UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (Exact name of registrant as specified (I.R.S. Employer
jurisdiction of in its charter) Identification No.)
incorporation or
organization)
301 FREMONT STREET
LAS VEGAS, NEVADA 89101
(702) 388 - 2224
(Address of principal executive offices and telephone number, including area
code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
As of June 30, 2005, shares outstanding of each of the registrant's classes of
common stock:
Class Number of shares
- ----- ----------------
Not applicable Not applicable
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
Index
PART I FINANCIAL INFORMATION Page No.
-------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2005 (unaudited)
and December 31, 2004 ................................................ 1
Consolidated Statements of Operations for the three and six months
ended June 30, 2005 and 2004 (unaudited) ............................. 2
Consolidated Statements of Changes in Member's Deficit for the six
months ended June 30, 2005 (unaudited) and the year ended December 31,
2004 ................................................................. 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 2005 and 2004 (unaudited) ................................... 4
Notes to the Consolidated Financial Statements ....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ........................................................ 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........... 53
Item 4. Controls and Procedures .............................................. 53
PART II OTHER INFORMATION
Item 1. Legal Proceedings .................................................... 54
Item 6. Exhibits ............................................................. 55
SIGNATURES ..................................................................... 56
i
PART I
FINANCIAL INFORMATION
Item 1
Consolidated Financial Statements
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, December 31,
2005 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,432,113 $ 14,327,452
Restricted cash 2,540,008 2,540,008
Accounts receivable, less allowance for doubtful accounts of $636,230 and
$617,040 as of June 30, 2005 and December 31, 2004, respectively 1,963,979 2,064,981
Inventories 668,856 520,485
Prepaid expenses and deposits 5,748,301 2,212,396
Receivable from affiliate 615,477 715,216
Assets held for sale - 30,683,526
------------ ------------
Total current assets 27,968,734 53,064,064
------------ ------------
Property, equipment and improvements, net 162,123,340 142,181,216
Intangible assets, net 7,203,413 5,229,904
Goodwill 5,922,398 3,997,904
Other assets:
Deferred financing costs, net of accumulated amortization
of $2,375,651 and $1,767,700 as of June 30, 2005 and
December 31, 2004, respectively 4,753,774 5,361,723
Note receivable - affiliate 3,232,951 -
Investment in Buffington Harbor Riverboats, LLC 26,223,072 27,432,270
Other assets 9,664,219 9,109,383
------------ ------------
Total other assets 43,874,016 41,903,376
------------ ------------
Total assets $247,091,901 $246,376,464
============ ============
LIABILITIES AND MEMBER'S DEFICIT
Current liabilities:
Accounts payable $ 1,495,229 $ 1,751,530
Accrued liabilities:
Payroll and related 7,098,289 6,303,165
Interest 5,628,165 5,523,719
Property and franchise taxes 4,358,877 5,329,172
Other accrued liabilities 10,121,123 10,296,594
Liabilities related to assets held for sale - 2,713,847
------------ ------------
Total current liabilities 28,701,683 31,918,027
------------ ------------
Long-term debt, net of current maturities 326,313,188 316,857,960
------------ ------------
Total liabilities 355,014,871 348,775,987
------------ ------------
Member's deficit (107,922,970) (102,399,523)
------------ ------------
Total liabilities and member's deficit $247,091,901 $246,376,464
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
1
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For The Three Months Ended For The Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
OPERATING REVENUES:
Casino $ 68,275,963 $ 70,609,286 $139,358,610 $141,651,789
Rooms 1,917,569 1,919,669 3,711,673 3,793,506
Food and beverage 3,460,000 3,124,713 6,970,376 6,469,173
Other 1,392,747 1,155,236 2,450,477 2,214,880
------------ ------------ ------------ ------------
Gross revenues 75,046,279 76,808,904 152,491,136 154,129,348
Less promotional allowances 11,986,248 9,807,245 22,576,045 19,705,086
------------ ------------ ------------ ------------
Net operating revenues 63,060,031 67,001,659 129,915,091 134,424,262
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Casino 16,212,746 17,545,548 33,505,625 35,783,000
Rooms 441,108 467,054 825,053 932,296
Food and beverage 1,464,502 1,376,421 2,965,843 2,833,863
Other 242,399 323,551 501,877 565,084
Gaming taxes 14,752,004 15,327,424 30,050,193 30,511,538
Advertising and promotion 3,901,428 4,183,041 7,394,928 7,932,297
General and administrative 10,166,239 10,308,799 20,572,736 23,734,381
Corporate expense 3,961,114 874,680 5,158,184 1,680,286
Economic incentive - City of Gary 1,124,610 1,159,082 2,287,972 2,336,237
Depreciation and amortization 6,751,733 4,595,487 11,387,668 9,095,333
Loss on investment in Buffington Harbor
Riverboats, LLC 603,500 625,507 1,209,198 1,238,348
Loss on disposal of assets 37,835 18,302 37,975 19,357
------------ ------------ ------------ ------------
Total operating costs and expenses 59,659,218 56,804,896 115,897,252 116,662,020
------------ ------------ ------------ ------------
Operating income 3,400,813 10,196,763 14,017,839 17,762,242
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 86,414 5,289 98,616 10,403
Interest expense (7,443,649) (7,196,240) (14,680,024) (14,254,285)
Other non-operating expense (41,715) (95,639) (78,669) (123,847)
------------ ------------ ------------ ------------
Total other expense (7,398,950) (7,286,590) (14,660,077) (14,367,729)
------------ ------------ ------------ ------------
Net (loss) income $ (3,998,137) $ 2,910,173 $ (642,238) $ 3,394,513
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
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 Six Months Ended June 30, 2005 and the Year Ended December 31, 2004
Member's Deficit
----------------
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)
Net loss (unaudited) (642,238)
Distributions to Barden Development, Inc. (unaudited) (4,881,209)
----------------
Balance, June 30, 2005 (unaudited) $ (107,922,970)
================
The accompanying notes are an integral part of these consolidated financial
statements.
3
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For The Six Months Ended
June 30,
---------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (642,238) $ 3,394,513
Adjustments to reconcile (net loss) income to net cash
provided by operating activities:
Depreciation 9,797,852 7,764,091
Amortization 1,589,816 1,331,242
Loss on investment in Buffington Harbor Riverboats, LLC. 1,209,198 1,238,348
Loss on disposal of assets 37,975 19,357
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net 163,735 (534,229)
Decrease in related parties receivables 99,738 89,189
Decrease (increase) in inventories 20,514 (13,842)
Increase in prepaid expenses and deposits (3,389,137) (3,021,845)
(Increase) decrease in other assets (443,921) 680,752
Increase (decrease) in accounts payable 274,618 (3,785,298)
Increase in accrued payroll and other expenses 495,523 161,039
Increase (decrease) in accrued interest 104,446 (362,124)
(Decrease) increase in other accrued liabilities (2,889,928) 3,940,375
------------ ------------
Net cash provided by operating activities 6,428,191 10,901,568
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash - (390,008)
Acquisition of property and equipment (7,994,611) (29,160,744)
Decrease in prepaid leases and deposits 3,600 7,284
Investment in Buffington Harbor Riverboats, LLC - (71,606)
Proceeds from disposal of equipment 200 191,573
------------ ------------
Net cash used in investing activities (7,990,811) (29,423,501)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance cost for the 9 1/2% senior secured notes - (58,652)
Issuance cost for the $80.0 million secured credit facility - (51,232)
Proceeds from line of credit 22,437,970 27,901,293
Repayment of line of credit (13,050,806) (8,219,786)
Repayment of note from related party - 67,000
Advances on revolving credit facility with affiliate, net (3,232,951) -
Distribution to Barden Development, Inc. (4,881,209) (2,462,124)
------------ ------------
Net cash provided by financing activities 1,273,004 17,176,499
------------ ------------
Net decrease in cash and cash equivalents (289,616) (1,345,434)
Cash and cash equivalents, beginning of period 16,721,729 22,058,016
------------ ------------
Cash and cash equivalents, end of period $ 16,432,113 $ 20,712,582
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(unaudited)
For The Six Months Ended
June 30,
--------------------------
2005 2004
------------ ------------
INTEREST PAID:
Line of credit $ 1,276,442 $ 768,385
Notes - fixed interest at 11.653% 949,137 949,135
Senior Secured Notes - Fixed Interest, 9.5% 12,350,000 12,898,889
------------ ------------
Total $ 14,575,579 $ 14,616,409
============ ============
NON-CASH INVESTING ACTIVITIES:
Capital assets acquired from incurring accounts payable $ 95,163 $ -
Credit received from Naming Rights Agreement and applied to acquisition
of 170 acres of property from an affiliate - 1,500,000
------------ ------------
$ 95,163 $ 1,500,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE 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 Company 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 owns other
subsidiaries that operate two "Fitzgeralds-brand" casino properties:
- - A casino-hotel located in Tunica County, Mississippi ("Fitzgeralds Tunica"
or "Barden Mississippi").
- - A casino located in Black Hawk, Colorado ("Fitzgeralds Black Hawk" or
"Barden Colorado").
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 similarly facilitated the
offering of, and is a co-obligor with the Company of, the $260.0 million 9 1/2%
senior secured notes due 2010. MSCC has no assets or operations. See Note 7 -
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 with the remaining outstanding 11.653%
notes becoming unsecured, and this subsidiary has no assets or operations. See
Note 7 - 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 6 - 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.
6
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited. All
inter-company transactions and balances have been eliminated. Investments in
affiliates in which the Company has the ability to exercise significant
influence, but not control, are accounted for by the equity method. These
financial statements have been prepared in accordance with accounting principals
generally accepted in the United States of America, or "GAAP" for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements have been condensed or omitted. The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Significant estimates incorporated into our
consolidated financial statements include the estimated useful lives of
depreciable and amortizable assets, the estimated allowance for doubtful
accounts receivable, estimated cash flow in assessing the recoverability of
long-lived assets 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.
In the opinion of management, all adjustments (which include normal
recurring adjustments) considered necessary for a fair presentation of the
results for the interim periods have been made. The results for the three and
six months ended June 30, 2005 are not necessarily indicative of results to be
expected for the full fiscal year. The financial statements should be read in
conjunction with the financial statements and notes thereto included in The
Majestic Star Casino, LLC's Annual Report on Form 10-K for the year ended
December 31, 2004.
PROMOTIONAL ALLOWANCES
Cash incentives related to gaming play are recorded as a reduction of
gross revenues. Such amounts totaled $7.9 million and $6.1 million for the three
months ended June 30, 2005 and 2004, respectively, and $14.5 million and $12.1
million for the six months ended June 30, 2005 and 2004, 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:
7
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended June 30, For the six months ended June 30,
----------------------------------- --------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Rooms $ 601,656 $ 584,717 $ 1,210,349 $ 1,148,384
Food and Beverage 2,257,722 2,141,247 4,507,389 4,318,654
Other 113,882 114,616 226,682 236,038
-------------- -------------- -------------- --------------
Total $ 2,973,260 $ 2,840,580 $ 5,944,420 $ 5,703,076
============== ============== ============== ==============
The estimated retail value of such promotional allowances included in
operating revenues for the three-month periods ended June 30, 2005 and 2004 is
$4.0 million and $3.7 million, respectively, and for the six month periods ended
June 30, 2005 and 2004 is $8.1 million and $7.6 million, respectively.
The following schedule lists total cash incentives and the retail costs of
rooms, food, beverage, and other merchandise, which comprise the total
promotional allowances for each of the three- and six-month periods ended June
30, 2005 and 2004.
For the three months ended June 30, For the six months ended June 30,
----------------------------------- ---------------------------------
2005 2004 2005 2004
--------------- -------------- --------------- --------------
Cash based promotional activities $ 6,220,021 $ 4,796,971 $ 11,276,570 $ 9,778,936
Slot club and other 1,728,723 1,265,907 3,233,613 2,364,165
Retail cost of rooms, food, beverage and other 4,037,504 3,744,367 8,065,862 7,561,985
--------------- -------------- --------------- --------------
Total $ 11,986,248 $ 9,807,245 $ 22,576,045 $ 19,705,086
=============== ============== =============== ==============
RECENT 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.
8
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In May 2005, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 154, "Accounting Changes and Error
Corrections-a replacement of APB No. 20 and FASB Statement No. 3" ("SFAS 154").
SFAS 154 replaces APB No. 20, "Accounting Changes" and FASB Statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements" and changes the
requirements for the accounting for and reporting of a change in accounting
principle. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The Company does
not anticipate that adoption of SFAS 154 will have a material impact on its
financial position, results of operations or its cash flows.
NOTE 3. MUTUAL TERMINATION OF SALE OF FITZGERALDS BLACK HAWK
On April 14, 2005, Barden Colorado and Legends Gaming, LLC ("Legends")
mutually agreed to terminate the Asset Purchase Agreement dated July 12, 2004,
as amended (the "Purchase Agreement"), pursuant to which Barden Colorado had
agreed to sell and Legends had agreed to purchase substantially all of the
assets of the Fitzgeralds-brand casino located in Black Hawk, Colorado.
In connection with the mutual termination of the Purchase Agreement, the
earnest money deposit originally placed into escrow by Legends at the time of
execution of the Purchase Agreement was returned to Legends. In addition, the
Company paid Legends approximately $2.7 million, consisting of $0.7 million in
reimbursement of certain costs which were incurred in re-routing a storm sewer
pipe below grade and certain related transaction costs which the parties had
agreed to share equally together with $2.0 million as a termination fee. The
Company took a charge in the second quarter of 2005 for the payment of the
termination fee and its portion of the shared transaction costs and certain
other transaction expenses. The charge was $2.3 million. The reimbursement of
$0.7 million of costs incurred in re-routing the storm sewer pipe below grade
was capitalized.
Additionally, the Company took a charge of approximately $1.5 million in
the second quarter of 2005 for the depreciation and amortization expense that
was not recorded while Barden Colorado was held for sale during the period July
12, 2004 (the date of the Purchase Agreement) to April 14, 2005. The
corresponding catch-up depreciation and amortization in the three and six months
ended June 30, 2005 is $1.4 million (for the period July 12, 2004 to March 31,
2005) and $0.9 million (for the period July 12, 2004 to December 31, 2004),
respectively.
9
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Because the purchase agreement was mutually terminated, the results of
Fitzgeralds Black Hawk are no longer reflected in discontinued operations in the
accompanying consolidated statements of operations for all periods presented.
Additionally, its assets and liabilities are not classified on the consolidated
balance sheet as assets held for sale and as liabilities related to assets held
for sale as of June 30, 2005. However, since Fitzgeralds Black Hawk was held for
sale as of December 31, 2004, the assets that were held for sale and liabilities
related to assets held for sale are still classified as such on the December 31,
2004 consolidated balance sheet.
NOTE 4. RESTRICTED CASH
As of June 30, 2005 and 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. The Company settled
such pending appeal and paid the award in the second quarter of 2005. The bond,
and the associated restricted cash were subsequently released in early August
2005.
NOTE 5. INTANGIBLE ASSETS
Intangible assets at Fitzgeralds Tunica and Fitzgeralds Black Hawk
primarily include $7.8 million for customer relationships, $3.4 million for
trade names, and $0.7 million for an excursion license for a riverboat which
commenced full operations on March 18, 2004. Intangible assets for customer
relationships and trade names are being amortized over periods of 8 and 10
years, respectively. The riverboat excursion license is being amortized over 15
years, the period of the license. In accordance with SFAS 142, goodwill is not
amortized but instead subject to impairment tests at least annually. The Company
conducts its annual test in December. No additions or impairments of goodwill
were recorded in either of the fiscal quarters or six-month periods ended June
30, 2004 or 2005.
10
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The gross carrying amount and accumulated amortization of the Company's
intangible assets, other than goodwill, as of June 30, 2005 and December 31,
2004 are as follows:
Gross Carrying Accumulated Net Amount Expected
As of June 30, 2005 Amount Amortization June 30, 2005 Life
- --------------------------------- -------------- ------------- ------------- ---------
(in thousands)
Amortized intangible assets:
Customer relationship $ 7,840 $ (3,497) $ 4,343 8 yrs
Trade name 3,450 $ (1,232) 2,218 10 yrs
Riverboat excursion license 700 (58) 642 15 yrs
-------- -------- -------
Total intangible assets $ 11,990 $ (4,787) $ 7,203
======== ======== =======
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
======= ======== =======
In accordance with Financial Accounting Standards Board Statement Number
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"), Fitzgeralds Black Hawk had discontinued amortizing its intangible assets
on July 12, 2004, the date of the sales agreement discussed above in Note 3 -
Mutual Termination of Sale of Fitzgeralds Black Hawk. Consequently, there had
been no amortization expense recorded on its intangible assets for the period
from July 12, 2004 to April 14, 2005. As a result of the termination of the
sale, the Company has recorded a catch-up adjustment for amortization in the
second quarter of 2005. The amount of catch-up amortization in the three and six
months ended June 30, 2005 is $0.3 million (for the period July 12, 2004 to
March 31, 2005) and $0.2 million (for the period July 12, 2004 to December 31,
2004), respectively.
NOTE 6. 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 a dock, pavilion and parking facilities for the gaming
operations in the City of Gary ("BHR Property"). BHR is responsible for the
management, development and operation of the BHR Property. The Company and Trump
have each entered into an agreement with BHR (the "Berthing Agreement") to use
BHR Property for their respective gaming operations and have committed to pay
the cash operating losses of BHR as additional berthing fees. All expenditures
requiring a cash outlay by BHR are billed to Trump and the Company at cost.
Accordingly, BHR records as expenses the cost of providing such services and
records as other revenues the amounts billed to Trump and the Company.
11
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has paid BHR approximately $1.2 million and $2.5 million of
berthing fees for the three- and six-month periods ended June 30, 2005, and $1.2
million and $3.9 million for the three- and six-month periods ended June, 2004,
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. All of the
restaurants at BHR, which include Passports-A World Class Buffet and Koko
Taylor's Blues Cafe, are run by third party operators. Majestic Star sends
guests to these restaurants and the other food and beverage operations at BHR,
and the proprietors of these businesses charge the Company for the meals served
and the services provided. In addition, the Company reimburses BHR for valet
services it provides to guests of Majestic Star. The Company paid approximately
$0.8 million and $1.7 million to restaurants and other food and beverage
operations at BHR and to BHR for valet services in the three- and six-month
periods ended June 30, 2005, and approximately $0.6 million and $1.1 million in
the three- and six-month periods ended June 30, 2004, 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 operating losses, the remaining net loss of BHR results from
depreciation expense associated with the BHR property and is recorded as a loss
on investment in Buffington Harbor Riverboats, LLC on the Company's consolidated
statement of operations. The allocated net losses were approximately $0.6
million for each of the three-month periods ended June 30, 2005 and 2004,
respectively, and $1.2 million for each of the six-month periods ended June 30,
2005 and 2004, respectively. Because of the nature of the BHR arrangement, the
Company records its equity in the loss of BHR as a component of operating income
in the accompanying financial statements.
12
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following represents selected financial information for BHR as of June
30, 2005 and December 31, 2004 and for the three and six months ended June 30,
2005 and 2004.
BALANCE SHEETS
June 30, December 31,
2005 2004
------------ ------------
Cash $ 278,730 $ 311,052
Current assets, excluding cash 1,239,119 2,233,904
Property, plant and equipment, net 54,892,413 57,199,307
Other assets 81,128 82,359
------------ ------------
Total assets $ 56,491,390 $ 59,826,622
============ ============
Current liabilities $ 3,796,456 $ 4,657,377
Capital lease obligation, net of current 248,789 304,704
------------ ------------
Total liabilities 4,045,245 4,962,081
Total members' equity 52,446,145 54,864,541
------------ ------------
Total liabilities and members' equity $ 56,491,390 $ 59,826,622
============ ============
The Majestic Star Casino, LLC member's equity $ 26,223,072 $ 27,432,270
============ ============
STATEMENTS OF INCOME
For The Three Months Ended For The Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Gross revenue $ 2,898,855 $ 3,629,217 $ 5,947,525 $ 5,584,238
Operating loss $ (1,205,968) $ (1,250,813) $ (2,417,308) $ (2,476,358)
Net loss $ (1,207,000) $ (1,251,015) $ (2,418,396) $ (2,476,696)
13
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. LONG-TERM DEBT
June 30, December 31,
2005 2004
------------ ------------
Long-term debt outstanding is as follows:
9 1/2% senior secured notes due 2010 $260,000,000 $260,000,000
Senior secured credit facility 50,352,164 40,965,000
11.653% unsecured notes 15,961,024 15,892,960
------------ ------------
Long-term debt $326,313,188 $316,857,960
Less current maturities - -
------------ ------------
Total long-term debt, net of current
maturities $326,313,188 $316,857,960
============ ============
9 1/2% SENIOR SECURED NOTES DUE 2010
The 9 1/2% notes bear interest at a fixed annual rate of 9.5% payable
semi-annually on April 15 and October 15 of each year with a final payment of
interest and principal due on October 15, 2010. The 9 1/2% notes are
collateralized by substantially all of the current and future assets of the
Company and the subsidiary guarantors, 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.
The indenture governing the 9 1/2% notes 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.
SENIOR SECURED CREDIT FACILITY
The Company has an $80.0 million credit facility with Wells Fargo
Foothill, Inc. ("Wells Fargo"). 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'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 (earnings
before interest, taxes, depreciation, amortization and other adjustments 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
14
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 six months ended June 30, 2005, the Company
incurred interest expense on borrowings ranging from 5.65% to 7.0%.
At June 30, 2005 and at December 31, 2004, the Company had available
borrowing capacity under the $80.0 million credit facility of approximately
$29.6 million and $39.0 million, respectively.
On March 17, 2005, the Company entered into Amendment Number Two to the
Loan and Security Agreement ("Amendment Two"). Amendment Two clarifies that the
Company's 2004 purchase of 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.
On August 10, 2005, the Company entered into Amendment Number Three to the
Loan and Security Agreement ("Amendment Three"). Amendment Three modifies the
definition of EBITDA such that the Company can add back to EBITDA the
termination charge of $2.3 million related to the sale of substantially all of
the assets of Fitzgeralds Black Hawk (see Note 3 - Mutual Termination of Sale of
Fitzgeralds Black Hawk). Without Amendment Three, the Company would not have met
the minimum last twelve month EBITDA covenant, as of June 30, 2005, as contained
in the Loan and Security Agreement. In addition, the Company also amended the
quarterly interest coverage ratio covenant contained in the Loan and Security
Agreement, starting with the third quarter of 2005 through the fourth quarter of
2006. These amendments are effective as of June 15, 2005.
11.653% UNSECURED NOTES
At June 30, 2005 and December 31, 2004, Investor Holdings had debt
outstanding of $16.0 million and $15.9 million, respectively, related to its
11.653% notes, net of unamortized original issue discount of $0.3 million and
$0.4 million, respectively. The 11.653% notes bear interest at a fixed rate of
11.653% per annum payable semi-annually on 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 11.653% notes are unsecured.
15
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
Various legal proceedings are pending against the Company. Management
considers all such pending proceedings, comprised primarily of personal injury
and equal employment opportunity (EEO) claims, to be routine litigation
incidental to the Company's business. Except as described below, management
believes that the resolution of these proceedings will not individually or in
the aggregate, have a material effect on the Company's financial condition,
results of operations or cash flows.
In July 2004, a former employee of The Majestic Star Casino, LLC filed a
collective action against the Company and the motor vessel ("M/V") Majestic Star
to collect overtime wages which plaintiff alleges were not paid in violation of
the Fair Labor Standards Act. The Company believes that plaintiff is not
entitled to overtime wages because able bodied seamen are exempt from the
provisions of the FLSA. On July 6, 2005, the court entered an order dismissing
with prejudice the plaintiff's claims against the M/V Majestic Star and the
plaintiff's claims to enforce a maritime lien against Majestic Star Casino. The
court allowed to stand plaintiff's Fair Labor Standards Act claims against
Majestic Star Casino. There are currently five plaintiffs who have consented to
join the collective action. One of the five plaintiffs is time barred from
proceeding with a FLSA claim against the Company, and thus, on July 19, 2005 the
Company filed a motion to dismiss the claims filed by that plaintiff. The
Company has filed an answer to the FLSA claims of the remaining four plaintiffs.
There could be six additional seamen who qualify to join the collective action.
It is too early to determine the outcome and the effect, if any, on the
Company's financial position and results of operations. The Company has accrued
$35,000 for legal fees and other costs related to this claim.
In June 2003, a complaint was filed in the U.S. District Court for the
Northern District of Mississippi against Tunica County casino owners and
operators, including Barden Mississippi, the Tunica Casino Operators Association
and the Tunica County Tourism Commission alleging violation of federal and state
anti-trust claims, 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. Each of the casino defendants, including Barden Mississippi,
has filed counterclaims against the plaintiffs alleging, among other claims,
trademark infringement. The plaintiffs' antitrust and common law tort claims
against the Tunica County Tourism Commission have been dismissed. The casino
defendants have filed a motion for summary judgment on each of the claims
alleged against them and the plaintiffs have filed a motion for summary judgment
with respect to each of the casino defendants' counterclaims. Both motions are
currently pending before the court. Mediation is currently scheduled for October
6th and 7th of 2005 and trial is currently set for February 13, 2006. The
Company intends to vigorously defend against the lawsuit;
16
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
however, it is too early to determine the outcome and the effect, if any, on the
Company's financial position and results of operations. The Company has
established an accrual of $75,000 for legal fees and other costs.
INCOME TAX MATTERS
The Company 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 BDI, 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 fiscal year 2003. 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 Company is a limited liability company, and
as such, it is a pass-through entity for federal and state tax purposes.
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. Accordingly, no liability has been accrued by the Company relating to
this matter.
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 for the years in
which an assessment was received until it has fully evaluated its options with
its member and parent, BDI. In April 2005, BDI's non-resident shareholder paid
Indiana state income tax for fiscal year 2004 pursuant to the Indiana Tax
Court's decision in Aztar. BDI's non-resident shareholder determined that the
arguments to be made by the Company and BDI related to the assessed years were
not applicable to fiscal year 2004.
17
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE 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.
In April 2005, the IGC assessed Majestic Star $265,000 in fines related to
regulatory violations. Management self reported the majority of such violations
to the regulatory authorities and has taken corrective action to mitigate
against the risk of further violations. The Company took a charge for these
fines in the second quarter of 2005 to settle all claims by the IGC.
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 may be
required to hold individual licenses. The 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
18
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
lease agreement calls for the Company and 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.
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 4 - Restricted Cash).
To secure payment of claims under the workers' compensation programs at
Fitzgeralds Tunica, Fitzgeralds Black Hawk and Fitzgeralds Las Vegas, Investor
Holdings was required to post a letter of credit of $1.25 million, which is
secured by a certificate of deposit in a similar amount. Such certificate of
deposit is recorded in restricted cash on the Company's consolidated balance
sheet (see Note 4 - Restricted Cash).
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 had posted an appeal bond in the amount of $0.4 million
regarding the unfavorable ruling against the Company by the U.S. District Court
for the Northern District of Mississippi. This bond was secured by a letter of
credit. Investor Holdings in turn had restricted $0.4 million of its cash to
secure the letter of credit. The Company settled the matter and paid the
judgment during the second quarter of 2005 and the bond was released in early
August 2005. The letter of credit has been terminated and the restricted cash
released.
19
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. RELATED PARTY TRANSACTIONS
MANAGER AGREEMENT
Distributions to BDI under the Manager Agreement dated October 7, 2003 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 six months ended June 30, 2005 and 2004, Majestic Star made
distributions of $2.6 million and $2.5 million, respectively, to BDI pursuant to
the Manager Agreement.
TAX DISTRIBUTIONS
Pursuant to the terms in the indenture governing the 9 1/2% notes and the
loan agreement for the $80.0 million credit facility, the Company is permitted
to make distributions for its member's state and federal income tax liabilities.
In the second quarter of 2005, Majestic Star made a tax distribution of
$2.3 million to BDI for 2004 state tax liabilities and estimated 2005 taxes.
TRANSACTIONS BY OR WITH AFFILIATES
During the three- and six-months periods ended June 30, 2005, the Company
incurred rent expense payable to BHPA totaling $0.5 million and $1.1 million,
respectively, compared to $0.5 million and $1.5 million, respectively, in
the same three- and six-month periods last year. Accrued rent payable to BHPA
was $1.0 million and $1.1 million at June 30, 2005 and December 31, 2004.
BARDEN NEVADA EXPENSE SHARING AGREEMENT
The Company has entered into an expense sharing agreement dated October 7,
2003 with Barden Nevada Gaming, LLC ("Barden Nevada"), a subsidiary of Barden
Development, Inc. and a Fitzgeralds branded hotel and casino in Las Vegas,
Nevada ("Fitzgeralds Las Vegas"). The expense sharing agreement provides for a
fee from Barden Nevada to the Company in the amount of the greater of (i) $0.5
million per year or (ii) the actual amount of certain specified expenses
incurred by the Company in connection with providing services to Barden Nevada.
During each of three-month periods ended June 30, 2005 and 2004, the expense
sharing fees charged to Barden Nevada were $0.3 million. During the six months
ended June 30, 2005 and 2004, the expense sharing fees charged to Barden Nevada
were $0.7 million and $0.6 million, respectively.
BARDEN NEVADA REVOLVING PROMISSORY NOTE
On March 9, 2005, Barden Nevada entered into a revolving promissory note
with the Company, whereby Barden Nevada may request advances from time to time
from the Company up to $5.0 million. Interest is calculated based on the prime
rate (as published in the Money Section of the Wall Street Journal), plus the
margin spread paid by the Company under prime rate borrowings with Wells Fargo,
the agent bank under the Company's $80.0 million credit facility (see Note 7 -
Long-Term Debt). Interest is paid quarterly, in arrears. Any costs that are
funded by the Company and not repaid by Barden Nevada within thirty days will be
added to the principal amount outstanding. All amounts outstanding under the
promissory note are due and payable on October 7, 2007, along with accrued and
unpaid interest.
As of June 30, 2005, the principal balance of the note was $3.2 million.
20
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. 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 in Black Hawk, Colorado and
a casino and hotel located in Tunica, Mississippi (collectively, the
"Properties").
The Company identifies its business in three segments based on geographic
location. The Properties, in each of their segments, market primarily to
middle-income guests. The major products offered in each segment are as follows:
casino, hotel rooms (in Tunica, Mississippi only), and food and beverage.
The accounting policies of each business segment are the same as those
described in the summary of significant accounting policies previously described
in Note 1 to the audited financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004. There are minimal
inter-segment sales.
A summary of the Properties' operations by business segment for the three-
and six-month periods ended June 30, 2005 and 2004 and a summary of the
Properties' assets as of June 30, 2005 and December 31, 2004 are presented
below:
21
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For The Three Months For The Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2005 2004 2005 2004
-------- -------- -------- ---------
(in thousands) (in thousands)
Net revenues:
Majestic Star Casino $ 34,129 $ 36,603 $ 70,305 $ 73,590
Fitzgeralds Tunica 20,519 20,717 42,036 42,733
Fitzgeralds Black Hawk 8,412 9,682 17,574 18,101
-------- -------- -------- --------
Total $ 63,060 $ 67,002 $129,915 $134,424
======== ======== ======== ========
Operating income (loss):
Majestic Star Casino $ 3,958 $ 5,251 $ 9,566 $ 8,060
Fitzgeralds Tunica 2,788 3,051 6,092 7,067
Fitzgeralds Black Hawk 701 2,801 3,673 4,843
Corporate (1) (3,961) (875) (5,158) (1,680)
Majestic Investor Holdings (85) (31) (155) (528)
-------- -------- -------- --------
Total $ 3,401 $ 10,197 $ 14,018 $ 17,762
======== ======== ======== ========
Segment depreciation and amortization:
Majestic Star Casino $ 2,190 $ 1,880 $ 4,280 $ 3,793
Fitzgeralds Tunica 2,533 2,175 5,009 4,234
Fitzgeralds Black Hawk 1,960 471 1,960 929
Majestic Investor Holdings 69 69 139 139
-------- -------- -------- --------
Total $ 6,752 $ 4,595 $ 11,388 $ 9,095
======== ======== ======== ========
Expenditure for additions to long-lived assets:
Majestic Star Casino $ 1,851 $ 1,790 $ 2,338 $ 25,456
Fitzgeralds Tunica 980 2,625 2,647 3,069
Fitzgeralds Black Hawk 1,122 581 1,809 636
-------- -------- -------- --------
Total $ 3,953 $ 4,996 $ 6,794 $ 29,161
======== ======== ======== ========
As of As of
June 30, December 31,
2005 2004
--------- ------------
(in thousands)
Segment assets:
Majestic Star Casino (2) $ 247,286 $ 254,702
Fitzgeralds Tunica 78,954 80,452
Fitzgeralds Black Hawk assets retained 31,080 348
Fitzgeralds Black Hawk assets held for sale - 30,684
Majestic Investor Holdings 2,552 2,159
--------- ---------
Total 359,872 368,345
Less: Intercompany (112,780) (121,968)
--------- ---------
Total $ 247,092 $ 246,377
========= =========
(1) Corporate expenses reflect payroll, benefits, travel, Sarbanes Oxley
compliance charges, Fitzgeralds Black Hawk termination of sale charges,
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, Fitzgeralds Tunica and Fitzgeralds Black Hawk totaling $112.8
million at June 30, 2005. At December 31, 2004, the assets of Majestic
Star include intercompany receivables from Investor Holdings, Fitzgeralds
Tunica and Fitzgeralds Black Hawk of $122.0 million. Intercompany
receivables are eliminated in consolidation.
22
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SUBSEQUENT EVENT
On July 14, 2005, the City of Black Hawk delivered a Notice of Abatement
to Fitzgeralds Black Hawk. The notice requires that Fitzgeralds Black Hawk
remove the iron beams supporting the walls of the historic Masonic building on
our property. Previously, the building was substantially demolished in
anticipation of expansion and two of the walls of the structure remain in place.
The permit allowing for use of the iron beams to support the Masonic building
walls expired in June of this year. We are now negotiating with the City of
Black Hawk, asking the City of Black Hawk to allow us to remediate the
situation. Our current proposal would allow us to remove a portion of the iron
beams without engaging the expansion. We anticipate our proposed remediation to
cost between $0.3 million and $0.4 million. While the City of Black Hawk has
given an initial approval to our proposal, the City of Black Hawk has made it
clear that they want to see progress with regard to the expansion in the near
future. At this time we do not know how long the City of Black Hawk will permit
our proposed remediation. It is anticipated that the expansion would cost over
$20.0 million. There is no guarantee that the Company will be able to move
forward with an expansion that would meet the City of Black Hawk's desired
timetable, or that the expansion will be economically viable for the Company.
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
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 the eliminating entries necessary to
consolidate such entities.
23
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
As of June 30, 2005
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,604,498 $ - $ 9,827,615 $ - $ 16,432,113
Restricted cash 900,000 - 1,640,008 - 2,540,008
Accounts receivable, net 1,300,272 - 663,707 - 1,963,979
Inventories 43,810 - 625,046 - 668,856
Prepaid expenses and deposits 4,856,690 - 891,611 - 5,748,301
Receivable from affiliate 771,920 - 13,502 (169,945)(a) 615,477
------------- ------------- ------------- ------------- -------------
Total current assets 14,477,190 - 13,661,489 (169,945) 27,968,734
------------- ------------- ------------- ------------- -------------
Property, equipment and improvements, net 77,270,859 - 84,852,481 - 162,123,340
Intangible assets, net - - 7,203,413 - 7,203,413
Goodwill - - 5,922,398 - 5,922,398
Other assets:
Deferred financing costs, net 4,410,650 - 343,124 - 4,753,774
Note receivable - affiliate 3,232,951 - - - 3,232,951
Investment in Buffington Harbor
Riverboat, LLC 26,223,072 - - - 26,223,072
Long term receivable - related party 112,609,816 - - (112,609,816)(a) -
Other assets 9,061,095 - 603,124 - 9,664,219
------------- ------------- ------------- ------------- -------------
Total other assets 155,537,584 - 946,248 (112,609,816) 43,874,016
------------- ------------- ------------- ------------- -------------
Total assets $ 247,285,633 $ - $ 112,586,029 $(112,779,761) $ 247,091,901
============= ============= ============= ============= =============
LIABILITIES AND MEMBER'S DEFICIT
Current liabilities:
Accounts payable $ 442,851 $ - $ 1,052,378 $ - $ 1,495,229
Payable to related party - - 169,945 (169,945)(a) -
Accrued liabilities:
Payroll and related 2,748,642 - 4,349,647 - 7,098,289
Interest 5,469,976 - 158,189 - 5,628,165
Property and franchise taxes 3,965,717 - 393,160 - 4,358,877
Other accrued liabilities 5,156,841 - 4,964,282 - 10,121,123
------------- ------------- ------------- ------------- -------------
Total current liabilities 17,784,027 - 11,087,601 (169,945) 28,701,683
------------- ------------- ------------- ------------- -------------
Investment in subsidiaries 27,072,412 - - (27,072,412)(b) -
Due to related parties - - 112,609,816 (112,609,816)(a) -
Long-term debt, net of current maturities 310,352,164 260,000,000 15,961,024 (260,000,000)(c) 326,313,188
------------- ------------- ------------- ------------- -------------
Total liabilities 355,208,603 260,000,000 139,658,441 (399,852,173) 355,014,871
------------- ------------- ------------- ------------- -------------
Member's deficit (107,922,970) (260,000,000) (27,072,412) 287,072,412(b)(c) (107,922,970)
------------- ------------- ------------- ------------- -------------
Total liabilities and member's deficit $ 247,285,633 $ - $ 112,586,029 $(112,779,761) $ 247,091,901
============= ============= ============= ============= =============
(a) To eliminate intercompany receivables and payables.
(b) To eliminate intercompany accounts and investment in subsidiaries.
(c) As more fully described in Note 7 - 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.
24
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. 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 and deposits 1,575,936 - 636,460 - 2,212,396
Receivable from affiliate 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
------------- ------------- ------------- ------------- -------------
Total other assets 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
Payable to related party - - 82,305 (82,305)(a) -
Accrued liabilities:
Payroll and related 3,216,179 - 3,086,986 - 6,303,165
Interest 5,365,530 - 158,189 - 5,523,719
Property and franchise taxes 4,811,880 - 517,292 - 5,329,172
Other accrued liabilities 6,040,223 - 4,256,371 - 10,296,594
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 receivables and payables.
(b) To eliminate intercompany accounts and investment in subsidiaries.
(c) As more fully described in Note 7 - 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.
25
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 2005
(unaudited)
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
------------ ------------- ------------ ------------ ------------
OPERATING REVENUES:
Casino $ 37,442,188 $ - $ 30,833,775 $ - $ 68,275,963
Rooms - - 1,917,569 - 1,917,569
Food and beverage 417,474 - 3,042,526 - 3,460,000
Other 953,912 - 438,835 - 1,392,747
------------ ------------- ------------ ------------ ------------
Gross revenues 38,813,574 - 36,232,705 - 75,046,279
Less promotional allowances 4,684,327 - 7,301,921 - 11,986,248
------------ ------------- ------------ ------------ ------------
Net operating revenues 34,129,247 - 28,930,784 - 63,060,031
------------ ------------- ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Casino 6,770,189 - 9,442,557 - 16,212,746
Rooms - - 441,108 - 441,108
Food and beverage 464,552 - 999,950 - 1,464,502
Other - - 242,399 - 242,399
Gaming taxes 10,774,190 - 3,977,814 - 14,752,004
Advertising and promotion 1,982,911 - 1,918,517 - 3,901,428
General and administrative 6,258,424 - 3,907,815 - 10,166,239
Corporate expense 3,961,114 - - - 3,961,114
Economic incentive - City of Gary 1,124,610 - - - 1,124,610
Depreciation and amortization 2,189,482 - 4,562,251 - 6,751,733
Loss on investment in Buffington
Harbor Riverboats, LLC 603,500 - - - 603,500
Loss on disposal of assets 3,644 - 34,191 - 37,835
------------ ------------- ------------ ------------ ------------
Total operating costs and expenses 34,132,616 - 25,526,602 - 59,659,218
------------ ------------- ------------ ------------ ------------
Operating (loss) income (3,369) - 3,404,182 - 3,400,813
------------ ------------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 64,762 - 21,652 - 86,414
Interest expense (6,969,080) - (474,569) - (7,443,649)
Other non-operating expense (41,715) - - - (41,715)
Equity in net income of subsidiaries 2,951,265 - - (2,951,265)(a) -
------------ ------------- ------------ ------------ ------------
Total other expense (3,994,768) - (452,917) (2,951,265) (7,398,950)
------------ ------------- ------------ ------------ ------------
Net (loss) income $ (3,998,137) $ - $ 2,951,265 $ (2,951,265) $ (3,998,137)
============ ============= ============ ============ ============
(a) To eliminate equity in net income of subsidiaries.
26
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 2004
(unaudited)
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
------------ ------------- ------------ ------------ ------------
OPERATING REVENUES:
Casino $ 38,698,144 $ - $ 31,911,142 $ - $ 70,609,286
Rooms - - 1,919,669 - 1,919,669
Food and beverage 451,048 - 2,673,665 - 3,124,713
Other 728,988 - 426,248 - 1,155,236
------------ ------------- ------------ ------------ ------------
Gross revenues 39,878,180 - 36,930,724 - 76,808,904
Less promotional allowances 3,275,539 - 6,531,706 - 9,807,245
------------ ------------- ------------ ------------ ------------
Net operating revenues 36,602,641 - 30,399,018 - 67,001,659
------------ ------------- ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Casino 7,371,759 - 10,173,789 - 17,545,548
Rooms - - 467,054 - 467,054
Food and beverage 510,863 - 865,558 - 1,376,421
Other 65,646 - 257,905 - 323,551
Gaming taxes 11,146,341 - 4,181,083 - 15,327,424
Advertising and promotion 2,416,376 - 1,766,665 - 4,183,041
General and administrative 6,176,934 - 4,131,865 - 10,308,799
Corporate expense 874,680 - - - 874,680
Economic incentive - City of Gary 1,159,082 - - - 1,159,082
Depreciation and amortization 1,880,122 - 2,715,365 - 4,595,487
Loss on investment in Buffington
Harbor Riverboats, LLC 625,507 - - - 625,507
(Gain) loss on disposal of assets (746) - 19,048 - 18,302
------------ ------------- ------------ ------------ ------------
Total operating costs and expenses 32,226,564 - 24,578,332 - 56,804,896
------------ ------------- ------------ ------------ ------------
Operating income 4,376,077 - 5,820,686 - 10,196,763
------------ ------------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 2,597 - 2,692 - 5,289
Interest expense (6,721,673) - (474,567) - (7,196,240)
Other non-operating expense (95,639) - - - (95,639)
Equity in net income of subsidiaries 5,348,811 - - (5,348,811)(a) -
------------ ------------- ------------ ------------ ------------
Total other expense (1,465,904) - (471,875) (5,348,811) (7,286,590)
------------ ------------- ------------ ------------ ------------
Net income $ 2,910,173 $ - $ 5,348,811 $ (5,348,811) $ 2,910,173
============ ============= ============ ============ ============
(a) To eliminate equity in net income of subsidiaries.
27
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2005
(unaudited)
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
------------- ------------- ------------- ------------- -------------
OPERATING REVENUES:
Casino $ 76,139,357 $ - $ 63,219,253 $ - $ 139,358,610
Rooms - - 3,711,673 - 3,711,673
Food and beverage 859,997 - 6,110,379 - 6,970,376
Other 1,619,030 - 831,447 - 2,450,477
------------- ------------- ------------- ------------- -------------
Gross revenues 78,618,384 - 73,872,752 - 152,491,136
Less promotional allowances 8,313,399 - 14,262,646 - 22,576,045
------------- ------------- ------------- ------------- -------------
Net operating revenues 70,304,985 - 59,610,106 - 129,915,091
------------- ------------- ------------- ------------- -------------
OPERATING COSTS AND EXPENSES:
Casino 13,901,276 - 19,604,349 - 33,505,625
Rooms - - 825,053 - 825,053
Food and beverage 976,839 - 1,989,004 - 2,965,843
Other - - 501,877 - 501,877
Gaming taxes 21,844,453 - 8,205,740 - 30,050,193
Advertising and promotion 3,707,589 - 3,687,339 - 7,394,928
General and administrative 12,528,453 - 8,044,283 - 20,572,736
Corporate expense 5,158,184 - - - 5,158,184
Economic incentive - City of Gary 2,287,972 - - - 2,287,972
Depreciation and amortization 4,279,929 - 7,107,739 - 11,387,668
Loss on investment in Buffington
Harbor Riverboats, LLC 1,209,198 - - - 1,209,198
Loss on disposal of assets 3,644 - 34,331 - 37,975
------------- ------------- ------------- ------------- -------------
Total operating costs and expenses 65,897,537 - 49,999,715 - 115,897,252
------------- ------------- ------------- ------------- -------------
Operating income 4,407,448 - 9,610,391 - 14,017,839
------------- ------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 69,730 - 28,886 - 98,616
Interest expense (13,730,887) - (949,137) - (14,680,024)
Other non-operating expense (78,669) - - - (78,669)
Equity in net income of subsidiaries 8,690,140 - - (8,690,140)(a) -
------------- ------------- ------------- ------------- -------------
Total other expense (5,049,686) - (920,251) (8,690,140) (14,660,077)
------------- ------------- ------------- ------------- -------------
Net (loss) income $ (642,238) $ - $ 8,690,140 $ (8,690,140) $ (642,238)
============= ============= ============= ============= =============
(a) To eliminate equity in net income of subsidiaries.
28
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2004
(unaudited)
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
--------------- ------------- -------------- ------------- ---------------
OPERATING REVENUES:
Casino $ 77,904,303 $ - $ 63,747,486 $ - $ 141,651,789
Rooms - - 3,793,506 - 3,793,506
Food and beverage 938,241 - 5,530,932 - 6,469,173
Other 1,341,886 - 872,994 - 2,214,880
--------------- ------------- -------------- ------------- ---------------
Gross revenues 80,184,430 - 73,944,918 - 154,129,348
Less promotional allowances 6,594,196 - 13,110,890 - 19,705,086
--------------- ------------- -------------- ------------- ---------------
Net operating revenues 73,590,234 - 60,834,028 - 134,424,262
--------------- ------------- -------------- ------------- ---------------
OPERATING COSTS AND EXPENSES:
Casino 15,057,511 - 20,725,489 - 35,783,000
Rooms - - 932,296 - 932,296
Food and beverage 1,061,900 - 1,771,963 - 2,833,863
Other 65,646 - 499,438 - 565,084
Gaming taxes 22,210,245 - 8,301,293 - 30,511,538
Advertising and promotion 4,407,442 - 3,524,855 - 7,932,297
General and administrative 15,361,415 - 8,372,966 - 23,734,381
Corporate expense 1,680,286 - - - 1,680,286
Economic incentive - City of Gary 2,336,237 - - - 2,336,237
Depreciation and amortization 3,792,530 - 5,302,803 - 9,095,333
Loss on investment in Buffington
Harbor Riverboats, LLC 1,238,348 - - - 1,238,348
(Gain) loss on disposal of assets (1,662) - 21,019 - 19,357
--------------- ------------- -------------- ------------- ---------------
Total operating costs and expenses 67,209,898 - 49,452,122 - 116,662,020
--------------- ------------- -------------- ------------- ---------------
Operating income 6,380,336 - 11,381,906 - 17,762,242
--------------- ------------- -------------- ------------- ---------------
OTHER INCOME (EXPENSE):
Interest income 4,535 - 5,868 - 10,403
Interest expense (13,305,149) - (949,136) - (14,254,285)
Other non-operating expense (123,847) - - - (123,847)
Equity in net income of subsidiaries 10,438,638 - - (10,438,638)(a) -
--------------- ------------- -------------- ------------- ---------------
Total other expense (2,985,823) - (943,268) (10,438,638) (14,367,729)
--------------- ------------- -------------- ------------- ---------------
Net income $ 3,394,513 $ - $ 10,438,638 $ (10,438,638) $ 3,394,513
=============== ============= ============== ============= ===============
(a) To eliminate equity in net income of subsidiaries.
29
THE MAJESTIC STAR CASINO, LLC AND SUBSIDIARIES
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2005
(unaudited)
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
------------ ------------- ------------ ----------- ------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES: $ (9,553,396) $ - $ 15,981,587 $ - $ 6,428,191
------------ ------------- ------------ ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of property and equipment (2,827,255) - (5,167,356) - (7,994,611)
Decrease in prepaid leases and deposits 3,600 - - - 3,600
Proceeds from disposal of assets - - 200 - 200
------------ ------------- ------------ ----------- ------------
Net cash used in investing activities (2,823,655) - (5,167,156) - (7,990,811)
------------ ------------- ------------ ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from line of credit 22,437,970 - - - 22,437,970
Repayment of line of credit (13,050,806) - - - (13,050,806)
Advances to affiliate - net (3,232,951) - - - (3,232,951)
Cash received from (advanced to)
related parties 9,275,000 - (9,275,000) - -
Distribution to Barden Development, Inc. (4,881,209) - - - (4,881,209)
------------ ------------- ------------ ----------- ------------
Net cash provided by (used in) financing
activities 10,548,004 - (9,275,000) - 1,273,004
------------ ------------- ------------ ----------- ------------
Net (decrease) increase in cash and cash equivalents (1,829,047) - 1,539,431 - (289,616)
Cash and cash equivalents, beginning
of period 8,433,545 - 8,288,184 - 16,721,729
------------ ------------- ------------ ----------- ------------
Cash and cash equivalents, end of period $ 6,604,498 $ - $ 9,827,615 $ - $ 16,432,113
============ ============= ============ =========== ============
30
THE MAJESTIC STAR CASINO, LLC
(A Wholly Owned Subsidiary of Barden Development, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2004
(unaudited)
The Majestic The Majestic
Star Casino, Star Casino Guarantor Eliminating Total
LLC Capital Corp. Subsidiaries Entries Consolidated
------------- ------------- ------------ ----------- ------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES: $ (4,445,270) $ - $ 15,346,838 $ - $ 10,901,568
------------- ------------- ------------ ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Increase in restricted cash - - (390,008) (390,008)
Acquisition of property and equipment (25,455,822) - (3,704,922) - (29,160,744)
Decrease in prepaid leases and deposits 7,284 - - - 7,284
Investment in Buffington Harbor Riverboats, LLC (71,606) - - - (71,606)
Proceeds from disposal of equipment 167,412 - 24,161 - 191,573
------------- ------------- ------------ ----------- ------------
Net cash used in investing activities (25,352,732) - (4,070,769) - (29,423,501)
------------- ------------- ------------ ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance costs for the 9 1/2% senior secured notes (58,652) - - - (58,652)
Issuance costs for credit facility (51,232) - - - (51,232)
Proceeds from line of credit 27,901,293 - - - 27,901,293
Repayment of line of credit (8,219,786) - - - (8,219,786)
Cash received from (paid to) related parties 11,917,000 - (11,850,000) - 67,000
Distribution to Barden Development, Inc. (2,462,124) - - - (2,462,124)
------------- ------------- ------------ ----------- ------------
Net cash provided by (used in) financing activities 29,026,499 - (11,850,000) - 17,176,499
------------- ------------- ------------ ----------- ------------
Net decrease in cash and cash equivalents (771,503) - (573,931) - (1,345,434)
Cash and cash equivalents, beginning
of period 10,929,430 - 11,128,586 - 22,058,016
------------- ------------- ------------ ----------- ------------
Cash and cash equivalents, end of period $ 10,157,927 $ - $ 10,554,655 $ - $ 20,712,582
============= ============= ============ =========== ============
31
ITEM 2.
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 heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," but may be found in other locations as well. These forward-looking
statements generally relate to our plans, objectives and expectations for future
operations and are based upon management's reasonable estimates of future
results or trends. Although we believe that our plans and objectives reflected
in or suggested by such forward-looking statements are reasonable, we may not
achieve such plans or objectives. You should read this report completely and
with the understanding that actual future results may be materially different
from what we expect. We will not update forward-looking statements even though
our situation may change in the future.
Specific factors that might cause actual results to differ from our
expectations, or may cause us to modify our plans and objectives, include, but
are not limited to:
- the availability and adequacy of our cash flow to meet our
requirements, including payment of amounts due under the $80.0
million credit facility, 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 indenture
governing the 9 1/2% notes or the loan agreement governing the
$80.0 million credit facility, and thus causing us to be in default
with the trustee for the 9 1/2% notes and the lenders to the $80.0
million credit facility, 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;
- the inability to fund capital improvements and development needs
from existing operations, available credit, or new financing;
- 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;
32
- adverse determinations of issues related to disputed taxes,
particularly in Indiana, as evidenced by the requirement that
deductions previously taken for taxes paid on gross gaming receipts
are disallowed on our member's Indiana state income tax return, and
the charge taken in the three-month period ended March 31, 2004 for
retroactive real property taxes;
- other adverse conditions, such as adverse economic conditions in the
company's markets, changes in general customer confidence or
spending, increased tax burdens on our customers negatively
impacting their discretionary spending in our casinos, 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 operations 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;
- factors relating to the current state of world affairs and any
further acts of terrorism or any other destabilizing events in the
United States or elsewhere; and
- other factors discussed under "Factors that May Affect Future
Results" 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.
33
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").
The Company receives reimbursement of expenses for services provided to Barden
Nevada Gaming, LLC ("Barden Nevada" or "Fitzgeralds Las Vegas").
On April 14, 2005, Barden Colorado and Legends Gaming, LLC ("Legends")
mutually agreed to terminate the Asset Purchase Agreement dated July 12, 2004,
as amended (the "Purchase Agreement"), pursuant to which Barden Colorado had
agreed to sell and Legends had agreed to purchase substantially all of the
assets of the Fitzgeralds-brand casino located in Black Hawk, Colorado (see Note
3 to the Consolidated Financial Statements - Mutual Termination of the Sale of
Fitzgeralds Black Hawk).
In connection with the termination of the Purchase Agreement, the earnest
money deposit originally placed into escrow by Legends at the time of execution
of the Purchase Agreement was returned to Legends. In addition, the Company paid
Legends approximately $2.7 million, consisting of approximately $0.7 million in
reimbursement of certain costs, which were incurred in re-routing a storm sewer
pipe below grade and certain related transaction costs, which the parties had
agreed to share equally together with $2.0 million as a termination fee. The
Company took a charge in the second quarter of 2005 for the payment of the
termination fee and its portion of the shared transaction costs and certain
other transaction expenses. The charge was approximately $2.3 million.
Additionally, the Company took a charge of approximately $1.5 million in
the second quarter of 2005 for the depreciation and amortization expense that
was not recorded while Barden Colorado was held for sale during the period July
12, 2004 (the date of the Purchase Agreement) to April 14, 2005 in accordance
with generally accepted accounting principles.
Because the Purchase Agreement was terminated, the results of Fitzgeralds
Black Hawk are no longer reflected in discontinued operations.
Consolidated Results: Three-Month Period Ended June 30, 2005
The Company's gross revenues were $75.1 million in the second quarter of
2005 compared to $76.8 million in the prior year, a decline of $1.7 million, or
2.3%. Contributing to the decline in gross revenues was a $2.3 million, or 3.3%
decline in casino revenues to $68.3 million. Casino revenues comprise nearly
91.0% of our gross revenues. The Company's net revenues were $63.1 million, a
decline of $3.9 million, or 5.9%, from the same period in 2004. Contributing to
the decline in net revenues was an increase in promotional allowances of $2.2
million, or 22.2%, to $12.0 million. Promotional allowances are deducted from
gross revenues to compute net revenues. The Company spent more in promotional
allowances to offset marketing programs from competitors and to create
incremental customer visits to its casinos.
Net loss was $4.0 million compared to net income of $2.9 million for the
same period in 2004. Contributing to the net loss in the current quarter was the
decline in net revenues, a $2.3 million charge related to the mutual termination
of the sale of our Black Hawk property and related catch-up depreciation and
amortization of $1.4 million for the period July 12, 2004 through March 31, 2005
(the most recent quarter end before termination of the Fitzgeralds Black Hawk
sale) (see Note 3 to the Consolidated Financial Statements - Mutual Termination
of the Sale of Fitzgeralds Black Hawk), $0.3 million related to preparation for
Sarbanes-Oxley 404 compliance and expenses of $0.2 million incurred as the
Company evaluated certain casino investment opportunities.
34
Consolidated Results: Six-Month Period Ended June 30, 2005
The Company's gross revenues were $152.5 million in the six months ended
June 30, 2005 compared to $154.1 million in the prior year, a decline of $1.6
million, or 1.1%. Contributing to the decline in gross revenues was a $2.2
million, or 1.6%, decline in casino revenues to $139.4 million. Casino revenues
comprise nearly 91.4% of our gross revenues. The Company's net revenues were
$129.9 million, compared to $134.4 million in the same six-month period last
year, a decrease of $4.5 million, or 3.4%. Promotional allowances increased $2.9
million to $22.6 million. The Company has increased its promotional allowances
because of competitive pressures in its markets.
Net loss was $0.6 million compared to net income of $3.4 million for the
same period last year. The Company's net loss was impacted by the decline in net
revenues, charges and additional depreciation and amortization for the period
July 12, 2004 to December 31, 2004 of $0.9 million related to the mutual
termination of the sale of Fitzgeralds Black Hawk (see Note 3 to the
Consolidated Financial Statements - Mutual Termination of the Sale of
Fitzgeralds Black Hawk), $0.6 million related to preparation for Sarbanes-Oxley
404 compliance, and expenses of $0.2 million incurred in evaluating certain
casino investment opportunities. Included in net income in the 2004 period is a
$2.2 million charge related to retroactive 2002 and 2003 real property taxes at
Majestic Star.
At June 30, 2005, the Company had $16.4 million of cash, compared to $16.7
million at December 31, 2004. The Company had $29.6 million of available
borrowing capacity under its $80.0 million credit facility at June 30, 2005.
Total debt outstanding at June 30, 2005 was $326.3 million compared to
$316.9 million at December 31, 2004. Total debt outstanding at June 30, 2005
consisted of $260.0 million of 9 1/2% senior secured notes ("the 9 1/2%
notes"), $16.0 million (net of original issue discount) of 11.653% notes ("the
11.653% notes") and $50.4 million drawn on the Company's $80.0 million credit
facility. The second quarter is typically a period in which the Company's net
cash out flow from operations is due to the seasonality of the business and thus
requires the Company to use its line of credit as a funding source. During the
second quarter the Company was required to pay the scheduled semi-annual
interest on both the 9 1/2% notes and 11.653% notes. In addition, due to the
timing of the respective fiscal years of the states of Indiana and Colorado,
Majestic Star and Fitzgeralds Black Hawk are paying gaming taxes at the highest
marginal tax rates during the quarter for their gaming revenues. Both Indiana
and Colorado have tiered tax structures with the tax year starting on July 1 and
ending on June 30. As casino revenues increase throughout the tax year, the
marginal tax rates also increase, resulting in increased taxes paid in the
latter months of the tax year. During the quarter, the Company also made
distributions of $2.3 million to BDI for income taxes and paid $2.7 million to
the purchaser of Fitzgeralds Black Hawk upon termination of the transaction to
sell substantially all the assets of the property (see Note 3 to the
Consolidated Financial Statements - Mutual Termination of the Sale of
Fitzgeralds Black Hawk).
For the six months ended June 30, 2005, the Company spent $8.0 million
primarily for slot machines and TITO implementation at all of its properties,
various remodel projects, principally at Majestic Star, and a new slot player
tracking and marketing system and costs associated with burying a storm sewer
pipe below grade, both at Fitzgeralds Black Hawk.
35
Majestic Star (property operations only)
Gross revenues declined $1.1 million, or 2.7%, to $38.8 million in the
second quarter of 2005 from the second quarter of 2004. Lower casino revenues of
$1.3 million were the prime contributor to the decline in gross revenues. Net
revenues were $34.1 million for the three-month period ended June 30, 2005, a
decrease of $2.5 million, or 6.8%, over the same three-month period in 2004. Net
revenues declined due to our lower gross revenues and higher promotional
allowances of $1.4 million. Property management believes that casino revenues
have suffered due to travel delays caused by construction to roads, which
provide access to the property, aggressive marketing and promotional activities
by competitors and higher gas prices, impacting the gaming budgets of customers.
The property was very aggressive with its cash based promotional activities
during the quarter in order to offset the promotional efforts by competitors and
increase incremental customer visits to the property.
Total operating costs at Majestic Star declined by $1.2 million in the
second quarter of 2005 from the second quarter of 2004. The most significant
reductions occurred in casino expenses, which were down $0.6 million and
marketing expenses, which declined $0.4 million. Net loss for the three-month
period ended June 30, 2005 was $3.0 million compared to a net loss of $1.5
million in the three months ended June 30, 2004. The prime contributor to
Majestic Star's increased net loss was the decline in net revenues.
Gross revenues declined $1.6 million, or 2.0%, to $78.6 million in the six
months ended June 30, 2005 from the same period in 2004. Lower casino revenues
of $1.8 million were the prime contributor for the decline in gross revenues.
Net revenues were $70.3 million for the six-month period ended June 30, 2005, a
decrease of 3.3 million, or 4.5%, over the same period in the prior year. Higher
promotional allowances of $1.7 million and, a lower win percentage in table
games during the first quarter and nominal casino revenue growth in the
northwest Indiana market contributed to Majestic Star's lower net revenues.
Total operating costs at Majestic Star declined by $4.9 million. In the
first quarter of 2004, Majestic Star recognized a charge for 2002 and 2003
retroactive property taxes of $2.2 million. Similar expenses were not recognized
during the six months ended June 30, 2005. Other significant cost reductions
were in casino expenses, gaming taxes and marketing expenses, which were down
$1.2 million, $0.4 million and $0.7 million respectively. Net loss for the
six-month period ended June 30, 2005 was $4.2 million, compared to a net loss of
$5.4 million for the six months ended June 30, 2004
Market conditions in the second quarter of 2005 were soft, as slot coin-in
and table game drop volumes declined at northwest Indiana casinos in the second
quarter. In addition, Chicagoland casinos have increased their marketing and
promotional efforts. The recent roll back of the top tax rate from 70% to 50% in
Illinois' tiered gaming tax structure will allow Chicagoland casinos to improve
their profit margins and be more aggressive with marketing and promotions.
At Majestic Star, improvements have been made to the facility including a
recently opened new access road, which bypasses many of the hindrances
encountered when accessing the property and drops people directly into the third
level of the parking garage, the creation of `the retro-room', which allows our
casino guests to enjoy token operated slot machines in a nostalgic atmosphere, a
remodeled cage and ticket in ticket out ("TITO") redemption area on the third
deck of our casino, which will improve service to our guests while making our
operation more efficient, and remodeling of the first and second floor bars.
36
Fitzgeralds Tunica (property operations only)
Gross revenues increased by $0.4 million, or 1.7%, to $26.4 million in the
three months ended June 30, 2005 from the same three-month period last year.
Food and beverage revenues at the property increased $0.3 million and were the
main contributor to the increase in gross revenues. During the quarter property
management aggressively used food and beverage as a promotional tool. In
addition, casino revenues were $21.7 million for the three-month period ended
June 30, 2005, an increase of $0.1 million, or 0.3%, over the same quarter last
year. Net revenues declined $0.2 million, or 1.0%, to $20.5 million for the
three-month period ended June 30, 2005 as promotional allowances increased $0.6
million. Increased promotional activities at the property, particularly in food
and beverage, and cash, caused the increase.
Gross revenues increased by $0.3 million, or 0.5%, to $53.6 million in the
six-month period ended June 30, 2005 from the same period last year. Similar to
the second quarter mentioned above, food and beverage revenues increased $0.6
million. However casino revenues declined $0.1 million, or 0.3%, to $44.3
million, from the six-month period ended June 30, 2004. Net revenues were $42.0
million for the six-month period ended June 30, 2005, a decrease of $0.7
million, or 1.6%, over the same period in the prior year. Promotional allowances
are up $1.0 million in the six-month period ended June 30, 2005 from the same
six-month period last year. The property was more aggressive with food,
beverage, hotel and cash promotions in order to drive revenues. Flat market
conditions have impacted net revenues and casino revenues. Gross gaming revenues
in Mississippi river counties were down 0.5% and 0.8%, respectively, in the
three and six months ended June 30, 2005 from the same periods in 2004.
Operating expenses increased $0.1 million, or 0.4%, from the second
quarter of 2004 and increased $0.3 million, or 0.8%, from the six-month period
ended June 30, 2004. The prime contributor to the increase in operating expenses
was a $0.4 million and a $0.8 million increase in depreciation expense in the
three- and six-month periods ended June 30, 2005 from the similar 2004 periods.
The higher depreciation expense is the result of improvements and capital
expenditures made at the property during 2004 and the first six months of 2005.
Net income for the three- and six-month periods ended June 30, 2005 was $2.8
million and $6.1 million, respectively. This compares to net income of $3.1
million and $7.1 million, respectively, for the three- and six-month periods
ended June 30, 2004.
At Fitzgeralds Tunica there are currently 715 slot machines operating with
TITO, or over 50% of the casino floor. The property is seeing acceptance of the
TITO product by its customers, plus it is enhancing the efficiency of the
operation. In addition, at the end of June management relocated the high limit
slot room to the first floor of the casino. Management believes the new high
limit slot room allows easier access for casino guests in an improved
environment.
Fitzgeralds Black Hawk (property operations only)
Gross revenues declined $1.1 million, or 10.5%, to $9.8 million in the
second quarter of 2005 from the second quarter of 2004. The main contributor to
the decline in gross revenues was a drop in casino revenues to $9.1 million in
the second quarter of 2005, from $10.3 million last year. Slot revenues, which
comprise the majority of casino revenues, decreased 11.3%, as slot
37
coin-in decreased 4.9% and the slot win percentage declined 0.4%. Net revenues
declined to $8.4 million in the three-month period ended June 30, 2005 from $9.7
million in the same three-month period last year.
Operating expenses increased $0.8 million during the quarter; however,
$1.4 million of the increase is attributable to catch-up depreciation for the
period July 12, 2004 through March 31, 2005 (the most recent quarter end before
termination of the Fitzgeralds Black Hawk sale.) Net income for the three-month
period ended June 30, 2005 was $0.7 million, compared to $2.8 million in the
three-month period ended June 30, 2004.
Gross revenues declined $0.3 million, or 1.7%, to $20.3 million in the
six-month period ended June 30, 2005 from the same period in 2004. Casino
revenues decreased to $18.9 million from $19.3 million and are the main
contributor for the decline in gross revenues. For the six-month period ended
June 30, 2005, slot revenues, which comprise the majority of casino revenues,
decreased 2.1% due to a drop in coin-in of 1.7%. Net revenues were $17.6 million
for the six-month period ended June 30, 2005 and $18.1 million for the same
period in 2004.
Operating expenses increased $0.6 million during the six months ended June
30, 2005; however, $0.9 million of the increase is attributable to catch-up
depreciation for the period July 12, 2004 through December 31, 2004. Net income
for the six-month period ended June 30, 2005 was $3.7 million. This compares to
net income of $4.8 million for the six-month period ended June 30, 2004.
Fitzgeralds Black Hawk's net revenues were impacted by soft market
conditions and the opening of remodeled facilities at competitors. In addition,
a June 21st rockslide on the main road into Black Hawk will most likely have an
impact on the third quarter revenues in the market as it is anticipated that
this road will not be re-opened until mid-September 2005. Management continues
to address the ability to remain competitive in the market. Management has
implemented a new slot marketing and player tracking system during the quarter
and recently started to implement TITO at the property. Currently there are 56
of the property's nearly 600 slot machines operating with TITO and management
will continue to implement TITO on all slot machines.
38
RESULTS OF OPERATIONS
The following table sets forth information derived from the Company's
statements of operations expressed as a percentage of gross operating revenues.
CONSOLIDATED STATEMENTS OF OPERATIONS - PERCENTAGE OF GROSS OPERATING REVENUES
For The For The
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2005 2004 2005 2004
----- ----- ----- -----
OPERATING REVENUES:
Casino 91.0% 91.9% 91.4% 91.9%
Rooms 2.6% 2.5% 2.4% 2.5%
Food and beverage 4.6% 4.1% 4.6% 4.2%
Other 1.8% 1.5% 1.6% 1.4%
----- ----- ----- -----
Gross operating revenues 100.0% 100.0% 100.0% 100.0%
Less promotional allowances 16.0% 12.8% 14.8% 12.8%
----- ----- ----- -----
Net operating revenues 84.0% 87.2% 85.2% 87.2%
----- ----- ----- -----
OPERATING COSTS AND EXPENSES:
Casino 21.6% 22.8% 22.0% 23.2%
Rooms 0.6% 0.6% 0.5% 0.6%
Food and beverage 2.0% 1.8% 1.9% 1.8%
Other 0.3% 0.4% 0.3% 0.4%
Gaming taxes 19.7% 20.0% 19.7% 19.8%
Advertising and promotion 5.2% 5.5% 4.8% 5.2%
General and administrative (1) 13.4% 13.4% 13.6% 15.4%
Corporate expenses (2) 5.3% 1.1% 3.4% 1.1%
Economic incentive - City of Gary 1.5% 1.5% 1.5% 1.5%
Depreciation and amortization (3) 9.0% 6.0% 7.5% 5.9%
Loss on investment in the BHR joint venture 0.8% 0.8% 0.8% 0.8%
Loss on sale of assets 0.1% 0.0% 0.0% 0.0%
----- ----- ----- -----
Total operating costs and expenses 79.5% 73.9% 76.0% 75.7%
----- ----- ----- -----
Operating income 4.5% 13.3% 9.2% 11.5%
----- ----- ----- -----
OTHER INCOME (EXPENSES):
Interest income 0.1% 0.0% 0.1% 0.0%
Interest expense -9.9% -9.4% -9.6% -9.2%
Other non-operating expense -0.0% -0.1% -0.1% -0.1%
----- ----- ----- -----
Total other expenses -9.8% -9.5% -9.6% -9.3%
----- ----- ----- -----
Net (loss) income -5.3% 3.8% -0.4% 2.2%
===== ===== ===== =====
(1) General and administrative expenses for the six months ended June 30, 2004
include a $2.2 million retroactive property tax charge.
(2) Corporate expenses for the three and six months ended June 30, 2005
include a $2.3 million charge related to the mutual termination of the
sale of Fitzgeralds Black Hawk.
(3) Depreciation and amortization expense includes Fitzgeralds Black Hawk
catch-up depreciation and amortization expense of $1.4 million and $0.9
million in the three and six months ended June 30, 2005.
39
The following table provides certain selected financial information from our
consolidated statements of operations.
Consolidated
For The For The
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
------------------ Increase ----------------- Increase
2005 2004 (Decrease) 2005 2004 (Decrease)
------- -------- ---------- ------- ------- ----------
(in millions) (in millions)
Casino revenues $ 68.3 $ 70.6 -3.3% $ 139.4 $ 141.6 -1.6%
Room revenues 1.9 1.9 -0.1% 3.7 3.8 -2.2%
Food and beverage revenues 3.5 3.1 10.7% 7.0 6.5 7.7%
Other revenues 1.4 1.2 20.6% 2.4 2.2 10.6%
------- -------- ------ ------- ------- -------
Gross operating revenues 75.1 76.8 -2.3% 152.5 154.1 -1.1%
Less promotional allowances 12.0 9.8 22.2% 22.6 19.7 14.6%
------- -------- ------ ------- ------- -------
Net operating revenues 63.1 67.0 -5.9% 129.9 134.4 -3.4%
Operating expenses 59.7 56.8 5.0% 115.9 116.7 -0.7%
------- -------- ------ ------- ------- -------
Operating income 3.4 10.2 -66.6% 14.0 17.7 -21.1%
Other income (expense) (7.4) (7.3) 1.5% (14.6) (14.3) 2.0%
------- -------- ------ ------- ------- -------
Net income $ (4.0) $ 2.9 -237.4% $ (0.6) $ 3.4 -118.9%
======= ======== ====== ======= ======= =======
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 For The
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
------------------ Increase ---------------- Increase
2005 2004 (Decrease) 2005 2004 (Decrease)
------ ------ ---------- ------ ------ ----------
(in millions) (in millions)
Casino revenues $ 37.4 $ 38.7 -3.2% $ 76.1 $ 77.9 -2.3%
Room revenues - - 0.0% - - 0.0%
Food and beverage revenues 0.4 0.5 -7.4% 0.9 0.9 -8.3%
Other revenues 1.0 0.7 30.9% 1.6 1.4 20.7%
------ ------ ------- ------ ------ -----
Gross operating revenues 38.8 39.9 -2.7% 78.6 80.2 -2.0%
Less promotional allowances 4.7 3.3 43.0% 8.3 6.6 26.1%
------ ------ ------- ------ ------ -----
Net operating revenues 34.1 36.6 -6.8% 70.3 73.6 -4.5%
Operating expenses 30.1 31.3 -3.8% 60.7 65.6 -7.3%
------ ------ ------- ------ ------ -----
Operating income 4.0 5.3 -24.6% 9.6 8.0 18.7%
Other income (expense) (7.0) (6.8) 1.9% (13.8) (13.4) 2.3%
------ ------ ------- ------ ------ -----
Net loss $ (3.0) $ (1.5) 91.1% $ (4.2) $ (5.4) -22.2%
====== ====== ===== ====== ====== =====
40
Fitzgeralds Tunica
For The For The
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
------------------ Increase ---------------- Increase
2005 2004 (Decrease) 2005 2004 (Decrease)
------- ------ ---------- ------ ------- ----------
(in millions) (in millions)
Casino revenues $ 21.7 $ 21.6 0.3% $ 44.3 $ 44.4 -0.3%
Room revenues 1.9 1.9 -0.1% 3.7 3.8 -2.2%
Food and beverage revenues 2.5 2.2 17.9% 5.0 4.4 12.4%
Other revenues 0.3 0.3 3.9% 0.6 0.7 -7.7%
------- ------ ----- ------ ------- -----
Gross operating revenues 26.4 26.0 1.7% 53.6 53.3 0.5%
Less promotional allowances 5.9 5.3 12.2% 11.6 10.6 9.2%
------- ------ ----- ------ ------- -----
Net operating revenues 20.5 20.7 -1.0% 42.0 42.7 -1.6%
Operating expenses 17.7 17.6 0.4% 35.9 35.6 0.8%
------- ------ ----- ------ ------- -----
Operating income 2.8 3.1 -8.6% 6.1 7.1 -13.8%
Other income (expense) 0.0 0.0 365.7% 0.0 0.0 247.0%
------- ------ ----- ------ ------- -----
Net income $ 2.8 $ 3.1 -8.4% $ 6.1 $ 7.1 -13.6%
======= ====== ===== ====== ======= =====
Fitzgeralds Black Hawk
For The For The
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
------------------ Increase ---------------- Increase
2005 2004 (Decrease) 2005 2004 (Decrease)
------- ------ ---------- ------ ------- ----------
(in millions) (in millions)
Casino revenues $ 9.1 $ 10.3 -11.0% $ 18.9 $ 19.3 -2.0%
Room revenues - - 0.0% - - 0.0%
Food and beverage revenues 0.6 0.5 -1.9% 1.2 1.1 2.5%
Other revenues 0.1 0.1 0.3% 0.2 0.2 5.2%
------- ------ ----- ------ ------- -----
Gross operating revenues 9.8 10.9 -10.5% 20.3 20.6 -1.7%
Less promotional allowances 1.4 1.2 10.1% 2.7 2.5 7.2%
------- ------ ----- ------ ------- -----
Net operating revenues 8.4 9.7 -13.1% 17.6 18.1 -2.9%
Operating expenses 7.7 6.9 12.1% 13.9 13.3 4.9%
------- ------ ----- ------ ------- -----
Operating income 0.7 2.8 -75.0% 3.7 4.8 -24.2%
Other income (expense) - - - -
------- ------ ----- ------ ------- -----
Net income $ 0.7 $ 2.8 -75.0% $ 3.7 $ 4.8 -24.2%
======= ====== ===== ====== ======= =====
41
Majestic Investor Holdings
For The For The
Three Months Ended Six Months Ended
June 30, Percentage June 30, Percentage
------------------ Increase ---------------- Increase
2005 2004 (Decrease) 2005 2004 (Decrease)
------- ------ ---------- ------ ------- ----------
(in millions) (in millions)
Casino revenues $ - $ - - $ - $ - -
Room revenues - - - - - -
Food and beverage revenues - - - - - -
Other revenues - - - - - -
------- ------ ----- ------ ------- -----
Gross operating revenues - - - - - -
Less promotional allowances - - - - - -
------- ------ ----- ------ ------- -----
Net operating revenues - - - - - -
Operating expenses 0.1 - 173.5% 0.2 0.5 -70.7%
------- ------ ----- ------ ------- -----
Operating loss (0.1) - 173.5% (0.2) (0.5) -70.7%
Other income (expense) (0.4) (0.5) -2.5% (0.9) (1.0) -1.2%
------- ------ ----- ------ ------- -----
Net loss $ (0.5) $ (0.5) 8.3% $ (1.1) $ (1.5) -26.1%
======= ====== ===== ====== ======= =====
The following tables reflect selected financial information as a percentage of
consolidated gross operating revenues at Majestic Star, Fitzgeralds Tunica,
Fitzgeralds Black Hawk and Majestic Investor Holdings. All percentage
calculations are shown before corporate overhead.
Majestic Star
For The For The
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2005 2004 2005 2004
---- ---- ---- ----
Casino revenues 49.9% 50.4% 49.9% 50.5%
Room revenues - - - -
Food and beverage revenues 0.5% 0.6% 0.6% 0.6%
Other revenues 1.3% 0.9% 1.1% 0.9%
---- ---- ---- ----
Gross operating revenues 51.7% 51.9% 51.6% 52.0%
Less promotional allowances 6.2% 4.3% 5.5% 4.3%
---- ---- ---- ----
Net operating revenues 45.5% 47.6% 46.1% 47.7%
Operating expenses 40.2% 40.8% 39.8% 42.5%
---- ---- ---- ----
Operating income 5.3% 6.8% 6.3% 5.2%
Other income (expense) -9.3% -8.9% -9.0% -8.7%
---- ---- ---- ----
Net loss -4.0% -2.1% -2.7% -3.5%
==== ==== ==== ====
42
Fitzgeralds Tunica
For The For The
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2005 2004 2005 2004
----- ----- ----- -----
Casino revenues 28.9% 28.1% 29.0% 28.8%
Room revenues 2.6% 2.5% 2.4% 2.5%
Food and beverage revenues 3.3% 2.8% 3.3% 2.9%
Other revenues 0.4% 0.4% 0.4% 0.4%
---- ---- ---- ----
Gross operating revenues 35.2% 33.8% 35.1% 34.6%
Less promotional allowances 7.9% 6.8% 7.6% 6.9%
---- ---- ---- ----
Net operating revenues 27.3% 27.0% 27.5% 27.7%
Operating expenses 23.6% 23.0% 23.6% 23.1%
---- ---- ---- ----
Operating income 3.7% 4.0% 3.9% 4.6%
Other income (expense) 0.0% 0.0% 0.0% 0.0%
---- ---- ---- ----
Net income 3.7% 4.0% 3.9% 4.6%
==== ==== ==== ====
Fitzgeralds Black Hawk
For The For The
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2005 2004 2005 2004
----- ----- ----- -----
Casino revenues 12.2% 13.4% 12.4% 12.5%
Room revenues - - - -
Food and beverage revenues 0.7% 0.7% 0.7% 0.7%
Other revenues 0.1% 0.1% 0.1% 0.1%
---- ---- ---- ----
Gross operating revenues 13.0% 14.2% 13.2% 13.3%
Less promotional allowances 1.8% 1.6% 1.8% 1.6%
---- ---- ---- ----
Net operating revenues 11.2% 12.6% 11.4% 11.7%
Operating expenses 10.3% 9.0% 9.1% 8.6%
---- ---- ---- ----
Operating income 0.9% 3.6% 2.3% 3.1%
Other income (expense) 0.0% 0.0% 0.0% 0.0%
---- ---- ---- ----
Net loss 0.9% 3.6% 2.3% 3.1%
==== ==== ==== ====
43
Majestic Investor Holdings
For The For The
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2005 2004 2005 2004
----- ----- ----- -----
Casino revenues - - - -
Room revenues - - - -
Food and beverage revenues - - - -
Other revenues - - - -
---- ---- ---- ----
Gross operating revenues - - - -
Less promotional allowances - - - -
---- ---- ---- ----
Net operating revenues - - - -
Operating expenses 0.1% 0.1% 0.1% 0.4%
---- ---- ---- ----
Operating loss -0.1% -0.1% -0.1% -0.4%
Other expenses -0.6% -0.6% -0.6% -0.6%
---- ---- ---- ----
Net loss -0.7% -0.7% -0.7% -1.0%
==== ==== ==== ====
44
SECOND QUARTER 2005 COMPARED TO SECOND QUARTER 2004
Consolidated gross operating revenues for the second quarter of 2005
decreased $1.7 million, or 2.3%, from consolidated gross operating revenues
recorded in the second quarter of 2004. Majestic Star and Fitzgeralds Black Hawk
each contributed $1.1 million of the decrease in consolidated gross operating
revenues. Fitzgeralds Tunica offset the decreases in gross operating revenues at
Majestic Star and Fitzgeralds Black Hawk with an increase of $0.4 million. The
decrease in consolidated gross operating revenues resulted from a decrease in
consolidated casino revenues, which comprise 91.0% of consolidated gross
revenues. Consolidated casino revenues decreased $2.3 million, or 3.3%, to $68.3
million. Majestic Star accounted for $1.3 million of the decrease in
consolidated casino revenues, while Fitzgeralds Black Hawk accounted for $1.2
million of the decrease. A 10.5% decline in Majestic Star's table games drop and
a 0.6% decline in table games win percentage resulted in a $0.9 million decline
in table game revenues from the second quarter of 2004. Also, adding to the
decline in casino revenue at Majestic Star was a $0.3 million decrease in slot
revenue, which resulted from a 5.9% decline in slot coin-in offset by a 0.4%
increase in slot hold percentage. The drop in casino revenues at Fitzgeralds
Black Hawk resulted primarily from a decrease in slot revenue due to a decline
in slot coin-in of 4.9% and a lower overall win percentage in slots of 0.4%. Win
percentage on our casino games are relatively predictable over long periods, but
can fluctuate significantly over shorter periods, such as a fiscal quarter.
Softer market conditions and strong competition contributed to the decline in
consolidated gross revenues.
Consolidated promotional allowances increased $2.2 million, or 22.2%.
Majestic Star's promotional allowances increased $1.4 million, or 43.0%, as the
property was more aggressive with its cash based promotional activities in order
to address the marketing efforts of its competitors and increase visits to the
property. Fitzgeralds Tunica's promotional allowances increased $0.6 million, as
the property increased complimentary products and services, primarily in food
and beverage, and expanded its cash based promotional activities. Greater
promotional expenses were incurred to increase visits and gambling in the
casino.
Total consolidated operating expenses increased $2.9 million, or 5.0%, due
primarily to increases of $3.1 million, or 352.9%, in corporate expenses and
$2.2 million, or 46.9%, in depreciation and amortization expenses, offset by
decreases of $1.3 million, or 7.6%, in casino expenses, $0.6 million, or 3.8%,
in gaming taxes and $0.3 million, or 6.7%, in advertising and promotional
expenses.
Majestic Star and Fitzgeralds Tunica contributed $0.6 million and $0.4
million, respectively, of our decline in consolidated casino expenses. Majestic
Star's declines are attributable to lower payroll costs, lower lease expenses on
gaming equipment and lower progressive expense, offset by increased
complimentary expenses and cash promotions. At Fitzgeralds Tunica, the decline
is due to lower lease expenses on gaming equipment and lower costs associated
with wide area progressive participations.
The decline in consolidated gaming taxes is attributable to a $0.4 million
decline at Majestic Star and a $0.2 million decline at Fitzgeralds Black Hawk.
The decline in gaming taxes at both properties is a direct result of lower
gaming revenues.
45
Consolidated advertising and promotion expenses are down $0.3 million due
to lower costs at Majestic Star. Costs were down at Majestic Star by $0.4
million as the property reduced advertising on television, radio, billboards,
and in print media.
Corporate expenses increased $3.1 million. The increase is primarily
attributed to the $2.3 million charge resulting from the mutual termination of
the sale of Fitzgeralds Black Hawk, $0.3 million of costs associated with the
Company's Sarbanes-Oxley 404 compliance project, and $0.2 million of costs
incurred as the Company evaluated certain casino investment opportunities.
Consolidated depreciation and amortization expense increased in the second
quarter of 2005 as compared to the second quarter of 2004 by $2.2 million to
$6.8 million. $1.4 million of the increase resulted from the catch-up
depreciation and amortization charge at Fitzgeralds Black Hawk (see Note 3 -
Mutual Termination of Sale of Fitzgeralds Black Hawk). Fitzgeralds Tunica and
Majestic Star recognized increases of $0.4 million and $0.3 million,
respectively. The increases resulted from capital expenditures made at both
properties in 2004 and the first half of 2005.
Consolidated other income (expense) increased by $0.1 million to $7.4
million. The main component of consolidated other income (expense) is interest
expense, which increased $0.2 million due to a greater principal amount
outstanding on the Company's $80.0 million credit facility and higher interest
rates associated with the $80.0 million credit facility. At June 30, 2005 and
June 30, 2004, the Company had $50.4 million and $45.6 million outstanding on
the credit facility. In addition during the past quarter, the Company's interest
rate on borrowings ranged between 6.12% and 7.00%, while in the same quarter
last year, the interest rate on borrowings ranged between 4.61% and 5.00%.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004
Consolidated gross operating revenues for the six months ended June 30,
2005 decreased $1.6 million, or 1.1%, from consolidated gross operating revenues
recorded in the six months ended June 30, 2004. Majestic Star's and Fitzgeralds
Black Hawk's gross operating revenues declined by $1.6 million and $0.3 million,
respectively. Fitzgeralds Tunica's gross operating revenues increased $0.3
million. The decrease in consolidated gross operating revenues resulted from a
decline in consolidated casino revenues, which comprise 91.4% of consolidated
gross revenues. Consolidated casino revenues decreased $2.2 million, or 1.6%, to
$139.4 million during the first six months of 2005 as compared to the same
period in 2004. Majestic Star accounted for $1.8 million of the decrease in
consolidated casino revenues, while Fitzgeralds Black Hawk accounted for $0.4
million of the decrease. A 5.0% decline in Majestic Star's table games drop and
a 1.1% decline in table games win percentage resulted in a $1.6 million decline
in table game revenues from the six months ended June 30, 2004. Also adding to
the decline in casino revenue at Majestic Star was a $0.2 million decrease in
slot revenue, which resulted from a 3.7% decline in slot coin-in offset by a
0.3% increase in slot hold percentage. The drop in casino revenues at
Fitzgeralds Black Hawk is primarily the result of a decrease in slot revenue due
to a decline in slot coin-in of 1.7%. At Fitzgeralds Tunica, higher gross
revenues are the result of greater food and beverage revenues, as the property
has enhanced its promotions of food and beverage products served through its
bars and restaurants.
46
Consolidated promotional allowances increased $2.9 million, or 14.6%,
primarily due to increases in casino related promotional cash activities at both
Majestic Star and Fitzgeralds Tunica, and higher levels of complimentaries at
Fitzgeralds Tunica. These expenses were incurred to increase customer visits and
revenues, and to remain competitive in the Chicagoland and Tunica markets.
Majestic Star's promotional allowances increased $1.7 million, or 26.1%, from
the six months ended June 30, 2004 and is directly related to significant
increases in cash based promotions. Promotional allowances at Fitzgeralds Tunica
also increased $1.0 million in the six months ended June 30, 2005, or 9.2%. $0.4
million of Fitzgeralds Tunica's increased promotional allowances came from
providing complimentary products and services to its customers and $0.6 million
of the increase came from promotional cash activities.
Total consolidated operating expenses decreased $0.8 million, or 0.7%, due
primarily to decreases in casino expenses of $2.3 million, gaming and incentive
taxes of $0.5 million, advertising and promotion expenses of $0.5 million and
general and administrative expenses of $3.2 million, offset by increases in
corporate expense of $3.5 million and depreciation of $2.3 million.
Consolidated casino expenses were $33.5 million in the six months ended
June 30, 2005, a decrease of $2.3 million, or 6.4%, from the six months ended
June 30, 2004. Majestic Star experienced a $1.2 million decrease in casino
expense due to lower casino volumes, along with management's continued focus on
reducing costs. Fitzgeralds Tunica's casino expense declined $0.7 million due to
reductions in slot lease and wide area network progressive slot expenses.
Fitzgeralds Back Hawk casino expenses declined $0.4 million due to a decrease in
progressive slot expense and lower casino volumes.
Consolidated gaming taxes decreased $0.5 million, or 1.5%, to $30.1
million in the six months ended June 30, 2005 from the six months ended June 30,
2004, which is directly related to the decline in casino revenues.
Consolidated advertising and promotional expenses declined $0.5 million,
or 6.8%, to $7.4 million. The most significant decline came at Majestic Star,
where advertising and promotional expenses were down $0.7 million. The reduction
is due to reduced advertising on television, radio, billboards, and in print
media.
Consolidated general and administrative expenses decreased $3.2 million,
or 13.3%, to $20.6 million in the six months ended June 30, 2005 from the six
month period ended June 30, 2004. Majestic Star accounted for $2.8 million, or
89.6%, of the reduction. The most significant item affecting Majestic Star's
general and administrative expense was a $2.2 million charge for retroactive
real property taxes for the years 2002 and 2003 taken in the first quarter of
2004. There was not a similar charge in 2005. Majestic Star also incurred lower
berthing fee expenses of $0.5 million related to the operations of BHR, $0.3
million in lower insurance and claim costs, offset by $0.3 million in Indiana
Gaming Commission fines. General and administrative expenses at Majestic
Investor Holdings for the first half of 2005 decreased $0.4 million from 2004.
In the first quarter of 2004 the Company posted an accrual of $0.4 million to
reserve for a judgment in a lawsuit against Fitzgeralds Tunica pertaining to
certain events relating to the acquisition of Fitzgeralds Tunica from its former
owner.
47
Corporate expenses increased $3.5 million, or 207.0%, to $5.2 million. The
increase is primarily attributed to the $2.3 million charge resulting from the
mutual termination of the sale of Fitzgeralds Black Hawk, $0.6 million of costs
associated with the Company's Sarbanes-Oxley 404 compliance project, and $0.2
million of costs incurred when the Company evaluated certain casino investment
opportunities.
Consolidated depreciation and amortization expense increased by $2.3
million to $11.4 million. $0.9 million of the increase resulted from catch-up
depreciation and amortization charges at Fitzgeralds Black Hawk (see Note 3 -
Mutual Termination of Sale of Fitzgeralds Black Hawk). Fitzgeralds Tunica and
Majestic Star recognized increases of $0.8 million and $0.5 million,
respectively. The increases at Fitzgeralds Tunica and Majestic Star result from
capital expenditures made at both properties in 2004 and the first half of 2005.
Consolidated other income (expense) increased by $0.3 million to $14.7
million. The main component of consolidated other income (expense) is interest
expense, which increased $0.4 million due to generally greater principal
outstanding on the Company's $80.0 million credit facility this year versus last
year, and higher interest rates associated with the $80.0 million credit
facility. The Company's interest rate on borrowings ranged between 5.65% and
7.00%, while in the same six month period last year, the interest rate on
borrowings ranged between 4.37% and 5.00%.
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. Over the
course of the year, we generate significant cash flows from operating
activities. For the six months ended June 30, 2005 and 2004, we reported cash
flows from operating activities totaling $6.4 million and $10.9 million,
respectively. We use our cash flows to meet our financial obligations, which
consist principally of financing the daily operations of our casinos, servicing
our debt, funding capital improvements and projects, and making distributions to
BDI under the Manager Agreement and permitted tax distribution under the
indenture.
At June 30, 2005, $50.4 million was outstanding under the $80.0 million
credit facility. The Company had unrestricted cash and cash equivalents of $16.4
million at June 30, 2005, compared to $16.7 million at December 31, 2004. For
the six months ended June 30, 2005, the Company spent $8.0 million primarily for
slot machines and TITO implementation at all of its properties, various remodel
projects, principally at Majestic Star, and a new slot player tracking and
marketing system and costs associated with burying a storm sewer pipe below
grade, both at Fitzgeralds Black Hawk. During the six months ended June 30,
2004, the Company spent $29.2 million for property, plant and equipment, which
consisted principally of the purchase of 170 acres of property adjacent to
Majestic Star and the Buffington Harbor facilities, the construction of a new
administration building and integration of slot machines with TITO technology at
Majestic Star, the installation of new slot player tracking and marketing
software at Fitzgeralds Tunica, a partial expansion and remodel of our casino
floor at Fitzgeralds Tunica, and our continued investment in the newest gaming
and related equipment at all of our properties. The Company intends to spend up
to an additional $4.0 million on capital expenditures in 2005, which is the
remaining amount allowed under the 2005 capital expenditure covenant contained
within the $80.0 million credit facility. This amount will be primarily directed
toward purchasing new slot machines and integrating slot machines with TITO at
all of our properties,
48
and limited remodel projects at Majestic Star and Fitzgeralds Tunica. We believe
that TITO technology will lead to greater efficiency on our casino floor, thus
providing cost savings, and longer slot machine playing times by our customers
without interruptions, which should enhance the guest experience and our casino
revenues.
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. No assurance can be
given that our operating cash flows or proceeds from additional financings, if
available, will be sufficient for such purposes.
While we continue to evaluate potential opportunities to expand our
existing casinos or to pursue other growth opportunities, we may not have
sufficient funds to finance such strategic projects under our existing debt
agreements. In addition, our existing debt agreements limit our ability to incur
additional debt unless we can meet certain financial ratios. Should the Company
identify an asset, business acquisition or expansion opportunity, 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. On July 14, 2005, the City of Black Hawk delivered a Notice of
Abatement to Fitzgeralds Black Hawk. The notice requires that Fitzgeralds Black
Hawk remove the iron beams supporting the walls of the historic Masonic building
on our property. Previously, the building was substantially demolished in
anticipation of expansion and two of the walls of the structure remain in place.
The permit allowing for use of the iron beams to support the Masonic building
walls expired in June of this year. We are now negotiating with the City of
Black Hawk, asking the City of Black Hawk to allow us to remediate the
situation. Our current proposal would allow us to remove a portion of the iron
beams without engaging the expansion. We anticipate our proposed remediation to
cost between $0.3 million and $0.4 million. While the City of Black Hawk has
given an initial approval to our proposal, the City of Black Hawk has made it
clear that they want to see progress with regard to the expansion in the near
future. At this time we do not know how long the City of Black Hawk will permit
our proposed remediation. It is anticipated that the expansion would cost over
$20.0 million. There is no guarantee that the Company will be able to move
forward with an expansion that would meet the City of Black Hawk's desired
timetable, or that the expansion will be economically viable for the Company.
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. In addition, in
April 2005, the Company made distributions to its member of $2.3 million for
2004 state income tax liabilities and 2005 estimated state tax liabilities. The
Company anticipates that it will make future distributions to fund its member's
tax liabilities.
49
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 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 Company's 2004
purchase of 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.
On August 10, 2005, the Company entered into Amendment Number Three to the
Loan and Security Agreement ("Amendment Three"). Amendment Three modifies the
definition of EBITDA such that the Company can add back to EBITDA the
termination charge of $2.3 million related to the sale of Fitzgeralds Black
Hawk. (See Note 3 - Mutual Termination of Sale of Fitzgeralds Black Hawk).
Without Amendment Three, the Company would not have met the minimum last twelve
month EBITDA covenant, as of June 30, 2005, as contained in the Loan and
Security Agreement. In addition, the Company also amended the quarterly interest
coverage ratio covenant contained in the Loan and Security Agreement, starting
with the third quarter of 2005 through the fourth quarter of 2006. These
amendments are effective as of June 15, 2005.
As of June 30, 2005, the Company had $29.6 million available on its $80.0
million credit facility.
INCOME TAX MATTERS
The Company 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 BDI, 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 fiscal year 2003. 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
50
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 Company is a limited liability company, and
as such, it is a pass-through entity for federal and state tax purposes.
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. Accordingly, no liability has been accrued by the Company relating to
this matter.
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 for the years in
which an assessment was received until it has fully evaluated its options with
its member and parent, BDI. In April 2005, BDI's non-resident shareholder paid
Indiana state income tax for fiscal year 2004 pursuant to the Indiana Tax
Court's decision in Aztar. BDI's non-resident shareholder determined that the
arguments to be made by the Company and BDI related to the assessed years were
not applicable to fiscal year 2004.
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 June 30, 2005.
Payments Due By Year
------------------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter Total
-------------- -------------- ------------ ------------ ------------ ------------- -------------
Contractual Obligations
Long-Term Debt $ - $ - $ 16,290,000 $ - $ - $ 260,000,000 $ 276,290,000
Credit Facility - - 50,352,164 - - - 50,352,164
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) 3,532,834 3,532,834 2,747,760 - - - 9,813,428
-------------- -------------- ------------ ------------ ------------ ------------- -------------
Total $ 32,889,142 $ 32,728,648 $ 98,248,097 $ 26,785,156 $ 26,583,904 $ 284,026,370 $ 501,261,317
============== ============== ============ ============ ============ ============= =============
(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 7.0% is based on the current three-month LIBOR rate at
June 30, 2005 plus the current applicable margin of 3.50% associated with
the Company's LIBOR based loans.
On March 26, 1996, the City of Gary and Majestic Star entered into a
development agreement, which requires Majestic Star to pay the City an economic
incentive equal to 3% of Majestic Star's adjusted gross receipts, as defined by
the Riverboat Gambling Act. In the three- and six-month periods ended June 30,
2005, Majestic Star paid $1.1 million and $2.3 million, respectively to the City
of Gary in economic incentive taxes, compared to $1.2 million and $2.3 million
in the same three- and six-month periods last year.
51
RECENT 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.
In May 2005, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 154, "Accounting Changes and Error
Corrections-a replacement of APB No. 20 and FASB Statement No. 3" ("SFAS 154").
SFAS 154 replaces APB No. 20, "Accounting Changes" and FASB Statement No. 3,
"Reporting Accounting Changes in Interim Financial Statements" and changes the
requirements for the accounting for and reporting of a change in accounting
principle. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 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.
52
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information reported in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2004.
ITEM 4.
CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 15d-15 of the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective to cause the material information required
to be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 to be recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives.
There have been no changes in the Company's internal controls during the
quarter ended June 30, 2005 that have materially affected, or are reasonably
likely to materially affect the Company's financial reporting.
53
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal proceedings are pending against the Company. Management
considers all such pending proceedings, comprised primarily of personal injury
and equal employment opportunity (EEO) claims, to be routine litigation
incidental to the Company's business. Except as described below, management
believes that the resolution of these proceedings will not individually or in
the aggregate, have a material effect on the Company's financial condition,
results of operations or cash flows.
In July 2004, a former employee of The Majestic Star Casino, LLC filed a
collective action against the Company and the motor vessel ("M/V") Majestic Star
to collect overtime wages which plaintiff alleges were not paid in violation of
the Fair Labor Standards Act. The Company believes that plaintiff is not
entitled to overtime wages because able bodied seamen are exempt from the
provisions of the FLSA. On July 6, 2005, the court entered an order dismissing
with prejudice the plaintiff's claims against the M/V Majestic Star and the
plaintiff's claims to enforce a maritime lien against Majestic Star Casino. The
court allowed to stand plaintiff's Fair Labor Standards Act claims against
Majestic Star Casino. There are currently five plaintiffs who have consented to
join the collective action. One of the five plaintiffs is time barred from
proceeding with a FLSA claim against the Company, and thus, on July 19, 2005 the
Company filed a motion to dismiss the claims filed by that plaintiff. The
Company has filed an answer to the FLSA claims of the remaining four plaintiffs.
There could be six additional seamen who qualify to join the collective action.
It is too early to determine the outcome and the effect, if any, on the
Company's financial position and results of operations. The Company has accrued
$35,000 for legal and other costs related to this claim.
In June 2003, a complaint was filed in the U.S. District Court for the
Northern District of Mississippi against Tunica County casino owners and
operators, including Barden Mississippi, the Tunica Casino Operators Association
and the Tunica County Tourism Commission alleging violation of federal and state
anti-trust claims, 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. Each of the casino defendants, including Barden Mississippi,
has filed counterclaims against the plaintiffs alleging, among other claims,
trademark infringement. The plaintiffs' antitrust and common law tort claims
against the Tunica County Tourism Commission have been dismissed. The casino
defendants have filed a motion for summary judgment on each of the claims
alleged against them and the plaintiffs have filed a motion for summary judgment
with respect to each of the casino defendants' counterclaims. Both motions are
currently pending before the court. Mediation is currently scheduled for October
6th and 7th of 2005 and trial is currently set for February 13, 2006. The
Company intends to vigorously defend against the 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. The Company has established an
accrual of $75,000 for legal fees and other costs.
54
ITEM 6. EXHIBITS
(a) The following exhibits are filed as part of this report:
Exhibit No. Description of Document
31.1 Certification of Chief Executive Officer pursuant to
Rule 15d-14 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Rule 15d-14 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
55
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 15, 2005
THE MAJESTIC STAR CASINO, LLC
/s/ Don H. Barden
- -------------------------
Don H. Barden
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jon S. Bennett
- -------------------------
Jon S. Bennett
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
THE MAJESTIC STAR CASINO CAPITAL CORP.
/s/ Don H. Barden
- -------------------------
Don H. Barden
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jon S. Bennett
- -------------------------
Jon S. Bennett
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
56
EXHIBIT INDEX
31.1 Certification of Chief Executive Officer pursuant to Rule 15d-14 of
the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule 15d-14 of
the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
57