UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission file number: 333-06489
Indiana THE MAJESTIC STAR CASINO, LLC 43-1664986
Indiana THE MAJESTIC STAR CASINO CAPITAL CORP. 35-2100872
(State or other jurisdiction of (Exact name of registrant (I.R.S. Employer
incorporation or organization) as specified in its charter) Identification No.)
301 Fremont Street
Las Vegas, NV 89101
(702) 388-2224
(Registrant's address and telephone number, including area code)
Securities registered pursuant to section 12(b) of the act: None
Securities registered pursuant to section 12(g) of the act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes [ ] No [X]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant: Not Applicable. The Company has no publicly
traded equity securities.
The number of shares of common stock issued and outstanding: Not Applicable.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business 1
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 19
Item 6. Selected Consolidated Financial Data 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 41
Item 8. Financial Statements and Supplementary Data 43
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 43
Item 9A. Controls and Procedures 43
Item 9B. Other Information 43
PART III
Item 10. Directors and Executive Officers of Registrant 44
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 47
Item 13. Certain Relationships and Related Transactions 48
Item 14. Principal Accountant Fees and Services 49
PART IV
Item 15. Exhibits and Financial Statement Schedules 51
Signatures S-1
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PART I
ITEM 1. BUSINESS
GENERAL
The Majestic Star Casino, LLC was formed in December 1993 as an Indiana
limited liability company. The Majestic Star Casino, LLC conducts its operations
both directly and through its subsidiaries. In this report, unless indicated
otherwise, "Majestic," the "Company," "we," "us," and "our" refer to The
Majestic Star Casino, LLC, The Majestic Star Casino Capital Corp., and our
subsidiaries who guarantee our principal debt obligations.
We own and operate three casino properties, located in Gary, Indiana,
("Majestic Star"), Tunica County, Mississippi ("Barden Mississippi" or
"Fitzgeralds Tunica"), and Black Hawk, Colorado ("Barden Colorado" or
"Fitzgeralds Black Hawk"). Our properties collectively contain approximately
3,542 slot machines, 87 table games and 507 hotel rooms (Fitzgeralds Tunica
only). Our properties are well established, each having been in operation for at
least eight years, and are well situated within significant drive-in gaming
markets. Within each market, we leverage our strong brand names, experienced
management, value-oriented amenities and emphasis on slot play to target
mid-level gaming customers who overwhelmingly favor slot play.
On July 12, 2004, the Company entered into an agreement to sell
substantially all of the assets, subject to certain liabilities, of Fitzgeralds
Black Hawk for a purchase price of $66.0 million, which purchase price will be
subject to adjustments based on working capital and certain capital expenditures
made as of the closing date (see Note 7 of Notes to Consolidated Financial
Statements -- The Majestic Star Casino, LLC and subsidiaries). The Company has
been aggressively seeking new growth opportunities in numerous locations for
reinvestment of the net proceeds from the sale of Fitzgeralds Black Hawk. Since
many of these new gaming opportunities are still evolving and being analyzed, or
are part of a broader bidding process, it is premature to indicate specifically
and quantitatively when these opportunities and the investments needed to bring
these opportunities to fruition will transpire, if at all. Reinvestment could
also include enhancing or upgrading the facilities and amenities at either
Majestic Star or Fitzgeralds Tunica. The Company continues to evaluate all of
its options.
We are indirectly wholly owned and controlled by Don H. Barden, our
Chairman, President and Chief Executive Officer and the sole shareholder of
BDI. Mr. Barden has an established track record of operating, developing and
acquiring properties in the gaming industry and in other industries.
Our executive offices are located at 301 Fremont Street, 12th Floor, Las
Vegas, Nevada 89101, and our telephone number is (702) 388-2224. Our World Wide
Web site can be accessed through either http://www.majesticstar.com or
http://www.fitzgeralds.com. The information in our website is not part of this
report.
RESTATEMENT OF PREVIOUSLY REPORTED AMOUNTS
Cash Based Promotional Activities
The Company has determined that cash-based promotional activities should
be presented as a reduction of gross revenues. Such cash-based promotional
activities had previously been recorded as casino expense. The restatement has
no impact on previously reported consolidated operating income, net income
(loss) or any element of the consolidated balance sheets or consolidated
statements of cash flows for any date or period presented. This restatement has
no impact on EBITDA or adjusted EBITDA as previously reported by the Company. In
addition, the restatement has no impact on compliance with any financial
covenants under the $80.0 million credit facility or the indenture governing the
$260.0 million of 9 1/2% senior secured notes.
The restatement results from a re-evaluation of the accounting treatment
of various cash-based promotional activities during the preparation and audit of
the financial statements for the year ended December 31, 2004. Periodically, the
Company offers various cash based promotions to its casino customers. Generally
these promotions are based upon the rated or tracked play of its customers.
These promotions can range in value and timing, and are offered at the sole
discretion of the Company's management. The Company's cash-based promotional
activities are intended to encourage repeat visits to the Company's casinos.
While casino customers are under no obligation to spend the promotional cash in
gaming activities at the casino, the customer must be physically present to
receive the cash promotional award and the Company's experience shows that the
vast majority of customers do engage in gaming activities the same day the cash
is received. The Company has concluded that the payout of cash under these
cash-based promotional activities should be treated as a reduction of gross
revenues when redeemed, in accordance with Emerging Issues Task Force ("EITF")
No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer."
In addition to the above-described restatement, the Company also recorded
an adjustment for cash-based promotional activities in the fourth quarter of
2004 to correct amounts previously reported for the nine months ended
September 30, 2004. The adjustment reduced each of net revenues and operating
expenses by approximately $12.9 million in the fourth quarter.
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GAMING FACILITIES
- Majestic Star. Majestic Star is a riverboat casino located at
Buffington Harbor in Gary, Indiana, approximately 23 miles southeast
of downtown Chicago. The riverboat casino is a four-story, 360-foot
long vessel with a contemporary design that accommodates
approximately 3,000 passengers plus crew. The casino includes
approximately 40,800 square feet of gaming space across three
expansive decks, which contain approximately 1,574 slot machines and
47 table games. In 2004, Majestic Star added an entertainment stage
on the second floor of the casino and on the third floor completed
the new Don and Mike's Sports Bar, which opened on May 5, 2004.
During the second quarter of 2004, Majestic Star also remodeled its
VIP lounge and its high limit table game area and finished
construction on an outdoor festival area located adjacent to the
2,000-space covered parking garage at the Buffington Harbor gaming
complex. The festival area provides another entertainment venue to
bring people to our gaming facility.
Majestic Star operates from the Buffington Harbor gaming complex,
which we share with the Trump Casino and own through a joint venture
(the "BHR Joint Venture") with Trump Indiana, Inc. (our "Joint
Venture Partner" or "Trump"). The Buffington Harbor gaming complex
is a two-level, 85,410 square foot structure containing Passports
World Class Buffet, Koko Taylor's Blues Cafe and three additional
food and beverage outlets: Miller Pizza, Harbor Treats and Jackpot
Java. At this time, Buffington Harbor leases the rights to operate
these restaurants to third parties and does not operate any of the
food and beverage facilities located on its premises. The Buffington
Harbor gaming complex also contains a gift shop, banquet and
entertainment facilities, and the recently remodeled VIP lounge,
which is available only to Majestic Star's customers. The Buffington
Harbor gaming complex is situated on an approximately 100-acre site,
containing a 2,000-space covered parking structure and 2,600 surface
parking spaces, and offers valet parking and convenient bus loading
and unloading facilities.
On November 22, 2004, Trump Hotels and Casino Resorts, Inc.
("THCR"), the owner of Trump, entered into a pre-negotiated plan of
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Since
that time, THCR has been operating as a debtor in possession of its
assets and Trump has continued to pay its monthly obligations under
the BHR Joint Venture and parking garage lease.
In February 2004, Majestic Star acquired 170 acres of property
adjacent to the Buffington Harbor gaming complex, from Gary New
Century, LLC, an affiliate of ours, for $22.1 million, including
approximately $0.2 million for legal and other transaction costs.
This land is held for future development, which could incorporate
various public and privately funded projects. At this time the City
of Gary is constructing a new access road that is a first phase
toward developing the 170 acres. In addition, the new access road
will improve access to the Buffington Harbor gaming complex. Part of
the new road will terminate on the second deck of the 2,000 space
covered parking garage. The first phase of the road construction is
anticipated to be completed in late spring of 2005.
- Fitzgeralds Tunica. Fitzgeralds Tunica is located in north Tunica
County, Mississippi, approximately 30 miles from downtown Memphis,
Tennessee. Fitzgeralds Tunica has an Irish castle theme and is the
focal point of a 50-acre site situated adjacent to the Mississippi
River. Fitzgeralds Tunica is a full-service entertainment
destination and our customer base has been increased and diversified
by our ability to attract, in addition to local customers,
independent travelers, tour-and-travel customers and guests for
special events and conventions. Fitzgeralds Tunica includes a
507-room hotel (including 72 suites), an indoor special events
center, an indoor swimming pool and a casino offering approximately
1,375 slot machines and 34 table games, two bars, three restaurants
and a gift shop. Fitzgerald Tunica has 1,264 surface parking spaces,
a 411-space covered parking garage and 120 valet parking spaces. In
February 2004, we completed a remodel project to the rooms on the
first and third floors of our nine-floor hotel. The remodel project
improved approximately 100 rooms. During June 2004, the property
completed improvements to the second floor of the casino, which
includes larger restrooms, enhanced cage and guest service areas and
an expanded casino floor that provides space for 90 additional slot
machines, which became operational on July 9, 2004. Also, in August
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2004, the property installed a new slot player tracking and
marketing system. This new system has allowed us to install TITO
technology, which will make our casino floor operate more
efficiently while allowing us to improve guest service, and will
provide for more effective marketing toward our casino customers.
- Fitzgeralds Black Hawk. Fitzgeralds Black Hawk is located adjacent
to the entrance to the downtown gaming area of Black Hawk, Colorado.
Fitzgeralds Black Hawk is approximately 25 miles from Denver. The
casino offers approximately 591 slot machines, 6 table games, a
restaurant and a bar. Fitzgeralds Black Hawk also has a 392-space,
all valet parking garage adjacent to the casino. During 2004, we
installed a new exterior sign package and enhanced its slot machine
offerings by introducing new penny and multi-denominational slots,
and relocated the high limit room to a more favorable area of the
casino floor.
OPERATING STRATEGY
Our operating strategy is to attract middle market guests by continuing to
promote our properties as synonymous with a quality casino experience and
personal service at an affordable price. We intend to accomplish this by
continuing to pursue the following principal elements of our strategy:
GOOD LOCATIONS IN STRONG DRIVE-IN MARKETS. Our properties are located in
significant drive-in gaming markets, which allows our casino patrons
to reach us in short travel times and make repeated trips to our
gaming facilities.
- Majestic Star. Majestic Star is located in, and primarily draws
from, the Chicago metropolitan area and is located 23 miles from
downtown Chicago. Majestic Star also attracts drive-in customers
from other areas in Illinois, Indiana, and Michigan. Buffington
Harbor has the highest concentration of gaming positions in the
Chicago market, offering patrons a total of approximately 4,000
gaming positions.
- Fitzgeralds Tunica. Fitzgeralds Tunica primarily draws its gaming
patrons from the Memphis, Tennessee area and also attracts drive-in
customers from Northern Mississippi, Little Rock, Arkansas to the
west, southern Missouri to the north and Birmingham and Huntsville,
Alabama to the east, as well as regional weekend travelers flying
into Memphis. The Tunica market draws most of its customers from
within a 200-mile radius.
- Fitzgeralds Black Hawk. Fitzgeralds Black Hawk is located in the
Black Hawk/Central City market, which includes the City of Black
Hawk and Central City, and attracts drive-in or "day trip" customers
from the population centers of Denver, Boulder, Colorado Springs and
Fort Collins, Colorado as well as Cheyenne, Wyoming. Each of these
population centers is located within a 150-mile radius of the Black
Hawk/Central City market.
STRONG GAMING BRANDS. We believe our strong gaming brands help attract and
retain customers.
- Majestic Star. We utilize a comprehensive integrated marketing
campaign to brand Majestic Star as "THE WINNING PLACE TO PLAY(TM)"
or "THIS IS MY KIND OF PLACE(TM)" in the Chicago metropolitan area
for slot customers from the middle-income segment. On March 1, 2004,
Majestic Star began using Mike Ditka, the former Chicago Bears
player and coach, as a celebrity spokesperson to promote,
reposition and create better brand awareness of the property. Our
ads with Mike Ditka, along with other messages about Majestic Star,
have appeared in all advertising venues including television, radio,
print and outdoor media, which we believe has enhanced our slot
leadership positioning and improved our market share among
Chicago-area gaming facilities. We intend to utilize these and other
similar broad marketing techniques to attract middle-income
customers, who we are then able to qualify and target for direct
marketing activities.
- Fitzgeralds. The Fitzgeralds brand has developed into a nationally
recognized gaming brand by using a consistent Irish Luck theme
throughout the casinos, hotel, restaurants and bars at our
properties. The Irish Luck theme allows us to capitalize on our
belief that every casino guest wants to feel lucky. The Irish Luck
theme incorporates various aspects of Irish folklore, such as
leprechauns, horseshoes, four-leaf clovers, the Blarney Stone and a
pot of gold at the end of a rainbow. We believe that Fitzgeralds
customers have come
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to associate the Irish Luck theme and the associated trade dress and
Fitzgeralds brand trademarks with strong guest services such as the
personal attention and quality product and gaming experience that we
seek to provide at both of our Fitzgeralds properties.
STRONG OWNERSHIP AND EXPERIENCED MANAGEMENT. We are indirectly wholly
owned and controlled by Don H. Barden, our Chairman, President and
Chief Executive Officer. Mr. Barden has an established track record
of developing, operating, and acquiring properties in the gaming
industry. Mr. Barden also has successfully built, owned, and
operated numerous businesses in the cable television, international
trade, and real estate industries and has owned and operated several
radio stations over the past 35 years. Barden Companies, Inc., a
company wholly owned by Mr. Barden and one of our affiliates, was
named "Company of the Year" for 2003 by Black Enterprise magazine.
In addition, in 2004 Mr. Barden received a Trumpet Award as
Entrepreneur of the Year. Trumpet Awards recognize the achievements
of African-Americans and salutes them for their fortitude and
persistence. Further, in 2003, Mr. Barden was recognized as the
"Master Entrepreneur" of Eastern Michigan during the Ernst & Young
Entrepreneur of the Year contest. We have a proven management team
with substantial experience in the gaming industry and with our
properties in their respective markets. In addition, our property
general managers and chief financial officer have a combined 111
years of experience in the casino industry.
EMPHASIZE SLOT PLAY. We emphasize slot machine wagering, which we believe
is the fastest growing, most stable and most profitable segment of
the casino entertainment business. The increasing popularity of slot
machines is due, in part, to the continuing rapid technological
innovation that is resulting in the replacement of older devices
with advanced interactive electronic games and ticket-in ticket-out
technology ("TITO"). During 2003 and 2004, we converted and/or
purchased approximately 400 slot machines and 633 slot machines,
respectively, at Majestic Star that utilize the TITO coinless slot
technology. As of today, 71% of Majestic Star's slot machines are
TITO and we anticipate 88% of our slot machines being TITO by the
end of 2005. In 2003, we installed a new slot player tracking and
casino management system at Majestic Star. These new systems provide
us with advanced capabilities of tracking our customers' slot and
table game play and allow us to implement new, more effective,
promotions that we believe will enhance our revenues and
profitability. At Fitzgerald Tunica, we installed the same casino
management system in February 2004 and the same slot player tracking
system in June 2004 that are in use at Majestic Star. These new
systems at Fitzgeralds Tunica have allowed us to begin implementing
TITO. We currently have 158 TITO equipped slot machines on our
casino floor with the goal of having 540 TITO equipped slot machines
by the end of 2005. In 2004, we invested significantly in newer slot
machines, which we believe offer greater variety, higher frequency
payouts and longer periods of play for our casino customers relative
to traditional reel devices. We continue to enhance and modify our
mix of slot machines to meet the demand of our customers. As a
result of our continued focus on slot play, slot revenues generated
approximately 87% of our gaming revenues for the twelve months ended
December 31, 2004.
FOCUS ON QUALITY AND SERVICE AT AN AFFORDABLE PRICE. Our casinos provide a
high-quality casino entertainment experience at an affordable price
to attract middle market guests. We believe these middle market
guests constitute the largest segment of potential gaming customers
whom we can then identify, qualify and target for direct marketing
activities. Our approach to business at our properties focuses on
guest service and includes:
- friendly employees;
- trained hosts to personally assist guests;
- quality food and beverages and, at Fitzgeralds Tunica, lodging at a
moderate price;
- a mix of gaming machines tailored to our customers; and
- personal attention through direct mail promotions, targeted
incentives and the use of the Majestic Star and Fitzgeralds Cards as
part of a frequent player recognition program.
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We believe that such an approach to business creates a comfortable,
familiar and friendly environment that promotes customer loyalty and
satisfaction, enhances playing time, leads to a high rate of repeat business and
is the basis for the further development of our brands and our reputation for
quality and service at an affordable price.
MARKETING and GROWTH STRATEGIES
We believe that our future growth is going to be based upon our ability to
successfully grow and market to our database of casino customers, provide our
customers with a superior level of service and value-oriented gaming, hotel
(Fitzgeralds Tunica only), food, beverage and entertainment options. We will
continue other forms of broad based marketing to attract customers to our
facilities. These other forms include television, radio, newspaper and outdoor
media. Our advertising messages are awareness, image and product oriented. We
also emphasize entertainment, events and promotions through different methods of
advertising to increase our revenues.
All of our properties are located in regional markets. Our customers
generally live within close proximity to our casinos, and are likely to make
frequent trips to our facilities. Since we operate regionally, database
marketing is a key element to encouraging casino customers to make frequent
visits to our properties. But equally as critical is attracting new customers to
our casinos so that we can grow our database. We do this through a combination
of promotions, events, product and entertainment marketing. We use both internal
and broad based external media to create awareness of our promotions, events,
products and entertainment. Broad based media includes television, radio,
newspaper, internet and outdoor media. Once we get a customer to try one of our
casino facilities, it is important that we get them to sign-up for a Majestic
Star or Fitzgeralds player card. Through our investment in player tracking
technology systems, the use of the Majestic Star and Fitzgeralds player card
allows us to track individual or combined play at slot machines, table games, as
well as food and beverage and hotel expenditures (available only at Fitzgeralds
Tunica). The systems allow us to identify players and their gaming preferences
and practices and to develop a comprehensive customer database for marketing and
guest services purposes. Our player tracking programs allow us to target our
marketing programs to categories of players, including advertising programs,
promotions, tournaments with substantial cash prizes, special group and tour
packages, direct mail, and other events and incentives designed to promote
customer loyalty and increase repeat business. Our tracking system also allows
us to better tailor our pricing, promotions, gaming machine selection and other
guest services to customer preferences. We currently have an aggregate of over
442,000 active players in our combined Majestic Star and Fitzgeralds databases.
A key element to enhancing our casino revenues and profitability is our
continued investment in TITO technology. We currently have 1,168 or 71% of our
slot machines at Majestic Star equipped with TITO technology. We anticipate
having 1,450 or 88% of our slot machines equipped with TITO technology by the
end of 2005. In addition, in 2004 we began installing TITO technology on our
slot machines at Fitzgeralds Tunica. We currently have implemented TITO on 158
slot machines and anticipate having TITO on 540 of the property's nearly 1,400
slot machines by the end of 2005. We also have invested in a new slot player
tracking and marketing system at Fitzgeralds Black Hawk in 2005. Once
implemented, this system will allow us to start installing TITO on selected
machines at that property. TITO will allow us to operate our casino floors more
efficiently. This will allow us to provide greater levels of guest service. In
addition, TITO allows our customers to play their favorite slot machines longer
with fewer interruptions. Finally, TITO eliminates the problems of handling coin
and tokens. Our customers will find this advantageous since they will no longer
have to carry buckets of coins and tokens to a redemption location. With TITO,
tickets can be redeemed at kiosks conveniently located throughout the casino.
We also continue to invest in amenities and entertainment venues. The
remodeling of the Monte Carlo Room, our VIP lounge, and the opening of Don and
Mike's Sports Bar are all examples of our investments at Majestic Star. The
property also expanded the entertainment provided to its casino guests by
offering acts on the Star Stage and completed construction of an outdoor
festival area, which began hosting events in the summer of 2004. With our Joint
Venture Partner, we converted Buffington Harbor's first floor ticketing area
into a 600-person banquet and entertainment facility. These facilities are
available for weddings, concerts, fairs, social gatherings, flea markets and
other events designed to increase traffic to our casino.
We believe that Majestic Star is one of only two locations in the Chicago
market with the capacity to significantly expand its land-based facilities. We,
along with our Joint Venture Partner, own approximately 100-acres at the
Buffington Harbor gaming complex. In addition, on February 11, 2004, we acquired
approximately 170 acres of land located adjacent to the Buffington Harbor gaming
complex. We intend to use the land for development opportunities, which may
include possible public and private investments.
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In Tunica, Mississippi, the local government has invested in developing
tourism and promoting the area casinos. In 2004, Tunica County opened the Tunica
River Front Park adjacent to our Fitzgeralds Tunica property. The Tunica River
Front Park is a $23.0 million facility that contains a museum, nature trails,
retail outlets, a boat docking facility and a riverboat. In addition, Tunica
County constructed a new golf course near the Tunica casinos. In an effort to
increase customer traffic to the Tunica area, Tunica County is expanding its
airport into a regional airport. The airport runway has already been lengthened
to accommodate regional jets. In addition, the airport has recently installed an
instrument landing system. These improvements, and other improvements planned
for the future, are intended to expand the Tunica market reach and bring more
visitors to the area.
COMPETITION
We face intense competition in each of the markets in which our gaming
facilities are located. Many of our competitors have significantly greater name
recognition and financial, marketing and other resources than we do. In addition
to regional competitors, we compete with gaming facilities nationwide, including
land-based casinos in Nevada and Atlantic City, not only for customers but also
for employees. We also compete, to some extent, with other forms of gaming on
both a local and national level, including state-sponsored lotteries, Internet
gaming, on- and off-track wagering and card parlors.
In northwest Indiana there are four other casinos that Majestic Star
competes with for customers. In addition there are numerous other casinos in the
Chicago area, some of which are in close proximity to Majestic Star. In Tunica,
Mississippi, there are eight other casinos that compete with Fitzgeralds Tunica
along with casinos further south in Mississippi and in other states that seek to
attract customers from many of the same areas in which we market. Lastly, there
are numerous casinos in Black Hawk/Central City, Colorado all competing for
customers in the primary feeder markets of Fitzgeralds Black Hawk.
Our competitors continue to make significant capital expenditures in their
properties. During the third and fourth quarter of 2004, the Horseshoe Casino in
Hammond, Indiana, added 2,000 spaces to its parking garage, significantly
increasing its parking capacity. Also, Harrah's East Chicago Casino and Hotel
made $27.0 million in improvements to its facility. The Blue Chip Casino and
Hotel, which is less than 40 miles east of Majestic Star, is currently
undergoing a $150 million expansion project, which includes a new, larger vessel
and a four level parking structure with 950 parking spaces, which will increase
their capacity to 3,000 parking spaces. Their pavilion will be expanded by
17,000 square feet and will house a new buffet, entertainment lounge and steak
house. The expansion is expected to be completed near the end of 2005. In Black
Hawk, Colorado, the Isle of Capri and Colorado Central Station casinos (both
owned by Isle of Capri) have undertaken significant remodel and expansion
projects. It has been reported that the Isle of Capri is spending $94.0 million
to remodel the two facilities, and to add a parking garage and skyway overpass
to connect the two properties. Once completed, Isle of Capri and Colorado
Central Station will provide significantly enhanced facilities and products in
the Black Hawk market, which could increase competition and negatively impact
our Black Hawk operations.
The recent and continued expansion of legalized casino gaming within
existing jurisdictions and to new jurisdictions throughout the United States has
increased competition faced by us and such competition will continue to increase
in the future. Currently, the award of the tenth casino license in Illinois is
being challenged by Illinois state officials. Currently there are ten casino
licenses authorized in Illinois. Once this matter is resolved, and a new casino
operation is allowed to move forward, depending on the location of that casino,
it could have a significant impact on the financial performance of our Majestic
Star facility. In addition, a Senate committee in the Illinois legislature
approved legislation that would allow three casinos - a publicly owned,
land-based casino in Chicago and two riverboat casinos, one in Waukegan and
another in Chicago's south suburbs. The legislation would also raise limits on
existing riverboats from 1,200 gaming positions to 2,000 positions. It is
unknown if this legislation will continue to retain its current provisions and
become law. However, if it were to become law in its current form or something
similar, then the financial impact to our Majestic Star operation could be
significant. In Indiana, the IGC authorized the establishment of an eleventh
casino operation in Orange County, Indiana, which is located over 250 miles
south of Gary, Indiana, the site of Majestic Star. The IGC issued an operating
agent contract to Trump Hotels & Casino Resorts ("THCR") to operate a riverboat
casino in Orange County, Indiana. Subsequently, THCR dropped its bid on
developing a casino in Orange County. Other groups that previously competed for
the right to operate the casino are
6
now showing renewed interest. With regard to Mississippi, there are no limits
on the number of gaming licenses allowed, and there has been discussion of
additional competitors entering the market. However, no development has occurred
on any of these projects. In Black Hawk, Colorado, the opening of the new road,
Central City Parkway, provides an alternative route to Black Hawk through
Central City. As a result of the new route, there has been renewed interest in
casino properties in Central City. This renewed interest could take the form of
new or expanded casinos, which would compete directly with our Fitzgeralds Black
Hawk operation.
Additionally, if casino gaming were legalized in jurisdictions near our
properties, where casino gaming currently is not permitted, we could face
additional competition. For example, our casino in Tunica, Mississippi competes
for customers from Memphis, Tennessee and Little Rock, Arkansas, where casino
gaming activity is currently prohibited. However, in the past, Arkansas voters
and the Arkansas legislature have considered various proposals to approve casino
gaming in Arkansas or slot machines at certain racetracks. Tennessee passed
legislation and commenced a state-sponsored lottery in January 2004. In
addition, there have been efforts in the past to open a casino in Memphis,
Tennessee. Memphis is a primary feeder market for our Tunica facility. While we
believe it unlikely that a casino will open in Memphis, Tennessee, if such an
event were to occur or if other casinos should open in our markets or areas that
could potentially draw customers from our markets, the Company could experience
a material negative impact to its business and financial results.
We are also subject to the competitive effects of consolidation and
acquisitions within the gaming industry. Harrah's Entertainment, Inc.
("Harrah's") completed its acquisition of Horseshoe Gaming Holding Corp.
("Horseshoe") on July 1, 2004. Harrah's and Horseshoe both operate casinos in
the northwest Indiana and Tunica markets. Harrah's also signed a definitive
agreement on July 14, 2004 to acquire Caesars Entertainment, Inc. ("Caesars").
In connection with the merger, on September 27, 2004, Harrah's agreed to sell
Harrah's East Chicago and Harrah's Tunica, and Caesars agreed to sell its
Bally's Tunica property to Colony Capital. In addition, MGM Mirage ("MGM") is in
the process of acquiring Mandalay Resorts Group. While it is difficult to
determine the actual effects of the acquisitions, the acquisitions will allow
both companies to expand their database of players and market share
significantly and might help them to recognize operating and administrative
synergies within both markets. In addition, Colony Capital would invest
significantly in Capital expenditures and marketing, thus increasing their
presence and competition within our markets.
Competition requires us to continually make substantial capital
expenditures to maintain and enhance the competitive positions of our
properties, including updating slot machines to reflect changing technology,
refurbishing rooms and public service areas periodically, replacing obsolete
equipment on an ongoing basis and making other expenditures to increase the
attractiveness and add to the appeal of our properties. Because we are highly
leveraged, after satisfying our obligations under our outstanding indebtedness,
there can be no assurance that we will have sufficient funds to undertake these
expenditures or that we will be able to obtain sufficient financing to fund such
expenditures. Our debt instruments limit our capital expenditures on an annual
basis, and our ability to incur additional debt. If we are unable to make
adequate expenditures, our competitive position and our results of operations
could be materially adversely affected.
EMPLOYEES AND UNIONS
As of December 31, 2004, we directly employed approximately 2,081 persons.
Approximately 4.9% of our workforce is unionized. As of December 31, 2004,
Majestic Star and the BHR Joint Venture employed approximately 1,040 people,
approximately 180 of whom are represented by a union. At Majestic Star, Hotel
Employees Restaurant Employees International Union, Local No. 1, or UNITE HERE
represents 64 employees, under a tentative five-year contract that will expire
on October 31, 2009. There are also 69 employees at the BHR Joint Venture who
are represented by UNITE HERE, Majestic Star and its Joint Venture Partner have
begun negotiating a new contract with those employees. While the Company
believes that a new labor agreement will be negotiated and executed, at this
time it cannot be determined what terms will be contained in the new contract or
when the contract will be voted on by the UNITE HERE members. The Seafarers
Entertainment and Allied Trades Union represents 20 employees of Majestic Star
under a contract that expires August 2007. The United Steelworkers of America
union represents 18 full and regular-part time slot mechanics at Majestic Star
and is currently negotiating a contract with the Company. An additional 9
employees of the BHR Joint Venture are represented by the International Union of
Operating Engineers, Local No. 399 under a contract, which expires in June 2006.
As of December 31, 2004,
7
Fitzgeralds Tunica and Fitzgeralds Black Hawk employed approximately 1,167 and
313 people, respectively, none of whom are represented by a union. Management
believes that our overall relations with its employees and unions are good.
In recruiting personnel, Majestic Star is obligated, under the terms of an
agreement with the City of Gary, to use its best efforts to have an employee
base which is comprised of 70% from racial minority groups, 52% females, 67%
residents of the City of Gary and 90% residents of Lake County, Indiana. We
believe that our recruitment efforts and programs meet this obligation.
TRADE NAMES, TRADEMARKS AND SERVICE MARKS
We utilize a comprehensive integrated marketing campaign to brand Majestic
Star as "THE WINNING PLACE TO PLAY(TM)" or "THIS IS MY KIND OF PLACE(TM)" for
slot customers from the middle-income segment. We own certain trademarks that
are integral to the business and operation of Majestic Star's riverboat gaming
facility and the Fitzgeralds Casinos. For Majestic Star, each of the trademarks,
"Majestic Star Casino(TM)" (words and design), "Majestic Star(TM)," "Club
Majestic(TM)," "Club Majestic Premier(TM)," "Change Your Luck! (TM)" and "We've
Got Your Slots(TM)," each are currently registered in the United States Patent
and Trademark Office ("PTO"). Applications for registrations have been filed in
the PTO for the marks "THE WINNING PLACE TO PLAY" and "THIS IS MY KIND OF
PLACE."
The Fitzgeralds Casinos have developed a national gaming brand by using a
consistent Irish Luck theme throughout the casinos, hotel, restaurants and bars
at all of its properties. We own proprietary rights in registered and common law
trade names, trademarks and service marks used in connection with the business
and created to enhance the Irish Luck theme and gaming activities, including the
marks "Fitzgeralds(R)," "Fitz(R)", and "Get Reel Lucky(R)". Following the
Fitzgeralds acquisition, and under a license from us, Fitzgeralds Reno, Inc.
("Fitzgeralds Reno"), a subsidiary of Fitzgeralds Gaming Corporation, retained
the right to use the name "Fitzgeralds(R)" and certain other marks in connection
with its operation of its existing casino property in Reno, Nevada and in
connection with any casino properties it may operate in the future in Northern
California, Northern Nevada, Oregon and Washington. In addition, Fitzgeralds
Reno may assign the license to the first purchaser of the casino in Reno;
however, any other assignment requires our prior written consent. We retained
all other rights to the Fitzgeralds name and all Fitzgeralds trademarks, service
marks and trade dress for use in connection with Fitzgeralds Tunica and
Fitzgeralds Black Hawk. In connection with any use of the Fitzgeralds name, the
terms of the license require Fitzgeralds Gaming Corporation to comply with
certain requirements, including operating any casino property using the
Fitzgeralds name in accordance with our current operating standards. In
connection with the spin-off of Barden Nevada, we entered into a license with
Barden Nevada to allow Barden Nevada the right to use the name "Fitzgeralds(R)"
in connection with its operation of that property.
In connection with that certain Asset Purchase Agreement by and between
Barden Colorado Gaming, LLC and Legends Gaming, LLC ("Legends") dated as of July
12, 2004, Majestic Investor Holdings, LLC ("MIH") agreed to enter into a License
Agreement with Legends to be effective at the closing of the Asset Purchase
Agreement, pursuant to which MIH will grant Legends an exclusive right and
license to use and exploit certain trade names, trademarks and service marks
(collectively, the "Marks"), solely in connection with the ownership,
development, operation, management and promotion of Fitzgeralds Black Hawk,
subject to the terms and conditions set forth in the License Agreement. The
license will have an initial term of ninety-nine (99) years, and in the event
the initial term has not been terminated prior to its expiration, the term will
automatically renew for an additional ninety-nine (99) years. Except as
otherwise permitted in the License Agreement, Legends may not adopt or use,
without MIH's prior written consent, any variation of the Marks and agrees that
it will operate and promote Fitzgeralds Black Hawk in accordance with quality
standards as defined in the License Agreement. Under certain defined
circumstances, Legends will have the right of first refusal to purchase the
Marks for fair market value. Legends may also effectuate one assignment of its
rights under the License Agreement to any entity that owns and operates
Fitzgeralds Black Hawk without the prior consent of MIH. Any further assignments
to non-affiliated successor owners of Fitzgeralds Black Hawk may be made only
with the prior written consent of MIH.
8
ENVIRONMENTAL MATTERS
The Company is subject to certain federal, state and local environmental,
safety and health laws, regulations and ordinances including but not limited to
the Clear Air Act, Clean Water Act, Occupational Safety and Health Act, Oil
Pollution Act, Resource Conservation Recovery Act and the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"). The Company may incur material liability if contamination is
discovered on any of its properties either during the course of future
development or in connection with the properties designated for investigation or
remediation, as discussed below.
Specifically, the Black Hawk and Central City gaming districts, including
the Fitzgeralds Black Hawk site, are located within a 400-square mile area that
in 1983 was designated by the EPA as the Clear Creek/ Central City National
Priorities List Site Study Area ("Study Area") pursuant to CERCLA. The Study
Area includes numerous specifically identified areas of mine tailings and other
waste piles caused by historical mining activity in the area, which areas are
the subject of ongoing investigation and clean-up by the EPA and the Colorado
Department of Public Health and Environment ("CDPHE"). CERCLA addresses
remediation of sites from which there has been a release or threatened release
of hazardous substances and authorizes the EPA to take any necessary response
actions at Superfund sites, including requiring potentially responsible parties
("PRPs") to clean up or contribute to the clean up of a Superfund site. PRPs are
broadly defined under CERCLA, and include past and present owners and operators
of a site. CERCLA imposes strict liability on PRPs, and courts have commonly
held PRPs to be jointly and severally liable for all remediation costs.
Fitzgeralds Black Hawk is not within any of the specific areas of the
Study Area currently identified by the EPA and CDPHE for investigation or
remediation. The property on which the Fitzgeralds Black Hawk casino is situated
was not a historical mining site but rather was the location for a general
store. The parking complex for the casino and an adjacent vacant lot, however,
are situated near a historical milling area. To date no remediation requirements
have been recommended or required with regard to any portion of the property,
although test borings would likely be required in connection with any future
construction on the expansion parcel of the property. Based on the assessments
to date, we are not aware of any environmental problems affecting Fitzgeralds
Black Hawk, which are likely to result in material costs to us. No assurance can
be given, however, that environmental problems will not subsequently be
discovered. Furthermore, the EPA or other governmental authorities could broaden
their investigations and identify areas of concern within the site, we could be
identified as a PRP, and any liability related thereto could have a material
adverse effect on us.
The 170 acres of land (the "Land") acquired by Majestic Star on February
11, 2004 also contains areas with environmental issues. Within the Land, there
are areas that have been remediated or are in the process of remediation. The
City of Gary has been and continues to be responsible for remediation of all of
the Land, and has agreed to indemnify the Company, by assignment through GNC,
from and against any liability, obligation or expense, including attorney and
consultant fees, arising out of or in connection with the environmental
condition of the Land.
FINANCIAL INFORMATION ABOUT SEGMENTS
For financial information regarding the Company's business segments, see
Note 17 of the Notes to Consolidated Financial Statements.
SEASONALITY
The gaming operations of the Company's properties are seasonal and,
depending on the location and other circumstances, the effects of such
seasonality could be significant. The properties' results are affected by
inclement weather in relevant markets. For example, because of the climate in
the Chicago metropolitan area, Majestic Star's operating revenues are expected
to be stronger during the period from May through September. Fitzgeralds Black
Hawk, located in the Rocky Mountains of Colorado, is subject to snow and icy
road conditions during the winter months. Any such severe weather conditions may
discourage potential customers from visiting the Fitzgeralds Black Hawk
facilities. At Fitzgeralds Tunica and Fitzgeralds Black Hawk, business levels
are typically weaker from Thanksgiving through the end of the winter and
typically stronger from mid-June to mid-November. Accordingly, the Company's
results of operations are expected to fluctuate from quarter to quarter and the
results for any fiscal quarter may not be indicative of results for future
fiscal quarters.
9
GOVERNMENT REGULATION AND LICENSING
General
The ownership and operation of our gaming facilities are subject to
various state and local laws and regulations in the jurisdictions where they are
located. Because of the spin-off of Barden Nevada, we are no longer subject to
Nevada gaming licensing and regulatory control except that we must periodically
report on our gaming operations outside of Nevada to the Nevada gaming
regulators.
The following is a summary of the provisions of the laws and regulations
applicable to the Company's gaming operations and other laws and regulations
applicable to the Company as a registered holding company in Mississippi. The
summary does not purport to be a full description thereof and is qualified in
its entirety by reference to such laws and regulations.
Indiana Gaming Regulation
The ownership and operation of Majestic Star is subject to regulation by
the State of Indiana. In 1993, the State of Indiana passed the Riverboat
Gambling Act that created the Indiana Gaming Commission (the "IGC"). The IGC is
given extensive powers and duties for the purposes of administering, regulating
and enforcing riverboat gaming in Indiana.
The IGC has jurisdiction and supervision over all riverboat gaming
operations in Indiana and all persons on riverboats where gaming operations are
conducted. These powers and duties include authority to (i) investigate all
applicants for riverboat gaming licenses, (ii) select licensees from competing
applicants, (iii) establish fees for licensees and (iv) prescribe all forms used
by applicants. The IGC is authorized to adopt rules for administering the gaming
statute and the conditions under which riverboat gaming in Indiana may be
conducted. The IGC may suspend or revoke the license of a licensee or impose
civil penalties, in some cases without notice or hearing, for any act in
violation of the Riverboat Gambling Act or for any fraudulent act.
The Riverboat Gambling Act requires an extensive disclosure of records and
other information concerning an applicant, including disclosure of all
directors, officers and persons holding a five percent or more direct or
indirect beneficial interest in an applicant. In determining whether to grant or
renew an owner's license to an applicant, the IGC considers a number of factors,
including (i) the character, reputation, experience and financial integrity of
the applicant, (ii) the facilities or proposed facilities for the conduct of
riverboat gaming, (iii) the prospective revenue to be collected by the state
from the conduct of riverboat gaming, (iv) the good faith affirmative action
plan to recruit, train and upgrade minorities in all employment classifications,
(v) the financial ability of the applicant to purchase and maintain adequate
liability and casualty insurance, (vi) whether the applicant has adequate
capitalization to provide and maintain the riverboat for the duration of the
license and (vii) the extent to which the applicant meets or exceeds other
standards adopted by the IGC. The IGC may also give favorable consideration to
applicants for economically depressed areas and applicants who provide for
significant development of a large geographic area. A gaming license is a
revocable privilege and is not a property right.
An owner's initial license expires five years after the effective date of
the license (unless earlier terminated or revoked) and may be renewed for
one-year periods by the IGC upon satisfaction of certain statutory and
regulatory requirements. While the IGC reserves the right to investigate
riverboat licensees at any time it deems necessary, after the expiration of the
initial license, each riverboat licensee must undergo a complete reinvestigation
every three years. In June 1996, Majestic Star obtained its initial gaming
license from the IGC and has renewed it annually since. In June 2001 and 2004,
Majestic Star underwent its requisite three-year reinvestigations
satisfactorily. Majestic Star's current license will remain valid until June
2005.
A riverboat owner's license and operating contract entitle the licensee or
the operating agent to operate one riverboat. In May 2003, the Riverboat
Gambling Act was amended to allow a person to hold up to one hundred percent of
up to two individual riverboat's licenses. A transfer fee of $2.0 million
is imposed on a riverboat licensee who purchases or otherwise acquires a
controlling interest in a second Indiana riverboat's license. If a
riverboat licensee or the operating agent is a publicly traded corporation, its
articles of incorporation must contain language concerning transfer of
ownership, suitability determinations and possible divestiture of ownership.
10
The IGC is authorized to conduct investigations into gambling games, the
maintenance of equipment, and violations of the Riverboat Gambling Act as it
deems necessary. Riverboat licensees and operating agents may be subject to
fines, suspension or revocation of its owner's license or operating contract for
any conduct that violates the Act, rules promulgated thereunder or that
constitutes a fraudulent act.
Additionally, the IGC is authorized to license suppliers and certain
occupations related to riverboat gaming. Gaming equipment and supplies
customarily used in conducting riverboat gaming may be purchased or leased only
from licensed suppliers. By rules promulgated by the IGC, riverboat licensees,
who employ non-licensed individuals in positions requiring licensure or who
purchase supplies from a non-licensed entity, may be subject to a disciplinary
action.
A riverboat licensee may not enter into or perform any contract or
transaction in which it transfers or receives consideration that is not
commercially reasonable or that does not reflect the fair market value of goods
and services rendered or received. All contracts are subject to disapproval by
the IGC and contracts should reflect the potential for disapproval. The Act
places special emphasis on minority and women business enterprise participation
in the riverboat industry. Riverboat licensees and operating agents must
establish goals of expending ten percent of the total dollars spent on goods and
services with minority business enterprises and five percent with women business
enterprises. Each riverboat licensee is required to submit annually to the IGC a
report that includes the total dollar value of contracts awarded for goods and
services and the percentage awarded to minority and women's business
enterprises. The IGC may suspend, limit or revoke an owner's gaming license or
impose a fine for failure to comply with these statutory requirements. The
Company has compiled and submitted unaudited reports for the calendar year ended
December 31, 2004, which the Company believes demonstrate it has met these
statutory requirements.
Under IGC regulations, minimum and maximum wagers on games are left to the
discretion of the licensee. Wagering is required to be conducted with tokens,
chips or electronic cards instead of cash or coins.
Majestic Star commenced dockside gaming on August 5, 2002. In connection
with dockside operations, Indiana imposed a graduated wagering tax based upon
adjusted gross receipts. The graduated wagering tax has a starting rate of 15%
with a top rate of 35% for adjusted gross receipts in excess of $150 million. By
statute enacted in 2003, riverboats had to commence utilization of the graduated
tax rate on July 1, 2002, even though dockside operations at Majestic Star did
not commence until August 5, 2002. The statute further allowed Indiana
riverboats to pay the difference in the tax liability in two installments, one
due in 2003 and the second in 2004. Prior to July 1, 2002, Indiana gaming taxes
were levied on adjusted gross receipts, as defined by Indiana gaming laws, at
the rate of 20%. Starting on August 5, 2002, Indiana also imposed an admissions
tax of $3 per turnstile count.
Pursuant to legislation enacted in 2003, riverboats may now operate 24
hours per day. Majestic Star commenced 24-hour operations on July 12, 2003.
Riverboats licensed by the IGC are assessed as real property for property
tax purposes and, thus, are taxed at rates determined by local taxing
authorities. All Indiana state excise taxes, use taxes and gross retail taxes
apply to sales made on a riverboat.
As a condition of continued licensure, Majestic Star must maintain a bond
in the amount of $1.0 million to meet general legal and financial obligations to
the local community and the State. Majestic Star is currently seeking a waiver
from the IGC on the bond requirement. The riverboat licensee and the operating
agent must carry insurance in types and amounts as required by the IGC.
11
The IGC has promulgated a rule that prohibits distributions, excluding
distributions for the payment of taxes, by a Riverboat Licensee to its partners,
shareholders, itself or any affiliated entity if the distribution would impair
the financial viability of the riverboat gaming operation. The IGC has also
promulgated a rule mandating Riverboat Licensees to maintain a cash reserve to
protect patrons against defaults in gaming debts. The cash reserve is to be
equal to a Riverboat Licensee's average payout for a three-day period based on
the riverboat's performance the prior calendar quarter. The cash reserve can
consist of cash on hand, cash maintained in Indiana bank accounts and cash
equivalents not otherwise committed or obligated. We are in compliance with the
cash reserve requirement.
The Company and its affiliates are subject to restrictions on the
incurrence of debt. A riverboat licensee and its affiliates may enter into debt
transactions that total one million dollars or more only with the prior approval
of the IGC. Such approval is subject to compliance with request procedures and a
showing that each person with whom the riverboat licensee and its affiliates
enters into a debt transaction would be suitable for licensure under the Act.
Pursuant to legislation adopted in May 2003, the IGC adopted rules to
establish and implement a voluntary exclusion program that requires, among other
things, (1) that persons who participate in the voluntary exclusion program be
included on a list of persons excluded from all Indiana riverboats, (2) that
persons who participate in the voluntary exclusion program may not seek
re-admittance to Indiana riverboats, (3) Riverboat Licensees and Operating
Agents must make reasonable efforts, as determined by the IGC, to cease all
direct marketing efforts to a person participating in a voluntary exclusion
program, and (4) a Riverboat Licensee or Operating Agent may not cash a check
of, or extend credit to, a person participating in the voluntary exclusion
program. The voluntary exclusion program does not preclude a Riverboat Licensee
or Operating Agent from seeking payment of a debt accrued by a person before
entry into the voluntary exclusion program.
Mississippi Gaming Regulation
The ownership and operation of casino gaming facilities in Mississippi are
subject to extensive state and local regulations, but primarily are subject to
the licensing and/or regulatory control of the Mississippi Gaming Commission
(the "Mississippi Commission"). The Mississippi Gaming Control Act (the
"Mississippi Act") legalized dockside casino gaming in Mississippi. The
Mississippi Commission has adopted regulations that provide the framework and
requirements for casino operations in Mississippi.
The regulations are subject to amendment and interpretation by the
Mississippi Commission. Changes in Mississippi laws or regulations may limit or
otherwise materially affect the types of gaming that may be conducted and such
changes, if enacted, could have an adverse effect on us and our business,
financial condition and results of operations.
12
The Mississippi Act provides for legalized dockside gaming in each of the
fourteen counties that border the Gulf Coast or the Mississippi River, but only
if the voters in the applicable county have not voted to prohibit gaming in that
county. In recent years, certain anti-gaming groups proposed for adoption
through the initiative and referendum process certain amendments to the
Mississippi Constitution, which would prohibit gaming in the state. The
proposals were declared illegal by Mississippi courts. If another such proposal
were to be offered and if a sufficient number of signatures were to be gathered
to place a legal initiative on the ballot, it is possible for the voters of
Mississippi to consider such a proposal in November of 2006. While we are unable
to predict whether such an initiative will appear on a ballot or the likelihood
of such an initiative being approved by the voters, if such an initiative were
passed and gaming were prohibited in Mississippi, it would have a significant
adverse effect on us and our business, financial condition and results of
operations.
Currently, dockside gaming is permissible in nine of the fourteen eligible
counties in the State of Mississippi and gaming operations have commenced in
seven counties. Under Mississippi law, gaming vessels must be located on the
Mississippi River or on navigable waters in eligible counties along the
Mississippi River, or in the waters lying south of the counties along the
Mississippi Gulf Coast. Fitzgeralds Tunica is located on barges situated in a
specially constructed basin near the Mississippi River. In the past, whether
basins such as the one in which the Fitzgeralds Tunica casino barges are located
constituted "navigable waters" suitable for gaming under Mississippi law was a
controversial issue. The Mississippi Attorney General issued an opinion in July
1993 addressing legal locations for gaming vessels under the Mississippi Act,
and on May 24, 1993, the Mississippi Commission approved the location of the
casino barges on the Fitzgeralds Tunica site as legal under the opinion of the
Mississippi Attorney General. Since 1993, the Mississippi Commission has issued
or renewed licenses to Fitzgeralds Tunica on several separate occasions. We
believe that Fitzgeralds Tunica is in compliance with the Mississippi Act and
the Mississippi Attorney General's "navigable waters" opinion. However, no
assurance can be given that a court would ultimately conclude that our
Fitzgeralds Tunica barges are located on navigable waters within the meaning of
Mississippi law. If the basin in which our Fitzgeralds Tunica casino barges are
presently located were not deemed navigable waters within the meaning of
Mississippi law, such a decision would have a material adverse effect on us and
our business, financial condition and results of operations.
The Mississippi Act permits unlimited stakes gaming on permanently moored
vessels on a 24-hour basis and does not restrict the percentage of space, which
may be utilized for gaming. The Mississippi Act permits substantially all
traditional casino games and gaming devices. Only persons who are 21 years of
age or older may wager on games in the state of Mississippi.
We and any subsidiary of ours that owns or operates a casino in
Mississippi (a "Gaming Subsidiary") are subject to the licensing and regulatory
control of the Mississippi Commission. Each of the Company, Majestic Investor,
LLC ("Investor"), Majestic Investor Holdings and BDI have registered under the
Mississippi Act as either a publicly traded corporation (a "Registered
Corporation") or a holding company of Barden Mississippi Gaming, LLC ("Barden
Mississippi"), the owner and operator of Fitzgeralds Tunica, a licensee of the
Mississippi Commission. BDI, the Company, Investor and Majestic Investor
Holdings, as registered holding companies or publicly traded corporations, and
Barden Mississippi, as a gaming licensee, are required to submit detailed
financial, operating and other reports to the Mississippi Commission and furnish
any other information that the Mississippi Commission may require. If we are
unable to continue to satisfy the registration requirements of the Mississippi
Act, we, any of our related registered holding companies or publicly traded
corporations and Barden Mississippi cannot own or operate gaming facilities in
Mississippi. No person may become a stockholder of or receive any percentage of
profits from a licensed subsidiary of a registered holding company or publicly
traded corporation without first obtaining licenses and approvals from the
Mississippi Commission. While we have received such approvals in connection with
the licensing of Barden Mississippi, no assurance can be given that we will
continue to receive such approvals in the future.
Barden Mississippi must maintain its gaming license from the Mississippi
Commission in order to continue to operate a casino in Mississippi. Such
licenses are issued by the Mississippi Commission subject to certain conditions,
including continued compliance with all applicable state laws and regulations.
There are no limitations on the number of gaming licenses, which may be issued
in Mississippi. Gaming licenses require the payment of periodic fees and taxes,
are not transferable, are issued for a three-year period (and may be continued
for two additional three-year periods) and must be renewed periodically
thereafter. Barden Mississippi's current gaming license expires in December of
2007. There can be no assurance that any subsequent application for a license
will be approved.
13
Certain management personnel of BDI, the Company, Investor and Majestic
Investor Holdings, and certain management personnel and key employees of Barden
Mississippi must be found suitable or approved by the Mississippi Commission. We
believe that we have obtained, applied for or are in the process of applying for
all necessary findings of suitability with respect to the companies, although
the Mississippi Commission, in its discretion, may require additional persons to
file applications for findings of suitability. In addition, any person having a
material relationship or involvement with us may be required to be found
suitable, in which case those persons must pay the costs and fees associated
with such investigation. The Mississippi Commission may deny an application for
a finding of suitability for any cause that it deems reasonable. Changes in
certain licensed positions must be reported to the Mississippi Commission. In
addition to its authority to deny an application for a finding of suitability,
the Mississippi Commission has jurisdiction to disapprove a change in any
person's corporate position or title and such changes must be reported to the
Mississippi Commission. The Mississippi Commission has the power to require us,
BDI, Investor, Majestic Investor Holdings and Barden Mississippi to suspend or
dismiss officers, directors, managers, members and other key employees or sever
relationships with other persons who refuse to file appropriate applications or
whom the authorities find unsuitable to act in such capacities. There can be no
assurance that such persons who have filed or will be required to file
applications for findings of suitability will be found suitable by the
Mississippi Commission. Determinations of suitability or questions pertaining to
licensing are not subject to judicial review in Mississippi.
Substantially all material loans, leases, sales of securities and similar
financing transactions by a Registered Corporation or a gaming subsidiary must
be reported to or approved by the Mississippi Commission. A Gaming Subsidiary
may not make a public offering of its securities, but may pledge or mortgage
casino facilities. A Registered Corporation may not make a public offering of
its securities without the prior approval of the Mississippi Commission if any
part of the proceeds of the offering is to be used to finance the construction,
acquisition or operation of gaming facilities in Mississippi or to retire or
extend obligations incurred for those purposes.
Under the regulations of the Mississippi Commission, Barden Mississippi
may not guarantee a security issued by us or any other affiliated company
pursuant to a public offering, or pledge the assets of Barden Mississippi to
secure payment or performance of the obligations evidenced by the security
issued by the affiliated company, without the prior approval of the Mississippi
Commission. A pledge of the equity securities of a gaming licensee and the
foreclosure of such a pledge are ineffective without the prior approval of the
Mississippi Commission. Moreover, restrictions on the transfer of an equity
security issued by a Mississippi gaming licensee or a registered holding company
and agreements not to encumber such securities are ineffective without the prior
approval of the Mississippi Commission.
Changes in control of BDI, the Company, Investor, Majestic Investor
Holdings or Barden Mississippi, whether through merger, consolidation,
acquisition of assets, management or consulting agreements or any act or conduct
by a person by which he or she obtains control, may not occur without the prior
approval of the Mississippi Commission. Entities seeking to acquire control of
one or more of these companies must satisfy the Mississippi Commission in a
variety of stringent standards prior to assuming control of any such company.
The Mississippi Commission may also require controlling stockholders, officers,
directors, and other persons having a material relationship or involvement with
the entity proposing to acquire control, to be investigated and licensed as part
of the approval process relating to the transaction.
None of BDI, the Company, Investor, Investor Holdings or Barden
Mississippi may engage in gaming activities in Mississippi while also conducting
gaming operations outside of Mississippi without approval of the Mississippi
Commission. The Mississippi Commission may require determinations that, among
other things, there are means for the Mississippi Commission to have access to
information concerning the out-of-state gaming operations of our affiliates and
us. We have received a waiver of foreign gaming approval from the Mississippi
Commission for our gaming operations in Indiana and Colorado. We will be
required to obtain the approval or a waiver of such approval from the
Mississippi Commission prior to engaging in any additional future gaming
operations outside of Mississippi. There can be no assurance that any such
approvals will be obtained.
14
If the Mississippi Commission determined that we, BDI, Investor, Majestic
Investor Holdings or Barden Mississippi violated a gaming law or regulation, the
Mississippi Commission could limit, condition, suspend or revoke the approvals
of any such company and the license of Barden Mississippi, subject to compliance
with certain statutory and regulatory procedures. In addition, we, BDI,
Investor, Majestic Investor Holdings, Barden Mississippi and the persons
involved could be subject to substantial fines for each separate violation.
Because of such a violation, the Mississippi Commission could attempt to appoint
a supervisor to operate the casino facilities. Limitation, conditioning or
suspension of any gaming license or approval or the appointment of a supervisor
could (and revocation of any gaming license or approval would) materially
adversely affect us and our business, financial condition and results of
operations.
License fees and taxes are computed in various ways depending on the type
of gaming involved and are payable to the State of Mississippi and to the
counties and cities in which a Gaming Subsidiary's operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable either weekly, monthly, quarterly or annually. Gaming taxes are based
upon:
- a percentage of the gross gaming revenues received by the casino
operation;
- the number of gaming devices operated by the casino; or
- the number of table games operated by the casino.
The license fee payable to the State of Mississippi is based upon "gaming
receipts" (generally defined as gross receipts less payouts to customers as
winnings) and the current maximum tax rate imposed is eight percent of all
gaming receipts in excess of $134,000 per month. The foregoing license fees paid
by Barden Mississippi are allowed as a credit against Barden Mississippi's
Mississippi income tax liability for the year paid. The gross revenue fee
imposed by Tunica County equals approximately four percent of the gaming
receipts.
Colorado Gaming Regulation
Colorado legalized limited gaming by constitutional amendment approved by
Colorado voters on November 6, 1990. The Colorado legislature thereafter enacted
the Limited Gaming Act of 1991 (the "Colorado Act") to implement the provisions
of the constitutional amendment, and limited gaming commenced in Colorado on
October 1, 1991. The Colorado Act authorizes limited gaming only in certain
designated commercial districts of Central City, Black Hawk and Cripple Creek,
Colorado. Limited gaming consists of poker, blackjack and slot machines, all
with maximum single bets of five dollars. Only persons aged 21 or older may
participate in limited gaming, and limited gaming and the sale of alcoholic
beverages are prohibited between the hours of 2:00 a.m. and 8:00 a.m. Limited
gaming is only allowed on premises licensed for that purpose, and the licensed
premises of any building may not exceed 35% of the square footage of the
building and no more than 50% of any floor of such building. There is no
limitation on the size of any structure or total square footage devoted to
limited gaming.
Pursuant to the Colorado Act and the rules and regulations promulgated
thereunder (collectively, the "Colorado Gaming Regulations"), the ownership and
operation of limited gaming facilities in Colorado, however acquired, are
subject to extensive regulation. The Colorado Act created the Division of Gaming
(the "Colorado Division") within the Colorado Department of Revenue and the
Colorado Limited Gaming Control Commission (the "Colorado Gaming Commission") to
license, implement, regulate, and supervise the conduct of limited gaming. The
Director of the Colorado Division (the "Colorado Director"), under the general
supervision of the Colorado Gaming Commission, is granted broad powers to ensure
compliance with the Colorado Act and the rules.
15
The Colorado Gaming Commission may issue: (1) slot machine or distributor;
(2) operator; (3) retail gaming; (4) support; and (5) key employee gaming
licenses. The first three licenses require annual renewal by the Colorado Gaming
Commission. Support and key employee licenses are issued for two-year periods
and are renewable by the Division Director. The license renewal process requires
that the Colorado Division re-certifies to the Colorado Gaming Commission that
the licensee continues to operate in compliance with all statutes, rules and
regulations governing the conduct of casino gaming in Colorado and continues to
be of good moral character and fitness. The Colorado Gaming Commission has broad
discretion to condition, suspend for up to six months, revoke, limit or restrict
a license at any time and also has the authority to impose fines.
A retail gaming license is required for all persons conducting limited
stakes gaming on their premises. In addition, an operator license is required
for all persons who engage in the business of placing and operating slot
machines on the premises of a retailer. However, a retailer is not required to
hold an operator license. No person may have an ownership interest in more than
three retail licenses. The operator and retail gaming licenses for Fitzgeralds
Black Hawk were renewed by the Colorado Gaming Commission for a one-year period
in September 2004.
The Colorado Act requires that every officer, director, and stockholder of
private corporations or equivalent office or ownership holders for non-corporate
applicants, and every officer, director or stockholder holding either a 5% or
greater interest or controlling interest of a publicly traded corporation or
owners of an applicant or licensee, shall be a person of good moral character
and submit to a full background investigation conducted by the Colorado Division
and the Colorado Gaming Commission. The Colorado Gaming Commission may require
any person having an interest in a license or a licensee to undergo a full
background investigation and pay the cost of investigation in the same manner as
an applicant. Limited disclosure forms are required of those persons holding any
equity interest in a non-publicly traded applicant.
In addition, all persons loaning monies, goods, or real or personal
property to a licensee or applicant, or having any interest in a licensee or
applicant, or entering into any agreement with a licensee or applicant, must
provide any information requested by the Colorado Division or Colorado Gaming
Commission, and at the discretion of the Colorado Division or the Colorado
Gaming Commission, these persons must supply all information relevant to a
determination of any such person's suitability for licensure and must submit to
a full background investigation if ordered by the Colorado Gaming Commission.
Failure to promptly provide all information requested, or to submit to a
suitability or background investigation, may result in the denial of a license
application, suspension or revocation of an existing license, termination of any
lease, note arrangement, or agreement between the applicant or licensee and the
person requested to provide the information, and other sanctions. Investigations
for suitability, background, or any other reason may delay a license application
or the operation under any agreement with a licensee. All agreements, contracts,
leases or arrangements in violation of the Colorado Act or the rules are void
and unenforceable.
Persons found unsuitable by the Colorado Gaming Commission may be required
immediately to terminate any interest in, association or agreement with, or
relationship to a licensee. A finding of unsuitability with respect to any
officer, director, employee, associate, lender or beneficial owner of a licensee
or applicant may also jeopardize the licensee's license or applicant's license
application. Licenses may be conditioned upon termination of any relationship
with unsuitable persons.
16
The Colorado Act and the rules require licensees to maintain detailed
books and records, which accurately account for all monies and business
transactions. Books and records must be furnished upon demand to the Colorado
Gaming Commission, the Colorado Division and other law enforcement authorities.
The rules also establish extensive playing procedures, standards, requirements
and rules of play for poker, blackjack and slot machines.
Retail gaming licensees must, in addition, adopt comprehensive internal
control procedures governing their limited gaming operations. Such procedures
include the areas of accounting, internal fiscal control, surveillance,
security, cashier operations, key control, reporting procedures, personnel
procedures and fill and drop procedures, among others. Such procedures must be
approved in advance by the Colorado Division. Licensees are prohibited from
engaging in fraudulent acts which include, among other things, misrepresenting
the probabilities of pay out, improperly canceling a bet, conducting limited
gaming without a valid license and employing an unlicensed person in a position
which requires a licensed employee. Licensees must report to the Colorado
Division all licenses and all applications for licenses in foreign
jurisdictions.
With limited exceptions applicable to licensees that are publicly traded
entities, no person, including persons who may acquire an interest in a licensee
pursuant to a foreclosure, may sell, lease, purchase, convey or acquire any
interest in a retail gaming or operator license or business without the prior
approval of the Colorado Gaming Commission.
The State of Colorado has enacted an annual tax on the adjusted gross
proceeds ("AGP") from limited gaming. AGP is generally defined as the amounts
wagered minus payments to players. For poker, AGP means those sums wagered on a
hand retained by the licensee as compensation. Currently, the gaming tax on AGP
ranges between 0.25% and 20%. The gaming tax is paid monthly, with licensees
required to file returns by the 15th of the following month. Effective July 1 of
each year, the Colorado Gaming Commission establishes the gaming tax rates for
the following 12 months. Under the Constitution of the State of Colorado, the
Colorado Gaming Commission may increase the gaming tax rate to as much as 40% of
AGP. Since July 1, 1999, the Colorado Commission has set a gaming tax rate of
0.25% on adjusted gross gaming proceeds of up to and including $2 million, 2%
over $2 million up to and including $4 million, 4% over $4 million up to and
including $5 million, 11% over $5 million up to and including $10 million, 16%
over $10 million up to and including $15 million, and 20% over $15 million. The
tax rates were reaffirmed by the Colorado Gaming Commission on June 17, 2004 for
the period July 1, 2004 through June 30, 2005. For the fiscal year starting July
1, 2005, the Colorado Gaming Commission is currently evaluating the tax rates.
There is no assurance that the Colorado Gaming Commission will keep tax rates at
their current levels.
The Colorado Gaming Commission also may impose device fees. Effective July
1, 1999, the Colorado Commission eliminated annual device fees. Despite the
elimination of the annual device fee, casinos are still required to obtain
device stamps from the Colorado Division of Gaming and must follow device
tracking procedures. The City of Black Hawk imposes a monthly device fee on each
slot machine, black jack and poker table in the current amount of $62.50 per
device or table. Black Hawk also imposes taxes and fees on other aspects of the
businesses of gaming licensees, such as parking, liquor license and other
municipal taxes and fees. It is not unreasonable to expect substantial increases
in these fees or the imposition of new taxes and fees.
A violation of the Colorado Act, or any of the rules, is a criminal
offense. Persons violating the Colorado Act or the rules may, in addition to any
gaming license suspension or revocation, or administrative fine, be subject to
criminal prosecution resulting in incarceration, fines or both.
Treasury Department Regulations
The Internal Revenue Code and Treasury Regulations require operators of
casinos located in the United States to file information returns for U.S.
citizens, including names and addresses of winners, for keno and slot machine
winnings in excess of prescribed amounts and table game winnings in which the
payout is a certain amount greater than the wager. The Internal Revenue Code and
Treasury Regulations also require operators to withhold taxes on some keno,
bingo, and slot machine winnings of nonresident aliens.
Regulations adopted by the Financial Crimes Enforcement Network ("FinCEN")
of the Treasury Department and the gaming regulatory authorities in the domestic
jurisdictions in which we operate casinos require the reporting of currency
transactions in excess of $10,000 occurring within a gaming day, including
identification of the patron by
17
name and social security number. On September 26, 2002 FinCEN implemented the
suspicious activity-reporting rule. This reporting obligation requires casinos
to report suspicious monetary transactions when the casino knows, suspects, or
has reason to suspect that the transaction involves funds derived from illegal
activity or is otherwise intended to facilitate illegal activity.
In late April 2004, The Treasury Department began an audit of Fitzgeralds
Tunica's compliance with the currency transaction and suspicious activity
reporting requirements. We feel that this audit is routine in nature and not the
result of specific reporting requirement violations. The audit is still in
process.
Compliance with Other Laws and Regulations
Our operations are also subject to extensive state and local regulations
in addition to the regulations described above, and, on a periodic basis, we
must obtain various other licenses and permits, including those required to sell
alcoholic beverages.
ITEM 2. PROPERTIES
We own and operate three casino properties, located in Gary, Indiana,
Tunica County, Mississippi and Black Hawk, Colorado. The 9 1/2% notes and our
$80.0 million senior secured credit facility are secured by a lien on
substantially all of our subsidiary guarantors' assets, including the real
property.
SUMMARY OF PROPERTY INFORMATION
FITZGERALDS
MAJESTIC STAR FITZGERALDS TUNICA BLACK HAWK
--------------- ------------------ -----------------
Date Opened June 1996 June 1994 May 1995
Gaming Square Feet 40,800 38,088 10,253
Slot Machines 1,574 1,375 594
Table Games 47 34 6
Hotel Rooms -- 435 standard --
72 suites
Amenities Buffet Buffet Restaurant
Food Court Steak house Bar
Restaurant Coffee shop
Gift shop 2 bars
Ballroom Ballroom
Bars Gift shop
Parking 2,000 covered 411 covered 392 covered valet
2,600 surface 1,264 surface
300 valet 120 valet
ITEM 3. LEGAL PROCEEDINGS
Various legal proceedings are pending against the Company. Management
considers all such pending proceedings, comprised primarily of personal injury
and equal employment opportunity (EEO) claims, to be routine litigation
incidental to the Company's business. Except as described below, management
believes that the resolution of these proceedings will not individually or in
the aggregate, have a material effect on the Company's financial condition,
results of operations or cash flows.
In July 2004, a former employee of Majestic Star filed a complaint against
the M/V Majestic Star in the U.S. District Court, Northern District of Indiana
on behalf of himself and a class of other similarly situated employees to obtain
a maritime lien for back wages for overtime hours worked while employed with
Majestic Star plus all other relief to which they may be entitled under the Fair
Labor Standards Act ("FLSA") and the Maritime
18
Lien Act. On October 1, 2004, the Company moved to dismiss the complaint for
insufficiency of service of process under both the Federal Rules of Civil
Procedure and the Supplemental Rules of Civil Procedure relating to Maritime
claims. On November 10, 2004, the Court denied the Company's Motion to Dismiss
for insufficiency of service of process; however, it reserved ruling on whether
the complaint was properly served under the Supplemental Rules of Civil
Procedure relating to Maritime claims. On November 13, 2004, the plaintiffs
moved for leave to amend their complaint to add The Majestic Star Casino, LLC as
an additional defendant and on December 3, 2004, moved for leave to file a third
amended complaint to add four individuals (all of whom had previously filed
consents to join the lawsuit) as plaintiffs to the action and to add a Fair
Labor Standards Act claim against the Company. On December 30, 2004, the Company
filed a Response in Opposition to Plaintiffs' Motion for Leave to File a Second
and Third Amended Complaint and Alternatively to Dismiss the Complaint under
Rule 12(b)(1) and 12(b)(6). The plaintiffs have filed an opposition to the
Company's motion to dismiss and the Company has filed a reply in response
thereto. On January 25, 2005, the Magistrate Judge presiding over the case
entered an order granting plaintiffs leave to file their third amended
complaint, but did not rule on the Company's motion to dismiss. There could be
23 seamen who qualify for the class. A pretrial conference has been set for
April 25, 2005. It is too early to determine the likelihood of an unfavorable
outcome to the Company.
In December 2002, a complaint was filed in the U.S. District Court for the
Northern District of Mississippi against Barden Mississippi and the former owner
of Fitzgeralds Tunica, alleging violation of Title VII of the Civil Rights Act
of 1964 and violation of 42 U.S.C. Section 1981, as well as certain other state
law claims. The former owner of Fitzgeralds Tunica was dismissed from the case
in 2003. On May 6, 2004, the Court awarded the plaintiff $312,000, which sum
represents back pay, emotional distress and punitive damages, plus an additional
sum for reasonable attorney fees. A notice of appeal has been filed on behalf of
Barden Mississippi with the United States District Court of Appeals for the
Fifth Circuit and the Company has posted a supersedes bond in the amount of
approximately $400,000. All appellate briefs have been filed. There is no set
date by which the appeals court is required to issue a decision. Our insurance
carrier has agreed to extend coverage over the entire claim except for the
amount relating to punitive damages and has agreed to share past and current
expenses with the Company. The Company has established a liability of
approximately $253,000 representing its best estimate of the amount not covered
by insurance for the award, the estimated plaintiff's attorney fees and the
Company's attorney fees. The parties are engaged in settlement discussions;
however, should they be unable to reach an agreement, the Company will continue
to vigorously prosecute its appeal.
In June 2003, a complaint was filed in the U.S. District Court for the
Northern District of Mississippi against several Tunica-area casino owners and
operators, including Barden Mississippi, alleging violation of federal and state
antitrust laws, as well as various other tort and contract claims. The
plaintiffs claim the defendants made a joint decision to refuse to advertise on
the plaintiffs' website. The plaintiffs are seeking treble, compensatory and
punitive damages totaling approximately $33.0 million, plus interest and
attorney's fees. The litigation is in the discovery phase and the case is
currently set for trial beginning August 22, 2005. The Company intends to
vigorously defend against this lawsuit; however, it is too early to determine
the outcome and the effect, if any, on the Company's financial position and
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company is a limited liability company and Mr. Barden indirectly holds
100% of our membership interests. There is no established public trading market
for the membership interests.
We did not pay any cash dividends during the past three years, and have no
current plan to pay any cash dividends in the near term. We are restricted in
our ability to pay dividends under various covenants of our debt agreements.
19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required by this item is incorporated herein by reference
from the section captioned "Five Year Summary of Selected Financial Data and
Related Restatement" set forth in Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 headings
"Business," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," but may be found in other locations as well. These
forward-looking statements generally relate to our plans, objectives and
expectations for future operations and are based upon management's reasonable
estimates of future results or trends. Although we believe that our plans and
objectives reflected in or suggested by such forward-looking statements are
reasonable, we may not achieve such plans or objectives. You should read this
report completely and with the understanding that actual future results may be
materially different from what we expect. We will not update forward-looking
statements even though our situation may change in the future.
Specific factors that might cause actual results to differ from our
expectations, or may cause us to modify our plans and objectives, include, but
are not limited to:
- the availability and adequacy of our cash flow to meet our
requirements, including payment of amounts due under the $80.0
million credit facility, the 11.653% notes and the 9 1/2% notes;
- changes in our financial condition that may cause us to not be in
compliance with the covenants contained within the Loan and Security
Agreement governing the $80.0 million credit facility, which may
permit acceleration on the debt obligations outstanding;
- changes or developments in laws, regulations or taxes in the casino
and gaming industry including increases or new taxes imposed on
gaming revenues, gaming devices and admission taxes;
- increased competition in existing markets or the opening of new
gaming jurisdictions;
- 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;
- the inability of the Company to find an economically viable project
to invest the net proceeds from the sale of our Fitzgeralds Black
Hawk asset, and thus (i) requiring the Company to pay down on the
$80.0 million credit facility and take a permanent reduction in the
$80.0 million credit facility by the amount of the pay down and to
make an offer to purchase the Company's 9 1/2% notes with any
remaining proceeds or (ii) evaluate other alternatives available to
the Company with regard to the sale of the assets of Fitzgeralds
Black Hawk.
- adverse determinations of issues related to disputed taxes,
particularly in Indiana, as evidenced by the charge in the current
year of retroactive property taxes and the requirement that
deductions previously taken for taxes paid on gross gaming receipts
are disallowed on our member's Indiana state income tax return;
20
- the inability to fund capital improvements and development needs
from existing operations, available credit, or new financing;
- 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;
- failure to maintain favorable relationships with employees of the
Company including the timely negotiation of fair and economically
prudent labor agreements covering employees subject to collective
bargaining agreements;
- risk of our Joint Venture Partner, Trump Indiana, Inc., not making
its lease payments when due in connection with the parking facility
in Gary, Indiana or failing to fund the Joint Venture;
- the disruption to our casino operation due to acts of nature or God;
- the inability to retain management personnel who are important to
our operations and potential delays in identifying and employing
candidates to fill vacated positions due to a lack of qualified
candidates;
- other factors discussed under "Factors that May Affect Future
Results" or elsewhere in this report that may be disclosed from time
to time in filings we make with the SEC or otherwise.
All future written and verbal forward-looking statements attributable to
us or any person acting on our behalf are expressly qualified in their entirety
by the cautionary statements contained or referred to in this section. In light
of these risks, uncertainties and assumptions, the forward-looking events
discussed in this report might not occur.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, our financial statements, including the notes
thereto listed in Item 15(a).
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA AND RELATED RESTATEMENT
The Company has restated the accompanying financial data for the years
ended December 31, 2003, 2002, 2001 and 2000 to reflect a revision in
classification of certain cash based promotional ("CBP") activities. During the
preparation and audit of the financial statements for the year ended December
31, 2004, the Company re-evaluated the accounting treatment of its CBP programs.
Periodically, the Company makes various CBP offers to its casino customers.
Generally these offers are based upon the rated or tracked play of its
customers. These promotions can range in value and timing and are offered at the
sole discretion of the Company's management. The Company's CBP activities are
intended to encourage repeat visits to the Company's casinos. While casino
customers are under no obligation to spend the promotional cash in gaming
activities at the casino, the Company's experience shows that the vast majority
of customers do engage in gaming activities the same day the cash is received.
The Company has concluded that the payout of cash under these CBP programs
should be treated as a reduction of gross revenues when redeemed. The costs
related to these CBP programs were previously classified as a casino expense.
The restatement affected net revenues and operating expenses, as shown in the
accompanying financial statements, but has no impact on consolidated operating
income, net income (loss) or any element of the consolidated balance sheets or
consolidated statements of cash flows for any date or period presented. See
Note 2 of Notes to Consolidated Financial Statements. Amounts appearing in the
following table, and in the accompanying analysis of financial condition and
results of operations, reflect the restatement for all years presented, as
explained in note (1) to the table:
21
For The Years Ended December 31,
2003 2002 2001 2000
2004 Restated (1) Restated (1) Restated (1)(2) Restated (1)
--------- ------------ ------------ --------------- ------------
(in thousands)
STATEMENT OF OPERATIONS DATA:
Net revenues $ 224,276 $ 212,982 $ 213,254 $ 125,132 $ 113,762
Cost and expenses 200,498 188,669 184,865 111,188 104,900
Operating income 23,778 24,313 28,389 13,944 8,862
Interest expense, net (28,508) (31,178) (32,233) (15,627) (14,105)
(Loss) gain on bond redemption - (31,960) 69 - (382)
Loss from continuing operations (4,932) (39,011) (3,958) (1,831) (5,750)
Income (loss) from discontinued operation (3) 9,951 (4,841) 5,274 280 -
Net income (loss) 5,019 (43,852) 1,316 (1,551) (5,750)
As Of December 31,
---------------------------------------------------------------------
2004 (4) 2003 (5) 2002 2001 2000
-------- -------- -------- -------- --------
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 14,327 $ 22,058 $ 24,548 $ 25,925 $ 16,120
Restricted cash 2,540 1,400 1,250 1,000 2,000
Assets held for sale 30,684 - - - -
Investment in BHR, net 27,432 29,734 31,833 33,899 43,924
Total assets 246,376 233,215 275,810 291,076 126,597
Liabilities related to assets held for sale 2,714 - - - -
Current liabilities, net of liabilities
related to assets held for sale 29,204 33,667 25,458 37,160 21,795
Long-term debt 316,858 301,715 274,527 273,897 128,233
Total liabilities 348,776 335,382 299,985 311,057 150,028
Member's deficit (102,400) (102,167) (24,175) (19,981) (23,431)
NOTES:
(1) Amounts have been restated to reflect the correction for cash based
promotional programs, as more fully described in Note 2 of Notes to
Consolidated Financial Statements. Amounts previously reported for (i) net
revenues and (ii) costs and expenses have each been reduced by the
following amounts for the respective periods presented (the restatement
had no impact on any other previously reported amounts appearing in the
above table): $15.2 million (2003), $14.7 million (2002), $5.5 million
(2001) and $4.2 million (2000).
(2) On December 6, 2001, the Company acquired the Fitzgeralds properties and
commenced operations of the Fitzgeralds properties on December 7, 2001.
Accordingly, the consolidated results of operations for the year ended
December 31, 2001 reflect only 25 days of operating results for the
Fitzgeralds properties.
(3) Income (loss) from discontinued operations represents the operating
results of Fitzgeralds Black Hawk for which an agreement was executed on
July 12, 2004 to sell substantially all the assets of the property,
subject to certain liabilities, for all periods presented, and Barden
Nevada for the years-ended December 31, 2003, 2002, 2001 and 2000, which
was spun off to Barden Development Inc. on December 31, 2003. The loss
from discontinued operations for the year ended December 31, 2003 includes
a $10.0 million charge resulting from the write-down of the value of
Barden Nevada's assets to fair market value concurrent with the spin-off.
(4) Selected balance sheet data at December 31, 2004 includes substantially
all the assets and certain liabilities of Fitzgeralds Black Hawk that are
being reflected as held for sale. These amounts are reflected in the line
items assets held for sale and liabilities related to assets held for
sale. The selected balance sheet data as of December 31, 2003, 2002, and
2001 reflect the assets and liabilities of Fitzgeralds Black Hawk as held
for use.
(5) Selected balance sheet data at December 31, 2004 and 2003 is exclusive of
Barden Nevada, which was spun out to Barden Development, Inc. effective
December 31, 2003. The selected balance sheet data as of December 31, 2002
and 2001 reflect the assets and liabilities of Barden Nevada as held for
use.
22
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"). On July 12, 2004, the Company entered into an Asset Purchase Agreement
("APA") to sell substantially all the assets, subject to certain liabilities, of
Fitzgeralds Black Hawk for $66.0 million. The proceeds of the Fitzgeralds Black
Hawk sale are subject to adjustment based upon required capital expenditures and
certain levels of working capital as defined in the APA. As a result of the
pending sale of Fitzgeralds Black Hawk, the operating results of Fitzgeralds
Black Hawk are reflected in discontinued operations for all periods included in
our tables and discussions. In addition, Fitzgeralds Las Vegas was spun-out to
Barden Development, Inc. ("BDI"), the Company's parent, on December 31, 2003.
Because the spin-off of Fitzgeralds Las Vegas occurred on 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.
Majestic Star has been owned and operated by the Company since 1996. On
December 6, 2001, the Company acquired the Fitzgeralds Casinos and commenced
operations of the Fitzgeralds Casinos on December 7, 2001.
Overall Operating Results
Our consolidated gross revenues were $259.2 million in 2004 as compared to
$243.3 million in 2003, an increase of $15.9 million or 6.5%. The increase is
primarily due to our marketing and promotional programs, and focus on providing
our casino guests with the newest and most appealing slot machines. We had
consolidated net income of $5.0 million in 2004 compared to a consolidated net
loss of $43.9 million in 2003. Our increased net income is principally due to
our improved gross revenues and lower interest expenses and certain charges
incurred in 2003 to refinance substantially all of the Company's debt and the
write-down of Barden Nevada assets to fair value prior to the spin-off to BDI.
The Company derives in excess of 91% of its revenues from its casino
operations, comprised of slot machines and table games. Casino revenues are the
difference between the amount wagered and the amount paid to customers from
gaming activities. Approximately 87% of our casino revenues are from slot
machine revenues. Casino revenues are impacted by wagering volumes and the
variability of win percentages associated with our casino games. The other
principal components of revenues are room revenues from the hotel at Fitzgeralds
Tunica and food and beverage revenues at both Majestic Star and Fitzgeralds
Tunica. Room revenues are a function of occupancy rate and average daily rate.
Food and beverage revenues are similarly affected by the volume of, and the
prices charged by us for, food and beverage.
Our gross revenues are reduced by our promotional allowances. Promotional
allowances consist of the retail value of hotel (Fitzgeralds Tunica only), food
and beverage and other services and merchandise provided to our customers on a
complimentary basis. In addition, we reduce revenues for the cash based payments
to customers who are members of our slot clubs and cash-based promotional
activities, including cash given to our customers through our direct mail
programs.
The Company's most significant expenses are expenses related to operating
the casinos and the rooms (Fitzgeralds Tunica only), and the furnishing of food
and beverage to our customers. Casino expenses include rental expenses of
23
slot machines, payroll and benefit expenses, the cost of complimentaries
provided to the casino departments for rooms, food and beverage, expenses for
supplies, repairs and maintenance and various promotional activities.
The Company's other significant expenses relate to advertising and
promotional expenses, gaming taxes, general and administrative, and depreciation
and amortization. Advertising and promotional expenses primarily reflect the
costs of media and production, including television, radio, billboards and
direct mail, hosting and development of our casino customers, sales, and the
payroll and benefits to support these functions. Gaming taxes consist of
wagering taxes and admissions taxes paid to the States of Indiana and
Mississippi. The Company pays other forms of taxes including, sales and use
taxes, payroll taxes, property taxes, franchise taxes, etc. These expenses are
included in the expense category most directly related to the tax. General and
administrative expenses include insurance, finance, human resources, information
technology, facilities, utilities, general housekeeping, wardrobe, professional
fees, property taxes, repairs and maintenance, rent and other expenses
associated with the parking garage lease with Buffington Harbor Parking
Associates ("BHPA"), berthing fees paid to the BHR Joint Venture and the payroll
and benefits involved in operating the general and administrative areas.
Depreciation and amortization expense include depreciation on land
improvements, building and building improvements, machinery, and equipment.
Amortization includes the amortization of capitalized fees relating to the
issuance costs of our 9 1/2% notes, our $80.0 million credit facility and the
$16.3 million of unsecured and outstanding 11.653% notes. Prior to our
refinancing on October 7, 2003, we also recorded amortization of capitalized
fees relating to the issuance of Majestic Star's $130.0 million of 10 7/8%
notes, Majestic Investor Holdings $151.8 million of 11.653% notes and the $20.0
million and $15.0 million credit facilities, which previously existed at
Majestic Star and Majestic Investor Holdings, respectively. These capitalized
fees were written off when substantially all the related debt was purchased in
2003. In addition, Fitzgeralds Tunica is amortizing certain intangible assets
that were recognized at its acquisition based on the value of the assets that
were acquired. Also, the Company is recognizing a loss for its equity investment
in the BHR Joint Venture. After Majestic Star and the Joint Venture Partner
reimburse the BHR Joint Venture for all operating losses and the costs of
services, meals and beverages provided directly to their customers, the
remaining net loss of the BHR Joint Venture results from depreciation expense
and loss on disposal of assets associated with the BHR Joint Venture property.
The events that affected our 2004 results or that may affect future
results are listed below and discussed in greater detail in our discussion of
operating results and under the section entitled "Factors that May Affect Future
Results".
- Our consolidated casino revenues grew by $15.2 million or 6.8% to
$236.1 million for the twelve-month period ended December 31, 2004,
as compared to the same period last year. Consolidated casino
revenues contributed 91.1% of our total consolidated gross revenues.
Majestic Star contributed $13.0 million or 85.7% of our casino
revenue growth. In 2004, Majestic Star increased its marketing
efforts. The property initiated marketing campaigns to create better
awareness in the highly competitive northwest Indiana market. Many
of the campaigns were centered around Mike Ditka, former NFL coach
and player for the Chicago Bears. Mr. Ditka became a celebrity
spokesperson for the property and was featured in different
advertising media throughout the Chicago and northwest Indiana area.
The property also intensified its direct mail marketing programs and
created a new cash back program for its slot customers. Majestic
Star will continue to utilize many of its successful marketing
programs into 2005.
- At Fitzgeralds Tunica, casino revenues increased $2.2 million or
2.6% in 2004 from 2003. The Tunica, Mississippi casino market is
very competitive and market growth was minimal in 2004. The property
was able to generate the increase in casino revenue by continuing to
emphasize its direct mail and promotional programs. In addition, in
2004, the property management team emphasized getting rated casino
customers into the hotel. As a result of this effort, approximately
66.4% of our hotel rooms were provided on a complimentary basis to
rated players. This compares to 40.7% in 2003. In order to maximize
profitability and cash flow, the property's management team is
focused on cost containment, except where investment is necessary to
maintain competitiveness, such as in the acquisition of new slot
machine technology, as more fully discussed below.
- Consolidated promotional allowances increased $4.5 million in 2004
from 2003. Consolidated promotional allowances include the retail
value of hotel rooms (Fitzgeralds Tunica only), food, beverage and
24
merchandise provided to our casino customers at no charge.
Consolidated promotional allowances also include cash based
promotional activities, including those cash based activities
related to our slot clubs and direct mail program. The increase in
consolidated promotional allowances is principally attributable to
a new slot club program at Majestic Star, the increased emphasis
on direct mail and the shift of filling more hotel rooms with rated
casino players at Fitzgeralds Tunica.
- Consolidated operating costs and expenses increased $11.8 million in
2004 from 2003. Consolidated casino expenses increased $1.5 million
in 2004. The increase is the result of higher gaming volumes and the
cost of complimentary services and products provided to our casino
customers. Consolidated gaming and economic incentive taxes
increased $3.5 million over 2003. Before the $2.1 million adjustment
for retroactive gaming taxes in 2003, the increase would have been
$5.5 million. The increase in our consolidated gaming and economic
incentive taxes is due to our strong growth in casino revenues.
Consolidated advertising and promotional expenses increased $1.6
million as a result of the increased marketing efforts at Majestic
Star. Consolidated general and administrative expenses increased
$3.8 million in 2004 versus 2003. Approximately $1.9 million of the
increase relates to a retroactive property tax charge at Majestic
Star for the years 2002 and 2003, which was recorded in 2004 based
on our estimate of tax amounts that will be ultimately billed by
Lake County, Indiana (see Note 15 to Consolidated Financial
Statements). Other areas contributing to our increased general and
administrative expenses include increased payroll and benefits,
greater current year property taxes, principally at Majestic Star,
and insurance and regulatory costs. Consolidated depreciation and
amortization increased by $1.2 million. Actual depreciation expense
increased by $3.0 million as a result of the capital expenditures
made in 2004 at our properties. The impact of suspended depreciation
and amortization of the assets relating to Fitzgeralds Black Hawk
(due to its classification as an asset held for sale) was
approximately $1.0 million during the period July 12, 2004 to
December 31, 2004. Amortization expense declined by $1.8 million as
almost all of the deferred financing costs related to the Company's
old debt and credit facilities was written off in October 2003 when
the Company refinanced its debt obligations. The current 9 1/2%
notes and $80.0 million credit facility were arranged at lower costs
than the fees and expenses incurred under the previous debt
obligations.
- Consolidated interest expense declined by $2.7 million in 2004 from
2003 as the Company refinanced substantially all of its previous
debt and issued $260.0 million of 9 1/2% notes and drew $28.0
million on its $80.0 million credit facilities to accomplish the
refinancing in October 2003. Prior debt obligations included $130.0
million of 10 7/8% notes and $151.8 million of 11.653% notes.
- Through December 31, 2004, we spent approximately $38.8 million on
capital expenditures. While $22.1 million was spent on 170 acres of
property adjacent to the Majestic Star and Buffington Harbor
facilities, the balance has mainly been spent on improving and
enhancing our casino operations. At Fitzgeralds Tunica we
implemented a new slot player tracking and marketing system and
expanded the casino floor space, which increased slot machine
capacity by 90 games, along with remodeling the bathrooms, cage and
guest services areas.
- We continue to purchase the latest slot machine products at all of
our properties. In addition, we continue the implementation of TITO
at Majestic Star. At this time 1,162, or 71.0%, of Majestic Star's
slot machines are equipped with TITO, with the goal of having 88.0%
of our slot machines TITO operational by year-end. In addition, the
implementation of the new slot player tracking and marketing system
at Fitzgeralds Tunica allowed us to begin installing TITO at that
property. Currently we have 158 slot machines that operate with TITO
with the goal of having 540 slot machines TITO operational by the
end of 2005. In February 2005 we invested in new slot player
tracking and marketing technology at Fitzgeralds Black Hawk which
will allow the property to begin installing TITO. The new slot
machines, coupled with TITO technology, should allow our casino
guests to play their favorite slot machines with fewer
interruptions, thus generating longer playing times on TITO equipped
slot machines and allowing us to provide better guest service.
- The Company also has spent capital dollars in other areas this past
year with the primary benefit to improve the guest experience. In
February 2004, Fitzgeralds Tunica completed a room remodel project
with improvements to approximately 100 of the property's 507 hotel
rooms. Within the Majestic Star vessel, construction of the new Don
and Mike's Sports Bar was completed and the bar opened in May 2004.
The
25
Sports Bar offers sports entertainment on 13 flat screen TV's,
coupled with a food and beverage operation. The Sports Bar contains
39 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. Majestic Star has also remodeled the VIP lounge and
its high limit table games area known as the Monte Carlo Room.
- The City of Gary is currently constructing a new road that will
provide better access to Majestic Star, Buffington Harbor and the
170 acres of property Majestic Star acquired in February 2004. Road
construction costs will be paid from public funds. The first phase
of the road construction is expected to be completed in the late
spring of 2005.
- Competition remains intense in all of the markets in which the
Company competes. During the third and fourth quarter, the Horseshoe
in Hammond, Indiana opened a 2,000 space-parking garage and Harrah's
East Chicago completed $27.0 million of improvements to its
facilities.
- Consolidation of larger casino companies could enhance competition
in the Company's markets. For example, in the Tunica market,
Harrah's completed its acquisition of Horseshoe giving Harrah's two
properties in the market. Harrah's then announced that it was going
to acquire Caesars which would give Harrah's an additional three
properties in the Tunica market. Including Fitzgeralds Tunica, there
are currently nine properties in the Tunica market, with Harrah's
potentially controlling more than half of the existing properties.
Harrah's and Caesars have subsequently announced the sale of two of
the Tunica properties to Colony Capital. With Harrah's acquisition
of Horseshoe, Harrah's now controls the two market leading casinos
in the northwest Indiana market. However, Harrah's has subsequently
announced the sale of its Harrah's East Chicago property to Colony
Capital. While it is difficult to determine the long-term effects of
the acquisitions, the Harrah's organization will have acquired the
top competitor in both the Tunica and northwest Indiana markets,
will have expanded its database of players and market share
significantly, and may be able to recognize operating and
administrative synergies within both markets. In addition, Colony
Capital could invest significantly in capital expenditures and
marketing, thus increasing their presence and competition within our
markets.
- Majestic Star has been assessed $2.6 million, plus interest, by the
Indiana Department of Revenue for the tax deductions its member took
on its Indiana tax return for taxes paid on adjusted gross gaming
revenues. In addition, Barden Development, Inc., the Company's
parent and member, has been assessed $1.3 million, plus interest and
penalties regarding the same issue. These assessments pertain to the
years 1996-2002. Majestic Star, a pass through entity for federal
and state income tax purposes, contends that it is not liable for
the assessments. The Company has formally protested with the state
that it is not liable for the assessments. The Company's debt
agreements, however, allow the Company to make distributions to its
member for the purposes of the member's income tax liability
resulting from the operations of the Company. Should the member
ultimately be found liable for additional taxes relating to this
matter, the Company will make such permitted distributions. The
Company and Barden Development, Inc. are currently reviewing their
options with regard to the assessments, and no distributions have
been made.
The information contained above under "Statement on Forward-Looking
Information" and the competitive factors set forth in "Item 1. Business", under
the caption "Competition," have had and will continue to have an effect on our
operations.
26
RESULTS OF OPERATIONS
The following table sets forth information derived from the Company's
statements of income expressed as a percentage of gross revenues.
CONSOLIDATED STATEMENTS OF OPERATIONS - PERCENTAGE OF GROSS REVENUES
For the years ended December 31,
2003 2002
2004 Restated Restated
------- -------- --------
OPERATING REVENUES:
Casino 91.1% 90.8% 90.8%
Rooms 3.0% 3.3% 3.4%
Food and beverage 4.3% 4.4% 4.5%
Other 1.6% 1.5% 1.3%
------- -------- --------
Gross operating revenues 100.0% 100.0% 100.0%
Less promotional allowances 13.4% 12.5% 12.3%
------- -------- --------
Net operating revenues 86.6% 87.5% 87.7%
------- -------- --------
OPERATING COSTS AND EXPENSES:
Casino 22.9% 23.8% 23.6%
Rooms 0.7% 1.0% 1.1%
Food and beverage 2.0% 1.8% 2.0%
Other 0.3% 0.2% 0.1%
Gaming taxes (1) 20.5% 20.5% 18.2%
Advertising and promotion 5.4% 5.1% 5.4%
General and administrative (2) 15.1% 14.5% 15.1%
Corporate expenses 1.3% 1.4% 1.1%
Economic incentive - City of Gary 1.7% 1.7% 1.6%
Depreciation and amortization 6.6% 6.5% 6.8%
Loss on investment in the BHR joint venture 0.9% 1.0% 1.0%
Loss on sale of assets 0.0% 0.0% 0.0%
Pre-opening expenses 0.0% 0.0% 0.0%
------- -------- --------
Total operating costs and expenses 77.4% 77.5% 76.0%
------- -------- --------
Operating income 9.2% 10.0% 11.7%
------- -------- --------
OTHER INCOME (EXPENSES):
Interest income 0.0% 0.0% 0.1%
Interest expense -11.0% -12.8% -13.3%
Loss on bond redemption 0.0% -13.1% 0.0%
Other non-operating expense -0.1% -0.1% -0.1%
------- -------- --------
Total other expenses -11.1% -26.0% -13.3%
------- -------- --------
Loss from continuing operations -1.9% -16.0% -1.6%
Income (loss) from discontinued operations 3.8% -2.0% 2.1%
------- -------- --------
Net income (loss) 1.9% -18.0% 0.5%
======= ======== ========
(1) Gaming taxes include the $2.1 million (0.9% of gross revenue) retroactive
gaming tax charge in the year ended December 31, 2003.
(2) General and administrative expenses for the year ended December 31, 2004
include a $1.9 million (0.7% of gross revenue) retroactive property tax
charge.
27
The following table provides certain selected financial information from
our consolidated statements of operations. Percentage increase (decrease)
calculations are derived using the whole numbers rather than the rounded
numbers.
For The
Twelve Months Ended Percentage
December 31, Increase / (Decrease)
-------------------------------------- -----------------------
2003 2002 2004 v. 2003 v.
2004 Restated Restated 2003 2002
------- -------- -------- ------- -------
(in millions)
Casino revenues $ 236.1 $ 220.9 $ 220.8 6.9% 0.1%
Room revenues 7.7 7.9 8.2 (3.3%) (2.8%)
Food and beverage revenues 11.2 10.8 10.9 4.2% (1.1%)
Other revenues 4.2 3.7 3.2 12.6% 13.5%
------- ------- ------- ------ -------
Gross operating revenues 259.2 243.3 243.1 6.5% 0.1%
Less promotional allowances 34.9 30.3 29.9 14.9% 1.7%
------- ------- ------- ------ -------
Net operating revenues 224.3 213.0 213.2 5.3% (0.1%)
Operating expenses 200.5 188.7 184.8 6.3% 2.1%
------- ------- ------- ------ -------
Operating income 23.8 24.3 28.4 (2.2%) (14.4%)
Other income (expense) (28.7) (63.3) (32.4) (54.7%) 95.8%
------- ------- ------- ------ -------
Loss from continuing operations (4.9) (39.0) (4.0) (87.4%) 885.6%
Income (loss) from discontinued operation 9.9 (4.9) 5.3 (305.5%) (191.8%)
------- ------- ------- ------ -------
Net income (loss) 5.0 (43.9) 1.3 (111.4%) (3432.8%)
======= ======= ======= ====== =======
Consolidated
The following tables provide certain selected segment financial
information for each of the Majestic Star, Fitzgeralds Tunica, and Fitzgeralds
Black Hawk, as well as Majestic Investor Holdings (an intermediate holding
company that owns Fitzgeralds Tunica and Fitzgeralds Black Hawk). All amounts
are shown before corporate overhead. Percentage increase (decrease) calculations
are derived using the whole numbers rather than the rounded numbers.
Majestic Star
For The
Twelve Months Ended Percentage
December 31, Increase / (Decrease)
-------------------------------------- ------------------------
2003 2002 2004 v. 2003 v.
2004 Restated Restated 2003 2002
------- -------- -------- ------- -------
(in millions)
Casino revenues $ 149.6 $ 136.5 $ 132.6 9.5% 3.0%
Room revenues - - - - -
Food and beverage revenues 1.8 1.5 1.6 21.7% (7.9%)
Other revenues 2.9 2.3 2.0 27.0% 17.3%
------- ------- ------- ------- -------
Gross operating revenues 154.3 140.3 136.2 9.9% 3.1%
Less promotional allowances 13.2 11.0 8.9 19.8% 23.7%
------- ------- ------- ------- -------
Net operating revenues 141.1 129.3 127.3 9.1% 1.6%
Operating expenses 124.7 112.2 108.0 11.1% 3.9%
------- ------- ------- ------- -------
Operating income 16.4 17.1 19.3 (4.3%) (11.0%)
Other income (expense) (26.8) (27.4) (14.4) (2.0%) 90.1%
------- ------- ------- ------- -------
Net (loss) income $ (10.4) $ (10.3) $ 4.9 1.8% (311.4%)
======= ======= ======= ======= =======
28
Fitzgeralds Tunica
For The
Twelve Months Ended Percentage
December 31, Increase / (Decrease)
-------------------------------------- ------------------------
2003 2002 2004 v. 2003 v.
2004 Restated Restated 2003 2002
------- -------- -------- ------- -------
(in millions)
Casino revenues $ 86.5 $ 84.3 $ 88.2 2.6% (4.3%)
Room revenues 7.7 8.0 8.2 (3.3%) (2.8%)
Food and beverage revenues 9.4 9.3 9.3 1.4% 0.1%
Other revenues 1.3 1.4 1.3 (10.6%) 8.0%
------- ------- ------- ------- ------
Gross operating revenues 104.9 103.0 107.0 1.8% (3.7%)
Less promotional allowances 21.7 19.4 21.0 12.1% (7.7%)
------- ------- ------- ------- ------
Net operating revenues 83.2 83.6 86.0 (0.5%) (2.7%)
Operating expenses 71.7 70.6 71.1 1.6% (0.7%)
------- ------- ------- ------- ------
Operating income 11.5 13.0 14.9 (11.9%) (12.3%)
Other income (expense) - - - 9.5% (60.2%)
------- ------- ------- ------- ------
Net income $ 11.5 $ 13.0 $ 14.9 (11.9%) (12.4%)
======= ======= ======= ======= ======
Fitzgeralds Black Hawk (Discontinued Operation and Not Included in Consolidated
Selected Financial Information)
For The
Twelve Months Ended Percentage
December 31, Increase / (Decrease)
-------------------------------------- ------------------------
2003 2002 2004 v. 2003 v.
2004 Restated Restated 2003 2002
------- -------- -------- ------- -------
(in millions)
Casino revenues $ 38.7 $ 34.5 $ 36.0 12.3% (4.4%)
Room revenues - - - 0.0% 0.0%
Food and beverage revenues 2.2 2.0 1.9 10.2% 5.7%
Other revenues 0.4 0.3 0.3 54.7% 8.0%
------- ------- ------- ------- -------
Gross operating revenues 41.3 36.8 38.2 12.5% (3.8%)
Less promotional allowances 5.1 4.8 5.1 6.6% (6.8%)
------- ------- ------- ------- -------
Net operating revenues 36.2 32.0 33.1 13.3% (3.3%)
Operating expenses 26.2 24.9 25.8 5.7% (3.8%)
------- ------- ------- ------- -------
Operating income 10.0 7.1 7.3 39.8% (1.8%)
Other income (expense) - - - 0.0% (100.0%)
------- ------- ------- ------- -------
Net income $ 10.0 $ 7.1 $ 7.3 39.5% (1.9%)
======= ======= ======= ======= =======
29
Majestic Investor Holdings
For The
Twelve Months Ended Percentage
December 31, Increase / (Decrease)
-------------------------------------- ------------------------
2004 v. 2003 v.
2004 2003 2002 2003 2002
------- -------- -------- ------- -------
(in millions)
Casino revenues $ - $ - $ - 0.0% 0.0%
Room revenues - - - 0.0% 0.0%
Food and beverage revenues - - - 0.0% 0.0%
Other revenues - - - 0.0% 0.0%
------- ------- ------- ------- -------
Gross operating revenues - - - 0.0% 0.0%
Less promotional allowances - - - 0.0% 0.0%
------- ------- ------- ------- -------
Net operating revenues - - - 0.0% 0.0%
Operating expenses 0.7 2.4 3.0 (71.1%) (19.2%)
------- ------- ------- ------- -------
Operating loss (0.7) (2.4) (3.0) (71.1%) (19.2%)
Other income (expense) (1.9) (35.9) (18.0) (94.7%) 100.0%
------- ------- ------- ------- -------
Loss from continuing operations (2.6) (38.3) (21.0) (93.3%) 83.2%
Loss from discontinued operation - (10.0) - (100.0%) 0.0%
------- ------- ------- ------- -------
Net loss $ (2.6) $ (48.3) $ (21.0) (94.7%) 131.0%
======= ======= ======= ======= =======
The following tables reflect selected financial information as a
percentage of consolidated gross operating revenues at Majestic Star,
Fitzgeralds Tunica and Majestic Investor Holdings. All percentage calculations
are shown before corporate overhead.
Majestic Star
For The
Twelve Months Ended
December 31,
-----------------------------------
2003 2002
2004 Restated Restated
----- -------- --------
Casino revenues 57.7% 56.1% 54.5%
Room revenues 0.0% 0.0% 0.0%
Food and beverage revenues 0.7% 0.6% 0.7%
Other revenues 1.1% 0.9% 0.8%
----- ----- ----
Gross operating revenues 59.5% 57.6% 56.0%
Less promotional allowances 5.1% 4.5% 3.7%
----- ----- ----
Net operating revenues 54.4% 53.1% 52.3%
Operating expenses 48.1% 46.1% 44.4%
----- ----- ----
Operating income 6.3% 7.0% 7.9%
Other income (expense) (10.3%) (11.2%) (5.9%)
----- ----- ----
Net (loss) income (4.0%) (4.2%) 2.0%
===== ===== ====
30
Fitzgeralds Tunica
For The
Twelve Months Ended
December 31,
-----------------------------------
2003 2002
2004 Restated Restated
----- -------- --------
Casino revenues 33.4% 34.7% 36.3%
Room revenues 3.0% 3.2% 3.4%
Food and beverage revenues 3.6% 3.8% 3.8%
Other revenues 0.5% 0.6% 0.5%
----- ----- ----
Gross operating revenues 40.5% 42.3% 44.0%
Less promotional allowances 8.4% 7.9% 8.6%
----- ----- ----
Net operating revenues 32.1% 34.4% 35.4%
Operating expenses 27.7% 29.0% 29.3%
----- ----- ----
Operating income 4.4% 5.4% 6.1%
Other income (expense) 0.0% 0.0% 0.0%
----- ----- ----
Net income 4.4% 5.4% 6.1%
===== ===== ====
Majestic Investor Holdings
For The
Twelve Months Ended
December 31,
-----------------------------------
2004 2003 2002
----- -------- --------
Casino revenues - - -
Room revenues - - -
Food and beverage revenues - - -
Other revenues - - -
----- ----- ----
Gross operating revenues - - -
Less promotional allowances - - -
----- ----- ----
Net operating revenues - - -
Operating expenses 0.3% 1.0% 1.2%
----- ----- ----
Operating loss (0.3%) (1.0%) (1.2%)
Other income (expense) (0.7%) (14.8%) (7.4%)
----- ----- ----
Loss from continuing operations (1.0%) (15.8%) (8.6%)
Loss from discontinued operation 0.0% (4.1%) 0.0%
----- ----- ----
Net loss (1.0%) (19.9%) (8.6%)
===== ===== ====
2004 compared to 2003
Consolidated gross revenues in 2004 increased $15.9 million or 6.5% over
consolidated gross revenues recorded in 2003. Majestic Star contributed $14.0
million of the increase. Consolidated casino revenues, which comprise
approximately 91.1% of our gross revenues, were up $13.0 million at Majestic
Star and $2.2 million at Fitzgeralds Tunica. The increase in our consolidated
casino revenues represents 95.8% of the increase in our consolidated gross
operating revenues.
31
Majestic Star accounted for 85.7% of the increase to consolidated casino
revenues, which resulted from capital improvements and our strong marketing and
promotional efforts at the property in 2004. These efforts include a multimedia
advertising campaign featuring former Chicago Bears player and coach, Mike
Ditka, as the property's celebrity spokesperson, the re-branding of the property
as "THE WINNING PLACE TO PLAY"(TM), the establishment of a new players club
loyalty program, the remodeling of the property's VIP lounge and high limit
area, the Monte Carlo Room, the opening of Don and Mike's Sports Bar, our
acquisitions of the newest and most entertaining slot machines and our continued
investment in ticket in ticket out technology ("TITO"). Currently, Majestic Star
has 1,162 TITO slot machines in operation (71.0% of the casino floor). The
property also expanded the entertainment provided to its casino guests by
offering nightly acts on the Star Stage and periodic concerts and events at the
Festival Park. Majestic Star's slot coin-in (amounts wagered by customers)
increased 7.1% over last year. In addition, table games handle (amounts wagered
by customers) is up 15.4% this year. This is primarily the result of raising our
table game betting limits and targeted marketing. Our greater volumes, coupled
with a higher win percentage in table games, which increased to 16.6% from
15.4%, generated additional slot and table games revenues of $7.6 million and
$5.3 million, respectively.
Fitzgeralds Tunica's increase in casino revenue resulted from greater
efforts in direct mail and more emphasis on putting rated casino players in the
hotel. The Tunica market is very competitive and growth is nominal. The
property's management is focusing on programs that will increase cash flow in a
cost effective manner.
Consolidated promotional allowances increased $4.5 million, or 14.9%,
primarily due to a new slot club program at Majestic Star, greater emphasis on
cash based direct mail marketing and higher levels of hotel complimentary
expenses at Fitzgeralds Tunica (see above discussion). Promotional allowances at
Fitzgeralds Tunica increased $2.3 million, or 12.1%. Majestic Star's promotional
allowances increased $2.2 million, or 19.8%.
Total consolidated operating costs and expenses increased $11.8 million,
or 6.3%, due primarily to increases in casino expenses of $1.5 million, or 2.6%,
gaming and incentive taxes of $3.5 million, or 6.4%, advertising and promotion
expenses of $1.6 million, or 13.1%, general and administrative expenses of $3.8
million, or 10.8%, and depreciation and amortization expense of $1.2 million, or
7.8%. Operating costs and expenses at Majestic Star increased $12.5 million
before corporate overhead, while operating costs and expenses at Fitzgeralds
Tunica increased $0.4 million or 0.6%. At Majestic Investor Holdings, an
intermediary holding company formed to purchase the Fitzgeralds Properties and
service the 11.653% notes, operating costs and expenses declined $1.7 million or
71.1%. The decline at Majestic Investor Holdings is principally due to the
purchase of 89.3% of the outstanding 11.653% notes issued by Majestic Investor
Holdings in October 2003. A significant portion of Majestic Investor Holdings
operating costs and expenses came from the amortization of capitalized financing
costs related to the 11.653% notes. Upon purchase in 2003 of the 11.653% notes
by the Company, a significant portion of the remaining capitalized financing
costs was written off.
Consolidated casino expenses had a net increase of $1.5 million to $59.4
million. An increase of $1.8 million in casino expenses at Majestic Star, which
was directly related to increased business, was offset slightly by a decrease in
casino expenses of $0.3 million at Fitzgeralds Tunica. At Majestic Star, casino
expenses were higher due to greater volumes, higher progressive expenses and
increased costs of providing complimentary food and beverage services to our
casino guests at the food operations within Buffington Harbor.
Consolidated gaming and incentive taxes increased $3.5 million to $57.5
million. However, the increase would have been $5.5 million had it not been for
a retroactive gaming tax assessment in Indiana of $2.1 million during the second
quarter of 2003. This $5.5 million increase (exclusive of the effect of the
retroactive gaming tax assessment) is because of the increased casino revenues
at both Majestic Star and Fitzgeralds Tunica, with the greatest increase coming
at Majestic Star, where our increased casino revenues resulted in a $5.1 million
increase in gaming and economic incentive taxes (exclusive of the retroactive
gaming tax assessment).
Consolidated advertising and promotion expenses increased $1.6 million to
$13.9 million. The increase is attributable to the advertising and promotional
activities at Majestic Star. The increased costs at Majestic Star are the result
of the new marketing campaigns described earlier and a greater presence in
various forms of media. The property has also increased its entertainment. The
marketing effort at Majestic Star improved both its identity and competitive
position in the northwest Indiana and Chicago markets, and was one of the main
reasons for the property's significant casino revenue growth.
32
Consolidated general and administrative expenses increased $3.8 million to
$39.0 million. Majestic Star comprised $2.6 million of the increase. The most
significant item affecting Majestic Star was a $1.9 million increase due to a
retroactive real property tax adjustment for the years 2002 and 2003 (see
discussion on retroactive property taxes immediately below). Majestic Star also
incurred higher current year property taxes for which it is either directly or
indirectly responsible, increased payroll and payroll benefits, higher
regulatory fees and increased costs associated with the 170 acres of property
acquired from Gary New Century, an affiliate, in February 2004, offset by lower
costs associated with BHR. Fitzgeralds Tunica recognized greater costs of $1.1
million, which primarily resulted from increased payroll and benefit expenses,
higher insurance and claim costs, and greater regulatory costs, professional
fees, and utility costs. At Majestic Investor Holdings, a reserve was
established for $0.4 as the Company appeals a judgment to a lawsuit against
Fitzgeralds Tunica pertaining to certain events relating to the acquisition of
Fitzgeralds Tunica from its former owner (see Part I, Item 3. Legal
Proceedings).
The retroactive property tax accruals at Majestic Star discussed above
resulted from events beginning in January 2004, when Majestic Star received a
preliminary property tax reassessment notice that increased the valuation of its
riverboat vessel in Lake County, Indiana. The valuation assessment was part of a
countywide reassessment, which was retroactive to 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 followed administrative policies of the taxing authorities and paid Lake
County an amount equal to 70% of its 2001 property tax liability, and estimated
an accrual for the balance due for 2002 and 2003 at December 31, 2003. In April
2004, tax rates on the real property within Lake County, Indiana were issued. In
addition, in April 2004, the State of Indiana issued final notices of assessed
valuations to property owners within Lake County. The Company used the
information provided in April to revise its estimate of the amounts due. See
Note 15 to the Notes to Consolidated Financial Statements.
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, received a notice reflecting final assessed
values. Majestic Star, through the joint venture agreement and the operating
lease agreement, is liable for its portion of BHR's and BHPA's property tax
liabilities.
Based on the assessments and tax rates issued in April 2004, Majestic Star
increased its accrual for real property taxes on its vessel and its
proportionate share of liability for BHPA and BHR, by $2.2 million for the
quarter ended March 31, 2004, but this amount was subsequently adjusted downward
by $0.3 million in the third and fourth quarters of 2004 as the Company has
changed its estimate for the retroactive tax liability for the year 2003. During
2004, Majestic Star paid the remaining amounts due for its 2002 property tax
liabilities. At December 31, 2004, the accrual related to the twelve-month
period ended December 31, 2004 and to the fiscal year 2003 for property taxes
owed directly or indirectly by Majestic Star is $7.3 million. Majestic Star
estimates its 2003 property tax liability at $3.6 million and anticipates paying
its 2003 tax bill in 2005.
Consolidated depreciation and amortization expense increased by $1.2
million to $17.0 million. Majestic Star and Fitzgeralds Tunica recognized
increases of $2.0 million and $1.0 million, respectively. The increases are the
result of capital expenditures made at both properties. The increases in
depreciation expense were offset by a $1.8 million reduction in amortization
expense at Majestic Investor Holdings. Amortization expense at Majestic Investor
Holdings, in 2003, resulted from the periodic write-off of capitalized financing
fees over the life of the 11.653% notes. The majority of these fees were written
off in October of 2003, when the Company purchased 89.3% of the 11.653% notes
during a refinancing of the Company.
Consolidated other expenses consist primarily of interest expense and loss
on bond redemption. Interest expense declined by $2.7 million, or approximately
8.5%, in 2004 as compared to 2003. The reduced interest expense is the result of
refinancing substantially all of the Company's outstanding debt in October 2003.
In 2003, the Company recognized a loss on bond redemption of $32.0 million when
it redeemed all of Majestic Star's 10 7/8% notes and purchased 89.3% of Majestic
Investor Holdings 11.653% notes. There were no bond redemptions in 2004.
33
The Company recognized income from discontinued operations of $10.0
million in 2004 and a loss of $4.8 million in 2003. Discontinued operations for
2004 reflect the results of the Company's Black Hawk operation, which is held
for sale, while discontinued operations for 2003 reflect the results of both the
Black Hawk operation and Fitzgeralds Las Vegas prior to the spin off.
Fitzgeralds Black Hawk contributed income from discontinued operations of $10.0
million and $7.2 million, respectively, in 2004 and 2003. Fitzgeralds Las Vegas
contributed a loss from discontinued operations of $12.0 million in 2003, which
includes a $10.0 million write-down of the assets of Fitzgeralds Las Vegas to
fair market value prior to spin-off.
2003 compared to 2002
Consolidated gross revenues declined $0.2 million or 0.1% to $243.3
million in 2003 from 2002 primarily due to soft economic conditions,
competition, remodeling projects at both Majestic Star and Fitzgeralds Tunica,
which disrupted our casino floors, the closure for remodeling of food outlets at
the Buffington Harbor gaming complex, which impacted Majestic Star's casino
operations, and periods of severe weather that impacted our Fitzgeralds Tunica
property. Since consolidated casino revenues represents 90.8% of our
consolidated gross revenues, the items that impacted our consolidated gross
revenues also impacted our consolidated casino revenues. Nevertheless, casino
revenues increased at Majestic Star during 2003. Majestic Star's increased
casino revenues came primarily from table games, as table games handle increased
$19.6 million during 2003. Supporting overall gaming activity at Majestic Star
was the opening of the 2,000 space parking garage at Buffington Harbor in May
2002, the implementation of dockside gaming in August 2002 and the provision for
around the clock gaming which began in July 2003. At Fitzgeralds Tunica, slot
revenues declined $3.1 million and table game revenues declined $700,000,
primarily due to lower volumes.
Total consolidated operating costs and expenses rose $3.8 million or 2.1%
to $188.7 million in 2003 from 2002. Exclusive of consolidated gaming and
economic incentive taxes, total operating costs and expenses actually declined
by $2.1 million or 1.6%. Due to the lack of growth in our revenues, the Company
focused on cost containment.
Higher consolidated gaming and economic incentive taxes in 2003,
principally at Majestic Star, contributed to a $6.0 million increase in expense
from 2002. The increase is primarily due to the higher tiered tax structure in
Indiana imposed in connection with the implementation of dockside gaming in
August 2002. The tiered tax structure for the year ended December 31, 2003
resulted in $4.6 million of additional taxes paid by Majestic Star. In addition,
Majestic Star took a one-time charge of $2.1 million in June 2003 for
"retroactive dockside taxes." (See Note 15 of notes to consolidated financial
statements). The increases in gaming taxes at Majestic Star during 2003 were
offset by a decrease in gaming taxes at Fitzgeralds Tunica of $0.7 million
during 2003 due to lower casino revenues. For a more detailed discussion on the
gaming tax structures in the states in which we operate, see "Government
Regulations and Licensing."
Consolidated general and administrative expenses decreased $1.5 million or
4.0% to $35.2 million in 2003 from 2002. The decrease in general and
administrative expenses is primarily due to reduced payroll and benefit
expenses, lower costs associated with the operations of the BHR Joint Venture,
and reduced insurance premiums and bonus expenses. Offsetting these lower
expenses was an increase in parking garage lease expenses paid by Majestic Star
attributable to a full year of lease payments in 2003 compared to only seven
months of payments in 2002, when the garage opened. Parking garage lease
expenses were $2.1 million in 2003 compared to $1.0 million in 2002.
Consolidated depreciation and amortization decreased to $15.8 million in
2003 from $16.6 million in 2002 due principally to the fact that the machinery
and equipment at Majestic Star has been fully depreciated. In addition, since
our refinancing on October 7, 2003, we are no longer amortizing capitalized
financing costs associated with all of the 10 7/8% notes and 89.3% of the
11.653% notes as these costs were written off on such date.
Consolidated net interest expense for the year ended December 31, 2003 was
$31.2 million compared to $32.2 million for the same period in 2002. The
decrease of $1.0 million is attributable to the lower interest cost from
refinancing our debts in October 2003.
In October 2003, the Company recognized a loss of $32.0 million from the
redemption and retirement of all of its 10 7/8% notes and the purchase of
approximately 89.3% of its 11.653% notes. The loss on the retirement of debt is
comprised of the premium paid to redeem or purchase and retire the old notes,
and the write-off of the unamortized capitalized debt issuance costs and the
original issue discount related to the old notes.
34
Loss from discontinued operations was $4.9 million during the twelve-month
period ended December 31, 2003, which is comprised of a $10.0 million charge
related to Investor Holdings' spin-out of Barden Nevada to BDI and a $2.0
million loss from discontinued operations from Fitzgeralds Las Vegas, offset by
income from discontinued operations of $7.1 million from Fitzgeralds Blackhawk,
exclusive of corporate allocation. This compares to income from discontinued
operations of $5.3 million for the twelve-month period ended December 31, 2002,
which consists of a $2.0 million loss from discontinued operations from
Fitzgeralds Las Vegas, offset by income from discontinued operations of $7.3
million from Fitzgeralds Black Hawk.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations with internal cash flows from our
operations and borrowings under our $80.0 million credit facility. We generate
substantial cash flows from operating activities. For the years ended December
31, 2004 and 2003, we reported cash flows from operating activities of $22.0
million and $32.0 million, respectively. We use our cash flows to meet our
financial obligations, which consist principally of financing our daily
operations of our casinos, servicing our debt, funding capital improvements and
projects, and making distributions to BDI under the manager agreement. During
2004, 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 December 31, 2004, $41.0 million was outstanding under the $80.0
million credit facility. The Company had unrestricted cash and cash equivalents
of $16.7 million at December 31, 2004, compared to $22.1 million at December 31,
2003, inclusive of Fitzgeralds Black Hawk for both periods. In 2004, the Company
spent $38.8 million for the purchase of 170 acres of property adjacent to
Majestic Star and the Buffington Harbor facility discussed above, the remodeling
and construction of Don and Mike's Sports Bar, the Monte Carlo Room and VIP
lounge all at Majestic Star, the construction of new administration buildings at
Majestic Star and Fitzgeralds Tunica, the installation of new slot player
tracking and marketing software at Fitzgeralds Tunica, a partial expansion and
remodel of our casino floor and remodel of approximately 100 hotel rooms at
Fitzgeralds Tunica, gaming and related equipment at all of our properties, and
stabilization of a rock wall adjacent to the parking garage at Fitzgeralds Black
Hawk. For the year ended December 31, 2003, the Company spent $18.5 million for
capital expenditures which consisted principally of remodeling projects at
Majestic Star and Fitzgeralds Tunica, new slot machines, conversion to TITO
technology, the acquisition of approximately 50 acres of land and a warehouse
from an affiliate of ours and the acquisition of a new casino management system
and a slot player tracking system at Majestic Star.
Management believes that the Company's cash flow from operations and its
current line of credit will be adequate to meet the Company's anticipated normal
operating requirements for working capital, its planned capital expenditures and
its significant contractual obligations with respect to amounts outstanding
under the $80.0 million credit facility, the 11.653% notes, the 9 1/2% notes,
payments to BHR, and lease payments to BHPA. The majority of principal payments
on our senior debt are not due until October 2010. However, the Company will be
required to pay $16.3 million still outstanding on the 11.653% notes, plus
accrued interest thereon, and any amounts outstanding on the $80.0 million
credit facility, plus accrued interest thereon, in 2007.
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 without additional
borrowing. In addition, our existing debt agreements limit our ability to incur
additional debt unless we can meet certain financial ratios. The Company has
entered into an agreement to sell substantially all the assets subject to
certain liabilities of its Black Hawk gaming facility for $66.0 million, subject
to adjustments for working capital and capital expenditures. Pursuant to the
indenture governing the 9 1/2% notes and the Loan and Security Agreement for the
$80.0 million credit facility, the Company must (i) invest the net proceeds from
the sale in related assets or businesses of the Company or its restricted
subsidiaries, or (ii) pay down the current outstanding balance on the $80.0
million credit facility and take a permanent reduction in the $80.0 million
credit facility for such amounts paid. To the extent such net proceeds are not
used as described in (i) and (ii), the Company is required to make an offer to
purchase the 9 1/2 notes. Should the Company identify an asset or business
acquisition, there is no guarantee that any additional financing needed by the
Company will be available on acceptable terms or at all in order to allow for
the investment in such opportunities. In addition, we anticipate that the sale
of the assets of Fitzgeralds Black Hawk will generate a gain. The Majestic Star
Casino, LLC is a limited liability company and the income and expenses of the
Company pass through to its member. Any gain will be included with other income
and expenses
35
the Company passes through to its member. The indenture governing the 9 1/2%
notes and the Loan and Security Agreement for the $80.0 million credit facility
allow for distributions to our member to pay income taxes. Accordingly, not all
of the proceeds for the sale may be available to the Company, as a portion may
be distributed to the member as allowed by the indenture.
The ultimate resolution of the assessments by the Indiana Department of
Revenue against the Company and the Company's member and parent, BDI, in the
amount of $3.9 million, plus penalties and interest (as more fully described
below) could have a material impact on the Company's liquidity in the period
that the taxes are paid, if any, and to the extent that the Company uses such
liquidity to make distributions to its member for tax purposes.
The purchase of certain gaming facilities by larger more recognized brand
names or the expansion of gaming in jurisdictions in which gambling is already
legal or currently illegal could significantly increase competition for the
Company and thereby require additional investment by the Company in its
facilities, gaming devices and marketing efforts. If necessary and to the
extent permitted under the indenture governing the 9 1/2% notes, the Company
would seek additional financing through borrowings of debt or equity financing,
subject to any governmental approvals. There can be no assurance that additional
financing, if needed, will be available to the Company or that, if available,
the financing will be on terms favorable to the Company. In addition, there is
no assurance that the Company's estimate of its reasonably anticipated liquidity
needs is accurate or that unforeseen events will not occur, resulting in the
need to raise additional funds.
On May 4, 2004, the Company entered into Amendment Number One to Loan and
Security Agreement ("Amendment") with the lenders to the $80.0 million credit
facility. The main item addressed in the Amendment was the definition of EBITDA,
which was amended 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 not
have met the required EBITDA covenant for the quarter ended March 31, 2004 as
contained in the Loan and Security Agreement. For the year ended December 31,
2004, the Company was in compliance with all covenants to the $80.0 million
credit facility.
On March 17, 2005, the Company entered into Amendment Number Two to Loan
and Security Agreement ("Amendment Two") with the lenders to the $80.0 million
credit facility. Amendment Two clarifies that the purchase of the 170 acres of
land located adjacent to the Buffington Harbor gaming complex is not a "Capital
Expenditure" under the Loan and Security Agreement nor is it subject to the
fiscal year Capital Expenditure limitations set forth in the Loan and Security
Agreement. Amendment Two is effective as of March 1, 2005. The Company spent
an additional $16.9 million on capital expenditures, which is in compliance with
the covenant, as amended.
As of December 31, 2004, the Company had $39.0 million available on its
$80.0 million credit facility.
INCOME TAX MATTER
The Majestic Star Casino, LLC has been assessed $2.6 million, plus
interest, for the fiscal year 1996 and the period January 1, 1998 through June
18, 2001, by the Indiana Department of Revenue ("Department"). On September 7,
2004, the Department assessed Barden Development, Inc., the Company's parent and
member, $1.3 million, plus penalties and interest for the remainder of 2001 and
all of fiscal year 2002. No assessments have been received for the fiscal year
2003 or for the fiscal year 2004. The assessments relate to deductions for
payments of taxes on adjusted gross gaming revenues the Company's member took in
computing adjusted gross income for Indiana state income tax purposes. The
Department has taken the position that the Company had an obligation to withhold
and remit tax for the non-resident shareholder of its member. The Company timely
filed protests for all tax years at issue and those protests are currently
pending before the Legal Division of the Department. On April 19, 2004, the
Indiana Tax Court ruled in a similar case involving another Indiana casino,
Aztar Indiana Gaming Corporation ("Aztar") that the gross wagering tax is a tax
based on or measured by income and that it must be added back to the taxable
income base for the purpose of determining adjusted gross income for Indiana tax
purposes. On September 28, 2004, the Indiana Supreme Court denied Aztar's
request to review the Indiana Tax Court's decision and thus the Indiana Tax
Court's opinion in the Aztar case is controlling precedent. On October 5, 2004,
the
36
Department sent a letter to the Company indicating that it considers the
matter closed unless the Company's protest contains new issues not addressed in
the Aztar matter. The Company is a limited liability company
and therefore it is the Company's belief that it is not liable or obligated to
pay the assessment or interest thereon. In addition, the Company will continue
to pursue its protest with the Department on the grounds that the assessments
contain calculation errors and that its protest sets forth issues not decided in
Aztar.
The Company's indenture governing the 9 1/2% notes and the loan agreement
related to the $80.0 million credit facility allow the Company to make
distributions to its member for tax purposes. Accordingly, should the Company's
member ultimately be found liable for additional state income taxes to the State
of Indiana, the Company would make distributions sufficient to pay the
additional tax. Any payments would be recorded as distributions in Member's
Deficit. The Company does not intend to make any distributions until it has
fully evaluated its options with its member and parent, Barden Development, Inc.
REFINANCING TRANSACTIONS
On October 7, 2003, the Company consummated the refinancing of
substantially all of its debt, including 100% of its 10 7/8% notes and 89.3% of
Investor Holding's 11.653% notes. The refinancing was financed with the proceeds
of the 9 1/2% notes plus $28.0 million from the $80.0 million credit facility
along with cash on hand. In October 2003, the Company recognized a loss of $32.0
million in connection with the refinancing, which is comprised of the premium
paid to redeem or purchase and retire the old notes, and the write-off of the
capitalized debt issuance costs and of the original issue discount related to
the old 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 on April 15, 2004. The 9 1/2%
notes will mature on October 15, 2010. The 9 1/2% notes are secured by a pledge
of our equity interests held by BDI, our equity interests in the subsidiary
guarantors, and substantially all of our current and future assets, excluding
certain assets.
The indenture governing the 9 1/2% notes contains covenants which, among
other things, restricts 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
an $80.0 million credit facility with Wells Fargo Foothill, Inc., and terminated
the two existing credit facilities with Wells Fargo Foothill, Inc. Subject to
certain exceptions, the $80.0 million credit facility is secured by a first
priority lien on substantially all of the assets of the Company. Borrowings
under the $80.0 million credit facility bear interest at the Company's choice of
LIBOR plus a range of 3.00% to 3.50% of 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
(defined in the credit agreement, as earnings before interest, taxes,
depreciation and amortization) plus losses that occurred from the early
retirement of debt during the three-month period ended December 31, 2003. The
Wells Fargo Foothill, Inc. base rate approximates the prime rate. Full payment
of any outstanding balance under the $80.0 million credit facility is due upon
maturity in October 2007. The credit agreement includes restrictive 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.
NEW ACCOUNTING PRINCIPLES
In November 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 151 "Inventory Costs-an amendment of
ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). SFAS
151 is effective for financial statements for fiscal years beginning after June
15, 2005. The Company does not expect that the adoption of SFAS 151 will have a
material impact on its financial position, results of operations or its cash
flows.
37
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 153, "Exchanges of Nonmonetary Assets-an
amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends APB Opinion No.
29, "Accounting for Nonmonetary Transactions", to eliminate the exception for
nonmonetary exchanges of similar productive assets and replace it with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance (i.e., if the future cash flows of the entity are expected to change
significantly as a result of the exchange). SFAS 153 is effective for financial
statements for fiscal years beginning after June 15, 2005. The Company does not
expect that the adoption of SFAS 153 will have a material impact on its
financial position, results of operations or its cash flows.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
requires our management to make estimates and assumptions about the effects of
matters that are inherently uncertain including those matters related to
property taxes at Majestic Star. We have summarized our significant accounting
policies in Note 2 to our consolidated financial statements. Of our accounting
policies, we believe the following may involve a higher degree of judgment and
complexity.
Revenue Recognition -- Casino revenue is the net win from gaming activities,
which is the difference between the amount wagered by our gaming patrons and the
amount paid out to our patrons as a result of those wagers. Hotel, food and
beverage and other revenue are recognized at the time the related service is
performed. We deduct from our gross revenues the retail value of hotel rooms,
food, beverage and merchandise provided to our casino customers on a
complimentary basis. We also deduct from our gross revenues the value of certain
cash based promotional activities, including cash earned by customers as part of
our slot club programs and cash coupons mailed to our casino customers.
Goodwill and Other Intangible Assets -- We have approximately $4.0 million of
goodwill and $5.2 million of other intangibles assets recorded on our balance
sheet at December 31, 2004, related to the acquisition of Fitzgeralds Tunica. We
regularly evaluate our acquired businesses for potential impairment indicators.
Additionally, we adopted the provisions of SFAS 142, "Goodwill and Other
Intangible Assets," in January 2002, that require us to perform impairment
testing at least annually. Our judgments regarding the existence of impairment
indicators are based on, among other things, the regulatory and market status
and operational performance of our acquired business. Future events could
significantly impact our judgments and any resulting impairment loss could have
a material adverse impact on our financial condition and results of operations.
Property and Equipment -- At December 31, 2004, we have approximately $142.2
million of net property and equipment recorded on our balance sheet. We
depreciate our assets on a straight-line basis over their estimated useful
lives. The estimate of the useful lives is based on the nature of the asset as
well as our current operating strategy. Future events, such as property
expansions, new competition and new regulations, could result in a change in the
manner in which we are using certain assets requiring a change in the estimated
useful lives of such assets. In assessing the recoverability of the carrying
value of property and equipment, we must make assumptions regarding estimated
future cash flows and other factors. If these estimates or the related
assumptions change in the future, we may be required to record impairment
charges for these assets.
Casino Club Liability - Majestic Star, Fitzgeralds Tunica and Fitzgeralds Black
Hawk offer programs whereby participants can accumulate points for casino
wagering that can currently be redeemed for cash, lodging, food and beverages
and merchandise. A liability is recorded for the estimate of unredeemed points
based upon each property's redemption history. Changes in the program, increases
in membership and changes in the redemption patterns of the participants can
impact this liability.
Self-Insurance -- The Company maintains accruals for self-insured health and
workers compensation programs, which are classified in payroll and related
liabilities in the consolidated balance sheets. Management and consultants
determine the estimates of these accruals by periodically evaluating the
historical expenses and projected trends related to these accruals. Actual
results may differ from those estimates.
38
Litigation, Claims and Assessments -- We also utilize estimates for litigation,
claims and assessments. These estimates are based upon our knowledge and
experience about past and current events and also upon reasonable future events.
Actual results may differ from those estimates.
CONTRACTUAL COMMITMENTS
The following table summarizes our obligations and commitments to make
future payments under certain contracts, including long-term debt obligations,
which include our $80.0 million credit facility at December 31, 2004.
Payments Due By Year
Contractual Obligations 2005 2006 2007 2008 2009 Thereafter Total
------------ ----------- ------------ ------------- ------------ ------------ ------------
Long-Term Debt $ - $ - $ 16,290,000 $ - $ - $260,000,000 $276,290,000
Credit Facility - - $ 40,965,000 - - - $ 40,965,000
Operating Leases (1) 2,758,034 2,597,540 2,418,089 2,085,156 1,883,904 2,413,870 $ 14,156,593
Interest on
Long-Term Debt 26,598,274 26,598,274 26,440,084 24,700,000 24,700,000 21,612,500 150,649,132
Credit Facility (2) 2,335,005 2,335,005 1,816,115 - - - 6,486,125
------------ ----------- ------------ ------------- ------------ ------------ ------------
Total $ 31,691,313 $31,530,819 $ 87,929,288 $ 26,785,156 $ 26,583,904 $284,026,370 $488,546,850
============ =========== ============ ============= ============ ============ ============
(1) The Majestic Star Casino, LLC and Trump Indiana have each entered
into parallel operating lease agreements with BHPA. Each of the
lease agreements call for The Majestic Star Casino, LLC and Trump
Indiana to make monthly lease payments. However, each party is
entitled to a credit of 50% of such payment if the other party makes
its monthly payment. In the above Contractual Commitments schedule
the BHPA operating lease is shown net of the 50% credit.
(2) Variable rate of 5.7% is based on the current LIBOR rate at December
31, 2004.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Significant Leverage
We have a significant amount of debt. We currently have outstanding $275.9
million of long-term debt, $260.0 million of which is represented by the 9 1/2%
notes and $16.3 million ($15.9 million, net of original issue discount) of which
is represented by the 11.653% notes issued by Majestic Investor Holdings, LLC in
December 2001. We also have an $80.0 million senior secured credit facility,
under which $41.0 million is currently outstanding. In addition, the indenture
governing the notes permits us to incur additional debt in certain
circumstances.
Our high level of debt could have important consequences and significant
adverse effects on our business. For example, it could, among other things:
- - require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, development projects, acquisitions and other general
corporate purposes;
- - limit our ability to fund or obtain additional financing for future
working capital, or capital expenditures necessary to keep our casinos
competitive or to finance expansions of our existing facilities or
consummate acquisitions;
- - increase our vulnerability to adverse economic and industry conditions or
a downturn in our business; and
- - result in an event of default if we fail to comply with the financial and
other restrictive covenants contained in the indenture or our senior
secured credit facility, which event of default could result in all of our
indebtedness becoming immediately due and payable and would permit some or
all of our lenders to foreclose on our assets securing such indebtedness.
The occurrence of any one of these events could have a material adverse
effect on our business, financial condition, results of operations, and/or
prospects as well as our ability to satisfy our obligations under the notes.
39
Competition.
We face intense competition in each of the markets in which our gaming
facilities are located. In some of the jurisdictions in which we operate,
competition is expected to intensify as new gaming operations enter these
markets and existing competitors consolidate with one another or expand or
enhance their operations. Our competitors have engaged in aggressive market
strategies. In addition, expansion of legalized gaming to new jurisdictions
throughout the United States also has increased competition faced by us and will
continue to do so in the future.
Competition requires us to make substantial capital expenditures to
maintain and enhance the competitive positions of our properties. Because we are
highly leveraged, after satisfying our obligations under our outstanding
indebtedness, there can be no assurance that we will have sufficient funds to
undertake these expenditures, that we will be able to obtain sufficient
financing to fund such expenditures or that our senior secured credit facility
will permit such capital expenditures to be made.
Government Regulation and Taxes.
Government regulations require us to, among other things:
- - pay gaming fees and taxes in each state where we operate a casino,
including retroactive taxes when and if enacted, such as the $1.9 million
retroactive real property tax charge in 2004 and the $2.1 million of
retroactive gaming tax charge in 2003, both in Indiana;
- - obtain a gaming license in each state where we operate a casino, which we
must renew periodically and which may be suspended or revoked if we do not
meet detailed regulatory requirements; and
- - receive and maintain local licenses to sell alcoholic beverages in our
casinos.
No assurances can be given that any new gaming licenses, liquor licenses,
registrations, findings of suitability, permits and approvals, will be given or
that existing ones will be renewed when they expire.
The compliance costs associated with these laws, regulations and licenses
are significant. A change in the laws, regulations and licenses applicable to
our business or a violation of any current or future laws or regulations or our
gaming licenses could require us to make material expenditures or could
otherwise materially adversely affect our business or financial results.
Further, because the casino industry can provide a significant source of tax
revenues, changes in tax laws or the interpretation of existing laws can
adversely affect the Company. Certain expanded opportunities for the Company,
such as dockside gaming, have been combined with increased taxation. In
addition, the Company is challenging certain tax assessments, including those
related to the deductibility of gaming tax expense when computing income taxes
in Indiana, which if ultimately determined adversely to the Company could have a
material adverse effect on our financial results.
Legislation or local referenda on gaming may restrict or adversely impact our
operations.
The casino entertainment industry is subject to political and regulatory
uncertainty. In some of the jurisdictions in which we currently operate or from
which we attract customers, or in which we may expand, gaming is subject to
local referenda and there have been a number of initiatives to ban or expand to
new venues gaming in the jurisdictions in which our casinos are located or to
expand gaming to new venues competitive with our properties. For example, there
have been prior attempts to ban gaming in Mississippi. If the results of a
referendum held in a jurisdiction in which we operate were to restrict gaming in
whole or in part or if the results of a referendum in a nearby non-gaming
jurisdiction were to permit gaming, our results of operations could be
negatively impacted.
Economic Factors.
The economic health of the casino industry is affected by a number of
macro economic factors that are beyond our control, including: (i) general
economic conditions and economic conditions specific to our primary markets;
(ii) levels of disposable income of casino patrons; (iii) increased
transportation costs resulting in decreased travel by patrons; and, (iv)
increased energy costs. We believe that one or more of the foregoing economic
conditions did
40
have an adverse impact on our results of operation in 2004 and
any of these factors could negatively impact our revenues and results of
operations in the future.
Political Factors.
Continuing military action, the prospects of extended military action and
the fear of domestic terrorism have resulted in a decline in vacation travel and
tourism. The magnitude and duration of these effects is unknown and cannot be
predicted. Any decline in vacation travel and tourism could adversely affect our
revenues. Continued or even worsening negative market conditions related to any
future occurrences of terrorist actions or other destabilizing events, and other
actions that perpetuate a climate of war could cause existing and potential
customers to delay and cancel travel, convention and vacation plans, could
decrease wagering and increase energy or other costs, and as a result could
adversely affect our revenues and cash flow in the future.
Joint Venture Partner.
Efficient operation of the BHR Joint Venture to support our casino will
depend upon our continuing ability, as well as that of our Joint Venture
Partner, to fund day-to-day operations and agree on related business matters. In
addition, both we and our Joint Venture Partner are jointly and severally liable
to make lease payments related to the Buffington Harbor parking facility. When
our Joint Venture Partner makes its share of the lease payment, we receive a 50%
credit towards our lease obligations. Any failure by the Joint Venture Partner
to fund operations of the BHR Joint Venture when required or to make the lease
payments related to the Buffington Harbor parking facility (including its
obligations under the BHPA lease), or any significant conflict in this
relationship that is not promptly resolved, would adversely affect the
operations of the gaming complex. A significant disruption in the business of
the gaming complex is likely to adversely affect the operations of Majestic Star
and our ability to generate revenues.
On November 21, 2004, THCR entered into a pre-negotiated plan of
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Since that time,
THCR has been operating as a debtor in possession of its assets and Trump has
continued to pay its monthly obligations under both the BHR operating and BHPA
lease agreements. However, pursuant to the loan agreement on the BHPA parking
garage, Trump was required to have the bankruptcy court allow the assumption of
the parking garage lease by Trump within 90 days of filing bankruptcy. Trump
failed to have the bankruptcy court approve assumption of the lease. This has
created a technical default under the loan agreement. Trump is currently in the
process of having the bankruptcy court approve the assumption of the lease and
to date the lenders under the BHPA loan agreement have not pursued the remedies
for the technical default.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates and
commodity prices. Our primary exposure to market risk is interest rate risk
associated with our long-term debt. The Company does not have any financial
instruments held for trading or other speculative purposes, does not invest in
derivative financial instruments, interest rate swaps or other investments that
alter interest rate exposure.
41
The table below provides information about our financial instruments that
are sensitive to changes in interest rates. For debt obligations, the table
presents notional amounts and weighted average interest rates by contractual
maturity dates for the twelve-month periods ended December 31:
Fair
Amounts in Thousands 2005 2006 2007 2008 2009 Thereafter Total Value (1)
---- ---- ------- ---- ---- ---------- -------- ---------
Variable rate debt:
- - Amounts outstanding under the
senior credit facility, payable at
LIBOR plus a margin of 3.0%
to 3.5%, or Wells Fargo
Foothill Base Rate plus a margin
of 0.25% to 0.75. The range
is based on the Company's EBITDA. $ - $ - $40,965 $ - $ - $ - $ 40,965 $ 40,965
Average interest rate (2) 5.7%
Fixed Rate Debt:
- - $260.0 principal amount of
9 1/2% Senior Secured Notes
due 2010 $ - $ - $ - $ - $ - $ 260,000 $260,000 $276,094
Average interest rate (2) 9.5%
- - $16.3 million principal amount
(carrying value $15.9 million,
net of discount) of 11.653%
unsecured notes due 2007. $ - $ - $15,893 $ - $ - $ - $ 15,893 $ 15,893
Average interest rate (2) 11.7%
---- ---- ------- ---- ---- ---------- -------- --------
$ - $ - $56,858 $ - $ - $ 260,000 $316,858 $332,952
==== ==== ======= ==== ==== ========== ======== ========
(1) The fair values for debt with no public market are based on the borrowing
rates currently available for debt instruments with similar terms and
maturities, and for publicly traded debts are based on market quotes.
(2) Based on contractual interest rates for fixed rate indebtedness or current
LIBOR rates for variable rate indebtedness.
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates and
commodity prices. Our primary exposure to market risk is interest rate risk
associated with our $80.0 million credit facility. We attempt to limit our
exposure to interest rate risk by managing the mix of our long-term fixed-rate
borrowings and short-term borrowings under the $80.0 million credit facility.
Borrowings under the $80.0 million credit facility bear interest at a margin
above the LIBOR or the Base Rate (each, as defined in the Loan and Security
Agreement governing the $80.0 million credit facility) as selected by us.
However, the amount of outstanding borrowings is expected to fluctuate and may
be reduced from time to time. The $80.0 million credit facility matures in
October 2007.
The $80.0 million credit facility, along with cash flow from operations,
are used to maintain liquidity and fund business operations. The nature and
amount of the Company's debt may vary as a result of future business
requirements, market conditions and other factors.
42
The senior secured credit facility has a maximum credit line of $80.0
million. Assuming we have borrowed against the maximum available under the
senior secured credit facility, a one-half percentage point change in the
underlying variable rate would result in a change in related interest expense of
$400,000 on an annual basis. Additionally, should we assume variable rate debt
in the future, we will be subject to market risk, which is the risk of loss from
changes in market prices and interest rates.
At December 31, 2004, we had outstanding borrowings of $41.0 million under
our credit facility.
We have approximately $260.0 million principal amount of 9 1/2% notes
outstanding under the indenture governing the notes and $15.9 million principal
amount (net of original issue discount) of the 11.653% notes outstanding.
Interest expense on our fixed rate debt instruments are not affected by a change
in the market rates of interest, and therefore, such changes generally do not
have an impact on future earnings. While our $260.0 million of 9 1/2% notes are
not actively traded, we believe, based upon information received from brokers,
that our $260.0 million of 9 1/2% notes were priced at 106.19% for a value of
$276.1 million at December 31, 2004. The $15.9 million of 11.653% notes to our
knowledge are not publicly traded. We believe the fair value of this debt to be
$15.9 million since the equity interests and assets of Investor Holdings or its
restricted subsidiaries no longer secure these notes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 15(a) of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. 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 (which included an assessment
of the circumstances relating to the restatement for cash based promotional
allowances), 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 December 31, 2004 that have
materially affected, or are reasonably likely to materially affect the Company's
internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of December 31, 2004.
NAME AGE POSITION(S)
---- --- -----------
Don H. Barden 61 Chairman, President and Chief Executive Officer
Michelle R.Sherman 39 Director
Steven J.Lemberg 50 Director
Andrew J. Warhola 78 Director
Jon S. Bennett 44 Vice President and Chief Financial Officer
Don H. Barden is Chairman, President and Chief Executive Officer of the
Company and, since November 1993, Chairman and President of BDI, the manager of
the Company, with responsibility for key policy-making functions. Since their
formations, Mr. Barden is also President and Chief Executive Officer of Investor
and Manager of Investor Holdings; Barden Colorado; Barden Mississippi; and
Chairman, President and Chief Executive Officer of Majestic Investor Capital
Corp. ("Investor Capital"), Barden Colorado, and Barden Mississippi. Mr. Barden
also has served as a director of Investor Capital since its formation.
Additionally, he is the President and Chief Executive Officer of a group of
other companies he owns and/or operates. Over the past 35 years, Mr. Barden has
successfully developed, owned and operated many business enterprises in various
industries including real estate development, casino gaming, broadcasting, cable
television and international trade. Black Enterprise Magazine named Barden
Companies, Inc., a company wholly owned by Mr. Barden and one of our affiliates,
"Company of the Year" for 2003. In 2004 Mr. Barden received a Trumpet Award as
"Entrepreneur of the Year." The Trumpet Awards recognize the achievements of
African-Americans and salutes them for their fortitude and persistence. Further,
in 2003, Mr. Barden was recognized as the "Master Entrepreneur" of Eastern
Michigan during the Ernst & Young "Entrepreneur of the Year" contest.
Michelle R. Sherman has been a Director of the Company since July 9, 2004.
Ms. Sherman also serves as Vice President, Chief Financial Officer and Treasurer
of Barden Companies, Inc ("Barden"). Ms. Sherman has been with Barden for over
11 years, serving Barden in various capacities including accounting, finance
administration and business development. Ms. Sherman is an officer in many
Barden entities. Ms. Sherman is a licensed Certified Public Accountant in the
State of Michigan and has a Master of Science degree in International Finance.
Steven J. Lemberg has been a Director of the Company since July 9, 2004.
Mr. Lemberg also serves as Executive Vice President of Strategic Initiatives for
the Company, a position he has held since January 3, 2005. Prior to employment
with the Company, Mr. Lemberg was the Chief Executive Officer of a national
promotional company. Mr. Lemberg held various positions with that company and
its predecessor entities from January 1996 to December 2004, including Chief
Operating Officer, Chief Financial Officer, and Executive Vice President of a
division of a NYSE-listed company. Mr. Lemberg was also a Tax Partner in the
firm Coopers and Lybrand from 1989 to 1996. Mr. Lemberg received a juris doctor
degree from the University of Michigan School of Law. He is a Certified Public
Accountant and a licensed attorney in the State of Michigan.
Andrew J. Warhola has been a Director of the Company since July 9, 2004.
Mr. Warhola received a bachelor's degree in economics in 1948 and a bachelor of
laws degree in 1951 both from the University of Michigan. Mr. Warhola went on to
develop a successful law practice in Lorain, Ohio. Mr. Warhola's law firm
specialized in real estate, small business, banking and health care. Mr. Warhola
has retired from the firm. During Mr. Warhola's career he served as a board
member and trustee to various organizations, was active in many community and
civic groups and co-founded a radio station.
Jon S. Bennett has been the Vice President and Chief Financial Officer of
the Company since October 2002 with overall responsibility for all aspects of
the Company's financial management, accounting and reporting processes. Mr.
Bennett is also the Vice President and Chief Financial Officer for Investor,
Investor Holdings, The Majestic Star Casino Capital Corp., Investor Capital,
Barden Mississippi and Barden Colorado. Prior to Mr. Bennett's appointment as
Vice President and Chief Financial Officer, Mr. Bennett was Vice President of
Finance and Administration for Barden Mississippi from the acquisition in
December 2001 to his promotion in October 2002. Mr. Bennett has held various
positions with Fitzgeralds Gaming Corporation, including Vice President of
Finance and Administration for
44
Fitzgeralds Tunica from April 1997 to December 2001 and Director of Finance for
three Fitzgeralds Gaming Corporation properties located in Reno, Nevada. Mr.
Bennett was also Chief Financial Officer for Peppermill Casinos, Inc. from May
1995 to April 1997.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company earn a monthly fee of
$3,500, plus $1,000 for each Board meeting they attend. Directors are reimbursed
for expenses reasonably incurred in connection with their service on the Board.
CODE OF ETHICS
We have adopted a Code of Ethics that applies to our Directors, Chief
Executive Officer and Chief Financial Officer and any other person performing
similar functions. The failure of any of these persons to comply with the Code
of Ethics may result in disciplinary action, up to and including termination of
employment. This Code of Ethics has been posted to our website at
www.majesticstar.com and www.fitzgeralds.com.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation earned for services
performed for The Majestic Star Casino, LLC, and its subsidiaries, during the
years shown below by our Chief Executive Officer and our other current and past
executive officers during 2004. All compensation is paid by The Majestic Star
Casino, LLC.
ANNUAL COMPENSATION
-------------------- ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION
----------------- ---- -------- --------- ------------
Don H. Barden (1) 2004 $425,000 $ - $ 176,426
Chairman, President and 2003 390,096 - 169,742
Chief Executive Officer 2002 370,000 - 124,533
Michael E. Kelly (2) 2004 $386,171 $ 187,325 $ 19,518
Executive Vice President 2003 400,000 271,498 23,892
Chief Operating Officer and Secretary 2002 423,077 292,570 72,370
Jon. S. Bennett (3) 2004 $250,017 $ 50,000 $ 41,784
Vice President and 2003 256,731 25,000 68,164
Chief Financial Officer 2002 212,716 43,000 3,433
(1) For the years 2004 and 2003, the amounts reflected in "All Other
Compensation" for Mr. Barden represent life insurance premiums paid by the
Company of $129,368 and $123,435, respectively, and an auto allowance of
$47,058 and $46,307, respectively. For the year 2002, "All Other
Compensation" reflects life insurance premiums paid by the Company of
$124,533.
(2) For the year 2004, Mr. Kelly's salary includes the payment of $49,231 of
unused vacation relating to 2004 and 2003. For the year 2004, the amounts
reflected in "All Other Compensation" for Mr. Kelly represent life
insurance premiums paid by the Company of $1,160, an auto allowance of
$8,685, reimbursement for unreimbursed medical plan expenditures of $5,173
and $4,500 for a 401(k) match for which Mr. Kelly was fully vested. For
the year 2003, the amounts reflected in "All Other Compensation" for Mr.
Kelly represent life insurance premiums paid by the Company of $670, an
auto allowance of $13,722, reimbursement for unreimbursed medical plan
expenditures of $5,000 and $4,500 for a 401(k) match. Mr. Kelly's salary
in 2002 includes $23,077 for unused vacation for 2001. The amounts in "All
Other Compensation" for Mr. Kelly in 2002 includes a 401(k) match of
$12,900, reimbursement of $5,000 for unreimbursed medical plan
expenditures, $38,511 for relocation expenses, $12,635 for an automobile
allowance,
45
and $3,324 of life insurance premiums paid by the Company on Mr. Kelly's
behalf. Bonuses reflected in the Executive Compensation Schedule are for
the year earned. Mr. Kelly resigned his employment in August 2004.
(3) For the year 2004, the amounts shown in "All Other Compensation" reflect
$36,090 of taxable relocation and housing allowance costs, a 401(k) match
of $4,500 for which Mr. Bennett is fully vested, $1,140 of life insurance
premiums paid by the Company on Mr. Bennett's behalf and reimbursement for
unreimbursed medical plan expenditures of $54. For the year 2003, Mr.
Bennett's salary includes the payment of $6,731 of unused vacation
relating to 2002 while Mr. Bennett was the Vice President of Finance and
Administration at Barden Mississippi. The amounts shown in "All Other
Compensation" reflect $58,569 of taxable relocation and housing allowance
costs, reimbursement of $5,000 for unreimbursed medical plan expenditures,
a 401(k) match of $4,500 and $95 of life insurance premiums paid by the
Company on Mr. Bennett's behalf. The amount in "All Other Compensation"
for Mr. Bennett in 2002 includes a 401(k) match of $3,433. Bonuses
reflected in the Executive Compensation Schedule are for the year earned,
not paid.
EMPLOYMENT AGREEMENTS
Mr. Barden serves as our Chairman, President and Chief Executive Officer
and currently receives annual compensation of $600,000 as an employee, pursuant
to a letter agreement with the Company dated October 22, 2001, as amended
January 1, 2005. The Company pays life insurance premiums on policies with a
value of $5.0 million and provides Mr. Barden with an auto allowance.
Mr. Bennett serves as our Vice President and Chief Financial Officer
pursuant to an employment agreement with the Company dated October 21, 2002, as
amended December 20, 2004. Under this agreement, Mr. Bennett's period of
employment was extended until January 20, 2006 at a base compensation of
$275,000 effective January 1, 2005, subject to annual reviews. Mr. Bennett can
also earn bonuses subject to the discretion of the President and Chief Executive
Officer. In addition to such compensation, Mr. Bennett is entitled to term life
insurance in an amount equal to $1.0 million and other customary employee
benefits, including participation in the Company's 401(k) plan. Mr. Bennett is
also entitled to additional compensation upon a change in control, equal to the
remaining amount due under his employment agreement plus six months of his
annual salary following the expiration of his current employment agreement.
Mr. Lemberg serves as a Board member and, effective January 3, 2005,
joined the Company as Executive Vice President of Strategic Initiatives pursuant
to an employment agreement dated December 17, 2004. Unless sooner terminated as
provided therein, the agreement continues in effect for two years. Thereafter,
the term automatically extends for successive one year periods unless either
party provides notice of its intention not to renew the agreement. The agreement
provides for a base salary of $300,000 and participation in the Company's
discretionary bonus program. Mr. Lemberg is also entitled to participate in the
Company's employee benefits plans as are generally made available to the
Company's senior executives and is entitled to reimbursement of business
expenses. If the Company terminates Mr. Lemberg without "cause," if Mr. Lemberg
terminates his employment for "good reason" (as each such term is defined in the
agreement) or if the Company fails to renew the agreement, Mr. Lemberg is
entitled to continued base salary for a maximum of six months or the remaining
term of the agreement, bonus compensation for the employment term and COBRA
benefits for a period of six months. Mr. Lemberg agreed not to compete with the
Company for a period of nine months following termination of his employment for
any reason in the State of Nevada or within 150 miles of any location at which
the Company or any of its affiliates (including its parent, subsidiaries and
joint ventures) conducts or proposes to conduct gaming operations.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee was formed in July 2004 with Andrew J. Warhola
(Chairman), Steven J. Lemberg and Michelle R. Sherman as members. During 2004,
Messrs. Warhola and Lemberg were independent directors and none of the members
were employees or former employees of the Company or its subsidiaries. Ms.
Sherman is an officer of the Company's parent, Barden Development, Inc.
Effective January 3, 2005, the Company employed Mr. Lemberg as Executive Vice
President of Strategic Initiatives and Mr. Lemberg resigned from the
Compensation Committee effective December 31, 2004.
COMPENSATION COMMITTEE
The Compensation Committee (the "Committee") is responsible for
establishing, monitoring and implementing the policies that govern compensation
programs for the Company's executives and key management. The Committee reviews
compensation policies and procedures with management and makes recommendations
to the Board of Directors and determines the compensation for the Chief
Executive Officer ("CEO"). The CEO establishes the compensation of the other
executive officers of the Company after consultation with the Committee using
the parameters set by the Committee.
The primary goal of the Committee is to ensure that the Company's
compensation programs 1) effectively attract and retain executives and key
management; 2) establish and implement policies and procedures in a fair and
equitable manner; and 3) are consistent with the employee's individual
performance and the performance of the Company as a whole. The ranges for
compensation of the executive officers, including the CEO, and key management
are generally set at levels that the Committee believes to be competitive with
other gaming companies. For the purpose of comparing the compensation programs
of other gaming companies, the Committee reviews various relevant factors,
including size and structure, the composition of the Company's properties, the
market in which they operate, the structure of their compensation programs and
the availability of public compensation information.
46
Base salary, performance bonuses and other fringe benefits are the primary
elements of the Company's executive compensation program. The Committee sets
salary ranges for the Company's executives and key management at levels it
believes to be competitive with gaming companies of similar size and in similar
markets. Annual salaries are established based upon available market data,
employee's length of service, employee contribution to the overall goals and
performance of the Company. Annual salaries of executives and key management are
reviewed from time to time and adjustments are made where necessary to remain
competitive with gaming companies of similar size and structure.
Performance bonuses are discretionary and are determined based on the
individual's overall performance for that year, their contribution to the goals
of the Company and, with the exception of corporate personnel, the financial
performance of their applicable property. Bonuses are paid after the CEO and
management have assessed the Company's year-end financial results.
The Committee establishes the CEO's compensation and considers multiple
factors in making such determination. The CEO is the Chairman, President,
founder and 100% owner of the Company. He created the long-term vision for the
Company and continues to successfully implement strategies that contribute to
the growth of the Company; he is positively recognized by the business and
financial community as the driving force behind the growth and continued success
of the Company. The CEO's overall compensation includes his annual salary and
other fringe benefits. As a result of a review of CEO compensation for gaming
companies of similar size and structure, the CEO received an increase in his
base salary, effective January 1, 2005. The CEO currently does not and has not
historically participated in the Company's bonus program.
COMPENSATION COMMITTEE: ANDREW J. WARHOLA
MICHELLE R. SHERMAN
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
We are indirectly wholly owned by Don H. Barden, our Chairman, President
and Chief Executive Officer.
The following table sets forth the beneficial ownership of each of The
Majestic Star Casino, LLC and The Majestic Star Casino Capital Corp., and its
direct and indirect subsidiaries, as of the date hereof.
THE
THE MAJESTIC MAJESTIC MAJESTIC BARDEN BARDEN
MAJESTIC STAR MAJESTIC INVESTOR INVESTOR MISSISSIPPI COLORADO
NAME AND ADDRESS OF STAR CAPITAL INVESTOR, HOLDINGS, CAPITAL GAMING, GAMING,
BENEFICIAL OWNER LLC CORP. LLC LLC CORP. LLC LLC
- ------------------- -------- -------- --------- --------- -------- ----------- -----------
Don H. Barden 100%(1) 100%(2) 100%(3) 100%(4) 100%(5) 100%(6) 100%(7)(8)
163 Madison Avenue
Suite 2000
Detroit, MI 48226
(1) Includes the membership interests in The Majestic Star Casino, LLC, all of
which are beneficially owned directly by BDI. Mr. Barden is the beneficial
owner of 100% of BDI.
(2) Includes the common stock of The Majestic Star Casino Capital Corp., all
of which is beneficially owned directly by The Majestic Star Casino, LLC,
which is beneficially owned directly by BDI. Mr. Barden is the beneficial
owner of 100% of BDI.
(3) Includes the membership interests of Majestic Investor, LLC, all of which
are beneficially owned directly by The Majestic Star Casino, LLC, which is
beneficially owned directly by BDI. Mr. Barden is the beneficial owner of
100% of BDI.
47
(4) Includes the membership interests of Majestic Investor Holdings, LLC, all
of which are beneficially owned directly by Majestic Investor, LLC, which
is beneficially owned directly by The Majestic Star Casino, LLC, which is
beneficially owned directly by BDI. Mr. Barden is the beneficial owner of
100% of BDI.
(5) Includes the common stock of Majestic Investor Capital Corp., all of which
is beneficially owned directly by Majestic Investor Holdings, LLC, which
is beneficially owned directly by Majestic Investor, LLC, which is
beneficially owned directly by The Majestic Star Casino, LLC, which is
beneficially owned directly by BDI. Mr. Barden is the beneficial owner of
100% of BDI.
(6) Includes the membership interests of Barden Mississippi Gaming, LLC, all
of which are beneficially owned directly by Majestic Investor Holdings,
LLC, which is beneficially owned directly by Majestic Investor, LLC, which
is beneficially owned directly by The Majestic Star Casino, LLC, which is
beneficially owned directly by BDI. Mr. Barden is the beneficial owner of
100% of BDI.
(7) Includes the membership interests of Barden Colorado Gaming, LLC, all of
which are beneficially owned directly by Majestic Investor Holdings, LLC,
which is beneficially owned directly by Majestic Investor, LLC, which is
beneficially owned directly by The Majestic Star Casino, LLC, which is
beneficially owned directly by BDI. Mr. Barden is the beneficial owner of
100% of BDI.
(8) On July 12, 2004, the Company entered into an agreement to sell
substantially all of the assets, subject to certain liabilities, of
Fitzgeralds Black Hawk for a purchase price of $66.0 million, which
purchase price will be subject to adjustments based on working capital and
certain capital expenditures made as of the closing date (see
Note 7 to the Notes to Consolidated Financial Statements for additional
information).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 bore no interest and was 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. In August 2004, Mr. Kelly left the Company's employment. Mr. Kelly
paid the remaining $66,000 due on the loan as a deduction from the compensation
owed to him at his departure.
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,
which was terminated).
During the year ended December 31, 2004, Majestic Star made distributions
totaling $5.3 million to BDI pursuant to the Manager Agreement. In January 2005,
the Company made a distribution of $1.3 pursuant to the Manager Agreement for
the three months ended December 31, 2004.
Prior to October 7, 2003, Majestic Star and Investor Holdings made manager
distributions as governed by the requirements of Majestic Star's 10 7/8% notes
and Investor Holdings' 11.653% notes. Manager distributions for 2003 and 2002
were $5.0 million and $5.5 million, respectively.
In April 2003, the Company, as authorized by the indentures governing the
10 7/8% notes and the 11.653% notes, made income tax distributions totaling $1.0
million to its member.
During the years ended December 31, 2004, 2003 and 2002, we incurred rent
expense payable to BHPA totaling $2.2 million, $2.1 million and $1.0 million,
respectively. As of December 31, 2004 and 2003, our accrued rent payable to BHPA
was $1.1 million and $0.7 million, respectively.
48
MANAGER AGREEMENT
On October 7, 2003, concurrent with the consummation of the offering of
the 9 1/2% notes, we entered into a Manager Agreement (the "new Manager
Agreement") with BDI. Distributions to BDI under the new Manager Agreement are
limited by the terms of the indenture governing the 9 1/2% notes and by the
terms of the $80.0 million credit facility. The distributions for each fiscal
quarter may not exceed 1% of consolidated net revenue and 5% of our consolidated
cash flow (as defined in the indenture governing the 9 1/2% notes and the $80.0
million credit facility) for the immediately preceding fiscal quarter.
The distributions are subordinated to the payment in full of principal,
interest, and liquidated damages, if any, then due on the 9 1/2% notes and to
obligations under the $80.0 million credit facility, and may not be paid if the
Company is in default under the indenture governing the 9 1/2% notes or under
the $80.0 million credit facility or if the Company does not meet certain
financial ratios as provided in the indenture.
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 twelve months ended December 31, 2004, the
Company charged Barden Nevada $1.1 million pursuant to the expense sharing
agreement.
NAMING RIGHTS AGREEMENT
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, and the Company received a credit of $1.5
million against the purchase price of the GNC Land at closing.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PricewaterhouseCoopers LLP ("PwC") acted as our independent registered
public accounting firm during 2004, 2003 and 2002. Below is a breakdown of the
fees paid to them.
AUDIT FEES
The aggregate fees billed by PwC for professional services rendered for
audit services in fiscal years 2004 and 2003 were $364,023 and $459,980,
respectively. Services performed included:
- - Audit of the Company's annual financial statements, including the audits
of various subsidiaries conducting gaming operations as required by the
regulations of the respective jurisdictions.
- - Reviews of the Company's quarterly financial statements.
- - Statutory and regulatory audits, consents and other services related to
Security and Exchange Commission ("SEC") matters.
49
AUDIT-RELATED FEES
There were no fees billed by PwC for audit-related services in fiscal
years 2004 and 2003.
TAX FEES
The aggregate fees billed by PwC for professional services rendered for
tax-related services in fiscal years 2004 and 2003 were $40,620 and $45,500,
respectively. These fees were associated with federal and state tax compliance,
tax advice, tax planning and tax return preparation.
ALL OTHER FEES
The aggregate fees billed by PwC for professional services rendered for
engagements other than Audit Fees, Audit-Related Fees and Tax Fees were $43,055
and $8,596 in fiscal years 2004 and 2003, respectively. These fees related to
401(k) plan audits and health plan Form 5500 Filings.
50
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements as listed on Page F-1.
2. Financial Statement Schedule as listed on Page F-1.
3. Exhibits: The exhibits included as part of this report are listed in
the attached Exhibit Index on Page E-1, which is incorporated herein
by reference.
(b) The exhibits included as part of this report are listed in the attached
Exhibit Index on Page E-1, which is incorporated herein by reference.
(c) The response to this portion of Item 15 is submitted as a separate section
of this report.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 31, 2005.
THE MAJESTIC STAR CASINO, LLC THE MAJESTIC STAR CASINO CAPITAL
CORP.
By: /s/ Don H. Barden By: /s/ Don H. Barden
------------------------------- --------------------------------
Don H. Barden Don H. Barden
Chairman, President and Chief President and Chief Executive
Executive Officer Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on March 31, 2005 on
behalf of the Registrant and in the capacities indicated.
THE MAJESTIC STAR CASINO, LLC
SIGNATURE TITLE
/s/ Don H. Barden Chairman, President and Chief Executive
- ---------------------------- Officer (Principal Executive Officer)
Don H. Barden
/s/ Jon S. Bennett Vice President and Chief Financial Officer
- ---------------------------- (Principal Financial and Accounting Officer)
Jon S. Bennett
/s/ Steven J. Lemberg Director
- ----------------------------
Steven J. Lemberg
/s/ Michelle R. Sherman Director
- ----------------------------
Michelle R. Sherman
/s/ Andrew J. Warhola Director
- ----------------------------
Andrew J. Warhola
THE MAJESTIC STAR CASINO CAPITAL CORP.
SIGNATURE TITLE
/s/ Don H. Barden President and Chief Executive Officer
- ---------------------------- (Principal Executive Officer )
Don H. Barden
/s/ Jon S. Bennett Vice President and Chief Financial Officer
- ---------------------------- (Principal Financial and Accounting Officer)
Jon S. Bennett
S-1
EXHIBIT INDEX
Certain of the following exhibits have been previously filed with the
Securities and Exchange Commission by the Company pursuant to the requirements
of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such
exhibits are identified by the parenthetical references following the listing of
each such exhibit and are incorporated herein by reference. The Company's
Commission file number is 333-06489.
EXHIBIT NO. DESCRIPTION OF EXHIBITS
2.1 Assignment of Interest by Barden Development, Inc. and Majestic
Investor Holdings, LLC dated as of December 31, 2003 (filed as
Exhibit 2.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2003)
2.2 Asset Purchase Agreement dated July 12, 2004 between Legends
Gaming, LLC and Barden Colorado Gaming, LLC (filed as Exhibit 2.1
to the Company's Current Report on Form 8-K dated July 12, 2004)
2.2.1 Amendment No. 1 dated February 1, 2005 to Asset Purchase
Agreement dated July 12, 2004 by and between Legends Gaming, LLC
and Barden Colorado Gaming, LLC
3.1 Amended and Restated Articles of Organization of The Majestic
Star Casino, LLC (filed as Exhibit 3.1 to the Company's
Registration Statement, No. 333-06489)
3.2 Third Amended and Restated Operating Agreement of The Majestic
Star Casino, LLC dated as of March 29, 1996(filed as Exhibit 3.2
to the Company's Registration Statement, No. 333-06489)
3.2.1 First Amendment of Third Amended and Restated Operating Agreement
of The Majestic Star Casino, LLC, dated as of June 18, 1999
(filed as Exhibit 3.3 to the Company's Registration Statement,
No. 333-85089)
3.3 Articles of Incorporation of The Majestic Star Casino Capital
Corp. (filed as Exhibit 3.4 to the Company's Registration
Statement, No. 333-85089)
3.4 Bylaws of The Majestic Star Casino Capital Corp. (filed as
Exhibit 3.5 to the Company's Registration Statement, No.
333-85089)
4.1 Indenture, dated as of October 7, 2003, among The Majestic Star
Casino, LLC and Majestic Star Casino Capital Corp., as issuers,
and the subsidiary guarantors, as subsidiary guarantors and The
Bank of New York, as trustee (filed as Exhibit 4.1 to the
Company's Registration Statement, No. 333-110993)
4.2 Supplemental Indenture, dated as of September 25, 2003, by and
among Majestic Investor Holdings, Majestic Investor Capital Corp.
and The Bank of New York, (filed as Exhibit 4.4 to the Company's
Registration Statement, No. 333-110993)
4.3 Intercreditor Agreement, dated as of October 7, 2003, between The
Bank of New York and Wells Fargo Foothill, Inc. (filed as Exhibit
4.6 to the Company's Registration Statement, No. 333-110993)
10.1 Loan and Security Agreement dated as of October 7, 2003, by and
among The Majestic Star Casino, LLC, certain subsidiaries
signatory thereto, the lenders signatories thereto and Wells
Fargo Foothill, Inc., as Agent (filed as Exhibit 10.1 to the
Company's Registration Statement, No. 333-110993)
10.1.1 Amendment Number One to Loan and Security Agreement dated as of
May 4, 2004 by and among The Majestic Star Casino, LLC, certain
subsidiaries signatory thereto, the lenders signatories thereto
and Wells Fargo Foothill, Inc., as Agent (filed as Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 2004)
10.1.2 Amendment Number Two to Loan and Security Agreement dated as of
March 1, 2005 by and among The Majestic Star Casino, LLC, certain
subsidiaries signatory thereto, the lenders signatories thereto
and Wells Fargo Foothill, Inc., as Agent (filed as Exhibit 10.1
to the Company's Current Report on Form 8-K dated March 22, 2005)
10.2* Letter Agreement dated as of January 1, 2005
between Don H. Barden and The Majestic Star Casino, LLC
10.3* Employment Agreement, dated October 21, 2002, between Jon Bennett
and The Majestic Star Casino, LLC (filed as Exhibit 10.4 to the
Company's Registration Statement, No. 333-110993)
10.3.1* Amendment to Employment Agreement dated December 20, 2004 between
Jon Scott Bennett and The Majestic Star Casino, LLC (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
December 22, 2004)
10.4* Employment Agreement dated as of December 17, 2004 between Steven
J. Lemberg and The Majestic Star Casino, LLC
10.5 Management Agreement dated as of October 7, 2003, between The
Majestic Star Casino, LLC and Barden Development, Inc. (filed as
Exhibit 10.8 to the Company's Registration Statement, No.
333-110993)
10.6 Expense Reimbursement Agreement, dated as of October 7, 2003,
between Barden Nevada Gaming, LLC and The Majestic Star Casino,
LLC (filed as Exhibit 10.9 to the Company's Registration
Statement, No. 333-110993)
10.7 Berthing Agreement dated as of April 23, 1996 between The
Majestic Star Casino, LLC and Buffington Harbor Riverboats (filed
as Exhibit 10.5 to the Company's Registration Statement, No.
333-06489)
10.8 First Amended and Restated Operating Agreement of Buffington
Harbor Riverboats, LLC made as of October 31, 1995 by and between
Trump Indiana, Inc. and The Majestic Star Casino, LLC, as amended
by Amendment No. 1 to First Amended and Restated Operating
Agreement of Buffington Harbor Riverboats, LLC, dated as of April
23, 1996 (filed as Exhibit 10.6 to the Company's Registration
Statement No. 333-06489)
10.8.1 Second Amendment to The First Amended and Restated Operating
Agreement of Buffington Harbor Riverboats, LLC (filed as Exhibit
10.12 to the Company's Registration Statement, No. 333-110993)
10.9 Development Agreement, dated March 26, 1996, by and between the
Company and the City of Gary, Indiana (filed as Exhibit 10.8 to
the Company's Registration Statement, No. 333-06489)
10.10 Parking Lease dated as of June 19, 2001 by and between Buffington
Harbor Parking Associates, LLC and The Majestic Star Casino, LLC
(filed as Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 2001)
21 List of Subsidiaries of The Majestic Star Casino, LLC (filed as
Exhibit 21 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2003)
31.1 Certification pursuant to Section 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 pursuant to Section 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 Section 906 of the Sarbanes-Oxley Act of 2002
* Identifies current management contracts or compensatory plans or arrangements.
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm F- 2
Consolidated Balance Sheets as of December 31, 2004 and 2003 F- 3
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002 F- 4
Consolidated Statements of Changes in Member's Deficit for the years ended December 31, 2004, 2003 and 2002 F- 5
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 F- 6
Notes to Consolidated Financial Statements F- 8
Schedule II- Valuation and Qualifying Accounts F-37
BUFFINGTON HARBOR RIVERBOATS, LLC (1)
Report of Independent Auditors F-38
Balance Sheets as of December 31, 2004 and 2003 F-39
Statements of Operations for the years ended December 31, 2004, 2003 and 2002 F-40
Statements of Members' Capital for the years ended December 31, 2004, 2003 and 2002 F-41
Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 F-42
Notes to Financial Statements F-43
(1) The financial statements of Buffington Harbor Riverboats, LLC are included
in this 10-K in order to comply with Rule 3-09 of Regulation S-X.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Member of
The Majestic Star Casino, LLC and Subsidiaries:
In our opinion, the consolidated financial statements listed in the index
appearing on page F-1 present fairly, in all material respects, the financial
position of The Majestic Star Casino, LLC and its subsidiaries (a wholly owned
subsidiary of Barden Development, Inc.) at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the consolidated financial statement schedule listed in the index appearing on
page F-1 presents fairly in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with the
auditing standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement and financial statement schedule
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As more fully described in Note 2 (Restatement), the Company has restated
its 2003 and 2002 consolidated financial statements to reflect a revision in
classification for cash-based promotional programs.
/s/ PricewaterhouseCoopers LLP
Las Vegas, Nevada
March 17, 2005
F-2
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
2004 2003
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 14,327,452 $ 22,058,016
Restricted cash 2,540,008 1,400,000
Accounts receivable, less allowance for doubtful accounts of
$617,040 (2004) and $258,546 (2003) 2,064,981 2,212,546
Inventories 520,485 707,685
Prepaid expenses 2,212,396 2,126,583
Receivable from affiliate 715,216 210,135
Note receivables due from related parties - 133,000
Assets held for sale 30,683,526 -
------------- -------------
Total current assets 53,064,064 28,847,965
------------- -------------
Property, equipment and improvements, net 142,181,216 142,167,931
Intangible assets, net 5,229,904 9,249,247
Goodwill 3,997,904 5,922,398
Other assets:
Deferred financing costs, net of accumulated amortization of
$1,767,700 (2004) and $552,079 (2003) 5,361,723 6,289,187
Investment in Buffington Harbor Riverboats, L.L.C 27,432,270 29,733,593
Other assets 9,109,383 11,004,457
------------- -------------
Total other assets 41,903,376 47,027,237
------------- -------------
Total assets $ 246,376,464 $ 233,214,778
============= =============
LIABILITIES AND MEMBER'S DEFICIT
Current liabilities:
Accounts payable $ 1,751,530 $ 6,387,955
Payable to related party - 247
Accrued liabilities:
Payroll and related 6,303,165 6,487,107
Interest 5,523,719 6,023,703
Property and franchise taxes 5,329,172 3,849,464
Other accrued liabilities 10,296,594 10,917,933
Liabilities related to assets held for sale 2,713,847 -
------------- -------------
Total current liabilities 31,918,027 33,666,409
------------- -------------
Long-term debt 316,857,960 301,715,324
------------- -------------
Total liabilities 348,775,987 335,381,733
------------- -------------
Commitments and contingencies
Member's deficit (102,399,523) (102,166,955)
------------- -------------
Total liabilities and member's deficit $ 246,376,464 $ 233,214,778
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended
December 31,
---------------------------------------------
2004 2003 2002
(Restated, (Restated,
See Note 2) See Note 2)
------------- ------------- -------------
OPERATING REVENUES:
Casino $ 236,093,555 $ 220,932,784 $ 220,800,005
Rooms 7,673,287 7,932,811 8,160,611
Food and beverage 11,237,430 10,781,929 10,903,317
Other 4,160,416 3,695,873 3,255,651
------------- ------------- -------------
Gross revenues 259,164,688 243,343,397 243,119,584
Less promotional allowances 34,888,831 30,361,144 29,865,472
------------- ------------- -------------
Net operating revenues 224,275,857 212,982,253 213,254,112
------------- ------------- -------------
OPERATING COSTS AND EXPENSES:
Casino 59,414,813 57,925,536 57,372,561
Rooms 1,784,333 2,552,127 2,684,354
Food and beverage 5,142,378 4,401,352 4,753,201
Other 888,600 468,512 338,510
Gaming taxes 53,014,290 49,946,481 44,117,667
Advertising and promotion 13,907,686 12,299,196 13,137,224
General and administrative 39,045,937 35,240,662 36,711,236
Corporate expense 3,399,281 3,456,161 2,759,744
Economic incentive - City of Gary 4,494,170 4,103,010 3,980,501
Depreciation and amortization 16,991,342 15,759,122 16,587,368
Equity in loss of joint venture - Buffington Harbor Riverboats, LLC 2,465,612 2,395,436 2,424,392
(Gain) loss on disposal of assets (49,995) 121,358 (15,392)
Pre-opening expenses - - 13,391
------------- ------------- -------------
Total operating costs and expenses 200,498,447 188,668,953 184,864,757
------------- ------------- -------------
Operating income 23,777,410 24,313,300 28,389,355
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 107,386 104,331 172,624
Interest expense (28,615,356) (31,282,788) (32,405,645)
(Loss) gain on bond redemption - (31,960,083) 68,957
Other non-operating expense (201,757) (185,574) (183,200)
------------- ------------- -------------
Total other expense (28,709,727) (63,324,114) (32,347,264)
------------- ------------- -------------
Loss from continuing operations (4,932,317) (39,010,814) (3,957,909)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations, including $10,000,000
for the write-down of assets to fair market value at spin-off (2003) 9,950,843 (4,841,160) 5,273,663
------------- ------------- -------------
Net income (loss) $ 5,018,526 $ (43,851,974) $ 1,315,754
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S DEFICIT
For the Years Ended December 31, 2004, 2003 and 2002
Member's Deficit
----------------
Balance, December 31, 2001 $ (19,981,487)
Net income 1,315,754
Distribution to Barden Development, Inc. (5,508,829)
---------------
Balance, December 31, 2002 (24,174,562)
Net loss (43,851,974)
Distribution to Barden Development, Inc. (6,065,213)
Spin-off of Barden Nevada Gaming, LLC to Barden Development Inc. (27,515,400)
Cash paid in excess of historical cost for land purchased from a related party (559,806)
---------------
Balance, December 31, 2003 (102,166,955)
Net income 5,018,526
Distribution to Barden Development, Inc. (5,251,094)
---------------
Balance, December 31, 2004 $ (102,399,523)
===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended
December 31,
-------------------------------------------
2004 2003 2002
------------ ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,018,526 $ (43,851,974) $ 1,315,754
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 15,501,453 12,950,562 15,287,877
Amortization 2,484,221 4,538,238 5,789,308
Loss on investment in Buffington Harbor Riverboats, L.L.C 2,465,612 2,395,436 2,424,392
(Gain) loss on disposal of assets (31,130) 117,097 5,219
Loss (gain) on bond redemption - 31,960,083 (68,957)
Loss on spin-off of discontinued operation - 11,972,607 -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net 84,831 (330,599) 224,482
Increase in receivables from affiliates (372,328) (707,110) -
Decrease (increase) in inventories 18,315 (44,228) 13,222
Increase in prepaid expenses (173,764) (7,297) (1,259,507)
Decrease in other assets 209,058 455,542 1,511,208
(Decrease) increase in accounts payable (5,262,507) 3,444,422 873,426
Increase in accrued payroll and other expenses 115,657 845,510 1,375,464
(Decrease) increase in accrued interest (499,984) 4,549,918 (6,820,527)
Increase in other accrued liabilities 2,602,094 3,688,690 633,362
------------ ------------- ------------
Net cash provided by operating activities 22,160,054 31,976,897 21,304,723
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fitzgeralds acquisition related costs - - (986,158)
Increase in restricted cash (1,140,008) (1,150,000) (250,000)
Proceeds from seller for Fitzgeralds purchase price adjustment - - 3,800,000
Acquisition of property and equipment, net of amounts in accounts payable (36,011,778) (18,462,990) (10,396,222)
Distribution of cash to Barden Development,
Inc. from spin-off of Barden Nevada Gaming - (4,395,606) -
Cash paid in excess of historical cost for land purchased from a related - (559,806) -
party
Decrease (increase) in prepaid leases and deposits 12,683 102,417 (113,186)
Investment in Buffington Harbor Riverboats, LLC (164,289) (295,719) (358,918)
Proceeds from disposal of equipment 339,797 77,154 53,117
------------ ------------- ------------
Net cash used in investing activities (36,963,595) (24,684,550) (8,251,367)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of 9 1/2% senior secured notes - 260,000,000 -
Issuance costs for the 9 1/2% senior secured notes (229,507) (4,420,000) -
Issuance costs for the 11.653% notes - - (1,523,568)
Cash paid for redemption of 11.653% notes - (135,477,000) (759,038)
Cash paid for redemption of 10 7/8% notes - (130,000,000) -
Payment of premium on early extinguishment of debt - (19,262,330) -
Issuance costs for the $80.0 million credit facility (58,652) (1,583,162) -
Proceeds from borrowings under bank line of credit 45,251,293 28,000,000 2,500,000
Repayments of borrowings under bank line of credit (30,244,786) (2,041,507) (9,000,000)
Net repayments from affiliates - 1,067,000 -
Repayment of long-term debt - - (139,331)
Distribution to Barden Development, Inc. (5,251,094) (6,065,213) (5,508,829)
------------ ------------- ------------
Net cash provided by (used in) financing activities 9,467,254 (9,782,212) (14,430,766)
------------ ------------- ------------
Net decrease in cash and cash equivalents (5,336,287) (2,489,865) (1,377,410)
Cash related to discontinued operations (2,394,277) - -
Cash and cash equivalents, beginning of period 22,058,016 24,547,881 25,925,291
------------ ------------- ------------
Cash and cash equivalents, end of period $ 14,327,452 $ 22,058,016 $ 24,547,881
============ ============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For The Years Ended
December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
Supplemental disclosure of cash flow information and non-cash investing
and financing activities:
Interest paid:
Equipment debt $ - $ - $ 44,667
State of Colorado sales and use tax assessment 26,338 - -
Notes - fixed interest 10 7/8% - 11,288,794 21,206,250
Notes - fixed interest 11.653% 1,899,081 15,317,338 17,702,015
Senior secured notes - fixed interest 9 1/2% 25,248,889 - -
Lines of credit 1,968,159 92,238 303,878
----------- ----------- -----------
$29,142,467 $26,698,370 $39,256,810
=========== =========== ===========
Non-cash investing activities:
Spin-off of equity interests in Barden Nevada net of cash, to Barden Development, Inc. $ - $23,938,044 $ -
Credit received from Naming Rights Agreement and applied to acquisition
of 170 acres of property from an affiliate (see Note 16) 1,500,000 - -
Capital assets acquired by incurring accounts payable 1,296,170 - -
----------- ----------- -----------
$ 2,796,170 $23,938,044 $ -
=========== =========== ===========
Supplemental non-cash financing activities:
Elimination of slot based progressive liability $ - $ - $ 400,000
Elimination of slot club liability - - 1,300,000
----------- ----------- -----------
$ - $ - $ 1,700,000
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
The Majestic Star Casino, LLC (the "Company") is a wholly owned subsidiary
of Barden Development, Inc. ("BDI") and was formed on December 8, 1993 as an
Indiana limited liability company to provide gaming and related entertainment to
the public. The Company commenced gaming operations in the City of Gary at
Buffington Harbor, located in Lake County, Indiana on June 7, 1996.
The Majestic Star Casino, LLC is a multi-jurisdictional gaming company. The
Company directly owns and operates one riverboat gaming facility located in
Gary, Indiana ("Majestic Star"). Through its wholly owned subsidiary, Majestic
Investor Holdings, LLC ("Investor Holdings"), the Company also indirectly owned
other subsidiaries that operated the following "Fitzgeralds-brand" casino
properties during the periods presented in the accompanying consolidated
financial statements:
- A casino-hotel located in Tunica County, Mississippi ("Fitzgeralds
Tunica").
- A casino located in Black Hawk, Colorado ("Fitzgeralds Black Hawk").
On July 12, 2004, the Company entered into an agreement to sell
substantially all of the net assets of Fitzgeralds Black Hawk, which
sale was not yet completed as of December 31, 2004. As a result of
the pending sale, results of Fitzgeralds Black Hawk have been
presented in discontinued operations for each of the three years
ended December 31, 2004, 2003 and 2002 in the accompanying
statements of operations. See Note 3 - Basis of Presentation and
Note 7 - Discontinued Operations.
- A casino-hotel located in Las Vegas, Nevada ("Fitzgeralds Las
Vegas"). Fitzgeralds Las Vegas was spun off to the Company's
member on December 31, 2003. As a result of the spin off,
results of Fitzgeralds Las Vegas have been presented in discontinued
operations for the years ended December 31, 2003 and 2002 in the
accompanying statements of operations. See Note 3 - Basis of
Presentation and Note 7 - Discontinued Operations.
The Company also has the following subsidiaries, which were formed for the
purpose of facilitating financing transactions:
- Majestic Star Casino Capital Corp. ("MSCC") was originally formed
for the purpose of facilitating the offering of the Company's $130.0
million 10 7/8% senior secured notes due 2006 (the "10 7/8% notes").
The 10 7/8% notes were fully purchased and redeemed on October 7,
2003. MSCC is a co-obligor with the Company for the $260.0 million
senior secured notes due 2010. MSCC has no assets or operations. See
Note 12 - Long Term Debt.
- Majestic Investor Capital Corp. (a wholly owned subsidiary of
Investor Holdings), was formed specifically to facilitate the
offering of Investor Holdings' $152.6 million 11.653% senior secured
notes due 2007 (the "11.653% notes"). Approximately 89.3%, or $135.5
million, of the 11.653% notes were purchased and redeemed on October
7, 2003 and this subsidiary has no assets or operations. See Note 12
- Long Term Debt.
The Company also has a non-controlling 50% interest in a corporate joint
venture formed for the purpose of acquiring and developing certain facilities
for the gaming operations in the City of Gary. See Note 10 - Investment in
Buffington Harbor Riverboats, L.L.C.
Except where otherwise noted, the words "we," "us," "our," and similar
terms, as well as the "Company," refer to The Majestic Star Casino, LLC and all
of its direct and indirect subsidiaries.
NOTE 2. RESTATEMENT
The Company has restated the accompanying consolidated statements of
operations for the years ended December 31, 2003 and 2002 to reflect a revision
in classification of certain cash based promotional ("CBP") activities. During
the preparation and audit of the financial statements for the year ended
December 31, 2004, the Company reevaluated the accounting treatment of its CBP
programs. Periodically, the Company makes various CBP offers to its casino
customers. Generally these offers are based upon the rated or tracked play of
its customers. These promotions can range in value and timing and are offered at
the sole discretion of the Company's management. The Company's CBP activities
are intended to encourage repeat visits to the Company's casinos. While casino
customers are under no obligation to spend the promotional cash in gaming
activities at the casino, the Company's experience shows that the vast majority
of customers do engage in gaming activities the same day the cash is received.
The Company has concluded that the payout of cash under these CBP programs
should be treated as a reduction of gross revenues when redeemed. The costs
related to these CBP programs were previously classified as a casino expense.
The restatement affected net revenues and operating expenses, as shown in the
accompanying table, but has no impact on consolidated operating income, net
income (loss) or any element of the consolidated balance sheets or consolidated
statements of cash flows for any date or period presented.
F-8
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The accompanying tables reconcile the results of operations for the years
ended December 31, 2003 and 2002, previously reported in the Company's Annual
Report on Form 10-K for the year ended December 31, 2003, to the amounts
included in the accompanying consolidated financial statements (amounts in
thousands of dollars). The accompanying table also reflects a change in
presentation for the discontinued operations of Fitzgeralds Black Hawk from
amounts previously disclosed in the 2003 10-K (see Note 7 - Discontinued
Operations):
Impact of Change in Presentation and Restatement
for the year ended December 31, 2003
--------------------------------------------------------
Amounts
As Originally Colorado Reported in
Reported Discontinued Restatement 2004 10-K
(In thousands) in 2003 10-K Operation for CBP (As restated)
------------- ------------ ------------ -------------
Net revenues $ 261,783 $ (33,644) $ (15,157) $ 212,982
Costs and expenses 230,338 (26,512) (15,157) 188,669
----------- ----------- ----------- -----------
Operating income 31,445 (7,132) - 24,313
Other expense (63,324) - - (63,324)
----------- ----------- ----------- -----------
Loss - continuing operations (31,879) (7,132) - (39,011)
Discontinued operations (11,973) 7,132 - (4,841)
----------- ----------- ----------- -----------
Net loss $ (43,852) $ - $ - $ (43,852)
=========== =========== =========== ===========
Impact of Change in Presentation and Restatement
for the year ended December 31, 2002
--------------------------------------------------------
Amounts
As Originally Colorado Reported in
Reported Discontinued Restatement 2004 10-K
(In thousands) in 2003 10-K Operation for CBP (As restated)
------------- ------------ ------------ -------------
Net revenues $ 263,102 $ (35,138) $ (14,710) $ 213,254
Costs and expenses 227,452 (27,877) (14,710) 184,865
------------ ----------- ----------- ------------
Operating income 35,650 (7,261) - 28,389
Other expense (32,339) (8) - (32,347)
------------ ----------- ----------- ------------
Income (loss) - continuing operations 3,311 (7,269) - (3,958)
Discontinued operations (1,995) 7,269 5,274
------------ ----------- ----------- ------------
Net income $ 1,316 $ - $ - $ 1,316
============ =========== =========== ============
In addition to the above-described restatement, the Company also recorded
an adjustment for cash-based promotional activities in the fourth quarter of
2004 to correct amounts previously reported for the nine months ended September
30, 2004. The adjustment reduced each of net revenues and operating expenses by
approximately $12.9 million in the fourth quarter.
NOTE 3. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
The Majestic Star Casino, LLC and its wholly owned direct and indirect
subsidiaries. All inter-company transactions and balances have been eliminated.
Investments in affiliates in which the Company has the ability to exercise
significant influence, but not control, are accounted for by the equity method.
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America, or "GAAP", and
with the instructions to Form 10-K. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates incorporated into our consolidated financial statements
include the estimated useful lives of depreciable and amortizable assets, the
estimated allowance for doubtful accounts receivable, estimated cash flow in
assessing the recoverability of long lived assets, and estimated liabilities for
our self-insured medical and worker's compensation plans, property taxes, slot
club point programs and litigation, claims and assessments. Actual results could
differ from those estimates.
F-9
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SPIN-OFF - The spin-off of Fitzgeralds Las Vegas to BDI 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 December 31, 2004 and
2003. The consolidated statements of operations recognize Fitzgeralds Las Vegas
as a discontinued operation for the years ended December 31, 2003 and 2002. The
consolidated statements of cash flows for the year ended December 31, 2003
reflect the distribution of cash from Fitzgeralds Las Vegas to BDI. The
remaining spin-off of our equity interests in Fitzgeralds Las Vegas involved no
cash. The statements of cash flows for the year ended December 31, 2002 fully
reflect the cash activities of Fitzgeralds Las Vegas. See Note 7 - Discontinued
Operations.
PENDING SALE OF FITZGERALDS BLACK HAWK - On July 12, 2004, the Company entered
into an agreement to sell substantially all of the assets subject to certain
liabilities of Fitzgeralds Black Hawk, which sale is not yet completed at
December 31, 2004. Consequently, the assets of Fitzgeralds Black Hawk for the
year ended December 31, 2004, are classified on the consolidated balance sheet
as assets held for sale, and its liabilities are classified as liabilities
related to assets held for sale. The results of Fitzgeralds Black Hawk are
reflected in discontinued operations in the accompanying consolidated statements
of operations for the years ended December 31, 2004, 2003 and 2002. The
statements of cash flow reflects the cash flow activities of Fitzgeralds Black
Hawk for the years ended December 31, 2004, 2003 and 2002. See Note 7 -
Discontinued Operations.
CASH AND CASH EQUIVALENTS - The Company considers cash equivalents to include
short-term investments with original maturities, or remaining maturities at time
of purchase, of ninety days or less. Cash equivalents are carried at cost plus
accrued interest, which approximates fair value. The Company places its cash
primarily in checking and money market accounts with high credit quality
financial institutions, which, at times, have exceeded federally insured limits.
RESTRICTED CASH - At December 31, 2004, restricted cash consists of (i)
certificates of deposit aggregating $2.1 million which serve as security for
letters of credit supporting various self-insured worker's compensation
programs, and (ii) cash of $0.4 million which serves as security for a bond
relating to the appeal of an award rendered against the Company in the U.S.
District Court for the Northern District of Mississippi (See Note 15 -
Commitments and Contingencies). As of December 31, 2003, restricted cash
consisted of certificates of deposit aggregating $1.4 million which served as
security for letters of credit for self-insured worker's compensation programs.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of casino
accounts receivable. The Company extends unsecured credit to approved casino
customers following background checks and investigations of creditworthiness. An
estimated allowance for doubtful accounts is maintained to reduce the Company's
receivables to their carrying amount, which approximates fair value. Management
believes that as of December 31, 2004, no significant concentrations of credit
risk existed for which an allowance had not already been determined and
recorded.
INVENTORIES - Inventories consisting principally of food, beverage, operating
supplies and gift shop items are stated at the lower of cost or market value.
Cost is determined by the first-in, first-out method.
RECEIVABLE FROM AFFILIATE: Amounts reflected in receivable from affiliate
represent non-interest bearing advances made by the Company to Fitzgerald's Las
Vegas.
OTHER ASSETS - Other assets consist principally of prepaid lease payments to
Buffington Harbor Parking Associates ("BHPA"), which are being amortized on a
straight line basis over the life of the lease in accordance with generally
accepted accounting principles. See Note 15 - Commitments and Contingencies.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
expense is computed utilizing the straight-line method over the estimated useful
lives of the depreciable assets. Costs of major improvements are capitalized;
costs of normal repairs and maintenance are charged to expense as incurred.
Gains or losses on dispositions of property and equipment are recognized in the
consolidated statements of operations when incurred.
CAPITALIZED INTEREST - The Company capitalizes interest costs associated with
debt incurred in connection with major construction projects. When no debt is
specifically identified as being incurred in connection with such construction
projects, the Company capitalizes interest on amounts expended on the project at
the Company's average cost of borrowed money. There was no interest capitalized
in any of the three years in the period ended December 31, 2004.
DEFERRED FINANCING COSTS - Deferred financing costs represent underwriter's and
agent's fees and commissions, closing costs and professional fees incurred in
connection with the issuance of the Company's 9 1/2% senior secured notes, the
$80.0 million credit facility and the remaining $16.3 million of outstanding
11.653% unsecured notes. Prior to October 7, 2003, the Company recognized
deferred financing costs on Majestic Star Casino's 10 7/8% notes and its $20.0
million credit facility with Wells Fargo Foothill Inc. and Investor Holdings'
11.653% notes and its $15.0 million credit facility with Wells Fargo Foothill,
Inc. Such costs were written off
F-10
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
when such debt was retired in 2003. Deferred financing costs are amortized over
the terms of the related notes and lines of credit using the straight-line
method, which approximates the effective interest method.
GOODWILL - Goodwill represents the purchase price of the Fitzgeralds assets,
which were acquired in December 2001 (the "Fitzgeralds Acquisition"), in excess
of their fair value. Goodwill for acquisitions after June 30, 2001 is not
subject to amortization but is subject to impairment testing at least annually.
The result of the test indicates that goodwill is not impaired for the year
ended December 31, 2004.
INTANGIBLE ASSETS - Intangible assets represent separately identifiable assets
acquired in the Fitzgeralds Acquisition and are amortized over their estimated
useful lives, generally eight to fifteen years. See Note 9 - Other Intangible
Assets.
INVESTMENT IN BUFFINGTON HARBOR RIVERBOATS, L.L.C. - The Company accounts for
its 50 percent interest in Buffington Harbor Riverboats, L.L.C. ("BHR") under
the equity method, whereby the initial investments are recorded at cost and then
adjusted for the Company's share of BHR's net income or loss.
CASINO REVENUE - Casino revenue is the net win from gaming activities, which is
the difference between gaming wins and losses. Hotel, food and beverage, and
other revenue are recognized at the time the related service is performed.
PROMOTIONAL ALLOWANCES - Cash incentives related to gaming play are recorded as
a reduction of gross revenues. Such amounts totaled $20.8 million, $18.1 million
and $17.9 million for the years ended December 31, 2004, 2003 and 2002,
respectively. In addition, the retail value of accommodations, food and
beverage, and other services furnished to hotel/casino guests without charge is
included in gross revenue and then deducted as promotional allowances. The
estimated departmental cost of providing such promotional allowances is included
primarily in casino expenses as follows:
Year Ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
Hotel $ 2,363,635 $ 1,464,915 $ 1,604,384
Food and Beverage 7,059,977 7,236,450 7,683,901
Other 470,482 314,346 278,341
----------- ----------- -----------
Total $ 9,894,094 $ 9,015,711 $ 9,566,626
=========== =========== ===========
The estimated retail value of such promotional allowances included in
operating revenues for the years ended December 31, 2004, 2003 and 2002 is $14.1
million, $12.2 million and $12.0 million, respectively.
The following schedule lists total cash incentives and the retail cost of
hotel, food, beverage, and other, which comprise the total promotional
allowances for each of the three years in the periods ended December 31, 2004.
For the years ended December 31,
----------------------------------------
2004 2003 2002
------------ ------------ ------------
Cash based promotional activities $ 17,488,530 $ 16,347,303 $ 15,975,248
Slot club and other 3,349,393 1,774,539 1,914,786
Retail cost of hotel, food and beverage and other 14,050,908 12,239,302 11,975,438
------------ ------------ ------------
Total Promotional Allowances $ 34,888,831 $ 30,361,144 $ 29,865,472
============ ============ ============
PRE-OPENING EXPENSES - Pre-opening expenses are expensed as incurred.
FEDERAL INCOME TAXES - The Company is organized as a limited liability
corporation and is an entity disregarded for U.S. federal income tax purposes.
At all times during each of the three years for the periods ended December 31,
2004, income of the Company was taxed directly to its member, and, accordingly,
no provision for federal income taxes is reflected in the financial statements.
ADVERTISING COSTS - Costs for advertising are expensed as incurred, except costs
for direct-response advertising, which are capitalized and amortized over the
period of the related program. Direct-response advertising consists primarily of
printing and mailing costs associated with the direct-mail programs. Capitalized
advertising costs, included in prepaid expense, were immaterial at December 31,
2004 and 2003. Consolidated advertising costs included in advertising and
promotion expenses, exclusive of Fitzgeralds
F-11
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Black Hawk, were $5.0 million, $3.3 million and $3.9 million for the years ended
December 31, 2004, 2003 and 2002, respectively. Fitzgeralds Black Hawk's
advertising costs included in the results of discontinued operations were $0.7
million, $0.5 million and $1.1 million for 2004, 2003 and 2002, respectively.
LONG-LIVED ASSETS - Long-lived assets and certain identifiable intangibles held
and used by the Company are reviewed for impairment when events or changes in
circumstances warrant such a review. The carrying value of a long-lived or
intangible asset is considered impaired when the anticipated undiscounted cash
flow from such asset is less than its carrying value. In that event, an
impairment loss is recognized. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that fair values are reduced for the cost
of disposition. Concurrent with the spin-off of Fitzgeralds Las Vegas, the
Company wrote down the value of Fitzgeralds Las Vegas's long lived assets to
fair market value, resulting in a $10.0 million charge in 2003. Accounting
standards generally accepted in the United States of America require annual
impairment review of all intangible assets with indefinite lives. The Company
has no intangible assets with indefinite lives. See Note 8 - Property and
Equipment and Note 9 - Other Intangible Assets.
CASINO CLUB LIABILITY - The Company has accrued for the liability of points
earned but not redeemed by its casino club members, less the points of inactive
players and points that have expired. The liability is calculated based on an
average historical redemption rate on a property by property basis. The increase
in the liability is recorded as a reduction of gross revenue in accordance with
U.S. generally accepted accounting standards for customer loyalty programs.
PROGRESSIVE LIABILITY - The Company maintains a number of "progressive" slot
machines and table games. As wagers are made by customers on the respective
progressive games, there is a corresponding increase in the amount available to
win (to be paid out when the appropriate jackpots are hit). The Company has
recorded the progressive jackpots as a component of other accrued liabilities.
SELF-INSURANCE LIABILITY -- The Company maintains accruals for self-insured
health and worker's compensation costs, which are classified in payroll and
related accrued liabilities in the accompanying consolidated balance sheets.
Management determines the estimate of these accruals by periodically evaluating
the historical experience and projects trends related to these accruals,
including an accrual for incurred but not reported claims. Actual results could
differ from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company believes, based upon current
information, that the carrying value of the Company's cash and cash equivalents,
restricted cash, accounts receivable and accounts payable approximates fair
value due to the short term nature of these assets and liabilities. The fair
value of the Company's long-term debt is determined based on quoted market
prices for the same or similar issues. See Note 13 - Fair Value of Financial
Instruments.
NOTE 4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs-an
amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). SFAS 151 is effective for financial statements for fiscal years
beginning after June 15, 2005. The Company does not anticipate that adoption of
SFAS 151 will have a material impact on its financial position, results of
operations or its cash flows.
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 153, "Exchanges of Nonmonetary
Assets-an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends APB
Opinion No. 29, "Accounting for Nonmonetary Transactions," to eliminate the
exception for nonmonetary exchanges of similar productive assets and replace it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance (i.e., if the future cash flows of the entity are expected
to change significantly as a result of the exchange). SFAS 153 is effective for
financial statements for fiscal years beginning after June 15, 2005. The Company
does not anticipate that adoption of SFAS 153 will have a material impact on its
financial position, results of operations or its cash flows.
NOTE 5. CERTIFICATE OF SUITABILITY AND LICENSES
On December 9, 1994, the Indiana Gaming Commission (the "Commission")
awarded the Company one of two certificates (the "Certificate") for a riverboat
owner's license for a riverboat casino to be docked in the City of Gary. Having
complied with certain statutory and regulatory requirements and other conditions
of the Commission, the Company received a five-year riverboat owner's
F-12
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
license on June 3, 1996. While the Commission reserves the right to investigate
riverboat licensees at any time it deems necessary, after expiration of the
initial license, each riverboat licensee must undergo a complete reinvestigation
every three years. In both June 2001 and June 2004, Majestic Star underwent its
requisite three year reinvestigations with satisfactory results. Majestic Star's
current license expires in June 2005. There can be no assurance that any
subsequent application for a license will be approved.
Trump Indiana, Inc. ("Trump") also has a Certificate of Suitability issued
by the Commission. The Company and Trump jointly developed and operate a docking
location from which the entities are conducting their respective riverboat
gaming operations in the City of Gary.
On November 21, 2004, Trump Hotels and Casino Resorts, Inc. ("THCR"), the
parent of Trump, entered into a pre-negotiated plan of reorganization under
Chapter 11 of the U.S. Bankruptcy Code. A significant decline in, or
interruption of, business at Trump could negatively impact the Company through
decreased customer traffic to the shared docking facility, an inability to share
operating costs with Trump, or both. Since that time, THCR has been operating as
a debtor in possession of its assets and Trump has continued to operate.
Majestic Star is not aware of any developments that would indicate Trump's
Certificate of Suitability would not continue to be approved. However, the
resolution of matters relating to Trump is outside the control of the Company.
The subsidiary that owns Fitzgerald's Mississippi must maintain its gaming
license from the Mississippi Commission in order to continue to operate a casino
in Mississippi. Such licenses are issued by the Mississippi Commission subject
to certain conditions, including continued compliance with all applicable state
laws and regulations. Gaming licenses require the payment of periodic fees and
taxes, are not transferable, are issued for a three-year period (and may be
continued for two additional three-year periods) and must be renewed
periodically thereafter. The current gaming license expires in December of 2007.
There can be no assurance that any subsequent application for a license will be
approved.
On October 18, 2001, the Colorado Gaming Commission issued operator and
retail licenses to the Company's subsidiary that is the owner and operator of
Fitzgeralds Black Hawk. The operator and retail gaming licenses were renewed by
the Colorado Gaming Commission for a one year period in September 2004.
NOTE 6. CITY OF GARY, INDIANA DEVELOPMENT OBLIGATION
On March 26, 1996, the City of Gary and the Company entered into a
development agreement ("Development Agreement") which required the Company,
among other things, (1) to invest $116.0 million in various on-site improvements
over the succeeding five years, (2) pay the City an economic incentive equal to
3% of the Company's adjusted gross receipts, as defined by the Riverboat
Gambling Act and (3) pay a default payment in the amount of damages for failure
to complete certain on-site developments, which amount is capped at $12.0
million.
The Company fulfilled all investment commitments with respect to the
Development Agreement as of September 2000 and continues to pay the 3% economic
incentive in accordance with the terms of the agreement.
NOTE 7. DISCONTINUED OPERATIONS
FITZGERALDS BLACK HAWK
On July 12, 2004, the Company entered into an agreement (the "Agreement")
to sell substantially all of the assets, subject to the assumption of certain
liabilities, of Fitzgeralds Black Hawk for a purchase price of $66.0 million,
which purchase price will be subject to adjustments based on working capital and
certain capital expenditures made as of the closing date. Consummation of the
transaction is subject to normal and customary closing requirements.
The results of Fitzgeralds Black Hawk are reflected as discontinued
operations in the accompanying consolidated statements of operations for the
years ended December 31, 2004, 2003 and 2002. Net revenues of Fitzgeralds Black
Hawk for the years ended December 31, 2004, 2003 and 2002 were $36.2 million,
$32.0 million and $33.1 million, respectively. Fitzgeralds Black Hawk's net
income for the years ended December 31, 2004, 2003 and 2002 was $10.0 million,
$7.1 million and $7.3 million, respectively. The estimated net proceeds from the
sale of Fitzgeralds Black Hawk exceed the net carrying value of approximately
$28.0 million at December 31, 2004; therefore, no impairment has been
recognized.
F-13
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the assets and liabilities of Fitzgeralds
Black Hawk as of December 31, 2004 included as assets and liabilities held for
sale in the accompanying consolidated balance sheet:
As of
December 31,
2004
------------
Cash $ 2,394,277
Accounts receivable, net 62,734
Inventory 168,885
Prepaid expenses and other 87,949
------------
Total current assets 2,713,845
Property and equipment, net 22,984,543
Other assets, net 4,985,138
------------
Total assets $ 30,683,526
------------
Accounts payable $ 186,582
Other current liabilities 2,527,265
------------
Total liabilities 2,713,847
------------
Net assets $ 27,969,679
============
Under the indenture governing the 9 1/2% notes and the Loan and Security
Agreement for the $80.0 million credit facility, the net proceeds from the sale
of the Fitzgeralds Black Hawk assets must be (i) invested in fixed assets or
property that will be used in a related business of the Company or its
restricted subsidiaries, or (ii) applied to repay indebtedness under the $80.0
million credit facility and permanently reduce the commitment thereunder in the
amount so repaid. To the extent such net proceeds are not used as described in
(i) and (ii), the Company is required to make an offer to purchase the 9 1/2%
notes.
The Company has been aggressively seeking new growth opportunities in
numerous locations. Since many of these new gaming opportunities are still
evolving and being analyzed, or are part of a broader bidding process, it is
premature to indicate specifically and quantitatively when these opportunities
and the investments needed to bring these opportunities to fruition will
transpire, if at all. Reinvestment could also include enhancing or upgrading the
facilities and amenities at either Majestic Star or Fitzgeralds Tunica.
FITZGERALDS LAS VEGAS
As discussed in Note 3, Fitzgeralds Las Vegas was spun off to the
Company's member, BDI, effective December 31, 2003. The net revenues of
Fitzgeralds Las Vegas were approximately $47.6 million and $48.8 million for
each of the years ended December 31, 2003 and 2002, respectively. The net loss
recorded in discontinued operations for Fitzgeralds Las Vegas was approximately
$2.0 million for each of the years ended December 31, 2003 and 2002. In
connection with the spin-off, Investor Holdings, the direct owner of Fitzgeralds
Las Vegas, recorded an impairment loss on discontinued operations of $10.0
million. The loss represents the difference between the estimated fair market
value and the book carrying value of Fitzgeralds Las Vegas at the date of the
spin-off.
F-14
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 and 2003, excluding amounts
relating to discontinued operations, consist of the following:
Estimated
Service Life
2004 2003 (Years)
------------- ------------- ------------
Land used in casino operations $ 1,327,597 $ 3,823,375 -
Land held for future development 22,112,093 - -
Vessel, buildings & improvements 81,966,299 96,783,613 25-39
Site improvements 18,348,072 17,596,240 9-15
Barge and improvements 16,106,969 16,030,350 13-15
Leasehold improvements 410,828 409,389 5
Furniture, fixtures and equipment 62,000,874 55,767,797 4-10
Construction in progress 833,771 3,948,889
------------- -------------
203,106,503 194,359,653
Less accumulated depreciation and amortization (60,925,287) (52,191,722)
------------- -------------
Property and equipment, net $ 142,181,216 $ 142,167,931
============= =============
Substantially all property and equipment are pledged as collateral. See
Note 12 - Long Term Debt.
NOTE 9. OTHER INTANGIBLE ASSETS
The gross carrying amount and accumulated amortization of the Company's
intangible assets, other than goodwill, as of December 31, 2004 and 2003 are as
follows:
Gross Carrying Accumulated Net Amount Expected
As of December 31, 2004 Amount Amortization December 31, 2004 Life
- ---------------------------------- -------------- ------------ ----------------- --------
(in thousands)
Amortized intangible assets:
Customer relationship $ 4,954 $ (1,900) $ 3,054 8 yrs
Trade name 2,180 (669) 1,511 10 yrs
Riverboat excursion license 700 (35) 665 15 yrs
-------------- ----------- -----------------
Total intangible assets $ 7,834 $ (2,604) $ 5,230
============== =========== =================
Gross Carrying Accumulated Net Amount
As of December 31, 2003 Amount Amortization December 31, 2003
- ---------------------------------- -------------- ------------ -----------------
(in thousands)
Amortized intangible assets:
Customer relationship $ 7,840 $ (2,033) $ 5,807 8 yrs
Trade name 3,450 (708) 2,742 10 yrs
Riverboat excursion license 700 - 700 15 yrs
-------------- ----------- -----------------
Total intangible assets $ 11,990 $ (2,741) $ 9,249
============== =========== =================
The schedule of amortized intangible assets as of December 31, 2004
excludes our discontinued operation, Fitzgeralds Black Hawk. Fitzgeralds Black
Hawk had intangible assets for customer relationships and trade name, net of
accumulated amortization, of $2.9 million at December 31, 2004.
In accordance with SFAS 144, Fitzgeralds Black Hawk discontinued
amortizing its intangible assets on July 12, 2004, the date of the sales
agreement discussed previously in Note 7. Consequently, amortization expense
recorded on its intangible assets was only $0.3 million for the year ended
December 31, 2004 compared to $0.5 million for each of the years ended December
31, 2003 and 2002, respectively.
The amortization expense recorded on the intangible assets, excluding
those intangible assets of Fitzgeralds Black Hawk, for the years ended December
31, 2004, 2003 and 2002 was $0.9 million for the year ended December 31, 2004
and $0.8 million for each of the years ended December 31, 2003 and 2002. The
Company has recorded a $0.7 million intangible asset representing the cost of an
excursion license for a riverboat, which commenced full operations in March of
2004. The estimated amortization expense for all
F-15
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amortized intangible assets for each of the five succeeding fiscal years is as
follows:
For the Years Ended December 31, (in thousands)
2005 $ 884
2006 884
2007 884
2008 884
2009 842
NOTE 10. 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"). The Company and Trump each have a 50%
non-controlling interest in BHR. The Company accounts for its interest in the
joint venture under the equity method of accounting. Activity relating to the
Company's investments in BHR is as follows:
Year Ended
December 31,
----------------------------------------------
2004 2003 2002
------------- ------------- -------------
Investment balance - beginning of year $ 29,733,593 $ 31,833,310 $ 33,898,784
Contributions 164,289 295,719 358,918
Equity loss of joint venture (2,465,612) (2,395,436) (2,424,392)
------------ ------------ ------------
Investment balance - end of year $ 27,432,270 $ 29,733,593 $ 31,833,310
============ ============ ============
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 the BHR Property for their respective gaming
operations and have committed to pay the cash operating losses of BHR as
additional berthing fees. All expenditures requiring a cash outlay by BHR are
billed to Trump and the Company at cost. Accordingly, BHR records as expenses
the cost of providing such services and records as other revenues the amounts
billed to Trump and the Company.
The Company has paid to BHR approximately $6.2 million, $5.7 million and
$6.0 million of berthing fees for the years 2004, 2003 and 2002, respectively.
Such amounts are recorded in general and administrative expense in the
consolidated statements of operations.
Majestic Star uses the food and beverage operations at BHR to provide its
casino customers with complimentary meals, beverages and services. Late in 2003,
two new restaurants opened at BHR. Passports-A World Class Buffet ("Passports")
replaced the existing buffet and Koko Taylor's Blues Cafe ("Koko Taylor's)
replaced the South Shore Grill. In addition, both Passports and Koko Taylor's
are run by a third party operator. The prior restaurants were operated by BHR.
The Company sends guests to these restaurants, and the other food and beverage
operators at BHR and the proprietors of these businesses charge the Company for
the meals served and the services provided. The Company paid approximately $2.2
million, $1.0 million and $1.1 million to these restaurants, and other food and
beverage operators at BHR, in the years 2004, 2003 and 2002, respectively. In
addition, the Company has reimbursed BHR for valet services in the amount of
$0.1 million, $0.2 million and $0.2 in the years 2004, 2003 and 2002,
respectively. Food, beverage and valet costs are recorded in casino expense in
the company's consolidated statements of operations. After the Company and Trump
reimburse BHR for all cash operational losses, the remaining net loss of BHR
results from depreciation expense associated with the BHR property and is
recorded as equity in loss of joint venture in the Company's consolidated
statements of operations. Such allocated net losses are approximately $2.5
million, $2.4 million and $2.4 million in the years 2004, 2003 and 2002,
respectively.
During January 2004, BHR received a property tax reassessment notice that
increased the valuation of BHR's real property in Lake County, Indiana. The
valuation assessment was part of a countywide reassessment, which is retroactive
to March 1, 2002. The reassessment was a result of a 1998 Indiana Supreme Court
ruling that declared the method of property assessment previously used
unconstitutional. Based on the assessments and tax rates issued during 2004, BHR
increased its accrual for real property taxes, and at December 31, 2004, the
accrual related to the twelve-month periods ended December 31, 2004 and 2003 for
property taxes owed directly or indirectly by BHR is $3.3 million. BHR has not
yet received property tax bills for fiscal years 2004 and 2003, and the accrual
of $3.3 million at December 31, 2004 is therefore an estimate based on
information currently available to BHR.
F-16
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following represents selected financial information for BHR as of
December 31, 2004 and 2003 and for each of the three years in the period ended
December 31, 2004:
December 31, 2004 December 31, 2003
----------------- -----------------
BALANCE SHEETS
Cash $ 311,052 $ 82,639
Current assets excluding cash 2,233,904 5,013,217
Property, plant and equipment, net 57,199,307 61,881,975
Other assets 82,359 101,248
----------- -----------
Total assets $59,826,622 $67,079,079
=========== ===========
Current liabilities 4,657,377 7,223,402
Capital lease obligations, net of current portion 304,704 388,491
----------- -----------
Total liabilities 4,962,081 7,611,893
Total members' equity 54,864,541 59,467,186
----------- -----------
Total liabilities and members' equity $59,826,622 $67,079,079
=========== ===========
The Majestic Star Casino, LLC - member's equity $27,432,270 $29,733,593
=========== ===========
Years Ended December 31,
-----------------------------------------------
2004 2003 2002
------------- ------------- -------------
STATEMENTS OF INCOME
Net revenues $ 11,145,457 $ 18,434,627 $ 16,095,365
============ ============ ============
Loss from operations $ (4,899,426) $ (4,785,459) $ (4,794,560)
============ ============ ============
Net loss $ (4,931,225) $ (4,790,868) $ (4,848,863)
============ ============ ============
NOTE 11. OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31, 2004 and 2003 were comprised of:
As of December 31,
----------------------------
2004 2003
------------ ------------
Gaming taxes 1,295,980 2,390,077
Other taxes 250,138 185,676
Chip & token liability 674,791 1,270,260
Accrued trade payables 2,752,264 2,232,981
Professional fees 524,045 235,141
Accrued rent 1,078,805 656,489
Other 3,720,571 3,947,309
------------ ------------
$ 10,296,594 $ 10,917,933
============ ============
F-17
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. LONG-TERM DEBT
December 31, December 31,
2004 2003
------------ ------------
Long-term debt outstanding at December 31, 2004 and December 31, 2003 is as
follows:
$260,000,000 senior secured notes, bearing interest of 9 1/2% payable
semi-annually on October 15 and April 15, with a final payment of principal and
interest due on October 15, 2010; collateralized by The Majestic Star Casino,
LLC's equity interests, and its equity interests in the subsidiary guarantors,
and substantially all of the assets of The Majestic Star Casino, LLC and the
assets of its subsidiary guarantors, other than the excluded assets. $260,000,000 $260,000,000
$80,000,000 credit facility, which expires in October 2007, bears interest at
the Company's choice of LIBOR plus a range of 3.00% to 3.50% or Wells Fargo
Foothill, Inc.'s base rate plus a range of 0.25% to 0.75%. The range is based on
the Company's EBITDA (Earnings before income taxes, interest, depreciation and
amortization and other adjustments, as defined in the Loan and Security
Agreement). The credit facility is secured by The Majestic Star Casino, LLC's
equity interests and its equity interests in the subsidiary guarantors, and
substantially all the assets of The Majestic Star Casino, LLC and the assets of
its subsidiary guarantors, other than the excluded assets.
40,965,000 25,958,493
$16,290,000 unsecured notes payable, net of unamortized discount of $397,040
and $533,169 at December 31, 2004 and 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. 15,892,960 15,756,831
------------ ------------
Total long-term debt $316,857,960 $301,715,324
Less current maturities - -
------------ ------------
Total long-term debt $316,857,960 $301,715,324
============ ============
The scheduled maturities of long-term debt are as follows:
For the Years Ended December 31,
2005 $ -
2006 -
2007 56,857,960
2008 -
2009 -
Thereafter 260,000,000
-------------
$ 316,857,960
=============
9 1/2% NOTES
The 9 1/2% notes bear interest at a fixed annual rate of 9.5% payable on
April 15 and October 15 of each year and have a maturity date of October 15,
2010. The 9 1/2% notes are secured by a pledge of substantially all of the
Company's current and future assets, other than certain excluded assets. The
9 1/2% notes are also collateralized by our equity interests held by BDI and our
equity interests in the subsidiary guarantors.
F-18
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The indenture governing the 9 1/2% notes (the "Indenture") contains
covenants which, among other things, restrict the Company's ability to (i) make
asset sales; (ii) make certain payments to, or investments in, third parties;
(iii) incur additional indebtedness or liens on any assets; (iv) enter into
transactions with affiliates; and (v) sell any restricted subsidiaries' assets.
In addition, upon a Change of Control as defined in the indenture governing the
9 1/2% notes, the Company will be required to offer to repurchase all of the
outstanding 9 1/2% notes at a cash price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of repurchase.
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.
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 determined based on the Company's EBITDA (as
defined in the Loan and Security Agreement and amendments thereto). Full payment
of any outstanding balance under the $80.0 million credit facility is due upon
maturity of the agreement in October 2007. The $80.0 million credit facility
includes covenants similar to those set forth in the indenture governing the
9 1/2% notes, and also requires the Company to maintain, as defined in the
covenants, minimum EBITDA and interest coverage ratios, which increase
periodically, and an annual limit on capital expenditures. During the year ended
December, 2004, the Company paid interest on borrowings ranging from 4.37% to
5.88%.
Prior to the issuance of the 9 1/2% senior secured notes during October
2003, The Majestic Star Casino, LLC had debt outstanding under its 10 7/8% notes
totaling $130.0 million, and Investor Holdings had debt outstanding totaling
$151.8 million related to its 11.653% notes. The Majestic Star Casino, LLC
10 7/8% notes were fully tendered and redeemed and $135.5 million of the
Investor Holdings 11.653% notes were purchased as a part of the issuance of the
9 1/2% senior secured notes and $28.0 million draw down from the credit
facility.
At December 31, 2004 and 2003, the Company had available borrowing
capacity under the $80.0 million credit facility of approximately $39.0 million
and $54.0 million, respectively.
AMENDMENTS TO THE LOAN AND SECURITY AGREEMENT
On May 4, 2004, the Company entered into Amendment Number One to the Loan
and Security Agreement ("Amendment One") with the lenders to the $80.0 million
credit facility. Among other things, Amendment One stipulates that EBITDA may be
adjusted to add back up to $2.5 million of charges related to a retroactive
property tax adjustment at Majestic Star (see Note 15). The amended definition
of EBITDA is effective as of December 31, 2003. Without Amendment One, the
Company would have not met the required EBITDA covenant for the quarter ended
March 31, 2004 as contained in the Loan and Security Agreement.
On March 17, 2005, the Company entered into Amendment Number Two to the
Loan and Security Agreement ("Amendment Two") with the lenders to the $80.0
million credit facility. Amendment Two clarifies that the purchase of the 170
acres of land (see Note 16) located adjacent to the Buffington Harbor gaming
complex is not a "Capital Expenditure" under the Loan and Security Agreement nor
is it subject to the fiscal year Capital Expenditure limitations set forth in
the Loan and Security Agreement. Amendment Two is effective as of March 1, 2005.
The Company spent an additional $16.9 million on capital expenditures, which is
in compliance with the covenant, as amended.
INTERCREDITOR AGREEMENTS
In connection with the Company entering into the $80 million credit
facility, the trustee under the 9 1/2% Indenture (as collateral agent) entered
into an intercreditor agreement with Wells Fargo Foothill, Inc., the agent under
the $80 million credit facility. The intercreditor agreement provides for the
contractual subordination of the liens on the collateral securing the 9 1/2%
senior secured notes (and the related guarantees) to the liens on the collateral
securing the indebtedness under the $80 million credit facility.
The intercreditor agreement, among other things, limits the trustee's
rights in an event of default under the 9 1/2% senior secured notes. Under the
intercreditor agreement, if the 9 1/2% senior secured notes become due and
payable prior to the stated maturity or are not paid in full at the stated
maturity at a time during which there is indebtedness outstanding under the $80
million credit facility, the trustee will not have the right to foreclose upon
the collateral unless and until the lenders under the $80 million credit
facility fail to take steps to exercise remedies with respect to or in
connection with the collateral within up to 190 days following notice to such
lenders of the occurrence of an event of default under the 9 1/2% Indenture. In
addition, the intercreditor agreement prevents the trustee and the holders of
the 9 1/2% senior secured notes from pursuing certain remedies with respect to
the collateral in an insolvency proceeding. The intercreditor agreement also
provides that the net proceeds from the sale of the collateral will first be
applied to repay indebtedness outstanding under the $80 million credit facility
and thereafter to the holders of the 9 1/2% senior secured notes.
F-19
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11.653% NOTES
At December 31, 2004 and 2003, Investor Holdings had debt outstanding of
$15.9 million and $15.8 million, respectively, related to its 11.653% notes, net
of unamortized discount of $0.4 million and $0.5 million, respectively. The
11.653% notes bear interest at a fixed rate of 11.653% per annum payable May 31
and November 30 each year. The 11.653% notes will mature on November 30, 2007.
There are no guarantees related to the 11.653% notes, and the notes are
unsecured.
OLD CREDIT FACILITIES
Prior to October 7, 2003, The Majestic Star Casino, LLC had a $20.0
million credit facility and Investor Holdings had a $15.0 million credit
facility. There were no borrowings against either of these lines of credit
during the year ended December 31, 2003, and therefore, there was no interest
expense. However, there were non-usage fees charged during the year ended
December 31, 2003, which are reflected in other non-operating expense in the
consolidated statements of operations. These credit facilities were replaced in
October 2003 with the $80.0 million credit facility.
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying value and estimated fair value
as of December 31, 2004 of the Company's financial instruments. (Refer to notes
3 and 12).
Carrying Estimated
Value Fair Value
------------ ------------
Assets:
Cash and equivalents $ 14,327,452 $ 14,327,452
Restricted Cash $ 2,540,008 $ 2,540,008
Liabilities:
Long-term debt $316,857,960 $332,951,960
While our $260.0 million of 9 1/2% senior secured notes are not actively
traded, we believe, based upon information received from investment
institutions, that our $260.0 million of 9 1/2% senior secured notes were priced
at 106.19% of face value for a value of $276.1 million at December 31, 2004. The
$15.9 million of 11.653% notes, net of original issue discount of $0.4 million,
are not publicly traded. We believe the fair value of this debt to be $15.9
million since these notes are no longer secured by the equity interests and
assets of Majestic Investor Holdings and its restricted subsidiaries.
NOTE 14. SAVINGS PLAN
The Company contributes to a defined contribution plan, which provides for
contributions in accordance with the plan document. The plan is available to
certain employees with at least one year of service. The Company contributes a
matching contribution up to a maximum of 3% of an employee's salary limited to a
specified dollar amount as stated in the plan document. The Company's
contributions to the plan amounted to $1.0 million, $1.0 million and $1.2
million during 2004, 2003 and 2002, respectively. The matching contribution made
during 2002 is inclusive of $185,000 in contributions made to the employees of
Fitzgeralds Las Vegas and $125,000 in contributions made to the employees of
Fitzgeralds Black Hawk, our discontinued operations. The matching contributions
made during 2004 and 2003 are inclusive of $146,000 and $138,000, respectively,
in contributions made to the employees of Fitzgeralds Black Hawk.
F-20
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has operating leases that cover a parking garage and various
office and gaming equipment. The following is a schedule by years of future
minimum rental payments required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of December 31,
2004:
FOR THE YEARS ENDED DECEMBER 31,
2005 $2,758,034
2006 2,597,540
2007 2,418,089
2008 2,085,156
2009 1,883,904
Thereafter 2,413,870
-----------
Total minimum payments required $14,156,593
===========
Included in the above minimum rental payment schedule are the future
minimum rental payments that we are obligated to pay to BHPA, from whom we rent
a parking garage. The Company and Trump Indiana have each entered into parallel
operating lease agreements with BHPA. Each of the lease agreements call for The
Company and Trump Indiana to make monthly lease payments. However, each party is
entitled to a credit of 50% of such payment if the other party makes its monthly
payment. In the above future minimum rental payment schedule, the BHPA operating
lease is shown net of the 50% credit.
Rent expense for the years ended December 31, 2004, 2003 and 2002 was
$6.4 million, $6.9 million and $6.3 million, respectively. These amounts
exclude rent expense related to Fitzgeralds Black Hawk, which was $1.1 million,
$1.1 million and $1.7 million for the years ended December 31, 2004, 2003, and
2002, respectively.
LEGAL PROCEEDINGS
Various legal proceedings are pending against the Company. Management
considers all such pending proceedings, comprised primarily of personal injury
and equal employment opportunity (EEO) claims, to be routine litigation
incidental to the Company's business. Except as described below, management
believes that the resolution of these proceedings will not individually or in
the aggregate, have a material effect on the Company's financial condition,
results of operations or cash flows.
In July 2004, a former employee of Majestic Star filed a complaint against
the M/V Majestic Star in the U.S. District Court, Northern District of Indiana
on behalf of himself and a class of other similarly situated employees to obtain
a maritime lien for back wages for overtime hours worked while employed with
Majestic Star plus all other relief to which they may be entitled under the Fair
Labor Standards Act ("FLSA") and the Maritime Lien Act. On October 1, 2004, the
Company moved to dismiss the complaint for insufficiency of service of process
under both the Federal Rules of Civil Procedure and the Supplemental Rules of
Civil Procedure relating to Maritime claims. On November 10, 2004, the Court
denied the Company's Motion to Dismiss for Insufficiency of Service of Process;
however, it reserved ruling on whether the complaint was properly served under
the Supplemental Rules of Civil Procedure relating to Maritime claims. On
November 13, 2004, the plaintiffs moved for leave to amend their complaint to
add The Majestic Star Casino, LLC as an additional defendant and on December 3,
2004, moved for leave to file a third amended complaint to add four individuals
(all of whom had previously filed consents to join the lawsuit) as plaintiffs to
the action and to add a Fair Labor Standards Act claim against the Company. On
December 30, 2004, the Company filed a Response in Opposition to Plaintiffs'
Motion for Leave to File a Second and Third Amended Complaint and Alternatively
to Dismiss the Complaint under Rule 12(b)(1) and 12(b)(6). The plaintiffs have
filed an opposition to the Company's motion to dismiss and the Company has filed
a reply in response thereto. On January 25, 2005, the Magistrate Judge presiding
over the case entered an order granting plaintiffs leave to file their third
amended complaint, but did not rule on the Company's motion to dismiss. There
could be potentially 23 seamen who qualify for the class. A pretrial conference
has been set for April 25, 2005. It is too early to determine the likelihood of
an unfavorable outcome to the Company.
In December 2002, a complaint was filed in the U.S. District Court for the
Northern District of Mississippi against Barden Mississippi and the former owner
of Fitzgeralds Tunica, alleging violation of Title VII of the Civil Rights Act
of 1964 and violation of 42 U.S.C. Section 1981, as well as certain other state
law claims. The former owner of Fitzgeralds Tunica was dismissed from the case
in 2003. On May 6, 2004, the Court awarded the plaintiff $312,000, which sum
represents back pay, emotional distress and punitive damages, plus an additional
sum for reasonable attorney fees. A notice of appeal has been filed on behalf of
Barden Mississippi with the United States District Court of Appeals for the
Fifth Circuit and the Company has posted a supersedes bond in the amount of $0.4
F-21
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
million. All appellate briefs have been filed. There is no set date by which the
appeals court is required to issue a decision. Our insurance carrier has agreed
to extend coverage over the entire claim except for the amount relating to
punitive damages and has agreed to share past and current expenses with the
Company. The Company has established a liability of approximately $253,000
representing its best estimate of the amount not covered by insurance for the
award, the estimated plaintiff's attorney fees and the Company's attorney fees.
The parties are engaged in settlement discussions; however, should they be
unable to reach an agreement, the Company will continue to vigorously prosecute
its appeal.
In June 2003, a complaint was filed in the U.S. District Court for the
Northern District of Mississippi against several Tunica-area casino owners and
operators, including Barden Mississippi, alleging violation of federal and state
antitrust laws, as well as various other tort and contract claims. The
plaintiffs claim the defendants made a joint decision to refuse to advertise on
the plaintiffs' website. The plaintiffs are seeking treble, compensatory and
punitive damages totaling approximately $33.0 million, plus interest and
attorney's fees. The litigation is in the discovery phase and the case is
currently set for trial beginning August 22, 2005. The Company intends to
vigorously defend against this lawsuit; however, it is too early to determine
the outcome and the effect, if any, on the Company's financial position and
results of operations.
INCOME TAX MATTER
The Majestic Star Casino, LLC has been assessed $2.6 million, plus
interest, for the fiscal year 1996 and the period January 1, 1998 through June
18, 2001, by the Indiana Department of Revenue ("Department"). On September 7,
2004, the Department assessed Barden Development, Inc., the Company's parent and
member, $1.3 million, plus penalties and interest for the remainder of 2001 and
all of fiscal year 2002. No assessments have been received for the fiscal year
2003 or the period to date of fiscal year 2004. The assessments relate to
deductions for payments of taxes on adjusted gross gaming revenues the Company's
member took in computing adjusted gross income for Indiana state income tax
purposes. The Department has taken the position that the Company had an
obligation to withhold and remit tax for the non-resident shareholder of its
member. The Company timely filed protests for all tax years at issue and those
protests are currently pending before the Legal Division of the Department. On
April 19, 2004, the Indiana Tax Court ruled in a similar case involving another
Indiana casino, Aztar Indiana Gaming Corporation ("Aztar") that the gross
wagering tax is a tax based on or measured by income and that it must be added
back to the taxable income base for the purpose of determining adjusted gross
income for Indiana tax purposes. On September 28, 2004, the Indiana Supreme
Court denied Aztar's request to review the Indiana Tax Court's decision, and
thus, the Indiana Tax Court's opinion in the Aztar case is controlling
precedent. On October 5, 2004, the Department sent a letter to the Company
indicating that it considers the matter closed unless the Company's protest
contains new issues not addressed in the Aztar matter. The Majestic Star Casino,
LLC is a limited liability company, and as such, it is a pass through entity for
federal and state tax purposes, and therefore, it is the Company's belief that
it is not liable or obligated to pay the assessment or interest thereon. In
addition, the Company will continue to pursue its protest with the Department on
the grounds that the assessments contain calculation errors and that its protest
sets forth issues not decided in Aztar.
The Company's indenture governing the 9 1/2% notes and the loan agreement
related to the $80.0 million credit facility, allow the Company to make
distributions to its member for tax purposes. Accordingly, should the Company's
member ultimately be found liable for additional state income taxes to the State
of Indiana, the Company would make distributions sufficient to pay the
additional tax. Any payments would be recorded as distributions in Member's
Deficit. The Company does not intend to make any distributions until it has
fully evaluated its options with its member and parent, Barden Development, Inc.
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. The valuation assessment was part of a countywide reassessment,
which is retroactive to March 1, 2002. The reassessment was a result of a 1998
Indiana Supreme Court ruling that declared that the method of property
assessment previously used was unconstitutional.
BHR, the Company's joint venture with Trump, also received a notice of
final assessed value of its real property. Similarly BHPA the owner of a parking
garage for which Majestic Star is a lessee under an operating lease, 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.
Based on the property tax assessments and tax rates issued during 2004,
Majestic Star increased its accrual for real property taxes on its vessel and
its proportionate share of liability for BHPA and BHR, and at December 31, 2004,
the accrual related to the twelve-month periods ended December 31, 2004 and 2003
for property taxes owed directly or indirectly by Majestic Star is $7.3 million.
Majestic Star anticipates paying its 2003 tax bill in 2005. Majestic Star, BHR
and BHPA have not received property tax bills for the years 2003 and 2004 and
the accrual of $7.3 million at December 31, 2004 is therefore an estimate based
on information currently available.
F-22
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
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.
A change in the Indiana state law governing gaming took effect on July 1,
2002. The new law enables Indiana's riverboat casinos to operate dockside. The
IGC approved Majestic Star's flexible boarding plan that allows the continuous
ingress and egress of patrons for the purpose of gambling while the riverboat is
docked. The plan went into effect on August 5, 2002 and imposes a graduated
wagering tax based upon adjusted gross receipts. As discussed below in
"Retroactive Dockside Tax," the graduated wagering tax has a starting rate of
15% with a top rate of 35% for adjusted gross receipts in excess of $150
million. For the period July 1 through August 4, 2002, the wagering tax was
raised by statute to 22.5% of adjusted gross receipts, but, as discussed below
in "Retroactive Dockside Tax," has been modified. Prior to July 1, 2002, Indiana
gaming taxes were levied on adjusted gross receipts, as defined by Indiana
gaming laws, at the rate of 20%. In addition to the wagering tax, an admissions
tax of $3 per turnstile count is assessed. Prior to August 5, 2002, Indiana
imposed an admissions tax of $3 per patron turnstile count at every boarding
time plus the count of the patrons that stayed over on the vessel from a
previous boarding time period.
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. The Majestic Star Casino's plan for 24-Hour
Dockside Gaming was submitted to the IGC and approved. The Majestic Star Casino
began operating on 24-hour basis on July 12, 2003.
In June 2003, the Indiana legislature clarified the start date of the
graduated wagering tax structure associated with the implementation of dockside
gaming. Previously, the start date for the computation of cumulative adjusted
gross receipts from gaming revenues ("AGR") under the graduated tax structure
was August 1, 2002 for seven riverboat casinos that implemented dockside gaming
with flexible scheduling on that date; and August 5, 2002, for three riverboat
casinos that implemented dockside gaming with flexible scheduling on that date.
The Indiana legislature's clarification requires riverboat casinos to begin
recognizing gaming tax liabilities for cumulative AGR under the graduated tax
structure starting on July 1, 2002 irrespective of when they implemented
dockside gaming. In addition, the State of Indiana's position is that no credit
be provided to the casino riverboats for taxes paid at the 22.5% rate. As a
result of the "Retroactive Dockside Tax," the Indiana Department of Revenue has
assessed an additional $2.1 million of gaming taxes due from Majestic Star.
Majestic Star took a charge in June 2003 for this assessment and paid the $2.1
million assessment in two equal installments as required on July 1, 2003 and
July 1, 2004.
The ownership and operation of our casino gaming facilities in Mississippi
and Colorado are also subject to various state and local regulations in the
jurisdictions where they are located. In Mississippi, our gaming operations are
subject to the Mississippi Gaming Control Act, and to the licensing and/or
regulatory control of the Mississippi Gaming Commission, the Mississippi State
Tax Commission and various state and local regulatory agencies, including liquor
licensing authorities. In Colorado, our gaming operations are subject to the
Limited Gaming Act of 1991, which created the Division of Gaming within the
Colorado Department of Revenue and the Colorado Limited Gaming Control
Commission which is empowered to license, implement, regulate and supervise the
conduct of limited gaming. Our Colorado operations are also subject to the
Colorado Liquor Code and the state and local liquor licensing authorities.
The Company's directors, officers, managers and key employees are required
to hold individual licenses. These requirements vary from jurisdiction to
jurisdiction. Licenses and permits for gaming operations and for individual
licensees are subject to revocation or non-renewal for cause. Under certain
circumstances, holders of our securities are required to secure independent
licenses and permits.
OTHER CONTINGENCIES
The Company and Trump have each entered into parallel operating lease
agreements with Buffington Harbor Parking Associates, LLC ("BHPA"), each having
a term until December 31, 2018. The gross rental payments are designed to
provide BHPA with sufficient funds to service its debt over the life of the
lease agreement. The operating lease agreement calls for the Company and
F-23
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Trump to make monthly lease payments for the full monthly amount due BHPA,
although each party is entitled to a credit for 50% of such payment if the other
party makes its monthly payment. Since the inception of the lease, neither the
Company nor Trump has had to make a payment greater than 50% of the required
rent.
On November 22, 2004, Trump Hotels and Casino Resorts, Inc. ("THCR"), the
parent of Trump, entered into a pre-negotiated plan of reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Since that time, THCR has been operating
as a debtor in possession of its assets, and Trump has continued to pay its
monthly obligations under both the BHR operating and BHPA lease agreements.
EMPLOYMENT AGREEMENTS
Mr. Don H. Barden serves as the Company's Chairman, President and Chief
Executive Officer, and President of BDI and currently receives annual
compensation of $600,000 as an employee, pursuant to a letter agreement dated
October 22, 2001, as amended January 1, 2005, with The Majestic Star Casino,
LLC. Mr. Barden is also President of BDI, the manager of the Company. The
Company pays life insurance premiums on policies with a value of $5.0 million
and provides Mr. Barden with an auto allowance.
Mr. Jon Bennett serves as our Vice President and Chief Financial Officer
pursuant to a two-year employment agreement dated October 21, 2002, as
previously amended on April 20, 2004 and December 20, 2004 and extended until
January 20, 2006. Under this agreement, Mr. Bennett will receive base
compensation of $275,000, subject to annual reviews, and can also earn bonuses
subject to the discretion of the Compensation Committee established within the
Company's Board of Directors. In addition to such compensation, Mr. Bennett is
entitled to term life insurance in an amount equal to $1.0 million and other
customary employee benefits, including participation in the Company's 401(k)
plan. Mr. Bennett is also entitled to additional compensation upon a change in
control, equal to the remaining amount due under his employment agreement plus
six months of his annual salary following the expiration of the current
amendment to his employment agreement.
LETTER OF CREDIT/SURETY BOND
As part of a self-insured worker's compensation program at Majestic Star,
the Company was required to post a letter of credit in the amount of $0.9
million to secure payment of claims. To collateralize the letter of credit, the
bank required that Majestic Star purchase a $0.9 million certificate of deposit.
Such certificate of deposit is recorded in restricted cash on the Company's
consolidated balance sheets (see Note 3).
To secure payment of claims under the worker's compensation programs at
Fitzgeralds Tunica, Fitzgeralds Black Hawk and Fitzgeralds Las Vegas, Investor
Holdings was required to post a letter of credit of $1.25 million. This letter
of credit is secured by restricted cash (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.
The Company has posted an appeal bond in the amount of $0.4 million in
order to proceed with its appeal regarding the unfavorable ruling against the
Company by the U.S. District Court for the Northern District of Mississippi (see
Legal Proceedings within this Note 15). This bond is secured by a letter of
credit. Investor Holdings in turn has restricted $0.4 million of its cash to
secure the letter of credit.
NOTE 16. RELATED PARTY TRANSACTIONS
LOANS TO RELATED PARTIES
In January 2002, the Company made a $200,000 employee loan to Mr. Michael
Kelly, formerly the Executive Vice President and Chief Operating Officer of the
Company. This loan bore no interest and was 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. In August 2004, Mr. Kelly's employment with the Company
was ended. The remaining $66,000 due on the loan was satisfied upon payment of
the final compensation payment due Mr. Kelly.
F-24
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TRANSACTIONS BY OR WITH AFFILIATES
On February 11, 2004, the Company acquired approximately 170 acres of land
located adjacent to the Buffington Harbor gaming complex from an affiliate (the
"GNC Land"). The purchase price was approximately $21.9 million (net of a
deposit of $2.0 million and a credit of $1.5 million related to the naming
rights agreement discussed below).
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.
In March 2003, Majestic Star purchased for $1.0 million, net of prorated
taxes plus closing costs, approximately 50 acres of land and a building adjacent
to the Buffington Harbor gaming complex from an affiliated company. The purchase
price was based on an independent third-party appraisal.
During the years ended December 31, 2004, 2003 and 2002, we incurred rent
expense payable to BHPA totaling $2.2 million, $2.1 and $1.0 million,
respectively. As of December 31, 2004 and 2003, our accrued rent payable to BHPA
was $1.1 million and $0.7 million, respectively.
INCOME TAX DISTRIBUTIONS
In April 2003, the Company, as authorized by the indentures governing the
10 7/8% notes and the 11.653% notes, made income tax distributions totaling $1.0
million to its sole member.
MANAGER AGREEMENTS
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 indenture governing the 9 1/2% notes and by the terms of the
$80.0 million credit facility. The distributions for each fiscal quarter may not
exceed 1% of the Company's consolidated net operating revenue and 5% of the
Company's consolidated cash flow (as defined in the indenture governing the
9 1/2% notes and the Loan and Security Agreement for the $80.0 million credit
facility) for the immediately preceding fiscal quarter.
During the year ended December 31, 2004, Majestic Star made distributions
totaling $5.3 million to BDI pursuant to the Manager Agreement.
In June 1999, Majestic Star entered into a LLC Manager Agreement with BDI
to provide for, among other things, BDI to act as our manager (the "Majestic
Star Manager Agreement"). Distributions to BDI under the Majestic Star Manager
Agreement were limited under the terms of the Majestic Indenture. The
distributions for each fiscal quarter could not exceed 5% of Majestic Star's
consolidated cash flow (as defined in the Majestic Indenture) for the
immediately preceding fiscal quarter and could not be paid if Majestic Star was
in default under the Majestic Indenture or if Majestic Star did not meet certain
financial ratios as provided in such indenture.
During the nine months ended September 30, 2003, Majestic Star Casino made
distributions totaling $1.0 million to BDI in accordance with the Majestic Star
Manager Agreement, related to the fourth quarter of 2002 and the six months
ended June 30, 2003.
In December 2001, Majestic Investor Holdings entered into a LLC Manager
Agreement with BDI to provide for, among other things, BDI to act as its manager
(the "Majestic Investor Holdings Manager Agreement"). Distributions to BDI under
the Majestic Investor Holdings Manager Agreement were limited under the terms of
the Majestic Investor Holdings Indenture. The distributions for each fiscal
quarter could not exceed 1% of net revenues plus 5% of Majestic Investor
Holdings' consolidated cash flow (as defined in the Majestic Investor Holdings
Indenture) for the immediately preceding fiscal quarter and could not be paid if
Majestic Investor Holdings was in default under the Majestic Investor Holdings
Indenture or if Majestic Investor Holdings did not meet certain financial ratios
as provided in such indenture.
F-25
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the nine months ended September 30, 2003, Majestic Investor
Holdings made distributions totaling $2.6 million to BDI in accordance with the
Majestic Investor Holdings Manager Agreement related to the fourth quarter of
2002 and the six months ended June 30, 2003.
Prior to October 7, 2003, Majestic Star and Investor Holdings made manager
distributions as governed by the requirements of Majestic Star's 10 7/8% notes
and Investor Holdings' 11.653% notes. Manager distributions for 2003 and 2002
were $5.0 million and $5.5 million, respectively.
BARDEN NEVADA EXPENSE SHARING AGREEMENT
Concurrent with the consummation of the offering of the 9 1/2% senior
secured 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. In 2004, Majestic Star charged Barden
Nevada $1.1 million under the expense sharing agreement.
NOTE 17. 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 3 to the audited financial statements. There are minimal inter-segment
sales.
F-26
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the Properties' operations by business segment for the years
ended December 31, 2004, 2003 and 2002 and a summary of the Properties' assets
as of December 31, 2004 and December 31, 2003 are presented below:
For the Years Ended
December 31,
-------------------------------------------
2003 2002
(Restated, See (Restated, See
2004 Note 2) Note 2)
--------- ------------- --------------
(in thousands)
Net revenues:
Majestic Star Casino $ 141,057 $ 129,312 $ 127,253
Fitzgeralds Tunica 83,218 83,670 86,001
--------- --------- ---------
Total $ 224,275 $ 212,982 $ 213,254
========= ========= =========
Operating income (loss):
Majestic Star Casino $ 16,394 $ 17,135 $ 19,250
Fitzgeralds Tunica 11,471 13,022 14,855
Corporate (1) (3,399) (3,456) (2,760)
Majestic Investor Holdings (689) (2,388) (2,956)
--------- --------- ---------
Total $ 23,777 $ 24,313 $ 28,389
========= ========= =========
Segment depreciation and amortization:
Majestic Star Casino $ 7,855 $ 5,834 $ 6,617
Fitzgeralds Tunica 8,858 7,820 7,373
Majestic Investor Holdings 278 2,105 2,597
--------- --------- ---------
Total $ 16,991 $ 15,759 $ 16,587
========= ========= =========
Expenditure for additions to long-lived assets:
Majestic Star Casino $ 28,692 $ 12,205 $ 5,189
Fitzgeralds Tunica 5,800 4,395 2,549
Fitzgeralds Black Hawk 1,520 1,863 1,177
--------- --------- ---------
Total $ 36,012 $ 18,463 $ 8,915
========= ========= =========
As of As of
December 31, December 31,
2004 2003
------------ -----------
(in thousands)
Segment assets:
Majestic Star Casino (2) $ 254,702 $ 260,925
Fitzgeralds Tunica 80,452 84,458
Fitzgeralds Black Hawk assets retained 348 -
Fitzgeralds Black Hawk assets held for sale 30,684 30,498
Majestic Investor Holdings 2,159 2,107
--------- ---------
Total $ 368,345 $ 377,988
Less: Intercompany (121,968) (144,773)
--------- ---------
Total $ 246,377 $ 233,215
========= =========
(1) Corporate expenses reflect payroll, benefits, travel and other costs
associated with our corporate staff and are not allocated to the
properties.
(2) The assets of Majestic Star include intercompany receivables from Investor
Holdings and Fitzgeralds Black Hawk totaling approximately $121.9
million at December 31, 2004. At December 31, 2003, the assets of
Majestic Star include intercompany receivables from Investor Holdings,
Fitzgeralds Tunica and Fitzgeralds Black Hawk of $144.8 million.
Intercompany receivables are eliminated in consolidation.
F-27
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
On October 7, 2003 The Majestic Star Casino, LLC issued $260.0 million of
9 1/2% senior secured notes and entered into an $80.0 million credit facility.
Under the indenture governing the 9 1/2% senior secured notes and the Loan and
Security Agreement for the $80.0 million credit facility, Investor Holdings,
Fitzgeralds Tunica and Fitzgeralds Black Hawk are guarantor subsidiaries.
Our supplemental guarantor financial information contains financial
information for The Majestic Star Casino, LLC, The Majestic Star Casino Capital
Corp (a co-issuer of the 9 1/2% senior secured notes but an entity with no
operations), the guarantor subsidiaries and our discontinued operations and the
eliminating entries necessary to consolidate such entities.
Our discontinued operations in both our condensed consolidating statements
of operations and cash flows for the years ended December 31, 2003 and 2002
contain the operating results and cash activities of Fitzgeralds Las Vegas.
Fitzgeralds Las Vegas was spun off to Barden Development, Inc., the Company's
parent, on December 31, 2003. In addition, as a result of the July 12, 2004
definitive agreement executed by the Company to sell substantially all the
assets, subject to certain liabilities of Fitzgeralds Black Hawk, those assets
and liabilities to be sold are included in the condensed consolidating balance
sheet as of December 31, 2004 in assets held for sale and liabilities related to
assets held for sale (see Note 7). The operations and cash flows of Fitzgeralds
Black Hawk are reflected in discontinued operations in the condensed
consolidating statements of operations and cash flows for the years ended
December 31, 2004, 2003 and 2002.
F-28
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2004
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
-------------- -------------- -------------- ---------------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,433,545 $ - $ 5,893,907 $ - $ 14,327,452
Restricted cash 900,000 - 1,640,008 - 2,540,008
Accounts receivable, net 1,329,576 - 735,405 - 2,064,981
Inventories 92,303 - 428,182 - 520,485
Prepaid expenses 1,575,936 - 636,460 - 2,212,396
Receivables from related party 775,722 - 21,799 (82,305) (a) 715,216
Assets held for sale - - 30,683,526 - 30,683,526
------------- ------------- ------------- ------------- -------------
Total current assets 13,107,082 - 40,039,287 (82,305) 53,064,064
------------- ------------- ------------- ------------- -------------
Property, equipment and improvements, net 78,679,302 - 63,501,914 - 142,181,216
Intangible assets, net - - 5,229,904 - 5,229,904
Goodwill - - 3,997,904 - 3,997,904
Other assets:
Deferred financing costs, net 4,947,983 - 413,740 - 5,361,723
Investment in Buffington Harbor
Riverboat, LLC 27,432,270 - - - 27,432,270
Long term receivable - related party 121,884,816 - - (121,884,816) (a) -
Other assets 8,650,694 - 458,689 - 9,109,383
------------- ------------- ------------- ------------- -------------
162,915,763 - 872,429 (121,884,816) 41,903,376
------------- ------------- ------------- ------------- -------------
Total Assets $ 254,702,147 $ - $ 113,641,438 $(121,967,121) $ 246,376,464
============= ============= ============= ============= =============
LIABILITIES AND MEMBER'S DEFICIT
Current Liabilities:
Accounts payable $ 940,307 $ - $ 811,223 $ - $ 1,751,530
Other accrued liabilities:
Payroll and related 3,216,179 - 3,086,986 - 6,303,165
Payable to related party - - 82,305 (82,305) (a) -
Interest 5,365,530 - 158,189 - 5,523,719
Progressive jackpot 891,116 - 823,930 - 1,715,046
Slot club liabilities 299,325 - 82,168 - 381,493
Other accrued liabilities 9,661,662 - 3,867,565 - 13,529,227
Liabilities related to assets held for
sale - - 2,713,847 - 2,713,847
------------- ------------- ------------- ------------- -------------
Total current liabilities 20,374,119 - 11,626,213 (82,305) 31,918,027
------------- ------------- ------------- ------------- -------------
Investment in subsidiaries 35,762,551 - - (35,762,551) (b) -
Due to related parties - - 121,884,816 (121,884,816) (a) -
Long-term debt, net of current maturities 300,965,000 260,000,000 15,892,960 (260,000,000) (c) 316,857,960
------------- ------------- ------------- ------------- -------------
Total liabilities 357,101,670 260,000,000 149,403,989 (417,729,672) 348,775,987
------------- ------------- ------------- ------------- -------------
Member's deficit (102,399,523) (260,000,000) (35,762,551) 295,762,551 (b)(c) (102,399,523)
------------- ------------- ------------- ------------- -------------
Total liabilities and member's deficit $ 254,702,147 $ - $ 113,641,438 $(121,967,121) $ 246,376,464
============= ============= ============= ============= =============
(a) To eliminate intercompany receivable and payables.
(b) To eliminate intercompany accounts and investment in subsidiaries.
(c) As more fully described in Note 12, Long Term Debt, The Majestic Star
Casino Capital Corp. is a co-obligor of the 9 1/2% senior secured notes
issued by the Company. Accordingly, such indebtedness has been presented
as an obligation of both the issuer and the co-obligor in the above
balance sheets.
F-29
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2003
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
Receivables from affiliate 587,254 - - (377,119) (a) 210,135
Notes receivable due from related parties 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 29,733,593 - - - 29,733,593
Long term receivable - related party 144,395,427 - - (144,395,427) (a) -
Other assets 10,412,478 - 591,979 - 11,004,457
------------- ------------- ------------- ------------- -------------
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
Other accrued liabilities:
Payroll and related 2,588,039 - 3,899,068 - 6,487,107
Interest 5,865,514 - 158,189 - 6,023,703
Progressive jackpot 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
============= ============= ============= ============= =============
(a) To eliminate intercompany receivable and payables.
(b) To eliminate intercompany accounts and investment in subsidiaries.
(c) As more fully described in Note 12, Long Term Debt, The Majestic Star
Casino Capital Corp. is a co-obligor of the 9 1/2% senior secured notes
issued by the Company. Accordingly, such indebtedness has been presented
as an obligation of both the issuer and the co-obligor in the above
balance sheets.
F-30
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2004
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operation (b) Entries (a) Consolidated
-------------- ------------- ------------- ------------- ------------- -------------
OPERATING REVENUES:
Casino $ 149,562,121 $ - $ 86,531,434 $ - $ - $236,093,555
Rooms - - 7,673,287 - - 7,673,287
Food and beverage 1,818,506 - 9,418,924 - - 11,237,430
Other 2,892,189 - 1,268,227 - - 4,160,416
------------- ------- ------------ ------------ ------------ ------------
Gross revenues 154,272,816 - 104,891,872 - - 259,164,688
Less promotional allowances 13,214,964 - 21,673,867 - - 34,888,831
------------- ------- ------------ ------------ ------------ ------------
Net revenues 141,057,852 - 83,218,005 - - 224,275,857
------------- ------- ------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Casino 28,769,304 - 30,645,509 - - 59,414,813
Rooms - - 1,784,333 - - 1,784,333
Food and beverage 2,063,543 - 3,078,835 - - 5,142,378
Other 637,209 - 251,391 - - 888,600
Gaming taxes 42,794,831 - 10,219,459 - - 53,014,290
Advertising and promotion 8,964,510 - 4,943,176 - - 13,907,686
General and administrative 26,697,392 - 12,348,545 - - 39,045,937
Corporate expense 3,399,281 - - - - 3,399,281
Economic incentive - City of Gary 4,494,170 - - - - 4,494,170
Depreciation and amortization 7,855,545 - 9,135,797 - - 16,991,342
Loss on investment in Buffington
Harbor Riverboats, LLC 2,465,612 - - - - 2,465,612
(Gain) loss on disposal of assets (78,830) - 28,835 - - (49,995)
------------- ------- ------------ ------------ ------------ ------------
Total costs and expenses 128,062,567 - 72,435,880 - - 200,498,447
------------- ------- ------------ ------------ ------------ ------------
Operating income 12,995,285 - 10,782,125 - - 23,777,410
------------- ------- ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 93,210 - 14,176 - - 107,386
Interest expense (26,717,083) - (1,898,273) - - (28,615,356)
Other non-operating expense (201,757) - - - - (201,757)
Equity in net income (loss) of subsidiaries 18,848,871 - 9,950,843 - (28,799,714) -
------------- ------- ------------ ------------ ------------ ------------
Total other (expense) income (7,976,759) - 8,066,746 - (28,799,714) (28,709,727)
------------- ------- ------------ ------------ ------------ ------------
Income (loss) from continuing operations 5,018,526 - 18,848,871 - (28,799,714) (4,932,317)
DISCONTINUED OPERATIONS:
Income from discontinued operations - - - 9,950,843 - 9,950,843
------------- ------- ------------ ------------ ------------ ------------
Net income $ 5,018,526 $ - $ 18,848,871 $ 9,950,843 $(28,799,714) $ 5,018,526
============= ======= ============ ============ ============ ============
(a) To eliminate equity in net income of subsidiaries.
(b) Contained within the discontinued operations are the operations of
Fitzgeralds Black Hawk, for which an agreement was entered into on July
12, 2004 to sell substantially all of its assets, subject to certain of
its liabilities (see Note 7, Discontinued Operations); and, the operations
of Fitzgeralds Las Vegas which is not a Guarantor and was spun off to BDI
on December 31, 2003.
F-31
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2003 (Restated, See Note 2)
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operation (b) Entries (a) Consolidated
-------------- ------------- -------------- ------------- ------------- -------------
OPERATING REVENUES:
Casino $ 136,568,073 $ - $ 84,364,711 $ - $ - $ 220,932,784
Rooms - - 7,932,811 - - 7,932,811
Food and beverage 1,494,793 - 9,287,136 - - 10,781,929
Other 2,277,143 - 1,418,730 - - 3,695,873
------------- ----- ------------- ------------- ------------ -------------
Gross revenues 140,340,009 - 103,003,388 - - 243,343,397
Less promotional allowances 11,027,542 - 19,333,602 - - 30,361,144
------------- ----- ------------- ------------- ------------ -------------
Net revenues 129,312,467 - 83,669,786 - - 212,982,253
------------- ----- ------------- ------------- ------------ -------------
OPERATING COSTS AND EXPENSES:
Casino 26,952,300 - 30,973,236 - - 57,925,536
Rooms - - 2,552,127 - - 2,552,127
Food and beverage 1,632,438 - 2,768,914 - - 4,401,352
Other - - 468,512 - - 468,512
Gaming taxes 40,167,015 - 9,779,466 - - 49,946,481
Advertising and promotion 6,837,262 - 5,461,934 - - 12,299,196
General and administrative 24,130,282 - 11,110,380 - - 35,240,662
Corporate expense 2,774,978 - 681,183 - - 3,456,161
Economic incentive - City of Gary 4,103,010 - - - - 4,103,010
Depreciation and amortization 5,834,078 - 9,925,044 - - 15,759,122
Loss on investment in Buffington
Harbor Riverboats, LLC 2,395,436 - - - - 2,395,436
Loss (gain) on disposal of assets 125,919 - (4,561) - - 121,358
------------- ----- ------------- ------------- ------------ -------------
Total costs and expenses 114,952,718 - 73,716,235 - - 188,668,953
------------- ----- ------------- ------------- ------------ -------------
Operating income 14,359,749 - 9,953,551 - - 24,313,300
------------- ----- ------------- ------------- ------------ -------------
OTHER INCOME (EXPENSE):
Interest income 62,023 - 42,308 - - 104,331
Interest expense (17,280,924) - (14,001,864) - - (31,282,788)
Loss on bond redemption (10,007,703) - (21,952,380) - - (31,960,083)
Other non-operating expense (156,362) - (29,212) - - (185,574)
Equity in net income (loss) of
subsidiaries (30,828,757) - 5,158,840 - 25,669,917 -
------------- ----- ------------- ------------- ------------ -------------
Total other expense (58,211,723) - (30,782,308) - 25,669,917 (63,324,114)
------------- ----- ------------- ------------- ------------ -------------
Loss from continuing operations (43,851,974) - (20,828,757) - 25,669,917 (39,010,814)
DISCONTINUED OPERATIONS:
(Loss) income from discontinued
operations - - (10,000,000) 5,158,840 - (4,841,160)
------------- ----- ------------- ------------- ------------ -------------
Net (loss) income $ (43,851,974) $ - $ (30,828,757) $ 5,158,840 $ 25,669,917 $ (43,851,974)
============= ===== ============= ============= ============ =============
(a) To eliminate equity in net income (loss) of subsidiaries.
(b) Contained within the discontinued operations are the operations of
Fitzgeralds Black Hawk, for which an agreement was entered into on July
12, 2004 to sell substantially all of its assets, subject to certain of
its liabilities (see Note 7, Discontinued Operations); and, the operations
of Fitzgeralds Las Vegas which is not a Guarantor and was spun off to BDI
on December 31, 2003.
F-32
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2002 (Restated, See Note 2)
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operation (b) Entries (a) Consolidated
-------------- ------------- --------------- ------------- ------------ -------------
OPERATING REVENUES:
Casino $ 132,599,608 $ - $ 88,200,397 $ - $ - $ 220,800,005
Rooms - - 8,160,611 - - 8,160,611
Food and beverage 1,623,621 - 9,279,696 - - 10,903,317
Other 1,941,880 - 1,313,771 - - 3,255,651
------------- ------- ------------- ------------- ----------- -------------
Gross revenues 136,165,109 - 106,954,475 - - 243,119,584
Less promotional allowances 8,912,166 - 20,953,306 - - 29,865,472
------------- ------- ------------- ------------- ----------- -------------
Net revenues 127,252,943 - 86,001,169 - - 213,254,112
------------- ------- ------------- ------------- ----------- -------------
OPERATING COSTS AND EXPENSES:
Casino 27,028,364 - 30,344,197 - - 57,372,561
Rooms - - 2,684,354 - - 2,684,354
Food and beverage 1,861,665 - 2,891,536 - - 4,753,201
Other - - 338,510 - - 338,510
Gaming taxes 33,621,349 - 10,496,318 - - 44,117,667
Advertising and promotion 7,319,494 - 5,817,730 - - 13,137,224
General and administrative 25,158,762 - 11,552,474 - - 36,711,236
Corporate expense 2,193,080 - 566,664 - - 2,759,744
Economic incentive - City of Gary 3,980,501 - - - - 3,980,501
Depreciation and amortization 6,616,863 - 9,970,505 - - 16,587,368
Loss on investment in Buffington
Harbor Riverboats, LLC 2,424,392 - - - - 2,424,392
Gain on disposal of assets (8,850) - (6,542) - - (15,392)
Pre-opening expenses - - 13,391 - - 13,391
------------- ------- ------------- ------------- ----------- -------------
Total costs and expenses 110,195,620 - 74,669,137 - - 184,864,757
------------- ------- ------------- ------------- ----------- -------------
Operating income 17,057,323 - 11,332,032 - - 28,389,355
------------- ------- ------------- ------------- ----------- -------------
OTHER INCOME (EXPENSE):
Interest income 57,962 - 114,662 - - 172,624
Interest expense (14,318,995) - (18,086,650) - - (32,405,645)
Gain on bond redemption - - 68,957 - - 68,957
Other non-operating expense (141,516) - (41,684) - - (183,200)
Equity in net (loss) income of
subsidiaries (1,339,020) - 5,273,663 - (3,934,643) -
------------- ------- ------------- ------------- ----------- -------------
Total other expense (15,741,569) - (12,671,052) - (3,934,643) (32,347,264)
------------- ------- ------------- ------------- ----------- -------------
Income (loss) from continuing
operations 1,315,754 - (1,339,020) - (3,934,643) (3,957,909)
DISCONTINUED OPERATIONS:
Income from discontinued
operations - - - 5,273,663 - 5,273,663
------------- ------- ------------- ------------- ----------- -------------
Net income (loss) $ 1,315,754 $ - $ (1,339,020) $ 5,273,663 $(3,934,643) $ 1,315,754
============= ======= ============= ============= =========== =============
(a) To eliminate equity in net income (loss) of subsidiaries.
(b) Contained within the discontinued operations are the operations of
Fitzgeralds Black Hawk, for which an agreement was entered into on July
12, 2004 to sell substantially all of its assets, subject to certain of
its liabilities (see Note 7, Discontinued Operations); and, the operations
of Fitzgeralds Las Vegas which is not a Guarantor and was spun off to BDI
on December 31, 2003.
F-33
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2004
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operations (a) Entries (b) Consolidated
------------- -------------- ------------- -------------- ----------- -------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES: $ (5,874,882) $ - $ 17,271,093 $ 10,763,843 $ - $ 22,160,054
------------- ------ ------------- ------------- --- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Increase in restricted cash - - (1,140,008) - - (1,140,008)
Acquisition of property and
equipment (28,691,842) - (5,800,175) (1,519,761) - (36,011,778)
Decrease in prepaid leases
and deposits 12,683 - - - - 12,683
Investment in Buffington
Harbor Riverboats, LLC (164,289) - - - - (164,289)
Proceeds from disposal of
equipment 244,580 - 48,456 46,761 - 339,797
------------- ------ ------------- ------------- --- -------------
Net cash used in investing
activities (28,598,868) - (6,891,727) (1,473,000) - (36,963,595)
------------- ------ ------------- ------------- --- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance costs for the
9-1/2% senior secured
notes (229,507) - - - - (229,507)
Issuance costs for credit
facility (58,652) - - - - (58,652)
Proceeds from line of credit 45,251,293 - - - - 45,251,293
Repayment of line of credit (30,244,786) - - - - (30,244,786)
Cash advances (to) from
affiliates 22,510,611 - (13,010,611) (9,500,000) - -
Distribution to Barden
Development, Inc. (5,251,094) - - - - (5,251,094)
------------- ------ ------------- ------------- --- -------------
Net cash provided by (used in)
financing activities 31,977,865 - (13,010,611) (9,500,000) - 9,467,254
------------- ------ ------------- ------------- --- -------------
Net decrease in cash and cash
equivalents (2,495,885) - (2,631,245) (209,157) - (5,336,287)
Cash related to discontinued
operations - - - (2,394,277) - (2,394,277)
Cash and cash equivalents,
beginning of period 10,929,430 - 8,525,152 2,603,434 - 22,058,016
------------- ------ ------------- ------------- --- -------------
Cash and cash equivalents,
end of period $ 8,433,545 $ - $ 5,893,907 $ - $ - $ 14,327,452
============= ====== ============= ============= === =============
(a) Contained within the Discontinued Operations are the cash flow activities
of Fitzgeralds Black Hawk, for which an agreement was entered into on July
12, 2004 to sell substantially all of its assets subject to certain of its
liabilities (see Note 7, Discontinued Operations).
(b) To eliminate inter-company receivables and payables.
F-34
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2003
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operations (a)(b) Entries (c) Consolidated
------------ ------------ ------------ ----------------- ----------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES: $ 19,736,325 $ - $ 4,608,929 $ 7,631,643 $ - $ 31,976,897
------------ --- ------------ ------------ ---- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Increase in restricted cash (900,000) - (250,000) - - (1,150,000)
Distribution of cash to Barden
Development, Inc. from spin-off
of Barden Nevada Gaming - - - (4,395,606) - (4,395,606)
Acquisition of property and
equipment (12,204,798) - (4,395,315) (1,862,877) - (18,462,990)
Cash paid in excess of historical
cost for land purchased from
a related party (559,806) - - - - (559,806)
Decrease in prepaid leases
and deposits 102,417 - - - - 102,417
Investment in Buffington Harbor
Riverboats, L.L.C (295,719) - - - - (295,719)
Proceeds from disposal of
equipment 14,750 - 55,380 7,024 - 77,154
------------ --- ------------ ------------ ---- ------------
Net cash used in investing
activities (13,843,156) - (4,589,935) (6,251,459) - (24,684,550)
------------ --- ------------ ------------ ---- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of
9 1/2% notes 260,000,000 - - - - 260,000,000
Payment of bond redemption by
parent (153,195,427) - 153,195,427 - - -
Payment of premium on early
extinguishment of debt (7,069,400) - (12,192,930) - - (19,262,330)
Payment of senior secured notes
issuance costs (4,420,000) - - - - (4,420,000)
Payment of credit facility
issuance costs (1,583,162) - - - - (1,583,162)
Cash paid for redemption of
11.653% notes - - (135,477,000) - - (135,477,000)
Cash paid for redemption of
10-7/8% notes (130,000,000) - - - - (130,000,000)
Proceeds from line of credit 28,000,000 - - - - 28,000,000
Repayment of line of credit (2,041,507) - - - - (2,041,507)
Repayment of note from
related party 67,000 - - - - 67,000
Cash advances (to) from
affiliates 9,100,000 - (2,200,000) (5,900,000) - 1,000,000
Distribution to Barden
Development, Inc. (2,385,300) - (3,679,913) - - (6,065,213)
------------ --- ------------ ------------ ---- ------------
Net cash used in financing
activities (3,527,796) - (354,416) (5,900,000) - (9,782,212)
------------ --- ------------ ------------ ---- ------------
Net increase (decrease) in
cash and cash equivalents 2,365,373 - (335,422) (4,519,816) - (2,489,865)
Cash and cash equivalents,
beginning of period 8,564,057 - 8,860,574 7,123,250 - 24,547,881
------------ --- ------------ ------------ ---- ------------
Cash and cash equivalents, end
of period $ 10,929,430 $ - $ 8,525,152 $ 2,603,434 $ - $ 22,058,016
============ === ============ ============ === ============
(a) Contained within the Discontinued Operations are the cash flow activities
of Fitzgeralds Black Hawk, for which an agreement was entered into on July
12, 2004 to sell substantially all of its assets subject to certain of its
liabilities (see Note 7, Discontinued Operations).
(b) Contained within Discontinued Operations are the cash flow activities of
Fitzgeralds Las Vegas, whose equity interests were spun off to Barden
Development, Inc. on December 31, 2003 (see Note 7, Discontinued
Operations).
(c) To eliminate inter-company receivables and payables.
F-35
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2002
The Majestic The Majestic
Star Casino, Star Casino Guarantor Discontinued Eliminating Total
LLC Capital Corp. Subsidiaries Operations (a)(b) Entries (c) Consolidated
------------ ------------ ------------ ----------------- ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES: $ 8,960,224 $ - $ (391,203) $ 9,700,200 $ 3,035,502 $ 21,304,723
------------ --- ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition related costs - - (986,158) - - (986,158)
Increase in restricted cash - (250,000) - - (250,000)
Proceeds from seller for
purchase price adjustment - - 3,800,000 - - 3,800,000
Acquisition of property and
equipment (5,188,766) - (2,549,049) (2,658,407) - (10,396,222)
Increase in prepaid leases
and deposits (113,186) - - - (113,186)
Investment in Buffington
Harbor Riverboats, L.L.C (358,918) - - - - (358,918)
Proceeds from disposal of
equipment 8,850 - 6,542 37,725 - 53,117
------------ --- ------------ ------------ ------------ ------------
Net cash (used in)
provided by investing
activities (5,652,020) - 21,335 (2,620,682) - (8,251,367)
------------ --- ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance costs for the
11.653% senior secured notes - - (1,523,568) - - (1,523,568)
Cash paid for redemption
of 11.653% senior secured notes - - (759,038) - - (759,038)
Proceeds from line of credit - - 2,500,000 - - 2,500,000
Repayment of line of credit - - (9,000,000) - - (9,000,000)
Cash received from (advanced to)
affiliates - - 11,606,547 (8,571,045) (3,035,502) -
Repayment of long term debt - - - (139,331) - (139,331)
Distribution to Barden
Development, Inc. (2,964,623) - (2,544,206) - - (5,508,829)
------------ --- ------------ ------------ ------------ ------------
Net cash used in financing
activities (2,964,623) - 279,735 (8,710,376) (3,035,502) (14,430,766)
------------ --- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 343,581 - (90,133) (1,630,858) - (1,377,410)
Cash and cash equivalents, beginning
of period 8,220,476 - 8,950,707 8,754,108 - 25,925,291
------------ --- ------------ ------------ ------------ ------------
Cash and cash equivalents, end
of period $ 8,564,057 $ - $ 8,860,574 $ 7,123,250 $ - $ 24,547,881
============ === ============ ============ ============ ============
(a) Contained within the Discontinued Operations are the cash flow activities
of Fitzgeralds Black Hawk, for which an agreement was entered into on July
12, 2004 to sell substantially all of its assets subject to certain of its
liabilities (see Note 7, Discontinued Operations).
(b) Contained within Discontinued Operations are the cash flow activities of
Fitzgeralds Las Vegas, whose equity interests were spun off to Barden
Development, Inc. on December 31, 2003 (see Note 7, Discontinued
Operations).
(c) To eliminate inter-company receivables and payables.
F-36
SCHEDULE II
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
Balance at Charged to Charged to Balance at
beginning costs and other end
Descriptions of year expenses accounts Deductions of year
- -------------------------------- ---------- ---------- ---------- ----------- ----------
Allowance for doubtful accounts:
Year ended December 31, 2002 359,702 449,335 50,358 486,706 372,689
Year ended December 31, 2003 372,689 205,709 4,758 324,610 (a) 258,546
Year ended December 31, 2004 258,546 535,782 - 177,288 (b) 617,040
(a) Fitzgeralds Las Vegas' allowance for doubtful account balances and
transactions are included in the amounts listed above for the year ended
December 31, 2002, but is not included for the year ended December 31,
2003, since the spin-off of Fitzgeralds Las Vegas to BDI occurred on
December 31, 2003. The allowance for doubtful accounts 2003 beginning
balance totaling $101,356 for Fitzgeralds Las Vegas was deducted from the
above schedule and is included in the $324,610 in the deductions column
for the year 2003.
(b) Fitzgeralds Black Hawk's allowance for doubtful account balances and
transactions are included in the amounts listed above for the years ended
December 31, 2002 and 2003, but are not included for the year ended
December 31, 2004, since the asset sale agreement was signed July 12,
2004. The allowance for doubtful accounts 2004 beginning balance totaling
$13,334 for Fitzgeralds Black Hawk was deducted from the above schedule
and is included in the $177,288 in the deductions column for the year
2004.
F-37
Report of Independent Auditors
Members
Buffington Harbor Riverboats, L.L.C.
We have audited the accompanying balance sheets of Buffington Harbor Riverboats,
L.L.C. as of December 31, 2004 and 2003, and the related statements of
operations, members' capital, and cash flows for each of the three years in the
period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. We were not engaged to perform an audit of the
Company's internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Buffington Harbor Riverboats,
L.L.C. at December 31, 2004 and 2003, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in the United States.
February 28, 2005
/s/ Ernst & Young LLP
F-38
Buffington Harbor Riverboats, L.L.C.
Balance Sheets
<Table>
<Caption>
DECEMBER 31
2004 2003
--------------------------------
ASSETS
Current assets:
Cash $ 311,052 $ 82,639
Trade receivables 32,723 56,626
Inventory 95,707 186,768
Prepaid expenses and other current assets 261,621 241,824
Due from members 1,843,853 4,527,999
--------------------------------
Total current assets 2,544,956 5,095,856
Property, plant, and equipment, net 57,199,307 61,881,975
Other assets 82,359 101,248
--------------------------------
Total assets $59,826,622 $67,079,079
================================
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Current portion of capital lease obligations $ 83,788 $ 71,152
Accounts payable 838,069 1,414,654
Accrued expenses 443,772 390,012
Accrued property taxes 3,291,748 5,347,584
--------------------------------
Total current liabilities 4,657,377 7,223,402
Capital lease obligations, net of current portion 304,704 388,491
Members' capital 54,864,541 59,467,186
--------------------------------
Total liabilities and members' capital $59,826,622 $67,079,079
================================
</Table>
See accompanying notes.
F-39
Buffington Harbor Riverboats, L.L.C.
Statements of Operations
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2004 2003 2002
----------------------------------------------------------
Revenues:
Food and beverage $ -- $ 757,381 $ 1,343,800
Related party 10,500,908 16,827,528 13,988,248
Other 644,549 849,718 763,317
----------------------------------------------------------
Net revenues 11,145,457 18,434,627 16,095,365
Cost and expenses:
Food and beverage 1,161,267 1,732,499 2,646,737
General and administrative 9,805,323 16,495,832 13,026,312
Depreciation 4,897,362 4,788,031 4,848,501
Other 180,931 203,724 368,375
----------------------------------------------------------
16,044,883 23,220,086 20,889,925
----------------------------------------------------------
Loss from operations (4,899,426) (4,785,459) (4,794,560)
Interest (expense) income, net (31,799) (5,409) (54,303)
----------------------------------------------------------
Net loss $ (4,931,225) $ (4,790,868) $ (4,848,863)
==========================================================
</Table>
See accompanying notes.
F-40
Buffington Harbor Riverboats, L.L.C.
Statements of Members' Capital
<Table>
<Caption>
MEMBER RETAINED
CONTRIBUTIONS DEFICIT TOTAL
---------------------------------------------------------
Balance, December 31, 2001 $101,316,444 $(33,518,795) $ 67,797,649
Capital contributions made by Trump Indiana, Inc. 358,918 -- 358,918
Capital contributions made by The Majestic Star Casino, LLC 358,918 -- 358,918
Net loss -- (4,848,863) (4,848,863)
---------------------------------------------------------
Balance, December 31, 2002 102,034,280 (38,367,658) 63,666,622
Capital contributions made by Trump Indiana, Inc. 295,716 -- 295,716
Capital contributions made by The Majestic Star Casino, LLC 295,716 -- 295,716
Net loss -- (4,790,868) (4,790,868)
---------------------------------------------------------
Balance, December 31, 2003 102,625,712 (43,158,526) 59,467,186
Capital contributions made by Trump Indiana, Inc. 164,290 -- 164,290
Capital contributions made by The Majestic Star Casino, LLC 164,290 -- 164,290
Net loss -- (4,931,225) (4,931,225)
---------------------------------------------------------
Balance, December 31, 2004 $102,954,292 $(48,089,751) $ 54,864,541
=========================================================
</Table>
See accompanying notes.
F-41
Buffington Harbor Riverboats, L.L.C.
Statements of Cash Flows
<Table>
<Caption>
YEAR ENDED DECEMBER 31
2004 2003 2002
---------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,931,225) $ (4,790,868) $ (4,848,863)
Adjustments to reconcile net loss to net cash flows
provided by operating activities:
Depreciation 4,897,362 4,788,031 4,848,501
Loss on disposal of fixed assets 32,476 -- 10,861
Changes in operating assets and liabilities:
Decrease in trade receivables 23,903 36,161 (66,773)
Decrease (increase) in inventory 91,061 (5,476) 129,056
Increase in prepaid expenses and other current
assets (19,797) (124,873) 11,042
Decrease in other assets 18,889 7,166 3,064
(Decrease) increase in accounts payable (576,585) 701,778 277,551
(Decrease) increase in accrued expenses and accrued
property taxes (2,002,076) 4,302,270 (316,779)
Decrease (increase) in due from members 2,684,146 (4,879,166) (207,302)
---------------------------------------------
Net cash flows provided by operating activities 218,154 35,023 (159,642)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment, net (247,170) (594,321) (825,335)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions, net 328,580 591,432 717,836
Principal payments under capital lease obligations (71,151) -- --
---------------------------------------------
Net cash flows provided by financing activities 257,429 591,432 717,836
---------------------------------------------
Net increase in cash 228,413 32,134 (267,141)
Cash at beginning of year 82,639 50,505 317,646
---------------------------------------------
Cash at end of year $ 311,052 $ 82,639 $ 50,505
=============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Equipment obtained through capital lease $ -- $ 459,643 $ --
=============================================
</Table>
See accompanying notes.
F-42
Buffington Harbor Riverboats, L.L.C.
Notes to Financial Statements
December 31, 2004
1. ORGANIZATION AND OPERATIONS
Trump Indiana, Inc. (Trump Indiana) and The Majestic Star Casino, LLC (Barden),
the two holders of certificates of suitability for the Gary, Indiana riverboat
casinos, formed Buffington Harbor Riverboats, L.L.C. (BHR or the Company) on
September 27, 1995 and have entered into an agreement (the BHR Agreement)
relating to the joint ownership, development, and operation of all common
land-based and waterside operations in support of the Trump Indiana and Barden
riverboat casinos. Under the BHR Agreement, BHR acquired property and
constructed common roadways, utilities, and other infrastructure improvements on
BHR's property.
The BHR Agreement terminates on December 31, 2035, but may be extended through
Trump Indiana's and Barden's mutual consent.
The BHR Agreement provides the framework for the operations of BHR. BHR relies
on the continued financial support of Trump Indiana and Barden in order to
support its operating activities and to meet its current working capital
obligations.
On November 21, 2004, Trump Hotels & Casino Resorts, Inc. (THCR) and
substantially all of its subsidiaries including Trump Indiana, filed voluntary
petitions in the Bankruptcy Court under Chapter 11 of the United States
Bankruptcy Code. On December 15, 2004, THCR filed a Plan of Reorganization and
the related Disclosure Statement containing the terms of the proposed financial
restructuring plan with the Bankruptcy Court. During the bankruptcy period,
Trump Indiana has maintained its normal business operations and continues to
maintain its capacity under the BHR Agreement. The BHR Agreement specifies that
if at any time one of the partners were to become insolvent, the other partner
would be required to maintain full support of BHR's operating activities and to
meet BHR's working capital obligations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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. Actual results could differ from those estimates.
F-43
Buffington Harbor Riverboats, L.L.C.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory consists of food, souvenirs, clothing, and other miscellaneous items.
Inventory is stated at cost on the first-in, first-out method.
REVENUE RECOGNITION
Under the terms of the BHR Agreement, all expenditures requiring a cash outlay
by BHR are billed to Trump Indiana and Barden at cost. Accordingly, BHR records
as expenses the cost of providing such services and records as other revenues
the amounts billed to Trump Indiana and Barden.
In December of 2003, BHR entered into an agreement to outsource its food
services to a third party. All related revenues from food and beverage sales
during 2004 were recognized by this third party.
ADVERTISING COSTS
Included in the land-based and waterside operations is the advertising of joint
venture interests. BHR expenses advertising costs as incurred. Advertising costs
were approximately $290,000, $252,000, and $291,000 for the years ended December
31, 2004, 2003, and 2002, respectively.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is carried at cost. Property, plant, and
equipment is depreciated on the straight-line method over the following useful
lives:
<Table>
Land improvements 15 years
Building 40 years
Building improvements 5-10 years
Harbor improvements 10-15 years
Furniture, fixtures, and equipment 5 years
</Table>
INCOME TAXES
BHR makes no provision (benefit) for income taxes since taxable income (loss) is
allocated to the members for inclusion in their respective income tax returns.
F-44
Buffington Harbor Riverboats, L.L.C.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
BHR accounts for long-lived assets under the provisions of Statement of
Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets (SFAS No. 144). SFAS No. 144 requires, among other things,
that an entity review its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable.
There were no impairments during the years ended December 31, 2004 and 2003. BHR
took a loss on impairment charge of $18,694 in 2002 to record the disposal of
assets no longer operable and in use, in compliance with SFAS No. 144.
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is comprised of the following:
<Table>
<Caption>
2004 2003
----------------------------------
Land and land improvements $ 34,500,080 $ 34,500,080
Building and improvements 41,346,655 41,205,469
Harbor improvements 19,573,497 19,564,697
Furniture, fixtures, and equipment 8,260,014 8,625,177
Construction-in-progress 75,919 50,476
-----------------------------
103,756,165 103,945,899
Less accumulated depreciation 46,556,858 42,063,924
-----------------------------
Total property, plant, and equipment, net $ 57,199,307 $ 61,881,975
=============================
</Table>
Depreciation expense, which includes amortization of assets recorded under
capital lease obligations, was $4,897,362, $4,788,031, and $4,848,501 for the
years ended December 31, 2004, 2003, and 2002, respectively.
F-45
Buffington Harbor Riverboats, L.L.C.
Notes to Financial Statements (continued)
4. LEASES
During the year ended December 31, 2003, BHR acquired equipment through a
capital lease with a vendor. The lease had no stated interest rate so the
Company has imputed interest at a rate of 8%. A summary of payments due under
the capital lease obligation is as follows:
<Table>
2005 $ 111,839
2006 111,839
2007 111,839
2008 111,839
2009 9,320
----------
456,676
Amounts representing interest (68,184)
----------
388,492
Current portion (83,788)
----------
Long-term portion $ 304,704
==========
</Table>
5. EMPLOYEE BENEFIT PLAN
BHR sponsors a defined contribution benefit plan for substantially all employees
who meet certain eligibility criteria. BHR matches employee contributions up to
50% of the first 5% of base compensation that a participant contributes to the
plan. Total contributions to the plan were approximately $26,000, $31,000, and
$124,000 for the years ended December 31, 2004, 2003, and 2002, respectively.
6. COMMITMENTS AND CONTINGENCIES
INDIANA GAMING REGULATIONS
The ownership and operation of riverboat gaming operations in Indiana are
subject to state regulation under the Riverboat Gambling Act (Act) and the
administrative rules promulgated thereunder. The Indiana Gaming Commission (IGC)
is empowered to administer, regulate, and enforce the system of riverboat gaming
established under the Act and has jurisdiction and supervision over all
riverboat gaming operations in Indiana, as well as all persons on riverboats
where gaming operations are conducted. The IGC is empowered to regulate a wide
variety of gaming- and nongaming-related activities, including the licensing of
suppliers to, and employees at, riverboat gaming operations and to approve the
form of ownership and financial structure of not only riverboat owner and
F-46
Buffington Harbor Riverboats, L.L.C.
Notes to Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
INDIANA GAMING REGULATIONS (CONTINUED)
supplier licensees, but also their entity qualifiers and intermediary and
holding companies. Indiana regulations continue to be revised and adopted by the
IGC. The IGC has broad rulemaking power, and it is impossible to predict what
effect, if any, the amendment of existing rules or the finalization of currently
new rules might have on the operations of BHR, Trump Indiana, and Barden.
OTHER
BHR is currently undergoing a sales and use tax examination by the Indiana
Department of Revenue for the tax years 2002 to 2003 and although the outcome of
this examination is not complete, BHR believes there will be no material impact
to its financial condition or results of operations.
During January 2004, BHR received a reassessment notice that increased the
valuation of its property in Lake County, Indiana where BHR is located. The
valuation assessments were a part of a county-wide reassessment, and these
reassessments were 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 as unconstitutional. Although the valuation was
received by BHR prior to issuance of its December 31, 2003 financial statements,
the tax rate had not yet been set for Lake County. For 2003 financial statement
purposes, BHR calculated its property tax liability by multiplying the new 2002
valuation by the 2001 tax rate which was the most recent legislative rate in
place. This resulted in a substantially larger amount of property tax accrued
for each of the years ended December 31, 2002 and 2003. During 2004, the Company
received the 2002 property tax rates and paid the tax bills related to 2002
during July of 2004. There was a decrease in the property tax rate from 2001 to
2002 due to the significant upward revisions in the assessed values for the 2002
property tax year. The Company has not yet received property tax bills for the
years ended December 31, 2003 or 2004. The 2003 property tax rates were
legislated and published during the first quarter of 2005. The Company has
developed its 2003 property tax accruals at December 31, 2004 based on the
assessed values effective for the 2002 bills multiplied by the published tax
rates for 2003. As 2004 rates have not yet been legislated, the Company
developed its 2004 property taxes payable at the 2003 legislated rates with an
assumed rate increase. The Company believes that an assumed increase in rates is
reasonable for the 2004 tax year as it anticipates no significant upward
revisions to the assessed values. As a result of the above, BHR recorded
property tax (credit)/expense of ($862,000) and $5,144,000 for the years ended
December 31, 2004 and 2003, respectively.
F-47
Buffington Harbor Riverboats, L.L.C.
Notes to Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER (CONTINUED)
The majority of BHR's employees are covered by a collective bargaining
agreement. Such agreement expired in October 2004 and is still in negotiations.
Management believes the agreement will be renewed with no material impact to its
financial condition or results of operations.
F-48