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, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 333-06489
<Table>
INDIANA THE MAJESTIC STAR CASINO, LLC 43-1664986
INDIANA THE MAJESTIC STAR CASINO CAPITAL CORP. 35-2100872
(State or other (Exact name of registrant as specified in its charter) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
</Table>
301 FREMONT STREET
LAS VEGAS, NEVADA 89101
(702) 388 - 2224
(Address of principal executive offices and telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes X No
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes No X
------- -------
As of March 31, 2004, shares outstanding of each of the registrant's classes of
common stock:
<Table>
<Caption>
Class Number of shares
- ----- ----------------
Not applicable Not applicable
</Table>
THE MAJESTIC STAR CASINO, LLC
INDEX
<Table>
<Caption>
PART I FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2004 (Unaudited)
and December 31, 2003 ............................................... 1
Consolidated Statements of Operations for the three months
ended March 31, 2004 and 2003 (Unaudited) ........................... 2
Consolidated Statements of Changes in Member's Deficit for the three
months ended March 31, 2004 (Unaudited) and the year ended
December 31, 2003 ................................................... 3
Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and 2003 (Unaudited) ................................. 4
Notes to Consolidated Financial Statements .......................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......... 40
Item 4. Controls and Procedures ............................................. 41
PART II OTHER INFORMATION
Item 1. Legal Proceedings ................................................... 42
Item 6. Exhibits and Reports on Form 8-K .................................... 43
SIGNATURES ................................................................... S-1
</Table>
i
PART I
FINANCIAL INFORMATION
ITEM 1
CONSOLIDATED FINANCIAL STATEMENTS
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
March 31, December 31,
2004 2003
-------------- --------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 20,517,861 $ 22,058,016
Restricted cash 1,400,000 1,400,000
Accounts receivable, less allowance for doubtful accounts of $321,003 and
$258,546 as of March 31, 2004 and December 31, 2003, respectively 2,517,248 2,212,546
Inventories 700,523 707,685
Prepaid expenses 2,974,712 2,126,583
Receivable from affiliate 301,300 210,135
Note receivable due from related party 66,000 133,000
Other 35,970 --
-------------- --------------
Total current assets 28,513,614 28,847,965
-------------- --------------
Property, equipment and improvements, net 163,880,893 142,167,931
Intangible assets, net 8,917,996 9,249,247
Goodwill 5,922,398 5,922,398
Other assets:
Deferred financing costs, net of accumulated amortization
of $841,895 and $552,079 as of March 31, 2004 and
December 31, 2003, respectively 6,109,478 6,289,187
Investment in Buffington Harbor Riverboats, LLC 29,174,857 29,733,594
Other assets 9,253,857 11,004,456
-------------- --------------
Total other assets 44,538,192 47,027,237
-------------- --------------
Total Assets $ 251,773,093 $ 233,214,778
============== ==============
LIABILITIES AND MEMBER'S DEFICIT
Current Liabilities:
Accounts payable $ 3,291,920 $ 6,387,955
Payable to related party -- 247
Accrued liabilities:
Payroll and related 6,049,250 6,487,107
Interest 12,850,555 6,023,703
Progressive jackpots 2,847,760 2,673,662
Slot club liabilities 588,320 498,070
Other accrued liabilities 14,126,429 11,595,665
-------------- --------------
Total current liabilities 39,754,234 33,666,409
Long-term debt, net of current maturities 314,790,863 301,715,324
-------------- --------------
Total Liabilities 354,545,097 335,381,733
-------------- --------------
Member's Deficit (102,772,004) (102,166,955)
-------------- --------------
Total Liabilities and Member's Deficit $ 251,773,093 $ 233,214,778
============== ==============
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
1
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------
2004 2003
------------ ------------
OPERATING REVENUES:
Casino $ 71,042,503 $ 65,256,203
Rooms 1,873,837 1,925,669
Food and beverage 3,344,460 3,220,198
Other 1,059,644 935,165
------------ ------------
Gross revenues 77,320,444 71,337,235
Less promotional allowances 5,027,775 4,480,958
------------ ------------
Net operating revenues 72,292,669 66,856,277
------------ ------------
OPERATING COSTS AND EXPENSES:
Casino 23,107,517 20,277,519
Rooms 465,242 602,837
Food and beverage 1,457,442 1,300,603
Other 241,533 252,171
Gaming taxes 15,184,114 13,575,621
Advertising and promotion 3,749,256 3,701,938
General and administrative 13,425,582 9,319,122
Corporate expense 805,606 883,187
Economic incentive - City of Gary 1,177,155 1,060,247
Depreciation and amortization 4,499,843 4,396,503
Loss on investment in Buffington Harbor Riverboats, LLC 612,841 604,021
Loss on disposal of assets 1,055 109,720
------------ ------------
Total operating costs and expenses 64,727,186 56,083,489
------------ ------------
Operating income 7,565,483 10,772,788
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 5,114 35,742
Interest expense (7,058,045) (7,955,798)
Other non-operating expense (28,209) (47,814)
------------ ------------
Total other expense (7,081,140) (7,967,870)
------------ ------------
Income from continuing operations 484,343 2,804,918
DISCONTINUED OPERATION
Income from discontinued operation -- 230,299
------------ ------------
Net income $ 484,343 $ 3,035,217
============ ============
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
2
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND THE YEAR ENDED DECEMBER 31, 2003
(UNAUDITED)
<Table>
<Caption>
Member's Deficit
----------------
BALANCE, DECEMBER 31, 2002 $ (24,174,562)
Net loss (43,851,974)
Distributions to Barden Development, Inc. (6,065,213)
Distribution of Barden Nevada Gaming, LLC to Barden
Development, Inc. (27,515,400)
Appreciated value of land purchased from a related party (559,806)
----------------
BALANCE, DECEMBER 31, 2003 $ (102,166,955)
Net income 484,343
Distribution to Barden Development, Inc. (1,089,392)
----------------
BALANCE, MARCH 31, 2004 $ (102,772,004)
================
</Table>
The accompanying notes are an integral part of
these consolidated financial statements.
3
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------
2004 2003(1)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 484,343 $ 3,035,217
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 3,844,304 3,720,735
Amortization 655,539 1,346,820
Loss on investment in Buffington Harbor Riverboats, LLC 612,841 604,021
Loss on disposal of assets 1,055 109,720
Changes in operating assets and liabilities:
Decrease in accounts receivable, net 1,195,298 205,243
Decrease in inventories 7,163 6,477
Increase in prepaid expenses (879,579) (672,937)
Decrease in other assets 246,079 151,342
Decrease in accounts payable (3,096,035) (677,909)
Decrease in related parties payables (91,412) --
Decrease in accrued payroll and other expenses (437,858) (1,049,452)
Increase in accrued interest 6,826,412 7,955,736
Increase (decrease) in other accrued liabilities 2,795,112 (95,433)
------------ ------------
Net cash provided by operating activities 12,163,262 14,639,580
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash -- (250,000)
Acquisition of property and equipment (25,665,295) (1,986,298)
Appreciated value of land purchased from a related party -- (559,806)
Decrease in prepaid leases and deposits -- 1,000
Investment in Buffington Harbor Riverboats, LLC (54,104) --
Proceeds from disposal of equipment 106,975 29,750
------------ ------------
Net cash used in investing activities (25,612,424) (2,765,354)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance cost for the 9 1/2% senior secured notes (73,110) --
Issuance cost for the 11.653% senior secured notes -- (2,337)
Issuance cost for the $80.0 million secured credit facility (36,997) --
Proceeds from line of credit 20,001,293 --
Repayment of line of credit (6,959,787) --
Repayment of notes from related parties 67,000 982,911
Repayment of long-term debt -- (75,209)
Distribution to Barden Development, Inc. (1,089,392) (1,247,782)
------------ ------------
Net cash provided by (used in) financing activities 11,909,007 (342,417)
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,540,155) 11,531,809
Cash and cash equivalents, beginning of period 22,058,016 24,547,881
------------ ------------
Cash and cash equivalents, end of period $ 20,517,861 $ 36,079,690
============ ============
INTEREST PAID:
Equipment Debt $ -- $ 4,981
Lines of credit 231,193 61
------------ ------------
$ 231,193 $ 5,042
============ ============
</Table>
- ----------
(1) Contained within the March 31, 2003 consolidated statement of cash flows are
the cash flow activities of Barden Nevada Gaming, LLC, whose equity
interests were spun off to Barden Development, Inc. on December 31, 2003.
The accompanying notes are an integral part of
these consolidated financial statements.
4
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
The Majestic Star Casino, LLC (the "Company") was formed on December 8, 1993
as an Indiana limited liability company to provide gaming and related
entertainment to the public. The Company commenced gaming operations in the City
of Gary at Buffington Harbor, located in Lake County, Indiana on June 7, 1996.
Majestic Investor, LLC ("Investor") was formed in September 2000 to satisfy the
Company's off-site development obligations under the Development Agreement with
the City of Gary.
As a result of the acquisition of three additional casino properties in
December of 2001 from Fitzgeralds Gaming Corporation and certain of its
affiliates, The Majestic Star Casino, LLC is a multi-jurisdictional gaming
company that directly owns and operates one riverboat gaming facility located in
Gary, Indiana ("Majestic Star") and through its wholly-owned subsidiary,
Majestic Investor Holdings, LLC ("Majestic Investor Holdings" or "Investor
Holdings") owns two Fitzgeralds-brand casino-hotels located in Tunica County,
Mississippi ("Barden Mississippi Gaming, LLC", "Barden Mississippi" or
"Fitzgeralds Tunica"), Black Hawk, Colorado (casino only) ("Barden Colorado
Gaming, LLC", "Barden Colorado" or "Fitzgeralds Black Hawk"), and prior to
January 1, 2004, owned a third Fitzgeralds-brand casino-hotel located in Las
Vegas, Nevada ("Barden Nevada Gaming, LLC", "Barden Nevada" or "Fitzgeralds Las
Vegas"). See Note 2 for further discussion of the spin-off of Fitzgeralds Las
Vegas on December 31, 2003.
The Majestic Star Casino Capital Corp., a wholly-owned subsidiary of the The
Majestic Star Casino, LLC, was originally formed for the purpose of facilitating
the offering of The Majestic Star Casino, LLC's $130.0 million 10 7/8% senior
secured notes due 2006 (the "10 7/8% notes") and Majestic Investor Capital
Corp., a wholly-owned subsidiary of Investor Holdings, was formed specifically
to facilitate the offering of Investor Holdings' $152.6 million 11.653% senior
secured notes due 2007 (the "11.653% notes"). Both The Majestic Star Casino
Capital Corp. and Majestic Investor Capital Corp. do not have any assets or
operations. On October 7, 2003, the Company issued $260.0 million 9 1/2% senior
secured notes (the "9 1/2% notes") and entered into an $80.0 million credit
facility (the"$80.0 million credit facility"). The proceeds from the 9 1/2%
notes and $28.0 million from the $80.0 million credit facility were used to
purchase and redeem all of the 10 7/8% notes and purchase approximately 89.3%,
or $135.5 million, of the 11.653% notes (see Note 6 for a further discussion of
the debt refinancing and the 9 1/2% notes).
Except where otherwise noted, the words "we," "us," "our," and similar
terms, as well as the "Company," refer to The Majestic Star Casino, LLC and all
of its direct and indirect subsidiaries.
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited. All
inter-company transactions and balances have been eliminated. Investments in
affiliates in
5
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which the Company has the ability to exercise significant influence, but not
control, are accounted for by the equity method. These financial statements have
been prepared in accordance with accounting principals generally accepted in the
United States of America, or "GAAP" for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
certain information and footnote disclosures normally included in financial
statements have been condensed or omitted. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates incorporated into our consolidated
financial statements include the estimated useful lives of depreciable and
amortizable assets, the estimated allowance for doubtful accounts receivable,
estimated cash flow in assessing the recoverability of long-lived assets,
estimated liabilities for our self-insured medical plan, slot club point
programs and litigation, claims and assessments. Actual results could differ
from those estimates.
In the opinion of management, all adjustments (which include normal
recurring adjustments) considered necessary for a fair presentation of the
results for the interim periods have been made. The results for the three months
ended March 31, 2004 are not necessarily indicative of results to be expected
for the full fiscal year. The financial statements should be read in conjunction
with the financial statements and notes thereto included in The Majestic Star
Casino, LLC's Annual Report on Form 10-K for the year ended December 31, 2003.
SPIN-OFF
The spin-off of Fitzgeralds Las Vegas to Barden Development, Inc. ("BDI"), our
member, occurred on December 31, 2003. As such, the assets, liabilities and
equity of Fitzgeralds Las Vegas are not included in our consolidated balance
sheets as of March 31, 2004 or at December 31, 2003. The consolidated statements
of operations and cash flows for the three months ended March 31, 2004 do not
include the activities of Fitzgeralds Las Vegas. However, the consolidated
statement of operations recognizes Fitzgeralds Las Vegas as a discontinued
operation for the three months ended March 31, 2003.
RECLASSIFICATIONS
The consolidated financial statements and footnotes for the prior year
reflect certain reclassifications to conform to the current year presentation,
which have no effect on previously reported net income.
6
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROMOTIONAL ALLOWANCES
Cash discounts and other cash incentives related to gaming play and the
retail value of accommodations, food and beverage, and other services furnished
to hotel/casino guests without charge are included in gross revenue and then
deducted as promotional allowances. The estimated departmental cost of providing
such promotional allowances is included primarily in casino operating expenses
as follows:
<Table>
<Caption>
For the three months ended March 31,
---------------------------------------
2004 2003
--------------- ----------------
Hotel $ 563,667 $ 349,146
Food and Beverage 2,177,407 2,088,478
Other 121,422 101,451
--------------- ----------------
Total $ 2,862,496 $ 2,539,075
=============== ================
</Table>
The estimated retail value of such promotional allowances is included in
operating revenues as follows:
<Table>
<Caption>
For the three months ended March 31,
---------------------------------------
2004 2003
--------------- ----------------
Hotel $ 1,181,455 $ 825,959
Food and Beverage 2,319,501 2,303,569
Other 313,800 298,485
--------------- ----------------
Total $ 3,814,756 $ 3,428,013
=============== ================
</Table>
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 ("SFAS 150") "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
Provisions of SFAS 150 became effective for financial instruments entered into
or modified after May 31, 2003. The Company adopted SFAS 150 on January 1, 2004.
The adoption had no impact on its financial position, results of operations or
cash flows.
NOTE 3. RESTRICTED CASH
As of both March 31, 2004 and December 31, 2003, restricted cash relating to
the Company's self-insured workers compensation programs totaled $1.4 million.
The Majestic Star Casino, LLC purchased a $0.9 million certificate of deposit to
secure a letter of credit related to the Majestic Star workers compensation
program. The certificate of deposit is recorded as restricted cash. Investor
Holdings maintains a letter of credit in the amount of $0.5 million for the
self-insured workers compensation programs at Fitzgeralds Tunica, Fitzgeralds
Black Hawk and Fitzgeralds Las Vegas. The bank that issued the $0.5 million
letter of credit has restricted the cash of Investor Holdings in an equivalent
amount as security for the letter of credit.
7
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INTANGIBLE ASSETS
Intangible assets at Investor Holdings primarily include $7.8 million for
customer relationships and $3.4 million for trade names. The $0.7 million
intangible asset represents an excursion license for a riverboat, which
commenced full operations on March 18, 2004. An intangible asset of $5.2 million
pertaining to the Nevada gaming license was transferred to Fitzgeralds Las Vegas
and subsequently spun off to BDI. Intangible assets for customer relationships
and trade names are being amortized over a period of 8-10 years. The riverboat
excursion license is being amortized over 15 years, the period of the license.
In accordance with SFAS 142, goodwill is not amortized but instead subject to
impairment tests at least annually.
The gross carrying amount and accumulated amortization of the Company's
intangible assets, other than goodwill, as of March 31, 2004 is as follows:
<Table>
<Caption>
Gross Carrying Accumulated Net Amount Expected
Amount Amortization March 31, 2004 Life
-------------- ------------ -------------- --------
(in thousands)
Amortized intangible assets:
Customer relationship $ 7,840 $ (2,277) $ 5,563 8 yrs
Trade names 3,450 (795) 2,655 10 yrs
Riverboat excursion license 700 -- 700 15 yrs
-------------- ------------ --------------
Total intangible assets $ 11,990 $ (3,072) $ 8,918
============== ============ ==============
</Table>
The amortization expense recorded on the intangible assets for both of the
three-month periods ended March 31, 2004 and 2003 was $0.3 million. The
riverboat excursion license will be amortized at the rate of approximately
$4,000 per month beginning in April 2004.
NOTE 5. INVESTMENT IN BUFFINGTON HARBOR RIVERBOATS, L.L.C.
On October 31, 1995, the Company and Trump Indiana, Inc., our Joint Venture
Partner ("Trump"), entered into the First Amended and Restated Operating
Agreement of Buffington Harbor Riverboats, LLC ("BHR") for the purpose of
acquiring and developing certain facilities for the gaming operations in the
City of Gary ("BHR Property"). BHR is responsible for the management,
development and operation of the BHR Property. The Company and Trump have each
entered into an agreement with BHR (the "Berthing Agreement") to use BHR
Property for their respective gaming operations and have committed to pay the
cash operating losses of BHR as additional berthing fees. All expenditures
requiring a cash outlay by BHR are billed to Trump and the Company at cost.
Accordingly, BHR records as expenses the cost of providing such services and
records as other revenues the amounts billed to Trump and the Company.
8
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has paid to BHR approximately $1.8 million and $1.3 million of
berthing fees for the three months ended March 31, 2004 and 2003, respectively.
Such amounts are recorded in general and administrative expense in the
consolidated statement of operations. In addition, the Company has paid
approximately $0.4 million and $0.2 million of costs associated with food and
beverages, and valet services, and such amounts are recorded in casino expense
in the Company's consolidated statements of operations, for the three months
ended March 31, 2004 and 2003, respectively. After the Company and Trump
reimburse BHR for all cash operational losses, the remaining net loss of BHR
results from depreciation expense associated with the BHR property. The
allocated net losses are approximately $0.6 million for each of the three month
periods ended March 31, 2004 and 2003, respectively.
The following represents selected financial information for BHR as of March
31, 2004 and December 31, 2003 and for the three months ended March 31, 2004 and
2003:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
BALANCE SHEETS
Cash $ 21,011 $ 82,639
Current assets, excluding cash 3,922,786 5,013,217
Property, plant and equipment, net 60,699,441 61,881,975
Other assets 100,094 101,248
------------ ------------
Total assets $ 64,743,332 $ 67,079,079
============ ============
Current liabilities $ 6,005,127 $ 7,223,402
Capital lease obligation, net of current 388,491 388,491
------------ ------------
Total liabilities 6,393,618 7,611,893
Total members' equity 58,349,714 59,467,186
------------ ------------
Total liabilities and members' equity $ 64,743,332 $ 67,079,079
============ ============
The Majestic Star Casino, LLC member's equity $ 29,174,857 $ 29,733,593
============ ============
</Table>
<Table>
<Caption>
FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
----------- -----------
STATEMENTS OF INCOME
Gross revenue $ 1,955,021 $ 3,377,808
Operating loss $(1,225,545) $(1,203,740)
Net loss $(1,225,679) $(1,208,041)
</Table>
9
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. LONG-TERM DEBT
<Table>
<Caption>
March 31, December 31,
Long-term debt outstanding at March 31, 2004 and December 31, 2003 is as follows: 2004 2003
------------- --------------
$260,000,000 senior secured notes, bearing interest of 9 1/2% payable on
October 15 and April 15 beginning April 15, 2004 and due October 15, 2010;
collateralized by The Majestic Star Casino, LLC's equity interests, and its
equity interests in the subsidiary guarantors, and substantially all of
the assets of The Majestic Star Casino, LLC and the assets of its subsidiary
guarantors, other than the excluded assets. $ 260,000,000 $ 260,000,000
$80,000,000 credit facility, which expires in October 2007, bears interest at the
Company's choice of LIBOR plus a range of 3.00% to 3.50% or Wells Fargo
Foothill, Inc.'s base rate plus a range of 0.25% to 0.75%. The range is based on
the Company's EBITDA (as defined in the Loan and Security Agreement). The
credit facility is secured by The Majestic Star Casino, LLC's equity interests and its
equity interests in the subsidiary guarantors, and substantially all the assets of
The Majestic Star Casino, LLC and the assets of its subsidiary guarantors, other
than the excluded assets. 39,000,000 25,958,493
$16,290,000 unsecured notes payable, net of unamortized discount of $499,137 and
$533,169 at March 31, 2004 and December 31, 2003, respectively. Investor Holdings
pays interest at a rate of 11.653% on the notes. Interest is paid semi-annually on
May 31 and November 30, with a final payment of principal and interest due on
November 30, 2007. On October 7, 2003, the notes became unsecured obligations
of Investor Holdings. 15,790,863 15,756,831
------------- --------------
Long-term debt $ 314,790,863 $ 301,715,324
Less current maturities -- --
------------- --------------
Total long-term debt $ 314,790,863 $ 301,715,324
============= ==============
</Table>
9 1/2% NOTES
The 9 1/2% notes bear interest at a fixed annual rate of 9.5% payable on
April 15 and October 15 of each year, commencing April 15, 2004. The 9 1/2%
notes will mature on
10
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
October 15, 2010. The 9 1/2% notes are secured by a pledge of substantially all
of the Company's current and future assets, other than the assets of Fitzgeralds
Las Vegas (which became an unrestricted and non-guarantor subsidiary effective
October 7, 2003 and was subsequently spun off to BDI on December 31, 2003) and
certain other excluded assets. The 9 1/2% notes are also collateralized by our
equity interests held by BDI and our equity interests in the subsidiary
guarantors.
The indenture governing the 9 1/2% notes contains covenants which, among
other things, restrict the Company's ability to (i) make certain payments to, or
investments in, third parties; (ii) incur additional indebtedness or liens on
any assets; (iii) enter into transactions with affiliates; and (iv) sell any
restricted subsidiaries' assets. In addition, upon a Change of Control as
defined in the indenture governing the 9 1/2% notes, the Company will be
required to offer to repurchase all of the outstanding 9 1/2% notes at a cash
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest to the date of repurchase.
Concurrent with the closing of the 9 1/2% notes, the Company established the
$80.0 million credit facility with Wells Fargo Foothill, Inc., and terminated
two existing credit facilities with Wells Fargo Foothill, Inc. Subject to
certain exceptions, the $80.0 million credit facility is secured by a pledge of
our equity held by BDI and the equity of our subsidiary guarantors and a first
priority lien on substantially all of the assets of the Company (which excludes
the assets of Fitzgeralds Las Vegas). Borrowings under the $80.0 million credit
facility bear interest at the Company's choice of LIBOR plus a range of 3.00% to
3.50% or Wells Fargo Foothill, Inc.'s base rate (which approximates the prime
rate) plus a range of 0.25% to 0.75%. The range is based on the Company's EBITDA
(as defined in the Loan and Security Agreement). Full payment of any outstanding
balance under the $80.0 million credit facility is due upon maturity of the
agreement in October 2007. The credit agreement includes covenants similar to
those set forth in the indenture governing the 9 1/2% notes, and also requires
the Company to maintain, as defined in the covenants, minimum EBITDA and
interest coverage ratios, which increase periodically, and an annual limit on
capital expenditures. During the three months ended March 31, 2004, the Company
paid interest on borrowings ranging from 4.37% to 4.75%.
At March 31, 2004 and at December 31, 2003, the Company had available
borrowing capacity under the $80.0 million credit facility of approximately
$41.0 million and $54.0 million, respectively.
On May 4, 2004, the Company and the lenders to the $80.0 million credit
facility agreed to the form of an amendment to the loan and security agreement
(attached as Exhibit 10.1 to this Form 10-Q). The amendment modifies the
definition of EBITDA to specifically clarify that it was acceptable to add back
up to $2.5 million of charges related to the previously discussed retroactive
property tax adjustment at Majestic Star. The modified definition of EBITDA is
effective as of December 31, 2003. Without the amendment, the Company would have
not met the required $13.9 million EBITDA covenant for the quarter ended March
31, 2004.
11
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11.653% NOTES
At March 31, 2004 and at December 31, 2003, Investor Holdings had debt
outstanding of $15.8 million related to its 11.653% notes, net of unamortized
discount of $0.5 million. The 11.653% notes bear interest at a fixed rate of
11.653% per annum payable May 31 and November 30 each year. The 11.653% notes
will mature on November 30, 2007. Investor Holdings no longer guarantees the
11.653% notes (nor does any other subsidiary of the Company), and the liens on
the collateral have been released.
OLD CREDIT FACILITIES
During the first quarter of 2003, The Majestic Star Casino, LLC had a $20.0
million credit facility (the "Majestic credit facility") and Investor Holdings
had a $15.0 million credit facility (the "Majestic Investor Holdings credit
facility"). There were no borrowings against either of these lines of credit
during the first quarter of 2003, and therefore, there was minimal interest
expense. However, there were non-usage fees charged during the first quarter of
2003, which totaled $48,000. These credit facilities were replaced in October
2003 with the $80.0 million credit facility. There were no borrowings on the
Majestic credit facility or the Majestic Investor Holdings credit facility on
the date that both facilities were terminated, October 7, 2003.
NOTE 7. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
Various legal proceedings are pending against the Company. Management
considers all such pending proceedings, comprised primarily of personal injury
and equal employment opportunity (EEO) claims, to be routine litigation
incidental to the Company's business. Except as described below, management
believes that the resolution of these proceedings will not individually or in
the aggregate, have a material effect on the Company's financial condition,
results of operations or cash flows.
On April 19, 2004 the Indiana Tax Court ruled on the matter of Aztar Indiana
Gaming Corporation ("Aztar") v. Indiana Department of State Revenue ("Department
of Revenue"). Aztar operates a riverboat casino in Indiana. The ruling denied
Aztar's deductions claimed on its Indiana income tax returns for taxes paid on
gaming revenues to the state. This ruling has significant implications for all
Indiana casinos. Majestic Star has been issued notices of proposed assessments
by the Department of Revenue totaling $2.6 million for the period 1996 to June
16, 2001. While The Majestic Star Casino, LLC is a limited liability company and
its income and expenses pass to its member, the
12
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Department of Revenue has taken the position that The Majestic Star Casino, LLC
had a requirement to withhold and remit state income tax. No assessment has been
issued by the Department of Revenue for any tax periods subsequent to June 16,
2001, but the Company estimates that if the assessments were extended through
the latest reporting date of March 31, 2004, there would be an additional tax
liability of approximately $2.7 million, plus interest. This additional tax
liability amount would be adjusted against any net taxable income or losses
previously reported to the state by our member. In addition, to date, the
Company has not been charged a penalty for failing to withhold and remit the
taxes to the state. Aztar has announced that it will request a rehearing of the
tax court ruling. If the outcome of the rehearing is unfavorable to Aztar, then
the Company's member could similarly be required to pay additional taxes to the
State of Indiana, along with interest. Under its indenture governing the 9 1/2%
notes and the loan agreement related to the $80.0 million credit facility, the
Company is allowed to make distributions to its member for tax purposes, and the
Company intends to do so when this matter is ultimately resolved. Any payments
would be recorded as distributions to its member.
In December 2002, a complaint was filed in the U.S. District Court for the
Northern District of Mississippi against Barden Mississippi and the former owner
of Fitzgeralds Tunica, alleging violation of Title VII of the Civil Rights Act
of 1964 and violation of 42 U.S.C. Section 1981, as well as certain other state
law claims. The lawsuit pertains to certain events alleged to have occurred on
or about December 7, 2001 in connection with Investor Holdings' acquisition of
Fitzgeralds Tunica from its former owner. The plaintiff was seeking back pay,
front pay, compensatory damages and punitive damages in excess of $3.5 million.
The former owner of Fitzgeralds Tunica has been dismissed from the case. After a
three-day bench trial against Barden Mississippi, on May 6, 2004, the Judge
awarded the plaintiff $312,006, which incorporates back pay, emotional distress
and punitive damages plus an additional sum for reasonable attorney fees in an
amount that has not yet been determined. The Company has established a reserve
at March 31, 2004 for the award in the amount of $392,006 along with $35,000 for
the Company's attorney fees. The Company intends to appeal the judgment.
PROPERTY TAXES
During January 2004, Majestic Star received a preliminary property tax
reassessment notice that increased the valuation of its riverboat vessel in Lake
County, Indiana, where Majestic Star is located. The valuation assessment was
part of a countywide reassessment, and these reassessments are to be
retroactively effective as of March 1, 2002. The reassessment was a result of a
1998 Indiana Supreme Court ruling that declared the method of property
assessment previously used was unconstitutional. Majestic Star has followed
administrative policies of the taxing authorities and has paid Lake County an
amount equal to 70% of its 2001 property tax liability, and has accrued the
balance due for 2002 and 2003. At December 31, 2003, it was only possible to
estimate the remaining property tax liability for Majestic Star using
information that was currently available, and such estimate was subject to
significant uncertainty given the appeal made by Majestic Star as to the very
high assessed valuation to its vessel and the fact that no real property tax
rates had been issued for Lake County. In April 2004, tax rates on the real
property within Lake County, Indiana were issued. In addition, in April
13
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2004, the State of Indiana issued final notices of assessed valuations to
property owners within Lake County. The Company has used the information
provided in April to revise its estimate of the amounts due, as more fully
described below.
BHR, the Company's joint venture with Trump, also received a notice of final
assessed value of its real property. Similarly Buffington Harbor Parking
Associates ("BHPA"), the owner of a parking garage for which Majestic Star is a
lessee under an operating lease, has received a notice reflecting final assessed
values. Majestic Star, through the joint venture agreement and the operating
lease agreement, would be liable for its portion of BHR's and BHPA's property
tax liabilities.
Previously, the Company met with the third party hired by the State of
Indiana, which conducted the assessments of Majestic Star's vessel and the
parking garage (the "Assessor"). Management of BHR similarly met with the
Assessor regarding the assessment of the joint venture's real property. The
reason for these meetings was to discuss what the Company and BHR management
felt were incorrect assessed valuations. Based on these meetings and the
approval of the State of Indiana, the value of Majestic Star's vessel was
reduced to an amount that approximates its previous assessed valuation. In
addition, the assessed valuation of certain real property of BHPA and BHR has
been reduced.
The Company had previously consulted with legal counsel and tax experts, and
believed that its liability for property taxes (including amounts due directly
by Majestic Star and indirectly through BHR and BHPA) was likely to range from
approximately $4.2 million to approximately $11.6 million. The lower end of the
range was based on the Company's property tax liabilities for these entities in
prior years (or similar property in the case of the new BHPA parking garage),
plus a factor for inflation (to take into consideration increases in operating
costs of Lake County), and less the payments already made to Lake County. The
upper end of the range was the amount calculated by taking the preliminary
assessed values (ignoring the likelihood of reductions through then pending
appeals), multiplied by the last legislatively issued tax rate for Lake County.
Management believed it was remote that the liability would reach the upper end
of the range. However, since the State of Indiana had yet to determine a tax
rate for Lake County, there was no amount in the range of potential property tax
liabilities that was a better estimate than any other amount in the range at
that time. Accordingly, the Company accrued a liability of $4.2 million at
December 31, 2003. Based on the assessments and tax rates issued in April 2004,
the Company has increased its accrual for real property taxes on Majestic Star's
vessel, and its proportionate share of liability for BHPA and BHR, by $2.2
million. At March 31, 2004, the accrual for all unpaid property taxes owed
directly or indirectly by Majestic Star is $8.2 million.
Final tax bills for 2002 were scheduled to be mailed in May 2004 with
payment due at the end of the month. However, a group of taxpayers in Lake
County has filed a lawsuit against the State of Indiana, claiming that the 2002
real estate reassessment was unlawful. On May 7, 2004, the Lake County Superior
Court ruled in favor of the taxpayers, and issued an order prohibiting Lake
County from mailing tax bills based on the reassessment. The Court ordered Lake
County to send property tax bills for the remaining 30% of taxes due for 2002,
based on the 2001 assessed values and tax rates. Lake County has stated that it
will not be able to mail such bills for several months. It is likely the Lake
County Superior Court's order will be appealed, and the outcome cannot be
determined at this time. The Company has not adjusted its accrual at March 31,
2004. In the event there is no appeal or no reversal on appeal, the Company will
then reduce its current accrual.
14
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GAMING REGULATIONS
The ownership and operation of riverboat gaming operations in Indiana are
subject to strict state regulation under the Riverboat Gambling Act (the "Act")
and the administrative rules promulgated thereunder. The Indiana Gaming
Commission ("IGC") is empowered to administer, regulate and enforce the system
of riverboat gaming established under the Act and has jurisdiction and
supervision over all riverboat gaming operations in Indiana, as well as over all
persons on riverboats where gaming operations are conducted. The IGC is
empowered to regulate a wide variety of gaming and non-gaming related
activities, including the licensing of suppliers to, and employees at, riverboat
gaming operations and to approve the form of entity qualifiers and intermediary
and holding companies. The IGC has broad rulemaking power, and it is impossible
to predict what effect, if any, the amendment of existing rules or the
finalization of proposed rules might have on the Company's operations.
Effective July 1, 2003, a licensed riverboat owner who implements flexible
scheduling can conduct gambling operations for up to 24 hours per day upon
receiving IGC approval. Under prior IGC rules, riverboat casinos were required
to close for three hours daily. Majestic Star's plan for 24-Hour Dockside Gaming
was submitted to the IGC and approved. Majestic Star began operating on 24-hour
basis on July 12, 2003.
The ownership and operation of our casino gaming facilities in Mississippi
and Colorado are also subject to various state and local regulations in the
jurisdictions where they are located. In Mississippi, our gaming operations are
subject to the Mississippi Gaming Control Act, and to the licensing and/or
regulatory control of the Mississippi Gaming Commission, the Mississippi State
Tax Commission and various state and local regulatory agencies, including liquor
licensing authorities. In Colorado, our gaming operations are subject to the
Limited Gaming Act of 1991, which created the Division of Gaming within the
Colorado Department of Revenue and the Colorado Limited Gaming Control
Commission, which is empowered to license, implement, regulate and supervise the
conduct of limited gaming. Our Colorado operations are also subject to the
Colorado Liquor Code and the state and local liquor licensing authorities.
The Company's directors, officers, managers and key employees are required
to hold individual licenses. These requirements vary from jurisdiction to
jurisdiction. Licenses and permits for gaming operations and for individual
licensees are subject to revocation or non-renewal for cause. Under certain
circumstances, holders of our securities are required to secure independent
licenses and permits.
15
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER CONTINGENCIES
The Company and Trump have each entered into parallel operating lease
agreements with Buffington Harbor Parking Associates, LLC ("BHPA"), each having
a term until December 31, 2018. The operating lease agreement calls for the
Company and Trump to make monthly lease payments equal to 100% of BHPA's debt
service requirement for the following month, although each party is entitled to
a credit for 50% of such payment if the other party makes its monthly payment.
Since the inception of the lease, neither the Company nor Trump has had to make
a payment equal to 100% of BHPA's debt service cost.
LETTER OF CREDIT/SURETY BOND
In accordance with an order of the IGC, the Company's riverboat owner's
license was renewed subject to certain conditions. Pursuant to the license
renewal, the Company was required to post a bond in the amount of $1.0 million
to secure its regulatory obligations. The $1.0 million bond has yet to be
provided. The IGC is currently reviewing language to be included in the bond.
When the language is finalized, the Company will post the new bond.
To secure payment of claims under the workers compensation programs at
Fitzgeralds Tunica, Fitzgeralds Black Hawk and Fitzgeralds Las Vegas, Investor
Holdings was required to post a letter of credit of $0.5 million. This letter of
credit is secured by restricted cash (see Note 3).
As part of a self-insured workers compensation program at Majestic Star, the
Company was required to post a letter of credit in the amount of $0.9 million to
secure payment of claims. To collateralize the letter of credit, the bank
required that Majestic Star purchase a $0.9 million certificate of deposit. Such
certificate of deposit is recorded in restricted cash on the Company's
consolidated balance sheet (see Note 3).
The State of Mississippi has required Fitzgeralds Tunica to post surety
bonds as security for current and future sales and gaming revenue tax
obligations. Fitzgeralds Tunica has four surety bonds: a $0.6 million bond in
place with the Mississippi State Tax Commission and three $5,000 bonds with the
Mississippi Alcoholic Beverage Control. These surety bonds are secured only by
personal guaranties of Don H. Barden. If Mr. Barden is required to make payments
to the bonding companies as a result of the guaranties, the Company will be
obligated to reimburse Mr. Barden for any such payments.
16
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. RELATED PARTY TRANSACTIONS
LOANS TO RELATED PARTIES
In January 2002, the Company made a $200,000 employee loan to Mr. Michael
Kelly, Executive Vice President and Chief Operating Officer of the Company. This
loan bears no interest and is due and payable in full in January 2005. In both
March 2003 and March 2004, Mr. Kelly paid $67,000 in accordance with the loan
agreement. As of March 31, 2004, the outstanding balance was $66,000.
TRANSACTIONS BY OR WITH AFFILIATES
On February 11, 2004, we acquired approximately 170 acres of land located
adjacent to the Buffington Harbor gaming complex from an affiliate of ours (the
"GNC Land"). The purchase price for the GNC Land was not greater than eighty
percent (80%) of the appraised value as evidenced by the written appraisal of an
independent appraiser dated not more than ninety (90) days prior to the closing.
The purchase price was approximately $21.9 million (net of a deposit of $2.0
million and a credit of $1.5 million related to the Naming Rights Agreement
discussed below, which was terminated).
Gary New Century, LLC ("GNC"), a company wholly-owned by Mr. Barden,
intended to develop an outdoor amphitheater on property it owned adjacent to
Majestic Star. The Company entered into a Naming Rights Agreement with GNC
effective in October 2001. Pursuant to the Naming Rights Agreement, GNC agreed
to use the name "The Majestic Star Amphitheater" as the name of the amphitheater
and the Company paid GNC $1.5 million during 2001 for such rights. The initial
term of the Naming Rights Agreement was three years commencing on the opening of
the amphitheater. The Naming Rights Agreement was terminated in connection with
the acquisition of the GNC Land by the Company and the Company received a credit
of $1.5 million against the purchase price of the GNC Land at closing.
During the three months ended March 31, 2004, Majestic Star made a
distribution of $1.1 million to BDI pursuant to a new Manager Agreement (see
below). Majestic Star made a distribution of $0.4 million for the three months
ended March 31, 2003 related to the prior Majestic Star Manager Agreement.
Investor Holdings made a distribution of $0.9 million for the three months
ended March 31, 2003 related to the prior Investor Holdings Manager Agreement.
MANAGER AGREEMENT
On October 7, 2003, concurrent with the consummation of the offering of the
9 1/2% notes, the Company entered into a new Manager Agreement with BDI.
Distributions to BDI under the new Manager Agreement are governed and limited by
the terms of the
17
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
indenture governing the 9 1/2% notes and by the terms of the $80.0 million
credit facility. The distributions for each fiscal quarter may not exceed 1% of
the Company's consolidated net operating revenue and 5% of the Company's
consolidated cash flow (as defined in the indenture governing the 9 1/2% notes
and the Loan and Security Agreement for the $80.0 million credit facility) for
the immediately preceding fiscal quarter.
BARDEN NEVADA EXPENSE SHARING AGREEMENT
Concurrent with the consummation of the offering of the 9 1/2% notes, we
entered into an expense sharing agreement with Barden Nevada. The expense
sharing agreement provides for a fee from Barden Nevada to us in the amount of
the greater of (i) $500,000 per year or (ii) the actual amount of certain
specified expenses incurred by us in connection with providing management
services to Barden Nevada. For the three months ended March 31, 2004, Barden
Nevada paid us an expense sharing fee of $269,000.
NOTE 9. SEGMENT INFORMATION
The Majestic Star Casino, LLC either directly or indirectly through
wholly-owned subsidiaries owns and operates three properties as follows: a
riverboat casino located in Gary, Indiana; a casino and hotel located in Tunica,
Mississippi; and a casino located in Black Hawk, Colorado (collectively, the
"Properties").
The Company identifies its business in three segments based on geographic
location. The Properties, in each of their segments, market primarily to
middle-income guests. The major products offered in each segment are as follows:
casino, hotel rooms (in Tunica, Mississippi only), and food and beverage.
The accounting policies of each business segment are the same as those
described in the summary of significant accounting policies previously described
in Note 1 to the audited financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003. There are minimal
inter-segment sales.
A summary of the Properties' operations by business segment for the three
months ended March 31, 2004 and 2003 and a summary of the Properties' segment
assets as of March 31, 2004 are presented below:
18
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<Table>
<Caption>
For the Three Months
Ended March 31,
----------------------
2004 2003
-------- --------
(in thousands)
Net revenues:
Majestic Star $ 39,961 $ 35,975
Fitzgeralds Tunica 23,484 22,965
Fitzgeralds Black Hawk 8,848 7,916
-------- --------
Total $ 72,293 $ 66,856
======== ========
Operating income (loss):
Majestic Star $ 2,810 $ 6,245
Fitzgeralds Tunica 3,589 4,704
Fitzgeralds Black Hawk 2,042 1,373
Corporate (1) (806) (883)
Majestic Investor Holdings (70) (666)
-------- --------
Total $ 7,565 $ 10,773
======== ========
Segment depreciation and amortization:
Majestic Star $ 1,912 $ 1,414
Fitzgeralds Tunica 2,060 1,905
Fitzgeralds Black Hawk 458 412
Majestic Investor Holdings 70 666
-------- --------
Total $ 4,500 $ 4,397
======== ========
Expenditure for additions to long-lived assets:
Majestic Star $ 25,166 $ 923
Fitzgeralds Tunica 444 267
Fitzgeralds Black Hawk 55 249
Fitzgeralds Las Vegas (2) -- 547
-------- --------
Total $ 25,665 $ 1,986
======== ========
</Table>
<Table>
<Caption>
As of
March 31,
2004
---------
Segment assets:
Majestic Star $ 283,861
Fitzgeralds Tunica 81,895
Fitzgeralds Black Hawk 30,134
Majestic Investor Holdings 59,251
---------
Total 455,141
Less: Intercompany (203,368)
---------
Total $ 251,773
=========
</Table>
(1) Corporate expenses reflect payroll, benefits, travel and other costs
associated with our corporate staff and are not allocated to the properties.
(2) The equity interests in Fitzgeralds Las Vegas were spun off to BDI on
December 31, 2003. Prior to the spin-off, the assets of Fitzgeralds Las
Vegas were reflected as held for use.
19
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The proceeds from the issuance of the 9 1/2% notes and approximately $28.0
million of the $80.0 million credit facility were used to purchase and redeem
all of the 10 7/8% notes and purchase substantially all of the 11.653% notes.
Under the indenture governing the 9 1/2% notes and the Loan and Security
Agreement for the $80.0 million credit facility, Fitzgeralds Tunica and
Fitzgeralds Black Hawk remain as guarantors; however, Fitzgeralds Las Vegas
became an unrestricted and non-guarantor subsidiary and was subsequently spun
off to BDI on December 31, 2003.
The following condensed consolidating information presents condensed
consolidating balance sheets as of March 31, 2004 and December 31, 2003,
condensed consolidating statements of operations for the three months ended
March 31, 2004 and 2003 and condensed consolidating statements of cash flows for
the three months ended March 31, 2004 and 2003 for The Majestic Star Casino,
LLC, The Majestic Star Casino Capital Corp. (a co-issuer of the 9 1/2% notes),
the guarantor subsidiaries, our discontinued operation, and eliminating entries
necessary to consolidate such entities.
20
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF MARCH 31, 2004
(UNAUDITED)
<Table>
<Caption>
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 8,554,546 $ -- $ 11,963,315 $ -- $ 20,517,861
Restricted cash 900,000 -- 500,000 -- 1,400,000
Accounts receivable, net 1,774,207 -- 743,041 -- 2,517,248
Inventories 65,959 -- 634,564 -- 700,523
Prepaid expenses 2,355,733 -- 618,979 -- 2,974,712
Receivables from affiliate 319,608 -- 58,710 (77,018)(a) 301,300
Note receivable from related party 66,000 -- -- -- 66,000
Other -- -- 35,970 -- 35,970
------------- ------------- ------------- ------------- -------------
Total current assets 14,036,053 -- 14,554,579 (77,018) 28,513,614
------------- ------------- ------------- ------------- -------------
Property, equipment and improvements, net 78,252,928 -- 85,627,965 -- 163,880,893
Intangible assets, net -- -- 8,917,996 -- 8,917,996
Goodwill -- -- 5,922,398 -- 5,922,398
Other assets:
Deferred financing costs, net 5,589,813 -- 519,665 -- 6,109,478
Investment in Buffington Harbor
Riverboat, LLC 29,174,857 -- -- -- 29,174,857
Long term receivable - related party 139,145,427 -- -- (139,145,427)(a) --
Other assets 8,661,878 -- 591,979 -- 9,253,857
------------- ------------- ------------- ------------- -------------
Total other assets 182,571,975 -- 1,111,644 (139,145,427) 44,538,192
------------- ------------- ------------- ------------- -------------
Total Assets $ 274,860,956 $ -- $ 116,134,582 $(139,222,445) $ 251,773,093
============= ============= ============= ============= =============
LIABILITIES AND MEMBER'S
DEFICIT
Current Liabilities:
Accounts payable $ 2,471,501 $ -- $ 820,419 $ -- $ 3,291,920
Other accrued liabilities:
Payroll and related 2,502,612 -- 3,546,638 -- 6,049,250
Payable to related party 1,720 -- 75,298 (77,018)(a) --
Interest 12,217,797 -- 632,758 -- 12,850,555
Progressive jackpots 730,948 -- 2,116,812 -- 2,847,760
Slot club liabilities 95,950 -- 492,370 -- 588,320
Other accrued liabilities 11,090,843 -- 3,035,586 -- 14,126,429
------------- ------------- ------------- ------------- -------------
Total current liabilities 29,111,371 -- 10,719,881 (77,018) 39,754,234
------------- ------------- ------------- ------------- -------------
Investment in subsidiaries 49,521,589 -- -- (49,521,589)(b) --
Due to related parties -- -- 139,145,427 (139,145,427)(a) --
Long-term debt, net of current maturities 299,000,000 260,000,000 15,790,863 (260,000,000)(c) 314,790,863
------------- ------------- ------------- ------------- -------------
Total Liabilities 377,632,960 260,000,000 165,656,171 (448,744,034) 354,545,097
------------- ------------- ------------- ------------- -------------
Member's Deficit (102,772,004) (260,000,000) (49,521,589) 309,521,589(b)(c) (102,772,004)
------------- ------------- ------------- ------------- -------------
Total Liabilities and Member's Deficit $ 274,860,956 $ -- $ 116,134,582 $(139,222,445) $ 251,773,093
============= ============= ============= ============= =============
</Table>
- ----------
(a) To eliminate intercompany receivables and payables.
(b) To eliminate intercompany accounts and investment in subsidiaries.
(c) As more fully described in Note 6, Long-Term Debt, The Majestic Star Casino
Capital Corp. is a co-obligor of the 9 1/2% notes issued by the Company.
Accordingly, such indebtedness has been presented as an obligation of both
the issuer and the co-obligor in the above balance sheet.
21
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2003
<Table>
<Caption>
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
------------- ------------- ------------ ----------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 10,929,430 $ -- $ 11,128,586 $ -- $ 22,058,016
Restricted cash 900,000 -- 500,000 -- 1,400,000
Accounts receivable, net 1,544,483 -- 668,063 -- 2,212,546
Inventories 77,312 -- 630,373 -- 707,685
Prepaid expenses 1,628,044 -- 498,539 -- 2,126,583
Receivable from affiliate 587,254 -- -- (377,119)(a) 210,135
Note receivable from related party 133,000 -- -- -- 133,000
------------- ------------- ------------ ------------- ------------
Total current assets 15,799,523 -- 13,425,561 (377,119) 28,847,965
------------- ------------- ------------ ------------- ------------
Property, equipment and improvements, net 54,849,742 -- 87,318,189 -- 142,167,931
Intangible assets, net -- -- 9,249,247 -- 9,249,247
Goodwill -- -- 5,922,398 -- 5,922,398
Other assets:
Deferred financing costs, net 5,734,214 -- 554,973 -- 6,289,187
Investment in Buffington Harbor
Riverboat, LLC 29,733,594 -- -- -- 29,733,594
Long term receivable - related party 144,395,427 -- -- (144,395,427)(a) --
Other assets 10,412,477 -- 591,979 -- 11,004,456
------------- ------------- ------------ ------------- ------------
Total other assets 190,275,712 -- 1,146,952 (144,395,427) 47,027,237
------------- ------------- ------------ ------------- ------------
Total Assets $ 260,924,977 $ -- $117,062,347 $(144,772,546) $233,214,778
============= ============= ============ ============= ============
LIABILITIES AND MEMBER'S DEFICIT
Current Liabilities:
Accounts payable $ 5,457,108 $ -- $ 930,847 $ -- $ 6,387,955
Payable to related party -- -- 377,366 (377,119)(a) 247
Accrued liabilities:
Payroll and related 2,588,039 -- 3,899,068 -- 6,487,107
Interest 5,865,514 -- 158,189 -- 6,023,703
Progressive jackpots 608,234 -- 2,065,428 -- 2,673,662
Slot club liabilities -- -- 498,070 -- 498,070
Other accrued liabilities 8,003,123 -- 3,592,542 -- 11,595,665
------------- ------------- ------------ ------------- ------------
Total current liabilities 22,522,018 -- 11,521,510 (377,119) 33,666,409
------------- ------------- ------------ ------------- ------------
Investment in subsidiaries 54,611,421 -- -- (54,611,421)(b) --
Due to related parties -- -- 144,395,427 (144,395,427)(a) --
Long-term debt, net of current maturities 285,958,493 260,000,000 15,756,831 (260,000,000)(c) 301,715,324
------------- ------------- ------------ ------------- ------------
Total Liabilities 363,091,932 260,000,000 171,673,768 (459,383,967) 335,381,733
------------- ------------- ------------ ------------- ------------
Member's Deficit (102,166,955) (260,000,000) (54,611,421) 314,611,421(b)(c) (102,166,955)
------------- ------------- ------------ ------------- ------------
Total Liabilities and Member's Deficit $ 260,924,977 $ -- $117,062,347 $(144,772,546) $233,214,778
============= ============= ============ ============= ============
</Table>
- ----------
(a) To eliminate intercompany receivables and payables.
(b) To eliminate intercompany accounts and investment in subsidiaries.
(c) As more fully described in Note 6, Long-Term Debt, The Majestic Star Casino
Capital Corp. is a co-obligor of the 9 1/2% notes issued by the Company.
Accordingly, such indebtedness has been presented as an obligation of both
the issuer and the co-obligor in the above balance sheet.
22
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(UNAUDITED)
<Table>
<Caption>
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- ------------
OPERATING REVENUES:
Casino $ 39,206,159 $ -- $ 31,836,344 $ -- $ 71,042,503
Rooms -- -- 1,873,837 -- 1,873,837
Food and beverage 487,193 -- 2,857,267 -- 3,344,460
Other 612,898 -- 446,746 -- 1,059,644
------------- ------------- ------------- ------------- ------------
Gross revenues 40,306,250 -- 37,014,194 -- 77,320,444
Less promotional allowances 345,664 -- 4,682,111 -- 5,027,775
------------- ------------- ------------- ------------- ------------
Net operating revenues 39,960,586 -- 32,332,083 -- 72,292,669
------------- ------------- ------------- ------------- ------------
OPERATING COSTS AND EXPENSES:
Casino 10,658,745 -- 12,448,772 -- 23,107,517
Rooms -- -- 465,242 -- 465,242
Food and beverage 551,037 -- 906,405 -- 1,457,442
Other -- -- 241,533 -- 241,533
Gaming taxes 11,063,904 -- 4,120,210 -- 15,184,114
Advertising and promotion 1,991,066 -- 1,758,190 -- 3,749,256
General and administrative 9,184,481 -- 4,241,101 -- 13,425,582
Corporate expense 805,606 -- -- -- 805,606
Economic incentive - City of Gary 1,177,155 -- -- -- 1,177,155
Depreciation and amortization 1,912,408 -- 2,587,435 -- 4,499,843
Loss on investment in Buffington
Harbor Riverboats, LLC 612,841 -- -- -- 612,841
(Gain) loss on disposal of assets (916) -- 1,971 -- 1,055
------------- ------------- ------------- ------------- ------------
Total operating costs and expenses 37,956,327 -- 26,770,859 -- 64,727,186
------------- ------------- ------------- ------------- ------------
Operating income 2,004,259 -- 5,561,224 -- 7,565,483
------------- ------------- ------------- ------------- ------------
OTHER INCOME (EXPENSE):
Interest income 1,938 -- 3,176 -- 5,114
Interest expense (6,583,476) -- (474,569) -- (7,058,045)
Other non-operating expense (28,209) -- -- -- (28,209)
Equity in net income of subsidiaries 5,089,831 -- -- (5,089,831)(a) --
------------- ------------- ------------- ------------- ------------
Total other expense (1,519,916) -- (471,393) (5,089,831) (7,081,140)
------------- ------------- ------------- ------------- ------------
Net income $ 484,343 $ -- $ 5,089,831 $ (5,089,831) $ 484,343
============= ============= ============= ============= ============
</Table>
- ----------
(a) To eliminate equity in net income of subsidiaries.
23
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
<Table>
<Caption>
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operation (b) Entries Consolidated
------------- ------------- ------------- ------------- ------------ ------------
OPERATING REVENUES:
Casino $ 35,332,173 $ -- $ 29,924,030 $ -- $ -- $ 65,256,203
Rooms -- -- 1,925,669 -- -- 1,925,669
Food and beverage 391,922 -- 2,828,276 -- -- 3,220,198
Other 570,798 -- 364,367 -- -- 935,165
------------- ------------- ------------- ------------- ------------ ------------
Gross revenues 36,294,893 -- 35,042,342 -- -- 71,337,235
Less promotional allowances 319,471 -- 4,161,487 -- -- 4,480,958
------------- ------------- ------------- ------------- ------------ ------------
Net operating revenues 35,975,422 -- 30,880,855 -- -- 66,856,277
------------- ------------- ------------- ------------- ------------ ------------
OPERATING COSTS AND EXPENSES:
Casino 8,803,070 -- 11,474,449 -- -- 20,277,519
Rooms -- -- 602,837 -- -- 602,837
Food and beverage 383,862 -- 916,741 -- -- 1,300,603
Other -- -- 252,171 -- -- 252,171
Gaming taxes 9,740,773 -- 3,834,848 -- -- 13,575,621
Advertising and promotion 1,714,985 -- 1,986,953 -- -- 3,701,938
General and administrative 5,885,187 -- 3,433,935 -- -- 9,319,122
Corporate expense 599,855 -- 283,332 -- -- 883,187
Economic incentive - City of
Gary 1,060,247 -- -- -- -- 1,060,247
Depreciation and amortization 1,414,095 -- 2,982,408 -- -- 4,396,503
Loss on investment in
Buffington Harbor Riverboats,
LLC 604,021 -- -- -- -- 604,021
Loss (gain) on disposal of
assets 124,720 -- (15,000) -- -- 109,720
------------- ------------- ------------- ------------- ------------ ------------
Total operating costs and
expenses 30,330,815 -- 25,752,674 -- -- 56,083,489
------------- ------------- ------------- ------------- ------------ ------------
Operating income 5,644,607 -- 5,128,181 -- -- 10,772,788
------------- ------------- ------------- ------------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 14,157 -- 21,585 -- -- 35,742
Interest expense (3,534,438) -- (4,421,360) -- -- (7,955,798)
Other non-operating expense (38,335) -- (9,479) -- -- (47,814)
Equity in net income of
subsidiaries 949,226 -- 230,299 -- (1,179,525)(a) --
------------- ------------- ------------- ------------- ------------ ------------
Total other expense (2,609,390) -- (4,178,955) -- (1,179,525) (7,967,870)
------------- ------------- ------------- ------------- ------------ ------------
Income from continuing
operations 3,035,217 -- 949,226 -- (1,179,525) 2,804,918
Income from discontinued
operation -- -- -- 230,299 -- 230,299
------------- ------------- ------------- ------------- ------------ ------------
Net income $ 3,035,217 $ -- $ 949,226 $ 230,299 $ (1,179,525) $ 3,035,217
============= ============= ============= ============= ============ ============
</Table>
(A) To eliminate equity in net income of subsidiaries.
(b) The Discontinued Operation reflects the operations of Fitzgeralds Las Vegas,
which is not a guarantor of the 9 1/2% notes and was spun off to BDI on
December 31, 2003.
24
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(UNAUDITED)
<Table>
<Caption>
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES: $ 5,580,383 $ -- $ 6,582,879 $ -- $ 12,163,262
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of property and equipment (25,166,345) -- (498,950) -- (25,665,295)
Investment in Buffington Harbor
Riverboats, LLC (54,104) -- -- -- (54,104)
Proceeds from disposal of equipment 106,175 -- 800 -- 106,975
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities (25,114,274) -- (498,150) -- (25,612,424)
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance cost for the 9-1/2% senior
secured notes (73,110) -- -- -- (73,110)
Issuance cost for credit facility (36,997) -- -- -- (36,997)
Proceeds from line of credit 20,001,293 -- -- -- 20,001,293
Repayment of line of credit (6,959,787) -- -- -- (6,959,787)
Cash received from (advanced to)
related parties 5,317,000 (5,250,000) -- 67,000
Distribution to Barden Development, Inc. (1,089,392) -- -- -- (1,089,392)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities 17,159,007 -- (5,250,000) -- 11,909,007
------------- ------------- ------------- ------------- -------------
Net (decrease) increase in cash and
cash equivalents (2,374,884) -- 834,729 -- (1,540,155)
Cash and cash equivalents, beginning
of period 10,929,430 -- 11,128,586 -- 22,058,016
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents, end of period $ 8,554,546 $ -- $ 11,963,315 $ -- $ 20,517,861
============= ============= ============= ============= =============
</Table>
25
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE. 10 SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
<Table>
<Caption>
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operation (a) Entries Consolidated
------------ ------------- ------------- ------------- ----------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES: $ 8,007,222 $ -- $ 5,660,575 $ 971,783 $ -- $ 14,639,580
------------ ------------- ------------- ------------- ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Increase in restricted cash -- -- (250,000) -- -- (250,000)
Acquisition of property and
equipment (923,175) -- (515,746) (547,377) -- (1,986,298)
Appreciated value of land
purchased from a related party (559,806) -- -- -- -- (559,806)
Decrease in prepaid leases and
deposits 1,000 -- -- -- -- 1,000
Proceeds from disposal of
equipment 14,750 -- 15,000 -- -- 29,750
------------ ------------- ------------- ------------- ----------- ------------
Net cash used in investing
activities (1,467,231) -- (750,746) (547,377) -- (2,765,354)
------------ ------------- ------------- ------------- ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payment of 11.653% notes issuance
costs -- -- (2,337) -- -- (2,337)
Repayment of long-term debt -- -- -- (75,209) -- (75,209)
Repayment of notes from related
parties 282,911 -- 700,000 -- -- 982,911
Distribution to Barden
Development, Inc. (383,488) -- (864,294) -- -- (1,247,782)
------------ ------------- ------------- ------------- ----------- ------------
Net cash used in financing
activities (100,577) -- (166,631) (75,209) -- (342,417)
Net increase in cash and cash
equivalents 6,439,414 -- 4,743,198 349,197 -- 11,531,809
Cash and cash equivalents,
beginning of period 8,564,057 -- 11,588,218 4,395,606 -- 24,547,881
------------ ------------- ------------- ------------- ----------- ------------
Cash and cash equivalents, end
of period $ 15,003,471 $ -- $ 16,331,416 $ 4,744,803 $ -- $ 36,079,690
============ ============= ============= ============= =========== ============
</Table>
- ----------
(a) The Discontinued Operation reflects the operations of Fitzgeralds Las Vegas,
which is not a guarantor of the 9 1/2% notes and was spun off to BDI on
December 31, 2003.
26
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
STATEMENT ON FORWARD-LOOKING INFORMATION
Throughout this report we make forward-looking statements. Forward-looking
statements include the words "may," "will," "would," "could," "likely,"
"estimate," "intend," "plan," "continue," "believe," "expect" or "anticipate"
and other similar words and include all discussions about our acquisition and
development plans. We do not guarantee that the transactions and events
described in this report will happen as described or that any positive trends
noted in this report will continue. The forward-looking statements contained in
this report are generally located in the material set forth under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," but may be found in other locations as well. These forward-looking
statements generally relate to our plans, objectives and expectations for future
operations and are based upon management's reasonable estimates of future
results or trends. Although we believe that our plans and objectives reflected
in or suggested by such forward-looking statements are reasonable, we may not
achieve such plans or objectives. You should read this report completely and
with the understanding that actual future results may be materially different
from what we expect. We will not update forward-looking statements even though
our situation may change in the future.
Specific factors that might cause actual results to differ from our
expectations, or may cause us to modify our plans and objectives, include, but
are not limited to:
- - the availability and adequacy of our cash flow to meet our requirements,
including payment of amounts due under the $80.0 million credit facility
and the 9 1/2% notes;
- - changes in our financial condition that may cause us to not be in
compliance with the covenants contained within the indenture governing the
9 1/2 notes or the Loan and Security Agreement governing the $80.0 million
credit facility, and thus causing us to be in default with the trustee for
the 9 1/2% notes and the lenders to the $80.0 million credit facility,
requiring a payment acceleration on the debt obligations outstanding;
- - changes or developments in laws, regulations or taxes in the casino and
gaming industry including increases in new taxes imposed on gaming
revenues, gaming devices or admission taxes;
- - increased competition in existing markets or the opening of new gaming
jurisdictions;
- - our failure to obtain, delays in obtaining or the loss of any licenses,
permits or approvals, including gaming and liquor licenses, or the
limitation or conditioning of any such licenses, permits or approvals, or
our failure to obtain an unconditional renewal of any such licenses,
permits or approvals on a timely basis;
- - adverse determinations of issues related to disputed taxes, particularly
in Indiana, as
27
evidenced by the charge in the current quarter of retroactive property
taxes and the recent ruling in the Aztar case, which denied Aztar's
deductions of taxes paid on its casino revenue on its Indiana state income
tax return for which Majestic Star's member faces a similar issue;
- - other adverse conditions, such as adverse economic conditions in the
Company's markets, changes in general customer confidence or spending,
increased fuel and transportation costs, or travel concerns that may
adversely affect the economy in general and/or the casino and gaming
industry in particular;
- - the ability to fund capital improvements and development needs from
existing operations, available credit, or new financing;
- - risk of our joint venture partner, Trump Indiana, Inc., not making its
lease payments when due in connection with the parking facility in Gary,
Indiana or failing to fund the joint venture;
- - factors relating to the current state of world affairs and any further
acts of terrorism or any other destabilizing events in the United States
or elsewhere; and
- - other factors discussed under "Factors that May Affect Future Results" in
our December 31, 2003 Form 10-K in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" or elsewhere in
that report or that may be disclosed from time to time in filings we make
with the SEC or otherwise.
All future written and verbal forward-looking statements attributable to us
or any person acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this section. In light of
these risks, uncertainties and assumptions, the forward-looking events discussed
in this report might not occur.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, our financial statements, including the notes
thereto.
EXECUTIVE OVERVIEW
The Company
The Majestic Star Casino, LLC and its subsidiaries (collectively, the
"Company"), operate a riverboat gaming facility located in Gary, Indiana
("Majestic Star") and two Fitzgeralds-brand casino-hotels located in Tunica
County, Mississippi ("Barden Mississippi" or "Fitzgeralds Tunica") and Black
Hawk, Colorado (casino only) ("Barden Colorado" or "Fitzgeralds Black Hawk").
Fitzgeralds Tunica and Fitzgeralds Black Hawk are collectively referred to
herein as the "Fitzgeralds Casinos." The Company, for a fee, manages the
operations of Barden Nevada Gaming, LLC ("Barden Nevada" or "Fitzgeralds Las
Vegas"). Fitzgeralds Las Vegas was spun off to Barden Development, Inc. ("BDI"),
the Company's parent, effective on December 31, 2003. Because the spin-off of
Fitzgeralds Las Vegas was effective December 31, 2003, the discussion of our
historical operating results in this section does not include the financial
results of Fitzgeralds Las Vegas except to the extent it is a discontinued
operation.
28
Overall Operating Results
Our consolidated gross operating revenues in the three month period ended
March 31, 2004 of $77.3 million was an improvement over our consolidated gross
operating revenues in the three month period ended March 31, 2003 of $71.3
million. The increase is primarily due to the March kick-off of our multi-media
campaign featuring Mike Ditka as the Majestic Star's celebrity spokesperson,
greater promotional activities, better weather conditions, particularly in and
around the Black Hawk area, generally better market conditions, public
acceptance of improvements we made during the year 2003 at our facilities, and
displacement of customers from a competitor in the Black Hawk market. We had a
consolidated net income of $0.5 million during the three-month period ended
March 31, 2004 compared to a consolidated net income of $3.0 million during the
three-month period ended March 31, 2003. The decline in net income is primarily
due to higher gaming taxes of $1.6 million (of which Majestic Star accounts for
$1.3 million), higher casino expenses of $2.8 million, a $2.2 million
retroactive property tax accrual at Majestic Star, increased berthing fees of
$0.5 million incurred by Majestic Star related to the Buffington Harbor
Riverboats, LLC ("BHR") operations, and generally higher property taxes,
insurance costs and reserves related to an unfavorable judgment to a lawsuit
that relates back to the acquisition of Fitzgeralds Tunica in December 2001.
An overview of the developments that affected our results during the quarter
ended March 31, 2004, or that may affect future results are listed below and
discussed in greater detail in our discussion of operating results:
- On October 7, 2003, the Company completed a refinancing of
substantially all of its debt. As a result of the refinancing, the
Company was able to issue debt and enter into a credit agreement with
significantly lower interest rates. At March 31, 2004, the Company had
$315.3 million of debt outstanding. At March 31, 2003, total debt
outstanding was $281.8 million. Despite the increase in debt, the
Company was able to reduce interest expense by $900,000 due to the
lower interest rates of its current debt obligations.
- We spent $25.7 million on capital expenditures in the first quarter of
2004, principally for the acquisition of approximately 170 acres of
land from an affiliate. The purchase price of the land was $21.9
million and we paid $22.0 million, which includes capitalized legal
fees and other costs associated with the purchase, to consummate the
transaction. We also continue to invest in slot machine technology. At
Majestic Star, approximately one-third of our casino floor or over 500
slot machines are equipped with ticket-in ticket-out ("TITO")
technology. We anticipate the implementation of TITO on another 300
slot machines over the next few weeks with the majority of Majestic
Star's slot machines equipped with TITO by year-end. We also plan to
install TITO technology on approximately 200 slot machines at
Fitzgeralds Tunica and approximately 120 slot machines at Fitzgeralds
Black Hawk by the end of the year. We believe that TITO technology
should lead to greater efficiency on our casino floor and longer slot
machine playing times by our customers without interruptions.
29
- We continue to purchase the latest slot machine product at all of our
properties. We feel that the new slot machine product provides the game
features and entertainment that our slot customers are looking for.
- Majestic Star took a non-recurring $2.2 million charge related to
retroactive property taxes. Please see the discussion in Note 7 to our
consolidated financial statements.
- At Majestic Star, we kicked-off our multimedia campaign featuring Mike
Ditka as Majestic Star's celebrity spokesperson. As a result, the 12.5%
growth rate of our casino revenues to $13.5 million for March 2004 was
significantly higher (and set a record for casino revenues in a month)
than the growth rate experienced by the four other casinos (less than
1.0%, on a combined basis), that comprise the northwest Indiana market.
- The new Koko Taylor's Blues Cafe and Passports World Class Buffet at
Buffington Harbor are being well accepted by our casino patrons. These
two food outlets provide a different and improved dining experience for
our customers. In addition, the casino and restroom remodeling project
at Majestic Star that was completed in October 2003 has been well
accepted by our casino patrons.
- The City of Gary is expected to start construction in the summer of
2004 on a new road that will provide better access to Buffington Harbor
and the 170 acres of property we acquired from an affiliate in February
2004. Road construction costs will be paid from public funds and is the
first step to developing the 170 acres.
- Within the Majestic Star vessel, construction of the new Don and Mike's
Sports Bar was completed and the opening was on May 5, 2004. The Sports
Bar offers sports entertainment on 13 flat screen TV's, coupled with a
food and beverage operation. The Sports Bar contains approximately 40
slot machines and was constructed in the third floor players lounge.
The new Sports Bar has allowed us to close our first floor snack bar so
that we can expand our casino floor and add additional slot machines.
- The Majestic Star festival area has been completed and the first event
is scheduled for mid-June 2004. We have tentatively scheduled numerous
additional events through the remainder of 2004. Majestic Star intends
to utilize the festival area to expand its market reach.
- On April 19, 2004, the Indiana Tax Court ruled on the matter of Aztar
Indiana Gaming Corporation ("Aztar") v. Indiana Department of State
Revenue ("Department of Revenue"). The decision denied Aztar's
deduction of taxes paid on casino revenues when computing Indiana state
income tax. Majestic Star has received notices of proposed assessments
from the Department of Revenue for similar deductions taken on Majestic
Star's Indiana state income tax returns. For the period 1996 to June
16, 2001, Majestic Star has been assessed $2.6 million by the
Department of Revenue, exclusive of interest. Majestic Star has
estimated potential additional tax liabilities of $2.7 million from the
date of last assessment
30
through March 31, 2004, exclusive of interest. Majestic Star is a
limited liability company and its income and expenses pass to its
member. Under the indenture governing the Company's $260.0 million 9
1/2% notes, the Company can and will make distributions to fund its
member's tax liabilities. Aztar has announced that it will ask for a
rehearing before the tax court; however, there is no certainty as to
Aztar's success and the Company may have to make future distributions
to its member.
- In February 2004, Fitzgeralds Tunica completed a room remodeling
project with improvements to approximately 100 of the property's 507
hotel rooms. The property is also making improvements to the second
floor of its casino, which includes larger restrooms, enhanced cage and
guest service areas and an expanded casino floor that when completed
will provide space for 100 additional slot machines. It is anticipated
that the project will be completed in June 2004. We also anticipate the
implementation of a new slot monitoring and player tracking system in
June 2004. The new system will give us the ability to better track and
promote to our slot players.
- The Tunica River Park had its grand opening on March 18, 2004. The Park
is adjacent to our Fitzgeralds Tunica property. In addition, a
sightseeing riverboat recommenced operations concurrent with the grand
opening. Fitzgeralds Tunica can promote directly to passengers of the
riverboat.
- The Company's gaming and admissions tax increased $1.6 million during
the first quarter of 2004 over the first quarter of 2003 as a result of
higher casino revenues.
- In early May, the Ho-Chunk Indian Tribe unveiled plans to develop a
casino hotel complex in the south suburbs of Chicago. In addition,
discussions have occurred on granting three to four new casino licenses
in Illinois. These projects, if they materialize, could have a direct
impact on Majestic Star. The Company will monitor this situation as it
develops and will work to continue to enhance its gaming interests in
the region and the economic benefits that it brings to the surrounding
community.
- The information contained above under "Statement on Forward Looking
Information" and the competitive factors set forth in Item 1. Business,
under the caption "Competition", in our December 31, 2003 Form 10-K
have had and will continue to have an effect on our operations.
31
RESULTS OF OPERATIONS
The following table sets forth information derived from the Company's
statements of income expressed as a percentage of gross operating revenues.
CONSOLIDATED STATEMENTS OF OPERATIONS - PERCENTAGE OF GROSS OPERATING REVENUES
<Table>
<Caption>
FOR THE
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---------- ----------
OPERATING REVENUES:
Casino 91.9% 91.5%
Rooms 2.4% 2.7%
Food and beverage 4.3% 4.5%
Other 1.4% 1.3%
---------- ----------
Gross operating revenues 100.0% 100.0%
Less promotional allowances 6.5% 6.3%
---------- ----------
Net operating revenues 93.5% 93.7%
---------- ----------
OPERATING COSTS AND EXPENSES:
Casino 29.9% 28.4%
Rooms 0.6% 0.8%
Food and beverage 1.9% 1.8%
Other 0.3% 0.3%
Gaming taxes 19.6% 19.0%
Advertising and promotion 4.9% 5.2%
General and administrative (1) 17.3% 13.1%
Corporate expenses 1.1% 1.2%
Economic incentive - City of Gary 1.5% 1.5%
Depreciation and amortization 5.8% 6.2%
Loss on investment in the BHR joint venture 0.8% 0.9%
Loss on sale of assets 0.0% 0.2%
---------- ----------
Total operating costs and expenses 83.7% 78.6%
---------- ----------
Operating income 9.8% 15.1%
---------- ----------
OTHER INCOME (EXPENSES):
Interest income -- 0.1%
Interest expense -9.1% -11.2%
Other non-operating expense -0.1% -0.1%
---------- ----------
Total other expenses -9.2% -11.2%
---------- ----------
Income from continuing operations 0.6% 3.9%
Income from discontinued operations -- 0.3%
---------- ----------
Net income 0.6% 4.2%
========== ==========
</Table>
- ----------
(1) General and administrative expenses include the $2.2 million retroactive
property tax accrual related to 2002 and 2003.
32
The following table provides certain selected financial information from our
consolidated statements of operations.
Consolidated
<Table>
<Caption>
FOR THE
THREE MONTHS ENDED
MARCH 31, Percentage
------------------------ Increase
2004 2003 (Decrease)
---------- ---------- ----------
(in millions)
Casino revenues $ 71.0 $ 65.3 8.9%
Room revenues 1.9 1.9 -2.7%
Food and beverage revenues 3.3 3.2 3.9%
Other revenues 1.1 0.9 13.3%
---------- ---------- ----------
Gross operating revenues 77.3 71.3 8.4%
Less promotional allowances 5.0 4.4 12.2%
---------- ---------- ----------
Net operating revenues 72.3 66.9 8.1%
Operating expenses 64.7 56.1 15.4%
---------- ---------- ----------
Operating income 7.6 10.8 -29.8%
Other expenses (7.1) (8.0) -11.1%
---------- ---------- ----------
Income from continuing operations 0.5 2.8 -82.7%
Income from discontinued operation -- 0.2 -100.0%
---------- ---------- ----------
Net income $ 0.5 $ 3.0 -84.0%
========== ========== ==========
</Table>
The following tables provide certain selected segment financial information
for each of the Majestic Star, Fitzgeralds Tunica, and Fitzgeralds Black Hawk,
as well as Majestic Investor Holdings (an intermediate holding company that owns
Fitzgeralds Tunica and Fitzgeralds Black Hawk). All amounts are shown before
corporate overhead.
Majestic Star
<Table>
<Caption>
FOR THE
THREE MONTHS ENDED
MARCH 31, Percentage
------------------------ Increase
2004 2003 (Decrease)
---------- ---------- ----------
(in millions)
Casino revenues $ 39.2 $ 35.3 11.0%
Room revenues -- -- --
Food and beverage revenues 0.5 0.4 24.3%
Other revenues 0.6 0.6 7.4%
---------- ---------- ----------
Gross operating revenues 40.3 36.3 11.1%
Less promotional allowances 0.3 0.3 8.2%
---------- ---------- ----------
Net operating revenues 40.0 36.0 11.1%
Operating expenses 37.2 29.7 25.0%
---------- ---------- ----------
Operating income 2.8 6.3 -55.0%
Other expenses (6.6) (3.6) 85.7%
---------- ---------- ----------
Net (loss) income $ (3.8) $ 2.7 -241.5%
========== ========== ==========
</Table>
33
Fitzgeralds Tunica
<Table>
<Caption>
FOR THE
THREE MONTHS ENDED
MARCH 31, Percentage
----------------------- Increase
2004 2003 (Decrease)
---------- ---------- ----------
(in millions)
Casino revenues $ 22.8 $ 21.8 4.5%
Room revenues 1.9 1.9 -2.7%
Food and beverage revenues 2.3 2.4 -1.0%
Other revenues 0.3 0.3 17.8%
---------- ---------- ----------
Gross operating revenues 27.3 26.4 3.6%
Less promotional allowances 3.8 3.4 12.7%
---------- ---------- ----------
Net operating revenues 23.5 23.0 2.3%
Operating expenses 19.9 18.3 8.9%
---------- ---------- ----------
Operating income 3.6 4.7 -23.7%
Other income (expense) 0.0 0.0 -16.9%
---------- ---------- ----------
Net income $ 3.6 $ 4.7 -23.7%
========== ========== ==========
</Table>
Fitzgeralds Black Hawk
<Table>
<Caption>
FOR THE
THREE MONTHS ENDED
MARCH 31, Percentage
----------------------- Increase
2004 2003 (Decrease)
---------- ---------- ----------
(in millions)
Casino revenues $ 9.1 $ 8.1 11.6%
Room revenues -- -- --
Food and beverage revenues 0.5 0.5 10.7%
Other revenues 0.1 0.1 46.2%
---------- ---------- ----------
Gross operating revenues 9.7 8.7 11.8%
Less promotional allowances 0.9 0.8 11.5%
---------- ---------- ----------
Net operating revenues 8.8 7.9 11.8%
Operating expenses 6.8 6.5 4.0%
---------- ---------- ----------
Operating income 2.0 1.4 48.7%
Other income (expense) -- -- --
---------- ---------- ----------
Net income $ 2.0 $ 1.4 48.7%
========== ========== ==========
</Table>
34
Majestic Investor Holdings
<Table>
<Caption>
FOR THE
THREE MONTHS ENDED
MARCH 31, Percentage
------------------------ Increase
2004 2003 (Decrease)
---------- ---------- ----------
(in millions)
Casino revenues $ -- $ -- --
Room revenues -- -- --
Food and beverage revenues -- -- --
Other revenues -- -- --
---------- ---------- ----------
Gross operating revenues -- -- --
Less promotional allowances -- -- --
---------- ---------- ----------
Net operating revenues -- -- --
Operating expenses -- 0.7 -89.5%
---------- ---------- ----------
Operating loss -- (0.7) -89.5%
Other expenses (0.5) (4.4) -89.3%
---------- ---------- ----------
Loss from continuing operations (0.5) (5.1) -89.3%
Income from discontinued operation -- 0.2 -100.0%
---------- ---------- ----------
Net loss $ (0.5) $ (4.9) -88.8%
========== ========== ==========
</Table>
The following tables reflect selected financial information as a percentage
of consolidated gross operating revenues at the Majestic Star, Fitzgeralds
Tunica, Fitzgeralds Black Hawk and Majestic Investor Holdings. All percentage
calculations are shown before corporate overhead.
Majestic Star
<Table>
<Caption>
FOR THE
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---------- ----------
Casino revenues 50.7% 49.5%
Room revenues -- --
Food and beverage revenues 0.6% 0.6%
Other revenues 0.8% 0.8%
---------- ----------
Gross operating revenues 52.1% 50.9%
Less promotional allowances 0.4% 0.5%
---------- ----------
Net operating revenues 51.7% 50.4%
Operating expenses 48.1% 41.7%
---------- ----------
Operating income 3.6% 8.7%
Other expenses -8.5% -5.0%
---------- ----------
Net (loss) income -4.9% 3.7%
========== ==========
</Table>
35
Fitzgeralds Tunica
<Table>
<Caption>
FOR THE
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---------- ----------
Casino revenues 29.5% 30.6%
Room revenues 2.4% 2.7%
Food and beverage revenues 3.0% 3.3%
Other revenues 0.5% 0.4%
---------- ----------
Gross operating revenues 35.4% 37.0%
Less promotional allowances 5.0% 4.8%
---------- ----------
Net operating revenues 30.4% 32.2%
Operating expenses 25.7% 25.6%
---------- ----------
Operating income 4.7% 6.6%
Other expenses 0.0% 0.0%
---------- ----------
Net income 4.7% 6.6%
========== ==========
</Table>
Fitzgeralds Black Hawk
<Table>
<Caption>
FOR THE
THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---------- ----------
Casino revenues 11.7% 11.3%
Room revenues -- --
Food and beverage revenues 0.7% 0.7%
Other revenues 0.1% 0.1%
---------- ----------
Gross operating revenues 12.5% 12.1%
Less promotional allowances 1.1% 1.0%
---------- ----------
Net operating revenues 11.4% 11.1%
Operating expenses 8.8% 9.2%
---------- ----------
Operating income 2.6% 1.9%
Other expenses -- --
---------- ----------
Net income 2.6% 1.9%
========== ==========
</Table>
36
Majestic Investor Holdings
<Table>
<Caption>
FOR THE
THREE MONTHS ENDED
MARCH 31,
-----------------------
2004 2003
---------- ----------
Casino revenues -- --
Room revenues -- --
Food and beverage revenues -- --
Other revenues -- --
---------- ----------
Gross operating revenues -- --
Less promotional allowances -- --
---------- ----------
Net operating revenues -- --
Operating expenses 0.1% 0.9%
---------- ----------
Operating loss -0.1% -0.9%
Other expenses -0.6% -6.2%
---------- ----------
Loss from continuing operations -0.7% -7.1%
Income from discontinued operations -- 0.3%
---------- ----------
Net loss -0.7% -6.8%
========== ==========
</Table>
FIRST QUARTER 2004 COMPARED TO FIRST QUARTER 2003
Consolidated gross operating revenues for the first quarter of 2004
increased $6.0 million or 8.4% over consolidated gross operating revenues
recorded in the first quarter of 2003. This increase is primarily attributable
to increases in consolidated casino revenues at all three of our casinos.
Consolidated casino revenues were up $3.9 million at Majestic Star, $1.0 million
at Fitzgeralds Tunica and $0.9 million at Fitzgeralds Black Hawk for the first
quarter of 2004 as compared to the first quarter of 2003. The increase in our
consolidated casino revenues represents 96.7% of the increase in our
consolidated gross operating revenues.
Consolidated casino revenues increased $5.8 million or 8.9% to $71.0 million
during the first quarter of 2004 as compared to the first quarter of 2003.
Majestic Star accounted for 67.0% of the increase to consolidated casino
revenues, which primarily resulted from the March 2004 kick-off of a multimedia
advertising campaign featuring former Chicago Bears player and coach, Mike
Ditka, as the property's celebrity spokesperson, more aggressive direct mail and
cash promotional efforts, and the positive acceptance by our customers of the
new Koko Taylor's Blues Cafe and Passports World Class Buffet at Buffington
Harbor along with the casino and restroom facility improvements made at Majestic
Star during 2003.
37
Casino revenue was higher at Fitzgeralds Black Hawk because of management's
continued focus on maximizing yield on marketing and promotional activities,
generally better economic conditions, improved weather conditions particularly
in March of this year versus March of last year, and displacement of customers
from a competitor that is undergoing remodeling and construction. With respect
to Fitzgeralds Black Hawk, the maximum wager is $5.00. Fitzgeralds Tunica's
increase in casino revenue resulted from better market conditions and increases
in direct mail and patron complimentary allowances. Higher levels of direct mail
and patron complimentary allowances reflect a shift in strategy from the first
quarter of 2003 and were implemented to address the increasing competitiveness
of the market.
Consolidated promotional allowances increased $0.5 million or 12.2% in the
first quarter of 2004 as compared to the first quarter of 2003, primarily due to
increases in casino related promotional cash activities and higher levels of
complimentaries at Fitzgeralds Tunica in an effort to increase revenues and to
remain competitive in the Tunica market. Promotional allowances at Fitzgeralds
Tunica increased $0.4 million in the first quarter of 2004 or 12.7% as compared
to the first quarter of 2003 and represents 79.6% of the consolidated increase.
Total consolidated operating expenses increased $8.6 million or 15.4% in the
first quarter of 2004 as compared to the first quarter of 2003, due primarily to
company wide increases in casino expenses of $2.8 million, gaming taxes of $1.6
million and general and administrative expenses of $4.1 million.
Consolidated casino expenses were $23.1 million in the first quarter of
2004, an increase of $2.8 million or 14.0% from the same period in 2003. The
increase in casino expenses is due in part to increased business volumes at all
of the properties, especially at Majestic Star, which comprised 65.6% of the
quarter over quarter increase. Casino expenses were higher due to greater levels
of cash promotional activities directed toward our casino guests, higher
progressive expenses as we had some large progressive jackpots in the first
quarter of 2003 and increased costs of comps provided to our casino guests,
particularly at Fitzgeralds Tunica.
Consolidated gaming taxes increased $1.6 million or 11.8% to $15.2 million
in the first quarter of 2004 from the first quarter or 2003 primarily because of
the increased casino revenues at all of our properties, with the greatest
increase coming at Majestic Star, where our increased casino revenues resulted
in a $1.1 million increase in gaming taxes and a $0.2 million increase in
admission tax. The tax structures and rates were similar at all of our casinos
in the first quarter of 2004 and the first quarter of 2003.
Consolidated general and administrative expenses increased $4.1 million or
44.1% to $13.4 million in the first quarter of 2004 from the first quarter of
2003. The increase in general and administrative expense in the first quarter of
2004 was mostly due to events occurring at Majestic Star, which comprised $3.3
million of the increase. The most significant item affecting general and
administrative expense at Majestic Star was a $2.2 million increase in
retroactive property tax accruals for the years 2002 and 2003 (see Note 7 under
the heading "Property Taxes"). Majestic Star also incurred greater berthing fee
expenses of $0.5 million related to the operations of BHR, and $0.3 million of
higher current quarter property taxes and insurance costs. Fitzgeralds Tunica
recognized greater costs of $0.9 million. The increases come primarily from
payroll and benefit expenses, higher insurance
38
and claim costs, and a $0.4 million reserve for a recent judgment to a lawsuit
against Fitzgeralds Tunica pertaining to certain events alleged to have occurred
on about December 7, 2001 in connection with Investor Holdings' acquisition of
Fitzgeralds Tunica from its former owner (see Part II, Item 1. Legal
Proceedings).
Consolidated other expenses consist primarily of interest expense, which
declined by $0.9 million in the first quarter of 2004 as compared to the same
period in 2003. The reduced interest expense is the result of the October 7,
2003 purchase and redemption of all of The Majestic Star Casino, LLC's $130.0
million 10 7/8% notes and purchase of 89.3% of Majestic Investor Holdings LLC's
$151.8 million 11.653% notes. To purchase and redeem these notes, and pay the
related premium thereon, the Company issued $260.0 million of 9 1/2% notes and
entered into an $80.0 million credit facility. During the quarter ended March
31, 2004, the Company paid interest on advances under the credit facility at
interest rates ranging from 4.37% to 4.75%.
The Company is recognizing income from discontinued operations of $0.2
million in the first quarter of 2003. The income from discontinued operations
relates to Fitzgeralds Las Vegas, which was spun off to BDI on December 31,
2003.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations with internal cash flow from our
operations and borrowings under our line of credit. We generate substantial cash
flows from operating activities. For the quarter ended March 31, 2004 and 2003,
we reported cash flows from operating activities of $12.2 million and $14.6
million, respectively. We use our cash flows to meet our cash requirements,
which consist principally of financing our operations, meeting our debt service
requirements, and making distributions to BDI under the manager agreement.
During the quarter we used our line of credit to partially finance capital
expenditures, including the acquisition of 170 acres of land, plus associated
legal fees and other costs, from an affiliate.
At March 31, 2004, $39.0 million was outstanding under the $80.0 million
credit facility. The Company had unrestricted cash and cash equivalents of $20.5
million at March 31, 2004, compared to $22.1 million at December 31, 2003. For
the quarter ended March 31, 2004, the Company spent $25.7 million for property,
plant and equipment, which consisted principally of the land acquisition
mentioned previously, the construction of a new administrative building and
integration of slot machines with ticket-in ticket-out technology ("TITO") at
Majestic Star, expansion of our casino floor and implementation of a new slot
marketing and player tracking system at Fitzgeralds Tunica and our continued
investment in the newest slot machines at each of our properties. During the
first quarter of 2003, the Company spent $2.0 million primarily on the purchase
of land and a building, technology enhancements and gaming equipment. For the
remainder of 2004, the Company anticipates spending an additional $14.3 million
on capital expenditures. This amount will be primarily directed toward
purchasing new slot machines, the continued implementation of the new slot
marketing and player tracking system at Fitzgeralds Tunica, integrating almost
all of Majestic Star's slot machines with TITO and installing TITO on selected
slot machines at Fitzgeralds Tunica and Fitzgeralds Black Hawk. We believe that
TITO technology will lead to greater efficiency on our casino floor, thus
providing cost savings, and longer slot machine playing times by our customers
without interruptions, which should enhance our casino revenues.
39
Management believes that the Company's cash flow from operations and its
current line of credit will be adequate to meet the Company's anticipated normal
operating requirements for working capital, its planned capital expenditures and
its significant contractual obligations with respect to amounts outstanding
under the $80.0 million credit facility, the 11.653% notes, and the 9 1/2%
notes, payments to BHR, and lease payments to BHPA. The majority of principal
payments on our senior debt is not due until October 2010. However, the Company
will be required to pay $16.3 million still outstanding on the 11.653% notes,
plus accrued interest thereon, and any amounts outstanding on the $80.0 million
credit facility, plus accrued interest thereon, in 2007. No assurance can be
given that our operating cash flows or proceeds from additional financings, if
available, will be sufficient for such purposes.
While we continue to evaluate potential opportunities to expand our existing
casinos or to pursue other growth opportunities, we may not have sufficient
funds to finance such strategic projects under our existing debt agreements,
which also limits our ability to incur additional debt. The purchase of certain
gaming facilities by larger more recognized brand names or the expansion of
gaming in jurisdictions in which gambling is already legal or currently illegal
could significantly increase competition for the Company. If necessary and to
the extent permitted under the indenture governing the 9 1/2% notes, the Company
will seek additional financing through borrowings of debt or equity financing,
subject to any governmental approvals. There can be no assurance that additional
financing, if needed, will be available to the Company, or that, if available,
the financing will be on terms favorable to the Company. In addition, there is
no assurance that the Company's estimate of its reasonably anticipated liquidity
needs is accurate or that unforeseen events will not occur, resulting in the
need to raise additional funds. The recent retroactive property tax accrual as
explained above and the ruling on the matter of Aztar Indiana Gaming Corporation
v. Indiana Department of State Revenue as more fully described in Part II Item
1, Legal Proceedings, could have a material impact on the Company's liquidity.
On May 4, 2004, the Company and the lenders to the $80.0 million credit
facility agreed to the form of an amendment to the loan and security agreement
(attached as Exhibit 10.1 to this Form 10-Q). The amendment modifies the
definition of EBITDA to specifically clarify that it was acceptable to add back
up to $2.5 million of charges related to the previously discussed retroactive
property tax adjustment at Majestic Star. The modified definition of EBITDA is
effective as of December 31, 2003. Without the amendment, the Company would have
not met the required $13.9 million EBITDA covenant for the quarter ended March
31, 2004.
As of March 31, 2004, the Company had $41.0 million available on its $80.0
million credit facility.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information reported in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2003.
40
ITEM 4.
CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 15d-15 of the Securities Exchange Act
of 1934. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to cause the material information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 to be recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives.
There have been no changes in the Company's internal controls over financial
reporting during the quarter ended March 31, 2004 that have materially affected,
or are reasonably likely to materially affect the Company's internal controls
over financial reporting.
41
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal proceedings are pending against the Company. Management
considers all such pending proceedings, comprised primarily of personal injury
and equal employment opportunity (EEO) claims, to be routine litigation
incidental to the Company's business. Except as described below, management
believes that the resolution of these proceedings will not individually or in
the aggregate, have a material effect on the Company's financial condition,
results of operations or cash flows.
On April 19, 2004, the Indiana Tax Court ruled on the matter of Aztar
Indiana Gaming Corporation ("Aztar") v. Indiana Department of State Revenue
("Department of Revenue"). Aztar operates a riverboat casino in Indiana. The
ruling denied Aztar's deductions claimed on its Indiana income tax returns for
taxes paid on gaming revenues to the state. This ruling has significant
implications for all Indiana casinos. Majestic Star has been issued notices of
proposed assessments by the Department of Revenue totaling $2.6 million for the
period 1996 to June 16, 2001. While Majestic Star is a limited liability company
and its income and expenses pass to its member, the Department of Revenue has
taken the position that Majestic Star had a requirement to withhold and remit
state income tax. No assessment has been issued by the Department of Revenue for
any tax period subsequent to June 16, 2001, but the Company estimates that if
the assessment were extended through the latest reporting date of March 31,
2004, there would be an additional tax liability of approximately $2.7 million,
plus interest. This additional tax liability amount would be adjusted against
any net taxable income or losses previously reported to the state by our member.
In addition, to date, Majestic Star has not been charged a penalty for the claim
it failed to withhold and remit the taxes to the state. Aztar has announced that
it will request a rehearing of the tax court ruling. If the outcome of the
rehearing is unfavorable to Aztar, then the Company's member could similarly be
required to pay additional taxes to the State of Indiana, along with interest.
Under its loan indenture, the Company is allowed to make distributions to its
member for tax purposes, and the Company intends to do so when this matter is
ultimately resolved. Any payments would be recorded as distributions to its
member.
In December 2002, a complaint was filed in the U.S. District Court for
the Northern District of Mississippi against Barden Mississippi and the former
owner of Fitzgeralds Tunica, alleging violation of Title VII of the Civil Rights
Act of 1964 and violation of 42 U.S.C. Section 1981, as well as certain other
state law claims. The lawsuit pertains to certain events alleged to have
occurred on or about December 7, 2001 in connection with Investor Holdings'
acquisition of Fitzgeralds Tunica from its former owner. The plaintiff was
seeking back pay, front pay, compensatory damages and punitive damages in excess
of $3.5 million. The former owner of Fitzgeralds Tunica has been dismissed from
the case. After a three-day bench trial against Barden Mississippi, on May 6,
2004, the Judge awarded the plaintiff $312,006, which incorporates back pay,
emotional distress and punitive damages plus an additional sum for reasonable
attorney fees in an amount that has not yet been determined. The Company has
established a reserve at March 31, 2004 for the award in the amount of $392,006
along with $35,000 for the Company's attorney fees. The Company intends to
appeal the judgment.
42
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
<Table>
<Caption>
Exhibit No. Description of Document
----------- -----------------------
10.1 Amendment Number One to Loan And Security Agreement
by and between The Majestic Star Casino, LLC and
each of its guarantor subsidiaries and the lenders
to the $80.0 million senior secured credit facility
10.2 Six month extension to the Employment Agreement for
the Chief Financial Officer of the Company
31.1 Certification of Chief Executive Officer pursuant to
Rule 15d-14 of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Rule 15d-14 of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
</Table>
(b) Reports on Form 8-K.
On January 15, 2004, the Company filed a report on Form 8-K under Items
2 and 7 to furnish information regarding the spin-off of Barden Nevada
to BDI.
On March 2, 2004, the Company filed a report on Form 8-K under Items 7,
9 and 12 to furnish a press release announcing the Company's financial
results for its quarter and year ended December 31, 2003.
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 2004
THE MAJESTIC STAR CASINO, LLC
/s/ Don H. Barden
- -----------------
Don H. Barden
Manager, Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jon S. Bennett
- ------------------
Jon S. Bennett
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
THE MAJESTIC STAR CASINO CAPITAL CORP.
/s/ Don H. Barden
- -----------------
Don H. Barden
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jon S. Bennett
- ------------------
Jon S. Bennett
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
S-1
10-Q EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
10.1 Amendment Number One to Loan And Security Agreement
by and between The Majestic Star Casino, LLC and each
of its guarantor subsidiaries and the lenders to the
$80.0 million senior secured credit facility
10.2 Six month extension to the Employment Agreement for
the Chief Financial Officer of the Company
31.1 Certification of Chief Executive Officer pursuant to
Section 302.
31.2 Certification of Chief Financial Officer pursuant to
Section 302.
32 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
</Table>