacks the payment mechanisms used to place bets, and pay off winners, through the thousands of offshore online gambling sites currently in operation. The statute makes it illegal for banks, credit card companies or similar institutions to collect on a debt incurred through an online gambling site. However, the UIGEA did not update the federal Wire Act of 1961 to specifically apply to all forms of online gambling. Therefore, during the 111th Congress (2009-2010), several bills pertaining to Internet gambling were introduced. There are ongoing efforts at the federal level to legalize internet gaming, including but not limited to, internet poker, but no such efforts have yet been successful. Should online poker or other forms of internet gambling become legal in the United States, it would not only increase the level of competition we face but also increase the number of gaming opportunities.
Business Seasonality: Our gaming operations are affected by the weather. We have experienced downturns in customer volume during the summer months and increases in volume during winter months, although we do experience lower volume during winter storms and harsh weather. These seasonal and adverse weather conditions in the Detroit metropolitan area may discourage potential customers from visiting us. We believe we have also experienced downturns in customer volume as a consequence of nearby road repairs and construction, which generally occur in the spring, summer and fall, as well as during various sporting or entertainment events simultaneously taking place within the downtown area of the city of Detroit.
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 represented approximately 89.6% and 89.9% of our total gross revenues for the years ended December 31, 2012 and December 31, 2011, respectively. Gross casino revenues are comprised of revenues from our slot and 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 FASB ASC applicable to instances where consideration is given by a vendor to a customer, we reduce gross casino revenues by 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 years ended December 31, 2012 and December 31, 2011 (in thousands).
| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
| Gross casino revenue: | ||||||||
| Slot machines | $ | 302,785 | $ | 302,912 | ||||
| Table games | 50,155 | 51,048 | ||||||
| Club point expense | (6,396 | ) | (6,564 | ) | ||||
| Total gross casino revenue | $ | 346,544 | $ | 347,396 | ||||
| Relationship to gross casino revenues: | ||||||||
| Slot machines | 87.4 | % | 87.2 | % | ||||
| Table games | 14.5 | % | 14.7 | % | ||||
| Club point expense | -1.9 | % | -1.9 | % | ||||
| Total gross casino revenue | 100.0 | % | 100.0 | % | ||||
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Other principal components of our revenues are our food and beverage and hotel revenue, each of which is affected by customer volume and price. The following table reflects food and beverage and hotel revenues for the years ended December 31, 2012 and December 31, 2011 (in thousands).
| Year Ended December 31, | Year Ended December 31, | |||||||
| 2012 | 2011 | |||||||
| Gross food and beverage and hotel revenue: | ||||||||
| Food and beverage | $ | 22,827 | $ | 23,158 | ||||
| Hotel | 12,117 | 11,004 | ||||||
Total gross food and beverage, and hotel revenue | $ | 34,944 | $ | 34,162 | ||||
| Relationship to gross revenues: | ||||||||
| Food and beverage | 5.9 | % | 6.0 | % | ||||
| Hotel | 3.1 | % | 2.8 | % | ||||
| Total gross food and beverage, and hotel revenue | 9.0 | % | 8.8 | % | ||||
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 years ended December 31, 2012 and December 31, 2011 (in thousands).
| Year Ended December 31, | Year Ended December 31, | |||||||
| 2012 | 2011 | |||||||
| Direct operating expenses: | ||||||||
| Casino | $ | 79,169 | $ | 80,496 | ||||
| Gaming taxes | 74,823 | 74,961 | ||||||
| Food and beverage | 15,492 | 18,530 | ||||||
| Hotel | 10,019 | 9,156 | ||||||
| Depreciation & Amortization | 32,264 | 37,303 | ||||||
| Total direct operating expenses | $ | 211,767 | $ | 220,446 | ||||
| Relationship to net revenues: | ||||||||
| Casino | 23.9 | % | 24.1 | % | ||||
| Gaming taxes | 22.6 | % | 22.5 | % | ||||
| Food and beverage | 4.7 | % | 5.6 | % | ||||
| Hotel | 3.0 | % | 2.7 | % | ||||
| Depreciation & Amortization | 9.7 | % | 11.2 | % | ||||
| Total direct operating expenses | 63.9 | % | 66.1 | % | ||||
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, and our non-gaming office furniture and equipment.
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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 years ended December 31, 2012 and December 31, 2011 (in thousands).
| Year Ended December 31, | Year Ended December 31, | |||||||
| 2012 | 2011 | |||||||
| Indirect operating expenses: | ||||||||
| Marketing, advertising and entertainment | $ | 7,899 | $ | 8,287 | ||||
| Facilities | 19,907 | 20,215 | ||||||
| General and administrative | 48,155 | 46,072 | ||||||
| Other | 370 | 282 | ||||||
| Total indirect operating expenses | $ | 76,331 | $ | 74,856 | ||||
| Relationship to net revenues: | ||||||||
| Marketing, advertising and entertainment | 2.4 | % | 2.5 | % | ||||
| Facilities | 6.0 | % | 6.1 | % | ||||
| General and administrative | 14.5 | % | 13.8 | % | ||||
| Other | 0.1 | % | 0.1 | % | ||||
| Total indirect operating expenses | 23.0 | % | 22.5 | % | ||||
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, board management fees, 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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Other Income/(Expenses)
Other expenses consist primarily of interest on our indebtedness, the amortization of deferred financing costs, and accretion of discounts on our senior notes. The following table illustrates the components of other expense and their relationships to net revenues for the years ended December 31, 2012 and December 31, 2011 (in thousands).
| Year Ended December 31, | Year Ended December 31, | |||||||
| 2012 | 2011 | |||||||
| Other income/(expense): | ||||||||
| Interest expense | $ | (50,581 | ) | $ | (50,167 | ) | ||
| Amortization of finance fees and accretion of discount on senior notes | (7,540 | ) | (6,938 | ) | ||||
| Refinancing expense | (1,732 | ) | — | |||||
| Other income/(expense) | (622 | ) | (1,172 | ) | ||||
| Total other expense | $ | (60,475 | ) | $ | (58,277 | ) | ||
| Relationship to net revenues: | ||||||||
| Interest expense | -15.2 | % | -15.1 | % | ||||
| Amortization of finance fees and accretion of discount on senior notes | -2.3 | % | -2.1 | % | ||||
| Refinancing expense | -0.5 | % | 0.0 | % | ||||
| Other income/(expense) | -0.2 | % | -0.4 | % | ||||
| Total other expense | -18.2 | % | -17.6 | % | ||||
Provision for Income Taxes
The provision for income taxes reflects our current and deferred provisions, which are considered income taxes under the Income Taxes topic of the FASB ASC. The following table illustrates the components of the provision for income taxes and their relationships to net revenues for years ended December 31, 2012 and December 31, 2011 (in thousands).
| Year Ended December 31, | Year Ended December 31, | |||||||
| 2012 | 2011 | |||||||
| Provision for income taxes: | ||||||||
| Tax expense – current | $ | (211 | ) | $ | (1,859 | ) | ||
| Tax expense– deferred | (6,727 | ) | (2,812 | ) | ||||
| Total provision for income taxes | $ | (6,938 | ) | $ | (4,671 | ) | ||
| Relationship to net revenues: | ||||||||
| Tax expense – current | -0.1 | % | -0.6 | % | ||||
| Tax expense – deferred | -2.1 | % | -0.8 | % | ||||
| Total provision for income taxes | -2.2 | % | -1.4 | % | ||||
Refer to Note 2— Summary of Significant Accounting Policies to the Consolidated Financial Statements and Note 9 “Income taxes” presented in Item 8 “Financial Statements and Supplementary Data” of this report.
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Results of Operations
Period Ended December 31, 2012 Compared to December 31, 2011
Net revenues. Net revenues for the year ended December 31, 2012 and December 31, 2011 were approximately $331.7 million and $333.4 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 of the city of Detroit, short-term disruptions related to Casino renovations, and our ability to attract customers within the Detroit Commercial Market. Casino revenue represented 89.6% and 89.9% of gross revenues for the years ended December 31, 2012 and December 31, 2011, respectively. The Company’s 0.2% decline in gross casino revenues in 2012 was consistent with the change in the overall Detroit Commercial Market, whose gross gaming revenues declined approximately 0.5% in 2012 based upon information provided by the MGCB. The Detroit Commercial Market declined 6.9% for the three months ended March 31, 2013 compared to the three months ended March 31, 2012, and Greektown’s share of the Detroit Commercial Market (based upon information provided by the MGCB) was 24.8% and 25.6% for the three months ended March 31, 2013 and March 31, 2012, respectively.
Direct operating expenses. Direct operating expenses decreased by $8.7 million, or 2.2% as a percentage of net revenues for the year ended December 31, 2012 compared to the year ended December 31, 2011. The following is a discussion of the principal drivers of trends in direct operating expenses:
| • | Casino expenses. Casino-related expenses decreased $1.3 million, or 0.2% as a percentage of net revenues for the year ended December 31, 2012 compared to the year ended December 31, 2011. The decrease in this category was primarily driven by a decrease of approximately $2.5 million in slot participation and progressive expenses and payroll expenses, offset by an increase in other expenses, including maintenance equipment, parts, contract services, direct mail and postage, of $1.2 million. | |
| • | Gaming taxes. Gaming taxes decreased $0.1 million for the year ended December 31, 2012 compared to the year ended December 31, 2011, as a result of the decrease in gross gaming revenue. Gaming taxes as a percentage of gross casino revenue remained consistent at approximately 21.6% during the year ended December 31, 2012, as compared to the year ended December 31, 2011. | |
| • | Food and beverage expenses. Food and beverage expenses decreased $3.0 million, or 0.9% as a percentage of net revenues during the year ended December 31, 2012 compared to the year ended December 31, 2011, primarily as a result of a decrease in payroll compensation expense of $1.8 million, due to the implementation of operating efficiencies and the Company’s closure of its buffet, which was being renovated during 2012. In addition, cost of goods sold decreased $0.9 million, and other expenses decreased $0.3 million. | |
| • | Hotel expenses. Hotel expenses increased $0.9 million, or 0.3% as a percentage of net revenues, during the year ended December 31, 2012 compared to the year ended December 31, 2011. This increase was primarily driven by an increase in payroll expense of $0.6 million, and utilities and other expenses of $0.3 million. These increases were due to higher occupancy rates, which also drove higher revenue. | |
| • | Depreciation and amortization expense. Depreciation and amortization expense decreased $5.0 million, or 1.5% as a percentage of net revenues, during the year ended December 31, 2012 compared to the year ended December 31, 2011. This decrease was the result of certain short lived depreciable assets becoming fully depreciated during the year ended December 31, 2011. |
Indirect operating expenses. Indirect operating expenses increased $1.5 million, or 0.5% as a percentage of net revenues, during the year ended December 31, 2012 compared to the year ended December 31, 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 decreased by approximately $0.4 million, or 0.1% as a percentage of net revenues, during the ended December 31, 2012. The decrease was primarily driven by the decrease in various advertising media, production and art work, and public relations expenses, of approximately $0.7 million, offset by the increase in payroll expenses of approximately $0.3 million. |
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| • | Facilities. Facilities expense decreased by approximately $0.3 million, or 0.1% as a percentage of net revenues, during the year ended December 31, 2012 compared to the year ended December 31, 2011. The decrease is due to lower maintenance costs of $0.4 million, offset by an increase in utility costs of $0.1 million. | |
| • | General and administrative. General and administrative expenses increased by approximately $2.1 million, or 0.7% as a percentage of net revenues, during the year ended December 31, 2012 compared to the year ended December 31, 2011. The increase primarily related to expenses resulting from the Detroit Casino Council union contract ratification incentives of $1.5 million, professional fees related to the proxy contest earlier in 2012 of $0.5 million, and costs related to the opposition of the failed ballot initiative to expand commercial gaming in the state of Michigan of $0.3 million. | |
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As previously discussed, on January 30, 2013 the Special Committee of the Board of Directors engaged counsel and financial advisors to assist the Special Committee in its assessment of Athens’ position and other strategic alternatives. Costs associated with these and other advisors are estimated to range between $2.8 million and $3.5 million, and are expected to be incurred principally in the first quarter of 2013.
Upon a change of control, outstanding and unvested restricted stock and restricted share units immediately vest. Based upon the change of control described approved by the MGCB on April 9, 2013, the Company anticipates recognizing approximately $0.9 million of expense related to the accelerated vesting of outstanding and unvested stock-based compensation in the second quarter of 2013. | ||
| • | Other. Other indirect operating expenses remained consistent during the year ended December 31, 2012 and December 31, 2011. |
Other expenses. Other expenses increased $2.2 million, or 0.7% as a percentage of net revenues, during the year ended December 31, 2012 compared to the year ended December 31, 2011. The following is a discussion of the principal drivers of trends in other expenses:
| • | Interest expense, net. Interest expense increased $0.4 million during the year ended December 31, 2012 compared to the year ended December 31, 2011. The increase was primarily due to lower interest income of approximately $0.2 million in 2012. | |
| • | Amortization of finance fees and accretion of discount on senior notes. Amortization of finance fees and accretion of discount on the Senior Secured Notes (as defined below) increased by $2.3 million during the year ended December 31, 2012 compared to the year ended December 31, 2011. The increase is primarily related to amortization expense in relation to the accretion of discount on the Senior Secured Notes, which mature on July 1, 2015, increased $0.6 million. | |
| • | Refinancing expense. Refinancing expense increased by $1.7 million during the year ended December 31, 2012 compared to the year ended December 31, 2011. The increase is primarily related to $1.7 million of costs incurred in 2012 for the potential refinancing of the Senior Secured Notes and Revolving Loan facility. These costs were expensed in 2012 due to the subsequent expiration of the lender pricing in March 2013. | |
| • | Other expense. Other expense decreased approximately $0.6 million during the year ended December 31, 2012 compared to the year ended December 31, 2011. The decrease is related to lower restructuring costs of approximately $0.4 million in 2012. |
Provision for income taxes. The provision for income taxes increased approximately $2.3 million during the year ended December 31, 2012 compared to the year ended December 31, 2011. The increase was primarily related to the increase of $3.9 million in deferred taxes due to the nonrecurrence of a tax benefit resulting from the elimination of the MBT in 2011, partially offset by a decrease in the current tax provision due to the elimination of the MBT in 2011.
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements as of December 31, 2012 and 2011.
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Liquidity and Capital Resources
Overview
Our cash requirements are for working capital, obligations under the Development Agreement, gaming taxes, debt service, and the improvement of our facilities. Cash and cash equivalents were $49.4 million as of December 31, 2012.
At December 31, 2012, the Company had $29.1 million of available borrowings under our Revolving Loan ($45.0 million of commitment less $15.0 million in borrowings in relation to the construction of the valet parking garage less outstanding letters of credit of approximately $0.9 million).
The Company’s capital expenditures for the year ending December 31, 2012 were approximately $40.3 million, including spending related numerous additions and renovations, including the new valet parking garage, the fine-dining restaurant Brizola, the market-style dining area Market District, and other investments in the property. Capital expenditures for the first quarter of 2013 are expected to approximate $7.5 million, including spending related to the completion of the new valet parking garage.
At December 31, 2012 and 2011 the face amount of the outstanding Senior Secured Notes (as defined below) was $385 million, due in 2015. During the year ended December 31, 2012 and the year ended December 31, 2011, interest expense was $50.6 million and $50.2 million, respectively.
Cash Flows
Our cash flows for the years ended December 31, 2012 and December 31, 2011 consisted of the following (in thousands):
| Year Ended December 31, | Year Ended December 31, | |||||||
| 2012 | 2011 | |||||||
| Cash flows: | ||||||||
| Net cash provided by operating activities | $ | 24,096 | $ | 20,089 | ||||
| Net cash (used in) provided by investing activities | (40,300 | ) | 554 | |||||
| Net cash provided by (used in) financing activities | 14,892 | (84 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | $ | (1,312 | ) | $ | 20,559 | |||
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Net cash provided by operating activities. Net cash provided by operating activities for the year ended December 31, 2012 increased by approximately $4.0 million, as compared to the year ended December 31, 2011. The increase in operating cash flows was primarily due to the payment of an unsecured distribution liability of $10.0 million in 2011, partially offset by collection of a note receivable of $2.0 million and property tax receivable of $3.5 million in 2011.
Net cash (used in) provided by investing activities. Net cash used in investing activities for the year ended December 31, 2012 increased by approximately $40.8 million, as compared to the year ended December 31, 2011. The increase in investing activities was primarily due to the increase in capital expenditures of $24.6 million, driven primarily by spending to construct the new valet garage. In 2011, the Company received proceeds from disposition of real estate of $10.7 million in relation to a land transaction with Wayne County, and reduced restricted cash by $5.0 million.
Net cash provided (used in) by financing activities. Net cash provided by financing activities for the year ended December 31, 2012 increased by approximately $15.0 million, as compared to the year ended December 31, 2011. The increase in financing activities was primarily due to the $15.0 million of borrowings under the Revolving Loan facility in 2012, partially offset by $0.1 million of financing fees paid in 2012.
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Purchase Agreement; Indenture; Senior Secured 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’s, 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.
The Company paid approximately $18.3 million and $6.8 million in interest payments in relation to the Series A and Series B Notes, respectively on January 3, 2012. Additionally, the Company paid approximately $18.2 million and $6.8 million in interest payments in relation to the Series A and Series B Notes, respectively on July 2, 2012. Furthermore, subsequent to December 31, 2012, the Company paid approximately $18.2 million and $6.8 million in interest payments in relation to the Series A and Series B Notes, respectively; refer to Item 8 – “Financial and Supplementary Data.”
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 (i) a second priority lien on 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 second priority 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 Loan agreement described below).
Optional Redemption: 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 Indentures 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 June 30, 2015. No excess cash flow payments were required to be made by the Company for the fiscal year ended 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. The acquisition by Athens of the shares that it has contracted to purchase, which was approved by the MGCB on April 9, 2013, would constitute a change of control under the Indenture. See Item 1A. Risk Factors – “If we experience a change of control we might not have sufficient funds to cover potential mandatory repurchase costs.”
Covenants: The Indenture contains covenants limiting the ability of Greektown Superholdings and/or its 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, except as permitted by the Indenture; (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.
The Company had previously announced, on December 19, 2012, the pricing of $455.0 million of credit facilities, intended to replace the Company’s Senior Secured Notes and Revolving Loan facility. As a result of the potential change in ownership, the Company was not in a position to present the refinancing for the required MGCB approval prior to the March 17, 2013 expiration of lender pricing commitments, and therefore did not close the refinancing as contemplated by the December 2012 announcement.
Revolving Loan Agreement
On the Effective Date, the Company entered into a credit agreement with Comerica Bank for the Revolving Loan facility. On July 6, 2011, July 8, 2011, May 24, 2012, and March 18, 2013, the Company and 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, 2014. The maximum expiration of individual letters of credit is twelve months after the issuance thereof, if earlier, the maturity of the Revolving Loan. On May 24, 2012, the Company and Comerica Bank executed a Third Amendment to the Credit Agreement. The Third Amendment, which was approved by the MGCB, increased the aggregate principal amount available under the facility by $15.0 million to $45 million (including $5 million for the issuance of standby letters of credit). Any borrowings under the additional $15.0 million commitment are required to fund expenditures relating to the new valet parking garage, and are to be repaid in quarterly installments equal to 1/20th of the amount advanced, commencing on the first month after the parking facility’s completion date in February 2013. The amendment also, among other things, excludes capital expenditures relating to the valet parking garage from the Fixed Charge Coverage Ratio calculation, discussed below, not to exceed $25.7 million.
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On March 18, 2013, the Company and Comerica Bank executed a Fourth Amendment to the Credit Agreement and Consent (the “Fourth Amendment”). The Fourth Amendment, which was approved by the MGCB on March 12, 2013, extended the expiration of the Revolving Loan facility from December 30, 2013, to December 30, 2014, amended the definition of “EBITDA” to add back the items described in clauses (vi) through (x) of the summarized definition of “EBITDA” below, added certain capital expenditures to the list of items excludable from the “Fixed Charges” definition, reduced the requirements under the minimum EBITDA covenant for certain periods, and gave Comerica Bank’s consent to the acquisition of 51% or more of the capital stock of the Company by Athens.
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 Revolving Loan 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).
Prior to July 1, 2012, there was a facility fee of 0.50% per annum on the aggregate revolving credit commitment amount payable quarterly in arrears on the first day of each fiscal quarter. As of May 24, 2012, the amendment replaced the facility fee of 0.50% with an unused line of credit fee of 0.75% per annum on the face amount of commitment less any borrowings outstanding payable quarterly commencing on July 1, 2012 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 the May 24, 2012, Third 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 0.25% (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 was in compliance with those covenants on December 31, 2012.
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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 “Trappers 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. 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.
“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., ending June 30, 2011, (v) for any fiscal quarter ending on or before June 30, 2012, specified non-recurring expenses, (vi) goodwill impairment charges, (vii) certain costs, fees and expenses relating to the proposed refinancing of the Senior Secured Notes or relating to the proposed stock acquisition by Athens, (vii) certain non-cash compensation expenses, (ix) non-cash purchase accounting adjustments, and (x) all other non-cash 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.
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.
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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.
As of December 31, 2012, the Company had $29.1 million of available borrowings under the Credit Agreement ($45.0 million of commitment less $15.0 million in borrowings in relation to the construction of the valet parking garage less outstanding letters of credit of $0.9 million).
At December 31, 2012, the Company was in compliance with its covenants under the Indenture and the Revolving Loan Agreement.
Michigan Gaming Control Board Covenant
We are subject to compliance with a regulatory fixed charge coverage ratio maintenance covenant required by the MGCB.
In connection with our emergence from Chapter 11, the MGCB order granting approval of our new ownership structure, capitalization and management provides that we must comply with a minimum fixed charge coverage ratio maintenance covenant. The covenant requires us to maintain a ratio of EBITDA to fixed charges (each as defined in the order) on the last day of each calendar quarter of not less than 1.05 to 1.00.
The fixed charge coverage ratio is measured on a trailing four quarter basis. We are required to comply with this covenant for so long as any indebtedness is outstanding under our Revolving Loan facility and the Senior Secured Notes. Although we were in compliance with this covenant as of December 31, 2012, the Company does not anticipate being able to maintain the required minimum ratio of EBITDA to fixed charges for the twelve month measurement period ending March 31, 2013, based upon current estimates. At the April 9, 2013 meeting of the MGCB, the MGCB approved the Company’s request for suspension of the covenant for the measurement period ending March 31, 2013. The MGCB order also contains a limitation on certain restricted payments.
If we fail to comply with these requirements and we are not able to obtain a waiver from the MGCB, we could be subject to additional restrictions on our ability to operate our casino business, fines and suspension or revocation of our gaming license. The revocation of our gaming license or its suspension for more than a short time could result in an event of default under the credit agreement governing the Revolving Loan facility and an event of default under the indenture governing the Senior Secured Notes and could materially adversely affect or eliminate our ability to generate revenue from our casino operations. Even though we obtained a suspension of the covenant for the measurement period ending March 31, 2013, the MGCB may impose additional covenants or other restrictions on our ability to incur indebtedness, which could materially adversely affect our business.
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FUTURE CASH FLOWS
Contractual Obligations and Commercial Commitments
As of December 31, 2012, the Company had the following contractual obligations and commercial commitments:
| Payment Due By Period (in thousands) | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
| Senior Secured Notes (1) | $ | 385,000 | $ | — | $ | 385,000 | $ | — | $ | — | ||||||||||
| Interest on Senior Secured Notes (2) | 150,150 | 50,050 | 100,100 | — | — | |||||||||||||||
| Revolving Loan (3) | 15,000 | 3,000 | 6,000 | 6,000 | — | |||||||||||||||
| Interest on Revolving Loan (4) | 1,152 | 409 | 548 | 195 | ||||||||||||||||
| Development Agreement (5) | — | — | — | — | — | |||||||||||||||
| Capital Lease Obligations (6) | 8,036 | 336 | 672 | 672 | 6,356 | |||||||||||||||
| Lump Sum Ratification Payments (7) | 1,221 | 1,221 | — | — | — | |||||||||||||||
| Total | $ | 560,559 | $ | 55,016 | $ | 492,320 | $ | 6,867 | $ | 6,356 | ||||||||||
| (1) | With respect to principal amortization, Greektown Superholdings will be required to redeem the Senior Secured Notes in an amount equal to 50% of Consolidated Excess Cash Flow (defined in the definitive documentation as EBITDA less capital expenditures, less cash interest expense, less cash tax expense) for each fiscal year. All such Consolidated Excess Cash Flow redemption payments are to be made at 103% of principal being repaid. We did not include anticipated principal amortization based on Consolidated Excess Cash Flow in this schedule as these amounts are conditioned on Greektown Superholdings achieving future EBITDA figures that are not determinable at this time. Rather, all principal amortization for purposes of this calculation is assumed to take place upon expiration of the Senior Secured Notes five years from the Effective Date. |
| (2) | For the purposes of this calculation, interest payments were calculated by applying an interest rate of 13%, which is the rate of the Senior Secured Notes. |
(3)
|
With respect to principal amortization, Greektown Superholdings will be required to repay the Revolving Loan borrowings related to the new valet parking facility in quarterly installments equal to 1/20th of the $15.0 million outstanding, commencing on the first month after the parking facility’s completion date. |
| (4) | For the purposes of this calculation, interest payments were calculated by applying an interest rate of 3.0%, which is Comerica’s prime rate of 3.25% less 0.25% as of January 30, 2013. |
|
(5)
|
The Development Agreement requires us to pay the city of Detroit a daily fee in the amount of 1% of adjusted gross receipts, which will increase to 2% of adjusted gross receipts if our adjusted gross receipts exceed $400 million in any calendar year, beginning on the day such receipts are reached and continuing thereafter. We have not included these amounts in the table as the payments are conditioned on future adjusted gross receipts that are not determinable at this time. In addition, if and when the $400 million gross receipt number is satisfied, we will be required to pay a one-time fee of $4 million to the city of Detroit, which we did not include in the table above as we cannot determine whether we will exceed the $400 million in adjusted gross receipts for any particular year. |
| (6) | We lease a portion of the Expanded Complex known as the St. Mary’s School Building. In accordance with the provisions of the Leases topic of the FASB ASC, we account for this lease as a capital lease. The amounts listed reflect the minimum contractual lease payments under the lease agreement. |
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| (7) | The DCC ratified a four year labor agreement with the Company on October 24, 2011. The Ratified Agreement provides the following: In the first year of the Ratified Agreement, a first lump sum ratification payment (“Payment”) of $2,500 and $2,000 will be made to full time and part time employees, respectively. The payments were paid in the fourth quarter of 2011. In the third year (after October 17, 2013) of the Ratified Agreement, a second payment of $1,000 and $800 will be made to full time and part time employees, respectively. The payments will be paid in the fourth quarter of 2013. |
The Company expects that cash flow from operations together with our unused borrowing capacity under the Revolving Credit Facility will be sufficient to meet our obligations and commitments.
Inflation
We believe that general inflation had no significant impact on our business, results of operations, financial condition or cash flows during the years ended December 31, 2012 and 2011. Absent changes in competitive and economic conditions in Detroit or specific events affecting the hotel and casino industry generally, we do not expect that inflation will have a significant impact on our operations in the future. Changes in specific prices, such as fuel and transportation prices, relative to the general rate of inflation may have a material adverse effect on the hotel and casino industry in general and, therefore, our business, results of operations, financial condition and cash flows.
Critical Accounting Policies, Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.
Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements.
We believe our application of accounting policies, and the estimates inherently required by the policies, are reasonable. These accounting policies and estimates are constantly reevaluated and adjustments are made when facts and circumstances dictate a change. Refer to Note 2— Summary of Significant Accounting Policies to the Consolidated Financial Statements presented in Item 8 of this report.
Net Revenues
The Company recognizes as casino revenues 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. In accordance with the Revenue Recognition topic of the FASB ASC applied to circumstances where consideration is given by a vendor to a customer, 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 to arrive at net revenues.
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Allowance for Doubtful Casino Accounts Receivable
Our gaming receivables consist predominantly of gaming markers issued to casino patrons on the gaming floor. We maintain strict controls over the issuance of markers and the collection of outstanding markers from patrons who fail to pay within a timely manner. Our methods of collection include the mailing of statements and delinquency notices, personal contacts through independent collection agencies and civil litigation.
We record an allowance for doubtful casino accounts receivable that represents our best estimate of the amount of probable credit losses in our existing accounts receivable. We assess the amount of the allowance on a quarterly basis based on historical write-off experience and review of returned gaming markers, past-due balances and individual collection analysis. Account balances are charged off against the allowance after all reasonable means of collection have been exhausted and the potential for recovery is considered remote.
Impairment 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. The Property, Plant, and Equipment topic of the FASB ASC 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 cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted 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. No impairment was recorded during the year ended December 31, 2012.
Goodwill and Intangible Assets
Goodwill represents the excess of reorganization value over fair value of assets acquired and liabilities assumed in fresh start accounting. 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. For the year ended December 31, 2012, no impairment was recorded, based on the Company’s annual impairment testing procedures.
Goodwill is tested for impairment using a discounted cash flow model based on the estimated future results of the Company, discounted using the market participant-based, weighted-average cost of capital, and market indicators of terminal year capitalization rates.
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-life intangible asset to the carrying values using a discounted cash flow approach. 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.
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.
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The Company’s estimates of cash flows are based on the current regulatory, political and economic climates, recent operating information, and the property’s forecasts. 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.
Financing Fees
The Company capitalizes certain financing costs in accordance with the Debt topic of the FASB ASC. Accordingly, we begin capitalizing finance costs when activities in relation to the procurement of financing begin, and cease capitalization when all financing activities are substantially complete. Financing fees are amortized using the effective interest rate method.
Stock-Based Compensation Expense
Stock-based compensation cost is estimated at the grant date based on the fair value of the award and is expensed ratably over the service period of the award. The Company did not record stock-based compensation expense for the six months ended June 30, 2010, as there was no stock-based compensation plan in place at that time, but recorded a stock-based compensation expense for the years ended December 31, 2012 and 2011. The Company accounts for its stock-based compensation in accordance with FASB ASC Topic 718.
The weighted-average fair value of the stock-based awards was calculated based on the Black-Scholes option pricing method. The weighted-average fair value was approximately $90 for the year ended December 31, 2012. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
Contingencies
We accrue for contingent obligations, including legal costs, when the obligation is probable and the amount can be reasonably estimated. As facts concerning contingencies become known we reassess our position and make appropriate adjustments to the financial statements. Estimates that are particularly sensitive to future changes include those related to tax, legal, and other regulatory matters that are subject to change as events evolve and additional information becomes available. Refer to Note 11 – Commitments and Contingencies of the Consolidated Financial Statements as of December 31, 2012 as presented in Item 8 of this report.
Income Taxes
We use the asset and liability method to account for income taxes. Under this method, deferred income taxes are determined based on the differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements which will result in taxable or deductible amounts in future years and are measured using the currently enacted tax rates and laws. A valuation allowance is provided to reduce net deferred tax assets to the amount that, based on available evidence, is more likely than not to be realized.
Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonable and foreseeable outcome related to uncertain tax matters. We have recorded an estimated income tax contingency related to certain potential taxes that could be assessed in connection with the enactment of the Plan. The Company records potential penalties on uncertain positions. Once the Company has asserted a position, interest is recorded on uncertain tax positions subsequent to the passage of the filing deadline. Included in the tax contingency are accrued penalties and interest.
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Recently adopted accounting pronouncements
The following are accounting standards adopted or issued recently that were evaluated for potential impact on the Company.
The FASB issued ASU No. 2011-08, Testing Goodwill for Impairment (Topic 350) which allows companies the option to perform a qualitative assessment to determine whether it is more likely than not (a likelihood of more than 50 percent) that the fair value of its reporting unit is less than its carrying amount. However, if a company concludes otherwise, then it would proceed to the current two-step approach to the annual test. Entities are permitted to apply guidance for annual and interim impairment tests performed as of a date before September 15, 2011, provided financial statements for the most recent annual or interim period have not been issued. The adoption of this standard did not have an effect on the Company’s consolidated financial statements.
The FASB issued ASU No. 2012-02, Intangibles – Goodwill and Other (Topic 350), Update of ASU No. 2011-08, Testing Goodwill for Impairment (Topic 350). The amendments in the update provide companies with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether the company should perform a quantitative impairment test. The amendments in the update also enhances the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment, which is equivalent to the impairment testing requirements for other long-lived assets. The amendments in the update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 with early adoption permitted. The adoption of this update did not have an effect on the Company’s consolidated financial statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign exchange and commodity prices. We do not believe we are subject to material risk from adverse changes in foreign exchange or commodity prices. We are subject to market risk from adverse changes in interest rates.
Borrowings under the Revolving Loan bear interest at a variable rate, as discussed in the “Liquidity and Capital Resources” section above. If interest rates were to increase, interest expense with respect to the Revolving Loan borrowings would increase; however, the extent of such increase cannot be determined at this time.
We do no enter into derivative contracts for trading or speculative purposes, but we may enter into derivatives, particularly interest rate swaps, to reduce interest rate exposure arising from our borrowings under the Revolving Loan.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| Contents | ||
| Report of Independent Registered Public Accounting Firm | 51 | |
| Audited Consolidated Financial Statements | ||
| Consolidated Balance Sheets | 52-53 | |
| Consolidated Statements of Operations | 54 | |
| Consolidated Statements of Shareholders’ Equity | 55 | |
| Consolidated Statements of Cash Flows | 56 | |
| Notes to Consolidated Financial Statements | 57 | |
| 52 |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Greektown Superholdings, Inc.
We have audited the accompanying consolidated balance sheets of Greektown Superholdings, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Greektown Superholdings, Inc. at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
| /s/ Ernst & Young LLP | |
| Detroit, Michigan | |
| April 12, 2013 |
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Greektown Superholdings,
Inc.
Consolidated Balance Sheets
(In Thousands, except share and per share data)
| December 31, | ||||||||
| 2012 | 2011 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 49,442 | $ | 50,754 | ||||
| Accounts receivable – gaming, less allowance for doubtful accounts of $236 and $282 in 2012 and 2011, respectively | 710 | 734 | ||||||
| Accounts receivable – other, less allowance for doubtful accounts of $163 and $138 in 2012 and 2011, respectively | 1,397 | 1,216 | ||||||
| Inventories | 458 | 398 | ||||||
| Prepaid expenses | 3,902 | 5,605 | ||||||
| Prepaid Michigan Gaming Control Board annual fee | 9,104 | 8,823 | ||||||
| Prepaid municipal service fees | 3,411 | 3,346 | ||||||
| Deposits | 1,632 | 1,631 | ||||||
| Total current assets | 70,056 | 72,507 | ||||||
| Property, building, and equipment, net | 342,417 | 317,085 | ||||||
| Other assets: | ||||||||
| Financing fees - net of accumulated amortization of $8,530 and $5,086 in 2012 and 2011, respectively | 8,235 | 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 of $34,500 and $20,700 in 2012 and 2011, respectively | 34,500 | 48,300 | ||||||
| Goodwill | 110,252 | 110,252 | ||||||
| Total assets | $ | 709,590 | $ | 703,845 | ||||
| The accompanying notes are an integral part of the consolidated financial statements. | ||||||||
| 54 |
| 55 |
| Greektown Superholdings, Inc. | ||
| Consolidated Statements of Operations | ||
| (In Thousands, except share and per share data) | ||
| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
| Revenues | ||||||||
| Casino | $ | 346,544 | $ | 347,396 | ||||
| Food and beverage | 22,827 | 23,158 | ||||||
| Hotel | 12,117 | 11,004 | ||||||
| Other | 5,414 | 4,763 | ||||||
| Gross revenues | 386,902 | 386,321 | ||||||
| Less promotional allowances | 55,186 | 52,949 | ||||||
| Net revenues | 331,716 | 333,372 | ||||||
| Operating expenses | ||||||||
| Casino | 79,169 | 80,496 | ||||||
| Gaming taxes | 74,823 | 74,961 | ||||||
| Food and beverage | 15,492 | 18,530 | ||||||
| Hotel | 10,019 | 9,156 | ||||||
| Marketing, advertising, and entertainment | 7,899 | 8,287 | ||||||
| Facilities | 19,907 | 20,215 | ||||||
| Depreciation and amortization | 32,264 | 37,303 | ||||||
| General and administrative expenses | 48,155 | 46,072 | ||||||
| Other | 370 | 282 | ||||||
| Operating expenses | 288,098 | 295,302 | ||||||
| Income from operations | 43,618 | 38,070 | ||||||
| Other expenses | ||||||||
| Interest expense, net | (50,581 | ) | (50,167 | ) | ||||
| Amortization of financing fees and accretion of discount on senior notes | (7,540 | ) | (6,938 | ) | ||||
| Refinancing expense | (1,732 | ) | — | |||||
| Other expense | (622 | ) | (1,172 | ) | ||||
| Total other expense, net | (60,475 | ) | (58,277 | ) | ||||
| Loss before income taxes | (16,857 | ) | (20,207 | ) | ||||
| Income tax expense – current | (211 | ) | (1,859 | ) | ||||
| Income tax expense – deferred | (6,727 | ) | (2,812 | ) | ||||
| Net loss | $ | (23,795 | ) | $ | (24,878 | ) | ||
| Loss per share: | ||||||||
| Basic | $ | (274.64 | ) | $ | (295.21 | ) | ||
| Diluted | $ | (274.64 | ) | $ | (295.21 | ) | ||
| Weighted average common shares outstanding | 149,146 | 142,423 | ||||||
| Weighted average common and common equivalent shares outstanding | 149,146 | 142,423 | ||||||
| The accompanying notes are an integral part of the consolidated financial statements. | ||||||||
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Note 1. Organization, Background & Bankruptcy Consideration
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 the Effective Date, the proceeds of the Rights Offering, 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.
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Note 2. Summary of Significant Accounting Policies
Presentation and Basis of Accounting
The accompanying consolidated financial statements present the financial position of Greektown Superholdings, Inc. and its wholly owned subsidiaries as of December 31, 2012 and 2011. The accompanying consolidated statements of operations and cash flows are included for the years ended December 31, 2012 and December 31, 2011.
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 the carrying amount of property, building, and equipment, intangible assets, asset impairments, accrued income taxes, valuation allowance for receivables, and certain other accrued liabilities. Actual results could differ from those estimates.
Casino Revenues
Greektown Casino recognizes as casino revenues 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):
| Year Ended December 31, | Year Ended December 31, | |||||||
| 2012 | 2011 | |||||||
| Food and beverage | $ | 9,703 | $ | 10,094 | ||||
| Hotel | 2,827 | 2,173 | ||||||
| $ | 12,530 | $ | 12,267 | |||||
Cash and Cash Equivalents
The Company considers all highly liquid investment instruments with original maturities of three months or less to be cash equivalents.
Accounts and Notes Receivable and Allowance for Doubtful Accounts
Accounts receivable – gaming consist primarily of gaming markers issued to casino patrons on the gaming floor. A marker is a voucher for a specified amount of dollars negotiable solely within Greektown Casino. Markers are recorded at issued value and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience and review of returned gaming markers, past-due balances, and individual collection analysis. Account balances are charged off against the allowance after all reasonable means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
Inventories
Inventories, consisting of food and beverage items, are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Inventories totaled approximately $0.5 million as of December 31, 2012 and approximately $0.4 million as of December 31, 2011.
Deposits
Deposits primarily consist of a workman’s compensation insurance deposit for the permanent casino construction. As of December 31, 2012 and 2011, deposits totaled approximately $1.6 million.
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Note 2. Summary of Significant Accounting Policies (continued)
Property, Building, and Equipment
Property, building, and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Expenditures for repairs and maintenance are charged to expense as incurred and approximated $1.2 million and $1.3 million for the years ended December 31, 2012 and December 31, 2011, respectively.
Financing Fees
The Company incurred certain financing costs in order to secure financing for its emergence from bankruptcy at June 30, 2010. These costs were capitalized and are being amortized over the term of the respective financing agreements.
Gross financing fees capitalized totaled $16.8 million and $16.7 million as of December 31, 2012 and 2011, respectively. Net capitalized financing fees totaled $8.2 million and $11.6 million as of December 31, 2012 and 2011, respectively. The amortization of these fees was $5.1 million and $3.4 million for the years ended December 31, 2012 and December 31, 2011, respectively. Of the $5.1 million amortized in 2012, $1.7 million was related to costs incurred during the refinancing efforts described above.
In addition, the Company incurred $1.7 million of costs related to the Company’s efforts to refinance the Senior Secured Notes and Revolving Loan facility during the three months ended December 31, 2012. These costs were expensed during the fourth quarter of 2012 as the refinancing pricing commitments subsequently expired in March 2013 (See Note 6).
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. Goodwill was not impaired for the year ended December 31, 2012, as determined by the Company’s fourth quarter goodwill testing procedures. Goodwill is tested for impairment using a discounted cash flow model based on the estimated future results of the Company, discounted using the market participant-based, weighted-average cost of capital, and market indicators of terminal year capitalization rates. Goodwill is also tested for impairment using a market approach. The Company estimates fair value using an in-exchange premise based upon market capitalization of Level 2 using quoted prices for similar assets, adding an estimated control premium, and then weighting the fair market value to the respective enterprise (see Note 5).
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. Indefinite-lived intangible assets were not impaired for the year ended December 31, 2012, as determined by the Company’s fourth quarter testing procedures. 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.
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 the property’s forecasts. 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 property.
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 years ended December 31, 2012 and December 31, 2011 was $0.8 million and $0.6 million, respectively (See Note 12).
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 13).
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Note 2. Summary of Significant Accounting Policies (continued)
Reserve for Club Greektown
Greektown Casino sponsors a players club (“Club Greektown”) for its repeat customers. Members of the club earn points for playing the Company’s electronic video and table games.
Club Greektown members may redeem points for cash, and may also earn special coupons or awards. The Company estimates the cash value of points earned by club members and recognizes a related liability for any unredeemed points. The cash value of points earned, and reflected as a direct reduction in casino revenue, totaled $6.4 million and $6.6 million for the years ended December 31, 2012 and December 31, 2011, respectively.
Advertising Expense
The Company expenses costs associated with advertising and promotion as incurred. Advertising and promotion expenses were approximately $6.7 million and $7.5 million for the years ended December 31, 2012 and December 31, 2011, respectively.
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.
Prior to 2012, the Company had recorded income taxes for the Michigan Business Tax (“MBT”), which was 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 year ended December 31, 2011. Based on state of Michigan tax reform, the MBT was eliminated effective January 1, 2012 and deferred taxes related to the MBT were adjusted in 2011. In lieu of the MBT, the state of Michigan has enacted a six percent corporate income tax, which became effective January 1, 2012. 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 and did not record a benefit for losses during the years ended December 31, 2012 and December 31, 2011. Due to the uncertainty in the ability to recognize these deferred tax assets, 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 current income tax expense.
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 Company’s long-lived assets will not be recoverable. No impairment was recorded during the years ended December 31, 2012 and December 31, 2011 (See Note 4).
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 December 31, 2012 and 2011, the fair value of the Senior Secured Notes was approximately $412.4 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 values of the capital lease obligation and Revolver Loan approximate their carrying values, as determined by the Company, using available market information (See Note 15).
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Note 2. Summary of Significant Accounting Policies (continued)
Concentrations of Risk
As of December 31, 2012 and 2011 approximately 1,410 and 1,290, respectively, of the Company’s employees were covered by collective bargaining agreements, including a majority of the Company’s hourly staff. In 2011, the Company entered into a four year agreement with the Detroit Casino Council (“DCC”). The DCC union represents approximately 1,283 union members. In June 2012, the Company entered into a four year agreement with International Union, Security, Police, and Fire Professionals of America (“SPFPA”). The SPFPA union represents approximately 127 union members. We consider our relationship with our employees and the labor unions to be good.
During the year ended December 31, 2012 and December 31, 2011, the Company paid $0.2 million and $3.7 million, respectively, in lump sum payments in lieu of compensation increases in accordance with the Ratification Agreements with the SPFPA and DCC. The Company had $1.8 million and $3.4 million recorded as a prepaid asset for such payments at December 31, 2012 and December 31, 2011, respectively.
During the years ended December 31, 2012 and 2011 approximately 95% of the Company’s patrons came from within a 100-mile radius of the property.
Reclassification
Certain items in the 2011 financial statements have been reclassified to conform to the 2012 presentation.
As the restructuring costs subsequent to the emergence from bankruptcy are no longer material as of December 31, 2012, those are costs no longer required to be separately stated in the statement of operations. Accordingly, the statement of operations classification of restructuring costs subsequent to the emergence from bankruptcy has been classified within other expenses for the year ended December 31, 2012. As a result, for the year ended December 31, 2011 the Company reclassified $1.1 million of restructuring costs from net loss on Chapter 11 related reorganization items to other expense.
Recently adopted accounting pronouncements
The following are accounting standards adopted or issued recently that were evaluated for potential impact on the Company.
The FASB issued ASU No. 2011-08, Testing Goodwill for Impairment (Topic 350) which allows companies the option to perform a qualitative assessment to determine whether it is more likely than not (a likelihood of more than 50 percent) that the fair value of its reporting unit is less than its carrying amount. If a company concludes it is more likely than not that the fair value of its reporting unit is less than its carrying amount, then it would proceed to the current two-step approach to the annual test. Entities are permitted to apply guidance for annual and interim impairment tests performed before September 15, 2011, provided that financial statements for the most recent annual or interim period have not been issued. The adoption of this standard did not have an effect on the Company’s consolidated financial statements.
The FASB issued ASU No. 2012-02, Intangibles – Goodwill and Other (Topic 350), Update of ASU No. 2011-08, Testing Goodwill for Impairment (Topic 350). The amendments in the update provide companies with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether the company should perform a quantitative impairment test. The amendments in the update also enhances the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment, which is equivalent to the impairment testing requirements for other long-lived assets. The amendments in the update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 with early adoption permitted. The adoption of this update did not have an effect on the Company’s 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.
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Note 3. Emergence from Chapter 11
Fresh Start Consolidated Balance Sheet
In accordance with the Reorganizations topic of 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 the Greektown Holdings, its direct and indirect subsidiaries and certain affiliates 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.
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 mid-point 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 of $662.7 million 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.
Note 4. Property, Building, and Equipment
Property, building, and equipment and related depreciable lives as of December 31, 2012 and 2011 were as follows (in thousands):
| As of December 31, | ||||||||||||
| 2012 | 2011 | Depreciable Lives | ||||||||||
| Land | $ | 36,518 | $ | 34,841 | — | |||||||
| Gaming building and improvements | 115,725 | 109,856 | 3–35 years | |||||||||
| Gaming equipment and furnishings | 34,381 | 29,178 | 3–5 years | |||||||||
| Non-gaming buildings and improvements | 143,803 | 143,695 | 39 years | |||||||||
| Non-gaming office furniture and equipment | 29,731 | 26,795 | 5–7 years | |||||||||
| Construction-in-progress | 37,108 | 9,380 | — | |||||||||
| 397,266 | 353,745 | |||||||||||
| Less accumulated depreciation and amortization | (54,849 | ) | (36,660 | ) | ||||||||
| Property, building, and equipment, net | $ | 342,417 | $ | 317,085 | ||||||||
Depreciation expense includes the amortization related to the asset under capital lease obligation. Depreciation expense was $18.5 million and $23.5 million for the years ended December 31, 2012 and December 31, 2011, respectively.
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Note 5. Goodwill & Intangible Assets
Goodwill represents the excess of the reorganization value of the Company over the fair value of tangible and identified intangible net assets upon emergence from bankruptcy at June 30, 2010. The Company recorded goodwill of $110.3 million upon the application of fresh start reporting.
Other identifiable intangible assets 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 5 years Indefinite | |||||||
| Rated player relationships | 69,000 | 34,500 | 34,500 | |||||||||||
| Casino development rights | 117,800 | — | 117,800 | |||||||||||
| Total other identifiable intangible assets | $ | 213,100 | $ | 34,500 | $ | 178,600 | ||||||||
Amortization expense related to the rated player relationships intangible asset was approximately $13.8 million for each of the years ended December 31, 2012 and December 31, 2011. Annual amortization expense for the years ended December 31, 2013 and 2014 is estimated to be approximately $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.
Casino development rights were valued based on the Greenfield method, which is a function of the cost to build a new casino operation taking into consideration, the build out period, and projected cash flows attributable to the casino once operational and adjusted to present value using a market participant discount rate.
The Company complies with the provisions of the Intangible Assets – Goodwill and Other topic of the FASB ASC, which provides guidance on how identifiable intangible assets should be accounted for upon acquisition and subsequent to their initial financial statement recognition. This topic requires that identifiable intangible assets with indefinite lives be capitalized and tested for impairment at least annually by comparing the fair values of those assets with their recorded amounts. Accordingly, the Company performs its impairment test in the fourth quarter of each year by comparing the assets’ estimated fair value to the related carrying value as of that date. The indefinite lived assets were not impaired for the year ended December 31, 2012, as determined by Company’s annual impairment testing procedures.
Note 6. 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’s, 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 6. 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 New 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.
Subsequent to December 31, 2012, the Company paid approximately $18.2 million and $6.8 million in interest payments in relation to the Series A and Series B Notes, respectively.
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 second-priority 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 Loan facility described below).
Optional Redemption: 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 June 30, 2015. No excess cash flow payments were required to be made by the Company or are due 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.
On January 16, 2013, the Company received a letter from Athens Acquisition, LLC (“Athens”), a company owned by Dan Gilbert, who owns Rock Gaming, which in conjunction with Caesars Entertainment Corporation operates Horseshoe Casinos in Cleveland and Cincinnati. The letter from Athens stated it “acquired a small position” in the Company in mid-2012 and that it “entered into an agreement to purchase a large block of the Company’s shares on December 20, 2012.”
On February 8, 2013, Athens filed a Schedule 13D with the Securities and Exchange Commission disclosing that it had entered into an agreement to acquire additional shares from two other shareholders, and in such disclosure, Athens stated that if it consummates all such transactions (entered into through January 31, 2013), it may be deemed to have beneficial ownership representing 76.8% of the voting power of all securities of the Company. The acquisition by Athens of the shares that it has contracted to purchase, which was approved by the MGCB on April 9, 2013, would constitute a change of control under the Indenture.
Covenants: The Indenture contains covenants limiting the ability of Greektown Superholdings and/or its 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, except as permitted by the indenture, (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.
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Note 6. Debt (continued)
The Company had previously announced, on December 19, 2012, the pricing of $455.0 million of credit facilities, intended to replace the Company’s Senior Secured Notes and Revolving Loan facility. As a result of the potential change of ownership, the Company was not in a position to present the refinancing for the required MGCB approval prior to the March 17, 2013 expiration of lender pricing commitments, and therefore did not close the refinancing as contemplated by the December 2012 announcement.
Revolving Loan Agreement
On the Effective Date, the Company (Borrower) entered into a credit agreement with Comerica Bank for the Revolving Loan facility. On July 6, 2011, July 8, 2011, May 24, 2012, and March 18, 2013, the Company and 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, 2014. The maximum expiration of individual letters of credit is twelve months after the issuance thereof or, if earlier, the maturity of the Revolving Loan. On May 24, 2012, the Company and Comerica Bank executed a Third Amendment to the Credit Agreement. The Third Amendment, which was approved by the MGCB, increased the aggregate principal amount available under the facility by $15.0 million to $45.0 million (including $5 million for the issuance of standby letters of credit). Any borrowings under the additional $15.0 million commitment are required to fund expenditures relating to the new valet parking garage, and are to be repaid in quarterly installments equal to 1/20th of the amount advanced, commencing on the first month after the parking facility’s completion date in February 2013. The amendment also, among other things, excludes capital expenditures relating to the valet parking garage from the Fixed Charge Coverage Ratio calculation, discussed below, not to exceed $25.7 million.
On March 18, 2013, the Company and Comerica Bank executed a Fourth Amendment to the Credit Agreement and Consent (the “Fourth Amendment”). The Fourth Amendment, which was approved by the MGCB on March 12, 2013, extended the expiry of the Revolving Loan facility from December 30, 2013, to December 30, 2014, amended the definition of “EBITDA” to add back the items described in clauses (vi) through (x) of the summarized definition of “EBITDA” below, added certain capital expenditures to the list of items excludable from the “Fixed Charges” definition, reduced the requirements under the minimum EBITDA covenant for certain periods, and gave Comerica Bank’s consent to the acquisition of 51% or more of the capital stock of the Company by Athens.
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 outstanding balance under the Revolving Loan 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).
Prior to July 1, 2012, there was 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. As of May 24, 2012, the Third Amendment replaced the facility fee of 0.50% with an unused line of credit fee of 0.75% per annum on the face amount of commitment less any borrowings outstanding payable quarterly commencing on July 1, 2012 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 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 0.25% (under the prime 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.
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Note 6. Debt (continued)
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 subsidiaries name, jurisdiction of incorporation, or the location at which any Collateral is stored.
The May 24, 2012 amendment to the Credit Agreement eliminated the preexisting June 30, 2012 outside date for the release of the liens on a small parcel of real property (the “Trappers 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. 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.
“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., ending June 30, 2011 (v) for any fiscal quarter ending on or before June 30, 2012, specified non-recurring expenses, (vi) goodwill impairment charges, (vii) certain costs, fees and expenses relating to the proposed refinancing of the Senior Secured Notes or relating to the proposed stock acquisition by Athens, (viii) certain non-cash compensation expenses, (ix) non-cash purchase accounting adjustments, and (x) all other non-cash 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.
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.
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Note 6. Debt (continued)
As of December 31, 2012, the Company had $29.1 million of available borrowing under the Credit Agreement ($45.0 million of commitment less $15.0 million in borrowings in relation to the construction of the valet parking garage less outstanding letters of credit of approximately $0.9 million).
At December 31, 2012, the Company was in compliance with its covenants under the Indenture and the Revolving Loan Agreement.
Note 7. Shareholders’ Equity
Common Stock
Greektown Superholdings is authorized to issue 5 million shares of Common Stock, of which 152,054 shares were issued and outstanding as of December 31, 2012 and 3,427 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 a series known 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 December 31, 2012. A total of 645,065 shares of Greektown Superholdings’ Preferred Stock are designated as a series known as Series A-2 Participating Convertible Preferred Stock, par value $0.01 per share (the “Series A-2 Preferred Stock”; together with the Series A-1 Preferred Stock, the “Series A Preferred Stock”), of which 162,255 shares were issued and outstanding as of December 31, 2012. A holder’s shares of Series A Preferred Stock are voluntarily convertible at the election of such holder at any time after December 31, 2010 and all shares of Series A Preferred Stock are mandatorily convertible upon the vote or written consent of 66 2/3% of the then outstanding shares of Series A Preferred Stock (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. 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.
Summary of Stock Terms
Issuance of Additional Stock. The Board of Directors 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 & Revenue Act and Administrative Rules – promulgated 1998 & amended 2008 (the “Michigan Gaming 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.
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Note 7. Shareholders’ Equity (continued)
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.
Dividends. Each share of Series A Preferred Stock (including unissued shares) accrues 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. Such dividends are cumulative; provided, however, that such dividends should be payable only when, as, and if declared by the Board of Directors 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 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”) which price will be adjusted 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 Michigan Gaming 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.
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Note 7. Shareholders’ Equity (continued)
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.
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.
Stockholders Agreement
On April 8, 2013, the Company and Athens executed an agreement regarding Athens’ provision of minority protections to the non-Athens stockholders of the Company.
Liquidity Rights
| · | The Stockholders Agreement provides that from the date that Athens acquires control of the Company until the later to occur of (i) December 31, 2013 and (ii) six months after Athens has acquired control of the Company, Athens will grant all non-Athens stockholders of the Company at least two opportunities for liquidity at $90 per share on an unconverted basis. |
| · | The two opportunities for liquidity may be provided by any means, including by merger or otherwise, so long as the economic result is the same. If effected through a merger, Athens must permit any non-Athens stockholders the right to elect to receive either cash or securities in the surviving entity. |
| · | In order to participate in any liquidity event under the Stockholders Agreement, Standard General Fund L.P. and certain affiliated funds and Brigade Leveraged Capital Structures Fund Ltd. must first execute an Investor Rights Agreement whereby each will: |
| o | provide a release of all existing claims against Athens and its affiliates and the Company and its affiliates; and |
| o | in addition to the liquidity rights provided by the Stockholders Agreement, receive a right to put its shares to Athens at $90 per share on an unconverted basis until the later to occur of (i) December 31, 2013 and (ii) six months after Athens has acquired control of the Company. |
Governance
- Minority Director Representation. The Stockholders Agreement provides that there must be at least two independent directors on the Board of Directors until the time that Athens has acquired 90% of each class of Company securities, at which time Athens is obligated to cause the Company to effect a Short-Form Merger under Delaware law.
- Minority Independent Director Consent Rights. One of the Minority Independent Directors will be tasked with protecting the non-Athens stockholders through the exercise of certain consent rights over the following actions:
- the Company’s entry into certain related-party transactions;
- changes to the Company’s and its subsidiaries’ organizational documents which changes would disproportionately and adversely affect the non-Athens stockholders of the Company; and
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Note 7. Shareholders’ Equity (continued)
- issuances of Company securities in connection with any joint venture or strategic partnership entered into by the Company.
Tag-Along and Preemptive Rights
- Pursuant to the Stockholders Agreement, all non-Athens stockholders will be granted:
- “tag-along” rights on certain sales of Company securities by Athens; and
- preemptive rights over certain equity issuances by the Company and debt issuances by the Company to Athens or its affiliates.
U.S. Securities and Exchange Commission Registration
Athens has also agreed to cause the Company to continue as a U.S. Securities and Exchange Commission registrant unless and until Athens effects a short-form merger, except with the prior approval of the Minority Independent Director.
Term
- The Stockholders Agreement terminates upon the earliest to occur of:
- Athens and the Company effectuating a Short-Form Merger;
- the consummation of a sale or transfer of Company securities whereby neither Athens nor any of its affiliates beneficially owns a majority of Company securities; and
- the time when all Company securities are owned by Athens and/or its affiliates.
Shareholders’ Rights Plan
On December 31, 2012, the Board of Directors adopted a shareholders’ rights plan, subject to MGCB approval, which was intended to protect the Company and its stockholders from efforts to obtain control of the Company that the Board of Directors determined were not in the best interests of the Company and its stockholders, and to enable all stockholders to realize the long-term value of their investment in the Company (the Rights Agreement). On April 8, 2013, pursuant to the previous approval of the Board of Directors (which was conditioned on the execution of the Stockholders Agreement), the Rights Agreement was terminated and the conditional rights distribution that had been declared on December 30, 2012 was suspended. The Rights Agreement and rights distribution had not, in any event, become effective because their effectiveness had been made expressly dependent upon approval of the MGCB and such approval has not been obtained.
Shareholders’ Rights Plan
On December 31, 2012, the Board of Directors adopted a shareholders’ rights plan, subject to MGCB approval, which was intended to protect the Company and its stockholders from efforts to obtain control of the Company that the Board of Directors determined were not in the best interests of the Company and its stockholders, and to enable all stockholders to realize the long-term value of their investment in the Company (the Rights Agreement). On April 8, 2013, pursuant to the previous approval of the Board of Directors (which was conditioned on the execution of the Stockholders Agreement), the Rights Agreement was terminated and the conditional rights distribution that had been declared on December 30, 2012 was suspended. The Rights Agreement and rights distribution had not, in any event, become effective because their effectiveness had been made expressly dependent upon approval of the MGCB and such approval has not been obtained.
Note 8. Leases
The Company leases certain portions of its owned or leased facilities under noncancelable operating leases. Rental income was $0.5 million for each of the years ended December 31, 2012 and December 31, 2011.
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Note 8. Leases (continued)
Future minimum rental payments required under non-cancelable leases with initial or remaining lease terms in excess of one year and lease and sublease income as of December 31, 2012 are as follows (in thousands):
| Capital Lease Payments | Lease Income | ||||||||
| Year ending December 31: | |||||||||
| 2013 | $ | 336 | $ | 689 | |||||
| 2014 | 336 | 649 | |||||||
| 2015 | 336 | 547 | |||||||
| 2016 | 336 | 481 | |||||||
| 2017 | 336 | 283 | |||||||
| Thereafter | 6,356 | 1,041 | |||||||
| 8,036 | 3,690 | ||||||||
| Less amount representing interest | 5,547 | ||||||||
| Total present value of net minimum obligation under capital lease (current and noncurrent) payments | 2,489 | ||||||||
| Less obligation under capital lease – current portion payments | 17 | ||||||||
| Obligation under capital lease – noncurrent portion payments | $ | 2,472 | |||||||
Certain leases include escalation clauses relating to the consumer price index, utilities, taxes, and other operating expenses. The Company will receive additional rental income in future years based on those factors that cannot be estimated currently.
Note 9. Income Taxes
Income taxes
The Company’s income tax provision consists of the following (in thousands):
| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
| Current | $ | (211 | ) | $ | (1,859 | ) | ||
| Deferred | (6,727 | ) | (2,812 | ) | ||||
| Total Income Tax Expense | $ | (6,938 | ) | $ | (4,671 | ) | ||
Included in other accrued income taxes is an estimated income tax contingency of $9.2 million related to certain potential taxes that could be assessed in connection with the enactment of the Plan. The Company records potential penalties on uncertain positions when the Company expects to assert a position. Interest is recorded on uncertain tax positions subsequent to the passage of the filing deadline. Included in the tax contingency is $1.8 million of accrued penalties and interest.
A reconciliation of the change in our estimated income tax contingency as follows (in thousands):
| Total | ||||
| Balance at December 31, 2011 | $ | 8,871 | ||
| Additions | 294 | |||
| Balance at December 31, 2012 | $ | 9,165 | ||
The Company files state of Michigan and federal income tax returns, and is no longer subject to state and local income tax examinations by the tax authorities for years before 2007. At December 31, 2012 and 2011, there is approximately $9.2 million and $8.9 million, respectively, of unrecognized tax benefits that if recognized would affect the annual effective tax rate.
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Note 9. Income Taxes (continued)
Deferred tax
Deferred income taxes result from temporary differences between the recognition of income and expenses for financial statement and income tax purposes. Temporary differences and net operating loss carryforwards, which give rise to the net deferred tax liability position, as of December 31, 2012 and December 31, 2011 (in thousands), are as follows:
| Deferred Tax Asset | ||||||||
| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
| Property, building and equipment | $ | 2,314 | $ | 2,655 | ||||
| Intangible assets | 8,947 | 5,368 | ||||||
| Net operating loss carryforwards | 18,793 | 11,539 | ||||||
| Other | 790 | 1,307 | ||||||
| $ | 30,844 | $ | 20,869 | |||||
| Valuation allowance | $ | (30,844 | ) | $ | (20,869 | ) | ||
| Net deferred tax assets | $ | — | $ | — | ||||
| Deferred Tax Liability | ||||||||
| Intangible assets | $ | (16,821 | ) | $ | (10,094 | ) | ||
| Total deferred tax liability | (16,821 | ) | (10,094 | ) | ||||
| Net Deferred Tax Liability | $ | (16,821 | ) | $ | (10,094 | ) | ||
The Company has a full valuation allowance at December 31, 2012 and 2011, as it is not expected that the deferred tax assets will be realized. The Company has $51.0 million of net operating loss carryforwards that will expire beginning in 2032.
Tax rate reconciliation - Income (loss) before provisions for income taxes
The Company’s effective tax rate reconciliation for the years ended December 31, 2012 and December 31, 2011 is as follows:
| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
| U.S. Federal statutory tax rate | 35 | % | 35 | % | ||||
| State taxes | (1 | )% | 13 | % | ||||
| Valuation allowance | (77 | )% | (71 | )% | ||||
| Tax contingency | (2 | )% | 0 | % | ||||
| Effective Tax Rate | (45 | )% | (23 | )% | ||||
Note 10. Gaming Taxes and Fees
Under the provisions of the Michigan Gaming Act, casino licensees are subject to the following gaming taxes and fees on an ongoing basis:
| • | An annual licensing fee; |
| • | An annual assessment fee payment, together with the Detroit Commercial Casinos, of all MGCB regulatory and enforcement costs. The Company prepaid $10.6 million for its portion of the fiscal 2013 annual assessment in 2012; the fiscal 2012 annual assessment was paid in 2011, and was $10.2 million. |
| • | A wagering tax, calculated based on adjusted gross gaming receipts, payable daily, of 19%. |
| • | A municipal services fee payment; an amount equal to the greater of 1.25% of adjusted gross gaming receipts or $4.0 million annually. |
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Note 10. Gaming Taxes and Fees (continued)
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 $74.8 million and $75.0 million for the years ended December 31, 2012 and December 31, 2011, respectively.
The Company is 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’s adjusted gross receipts did not exceed $400 million during the calendar year ended 2012 or 2011.
Note 11. Commitments and Contingencies
The Company is a defendant in various pending litigation. 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, 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 year ended December 31, 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 a hearing on that matter before the United States Bankruptcy Court for the Eastern District of Michigan is scheduled for May 21, 2013.
The Company requested a ruling from the Michigan Department of Treasury regarding certain potential tax liabilities under the Michigan Business Tax (principally related to the survival of certain Michigan tax attributes such as net operating loss carryforwards and the tax basis of assets) arising from the June 30, 2010 restructuring transactions. The Company failed to receive a favorable ruling. 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. Such briefing was submitted and the Bankruptcy Court has not yet ruled.
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. There are currently additional claims that may still be asserted. The amounts of such claims are estimated at approximately $0.0 million, as of year ended December 31, 2012, and 2011.
Note 12. 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. Additionally, 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 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 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.
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Note 12. Stock Based Compensation (continued)
The Company accounts for its stock based compensation in accordance with ASC Topic 718. Stock based compensation expense for the years ended December 31, 2012 and December 31, 2011 totaled $0.8 million and $0.6 million, respectively. As of December 31, 2012, the Company had approximately $1.5 million of compensation cost related to nonvested awards not yet recognized. These costs are expected to be recognized over the next 2 years in accordance with the Company’s vesting schedule.
The weighted-average fair value at the grant date of restricted stock and restricted share units granted during the year ended December 31, 2012 was approximately $90.
The following table summarizes the Company’s unvested restricted share and restricted share unit stock activity:
| Restricted Shares | Restricted Share Units | |||||||
| Unvested at December 31, 2011 | 7,843 | 11,333 | ||||||
| Granted | — | 6,164 | ||||||
| Vested | (4,417 | ) | (4,666 | ) | ||||
| Unvested at December 31, 2012 | 3,426 | 12,831 | ||||||
Upon a change of control, outstanding and unvested restricted stock and restricted share units immediately vest. Based upon the change of control described in Note 17, the Company anticipates recognizing approximately $0.9 million of expense related to the accelerated vesting of outstanding and unvested stock-based compensation in the second quarter of 2013.
Note 13. 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 year ended December 31, 2012 and December 31, 2011 (in thousands, except per share data):
| Year Ended December 31, | ||||||||
| 2012 | 2011 | |||||||
| Net loss attributable to common stockholders for basic computation | $ | (23,795 | ) | $ | (24,878 | ) | ||
| Less: Preferred stock dividends | (12,194 | ) | (12,194 | ) | ||||
| Less: Preferred stock dividends on shares underlying warrants | (4,973 | ) | (4,973 | ) | ||||
| Adjusted net loss available to common stockholders | (40,962 | ) | (42,045 | ) | ||||
| Basic and diluted loss per common share: | ||||||||
| Weighted average common shares outstanding | 149,146 | 142,423 | ||||||
| Basic and diluted loss per common share | $ | (274.64 | ) | $ | (295.21 | ) | ||
Due to the Company’s net loss for the years ended December 31, 2012 and December 31, 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 14. 401(k) Plan
Employees of the Company can participate in a 401(k) Plan. For union employees, the Company makes contributions to the 401(k) Plan based on years of service. The total expense recognized under the 401(k) Plan by the Company was $2.1 million for the years ended December 31, 2012 and December 31, 2011.
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Note 15. 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 at 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.
Note 16. 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.
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Note 16. Michigan Gaming Control Board Covenant (continued)
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 advancesunder 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.
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.
Although we were in compliance with this covenant as of December 31, 2012, the Company does not anticipate being able to maintain the required minimum ratio of EBITDA to fixed charges for the twelve month measurement period ending March 31, 2013, based upon current estimates. At the April 9, 2013 meeting of the MGCB, the MGCB approved the Company’s request for suspension of the covenant for the measurement period ending March 31, 2013.
If we fail to comply with these requirements and we are not able to obtain a waiver from the MGCB, we could be subject to additional restrictions on our ability to operate our casino business, fines and suspension or revocation of our gaming license. The revocation of our gaming license or its suspension for more than a short time could result in an event of default under the credit agreement governing the Revolving Loan facility and an event of default under the indenture governing the Senior Secured Notes and could materially adversely affect or eliminate our ability to generate revenue from our casino operations. Even though we obtained a suspension of the covenant for the measurement period ending March 31, 2013 from the MGCB, the MGCB may impose additional covenants or other restrictions on our ability to incur indebtedness, which could materially adversely affect our business.
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 17. Subsequent Events
On January 2, 2013, the Company paid its semi-annual interest payment of $25.0 million on the Senior Secured Notes.
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Note 17. Subsequent Events (continued)
On January 16, 2013, the Company received notification from Athens stating it “acquired a small position in the Company” in mid-2012 and that it “entered into an agreement to purchase a large block of the Company’s shares on December 20, 2012.” Athens subsequently publicly disclosed that it had entered into agreements to acquire additional shares from two other shareholders, and in such disclosure, Athens stated that if it consummates all such transactions (entered into through January 31, 2012), it may be deemed to have beneficial ownership representing 76.8% of the voting power of all securities of the Company. The MGCB approved Athens’ purchase of the majority of shares of Greektown Superholdings on April 9, 2013. Due to the consummation of the aforementioned transaction, a §382 limitation would be applied against the net operating loss carryforward of the Company. Although such limit would not reduce the total amount of net operating loss carryforward, it would limit the amount of net operating loss carryforward which could be utilized to offset taxable income in any given future year.
As discussed in Note 16, the Company does not anticipate being able to maintain the MGCB-required minimum ratio of EBITDA to fixed charges for the twelve month measurement period ending March 31, 2013. At the April 9, 2013 meeting of the MGCB, the MGCB approved the Company’s request for suspension of the covenant for the measurement period ending March 31, 2013.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including our President (Chief Executive Officer) and Senior Vice President (Chief Financial Officer), of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2012. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, the Company’s management was required to apply its reasonable judgment. Based upon the required evaluation, our President (Chief Executive Officer) and Senior Vice President (Chief Financial Officer) concluded that as of December 31, 2012, the Company’s disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and procedures also were effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to its management, including the President (Chief Executive Officer) and Senior Vice President (Chief Financial Officer) as appropriate, to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the Company. The Company designs and maintains accounting and internal control systems to provide reasonable assurance at reasonable cost that assets are safeguarded against loss from unauthorized use or disposition, and that the financial records are reliable for preparing financial statements and maintaining accountability for assets.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management evaluated, under the supervision and with the participation of the Company’s President (Chief Executive Officer) and Senior Vice President (Chief Financial Officer), the effectiveness of the design and operation of the Company’s internal controls and procedures with respect to financial reporting as of December 31, 2012, based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation, the Company’s President (Chief Executive Officer) and Senior Vice President (Chief Financial Officer) concluded that the Company’s internal controls and procedures with respect to financial reporting were effective as of December 31, 2012.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the year ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
None
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this item is set forth in our definitive proxy statement for the 2013 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
Item 11. Executive Compensation.
The information required by this item is set forth in our definitive proxy statement for the 2013 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item is set forth in our definitive proxy statement for the 2013 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is set forth in our definitive proxy statement for the 2013 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
Item 14. Principal Accounting Fees and Services.
The information required by this item is set forth in our definitive proxy statement for the 2013 Annual Meeting of Stockholders and is incorporated herein by reference to such proxy statement.
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements. The financial statements filed as part of this report are listed on the Index to the Consolidated Financial
Statements.
(a)(2) Financial Statement Schedules. Schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
(a)(3) Exhibits. Reference is made to the Exhibit Index. The exhibits are included, or incorporated by reference, in the Annual Report on Form 10-K and are numbered in accordance with Item 601 of Regulation S-K.
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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 | |
| Date: | April 12, 2013 | |
| Signature | Title | Date | ||
| /s/ Michael Puggi | President and Chief Executive Officer | April 12, 2013 | ||
| Michael Puggi | ||||
| /s/ Glen Tomaszewski | Senior Vice President, Chief Financial Officer and Treasurer | April 12, 2013 | ||
| Glen Tomaszewski | ||||
| /s/ Freman Hendrix | Chairman of the Board and Director | April 12, 2013 | ||
| Freman Hendrix | ||||
| /s/ Charles Moore | Vice Chairman of the Board and Director | April 12, 2013 | ||
| Charles Moore | ||||
| /s/ John L. Bitove | Director | April 12, 2013 | ||
| John L. Bitove | ||||
| /s/ Yvette E. Landau | Director | April 12, 2013 | ||
| Yvette E. Landau | ||||
| /s/ Darrell Burks | Director | April 12, 2013 | ||
| Darrell Burks | ||||
| /s/James Barrett | Director | April 12, 2013 | ||
| James Barrett |
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EXHIBIT INDEX
| Exhibit No. | Description of Exhibit | |
| 2.1 | Second Amended Joint Plans of Reorganization filed with the United States Bankruptcy Court for the Eastern District of Michigan on December 7, 2009. (Schedules omitted. The Registrant hereby agrees to provide the omitted schedules to the Plan supplemental to the Securities and Exchange Commission upon request.)1 | |
| 3.1 | Certificate of Incorporation of Greektown Superholdings, Inc. 1 | |
| 3.2 | Certificate of Amendment to the Certificate of Incorporation of Greektown Superholdings, Inc. 1 | |
| 3.3 | Bylaws of Greektown Superholdings, Inc. 1 | |
| 3.4 | Amended and Restated Bylaws of Greektown Superholdings, Inc., as amended on August 8, 2012. 11 | |
| 3.5 | Amended and Restated Bylaws of Greektown Superholdings, Inc., as amended on December 30, 2012. 12 | |
| 3.6 | Amended and Restated Bylaws of Greektown Superholdings, Inc., as amended on April 8, 2013. 14 | |
| 3.7 | Rights Agreement, dated as of December 31, 2012, between Greektown Superholdings, Inc. and Continental Stock Transfer & Trust Company. 12 | |
| 3.8 | Rights Agreement, dated as of December 31, 2012, between Greektown Superholdings, Inc. and Continental Stock Transfer & Trust Company, as amended by Form 8-K filed January 9, 2013. 13 | |
| 3.9 | Amendment No.1 to Rights Agreement, effective as of April 8, 2013, between Greektown Superholdings, Inc. and Continental Stock Transfer & Trust Company.16 | |
| 4.1 | Senior Secured Superpriority Debtor-in-Possession Credit Agreement, dated December 29, 2009. 1 | |
| 4.2 | Form of Series A Preferred Stock Warrant. 1 | |
| 4.3 | Indenture, dated June 30, 2010, by and among Greektown Superholdings, Inc., Wilmington Trust FSB and certain subsidiaries of Greektown Superholdings, Inc. 2 | |
| 10.1 | Revised Development Agreement, dated August 5, 2002, by and among the City of Detroit, The Economic Development Corporation of the City of Detroit and Greektown Casino, L.L.C. 1 | |
| 10.2 | Lease between Adam J. Maida Roman Catholic Archbishop of the Archdiocese of Detroit and Greektown Casino, LLC dated August 28, 2006. 1 | |
| 10.3 | Amended Settlement Agreement dated February 22, 2010 among the City of Detroit, Greektown Casino, L.L.C., Greektown Holdings, L.L.C. and the other affiliated debtors and debtors in possession. 1 | |
| 10.4 | Collective Bargaining Agreement effective June 13, 2008, by and between Greektown Casino, LLC., dba Greektown Casino, and the International Union, Security, Police, Fire Professionals Of America (IUSPFPA), and its Amalgamated Local #1227. 1 | |
| 10.5 | Collective Bargaining Agreement dated October 17, 2007, between Greektown Casino, LLC, and The Detroit Casino Council. 1 | |
| 10.6 | Consulting Agreement dated February 12, 2010, by and between Greektown Casino, L.L.C., and WG-Michigan LLC. 1 | |
| 10.7 | Indemnification Agreement dated March 31, 2010, by and among Greektown Superholdings, Inc., George Boyer and certain other parties thereto. 1 | |
| 10.8 | Indemnification Agreement dated March 31, 2010, by and among Greektown Superholdings, Inc., Cliff J. Vallier and certain other parties thereto. 1 | |
| 10.9 | Purchase and Put Agreement, dated November 2, 2009, by and among the Put Parties. 3 | |
| 10.10 | First Amendment to the Purchase and Put Agreement dated January 11, 2010, by and among the Put Parties. 3 | |
| 10.11 | Disclosure Statement filed with the United States Bankruptcy Court for the Eastern District of Michigan on December 7, 2009. 4 | |
| 10.12 | Form of Litigation Trust Agreement, to be entered into by and among the Debtors, the trustee for the Litigation Trust and certain members of the governing board of the Litigation Trust appointed pursuant to the Plan. 3 | |
| 10.13 | Form of Litigation Trust 8% Promissory Note. 3 | |
| 10.14 | Letter Agreement, dated November 13, 2009, by and among the Put Parties and certain pre-petition lenders. 3 | |
| 10.15 | Form of Management Agreement, to be entered into by and between Greektown Superholdings, Inc. and WG-Michigan, LLC. 3 | |
| 10.16 |
Greektown Superholdings, Inc. Stock Incentive Plan. 5 |
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| 10.17 | Pledge and Security Agreement, dated June 30, 2010, by and among Greektown Superholdings, Inc., Greektown Newco Sub, Inc., Greektown Holdings, L.L.C., Greektown Casino, L.L.C., Realty Equity Company Inc., Contract Builders Corporation and Comerica Bank. 5 | |
| 10.18 | Pledge and Security Agreement, dated June 30, 2010, by and among Greektown Superholdings, Inc., Greektown Newco Sub, Inc., Greektown Holdings, L.L.C., Greektown Casino, L.L.C., Realty Equity Company Inc., Contract Builders Corporation and Wilmington Trust FSB. 5 | |
| 10.19 | Credit Agreement, dated June 30, 2010, by and between Greektown Superholdings, Inc. and Comerica Bank. 2 | |
| 10.20 | Form of Indemnification Agreement, entered into by and between Greektown Superholdings, Inc. and each of the members of the Board of Directors. 6 | |
| 10.21 | First Amendment, dated as of July 6, 2011 to the Credit Agreement between Greektown Superholdings, Inc. and Comerica Bank.7 | |
| 10.22 | Second Amendment, dated as of July 8, 2011 to the Credit Agreement between Greektown Superholdings, Inc. and Comerica Bank.7 | |
| 10.23 | Third Amendment, dated as of May 24, 2012, between Greektown Superholdings, Inc. and Comerica Bank. 9 | |
| 10.24 | Fourth Amendment to Credit Agreement and Consent, dated as of March 18, 2013, between Greektown Superholdings, Inc. and Comerica Bank. 14 | |
| 10.25 | Employment Agreement, effective June 25, 2011, between Greektown Superholdings, Inc. and Michael Puggi. 7 | |
| 10.26 | Employment Agreement, dated October 12, 2011, between Greektown Superholdings, Inc. and Glen Tomaszewski. 8 | |
| 10.27 | Employment Agreement, dated May 1, 2012, between Greektown Superholdings, Inc. and Richard Vitali. 10 | |
| 10.28 | Minority Rights Term Sheet, dated March 18, 2013. 14 | |
| 10.29 | Shareholders Agreement, dated April 8, 2013 between Greektown Superholdings, Inc. and Athens Acquisition, LLC. 15 | |
| 16.1 | KPMG Letter dated March 31, 2010. 1 | |
| 21.1 | List of Subsidiaries of Greektown Superholdings, Inc. 2 | |
| 23.1 | Consent of Ernst & Young LLP, independent registered public accounting firm. | |
| 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 | ||
1 Previously filed with Form 10
2 Previously filed with Form 8-K on July 2, 2010
3 Previously filed with Amendment No. 1 to Form 10
4 Previously filed with Amendment No. 2 to Form 10
5 Previously filed with Form S-4 on September 17, 2010
6 Previously filed with Amendment No. 3 to Form S-4 on December 15, 2010
7 Previously filed with Form 10-Q on August 15, 2011
8 Previously filed with Form 10-Q on November 14, 2011
9 Previously filed with Form 8-K on May 30, 2012
10 Previously filed with Form 10-Q on August 14, 2012
11 Previously filed with Form 8-K on August 14, 2012
12 Previously filed with Form 8-K on December 31, 2012
13 Previously filed with Form 8-K on January 9, 2013
14 Previously filed with Form 8-K on March 21, 2013
15 Previously filed with Form 8-K on April 9, 2013
16 Previously filed with Form 8-K on April 11, 2013
84