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Filed Pursuant to Rule 424(b)(3)
Registration File No. 333-85089
PROSPECTUS
THE MAJESTIC STAR CASINO, LLC
[LOGO OF MAJESTIC STAR CASINO]
OFFER TO EXCHANGE
10 7/8% SENIOR SECURED NOTES DUE 2006, SERIES B
FOR ALL OF ITS OUTSTANDING
10 7/8% SENIOR SECURED NOTES DUE 2006, SERIES A
TERMS OF THE EXCHANGE OFFER
. The exchange offer expires at 5:00 p.m. New York City time, on September 30,
1999, unless extended.
. All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged.
. Tenders of the outstanding notes may be withdrawn any time before 5:00 p.m.
New York City time, on the expiration of the exchange offer.
. The exchange offer is not subject to any condition, other than that the
exchange offer may not violate applicable law or any applicable
interpretation of the staff of the Securities and Exchange Commission.
. We will not receive any proceeds from the exchange offer.
. The exchange of notes will not be a taxable exchange for U.S. federal income
tax purposes.
. The terms of the new notes to be issued are substantially identical to your
old notes, except that the new notes will not have transfer restrictions and
you will not have registration rights.
. There is no existing market for the new notes, and we do not intend to apply
for listing of the new notes on any securities exchange.
FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER PRIOR TO YOUR
PARTICIPATION IN THE EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON PAGE 11.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE NOTES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
NEITHER THE INDIANA GAMING COMMISSION NOR ANY OTHER REGULATORY AGENCY HAS
APPROVED OR DISAPPROVED OF THESE NOTES OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is August 31, 1999
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TABLE OF CONTENTS
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PAGE
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Incorporation of Information We file with the SEC........................ ii
Forward-Looking Statements............................................... ii
Available Information.................................................... iii
Prospectus Summary....................................................... 1
Risk Factors............................................................. 11
Use of Proceeds.......................................................... 16
Capitalization........................................................... 17
Selected Financial Information........................................... 18
The Exchange Offer....................................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Business................................................................. 43
Management............................................................... 48
Summary Compensation Table............................................... 49
Principal Owner.......................................................... 50
Certain Relationship and Related Transaction............................. 50
Description of Credit Facility and Intercreditor Agreement............... 50
Description of the New Notes............................................. 52
Material Agreements...................................................... 85
Regulatory Matters....................................................... 88
Specific Federal Income Tax Considerations............................... 92
Plan of Distribution..................................................... 93
Legal Matters............................................................ 94
Independent Accountants.................................................. 94
Index to Consolidated Financial Statements............................... F-1
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INCORPORATION OF INFORMATION WE FILE WITH THE SEC
This prospectus "incorporates by reference" important business and financial
information about our company that is not included in or delivered with this
prospectus. This means:
. incorporated documents are considered part of this prospectus;
. we can disclose important information to you by referring you to those
documents; and
. information that we file with the Securities and Exchange Commission
after the date of this prospectus will automatically update and
supersede this prospectus.
The following documents are incorporated into this prospectus by reference:
. our Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
. our Quarterly Report on Form 10-Q for the period ended March 31, 1999;
.our Quarterly Report on Form 10-Q for the period ended June 30, 1999; and
. all documents filed by us under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 after the date of this prospectus and
before the exchange offer is complete.
You may obtain copies of the information incorporated by reference into this
prospectus without charge upon oral or written request to: The Majestic Star
Casino, LLC; Attention: Chief Financial Officer; One Buffington Harbor, Gary,
Indiana 46406-3000; Telephone: (219) 977-7823
To obtain timely delivery of any of this information, you must make your
request at least five business days prior to the expiration of the exchange
offer. The date by which you must make your request is September 23, 1999.
FORWARD-LOOKING STATEMENTS
This prospectus includes or incorporates by reference forward-looking
statements as they are defined in the Securities Act of 1933 and the Securities
Exchange Act of 1934. Forward-looking statements include the words "may,"
"will," "estimate," "intend," "continue," "believe," "expect" or "anticipate"
and other similar words. The forward-looking statements contained in this
prospectus are generally located in the material set forth under the headings
"Prospectus Summary," "Risk Factors," "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business," but may be found in other locations as well. These forward-looking
statements generally relate to our plans and objectives for future operations
and are based upon management's reasonable estimates of future results or
trends. Although we believe that our plans and objectives reflected in or
suggested by such forward-looking statements are reasonable, we may not achieve
such plans or objectives. Actual results may differ from projected results due,
but not limited, to unforeseen developments, including developments relating to
the following:
. the availability and adequacy of our cash flow to meet our requirements,
including payment of your notes and the new notes to be issued pursuant
to this exchange offer,
. economic, competitive, demographic, business and other conditions in our
local and regional markets,
. changes or developments in laws, regulations or taxes in the gaming
industry,
. actions taken or omitted to be taken by third parties, including our
customers, suppliers, competitors and members as well as legislative,
regulatory, judicial and other governmental authorities,
. competition in the gaming industry,
. changes in personnel or compensation, including federal minimum wage
requirements,
. the loss of any license or permit or our failure to obtain an
unconditional renewal of our gaming license on a timely basis,
. the loss of our riverboat casino or our joint venture's land-based
facilities due to casualty, weather, mechanical failure or any extended
or extraordinary maintenance or inspection that may be required,
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. changes in our business strategy, capital improvements or development
plans,
. the availability of additional capital to support capital improvements
and development, and
. other factors discussed under "Risk Factors" or elsewhere in this
prospectus.
All future written and oral forward-looking statements made by us or on our
behalf are also subject to these factors. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in or
incorporated by reference into this prospectus might not occur.
AVAILABLE INFORMATION
We file annual quarterly and current reports, proxy statements and other
information with the U.S. Securities and Exchange Commission. You may read and
copy the reports, statements and other information with the U.S. Securities and
Exchange Commission's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can request copies of these documents by writing to
the U.S. Securities and Exchange Commission but must pay photocopying fees.
Please call the U.S. Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the operation of the public reference rooms. Our U.S.
Securities and Exchange Commission filings are also available to the public on
the U.S. Securities and Exchange Commission's Internet site
(http://www.sec.gov).
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PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this prospectus and is qualified by the more detailed information set forth
elsewhere in this prospectus, which should be read in its entirety. This
summary does not contain all of the information that may be important to you in
deciding whether to participate in the exchange offer. We encourage you to read
the entire prospectus, including the financial data and the information
described under the heading "Risk Factors" on page 11 and under the heading
"Forward-Looking Statements" on page ii. Unless otherwise indicated, the terms
"we," "our," "us" and other similar terms mean The Majestic Star Casino, LLC
and our wholly owned subsidiary, The Majestic Star Casino Capital Corp., and
all references to numbers of slot machines and table games are as of June 30,
1999. The Majestic Star Casino Capital Corp. is a co-issuer of the notes to be
issued pursuant to the exchange offer. It was formed to facilitate the offering
of the notes sold by us on June 18, 1999 and has no assets or operations.
THE EXCHANGE OFFER
On June 18, 1999, we sold $130.0 million of our 10 7/8% Senior Secured Notes
due 2006, Series A, to the initial purchaser--Jefferies & Company, Inc. The
initial purchaser resold those notes in reliance on Rule 144A and other
exemptions under the Securities Act of 1933.
Simultaneously with the purchase and sale of such notes, we entered into a
registration rights agreement with the initial purchaser. Under the
registration rights agreement, we agreed, among other things, to:
. file a registration statement with the Securities and Exchange Commission
related to the exchange offer on or before August 17, 1999;
. deliver this prospectus to you;
. cause the registration statement, which includes this prospectus, to
become effective on or before October 18, 1999;
. complete the exchange offer within 30 days after the registration
statement becomes effective.
You are entitled to exchange your old notes for new registered 10 7/8%
Senior Secured Notes due 2006, Series B, with substantially identical terms as
the old notes, except that the new notes will not have transfer restrictions
and registration rights. If we do not complete the exchange offer on or before
the 30th day after the registration statement becomes effective, we must pay
liquidated damages to the holders of the old notes until the exchange offer is
completed. You should read the discussion under the heading "The Exchange
Offer--Purpose and Effect; Registration Rights" and "Description of the New
Notes" for further information regarding the new notes that we are offering in
exchange for your old notes.
We believe that you may resell the new notes issued in the exchange offer
without compliance with the registration and prospectus deliver provisions of
the Securities Act of 1933, subject to the conditions described under "The
Exchange Offer." You should read that section for further information regarding
the exchange offer.
THE MAJESTIC STAR CASINO, LLC
We own and operate the Majestic Star Casino, the newest and one of the
largest gaming vessels serving the Chicago metropolitan area. We are
conveniently located at Buffington Harbor in Gary, Indiana, approximately 23
miles southeast of downtown Chicago. The Chicago metropolitan area is the third
largest metropolitan area in the United States. In 1998, casinos in this market
generated approximately $1.5 billion of gaming revenue. During the six months
ended June 30, 1999, our EBITDA (as defined) increased 43.5% to approximately
$15.1 million compared to $10.5 million in the same period in 1998.
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In October 1997, we replaced a chartered vessel with the current Majestic
Star Casino, a newly constructed 360 foot long vessel with a contemporary
design and a stable V-shaped hull. The casino accommodates approximately 43,000
square feet of gaming space across three expansive decks, which contain 1,410
slot machines and 56 table games. The Majestic Star Casino offers patrons an
exciting gaming environment with a bright and spacious layout, high ceilings,
an atrium spanning two decks, colorful chandeliers and mirrors. Passengers move
freely between the various levels of the casino through escalators, elevators
and stair towers. The Majestic Star Casino also offers its customers on-board
food and beverage facilities. In addition, in July 1999, we opened a new VIP
lounge on board the vessel and remodeled a VIP boarding lounge in the dockside
pavilion.
We are indirectly wholly owned by Don H. Barden, our Chairman, President and
Chief Executive Officer. Mr. Barden has invested approximately $24.0 million to
design, develop, and construct the Majestic Star Casino and the Buffington
Harbor gaming complex and to make related expenditures. Mr. Barden has also
successfully built, owned and operated numerous businesses in the cable
television, international trade and real estate industries and has owned and
operated several radio stations over the past 30 years. In addition, we have a
proven management team with substantial experience both industry-wide and in
the Chicago metropolitan market.
Our principal executive offices are located at One Buffington Harbor Drive,
Gary, Indiana 46406-3000. Our telephone number is (219) 977-7777.
BUFFINGTON HARBOR
The Majestic Star Casino operates from the Buffington Harbor gaming complex,
which we share with the Trump Casino. The Buffington Harbor gaming complex
includes a guest pavilion, vessel berths, parking lots and other common area
facilities. Buffington Harbor has the largest concentration of gaming positions
in the Chicago metropolitan market, offering patrons a total of approximately
3,455 gaming positions, which is greater than the number of gaming positions
that exist at any other site in northwest Indiana. This number is also
substantially greater than the number of gaming positions allowed at any
individual Illinois gaming site, which is currently limited by Illinois gaming
laws to 1,200. We believe that we have achieved operating cost savings and
marketing advantages over our competitors as a result of the operation of two
casinos at the same location.
Buffington Harbor offers two cruising vessel casinos (ours and the Trump
Casino) with a staggered cruising schedule. As a result, patrons enjoy
significantly reduced waiting times to board a casino. Specifically, the
maximum scheduled waiting time for Buffington Harbor patrons is 30 minutes,
compared to a maximum of 90 minutes in all other northwest Indiana gaming
locations. Further, gaming customers in the Chicago area, Indianapolis, South
Bend and Fort Wayne, Indiana, and Kalamazoo and Grand Rapids, Michigan can
conveniently access Buffington Harbor, which is located at the interchange of
U.S. 12 and Indiana State Highway 912, just off of I-80/94 and the Indiana Toll
Road.
The Buffington Harbor gaming complex is a two-level, 90,000 square foot
structure containing a 352-seat buffet, a 110-seat steakhouse restaurant,
several bars and lounges, gift shops and areas for staging and ticketing. The
complex features a grand entrance, granite and marble floors, unique metallic
finishes, two large fountains and a variety of lighting effects. The Buffington
Harbor gaming complex is situated on an approximately 100-acre site, containing
approximately 3,000 parking spaces, and offers valet parking and convenient bus
loading and unloading facilities. The Buffington Harbor gaming complex was
developed and constructed by Buffington Harbor Riverboats, L.L.C., a joint
venture between us and an indirect subsidiary of Trump Hotels and Casino
Resorts, Inc.
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MARKET OVERVIEW
The Chicago metropolitan area is the third most populated metropolitan area
in the United States. According to demographic sources, there were
approximately nine million adults living in the area in 1998, and the average
household income was approximately $48,200. The population and average
household income of the Chicago metropolitan market are the largest among all
United States riverboat/cruising vessel casino markets. The Chicago
metropolitan market is a relatively young gaming market, as gaming was first
introduced in 1992. This market is primarily served by nine riverboat/cruising
vessel casinos, including our casino, operating under licenses granted by the
States of Illinois and Indiana. These casinos generated 1998 gaming revenue of
approximately $1.5 billion, ranking first among all United States
riverboat/cruising vessel casino markets. Such revenue has increased at a
compound annual rate of approximately 26.1% since 1995. Notwithstanding the
recent growth trends, we believe that the Chicago metropolitan market remains
underserved.
GROWTH STRATEGY
Leverage Existing Customer Base. We have established the Club M-Star Slot
Club to increase the frequency of visits by our existing customers. This
program enables us to maintain a comprehensive database of information about
our gaming patrons, including their gaming levels, duration of play and
preferences. We use this information to create a comprehensive direct mail
marketing program. As a result, we have reduced our overall marketing costs and
have improved the efficiency of our marketing expenditures. In addition, we
recently opened a VIP lounge on board the vessel and remodeled a VIP boarding
lounge in the dockside pavilion. We believe these amenities will differentiate
us from our competitors who currently provide only dockside lounges. We have
also introduced a concierge service to assist in providing superior service to
our higher activity gaming patrons.
Attract New Customers. We continue to use mass media, such as radio,
television, newspaper and billboard advertising, to enhance our brand image and
attract new customers. In this effort, we promote the convenience of two
casinos at Buffington Harbor and major events, such as player parties and
promotional giveaways. Once new patrons visit the Majestic Star Casino, we
endeavor to register them in the Club M-Star. This allows us to expand our
database of customers and to tailor our marketing programs accordingly. To
further these efforts, in the first quarter of 1999, we created a player
development function with the mission of attracting and creating marketing
programs directed towards higher activity gaming customers.
Increase Emphasis on Slot Play. Slot machine wagering is the fastest growing
and most profitable segment of our casino, representing approximately 76.4% of
our gaming revenues in 1998. We continue to enhance slot machine revenue by
modifying our mix of slot machine types and introducing the latest slot machine
models. For example, in 1998, we introduced nickel slot machines, various poker
video and participation games, including Wheel of Fortune(R) and Jeopardy(R),
and in the first quarter of 1999, we introduced Monopoly(R). These
participation games provide patrons with the opportunity to conduct more
advanced betting on a single game. As a result, we have substantially increased
our revenues with respect to these games compared to the house average.
Provide Attentive, Friendly Customer Service. As part of our commitment to
providing a quality casino entertainment experience for our patrons, we are
dedicated to ensuring a high level of customer satisfaction and loyalty by
providing attentive customer service in a clean, friendly and relaxed
atmosphere. We recognize that consistent quality and a comfortable atmosphere
stem from the collective care and friendliness of each of our employees. Toward
this end, we conduct ongoing training sessions to emphasize the importance of
customer contact and to encourage our employees to be friendly, smile and wish
each customer good luck. In addition, we offer competitive employee benefit
programs to recruit and retain friendly, professional employees.
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Construction of New Parking Facility. We currently intend to construct a
multi-level covered parking structure with our joint venture partner. The
parking structure is expected to provide customers with approximately 1,600
covered parking spaces and indoor access to the Buffington Harbor gaming
complex. Customers currently either park their automobiles in an approximately
3,000 space flat parking lot or use our valet parking services. We currently
expect to contribute approximately $3.5 million of capital toward the project.
We believe that the convenience of the new parking structure will attract a
significant number of new customers to the Buffington Harbor gaming complex,
thereby providing substantial opportunities to increase our net revenues and
related cash flow.
Expand Operations. The Buffington Harbor gaming complex is located on an
approximately 100-acre site. We believe that we are one of only two locations
in the Chicago metropolitan market with the capacity to significantly expand
our land-based facilities. In addition to the property owned by the joint
venture, an affiliate of ours has entered into discussions with various parties
concerning the feasibility of purchasing additional land adjacent to the joint
venture property for future development. We also continually evaluate the
acquisition and/or construction of gaming facilities in new locations.
TERMS OF THE EXCHANGE OFFER
NEW NOTES............... We are offering registered 10 7/8% Senior Secured
Notes due 2006, Series B, for your notes. The terms
of the new notes and your old notes are substantially
identical, except:
. the new notes will be registered under the
Securities Act of 1933;
. the new notes will not bear any legends
restricting transfer; and
. your rights under the registration rights
agreement, including your right to receive
liquidated damages, will terminate.
THE EXCHANGE OFFER...... We are offering to exchange $130.0 million total
principal amount of the new notes for your old notes.
As of the date of this prospectus, $130,000,000
aggregate principal amount of the old notes is
outstanding.
EXPIRATION DATE......... You have until 5:00 p.m., New York City time, on
September 30, 1999 to validly tender your old notes
if you want to exchange your old notes for new notes.
We may extend that date under certain conditions.
CONDITIONS OF THE
EXCHANGE OFFER.........
The exchange offer is not subject to any conditions,
other than that the exchange offer does not violate
applicable law or any applicable interpretation of
the staff of the Securities and Exchange Commission.
INTEREST................ You will receive interest on the new notes from the
date interest was last paid on your old notes, or, if
no interest was paid on your old notes, you will
receive interest from June 18, 1999. If your old
notes are exchanged for new notes, you will not
receive any accrued interest on your old notes.
PROCEDURES FOR
TENDERING OLD NOTES;
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS......
If you want to participate in the exchange offer, you
must transmit a properly completed and signed letter
of transmittal, and all other documents required by
the letter of transmittal, to the exchange agent.
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Please send these materials to the exchange agent at
the address set forth in the accompanying letter of
transmittal prior to 5:00 p.m., New York City time,
on the expiration date. You must also send one of the
following:
. a certificate of your old notes;
. a timely confirmation of book-entry transfer of
your old notes into the exchange agent's
account at The Depository Trust Company; or
. the items required by the guaranteed delivery
procedures described below.
If you are a beneficial owner of your old notes and
your old notes are registered in the name of a
nominee, such as a broker, dealer, commercial bank or
trust company, and you wish to tender your old notes
in the exchange offer, you should instruct your
nominee to promptly tender the old notes on your
behalf.
If you are a beneficial owner and you want to tender
your old notes on your own behalf, you must, before
completing and executing the letter of transmittal
and delivering your old notes, make appropriate
arrangements to either register ownership of your old
notes in your name or obtain a properly completed
bond power from the registered holder of your old
notes. By executing the letter of transmittal, you
will represent to us that:
. you are not our "affiliate" (as defined in Rule
405 under the Securities Act of 1933);
. you will acquire the new notes in the ordinary
course of your business;
. you are not a broker-dealer that acquired your
notes directly from us in order to resell them
pursuant to Rule 144A under the Securities Act
of 1933 or any other available exemption under
the Securities Act of 1933;
. if you are a broker-dealer that acquired your
notes as a result of market-making or other
trading activities, you will deliver a
prospectus in connection with any resale of new
notes; and
. you are not participating, do not intend to
participate and have no arrangement or
understanding with any person to participate in
the distribution of the new notes.
If your old notes are not accepted for exchange for
any reason, we will return your old notes to you at
our expense.
GUARANTEED DELIVERY
PROCEDURES.............
If you wish to tender your old notes and:
. your old notes are not immediately available;
. you are unable to deliver on time your old
notes or any other document that you are
required to deliver to the exchange agent; or
. you cannot complete the procedures for delivery
by book-entry transfer on time;
then you may tender your old notes according to the
guaranteed delivery procedures that are discussed in
the letter of transmittal and in "The Exchange
Offer--Guaranteed Delivery Procedures."
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ACCEPTANCE OF OLD NOTES
AND DELIVERY OF NEW
NOTES .................
We will accept all old notes that you have properly
tendered on time when all conditions of the exchange
offer are satisfied or waived. The new notes will be
delivered promptly after we accept the old notes.
WITHDRAWAL RIGHTS....... You may withdraw the tender of your old notes at any
time before 5:00 p.m., New York City time, on the
expiration date.
THE EXCHANGE AGENT...... IBJ Whitehall Bank & Trust Company is the exchange
agent. Its address and telephone number are set forth
in "The Exchange Offer--The Exchange Agent."
FEES AND EXPENSES....... We will pay all expenses relating to the exchange
offer and compliance with the registration rights
agreement. We will also pay certain transfer taxes,
if applicable, relating to the exchange offer.
RESALES OF NEW NOTES.... We believe that the new notes may be offered for
resale, resold and otherwise transferred by you
without further compliance with the registration and
prospectus delivery requirements of the Securities
Act of 1933 if:
. you are not our "affiliate" (as defined in Rule
405 under the Securities Act of 1933);
. you acquire the new notes in the ordinary
course of your business;
. you are not a broker-dealer that purchased old
notes from us to resell them pursuant to Rule
144A under the Securities Act of 1933 or any
other available exemption under the Securities
Act of 1933; and
. you are not participating, and have no
arrangement or understanding with any person to
participate, in a distribution (within the
meaning of the Securities Act of 1933) of the
new notes.
You should read the information under the heading
"The Exchange Offer--Resales of the New Notes" for a
more complete description of why we believe that you
can freely transfer the new notes received in the
exchange offer without registration or delivery of a
prospectus.
All broker-dealers that are issued new notes for
their own accounts in exchange for old notes that
were acquired as a result of market-making or other
trading activities must acknowledge that they will
deliver a prospectus meeting the requirements of the
Securities Act of 1933 in connection with any resale
of the new notes. If you are a broker-dealer and are
required to deliver a prospectus, you may use this
prospectus for an offer to resell, a resale or other
transfer of the new notes.
FEDERAL INCOME TAX
CONSEQUENCES...........
The issuance of the new notes will not constitute a
taxable exchange for U.S. federal income tax
purposes. You will not recognize any gain or loss
upon receipt of the new notes. See "Certain Federal
Income Tax Consequences."
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REGISTRATION RIGHTS In connection with the sale of the old notes, we
AGREEMENT............... entered into a registration rights agreement with the
initial purchaser of the old notes that grants the
holders of the old notes registration rights. As a
result of making and consummating this exchange
offer, we will have fulfilled most of our obligations
under the registrations rights agreement. If you do
not tender your old notes in the exchange offer, you
will not have any further registration rights under
the registration rights agreement or otherwise unless
you were not eligible to participate in the exchange
offer or do not receive freely transferrable new
notes in the exchange offer. See "The Exchange
Offer--Purpose and Effect; Registration Rights."
USE OF PROCEEDS......... We will not receive any proceeds from the issuance of
the new notes, and we will pay the expenses of the
exchange offer.
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
If you do not exchange your old notes for the new notes in the exchange
offer, your old notes will continue to be subject to the restrictions on
transfer contained in the legend on the old notes. In general, the old notes
may not be offered or sold unless they are registered under the Securities Act
of 1933. However, you may offer or sell your old notes under an exemption from,
or in a transaction not subject to, the Securities Act of 1933 and applicable
state securities laws. We do not currently anticipate that we will register the
old notes under the Securities Act of 1933.
SUMMARY OF TERMS OF THE NEW NOTES
The form and terms of the new notes are the same as the form and terms of
the old notes, except that the new notes will be registered under the
Securities Act of 1933. As a result, the new notes will not bear legends
restricting their transfer and will not contain the registration rights and
liquidated damage provisions contained in the old notes. The new notes
represent the same debt as the old notes. Both the old notes and the new notes
are governed by the same indenture.
ISSUERS................. The Majestic Star Casino, LLC and its wholly owned
subsidiary, The Majestic Star Casino Capital Corp.
SECURITIES OFFERED...... $130,000,000 principal amount of 10 7/8% Senior
Secured Notes due 2006, Series B.
MATURITY DATE........... July 1, 2006.
INTEREST RATE........... 10 7/8% per year.
INTEREST PAYMENT Semi-annually beginning on January 1, 2000.
DATES...................
RANKING................. The new notes will rank senior in right of payment to
any of our subordinated indebtedness and will rank
equal in right of payment to any of our senior
indebtedness.
SECURITY INTEREST....... The new notes will be secured by, among other things,
a pledge or assignment of the Majestic Star Casino
vessel, each member's interest in
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The Majestic Star Casino, LLC, our membership
interest in our joint venture, the Berthing
Agreement, dated as of April 26, 1996, by and between
us and our joint venture, our rights to the service
mark "Majestic Star Casino" and substantially all of
our other assets, other than certain specified
excluded assets. The lien on the collateral securing
the proposed new credit facility will be senior to
the lien on the collateral securing the new notes.
OPTIONAL REDEMPTION..... After July 1, 2003, all or some of the new notes may
be redeemed at our option at the following premiums,
plus interest:
<TABLE>
<CAPTION>
FOR THE PERIOD BELOW PERCENTAGE
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<S> <C>
On or after July 1, 2003...................... 105.438%
On or after July 1, 2004...................... 102.719%
July 1, 2005 and thereafter................... 100.000%
</TABLE>
Prior to July 1, 2002, up to 35% of the principal
amount of the new notes may be redeemed at our option
with the net proceeds of certain public equity
offerings at 110.875% of their face amount, plus
interest.
REQUIRED REGULATORY
REDEMPTION ............
The new notes may be redeemed in the event of certain
determinations by the gaming authorities in
jurisdictions in which we conduct gaming operations.
See "Description of the New Notes--Redemption."
GUARANTEES.............. Subject to certain exceptions, if we create or
acquire new wholly owned subsidiaries, they will
guarantee our obligations under the new notes.
CHANGE OF CONTROL If we go through a change of control, we must give
OFFER................... holders of the new notes the opportunity to sell us
their new notes at 101% of their face amount, plus
interest.
ASSET SALE PROCEEDS..... If we do not reinvest cash proceeds from the sale of
assets in our business, we may have to use these
proceeds to offer to buy back some of the new notes
at their face amount, plus interest.
CERTAIN INDENTURE The new notes will be governed by the same indenture
PROVISIONS.............. governing the old notes. The provisions of the
indenture will limit our ability to:
.incur more debt;
.pay management fees;
.pay dividends, redeem stock, or make other
distributions;
.issue ownership interests in subsidiaries;
.make certain investments;
.create liens;
.merge or consolidate; and
.transfer or sell our assets.
These covenants are subject to a number of important
exceptions.
8
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following table presents our summary financial and operating data for
the fiscal years ended December 31, 1996 through 1998 and for the six months
ended June 30, 1998 and 1999 and balance sheet data at June 30, 1999. This data
is derived from our financial statements, which have been audited by
PricewaterhouseCoopers LLP, except that the financial and operating data for
the six months ended June 30, 1998 and 1999 and the balance sheet data at June
30, 1999 have been derived from our unaudited financial statements which, in
our opinion, contain all adjustments (consisting only of normal and recurring
adjustments) necessary for a fair representation of our financial position and
results of operations at such dates and for such periods. Because the data in
this table is only a summary and does not provide all of the data contained in
our financial statements, including the related notes, you should read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes thereto appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------------- ----------------
1996(A) 1997 1998 1998 1999
------- ------- -------- ------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................... $54,221 $94,543 $114,263 $56,685 $60,710
Operating expenses.............. $48,949 86,236 92,758 47,850 45,648
Depreciation and amortization... 5,320 7,700 7,820 3,832 3,915
Operating income................ (48) 607 13,685 5,003 11,147
OTHER FINANCIAL DATA:
EBITDA(b)....................... $10,738 $12,701 $ 23,219 $10,494 $15,062
EBITDA margin................... 19.8% 13.4% 20.3% 18.5% 24.8%
Capital expenditures............ 20,242 39,641 2,100 1,516 2,067
OPERATING DATA:
Number of slot machines(c)...... 924 1,532 1,499 1,459 1,410
Number of table games(c)(d)..... 50 64 61 61 56
Win per slot per day............ $ 198 $ 187 $ 154 $ 153 $ 176
Win per table per day(d)........ 1,496 1,248 1,116 1,174 1,319
Win per patron.................. 53 56 57 55 68
PRO FORMA DATA:
EBITDA to interest expense, net(e)............................... 2.0x
Net Debt to EBITDA(f)............................................ 4.2x
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1999
----------------------
ACTUAL
----------------------
(DOLLARS IN THOUSANDS,
UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(g)........................... $ 14,302
Total assets........................................... $129,169
Total debt............................................. $138,046
Members' (deficit)..................................... $(16,022)
</TABLE>
- --------
Footnotes on following page:
9
<PAGE>
(a) We had 205 days of gaming operations during 1996.
(b) EBITDA represents operating income before depreciation, amortization, pre-
opening expenses, loss on disposition of assets, and lease and termination
payments on the chartered vessel. Pre-opening expenses were $4.6 million
and $1.3 million in 1996, and 1997, respectively. Loss on disposition of
assets was approximately $1.6 million, $1.0 million and $0.9 million in
1997, 1998, and the six months ended June 30, 1998, respectively. Prior to
October 27, 1997, we chartered a vessel to conduct our gaming operations.
Lease and termination payments on the chartered vessel were approximately
$0.9 million, $1.5 million, $0.8 million, and $0.8 million in 1996, 1997,
1998, and the six months ended June 30, 1998, respectively. EBITDA is
presented to enhance the understanding of our financial performance and our
ability to service our debt, including the notes issued on June 18, 1999.
We understand that EBITDA is used by certain investors as one measure of
cash flow and enables a comparison of our performance with the performance
of other companies that report EBITDA. EBITDA is not a generally accepted
accounting principles financial indicator and should not be considered an
alternative to, or more meaningful than, net income or income from
operations as an indicator of our operating performance or net cash
provided by operating activities as a measure of liquidity. EBITDA as
presented may not be comparable to similarly titled measures reported by
other companies.
(c) Reflects data at year-end or period end.
(d) Excludes poker table data.
(e) Pro forma interest expense, net, is $14.7 million and represents pro forma
interest expense (excluding the non-cash component), of the $130 million 10
7/8% and $6 million 12 3/4% notes and $4.3 million of equipment financing
for the full year, net of interest income.
(f) Net Debt to EBITDA is total debt less cash and cash equivalents (other than
cage cash) at the end of the period presented. The net debt to EBITDA ratio
is computed on an annualized basis.
(g) Includes approximately $3.1 million of cage cash as of June 30, 1999.
10
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and the other
information in this prospectus before tendering your old notes in the exchange
offer.
IF YOU DO NOT EXCHANGE YOUR OLD NOTES FOR THE REGISTERED NOTES IN THE EXCHANGE
OFFER, YOU MAY LOSE YOUR RIGHTS TO HAVE YOUR NOTES REGISTERED AND MAY NOT BE
ABLE TO SELL YOUR OLD NOTES
We did not register your old notes under the Securities Act of 1933 or any
state securities laws. If you do not exchange your old notes for new notes in
the exchange offer, your old notes will continue to be subject to the
restrictions on transfer as stated in the legend on the old notes. In general
you may not offer or sell the old notes unless they are:
. registered under the Securities Act of 1933;
. offered or sold pursuant to an exemption from the Securities Act of 1933
and applicable state securities laws; or
. offered or sold in a transaction not subject to the Securities Act of
1933 and applicable state securities laws.
We do not currently anticipate that we will register the old notes under the
Securities Act of 1933. In addition, holders who do not tender their old notes,
except for certain instances involving the initial purchaser or holders of old
notes who are not eligible to participate in the exchange offer or who do not
receive freely transferrable new notes pursuant to the exchange offer, will not
have any further registration rights under the registration rights agreement or
otherwise and will not have rights to receive liquidated damages.
THE MARKET FOR THE OLD NOTES MAY BE SIGNIFICANTLY MORE LIMITED AFTER THE
EXCHANGE OFFER
If the old notes are tendered and accepted for exchange pursuant to the
exchange offer, the trading market for the old notes that remain outstanding
may be significantly more limited. As a result, the liquidity of the old notes
not tendered for exchange may be adversely affected. The extent of the market
for the old notes and the availability of price quotations would depend upon a
number of factors, including the number of holders of old notes remaining
outstanding and the interest of securities firms in maintaining a market in the
old notes. An issue of securities with a similar outstanding market value
available for trading, which is called the "float," may command a lower price
than would be comparable to an issue of securities with a greater float. As a
result, the market price for the old notes that are not exchanged in the
exchange offer may be affected adversely as the old notes exchanged pursuant to
the exchange offer reduce the float. The reduced float also may make the
trading price of the old notes that are not exchanged more volatile.
OUR SIGNIFICANT INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NEW NOTES
We now have, and after this exchange offer will continue to have, a
significant amount of debt. The new notes will rank senior in right of payment
to any of our subordinated indebtedness and will rank equally with any of our
senior indebtedness. As of June 30, 1999, we had outstanding $127.8 million of
long-term debt represented by the old notes, $6.0 million of long-term debt
represented by the senior secured notes due 2003, and approximately $4.3
million of outstanding equipment financing. In addition, promptly following
this offering, we expect to enter into a new $20.0 million senior credit
facility. The proposed new credit facility will only be available to us if the
Indiana Gaming Commission approves the facility. Although we currently
anticipate that the Indiana Gaming Commission will approve the proposed
facility, there can be no assurance of such approval.
11
<PAGE>
The indenture governing the new notes will impose certain operating and
financial restrictions on us, but it will permit us to incur additional
indebtedness under certain circumstances, including to fund future
acquisitions, if any.
Our high level of debt could, among other things,
. limit our flexibility in planning for, or reacting to, changes in our
business and industry,
. increase our vulnerability to adverse economic and industry conditions or
a downturn in our business,
. limit our ability to fund or obtain additional financing for future
working capital, capital expenditures, development projects, acquisitions
and other general corporate requirements, and
. limit our ability to fund a change of control offer.
WE WILL NEED A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR DEBT; OUR ABILITY TO
GENERATE CASH DEPENDS ON MANY FACTORS
Our high level of debt with financial restrictions poses a substantial risk
to holders of the new notes, including the risk that we might not be able to
generate sufficient cash flow to service our debt or to meet unanticipated
capital needs or shortfalls in our projections. Our ability to meet these
obligations is dependent upon the performance of our sole property, the
Majestic Star Casino, which is subject to economic, political, competitive,
regulatory and other factors that are beyond our control. In addition, our
ability to repay the new notes when due on July 1, 2006, will depend upon our
ability to generate sufficient cash from our operations or to refinance the new
notes on or before the date they become due. We plan to be able to service our
debt and repay the new notes when due with cash from operations. However, if we
are not able to do so, we may need to seek additional financing in the debt or
equity markets, refinance the new notes, sell selected assets or reduce or
delay planned capital expenditures. Any such financing, refinancing or sale of
assets might not be available on economically favorable terms, if at all.
YOUR RIGHT TO RECEIVE PAYMENTS ON THE NEW NOTES WILL BE EFFECTIVELY
SUBORDINATED TO PAYMENTS UNDER OUR PROPOSED NEW CREDIT FACILITY AND OUR
EQUIPMENT FINANCING TO THE EXTENT OF THE COLLATERAL SECURING THIS OTHER DEBT;
THE VALUE OF THE COLLATERAL MAY BE LESS THAN THE AMOUNTS DUE ON THE NEW NOTES
The new notes and any future subsidiary guarantees will be effectively
subordinated to (a) up to $20.0 million principal amount of indebtedness that
may be incurred under our proposed new credit facility because the lender's
lien on the collateral will be senior to the lien of the trustee under the new
notes, and (b) approximately $4.3 million of outstanding equipment financing,
and future equipment financing and purchase money debt, in each case to the
extent of the assets securing that indebtedness. As a result, upon any
distribution to our creditors or the creditors of any future subsidiary
guarantors in bankruptcy, liquidation, reorganization or similar proceedings,
our lenders under our proposed new credit facility, our equipment financing and
our purchase money indebtedness will be entitled to be repaid in full before
any payment is made to you from the proceeds of the assets securing such
indebtedness, or the sale of the equipment subject to such equipment financing.
Consequently, it is unlikely that the liquidation of the collateral securing
the new notes would produce proceeds in an amount sufficient to pay the
principal of, premium, if any, and accrued interest on the new notes after also
satisfying the obligations to pay any senior secured creditors.
In addition, the trustee under the indenture and the lenders under our
proposed new credit facility will enter into an intercreditor agreement to
govern the relationships among them and their obligations and rights. Financing
by multiple lenders with security interests in common collateral may result in
increased complexity and lack of flexibility in a debt restructuring or other
work-out relating to us.
GAMING OR OTHER REGULATIONS MAY DELAY OR OTHERWISE IMPEDE THE TRUSTEE'S ABILITY
TO FORECLOSE ON THE COLLATERAL
Our new notes will be governed under the indenture with IBJ Whitehall Bank &
Trust Company, as trustee, and will be secured by substantially all of our
current and future assets, other than certain excluded
12
<PAGE>
assets. The new notes will not be secured by our riverboat gaming license or
any of the assets of our joint venture. The Indiana Riverboat Gambling Act
prohibits borrowing money against an owner's gaming license and further
requires that the Indiana Gaming Commission approve any sale or transfer of a
license. In the event we fail to pay the new notes or otherwise default under
the indenture before the trustee or the holders of the new notes can foreclose
or take possession of the assets, they may need to file applications with the
Indiana Gaming Commission in order to become licensed. This process, along with
other foreclosure and sale laws, could substantially delay the ability of the
trustee or any noteholder to obtain the benefit of any collateral securing the
new notes and reduce the proceeds from the sale of such collateral by reducing
the number of potential bidders. See "Regulatory Matters."
IF THE JOINT VENTURE WERE TO LOSE ITS LEASE OR BE REQUIRED TO CONSTRUCT A NEW
HARBOR, ITS OPERATIONS WOULD BE SIGNIFICANTLY DISRUPTED, WHICH WOULD ADVERSELY
AFFECT OUR BUSINESS
The joint venture leases the harbor and certain other property on which the
Buffington Harbor gaming complex is situated from Lehigh Portland Cement
Company under a lease dated as of June 29, 1995, which was rent free prior to
1998. Since January 1998, the joint venture has paid rent of $125,000 per month
under the lease, of which we fund $62,500. The lease places certain
restrictions on the use of the harbor by us and our joint venture partner and
requires the joint venture to diligently seek permits for the construction of a
new harbor. The term of the lease has been extended to the earlier of December
31, 2005 or such time as the joint venture has obtained the necessary permits
and completed construction of a new harbor. If the joint venture is required to
reconfigure or construct a new harbor, it will significantly disrupt our
operations. A new harbor may require new guest facilities. The construction of
new facilities would entail significant risks, including possible shortages of
construction materials or labor, unforeseen engineering or environmental
problems, weather interference and other factors, any of which could cause a
temporary stoppage of our operations or could otherwise adversely affect our
operations. The joint venture is currently negotiating the purchase of the
harbor and property adjacent thereto, which would eliminate its obligations
under its lease. There can be no assurance, however, that the harbor and
adjacent property will be purchased on favorable terms or at all. If the joint
venture or an affiliate of the joint venture or its members does not purchase
the harbor property, the joint venture would have to construct a new harbor
under the terms of its lease or request an extension of the lease. Such
construction or the loss of such lease upon its termination would have a
material adverse effect on our operations and our financial condition. See
"Material Agreements--Harbor Lease Agreement."
LOSS OF OUR VESSEL OR THE DOCKSIDE PAVILION FROM SERVICE WOULD ADVERSELY AFFECT
OUR BUSINESS
Our revenues are solely dependent on the Majestic Star Casino and,
indirectly, on the Buffington Harbor gaming complex. We are therefore subject
to greater risks than a more diversified gaming operation with multiple
locations. Also, if mechanical failure, damage to the vessel or the dockside
pavilion or other casualty, including severe weather conditions or extended or
extraordinary maintenance or inspection (including routine inspections required
by the U.S. Coast Guard) took the Majestic Star Casino out of service for any
period of time, it would materially adversely affect our operations. Due to
severe winter weather conditions during the first ten days of January 1999,
combined with the fact that we failed to operate on two weekend days in January
1999, our revenues for the first quarter were adversely impacted by an
estimated $1.5 million.
ANY SIGNIFICANT CONFLICTS BETWEEN US AND OUR JOINT VENTURE PARTNER COULD HAVE
AN ADVERSE EFFECT ON THE OPERATIONS OF THE BUFFINGTON HARBOR GAMING COMPLEX,
WHICH WOULD ADVERSELY AFFECT OUR BUSINESS
In 1995, we formed the joint venture, Buffington Harbor Riverboats, L.L.C.,
with Trump Indiana, Inc. to develop and operate the dockside pavilion and
common areas of the Buffington Harbor gaming complex. Efficient operation of
the joint venture to support our casino will depend upon our continuing
ability, as well as that of our joint venture partner, to fund day-to-day
operations and agree on related business matters. Any failure by the joint
venture partner to fund operations of the joint venture when required, or any
significant
13
<PAGE>
conflict in this relationship that is not promptly resolved, would adversely
affect the operations of the gaming complex. A significant disruption in the
business of the gaming complex is likely to adversely affect the operations of
the Majestic Star Casino and our ability to generate revenues.
WE EXPERIENCE INTENSE COMPETITION FROM OTHER GAMING FACILITIES
Our operations are subject to intense competition from other gaming
facilities. We compete primarily with gaming facilities in the Chicago
metropolitan market, including our joint venture partner and other riverboat
casinos at East Chicago, Hammond and Michigan City, Indiana, and at Elgin,
Aurora and Joliet, Illinois, and to a lesser extent, with four additional
riverboat casinos currently authorized to operate in southern Indiana. We also
compete with various gaming operations on Native American lands located in
Michigan, Wisconsin and potentially northern Indiana. We expect future
competition from three land-based casinos to be developed in Detroit, Michigan
pursuant to a November 1996 voter initiative. The MGM Grand currently operates
from a temporary facility in Detroit, Michigan, and we anticipate that the
other two casinos will operate from temporary facilities shortly. We anticipate
that competition will increase with the recent purchase and pending sale of two
area casinos to larger and stronger competitors. Many of our competitors have
greater gaming industry management experience and financial resources than we
do.
Currently, there are only nine gaming licenses authorized in the Chicago
metropolitan market. Indiana or Illinois could authorize additional gaming
licenses in the future. Legislation has been introduced on numerous occasions
in recent years in Illinois to provide for land-based casinos in Chicago and to
expand riverboat gaming in Illinois. In May 1999, legislation was signed into
law to relocate an existing but not operating riverboat gaming license to
Rosemont, Illinois (excluding the City of Chicago) and to provide for dock-side
gaming. In the last Indiana legislative session, legislation was introduced to
allow certain organizations to operate a limited number of electronic gaming
devices. We are unable to predict whether any such legislation, in Illinois,
Indiana or elsewhere, will be enacted or whether, if passed, it would have a
material adverse impact on our operations. See "Business--Competition."
LOSS OF OUR LICENSE AND CHANGES IN GAMING REGULATIONS AND LEGISLATION COULD
ADVERSELY IMPACT OUR OPERATIONS
Under the Indiana Riverboat Gambling Act, the Indiana Gaming Commission has
broad rule making authority to adopt regulations regarding riverboat gaming
operations and to require extensive information regarding parties having an
interest in the owner's license. Our license is subject to renewal in June
2001. Under the Indiana Riverboat Gambling Act, an owner's license does not
create a property right, but is a revocable privilege contingent upon
continuing suitability for licensure. We cannot assure you that the Indiana
Gaming Commission will renew our license. The Indiana Gaming Commission may
revoke, restrict or suspend an owner's license at any time that the Indiana
Gaming Commission determines the licensee is in violation of the Indiana
Riverboat Gambling Act or the rules and regulations of the Indiana Gaming
Commission or if the Indiana Gaming Commission determines revocation of the
license is in the best interest of Indiana and will protect and enhance the
credibility and integrity of riverboat gambling operations.
From time to time, various proposals have been introduced in the Indiana
General Assembly that, if enacted, could adversely affect the regulation,
taxation and operation of the gaming industry, including the Majestic Star
Casino. Future legislation or regulations could have a material adverse effect
on our business and our results of operations. See "Regulatory Matters."
The National Gambling Impact Study Commission, established by Congress to
study the social and economic impact of gambling, issued its findings and
recommendations for legislation and administrative actions June 18, 1999. These
recommendations could result in new regulatory requirements that could
adversely impact the gaming industry in general. While we do not know what
recommendations, if any, will be made, many observers believe that this
Commission will recommend a moratorium on additional casinos and lottery games,
more federal regulation of Native American reservation casinos, and prohibition
of all forms of Internet gambling.
14
<PAGE>
THE LOSS OF KEY PERSONNEL AND ANY INABILITY TO ATTRACT AND RETAIN QUALIFIED
EMPLOYEES COULD ADVERSELY IMPACT OUR OPERATIONS
Our operations depend on the efforts and skills of a few key executives. The
loss of any one of them could have a material adverse effect on us. In the
event of such loss, we may not be able to attract and hire suitable
replacements. Additionally, our operations require qualified managers and
skilled employees with gaming industry experience to operate our business
successfully. We believe there is a shortage of skilled labor in the gaming
industry, which may make it more difficult and expensive for us to attract and
retain qualified employees. We expect that increased competition in the gaming
industry will intensify this problem. If we are unable to attract and retain
qualified individuals, our operations would be adversely affected.
MANY OF OUR EMPLOYEES BELONG TO UNIONS; ANY LABOR DISRUPTIONS OR WORK STOPPAGES
COULD HAVE AN ADVERSE IMPACT ON OUR BUSINESS
Approximately 13% of our workforce and approximately 36% of the joint
venture's workforce is unionized. We and the joint venture have collective
bargaining agreements with Local 1 of the Hotel Employees and Restaurant
Employees International Union, both of which expire on June 30, 2001. We and
the joint venture have collective bargaining agreements with the Operating
Engineers Union, which expire on September 30, 2003 in our case and June 30,
2001 in the case of the joint venture. We also have an agreement with the
Seafarers International Union, which expires on July 10, 2003. The joint
venture is currently negotiating an amendment to its collective bargaining
agreement with the Hotel Employees and Restaurant Employees International Union
to cover an additional group of employees. Any labor disruptions or work
stoppages could have a material adverse effect on our operations. See
"Business--Employees."
MANY FACTORS AFFECTING THE LABOR POOL IN INDIANA COULD INCREASE OUR LABOR COSTS
We are dependent upon the available labor pool of unskilled and semi-skilled
employees. We are also subject to the Fair Labor Standards Act, which governs
such matters as minimum wage, overtime and other working conditions. In
addition, our agreement with the City of Gary, Indiana, requires us to use our
best efforts to have an employee base comprised of 70% racial minorities, 52%
females, 67% residents of the City of Gary and 90% residents of Lake County,
Indiana. A shortage in the labor pool, especially in the City of Gary and in
Lake County, or other general inflationary pressures or changes in applicable
state or federal minimum wage or other labor laws, could result in increased
labor costs to us.
WE ARE SUBJECT TO SIGNIFICANT TAXES, WHICH COULD BE INCREASED AT ANY TIME
Gaming companies are typically subject to significant taxes and fees in
addition to standard Federal and state income taxes. We now pay substantial
taxes and fees, which are subject to increase at any time. See "Regulation and
Licensing."
The Indiana General Assembly could enact higher wagering or admissions taxes
at any time. There have been proposals from time to time to tax all gaming
establishments, (including riverboat/cruising vessel casinos), at the Federal
level. Any significant increase in our tax rates would have a material adverse
effect on operations.
IF WE OR OUR SIGNIFICANT VENDORS FAIL TO BECOME YEAR 2000 COMPLIANT IN A TIMELY
MANNER, OUR OPERATIONS COULD BE ADVERSELY AFFECTED
Beginning in the year 2000, our business operations will depend on the
ability of the computer programs used in our gaming operations and financial
reporting systems to accommodate the date change. As of this date, we have
modified or upgraded, or scheduled an upgrade of, all of such systems to meet
year 2000 requirements. We are also requesting assurances from our significant
suppliers and vendors that their systems are year 2000 compliant or that they
are identifying and addressing problems to ready themselves for the year
15
<PAGE>
2000. We expect to have confirmation that all systems are compliant by
September 1999. We do not anticipate that our expenditures with respect to year
2000 compliance will have a material impact on our operations. If, however, we
or one of our significant vendors fails to become year 2000 compliant, our
operations could be significantly disrupted. Due to the general uncertainty
inherent in the year 2000 problem, we are unable to determine at this time the
extent to which year 2000 issues could impact our business.
WE ARE SUBJECT TO POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES
The Buffington Harbor gaming complex is located on a site where prior
industrial operations and activities may have resulted in contamination of the
environment. As the owner and operator of the Majestic Star Casino and a member
of the joint venture, we could be held responsible for the costs of addressing
any contamination. Our liability under applicable environmental laws may be
imposed without regard to whether we knew of, or were responsible for, the
presence of hazardous substances and, in some cases, may not be limited to the
value of the affected property. There can be no assurance that further
development of the facility, including the proposed new parking facility, or of
a new harbor, and the related construction, will not identify environmental
contamination. If this were to occur, the costs of remediation or the
disruption to our business could adversely affect our operations and may also
adversely affect our ability to sell, lease or operate the property or to
borrow against it. Neither we nor the joint venture is entitled to
indemnification from any prior owners or operators of the site with respect to
environmental matters. See "Regulatory Matters--Other Non-Gaming Regulations."
WE MAY BE REQUIRED TO CONSUMMATE A REQUIRED REGULATORY REDEMPTION OR A
REPURCHASE UPON A CHANGE OF CONTROL
The new notes will be redeemable, in whole or in part, at any time, at 100%
of the principal amount, plus accrued interest to the redemption date, pursuant
to, and in accordance with, any Required Regulatory Redemption (as defined in
this prospectus under "Description of the New Notes"). In addition, upon a
change of control, you will, subject to certain limitations, have the right to
require us to repurchase all or a portion of the new notes at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest thereon,
if any, to the date of repurchase. There can be no assurance that we will have
sufficient funds to consummate a Required Regulatory Redemption or a repurchase
upon a change of control or that such a redemption or repurchase, if
consummated, would not have a material adverse effect on our business. See
"Description of the New Notes--Redemption" and "--Repurchase Upon Change of
Control."
THERE IS CURRENTLY NO PUBLIC MARKET FOR THE NEW NOTES
There is no existing market for the new notes and there can be no assurance
as to the liquidity of any market that may develop for the new notes. An active
market may not develop for the new notes. If not, the market price and
liquidity of the new notes may be adversely affected. If any of the new notes
are traded after their initial issuance, they may trade at a discount from
their initial offering price. Future trading prices of the new notes will
depend on many factors, including, among other things, our ability to effect
the exchange offer, prevailing interest rates, our operating results and the
market for similar securities. See "Exchange Offer," "Description of the New
Notes," and "Plan of Distribution."
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. In consideration
for issuing the new notes, we will receive outstanding old notes in like
original principal amount at maturity. All old notes received in the exchange
offer will be canceled.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. The
following table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and the notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------
ACTUAL
(DOLLARS IN THOUSANDS,
UNAUDITED)
<S> <C>
Cash and cash equivalents(a)............................. $ 14,302
========
Total debt:
Bank credit facility(b)................................ $ --
Senior Secured Notes due 2003.......................... 6,000
Senior Secured Notes due 2006(c)....................... 127,749
Capital lease obligations.............................. 4,297
--------
Total debt........................................... $138,046
Members' (deficit)....................................... (16,022)
Total capitalization................................. $122,024
========
</TABLE>
- --------
(a) Includes approximately $3.1 million of cage cash as of June 30, 1999.
(b) Promptly following this offering, we expect to enter into a $20.0 million
senior secured credit facility. The establishment of the credit facility is
subject to approval by the Indiana Gaming Commission.
(c) Reflects issuance of $130.0 million aggregate principal amount thereof.
17
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table presents our selected financial information for each of
the three fiscal years ended December 31, 1996, 1997 and 1998 and for the six
months ended June 30, 1998 and 1999. This data is derived from our financial
statements, which have been audited by PricewaterhouseCoopers LLP, except that
the data for the six months ended June 30, 1998 and 1999 has been derived from
our unaudited financial statements which, in our opinion, contain all
adjustments (consisting only of normal and recurring adjustments) necessary for
a fair presentation of our financial position and results of operations at such
dates and for such periods. Because the data in this table is only a summary
and does not provide all of the data contained in our financial statements,
including the related notes, you should read "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and the notes thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------------------- ----------------
1996(A) 1997 1998 1998 1999
------- ------- -------- ------- -------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT OPERATING
DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Casino......................... $52,788 $92,305 $111,481 $55,219 $59,413
Food and beverage.............. 809 1,559 1,643 858 968
Other.......................... 636 849 1,477 818 468
------- ------- -------- ------- -------
Gross revenues............... 54,233 94,712 114,601 56,895 60,849
Less promotional allowances.. (12) (169) (337) (211) (139)
------- ------- -------- ------- -------
Net revenues................. 54,221 94,543 114,263 56,685 60,710
Costs and expenses
Casino......................... 9,257 16,758 18,853 9,488 10,216
Gaming and admission taxes..... 15,538 26,956 32,722 16,307 16,663
Food and beverage.............. 1,129 1,937 2,390 1,176 1,236
Advertising and promotion...... 4,563 12,709 10,156 6,129 3,319
General and administrative..... 12,289 22,230 24,222 12,138 12,379
Economic incentive-City of
Gary.......................... 1,586 2,789 3,456 1,707 1,835
Loss on disposition of assets.. -- 1,603 959 904 --
Pre-opening costs.............. 4,587 1,254 -- -- --
Depreciation and amortization.. 5,320 7,700 7,820 3,832 3,915
------- ------- -------- ------- -------
Total costs and expenses..... 54,269 93,936 100,578 51,681 49,563
------- ------- -------- ------- -------
Operating income (loss).......... (48) 607 13,685 5,003 11,147
Other income (expense):
Loss on investment in the
Joint Venture (b)............. (2,440) (3,448) (3,167) (1,601) (1,404)
Interest income................ 2,199 1,831 860 460 396
Interest expense............... (8,247) (12,261) (15,326) (7,630) (7,758)
Interest expense to affiliate.. (351) (616) (525) (291) (167)
------- ------- -------- ------- -------
Total other income (loss).... (8,839) (14,494) (18,158) (9,061) (8,933)
======= ======= ======== ======= =======
Income (loss) before
extraordinary item ......... (8,887) (13,887) (4,473) (4,058) 2,214
======= ======= ======== ======= =======
EXTRAORDINARY ITEM:
Loss on Bond Redemption........ -- -- -- -- (15,238)
Net income (loss) (8,887) (13,887) (4,473) (4,058) (13,024)
OTHER DATA:
EBITDA(c)...................... 10,738 12,701 23,219 10,494 15,062
Capital Expenditures........... 20,242 39,641 2,100 1,516 2,067
Ratio of earnings to fixed
charges(d).................... -- -- -- -- 1.28
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER
31,
-------------------------- AT JUNE 30,
1996 1997 1998 1999
-------- -------- -------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.......................... $ 10,688 $ 9,993 $ 19,172 $ 23,626
Total assets............................ 142,384 134,762 125,261 129,169
Current liabilities..................... 8,141 11,699 11,109 15,338
Long-term liabilities................... 118,880 121,588 117,150 129,853
Members' deficit........................ 15,363 1,475 (2,998) (16,022)
</TABLE>
- --------
(a) We had 205 days of gaming operations during 1996.
(b) The loss represents our 50% share of the joint venture's non-cash net loss.
(c) EBITDA represents operating income before depreciation, amortization, pre-
opening expenses, loss on disposition of assets, and lease and termination
payments on the chartered vessel. Pre-opening expenses were $4.6 million
and $1.3 million in 1996 and 1997, respectively. Loss on disposition of
assets was approximately $1.6 million, $1.0 million and $0.9 million in
1997, 1998, and the six months ended June 30, 1998, respectively. Prior to
October 27, 1997, we chartered a vessel to conduct our gaming operations.
Lease and termination payments on the chartered vessel were approximately
$0.9 million, $1.5 million, $0.8 million, and $0.8 million in 1996, 1997,
1998, and the six months ended June 30, 1998, respectively. EBITDA is
presented to enhance the understanding of our financial performance and our
ability to service our debt, including the Notes. We understand that EBITDA
is used by certain investors as one measure of cash flow and enables a
comparison of our performance with the performance of other companies that
report EBITDA. EBITDA is not a generally accepted accounting principles
financial indicator and should not be considered an alternative to, or more
meaningful than, net income or income from operations as an indicator of
our operating performance or net cash provided by operating activities as a
measure of liquidity.
(d) As indicated above, through December 31, 1998, earnings were not adequate
to cover fixed charges. For the fiscal years ended December 31, 1996, 1997
and 1998, and the six months ended June 30, 1998, the deficiency was
approximately $9.1 million, $16.2 million, $4.5 million and $4.1 million,
respectively. For the six months ended June 30, 1999, fixed charges were
$7.9 million and the earnings before fixed charges, which exclude the
impact of the extraordinary loss on bond redemption, were $10.1 million.
Fixed charges include interest charges, amortization of debt expense and
discounts.
19
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT; REGISTRATION RIGHTS
We sold the old notes to the initial purchaser on June 18, 1999. The initial
purchaser then resold the old notes under an offering circular dated June 15,
1999 in reliance on rule 144A and other available exemptions under the
Securities Act of 1933. On June 18, 1999, we entered into a registration rights
agreement with the initial purchaser. Under the registration rights agreement
we agreed to:
. file a registration statement with the Securities and Exchange Commission
relating to the exchange offer under the Securities Act of 1933 no later
than August 17, 1999;
. use our best efforts to cause the exchange offer registration statement
to be declared effective under the Securities Act of 1933 on or before
October 18, 1999;
. commence the exchange offer promptly after the exchange offer
registration statement is declared effective by the Securities and
Exchange Commission;
. keep the exchange offer open for acceptance for not less than 30 days
after notice of the exchange offer is mailed to holders of the old notes;
. cause the exchange offer to be consummated not later than 30 days
following the date of the effectiveness of the exchange offer
registration statement;
. use our best efforts to keep the exchange offer registration statement
effective until the closing of the exchange offer and thereafter until we
have issued new notes in exchange for all old notes that have been
properly tendered for exchange prior to the expiration of the exchange
offer.
In the registration rights agreement, we agreed to file a shelf registration
statement if:
. we are not permitted to effect the exchange offer under applicable law or
applicable interpretations of law by the Securities and Exchange
Commission staff;
. the exchange offer is not consummated by November 18, 1999;
. any holder of old notes notifies us that it (i) is not entitled to
participate in the exchange offer, (ii) may not resell the new notes
acquired by it in the exchange offer to the public without delivering a
prospectus and this prospectus is not appropriate or available for
purposes of these resales or (iii) is a broker-dealer and owns old notes
acquired directly from us or one of our affiliates; or
. the holders of a majority in aggregate principal amount of the old notes
are not eligible to participate in the exchange offer and to receive new
notes that they may resell to the public without restriction under the
Securities Act of 1933 and the Securities Exchange Act of 1934 and
without material restrictions under applicable blue sky or state
securities laws.
If we are required to file a shelf registration statement, we must make our
best efforts to keep the shelf registration statement continuously effective,
supplemented and amended until the second anniversary of the effective date of
the shelf registration statement or a shorter period that will terminate when
all the notes covered by the shelf registration statement have been sold
pursuant to the shelf registration statement.
A holder who sells old notes pursuant to the shelf registration statement
generally will be required to be named as a selling security holder in the
prospectus and to deliver a copy of the prospectus to purchasers. If we are
required to file a shelf registration statement, we will provide to each holder
of the old notes copies of the prospectus that is a part of the self
registration statement and notify each such holder when the self registration
statement becomes effective.
Such holder will be subject to some of the civil liability provisions under
the Securities Act of 1933 in connection with these sale sand will be bound by
the provisions of the registration rights agreement that are applicable to such
holder, including certain indemnification and contribution obligations.
20
<PAGE>
The registration rights agreement requires us to pay the holders of the
notes liquidated damages if a registration default exists. A registration
default will exist if:
. we fail to file any of the registration statements required by the
registration rights agreement on or prior to the date specified for such
filing;
. any of such registration statements is not declared effective by the
Securities and Exchange Commission on or prior to the date specified for
such effectiveness;
. we have not exchanged new notes for all old notes, validly tendered in
accordance with the terms of the exchange offer within 30 days after the
date on which an exchange offer registration statement is declared
effective by the Securities and Exchange Commission;
. the shelf registration statement is declared effective but thereafter,
during the period for which we are required to maintain the effectiveness
of the shelf registration statement, it ceases to be effective or usable
in connection with the resale of the new notes covered by the shelf
registration statement.
If a registration default exists, we are required to pay liquidated damages
in the amount of $0.05 per week per $1,000 principal amount of notes to each
holder for each weekly period following the registration default during the
first 90-day period following such default. The amount of liquidated damages
increases by $0.05 per week per $1,000 principal amount of the notes with
respect to each subsequent 90-day period following such default, up to a
maximum amount of $0.20 per week per $1,000 principal amount of the notes.
The exchange offer is intended to satisfy our exchange offer obligations
under the registration rights agreement. The above summary of the registration
rights agreement is not complete and is subject to, and qualified by reference
to, all of the provisions of the registration rights agreement. A copy of the
registration rights agreement is filed as an exhibit to the registration
statement that includes this prospectus.
If you participate in the exchange offer, you will, with limited exceptions,
receive notes that are freely tradeable and not subject to restrictions on
transfer. You should read this prospectus under the heading "--Resales of the
New Notes" for more information relating to your ability to transfer new notes.
The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of old notes in any jurisdiction in which the exchange
offer or the acceptance of the exchange offer would not be in compliance with
the securities laws or blue sky laws of such jurisdiction.
EXPIRATION DATE; EXTENSIONS
The expiration date of the exchange offer is September 30, 1999 at 5:00
p.m., New York City time. We may extend the exchange offer in our sole
discretion. If we extend the exchange offer, the expiration date will be the
latest date and time to which the exchange offer is extended. We will notify
the exchange agent of any extension by oral or written notice and will make a
public announcement of the extension no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date.
We expressly reserve the right, in our sole and absolute discretion:
. to delay accepting an old notes;
. to extend the exchange offer;
. if any of the conditions under "--Conditions of the Exchange Offer" have
not been satisfied, to terminate the exchange offer; and
. to waive any condition or otherwise amend the terms of the exchange offer
in any manner.
If the exchange offer is amended in a manner we deem to constitute a
material change, we will promptly disclose the amendment by means of a
prospectus supplement that will be distributed to the registered holders of the
old notes. Any delay in acceptance, extension, termination or amendment will be
followed promptly by
21
<PAGE>
an oral or written notice of the event to the exchange agent. We will also make
a public announcement of the vent. Without limiting the manner in which we may
choose to make any public announcement and subject to applicable law, we have
no obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a release to a national news service.
TERMS OF THE EXCHANGE OFFER
We are offering, upon the terms and subject to the conditions set forth in
this prospectus and in the accompanying letter of transmittal, to exchange up
to $130.0 million total principal amount of new notes for a like total
principal amount of outstanding old notes. We will accept for exchange any and
all old notes that are validly tendered on or before 5:00 p.m. New York City
time, on the expiration date. Tenders of the old notes may be withdrawn at any
time before 5:00 p.m. New York City time, on the expiration date. The exchange
offer is not conditioned upon any minimum principal amount of old notes being
tendered for exchange. However, the exchange offer is subject to the terms of
the registration rights agreement and the satisfaction of the conditions
described under "--Conditions of the Exchange Offer." Holders may tender less
than the aggregate principal amount represented by their old notes if they
appropriately indicate this fact on the letter of transmittal accompanying the
tendered old notes or indicate this pursuant to the procedures for book-entry
transfer described below.
As of the date of this prospectus, $130.0 million in aggregate principal
amount of the old notes were outstanding. Solely for reasons of administration,
we have fixed the close of business on August 30, 1999 as the record date for
purposes of determining the persons to whom this prospectus and the letter of
transmittal will be mailed initially. Only a holder of the old notes (or such
holder's legal representative or attorney-in-fact) whose ownership is reflected
in the records of IBJ Whitehall Bank & Trust Company, as registrar, or whose
notes are held of record by the depositary, may participate in the exchange
offer. There will be no fixed record date for determining the eligible holders
of the old notes who are entitled to participate in the exchange offer. We
believe that, as of the date of this prospectus, no holder is our "affiliate"
(as defined in Rule 405 under the Securities Act of 1933).
We will be deemed to have accepted validly tendered old notes when, as and
if we give oral or written notice of our acceptance to the exchange agent. The
exchange agent will act as agent for the tendering holders of old notes and for
purposes of receiving the new notes from us. If any tendered old notes are not
accepted for exchange because of an invalid tender or otherwise, certificates
for the unaccepted old notes will be returned, without expense, to the
tendering holder as promptly as practicable after the expiration date.
Holders of old notes do not have appraisal or dissenters' rights under
applicable law or the indenture as a result of the exchange offer. We intend to
conduct the exchange offer in accordance with the applicable requirements of
the Securities Exchange Act of 1934 and the rules and regulations under the
Securities Exchange Act of 1934, including Rule 14e-1.
Holders who tender their old notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the letter of transmittal, transfer taxes with respect to the exchange of
old notes pursuant to the exchange offer. We will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
exchange offer. See "--Fees and Expenses."
We do not make any recommendations to holders of old notes as to whether to
tender any of their old notes pursuant to the exchange offer. In addition, no
one has been authorized to make any such recommendation. Holders of old notes
must make their own decision whether to participate in the exchange offer and,
if the holder chooses to participate in the exchange offer, the aggregate
principal amount of old notes to tender, after reading carefully this
prospectus and the letter of transmittal and consulting with their advisors, if
any, based on their own financial position and requirements.
22
<PAGE>
CONDITIONS OF THE EXCHANGE OFFER
You must tender your old notes in accordance with the requirements of this
prospectus and the letter of transmittal in order to participate in the
exchange offer.
Notwithstanding any other provision of the exchange offer, or any extension
of the exchange offer, we will not be required to accept for exchange any old
notes, and we may terminate or amend the exchange offer if we are not permitted
to effect the exchange offer under applicable law or any interpretation of
applicable law by the staff of the Securities and Exchange Commission. If we
determine in our sole discretion that any of these events or conditions has
occurred, we may, subject to applicable law, terminate the exchange offer and
return all old notes tendered for exchange or may waive any condition or amend
the terms of the exchange offer.
We expect that the above conditions will be satisfied. The above conditions
are for our sole benefit and may be waived by us at any time in our sole
discretion. Our failure at any time to exercise any of the above rights will
not be a waiver of those rights and each right will be deemed an ongoing right
that may be asserted at any time. Any determination by us concerning the events
described above will be final and binding upon all parties.
INTEREST
Each new note will bear interest from the most recent date to which interest
has been paid or duly provided for on the old note surrendered in exchange for
such new note or, if no interest has been paid or duly provided for on such old
note, from June 18, 1999. Holders of the old notes whose old notes are accepted
for exchange will not receive accrued interest on their old notes for any
period from and after the last interest payment date to which interest has been
paid or duly provided for on their old notes prior to the original issue date
of the new notes or, if no such interest has been paid or duly provided for,
will not receive any accrued interest on their old notes, and will be deemed to
have waived the right to receive any interest on their old notes accrued from
and after such interest payment date or, if no such interest has been paid or
duly provided for, from and after June 18, 1999.
PROCEDURES FOR TENDERING OLD NOTES
The tender of a holder's old notes and our acceptance of old notes will
constitute a binding agreement between the tendering holder and us upon the
terms and conditions of this prospectus and the letter of transmittal. Unless a
holder tenders old notes according to the guaranteed delivery procedures or the
book-entry procedures described below, the holder must transmit the old notes,
together with a properly completed and executed letter of transmittal and all
other documents required by the letter of transmittal, to the exchange agent at
its address before 5:00 p.m., New York City time, on the expiration date. The
method of delivery of old notes, letters of transmittal and all other required
documents is at the election and risk of the tendering holder. If delivery is
by mail, we recommend delivery by registered mail, properly insured, with
return receipt requested. Instead of delivery of mail, we recommend that each
holder use an overnight or hand delivery service. In all cases, sufficient time
should be allowed to assure timely delivery.
Any beneficial owner of the old notes whose old notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender old notes in the exchange offer should contact that
registered holder promptly and instruct that registered holder to tender on its
behalf. If the beneficial owner wishes to tender directly, it must, prior to
completing and executing the letter of transmittal and tendering old notes,
make appropriate arrangements to register ownership of the old notes in its
name. Beneficial owners should be aware that the transfer of registered
ownership may take considerable time.
23
<PAGE>
Any financial institution that is a participant in DTC's Book-Entry Transfer
Facility system may make book-entry delivery of the old notes by causing DTC to
transfer the old notes into the exchange agent's account in accordance with
DTC's procedures for such transfer. To be timely, book-entry delivery of old
notes requires receipt of a confirmation of a book-entry transfer before the
expiration date. Although delivery of the old notes may be effected through
book-entry transfer into the exchange agent's account at DTC, the letter of
transmittal, properly completed and executed, with any required signature
guarantees and any other required documents or an agent's message (as described
below), must in any case be delivered to and received by the exchange agent at
its address on or before the expiration date, or the guaranteed delivery
procedure set forth below must be complied with.
DTC has confirmed that the exchange offer is eligible for DTC's Automated
Tender Offer Program. Accordingly, participants in DTC's Automated Tender Offer
Program may, instead of physically completing and signing the applicable letter
of transmittal and delivering it to the exchange agent, electronically transmit
their acceptance of the exchange offer by causing DTC to transfer old notes to
the exchange agent in accordance with DTC's Automated Tender Offer Program
procedures for transfer. DTC will then send an agent's message to the exchange
agent.
The term "agent's message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, which
states that DTC has received an express acknowledgment from a participant in
DTC's Automated Tender Offer Program that is tendering old notes that are the
subject of such book-entry confirmation; that the participant has received and
agrees to be bound by the terms of the applicable letter of transmittal or, in
the case of an agent's message relating to guaranteed delivery, that the
participant has received and agrees to be bound by the applicable notice of
guaranteed delivery; and that we may enforce such agreement against that
participant.
Each signature on a letter of transmittal or a notice of withdrawal must be
guaranteed unless the old notes are tendered:
. by a registered holder who has not completed the box entitled "Special
Delivery Instructions;" or
. for the account of an eligible institution (as described below).
If a signature on a letter of transmittal or a notice of withdrawal is
required to be guaranteed, the signature must be guaranteed by a participant in
a recognized Medallion Signature Program (a "Medallion Signature Guarantor").
If the letter of transmittal is signed by a person other than the registered
holder of the old notes, the old notes surrendered for exchange must be
endorsed by the registered holder, with the signature guaranteed by a Medallion
Signature Guarantor. If any letter of transmittal, endorsement, bond power,
power of attorney or any other document required by the letter of transmittal
is signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or
representative capacity, such person should sign in that capacity when signing.
Such person must submit to us evidence satisfactory, in our sole discretion, of
his or her authority to so act unless we waive such requirement.
As used in this prospectus with respect to the old notes, a "registered
holder" is any person in whose name the old notes are registered on the books
of the registrar. An "eligible institution" is a firm that is a member of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or any other "eligible guarantor
institution" as such term is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934.
We will determine in our sole discretion all questions as to the validity,
form, eligibility (including time of receipt), acceptance and withdrawal of old
notes tendered for exchange. Our determination will be final and binding. We
reserve the absolute right to reject old notes not properly tendered and to
reject any old notes if acceptance might, in our judgment or our counsel's
judgment, be unlawful. We also reserve the absolute right to waive any defects
or irregularities or conditions of the exchange offer as to particular old
notes at any time, including the right to waive the ineligibility of any holder
who seeks to tender old notes in the exchange offer.
24
<PAGE>
Our interpretation of the terms and conditions of the exchange offer,
including the letter of transmittal and its instructions, will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of old notes for exchange must be cured within such
period of time as we determine. Neither our company nor the exchange agent is
under any duty to give notification of defects in such tenders or will incur
any liability for failure to give such notification. The exchange agent will
use reasonable efforts to give notification of defects or irregularities with
respect to tenders of old notes for exchange but will not incur any liability
for failure to give such notification. Tenders of old notes will not be deemed
to have been made until such irregularities have been cured or waived.
By tendering, you will represent to us that, among other things:
. you are not our "affiliate" (as defined in Rule 405 under the Securities
Act of 1933);
. you will acquire the new notes in the ordinary course of your business;
. you are not a broker-dealer that acquired your notes directly from us in
order to resell them pursuant to Rule 144A under the Securities Act of
1933 or any other available exemption under the Securities Act of 1933;
. if you are a broker-dealer that acquired your notes as a result of
market-making or other trading activities, you will deliver a prospectus
in connection with any resale of new notes; and
. you are not participating, do not intend to participate and have no
arrangement or understanding with any person to participate in the
distribution of the new notes.
In connection with a book-entry transfer, each participant will confirm that
it makes the representations and warranties contained in the letter of
transmittal.
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your old notes and:
. your old notes are not immediately available;
. you are unable to deliver on time your old notes or any other document
that you are required to deliver to the exchange agent; or
. you cannot complete the procedures for delivery by book-entry transfer on
time;
you may tender your old notes according to the guaranteed delivery procedures
described in the letter of transmittal. Those procedures require that:
. tender must be made by or through an eligible institution and a notice of
guaranteed delivery must be signed by the holder;
. on or before the expiration date, the exchange agent must receive from
the holder and the eligible institution a properly completed and executed
notice of guaranteed delivery by mail or hand delivery setting forth the
name and address of the holder, the certificate number or numbers of the
tendered old notes and the principal amount of tendered old notes; and
. properly completed and executed documents required by the letter of
transmittal and the tendered old notes in proper form for transfer or
confirmation of a book-entry transfer of such old notes into the exchange
agent's account at DTC must be received by the exchange agent within four
business days after the expiration date of the exchange offer.
Any holder who wishes to tender old notes pursuant to the guaranteed
delivery procedures must ensure that the exchange agent receives the notice of
guaranteed delivery and letter of transmittal relating to such old notes before
5:00 p.m., New York City time, on the expiration date.
25
<PAGE>
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the exchange offer, we
will accept old notes that are properly tendered in the exchange offer prior to
5:00 p.m., New York City time, on the expiration date. The new notes will be
delivered promptly after acceptance of the old notes. For purposes of the
exchange offer, we will be deemed to have accepted validly tendered old notes
when, as and if we have given notice to the exchange agent.
WITHDRAWAL RIGHTS
Tenders of the old notes may be withdrawn by delivery of a written or
facsimile transmission notice to the exchange agent at its address set forth
under "--The Exchange Agent; Assistance" at any time before 5:00 p.m., New York
City time, on the expiration date. Any such notice of withdrawal must:
. specify the name of the person having deposited the old notes to be
withdrawn;
. identify the old notes to be withdrawn, including the certificate number
or numbers and principal amount of such old notes, or, in the case of old
notes transferred by book-entry transfer, the name and number of the
account at DTC to be credited;
. be signed by the holder in the same manner as the original signature on
the letter of transmittal by which old notes were tendered, including any
required signature guarantees, or be accompanied by a bond power in the
name of the person withdrawing the tender, in satisfactory form as
determined by us in our sole discretion, executed by the registered
holder, with the signature guaranteed by a Medallion Signature Guarantor,
together with the other documents required upon transfer by the
indenture; and
. specify the name in which the old notes are to be re-registered if
different from the person who deposited the old notes.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by us, in our sole discretion. Any
old notes withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the exchange offer and will be returned to the holder
without cost as soon as practicable after withdrawal. Properly withdrawn old
notes may be retendered pursuant to the procedures described under "--
Procedures for Tendering Old Notes" at any time on or before the expiration
date.
THE EXCHANGE AGENT; ASSISTANCE
IBJ Whitehall Bank & Trust Company is the exchange agent. All tendered old
notes, executed letters of transmittal and other related documents should be
directed to the exchange agent. Questions and requests for assistance and
requests for additional copies of the prospectus, the letter of transmittal and
other related documents should be addressed to the exchange agent as follows:
By Registered or Certified Mail: By Hand or Overnight Courier: By Telephone:
IBJ Whitehall Bank & Trust CompanyIBJ Whitehall Bank & Trust Company
(212) 858-
P.O. Box 84 One State Street 2103
Bowling Green Station New York, New York 10004 (212) 858-
New York, New York 10274-0084 2611-fax
Attn: Securities Processing Window,
Subcellar One, (SC-1)
Attn: Reorganization Operations Department To confirm
facsimile
transmission
call:
FEES AND EXPENSES (212) 858-
2103
We will bear the expenses of soliciting the old notes for exchange. The
principal solicitation is being made by mail by the exchange agent. Additional
solicitation may be made by telephone, facsimile or in the person by officers
and regular employees of our company and our affiliates and by persons so
engaged by the exchange agent.
26
<PAGE>
We will pay the exchange agent reasonable and customary fees for its
services and will reimburse the exchange agent for its reasonable out-of-pocket
expenses in connection with its services and pay other registration expenses,
including fees and expenses of the trustee under the indenture, filing fees,
blue sky fees and printing and distribution expenses.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptance of the exchange offer.
We will pay all transfer taxes, if any, applicable to the exchange of old
notes pursuant to the exchange offer. If, however, a transfer tax is imposed
for any reason other than the exchange of old notes pursuant to the exchange
offer, then the amount of those transfer taxes, whether imposed on the
registered holder or any other persons, will be payable by the tendering
holder. If satisfactory evidence of payment of those taxes or exemption is not
submitted with the letter of transmittal, the amount of those transfer taxes
will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as the old notes,
as reflected in our accounting records on the date of the exchange.
Accordingly, we will recognize no gain or loss for accounting purposes. The
expenses of the exchange offer will be amortized over the term of the new
notes.
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
As a result of this exchange offer, we will have fulfilled most of our
obligations under the registration rights agreement. Holders who do not tender
their old notes, except for certain instances involving the initial purchasers
or holders of old notes who are not eligible to participate in the exchange
offer or who do not receive freely transferrable new notes pursuant to the
exchange offer, will not have any further registration rights under the
registration rights agreement or otherwise and will not have rights to receive
additional interest. Accordingly, any holder who does not exchange its old
notes for new notes will continue to hold the untendered old notes and will be
entitled to all the rights and subject to all the limitations applicable under
the indenture, except to the extent that such rights or limitations, by their
terms, terminate or cease to have further effectiveness as a result of the
exchange offer.
Any old notes that are not exchanged for new notes pursuant to the exchange
offer will remain restricted securities within the meaning of the Securities
Act of 1933. In general, such old notes may be resold only:
. to our company or any of our subsidiaries;
. inside the United States to a "qualified institutional buyer" in
compliance with Rule 144A under the Securities Act of 1933;
. inside the United States to an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of
1933) or an "accredited investor" that, prior to such transfer, furnishes
or has furnished on its behalf by a U.S. broker-dealer to the trustee
under the indenture a signed letter containing certain representations
and agreements relating to the restrictions on transfer of the new notes,
the form of which letter can be obtained from the trustee;
. outside the United States in compliance with Rule 904 under the
Securities Act of 1933;
. pursuant to the exemption from registration provided by Rule 144 under
the Securities Act of 1933, if available; or
. pursuant to an effective registration statement under the Securities Act
of 1933.
Each accredited investor that is not a qualified institutional buyer and
that is an original purchaser of any of the old notes from the initial
purchasers will be required to sign a letter confirming that it is an
accredited investor under the Securities Act of 1933 and that it acknowledges
the transfer restrictions summarized above.
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<PAGE>
RESALES OF THE NEW NOTES
We are making the exchange offer in reliance on the position of the staff of
the Securities and Exchange Commission as set forth in interpretive letters
addressed to third parties in other transactions. However, we have not sought
our own interpretive letter. Although there has been no indication of any
change in the staff's position, we cannot assure you that the staff of the
Securities and Exchange Commission would make a similar determination with
respect to the exchange offer as it has in its interpretive letters to third
parties. Based on these interpretations by the staff, and except as provided
below, we believe that new notes may be offered for resale, resold and
otherwise transferred by a holder who participates in the exchange offer and is
not a broker-dealer without further compliance with the registration and
prospectus delivery provisions of the Securities Act of 1933. In order to
receive new notes that are freely tradeable, a holder must acquire the new
notes in the ordinary course of its business and may not participate, or have
any arrangement or understanding with any person to participate, in the
distribution (within the meaning of the Securities Act of 1933) of the new
notes. Holders wishing to participate in the exchange offer must make the
representations described in "--Procedures for Tendering Old Notes" above.
Any holder of old notes:
. who is our "affiliate" (as defined in Rule 405 under the Securities Act
of 1933);
. who did not acquire the new notes in the ordinary course of its business;
. who is a broker-dealer that purchased old notes from us to resell them
pursuant to Rule 144A under the Securities Act of 1933 or any other
available exemption under the Securities Act of 1933; or
. who intends to participate in the exchange offer for the purpose of
distributing (within the meaning of the Securities Act of 1933) new
notes;
will be subject to separate restrictions. Each holder in any of the above
categories:
. will not be able to rely on the interpretation of the staff of the
Securities Act of 1933 in the above-mentioned interpretive letters;
. will not be permitted or entitled to tender old notes in the exchange
offer; and
. must comply with the registration and prospectus delivery requirements of
the Securities Act of 1933 in connection with any sale or other transfer
of old notes, unless such sale is made pursuant to an exemption from such
requirements.
In addition, if you are a broker-dealer holding old notes acquired for your
own account, then you may be deemed a statutory "underwriter" within the
meaning of the Securities Act of 1933 and must deliver a prospectus meeting the
requirements of the Securities Act of 1933 in connection with any resales of
your new notes. Each broker-dealer that receives new notes for its own account
pursuant to the exchange offer must acknowledge that it acquired the old notes
for its own account as a result of market-making activities or other trading
activities and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act of 1933 in connection with any resale of
those new notes. The letter of transmittal states that. by making the above
acknowledgment and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act of 1933.
Based on the position taken by the staff of the Securities and Exchange
Commission in the interpretive letters referred to above, we believe that
broker-dealers that acquired old notes for their own accounts, as a result of
market-making or other trading activities ("Participating Broker-Dealers"), may
fulfill their prospectus delivery requirements with respect to the new notes
received upon exchange of old notes (other than old notes that represent an
unsold allotment from the original sale of the old notes) with a prospectus
meeting the requirements of the Securities Act of 1933, which may be the
prospectus prepared for an exchange offer so
28
<PAGE>
long as it contains a description of the plan of distribution with respect to
the resale of such new notes. Accordingly, this prospectus, as it may be
amended or supplemented, may be used by a Participating Broker-Dealer during
the period referred to below in connection with resales of new notes received
in exchange for old notes where such old notes were acquired by the
Participating Broker-Dealer for its own account as a result of market-making or
other trading activities. Subject to the provisions of the registration rights
agreement, we have agreed that this prospectus may be used by a Participating
Broker-Dealer in connection with resales of such new notes. See "Plan of
Distribution." However, a Participating Broker-Dealer that intends to use this
prospectus in connection with the resale of new notes received in exchange for
old notes pursuant to the exchange offer must notify us, or cause us to be
notified, on or before the expiration date of the exchange offer, that it is a
Participating Broker-Dealer. Such notice may be given in the space provided for
that purpose in the letter of transmittal or may be delivered to the exchange
agent at the address set forth under "--The Exchange Agent; Assistance." Any
Participating Broker-Dealer that is our "'affiliate" may not rely on such
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act of 1933 in connection with any
resale transaction.
Each Participating Broker-Dealer that tenders old notes pursuant to the
exchange offer will be deemed to have agreed, by execution of the letter of
transmittal, that upon receipt of notice from us of the occurrence of any event
or the discovery or any fact that makes any statement contained in this
prospectus untrue in any material respect or that causes this prospectus to
omit to state a material fact necessary in order to make the statements
contained herein, in light of the circumstances under which they were made, not
misleading or of the occurrence of other events specified in the registration
rights agreement, such Participating Broker-Dealer will suspend the sale of new
notes pursuant to this prospectus until we have amended or supplemented this
prospectus to correct such misstatement or omission and have furnished copies
of the amended or supplemented prospectus to the Participating Broker-Dealer or
we have given notice that the sale of the new notes may be resumed, as the case
may be.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Our company was formed in December 1993 as an Indiana limited liability
company, to develop a riverboat casino in the City of Gary, Indiana as its sole
operation. In June 1996, the Indiana Gaming Commission granted us a gaming
license. At that time, we commenced operations with a leased vessel. In October
1997, we replaced the leased vessel with the newly constructed Majestic Star
Casino, which we own.
Together with our joint venture partner, we own and operate certain common
facilities at the Buffington Harbor gaming complex, including the guest
pavilion, vessel berths, parking lots and other infrastructure. We each have a
fifty-percent ownership interest in the joint venture.
In the fourth quarter of 1998, we implemented a multifaceted strategy to
increase operating revenues and cash flow. We implemented an aggressive
marketing strategy designed to increase the total number of passengers and the
win per passenger. We also reduced the number of chartered bus passengers. At
the same time, we expanded our amenities and focused on enhancing the service
that we deliver to our customers. These changes also included an enhanced
overall management structure.
Because of the climate in the Chicago metropolitan area, the Majestic Star
Casino's operations are seasonal, with stronger results expected during the
period from May through September. Accordingly, our 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. Future
operating results will be subject to significant business, economic, regulatory
and competitive uncertainties and contingencies, many of which are beyond our
control.
30
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED JUNE
DECEMBER 31, 30,
--------------------- -------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
REVENUES:
Casino............................... 97.4% 97.5% 97.3% 97.1% 97.6%
Food and beverage.................... 1.5 1.6 1.4 1.5% 1.6%
Other................................ 1.1 0.9 1.3 1.4 0.8
----- ----- ----- ----- -----
Gross revenues..................... 100.0 100.0 100.0 100.0 100.0
Less promotional allowances........ 0.0 (0.2) (0.3) (0.4) (0.2)
Net revenues....................... 100.0 99.8 99.7 99.6 99.8
COSTS AND EXPENSES:
Casino............................... 17.1% 17.7% 16.5% 16.7% 16.8%
Gaming and admission taxes........... 28.7 28.5 28.6 28.7 27.4
Food and beverage.................... 2.1 2.0 2.1 2.1 2.0
Advertising and promotion............ 8.4 13.4 8.9 10.8 5.5
General and administrative........... 22.7 23.5 21.1 21.3 20.3
Economic incentive--City of Gary..... 2.9 2.9 3.0 3.0 3.0
Depreciation and amortization........ 9.8 8.1 6.8 6.7 6.4
Loss on disposition of assets........ 0.0 1.7 0.8 1.6 --
Pre-opening costs.................... 8.5 1.3 -- -- --
----- ----- ----- ----- -----
Total costs and expenses........... 100.2 99.1 87.8 90.9 81.5
OPERATING INCOME (LOSS)................ (0.2) 0.7 11.9 8.7 18.3
OTHER INCOME (EXPENSE):
Loss on investment in the BHR Joint
Venture............................. (4.5) (3.6) (2.8) (2.8)% (2.3)%
Interest income...................... 4.1 1.9 0.8 0.8 0.7
Interest expense..................... (15.2) (12.9) (13.4) (13.4) (12.7)
Interest expense to affiliate........ (0.6) (0.7) (0.5) (0.5) (0.3)
----- ----- ----- ----- -----
Total other income (loss).......... (16.2) (15.3) (15.9) (15.9) (14.7)
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM.................................. (16.4)% (14.6)% (4.0)% (7.2)% 3.6%
EXTRAORDINARY ITEM:
Loss on bond redemption -- -- -- -- (25.0)%
NET INCOME (LOSS)...................... (16.4)% (14.6)% (4.0)% (7.2)% (21.4)%
===== ===== ===== ===== =====
EBITDA................................. 19.8% 13.4% 20.3% 18.4% 24.75%
===== ===== ===== ===== =====
</TABLE>
- --------
EBITDA (defined as earnings before interest, income taxes, depreciation and
amortization and, for purposes hereof, does not include payments associated
with, and termination of, the chartered vessel lease) is presented solely as a
supplemental disclosure to assist in the evaluation of our ability to generate
cash flow. In particular, we believe that an analysis of EBITDA enhances the
understanding of the financial performance of companies with substantial
depreciation and amortization. EBITDA is not a generally accepted accounting
principles financial indicator and should not be considered an alternative to,
or more meaningful than, net income or income from operations as an indicator
of our operating performance or net cash provided by operating activities as
measure of liquidity.
Comparison of the Three Months Ended June 30, 1999 and 1998
Gross revenues for the second quarter ended June 30, 1999, amounted to
approximately $31.3 million, an increase of approximately $3.0 million from
gross revenues recorded in the second quarter ended June 30, 1998. The 10.6%
increase in gross revenues was primarily attributable to an increase in the win
per patron.
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<PAGE>
Casino revenues during the three months ended June 30, 1999, totaled
approximately $30.5 million, of which slot machines accounted for approximately
$23.3 million (76.2%) and table games accounted for approximately $7.3 million
(23.8%). The average number of slot machines in operation decreased to 1,410
during the three months ended June 30, 1999, from 1,526 during the three months
ended June 30, 1998. The average win per slot machine per day increased to
approximately $179 for the three months ended June 30, 1999, from approximately
$153 during the three months ended June 30, 1998. The average number of table
games in operation during the three months ended June 30, 1999, decreased to 56
from 61 during the three months ended June 30, 1998. The average win per table
game per day during the three months ended June 30, 1999, increased to
approximately $1,425 compared to approximately $1,075 during the three months
ended June 30, 1998. The average daily win per state passenger count was
approximately $38 and the average daily win per patron was approximately $69
during the three months ended June 30, 1999, compared to an average daily win
per state passenger count of approximately $31 and an average daily win per
patron of approximately $54 for the three months ended June 30, 1998.
Food and beverage revenues for the three months ended June 30, 1999, totaled
approximately $500,000 or 1.6% of gross revenues, compared to approximately
$392,000 or 1.4% of gross revenues for the three months ended June 30, 1998.
Other revenue, consisting of primarily of commission income, totaled
approximately $249,000, or 0.8% of gross revenues, compared to approximately
$254,000, or 0.9% of gross revenues, for the three months ended June 30, 1998.
Promotional allowances (complementaries) included in our gross food revenues
for the three months ended June 30, 1999, and 1998, were approximately $77,000
and $79,000, respectively. Promotional allowances provided to our gaming
patrons at facilities located in, and/or owned by the joint venture for the
three months ended June 30, 1999, and 1998, totaled approximately $204,000 and
$104,000, respectively, and are characterized in the financial statements as an
expense to the casino. The joint venture invoices us monthly for these
promotional allowances at cost, which approximates the retail value of these
promotional allowances.
Casino operating expenses for the three months ended June 30, 1999, totaled
approximately $5.1 million, or 16.2% of gross revenues and 16.6% of casino
revenues, respectively, compared to approximately $4.6 million, or 16.3% of
gross revenues and 16.7% of casino revenues, respectively, for the three months
ended June 30, 1998. These expenses were primarily comprised of salaries, wages
and benefits, and operating and promotional expenses of the casino. The dollar
increase of $448,000, or 9.7%, in casino operating expenses is primarily
attributed to an increase in gaming equipment rental and progressive expense
for jackpots offset by a slight decrease in payroll expenses.
Gaming and admissions taxes totaled approximately $8.5 million for the three
months ended June 30, 1999, compared to approximately $8.2 million for the
three months ended June 30, 1998. These taxes are levied on adjusted gross
receipts, as defined by Indiana gaming laws, at the rate of 20%, plus $3 per
passenger per the state passenger count. An additional $942,000 was paid during
the three months ended June 30, 1999, compared to approximately $854,000 in the
three months ended June 30, 1998, to the City of Gary, Indiana under an
agreement whereby we pay approximately 3% of the adjusted gross receipts
directly to the City of Gary.
Advertising and promotion expenses for the three months ended June 30, 1999,
totaled approximately $1.8 million, or 5.8% of gross revenues, compared to
approximately $3.2 million, or 11.4% of gross revenues during the three months
ended June 30, 1998. Advertising and promotion expenses included salaries,
wages and benefits of the marketing and casino service departments, as well as
promotions, advertising and special events. The $1.4 million or 43.7% decrease
in advertising and promotion expenses during the three months ended June 30,
1999, was primarily the result of us redirecting our marketing dollars to
target or direct marketing from mass marketing and also significantly reducing
the amount of chartered bus passengers.
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<PAGE>
General and administrative expenses for the three months ended June 30,
1999, were approximately $6.2 million, or 19.8% of gross revenues, compared to
$5.6 million, or 19.8% of gross revenues, during the three months ended June
30, 1998. These expenses included approximately $1.8 million for berthing fees
paid to the joint venture, $1.3 million for marine operations and $612,524 for
security and surveillance operations during the second quarter of 1999. The
$584,000 increase in these expenses is primarily attributed to an increase of
approximately $174,000 in berthing fees primarily for property taxes of the
joint venture, approximately $140,000 in security due to an increase in
staffing, and approximately $115,000 for property taxes associated with the
larger vessel during the three months ended June 30, 1999.
Depreciation and amortization for the second quarter ended June 30, 1999,
was approximately $1,972,000, or 6.3% of gross revenues, compared to
approximately $1,902,000, or 6.7% of gross revenues, during the three months
ended June 30, 1998. The $70,000 increase in depreciation expense for the three
months ended June 30, 1999, is attributable to the increased expense associated
with machinery and equipment placed into service during the past year.
Operating income for the three months ended June 30, 1999, was approximately
$6.1 million, or 19.5% of gross revenues, compared to an operating income for
the three months ended June 30, 1998 of $3.1 million, or 11.0% of gross
revenues. During the three months ended June 30, 1998, we had a net loss on
disposition of assets totaling approximately $169,000. We wrote off assets used
on our chartered vessel that had a net book value of approximately $20,000 and
disposed of slot machines that had a net book value of approximately $149,000.
The $3.0 million, or 97.4%, increase in operating income is principally
attributable to the increase of the average daily win per patron to $69 during
the three months ended June 30, 1999, from $54 during the three months ended
June 30, 1998, combined with a $1.4 million, or 43.7%, decrease in overall
marketing expenses.
Net interest expense for the three months ended June 30, 1999, was
$3,747,000, or approximately 12.0% of gross revenues, compared to $3,719,000,
or approximately 13.2% for the same period last year. The $28,000 increase in
net interest expense is principally attributed to the overall increase in
outstanding debt during the second quarter of 1999 compared to the second
quarter of 1998. For the three months ended June 30, 1999, we paid accrued
contingent interest of approximately $3,018,000.
Our loss on the redemption of our old notes was approximately $15,238,000,
comprised of $12,836,000 of premium and $2,402,000 of unamortized deferred
financing costs, and the loss relating to our investment in the joint venture
for the three months ended June 30, 1999, was approximately $600,000. The joint
venture loss represents our 50% share of the joint venture's non-cash net loss
(primarily depreciation and amortization).
As a result of the foregoing, we experienced income before the extraordinary
item of $1.7 million and a loss of $1.3 million, during the three months ended
June 30, 1999 and 1998, respectively. Net losses were approximately $13.5
million and $1.3 million during the three months ended June 30, 1999, and 1998,
respectively.
Comparison of the Six Months Ended June 30, 1999 and 1998
Gross revenues for the six months ended June 30, 1999, amounted to
approximately $60.8 million, an increase of $4.0 million over gross revenues
recorded in the six months ended June 30, 1998. The 7.0% increase in gross
revenues was attributable to an increase in the daily win per patron.
Casino revenues during the six months ended June 30, 1999, totaled
approximately $59.4 million, of which slot machines accounted for approximately
$45.4 million (76.4%) and table games accounted for approximately $14.0 million
(23.6%). The average number of slot machines in operation decreased to 1,442
during the six months ended June 30, 1999, from 1,531 during the six months
ended June 30, 1998. The average win per slot machine per day increased to
approximately $176 for the six months ended June 30, 1999, from approximately
$153 during the six months ended June 30, 1998. The average number of table
games in
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<PAGE>
operation during the six months ended June 30, 1999, decreased to 59 from 61
during the six months ended June 30, 1998. The average win per table game per
day during the six months ended June 30,1999, increased to approximately
$1,319, compared to approximately $1,174 during the six months ended June 30,
1998. The average daily win per state passenger count was approximately $37 and
the average daily win per patron was approximately $68 during the six months
ended June 30, 1999, compared to an average daily win per state passenger count
of approximately $31 and an average daily win per patron of approximately $55
for the six months ended June 30, 1998.
Food and beverage revenues for the six months ended June 30, 1999, totaled
approximately $968,000, or 1.6% of gross revenues, compared to approximately
$858,000, or 1.5% of gross revenues, for the six months ended June 30, 1998.
The dollar increase in food and beverage revenues is attributed to an overall
increase in the number of customers served. Other revenue totaling
approximately $468,000, or 0.8% of gross revenues for the six months ended June
30, 1999, consisted primarily of commission income compared to approximately
$818,000 during the six months ended June 30, 1998. Other revenue during the
six months ended June 30, 1998 included a lump sum payment of $314,000 from our
joint venture partner to compensate us for the loss of certain parking spaces
to be utilized by our joint venture partner for the construction of a hotel
facility.
Promotional allowances (complementaries) included in our gross food revenues
for the six months ended June 30, 1999, and 1998, were approximately $139,000
and $211,000, respectively. The $72,000 dollar decrease on board the vessel was
offset by increased complementaries provided at BHR operated facilities.
Promotional allowances provided to our gaming patrons at facilities located in,
and/or owned by the joint venture for the six months ended June 30, 1999, and
1998, totaled approximately $387,000 and $238,000, respectively, and are
characterized in the financial statements as an expense to the casino. The
joint venture invoices us monthly for these promotional allowances at cost,
which approximates the retail value of these promotional allowances.
Casino operating expenses for the six months ended June 30, 1999, totaled
approximately $10.2 million, or 16.8% of gross revenues and 17.2% of casino
revenues, respectively, compared to approximately $9.5 million, or 16.7% of
gross revenues and 17.2% of casino revenues, respectively, for the six months
ended June 30, 1998. These expenses were primarily comprised of salaries, wages
and benefits, and operating and promotional expenses of the casino. The dollar
increase of $728,000 or 7.0% in casino operating expenses is primarily
attributed to an increase of approximately $544,000 for gaming equipment rental
and approximately $172,000 for progressive expense related to jackpots.
Gaming and admissions taxes totaled approximately $16.7 million for the six
months ended June 30, 1999, compared to approximately $16.3 million for the
three months ended June 30, 1998. These taxes are levied on adjusted gross
receipts, as defined by Indiana gaming laws, at the rate of 20%, plus $3 per
passenger per the state passenger count. An additional $1,835,000 was paid
during the six months ended June 30, 1999, compared to approximately $1,707,000
in the six months ended June 30, 1998, to the City of Gary, Indiana under an
agreement whereby we pay approximately 3% of the adjusted gross receipts
directly to the City of Gary.
Advertising and promotion expenses for the six months ended June 30, 1999,
totaled approximately $3.3 million, or 5.0% of gross revenues, compared to
approximately $6.1 million, or 10.8% of gross revenues during the six months
ended June 30, 1998. Advertising and promotion expenses included salaries,
wages and benefits of the marketing and casino service departments, as well as
promotions, advertising and special events. The $2.8 million or 45.8% decrease
in advertising and promotion expenses as a percentage of gross revenues during
the six months ended June 30, 1999, was primarily the result of redirecting its
marketing dollars to target or direct marketing from mass marketing and special
events combined with a significant reduction in the amount of chartered bus
passengers.
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<PAGE>
General and administrative expenses for the six months ended June 30, 1999,
were approximately $12.4 million, or 20.3% of gross revenues, compared to $12.1
million, or 21.3% of gross revenues, during the six months ended June 30, 1998.
These expenses included approximately $3.5 million for berthing fees paid to
the joint venture, $2.6 million for marine operations and $1.1 million for
security and surveillance operations during the six months ended June 30, 1999.
The $241,000 dollar increase in these expenses is primarily attributed to an
increase for property taxes during the six months ended June 30, 1999.
Depreciation and amortization for the six months ended June 30, 1999, was
approximately $3.9 million, or 6.4% of gross revenues, compared to
approximately $3.8 million, or 6.7% of gross revenues, during the six months
ended June 30, 1998. The $83,000 dollar increase in depreciation expense for
the six months ended June 30, 1999, is principally attributable to the
increased expense associated with machinery and equipment placed into service
during the past year.
Operating income for the six months ended June 30, 1999, was approximately
$11.1 million, or 18.3% of gross revenues, compared to an operating income for
the six months ended June 30, 1998, of $5.0 million, or 8.7% of gross revenues.
During the six months ended June 30, 1998, we had a net loss on the disposition
of assets totaling approximately $904,000. We wrote-off slot machines that had
a net book value of approximately $149,000 and assets used on our chartered
vessel that had a net book value of approximately $755,000. The $6.1 million or
122.8% increase in operating income is principally attributable to the increase
of the average daily win per patron to $68 during the six months ended June 30,
1999 from $55 during the six months ended June 30, 1998, combined with a 45.8%
decrease in marketing expenses.
Net interest expense for the six months ended June 30, 1999, was $7,529,000,
or approximately 12.4% of gross revenues, compared to $7,461,000, or
approximately 13.1% for the same period last year. The decrease in interest
expense is primarily attributed to the repayment of the $8.8 million demand
note due to Barden Development, Inc. and was partially offset by a $28,000
increase in interest expense due to an increase in overall outstanding debt
during the six months ended June 30, 1999, compared to the six months ended
June 30, 1998. For the six months ended June 30, 1999, we paid accrued
contingent interest of approximately $3,018,000.
Our loss on the redemption of our old notes was approximately $15.2 million
and the loss relating to our investment in the joint venture for the six months
ended June 30, 1999, was approximately $1.4 million. The joint venture loss
represents our 50% share of the joint venture's non-cash net loss (primarily
depreciation and amortization).
As a result of the foregoing, we experienced income before the extraordinary
item of $2.2 million and a loss of $4.1 million, during the six months ended
June 30, 1999 and 1998, respectively. Net losses were approximately $13.0
million and $4.1 million during the six months ended June 30, 1999, and 1998,
respectively.
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended December 31,
1997
Gross revenues for the year ended December 31, 1998, amounted to
approximately $114.6 million, an increase of approximately $19.9 million or
21.0% from gross revenues recorded in the year ended December 31, 1997. The
increase was attributable to the increased capacity associated with our new
vessel combined with an aggressive marketing strategy designed to increase the
total number of passengers.
Casino revenues during the year ended December 31, 1998 totaled
approximately $111.5 million of which slot machines accounted for approximately
$85.2 million (76.4%) and table games accounted for approximately $26.3 million
(23.6%). The average number of slot machines in operation increased to 1,519
during the year ended December 31, 1998 from 1,038 during the year ended
December 31, 1997. The average win per slot machine per day decreased to $154
for the year ended December 31, 1998 from approximately $187 during the
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year ended December 31, 1997. During the year ended December 31, 1998, slot
machine capacity and coin-in increased by approximately 46% and 25%,
respectively, compared to the year ended December 31, 1997, resulting in a
lower win per slot machine per day. The average number of table games in
operation during the year ended December 31, 1998, increased to 61 from 52
during the year ended December 31, 1997. The average win per table game per day
during the year ended December 31, 1998, declined to approximately $1,116
versus $1,248 in the year ended December 31, 1997, due primarily to a 17%
increase in table unit capacity and a 0.6% decrease in the table game hold
percentage. The average daily win per patron was $57 during the year ended
December 31, 1998, an increase of 2% compared to the year ended December 31,
1997.
Food and beverage revenue for the year ended December 31, 1998, totaled
approximately $1.6 million, or 1.4% of gross revenues, compared to
approximately $1.6 million, or 1.6% of gross revenues, for the year ended
December 31, 1997. Other revenue, consisting primarily of lump sum payments
totaling $504,000 from the Joint Venture Partner to compensate us for the loss
of certain parking spaces and commission income, totaled approximately $1.5
million, or 1.3% of gross revenues, for the year ended December 31, 1998,
compared to approximately $849,000, or 0.9% of gross revenues for the year
ended December 31, 1997. The dollar increase in food and beverage revenue, as
well as other revenue, was principally attributable to the increased capacity
associated with our new vessel.
Promotional allowances (complementaries) included in our 1998 and 1997 gross
food revenues were approximately $337,000 and $169,000, respectively.
Promotional allowances provided to our gaming patrons at the Buffington Harbor
facilities, totaled approximately $567,000 in 1998 and $646,000 in 1997, and
are characterized in the financial statements as an expense. Overall,
promotional allowances increased slightly in the aggregate as a result of
increased capacity. We were able to more effectively utilize facilities on
board the vessel as opposed to those operated by the joint venture, thus
altering the ratio of complementaries provided by us compared to those provided
by the joint venture.
Casino operating expenses for the year ended December 31, 1998 totaled
approximately $18.9 million, or 16.5% and 16.9% of gross revenues and casino
revenues, respectively, versus approximately $16.8 million, or 17.7% and 18.2%,
respectively, for the year ended December 31, 1997. These expenses were
primarily comprised of salaries, wages and benefits, and operating and
promotional expenses. The increase of approximately $2.1 million or 12.5% in
casino operating expenses is primarily attributed to an increase in payroll
expenses of which table games accounted for approximately $1.0 million and
slots accounted for approximately $320,000. Also, approximately $800,000 is
associated with general expenses related to operating the new and larger
vessel, including approximately $300,000 for gaming equipment rental.
Gaming and admissions taxes totaled approximately $32.7 million for the year
ended December 31, 1998, compared to approximately $27.0 million in the year
ended December 31, 1997. An additional $3.5 million was paid during the year
ended December 31, 1998 compared to approximately $2.8 million in the year
ended December 31, 1997, to the City of Gary under an agreement whereby we pay
3% of the adjusted gross receipts directly to the City of Gary.
Advertising and promotion expenses for the year ended December 31, 1998,
totaled approximately $10.2 million, or 8.9% of gross revenues, compared to
approximately $12.7 million, or 13.4% of gross revenues, during the year ended
December 31, 1997. Advertising and promotion expenses included salaries, wages
and benefits of the marketing and casino service departments as well as
promotions, advertising and special events. The $2.6 million, or 20.1%,
decrease in advertising and promotion expenses as a percentage of gross
revenues during the year ended December 31, 1998 compared to the year ended
December 31, 1997 was primarily the result of redirecting our marketing
dollars. During the first half of 1998, we focused our marketing dollars on
mass marketing to build our customer database. Beginning late third quarter and
all of the fourth quarter, we redirected our marketing dollars to target or
direct marketing and also significantly reduced the amount of chartered bus
passengers from approximately 10.0% to approximately 3.0% of total customers.
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General and administrative expenses for the year ended December 31, 1998,
were approximately $24.2 million, or 21.1% of gross revenues, compared to $22.2
million, or 23.5% of gross revenues, for the year ended December 31, 1997.
These expenses included approximately $7.1 million for berthing fees paid to
the joint venture, $6.0 million for marine operations and $1.9 million for
security and surveillance operations. The $2.0 million or 9.0% increase in
these expenses is primarily attributed to an increase of approximately $1.2
million in property taxes associated with the new vessel and approximately
$686,000 in berthing fees paid to the joint venture.
Depreciation and amortization for the year ended December 31, 1998, was
approximately $7.8 million, or 6.8% of gross revenues, compared to
approximately $7.7 million, or 8.1% of gross revenues, during the year ended
December 31, 1997. The $120,000 or 1.6% increase is attributed to approximately
$51,000 in depreciation expense associated with the acquisition of additional
slot machines in mid 1998 and the write off of organization costs with a net
book value of approximately $69,000 in the fourth quarter of 1998.
Operating income for the year ended December 31, 1998, was approximately
$13.7 million, or 11.9% of gross revenues, compared to approximately $607,000,
or 0.6% of gross revenues, in the year ended December 31, 1997. The results
included approximately $755,000 in expenses associated with the lease and
subsequent termination of our chartered vessel lease agreement effective March
1, 1998, losses on disposal of assets previously utilized on the chartered
vessel of approximately $755,000 in 1998 and $1.6 million in 1997, losses on
disposal of slot machines of approximately $204,000 replaced in 1998, and
approximately $1.3 million in pre-opening costs associated with the development
of the new vessel in 1997. The increase in operating income is principally
attributable to the increase in vessel capacity, which allowed us to achieve
higher gross revenues in 1998 based upon increased passenger counts.
Net interest expense for the year ended December 31, 1998 was approximately
$15.0 million, or 13.1% of gross revenues, compared to approximately $11.0
million, or 11.7% of gross revenues, for the year ended December 31, 1997. The
increase in net interest expense is attributed to the new vessel being placed
into service and the additional interest expense associated with the financing
of additional slot machine equipment in late 1997 for use on the new vessel.
Also, approximately $2.3 million of interest was capitalized in 1997. The
contingent interest ordinarily payable on May 15, 1998, and November 15, 1998,
was deferred, as allowed under the indenture related to the 12 3/4% Senior
Secured Notes.
Our loss in our investment in the joint venture for the year ended December
31, 1998 was approximately $3.2 million. The loss represents our 50% share of
the joint venture's non-cash net loss (primarily depreciation and
amortization).
As a result of the foregoing, we experienced net losses of approximately
$4.5 million and $13.9 million during the years ended December 31, 1998 and
1997, respectively.
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended December 31,
1996
Because we commenced operations on June 7, 1996, we have a limited operating
history and we lack a comparable period for prior years with respect to the
twelve month period ended December 31, 1997. This discussion of results of
operations provides a comparison of the full twelve month period ended December
31, 1997 with the 205 days of operations in 1996. Gross revenues for the year
ended December 31, 1997, amounted to approximately $94.7 million, an increase
of approximately $40.5 million from gross revenues recorded in the year ended
December 31, 1996. The increase was because we operated the entire twelve
months ended December 31, 1997, compared to 205 days of operations in the year
ended December 31, 1996.
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Casino revenues during the year ended December 31, 1997, totaled
approximately $92.3 million of which slot machines accounted for approximately
$69.1 million (74.8%) and table games accounted for approximately $23.2 million
(25.2%). The average number of slot machines in operation increased to 1,038
during the year ended December 31, 1997, from 924 during the year ended
December 31, 1996. The average win per slot machine per day was approximately
$187 and $198 for each of the years ended December 31, 1997 and 1996,
respectively. The average number of table games in operation during the year
ended December 31, 1997, increased to 52 from 50 during the year ended December
31, 1996. The average win per table game per day during the year ended December
31, 1997, declined to approximately $1,248 versus $1,496 in the year ended
December 31, 1996, due primarily to a 1.7% decrease in the table game hold
percentage. The average daily win per patron was $56 during the year ended
December 31, 1997, an increase of 6% compared to the year ended December 31,
1996.
Food and beverage revenue for the year ended December 31, 1997, totaled
approximately $1.6 million, or 1.6% of gross revenues, compared to
approximately $809,000 or 1.5% of gross revenues for the year ended December
31, 1996. Other revenue, consisting primarily of commission income, totaled
approximately $849,000, or 0.9% of gross revenues, compared to approximately
$636,000 or 1.1% of gross revenues for the year ended December 31, 1996. The
dollar increase in food and beverage revenue as well as other revenue is
because we operated the entire twelve months ended December 31, 1997, compared
to 205 days of operations in the year ended December 31, 1996.
Promotional allowances (complementaries) included in our 1997 and 1996 gross
food revenues were approximately $169,000 and $12,000, respectively. The
increase in promotional allowances is because we operated the entire twelve
months ended December 31, 1997 compared to 205 days of operations in the year
ended December 31, 1996. Promotional allowances provided to our gaming patrons
at the Buffington Harbor facilities, totaled approximately $646,000 and
$288,000 in 1997 and 1996, respectively, and are characterized in the financial
statements as an expense.
Casino operating expenses for the year ended December 31, 1997, totaled
approximately $16.8 million, or 17.7% and 18.2% of gross revenues and casino
revenues, respectively, versus approximately $9.3 million, or 17.1% and 17.5%
gross revenues and casino revenues, respectively, for the year ended December
31, 1996. These expenses were primarily comprised of salaries, wages and
benefits, and operating and promotional expenses of the casino. Both the dollar
increase in casino operating expenses of $7.5 million and the slight increase
of 0.6% as a percentage of gross revenues and casino revenues were primarily
the result of an increase in payroll expenses combined with us operating the
entire twelve months ended December 31, 1997 compared to 205 days of operations
in the year ended December 31, 1996.
Gaming and admissions taxes totaled approximately $27.0 million for the year
ended December 31, 1997, compared to approximately $15.5 million in the year
ended December 31, 1996. An additional $2.8 million was paid during the year
ended December 31, 1997, compared to approximately $1.6 million in the year
ended December 31, 1996 to the City of Gary.
Advertising and promotion expenses for the year ended December 31, 1997,
totaled approximately $12.7 million, or 13.4% of gross revenues, compared to
approximately $4.6 million, or 8.4% of gross revenues, during the year ended
December 31, 1996. Advertising and promotion expenses included salaries, wages
and benefits of the marketing and casino service departments as well as
promotions, advertising and special events. The 5.0% increase in advertising
and promotion expenses as a percentage of gross revenues during the year ended
December 31, 1997, compared to the 205 days of operation in the year ended
December 31, 1996, was primarily the result of increased expenditures
associated with direct mail (i.e., promotions and rebates offered to customers
using the slot machines), bus subsidies (i.e., promotions and discounts for
customers traveling by bus to our gaming complex), and an increase in general
media including billboards, print and radio to heighten our overall presence
within the marketplace in light of additional competition as well as increased
advertising associated with the opening of our new vessel.
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General and administrative expenses for the year ended December 31, 1997,
were approximately $22.2 million, or 23.5% of gross revenues, compared to $12.3
million, or 22.7% of gross revenues for the year ended December 31, 1996. These
expenses included approximately $6.4 million for berthing fees paid to the BHR
Joint Venture, $6.8 million for marine operations and $1.9 million for security
and surveillance operations. The dollar increase in these expenses is primarily
attributed to operating a full twelve months for the year ended December 31,
1997, compared to 205 days for the year ended December 31, 1996.
Depreciation and amortization for the year ended December 31, 1997, was
approximately $7.7 million, or 8.1% of gross revenues, compared to
approximately $5.3 million, or 9.8% of gross revenues, during the year ended
December 31, 1996. The dollar increase in these expenses is attributed to
operating a full twelve months for the year ended December 31, 1997, compared
to the 205 days for the year ended December 31, 1996.
Operating income for the year ended December 31, 1997, approximated
$607,000, or 0.6% of gross revenues, compared to an operating loss in the year
ended December 31, 1996, of $48,000, or (0.1%) of gross revenues. The results
for the years ended 1997 and 1996, included pre-opening costs associated with
the start-up of the new vessel and the chartered vessel, were approximately
$1.3 million and $4.6 million, respectively.
Net interest expense for the year ended December 31, 1997, was approximately
$11.0 million, or 11.7% of gross revenues, compared to approximately $6.4
million, or 11.7% of gross revenues, for the year ended December 31, 1996. The
dollar increase is attributed to operating a full twelve months for the period
ended December 31, 1997 compared to 205 days for the year ended December 31,
1996. $2.3 million and $213,000 of interest were capitalized in 1997 and 1996,
respectively. The contingent interest under the 12 3/4% Senior Secured Notes
payable on May 15, 1997, and November 15, 1997, was deferred, as allowed under
the indenture related to the 12 3/4% Senior Secured Notes.
The loss from our investment in the BHR Joint Venture for the year ended
December 31, 1997, was approximately $3.4 million. The loss represents our 50%
share of BHR's non-cash net loss.
As a result of the foregoing, we experienced net losses of approximately
$13.9 million and $8.9 million during the years ended December 31, 1997, and
1996, respectively.
YEAR 2000 COMPUTER COMPLIANCE
The approach of the year 2000 has become a potential problem for businesses
using computers and "embedded systems" in their operations. "Embedded systems"
consist of hardware and systems software other than applications software. Many
computer programs and embedded systems are date-sensitive and will only
recognize the last two digits of the year, thereby recognizing the year 2000 as
the year 1900 or not at all (the "Year 2000 Issue"). This could result in
system failures or miscalculations, causing disruptions of operations.
Readiness
We have undertaken a comprehensive assessment of our exposure to the Year
2000 Issue to identify and implement actions required to ensure that our
computers are year 2000 compliant.
The primary computer programs used in our operations and financial reporting
systems have been acquired from independent software vendors. We have contacted
these vendors to determine whether their programs are year 2000 compliant, and,
if not, to establish timelines as to when we will receive the required upgrades
that assure that these programs are year 2000 compliant. As of June 30, 1999,
substantially all of the computer programs used in our operations had been
upgraded, and the vendors have represented that these upgraded programs are
year 2000 compliant. We expect to confirm the compliance of all our computer
programs by September 1999.
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Embedded systems affect much of the Majestic Star Casino's operations, such
as power, security and general ship functions. Also, embedded systems control
some building security and operations, such as power management, ventilation
and elevator control at the Buffington Harbor gaming complex. The primary
embedded systems used in our operations have been acquired from independent
vendors. We have contacted these vendors to determine whether their systems are
year 2000 compliant, and, if not, to establish timelines as to when we will
receive the required upgrades that assure that these systems are year 2000
compliant. As of the date hereof, substantially all of the embedded systems
used in our operations had been upgraded, and the vendors have represented that
these upgraded systems are year 2000 compliant. We expect to confirm the
compliance of all our embedded systems by September 1999.
Although we presently believe that all of our computer programs and embedded
systems will be year 2000 compliant in a timely manner, there can be no
assurance that we will not be adversely affected by the Year 2000 Issue.
Our operations are also dependent upon certain third parties, including
utility providers and financial institutions. Significant public disclosure of
the state of readiness among basic infrastructure and other third-party
suppliers has not generally been available. Although our inquiries are
underway, we do not yet have the information to estimate the likelihood of
significant disruptions among our third-party suppliers.
Cost
We do not expect to incur costs in connection with the Year 2000 Issue that
will have a material impact on our operations. We currently estimate that
maintenance or modification costs associated with the Year 2000 Issue will be
approximately $400,000 to $500,000 in the aggregate. Of this amount,
approximately $55,000 has been incurred and expensed as of June 30, 1999.
Approximately $400,000 of the expected remaining cost is attributable to the
purchase of new hardware and software, which will be capitalized and amortized
over the useful lives of these assets. The remaining estimated amount of
$25,000 will be expensed as incurred.
Risks
Our failure to correct a material problem relating to the Year 2000 Issue
could result in an interruption in, or a failure of, certain of our normal
business activities or operations. Such failures could materially and adversely
affect our results of operations, liquidity or financial condition. Due to the
general uncertainty inherent in the Year 2000 Issue, resulting in part from the
uncertainty of the year 2000 readiness of third-party suppliers, we are unable
to determine at this time whether the consequences of year 2000 failures will
have a material impact on our results of operations, liquidity or financial
condition. Our operations would be adversely impacted if our third-party
suppliers that provide basic services, such as telecommunications, electric
power, and financial services, were adversely affected by the Year 2000 Issue.
Our actions are expected to significantly reduce our level of uncertainty about
the Year 2000 Issue. We believe that, with the implementation of new systems
and completion of our year 2000 efforts as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
Contingency Plans
We are developing remediation contingency plans and business resumption
contingency plans specific to the Year 2000 Issue. Remediation contingency
plans address the actions to be taken if the current approach to remediating a
system is falling behind schedule or otherwise appears in jeopardy of failing
to deliver a year 2000 ready system when needed. Business resumption
contingency plans address the actions that would be taken if critical business
functions cannot be carried out in the normal manner upon entering the next
century due to system or supplier failure.
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LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended June 30, 1999, we issued $130.0 million of 10 7/8%
Senior Secured Notes due 2006. The net proceeds from the offering were utilized
to redeem $99 million principal amount of our 12 3/4% Senior Secured Notes due
2003. During June 1999, approximately $7.5 million was classified as restricted
cash to effect a covenant defeasance of the remaining $6.0 million of the 12
3/4% Senior Secured Notes. Holders of the outstanding 10 7/8% Senior Secured
Notes have the right to require that we repurchase the notes at a premium under
certain conditions including a change in control.
At June 30, 1999, we had cash and cash equivalents of approximately $14.3
million. During the six months ended June 30, 1999, our capital expenditures
were approximately $2.1 million. Approximately $773,000 was expended for the
construction of two VIP lounge facilities of which one is located on the
vessel. The lounge on the vessel is located in the former Poker Room and was
opened on July 15, 1999. The second lounge is located adjacent to the boarding
area. Approximately $520,000 was expended on slot machines and upgrading gaming
equipment. We also contributed approximately $73,000 from working capital to
the joint venture for general enhancements during this period.
We, to date, have met our capital requirements through net cash from
operations, capital contributions and loans. For the six months ended June 30,
1999, net cash provided from operations totaled approximately $3.0 million
compared to approximately $1.7 million for the six months ended June 30, 1998.
For the six months ended June 30, 1999, $2.2 million in cash was used by
investing activities, compared to $7.6 million provided by investing activities
for the six months ended June 30, 1998. The majority of this change was caused
by cash released from restriction during the six months ended June 30, 1998.
Net cash used by financing activities was $3.8 million for the six months ended
June 30, 1999, compared to $1.6 million used by financing activities for the
six months ended June 30, 1998. This change was caused by the net impact of the
debt refinancing, including the restriction of cash for the covenant
defeasance. During the six months ended June 30, 1999, we also repaid an $8.8
million demand note originally borrowed from Barden Development, Inc. in 1996.
As of June 30, 1999, loans included: (i) $130.0 million principal amount of
10 7/8% Senior Secured Notes due 2006; (ii) $6.0 million principal amount of 12
3/4% Senior Secured Notes due 2003; and (iii) approximately $4.3 million of
equipment financing. The 10 7/8% million Senior Secured Notes are secured by
substantially all current and future assets other than certain excluded assets.
We are negotiating a new $20.0 million credit facility, which will also be
secured by substantially all current and future assets, other than certain
excluded assets. The lien on the collateral securing the proposed credit
facility will be senior to the lien on the collateral securing the 10 7/8%
Senior Secured Notes. The establishment of the proposed credit facility is
subject to approval of the Indiana Gaming Commission which approval was
obtained August 20, 1999.
Under the terms of our development agreement with the City of Gary, we
committed, among other things, to make development expenditures of $116 million
for its casino and associated infrastructure in the City of Gary over the next
five years. We have met or accrued a significant portion of these commitments.
The two principal components of the remaining portion of these commitments are
as follows: (1) $10 million for off-site development in the City by December
31, 1999 with the particular project(s) to be agreed to by the City; and (2) an
investment of $12 million to be expended over the five years following the June
1996 opening of the casino for enhancements to our operations at Buffington
Harbor and/or the gaming complex. We have already expended this $12 million for
enhancements of operations at Buffington Harbor and must receive approval from
the City of Gary that these expenditures satisfy the second component of the
remaining portion of the development agreement. With respect to the off-site
development commitment, we arranged for a $12.5 million surety bond which
provides collateral for completion of this development. We have deposited $3.6
million with a bank to guarantee a letter of credit to benefit the bonding
company that provided the surety bond.
We anticipate that additional capital contributions, currently estimated to
be between $500,000 and $700,000, for an emergency back-up generator and food
service area upgrade may be required for the joint venture facilities. We and
our joint venture partner also intend to construct a multi-level covered
parking
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structure. The parking structure is expected to provide customers with
approximately 1,600 covered parking spaces and indoor access to the Buffington
Harbor gaming complex. Customers currently either park their automobiles in a
parking lot or use valet parking services. The parking project is estimated to
cost approximately $35.0 million, including approximately $15.0 million for the
land. We currently expect to contribute approximately $3.5 million of capital
toward the project and to fund such further investments from operations. We
believe that the convenience of the new parking structure will attract a
significant number of new customers to Buffington Harbor, thereby providing
substantial opportunities to increase our net revenue and cash flow. The joint
venture intends to acquire the harbor and the property underlying the new
parking structure and the harbor. There can be no assurance that the harbor or
the property on which the garage is to be built will be acquired or that such
facility will be constructed or that the garage will be built on terms
favorable to us or at all.
Under a lease agreement with Lehigh Portland Cement Company, the joint
venture has leased certain property which is integral to the gaming operations
of us and our joint venture partner. The lease places certain restrictions on
the use of the harbor by us and our joint venture partner and requires the
reimbursement of certain costs which may be incurred by Lehigh Cement. The
lease was rent free through December 29, 1997, and, subject to certain
conditions, such as progress toward permits for a new harbor, has been extended
to the earlier of December 21, 2005, or to such time as the joint venture has
obtained requisite regulatory permits and completed construction of its
permanent harbor, with a monthly payment of $125,000. The joint venture
anticipates filing the requisite regulatory permits during 1999. If the
regulatory permits are obtained, the joint venture may be required to construct
a new harbor, berthing and guest facilities. The level of expenditures required
for such new facilities cannot be accurately estimated at this time.
Although Barden Development, Inc. to date has contributed approximately $24
million to us, the Members' Equity Account became negative during the first
quarter of 1998 and continues to be negative as of June 30, 1999. The decline
in the Members' Equity Account is primarily attributed to start-up costs,
operating losses,the disposition of assets previously utilized on the chartered
vessel, and the loss on the redemption of $99.0 million principal amount of the
12 3/4% Senior Secured Notes.
Based upon our anticipated future operations on board the Majestic Star
Casino vessel and capital expenditures, management believes that the available
cash flow from our future operations and certain planned equipment financings,
together with the proceeds from the 10 7/8% Senior Secured Notes and the
anticipated line of credit, will be adequate to meet our anticipated future
requirements for working capital, the remaining development obligations to the
City of Gary, and our capital expenditures and scheduled payments of interest
and principal on the 10 7/8% Senior Secured Notes and other permitted
indebtedness for 1999. No assurance can be given, however, that such proceeds
and operating cash flow from the Majestic Star Casino vessel, in light of
increased competition, will be sufficient for such purposes. If necessary and
to the extent permitted under the indenture, we will seek additional financing
through borrowings and debt or equity financing. There can be no assurance that
additional financing, if needed, will be available to us, or that, if
available, the financing will be on terms favorable to us. In addition, there
is no assurance that our estimate of our reasonably anticipated liquidity needs
is accurate or that unforeseen events will not occur, resulting in the need to
raise additional funds.
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BUSINESS
THE MAJESTIC STAR CASINO, LLC
We own and operate the Majestic Star Casino, the newest and one of the
largest gaming vessels serving the Chicago metropolitan market. We are
conveniently located at Buffington Harbor in Gary, Indiana, approximately 23
miles southeast of downtown Chicago. The Chicago metropolitan market is the
third largest metropolitan area in the United States. In 1998, casinos in this
market generated approximately $1.5 billion of gaming revenue. During the first
six months of 1999, our EBITDA increased 43.5% to approximately $15.1 million
compared to $10.5 million in the same period in 1998.
In October 1997, we replaced a chartered vessel with the current Majestic
Star Casino, a newly constructed 360 foot long vessel with a contemporary
design and a stable V-shaped hull. The casino accommodates approximately 43,000
square feet of gaming space across three expansive decks, which contain 1,410
slot machines and 56 table games. The Majestic Star Casino offers patrons an
exciting gaming environment with a bright and spacious layout, high ceilings,
an atrium spanning two decks, colorful chandeliers and mirrors. Passengers move
freely between the various levels of the casino through escalators, elevators
and stair towers. The Majestic Star Casino also offers its customers on-board
food and beverage facilities. In addition, we opened a VIP lounge on board the
vessel and remodeled a VIP boarding lounge in the dockside pavilion.
BUFFINGTON HARBOR
The Majestic Star Casino operates from the Buffington Harbor gaming complex,
which we share with the Trump Casino. The Buffington Harbor gaming complex
includes a guest pavilion, vessel berths, parking lots and other common area
facilities. Buffington Harbor has the largest concentration of gaming positions
in the Chicago metropolitan market, offering patrons a total of approximately
3,455 gaming positions, which is greater than the number of gaming positions
that exist at any other site in northwest Indiana. This number is also
substantially greater than the number of gaming positions allowed at any
individual Illinois gaming site, which is currently limited by Illinois gaming
laws to 1,200. We believe that we have achieved operating cost savings and
marketing advantages over our competitors as a result of the operation of two
casinos at the same location and the existence of the joint venture.
Buffington Harbor offers two cruising vessel casinos (ours and the Trump
Casino) with a staggered cruising schedule. The Majestic Star Casino conducts
gaming from 8:00 a.m. to 5:00 a.m. daily, seven days per week. Patrons can
begin gaming immediately upon boarding. The Trump Casino conducts gaming from
9:00 a.m. to 5:00 a.m. daily, seven days per week. As a result of these
staggered boarding sessions, the maximum scheduled waiting time for Buffington
Harbor patrons is 30 minutes, compared to a maximum of 90 minutes in all other
northwest Indiana gaming locations. Further, gaming customers in the Chicago
area, Indianapolis, South Bend and Fort Wayne, Indiana, and Kalamazoo and Grand
Rapids, Michigan can conveniently access Buffington Harbor, which is located at
the interchange of U.S. 12 and Indiana State Highway 912, just off of I-80/94
and the Indiana Toll Road.
The Buffington Harbor gaming complex is a two-level, 90,000 square foot
structure containing a 352-seat buffet, a 110-seat steakhouse restaurant,
several bars and lounges, gift shops and areas for staging and ticketing. The
complex features a grand entrance, granite and marble floors, unique metallic
finishes, two large fountains and a variety of lighting effects. The Buffington
Harbor gaming complex is situated on an approximately 100-acre site, containing
approximately 3,000 parking spaces, and offers valet parking and convenient bus
loading and unloading facilities. The Buffington Harbor gaming complex was
developed and constructed by the joint venture.
We currently intend to construct a multi-level covered parking structure
with our joint venture partner. The parking structure is expected to provide
customers with approximately 1,600 covered parking spaces and indoor
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access to the Buffington Harbor gaming complex. Customers currently either park
their automobiles in an approximately 3,000 space flat parking lot or use our
valet parking services. The project is estimated to cost approximately $35.0
million, including approximately $15.0 million for the land. We currently
expect to contribute approximately $3.5 million of capital toward the project.
We believe that the convenience of the new parking structure will attract a
significant number of new customers to Buffington Harbor, thereby providing
substantial opportunities to increase our net revenue and cash flow. The joint
venture intends to acquire the harbor and the property underlying the new
parking structure and the harbor. We cannot assure you that we will be able to
acquire the harbor or the property on which we intend to build the garage, or
that we will be able to build the garage on terms favorable to us or at all.
MARKET OVERVIEW
The Chicago metropolitan area is the third most populated metropolitan area
in the United States. According to demographic sources, there were
approximately nine million adults living in the area in 1998 and the average
household income was approximately $48,200. The population and average
household income of the Chicago metropolitan market are the largest among all
United States riverboat/cruising vessel casino markets. The Chicago
metropolitan market is a relatively young gaming market, as gaming was first
introduced in 1992. This market is primarily served by nine riverboat/cruising
vessel casinos, including our casino, operating under licenses granted by the
States of Illinois and Indiana. These casinos generated 1998 gaming revenue of
approximately $1.5 billion, ranking first among all United States
riverboat/cruising vessel casino markets. Such revenue has increased at a
compound annual rate of approximately 26.1% since 1995. Notwithstanding the
recent growth trends, we believe that the Chicago metropolitan market remains
underserved.
CASINO OPERATIONS
The Majestic Star Casino offers patrons 43,000 square feet of gaming space
across three expansive decks, which contain the following slot machines and
table games:
<TABLE>
<CAPTION>
NUMBER
OF
SLOT MACHINES UNITS
- ------------- ------
<S> <C>
5c.......................... 137
25c......................... 623
50c......................... 110
$1.......................... 481
$5.......................... 50
$25......................... 9
-----
Total Slots............. 1,410
=====
</TABLE>
<TABLE>
<CAPTION>
NUMBER
OF
TABLE GAMES UNITS
- ----------- ------
<S> <C>
Mini Baccarat....................................................... 2
Blackjack........................................................... 34
Caribbean Stud...................................................... 4
Craps............................................................... 4
Roulette............................................................ 4
Specialty Games..................................................... 8
-----
Total Table Games............................................... 56
=====
Total Gaming Positions(a)....................................... 1,802
=====
</TABLE>
- --------
(a) Assumes each table game has seven positions.
Slot machine wagering is the fastest growing and most profitable segment of
our casino, representing approximately 76.4% of gaming revenues in 1998. We
continue to enhance slot machine revenue by modifying our mix of slot machine
types and introducing the latest slot machine models. For example, in 1998 we
introduced nickel slot machines, various poker video and participation games,
including Wheel of Fortune(R) and Jeopardy(R), and in the first quarter of
1999, we introduced Monopoly(R). These participation games provide patrons with
the opportunity to conduct more advanced betting on a single game. As a result,
we have substantially increased revenues with respect to these games compared
to the house average.
44
<PAGE>
MARKETING AND PROMOTION
We have established the Club M-Star to increase the frequency of visits by
our existing customers. This program enables us to maintain a comprehensive
database of information about our gaming patrons, including their gaming
levels, duration of play and preferences. We use this information for tracking
purposes and creating a comprehensive direct mail program. As a result, we have
reduced our overall marketing costs and have improved the efficiency of our
marketing expenditures. In addition, we recently opened a VIP lounge on board
the vessel for our higher activity customers, and we remodeled a VIP boarding
lounge in the dockside pavilion. We believe these amenities will differentiate
us from our competitors, who provide only dockside lounges. We have also
introduced a concierge service to assist in providing superior service to our
higher activity gaming patrons.
We continue to use mass media, such as radio, television, newspaper and
billboard advertising, to enhance our brand image and attract new customers. In
this effort, we promote the convenience of two casinos at Buffington Harbor and
major events, such as player parties and promotional giveaways. Once new
patrons visit the Majestic Star Casino, we endeavor to register them in the
Club M-Star. This allows us to expand our database of customers and tailor our
marketing programs accordingly. To further these efforts, in the first quarter
of 1999, we created a player development function with the mission of
attracting and creating marketing programs directed towards higher activity
gaming customers.
As part of our commitment to providing a quality casino entertainment
experience for our patrons, we are dedicated to ensuring a high level of
customer satisfaction and loyalty by providing attentive customer service in a
clean, friendly and relaxed atmosphere. We recognize that consistent quality
and a comfortable atmosphere stem from the collective care and friendliness of
each of our employees. Toward this end, we conduct ongoing training sessions to
emphasize the importance of customer contact and encourage our employees to be
friendly, smile and wish each customer good luck. In addition, we offer
competitive employee benefit programs to recruit and retain friendly,
professional employees.
COMPETITION
Illinois and Indiana state laws currently limit the total number of licenses
issuable in the Chicago metropolitan market to nine. All licenses are currently
in operation, and the number of licenses cannot be increased without
legislative action. Indiana or Illinois could authorize additional gaming
licenses in the future. Legislation has been introduced on numerous occasions
in recent years to provide for land-based casinos in Chicago and to expand
riverboat gaming in Illinois. In May 1999, legislation was passed by the
Illinois House and Senate to relocate an existing but not operating riverboat
gaming license to Cook County, Illinois (excluding the City of Chicago) and to
provide for dockside gaming. During the first quarter of 1999, legislation was
introduced in Indiana to allow certain organizations (primarily VFW posts) to
possess a limited number of electronic gaming devices. To date, no such
legislation has been enacted. We are unable to predict whether any such
legislation, in Illinois, Indiana or elsewhere, will be enacted or whether, if
passed, it would have a material adverse impact on our results of operations or
financial condition.
We compete with the other eight gaming casinos in the Chicago metropolitan
market and, to a lesser extent, with four additional riverboats currently
authorized to operate in southern Indiana. We also compete with gaming
operations on Native American lands, including those located, or to be located,
in Michigan, Wisconsin and potentially northern Indiana. The Saginaw Chippewa
Indian Tribe is currently operating one of the largest Native American gaming
complexes in the United States in Mt. Pleasant, Michigan, approximately 250
miles northeast of Gary, Indiana. In December 1998, the Michigan Senate and
House of Representatives approved four additional Native American compacts,
which have been signed by the Governor of Michigan, that would allow land-based
casinos in Michigan, including southwest Michigan. The opening of land-based
casinos, which generally have a competitive advantage over cruising casinos,
could have an adverse effect on our operating results.
45
<PAGE>
With respect to the State of Michigan, we also expect future competition
from three land-based casinos to be developed in Detroit, Michigan, pursuant to
a November 1996 voter initiative. The MGM Grand currently operates from a
temporary facility and we anticipate that the other two casinos will operate
from temporary facilities shortly.
In addition, we anticipate that competition will increase with the recent
purchase and pending sale of two area casinos to larger and stronger
competitors. Harrah's Entertainment, Inc. has purchased Showboat, Inc.,
including the Showboat Mardi Gras Casino, located in East Chicago, Indiana.
During the first quarter of 1999, Harrah's renamed the East Chicago property to
take advantage of the Harrah's brand name. Harrah's has also announced that it
intends to expand the East Chicago facility and will invest approximately $30.0
million in various land-based developments during the coming year. Also,
Horseshoe Gaming, LLC, has agreed to acquire Empress Entertainment. Empress
Entertainment owns two area riverboat gaming operations: one in Hammond,
Indiana, and one in Joliet, Illinois.
Many of our competitors have greater gaming industry management experience,
financial resources and, in the case of Harrah's East Chicago and Empress
Hammond, covered parking garages. Our joint venture partner also constructed a
300-room hotel for its own use at the Buffington Harbor gaming complex. The
hotel opened in the fourth quarter of 1998.
EMPLOYEES
At June 30, 1999, we employed approximately 1,043 persons, and the joint
venture employed approximately 287 persons. We and the joint venture have
collective bargaining agreements with Local 1 of the Hotel Employees and
Restaurant Employees International Union, covering approximately 79 of our
employees and 84 employees of the joint venture in food and beverage service
positions. These agreements expire in 2001. The joint venture and we also have
collective bargaining agreements with the Operating Engineers Union, covering
approximately six employees of our marine operations department and 17
employees of the joint venture. The agreement with us expires in 2003 and the
agreement with the joint venture expires in 2001. We also have a collective
bargaining agreement with the Seafarers International Union, which covers
approximately 42 employees in the marine operations department. This agreement
expires in 2003.
The joint venture is currently negotiating an amendment to its collective
bargaining agreement with Local 1 of the Hotel Employees and Restaurant
Employees International Union. This agreement would cover approximately 104
additional employees in general facilities and housekeeping positions.
In recruiting personnel, we are obligated, under the terms of an agreement
with the City of Gary, Indiana, to use our best efforts to have an employee
base comprised of 70% racial minorities, 52% females, 67% residents of the City
of Gary, Indiana and 90% residents of Lake County, Indiana.
SEASONALITY
Because of the climate in the Chicago metropolitan area, our operations are
expected to be seasonal, with stronger results expected during the period from
May through September. Accordingly, the results of our 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.
PROPERTIES
We operate from the Buffington Harbor gaming complex, which we share with
the Trump Casino. The Buffington Harbor gambling complex was developed and
constructed by the BHR Joint Venture. We believe that we have achieved
operating cost savings and marketing advantages over our competitors as a
result of the operation of two casinos at the same location and the existence
of the BHR Joint Venture. We have expended approximately $118.0 million
constructing and equipping the Majestic Star Casino vessel and capitalizing the
46
<PAGE>
BHR Joint Venture. We believe that our vessel facility should meet our
operating needs for the foreseeable future.
The Buffington Harbor gaming complex is located on an approximately 100-acre
site. We believe that we are one of only two locations in the Chicago
metropolitan Market with the capacity to significantly expand our land-based
facilities. In addition to the joint venture property, an affiliate of ours has
entered into discussions with various parties concerning the feasibility of
purchasing additional land adjacent to the BHR Joint Venture property for
future development. We also continually evaluate the acquisition and/or
construction of gaming facilities in new locations.
LEGAL PROCEEDINGS
Various legal proceedings are pending against us. Management considers all
such pending proceedings, primarily personal injury and equal employment
opportunity (EEO) claims, to be incidental to the character of our business.
Management believes that the resolution of these proceedings will not,
individually or in the aggregate, have a material adverse effect on our
financial condition or results of operations.
In addition, on March 27, 1998, a complaint was filed in the Lake County
Superior Court in East Chicago, Indiana, against the joint venture, our joint
venture partner and us. The plaintiff, a former employee, claims to have been
assaulted in the parking lot on June 25, 1997, and is requesting compensatory
damages of $1 million and punitive damages of $10 million. The suit alleges
that our joint venture partner and we failed to provide adequate security to
prevent assaults. We intend to vigorously defend against such suit. However,
the case is in the discovery phase and it is too early to predict its outcome
or the effect, if any, on our financial position or the results of our
operations.
From time to time, we may be involved in routine administrative proceedings
involving alleged violations of certain provisions of the Indiana Riverboat
Gambling Act. Management believes that the outcome of any such proceedings will
not, either individually or in the aggregate, have a material adverse effect on
us or our ability to retain and/or renew any license required under the Indiana
Riverboat Gambling Act for our operations. In March 1998, we agreed to settle
two such proceedings with the payment of $120,000 to the Indiana Gaming
Commission. No such proceedings are pending at this time.
47
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS
We are managed by Barden Development, Inc. Our executive officers are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Don H. Barden..... 55 Chairman, President and Chief Executive Officer
Vice President, Chief Operating and Financial
Michael E. Kelly.. 37 Officer
David M. Wolf..... 42 Vice President of Administration
</TABLE>
Don H. Barden has served as our Chairman, President, and Chief Executive
Officer since December 8, 1993 and has served as Chairman and President of
Barden Development, Inc. since November 16, 1993. Mr. Barden is also the
President and Chief Executive Officer of a group of companies he owns and/or
operates. Over the past 30 years, Mr. Barden has successfully developed, owned
and operated many business enterprises in various industries including real
estate development, casino gaming, broadcasting, cable television and
international trade.
Michael E. Kelly has served as our Vice President, Chief Operating and
Financial Officer since January 1, 1999, and has maintained responsibility for
our daily operations since October 17, 1998. From April 1996 through December
31, 1998, Mr. Kelly served as our Vice President and Chief Financial Officer.
Mr. Kelly has also served as a Vice President of Barden Development, Inc. since
April, 1996. From June 1994 to April 1996, Mr. Kelly held various positions
with Fitzgeralds Gaming Corporation, including Vice President of Finance. Mr.
Kelly also was the Senior Director of Operations and Chief Financial Officer of
Fitzgeralds Tunica. From September 1991 to June 1994, Mr. Kelly was Vice
President and Chief Financial Officer of Empress River Casino Corporation and
its affiliates. From 1982 to 1991, Mr. Kelly was employed in various senior
finance and administrative functions by Harrah's Hotel & Casino in New Jersey
and Nevada and the Fitzgeralds Group in Reno and Las Vegas, Nevada.
David M. Wolf has served as our Vice President of Administration since March
1, 1999. Mr. Wolf has responsibility for finance, management information
systems, regulatory affairs, risk management and administration. From February
1997 through February 1999, Mr. Wolf was our Director of Finance. From 1981 to
1997, Mr. Wolf was employed in various senior finance and administrative
positions by Harrahs Hotel and Casino, Trump Plaza Hotel and Casino and
Tropicana Hotel and Casino in Atlantic City, New Jersey.
48
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation earned for services
performed during the three fiscal years in the period ended December 31, 1998
by our Chief Executive Officer and each of our other executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------
FISCAL ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION(A)
----------------- ------ -------- ------- ---------------
<S> <C> <C> <C> <C>
Don H. Barden(b)...................... 1998 $275,000 -- $ 1,120
Chairman, President and Chief
Executive Officer 1997 275,000 -- 1,170
1996 180,865 -- 585
Michael E. Kelly(c)................... 1998 $180,000 $45,000 $14,378
Vice President, Chief Operating and
Financial Officer 1997 180,000 45,000 43,417
1996 117,586 -- 42,926
David M. Wolf(d)...................... 1998 $ 94,144 $ 3,462 $ 2,607
Vice President of Administration 1997 84,423 -- 28,240
1996 -- -- --
</TABLE>
- --------
(a) Amounts represent contractual payments under individual employment
agreements. In 1998, we paid life insurance premiums of $1,120, $2,034 and
$632 on behalf of Messrs. Barden, Kelly and Wolf, respectively. We
contributed 401(k) matching funds of $7,313 and $1,975 to Messrs. Kelly and
Wolf. Mr. Kelly was reimbursed $1,402 for non-deductible medical plan
expenditures. Mr. Kelly also received $3,629 for non-deductible medical
plan expenditures related to 1997, paid in 1998. In 1997, we paid life
insurance premiums of $1,170, $1,895 and $526 on behalf of Messrs. Barden,
Kelly and Wolf, respectively. We contributed 401(k) matching funds of
$6,750 to Mr. Kelly. Mr. Kelly was also reimbursed $1,417 for non-
deductible medical plan expenditures. Mr. Kelly also received $1,740 in
lieu of our not having established a 401(k) plan in 1996, $7,615 for unused
vacation time, and $24,000 for non-vested stock options related to a
previous employer. Mr. Wolf received $27,714 for reimbursable relocation
expenses. In 1996, we paid life insurance premiums of $585 and $842 on
behalf of Messrs. Barden and Kelly, respectively. Mr. Kelly received
$24,000 for non-vested stock options related to a previous employer and
$18,341 for reimbursable relocation expenses.
(b) Mr. Barden joined us as Chairman, President and Chief Executive Officer in
December 1993 and has been paid in such capacities beginning in April 1996.
(c) Mr. Kelly joined us as Vice President and Chief Financial Officer in April
1996. Mr. Kelly assumed on an interim basis the duties of Chief Operating
Officer effective October 17, 1998. Effective January 1, 1999, Mr. Kelly
was employed as Vice President, Chief Operating and Financial Officer.
(d) Mr. Wolf joined us as Director of Finance in February 1997. Mr. Wolf was
promoted to Vice President of Administration effective March 1, 1999.
EMPLOYMENT AGREEMENTS
Mr. Barden serves as our Chairman, President and Chief Executive Officer and
currently receives annual compensation of $275,000 as an employee, pursuant to
a letter agreement dated as of April 25, 1996.
Mr. Kelly serves as our Vice President, Chief Operating and Financial
Officer pursuant to a two-year employment agreement effective as of January 1,
1999. Effective January 1, 1999, Mr. Kelly will receive base compensation of
$275,000 per year and can also earn annual incentive compensation based upon
his performance and our performance. In addition to such compensation, Mr.
Kelly is entitled to term life insurance
49
<PAGE>
in an amount equal to four times his base salary and other customary employee
benefits, including participation in our 401(k) plan. Mr. Kelly is also
entitled to additional compensation, upon a change in control, equal to his
base salary and incentive compensation for the remainder of the term of the
agreement, plus 12 months thereafter. Mr. Kelly's employment agreement
contains certain non-competition provisions with a duration of 12 months
following termination of his employment.
Mr. Wolf serves as our Vice President of Administration pursuant to a two-
year employment agreement, effective as of March 1, 1999. Effective, March 1,
1999, Mr. Wolf will receive a base compensation of $125,000 per year and can
also earn annual incentive compensation based upon his performance and our
performance. Mr. Wolf is also entitled to additional compensation, upon a
change in control, equal to his base salary and incentive compensation for the
remainder of the term of the agreement, plus six months thereafter. Mr. Wolf's
employment agreement contains other terms substantially similar to that of Mr.
Kelly's including certain non-competition provisions with a duration of 12
months following termination of his employment.
PRINCIPAL OWNER
We are indirectly wholly owned by Don H. Barden, our Chairman, President
and Chief Executive Officer. Mr. Barden has invested approximately $24.0
million to design, develop, and construct the Majestic Star Casino and the
Buffington Harbor gaming complex and to make related expenditures. Mr. Barden
has also successfully built, owned and operated numerous businesses in the
cable television, international trade and real estate industries and has owned
and operated several radio stations over the past 30 years.
The following table sets forth the beneficial ownership of the membership
interests in The Majestic Star Casino, LLC as of the date hereof.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER % OWNERSHIP
------------------------------------ -------------
<S> <C>
Don H. Barden............................................... 100.0%(a)
400 Renaissance Center, Suite 2400
Detroit, Michigan 48243
</TABLE>
- --------
(a) Includes the membership interests in The Majestic Star Casino, LLC
beneficially owned directly by Barden Development, Inc. and indirectly by
Barden Development, Inc. and Barden Management, Inc. through Gary
Riverboat Gaming, LLC. Mr. Barden is the beneficial owner of 100% of
Barden Development, Inc., Barden Management, Inc. and Gary Riverboat
Gaming, LLC.
CERTAIN RELATIONSHIP AND RELATED TRANSACTION
By December 31, 1995, our company had been capitalized by our members with
$35.0 million of capital contributions, including interest earned thereon.
Effective March 31, 1996, $10.8 million of the contributions of Barden
Development, Inc. was reclassified as indebtedness payable to Barden
Development, Inc., evidenced by the note to Barden Development, Inc.. In
September 1998, we paid $2.0 million of the amount outstanding under the note
to Barden Development, Inc., and repaid the remaining balance of approximately
$8.8 million in May 1999.
Please refer to the discussion of certain of our other agreements set forth
under "Material Agreements."
DESCRIPTION OF CREDIT FACILITY AND INTERCREDITOR AGREEMENT
NEW SENIOR CREDIT FACILITY
Promptly following the exchange offer, we expect to close on a new $20.0
million senior credit facility. Our proposed new senior credit facility will
be secured by substantially all of our current and future assets,
50
<PAGE>
other than certain excluded assets. The lien on the collateral securing the
proposed new credit facility will be senior to the lien on the collateral
securing the Notes. We expect that the credit facility will contain customary
conditions to closing and to borrowing and will contain representations and
warranties customary in other gaming-related financings. We also expect that
the credit facility will contain certain financial covenants and restrictions
on, among other things, indebtedness, investments, distributions and mergers.
There can be no assurance that we will be able to enter into the credit
facility on terms satisfactory to us or at all. The establishment of the senior
credit facility is subject to approval of the Indiana Gaming Commission which
approval was obtained August 20, 1999.
INTERCREDITOR AGREEMENTs
In connection with entering into the new credit facility, we expect the
trustee under the indenture will enter into an intercreditor agreement
substantially in the form of the intercreditor agreement attached as an exhibit
to the indenture with the lender under the new credit facility. We anticipate
that the intercreditor agreement will provide, among other things, that (i) the
lender's lien on the collateral securing the credit facility will be senior to
the lien on the collateral securing the new notes; (ii) during any insolvency
proceedings, the lender and the trustee under the indenture will coordinate
their efforts to give effect to the relative priority of their respective
security interests in the collateral; and (iii) following an Event of Default
(as defined in the intercreditor agreement), all decisions with respect to such
collateral, including the time and method of any disposition thereof, will be
made in accordance with the terms of the intercreditor agreement.
In addition, in connection with entering into any FF&E Financing (as
defined) secured by a Permitted Vessel Lien (as defined), the trustee under the
indenture will be permitted to enter into an intercreditor agreement with the
lender of such FF&E Financing, provided, that, among other things, the
intercreditor agreement does not adversely affect the holders of the notes.
51
<PAGE>
DESCRIPTION OF THE NEW NOTES
GENERAL
You can find the definitions of certain terms used in this description under
the subheading "Certain Definitions."
In addition:
. ""new notes" refers to the registered notes being offered by this
prospectus;
. ""old notes" refers to your old notes that may be exchanged for new notes
in the exchange offer;
. ""Notes'' refers collectively to the new notes and the old notes; and
. ""Issues'' refers to the Majestic Star Casino, LLC and the Majestic Star
Casino Capital Corp.
The old notes were, and the new notes will be, issued pursuant to the
Indenture, dated June 18, 1999 among The Majestic Star Casino, LLC, The
Majestic Star Casino Capital Corp., any future subsidiary guarantors and IBJ
Whitehall Bank & Trust Company as trustee. The form and terms of the new notes
are substantially identical to the form and terms of the old notes, except that
the new notes:
. will be registered under the Securities Act of 1933; and
. will not bear any legends restricting transfer.
The new notes will be issued solely in exchange for an equal principal
amount of old notes. As of the date of this prospectus, $130.0 million
aggregate principal amount of old notes is outstanding.
The following summaries of certain provisions of the indenture are not
complete and are subject to all the provisions of the indenture. Wherever we
refer to particular sections or defined terms used in the indenture, such
sections or defined terms are automatically incorporated into this prospectus.
BRIEF DESCRIPTION OF THE NEW NOTES
The new notes will be:
. general unsecured obligations of the Issuers;
. subordinated in right of payment to all existing and future Senior
Indebtedness of the Issuers;
. effectively subordinated to all secured Indebtedness of the Issuers;
. senior in right of payment to any future Indebtedness of the Issuers that
is specifically subordinated to the new notes; and
. unconditionally guaranteed by any Subsidiary Guarantors.
The new notes will be senior secured obligations of the Issuers and will
rank senior in right of payment to all existing and future subordinated
Indebtedness of the Issuers and equal in right of payment with all existing and
future senior Indebtedness of the Issuers. The Lien on the collateral securing
the Credit Facility will be senior to the Lien on the Collateral securing the
new notes. The new notes will be without recourse to the Members.
The Majestic Star Casino Capital Corp. is a wholly owned subsidiary of The
Majestic Star Casino, LLC and was incorporated solely for the purpose of
serving as a co-issuer of the Notes in order to facilitate the initial offering
and this exchange offer. Capital will not have any operations or assets and
will not have any revenues. As a result, prospective investors should not
expect Capital to participate in servicing the principal, interest, premium or
any other payment obligations on the Notes. See "--Certain Covenants--
Restrictions on Activities of Capital."
52
<PAGE>
The Indenture will allow us to designate certain Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to any
of the restrictive covenants set forth in the Indenture.
The new notes will be issued in registered form, without coupons, and in
denominations of $1,000 and integral multiples thereof.
PRINCIPAL, MATURITY AND INTEREST
The Indenture does not limit the aggregate principal amount of notes that
may be issued thereunder and provides that, subject to the covenant in the
Indenture described under "--Certain Covenants--Limitation on Incurrence of
Indebtedness," additional notes may be issued thereunder from time to time,
without the consent of the Holders of previously issued notes, in an aggregate
principal amount to be determined from time to time by the Issuers; provided,
that additional notes may not be issued with original issue discount as
determined under section 1271 et seq. of the Internal Revenue Code of 1986, as
amended (the "Code"). The new notes will mature on July 1, 2006. Interest on
the new notes will be payable semi-annually on July 1 and January 1 of each
year, commencing on January 1, 2000, to Holders of record on the immediately
preceding June 15 and December 15, respectively. The new notes will bear
interest at 10 7/8% per annum from the date of original issuance. Interest on
the new notes will accrue from the most recent date to which interest has been
paid or, if no interest has been paid, from the date of original issuance.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. The new notes will be payable both as to principal and interest
at the office or agency of the Issuers maintained for such purpose within the
City of New York or, at the option of the Issuers, payment of interest may be
made by check mailed to the Holders at their respective addresses set forth in
the register of Holders. Until otherwise designated by the Issuers, the
Issuers' office or agency will be the office of the Trustee maintained for such
purpose. If a payment date is a Legal Holiday, payment may be made at that
place on the next succeeding day that is not a Legal Holiday, and no interest
shall accrue for the intervening period.
REDEMPTION
At the Option of the Company. Except as set forth below, the new notes are
not redeemable at the Issuers' option prior to July 1, 2003. Thereafter, the
New notes will be subject to redemption at the option of the Issuers, in whole
or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest thereon to the applicable date of
redemption, if redeemed during the 12-month period beginning on July 1 of the
years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003.......................... 105.438%
2004.......................... 102.719%
2005 and thereafter........... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time or from time to time prior to
July 1, 2002, the Issuers may redeem, at their option, up to 35% of the
aggregate principal amount of the new notes then outstanding at a redemption
price of 110.875% of the principal amount thereof, plus accrued and unpaid
interest thereon through the applicable date of redemption, with the net cash
proceeds of one or more Public Equity Offerings; provided, that (i) such
redemption shall occur within 60 days of the date of closing of such Public
Equity Offering and (ii) at least 65% of the aggregate principal amount of
Notes issued on or after the Issue Date remains outstanding immediately after
giving effect to each such redemption.
The new notes will also be redeemable by the Issuers, in whole or in part,
at any time upon not less than 20 Business Days nor more than 60 days notice
(or such earlier date as may be required by any Governmental Authority) at 100%
of the principal amount thereof, plus accrued and unpaid interest thereon and
Liquidated Damages, if any, to the redemption date, pursuant to a Required
Regulatory Redemption.
53
<PAGE>
If less than all of the new notes are to be redeemed at any time, selection
of new notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the new notes are listed, or, if the new notes are not so listed, on a pro rata
basis, by lot or by such method as the Trustee deems to be fair and reasonable;
provided, that Notes of $1,000 or less may not be redeemed in part. Except in
the case of a Required Regulatory Redemption requiring less notice, notice of
redemption will be mailed by first-class mail at least 30 but not more than 60
days before the redemption date to each Holder to be redeemed at such Holder's
registered address. If any new note is to be redeemed in part only, the notice
of redemption that relates to such new notes will state the portion of the
principal amount thereof to be redeemed. A new note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original new notes. On and after the date of
redemption, interest will cease to accrue on new notes or portions thereof
called for redemption, unless the Issuers default in making such redemption
payment.
Mandatory. The new notes will not be entitled to any mandatory redemption
(except for a Required Regulatory Redemption) or have the benefit of any
sinking fund.
SUBSIDIARY GUARANTORS
The repayment of the new notes will be unconditionally and irrevocably
guaranteed, jointly and severally, by all future Restricted Subsidiaries. On
the Issue Date, the Company will have no Subsidiaries other than Capital (which
is a co-issuer and co-obligor of the Notes). The Indenture will provide that so
long as any Notes remain outstanding, any future Restricted Subsidiary shall
enter into a Subsidiary Guaranty.
If all of the Capital Stock of any Subsidiary Guarantor is sold by the
Company or any of its Subsidiaries to a Person (other than the Company or any
of its Subsidiaries) and the Net Proceeds from such Asset Sale are used in
accordance with the terms of the covenant described under "--Limitation on
Asset Sales," then such Subsidiary Guarantor shall be released and discharged
from all of its Obligations under its Subsidiary Guaranty and the Indenture.
The Obligations of each Subsidiary Guarantor under its Subsidiary Guaranty
will be limited to the maximum amount as will, after giving effect to all other
contingent and fixed liabilities of such Subsidiary Guarantor and after giving
effect to any collections from or payments made by or on behalf of any other
Subsidiary Guarantor in respect of the Obligations of such other Subsidiary
Guarantor under its Subsidiary Guaranty, result in the Obligations of such
Subsidiary Guarantor under its Subsidiary Guaranty not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law or
render a Subsidiary Guarantor insolvent.
SECURITY
The Issuers will assign and pledge, or cause to be assigned and pledged, as
collateral (the "Collateral") to the Trustee, for the benefit of the Trustee
and the Holders, as security for the Issuers' obligations with respect to the
new notes:
. the Majestic Star Casino Vessel;
. the Company's interest in the BHR Joint Venture;
. each members' interest in the Company;
. the Berthing Agreement and substantially all of the other assets of the
Company and any Subsidiary Guarantor, other than the Excluded Assets
(including, without limitation, the Gaming Licenses), and
. the Company's rights to the service mark "Majestic Star Casino."
The security interest in favor of the Trustee and the Holders will be
created in the Collateral pursuant to certain mortgages and security agreements
in favor of the Trustee (collectively, the "Security Agreements").
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The Trustee's security interest in the Collateral will be subordinated to a
lien securing Indebtedness outstanding under the Credit Facility. In connection
with incurring any such Indebtedness, the Trustee will be permitted to enter
into the Intercreditor Agreement, which will be substantially in the form of
the Intercreditor Agreement attached as an exhibit to the Indenture.
The proceeds of any sale of the Collateral following an Event of Default may
not be sufficient to satisfy payments due on the new notes. In addition, the
ability of the Holders to realize upon the Collateral may be limited pursuant
to applicable laws, including gaming, bankruptcy or securities laws.
If an Event of Default occurs and is continuing, the Trustee, on behalf of
the Holders, in addition to any rights or remedies available to it under the
Indenture and the Security Documents, may, subject to the Intercreditor
Agreement, take such action as it deems advisable and as is permitted under the
Security Agreements, to protect and enforce its rights in the Collateral,
including the institution of sale or foreclosure proceedings. The proceeds
received by the Trustee from any such sale or foreclosure will, subject to the
Intercreditor Agreement, be applied by the Trustee first to pay the expenses of
such sale or foreclosure and fees and other amounts then payable to the Trustee
under the Indenture, and thereafter to pay amounts due and payable with respect
to the new notes.
Certain Gaming Law Limitations. The Trustee's ability to foreclose upon the
Collateral will be limited by relevant gaming laws, which generally require
that Persons who own or operate a casino or purchase or sell gaming equipment
hold a valid gaming license or permit and require the approval of the IGC for
any transfer of a gaming license. No Person can hold an owner's license in the
State of Indiana unless the Person is found qualified or suitable by the
relevant Gaming Authorities. In order for the Trustee to be found qualified or
suitable, such Gaming Authorities would have discretionary authority to require
the Trustee and any or all of the Holders to file applications, be investigated
and be found qualified or suitable as an owner or operator of gaming
establishments. The applicant for qualification, a finding of suitability or
licensing must pay an application fee and all costs of such investigation. If
the Trustee is unable or chooses not to qualify, be found suitable, or be
licensed to own, operate or sell such assets, it would have to retain another
entity that could obtain the appropriate license to own, operate or sell such
assets. This licensing process could be lengthy, taking several months at a
minimum. In addition, in any foreclosure sale or subsequent resale by the
Trustee, licensing requirements under the relevant gaming laws may limit the
number of potential bidders and may delay any sale, either of which events
could have an adverse effect on the sale price of such Collateral. Therefore,
the practical value of realizing on the Collateral may, without the appropriate
approvals, be limited.
Certain Bankruptcy Limitations. The right of the Trustee to repossess and
dispose of the Collateral upon the occurrence of an Event of Default is likely
to be significantly impaired by applicable bankruptcy law if a bankruptcy
proceeding were to be commenced by or against the Issuers prior to the Trustee
having repossessed and disposed of the Collateral. Under the Bankruptcy Code, a
secured creditor is prohibited from repossessing its security from a debtor in
a bankruptcy case, or from disposing of security repossessed from such debtor,
without bankruptcy court approval. Moreover, the Bankruptcy Code permits the
debtor in certain circumstances to continue to retain and to use collateral
owned as of the date of the bankruptcy filing (and the proceeds, products,
offspring, rents or profits of such collateral to the extent provided by the
Security Documents and by applicable nonbankruptcy law) even though the debtor
is in default under the applicable debt instruments; provided, that the secured
creditor is given "adequate protection." The meaning of the term "adequate
protection" may vary according to circumstances. In view of the lack of a
precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict how
long payments under the Notes could be delayed following commencement of a
bankruptcy case, whether or when the Trustee could repossess or dispose of the
Collateral or whether or to what extent Holders would be compensated for any
delay in payment or loss of value of the Collateral through the requirement of
"adequate protection." Furthermore, in the event a bankruptcy court determines
the value of the Collateral is not sufficient to repay all amounts due on the
Notes, the Holders would hold secured claims to the extent of the value of the
Collateral to which the Holders are entitled, and would hold unsecured claims
with respect to such shortfall. Applicable Federal bankruptcy laws do not
permit the payment and/or accrual of post-petition interest,
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costs and attorneys' fees during a debtor's bankruptcy case unless the claims
are oversecured or the debtor is solvent at the time of reorganization. In
addition, if either Issuer becomes the subject of a bankruptcy case, the
bankruptcy court, among other things, may avoid certain transfers made by the
entity that is the subject of the bankruptcy filing, including, without
limitation, transfers held to be fraudulent conveyances or preferences.
Further, certain limitations exist under the Merchant Marine Act of 1936 on
the ability of non-U.S. citizens to realize upon collateral consisting of
vessels documented under the laws of the United States. To the extent that the
holders of the Notes are non-U.S. citizens, such limitation could adversely
affect the ability of the Trustee to complete foreclosure on the Collateral.
Also, the Trustee may be required to foreclose through a federal court
admiralty proceeding. Such a proceeding would entail compliance with notice and
other procedural requirements, and could require posting of a substantial bond
with the U.S. Marshall.
REPURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Issuers will be required to
offer to repurchase all of the new notes then outstanding (the "Change of
Control Offer") at a purchase price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest thereon and Liquidated Damages
if any, to the date of repurchase (the "Change of Control Payment"). Within 30
days following any Change of Control, the Issuers must mail or cause to be
mailed a notice to each Holder stating, among other things: (i) the purchase
price and the purchase date, which will be no earlier than 30 days nor later
than 45 days from the date such notice is mailed (the "Change of Control
Payment Date"); (ii) that any Holder electing to have new notes purchased
pursuant to a Change of Control Offer will be required to surrender the new
notes, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Notes completed, to the paying agent with respect to the new
notes (the "Paying Agent") at the address specified in the notice prior to the
close of business on the third Business Day preceding the Change of Control
Payment Date; and (iii) that the Holder will be entitled to withdraw such
election if the Paying Agent receives, not later than the close of business on
the second Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the name of the
Holder, the principal amount of new notes delivered for purchase, and a
statement that such Holder is withdrawing his election to have such new notes
purchased.
The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes in connection with a Change of Control. To the extent
that the provisions of any securities laws or regulations conflict with the
"Change of Control" provisions of the Indenture, the Issuers will comply with
the applicable securities laws and regulations and shall not be deemed to have
breached their obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
On the Change of Control Payment Date, the Issuers will, to the extent
lawful, (i) accept for payment the new notes or portions thereof tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all new notes or
portions thereof so tendered and not withdrawn, and (iii) deliver or cause to
be delivered to the Trustee the new notes so accepted, together with an
Officers' Certificate stating that the new notes or portions thereof tendered
to the Issuers are accepted for payment. The Paying Agent will promptly mail to
each Holder of new notes so accepted payment in an amount equal to the purchase
price for such new notes, and the Trustee will authenticate and mail (or cause
to be transferred by book entry) to each Holder a new note equal in principal
amount to any unpurchased portion of the Notes surrendered, if any; provided,
that each such new Note will be in the principal amount of $1,000 or an
integral multiple thereof. The Issuers will announce the result of the Change
of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders to require that the Issuers
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar restructuring.
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There can be no assurance that sufficient funds will be available at the
time of any Change of Control Offer to make required repurchases.
The Issuers will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Issuers and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The term "all or substantially all" as used in the definition of Change of
Control has not been interpreted under New York law (which is the governing law
of the Indenture) to represent a specific quantitative test. As a consequence,
in the event the Holders elect to exercise their rights under the Indenture and
the Issuers elect to contest such election, there could be no assurance as to
how a court would interpret the phrase under New York law, which may have the
effect of preventing the Trustee or the Holders from successfully asserting
that a Change of Control has occurred.
CERTAIN COVENANTS
Limitation on Restricted Payments. The Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly
(i) declare or pay any dividend or make any distribution on account of any
Equity Interests of the Company or any of its Subsidiaries or make any
other payment to any Excluded Person or Affiliate thereof (other than
(A) dividends or distributions payable in Equity Interests (other than
Disqualified Capital Stock) of the Company or (B) amounts payable to
the Company or any Restricted Subsidiary);
(ii) purchase, redeem or otherwise acquire or retire for value any Equity
Interest of the Company, any Subsidiary or any other Affiliate of the
Company (other than any such Equity Interest owned by the Company or
any Restricted Subsidiary);
(iii) make any principal payment on, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness of the Company or
any Subsidiary Guarantor that is subordinated in right of payment to the
Notes or such Subsidiary Guarantor's Subsidiary Guaranty thereof, as the
case may be, prior to any scheduled principal payment, sinking fund
payment or other payment at the stated maturity thereof; or
(iv) make any Restricted Investment
(all such payments and other actions set forth in clauses (i) through (iv)
above being collectively referred to as "Restricted Payments"), unless, at
the time of such Restricted Payment:
(a) no Default or Event of Default has occurred and is continuing or would
occur as a consequence thereof, and
(b) immediately after giving effect to such Restricted Payment on a pro
forma basis, the Company could incur at least $1.00 of additional
Indebtedness under the Interest Coverage Ratio test set forth in the
covenant described under "--Limitation on Incurrence of Indebtedness,"
and
(c) such Restricted Payment (the value of any such payment, if other than
cash, being determined in good faith by the Managers of the Company and
evidenced by a resolution set forth in an Officers' Certificate
delivered to the Trustee), together with the aggregate of all other
Restricted Payments made after the Issue Date (including Restricted
Payments permitted by clauses (i) and (ii) of the next following
paragraph and excluding Restricted Payments permitted by the other
clauses therein), is less than the sum of
(1) 50% of the Consolidated Net Income of the Company for the period
(taken as one accounting period) from the beginning of the first
fiscal quarter commencing immediately after the Issue Date to the
end of the Company's most recently ended fiscal quarter for which
internal financial
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statements are available at the time of such Restricted Payment (or,
if such Consolidated Net Income for such period is a deficit, 100%
of such deficit), plus
(2) 100% of the aggregate net cash proceeds (or of the net cash
proceeds received upon the conversion of non-cash proceeds into
cash) received by the Company from the issuance or sale, other than
to a Subsidiary, of Equity Interests of the Company (other than
Disqualified Capital Stock) after the Issue Date and on or prior to
the time of such Restricted Payment, plus
(3) 100% of the aggregate net cash proceeds (or of the net cash
proceeds received upon the conversion of non-cash proceeds into
cash) received by the Company from the issuance or sale, other than
to a Subsidiary, of any convertible or exchangeable debt security
of the Company that has been converted or exchanged into Equity
Interests of the Company (other than Disqualified Capital Stock)
pursuant to the terms thereof after the Issue Date and on or prior
to the time of such Restricted Payment (including any additional
net proceeds received by the Company upon such conversion or
exchange) plus
(4) the aggregate Return from Unrestricted Subsidiaries after the Issue
Date and on or prior to the time of such Restricted Payment.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would
not have been prohibited by the provisions of the Indenture;
(ii) the redemption, purchase, retirement or other acquisition of any
Equity Interests of the Company or Indebtedness of the Company or any
Restricted Subsidiary in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Subsidiary) of, other
Equity Interests of the Company (other than Disqualified Capital
Stock);
(iii) so long as clause (a) above is satisfied, with respect to each
taxable year that the Company qualifies as a Flow Through Entity, the
payment of Permitted Tax Distributions; provided, that (A) prior to
any payment of Permitted Tax Distributions the Company provides an
Officers' Certificate and Opinion of Counsel to the effect that the
Company and each Subsidiary in respect of which such distributions
are being made, qualify as Flow Through Entities for Federal income
tax purposes and for the states in respect of which such
distributions are being made and (B) at the time of such
distribution, the most recent audited financial statements of the
Company provided to the Trustee pursuant to the covenant described
under the caption "--Reports," provide that the Company and each such
Subsidiary were treated as Flow Through Entities for the period of
such financial statements;
(iv) the redemption, repurchase or payoff of any Indebtedness of the
Company or a Restricted Subsidiary with proceeds of any Refinancing
Indebtedness permitted to be incurred pursuant to the provision
described under "--Limitation on Incurrence of Indebtedness;"
(v) cash capital contributions, loans or advances to the BHR Joint Venture
that are used by the BHR Joint Venture to make capital expenditures in
the ordinary course of business; provided, that concurrently with such
contribution, loan or advance all other members of the BHR Joint
Venture make cash capital contributions, loans or advances, as the case
may be, on a pro rata basis, based on each member's ownership interest
in the BHR Joint Venture;
(vi) capital contributions to the BHR Joint Venture to pay for harbor
improvements required by the Harbor Lease (or otherwise necessary for
ordinary course operations of the Majestic Star Casino Vessel) and
other improvements ancillary to such harbor improvements;
(vii) Restricted Investments in an aggregate amount not to exceed $10
million to satisfy the Company's off-site development obligation
under the Development Agreement, less any amounts paid by a third-
party on behalf of the Company; and
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(viii) so long as clause (a) above is satisfied, Restricted Payments
required under the Management Agreement as in effect on the Issue
Date; provided, that the Interest Coverage Ratio for the Company's
most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on
which such payment is made would have been not less than 1.75 to
1.0, determined on a pro forma basis, as if such payment had been
made during such four-quarter period.
Not later than the date of making any Restricted Payment, the Company will
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by this covenant were computed, which calculations may be based upon
the Company's latest available financial statements.
Limitation on Incurrence of Indebtedness. The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, (i)
create, incur, issue, assume, guaranty or otherwise become directly or
indirectly liable with respect to, contingently or otherwise (collectively,
"incur"), any Indebtedness (including, without limitation, Acquired Debt) or
(ii) issue any Disqualified Capital Stock; provided, that the Company may incur
Indebtedness (including, without limitation, Acquired Debt) and issue shares of
Disqualified Capital Stock (and a Restricted Subsidiary may incur Acquired
Debt) if (x) no Default or Event of Default shall have occurred and be
continuing at the time of, or would occur after giving effect on a pro forma
basis to such incurrence or issuance, and (y) the Interest Coverage Ratio for
the Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Capital Stock is
issued would have been not less than 2.0 to 1.0, determined on a pro forma
basis (including a pro forma application of the net proceeds therefrom), as if
the additional Indebtedness had been incurred, or the Disqualified Capital
Stock had been issued, as the case may be, at the beginning of such four-
quarter period; provided, that in the case of Indebtedness (other than
Indebtedness outstanding under the Credit Facility, Purchase Money Obligations,
Capital Lease Obligations or Acquired Debt), the Weighted Average Life to
Maturity and final stated maturity of such Indebtedness is equal to or greater
than the Weighted Average Life to Maturity and final stated maturity of the
Notes.
Notwithstanding the foregoing, the foregoing limitations will not prohibit
the incurrence of:
(a) Indebtedness under the Credit Facility in an aggregate principal amount
not to exceed, at any time, the excess of (x) $20.0 million less the
aggregate amount of repayments of indebtedness contemplated by clause
(iii) under the caption "--Limitation on Asset Sale" (the "Permitted
Amount") over (y) the aggregate principal amount of BHR Attributed Debt
then outstanding;
(b) Purchase Money Obligations in an aggregate principal amount not to
exceed, at any time, the product of (i) $2.5 million times (ii) the
number of Casinos owned and operated solely by the Company and its
Restricted Subsidiaries on the date of such incurrence;
(c) FF&E Financing in an aggregate principal amount not to exceed, at any
time, the sum of (i) the principal amount of FF&E Financing outstanding
on the Issue Date and (ii) the product of (x) $5.0 million times (y)
the number of Casinos owned and operated solely by the Company and its
Restricted Subsidiaries on the date of such incurrence;
(d) performance bonds, appeal bonds, surety bonds, insurance obligations or
bonds and other similar bonds or obligations (including Obligations
under letters of credit) incurred in the ordinary course of business;
(e) Hedging Obligations incurred to fix the interest rate on any variable
rate Indebtedness otherwise permitted by the Indenture; provided, that
the notional principal amount of each such Hedging Obligation does not
exceed the principal amount of the Indebtedness to which such Hedging
Obligation relates;
(f) Indebtedness outstanding on the Issue Date, including the Notes
outstanding on the Issue Date;
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(g) Indebtedness incurred by the Company in an aggregate principal amount
not to exceed, at any time, $3.0 million;
(h) any Subsidiary Guaranty of the Notes; and
(i) Indebtedness issued in exchange for, or the proceeds of which are
contemporaneously used to extend, refinance, renew, replace, or refund
(collectively, "Refinance"), Indebtedness incurred pursuant to the
Interest Coverage Ratio test set forth in the immediately preceding
paragraph, clause (f) above or this clause (i) (the "Refinancing
Indebtedness"); provided, that (i) the principal amount of such
Refinancing Indebtedness does not exceed the principal amount of
Indebtedness so Refinanced (including any required premiums and out-of-
pocket expenses reasonably incurred in connection therewith), (ii) the
Refinancing Indebtedness has a final scheduled maturity that equals or
exceeds the final stated maturity, and a Weighted Average Life to
Maturity that is equal to or greater than the Weighted Average Life to
Maturity, of the Indebtedness being Refinanced and (iii) the
Refinancing Indebtedness ranks, in right of payment, no more favorable
to the Notes than the Indebtedness being Refinanced.
Restrictions on BHR Joint Venture. The Company will not permit the BHR Joint
Venture to, directly or indirectly:
(a) incur any Indebtedness or issue any Disqualified Capital Stock;
provided that the BHR Joint Venture may incur:
(i) Indebtedness if immediately after giving effect to such incurrence
on a pro forma basis, the Company could incur at least $1.00 of
additional Indebtedness under the Interest Coverage Ratio Test set
forth in the covenant described under "--Limitation on Incurrence
of Indebtedness;"
(ii) Indebtedness; provided, that after giving effect to the incurrence
of such Indebtedness, the aggregate principal amount of BHR
Attributed Debt does not exceed the Permitted Amount less the
aggregate principal amount of Indebtedness then outstanding under
clause (a) under the caption "--Limitation on Incurrence of
Indebtedness;" and
(iii) Indebtedness incurred to Refinance any Indebtedness incurred
pursuant to clause (i) above or Indebtedness of the BHR Joint
Venture outstanding on the Issue Date;
(b) create, incur, assume or suffer to exist any Lien on any asset of the
BHR Joint Venture, or on any income or profits therefrom, or assign or
convey any right to receive income therefrom, except Permitted Liens;
(c) declare or pay any dividend or make any distribution on account of any
Equity Interests of the BHR Joint Venture, unless such distributions
are made on a pro rata basis to all members of the BHR Joint Venture,
based on each member's ownership interest therein;
(d) purchase, redeem or otherwise acquire or retire for value any Equity
Interest of the BHR Joint Venture (other than any such Equity Interest
owned by the Company or any Restricted Subsidiary); or
(e) transfer, other than in the ordinary course of business, any assets of
the BHR Joint Venture, unless:
(i) the BHR Joint Venture receives consideration at the time of such
transfer not less than the fair market value of the assets subject
to such transfer;
(ii) at least 75% of the consideration for such transfer is in the form
of cash or Cash Equivalents or liabilities of the BHR Joint
Venture that are assumed by the transferee of such assets
(provided, that following such transfer there is no further
recourse to the BHR Joint Venture with respect to such
liabilities); and
(iii) within 270 days of such transfer, the net proceeds thereof are
(A) invested in assets related to the business of the BHR Joint
Venture, (B) applied to permanently repay Indebtedness of the BHR
Joint Venture, or (C) distributed to the members of the BHR Joint
Venture in accordance with paragraph (c) above.
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Limitation on Asset Sales. The Company will not, and will not permit any
Restricted Subsidiary to, make any Asset Sale unless
(i) the Company or such Restricted Subsidiary receives consideration at the
time of such Asset Sale not less than the fair market value of the
assets subject to such Asset Sale;
(ii) at least 75% of the consideration for such Asset Sale is in the form
of cash or Cash Equivalents or liabilities of the Company or any
Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Notes) that are assumed by the transferee of such
assets (provided, that following such Asset Sale there is no further
recourse to the Company or its Restricted Subsidiaries with respect to
such liabilities); and
(iii) within 270 days of such Asset Sale, the Net Proceeds thereof are (A)
invested in assets related to the business of the Company or its
Restricted Subsidiaries (which, in the case of an Asset Sale of the
Majestic Star Casino Vessel or any replacement Gaming Vessel (a
"Replacement Vessel"), must be a Gaming Vessel having a fair market
value, as determined by an independent appraisal, at least equal to
the fair market value of the Majestic Star Casino Vessel or such
Replacement Vessel immediately preceding such Asset Sale), (B)
applied to repay Indebtedness under Purchase Money Obligations
incurred in connection with the asset so sold, (C) applied to repay
Indebtedness under the Credit Facility and permanently reduce the
commitment thereunder in the amount of the Indebtedness so repaid or
(D) to the extent not used as provided in clauses (A), (B), or (C)
applied to make an offer to purchase Notes as described below (an
"Excess Proceeds Offer"); provided, that the Company will not be
required to make an Excess Proceeds Offer until the amount of Excess
Proceeds is greater than $5,000,000.
The foregoing provisions in (i) or (ii) above shall not apply to an Event of
Loss.
Pending the final application of any Net Proceeds, the Company may
temporarily reduce Indebtedness under the Credit Facility or temporarily invest
such Net Proceeds in Cash Equivalents.
Net Proceeds not invested or applied as set forth in the preceding clauses
(A), (B) or (C) constitute "Excess Proceeds." If the Company elects, or becomes
obligated to make an Excess Proceeds Offer, the Issuers will offer to purchase
Notes having an aggregate principal amount equal to the Excess Proceeds (the
"Purchase Amount"), at a purchase price equal to 100% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon and
Liquidated Damages, if any, to the purchase date. The Issuers must commence
such Excess Proceeds Offer not later than 30 days after the expiration of the
270 day period following the Asset Sale that produced such Excess Proceeds. If
the aggregate purchase price for the Notes tendered pursuant to the Excess
Proceeds Offer is less than the Excess Proceeds, the Company and its Restricted
Subsidiaries may use the portion of the Excess Proceeds remaining after payment
of such purchase price for general corporate purposes.
The Indenture will provide that each Excess Proceeds Offer will remain open
for a period of 20 Business Days and no longer, unless a longer period is
required by law (the "Excess Proceeds Offer Period"). Promptly after the
termination of the Excess Proceeds Offer Period (the "Excess Proceeds Payment
Date"), the Issuers will purchase and mail or deliver payment for the Purchase
Amount for the Notes or portions thereof tendered, pro rata or by such other
method as may be required by law, or, if less than the Purchase Amount has been
tendered, all Notes tendered pursuant to the Excess Proceeds Offer. The
principal amount of Notes to be purchased pursuant to an Excess Proceeds Offer
may be reduced by the principal amount of Notes acquired by the Issuers through
purchase or redemption (other than pursuant to a Change of Control Offer)
subsequent to the date of the Asset Sale and surrendered to the Trustee for
cancellation.
Any Excess Proceeds Offer will be conducted in compliance with applicable
regulations under the federal securities laws, including Exchange Act Rule 14e-
1. To the extent that the provisions of any securities laws or regulations
conflict with the "Asset Sale" provisions of the Indenture, the Issuers will
comply with the
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applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, create or suffer to exist or become
effective any restriction that would impair the ability of the Issuers to make
an Excess Proceeds Offer upon an Asset Sale or, if such Excess Proceeds Offer
is made, to pay for the Notes tendered for purchase.
Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Lien on any asset (including, without limitation, all real,
tangible or intangible property) of the Company or any Restricted Subsidiary,
whether now owned or hereafter acquired, or on any income or profits therefrom,
or assign or convey any right to receive income therefrom, except Permitted
Liens.
Limitation on Restrictions on Subsidiary Dividends. The Company will not,
and will not permit any Restricted Subsidiary to, directly or indirectly,
create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any Restricted Subsidiary to:
(i) pay dividends or make any other distributions to the Company or any of
its Restricted Subsidiaries (a) on such Restricted Subsidiary's Capital
Stock or (b) with respect to any other interest or participation in, or
measured by, such Restricted Subsidiary's profits, or
(ii) pay any Indebtedness owed to the Company or any of its Restricted
Subsidiaries, or
(iii) make loans or advances to the Company or any of its Restricted
Subsidiaries, or
(iv) transfer any of its assets to the Company or any of its Restricted
Subsidiaries,
except, with respect to clauses (i) through (iv) above, for such encumbrances
or restrictions existing under or by reason of:
(1) any Credit Facility containing dividend or other payment restrictions
that are not more restrictive than those contained in the documents
governing the Original Credit Facility;
(2) the Indenture, the Security Documents and the Notes;
(3) applicable law;
(4) Acquired Debt; provided, that such encumbrances and restrictions are
not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person,
so acquired;
(5) customary non-assignment and net worth provisions of any contract,
lease or license entered into in the ordinary course of business;
(6) customary restrictions on the transfer of assets subject to a Permitted
Lien imposed by the holder of such Lien; and
(7) the agreements governing permitted Refinancing Indebtedness; provided,
that such restrictions contained in any agreement governing such
Refinancing Indebtedness are no more restrictive than those contained
in any agreements governing the Indebtedness being refinanced.
Merger, Consolidation or Sale of Assets. Neither Issuer may consolidate or
merge with or into (regardless of whether such Issuer is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets (determined on a
consolidated basis for the Company and its Restricted Subsidiaries) in one or
more related transactions to, any other Person, unless:
(i) such Issuer is the surviving Person or the Person formed by or
surviving any such consolidation or merger (if other than such Issuer)
or to which such sale, assignment, transfer, lease, conveyance or other
disposition has been made is a corporation organized and existing under
the laws of the United States of America, any state thereof or the
District of Columbia;
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(ii) the Person formed by or surviving any such consolidation or merger (if
other than such Issuer) or the Person to which such sale, assignment,
transfer, lease, conveyance or other disposition has been made assumes
all the Obligations of such Issuer, pursuant to a supplemental
indenture and in a form reasonably satisfactory to the Trustee, under
the Notes, the Indenture, the Security Documents and the Registration
Rights Agreement;
(iii) immediately after giving effect to such transaction on a pro forma
basis, no Default or Event of Default exists;
(iv) such transaction would not result in the loss or suspension or
material impairment of any Gaming License unless a comparable
replacement Gaming License is effective prior to or simultaneously
with such loss, suspension or material impairment; and
(v) such Issuer, or any Person formed by or surviving any such
consolidation or merger, or to which such sale, assignment, transfer,
lease, conveyance or other disposition has been made, (A) has
Consolidated Net Worth (immediately after the transaction but prior to
any purchase accounting adjustments resulting from the transaction)
equal to or greater than the Consolidated Net Worth of such Issuer
immediately preceding the transaction and (B) will be permitted, at the
time of such transaction and after giving pro forma effect thereto as
if such transaction had occurred at the beginning of the applicable
four-quarter period, to incur at least $1.00 of additional Indebtedness
pursuant to the Interest Coverage Ratio test set forth in the covenant
described under "--Limitation on Incurrence of Indebtedness."
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which such Issuer is not the surviving Person, such surviving Person or
transferee shall succeed to, and be substituted for, and may exercise every
right and power of, such Issuer under, and such Issuer shall be discharged from
its Obligations under, the Indenture, the Security Agreements, the Notes and
the Registration Rights Agreement.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly, sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into any contract, agreement,
understanding, loan, advance or guaranty with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), except for:
(i) Affiliate Transactions that, together with all related Affiliate
Transactions, have an aggregate value of not more than $2,000,000;
provided, that (i) such transactions are conducted in good faith and on
terms that are no less favorable to the Company or the relevant
Restricted Subsidiary than those that would have been obtained in a
comparable transaction at such time by the Company or such Restricted
Subsidiary on an arm's-length basis from a Person that is not an
Affiliate of the Company or such Restricted Subsidiary and (ii) prior
to entering into such transaction the Company shall have delivered to
the Trustee an Officers' Certificate certifying to such effect;
(ii) Affiliate Transactions that, together with all related Affiliate
Transactions, have an aggregate value of not more than $5,000,000;
provided, that (i) a majority of the disinterested Managers determine
that such transactions are conducted in good faith and on terms that
are no less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable
transaction at such time by the Company or such Restricted Subsidiary
on an arm's-length basis from a Person that is not an Affiliate of the
Company or such Restricted Subsidiary and (ii) prior to entering into
such transaction the Company shall have delivered to the Trustee an
Officers' Certificate certifying to such effect; or
(iii) Affiliate Transactions for which the Company delivers to the Trustee
an opinion as to the fairness to the Company or such Restricted
Subsidiary from a financial point of view issued by an accounting,
appraisal or investment banking firm of national standing.
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Notwithstanding the foregoing, the following will be deemed not to be
Affiliate Transactions:
(a) Restricted Payments permitted by the provisions of the Indenture
described above under "--Limitations on Restricted Payments;"
(b) payments pursuant to the Berthing Agreement;
(c) the non-exclusive licensing of any service mark of the Company to an
Affiliate or Affiliates of the Company; and
(d) transactions between or among the Company and any Wholly Owned
Subsidiary of the Company.
Restriction on Sale and Issuance of Subsidiary Stock. The Company will not
sell, and will not permit any Restricted Subsidiary to issue or sell, any
Equity Interests (other than directors' qualifying shares) of any Restricted
Subsidiary to any Person other than the Company or a Wholly Owned Subsidiary of
the Company; provided, that the Company and its Restricted Subsidiaries may
sell all (but not less than all) of the Capital Stock of a Restricted
Subsidiary owned by the Company and its Restricted Subsidiaries if the Net
Proceeds from such Asset Sale are used in accordance with the terms of the
covenant described under "--Limitation on Asset Sales."
Rule 144A Information Requirement. The Issuers and the Subsidiary Guarantors
will furnish to the Holders or beneficial holders of Notes, upon their request,
and to prospective purchasers thereof designated by such Holders or beneficial
holders, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act for so long as is required for an offer or sale of the
Notes to qualify for an exemption under Rule 144A.
Subsidiary Guarantors. The Company will cause each Restricted Subsidiary to
(i) execute and deliver to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee, pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Issuers' Obligations
under the Notes and the Indenture on the terms set forth in the Indenture and
(ii) deliver to the Trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such Restricted
Subsidiary and constitutes a legal, valid, binding and enforceable obligation,
of such Restricted Subsidiary, in each case subject to customary
qualifications. Thereafter, such Restricted Subsidiary shall be a Subsidiary
Guarantor for all purposes of the Indenture.
Additional Collateral. The Company will, and will cause each of the
Subsidiary Guarantors to, grant to the Trustee a security interest in all
Collateral, whether owned on the Issue Date or thereafter acquired, and to
execute and deliver all documents and to take all action necessary or desirable
to perfect and protect such a security interest in favor of the Trustee.
Restrictions on Activities of Capital. Capital may not hold any assets,
become liable for any obligations or engage in any business activities;
provided, that Capital may be a co-obligor of the Notes pursuant to the terms
of the Indenture and as contemplated by the Purchase Agreement executed by the
Issuers and the Initial Purchaser and, as necessary, may engage in any
activities directly related or necessary in connection therewith.
Limitation on Lines of Business. The Company will not, and will not permit
any of its Restricted Subsidiaries or the BHR Joint Venture to, directly or
indirectly engage to any substantial extent in any line or lines of business
activity other than a Related Business.
Reports. Regardless of whether required by the rules and regulations of the
Securities and Exchange Commission (the "Commission"), so long as any Notes are
outstanding, the Issuers will furnish to the Trustee and Holders, within 15
days after either Issuer is or would have been required to file such with the
Commission, (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-K
if either of the Issuers were required to file such Forms, including for each a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Issuers' independent
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certified public accountants and (ii) all information that would be required to
be contained in a filing with the Commission on Form 8-K if either of the
Issuers were required to file such reports. From and after the time either of
the Issuers files a registration statement with the Commission with respect to
the Notes, the Issuers will file such information with the Commission so long
as the Commission will accept such filings.
EVENTS OF DEFAULT AND REMEDIES
Each of the following will constitute an Event of Default under the
Indenture:
(i) default for 30 days in the payment when due of interest on the Notes;
(ii) default in payment of principal (or premium, if any) on the Notes when
due at maturity, redemption, by acceleration or otherwise;
(iii) default in the performance or breach of the covenants in the
Indenture described under "--Repurchase Upon Change of Control," "--
Limitation on Asset Sales," or "--Merger, Consolidation or Sale of
Assets;"
(iv) failure by the Issuers or any Subsidiary Guarantor for 60 days after
notice to comply with any other agreements in the Indenture or the
Notes;
(v) default under (after giving effect to any applicable grace periods or
any extension of any maturity date) any mortgage, indenture or
instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Issuers
or any Restricted Subsidiary (or the payment of which is guaranteed by
the Issuers or any Restricted Subsidiary), whether such Indebtedness or
guaranty now exists or is created after the Issue Date, if (A) either
(1) such default results from the failure to pay principal of or
interest on such Indebtedness or (2) as a result of such default the
maturity of such Indebtedness has been accelerated, and (B) the
principal amount of such Indebtedness, together with the principal
amount of any other such Indebtedness with respect to which such a
payment default (after the expiration of any applicable grace period or
any extension of the maturity date) has occurred, or the maturity of
which has been so accelerated, exceeds $5,000,000 in the aggregate;
(vi) failure by the Issuers or any Subsidiary to pay final judgments (other
than any judgment as to which a reputable insurance company has
accepted full liability) aggregating in excess of $5,000,000, which
judgments are not discharged, bonded or stayed within 60 days after
their entry;
(vii) the cessation of substantially all gaming operations of the Issuers
for more than 60 days, except as a result of an Event of Loss,
(viii) any revocation, suspension, expiration (without previous or
concurrent renewal) or loss of any Gaming License for more than 60
days;
(ix) any failure to comply with any material agreement or covenant in, or
material provision of, any Security Document; and
(x) certain events of bankruptcy or insolvency with respect to the Issuers
or any of the Subsidiary Guarantors.
Subject to the terms of the Intercreditor Agreement, if any Event of Default
occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the then outstanding Notes may declare by written notice to
the Company and the Trustee all the Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, all outstanding Notes will become
due and payable without further action or notice. Holders may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power.
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The Holders of a majority in aggregate principal amount of the Notes then
outstanding, by written notice to the Trustee, may on behalf of the Holders of
all of the Notes (i) waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Notes or a
Default or an Event of Default with respect to any covenant or provision which
cannot be modified or amended without the consent of the Holder of each
outstanding Note affected, and/or (ii) rescind an acceleration and its
consequences if the rescission would not conflict with any judgment or decree
if all existing Events of Default (except nonpayment of principal or interest
that has become due solely because of the acceleration) have been cured or
waived.
The Issuers are required, upon becoming aware of any Default or Event of
Default, to deliver to the Trustee a statement specifying such Default or Event
of Default and what action the Issuers are taking or propose to take with
respect thereto.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, member, manager, officer, employee, incorporator, stockholder
or controlling person of the Issuers or any Subsidiary Grantor, as such, will
have any liability for any obligations of the Issuers or any Subsidiary Grantor
under the Notes, the Indenture or the Registration Rights Agreement or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release will be part of the consideration for
issuance of the Notes and the Subsidiary Guarantees. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuers may, at their option and at any time, elect to have all of their
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes and Liquidated Damages, if any, when such payments are due from
the trust referred to below, (ii) the Issuers' obligations concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and the Issuers' obligations in connection therewith
and (iv) the Legal Defeasance provisions of the Indenture.
In addition, the Issuers may, at their option and at any time, elect to have
their obligations released with respect to certain material covenants that are
described herein ("Covenant Defeasance") and thereafter any omission to comply
with such obligations shall not constitute a Default or Event of Default with
respect to the Notes. In the event Covenant Defeasance occurs, certain events
(not including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(i) the Issuers must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if
any, and interest on the outstanding Notes on the stated maturity or on
the applicable redemption date, as the case may be, and the Issuers
must specify whether the Notes are being defeased to maturity or to a
particular redemption date;
(ii) in the case of Legal Defeasance, the Issuers shall have delivered to
the Trustee an Opinion of Counsel confirming that (A) the Issuers have
received from, or there has been published by, the Internal Revenue
Service a ruling or (B) since the Issue Date, there has been a change
in the applicable Federal income tax law, in either case to the effect
that, and based thereon such Opinion of
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Counsel shall confirm that, the Holders will not recognize income, gain
or loss for Federal income tax purposes as a result of such Legal
Defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Issuers shall have delivered
to the Trustee an Opinion of Counsel confirming that the Holders will
not recognize income, gain or loss for Federal income tax purposes as
a result of such Covenant Defeasance and will be subject to Federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not
occurred;
(iv) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit);
(v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Issuers
or any of the Subsidiaries is a party or by which the Issuers or any of
the Subsidiaries is bound;
(vi) the Issuers must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Issuers with the intent
of preferring the Holders over the other creditors of the Issuers with
the intent of defeating, hindering, delaying or defrauding creditors
of the Issuers or others; and
(vii) the Issuers must deliver to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating, subject to certain factual
assumptions and bankruptcy and insolvency exceptions, that all
conditions precedent provided for in the Indenture relating to the
Legal Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents, and the Issuers may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Issuers will not be required to transfer or exchange any Note
selected for redemption. The Issuers will not be required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the two succeeding paragraphs, the Indenture and the
Notes may be amended or supplemented with the consent of the Holders of at
least a majority in aggregate principal amount of the Notes then outstanding
(including consents obtained in connection with a tender offer or exchange
offer for Notes) and any existing Default or Event of Default or compliance
with any provision of the Indenture or the Notes may be waived with the
consent of the Holders of a majority in aggregate principal amount of the then
outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder):
(i) reduce the principal amount of Notes whose Holders must consent to an
amendment, supplement or waiver;
(ii) reduce the principal of, or the premium (including, without
limitation, redemption premium) on, or change the fixed maturity of,
any Note; alter the provisions with respect to the payment on
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redemption of the Notes; or alter the price at which repurchases of the
Notes may be made pursuant to an Excess Proceeds Offer or Change of
Control Offer;
(iii) reduce the rate of or change the time for payment of interest on any
Note;
(iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in
aggregate principal amount of the Notes and a waiver of the payment
default that resulted from such acceleration);
(v) make any Note payable in money other than that stated in the Notes;
(vi) make any change in the provisions of the Indenture relating to waivers
of past Defaults with respect to, or the rights of Holders to receive,
payments of principal of or interest on the Notes;
(vii) waive a redemption payment with respect to any Note;
(viii) adversely affect the contractual ranking of the Notes or Subsidiary
Guarantees; or
(ix) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of the Holders, the
Issuers and the Trustee may amend or supplement the Indenture, the Notes and
the Security Documents to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Issuers' or the Subsidiary
Guarantors' obligations to Holders in the case of a merger or consolidation,
to make any change that would provide any additional rights or benefits to the
Holders or that does not adversely affect the legal rights of any such Holder
under the Indenture or the Notes, to release any Subsidiary Guaranty permitted
to be released under the terms of the Indenture, or to comply with
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Issuers, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; provided, that, if the Trustee acquires any conflicting
interest, it must eliminate such conflict within 90 days, apply to the
Commission for permission to continue, or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
occurs (and is not cured), the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent person in the conduct of his
or her own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or
expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full definition of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means Indebtedness of a Person existing at the time such
Person is merged with or into the Company or a Restricted Subsidiary or
becomes a Restricted Subsidiary, other than Indebtedness incurred in
connection with, or in contemplation of, such Person merging with or into the
Company or a Restricted Subsidiary or becoming a Restricted Subsidiary.
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"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, will mean
(a) the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise or (b) beneficial
ownership of 10% or more of the voting securities of such Person.
"Applicable Capital Gain Tax Rate" means a rate equal to the sum of (i) the
highest marginal Federal capital gain tax rate applicable to an individual who
is a citizen of the United States plus (ii) an amount equal to the sum of the
highest marginal state and local capital gain tax rates applicable to an
individual who is a resident of the State of New York, multiplied by a factor
equal to 1 minus the rate described in clause (i) above.
"Applicable Income Tax Rate" means a rate equal to the sum of (i) the
highest marginal Federal income tax rate applicable to an individual who is a
citizen of the United States plus (ii) an amount equal to the sum of the
highest marginal state and local income tax rates applicable to an individual
who is a resident of the State of New York, multiplied by a factor equal to 1
minus the rate described in clause (i) above.
"Asset Sale" means any (i) transfer (as defined), other than in the ordinary
course of business, of any assets of the Company or any Restricted Subsidiary;
(ii) direct or indirect issuance or sale of any Capital Stock of any Restricted
Subsidiary (other than directors' qualifying shares), in each case to any
Person (other than the Company or a Restricted Subsidiary); or (iii) Event of
Loss. For purposes of this definition, (a) any series of transactions that are
part of a common plan shall be deemed a single Asset Sale and (b) the term
"Asset Sale" shall not include (1) any series of transactions that have a fair
market value (or result in gross proceeds) of less than $1 million, until the
aggregate fair market value and gross proceeds of the transactions excluded
from the definition of Asset Sale pursuant to this clause (b)(1) exceed $5
million, or (2) any disposition of all or substantially all of the assets of
the Company that is governed under and complies with the terms of the covenant
described under "--Merger, Consolidation or Sale of Assets."
"Bankruptcy Code" means the United States Bankruptcy Code, codified at 11
U.S.C. (S)101-1330, as amended.
"BDI" means Barden Development, Inc., an Indiana corporation.
"BDI Pledge Agreement" means that certain Pledge Agreement executed by BDI
and Gary Riverboat Gaming, LLC providing for a pledge of the entire membership
interest in the Company held by each of them in favor of the Trustee, for the
ratable benefit of the Holders of the Notes, as the same may be amended in
accordance with the terms thereof and the Indenture.
"beneficial owner" has the meaning attributed to it in Rules 13d-3 and 13d-5
under the Exchange Act (as in effect on the Issue Date), whether or not
applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time.
"Berthing Agreement" means the Majestic Berthing Agreement, dated as of
April 23, 1996, by and between the Company and the BHR Joint Venture.
"BHR Attributed Debt" means the product of (i) the aggregate principal
amount of all outstanding Indebtedness incurred pursuant to clause (a)(ii)
under the caption "--Restrictions on BHR Joint Venture" times (ii) the
Company's percentage interest in the BHR Joint Venture; provided that any such
Indebtedness shall cease to be BHR Attributed Debt, as of the first date after
the date such Indebtedness is so incurred on which the Company can incur at
least $1.00 of additional Indebtedness under the Interest Coverage Ratio Test
set forth in the covenant described under the caption "--Limitation or
Incurrence of Indebtedness."
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"BHR Joint Venture" means Buffington Harbor Riverboats, LLC, a Delaware
limited liability company, in which the Company currently owns a 50% membership
interest, and any other Flow Through Entity owned solely by the members of the
BHR Joint Venture.
"BHR Operating Agreement" means the First Amended and Restated Operating
Agreement of the BHR Joint Venture, made as of October 31, 1995, as amended, by
and between Trump Indiana, Inc., a Delaware corporation, and the Company.
"BHR Pledge Agreement" means that certain Pledge Agreement executed by the
Company, providing for a pledge of the Company's entire membership interest in
the BHR Joint Venture in favor of the Trustee, for the ratable benefit of the
Holders of the Notes, as the same may be amended in accordance with the terms
thereof and the Indenture.
"Business Day" means any day other than a Legal Holiday.
"Capital" means The Majestic Star Casino Capital Corp., an Indiana
corporation and a wholly owned subsidiary of the Company.
"Capital Lease Obligation" means, as to any Person, the obligations of such
Person under a lease that are required to be classified and accounted for as
capital lease obligations under GAAP, and the amount of such obligations at any
date shall be the capitalized amount of such obligations at such date,
determined in accordance with GAAP.
"Capital Stock" means, (i) with respect to any Person that is a corporation,
any and all shares, interests, participations, rights or other equivalents
(however designated) of corporate stock, (ii) with respect to a limited
liability company, any and all membership interests, and (iii) with respect to
any other Person, any and all partnership, joint venture or other equity
interests of such Person.
"Cash Equivalent" means (i) any evidence of Indebtedness issued or directly
and fully guaranteed or insured by the United States of America or any agency
or instrumentality thereof (provided that the full faith and credit of the
United States of America is pledged in support thereof); (ii) time deposits and
certificates of deposit and commercial paper or bankers acceptance issued by
the parent corporation of any domestic commercial bank of recognized standing
having combined capital and surplus in excess of $250,000,000 and commercial
paper issued by others rated at least A-2 or the equivalent thereof by Standard
& Poor's Corporation or at least P-2 or the equivalent thereof by Moody's
Investors Service, Inc. and in each case maturing within one year after the
date of acquisition; (iii) investments in money market funds substantially all
of whose assets comprise securities of the type described in clauses (i) and
(ii) above and (iv) repurchase obligations for underlying securities of the
types and with the maturities described above.
"Casino" means a gaming establishment owned by the Company or a Restricted
Subsidiary and containing at least 500 slot machines and 10,000 square feet of
space dedicated to the operation of games of chance.
"Change of Control" means
(i) any merger or consolidation of the Company with or into any Person or
any sale, transfer or other conveyance, whether direct or indirect, of
all or substantially all of the assets of the Company, on a
consolidated basis, in one transaction or a series of related
transactions, if, immediately after giving effect to such
transaction(s), any "person" or "group" (as such terms are used for
purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or
not applicable) (other than an Excluded Person) is or becomes the
"beneficial owner," directly or indirectly, of more than 50% of the
total voting power in the aggregate of the Voting Stock of the
transferee(s) or surviving entity or entities,
(ii) any "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable) (other than an Excluded Person) is or becomes the
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"beneficial owner," directly or indirectly, of more than 50% of the
total voting power in the aggregate of the Voting Stock of the Company,
(iii) during any period of 12 consecutive months after the Issue Date,
individuals who at the beginning of any such 12-month period
constituted the Managers of the Company (together with any new
directors whose election by such Managers or whose nomination for
election by the members of the Company was approved by a vote of a
majority of the directors then still in office who were either
directors at the beginning of such period or whose election or
nomination for election was previously so approved, including new
directors designated in or provided for in an agreement regarding the
merger, consolidation or sale, transfer or other conveyance, of all
or substantially all of the assets of the Company, if such agreement
was approved by a vote of such majority of directors) cease for any
reason to constitute a majority of the Managers of the Company then
in office,
(iv) the Company adopts a plan of liquidation,
(v) the first day on which the Company fails to own 100% of the issued and
outstanding Equity Interests of Capital, or
(vi) the first day on which (A) the Company fails to own at least 45% of
issued and outstanding Equity Interests of the BHR Joint Venture, (B)
any Person owns a greater percentage interest than the Company in the
BHR Joint Venture or (C) any Excluded Person directly or indirectly
owns any interest in the BHR Joint Venture other than the interest
owned by the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means The Majestic Star Casino, LLC, an Indiana limited liability
company.
"Consolidated Cash Flow" means, with respect to any Person (the referent
Person) for any period,
(a) consolidated income (loss) from operations of such Person and its
subsidiaries for such period, determined in accordance with GAAP, plus
(b) to the extent such amounts are deducted in calculating such income
(loss) from operations of such Person for such period, and without
duplication (i) amortization, depreciation and other non-cash charges
(including, without limitation, amortization of goodwill, deferred
financing fees, and other intangibles but excluding (x) non-cash
charges incurred after the Issue Date that require an accrual of or a
reserve for cash charges for any future period and (y) normally
recurring accruals such as reserves against accounts receivables), and
(ii) Pre-Opening Expenses;
provided, that (1) the income from operations of any Person that is not a
Wholly Owned Subsidiary of the referent Person or that is accounted for by the
equity method of accounting will be included only to the extent of the amount
of dividends or distributions paid during such period to the referent Person or
a Wholly Owned Subsidiary of the referent Person, (2) the income from
operations of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition will be excluded, and (3) the
income from operations of any Restricted Subsidiary will not be included to the
extent that declarations of dividends or similar distributions by that
Restricted Subsidiary are not at the time permitted, directly or indirectly, by
operation of the terms of its organizational documents or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its owners.
"Consolidated Interest Expense" means, with respect to any Person for any
period, (a) the consolidated interest expense of such Person and its
subsidiaries for such period, whether paid or accrued (including amortization
of original issue discount, noncash interest payment, and the interest
component of Capital Lease Obligations), to the extent such expense was
deducted in computing Consolidated Net Income of such Person for such period
less (b) amortization expense, write-off of deferred financing costs and any
charge related to any premium or penalty paid, in each case accrued during such
period in connection with redeeming or retiring any Indebtedness before its
stated maturity, as determined in accordance with GAAP, to the extent such
expense, cost or charge was included in the calculation made pursuant to clause
(a) above.
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"Consolidated Net Income" means, with respect to any Person (the referent
Person) for any period, the aggregate of the Net Income of such Person and its
subsidiaries for such period, determined on a consolidated basis in accordance
with GAAP; provided, that (i) the Net Income of any Person relating to any
portion of such period that such Person (a) is not a Wholly Owned Subsidiary of
the referent Person or (b) is accounted for by the equity method of accounting
will be included only to the extent of the amount of dividends or distributions
paid to the referent Person or a Wholly Owned Subsidiary of the referent Person
during such portion of such period, (ii) the Net Income of any Person acquired
in a pooling of interests transaction for any period prior to the date of such
acquisition will be excluded, and (iii) the Net Income of any Restricted
Subsidiary will not be included to the extent that declarations of dividends or
similar distributions by that Restricted Subsidiary are not at the time
permitted, directly or indirectly, by operation of the terms of its
organizational documents or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its owners.
"Consolidated Net Worth" means, with respect to any Person, the total
stockholders' (or members') equity of such Person determined on a consolidated
basis in accordance with GAAP, adjusted to exclude (to the extent included in
calculating such equity), (i) the amount of any such stockholders' (or
members') equity attributable to Disqualified Capital Stock or treasury stock
of such Person and its consolidated subsidiaries, and (ii) all upward
revaluations and other write-ups in the book value of any asset of such Person
or a consolidated subsidiary of such Person subsequent to the Issue Date, and
(iii) all Investments in subsidiaries of such Person that are not consolidated
subsidiaries and in Persons that are not subsidiaries of such Person.
"Credit Facility" means (a) the credit facility, dated within 45 days of the
Issue Date (the "Original Credit Facility"), between the Company and the lender
thereunder (any related notes, guarantees, collateral documents, instruments
and agreements executed in connection therewith) and (b) any amendment,
modification, supplement, refunding, refinancing or replacement thereof that
(i) has terms and conditions (including with respect to applicable interest
rates and fees) customary for similar facilities extended to borrowers
comparable to the Company, and (ii) does not permit the Company to incur
Indebtedness in an aggregate principal amount at any time outstanding in excess
of $20.0 million.
"Default" means any event that is, or after notice or the passage of time or
both would be, an Event of Default.
"Development Agreement" means the Development Agreement, dated March 26,
1996, by and between the Company and the City of Gary, Indiana.
"Disqualified Capital Stock" means any Equity Interest that (i) either by
its terms (or by the terms of any security into which it is convertible or for
which it is exchangeable) is or upon the happening of an event would be
required to be redeemed or repurchased prior to the final stated maturity of
the Notes or is redeemable at the option of the holder thereof at any time
prior to such final stated maturity, or (ii) is convertible into or
exchangeable at the option of the issuer thereof or any other Person for debt
securities.
"Equity Holder" means (a) with respect to a corporation, each holder of
stock of such corporation, (b) with respect to a limited liability company or
similar entity, each member of such limited liability company or similar
entity, (c) with respect to a partnership, each partner of such partnership and
(d) with respect to any disregarded entity, the owner of such entity.
"Equity Interests" means Capital Stock or warrants, options or other rights
to acquire Capital Stock (but excluding any debt security that is convertible
into, or exchangeable for, Capital Stock).
"Event of Loss" means, with respect to any property or asset, any (i) loss,
destruction or damage of such property or asset or (ii) any condemnation,
seizure or taking, by exercise of the power of eminent domain or otherwise, of
such property or asset, or confiscation or requisition of the use of such
property or asset.
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"Excluded Assets" means (i) cash, deposit accounts and other cash
equivalents; (ii) assets securing Purchase Money Obligations or Capital Lease
Obligations permitted to be incurred under the Indenture; (iii) any agreements,
permits, licenses or the like that cannot be subject to a Lien under the
Security Documents without the consent of third parties, which consent is not
obtainable by the Company; and (iv) all Gaming Licenses; provided, that
Excluded Assets does not include the proceeds of the assets under clauses (ii);
(iii) or (iv) or of any other Collateral to the extent such proceeds do not
constitute Excluded Assets under clause (i) above; without limiting the
foregoing, Excluded Assets shall include gaming equipment subject to such
Purchase Money Obligations or Capital Lease Obligations, whether or not such
gaming equipment is located on or attached to the Majestic Star Casino Vessel.
"Excluded Person" means (i) any employee benefit plan of the Company or any
trustee or similar fiduciary holding Capital Stock of the Company for or
pursuant to the terms of any such plan, (ii) BDI, (iii) Barden Management,
Inc., so long as it is owned by Don H. Barden, (iv) Don H. Barden or his spouse
or an entity controlled by either of them, (v) the estate of Don H. Barden,
(vi) any descendant of Don H. Barden or the spouse of any such descendant,
(vii) the estate of any such descendant or the spouse of any such descendant,
(viii) any trust or other arrangement for the benefit of the spouse of Don H.
Barden or any such descendant or the spouse of any such descendant and (ix) any
charitable organization or trust established by Don H. Barden.
"FF&E" means furniture, fixture and equipment acquired by the Company or a
Restricted Subsidiary in the ordinary course of business for use in the
operation of a Casino.
"FF&E Financing" means Purchase Money Obligations or Capital Lease
Obligations incurred solely to acquire FF&E; provided, that the principal
amount of such Indebtedness does not exceed the cost (including sales and
excise taxes, installation and delivery charges and other direct costs and
expenses) of the FF&E purchased or leased with the proceeds thereof.
"FF&E Lender" means a Person that is not an Affiliate of the Company and is
a lender under FF&E Financing.
"Flow Through Entity" means an entity that (a) for Federal income tax
purposes constitutes (i) an "S corporation" (as defined in Section 1361(a) of
the Code), (ii) a "qualified subchapter S subsidiary" (as defined in Section
1361(b)(3)(B) of the Code), (iii) a "partnership" (within the meaning of
Section 7701(a)(2) of the Code) other than an "publicly traded partnership" (as
defined in Section 7704 of the Code), or (iv) a business entity that is
disregarded as an entity separate from its owner under the Code, the Treasury
Regulations or any published administrative guidance of the Internal Revenue
Service (the entities described in the immediately preceding clauses (i), (ii),
(iii) and (iv), a "Federal Flow Through Entity") and (b) for state and local
jurisdictions in respect of which Permitted Tax Distributions are being made,
is subject to treatment on a basis under applicable state or local income tax
law substantially similar to a Federal Flow Through Entity.
"gaap" means generally accepted accounting principles, as in effect from
time to time, set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession, and in the rules and regulations of the
Commission.
"GAAP" means gaap as in effect on the Issue Date.
"Gaming Authorities" means any agency, authority, board, bureau, commission,
department, office or instrumentality of any nature whatsoever of the United
States or foreign government, any state, province or any city or other
political subdivision, whether now or hereafter existing, or any officer or
official thereof, including, without limitation, the IGC and any other agency
with authority to regulate any gaming operation (or proposed gaming operation)
owned, managed or operated by the Company or any of its Subsidiaries.
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"Gaming Licenses" means every material license, material franchise or other
material approval or authorization required to own, lease, operate or otherwise
conduct or manage riverboat, dockside or land-based gaming activities in any
state or jurisdiction in which the Company or any of its Restricted
Subsidiaries conducts business (including, without limitation, all such
licenses granted by the IGC under the Indiana Riverboat Gambling Act, and the
rules and regulations promulgated thereunder), and all applicable liquor
licenses.
"Gaming Vessel" means a water-based casino (i) that is substantially similar
in size and space to the Majestic Star Casino Vessel, (ii) with at least the
same overall qualities and amenities as the Majestic Star Casino Vessel, and
(iii) that is developed, constructed and equipped to be in compliance with all
Federal, state and local laws, including, without limitation, the requirements
of the Indiana Riverboat Gambling Act. In the event the laws of the State of
Indiana change to permit the development and operation of land-based casinos,
the term "Gaming Vessel" shall be deemed to include a land-based casino meeting
the requirements of clauses (i), (ii) and (iii) above.
"Government Securities" means (i) direct obligations of the United States of
America for the timely payment of which its full faith and credit is pledged or
(ii) obligations of a Person controlled or supervised by and acting as an
agency or instrumentality of the United States of America the timely payment of
which is unconditionally guaranteed as a full faith and credit obligation by
the United States of America, which, in either case, are not callable or
redeemable at the option of the issuer thereof, and shall also include a
depository receipt issued by a bank (as defined in Section 3(a)(2) of the
Securities Act), as custodian with respect to any such Government Security or a
specific payment of principal of or interest on any such Government Security
held by such custodian for the account of the holder of such depository
receipt; provided, that (except as required by law) such custodian is not
authorized to make any deduction from the amount payable to the holder of such
depository receipt from any amount received by the custodian in respect of the
Government Security or the specific payment of principal of or interest on the
Government Security evidenced by such depository receipt.
"Governmental Authority" means any agency, authority, board, bureau,
commission, department, office or instrumentality of any nature whatsoever of
the United States or foreign government, any state, province or any city or
other political subdivision or otherwise and whether now or hereafter in
existence, or any officer or official thereof, and any maritime authority.
"guaranty" or "guarantee," used as a noun, means any guaranty (other than by
endorsement of negotiable instruments for collection in the ordinary course of
business), direct or indirect, in any manner (including, without limitation,
letters of credit and reimbursement agreements in respect thereof), of all or
any part of any Indebtedness or other Obligation. "guarantee," used as a verb,
has a correlative meaning.
"Harbor Lease" means the Harbor Lease Agreement, dated as of June 29, 1995,
by and between Trump Indiana, Inc. and Lehigh Portland Cement Company as
assigned by Trump Indiana, Inc. to the BHR Joint Venture pursuant to the
Assignment of Harbor Lease Agreement, dated as of October 31, 1995, by and
between Trump Indiana, Inc. and the BHR Joint Venture.
"Hedging Obligations" means, with respect to any Person, the Obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Holder" means the Person in whose name a Note is registered in the register
of the Notes.
"IGC" means the Indiana Gaming Commission, or any successor Gaming
Authority.
"Indebtedness" of any Person means (without duplication) (i) all liabilities
and obligations, contingent or otherwise, of such Person (A) in respect of
borrowed money (regardless of whether the recourse of the lender is
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to the whole of the assets of such Person or only to a portion thereof), (B)
evidenced by bonds, debentures, notes or other similar instruments, (C)
representing the deferred purchase price of property or services (other than
trade payables on customary terms incurred in the ordinary course of business),
(D) created or arising under any conditional sale or other title retention
agreement with respect to property acquired by such Person (even though the
rights and remedies of the seller or lender under such agreement in the event
of default are limited to repossession or sale of such property), (E)
representing Capital Lease Obligations, (F) under bankers' acceptance and
letter of credit facilities, (G) to purchase, redeem, retire, defease or
otherwise acquire for value any Disqualified Capital Stock, or (H) in respect
of Hedging Obligations; (ii) all Indebtedness of others that is guaranteed by
such Person; and (iii) all Indebtedness of others that is secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien on property (including, without
limitation, accounts and contract rights) owned by such Person, even though
such Person has not assumed or become liable for the payment of such
Indebtedness, provided, that the amount of such Indebtedness shall (to the
extent such Person has not assumed or become liable for the payment of such
Indebtedness) be the lesser of (x) the fair market value of such property at
the time of determination and (y) the amount of such Indebtedness. The amount
of Indebtedness of any Person at any date shall be the outstanding balance at
such date of all unconditional obligations as described above and the maximum
liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date. Notwithstanding the
foregoing, the term Indebtedness shall not include obligations arising from the
honoring by a bank or other financial institution of a check, draft or similar
instrument drawn against insufficient funds in the ordinary course of business,
provided, that such obligation is extinguished within two business days of its
incurrence. The principal amount outstanding of any Indebtedness issued with
original issue discount is the accredited value of such Indebtedness.
"Issuers" means Capital and the Company.
"Interest Coverage Ratio" means, for any period, the ratio of (i)
Consolidated Cash Flow of the Company for such period, to (ii) Consolidated
Interest Expense of the Company for such period. In calculating Interest
Coverage Ratio for any period, pro forma effect shall be given to the
incurrence, assumption, guarantee, repayment, repurchase, redemption or
retirement by the Company or any of its Subsidiaries of any Indebtedness
subsequent to the commencement of the period for which the Interest Coverage
Ratio is being calculated, as if the same had occurred at the beginning of the
applicable period. For purposes of making the computation referred to above,
acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including all mergers and consolidations, subsequent to the
commencement of such period shall be calculated on a pro forma basis, assuming
that all such acquisitions, mergers and consolidations had occurred on the
first day of such period. Without limiting the foregoing, the financial
information of the Company with respect to any portion of such period that
falls before the Issue Date shall be adjusted to give pro forma effect to the
issuance of the Notes and the application of the proceeds therefrom as if they
had occurred at the beginning of such period.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans,
guarantees, advances or capital contributions (excluding (i), payroll
commission, travel and similar advances to officers and employees of such
Person made in the ordinary course of business and (ii) bona fide accounts
receivable arising from the sale of goods or services in the ordinary course of
business consistent with past practice), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, and any
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP.
"Issue Date" means the date upon which the Notes are first issued.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed.
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"Lien" means any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind, regardless of whether filed, recorded or otherwise
perfected under applicable law (including any conditional sale or other title
retention agreement, any lease in the nature thereof, any option or other
agreement to sell or give a security interest in and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or
equivalent statutes) of any jurisdiction).
"Majestic Star Casino Vessel" means the Majestic Star riverboat casino
currently operated by the Company.
"Management Agreement" means that certain Management Agreement, dated the
Issue Date, by and between the Company and BDI, pursuant to which the Company
will pay to BDI fees for acting as the Manager of the Company, which fees, for
any fiscal quarter, shall not exceed 5% of Consolidated Cash Flow for the
immediately preceding fiscal quarter.
"Managers" means (i) for so long as the Company is a limited liability
company, the Managers appointed pursuant to the Operating Agreement or (ii)
otherwise, the Board of Directors of the Company.
"Members" means the members of the Company.
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person for such period, determined in accordance with
GAAP, reduced by the maximum amount of Permitted Tax Distributions for such
period, excluding (to the extent included in calculating such net income) (i)
any gain or loss, together with any related taxes paid or accrued on such gain
or loss, realized in connection with any Asset Sales and dispositions pursuant
to sale-leaseback transactions, and (ii) any extraordinary gain or loss,
together with any related taxes paid or accrued on such gain or loss.
"Net Proceeds" means the aggregate proceeds received in the form of cash or
Cash Equivalents in respect of any Asset Sale (including issuance or other
payments in an Event of Loss and payments in respect of deferred payment
obligations and any cash or Cash Equivalents received upon the sale or
disposition of any non-cash consideration received in any Asset Sale, in each
case when received), net of
(i) the reasonable and customary direct out-of-pocket costs relating to
such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions), other than any such
costs payable to an Affiliate of the Company,
(ii) taxes required to be paid by the Company, any of its Subsidiaries, or
any Equity Holder of the Company (or, in the case of any Company
Equity Holder that is a Flow Through Entity, the Upper Tier Equity
Holder of such Flow Through Entity) in connection with such Asset Sale
in the taxable year that such sale is consummated or in the
immediately succeeding taxable year, the computation of which shall
take into account the reduction in tax liability resulting from any
available operating losses and net operating loss carryovers, tax
credits and tax credit carryforwards, and similar tax attributes,
(iii) amounts required to be applied to the permanent repayment of
Indebtedness in connection with such Asset Sale, and
(iv) appropriate amounts provided as a reserve by the Company or any
Restricted Subsidiary, in accordance with GAAP, against any
liabilities associated with such Asset Sale and retained by the
Company or such Restricted Subsidiary, as the case may be, after such
Asset Sale (including, without limitation, as applicable, pension and
other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification
arising from such Asset Sale).
"Obligation" means any principal, premium, interest, penalty, fee,
indemnification, reimbursement, damage and other obligation and liability
payable under the documentation governing any liability.
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"Officers' Certificate" means a certificate signed on behalf of the Issuers
by two Officers of each of the Company and Capital, in each case, one of whom
must be the President, Chief Operating and Financial Officer, Treasurer,
Controller or a Senior Vice President.
"Opinion of Counsel" means an opinion from legal counsel who is reasonably
acceptable to the Trustee. Such counsel may be an employee of or counsel to the
Company, any Subsidiary of the Company or the Trustee.
"Permitted Investments" means
(i) Investments in the Company or in any Wholly Owned Subsidiary;
(ii) Investments in Cash Equivalents;
(iii) Investments in a Person, if, as a result of such Investment, such
Person (A) becomes a Wholly Owned Subsidiary, or (B) is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the
Company or a Wholly Owned Subsidiary;
(iv) Hedging Obligations;
(v) Investments as a result of consideration received in connection with an
Asset Sale made in compliance with the covenant described under the
caption "--Limitation on Asset Sales";
(vi) Investments existing on the Issue Date;
(vii) Investments paid for solely with Capital Stock (other than
Disqualified Capital Stock) of the Company;
(viii) credit extensions to gaming customers in the ordinary course of
business, consistent with industry practice;
(ix) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company in
satisfaction of judgments and
(x) loans or advances to employees of the Company and its Subsidiaries made
in the ordinary course of business in an aggregate amount not to exceed
$500,000 at any one time outstanding.
"Permitted Liens" means:
(i) Liens arising by reason of any judgment, decree or order of any court
for an amount and for a period not resulting in an Event of Default
with respect thereto, so long as such Lien is being contested in good
faith and is adequately bonded, and any appropriate legal proceedings
that may have been duly initiated for the review of such judgment,
decree or order shall not have been finally adversely terminated or the
period within which such proceedings may be initiated shall not have
expired;
(ii) security for the performance of bids, tenders, trade, contracts (other
than contracts for the payment of money) or leases, surety bonds,
performance bonds and other obligations of a like nature incurred in
the ordinary course of business, consistent with industry practice;
(iii) Liens (other than Liens arising under ERISA) for taxes, assessments
or other governmental charges not yet due or that are being contested
in good faith and by appropriate proceedings if adequate reserves
with respect thereto are maintained on the books of the Company in
accordance with gaap;
(iv) Liens of carriers, warehousemen, mechanics, landlords, material men,
repairmen or other like Liens arising by operation of law in the
ordinary course of business consistent with industry practices (other
than Liens arising under ERISA) and Liens on deposits made to obtain
the release of such Liens if (a) the underlying obligations are not
overdue for a period of more than 30 days or (b) such Liens are being
contested in good faith and by appropriate proceedings and adequate
reserves with respect thereto are maintained on the books of the
Company in accordance with gaap;
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(v) easements, rights of way, zoning and similar restrictions and other
similar encumbrances or title defects incurred in the ordinary course
of business, consistent with industry practices that, in the aggregate,
are not substantial in amount, and that do not in any case materially
detract from the value of the property subject thereto (as such
property is used by the Company or a Subsidiary) or interfere with the
ordinary conduct of the business of the Company or any of its
Subsidiaries; provided, that such Liens are not incurred in connection
with any borrowing of money or any commitment to loan any money or to
extend any credit;
(vi) pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and
other types of social security legislation;
(vii) Liens securing Refinancing Indebtedness incurred in compliance with
the Indenture to refinance Indebtedness secured by Liens, provided,
(a) such Liens do not extend to any additional property or assets;
(b) if the Liens securing the Indebtedness being refinanced were
subordinated to or pari passu with the Liens securing the Notes or
any intercompany loan, as applicable, such new Liens are subordinated
to or pari passu with such Liens to the same extent, and any related
subordination or intercreditor agreement is confirmed; and (c) such
Liens are no more adverse to the interests of Holders than the Liens
replaced or extended thereby;
(viii) Liens that secure Acquired Debt, provided, that such Liens do not
extend to or cover any property or assets other than those of the
Person being acquired and were not put in place in anticipation of such
acquisition;
(ix) Liens that secure Purchase Money Obligations or Capital Lease
Obligations permitted to be incurred under the Indenture; provided
that such Liens (other than Permitted Vessel Liens) do not extend to
or cover any property or assets other than those being acquired or
developed;
(x) Liens securing Obligations under the Indenture, the Notes or the
Security Documents;
(xi) Liens on assets of the Company and the Subsidiaries, and the proceeds
of any or all the foregoing, securing Indebtedness incurred pursuant
to clause (a) under the caption "--Limitation on Incurrence of
Indebtedness";
(xii) with respect to any vessel included in the Collateral, certain
maritime liens, including liens for crew's wages and salvage;
(xiii) leases or subleases granted in the ordinary course of business not
materially interfering with the conduct of the business of the
Company or any of the Restricted Subsidiaries;
(xiv) Liens arising from precautionary Uniform Commercial Code financing
statement filings regarding operating leases entered into by the
Company or any of its Subsidiaries in the ordinary course of
business; and
(xv) Liens on the BHR Joint Venture's rights as lessor under leases, which
Liens are to secure indebtedness of the BHR Joint Venture incurred
solely to finance the development, acquisition or construction of the
assets subject to such leases.
"Permitted Tax Distributions" in respect of the Company and each Subsidiary
that qualifies as a Flow Through Entity shall mean, with respect to any taxable
year, the sum of:
(a) the product of (i) the excess of (A) all items of taxable income or
gain (other than capital gain) allocated by the Company to Equity
Holders for such year over (B) all items of taxable deduction or loss
(other than capital loss) allocated to such Equity Holders by the
Company, for such year and (ii) the Applicable Income Tax Rate, plus
(b) the product of (i) the net capital gain (i.e., net long-term capital
gain over net short-term capital loss), if any, allocated by the
Company to Equity Holders for such year and (ii) the Applicable Capital
Gain Tax Rate, plus
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(c) the product of (i) the net short-term capital gain (i.e., net short-
term capital gain in excess of net long-term capital loss), if any,
allocated by the Company to Equity Holders for such year and (ii) the
Applicable Income Tax Rate, minus
(d) the aggregate Tax Loss Benefit Amount for the Company for such year;
provided, that in no event shall the Applicable Income Tax Rate or the
Applicable Capital Gain Tax Rate exceed the greater of (1) the highest
aggregate applicable effective marginal rate of Federal, state, and local
income to which a corporation doing business in the State of New York would be
subject in the relevant year of determination (as certified to the Trustee by a
nationally recognized tax accounting firm) plus 5%; and (2) 60%. For purposes
of calculating the amount of the Permitted Tax Distributions, the proportionate
part of the items of taxable income, gain, deduction, or loss (including
capital gain or loss) of any Subsidiary that is a Flow Through Entity shall be
included in determining the taxable income, gain, deduction, or loss (including
capital gain or loss) of the Company.
Estimated tax distributions shall be made within fifteen days following
March 31, May 31, August 31, and December 31 based upon an estimate of the
excess of (x) the tax distributions that would be payable for the period
beginning on January 1 of such year and ending on March 31, May 31, August 31,
and December 31 if such period were a taxable year (computed as provided above)
over (y) distributions attributable to all prior periods during such taxable
year.
Prior to making any estimated tax distribution, the Company shall require
each Equity Holder to agree that (a) promptly after the Company and each
Subsidiary file their respective annual tax return, (i) such Equity Holder
shall reimburse the Company to the extent the estimated tax distributions made
to such Equity Holder exceeded the actual Permitted Tax Distributions, as
determined on the basis of such tax returns filed in respect of such taxable
year for that Equity Holder and (ii) the Company shall make a further payment
to such Equity Holder to the extent such estimated tax distributions were less
than the tax distributions actually payable to such Equity Holder with respect
to such taxable year and (b) if the appropriate Federal or state taxing
authority finally determines that the amount of the items of taxable income,
gain, deduction, or loss (including capital gain or loss) of the Company or any
Subsidiary that is treated as a Flow Through Entity for any taxable year or the
aggregate Tax Loss Benefit Amounts carried forward to such taxable year should
be changed or adjusted, then (i) such Equity Holder shall reimburse the Company
to the extent the Permitted Tax Distributions previously made to such Equity
Holder in respect of that taxable year exceeded the Permitted Tax Distributions
with respect to such taxable year taking into account such change or adjustment
for such Equity Holder and (ii) the Company shall make a further payment to
such Equity Holder to the extent the Permitted Tax Distributions previously
paid to such Equity Holder were less than the Permitted Tax Distributions
payable to such Equity Holder with respect to such taxable year taking into
account such change or adjustment.
To the extent that any tax distribution would otherwise be made to any
Equity Holder at a time when an obligation of such Equity Holder to make a
payment to the Company pursuant to the previous paragraph remains outstanding,
the amount of any tax distribution to be made shall be reduced by the amounts
such Equity Holder is obligated to pay the Company.
"Permitted Vessel Lien" means a Lien on the Majestic Star Casino Vessel that
secures FF&E Financing; provided that (a) the FF&E Lender agrees (i) to release
such Lien upon satisfaction of such FF&E Financing, (ii) to release such Lien
upon payment (or promise of payment) to such FF&E Lender of that portion of the
proceeds of the sale of the Majestic Star Casino Vessel attributable to the
related FF&E and (iii) that such Lien is subordinate and inferior in every
respect to the Lien of the Trustee pursuant to the Preferred Ship Mortgage on
the hull and other equipment constituting the Majestic Star Casino Vessel
(other than the related FF&E) and (b) such Lien shall not have an adverse
impact on the Holders.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof, or any other entity.
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"Preferred Ship Mortgage" means the preferred ship mortgage on the Majestic
Star Casino Vessel, dated as of the Issue Date, by and between the Company and
the Trustee.
"Pre-Opening Expenses" means all costs of start-up activities that are
required to be expensed (and are not capitalized) in accordance with SOP 98-5.
"Public Equity Offering" means a bona fide underwritten public offering of
Qualified Capital Stock of the Company, pursuant to a registration statement
filed with and declared effective by the Commission in accordance with the
Securities Act.
"Purchase Money Obligations" means Indebtedness representing, or incurred to
finance (or to Refinance Indebtedness incurred to finance), the cost (i) of
acquiring any assets and (ii) of construction or build-out of facilities
(including Purchase Money Obligations of any other Person at the time such
other Person is merged with or into or is otherwise acquired by the Issuers);
provided, that (x) the principal amount of such Indebtedness does not exceed
80% of such cost, including construction charges, (y) any Lien securing such
Indebtedness does not extend to or cover any other asset or property other than
the asset or property being so acquired, constructed or built and (z) such
Indebtedness is (or the Indebtedness being Refinanced was) incurred, and any
Liens with respect thereto are granted, within 180 days of the acquisition or
commencement of construction or build-out of such property or asset.
"Qualified Capital Stock" means, with respect to any Person, Capital Stock
of such Person other than Disqualified Capital Stock.
"Related Business" means (a) the gaming and hotel businesses conducted by
the Company as of the Issue Date and any and all businesses that in the good
faith judgment of the Managers are materially related businesses or (b) a
business necessary to satisfy the Company's off-site development obligation
under the Development Agreement.
"Required Regulatory Redemption" means a redemption by the Issuers of any
Holder's Notes pursuant to, and in accordance with, any order of any
Governmental Authority with appropriate jurisdiction and authority relating to
a Gaming License, or to the extent necessary in the reasonable, good faith
judgment of the Managers of the Company to prevent the loss, failure to obtain
or material impairment or to secure the reinstatement of, any Gaming License,
where such redemption or acquisition is required because the Holder or
beneficial owner of Notes is required to be found suitable or to otherwise
qualify under any gaming laws and is not found suitable or so qualified within
a reasonable period of time.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means a Subsidiary other than an Unrestricted
Subsidiary.
"Return from Unrestricted Subsidiaries" means (a) 50% of any dividends or
distributions received by the Company or a Restricted Subsidiary from an
Unrestricted Subsidiary, to the extent that such dividends or distributions
were not otherwise included in Consolidated Net Income of the Company, plus (b)
to the extent not otherwise included in Consolidated Net Income of the Company,
an amount equal to the net reduction in Investments in Unrestricted
Subsidiaries resulting from (i) repayments of the principal of loans or
advances or other transfers of assets to the Company or any Restricted
Subsidiary from Unrestricted Subsidiaries or (ii) the sale or liquidation of
any Unrestricted Subsidiaries, plus (c) to the extent that any Unrestricted
Subsidiary of the Company is designated to be a Restricted Subsidiary, the fair
market value of the Company's Investment in such Subsidiary on the date of such
designation.
"Security Agreement" means that certain Security Agreement to encumber
substantially all of the assets of the Company, including the Company's
interest in the Berthing Agreement, in favor of the Trustee, for the ratable
benefit of the Holders of the Notes, as the same may be amended in accordance
with the terms thereof and the Indenture.
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"Security Documents" means, collectively, the BDI Pledge Agreement, the BHR
Pledge Agreement, the Preferred Ship Mortgage, the Security Agreement, the
Trademark Security Agreement, and any other agreements, instruments, financing
statements or other documents that evidence, set forth or limit the Lien of the
Trustee in the Collateral.
"subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity (including a limited liability company) of
which more than 50% of the total voting power of shares of Voting Stock thereof
is at the time owned or controlled, directly or indirectly, by such Person or
one or more of the other subsidiaries of that Person or a combination thereof
and (ii) any partnership in which such Person or any of its subsidiaries is a
general partner.
"Subsidiary" means any subsidiary of the Company.
"Subsidiary Guarantor" means any Restricted Subsidiary that has executed and
delivered in accordance with this Indenture an unconditional and irrevocable
Guarantee of the Issuers' obligations under the Notes and such Person's
successors and assigns.
"Subsidiary Guaranty" means an unconditional and irrevocable guaranty by a
Subsidiary Guarantor of the Obligations of the Issuers under the Notes and the
Indenture, as set forth in the Indenture, as amended from time to time in
accordance with the terms thereof.
"Tax Loss Benefit Amount" means, with respect to any taxable year, the
amount by which the Permitted Tax Distributions would be reduced were a net
operating loss or net capital loss from a prior taxable year of the Company
ending subsequent to the Issue Date carried forward to such taxable year;
provided, that for such purpose the amount of any such net operating loss or
net capital loss shall be utilized only once and in each case shall be carried
forward to the next succeeding taxable year until so utilized. For purposes of
calculating the Tax Loss Benefit Amount, the proportionate part of the items of
taxable income, gain, deduction, or loss (including capital gain or loss) of
any Subsidiary that is a Flow Through Entity for a taxable year of such
Subsidiary ending subsequent to the Issue Date shall be included in determining
the amount of net operating loss or net capital loss of the Company.
"Trademark Security Agreement" means that certain Trademark Security
Agreement executed by the Company to encumber the "Majestic Star Casino"
service mark in favor of the Trustee, for the ratable benefit of the Holders of
the Notes, as the same may be amended in accordance with the terms thereof and
the Indenture.
"Transfer" means, with respect to any asset, any direct or indirect sale,
assignment, transfer, lease, conveyance, or other disposition (including,
without limitation, by way of merger or consolidation).
"Unrestricted Subsidiary" means any Subsidiary that, at or prior to the time
of determination, shall have been designated by the Managers as an Unrestricted
Subsidiary; provided, that such Subsidiary does not hold any Indebtedness or
Capital Stock of, or any Lien on any assets of, the Company or any Restricted
Subsidiary. If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary as of such date. The Managers may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of any outstanding Indebtedness of such Unrestricted Subsidiary and
such designation shall only be permitted if (i) such Indebtedness is permitted
under the Interest Coverage Ratio test set forth in the covenant described
under the caption "--Certain Covenants--Limitation on Incurrence of
Indebtedness" calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period, and (ii) no
Default or Event of Default would be in existence following such designation.
The Company shall be deemed to make an Investment in each Subsidiary designated
as an Unrestricted Subsidiary immediately following such designation
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in an amount equal to the Investment in such Subsidiary and its subsidiaries
immediately prior to such designation. Any such designation by the Managers
shall be evidenced to the Trustee by filing with the Trustee a certified copy
of the resolution of the Managers giving effect to such designation and an
Officers' Certificate certifying that such designation complies with the
foregoing conditions and is permitted by the covenant described above under the
caption "--Certain Covenants--Limitation on Incurrence of Indebtedness."
"Upper Tier Equity Holder" means, in the case of any Flow Through Entity the
Equity Holder of which is, in turn, a Flow Through Entity, the person that is
ultimately subject to tax on a net income basis on the items of taxable income,
gain, deduction, and loss of the Company and its Subsidiaries that are Flow
Through Entities.
"Voting Stock" means, with respect to any Person, (i) one or more classes of
the Capital Stock of such Person having general voting power to elect at least
a majority of the Board of Directors, managers or trustees of such Person
(regardless of whether at the time Capital Stock of any other class or classes
have or might have voting power by reason of the happening of any contingency)
and (ii) any Capital Stock of such Person convertible or exchangeable without
restriction at the option of the holder thereof into Capital Stock of such
Person described in clause (i) above.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years (rounded to the nearest one-twelfth) obtained
by dividing (i) the then outstanding principal amount of such Indebtedness into
(ii) the total of the product obtained by multiplying (A) the amount of each
then remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect thereof,
by (B) the number of years (calculated to the nearest one-twelfth) that will
elapse between such date and the making of such payment.
"Wholly Owned Subsidiary" of any Person means a subsidiary of such Person
all the Capital Stock of which (other than directors' qualifying shares) is
owned directly or indirectly by such Person; provided, that (i) with respect to
the Company, the term Wholly Owned Subsidiary shall exclude Unrestricted
Subsidiaries and (ii) the BHR Joint Venture will be a Wholly Owned Subsidiary
of the Company so long as (a) the Company owns 90% or more of the outstanding
membership interests in the BHR Joint Venture and (b) the BHR Joint Venture is
a Restricted Subsidiary.
BOOK-ENTRY
The old notes were each registered in book-entry form and are represented by
two notes in fully registered form without interest coupons. These global notes
were deposited with the trustee as custodian for The Depository Trust Company
and registered in the name of DTC or its nominee.
The new notes will be represented by one or more notes in registered, global
form without interest coupons (collectively, the "Global Notes"). The Global
Notes will be deposited with the trustee as custodian for The Depository Trust
Company ("DTC"), in New York, New York, and registered in the name of DTC or
its nominee, in each case for credit to an account of a direct or indirect
participant as described below.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
notes in certificated form except in the limited circumstances described below.
See "--Exchange of Book-Entry Notes for Certificated Notes."
DEPOSITORY PROCEDURES
DTC has advised the Issuers that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of
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Participants. The Participants include securities brokers and dealers
(including the Initial Purchasers), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the "Indirect Participants").
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or Indirect Participants. The
ownership interest and transfer of ownership interest of each actual purchaser
of each security held by or on behalf of DTC are recorded on the records of the
Participants and Indirect Participants.
DTC has also advised the Issuers that pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchaser with portions of the principal
amount of Global Notes and (ii) ownership of such interests in the Global Notes
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC (with respect to Participants) or by
Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the Global Notes).
Investors in the Global Notes may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations that are Participants in such system. All interests in a Global
Note may be subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interest in a Global Note to such persons may be limited to
that extent. Because DTC can act only on behalf of Participants, which in turn
act on behalf of Indirect Participants and certain banks, the ability of a
person having a beneficial interest in a Global Note to pledge such interest to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such interest, may be affected by the lack of a
physical certificate evidencing such interest. For certain other restrictions
on the transferability of the Notes, see "--Exchange of Book-Entry Notes for
Certificated Notes."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal, premium, liquidated damages, if any,
and interest on a Global Note registered in the name of DTC or its nominee will
be payable by the Trustee to DTC or its nominee in its capacity as the
registered Holder under the Indenture. Under the terms of the Indenture, the
Issuers and the Trustee will treat the persons in whose names the Notes,
including the Global Notes, are registered as the owners thereof for the
purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, none of the Issuers, the Trustee or any agent of the
Issuers or the Trustee has or will have any responsibility or liability for (i)
any aspect of DTC's records or any Participant's or Indirect Participant's
records relating to or payments made on account of beneficial ownership
interests in the Global Notes, or for maintaining, supervising or reviewing any
of DTC's records or any Participant's or Indirect Participant's records
relating to the beneficial ownership interests in the Global Notes or (ii) any
other matter relating to the actions and practices of DTC or any of its
Participants or Indirect Participants.
DTC has advised the Issuers that its current practices, upon receipt of any
payment in respect of securities such as the Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in principal amount of beneficial interests in the relevant security
such as the Global Notes as shown on the records of DTC. Payments by
Participants and the Indirect Participants to the beneficial owners of Notes
will be governed by standing instructions and customary practices and will not
be the responsibility of DTC, the Trustee or the Issuers. None of the Issuers
or the Trustee will be liable for any delay by DTC or its Participants in
identifying the beneficial
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owners of the Notes, and the Issuers and the Trustee may conclusively rely on
and will be protected in relying on instructions from DTC or its nominee as the
registered owner of the Notes for all purposes.
Interests in the Global Notes will trade in DTC's Same-Day Funds Settlement
System and secondary market trading activity in such interests will, therefore,
settle in immediately available funds, subject in all cases to the rules and
procedures of DTC and its Participants. Transfers between Participants in DTC
will be effected in accordance with DTC's procedures, and will be settled in
same-day funds.
DTC has advised the Issuers that it will take any action permitted to be
taken by a Holder of Notes only at the direction of one or more Participants to
whose account DTC interests in the Global Notes are credited and only in
respect of such portion of the aggregate principal amount of the Notes as to
which such Participant or Participants has or have given direction. However, if
there is an Event of Default under the Notes, DTC reserves the right to
exchange Global Notes for legended Notes in certificated form, and to
distribute such Notes to its Participants.
The information in this section concerning DTC and its book-entry system has
been obtained from sources believed to be reliable, but the Issuers take no
responsibility for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among Participants in DTC it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Initial Purchaser nor
the Trustee will have any responsibility for the performance by DTC or its
Participants or Indirect Participants of their respective obligations under the
rules and procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive Notes in registered
certificated form if (i) DTC (x) notifies the Issuers that it is unwilling or
unable to continue as depositary for the Global Note and the Issuers thereupon
fail to appoint a successor depositary within 90 days or (y) has ceased to be a
clearing agency registered under the Exchange Act, or (ii) the Issuers, at
their option, notify the Trustee in writing that they elect to cause the
issuance of the Notes in certificated form. In addition, beneficial interests
in a Global Note may be exchanged for certificated Notes upon request but only
upon at least 20 days' prior written notice given to the Trustee by or on
behalf of DTC in accordance with customary procedures. In all cases,
certificated Notes delivered in exchange for any Global Note or beneficial
interest therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures) and will bear the restrictive legend referred to in
"Notice to Investors" unless the Issuers determine otherwise in compliance with
applicable law.
CERTIFICATED NOTES
Subject to certain conditions, any person having a beneficial interest in a
Global Note may, upon request to the Trustee, exchange such beneficial interest
for Notes in certificated form (a "Certificated Note"). Upon any such issuance,
the Trustee is required to register such Certificated Notes in the name of, and
cause the same to be delivered to, such person or persons (or the nominee of
any thereof). All such Certificated Notes would be subject to the legend
requirements described herein under "Notice to Investors." In addition, if (i)
the Issuers notify the Trustee in writing that the DTC (x) is no longer willing
or able to act as a depositary and the Issuers are unable to locate a qualified
successor within 90 days or (y) has ceased to be a clearing agency registered
under the Exchange Act or (ii) the Issuers, at their option, notify the Trustee
in writing that they elect to cause the issuance of Notes in the form of
Certificated Notes under the Indenture, then, upon surrender by the Global Note
Holder of its Global Note, Notes in such form will be issued to each person
that the Global Note Holder and the DTC identify as being the beneficial owner
of the related Notes.
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None of the Issuers or the Trustee will be liable for any delay by the
Global Note Holder or the DTC in identifying the beneficial owners of Notes and
the Trustee may conclusively rely on, and will be protected in relying on,
instructions from the Global Note Holder or the DTC for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes represented
by a Global Note (including principal, premium, if any, interest and liquidated
damages, if any, thereon) be made by wire transfer of immediately available
next day funds to the accounts specified by the Global Note Holder. With
respect to Certificated Notes, the Issuers will make all payments of principal,
premium, if any, interest and liquidated damages, if any, thereon by wire
transfer of immediately available funds to the accounts specified by the
Holders thereof or, if no such account is specified, by mailing a check to each
such Holder's registered address. The Issuers expect that secondary trading in
the Certificated Notes will also be settled in immediately available funds.
MATERIAL AGREEMENTS
OUR OPERATING AGREEMENT
We are a limited liability company organized under Indiana law. Our members
are Barden Development, Inc., which holds an 85% interest, and Gary Riverboat
Gaming, LLC, which holds a 15% interest. Don H. Barden is the sole beneficial
owner of both members.
Our operating agreement provides for certain rights and obligations among us
and our members, including with respect to the appointment of our manager and
restrictions on the transfer of membership units. Pursuant to our operating
agreement, our management is vested in our manager, Barden Development, Inc.
Our manager may resign at any time but may be removed only upon occurrence of
certain events and the vote of our members holding three-fourths of the
membership units not held by affiliates of our manager. If Barden Development,
Inc. ceases to be our manager, Barden Management, Inc. will serve as our
manager. Our operating agreement limits the transfer of our membership
interests. Any transfer of our membership interests is subject to the
discretionary approval of both our manager and the holders of a majority of our
membership interests. Additionally, any transfer must comply with all
applicable laws, including federal and state securities law and the Indiana
Riverboat Gambling Act.
MANAGEMENT AGREEMENT
On June 18, 1999, we entered into a Management Agreement with our manager,
Barden Development, Inc., to provide for, among other things, a management fee
payable by us to Barden Development, Inc. for acting as our manager. The fees
for any fiscal quarter are equal to 5% of our Consolidated Cash Flow (as
defined) for the immediately preceding fiscal quarter and may not be paid if we
are in default under the Indenture governing the Notes or if we do not meet
certain financial ratios as provided in the Indenture.
JOINT VENTURE AGREEMENT
We and our joint venture partner are each 50% members in the joint venture.
The Joint Venture Agreement requires each member to (i) make capital
contributions to the joint venture equal to one-half of the amount required for
the construction of agreed upon improvements and the funding of operations and
(ii) construct the contemplated common amenities in accordance with an agreed
upon budget.
The general affairs of the joint venture are governed by an Operating
Committee. The Operating Committee consists of four representatives, two
appointed by each member, and all four representatives must concur in any
action. If the Operating Committee is not able to agree upon a matter, the
matter is to be referred to a vote of the members. In addition, the members
also must decide on certain fundamental matters as
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specified in the Joint Venture Agreement. Most disputes arising out of the
Joint Venture Agreement that are not resolved by the members are subject to
resolution by arbitration. Excluded from the arbitration process are decisions
relative to changing the common amenities, changes in (or decisions involving
the enforcement of rights under) the Berthing Agreements, and increases in the
budget for the common amenities.
The Joint Venture Agreement establishes a Construction Committee consisting
of two representatives, one appointed by each member. The Construction
Committee is authorized to make decisions relating to routine construction
matters. The Construction Committee can only act upon the approval of both
representatives. If the representatives are not able to agree on a matter, it
is referred to a vote of the Operating Committee.
The Joint Venture Agreement also establishes a subcommittee to the Operating
Committee, consisting of the general managers of each of Majestic Star Casino
and our joint venture partner's gaming operation. This subcommittee is
authorized to make decisions involving the day-to-day operations of the joint
venture and can act only upon the approval of both general managers. If the
general managers are not able to agree on a matter, the matter is referred to
the Operating Committee.
A member loses its right to approve actions of the joint venture during any
period in which the member is in default under the Joint Venture Agreement.
Furthermore, the non-defaulting member may determine, in its sole discretion,
how and when the joint venture will enforce its rights with respect to the
defaulting member.
Events of default under the Joint Venture Agreement include a failure by a
member to make required capital contributions, bankruptcy, an event of default
under the Berthing Agreement, and any other failure of a member to perform its
obligations under the Joint Venture Agreement within 30 days after written
notice of default from the other member. The remedies for any such event of
default include (i) the loss by the member of its voting rights as described
above, and the loss of the voting rights of its representatives on the
construction committee and the operating committee, (ii) if the event of
default continues for 270 days, the non-defaulting member may acquire the
interest of the defaulting member in the joint venture (and its Berthing
Agreement) for $1.0 million, and (iii) other remedies available at law or in
equity. Furthermore, if the event of default involves a failure to make
required capital contributions, the other member may withdraw its capital
contribution, or be entitled to receive interest on its incremental capital
contribution, or require the defaulting member to pay interest in respect of
the capital contributions on which it defaulted.
BERTHING AGREEMENT
We and our joint venture partner each entered into separate berthing
agreements on April 23, 1996 with the joint venture. Each berthing agreement
obligates the joint venture to construct and maintain the common area
improvements (including parking lots, access roads, harbor improvements, other
infrastructure improvements and the pavilion), which are required for each
operator's gaming operations. Each berthing agreement also requires the joint
venture to carry insurance on the common area improvements and to reconstruct
or repair the common area improvements in the event of an insured casualty
(subject to certain dollar limitations as to reconstruction or repairs costing
more than available insurance proceeds).
Under its respective berthing agreement, each operator has the right to dock
its vessel at the mooring barge and the right to use substantially all of the
other common area improvements constructed by the joint venture. Each berthing
agreement also obligates the joint venture to provide specified services to
each of the operators in connection with the common area improvements,
including valet parking, shuttle buses, security, maintenance and food and
beverage services. Each operator is obligated to pay a license fee equal to
one-half of the amount by which the expenses of the joint venture exceed the
revenues of the joint venture.
We and our joint venture partner share equally in the operating expenses
related to the Buffington Harbor gaming complex, except for costs associated
with food and beverage, gift shop and valet operations, which are allocated on
a percentage of use by our and our joint venture partner's casino customers.
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Each berthing agreement imposes certain restrictions on the operations of
the operator, including a limitation on cruising rights so as to avoid
scheduling conflicts between the operators. Each berthing agreement also
provides certain remedies if the operator defaults in its obligations
thereunder, including, among other things, (i) a 100% increase in the license
fee during any period in which an operator has defaulted in the payment of its
license fee for more that 30 days, (ii) a suspension of gaming operations and
other rights if an event of default continues for more than 120 days, and (iii)
a buyout of the operator's rights in the joint venture and the berthing
agreement if an event of default continues for more than 270 days.
HARBOR LEASE AGREEMENT
Under a lease agreement dated June 29, 1995 with Lehigh Portland Cement, the
joint venture leases certain property that is integral to our gaming operations
as well as those of our joint venture partner. The property subject to the
Harbor Lease includes certain property abutting Buffington Harbor and on which
the docking and other support facilities for the Buffington Harbor facility are
located.
The Harbor Lease imposes certain limitations on the use of Buffington Harbor
and certain of its docks by us and our joint venture partner, including
limitations on cruises that would interfere with Lehigh Portland Cement's use
of the harbor or with certain rights Lehigh Portland Cement has granted to
Marblehead Lime Company to use the harbor. The Harbor Lease also requires the
joint venture to reimburse Lehigh Portland Cement for certain increases in its
operational costs caused by the joint venture's use of Buffington Harbor. We do
not believe that any of these limitations or requirements will have a material
adverse effect on our operations in light of the current and anticipated uses
of the docks and Buffington Harbor by Lehigh Portland Cement and Marblehead
Lime Company. No assurance can be given, however, with respect thereto because
neither we nor the joint venture has control over these factors.
The initial term of the Harbor Lease was extended to the earlier of December
31, 2005 or such time as the joint venture has obtained the necessary permits
for and constructed new harbor facilities. Since January 1998, the joint
venture has paid rent of $125,000 per month under the lease, of which we fund
$62,500. Prior to that time, the lease was rent-free. The harbor lease requires
the joint venture or its members to apply for the governmental permits
necessary for construction of, and to construct, a permanent harbor on the
shoreline of Lake Michigan lying immediately to the west of the existing
harbor. Construction of a new harbor will require the joint venture to acquire
permits from the U.S. Army Corps of Engineers, the Coast Guard and the Indiana
Department of Natural Resources, among others. The joint venture intends to
file applications for the permits by the end of 1999.
The joint venture is negotiating the purchase of the harbor and property
adjacent thereto, either directly or through an affiliate of the joint venture
or its members. In such event, the Harbor Lease would be terminated, and the
joint venture would have no further obligations with respect to constructing a
new harbor. We cannot assure you, however, that the harbor and adjacent
property can be purchased on favorable terms or at all or that the joint
venture will not have to fulfill its obligations under the Harbor Lease. If the
joint venture had to fulfill its obligations under the Harbor Lease by
constructing a new harbor, such construction would have a material adverse
effect on our operations and our financial condition.
AGREEMENT WITH CITY OF GARY, INDIANA
The City of Gary entered into a Development Agreement dated as of March 26,
1996, with us requiring us, among other things, to (i) invest $116.0 million in
various on-site and off-site improvements, (ii) pay the City of Gary an amount
equal to 3% of the Majestic Star Casino's adjusted gross receipts, as defined
in the Indiana Riverboat Gambling Act, (iii) obtain the insurance, bonds and/or
letters of credit required by the Indiana Riverboat Gambling Act, (iv) endeavor
to meet certain minority and local employment, union and vendor goals and (v)
pay a default payment in the amount of damages for failure to complete certain
on-site developments, the maximum amount of which is $12.0 million. In
addition, if we fail to complete the $10 million off-site development, the City
of Gary will have the right to obtain the benefits of the bond that was
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issued to the Indiana Gaming Commission. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
We have met or accrued a significant portion of the commitments relating to
(i) through (iv) in the preceding paragraph. We have already expended the $12
million for enhancements of our operations at Buffington Harbor and must
receive approval from the City of Gary that our expenditures satisfy that
component of our commitment under the development agreement. It is expected
that the investment of $10 million for off-site development, with particular
project(s) to be agreed to by the City of Gary, will be made by an affiliate of
the Company by December 31, 1999.
REGULATORY MATTERS
INDIANA
In 1993, Indiana enacted legislation permitting certain types of gaming
activity. The Indiana Riverboat Gambling Act authorizes the issuance of up to
11 riverboat gaming licenses on waterways located in Indiana counties which are
contiguous to Lake Michigan, the Ohio River or Patoka Lake. The Indiana
Riverboat Gambling Act strictly regulates the facilities, persons, associations
and practices related to gaming operations, including comprehensive law
enforcement provisions. The Indiana Riverboat Gambling Act vests the Indiana
Gaming Commission with the power and duties of administering, regulating and
enforcing the system of riverboat gaming in Indiana. Its jurisdiction extends
to every person, association, corporation, partnership and trust involved in
riverboat gaming operations in the State of Indiana.
Owner's Licenses
The Indiana Riverboat Gambling Act requires the owner of a riverboat gaming
operation to hold an owner's license issued by the Indiana Gaming Commission.
The Indiana Gaming Commission is authorized to issue 11 owner's licenses
statewide. Each license granted entitles the licensee to own and operate one
riverboat and gaming equipment as part of the gaming operation. A licensee may
own no more than a 10% interest in any other owner's license.
The Indiana Riverboat Gambling Act restricts the granting of the 11 owner's
licenses by location. The 11 licenses must be awarded as follows: (i) two
licenses for riverboats operating from Gary; (ii) one license for a riverboat
operating in Hammond; (iii) one license for a riverboat operating in East
Chicago; (iv) one license for a riverboat operating in any city located in
LaPorte, Porter or Lake counties, not including the above-named cities; (v)
five licenses for riverboats that operate upon the Ohio River from counties
contiguous thereto and with no more than one operating in any county; and (vi)
one license for a riverboat operating on Patoka Lake from either DuBois,
Crawford or Orange Counties. The Indiana Gaming Commission has not considered
applicants for the eleventh license since the Patoka Lake site has been
determined by the U.S. Army Corps of Engineers to be unsuitable for a casino
vessel project.
Each owner's license runs for a period of five years. Thereafter, the
license is subject to renewal on an annual basis upon a determination by the
Indiana Gaming Commission that the licensee continues to be eligible for an
owner's license under the Indiana Riverboat Gambling Act and the rules and
regulations adopted thereunder. All riverboat licensees have a continuing duty
to maintain suitability for licensure and are required to notify the Indiana
Gaming Commission of any material change in the information submitted in its
application or any other matter which would render the licensee ineligible. An
owner's license does not create a property right but is a revocable privilege
contingent upon continuing suitability for licensure. A licensed owner
undergoes a complete investigation every three years to determine that the
owner remains in compliance with the Indiana Riverboat Gambling Act.
Riverboat licensees are subject to extensive reporting requirements. In
addition, the Indiana Gaming Commission has independent investigating powers.
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The Indiana Gaming Commission may revoke, restrict or suspend an owner's
license at any time that the Indiana Gaming Commission determines the licensee
is in violation of the Indiana Riverboat Gambling Act or the rules and
regulations of the Indiana Gaming Commission or if the Indiana Gaming
Commission determines revocation of the license is in the best interest of
Indiana and will protect and enhance the credibility and integrity of riverboat
gambling operations. If the Indiana Gaming Commission determines that a
licensee is in violation of the Indiana Riverboat Gambling Act or the rules and
regulations promulgated by the Indiana Gaming Commission, then the Indiana
Gaming Commission may initiate a disciplinary proceeding to revoke, restrict or
suspend the license or take such other action, including imposition of civil
penalties, that the Indiana Gaming Commission deems necessary. If for any
reason a license is terminated, the assets of the riverboat gambling operation
must be secured and cannot be disposed of without the approval of the Indiana
Gaming Commission and the licensee remains under the jurisdiction of the
Indiana Gaming Commission until all matters related to the license have been
resolved.
A licensed owner may apply for and may hold other licenses that are
necessary for the operation of a riverboat, including licenses to sell
alcoholic beverages, a license to prepare and serve food and any other
necessary license. The Indiana Riverboat Gambling Act also requires that
officers, directors and employees of a gaming operation and suppliers of gaming
equipment, devices, and supplies and certain other suppliers be licensed.
Applicants for licensure must submit comprehensive application and personal
disclosure forms and undergo an exhaustive background investigation prior to
the issuance of a license. The applicant must also disclose the identity of
every shareholder or participant of the applicant and provide specific
information with respect to certain participants holding significant interests
(5% or greater) in the applicant. The Indiana Gaming Commission has the
authority to request specific information on any participant.
A riverboat owner licensee or any other person may not lease, hypothecate,
borrow money against or loan money against an owner's riverboat gaming license.
An ownership interest in an owner's riverboat gaming license may only be
transferred after receiving approval from the Indiana Gaming Commission and
upon compliance with the regulations issued under the Indiana Riverboat
Gambling Act.
Regulation of Gaming Operations
Wagering may not be conducted with money or other negotiable currency. No
person under the age of 21 is permitted to wager, and wagers may only be taken
from a person present on a licensed riverboat.
The Indiana Riverboat Gambling Act does not limit the maximum bet or per
patron loss. Minimum and maximum wagers on games are set by the licensee.
Riverboats operating in Indiana must be at least 150 feet long and have a
valid certificate of inspection from the U.S. Coast Guard to carry at least 500
passengers. Any riverboat that operates on the Ohio River must replicate, as
nearly as possible, historic Indiana steamboat passenger vessels of the
nineteenth century. Riverboats operating on Lake Michigan or Patoka Lake need
not meet this requirement.
Gaming sessions are generally required to be at least two hours and are
limited to a maximum duration of four hours. No gaming may be conducted while
the boat is docked, except (i) for 30-minute time periods at the beginning and
end of each cruise while the passengers are embarking and disembarking (total
gaming time is limited to four hours, however, including the pre- and post-
docking periods); and (ii) when weather, water or traffic conditions prevent
the boat from cruising. The Indiana Gaming Commission may grant extended cruise
hours in its discretion. If the master of the riverboat reasonably determines
and certifies in writing that specific weather, water or traffic conditions
present a danger to the riverboat and the riverboat's passengers and crew, the
riverboat may remain docked and gaming may take place until (i) the master
determines that the conditions have sufficiently diminished for the riverboat
to safely proceed; or (ii) the duration of the authorized excursion has
expired.
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After consultation with the U.S. Army Corps of Engineers, the Indiana Gaming
Commission may determine the available navigable waterways that are suitable
for the operation of riverboats under the Indiana Riverboat Gambling Act. If
the U.S. Army Corps of Engineers rescinds an approval for the operation of
riverboats on a waterway, a license issued under the Indiana Riverboat Gambling
Act becomes void and the holder may not conduct or continue gaming operations.
The Indiana Gaming Commission requires employees working on a riverboat to have
a valid merchant marine document from the U.S. Coast Guard.
The Indiana Riverboat Gambling Act imposes a 20% wagering tax on adjusted
gross receipts from gaming. The tax imposed is to be paid by the licensed owner
to the Indiana Department of State Revenue before the close of the business day
following the day when the wagers are made. The Indiana Riverboat Gambling Act
also requires that licensees pay a $3.00 admission tax for each person admitted
to a gaming excursion without regard to the actual fee, if any, paid by such
person. A riverboat license may be suspended or revoked for failure to pay such
tax. The Indiana Gaming Commission also has promulgated regulations requiring
riverboat owners to reimburse the Indiana Gaming Commission for the costs of
inspectors and agents required to be present during the conduct of gambling
operations. Further, the Indiana Gaming Commission may impose other fees and
assessments. Riverboats are assessed for property tax purposes as real property
and are taxed at rates determined by local taxing authorities. All Indiana
state excise taxes, use taxes and gross retail taxes apply to sales on a
riverboat.
The Indiana Gaming Commission may subject a licensee to fines, suspension or
revocation of its license for any act that is in violation of the Indiana
Riverboat Gambling Act, the regulations of the Indiana Gaming Commission, or
for any other fraudulent act. In addition, the Indiana Gaming Commission may
revoke an owner's license if the licensee has not begun regular riverboat
excursions prior to the end of the twelve month period following receipt of a
license from the Indiana Gaming Commission or if the Indiana Gaming Commission
determines that the revocation of the license is in the best interests of the
State of Indiana. A holder of a gaming license is required to post bond with
the Indiana Gaming Commission in an amount that the Indiana Gaming Commission
determines will adequately reflect the amount that a local community will
expend for infrastructure and other facilities associated with a riverboat
operation.
The Indiana Riverboat Gambling Act places special emphasis upon minority and
women's business enterprise participation in the riverboat industry. Any person
issued a riverboat owner's license must establish goals of expending at least
10% of the total dollar value of the licensee's contracts for goods and
services with minority business enterprises and 5% of the total dollar value of
the licensee's contracts for goods and services with women's business
enterprises.
An institutional investor (as defined in regulations promulgated by the
Indiana Gaming Commission) that acquires a direct or indirect beneficial
ownership interest of 5% or more of any riverboat licensee, through any class
of voting securities of the licensee or a holding company or intermediary
company of the licensee, is required to notify the Indiana Gaming Commission
and to provide additional information, and may be subject to a finding of
suitability. A person, other than an institutional investor, who acquires a
direct or indirect beneficial ownership interest of 5% or more of any riverboat
licensee, through any class of voting securities of the licensee or a holding
company or intermediary company of the licensee, other than an institutional
investor, is required to apply to the Indiana Gaming Commission for a finding
of suitability.
A riverboat owner licensee may not enter into or perform any contract or
transaction in which it transfers or receives consideration which is not
commercially reasonable or which does not reflect the fair market value of the
goods and services rendered or received. All contracts and transactions in
excess of $50,000 must be in writing. All contracts and transactions are
subject to disapproval, cancellation and termination by the Indiana Gaming
Commission if it finds that the contract or transaction does not comply with
the Indiana Riverboat Gambling Act or the regulations thereunder or does not
maintain the integrity of the riverboat gambling industry. A riverboat owner
licensee or an affiliate may not enter into a debt transaction of $1.0 million
or more without the prior approval of the Indiana Gaming Commission. Indiana
Gaming Commission regulations require a licensee or affiliate to conduct due
diligence to ensure that each person with whom the licensee or
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affiliate enters into a debt transaction would be suitable for licensure under
the Indiana Riverboat Gambling Act. The Indiana Gaming Commission has a rule
requiring the reporting of certain currency transactions, which is similar to
that required by Federal authorities.
The Indiana Riverboat Gambling Act prohibits contributions to a candidate
for a state, legislative or local office, or to a candidate's committee, a
regular party committee or a committee organized by a legislative caucus of the
Indiana General Assembly, by the holder of a riverboat owner's license or a
supplier's license, by an officer of the licensee, by a person that holds at
least a 1% interest in the licensee, by an officer of such a person or by a
political action committee of the licensee. The Indiana Gaming Commission has
issued a rule requiring quarterly reporting by the holder of a riverboat
owner's license or a supplier's license or officers of the licensee, officers
of persons that hold at least a 1% interest in the licensee, and of persons who
directly or indirectly own a 1% interest in the licensee.
The Indiana Gaming Commission has adopted a rule which prohibits a
distribution by a riverboat licensee to its partners, shareholders, itself, or
any affiliated entity, if the distribution would impair the financial viability
of the riverboat gaming operation. The Indiana Gaming Commission has adopted a
rule which requires riverboat licensees to maintain, on a quarterly basis, a
cash reserve in the amount of the actual payout for three days. The cash
reserve may include cash in the casino cage, cash in a bank account in Indiana,
or cash equivalents not committed or obligated.
The Governor of Indiana has appointed a Gaming Impact Study Commission
chaired by the Attorney General to review the impact of all forms of gaming in
Indiana and to issue its final report by December 31, 1999.
OTHER NON-GAMING REGULATIONS
We are subject to certain Federal, state and local environmental, safety and
health laws, regulations and ordinances that apply to non-gaming businesses
generally, such as the Clear Air Act, Clean Water Act, Occupational Safety and
Health Act, Resource Conservation Recovery Act and the Comprehensive
Environmental Response, Compensation and Liability Act. We have not made, and
do not anticipate making, material expenditures with respect to these
environmental laws, regulations and ordinances. However, the coverage and
attendant compliance costs associated with these laws, regulations and
ordinances may result in future additional costs to our operations. For
example, in 1990 Congress enacted the Oil Pollution Act to regulate response
actions and liability related to oil spills. In that regard, we are required to
meet certain financial responsibility requirements. We have met these financial
responsibility requirements through insurance and do not believe the costs of
complying with these regulations will be material. We could, however, incur
material liability in the event of a major oil spill that exceeds the insured
amounts. In addition, we may incur material liability if contamination is
discovered on our property, for example during the course of future
development. See "Risk Factors--We are subject to potential exposure to
environmental liabilities."
The Majestic Star Casino must comply with U.S. Coast Guard requirements as
to boat design, on-board facilities, equipment, personnel and safety. Our
vessel must hold a Certificate of Seaworthiness or must be approved by the
American Bureau of Shipping ("ABS") for stabilization and flotation, and may
also be subject to local zoning and building codes. The U.S. Coast Guard
requirements establish design standards, set limits on the operation of the
vessels and require individual licensing of all personnel involved with the
operation of the vessels. Loss of a vessel's Certificate of Seaworthiness or
ABS approval would preclude its use as a floating casino.
All shipboard employees, including those who have nothing to do with the
actual operation of the vessel (such as dealers, waiters, and security
personnel) may be subject to the Jones Act which, among other things, exempts
those employees from state workers' compensation awards.
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SPECIFIC FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations of the issuance of the new notes and the exchange offer. This
summary does not discuss all aspects of federal income taxation that may be
relevant to particular holders of new notes, especially in light of a holder's
personal investment circumstances, or to certain types of holders subject to
special treatment under the federal income tax laws (for example, life
insurance companies, tax-exempt organizations and foreign corporations and
individuals who are not citizens or; residents of the United States) and does
not discuss any aspects of state, local or foreign taxation. This discussion is
limited to those holders who will hold the new notes as "capital assets"
(generally, property held for investment) within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended (the "Code").
This summary is based upon laws, regulations, rulings and decisions now in
effect and upon proposed regulations, all of which are subject to change,
possibly with retroactive effect, by legislation, administrative action or
judicial decisions.
Exchange Offer. The exchange of old notes for new notes pursuant to the
exchange offer should not be treated as a taxable "exchange" because the new
notes should not be considered to differ materially in kind or extent from the
old notes. Rather, the new notes received by a holder of the old notes should
be treated as a continuation of the old notes. As a result, there should be no
gain or loss to holders exchanging the old notes for the new notes pursuant to
the exchange offer.
Interest. A holder will be required to include in gross income the stated
interest on the old notes or the new notes in accordance with the holder's
method of tax accounting.
Tax Basis. Generally, a holder's tax basis in a note will initially be the
holder's purchase price for the note and will be decreased by the amount of any
principal payments received. If a holder exchanges an old note for a new note
pursuant to the exchange offer, the tax basis of the new note immediately after
such exchange should equal the holder's tax basis in the old note immediately
prior to the exchange.
Sale. The sale, exchange or other disposition of a note (other than pursuant
to the exchange offer) generally will be taxable event. A holder generally will
recognize gain or loss equal to the difference between (1) the amount of cash
plus the fair market value of any property received upon such sale, exchange or
other taxable disposition of a note, other than in respect of accrued interest
on the note, and (2) the holder's adjusted tax basis in such note. Such gain or
loss will be capital gain or loss and would be long-term capital gain or loss
if the notes were held by the holder for the applicable holding period
(currently more than one year) at the time of such sale or other disposition.
The holding period of each new note would include the holding period of the old
note exchange for the new note.
Purchasers of Notes at Other than Original Issuance. The above summary does
not discuss special rules that may affect the treatment of purchasers that
acquire notes other than at original issuance, including those provisions of
the Code relating to the treatment of "market discount" and "acquisition
premium." Any such purchaser should consult its tax advisor as to the
consequences to the purchase of the acquisition, ownership and disposition of
notes.
Backup Withholding. Unless a holder or other payee provides his correct
taxpayer identification number (employer identification number or social
security number) to us, as payor, and certifies that such number is correct
under the federal income tax backup withholding rules, generally 31% of (1) the
interest paid on the notes and (2) the proceeds of sale or other disposition of
the notes must be withheld and remitted to the United States Department of
Treasury. Therefore, each holder should complete and sign the Substitute Form
W-9 so as to provide the information and certification necessary to avoid
certain foreign individuals, are not subject to these backup withholding and
reporting requirements. In order for a foreign individual to qualify as an
exempt
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foreign recipient, that exchanging holder must submit a statement, signed under
penalty of perjury, attesting to that individual's exempt foreign status.
Withholding is not an additional federal income tax. Rather, the federal
income tax liability of a person subject to withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained from the Internal Revenue Service.
The foregoing summary is included for general information only. Each holder
of old notes should consult its tax advisor as to the specific tax consequences
to it of the exchange offer, including the application of and effect of state,
local, foreign and other tax laws.
PLAN OF DISTRIBUTION
Based on interpretations by the Securities and Exchange Commission set forth
in no-action letters issued to third parties in similar transactions, we
believe that the new notes issued in the exchange offer in exchange for the old
notes may be offered for resale, resold and otherwise transferred by holders
without compliance with the registration and prospectus delivery provisions of
the Securities Act of 1933, provided that the new notes are acquired in the
ordinary course of such holders' business and the holders are not engaged in,
and do not intend to engage in, and have no arrangement or understanding with
any person to participate in, a distribution of new notes. This position does
not apply to any holder that is (1) an "affiliate" of ours within the meaning
of Rule 405 under the Securities Act of 1933, (2) a broker-dealer who acquired
notes directly from us or (3) broker-dealers who acquired notes as a result of
market-making or other trading activities. Any broker-dealers ("Participating
Broker-Dealers") receiving new notes in the exchange offer are subject to a
prospectus delivery requirement with respect to resales of the new notes. To
date, the Securities and Exchange Commission has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to transactions involving an exchange of securities such as the
Exchange pursuant to the exchange Offer (other than a resale of any unsold
allotment from the sale to the old notes to the initial purchaser) with this
prospectus.
Each broker-dealer receiving new notes for its own account in the exchange
offer must acknowledge that it will deliver a prospectus in any resale of the
new notes. Participating Broker-Dealers may use this prospectus in reselling
new notes, if the old notes were acquired for their own accounts as a result of
market-making activities or other trading activities. We have agreed that a
Participating Broker-Dealer may use this prospectus in reselling new notes. A
Participating Broker-Dealer intending to use this prospects in the resale of
new notes must notify us that it is a Participating Broker-Dealer. This notice
may be given in the space provided for in the letter of transmittal or may be
delivered to the exchange agent. See "The Exchange Offer-Resales of the New
Notes" for more information.
Each broker-dealer that receives new notes for its own account as a result
of market-making activities or other trading activities in connection with the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for old notes where such old
notes were acquired as a result of market-making activities or other trading
activities.
We will receive no proceeds in connection with the exchange offer or any
sale of new notes by broker-dealers. New notes received by broker-dealers for
their own account pursuant to the exchange offer may be sold from time to time
in one or more transactions in over-the-counter market, in negotiated
transactions, through the writing of options on the new notes or a combination
of these methods of resale, at market prices prevailing at the time of resale,
at prices related to the prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers that may receive compensation in the form of commissions or concessions
from the broker-dealers or the purchasers of any new
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notes. Any broker-dealer that resells new notes that were received by it for
its own account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act of 1933, and any profit
on any resale of new notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act of 1933. The letter of transmittal states that by acknowledging that it
will deliver, and by delivering, a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act of 1933.
LEGAL MATTERS
Certain legal matters relating to this offering will be passed upon for the
Company by Dykema Gossett PLLC, Detroit, Michigan and Barnes & Thornburg,
Indianapolis, Indiana.
INDEPENDENT ACCOUNTANTS
The financial statements at December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998 included in this prospectus
have been audited by PricewaterhouseCoopers LLP, independent accountants, as
stated in their report appearing herein.
The financial statements of Buffington Harbor Riverboats, L.L.C. as of
December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997, and
1996 included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
94
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS OF THE COMPANY
Balance Sheets as of June 30, 1999 (Unaudited) and December 31, 1998..... F-2
Statements of Income (Unaudited) for the three and six months ended June
30, 1999 and 1998....................................................... F-3
Statements of Cash Flows (Unaudited) for the six months ended June 30,
1999 and 1998........................................................... F-4
Notes to Financial Statements............................................ F-5
Report of Independent Accountants........................................ F-7
Balance Sheets as of December 31, 1998 and 1997.......................... F-8
Statements of Income for the years ended December 31, 1998, 1997, and
1996.................................................................... F-9
Statements of Changes in Members' Equity for the years ended December 31,
1998, 1997, and 1996.................................................... F-10
Statements of Cash Flows for the years ended December 31, 1998, 1997, and
1996.................................................................... F-11
Notes to the Financial Statements........................................ F-12
FINANCIAL STATEMENTS OF THE BHR JOINT VENTURE
Report of Independent Public Accountants................................. F-21
Balance Sheets at December 31, 1998 and 1997............................. F-22
Statements of Operations for the years ended December 31, 1998, 1997, and
1996.................................................................... F-23
Statements of Members' Capital for the years ended December 31, 1998,
1997, and 1996.......................................................... F-24
Statements of Cash Flows for the years ended December 31, 1998, 1997, and
1996.................................................................... F-25
Notes to the Financial Statements........................................ F-26
</TABLE>
F-1
<PAGE>
THE MAJESTIC STAR CASINO, LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 14,301,761 $ 17,295,401
Accounts receivable, less allowance for doubtful
accounts of $38,424 and $148,608, respectively.. 817,801 850,086
Inventories...................................... 51,149 41,948
Prepaid expenses................................. 964,082 984,512
Restricted cash.................................. 7,491,175 --
------------ ------------
Total current assets......................... 23,625,968 19,171,947
------------ ------------
Property, equipment, and vessel improvements, net.. 54,948,784 55,953,220
Other assets:
Deferred financing costs, less accumulated
amortization of $23,810 and $1,544,086,
respectively.................................... 4,984,190 2,657,129
Deferred costs, less accumulated amortization of
$3,441,662 and $2,899,062, respectively......... 2,210,367 2,762,967
Investment in Buffington Harbor Riverboats,
L.L.C........................................... 39,417,907 40,748,887
Other assets and deposits........................ 3,981,712 3,966,710
------------ ------------
Total other assets........................... 50,594,176 50,135,693
------------ ------------
Total assets................................. $129,168,928 $125,260,860
============ ============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current maturities of long-term debt............. $ 8,193,113 $ 1,945,724
Accounts payable................................. 810,994 428,070
Other accrued liabilities:
Payroll and related............................ 855,023 1,073,801
Interest....................................... 758,504 4,216,422
Other accrued liabilities...................... 4,675,214 3,039,970
Due to Buffington Harbor Riverboats, L.L.C..... 45,230 405,010
------------ ------------
Total current liabilities.................... 15,338,078 11,108,997
Long-term debt, net of current maturities.......... 129,852,979 108,390,332
Note to member..................................... -- 8,759,355
Commitments and contingencies...................... -- --
------------ ------------
Total long-term liabilities.................. 129,852,979 117,149,687
------------ ------------
Total liabilities............................ 145,191,057 128,258,684
------------ ------------
Members' equity:
Members' contributions........................... 24,000,000 24,000,000
Retained earnings (accumulated deficit).......... (40,022,129) (26,997,824)
------------ ------------
Total members' (deficit)..................... (16,022,129) (2,997,824)
------------ ------------
Total liabilities and members' equity........ $129,168,928 $125,260,860
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
THE MAJESTIC STAR CASINO, LLC
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE SIX MONTHS ENDED JUNE
30, 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Casino................. $ 30,527,215 $27,635,544 $ 59,413,287 $55,219,428
Food and beverage...... 500,081 391,625 967,982 858,141
Other.................. 248,596 254,352 467,999 817,892
------------ ----------- ------------ -----------
Gross revenues....... 31,275,892 28,281,521 60,849,268 56,895,461
less: promotional
allowances......... (76,943) (78,595) (139,291) (210,857)
------------ ----------- ------------ -----------
Net revenues......... 31,198,949 28,202,926 60,709,977 56,684,604
------------ ----------- ------------ -----------
COSTS AND EXPENSES:
Casino................. 5,057,329 4,609,372 10,215,549 9,488,392
Gaming and admission
taxes................. 8,515,879 8,176,607 16,662,969 16,306,860
Food and beverage...... 615,620 578,445 1,236,089 1,176,364
Advertising and
promotion............. 1,810,690 3,216,868 3,318,786 6,128,878
General and
administrative........ 6,196,377 5,612,006 12,379,477 12,138,343
Economic incentive--
City of Gary.......... 941,821 854,241 1,835,392 1,706,517
Depreciation and
amortization.......... 1,971,806 1,901,726 3,914,526 3,832,417
Loss on disposition of
assets................ -- 168,683 -- 903,675
------------ ----------- ------------ -----------
Total costs and
expenses............ 25,109,522 25,117,948 49,562,788 51,681,446
------------ ----------- ------------ -----------
Operating income..... 6,089,427 3,084,978 11,147,189 5,003,158
------------ ----------- ------------ -----------
OTHER INCOME (EXPENSE):
Loss on investment in
Buffington Harbor
Riverboats, L.L.C..... (599,977) (673,986) (1,403,991) (1,600,534)
Interest income........ 201,805 236,683 396,130 459,690
Interest expense....... (3,880,151) (3,810,203) (7,758,023) (7,629,663)
Interest expense to
affiliate............. (68,254) (145,162) (167,454) (290,683)
------------ ----------- ------------ -----------
Total other income
(expense)........... (4,346,577) (4,392,668) (8,933,338) (9,061,190)
------------ ----------- ------------ -----------
Income (loss) before
extraordinary item.. 1,742,850 (1,307,690) 2,213,851 (4,058,032)
EXTRAORDINARY ITEM:
Loss on bond
redemption............ (15,238,156) -- (15,238,156) --
------------ ----------- ------------ -----------
Net (loss)........... $(13,495,306) $(1,307,690) $(13,024,305) $ 4,058,032)
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
THE MAJESTIC STAR CASINO, LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 1999 ENDED JUNE 30, 1998
------------------- -------------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................. $(13,024,305) $(4,058,032)
Adjustment to reconcile net loss to
net cash provided by operating
activities:
Depreciation....................... 3,071,850 2,956,585
Amortization....................... 842,676 875,832
Loss on investment in Buffington
Harbor Riverboats, L.L.C.......... 1,403,991 1,600,534
Loss on disposal of assets......... -- 903,675
Loss on bond redemption............ 15,238,156 --
Decrease in accounts receivable,
net............................... 32,285 109,466
(Increase) decrease in
inventories....................... (9,201) 2,835
(Increase) decrease in prepaid
expenses.......................... 20,430 (383,953)
Increase in other assets........... (2,597,702) (1,429)
Increase (decrease) in accounts
payable........................... 382,924 (774,742)
Decrease in accrued payroll and
other expenses.................... (218,778) (834,038)
Increase (decrease) in accrued
interest.......................... (3,457,918) 529,758
Increase in other accrued
liabilities....................... 1,278,209 763,142
------------ -----------
Net cash provided by operating
activities...................... 2,962,617 1,689,633
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, equipment
and vessel improvements............. (2,067,414) (1,516,194)
Proceeds from sale of slot
equipment........................... -- 481,800
(Increase) decrease in deposits...... (15,000) 609,274
Increase in Letter of Credit
deposit............................. -- (3,624,708)
Investment in Buffington Harbor
Riverboats, L.L.C................... (73,011) (260,369)
Decrease in restricted cash.......... -- 11,904,716
------------ -----------
Net cash provided (used) by
investment activities........... (2,155,425) 7,594,519
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of 12 3/4% of Senior
Secured Notes....................... (116,005,298) --
Proceeds from issuance of 10 7/8%
Senior Secured Notes................ 127,738,000 --
Increase in restricted cash.......... (7,491,175) --
Payment of Senior Secured Notes
issuance costs...................... (4,241,526) --
Increase in short-term debt.......... 6,000,000 --
Cash paid to reduce short-term debt.. -- (100,694)
Cash paid to reduce long-term debt... (9,800,833) (1,008,164)
Reduction of notes payable........... -- (481,800)
------------ -----------
Net cash (used) by financing
activities...................... (3,800,832) (1,590,658)
Net increase (decrease) in cash and
cash equivalents...................... (2,993,640) 7,693,494
Cash and cash equivalents, beginning of
period................................ 17,295,401 8,083,594
------------ -----------
Cash and cash equivalents, end of
period................................ $ 14,301,761 $15,777,088
============ ===========
INTEREST PAID:
Principal member..................... $ 167,455 $ 145,162
Equipment debt....................... $ 254,360 $ 193,725
Senior Secured Notes--fixed
interest............................ $ 7,844,438 $ 6,693,750
Senior Secured Notes--contingent
interest............................ $ 3,018,090 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
THE MAJESTIC STAR CASINO, LLC
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The Majestic Star Casino, LLC (the "Company"), was formed on December 8,
1993, as an Indiana limited liability company, to provide gaming and related
entertainment to the public. The Company commenced gaming operations in the
City of Gary (the "City") at Buffington Harbor, located in Lake County, in the
State of Indiana on June 7, 1996. During the second quarter a wholly-owned
subsidiary, The Majestic Star Capital Corp., was formed to facilitate the
offering of new debt. The Majestic Star Casino Corp. has no assets, liabilities
or operations.
The accompanying unaudited financial statements represent the operations of
The Majestic Star Casino, LLC, as well as its investment in Buffington Harbor
Riverboats, L.L.C., and have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (which include normal recurring
adjustments) considered necessary for a fair presentation of the results for
the interim periods have been made. The results for the three and six months
ended June 30, 1999, 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, 1998.
NOTE 2. INVESTMENT IN BUFFINGTON HARBOR RIVERBOATS, L.L.C. ("BHR")
On October 31, 1995, the Company and Trump Indiana, Inc. (the "Joint Venture
Partner") entered into the First Amended and Restated Operating Agreement of
BHR for the purpose of acquiring and developing certain facilities for the
gaming operations in the City ("BHR Property"). BHR is responsible for the
management, development and operation of the BHR Property. The Company and the
Joint Venture Partner have each entered into an agreement with BHR (the
"Berthing Agreement") to use BHR Property for their respective gaming
operations and have committed to pay cash operating losses of BHR as additional
berthing fees. The Company and the Joint Venture Partner share equally in the
operating expenses relating to the BHR Property, except for costs associated
with food and beverage and gift shop, which are allocated on a percentage of
use by the casino customers of the Company and the Joint Venture Partner.
The following represents selected financial information of BHR:
BUFFINGTON HARBOR RIVERBOATS, L.L.C.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE SIX MONTHS ENDED JUNE
30, 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gross revenue........... $ 4,930,317 $ 5,085,419 $ 9,529,650 $ 9,900,523
Operating income
(loss)................. $ 294,811 $ (131,557) $ 180,101 $ (243,231)
Net (loss).............. $(1,199,952) $(1,347,933) $(2,807,982) $(3,201,069)
</TABLE>
NOTE 3. DEBT REFINANCING
During the quarter ended June 30, 1999, the Company refinanced a substantial
portion of its long-term debt. $99 million of the 12 3/4% Senior Secured Notes
were redeemed and $130 million of 10 7/8% Senior Secured Notes were issued.
$7,491,000 of cash has been restricted for the payment of principal, premium
and interest related to the $6 million principal amount of unredeemed 12 3/4%
Senior Secured Notes.
F-5
<PAGE>
THE MAJESTIC STAR CASINO, LLC
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
NOTE 4. EXTRAORDINARY ITEM -- LOSS ON BOND REDEMPTION
In connection with the Company's refinancing of its long-term debt, the
Company charged $15,238,000 to results of operations, representing premium paid
and unamortized deferred financing expenses. The charge was recorded as an
extraordinary item.
NOTE 5. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On March 27, 1998, a complaint was filed in the Lake County Superior Court
in East Chicago, Indiana, against BHR, the Joint Venture Partner and the
Company. The plaintiff, a former employee of the Company, claims to have been
assaulted in the BHR parking lot on June 25, 1997, and is requesting
compensatory and punitive damages totaling approximately $11.0 million. The
suit alleges that the Joint Venture Partner and the Company failed to provide
adequate security to prevent assaults. The Company intends to vigorously defend
against such suit. However, the case is in the discovery phase and it is too
early to predict the outcome of such suit and the effect, if any on the
Company's financial position and results of operations.
Harbor Lease
Under a lease agreement with Lehigh Portland Cement Company ("Lehigh
Cement"), BHR has leased certain property which is integral to the gaming
operations of the Joint Venture Partner and the Company. The lease places
certain restrictions on the use of the harbor by the Joint Venture Partners,
requires the reimbursement of certain costs which may be incurred by Lehigh
Cement and requires BHR to pursue permitting of and building of a new harbor.
The lease was rent free through December 29, 1997, and subject to certain
conditions, primarily continuing progress toward permitting of and then
building of a new harbor, the lease has been extended until the earlier of
December 31, 2005, or the completion of a new harbor. Starting in January 1998,
under the lease, the BHR Joint Venture pays rent of $125,000 per month. A new
harbor may require new guest facilities. The level of expenditures required for
such new facilities cannot be accurately estimated at this time.
Indiana Gaming Regulations
The ownership and operation of riverboat gaming operations in Indiana are
subject to strict state regulation under the Riverboat Gambling Act ("Act") and
the administrative rules promulgated thereunder. The Indiana Gaming Commission
("IGC") is empowered to administer, regulate and enforce the system of
riverboat gaming established under the Act and has jurisdiction and supervision
over all riverboat gaming operations in Indiana, as well as all persons on
riverboats where gaming operations are conducted. The IGC is empowered to
regulate a wide variety of gaming and nongaming related activities, including
the licensing of supplies to, and employees at, riverboat gaming operations and
to approve the form of entity qualifiers and intermediary and holding
companies. Indiana is a new jurisdiction and the emerging regulatory framework
is not yet complete. The IGC has adopted certain final rules and has published
others in proposed or draft form which are proceeding through the review and
final adoption process. The IGC has broad rulemaking power, and it is
impossible to predict what effect, if any, the amendment of existing rules or
the finalization of currently new rules might have on the Company's operations.
F-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
The Majestic Star Casino, LLC:
In our opinion, the accompanying balance sheets and the related statements
of income, changes in members' equity, and cash flows present fairly, in all
material respects, the financial position of The Majestic Star Casino, LLC (the
"Company") at December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ PricewaterhouseCoopers LLP
-------------------------------------
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
February 22, 1999
F-7
<PAGE>
THE MAJESTIC STAR CASINO, LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 17,295,401 $ 8,083,594
Accounts receivable, less allowance for doubtful
accounts of $148,608 and $370,000, respectively... 850,086 879,887
Inventories........................................ 41,948 33,717
Prepaid expenses................................... 984,512 995,887
------------ ------------
Total current assets........................... 19,171,947 9,993,085
------------ ------------
Property, equipment, and vessel improvements, net.... 55,953,220 61,206,890
Other Assets:
Deferred financing costs, less accumulated
amortization of $1,544,086 and $947,941,
respectively...................................... 2,657,129 3,150,149
Deferred costs, less accumulated amortization of
$2,889,062 and $1,802,683, respectively........... 2,762,967 3,990,587
Investment in Buffington Harbor Riverboats,
L.L.C............................................. 40,748,887 43,541,985
Other assets and deposits.......................... 3,966,710 974,551
Restricted cash.................................... -- 11,904,716
------------ ------------
Total other assets............................. 50,135,693 63,561,988
------------ ------------
Total Assets................................... $125,260,860 $134,761,963
============ ============
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Current maturities of long-term debt............... $ 1,945,724 $ 1,889,427
Short-term debt.................................... -- 100,696
Accounts payable................................... 428,070 1,519,235
Other accrued liabilities:
Payroll and related.............................. 1,073,801 1,453,789
Interest......................................... 4,216,422 3,076,512
Other accrued liabilities........................ 3,039,970 2,939,877
Due to Buffington Harbor Riverboats, L.L.C....... 405,010 719,058
------------ ------------
Total current liabilities...................... 11,108,997 11,698,594
Long-term debt, net of current maturities............ 108,390,332 110,828,515
Note to member....................................... 8,759,355 10,759,355
Commitments and contingencies........................ -- --
------------ ------------
Total long-term liabilities.................... 117,149,687 121,587,870
------------ ------------
Total Liabilities.............................. 128,258,684 133,286,464
------------ ------------
Members' Equity:
Members' contributions............................. 24,000,000 24,000,000
Retained earnings (Accumulated deficit)............ (26,997,824) (22,524,501)
------------ ------------
Total members' equity.......................... (2,997,824) 1,475,499
------------ ------------
Total Liabilities and Members' Equity.......... $125,260,860 $134,761,963
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-8
<PAGE>
THE MAJESTIC STAR CASINO, LLC
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Casino.............................. $111,480,624 $ 92,304,580 $ 52,788,009
Food and beverage.................. 1,643,470 1,559,071 808,567
Other.............................. 1,476,549 848,604 636,071
------------ ------------ ------------
Gross Revenues.................... 114,600,643 94,712,255 54,232,647
------------ ------------ ------------
less promotional allowances....... (337,410) (169,306) (12,088)
------------ ------------ ------------
Net Revenues..................... 114,263,233 94,542,949 54,220,559
Costs and Expenses:
Casino.............................. 18,853,387 16,758,049 9,256,597
Gaming and admission taxes.......... 32,722,100 26,956,027 15,537,905
Food and beverage................... 2,390,282 1,937,290 1,128,868
Advertising and promotion........... 10,155,661 12,708,722 4,563,096
General and administrative.......... 24,222,202 22,229,511 12,289,291
Economic incentive-City of Gary..... 3,455,705 2,789,461 1,586,351
Depreciation and amortization....... 7,820,276 7,700,345 5,319,682
Loss on disposition of assets....... 958,425 1,602,815 --
Pre-opening costs................... -- 1,253,758 4,586,879
------------ ------------ ------------
Total costs and expenses......... 100,578,038 93,935,978 54,268,669
------------ ------------ ------------
Operating income (loss)............. 13,685,195 606,971 (48,110)
Other Income (Expense):
Loss on investment in Buffington
Harbor
Riverboats, L.L.C................... (3,167,459) (3,447,944) (2,439,581)
Interest income..................... 860,240 1,831,187 2,198,929
Interest expense.................... (15,325,869) (12,260,715) (8,246,565)
Interest expense to affiliate........ (525,430) (616,691) (351,277)
Total other income (expense)..... (18,158,518) (14,494,163) (8,838,494)
------------ ------------ ------------
Net Income (Loss)................ $ (4,473,323) $(13,887,192) $ (8,886,604)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
THE MAJESTIC STAR CASINO, LLC
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997, AND 1996
RETAINED EARNINGS
-----------------------------------------
TOTAL
CAPITAL (ACCUMULATED MEMBERS'
CONTRIBUTIONS DEFICIT) EQUITY
------------- ------------ ------------
<S> <C> <C> <C>
Balance, December 31, 1995........... $ 34,759,355 $ 249,295 $ 35,008,650
Conversion of capital contribution
to debt........................... (10,759,355) -- (10,759,355)
Net loss........................... -- (8,886,604) (8,886,604)
------------ ------------ ------------
Balance, December 31, 1996........... 24,000,000 (8,637,309) 15,362,691
Net loss........................... -- (13,887,192) (13,887,192)
------------ ------------ ------------
Balance, December 31, 1997........... 24,000,000 (22,524,501) 1,475,499
Net loss........................... -- (4,473,323) (4,473,323)
------------ ------------ ------------
Balance, December 31, 1998........... $ 24,000,000 $(26,997,824) $ (2,997,824)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
THE MAJESTIC STAR CASINO, LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................. $(4,473,323) $(13,887,192) $ (8,886,604)
Adjustment to reconcile net loss to
net cash provided by operating
activities:
Depreciation....................... 5,949,639 5,764,612 2,815,104
Amortization....................... 1,870,637 1,935,733 2,504,578
Deferred expenses.................. -- -- 234,796
Loss on investment in Buffington
Harbor Riverboats, LLC............ 3,167,459 3,447,944 2,439,581
Loss on disposal of chartered
vessel improvements............... 958,425 1,602,815 --
(Increase) decrease in accounts
receivable, net................... 29,801 (322,071) (557,816)
Increase in inventories............ (8,231) (9,066) (24,651)
(Increase) decrease in prepaid
expenses.......................... 11,375 173,981 (1,169,868)
(Increase) decrease in other
assets............................ 36,683 (224,128) (310,722)
Increase (decrease) in accounts
payable........................... (1,091,165) 975,081 424,581
Increase (decrease) in accrued
payroll and other expenses........ (379,988) 860,297 593,492
Increase in accrued interest....... 1,139,910 607,814 2,468,698
Increase (decrease) in other
accrued liabilities............... (249,589) 1,270,264 2,323,270
----------- ------------ ------------
Net cash provided by operating
activities...................... 6,961,633 2,196,084 2,854,439
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, equipment
and vessel improvements............. (2,099,921) (39,641,158) (20,241,855)
Sale of slot equipment............... 427,050 -- --
Sale of telephone equipment.......... 16,000 -- --
Licensing and local initiative
expenditures........................ -- -- (2,747,000)
(Increase) decrease in Chartered
Vessel deposit...................... 609,274 1,108,264 (1,717,538)
Decrease in letter of credit
deposit............................. (3,600,000) -- --
Investment in Buffington Harbor
Riverboats, LLC..................... (374,363) (2,043,076) (25,563,415)
(Increase) decrease in restricted
cash................................ 11,904,716 39,784,138 (51,688,854)
----------- ------------ ------------
Net cash (used) provided by
investment activities........... 6,882,756 (791,832) (101,958,662)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of loan from Member......... -- -- 18,097,299
Proceeds from issuance of 12.75%
Senior Secured Notes................ -- -- 105,000,000
Cash paid to reduce short-term debt.. (100,696) (108,336) (18,097,299)
Cash paid to reduce long-term debt... (1,954,836) (2,148,321) (1,290,860)
Reduction of notes payable........... (427,050) -- --
Payment of loan to member............ (2,000,000) -- --
Cash paid for financing charges...... (150,000) -- --
Payment of Senior Secured Notes
issuance costs...................... -- -- (4,115,307)
----------- ------------ ------------
Net cash (used) provided by
financing activities............ (4,632,582) (2,256,657) 99,593,833
----------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... 9,211,807 (852,405) 489,610
Cash and cash equivalents, beginning
of period........................... 8,083,594 8,935,999 8,446,389
----------- ------------ ------------
Cash and cash equivalents, end of
period.............................. $17,295,401 $ 8,083,594 $ 8,935,999
=========== ============ ============
Interest paid:
Principal Member................... $ 525,429 $ 616,691 $ 351,277
Equipment Debt..................... $ 747,060 $ 577,386 $ 382,231
Senior Secured Notes............... $13,387,500 $ 13,387,500 $ 6,433,438
</TABLE>
Supplemental noncash operating and financing activities of the Company
include the following: During 1997, the Company refinanced existing equipment
debt of $3,805,070, and obtained additional financing of $4,275,750 for
additional equipment. On March 31, 1996, contributions totaling $10,759,355
were converted from Members' Equity to long-term debt. During 1996 the Company
obtained financing of $6,623,205.
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
THE MAJESTIC STAR CASINO, LLC
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. BASIS OF PRESENTATION:
The Majestic Star Casino, LLC (the "Company") was formed on December 8,
1993, as an Indiana limited liability company ("LLC"), to provide gaming and
related entertainment to the public. The Company commenced gaming operations in
the City of Gary (the "City") at Buffington Harbor, located in Lake County, in
the State of Indiana on June 7, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers cash equivalents to include short-term investments
with original maturities of ninety days or less. At December 31, 1998 and 1997,
the Company had bank deposits in excess of federally insured limits by
approximately $11,683,000 and $3,076,000, respectively.
Inventories
Inventories, which consist of food, beverage, and promotional items are
recorded at the lower of cost or market, cost being determined principally on a
first in, first out basis. The estimated cost of normal operating quantities
(base stock) of uniforms has been recorded as an asset and is not being
depreciated. Costs of base stock replacements are expensed as incurred. Other
assets in the accompanying balance sheets include $366,710 and $365,281 of base
stock inventories at December 31, 1998 and 1997, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed utilizing the straight line method over the estimated useful lives of
the assets. Costs of major improvements are capitalized; costs of normal
repairs and maintenance are charged to expense as incurred. Gains or losses on
disposal are recognized when incurred.
On October 27, 1997 the Chartered Vessel was replaced with the Permanent
Vessel. The Company wrote-off approximately $755,000 and $1,600,000 of assets
previously utilized on the Chartered Vessel, in 1998 and 1997, respectively.
The Company also wrote off approximately $204,000 of slot machines disposed of
in 1998.
Capitalized Interest
The Company capitalizes interest costs associated with debt incurred in
connection with major construction projects. When no debt is specifically
identified as being incurred in connection with such construction projects, the
Company capitalizes interest on amounts expended on the project at the
Company's average cost of borrowed money.
Interest expense capitalized for the construction of the new riverboat
casino (the "Permanent Vessel") was $2,530,000, of this amount, $2,317,000 and
$213,000 was capitalized during 1997 and 1996, respectively.
Organizational Costs
Costs incurred in connection with the formation of the limited liability
company have been capitalized and were initially being amortized over a period
of five years. The Company, in accordance with the Statement of Position 98-5,
Reporting on the Costs of Start-Up Activities, wrote off the remaining balance
of organization costs during the fourth quarter of 1998.
F-12
<PAGE>
THE MAJESTIC STAR CASINO, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred Financing Costs
Deferred financing costs represent agent's commission, closing costs and
professional fees incurred in connection with the Senior Secured Notes. Such
costs are being amortized over the seven year term of the notes.
Deferred Costs and Preopening Costs
Development obligation payments to the City and licensing costs represent
direct costs associated with the development of the riverboat casino, and were
deferred until operations commenced on June 7, 1996. These costs are currently
being amortized over five years, the life of the gaming license. Costs of
approximately $1,254,000 associated with the transition from the Chartered
Vessel to the Permanent Vessel in October 1997 and pre-opening costs of
approximately $4,587,000 in 1996 were charged to operations in the years ended
1997 and 1996, respectively.
Investment in Buffington Harbor Riverboats, L.L.C.
The Company accounts for its 50 percent interest in Buffington Harbor
Riverboats, L.L.C. ("BHR") under the equity method, whereby the initial
investments are recorded at cost and then adjusted for the Company's share of
BHR's net income or loss on distributions.
Restricted Cash
Cash and investments of approximately $11,905,000 at December 31, 1997
represent amounts designated as a completion reserve in 1997 for the
construction of the Permanent Vessel. The funds were invested primarily in
securities of the U. S. Government and its agencies, with original maturities
less than 180 days and were held in collateral accounts pursuant to
disbursement agreements of the Senior Secured Notes.
At December 31, 1998 no cash and investments were designated for future cash
requirements.
Casino Revenue
Casino revenue is the net win from gaming activities, which is the
difference between gaming wins and losses.
Promotional Allowances
Operating revenues include the retail value of food and other services,
which were provided to customers without charge. The corresponding charges have
been deducted from revenue in the accompanying statements of income as
promotional allowances in the determination of net operating revenues. The
estimated costs of providing the complimentary services are charged to the
casino department and are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Food............................................ $292,904 $160,293 $12,088
Retail.......................................... $ 44,506 $ 9,013 $ 0
</TABLE>
Federal Income Taxes
The Company has elected status as a partnership under the Internal Revenue
Code. Under this election, income of the Company is taxed directly to the
members and, accordingly, there is no provision for federal income taxes.
F-13
<PAGE>
THE MAJESTIC STAR CASINO, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Long-Lived Assets
The Company, in 1995, adopted the provisions of Statement of Financial
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived
Assets" ("SFAS No. 121"). SFAS No. 121 requires, among other things, that an
entity review its long-lived and certain related intangibles for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. Impairment of long-lived assets exists, if, at a
minimum the future expected cash flows (undiscounted and without interest
charges) from an entity's operation are less than the carrying value of these
assets. As a result of its review, the Company does not believe that any
impairment exists in the recoverability of its long-lived assets.
Fair Value of Financial Instruments
The Company believes, based upon current information, that the carrying
value of the Company's cash and cash equivalents, restricted cash, accounts
receivable and accounts payable approximates fair value because of the short
term maturity of those instruments. The Company estimates the fair value of its
long-term debt and notes payable approximates their carrying value based on
quotations received from investment bankers or because interest rates on the
debt approximate market rates.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior year balance sheet to
conform with the current year presentation.
3. CERTIFICATE OF SUITABILITY
On December 9, 1994, the Indiana Gaming Commission (the "Commission")
awarded the Company one of two certificates (the "Certificate") for a riverboat
owner's license for a riverboat casino to be docked in the City. Having
complied with certain statutory and regulatory requirements and other
conditions of the Commission, the Company received a five year riverboat
owner's license on June 3, 1996.
The second certificate was issued to Trump Indiana, Inc. ("Trump"). The
Company and Trump jointly developed and operate a docking location from which
the entities are conducting their respective riverboat gaming operations in the
City.
4. CITY OF GARY, INDIANA DEVELOPMENT OBLIGATION
On September 7, 1995, the Company and the City entered into an agreement for
the purpose of summarizing procedures regarding the acquisition of a certain
parcel of land in accordance with the Certificate. The Company paid the city
$250,000 under the terms of this agreement.
On September 29, 1995, the Company, Trump and the City entered into an
agreement. In accordance with this agreement, the Company paid the City
$5,000,000. As of December 31, 1996, $5,250,000 of deferred costs
F-14
<PAGE>
THE MAJESTIC STAR CASINO, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
represents the Company's development obligation to the City, which is being
amortized over 5 years, the life of the gaming license.
As of March 26, 1996, the City and the Company entered into a development
agreement which supersedes the September 7, 1995 agreement between the City and
the Company. The development agreement ("Development Agreement") requires the
Company, among other things, (1) to invest $116 million in various on-site
improvements over the next five years, (2) pay the City an economic incentive
equal to 3% of the Company's adjusted gross receipts, as defined by the
Riverboat Gambling Act and (3) pay a default payment in the amount of damages
for failure to complete certain on-site developments, which amount is capped at
$12 million.
The Company has met or accrued a significant portion of these commitments.
The two principal components of the remaining portion of the Company's
commitment are as follows: (1) $10 million for off-site development in the City
by 1998/1999 with the particular project(s) to be agreed to by the City; and
(2) $12 million (all of which has been expended through December 31, 1998, with
the exact amount to be agreed upon by the City and the Company) to be expended
over the five years following the June 1996 opening of the casino for
enhancements to the Company's operations at Buffington Harbor and/or BHR's
facilities.
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
ESTIMATED
SERVICE
LIFE
1998 1997 (YEARS)
------------ ----------- ---------
<S> <C> <C> <C>
Vessel............................. $ 43,312,617 $43,409,051 30
Buildings and improvements......... 63,407 49,507 5
Furniture, fixtures and equipment.. 22,683,450 22,691,072 5
------------ -----------
Total Property and equipment... 66,059,474 66,149,630
Less accumulated depreciation and
amortization...................... (10,106,254) (4,942,740)
------------ -----------
Total Property and equipment,
net........................... $ 55,953,220 $61,206,890
============ ===========
</TABLE>
Substantially all property and equipment are pledged as collateral on long-
term debt. See Note 8.
6. INVESTMENT IN BUFFINGTON HARBOR RIVERBOATS, L.L.C.
On October 31, 1995, the Company and 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 the City ("BHR
Property"). BHR is responsible for the management, development and operation of
the BHR Property. The Company and Trump have each entered into an agreement
with BHR (the "Berthing Agreement") to use BHR Property for their respective
gaming operations and have committed to pay cash operating losses of BHR as
additional berthing fees. The Company and BHR 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 the joint venture partner.
F-15
<PAGE>
THE MAJESTIC STAR CASINO, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following represents selected financial information of BHR:
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents........... $ 177,685 $ 129,509
Current assets...................... 1,947,456 2,246,364
Property, equipment, and
construction in progress, net...... 84,507,760 89,946,185
Other assets........................ 267,717 509,279
----------- -----------
Total assets........................ $86,722,933 $92,701,828
=========== ===========
Current liabilities................. 2,725,170 2,760,693
Total liabilities................... 5,225,159 5,617,858
Member's equity--The Majestic Star
Casino, LLC........................ 40,748,887 43,541,985
Total members' equity-- ............ 81,497,774 87,083,970
STATEMENTS OF INCOME
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1999
----------------- -----------------
<S> <C> <C>
Gross revenue....................... $18,647,686 $19,685,841
Operating income (loss)............. (6,352,146) (6,931,944)
Net income (loss)................... (6,334,926) (6,913,682)
</TABLE>
Promotional allowances provided to the Company's gaming patrons at BHR
facilities totaled approximately $567,000 in 1998 and $646,000 in 1997, and are
characterized in the Company's financial statements as an expense of the
casino. BHR invoices the Company monthly for these promotional allowances at
cost which approximates the retail value of the promotional allowances.
At December 31, 1998, 1997, and 1996, the Company's income statements
reflect approximately $7,668,000, $8,753,000, and $4,314,000 in vessel berthing
fee's and promotional allowances payable to BHR of which $7,982,000,
$8,860,000, and $3,487,000 was paid in 1998, 1997, and 1996, respectively.
7. CHARTER AGREEMENT
On August 17, 1995, the Company entered into a Charter Agreement
("Agreement") with New Yorker Acquisition Corporation ("Owner") and President
Casino, Inc. for the purpose of leasing the Owner's casino gaming vessel
together, with all improvements, furniture, fixtures and equipment.
The Agreement became effective on May 3, 1996 and expired on May 10, 1998.
The terms of the Agreement, required the Company to pay the Owner $125,000 plus
5% use tax monthly for the first 24 months. The Company was also required to
pay the cost of any repairs which are necessary to bring the Chartered Vessel
into the condition required on redelivery under the lease agreement. As
required by the Agreement, the Company in 1995 placed a security deposit in
escrow with a financial institution. The amount in escrow including accrued
interest was approximately $609,000 and $1,700,000 as of December 31, 1997 and
1996, respectively. The security deposit was refundable pursuant to the terms
of the escrow agreement.
On March 30, 1998, the Company executed an amendment to the August 17, 1995
Charter Agreement whereby New Yorker Acquisition Corporation, the lessor,
accepted re-delivery of the Chartered Vessel
F-16
<PAGE>
THE MAJESTIC STAR CASINO, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
effective March 1, 1998, "as-is, where-is" at Erie, Pennsylvania from the
Company. The Company agreed to release to New Yorker Acquisition Corporation a
$500,000 escrow account with accrued interest thereon, free and clear of any
claims in lieu of restoring the Chartered Vessel back to its original
condition. The Company during the year ended December 31, 1998 wrote-off assets
previously utilized on the Chartered Vessel that had a net book value of
approximately $755,000. As of March 1, 1998, all obligations of the Company and
New Yorker Acquisition Corporation have been fully satisfied and the parties
have no further obligations under the original charter agreement. The total
amount of expenses associated with the lease and subsequent termination of the
charter vessel lease agreement included in the Company's Statements of Income
was approximately $755,000, $1,537,000 and $879,000 for 1998, 1997 and 1996,
respectively.
8. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Senior secured notes payable; collateralized
by a first priority lien on substantially
all of the assets of the Company, due in
semi-annual installments of interest at
12.75% together with contingent interest
payable on May 15 and November 15; with a
final payment of principal and interest due
on May 15, 2003. (See Note 10).............. $105,000,000 $105,000,000
Contracts payable including related use
taxes; collateralized by gaming equipment;
due in aggregate monthly installments
(principal and interest) of approximately
$220,000, with varying maturity dates
through September 2001.(1).................. 5,336,056 7,717,942
------------ ------------
Total long-term debt......................... 110,336,056 112,717,942
Less current portion(1)...................... (1,945,724) (1,889,427)
------------ ------------
Long-term portion............................ $108,390,332 $110,828,515
============ ============
</TABLE>
The scheduled maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, MATURITIES
------------------------ ------------
<S> <C>
1999......................................................... $ 1,945,724
2000......................................................... 2,412,618
2001......................................................... 977,714
2002......................................................... --
Thereafter................................................... 105,000,000
------------
Total...................................................... $110,336,056
============
</TABLE>
- --------
(1) At December 31, 1998 deferred long term and current portion of equipment
debt includes accrued use taxes payable of approximately $110,083 and
approximately $65,408, respectively. At December 31, 1997 deferred long
term and current portion of equipment debt includes accrued use taxes
payable of approximately $175,492 and approximately $65,408, respectively.
F-17
<PAGE>
THE MAJESTIC STAR CASINO, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Senior Secured Notes
On May 22, 1996, the Company completed a private offering of $105,000,000 of
Senior Secured Notes due May 15, 2003. These notes were exchanged in November,
1996 by the Senior Exchange Secured Notes, which are registered under the
Securities Exchange Act of 1933, but which notes are otherwise substantially
identical in all material respects to the privately placed notes.
The Senior Secured Notes bear interest at a fixed rate of 12.75% per annum
payable May 15 and November 15 each year, commencing November 15, 1996.
Contingent interest is payable on the Senior Secured Notes, on each such
interest payment date, in an aggregate amount equal to 5.0% of the Company's
Consolidated Cash Flow, as defined in the Indenture between the Company and IBJ
Schroder Bank & Trust Company, as Trustee, dated May 22, 1996 (the
"Indenture"), for the six month period ending on March 31 or September 30
(each, a "Semiannual Period") most recently completed prior to such interest
payment date, based on maximum of $60.0 million of the Company's Consolidated
Cash Flow during any two consecutive Semiannual Periods; provided that no
contingent interest shall be payable with respect to any period prior to the
first day of the operation of the Majestic Star Casino, as defined in the
Indenture. Under certain circumstances, the Company, at its option, may defer
payment of all or any installment of contingent interest. At December 31, 1998
and 1997, accrued contingent interest payable was approximately $2,444,000 and
$1,253,000, respectively.
The Senior Secured Notes are collateralized by, among other things (i) a
pledge of the Company's 50% membership interest in BHR, (ii) a collateral
assignment of the Company's interest in the Berthing Agreement, (iii) a pledge
of all funds in the collateral accounts into which the proceeds from the Senior
Secured Notes were deposited pending their use and (iv) upon delivery of the
Permanent Vessel to the Company, a duly perfected first preferred ship mortgage
on such Permanent Vessel.
The 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.
Equipment Financing
At December 31, 1998 and 1997, approximately $5.2 million and $7.5 million,
respectively, of equipment financing, excluding accrued use taxes of
approximately $175,000 and $241,000, was outstanding of which $1.9 million
represents current maturities of long-term debt. At December 31, 1998, $2.6
million of this debt carries an interest rate of 11.5%, $2.0 million carries an
interest rate of 10.75%, and $607,000 carries an interest rate of 10.93%. The
debt is collateralized by certain gaming equipment and the remaining balance
will be repaid in varying monthly principal and interest payments of
approximately $220,000.
9. NOTE TO MEMBER
At December 31, 1998 and 1997, approximately $8.8 million and $10.8 million
was owed to a member of the Company. This note carries a floating interest rate
equal to the applicable federal short term note, as set forth in Section
1274(d) of the Internal Revenue Code of 1986 (4.2%, 5.5% and 5.6%, at December
31, 1998, 1997 and 1996, respectively) and could not be repaid, under the
Indenture, until the completion of the Permanent Vessel, which is complete.
This note resulted from the conversion of members' contributions into debt on
March 31, 1996. During January 1998, the proceeds from the Senior Secured Notes
reserved to repay the note were reclassified from restricted cash to operating
cash as the funds held in escrow were not required to complete the Permanent
Vessel.
F-18
<PAGE>
THE MAJESTIC STAR CASINO, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During September 1998, $2.0 million was repaid to a member of the Company,
BDI. The note is a demand note and there is no guaranty that the note due to
BDI will be repaid in 1999.
10. PROFIT SHARING PLAN
The Company contributes to a defined contribution plan which provides for
contributions in accordance with the plan document. The plan is available to
all employees with at least one year of service. The Company contributes a
matching contribution up to a maximum of 3% of an employee's salary limited to
a specified dollar amount as stated in the plan document. The Company's
contributions to the plan amounted to $272,000 and $288,000 during 1998 and
1997, respectively.
11. COMMITMENTS AND CONTINGENCIES
Letter of Credit/Surety Bond
In May 1996, the Company arranged for a $12.5 million five year surety bond
(the "Bond") to be issued to the Commission. The Bond's primary purpose is to
provide collateral for completion of the Company's off-site development
obligations under the Development Agreement. In 1996 to support the Company's
obligations to the bonding company, the Company obtained a $3.5 million letter
of credit from a bank to benefit the bonding company. The letter of credit was
renewed in both 1997 and 1998. The beneficial owner of the Company (the
"Owner") guaranteed the Company's obligations to the bonding company under the
Bond and to the bank under the $3.5 million letter of credit. During May 1998,
the Company replaced the Owner's financial guarantee by depositing $3.6 million
with the bank to guarantee the letter of credit to benefit the bonding company.
If the Owner is required to make payments to the bonding company as a result of
the guaranty, the Company will be obligated to reimburse the Owner for any such
payments.
Legal Proceedings
On January 15, 1998, the Company filed a petition for "Correction of an
Error" and on January 20, 1998, filed an appeal to the March 1, 1997, property
tax assessment of the Chartered Vessel. The Company believes it was not given
proper notice of the 1997 property tax assessment in accordance with the
general assessment provisions of the property tax law and the Company further
believes the assessment of approximately $1.2 million was incorrectly
calculated. The tax is payable in semiannual installments due in May and
November 1998. Both semiannual installments totaling approximately $560,000 in
the aggregate have been paid. The amount paid was based upon an estimate
provided to the Company by legal counsel.
On March 27, 1998, a complaint was filed in the Lake County Superior Court
in East Chicago, Indiana, against BHR, Trump Indiana, Inc., (the "Joint Venture
Partner") and the Company. The plaintiff, a former employee of the Company,
claims to have been assaulted in the BHR parking lot on June 25, 1997 and is
requesting compensatory and punitive damages totaling approximately $11
million. The suit alleges that the Joint Venture Partner and the Company failed
to provide adequate security to prevent assaults. The Company intends to
vigorously defend against such suit. However, it is too early to determine the
outcome of such suit and the effect, if any on the Company's financial position
and results of operations.
From time to time, the Company may be involved in routine administrative
proceedings involving alleged violations of certain provisions of the Riverboat
Gambling Act. Management believes that the outcome of any such proceedings will
not, either individually or in the aggregate, have a material adverse effect on
the Company or its ability to retain and/or renew any license required under
the Riverboat Gambling Act for the Company's operations.
F-19
<PAGE>
THE MAJESTIC STAR CASINO, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In March 1998, the Company agreed to settle two such proceedings with the
payment of $120,000 to the IGC. No such proceedings are pending at this time.
Harbor Lease
Under a lease agreement assumed by BHR, from the Joint Venture Partner with
Lehigh Portland Cement Company ("Lehigh Cement"), BHR has leased certain
property which is integral to the gaming operations of the Joint Venture
Partner and the Company. The lease places certain restrictions on the use of
the harbor by the joint venture partners, requires the reimbursement of certain
costs which may be incurred by Lehigh Cement and requires BHR to pursue
permitting of and building of a new harbor. The lease was rent free through
December 29, 1997 and subject to certain conditions, primarily continuing
progress toward permitting of and then building of a new harbor, the lease will
extend beyond December 29, 1997 until the earlier of December 31, 2005 or the
completion of a new harbor. The BHR Joint Venture will be required to pay
$125,000 per month beginning January 1998. A new harbor may require new guest
facilities. The level of expenditures required for such new facilities cannot
be accurately estimated at this time.
Indiana Gaming Regulations
The ownership and operation of riverboat gaming operations in Indiana are
subject to strict state regulation under the Riverboat Gambling Act ("Act") and
the administrative rules promulgated thereunder. The Indiana Gaming Commission
("IGC") is empowered to administer, regulate and enforce the system of
riverboat gaming established under the Act and has jurisdiction and supervision
over all riverboat gaming operations in Indiana, as well as all persons on
riverboats where gaming operations are conducted. The IGC is empowered to
regulate a wide variety of gaming and nongaming related activities, including
the licensing of supplies to, and employees at, riverboat gaming operations and
to approve the form of entity qualifiers and intermediary and holding
companies. Indiana is a new jurisdiction and the emerging regulatory framework
is not yet complete. The IGC has adopted certain final rules and has published
others in proposed or draft form which are proceeding through the review and
final adoption process. The IGC has broad rulemaking power, and it is
impossible to predict what effect, if any, the amendment of existing rules or
the finalization of currently new rules might have on the operations.
F-20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Buffington Harbor Riverboats, L.L.C.:
We have audited the accompanying balance sheets of Buffington Harbor
Riverboats, L.L.C. (a Delaware limited liability company) as of December 31,
1998 and 1997, and the related statements of operations, members' capital and
cash flows for the years December 31, 1998, 1997, and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Buffington Harbor
Riverboats, L.L.C. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years ended December 31, 1998, 1997, and
1996 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
-------------------------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
January 29, 1999
F-21
<PAGE>
BUFFINGTON HARBOR RIVERBOATS, L.L.C.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................. $ 177,685 $ 129,509
Trade receivables.................................... 67,730 11,119
Due from members' (Note 2)........................... 1,361,375 1,666,509
Inventory............................................ 261,750 339,066
Prepaid expenses and other current assets............ 78,916 100,161
----------- -----------
Total current assets............................... 1,947,456 2,246,364
PROPERTY, PLANT AND EQUIPMENT, NET (Notes 2 and 3)..... 84,507,760 89,946,185
OTHER ASSETS........................................... 267,717 509,279
----------- -----------
Total assets....................................... $86,722,933 $92,701,828
=========== ===========
LIABILITIES AND MEMBERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable..................................... $ 1,263,411 $ 2,095,812
Accrued expense...................................... 1,461,759 664,881
----------- -----------
Total current liabilities.......................... 2,725,170 2,760,693
DEFERRED RENT (Note 4)................................. 2,499,989 2,857,165
COMMITMENTS AND CONTINGENCIES (Note 4)................. -- --
MEMBERS' CAPITAL....................................... 81,497,774 87,083,970
----------- -----------
Total liabilities and member's capital............. $86,722,933 $92,701,828
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-22
<PAGE>
BUFFINGTON HARBOR RIVERBOATS, L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Food and beverage..................... $ 4,076,256 $ 5,541,672 $ 3,576,492
Other (Note 2)........................ 14,571,430 14,144,169 9,187,968
----------- ----------- -----------
Net revenues........................ 18,647,686 19,685,841 12,764,460
----------- ----------- -----------
COSTS AND EXPENSES
Food and beverage..................... 3,532,120 4,553,964 2,894,437
General and administrative............ 15,331,318 15,776,782 9,768,871
Depreciation.......................... 5,945,672 5,821,765 3,039,708
Other................................. 190,722 465,274 328,046
Preopening expenses................... -- -- 1,871,590
----------- ----------- -----------
Total costs and expenses............ 24,999,832 26,617,785 17,902,652
----------- ----------- -----------
Loss from operations................ (6,352,146) (6,931,944) (5,138,192)
INTEREST INCOME, net.................... 17,220 18,262 203,047
----------- ----------- -----------
Net loss............................ $(6,334,926) $(6,913,682) $(4,935,145)
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-23
<PAGE>
BUFFINGTON HARBOR RIVERBOATS, L.L.C.
STATEMENTS OF MEMBERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
RETAINED
MEMBER EARNINGS
CONTRIBUTIONS (DEFICIT) TOTAL
------------- ------------ -----------
<S> <C> <C> <C>
Balance, December 31, 1995............ $43,646,036 $ 73,781 $43,719,817
Capital contribution made by Trump
Indiana, Inc....................... 25,563,415 0 25,563,415
Capital contribution made by The
Majestic Star Casino, LLC.......... 25,563,415 0 25,563,415
Net loss.......................... 0 (4,935,145) (4,935,145)
----------- ------------ -----------
Balance, December 31, 1996............ $94,772,866 $ (4,861,364) $89,911,502
Capital contribution made by Trump
Indiana, Inc....................... 2,043,075 0 2,043,075
Capital contribution made by The
Majestic Star Casino, LLC.......... 2,043,075 0 2,043,075
Net loss.......................... 0 (6,913,682) (6,913,682)
----------- ------------ -----------
Balance, December 31, 1997............ $98,859,016 $(11,775,046) $87,083,970
Capital contribution made by Trump
Indiana, Inc....................... 374,365 0 374,365
Capital contribution made by The
Majestic Star Casino, LLC.......... 374,365 0 374,365
Net loss.......................... 0 (6,334,926) (6,334,926)
----------- ------------ -----------
Balance, December 31, 1998............ $99,607,746 $(18,109,972) $81,497,774
=========== ============ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-24
<PAGE>
BUFFINGTON HARBOR RIVERBOATS, L.L.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................. $(6,334,926) $(6,913,682) $ (4,935,145)
Adjustment to reconcile net loss to
net cash flows provided by (used in)
operating activities
Depreciation....................... 5,945,672 5,821,765 3,039,708
Deferred rent...................... (357,176) 1,142,856 1,714,309
Deferred income.................... -- (400,000) 400,000
Changes in operating assets and
liabilities.......................
Decrease (increase) in accounts
receivable........................ (56,611) 4,145 (15,264)
Decrease (increase) in due from
members'.......................... 305,134 261,881 (1,928,390)
Decrease (increase) in inventory... 77,316 14,900 (353,966)
Increase in prepaid expenses and
other current assets.............. 21,245 (8,599) (91,562)
Increase in other assets........... 241,562 (253,898) (255,381)
Increase (decrease) in accounts
payable........................... (832,401) 1,014,495 (1,859,328)
Increase in accrued expenses....... 796,878 204,739 460,142
----------- ----------- ------------
Net cash flows provided by (used
in) operating activities........ (193,307) 888,602 (3,824,877)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment, net...................... (507,247) (4,913,623) (61,290,442)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributed capital.................. 748,730 4,086,150 51,126,830
----------- ----------- ------------
Net increase (decrease) in cash.. 48,176 61,129 (13,988,489)
CASH BEGINNING OF PERIOD............... 129,509 68,380 14,056,869
----------- ----------- ------------
CASH END OF PERIOD..................... $ 177,685 $ 129,509 $ 68,380
=========== =========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-25
<PAGE>
BUFFINGTON HARBOR RIVERBOATS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
1. ORGANIZATION AND OPERATIONS:
Trump Indiana, Inc. ("Trump Indiana") and The Majestic Star Casino, LLC
("Barden"), the two holders of certificates of suitability for the Gary,
Indiana riverboat casinos, formed Buffington Harbor Riverboats, L.L.C. ("BHR")
on September 27, 1995 and have entered into an agreement (the "BHR Agreement")
relating to the joint ownership, development and operation of all common land
based and waterside operations in support of the Trump Indiana and Barden
riverboat casinos. Under the BHR Agreement, BHR acquired property and
constructed common roadways, utilities and other infrastructure improvements on
BHR's property.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Under the terms of the BHR Agreement, all expenditures requiring a cash
outlay by BHR are billed to Trump Indiana and Barden at cost. Accordingly, BHR
records as expenses the cost of providing such services and records as other
revenues the amounts billed to Trump Indiana and Barden.
Property, Plant and Equipment
Property, plant and equipment is carried at cost. Property and equipment is
depreciated on the straight-line method using rates based on the following
useful lives:
<TABLE>
<S> <C>
Land improvements............................................. 15 years
Buildings..................................................... 40 years
Building improvements......................................... 5-10 years
Harbor improvements........................................... 10-15 years
Furniture, fixtures and equipment............................. 5 years
</TABLE>
Income Taxes
BHR makes no provision (benefit) for income taxes since taxable income
(loss) is allocated to the members for inclusion in their respective income tax
returns.
Long-Lived Assets
BHR accounts for long-lived assets under the provisions of Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-
Lived Assets" ("SAS No. 121"). SAS No. 121 requires, among other things, that
an entity review its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable. BHR does not believe that any such
changes have occurred.
F-26
<PAGE>
BUFFINGTON HARBOR RIVERBOATS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land and land improvements...................... $35,353,824 $35,091,770
Building and building improvements.............. 40,224,143 40,199,358
Harbor improvements............................. 17,076,591 16,921,393
Furniture, fixtures and equipment............... 6,660,348 6,595,138
----------- -----------
99,314,906 98,807,659
Less: Accumulated depreciation.................. (14,807,146) (8,861,474)
----------- -----------
Total property, plant and equipment, net........ $84,507,760 $89,946,185
=========== ===========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES:
Indiana Gaming Regulations
The ownership and operation of riverboat gaming operations in Indiana are
subject to state regulation under the Riverboat Gambling Act ("Act") and the
administrative rules promulgated thereunder. The Indiana Gaming Commission
("IGC") is empowered to administer, regulate and enforce the system of
riverboat gaming established under the Act and has jurisdiction and supervision
over all riverboat gaming operations in Indiana, as well as all persons on
riverboats where gaming operations are conducted. The IGC is empowered to
regulate a wide variety of gaming and nongaming related activities, including
the licensing of suppliers to, and employees at, riverboat gaming operations
and to approve the form of ownership and financial structure of not only
riverboat owner and supplier licensees, but also their 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 currently new rules might have on the operations of BHR,
Trump Indiana and Barden.
Leases
Under a lease agreement assumed by BHR from Trump Indiana with Lehigh
Portland Cement Co. ("Lehigh Cement"), BHR has leased certain property, which
is integral to the gaming operations of Trump Indiana and Barden. The lease
places certain restrictions on the use of the harbor by riverboats of Barden
and Trump Indiana, requires the reimbursement of certain costs which may be
incurred by Lehigh Cement, and requires BHR to pursue the permitting and
construction of a new harbor. The lease was rent free through December 29, 1997
and subject to certain conditions, primarily continuing progress toward
permitting and construction of a new harbor, the lease will extend until the
earlier of December 31, 2005 or the completion of a new harbor. Subsequent to
the original 30-month term and beginning January, 1998 BHR is required to make
payments of $125,000 per month for the remainder of the lease term. As of
December 31, 1998 and 1997, BHR has recorded deferred rent expense of
$2,499,989 and $2,857,165, respectively. The level of expenditures necessary to
construct a new harbor cannot be accurately estimated at this time. BHR also
has office equipment and vehicle leases. Rental expense of noncancellable
operating leases was $1,481,194 and $1,502,239 for 1998, and 1997,
respectively.
F-27
<PAGE>
BUFFINGTON HARBOR RIVERBOATS, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Minimum rental commitments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
<S> <C>
1999......................................................... $ 1,813,942
2000......................................................... 1,804,476
2001......................................................... 1,662,646
2002......................................................... 1,500,000
2003......................................................... 1,500,000
Thereafter................................................... 3,000,000
-----------
$11,281,064
===========
</TABLE>
F-28
<PAGE>
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$130,000,000
[LOGO OF MAJESTIC STAR CASINO]
10 7/8% SENIOR SECURED NOTES
DUE 2006
----------------
PROSPECTUS
----------------
August 31, 1999
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