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, 2003
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 in its charter) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
ONE BUFFINGTON HARBOR DRIVE
GARY, INDIANA
46406-3000
(219) 977-7823
(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 Act)
Yes No X
--------- ---------
As of June 30, 2003, 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
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2003 (Unaudited)
and December 31, 2002...............................................................1
Consolidated Statements of Operations for the three and six months
ended June 30, 2003 and 2002 (Unaudited)............................................2
Consolidated Statement of Changes in Member's Deficit for the
six months ended June 30, 2003 (Unaudited) and the year ended
December 31, 2002...................................................................3
Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and 2002 (Unaudited)............................................4
Notes to Financial Statements.......................................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................27
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........................40
Item 4. Controls and Procedures.............................................................40
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................................40
Item 6. Exhibits and Reports on Form 8-K....................................................40
SIGNATURES...................................................................................41
i
PART I FINANCIAL INFORMATION
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 33,936,855 $ 24,547,881
Restricted cash 500,000 250,000
Accounts receivable, less allowance for doubtful accounts
of $303,137 and $372,689 as of June 30, 2003 and December 31, 2002, respectively 2,591,401 2,974,726
Inventories 958,697 982,486
Prepaid expenses 4,024,072 2,921,064
Note receivable due from affiliate - 700,000
Due from Buffington Harbor Riverboats, L.L.C. 427,221 217,925
------------ ------------
Total current assets 42,438,246 32,594,082
------------ ------------
Property, equipment and improvements, net 162,993,619 164,809,158
Intangible assets, net 16,894,246 17,691,746
Goodwill 5,922,398 5,922,398
Other Assets:
Deferred financing costs, net of accumulated amortization
of $5,463,402 and $4,375,528 as of June 30, 2003 and December 31, 2002, respectively 8,286,531 9,372,067
Investment in Buffington Harbor Riverboats, L.L.C. 30,634,131 31,833,311
Restricted cash 1,000,000 1,000,000
Other assets 12,286,830 12,587,112
------------ ------------
Total other assets 52,207,492 54,792,490
------------ ------------
Total Assets $280,456,001 $275,809,874
============ ============
LIABILITIES AND MEMBER'S DEFICIT
Current Liabilities:
Current maturities of long-term debt $ 81,224 $ 134,084
Accounts payable 3,471,539 4,048,298
Payroll and related 7,735,132 7,656,515
Accrued interest 8,542,542 1,473,785
Other accrued liabilities 12,239,743 12,145,469
------------ ------------
Total current liabilities 32,070,180 25,458,151
Long-term debt, net of current maturities 275,280,449 274,526,285
------------ ------------
Total Liabilities 307,350,629 299,984,436
Commitments and contingencies -- --
Member's Deficit (26,894,628) (24,174,562)
------------ ------------
Total Liabilities and Member's Deficit $280,456,001 $275,809,874
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
1
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
------------------ ----------------- ---------------- ----------------
REVENUES:
Casino $ 73,140,266 $ 72,066,873 $ 147,908,146 $ 145,560,289
Rooms 3,584,913 3,938,875 7,383,698 8,027,386
Food and beverage 5,098,410 5,288,758 10,351,272 10,818,004
Other 1,461,789 1,526,364 2,833,425 2,811,185
-------------- ------------- ------------- -------------
Gross revenues 83,285,378 82,820,870 168,476,541 167,216,864
Less promotional allowances (5,864,485) (5,945,547) (11,801,067) (12,284,762)
-------------- ------------- ------------- -------------
Net revenues 77,420,893 76,875,323 156,675,474 154,932,102
COSTS AND EXPENSES:
Casino 25,742,852 25,201,858 50,104,640 50,735,288
Rooms 1,641,287 1,863,809 3,187,183 3,632,309
Food and beverage 2,983,876 3,362,508 5,865,938 6,584,184
Other 410,449 396,601 820,057 775,255
Gaming taxes 15,887,061 13,428,854 30,203,147 27,025,440
Advertising and promotion 4,780,429 5,162,961 9,746,833 9,873,999
General and administrative 12,922,765 12,637,577 25,845,500 24,702,763
Economic incentive - City of Gary 1,011,164 948,882 2,071,411 1,887,142
Depreciation and amortization 5,698,320 5,777,366 11,369,896 11,442,019
Pre-opening expenses - 6,103 - 13,390
-------------- ------------- ------------- -------------
Total costs and expenses 71,078,203 68,786,519 139,214,605 136,671,789
-------------- ------------- ------------- -------------
Operating income 6,342,690 8,088,804 17,460,869 18,260,313
-------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 27,137 38,488 64,237 77,970
Interest expense (7,961,446) (8,120,449) (15,923,974) (16,284,461)
Gain (loss) on sale of assets 8,762 2,886 (100,958) 9,428
Other non-operating expense (46,640) (41,298) (94,454) (92,291)
-------------- ------------- ------------- -------------
Total other expense (7,972,187) (8,120,373) (16,055,149) (16,289,354)
-------------- ------------- ------------- -------------
Net (loss) income $ (1,629,497) $ (31,569) $ 1,405,720 $ 1,970,959
============== ============= ============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
2
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND THE YEAR ENDED DECEMBER 31, 2002
Capital Accumulated Total
Contributions Deficit Members' Deficit
------------- ------------ ----------------
Balance, December 31, 2001 $ 29,000,000 $(48,981,487) $(19,981,487)
Net income - 1,315,754 1,315,754
Distribution to Manager - (5,508,829) (5,508,829)
------------- ------------ ------------
Balance, December 31, 2002 29,000,000 (53,174,562) (24,174,562)
Net income - 1,405,720 1,405,720
Distribution to Manager - (3,565,980) (3,565,980)
Equity in property acquired from related party - (559,806) (559,806)
------------- ------------ ------------
Balance, June 30, 2003 $ 29,000,000 $(55,894,628) $(26,894,628)
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
THE MAJESTIC STAR CASINO, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
2003 2002
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,405,720 $ 1,970,959
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 7,489,647 7,578,116
Amortization 2,681,069 2,656,003
Loss on investment in Buffington Harbor Riverboats, L.L.C 1,199,180 1,207,900
Loss (gain) on sale of assets 100,958 (9,428)
Changes in operating assets and liabilities:
Decrease in accounts receivable 16,325 182,072
Decrease in inventories 23,788 20,272
Increase in prepaid expenses (1,307,754) (1,309,205)
Decrease in other assets 292,229 361,851
(Decrease) increase in accounts payable (576,759) 818,028
Increase in related party receivables - (287,499)
Increase in accrued payroll and related expenses 58,616 10,369
Increase in accrued interest 7,068,756 270,242
Increase(decrease) in other accrued liabilities 114,280 (347,129)
-------------- -------------
Net cash provided by operating activities 18,566,055 13,122,551
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of acquisition related costs - (986,158)
Proceeds from seller from purchase price adjustment - 3,800,000
Acquisition of property, equipment and improvements (5,823,805) (6,238,519)
Equity in property acquired from related party (559,806) -
Increase in prepaid lease and deposits - (74,000)
Increase in restricted cash (250,000) (250,000)
Investment in Buffington Harbor Riverboats, L.L.C 3,500 (40,455)
Proceeds from sale of equipment 48,739 42,717
-------------- -------------
Net cash used in investing activities (6,581,372) (3,746,415)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit - 10,600,000
Repayment of line of credit - (15,107,565)
Payment of 11.653% Senior Secured Notes issuance costs (2,337) (1,084,355)
Cash paid to reduce long-term debt (94,392) (65,140)
Cash received from loans to related parties 1,067,000 -
Distribution to Barden Development, Inc. (3,565,980) (1,693,573)
-------------- -------------
Net cash used in financing activities (2,595,709) (7,350,633)
-------------- -------------
Net increase in cash and cash equivalents 9,388,974 2,025,503
Cash and cash equivalents, beginning of period 24,547,881 25,925,291
-------------- -------------
Cash and cash equivalents, end of period $ 33,936,855 $ 27,950,794
============== ==============
INTEREST PAID:
Equipment Debt $ 8,787 $ 8,391
Senior Secured Notes - Fixed Interest 10-7/8% - 7,068,750
Senior Secured Notes - Fixed Interest 11.653% 8,842,704 8,707,126
Lines of credit 226 197,730
-------------- -------------
Total $ 8,851,717 $ 15,981,997
============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
4
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
The Majestic Star Casino, LLC (the "Company") was formed on December 8,
1993 to provide gaming and related entertainment to the public. The Company
commenced gaming operations at Buffington Harbor, in Gary, Indiana, on June 7,
1996. Majestic Investor, LLC was formed on September 12, 2000 as an
"unrestricted subsidiary" of the Company under the Indenture relating to the
Company's 10-7/8% Senior Secured Notes ("Majestic Indenture"). Majestic
Investor, LLC was initially formed to satisfy the Company's off-site development
obligations under the Development Agreement with Gary.
Majestic Investor, LLC entered into a definitive purchase and sale
agreement dated as of November 22, 2000, as amended December 4, 2000, with
Fitzgeralds Gaming Corporation ("Fitzgeralds") and certain of its affiliates to
purchase substantially all of the assets and certain liabilities of three of its
subsidiaries for approximately $149.0 million in cash, subject to adjustment in
certain circumstances. Majestic Investor, LLC assigned all of its rights and
obligations to Majestic Investor Holdings, LLC, a wholly-owned subsidiary of
Majestic Investor, LLC. Majestic Investor Holdings, LLC completed the purchase
of substantially all of the assets and certain liabilities on December 6, 2001
and commenced operations on December 7, 2001. The three Fitzgeralds brand
casinos are "restricted subsidiaries" of Majestic Investor Holdings, LLC under
the Indenture relating to Majestic Investor Holdings, LLC's 11.653% Senior
Secured Notes (the "Holdings Indenture") and "unrestricted subsidiaries" under
the Majestic Indenture relating to the Company's 10-7/8% Senior Secured Notes.
Except where otherwise noted, the words "we," "us," "our" and similar
terms, as well as the "Company" refer to The Majestic Star Casino, LLC and all
of its subsidiaries.
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited and
include the accounts of the Company and its wholly owned subsidiary, Majestic
Investor, LLC. All intercompany 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" 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 prepared in accordance with GAAP have been condensed or
omitted. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates
incorporated into our consolidated financial statements include the estimated
useful lives of depreciable and amortizable assets, the estimated allowance for
doubtful accounts receivable, estimated cash flow in assessing the
recoverability of long lived assets, estimated liabilities for our self insured
medical plan, slot club point programs and litigation, claims and assessments.
Actual results could differ from those estimates.
5
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, all adjustments (which include normal
recurring adjustments) considered necessary for a fair statement of the
results for the interim periods have been made. The results for the three and
six months ended June 30, 2003 are not necessarily indicative of results to be
expected for the full fiscal year. The financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
The consolidated financial statements and footnotes for prior year
reflect certain reclassifications to conform to the current year presentation,
which have no effect on previously reported net income.
NOTE 3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 145 ("SFAS 145"). Among other
matters, SFAS 145 addresses the presentation for gains and losses on early
retirements of debt in the statement of operations. SFAS 145 is effective for
fiscal years beginning after May 15, 2003. Adoption of SFAS 145 did not have a
material impact on the Company's financial condition or results of operation.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Guarantees of Indebtedness of Others."
FIN 45 elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain guarantees
that it has issued. It also clarifies (for guarantees issued after January 1,
2003) that a guarantor is required to recognize at the inception of a guarantee,
a liability for the fair value of the obligations undertaken in issuing the
guarantee. At June 30, 2003, the Company did not have any guarantees outside of
its consolidated group. Adoption of FIN 45 did not have a material impact on the
Company's financial condition or results of operation.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities."
FIN 46 addresses the requirements for business enterprises to consolidate
related entities in which they are determined to be the primary economic
beneficiary as a result of their variable economic interests. FIN 46 is intended
to provide guidance in judging multiple economic interests in an entity and in
determining the primary beneficiary. FIN 46 outlines disclosure requirements for
Variable Interest Entities ("VIEs") in existence prior to January 31, 2003, and
outlines consolidation requirements for VIEs created after January 31, 2003. The
Company has reviewed its major relationships and its overall economic interests
with other companies consisting of related parties, companies in which it has an
equity position and other suppliers to determine the extent of its variable
economic interest in these parties. The review has not resulted in a
determination that the Company would be judged to be the primary economic
beneficiary in any material
6
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. NEW ACCOUNTING PRINCIPLES (CONTINUED)
relationships, or that any material entities would be judged to be VIEs of the
Company. The Company believes it has appropriately reported the economic impact
and its share of risks of its commercial relationships through its equity
accounting along with appropriate disclosure of its commitments.
NOTE 4. RESTRICTED CASH
At June 30, 2003 and December 31, 2002, restricted cash of $1.0 million
represents U.S. Treasury Notes held in an escrow account for the benefit of
certain owners of land leased to Fitzgeralds Las Vegas. Also, at December 31,
2002, restricted cash of $250,000 at Majestic Investor Holdings, LLC, represents
a letter of credit for self-insured workers compensation at Fitzgeralds Tunica
and Fitzgeralds Black Hawk. As of June 30, 2003, this amount has been increased
to $500,000 due to Fitzgeralds Las Vegas being added to the self-insured workers
compensation program.
NOTE 5. INVESTMENT IN BUFFINGTON HARBOR RIVERBOATS, L.L.C. ("BHR")
On October 31, 1995, the Company and Trump Indiana, Inc. ("Trump")
entered into the First Amended and Restated Operating Agreement of BHR for the
purpose of acquiring and developing certain facilities for the gaming operations
in Gary ("BHR Property"). BHR is responsible for the management, development and
operation of the BHR Property. The Company and Trump have each entered into a
berthing agreement with BHR to use BHR Property for their respective gaming
operations and have committed to pay cash operating losses of BHR as additional
berthing fees. The Company and Trump share equally in the operating expenses
relating to the BHR Property, except for costs associated with food and
beverage, and valet operations, which are allocated on a percentage of use by
the casino customers of the Company and Trump.
The Company paid approximately $1.3 million and $2.5 million,
respectively, in berthing fees for the three and six months ended June 30, 2003,
compared to approximately $1.3 million and $2.9 million respectively, for the
three months and six months ended June 30, 2002. Such amounts are recorded in
general and administrative expense in the consolidated statements of operations.
In addition, the Company has paid approximately $177,000 and $380,000, and
$200,000 and $403,000, respectively, for costs associated with food and beverage
in each of the three and six month periods ended June 30, 2003 and 2002. Such
amounts are recorded in casino expenses in the Company's consolidated statements
of operations. After the company and Trump reimburse BHR for all cash
operational losses, the remaining net loss of BHR results from depreciation
expense associated with the BHR property. The Company has elected to record its
allocated portion of BHR's net loss within depreciation expense in its
consolidated statements of operations. The allocated net loss recorded in
depreciation expense for the three and six months ended June 30, 2003 is
approximately $595,000 and $1,199,000, respectively, compared to $602,000 and
$1,208,000, respectively, for the three and six months ended June 30, 2002.
7
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following represents selected financial information of BHR:
Buffington Harbor Riverboats, L.L.C.
Statements of Operations
(Unaudited)
For the Three Months Ended June 30, For the Six Months Ended June 30,
2003 2002 2003 2002
---------------- ---------------- ---------------- ---------------
Gross revenue $ 3,338,167 $ 3,704,729 $ 6,715,975 $ 7,922,702
Operating Income $ 1,852 $ 3,645 $ 5,158 $ 8,635
Net loss $ (1,190,320) $ (1,200,235) $ (2,398,361) $ (2,412,155)
NOTE 6. INTANGIBLE ASSETS
The Company (Gary property only) has no intangible assets. Intangible
assets at Majestic Investor Holdings, LLC primarily include $9.8 million for
customer relationships, $3.7 million for trade name and $5.2 million for gaming
licenses. Intangible assets for customer relationships and trade names are being
amortized over a period of 8-10 years. In accordance with SFAS 142, goodwill and
other indefinite lived intangible assets, such as Majestic Investor Holdings,
LLC's gaming license, are not amortized but instead are subject to impairment
testing at least annually.
The gross carrying amount and accumulated amortization of the
intangible assets, other than goodwill, as of June 30, 2003, are as follows:
Gross Carrying Accumulated Net Amount
Amount Amortization June 30, 2003
-------------- -------------- --------------
(in thousands) (in thousands) (in thousands)
Amortized intangible assets:
Customer relationships $ 9,800 $ (1,926) $ 7,874 8 yrs
Tradename 3,700 (580) 3,120 10 yrs
Riverboat excursion license 700 - 700 15 yrs
---------- ---------- ----------
14,200 (2,506) 11,694
Unamortized intangible
assets:
Gaming license 5,200 - 5,200
---------- ---------- ----------
Total intangible assets $ 19,400 $ (2,506) $ 16,894
========== ========== ==========
8
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INTANGIBLE ASSETS (CONTINUED)
The amortization expense recorded on the intangible assets for both the
three and six months ended June 30, 2003 and 2002 were $0.4 million and $0.8
million, respectively.
NOTE 7. GOODWILL
There were no changes in the carrying amount of goodwill for the three
and six months ended June 30, 2003. The carrying amount of goodwill as of June
30, 2003 and December 31, 2002 were approximately $5,922,000. In accordance with
SFAS 142, goodwill is not amortized but instead subject to impairment testing at
least annually.
NOTE 8. LONG-TERM DEBT
On June 18, 1999, the Company issued $130.0 million of 10-7/8% Senior
Secured Notes due 2006. In October 1999, the Company successfully completed an
exchange of its privately placed $130.0 million 10-7/8% Senior Secured Notes
Series A for $130.0 million 10-7/8% Senior Secured Notes Series B due 2006 (the
Senior Secured Notes") that are registered with the Securities and Exchange
Commission. The Senior Secured Notes bear interest at a fixed rate of 10-7/8%
per annum payable January 1 and July 1 each year, commencing January 1, 2000.
Substantially all of the Company's current and future assets other than certain
excluded assets are pledged as collateral. Excluded assets include the assets of
our "unrestricted subsidiaries," which include the subsidiaries that hold our
Fitzgeralds assets. The notes rank senior in right of payment to any of the
Company's subordinated indebtedness and equally with any of the Company's senior
indebtedness.
After July 1, 2003, the Company may, at its option, redeem all or some
of the notes at a premium that will decrease over time from 105.438% to 100% of
their face amount, plus interest. If the Company goes through a change of
control, it must give holders of the notes the opportunity to sell the Company
their notes at 101% of their face amount, plus interest.
The Majestic Indenture contains covenants, which among other things,
restrict the Company's ability to (i) make certain distributions and payments,
(ii) incur additional indebtedness, (iii) enter into transactions with
affiliates, (iv) sell assets or stock, and (v) merge, consolidate or transfer
substantially all of its assets.
On December 6, 2001, Majestic Investor Holdings and Majestic Investor
Capital, as co-issuer, issued $152.6 million of 11.653% Senior Secured Notes due
2007 (the "11.653% Senior Secured Notes"). The net proceeds of $145,000,400 from
the offering, together with an equity contribution from Majestic Investor, LLC,
were utilized to purchase substantially all of the assets and liabilities of
Fitzgeralds Mississippi Inc., 101 Main Street Limited Liability Company and
Fitzgeralds Las Vegas, Inc. and to pay related fees and expenses.
9
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. LONG-TERM DEBT (CONTINUED)
The Majestic Investor Holdings Senior Secured Notes bear interest at a
fixed rate of 11.653% per annum payable May 31 and November 30 each year,
commencing on May 31, 2002, substantially all of Majestic Investor Holdings'
current and future assets, other than certain excluded assets, are pledged as
collateral. The notes rank senior in right of payment to any of Majestic
Investor Holdings' subordinated indebtedness and equally with any of Majestic
Investor Holdings' senior indebtedness.
In connection with the issuance by Majestic Investor Holdings of
unregistered 11.653% Senior Secured Notes, Majestic Investor Holdings entered in
a registration rights agreement pursuant to which it agreed to file with the
Securities and Exchange Commission ("SEC") a registration statement (the
"Registration Statement") to exchange up to registered 11.653% Senior Secured
Notes under the Securities Act of 1933 for any and all of its outstanding
unregistered 11.653% Senior Secured Notes. The registration rights agreement
required Majestic Investor Holdings to pay liquidated damages to the holders of
the unregistered 11.653% Senior Secured Notes if the Registration Statement was
not declared effective by the SEC on or prior to April 5, 2002. The Registration
Statement was declared effective by the SEC on August 8, 2002 and Majestic
Investor Holdings was required to pay liquidated damages pursuant to the terms
of the registration rights agreement for the period from April 6, 2002 until
August 8, 2002. On May 31, 2002, in connection with the first scheduled interest
payment on the unregistered 11.653% Senior Secured Notes, Majestic Investor
Holdings, made its initial liquidated damages payment of $61,053 to the holders
of the 11.653% Senior Secured Notes. The final liquidated damages payment of
$114,474 was paid to the holders of the unregistered 11.653% Senior Secured
Notes on November 30, 2002. Pursuant to the Registration Statement, the offer to
exchange the registered 11.653% Senior Secured Notes for any or all of the
unregistered 11.653% Senior Secured Notes commenced on August 8, 2002 and
completed on September 6, 2002.
On or after November 30, 2005, Majestic Investor Holdings has the
right to redeem notes from time to time at a price that will decrease over time
from 105.827% of the principal amount in 2005 to 100% of the principal amount in
2006, plus, in each case, accrued and unpaid interest. Prior to November 30,
2004, Majestic Investor Holdings may, at its option, apply part of the net
proceeds from certain equity offerings to redeem up to 35% of the principal
amount of the notes at 111.653% of their face amount, plus accrued and unpaid
interest.
The Holdings Indenture contains covenants, which among other things,
restrict Majestic Investor Holdings ability to (i) make certain distributions
and payments, (ii) incur additional indebtedness, (iii) enter into transactions
with affiliates, (iv) sell assets or stock, and (v) merge, consolidate or
transfer substantially all of its assets.
During 2002, Majestic Investor Holdings purchased for $759,000, plus
accrued interest, its 11.653% Senior Secured Notes with a face value of
$865,000. The notes, net of un-amortized original issue discount, were being
carried at a value of $828,000; the resulting gain was $69,000.
10
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. LONG-TERM DEBT (CONTINUED)
Credit Facilities
In August 1999, the Company established a $20.0 million credit facility
(the "Majestic Credit Facility"), which is also secured by substantially all
current and future assets, other than certain excluded assets. The lien on the
collateral securing this Majestic Credit Facility is structurally senior to the
lien securing the 10-7/8% Senior Secured Notes. There were no borrowings on the
Majestic Credit Facility as of June 30, 2003 and December 31, 2002.
The terms of the Majestic Credit Facility is four years with an
interest rate at the Company's choice of LIBOR plus 3.75% or 1.5 percentage
points above the base rate. The base rate approximates the prime rate. The
minimum interest rate is 8.5%. The credit agreement includes covenants, which
among other things, (i) require operating income as defined in the credit
facility of at least $10.0 million for twelve consecutive months during the
credit period, and (ii) restrict the Company's ability to incur, assume, or
guarantee any indebtedness.
In December 2001, Majestic Investor Holdings established a $15.0
million credit facility (the "MIH Credit Facility"). The terms of the MIH Credit
Facility is four years with an interest rate at the Company's choice of LIBOR
plus 2.0%, or the base rate, which approximates the prime rate. The credit
facility is secured by substantially all of Majestic Investor Holdings current
and future assets, other than certain excluded assets. The lien on the
collateral securing MIH Credit Facility is senior to the lien on the collateral
securing the 11.563% Senior Secured Notes. The MIH Credit Facility also contains
financial covenants and restrictions on, among other things, indebtedness,
investments, distributions and mergers. There were no borrowing on the MIH
Credit Facility as of June 30, 2003 and December 31, 2002.
On July 28, 2003, the Company extended its existing $20 million credit
facility. Previously, the Majestic Credit Facility was set to expire on August
2, 2003. The extension runs through November 2, 2003. The terms and conditions
of the extended facility are similar to that of the current Majestic Credit
Facility.
Intercreditor Agreements
In connection with Majestic Star entering into its Majestic Credit
Facility, the trustee (as collateral agent) under the Majestic Indenture entered
into an intercreditor agreement with Wells Fargo Foothill, Inc., the lender
under Majestic Credit Facility. In addition, in connection with Majestic
Investor Holdings entering into its MIH Credit Facility, the trustee (as
collateral agent) under the Holdings Indenture entered into a virtually
identical intercreditor agreement with Wells Fargo Foothill, Inc., the lender
under MIH Credit Facility. Both intercreditor agreements provide for the
subordination of the liens securing the respective senior secured notes to the
liens securing the indebtedness under the respective Majestic and MIH credit
facilities.
The intercreditor agreements, among other things, limit the trustee's
rights in an event of default under the respective Majestic Star and Majestic
Investor Holdings Senior Secured Notes. Under the intercreditor agreements, if
the respective Majestic Star and Majestic Investor Holdings Senior Secured Notes
become due and payable prior to the stated maturity or are not paid in full at
the stated maturity at a time during which there is indebtedness outstanding
under the corresponding credit facilities, the trustee will not have the right
to foreclose upon the collateral unless and until the lender under the
corresponding Majestic and MIH Credit Facilities fails to take steps to exercise
remedies with respect to or in connection with the collateral within 180 days
following notice to such lender of the occurrence
11
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. LONG-TERM DEBT (CONTINUED)
of an event of default under the corresponding indenture. In addition, the
intercreditor agreements prevent the trustee and the holders of the respective
Majestic Star and Majestic Investor Holdings Senior Secured Notes from pursuing
remedies with respect to the collateral in an insolvency proceeding. The
intercreditor agreements also provide that the net proceeds from the sale of the
corresponding collateral will first be applied to repay indebtedness outstanding
under the corresponding Majestic and MIH Credit Facilities and thereafter to the
holders of the corresponding Majestic Star and Majestic Investor Holdings Senior
Secured Notes.
NOTE 9. 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. 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.
There have been no significant changes in legal proceedings previously
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002, except for those legal proceedings described below.
On June 27, 2003, a complaint was filed in the U.S. District Court for
the Northern District of Mississippi against several Tunica-area casino owners
and operators, including Fitzgeralds Tunica. The plaintiffs claim that the
defendants conspired to agree not to enter into any advertising or other
agreements with the plaintiffs, in violation of federal and state antitrust
laws, as well as various other tort and contract claims. The plaintiffs are
seeking treble, compensatory and punitive damages totaling approximately $33.0
million, plus interest and attorney's fees. The Company intends to vigorously
defend against this lawsuit. However, it is too early to determine the outcome
and the effect, if any, on the Company's financial position and results of
operations.
On November 3, 2000, a complaint was filed in the State of Indiana,
Lake County Court, Civil Division. The plaintiff, a former employee, filed a
complaint under Title VII of the Civil Rights Act of 1964. At December 31, 2002,
a reserve for $250,000 was established in the event of a judgment against the
Company. On August 6, 2003 the parties agreed to settle the matter for $265,000.
On May 11 and 12, 2000, the Company was issued notices of proposed
assessment by the Indiana Department of Revenue for income tax withholding
deficiencies for the years ended December 31, 1996 and 1998. The Indiana
Department of Revenue has taken the position that Indiana gross wagering tax
must be added back to the Company's income for the purpose of determining the
Indiana adjusted gross income tax on the Company's non-resident member, and that
the Company had the duty to withhold and remit adjusted gross income tax payable
by its non-resident member. The tax deficiency assessed for 1996 and 1998 totals
$553,744, plus accrued interest. On February 10, 2003, the Company was issued
notices of proposed assessment by the Indiana Department of Revenue for income
tax withholding deficiencies for the years ended December 31, 1999, 2000 and
2001, concerning the same issue. The tax deficiency assessed for 1999-2001
totals $2,012,397 plus accrued interest. The Company has filed administrative
protests and demands for hearing with the Department of Revenue to protect its
rights with respect to all tax years. However, it is too early to determine the
outcome of these contested tax assessments.
12
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. COMMITMENTS AND CONTINGENCIES (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 all
persons on riverboats where gaming operations are conducted. The IGC is
empowered to regulate a wide variety of gaming and nongaming related activities,
including the licensing of supplies to, and employees at, riverboat gaming
operations and to approve the form of entity qualifiers and intermediary and
holding companies. The IGC has broad rulemaking power, and it is impossible to
predict what effect, if any, the amendment of existing rules or the finalization
of proposed rules might have on the Company's operations.
A change in the Indiana state law governing gaming took effect on July
1, 2002. The new law enables Indiana's riverboat casinos to operate dockside.
The IGC approved Majestic Star's flexible boarding plan that allows the
continuous ingress and egress of patrons for the purpose of gambling while the
riverboat is docked. The plan went into effect on August 5, 2002 and imposes a
graduated wagering tax based upon adjusted gross receipts. As discussed below in
"Retroactive Dockside Tax," the graduated wagering tax has a starting rate of
15% with a top rate of 35% for adjusted gross receipts in excess of $150
million. For the period July 1 through August 4, 2002, the wagering tax was
raised by statute to 22.5% of adjusted gross receipts, but, as discussed below
in "Retroactive Dockside Tax," has been recently modified. Prior to July 1,
2002, Indiana gaming taxes were levied on adjusted gross receipts, as defined by
Indiana gaming laws, at the rate of 20%. In addition to the wagering tax, an
admissions tax of $3 per turnstile count is assessed. Prior to August 5, 2002,
Indiana imposed an admissions tax of $3 per patron turnstile count at every
boarding time plus the count of the patrons that stayed over on the vessel from
a previous boarding time period.
The State of Indiana recently enacted the following legislation:
o 24-Hour Dockside Gaming. Effective July 1, 2003, a licensed riverboat
owner who implements flexible scheduling can conduct gambling
operations for up to 24 hours per day upon receiving IGC approval.
Under prior IGC rules, riverboat casinos were required to close for
three hours daily. The Company's plan for 24-Hour Dockside Gaming was
submitted to the IGC and approved. The Company began operating on
24-hour basis on July 11, 2003.
o Retroactive Dockside Tax. The Indiana legislature has recently
clarified the start date of the graduated wagering tax structure
associated with the implementation of dockside gaming. Previously, the
starting point for the computation of cumulative adjusted gross
receipts from gaming revenues ("AGR") under the graduated tax structure
was August 1, 2002 for seven riverboat casinos that implemented
dockside gaming with flexible scheduling on that date; and August 5,
2002, for three riverboat casinos that implemented dockside gaming with
flexible scheduling on that date. The Indiana legislature's recent
13
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
clarification requires riverboat casinos to begin recognizing gaming
tax liabilities for cumulative AGR under the graduated tax structure
starting on July 1, 2002 if they implemented dockside gaming at any
point in time. In addition, the State of Indiana's position is that no
credit be provided for taxes previously paid for the period July 1,
2002 through July 31, 2002 for seven riverboat casinos and July 1, 2002
through August 4, 2002 for three riverboat casinos. For these periods
the statutory tax on AGR was 22.5%. As a result of the "Retroactive
Dockside Tax," the Indiana Department of Revenue has assessed an
additional $2,072,000 of gaming taxes due from the Company. The Company
has taken a charge in the three and six month periods ended June 30,
2003 for this assessment. The $2,072,000 assessment is required to be
paid in two equal installments on July 1, 2003 and July 1, 2004. All
penalties and interest due from riverboat casinos on the "Retroactive
Dockside Tax" assessments are waived as long as the riverboat casinos
pay 50% of their applicable assessments on July 1, 2003 and July 1,
2004. The Company paid 50% of the $2,072,000 assessment to Indiana
Department of Revenue on July 1, 2003.
The ownership and operation of our other casino gaming facilities in
Nevada, Mississippi and Colorado are also subject to various state and local
regulations in the jurisdictions where they are located. In Nevada, our gaming
operations are subject to the Nevada Gaming Control Act, and to the licensing
and regulatory control of the Nevada Gaming Commission, the Nevada State Gaming
Control Board and various local ordinances and regulations, including, without
limitation, applicable city and county gaming and liquor licensing authorities.
Pursuant to new legislation signed into law by the Governor of Nevada on July
23, 2003, the license fees on the number of gaming device operated has been
increased effective immediately. The taxes on gross revenues will be increased
on August 1, 2003, and the range of events covered by the casino entertainment
tax will be expanded effective September 1, 2003. Fitzgeralds Las Vegas will
also become subject to a payroll tax based on wages paid to its employees
effective October 1, 2003. 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 operations are also subject to the Colorado
Liquor Code and the state and local liquor licensing authorities.
The Company's directors, officer, managers and key employees are
required to hold individual licenses, the requirements for which vary from
jurisdiction to jurisdiction. Licenses and permits for gaming operations and of
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.
14
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other Contingencies
In September of 2000, AMB Parking, LLC, (a limited liability company
indirectly owned by Don. H. Barden, Chairman and CEO of the Company) and Trump
Indiana, Inc. (the "Joint Venture Partner") entered into an Operating Agreement
to form Buffington Harbor Parking Associates, LLC ("BHPA"). The limited
liability company was formed for the purpose of constructing and operating a
2,000 space-parking garage. The Company is recognizing $9,462,815 of advances
made on the parking garage construction as prepaid lease expense. The Company
and the Joint Venture Partner have each entered into parallel operating lease
agreements with BHPA, each having a term of until December 31, 2018. The rent
payable under both leases is intended to service the debt incurred by BHPA to
construct the parking garage. The Company is amortizing its prepaid lease over
the term of the operating lease agreement. The lease agreement calls for the
Company and the Joint Venture Partner to make monthly lease payments equal to
100% of BHPA's debt service requirement for the following month, although each
party is entitled to a credit for 50% of such payment if the other party makes
its monthly payment.
Majestic Investor Holdings received assessments of additional amounts
due related to insurance premiums paid for the period December 6, 2001 through
December 6, 2002. The premiums, totaling $160,000, relate to an audit by the
insurance carrier of Majestic Investor Holdings' workers compensation and
general liability plans. Majestic Investor Holdings had the right to dispute the
audit. Majestic Investor Holdings exercised its right. Majestic Investor
Holdings is disputing the payroll numbers used in the audit and the use of a
new, higher rated labor category in calculating workers compensation premiums.
The category was not used when the premiums were originally estimated. Majestic
Investor Holdings has not established an accrual for this assessment.
NOTE 10. SEGMENT INFORMATION
The Company owns and operates four properties as follows: a riverboat
casino located in Gary, Indiana; a casino and hotel located in downtown Las
Vegas, Nevada; a casino and hotel located in Tunica, Mississippi; and a casino
located in Black Hawk, Colorado (collectively, the "Properties").
The Company identifies its business in four 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 (except in Gary, Indiana and Black Hawk, Colorado)
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, 2002. There are minimal
inter-segment sales. Corporate costs are allocated to the business segments
through management fees from The Majestic Star Casino, LLC (with respect to the
casino in Gary) and from Majestic Investor Holdings, LLC (with respect to the
Fitzgeralds properties). These fees are reflected in "General and
Administrative" expenses.
A summary of the Properties' operations by business segment as of and
for the three and six months ended June 30, 2003 and June 30, 2002 is presented
below:
15
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SEGMENT INFORMATION (CONTINUED)
As of and for the Three Months Ended As of and for the Six Months Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
(In thousands) (In thousands) (In thousands) (In thousands)
Net revenues:
Majestic Star Casino $ 34,251 $ 32,400 $ 70,227 $ 64,152
Fitzgeralds Tunica 22,688 23,574 45,653 47,922
Fitzgeralds Black Hawk 8,535 8,313 16,450 17,275
Fitzgeralds Las Vegas 11,947 12,588 24,345 25,583
--------- --------- --------- ---------
Total $ 77,421 $ 76,875 $ 156,675 $ 154,932
--------- --------- --------- ---------
Income (loss) from operations:
Majestic Star Casino $ 2,906 $ 4,679 $ 8,675 $ 9,360
Fitzgeralds Tunica 2,891 3,310 7,439 7,939
Fitzgeralds Black Hawk 1,559 1,530 2,790 2,788
Fitzgeralds Las Vegas (325) (659) (89) (419)
Unallocated and other (1) (688) (771) (1,354) (1,408)
--------- --------- --------- ---------
Total $ 6,343 $ 8,089 $ 17,461 $ 18,260
--------- --------- --------- ---------
Segment depreciation and amortization
Majestic Star Casino $ 1,990 $ 2,284 $ 4,008 $ 4,562
Fitzgeralds Tunica 1,928 1,835 3,833 3,615
Fitzgeralds Black Hawk 412 364 823 727
Fitzgeralds Las Vegas 702 648 1,374 1,265
Unallocated and other (1) 666 646 1,332 1,273
--------- --------- --------- ---------
Total $ 5,698 $ 5,777 $ 11,370 $ 11,442
--------- --------- --------- ---------
Expenditures for additions to long-lived assets:
Majestic Star Casino $ 1,413 $ 2,331 $ 2,336 $ 3,504
Fitzgeralds Tunica 1,529 983 1,796 1,496
Fitzgeralds Black Hawk 523 335 772 439
Fitzgeralds Las Vegas 373 245 920 800
--------- --------- --------- ---------
Total $ 3,838 $ 3,894 $ 5,824 $ 6,239
--------- --------- --------- ---------
Segment assets:
Majestic Star Casino $ 119,461 $ 122,951
Fitzgeralds Tunica 85,475 92,495
Fitzgeralds Black Hawk 30,146 30,943
Fitzgeralds Las Vegas 37,457 45,709
Unallocated and other (1) 153,865 162,140
--------- ---------
Total 426,404 454,238
Less: intercompany (145,948) (166,445)
--------- ---------
Total $ 280,456 $ 287,793
========= =========
(1) Unallocated and other include corporate items and eliminations that are not
allocated to the operation segments.
16
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. RELATED PARTY TRANSACTIONS
On March 13, 2003, the Company purchased for $1,016,784, net of
prorated taxes plus closing costs, approximately 3.73 acres of land and a
building, adjacent to the Buffington Harbor gaming complex from an affiliated
company. The amounts were recorded in the Company's property and equipment
accounts at $406,000 for the land and $110,769 for the building, which was the
carrying value recorded on the affiliate's balance sheet. The remaining
consideration paid in excess of the seller's basis in the amount of $559,806 was
recorded as an adjustment to member's equity. The purchase price was based on an
independent third-party appraisal.
The Company entered into an LLC Manager Agreement on June 18, 1999 with
Barden Development, Inc. ("BDI") to provide for, among other things, BDI to act
as the managing Member of the LLC. Distribution of profits to BDI are limited
under the Majestic Indenture relating to the Senior Secured Notes. The
distribution cannot exceed 5% of the Company's Consolidated Cash Flow (as
defined in such Majestic Indenture) for the immediately preceding fiscal quarter
and may not be paid if the Company is in default under the Majestic Indenture or
if the Company does not meet certain financial ratios as provided in the
Majestic Indenture. During the six months ended June 30, 2003, the Company made
distributions totaling $766,624, to BDI related to the fourth quarter of 2002
and the first quarter of 2003.
During the six months ended June 30, 2003, Majestic Investor Holdings,
LLC made distributions totaling $1,750,680 to BDI, related to the fourth quarter
of 2002 and the first quarter of 2003, in accordance with the LLC Manager
Agreement between Majestic Investor Holdings, LLC and BDI dated December 5,
2001.
In December 2001, the Company made a $300,000 employee loan to Mr.
Barden. This loan bore interest at a rate of 7% per annum and was due and
payable in full on December 12, 2002. On March 17, 2003, $215,911 was paid on
the note. The balance of $84,094 in principal and $29,194 in interest was paid
on April 23, 2003.
On January 31, 2002, the Company made a $200,000 employee loan to Mr.
Kelly. On March 17, 2003, Mr. Kelly paid $67,000 in accordance with the loan
agreement. This loan bears no interest and is due and payable in full on January
31, 2005.
In December 2001, Majestic Investor Holdings, LLC issued a $700,000
note to BDI. The note bore interest at a rate of 7% annum. The principal and
accrued but unpaid interest were due and payable in full on December 12, 2002.
The principal and accrued interest was paid on March 17, 2003.
In April 2003, the Company, as authorized by the Majestic Indenture,
made a $710,277 distribution to it's sole member for income taxes. The
calculation for the distribution was based on the Company's net income during
the three-month period ended March 31, 2003.
In April 2003, Majestic Investor Holdings, LLC, as authorized by the
Holdings Indenture, made a $338,399 distribution to its sole member for income
taxes. The calculation for the
17
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. RELATED PARTY TRANSACTIONS (CONTINUED)
distribution was based on the Company's net income during the three-month period
ended March 31, 2003.
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Company's Senior Secured Notes are secured by substantially all of
the assets of the Majestic Star Casino, but not the assets of Majestic Investor
Holdings, LLC and its wholly-owned subsidiaries which include the three
Fitzgeralds' casino properties acquired on December 6, 2001.
Majestic Investor Holdings, LLC currently has $151.8 million of 11.653%
Senior Secured Notes outstanding (the "Holdings Notes"). The Holdings Notes are
unconditionally and irrevocably guaranteed, jointly and severally, by all of the
restricted subsidiaries (the "Guarantor Subsidiaries") of Majestic Investor
Holdings, LLC. The guarantees rank senior in right of payment to all existing
and future subordinated indebtedness of these restricted subsidiaries and equal
in right of payment with all existing and future senior indebtedness of these
restricted subsidiaries.
The following condensed consolidating information presents condensed
consolidating balance sheets as of June 30, 2003 and December 31, 2002 and
condensed consolidating statements of operations for the three and six months
ended June 30, 2003 and 2002, and condensed consolidating statements of cash
flows for the six months ended June 30, 2003 and 2002, for The Majestic Star
Casino, LLC, Majestic Investor Holdings, LLC, and the restricted subsidiaries of
Majestic Investor Holdings, LLC (on a combined basis) and the eliminating
entries necessary to combine such entities on a consolidated basis. The Majestic
Star Casino Capital Corp. and Majestic Investor, LLC, wholly-owned subsidiaries
of The Majestic Star Casino, LLC, and Majestic Investor Capital Corp., a
wholly-owned subsidiary of Majestic Investor Holdings, LLC, do not have any
material assets, obligations or operations. Therefore, no information has been
presented for these subsidiaries.
18
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS AS OF JUNE 30, 2003
MAJESTIC STAR MAJESTIC INVESTOR GUARANTOR ELIMINATING TOTAL
CASINO, LLC HOLDINGS, LLC SUBSIDIARIES ENTRIES CONSOLIDATED
------------- ----------------- ------------ ------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 17,802,029 $ 2,435,280 $ 13,699,546 $ - $ 33,936,855
Restricted cash - 500,000 - - 500,000
Accounts receivable, net 1,517,333 - 1,074,068 - 2,591,401
Inventories 62,805 - 895,892 - 958,697
Prepaid expenses and other
current assets 3,164,514 415,503 1,560,967 (689,691)(a) 4,451,293
------------ ------------ ------------ ------------- ------------
Total current assets 22,546,681 3,350,783 17,230,473 (689,691) 42,438,246
------------ ------------ ------------ ------------- ------------
Property, equipment and
improvements, net 47,450,627 - 115,542,992 - 162,993,619
Intangible assets, net - 5,200,000 11,694,246 - 16,894,246
Due from related parties - 109,173,530 - (109,173,530)(b) -
Investment in Buffington Harbor
Riverboats, L.L.C. 30,634,131 - - - 30,634,131
Other assets 12,865,478 6,019,807 8,610,474 - 27,495,759
Investment in subsidiaries 5,964,117 30,120,472 - (36,084,589)(b) -
------------ ------------ ------------ ------------- ------------
Total Assets $119,461,034 $153,864,592 $153,078,185 $(145,947,810) $280,456,001
============ ============ ============ ============= ============
LIABILITIES AND MEMBER'S DEFICIT
Current Liabilities:
Current maturities of long-term debt $ - $ - $ 81,224 $ - $ 81,224
Accounts payable, accrued and other 17,314,319 1,734,903 13,629,426 (689,692) 31,988,956
------------ ------------ ------------ ------------- ------------
Total current liabilities 17,314,319 1,734,903 13,710,650 (689,692) 32,070,180
------------ ------------ ------------ ------------- ------------
Due to related parties - - 109,173,529 (109,173,529)(a)(b) -
Long-term debt, net of current maturities 129,041,343 146,165,572 73,534 275,280,449
------------ ------------ ------------ ------------- ------------
Total Liabilities 146,355,662 147,900,475 122,957,713 (109,863,221) 307,350,629
Commitments and contingencies - - - - -
Member's Equity (Deficit): (26,894,628) 5,964,117 30,120,472 (36,084,589)(b) (26,894,628)
------------ ------------ ------------ ------------- ------------
Total Liabilities and Member's
Equity (Deficit) $119,461,034 $153,864,592 $153,078,185 $(145,947,810) $280,456,001
============ ============ ============ ============= ============
(a) To eliminate intercompany receivables and payables.
(b) To eliminate intercompany accounts and investment in subsidiaries.
19
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS AS OF DECEMBER 31, 2002
MAJESTIC STAR MAJESTIC INVESTOR GUARANTOR ELIMINATING TOTAL
CASINO, LLC HOLDINGS, LLC SUBSIDIARIES ENTRIES CONSOLIDATED
------------- ----------------- ------------- ------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 8,564,057 $ 1,007,660 $ 14,976,164 $ - $ 24,547,881
Restricted cash - 250,000 - - 250,000
Accounts receivable, net 1,733,543 52,695 1,188,488 - 2,974,726
Inventories 53,360 - 929,126 - 982,486
Prepaid expenses and other current assets 1,778,480 5,573,991 1,575,678 (5,089,160)(a) 3,838,989
------------- ------------- ------------- ------------- ------------
Total current assets 12,129,440 6,884,346 18,669,456 (5,089,160) 32,594,082
------------- ------------- ------------- ------------- ------------
Property, equipment and improvements, net 47,511,652 - 117,297,506 - 164,809,158
Intangible assets, net - 5,200,000 12,491,746 - 17,691,746
Due from related parties - 116,816,043 - (116,816,043)(b) -
Investment in Buffington Harbor Riverboats,
L.L.C. 31,833,311 - - - 31,833,311
Other assets 13,619,918 6,714,902 8,546,757 - 28,881,577
Investment in subsidiaries 8,082,405 19,959,009 - (28,041,414)(b) -
------------- ------------- ------------- ------------- ------------
Total Assets $ 113,176,726 $ 155,574,300 $157,005,465 $(149,946,617) $275,809,874
============= ============= ============= ============= ============
LIABILITIES AND MEMBER'S EQUITY (DEFICIT)
Current Liabilities:
Current maturities of long-term debt $ - $ - $ 134,084 $ - $ 134,084
Accounts payable, accrued and other 8,471,517 1,960,447 15,215,462 (323,359)(a) 25,324,067
------------- ------------- ------------- ------------- ------------
Total current liabilities 8,471,517 1,960,447 15,349,546 (323,359) 25,458,151
------------- ------------- ------------- ------------- ------------
Due to related parties - - 121,581,844 (121,581,844)(a)(b) -
Long-term debt, net of current maturities 128,879,771 145,531,448 115,066 - 274,526,285
------------- ------------- ------------- ------------- ------------
Total Liabilities 137,351,288 147,491,895 137,046,456 (121,905,203) 299,984,436
Commitments and contingencies - - - - -
Member's Equity (Deficit): (24,174,562) 8,082,405 19,959,009 (28,041,414)(b) (24,174,562)
------------- ------------- ------------- ------------- ------------
Total Liabilities and Member's
Equity (Deficit) $ 113,176,726 $ 155,574,300 $157,005,465 $(149,946,617) $275,809,874
============= ============= ============= ============= ============
============
(a) To eliminate intercompany receivables and payables.
(b) To eliminate intercompany accounts and investment in subsidiaries.
20
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 2003
MAJESTIC STAR MAJESTIC INVESTOR GUARANTOR ELIMINATING
CASINO, LLC HOLDINGS, LLC SUBSIDIARIES ENTRIES CONSOLIDATED
------------- ----------------- ------------ ----------- ------------
REVENUES:
Casino $ 33,598,792 $ - $ 39,541,474 $ - $ 73,140,266
Rooms - - 3,584,913 - 3,584,913
Food and beverage 343,563 - 4,754,847 - 5,098,410
Other 629,151 - 832,638 - 1,461,789
------------ ------------ ------------ ----------- ------------
Gross revenues 34,571,506 - 48,713,872 - 83,285,378
Less promotional allowances (320,055) - (5,544,430) - (5,864,485)
------------ ------------ ------------ ----------- ------------
Net revenues 34,251,451 - 43,169,442 - 77,420,893
------------ ------------ ------------ ----------- ------------
COSTS AND EXPENSES:
Casino 9,130,864 - 16,611,988 - 25,742,852
Rooms - - 1,641,287 - 1,641,287
Food and beverage 419,726 - 2,564,150 - 2,983,876
Other - - 410,449 - 410,449
Gaming taxes 11,427,754 - 4,459,307 - 15,887,061
Advertising and promotion 1,487,895 - 3,292,534 - 4,780,429
General and administrative 5,878,410 22,687 7,021,668 - 12,922,765
Economic incentive - City of Gary 1,011,164 - - - 1,011,164
Depreciation and amortization 1,989,766 665,819 3,042,735 - 5,698,320
------------ ------------ ------------ ----------- ------------
Total costs and expenses 31,345,579 688,506 39,044,118 - 71,078,203
------------ ------------ ------------ ----------- ------------
Operating income (loss) 2,905,872 (688,506) 4,125,324 - 6,342,690
------------ ------------ ------------ ----------- ------------
OTHER INCOME (EXPENSE):
Interest income 15,935 6,973 4,229 - 27,137
Interest expense (3,534,451) (4,421,439) (5,556) - (7,961,446)
(Loss) gain on sale of assets (1,199) - 9,961 - 8,762
Other non-operating expense (37,219) (9,421) - - (46,640)
Equity in net income (loss)
of subsidiaries (978,435) 4,133,958 - (3,155,523)(a) -
------------ ------------ ------------ ----------- ------------
Total other income (expense) (4,535,369) (289,929) 8,634 (3,155,523) (7,972,187)
------------ ------------ ------------ ----------- ------------
Net income (loss) $ (1,629,497) $ (978,435) $ 4,133,958 $(3,155,523) $ (1,629,497)
============ ============ ============ =========== ============
(a) To eliminate equity in net income of subsidiaries.
21
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 2002
MAJESTIC STAR MAJESTIC INVESTOR GUARANTOR ELIMINATING
CASINO, LLC HOLDINGS, LLC SUBSIDIARIES ENTRIES CONSOLIDATED
------------- ----------------- ------------ ------------ -------------
REVENUES:
Casino $ 31,640,532 $ - $ 40,426,341 $ - $ 72,066,873
Rooms - - 3,938,875 - 3,938,875
Food and beverage 402,014 - 4,886,744 - 5,288,758
Other 548,852 - 977,512 - 1,526,364
------------- ------------- ------------ ------------ ------------
Gross revenues 32,591,398 - 50,229,472 - 82,820,870
Less promotional allowances (191,249) - (5,754,298) - (5,945,547)
------------- ------------- ------------ ------------ ------------
Net revenues 32,400,149 - 44,475,174 - 76,875,323
------------- ------------- ------------ ------------ ------------
COSTS AND EXPENSES:
Casino 7,926,459 - 17,275,399 - 25,201,858
Rooms - - 1,863,809 - 1,863,809
Food and beverage 418,917 - 2,943,591 - 3,362,508
Other - - 396,601 - 396,601
Gaming taxes 8,649,780 - 4,779,074 - 13,428,854
Advertising and promotion 1,508,823 - 3,654,138 - 5,162,961
General and administrative 5,984,860 118,377 6,534,340 - 12,637,577
Economic incentive - City of Gary 948,882 - - - 948,882
Depreciation and amortization 2,284,216 646,178 2,846,972 - 5,777,366
Pre-opening expenses - 6,103 - - 6,103
------------- ------------- ------------ ------------ ------------
Total costs and expenses 27,721,937 770,658 40,293,924 - 68,786,519
------------- ------------- ------------ ------------ ------------
Operating income (loss) 4,678,212 (770,658) 4,181,250 - 8,088,804
------------- ------------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 8,292 18,286 11,910 - 38,488
Interest expense (3,526,978) (4,585,293) (8,178) - (8,120,449)
Gain (loss) on sale of assets 8,850 - (5,964) - 2,886
Non-operating expense (31,415) (9,883) - - (41,298)
Equity in net income (loss)
of subsidiaries (1,168,530) 4,179,018 - (3,010,488)(a) -
------------- ------------- ------------ ------------ ------------
Total other expense (4,709,781) (397,872) (2,232) (3,010,488) (8,120,373)
------------- ------------- ------------ ----------- ------------
Net income (loss) $ (31,569) $ (1,168,530) $ 4,179,018 $ (3,010,488) $ (31,569)
============= ============= ============ ============ ============
(a) To eliminate equity in net income of subsidiaries.
22
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 2003
MAJESTIC STAR MAJESTIC INVESTOR GUARANTOR ELIMINATING
CASINO, LLC HOLDINGS, LLC SUBSIDIARIES ENTRIES CONSOLIDATED
------------- ----------------- ------------- ------------ ------------
REVENUES:
Casino $ 68,930,965 $ - $ 78,977,181 $ - $147,908,146
Rooms - - 7,383,698 - 7,383,698
Food and beverage 735,485 - 9,615,787 - 10,351,272
Other 1,199,949 - 1,633,476 - 2,833,425
------------- -------------- ------------- ------------ ------------
Gross revenues 70,866,399 - 97,610,142 - 168,476,541
Less promotional allowances (639,526) - (11,161,541) - (11,801,067)
------------- -------------- ------------- ------------ ------------
Net revenues 70,226,873 - 86,448,601 - 156,675,474
------------- -------------- ------------- ------------ ------------
COSTS AND EXPENSES:
Casino 17,933,934 - 32,170,706 - 50,104,640
Rooms - - 3,187,183 - 3,187,183
Food and beverage 803,588 - 5,062,350 - 5,865,938
Other - - 820,057 - 820,057
Gaming taxes 21,168,527 - 9,034,620 - 30,203,147
Advertising and promotion 3,202,880 - 6,543,953 - 9,746,833
General and administrative 12,363,452 22,687 13,459,361 - 25,845,500
Economic incentive - City of Gary 2,071,411 - - - 2,071,411
Depreciation and amortization 4,007,882 1,331,557 6,030,457 - 11,369,896
------------- --------------- ------------- ------------ ------------
Total costs and expenses 61,551,674 1,354,244 76,308,687 - 139,214,605
------------- -------------- ------------- ------------ ------------
Operating income (loss) 8,675,199 (1,354,244) 10,139,914 - 17,460,869
------------- -------------- ------------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 30,092 25,271 8,874 - 64,237
Interest expense (7,068,889) (8,842,799) (12,286) - (15,923,974)
(Loss) gain on sale of assets (125,919) - 24,961 - (100,958)
Other non-operating expense (75,554) (18,900) - - (94,454)
Equity in net income (loss)
of subsidiaries (29,209) 10,161,463 - (10,132,254)(a) -
------------- -------------- ------------- ------------ ------------
Total other income expense (7,269,479) 1,325,035 21,549 (10,132,254) (16,055,149)
------------- -------------- ------------- ------------ ------------
Net income (loss) $ 1,405,720 $ (29,209) $ 10,161,463 $(10,132,254) $ 1,405,720
============= ============== ============= ============ ============
(a) To eliminate equity in net income of subsidiaries.
23
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 2002
MAJESTIC STAR MAJESTIC INVESTOR GUARANTOR ELIMINATING
CASINO, LLC HOLDINGS, LLC SUBSIDIARIES ENTRIES CONSOLIDATED
------------- ----------------- ------------ ------------ ------------
REVENUES:
Casino $ 62,779,197 $ - $ 82,781,092 $ - $145,560,289
Rooms - - 8,027,386 - 8,027,386
Food and beverage 835,159 - 9,982,845 - 10,818,004
Other 945,183 - 1,866,002 - 2,811,185
------------- -------------- ------------- ------------ ------------
Gross revenues 64,559,539 - 102,657,325 - 167,216,864
Less promotional allowances (407,009) - (11,877,753) - (12,284,762)
------------- -------------- ------------- ------------ ------------
Net revenues 64,152,530 - 90,779,572 - 154,932,102
------------- -------------- ------------- ------------ ------------
COSTS AND EXPENSES:
Casino 15,433,730 - 35,301,558 - 50,735,288
Rooms - - 3,632,309 - 3,632,309
Food and beverage 870,475 - 5,713,709 - 6,584,184
Other - - 775,255 - 775,255
Gaming taxes 17,226,612 - 9,798,828 - 27,025,440
Advertising and promotion 2,923,325 - 6,950,674 - 9,873,999
General and administrative 11,888,846 122,582 12,691,335 - 24,702,763
Economic incentive - City of Gary 1,887,142 - - - 1,887,142
Depreciation and amortization 4,561,854 1,272,525 5,607,640 - 11,442,019
Pre-opening expenses - 13,390 - - 13,390
------------- -------------- ------------- ------------ ------------
Total costs and expenses 54,791,984 1,408,497 80,471,308 - 136,671,789
------------- -------------- ------------- ------------ ------------
Operating income (loss) 9,360,546 (1,408,497) 10,308,264 - 18,260,313
------------- -------------- ------------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 16,166 34,798 27,006 - 77,970
Interest expense (7,175,603) (9,092,319) (16,539) - (16,284,461)
Gain on sale of assets 8,850 - 578 - 9,428
Other non-operating expense (64,916) (27,375) - - (92,291)
Equity in net income (loss)
of subsidiaries (174,084) 10,319,309 - (10,145,225)(a) -
------------- -------------- ------------- ------------ ------------
Total other income (expense) (7,389,587) 1,234,413 11,045 (10,145,225) (16,289,354)
------------- -------------- ------------- ------------ ------------
Net income (loss) $ 1,970,959 $ (174,084) $ 10,319,309 $(10,145,225) $ 1,970,959
============= ============== ============= ============ ============
(a) To eliminate equity in net income of subsidiaries.
24
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 2003
MAJESTIC STAR MAJESTIC INVESTOR GUARANTOR ELIMINATING CONSOLIDATED
CASINO, LLC HOLDINGS, LLC SUBSIDIARIES ENTRIES TOTAL
------------- ----------------- ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES: $ 13,225,762 $ (8,430,964) $ 13,771,257 $ - $ 18,566,055
------------- -------------- ------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (2,336,333) - (3,487,472) - (5,823,805)
Equity in property acquired from related
party (559,806) - - - (559,806)
Increase in restricted cash - (250,000) - - (250,000)
Investment in Buffington Harbor
Riverboats, L.L.C. 3,500 - - - 3,500
Proceeds from sale of equipment 14,750 - 33,989 - 48,739
------------- -------------- ------------- ------------ ------------
Net cash used in investing activities (2,877,889) (250,000) (3,453,483) - (6,581,372)
------------- -------------- ------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of 11.653% Senior Secured Notes
issuance costs - (2,337) - - (2,337)
Advances (to) from affiliates - 11,500,000 (11,500,000) - -
Cash received from loans to related parties 367,000 700,000 - - 1,067,000
Cash paid to reduce long-term debt - - (94,392) - (94,392)
Distribution to Barden Development, Inc. (1,476,901) (2,089,079) - - (3,565,980)
------------- -------------- ------------- ------------ ------------
Net cash provided by (used in) financing
activities (1,109,901) 10,108,584 (11,594,392) - (2,595,709)
------------- -------------- ------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents 9,237,972 1,427,620 (1,276,618) - 9,388,974
Cash and cash equivalents, beginning of period 8,564,057 1,007,660 14,976,164 - 24,547,881
------------- -------------- ------------- ------------ ------------
Cash and cash equivalents, end of period $ 17,802,029 $ 2,435,280 $ 13,699,546 $ - $ 33,936,855
============= ============== ============= ============ ============
25
THE MAJESTIC STAR CASINO, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 2002
MAJESTIC STAR MAJESTIC INVESTOR GUARANTOR ELIMINATING CONSOLIDATED
CASINO, LLC HOLDINGS, LLC SUBSIDIARIES ENTRIES TOTAL
------------- ----------------- ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES: $ 6,842,828 $ (6,563,506) $ 13,564,796 $ (721,567)(a) $ 13,122,551
------------- -------------- ------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of acquisition related costs - (986,158) - - (986,158)
Proceeds from seller from purchase price
adjustment - 3,800,000 - - 3,800,000
Increase in restricted cash - (250,000) - - (250,000)
Acquisition of property and equipment (3,503,728) - (2,734,791) - (6,238,519)
Increase in prepaid leases and deposits (74,000) - - - (74,000)
Proceeds from sale of equipment 8,850 - 33,867 - 42,717
Investment in Buffington Harbor Riverboats, LLC (40,455) - - - (40,455)
------------- -------------- ------------- ------------ -------------
Net cash provided by (used in) investing
activities (3,609,333) 2,563,842 (2,700,924) - (3,746,415)
------------- -------------- ------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of 11.653% Senior Secured Notes
issuance costs - (1,084,355) - - (1,084,355)
Cash advances (to) from related parties - 10,650,089 (11,371,656) 721,567(a) -
Line of credit, net - (4,507,565) - - (4,507,565)
Cash paid to reduce long-term debt - - (65,140) - (65,140)
Distribution to Barden Development, Inc. (628,031) (1,065,542) - (1,693,573)
------------- -------------- ------------- ------------ -------------
Net cash provided by (used in) financing
activities (628,031) 3,992,627 (11,436,796) 721,567 (7,350,633)
------------- -------------- ------------- ------------ -------------
Net increase (decrease) in cash and cash
equivalents 2,605,464 (7,037) (572,924) - 2,025,503
Cash and cash equivalents, beginning of
period 8,220,476 498,363 17,206,452 - 25,925,291
------------- -------------- ------------- ------------ -------------
Cash and cash equivalents, end of period $ 10,825,940 $ 491,326 $ 16,633,528 $ - $ 27,950,794
============= ============== ============= ============ =============
(a) To eliminate intercompany receivables and payables.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENT OF FORWARD-LOOKING INFORMATION
This report includes statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the safe harbor provisions of those sections and the Private
Securities Litigation Reform Act of 1995. Words such as "believes",
"anticipates", "estimates", "plans", "intends", "expects", "will" or "could"
used in the Company's reports filed with the Securities and Exchange Commission
are intended to identify forward-looking statements. All forward-looking
statements involve risks and uncertainties. Although the Company believes its
expectations are based upon reasonable assumptions within the bounds of its
current knowledge of its business and operations, there can be no assurances
that actual results will not materially differ from expected results. The
Company cautions that these and similar statements included in this report and
in previously filed periodic reports are further qualified by important factors
that could cause actual results to differ materially from those in the
forward-looking statements. Such factors include, without limitation: the risk
of the Joint Venture Partner not making its lease payments when due in
connection with the parking facility at the Gary property; the ability to fund
planned development needs and to service debt from existing operations and from
new financing; increased competition in existing markets or the opening of new
gaming jurisdictions; a decline in the public acceptance of gaming; the
limitation, conditioning or suspension of our gaming licenses; increases in or
new taxes imposed on gaming revenues, and gaming devices; admission taxes;
finding of unsuitability by regulatory authorities with respect to the Company
or its officers or key employees; loss and/or retirement of key employees;
significant increase in fuel or transportation prices; adverse economic
conditions in the Company's markets; severe and unusual weather in our markets;
adverse results of significant litigation matters; non-renewal of the Company's
gaming license from the appropriate regulatory authorities; and continuing
effects of terrorist attacks and any future occurrences of terrorist attacks or
other destabilizing events.
For more information on these and other factors, see the Company's most
recently filed Form 10-K. We caution readers not to place undue reliance on
forward-looking statements, which speak only as of the date hereof. All
subsequent written and oral forward-looking statements attributable to us are
expressly qualified in their entirety by the cautionary statements and factors
that may affect future results contained throughout this report. The Company
undertakes no obligation to publicly release any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, our financial statements, including the notes
thereto listed in Item 1.
OVERVIEW
The Majestic Star Casino, the Company's riverboat gaming facility
located in Gary, Indiana ("Majestic Star"), has been owned and operated by the
Company since 1996. On December 6, 2001, the Company, through certain
"unrestricted subsidiaries," acquired three Fitzgeralds brand casino-hotels.
The Company's 10-7/8% Senior Secured Notes (the "Star Notes") are
secured primarily by the assets of the Gary, Indiana casino and gaming facility.
The Fitzgeralds assets are held by
27
the "unrestricted subsidiaries" of the Company and specifically excluded from
the collateral securing the Star Notes. As the Company's noteholders have no
recourse to the Fitzgeralds assets, Management's Discussion and Analysis of
Financial Condition and Results of Operations focuses primarily on the results
of Majestic Star as well as the Company and it subsidiaries on a consolidated
basis. For a discussion of the results of the Fitzgeralds properties, please
refer to the Majestic Investor Holdings, LLC Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2003, as filed with the Securities and
Exchange Commission (the "Investor Holdings 10-Q").
The gaming operations of Majestic Star are affected by inclement
weather in the Chicago metropolitan market. Due to the climate in the Chicago
metropolitan area, Majestic Star's operations are expected to be seasonal with
stronger results generally expected during the period from May through
September. Accordingly, the Company's results of operations are expected to
fluctuate from quarter to quarter and the results for any fiscal quarter may not
be indicative of results for future fiscal quarters.
RESULTS OF OPERATIONS
The following discussion provides a comparison of the results of
operations of Majestic Star, and the Company and its subsidiaries on a
consolidated basis, for the three and six months ended June 30, 2003, with the
three and six months ended June 30, 2002. On a consolidated basis, gross
revenues increased approximately $464,000 or 0.6% and $1,260,000 or 0.7% to
approximately $83,285,000 and $168,477,000, respectively, during the three and
six months ended June 30, 2003, compared to $82,821,000 and $167,217,000,
respectively, during the three and six months ended June 30, 2002.
The following table sets forth information derived from the Company's
consolidated statements of operations for the three and six months ended June
30, 2003 and 2002, expressed as a percentage of consolidated gross revenues.
28
CONSOLIDATED STATEMENTS OF OPERATIONS - SUMMARY INFORMATION
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Gross revenues $ 83,285 $ 82,821 $ 168,477 $ 167,217
Operating income 6,343 $ 8,089 17,461 $ 18,260
EBITDA (1) 12,041 $ 13,866 28,831 $ 29,702
CONSOLIDATED STATEMENTS OF OPERATIONS - PERCENTAGE OF GROSS REVENUES
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
REVENUES:
Casino 87.8 % 87.0 % 87.8 % 87.0 %
Rooms 4.3 % 4.8 % 4.4 % 4.8 %
Food and beverage 6.1 % 6.4 % 6.1 % 6.5 %
Other 1.8 % 1.8 % 1.7 % 1.7 %
---------- ---------- ---------- ----------
Gross revenues 100.0 % 100.0 % 100.0 % 100.0 %
Less promotional allowances (7.0) % (7.2) % (7.0) % (7.3) %
---------- ---------- ---------- ----------
Net revenues 93.0 % 92.8 % 93.0 % 92.7 %
COSTS AND EXPENSES:
Casino 30.9 % 30.4 % 29.7 % 30.3 %
Rooms 2.0 % 2.3 % 1.9 % 2.2 %
Food and beverage 3.6 % 4.1 % 3.5 % 3.9 %
Other 0.5 % 0.5 % 0.5 % 0.5 %
Gaming taxes 19.1 % 16.2 % 17.9 % 16.2 %
Advertising and promotion 5.7 % 6.2 % 5.8 % 5.9 %
General and administrative 15.5 % 15.3 % 15.3 % 14.8 %
Economic incentive - City of Gary 1.2 % 1.1 % 1.2 % 1.1 %
Depreciation and amortization 6.9 % 6.9 % 6.8 % 6.9 %
Pre-opening expenses - % - % - % - %
---------- ---------- ---------- ----------
Total costs and expenses 85.4 % 83.0 % 82.6 % 81.8 %
---------- ---------- ---------- ----------
Operating income 7.6 % 9.8 % 10.4 % 10.9 %
OTHER INCOME (EXPENSE):
Interest income - % - % - % - %
Interest expense (9.6) % (9.8) % (9.5) % (9.7) %
Gain (Loss) on sale of assets - % - % (0.1) % - %
Other non-operating expense - % - % - % - %
---------- ---------- ---------- ----------
Total other income (expense) (9.6) % (9.8) % (9.6) % (9.7) %
---------- ---------- ---------- ----------
Net income (loss) (2.0) % - % 0.8 % 1.2 %
========== ========== ========== ==========
EBITDA (1) 14.5 % 16.7 % 17.1 % 17.8 %
1) EBITDA includes a retroactive charge of $2,072,000 for the three and six
months ended June 30, 2003. The charge relates to the recognition of
additional gaming tax liability associated with the State of Indiana's
clarification of the start date for paying gaming taxes under the current
tiered tax structure. Indiana's clarification now provides that a casino
operating dockside would pay taxes under the tiered structure effective
July 1, 2002. Previously, Majestic Star began paying taxes under the tiered
tax structure the date it commenced dockside gaming on August 5, 2002.
EBITDA is defined as earnings from operations before interest, taxes,
depreciation and amortization. EBITDA is presented solely as a supplemental
disclosure because management believes that it is a widely used measure of
operating performance in the gaming industry, and a principal basis for
valuation of gaming companies. Other companies may calculate EBITDA
differently. Management uses EBITDA as a measure of the Company's operating
performance. EBITDA should not be construed as an alternative to operating
income, as an indicator of the Company's operating performance, or as an
alternative to cash flows from operating activities, as a measure of
liquidity, or any other measure determined in accordance with generally
accepted accounting principles. The Company has significant uses of cash
including capital expenditures, interest payments, taxes and debt principal
repayments, which are not reflected in EBITDA.
A reconciliation of operating income to EBITDA follows:
29
RECONCILIATION OF OPERATING INCOME TO EBITDA
(IN MILLIONS)
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
------------ ------------ ------------ -----------
Operating income $ 6.3 $ 8.1 $ 17.4 $ 18.3
Depreciation and amortization 5.7 5.8 11.4 11.4
------------ ------------ ------------ -----------
EBITDA $ 12.0 $ 13.9 $ 28.8 $ 29.7
============ ============ ============ ===========
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30,
2002
Consolidated gross revenues for the three months ended June 30, 2003
amounted to approximately $83,285,000, an increase of approximately $464,000 or
0.5% from consolidated gross revenues recorded in the three months ended June
30, 2002. Majestic Star accounted for approximately $34,572,000, or 41.5% of
consolidated gross revenues for the three months ended June 30, 2003, which
reflects an increase of $1,980,000 in Majestic Star's gross revenues on an
unconsolidated basis, or 6.1% compared to the three months ended June 30, 2002.
The 6.1% increase in gross revenues at Majestic Star was primarily attributable
to an $871,000, or 3.2% increase in slot revenue, and a $1,088,000, or 26.4%
increase in table games revenue. The primary reasons for the increase are the
commencement of dockside gaming at Majestic Star on August 5, 2002 and the
opening of the 2,000 space parking garage on May 13, 2002.
The Company's business can be separated into four operating
departments: casino, hotel rooms (except Fitzgeralds Black Hawk and Majestic
Star), food and beverage and other. Consolidated casino revenues for the three
months ended June 30, 2003 totaled approximately $73,140,000, or 87.8% of
consolidated gross revenues, of which slot machines accounted for approximately
$63,303,000, or 86.6%, and table games accounted for approximately $9,837,000,
or 13.4%. Majestic Star's casino revenues during the three months ended June 30,
2003 totaled approximately $33,599,000, or 97.2% of its gross revenues, an
increase of approximately $1,958,000, or 6.2%, of which slot machines accounted
for approximately $28,384,000, or 84.5%, and table games accounted for
approximately $5,215,000, or 15.5%. The average number of slot machines in
operation at Majestic Star increased to 1,545 during the three months ended June
30, 2003, from 1,519 during the three months ended June 30, 2002. The average
win per slot machine per day at Majestic Star increased to approximately $202
for the three months ended June 30, 2003, from approximately $199 during the
three months ended June 30, 2002. The average number of table games in operation
at Majestic Star during the three months ended June 30, 2003 and 2002, was 54
and 52, respectively. The average win per table game per day during the three
months ended June 30, 2003 increased to approximately $1,068 compared to
approximately $872 during the three months ended June 30, 2002. The average
daily win per state passenger count at Majestic Star was approximately $84
during the three months ended June 30, 2003, compared to an average daily win
per state passenger count of $70 for the three months ended June 30, 2002.
Consolidated hotel room revenues totaled $3,585,000, or 4.3% of the
consolidated gross revenues for the three months ended June 30, 2003, a decrease
of $354,000 or 9.0% when compared to the three-month period ended June 30, 2002.
Consolidated hotel room revenues are attributable to operations of the
Fitzgeralds properties. Majestic Star does not operate a hotel.
30
Consolidated food and beverage revenues for the three months ended June
30, 2003 totaled approximately $5,098,000, or 6.1% of consolidated gross
revenues, compared to approximately $5,289,000, or 6.4% of consolidated gross
revenues, for the three months ended June 30, 2002. Majestic Star accounted for
approximately $344,000, or 1.0% of its gross revenues for the three months ended
June 30, 2003, which reflects a decrease of $58,000 in such revenues at Majestic
Star, or 14.5%, compared to the three months ended June 30, 2002.
Consolidated other revenues for the three months ended June 30, 2003
totaled approximately $1,462,000, or 1.8% of consolidated gross revenues,
compared to approximately $1,526,000, or 1.8% of consolidated gross revenues
during the three months ended June 30, 2002. Majestic Star accounted for
approximately $629,000, or 1.8% of its gross revenues for the three months ended
June 30, 2003, an increase of $80,000, or 14.6%, compared to the three months
ended June 30, 2002. Other revenue at Majestic Star consisted primarily of
commission income and the sale of cigars and cigarettes.
Consolidated promotional allowances deducted from the Company's
consolidated gross revenues for the three months ended June 30, 2003 and 2002
were approximately $5,864,000, or 7.0% of consolidated gross revenues, and
$5,946,000, or 7.2% of consolidated gross revenues, respectively. Of this
amount, Majestic Star accounted for approximately $320,000 or 1.0% of its gross
revenues, an increase of $129,000, or 67.3%, compared to the three months ended
June 30, 2002. The increase in promotional allowances is primarily attributable
to an increase in complimentaries and associated incentives.
Consolidated casino operating expenses for the three months ended June
30, 2003 totaled approximately $25,743,000, or 30.9% of consolidated gross
revenues and 35.2% of consolidated casino revenues, respectively, compared to
approximately $25,202,000, or 30.4% of consolidated gross revenues and 35.0% of
consolidated casino revenues, respectively, for the three months ended June 30,
2002. These expenses were primarily comprised of salaries, wages and benefits,
operating expenses and cash related marketing activities of the casinos.
Majestic Star's casino operating expenses accounted for approximately
$9,131,000, or 26.4% of Majestic Star gross revenues and 27.2% of Majestic Star
casino revenues, compared to approximately $7,926,000, or 24.3% of Majestic Star
gross revenues and 25.1% of Majestic Star casino revenues, respectively, for the
three months ended June 30, 2002. The dollar increase of $1,205,000, or 15.2%,
is primarily attributed to increased expenses of $538,000 in cash based
marketing activities and $617,000 in payroll and payroll related benefits.
Majestic Star provides meals and services to its gaming patrons at facilities
located in, and/or owned by BHR. The cost for these meals and services for the
three months ended June 30, 2003 and June 30, 2002 was $177,000 and $200,000,
respectively, and are characterized in the financial statements as casino
expense. BHR and other third party operators of food kiosks located at BHR
invoice the Company monthly for these charges.
Consolidated room expenses for the three months ended June 30, 2003
totaled $1,641,000, or 2.0% of consolidated gross revenues and 45.8% of
consolidated room revenues. For the three months end June 30, 2003, consolidated
room expenses decreased $223,000 or 11.9% over the same period last year.
Consolidated room expenses are attributable to operations of the Fitzgeralds
properties, as Majestic Star does not operate a hotel.
Consolidated food and beverage expenses for the three months ended June
30, 2003 totaled $2,984,000, or 3.6% of consolidated gross revenues and 58.5% of
consolidated food and beverage revenues. This is a decrease of $379,000 or 11.3%
over the same period last year. At Majestic Star, food and beverage expenses for
the three months ended June 30, 2003 totaled
31
$420,000, or 1.2% of gross revenues and 122.2% of food and beverage revenues, a
decrease of $1,000 or 0.2% over the same period last year.
Consolidated gaming taxes totaled approximately $15,887,000, or 19.1%
of consolidated casino revenues for the three months ended June 30, 2003,
compared to approximately $13,429,000, or 18.6% of consolidated casino revenues
for the three months ended June 30, 2002. Majestic Star accounted for gaming
taxes of approximately $11,428,000, or 34.0% of its casino revenues for the
three months ended June 30, 2003, compared to approximately $8,650,000, or 27.3%
of its casino revenues during the three months ended June 30, 2002. An
additional $1,011,000 was paid during the three months ended June 30, 2003,
compared to approximately $949,000 in the three months ended June 30, 2002, to
Gary under an agreement whereby Majestic Star pays 3% of the adjusted gross
receipts directly to Gary.
On August 5, 2002, Majestic Star implemented its flexible boarding plan
that allows the continuous ingress and egress of patrons for the purpose of
gambling while the casino riverboat is docked ("dockside gaming"). The plan also
imposes a graduated wagering tax based upon the casino revenues of Majestic
Star. The graduated wagering tax has a starting rate of 15% with a top rate of
35% for adjusted gross receipts in excess of $150 million. Majestic Star has
estimated its casino revenues for 2003 and calculated an effective tax rate at
which Majestic Star is recognizing gaming tax expense. The effective rate is
currently 24.15%, but is subject to adjustment depending on the potential
increase or decrease of casino revenues over original forecasts. During the
three month period ended June 30, 2002, Majestic Star paid gaming taxes at the
20% rate prescribed by Indiana law.
In addition to the higher effective tax rate as imposed by the
graduated wagering tax structure, in the quarter ended June 30, 2003, the
Indiana legislature clarified the start date of the graduated wagering tax
structure associated with the implementation of dockside gaming. Previously, the
starting point for the computation of cumulative casino revenues under the
graduated tax structure was August 1, 2002 for seven riverboat casinos that
implemented dockside gaming on that date; and August 5, 2002, for three
riverboat casinos, including Majestic Star, that implemented dockside gaming on
that date. The Indiana legislature's recent clarification requires riverboat
casinos to begin recognizing gaming tax liabilities for cumulative casino
revenues under the graduated tax structure starting on July 1, 2002 if they
implemented dockside gaming at any point in time. In addition, the State of
Indiana's position is that no credit be provided for taxes previously paid for
the period July 1, 2002 through July 31, 2002 for seven riverboat casinos and
July 1, 2002 through August 4, 2002 for three riverboat casinos, including
Majestic Star. For these periods the statutory tax on casino revenues was 22.5%.
As a result of this "Retroactive Dockside Tax," the Indiana Department of
Revenue has assessed an additional $2,072,000 of gaming taxes due from Majestic
Star. Majestic Star has taken a charge in the three month period ended June 30,
2003 for this assessment. The $2,072,000 assessment is required to be paid in
two equal installments, on July 1, 2003 and July 1, 2004. All penalties and
interest due from riverboat casinos on the "Retroactive Dockside Tax"
assessments are waived as long as the riverboat casinos pay 50% of their
applicable assessments on July 1, 2003 and July 1, 2004. Majestic Star paid the
$1,036,000 assessment to Indiana Department of Revenue on July 1, 2003.
Advertising and promotion expenses include salaries, wages and benefits
of the marketing and casino service departments, as well as promotions,
advertising and special events. Consolidated advertising and promotion expenses
for the three months ended June 30, 2003 totaled approximately $4,780,000, or
5.7% of consolidated gross revenues, compared to approximately $5,163,000, or
6.2% of consolidated gross revenues during the three months ended June 30, 2002.
Of this amount, Majestic Star accounted for approximately $1,488,000, or 4.3%
32
of its gross revenues for the three months ended June 30, 2003, compared to
approximately $1,509,000, or 4.6% of its gross revenues for the three months
ended June 30, 2002.
Consolidated general and administrative expenses for the three months
ended June 30, 2003 were approximately $12,923,000, or 15.5% of consolidated
gross revenues, compared to $12,638,000, or 15.3% of consolidated gross
revenues, during the three months ended June 30, 2002. Majestic Star accounted
for approximately $5,878,000, or 17.0% of its gross revenues for the three
months ended June 30, 2003 and $5,985,000, or 18.4% of its gross revenues for
the three months ended June 30, 2002. These expenses included approximately
$1,255,000 for berthing fees paid to BHR and $1,283,000 for marine operations,
including housekeeping, during the three months ended June 30, 2003, compared to
approximately $1,338,000 for berthing fees and $1,581,000 for marine operations
including housekeeping during the three-month ended June 30, 2002. The $107,000
or 1.8% decrease in general and administrative expenses is primarily attributed
to reduced payroll and payroll benefits of $309,000 related to marine operations
associated with dockside gaming partially offset by incremental expenses of
$385,000 for the parking garage lease.
Consolidated depreciation and amortization for the three months ended
June 30, 2003, were approximately $5,698,000, compared to approximately
$5,777,000 during the three months ended June 30, 2002. Depreciation and
amortization at Majestic Star are inclusive of the Company's loss on investment
in BHR. The loss on investment in BHR is primarily depreciation expense.
Depreciation and amortization attributed to Majestic Star for the three months
ended June 30, 2003 was approximately $1,990,000, compared to approximately
$2,284,000 during the three months ended June 30, 2002. The dollar decrease
totaled approximately $294,000, of which $264,000 is depreciation expense,
$24,000 is amortization expense and $7,000 is for the loss relating to the
investment in BHR. The decrease for the three months ended June 30, 2003 is
primarily attributable to machinery and equipment being fully depreciated. The
loss relating to the investment in BHR for the three months ended June 30, 2003
and 2002 was $595,000 and $602,000, respectively.
Consolidated operating income for the three months ended June 30, 2003
was $6,343,000, or 7.6% of consolidated gross revenues, compared to an operating
income for the three months ended June 30, 2002 of $8,089,000, or 9.8% of
consolidated gross revenues. Operating income attributed to Majestic Star for
the three months ended June 30, 2003 was approximately $2,906,000, or 8.4% of
its gross revenues, compared to $4,678,000, or 14.4% of its gross revenues,
during the three months ended June 30, 2002. The $1,772,000 or 37.9% decrease in
operating income is principally attributed to a 6.1% increase in Majestic Star's
gross revenues offset by increased expenses and the $2,072,000 charge in the
current quarter for the "Retroactive Docksides Tax" implemented by the State of
Indiana, as previously discussed.
The consolidated net interest expense for the three months ended June
30, 2003, was approximately $7,934,000, or 9.5% of consolidated gross revenues,
compared to approximately $8,082,000, or 9.8% of consolidated gross revenues for
the same period last year. Net interest expense attributed to Majestic Star for
the three months ended June 30, 2003 was approximately $3,519,000, or 10.2% of
its gross revenues, compared to $3,519,000, or 10.8% of its gross revenues for
the same period last year.
Other non-operating expenses of $47,000 and $41,000 for the three
months ended June 30, 2003 and 2002, respectively, mainly represent fees
associated with the line of credit.
33
As a result of the foregoing, the Company realized consolidated net
loss of approximately $1,629,000, or 2.0% of consolidated gross revenues for the
three months ended June 30, 2003, compared to a loss of $32,000 during the three
months ended June 30, 2002. Majestic Star realized a net loss of $651,000, or
1.9% of its gross revenues during the three months ended June 30, 2003, compared
to net income of $1,137,000 or 3.5% of its gross revenues during the three
months ended June 30, 2002.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Consolidated gross revenues for the six months ended June 30, 2003
amounted to approximately $168,477,000 an increase of approximately $1,260,000,
or 0.8% from consolidated gross revenues recorded in the six months ended June
30, 2002. Majestic Star accounted for approximately $70,866,000, or 42.1% of
consolidated gross revenues for the six months ended June 30, 2003, which
reflects an increase of $6,307,000 in Majestic Star's gross revenues on an
unconsolidated basis, or 9.8% compared to the six months ended June 30, 2002.
The 9.8% increase in gross revenues at Majestic Star was primarily attributable
to a $3,662,000, or 6.8% increase in slot revenue and a $2,489,000, or 28.6%
increase in table games revenue. The primary reasons for the increase are the
commencement of dockside gaming at Majestic Star on August 5, 2002, and the
opening of the 2,000 space parking garage on May 13, 2002.
The Company's business can be separated into four operating
departments: casino, hotel rooms (except Fitzgeralds Black Hawk and Majestic
Star), food and beverage and other. Consolidated casino revenues for the six
months ended June 30, 2003 totaled approximately $147,908,000, or 87.8% of
consolidated gross revenues, of which slot machines accounted for approximately
$127,215,000, or 86.0% and table games accounted for approximately $20,693,000,
or 14.0%. Majestic Star's casino revenues during the six months ended June 30,
2003 totaled approximately $68,931,000, or 97.3% of its gross revenues, an
increase of approximately $6,152,000, or 9.8%, of which slot machines accounted
for approximately $57,736,000, or 83.8%, and table games accounted for
approximately $11,195,000, or 16.2%. The average number of slot machines in
operation at Majestic Star increased to 1,544 during the six months ended June
30, 2003, from 1,473 during the six months ended June 30, 2002. The average win
per slot machine per day at Majestic Star increased to approximately $207 for
the six months ended June 30, 2003, from approximately $203 during the six
months ended June 30, 2002. The average number of table games in operation at
Majestic Star during the six months ended June 30, 2003 and 2002, was 55 and 52,
respectively. The average win per table game per day during the six months ended
June 30, 2003 increased to approximately $1,128 compared to approximately $931
during the six months ended June 30, 2002. The average daily win per state
passenger count at Majestic Star was approximately $86 during the six months
ended June 30, 2003, compared to an average daily win per state passenger count
of $70 for the six months ended June 30, 2002.
Consolidated hotel room revenues totaled $7,384,000, or 4.4% of the
consolidated gross revenues for the six months ended June 30, 2003, a decrease
of $644,000 or 8.0% when compared to the six months ended June 30, 2002.
Consolidated hotel room revenues are attributable to operations of the
Fitzgeralds properties. Majestic Star does not operate a hotel.
Consolidated food and beverage revenues for the six months ended June
30, 2003 totaled approximately $10,351,000, or 6.1% of consolidated gross
revenues, compared to approximately $10,818,000, or 6.5% of consolidated gross
revenues, for the six months ended June 30, 2002. Majestic Star accounted for
approximately $735,000, or 1.0% of its gross revenues for the six
34
months ended June 30, 2003, which reflects a decrease of $100,000 in such
revenues at Majestic Star, or 11.9%, compared to the six months ended June 30,
2002.
Consolidated other revenues for the six months ended June 30, 2003
totaled approximately $2,833,000, or 1.7% of consolidated gross revenues,
compared to approximately $2,811,000, or 1.7% of consolidated gross revenues
during the six months ended June 30, 2002. Majestic Star accounted for
approximately $1,200,000, or 1.7% of its gross revenues for the six months ended
June 30, 2003, an increase of $255,000, or 27.0%, compared to the six months
ended June 30, 2002. Other revenue at Majestic Star consisted primarily of
commission income and the sale of cigars and cigarettes.
Consolidated promotional allowances deducted from the Company's
consolidated gross revenues for the six months ended June 30, 2003 and 2002 were
approximately $11,801,000, or 7.0% of consolidated gross revenues, and
$12,285,000, or 7.3% of consolidated gross revenues, respectively. Of this
amount, Majestic Star accounted for approximately $640,000 or 0.9% of its gross
revenues, an increase of $233,000, or 57.1%, compared to the six months ended
June 30, 2002. The increase in promotional allowances is primarily attributable
to an increase in complimentaries and associated incentives.
Consolidated casino operating expenses for the six months ended June
30, 2003 totaled approximately $50,105,000, or 29.7% of consolidated gross
revenues and 33.9% of consolidated casino revenues, respectively, compared to
approximately $50,735,000, or 30.3% of consolidated gross revenues and 34.9% of
casino revenues, respectively, for the six months ended June 30, 2002. These
expenses were primarily comprised of salaries, wages and benefits, operating
expenses and cash related marketing activities of the casinos. Majestic Star's
casino operating expenses accounted for approximately $17,934,000, or 25.3% of
Majestic Star gross revenues and 26.0% of Majestic Star casino revenues,
compared to approximately $15,434,000, or 23.9% of Majestic Star gross revenues
and 24.6% of Majestic Star casino revenues, respectively, for the six months
ended June 30, 2002. The dollar increase of $2,500,000, or 16.2%, is primarily
attributed to increased expenses of $1,341,000 in cash based marketing
activities and $1,196,000 in payroll and payroll related benefits. Majestic Star
provides meals and services to its gaming patrons at facilities located in,
and/or owned by BHR. The cost for these meals and services for the six months
ended June 30, 2003 and June 30, 2002 was $380,000 and $403,000, respectively,
and are characterized in the financial statements as casino expense. BHR and
other third party operators of food kiosks located at BHR invoice the Company
monthly for these charges.
Consolidated room expenses for the six months ended June 30, 2003
totaled $3,187,000, or 1.9% of consolidated gross revenues and 43.2% of
consolidated room revenues. For the six months ended June 30, 2003, consolidated
room expenses decreased $445,000 or 12.3% over the same period last year.
Consolidated room expenses are attributable to operations of the Fitzgeralds
properties, as Majestic Star does not operate a hotel.
Consolidated food and beverage expenses for the six months ended June
30, 2003 totaled $5,866,000, or 3.5% of consolidated gross revenues and 56.7% of
consolidated food and beverage revenues. For the six months end June 30, 2003,
consolidated food and beverage expenses decreased $718,000 or 10.9% over the
same period last year. At Majestic Star, food and beverage expenses for the six
months ended June 30, 2003 totaled $804,000, or 1.1% of gross revenues and
109.3% of food and beverage revenues. For the six months end June 30, 2003, food
and beverage expenses decreased $67,000 or 7.7% over the same period last year.
35
Consolidated gaming taxes totaled approximately $30,203,000, or 20.4%
of consolidated casino revenues for the six months ended June 30, 2003, compared
to approximately $27,025,000, or 16.2% of consolidated casino revenues for the
six months ended June 30, 2002. Majestic Star accounted for gaming taxes of
approximately $21,169,000, or 30.7% of its casino revenues for the six months
ended June 30, 2003, compared to approximately $17,227,000, or 27.4% of its
casino revenues during the six months ended June 30, 2002. An additional
$2,071,000 was paid during the six months ended June 30, 2003, compared to
approximately $1,887,000 in the six ended June 30, 2002, to Gary under an
agreement whereby Majestic Star pays 3% of the adjusted gross receipts directly
to Gary.
On August 5, 2002, Majestic Star implemented its flexible boarding plan
that allows the continuous ingress and egress of patrons for the purpose of
gambling while the casino riverboat is docked ("dockside gaming"). The plan also
imposes a graduated wagering tax based upon the casino revenues of Majestic
Star. The graduated wagering tax has a starting rate of 15% with a top rate of
35% for adjusted gross receipts in excess of $150 million. Majestic Star has
estimated its casino revenues for 2003 and calculated an effective tax rate at
which Majestic Star is recognizing gaming tax expense. The effective rate is
currently 24.15%, but is subject to adjustment depending on the potential
increase or decrease of casino revenues over original forecasts. During the six
month period ended June 30, 2002, Majestic Star paid gaming taxes at the 20%
rate prescribed by Indiana law.
In addition to the higher effective tax rate as imposed by the
graduated wagering tax structure, in the quarter ended June 30, 2003, the
Indiana legislature clarified the start date of the graduated wagering tax
structure associated with the implementation of dockside gaming. Previously, the
starting point for the computation of cumulative casino revenues under the
graduated tax structure was August 1, 2002 for seven riverboat casinos that
implemented dockside gaming on that date; and August 5, 2002, for three
riverboat casinos, including Majestic Star, that implemented dockside gaming on
that date. The Indiana legislature's recent clarification requires riverboat
casinos to begin recognizing gaming tax liabilities for cumulative casino
revenues under the graduated tax structure starting on July 1, 2002 if they
implemented dockside gaming at any point in time. In addition, the State of
Indiana's position is that no credit be provided for taxes previously paid for
the period July 1, 2002 through July 31, 2002 for seven riverboat casinos and
July 1, 2002 through August 4, 2002 for three riverboat casinos, including
Majestic Star. For these periods the statutory tax on casino revenues was 22.5%.
As a result of this "Retroactive Dockside Tax," the Indiana Department of
Revenue has assessed an additional $2,072,000 of gaming taxes due from Majestic
Star. Majestic Star has taken a charge in the six month period ended June 30,
2003 for this assessment. The $2,072,000 assessment is required to be paid in
two equal installments, on July 1, 2003 and July 1, 2004. All penalties and
interest due from riverboat casinos on the "Retroactive Dockside Tax"
assessments are waived as long as the riverboat casinos pay 50% of their
applicable assessments on July 1, 2003 and July 1, 2004. Majestic Star paid 50%
of the $2,072,000 assessment to Indiana Department of Revenue on July 1, 2003.
Advertising and promotion expenses included salaries, wages and
benefits of the marketing and casino service departments, as well as promotions,
advertising and special events. Consolidated advertising and promotion expenses
for the six months ended June 30, 2003 totaled approximately $9,747,000, or 5.8%
of consolidated gross revenues, compared to approximately $9,874,000, or 5.9% of
consolidated gross revenues during the six months ended June 30, 2002. Of this
amount, Majestic Star accounted for approximately $3,203,000, or 4.5% of its
gross revenues for the six months ended June 30, 2003 and approximately
$2,923,000, or 4.5% of its gross revenues for the six months ended June 30,
2002.
36
Consolidated general and administrative expenses for the six months
ended June 30, 2003 were approximately $25,846,000, or 15.3% of consolidated
gross revenues, compared to $24,703,000, or 14.8% of consolidated gross
revenues, during the six months ended June 30, 2002. Majestic Star accounted for
approximately $12,363,000, or 17.4% of its gross revenues for the six months
ended June 30, 2003 and $11,889,000, or 18.4% of its gross revenues for the six
months ended June 30, 2002. These expenses included approximately $2,541,000 for
berthing fees paid to BHR and $2,594,000 for marine operations, including
housekeeping, during the six months ended June 30, 2003, compared to
approximately $2,950,000 for berthing fees and $3,135,000 for marine operations,
including housekeeping, during the six months ended June 30, 2002. The $475,000
or 4.0% increase in general and administrative expenses are primarily attributed
to incremental expenses associated with the parking garage lease and corporate.
Consolidated depreciation and amortization for the six months ended
June 30, 2003, were approximately $11,370,000, compared to approximately
$11,442,000, during the six months ended June 30, 2002. Depreciation and
amortization at Majestic Star are inclusive of the Company's loss on investment
in BHR. The loss on investment in BHR is primarily depreciation expense.
Depreciation and amortization attributed to Majestic Star for the six months
ended June 30, 2003 was approximately $4,008,000 compared to approximately
$4,562,000 during the six months ended June 30, 2002. The dollar decrease
totaled approximately $554,000, of which $511,000 is depreciation expense,
$34,000 is amortization expense and $9,000 is related to the loss on investment
in BHR. The decrease for the six months ended June 30, 2003 is primarily
attributable to machinery and equipment being fully depreciated. The loss
relating to the investment in BHR for the six months ended June 30, 2003 and
2002 was $1,199,000 and $1,208,000, respectively.
Consolidated operating income for the six months ended June 30, 2003
was $17,461,000, or 10.4% of consolidated gross revenues, compared to an
operating income for the six months ended June 30, 2002 of $18,260,000, or 10.9%
of consolidated gross revenues. Operating income attributed to Majestic Star for
the six months ended June 30, 2003 was approximately $8,675,000, or 12.2% of
gross Majestic Star revenues, compared to $9,360,000, or 14.5% of its gross
revenues, during the six months ended June 30, 2002. The $685,000 or 7.3%
decrease in operating income is principally attributed to a 9.8% increase in
Majestic Star's gross revenues offset by increased expenses and the $2,072,000
charge in the current quarter for the "Retroactive Dockside Tax" implemented by
the State of Indiana, as previously discussed.
The consolidated net interest expense for the six months ended June 30,
2003, was approximately $15,860,000, or 9.4% of consolidated gross revenues,
compared to approximately $16,206,000, or 9.7% of consolidated gross revenues
for the same period last year. Net interest expense attributed to Majestic Star
for the six months ended June 30, 2003 was approximately $7,039,000, or 9.9% of
gross revenues, compared to $7,159,000, or 11.1% of gross revenues for the same
period last year.
Other non-operating expenses of $94,000 and $92,000 for the six months
ended June 30, 2003 and 2002, respectively, mainly represent fees associated
with the line of credit.
As a result of the foregoing, the Company realized consolidated net
income of approximately $1,406,000, or 0.8% of consolidated gross revenues for
the six months ended June 30, 2003, compared to $1,971,000, or 1.2% of
consolidated gross revenues during the six months ended June 30, 2002. Majestic
Star realized net income of $1,435,000, or 2.0% of its gross revenues during the
six months ended June 30, 2003, compared to $2,145,000 or 3.3% of its gross
revenues during the six months ended June 30, 2002.
37
Earnings Before Interest, Income Taxes, Depreciation and Amortization (EBITDA)
Consolidated EBITDA (defined as earnings from operations before
interest, taxes, depreciation and amortization) was approximately $12,041,000 or
14.5% and $28,831,000 or 17.1%, respectively, of consolidated gross revenues
during the three and six months ended June 30, 2003, compared to approximately
$13,866,000, or 16.7% and $29,702,000, or 17.8% of consolidated gross revenues
during the three and six months ended June 30, 2002. EBITDA at Majestic Star was
approximately $4,896,000, or 14.2% and $12,683,000, or 17.9%, respectively, of
its gross revenues during the three and six months ended June 30, 2003, compared
to $6,962,000, or 21.4% and $13,922,000, or 21.6% of its gross revenues in the
prior year periods. Consolidated EBITDA and Majestic Star's EBITDA for both the
three and six month periods ended June 30, 2003 contains a "Retroactive Dockside
Tax" charge of $2,072,000. The charge relates to the recognition of additional
gaming tax liability associated with the State of Indiana's clarification of the
start date for paying gaming taxes under the current tiered tax structure.
Please see our earlier discussion in Management's Discussion and Analysis of
Financial Condition and Results of Operations for a more detail explanation.
EBITDA is presented solely as a supplemental disclosure because management
believes that it is a widely used measure of operating performance in the gaming
industry, and a principal basis for valuation of gaming companies. Other
companies may calculate EBITDA differently. Management uses EBITDA as a measure
of the Company's operating performance. EBITDA should not be construed as an
alternative to operating income, as an indicator of the Company's operating
performance, or as an alternative to cash flows from operating activities, as a
measure of liquidity, or as any other measure determined in accordance with
generally accepted accounting principles. Other companies may calculate EBITDA
differently. The Company has significant uses of cash including capital
expenditures, interest payments, taxes and debt principal repayments, which are
not reflected in EBITDA. A reconciliation of operating income/(loss) to EBITDA
is included in the financial schedules set forth earlier in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company had cash and cash equivalents of
$33,937,000. This amount included $17,802,000 at Majestic Star and $16,135,000
at Investor Holdings, LLC. During the six months ended June 30, 2003, the
Company's capital expenditures were $5,824,000, which included $2,336,000 at
Majestic Star.
The Company, has met its capital requirements to date through net cash
from operating activities. For the six months ended June 30, 2003, net cash
provided by operating activities totaled $18,566,000, compared to $13,123,000
during the six months ended June 30, 2002. At Majestic Star for the six months
ended June 30, 2003, net cash provided by operating activities totaled
approximately $13,226,000 and cash used by investing activities totaled
$2,878,000 compared to approximately $6,843,000 provided by operating activities
and $3,609,000 used in investing activities, during the six months ended June
30, 2002. At Majestic Star for the six months ended June 30, 2003, cash used in
financing activities totaled approximately $1,110,000, compared to $628,000 used
in financing activities during the six months ended June 30, 2002. This amount
includes a distribution of $767,000 related to the fourth quarter of 2002 and
first quarter of 2003 made during the six months ended June 30, 2003 by Majestic
Star to BDI under the Manager's Agreement. Also a distribution of $710,000 was
made during the six months ended June 30, 2003 by Majestic Star to BDI for
income taxes. As of August 14, 2003, there are no outstanding borrowings under
Majestic Star's $20.0 million credit facility.
Management believes that the Company's cash flow from operations and
its current lines of credit will be adequate to meet the Company's anticipated
future requirements for working capital, its capital expenditures and scheduled
payments of interest and principal on the Star Notes, lease payments to BHPA and
other permitted indebtedness for the year 2003. No
38
assurance can be given, however, that such proceeds and operating cash flow, in
light of increased competition, will be sufficient for such purposes. The
purchase of certain Indiana gaming facilities by larger more recognized brand
names could significantly increase competition for the Company. If necessary and
to the extent permitted under the Majestic Indenture relating to the Star Notes,
the Company will seek additional financing through borrowings of debt or equity
financing. There can be no assurance that additional financing, if needed, will
be available to the Company, or that, if available, the financing will be on
terms favorable to the Company. In addition, there is no assurance that the
Company's estimate of its reasonably anticipated liquidity needs is accurate or
that unforeseen events will not occur, resulting in the need to raise additional
funds.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 145 ("SFAS 145"). Among other
matters, SFAS 145 addresses the presentation for gains and losses on early
retirements of debt in the statement of operations. SFAS 145 is effective for
fiscal years beginning after May 15, 2003. Adoption of SFAS 145 did not have a
material impact on the Company's financial condition or results of operation.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Guarantees of Indebtedness of Others."
FIN 45 elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statement about its obligations under certain guarantees
that it has issued. It also clarifies (for guarantees issued after January 1,
2003) that a guarantor is required to recognize at the inception of a guarantee,
a liability for the fair value of the obligations undertaken in issuing the
guarantee. At June 30, 2003, the Company did not have any guarantees outside of
its consolidated group. The adoption of FIN 45 did not have a material impact on
the Company's financial condition or results of operation.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities."
FIN 46 addresses the requirements for business enterprises to consolidate
related entities in which they are determined to be the primary economic
beneficiary as a result of their variable economic interests. FIN 46 is intended
to provide guidance in judging multiple economic interest in an entity and in
determining the primary beneficiary. FIN 46 outlines disclosure requirements for
Variable Interest Entities ("VIEs") in existence prior to January 31, 2003, and
outlines consolidation requirement for VIEs created after January 31, 2003. The
Company has reviewed its major relationships and its overall economic interests
with other companies consisting of related parties, companies in which it has an
equity position and other suppliers to determine the extent of its variable
economic interest in these parties. The review has not resulted in a
determination that the Company would be judged to be the primary economic
beneficiary in any material relationships, or that any material entities would
be judged to be VIEs of the Company. The Company believes it has appropriately
reported the economic impact and its share of risks of its commercial
relationships through its equity accounting along with appropriate disclosure of
its commitments.
39
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,
2002.
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 Commission's rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 27, 2003, a complaint was filed in the U.S. District Court for
the Northern District of Mississippi against several Tunica-area casino owners
and operators, including Fitzgeralds Tunica. The plaintiffs claim that the
defendants conspired to agree not to enter into any advertising or other
agreements with the plaintiffs, in violation of federal and state antitrust
laws, as well as various other tort and contract claims. The plaintiffs are
seeking treble, compensatory and punitive damages totaling approximately $33.0
million, plus interest and attorney's fees. The Company intends to vigorously
defend against this lawsuit. However, it is too early to determine the outcome
and the effect, if any, on the Company's financial position and results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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
(b) The following reports on Form 8-K filed during the six months ended June 30,
2003:
On May 8, 2003, the Company filed a report on Form 8-K under Items 7, 9 and 12
to furnish a press release announcing the Company's financial results for its
first quarter ended March 31, 2003.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE MAJESTIC STAR CASINO, LLC
By: /s/ Don H. Barden August 14, 2003
------------------------------------------------------------
Don H. Barden, Member, Chairman, President and Chief Executive Officer
By /s/ Jon S. Bennett August 14, 2003
------------------------------------------------------------
Jon S. Bennett, Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
THE MAJESTIC STAR CASINO CAPITAL CORP.
By: /s/ Don H. Barden August 14, 2003
------------------------------------------------------------
Don H. Barden, Chairman, President and Chief Executive Officer
By: /s/ Jon S. Bennett August 14, 2003
------------------------------------------------------------
Jon S. Bennett, Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
41
EXHIBIT INDEX
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.