UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 333-06489
THE MAJESTIC STAR CASINO, LLC
(Exact name of registrant as specified in its charter)
Indiana 43-1664986
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Buffington Harbor Drive
Gary, Indiana 46406-3000
(219) 977-7823
(Registrant's address and telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [ ]
Shares outstanding of each of the registrant's classes of common stock as of
March 31, 1998:
Class Number of shares
----- ----------------
Not applicable Not applicable
THE MAJESTIC STAR CASINO, LLC
Index
Page No.
Part I-- FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets, as of March 31, 1998 (Unaudited)
and December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . .1
Statements of Income (Unaudited) for the three months
ended March 31, 1998 and 1997. . . . . . . . . . . . . . . . . . . . .2
Statements of Cash Flows (Unaudited) for the three months
ended March 31, 1998 and 1997. . . . . . . . . . . . . . . . . . . . .3
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . .4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . .7
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . 16
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
i
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE MAJESTIC STAR CASINO, LLC
Balance Sheets
March 31, December 31,
1998 1997
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $22,652,560 $8,083,594
Accounts receivable, less allowance for
doubtful accounts of $430,000 and $370,000,
respectively 1,032,855 879,887
Inventories 21,814 33,717
Prepaid expenses 1,196,572 995,887
---------- ---------
Total current assets 24,903,801 9,993,085
---------- ---------
Property, equipment, and vessel improvements, net 59,207,415 61,206,890
Other assets:
Organizational costs, less accumulated
amortization of $51,083 and $44,021, respectively 90,158 97,220
Deferred financing costs, less accumulated
amortization of $1,096,196 and $947,941,
respectively 3,001,894 3,150,149
Deferred costs, less accumulated amortization of
$2,041,262 and $1,758,662, respectively 3,614,963 3,893,367
Investment in Buffington Harbor Riverboats, L.L.C. 42,792,562 43,541,985
Other assets and deposits 366,710 974,551
Restricted cash -- 11,904,716
---------- ----------
Total other assets 49,866,287 63,561,988
---------- ----------
Total assets $133,977,503 $134,761,963
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current maturities of long-term debt $1,889,427 $1,889,427
Short-term debt 60,931 100,696
Accounts payable 855,006 1,519,235
Other accrued liabilities:
Payroll and related 1,014,295 1,453,789
Interest 6,683,900 3,076,512
Other accrued liabilities 2,847,007 2,939,877
Due to Buffington Harbor Riverboats, L.L.C. 783,146 719,058
--------- ---------
Total current liabilities 14,133,712 11,698,594
Long-term debt, net of current maturities 110,359,279 110,828,515
Note to member 10,759,355 10,759,355
Commitments and contingencies -- --
Total long-term liabilities 121,118,634 121,587,870
----------- -----------
Total liabilities 135,252,346 133,286,464
----------- -----------
Members' equity:
Members' contributions 24,000,000 24,000,000
Retained earnings (Accumulated deficit) (25,274,843) (22,524,501)
----------- -----------
Total members' equity (1,274,843) 1,475,499
----------- -----------
Total liabilities and members' equity $133,977,503 $134,761,963
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
THE MAJESTIC STAR CASINO, LLC
Statements of Income
(unaudited)
Three Months Three Months
Ended March 31, Ended March 31,
1998 1997
Revenues:
Casino $27,583,884 $23,629,068
Food and beverage 466,516 389,296
Other 563,540 214,428
---------- ----------
Gross revenues 28,613,940 24,232,792
less promotional allowances (132,262) (6,264)
---------- ----------
Net revenues 28,481,678 24,226,528
Costs and Expenses:
Casino 4,879,020 4,159,121
Gaming and admission taxes 8,130,253 6,849,769
Food and beverage 597,919 490,244
Advertising and promotion 2,912,010 2,189,214
General and administrative 6,526,337 5,759,183
Economic incentive - City of Gary 852,276 710,322
Depreciation and amortization 1,930,691 1,773,412
Loss on disposition of assets 734,992 --
--------- ---------
Total costs and expenses 26,563,498 21,931,265
---------- ----------
Operating income 1,918,180 2,295,263
Other Income (Expense):
Loss on investment in
Buffington Harbor Riverboats, L.L.C. (926,548) (635,314)
Interest income 223,007 733,244
Interest expense (3,819,460) (3,519,058)
Interest expense to affiliate (145,521) (150,900)
---------- ----------
Total other income (expense) (4,668,522) (3,572,028)
---------- ----------
Net income (loss) $(2,750,342) $(1,276,765)
========== =========
The accompanying notes are an integral part of these financial statements.
3
THE MAJESTIC STAR CASINO, LLC
Statements of Cash Flows
(unaudited)
For the three months For the three months
Ended March 31, 1998 Ended March 31, 1997
Cash Flows From Operating Activities
Net loss $(2,750,342) $(1,276,765)
Adjustment to reconcile net loss to net cash
provided by operating activities
Depreciation 1,492,775 1,315,712
Amortization 437,916 457,700
Loss on investment in Buffington Harbor
Riverboats, L.L.C. 926,548 635,314
Loss on disposal of chartered vessel improvements 734,992 --
Increase in accounts receivable, net (152,968) (47,295)
Decrease in inventories 11,903 2,422
(Increase) decrease in prepaid expenses (200,685) 275,773
Increase in other assets (5,621) --
Increase (decrease) in accounts payable (664,229) 786,454
Decrease in accrued payroll and other expenses (439,494) (71,651)
Increase in accrued interest 3,607,388 3,431,767
Increase (decrease) in other accrued liabilities (28,782) 203,804
--------- ---------
Net cash provided by operating activities 2,969,401 5,713,235
--------- ---------
Cash Flows From Investing Activities
Acquisition of property, equipment and vessel improvements (228,298) (7,708,067)
Increase (decrease) in Chartered Vessel deposit 609,274 (13,920)
Investment in Buffington Harbor Riverboats, L.L.C. (177,126) (1,032,508)
Deferred expenses -- (210,625)
Decrease in restricted cash 11,904,716 6,175,491
---------- ---------
Net cash provided (used) by investment activities 12,108,566 (2,789,629)
---------- ----------
Cash Flows From Financing Activities
Cash paid to reduce short-term debt (39,765) --
Cash paid to reduce long-term debt (469,236) (552,900)
---------- ---------
Net cash used by financing activities (509,001) (552,900)
---------- ---------
Net increase (decrease) in cash and cash equivalents 14,568,966 2,370,706
Cash and cash equivalents, beginning of period 8,083,594 8,935,999
---------- ---------
Cash and cash equivalents, end of period $22,652,560 $11,306,705
========== ==========
Interest paid:
Principal Member $145,520 $150,900
Equipment Debt $207,140 $139,661
The accompanying notes are an integral part of these financial statements.
4
THE MAJESTIC STAR CASINO, LLC
Notes to Financial Statements
(unaudited)
Note 1--Basis of Presentation
The Majestic Star Casino, LLC (the "Company"), was formed on December 8,
1993, as an Indiana limited liability company, to provide gaming and related
entertainment to the public. The Company commenced gaming operations in the
City of Gary (the "City") at Buffington Harbor, located in Lake County, in
the State of Indiana on June 7, 1996.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (which include normal recurring adjustments) considered
necessary for a fair presentation of the results for the interim periods
have been made. The results for the three months ended March 31, 1998 are
not necessarily indicative of results to be expected for the full fiscal
year. The financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Note 2--Investment in Buffington Harbor Riverboats, L.L.C. ("BHR"):
On October 31, 1995, the Company and Trump Indiana, Inc. (the "Joint Venture
Partner") entered into the First Amended and Restated Operating Agreement of
BHR for the purpose of acquiring and developing certain facilities for the
gaming operations in the City ("BHR Property"). BHR is responsible for the
management, development and operation of the BHR Property. The Company and
the Joint Venture Partner have each entered into an agreement with BHR (the
"Berthing Agreement") to use BHR Property for their respective gaming
operations and have committed to pay cash operating losses of BHR as
additional berthing fees. The Company and the Joint Venture Partner share
equally in the operating expenses relating to the BHR Property, except for
costs associated with food and beverage, gift shop, and valet operations,
which are allocated on a percentage of use by the casino customers of the
Company and the Joint Venture Partner.
5
The following represents selected financial information of BHR:
Buffington Harbor Riverboats, L.L.C.
Statements of Income
(Unaudited)
Three Months Three Months
Ended March 31, 1998 Ended March 31, 1997
-------------------- --------------------
Gross Revenue $ 4,815,104 $ 5,322,485
Operating Loss $ 374,788 $ 263,608
Net Loss $ 1,853,136 $ 1,688,873
Note 3--Commitments and Contingencies:
Legal Proceedings
On January 15, 1998, the Company filed a petition for "Correction of an
Error" and on January 20, 1998, filed an appeal to the March 1, 1997,
property tax assessment of the Chartered Vessel. The Company believes it
was not given proper notice of the 1997 property tax assessment in
accordance with the general assessment provisions of the property tax law
and the Company further believes the assessment of approximately $1.2
million was incorrectly calculated. According to legal counsel, the
probable 1998 property tax liability is estimated not to exceed
approximately $641,000. The tax is payable in semiannual installments due
in May and November 1998.
On March 27, 1998, a complaint was filed in the Lake County Superior Court
in East Chicago, Indiana, against BHR, the Joint Venture Partner and the
Company. The plaintiff, a former employee of the Company, claims to have
been assaulted in the BHR parking lot on June 25, 1997 and is requesting
compensatory and punitive damages totaling approximately $11 million. The
suit alleges that the Joint Venture Partner and the Company failed to
provide adequate security to prevent assaults. The Company intends to
vigorously defend against such suit. However, it is too early to determine
the outcome of such suit and the effect, if any on the Company's financial
position and results of operations.
Harbor Lease
Under a lease agreement with Lehigh Portland Cement Company ("Lehigh
Cement"), BHR has leased certain property which is integral to the gaming
operations of the Joint Venture Partner and the Company. The lease places
certain restrictions on the use of the harbor by the Joint Venture Partners,
requires the reimbursement of certain costs which may be incurred by Lehigh
Cement and requires BHR to pursue permitting of and building of a new
harbor. The lease was rent free through December 29, 1997 and subject to
certain conditions, primarily continuing progress toward permitting of and
then building of a new harbor, the lease has been extended until the earlier
of
6
December 31, 2005 or the completion of a new harbor. Starting in January
1998, under the lease, the BHR Joint Venture pays rent of $125,000 per
month. A new harbor may require new guest facilities. The level of
expenditures required for such new facilities cannot be accurately estimated
at this time.
Indiana Gaming Regulations
The ownership and operation of riverboat gaming operations in Indiana are
subject to strict state regulation under the Riverboat Gambling Act ("Act")
and the administrative rules promulgated thereunder. The Indiana Gaming
Commission ("IGC") is empowered to administer, regulate and enforce the
system of riverboat gaming established under the Act and has jurisdiction
and supervision over all riverboat gaming operations in Indiana, as well as
all persons on riverboats where gaming operations are conducted. The IGC is
empowered to regulate a wide variety of gaming and nongaming related
activities, including the licensing of supplies to, and employees at,
riverboat gaming operations and to approve the form of entity qualifiers and
intermediary and holding companies. Indiana is a new jurisdiction and the
emerging regulatory framework is not yet complete. The IGC has adopted
certain final rules and has published others in proposed or draft form which
are proceeding through the review and final adoption process. The IGC has
broad rulemaking power, and it is impossible to predict what effect, if any,
the amendment of existing rules or the finalization of currently new rules
might have on the Company's operations.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statement on Forward-Looking Information
This quarterly report includes various "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which
represent the Company's expectations or beliefs concerning future events.
Statements containing expressions such as "believes", "anticipates" or
"expects" used in the Company's press releases and reports filed with the
Securities and Exchange Commission (including periodic reports on Form 10-K
and Form 10-Q) are intended to identify forward-looking statements. All
forward-looking statements involve risks and uncertainties. Although the
Company believes its expectations are based upon reasonable assumptions
within the bounds of its knowledge of its business and operations, there can
be no assurances that actual results will not materially differ from
expected results. The Company cautions that these and similar statements
included in this report and in previously filed periodic reports are further
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements. Such factors
include, without limitation, the following: the purchase of real estate
for, and the design and construction of, a covered parking facility located
at the Company's gaming complex; the ability to fund planned development
needs and to service debt from existing operations and from new financing;
increased competition in existing markets or the opening of new gaming
jurisdictions; a decline in the public acceptance of gaming; the limitation,
conditioning or suspension of the Company's gaming license; increases in or
new taxes imposed on gaming revenues or gaming devices; a finding of
unsuitability by regulatory authorities with respect to the Company's
officers, or key employees; loss and/or retirement of key executives;
significant increase in fuel or transportation prices; adverse economic
conditions in the Company's markets; severe and unusual weather in the
Company's markets and adverse results of significant litigation matters.
Readers are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date thereof. The Company undertakes
no obligation to publicly release any revisions to such forward-looking
statements to reflect events or circumstances after the date hereof.
Overview
The Company was formed in December 1993 as an Indiana limited liability
company, to develop a riverboat casino in the City, as its sole operation.
The Company's efforts resulted in the IGC granting the Company a five year
riverboat owner's license on June 3, 1996. The Company's operations began
on June 7, 1996.
The Company and Trump Indiana, Inc. (the "Joint Venture Partner"), the
holder of a second gaming license to operate from the City, formed
Buffington Harbor Riverboats, L.L.C. ("BHR") to own and operate certain
common facilities at Buffington Harbor (the "Gaming Complex") such as the
guest
8
pavilion, vessel berths, parking lots and other infrastructure. The Company
and the Joint Venture Partner each have a fifty-percent ownership in BHR.
The Company's operations through October 19, 1997, were conducted on the
Chartered Vessel. The Chartered Vessel was chartered pursuant to a five
year lease, which began in May 1996, and contained approximately 26,000
square feet of gaming space, 932 slot machines and 50 table games.
In 1996, the Company entered into various agreements for the design,
engineering and construction of the Permanent Vessel. The Chartered Vessel
was replaced with the Permanent Vessel on October 27, 1997. The Permanent
Vessel, which is owned by the Company, contains approximately 43,000 square
feet of casino space on three decks, approximately 1,532 slot machines, 69
table games including 8 poker tables. The Permanent Vessel has an atrium,
escalators and elevators. The Company expended approximately $50 million,
excluding capitalized interest, on the Permanent Vessel.
On March 30, 1998, the Company executed an amendment to the August 17, 1995
charter agreement whereby New Yorker Acquisition Corporation, the lessor,
accepted re-delivery of the Chartered Vessel effective March 1, 1998, "as
is, where is" at Erie, Pennsylvania, from the Company, the lessee. The
Company also agreed to release a $500,000 escrow account with accrued
interest thereon, free and clear of any claims thereon to New Yorker
Acquisition Corporation, in lieu of restoring the Chartered Vessel back to
its original condition. The Company during the three months ended March 31,
1998, wrote-off assets previously utilized and left on board the Chartered
Vessel that had a net book value of approximately $735,000. As of March 1,
1998, all obligations of New Yorker Acquisition Corporation and the Company
have been fully satisfied and the parties have no further obligations under
the original charter agreement.
The federal law that prohibited cruising on federal waterways was amended
during the fourth quarter of 1996 to allow cruises and, as a result, the
Indiana Gaming Commission advised the Company that cruising could commence
November 15, 1996, subject to winter weather conditions. However, due to
winter weather conditions during the first quarter of both 1998 and 1997,
the Company conducted virtually all of its gaming operations with the
Permanent Vessel or the Chartered Vessel docked. The Company anticipates
resuming a regular cruising schedule during May 1998.
The approach of the year 2000 has become a potential problem for businesses
utilizing computers in their operations since many computer programs are
date sensitive and will only recognize the last two digits of the year,
thereby recognizing the year 2000 as the year 1900 or not at all (the "Year
2000 Issue"). Management has undertaken a comprehensive assessment of the
Company's exposure to the Year 2000 Issue and what will be required to
ensure that the Company is year 2000 compliant. The primary computer
programs utilized in the Company's operations and financial reporting
systems have been acquired from independent software vendors. The Company
is in the process of contacting these vendors to determine whether their
systems are year 2000 compliant, and, if not, establish timelines as to when
the Company will receive the required upgrades that assure that these
systems will be year 2000 compliant. Maintenance or modification costs
associated with the Year 2000 Issue will be expensed as incurred, while the
costs of any new software will be capitalized and
9
amortized over the software's useful life. The Company does not expect to
incur costs in connection with the Year 2000 Issue that would have a
material impact on operations. Although the Company presently believes that
all of its software programs will be year 2000 compliant, there can be no
assurances that the Company will not be adversely affected by the Year 2000
Issue.
Because of the climate in the Chicago metropolitan area, the Company's
operations are expected to be seasonal with stronger results expected during
the period May through September. Accordingly, the Company's results of
operations are expected to fluctuate from quarter to quarter and the results
for any fiscal quarter may not be indicative of results for future fiscal
quarters.
Results of Operations
Due to winter weather conditions or mechanical difficulties, the Company did
not operate for three days during the quarter ended March 31, 1998. The
discussions of results of operations contained herein provides a comparison
of the three month period ended March 31, 1998, with the three month period
ended March 31, 1997. Gross revenues were approximately $28.6 million and
$24.2 million during the three months ended March 31, 1998, and 1997,
respectively.
The following tables set forth: (i) summary information from the Company's
statements of income, as well as information relative to EBITDA (as defined
below) derived therefrom; and (ii) the Company's statements of income, as
well as information relative to EBITDA, expressed as a percentage of gross
revenues.
Statements of Income -- Summary Information
- --------------------------------------------
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------ ------------------
Gross Revenues (1) $28,614,000 $24,233,000
Operating Income (Loss) (2)(3) $1,918,000 $2,295,000
EBITDA (4) $5,336,000 $4,462,000
10
Statements of Income - - Percentage of Gross Revenues
- -----------------------------------------------------
For the Three Months For the Three Months
Ended March 31, 1998 Ended March 31, 1997
-------------------- ---------------------
Revenues:
Casino 96.4% 97.5%
Food and beverage 1.6% 1.6%
Other (1) 2.0% 0.9%
Gross Revenues 100.0% 100.0%
Less promotional allowances (0.5)% 0.0%
Net Revenues 99.5% 100.0%
Costs and Expenses:
Casino 17.0% 17.2%
Gaming and admission taxes 28.4% 28.3%
Food and beverage 2.1% 2.0%
Advertising and promotion 10.2% 9.0%
General and administrative (2) 22.8% 23.8%
Economic incentive-City of Gary 3.0% 2.9%
Depreciation and amortization 6.7% 7.3%
Loss on disposition of assets (3) 2.6% 0.0%
---- ----
Total 92.8% 90.5%
Operating Income (Loss): 6.7% 9.5%
Other Income (Expense):
Loss on investment in BHR (3.2)% (2.7)%
Interest income 0.8% 3.0%
Interest expense (13.4)% (14.5)%
Interest expense to affiliate (0.5)% (0.6)%
Total (16.3)% (14.8)%
---- ----
Net Income (Loss): (9.6)% (5.2)%
--- ---
EBITDA: (4) 18.7% 18.4%
---- ----
NOTES:
1. Includes a lump sum payment in March 1998 of approximately $314,000
from the Company's Joint Venture Partner to compensate the Company
for the loss of certain parking spaces to be utilized by the Joint
Venture Partner for the construction of a hotel facility.
2. Includes approximately $502,000 in expenses associated with the
termination of the charter vessel lease agreement effective March 1,
1998.
3. Includes a loss on disposal during the three months ended March 31,
1998, of approximately $735,000 for assets previously used on the
Chartered Vessel.
4. EBITDA (defined as earnings before interest, income taxes,
depreciation and amortization and, for purposes hereof, does not
include payments associated with, and termination of, the Chartered
Vessel lease) is presented solely as a supplemental disclosure to
assist in the evaluation of the Company's ability to generate cash
flow. In particular, the Company believes that an analysis of
EBITDA enhances the understanding of the financial performance of
companies with substantial depreciation and amortization.
Results for any one or more periods are not necessarily indicative of annual
results or continuing trends.
11
Comparison of the Three Months Ended March 31, 1998 and 1997
Gross revenues for the first quarter ended March 31, 1998 amounted to
approximately $28,614,000, an increase of approximately $4,381,000, or
18.1%, from gross revenues recorded in the first quarter ended March 31,
1997. The increase was attributable to an increase in the number of
customers attracted by the Permanent Vessel.
Casino revenues during the three months ended March 31, 1998, totaled
approximately $27,584,000, of which slot machines accounted for
approximately $20,380,000 (73.9%) and table games accounted for
approximately $7,204,000 (26.1%). The average number of slot machines in
operation increased to 1,532 during the three months ended March 31, 1998,
from 927 during the three months ended March 31, 1997. The average win per
slot machine per day decreased to approximately $153 for the three months
ended March 31, 1998, from approximately $206 during the three months ended
March 31, 1997. The average number of table games in operation (excluding
poker) during the three months ended March 31, 1998, increased to 61 from 50
during the three months ended March 31, 1997. The average win per table
game per day during the three months ended March 31,1998 declined to
approximately $1,277 compared to approximately $1,428 during the three
months ended March 31, 1997. During the three months ended March 31, 1998,
the Company operated 8 poker tables with an average win per table per day of
$613. The average daily win per state passenger count was $32 and the
average daily win per patron was $56 during the three months ended March 31,
1998, compared to an average daily win per state passenger count of $33 and
an average daily win per patron of $56 for the three months ended March 31,
1997.
Food and beverage revenues for the three months ended March 31, 1998,
totaled approximately $466,000 or 1.6% of gross revenues, compared to
approximately $389,000 or 1.6% of gross revenues for the three months ended
March 31, 1997. The dollar increase in food and beverage revenue is
attributed to an increase in customers attracted to the Permanent Vessel.
Other revenue totaling approximately $564,000, or 2.0% of gross revenues,
consisted primarily of a lump sum payment of $314,000 from the Company's
Joint Venture Partner to compensate the Company for the loss of certain
parking spaces to be utilized by the Joint Venture Partner for the
construction of a hotel facility, and commission income of approximately
$250,000 compared to approximately $214,000, or 0.9% of gross revenues for
the three months ended March 31, 1997.
Promotional allowances (complementaries) included in the Company's gross
food revenues for the three months ended March 31, 1998, and 1997, were
approximately $132,000 and $6,300, respectively. Promotional allowances
provided to the Company's gaming patrons at facilities located in, and/or
owned by BHR for the three months ended March 31, 1998, and 1997, totaled
approximately $278,000 and $134,000, respectively, and are characterized in
the financial statements as an expense to the casino. BHR invoices the
Company monthly for these promotional allowances at cost, which approximates
the retail value of these promotional allowances.
Casino operating expenses for the three months ended March 31, 1998, totaled
approximately $4,879,000, or 17.0% of gross revenues and 17.7% of casino
revenues, respectively, compared to
12
approximately $4,159,000, or 17.2% of gross revenues and 17.6% of casino
revenues, respectively, for the three months ended March 31, 1997. These
expenses were primarily comprised of salaries, wages and benefits, and
operating and promotional expenses of the casino. The dollar increase of
$720,000 in casino operating expenses is primarily attributed to an increase
in payroll expense and an increase in token coupon expense associated with
increased customer volumes.
Gaming and admissions taxes totaled approximately $8,130,000 for the three
months ended March 31, 1998, compared to approximately $6,850,000 for the
three months ended March 31, 1997. These taxes are levied on adjusted gross
receipts, as defined by Indiana gaming laws, at the rate of 20%, plus $3
per passenger per the state passenger count. An additional $852,000 was
paid during the three months ended March 31, 1998, compared to
approximately $710,000 in the three months ended March 31, 1997, to the City
under an agreement whereby the Company pays 3% of the adjusted gross
receipts directly to the City.
Advertising and promotion expenses for the three months ended March 31,
1998, totaled approximately $2,912,000, or 10.2% of gross revenues, compared
to approximately $2,189,000, or 9.0% of gross revenues during the three
months ended March 31, 1997. Advertising and promotion expenses included
salaries, wages and benefits of the marketing and casino service
departments, as well as promotions, advertising and special events. The
1.2% increase in advertising and promotion expenses as a percentage of gross
revenues during the three months ended March 31, 1998 was primarily the
result of increased expenditures associated with an increase in promotions,
special events and general media including billboards, print and radio to
heighten the Company's overall presence within the marketplace.
General and administrative expenses for the three months ended March 31,
1998 were approximately $6,526,000, or 22.8% of gross revenues, compared to
$5,759,000, or 23.8% of gross revenues, during the three months ended March
31, 1997. These expenses included approximately $1,851,000 for berthing
fees paid to BHR, $2,059,000 for marine operations and $465,000 for security
and surveillance operations during the first quarter of 1998. The dollar
increase in these expenses is primarily attributed to an increase of
$338,000 in marine operations as a result of the release of $502,000 in an
escrow account to satisfy certain obligations associated with the
termination of the charter vessel lease on March 1, 1998, as well as a
$250,000 increase in property taxes.
Depreciation and amortization for the first quarter ended March 31, 1998,
was approximately $1,931,000, or 6.7% of gross revenues, compared to
approximately $1,774,000, or 7.3% of gross revenues, during the three months
ended March 31, 1997. The dollar increase in depreciation expense for the
three months ended March 31, 1998, is principally attributable to the
completion of and placing in service of the Permanent Vessel. On October
27, 1997, the Chartered Vessel was replaced with the Permanent Vessel.
Operating income for the three months ended March 31, 1998, was
approximately $1,918,000, or 6.7% of gross revenues, compared to an
operating income for the three months ended March 31, 1997, of $2,295,000,
or 9.5% of gross revenues. During the three months ended March 31, 1998,
13
the Company wrote-off assets used on the Chartered Vessel that had a net
book value of approximately $735,000.
Net interest expense for the three months ended March 31, 1998, was
$3,742,000, or approximately 13.1% of gross revenues, compared to
$2,937,000, or approximately 12.1% for the same period last year. The
increase in net interest expense is attributed to the Permanent Vessel being
placed into service combined with the additional interest expense associated
with the financing of new gaming equipment in late 1997 for the Permanent
Vessel. During the three months ended March 31, 1997, approximately
$420,000 of interest expense was capitalized during the construction of the
Permanent Vessel. As of March 31, 1998, and 1997, the Company had accrued
contingent interest to date of approximately $1,518,000 and $843,000,
respectively. No contingent interest was paid during the three months ended
March 31, 1998, or 1997.
The Company's loss relating to its investment in BHR for the three months
ended March 31, 1998, was approximately $927,000. The loss represents the
Company's 50% share of BHR's non-cash net loss.
As a result of the foregoing, the Company experienced net losses of
approximately $2,750,000 and $1,277,000 during the three months ended March
31, 1998, and 1997, respectively.
Earnings Before Interest, Income Taxes, Depreciation and Amortization
("EBITDA")
EBITDA is presented solely as a supplemental disclosure and is used by the
Company to assist in the evaluation of the cash generating ability of its
gaming business.
EBITDA (excluding loss on disposal of assets of $735,000 and Chartered
Vessel lease and termination payments of approximately $752,000) during the
three months ended March 31, 1998, was approximately $5,336,000 or 18.7% of
gross revenues, compared to approximately $4,462,000, or 18.4% of gross
revenues, during the three months ended March 31, 1997. The increase in
EBITDA is primarily due to an increase in casino revenue associated with
operating the Permanent Vessel, as well as the recognition of a $314,000
lump sum payment by the Joint Venture Partner to the Company to compensate
the Company for the loss of certain parking spaces to be utilized by the
Joint Venture Partner for the construction of a hotel facility.
EBITDA should be viewed only in conjunction with all of the Company's
financial data and statements, and should not be construed as an alternative
either to income from operations (as an indicator of the Company's operating
performance) or to cash flows from operating activities as a measure of
liquidity.
Liquidity and Capital Resources
At March 31, 1998, the Company had cash and cash equivalents of
approximately $22.7 million. During the three months ended March 31, 1998,
the Company expended approximately $228,000
14
for property and equipment associated with the Permanent Vessel. The Company
has also contributed approximately $177,000 from working capital to BHR for
general enhancements during this period.
The Company, to date, has met its capital requirements through net cash from
operations, capital contributions and loans. For the three months ended
March 31, 1998, net cash provided from operations totaled approximately $3
million. The consolidated cash flow as defined in the Indenture governing
the Company's Senior Secured Notes was approximately $4.8 million in the
three months ended March 31, 1998. The consolidated cash flow in the second
semiannual period (October through March) was approximately $5.6 million.
As of March 31, 1998, loans included: (i) $105 million principal amount of
12.75% Senior Secured Notes due 2003, with additional contingent interest
equal to 5% of the Company's consolidated cash flow (as defined in the
underlying Indenture); (ii) approximately $10.8 million borrowed from BDI;
and (iii) approximately $7.2 million of equipment financing.
During January 1998, approximately $10.8 million of the proceeds from the
Senior Secured Notes, together with interest of $1.1 million earned thereon,
was reclassified from restricted cash to operating cash as the proceeds were
not required to complete the Permanent Vessel.
The Senior Secured Notes mature on May 15, 2003 and are redeemable at the
option of the Company, in whole or part, at any time on or after May 15,
2000, at various premiums. Holders of the Senior Secured Notes have the
right to require that the Company repurchase the notes at a premium under
certain conditions including a change in control of the Company.
The Senior Secured Notes carry a coupon interest rate of 12.75%, plus
contingent interest equal to 5% of the Company's Consolidated Cash Flow, as
defined, (not to exceed $3 million annually), both payable semi-annually.
The payment of contingent interest can be deferred under certain conditions.
The contingent interest ordinarily payable on November 15, 1996, May 15,
1997, and November 15, 1997, was deferred, as allowed under the terms of the
Indenture. During the three months ended March 31, 1998, and 1997, the
Company accrued contingent interest payable of approximately $265,000 and
$240,000, respectively. The Senior Secured Notes are collateralized by
essentially all the assets of the Company.
The Indenture contains financial and other covenants, which, among other
things, limits the Company's ability to (1) issue indebtedness, (2) make
investments, (3) make distributions and equity repurchases, (4) enter into
merger, consolidation and asset sale transactions, (5) create liens and (6)
enter into transactions with affiliates. These restrictions are subject to
a number of qualifications and exceptions as described in the Indenture.
If the Company is determined to be in default under the Indenture, the
Senior Secured Notes may be accelerated, which would materially adversely
affect the Company.
15
Under the terms of its development agreement with the City, the Company
committed, among other things, to make development expenditures of $116
million for its casino and associated infrastructure in the City over the
next five years. The Company has met or accrued a significant portion of
these commitments. The two principal components of the remaining portion of
these commitments are as follows: (1) $10 million for off-site development
in the City by 1998/1999 with the particular project(s) to be agreed to by
the City; and (2) $12 million (a substantial portion of which has been
expended through March 31, 1998, with the exact amount to be agreed upon by
the City and the Company) to be expended over the five years following the
June 1996 opening of the casino for enhancements to the Company's operations
at Buffington Harbor and/or BHR's facilities.
In May 1996, the Company arranged for a $12.5 million five year surety bond
(the "Bond") to be issued to the IGC. The Bond's primary purpose was to
provide collateral for completion of the Company's off-site development
obligations under the Development Agreement. In 1996 to support the
Company's obligations to the bonding company, the Company obtained a $3.5
million letter of credit from a bank to benefit the bonding company. The
beneficial owner (the "Owner") of the Company guaranteed the Company's
obligations to the bonding company under the Bond and to the bank under the
$3.5 million letter of credit. During the second quarter of 1998, the
Company anticipates replacing the Owner's financial guarantee and depositing
approximately $3.6 million with the bank to guarantee the letter of credit
to benefit the bonding company.
The Company anticipates that additional capital contributions to BHR,
currently estimated not to exceed $1,000,000, may be required for the BHR
facilities. The Company and the Joint Venture Partner are continuing to
review the feasibility of purchasing additional property for the
construction of a covered parking facility at the Gaming Complex. The
timing and cost of purchasing the additional property and of constructing a
covered parking facility at the Gaming Complex is undetermined at this time.
The Company expects to fund such further investments from operations and/or
from the funds designated for the repayment of the note due to BDI, provided
that the proceeds from the note due to BDI have not been utilized and are
available. There can be no assurance that such facility will be constructed
or that sufficient funds will be available for such construction.
Under a lease agreement with Lehigh Portland Cement Company ("Lehigh
Cement"), BHR has leased certain property which is integral to the gaming
operations of the Company and its Joint Venture Partner. The lease places
certain restrictions on the use of the harbor by the Company and its Joint
Venture Partner and requires the reimbursement of certain costs which may be
incurred by Lehigh Cement. The lease was rent free through December 29,
1997 and, subject to certain conditions, such as progress towards permits
for a new harbor, has been extended to the earlier of December 21, 2005, or
to such time as BHR has obtained requisite regulatory permits and completed
construction of its permanent harbor, with a monthly payment of $125,000.
BHR anticipates filing the requisite regulatory permits during 1998. If the
regulatory permits are obtained, the BHR Joint Venture may be required to
construct a new harbor, berthing and guest facilities. The level of
expenditures required for such new facilities cannot be accurately estimated
16
at this time.
Through October 19, 1997 the Company conducted its gaming operations on the
Chartered Vessel. On March 30, 1998, the Company executed an amendment to
the August 17, 1995 Charter Agreement whereby New Yorker Acquisition
Corporation, the lessor, accepted re-delivery of the Chartered Vessel
effective March 1, 1998 "as is where is" at Erie, Pennsylvania from the
Company. The Company also agreed to release to New Yorker Acquisition
Corporation a $500,000 escrow account with accrued interest thereon, free
and clear of any claims in lieu of restoring the Chartered Vessel back to
its original condition. The Company during the three months ended March 31,
1998, wrote-off assets previously utilized and left on board the Chartered
Vessel that had a net book value approximately $735,000. As of March 1,
1998 all obligations of the Company and New Yorker Acquisition Corporation
have been deemed fully satisfied and the parties have no further
obligations under the original charter agreement.
Although BDI to date has contributed approximately $24 million to the
Company, the Members' Equity Account became negative during the first
quarter of 1998. The decline in the Members' Equity Account is primarily
attributed to start-up costs, operating losses and the disposition of assets
previously utilized on the Charter Vessel.
Based upon the Company's anticipated future operations on board the
Permanent Vessel and capital expenditures, management believes that the
available cash flow from the casino's future operations and certain
equipment financing, together with the proceeds from the Senior Secured
Notes and the note due to BDI, will be adequate to meet the Company's
anticipated future requirements for working capital, the remaining
development obligations to the City, capital expenditures and scheduled
payments of interest and principal on the Senior Secured Notes and other
permitted indebtedness for 1998. No assurance can be given, however, that
operating cash flow from the Permanent Vessel in light of increased
competition within the marketplace and such other proceeds will be
sufficient for such purposes. Also there is no guaranty that the Note due
to BDI will not be repaid in 1998. The Company will seek, if necessary and
to the extent permitted under the Indenture, additional financing through
borrowings and debt or equity financing. There can be no assurance that
additional financing, if needed, will be available to the Company, or that,
if available, the financing will be on terms favorable to the Company. In
addition, there is no assurance that the Company's estimate of its
reasonably anticipated liquidity needs is accurate or that unforeseen events
will not occur, resulting in the need to raise additional funds.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
17
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
Various legal proceedings are pending against the Company. Management
considers all such pending proceedings, primarily personal injury claims, to
be ordinary litigation incidental to the character of the Company's
business. Management believes that the resolution of these proceedings will
not, individually or in the aggregate, have a material effect on the
Company's financial condition or results of operations.
On January 15, 1998, the Company filed a petition for "Correction of an
Error" and on January 20, 1998, filed an appeal to the March 1, 1997
property tax assessment of the Chartered Vessel. The Company believes it
was not given proper notice of the 1997 property tax assessment in
accordance with the general assessment provisions of the property tax law
and the Company further believes the assessment of approximately $1.2
million was incorrectly calculated. According to legal counsel, the
probable 1998 property tax liability is estimated not to exceed
approximately $641,000. The tax is payable in semiannual installments due
in May and November 1998.
On March 27, 1998, a complaint was filed in the Lake County Superior Court
in East Chicago, Indiana, against BHR, Trump Indiana, Inc. (the "Joint
Venture Partner") and the Company. The plaintiff, a former employee of the
Company, claims to have been assaulted in the BHR parking lot on June 25,
1997 and is requesting compensatory and punitive damages totaling
approximately $11 million. The suit alleges that the Joint Venture Partner
and the Company failed to provide adequate security to prevent assaults.
The Company intends to vigorously defend against such suit. However, it is
too early to determine the outcome of such suit and the effect, if any on
the Company's financial position and results of operations.
From time to time, the Company may be involved in routine administrative
proceedings involving alleged violations of certain provisions of the
Riverboat Gambling Act. Management believes that the outcome of any such
proceedings will not, either individually or in the aggregate, have a
material adverse effect on the Company or its ability to retain and/or renew
any license required under the Riverboat Gambling Act for the Company's
operations. In March 1998, the Company agreed to settle two such
proceedings with the payment of $120,000 in April 1998 to the IGC. No such
proceedings are pending at this time.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
Exhibit
No. Description
- -- -----------
10.17 Amendment to Charter Agreement, dated March 27, 1998, by and
among New Yorker Acquisition Corporation, the Company and
President Casinos, Inc., as amended to date.
18
10.18 Agreement on Ground Leases between Buffington Harbor Riverboats,
L.L.C. and Trump Indiana Realty, LLC; and BHR and The Majestic
Star Casino, LLC, dated February 24, 1998.
27 Financial Data Schedule (Edgar Version Only).
b. REPORTS ON FORM 8-K
None
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on May
12, 1998.
THE MAJESTIC STAR CASINO, LLC
By: Barden Development Inc., Manager
By: /S/ DON H. BARDEN
Don H. Barden
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
/S/ DON H. BARDEN President and Chief Executive May 12, 1998
Don H. Barden Officer of the Manager and the
Company (Principal Executive Officer)
/S/ MICHAEL E. KELLY Vice President and Chief Financial May 12, 1998
Michael E. Kelly Officer (Principal Financial and
Accounting Officer of the Company)
EXHIBIT INDEX
Exhibit
No. Description
- --- ---------
10.17 Amendment to Charter Agreement, dated March 27, 1998, by and among
New Yorker Acquisition Corporation, the Company and President
Casinos, Inc., as amended to date.
10.18 Agreement on Ground Leases between Buffington Harbor Riverboats,
L.L.C. and Trump Indiana Realty, LLC; and BHR and The Majestic Star
Casino, LLC, dated February 24, 1998.
27 Financial Data Schedule (Edgar Version Only).