Filed Pursuant to Rule 424(b)(1)
Registration No. 333-60361
PROSPECTUS
EMPRESS ENTERTAINMENT, INC.
OFFER TO EXCHANGE
ALL 8 1/8% SENIOR SUBORDINATED NOTES DUE 2006
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 FOR ALL OUTSTANDING
8 1/8% SENIOR SUBORDINATED NOTES DUE 2006
($150,000,000 PRINCIPAL AMOUNT OUTSTANDING)
The Exchange Offer (as defined) and withdrawal rights will expire at 5:00
p.m., New York City time, on November 6, 1998 (as such date may be extended,
the "Expiration Date").
Upon the terms and subject to the conditions set forth in this Prospectus,
as it may be amended and supplemented from time to time (this "Prospectus"),
and the accompanying Letter of Transmittal (the "Letter of Transmittal," and
together with the Prospectus, the "Exchange Offer"), Empress Entertainment,
Inc., a Delaware corporation (the "Company"), hereby offers, to exchange an
aggregate of up to $150,000,000 principal amount of its 8 1/8% Senior
Subordinated Notes due 2006 (the "New Notes"), which have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant
to a Registration Statement of which this Prospectus is a part, for an
identical principal amount of its outstanding 8 1/8% Senior Subordinated Notes
due 2006 (the "Old Notes") (the Old Notes and the New Notes are collectively
referred to herein as the "Notes") of the Company from the holders thereof in
integral multiples of $1,000. See "The Exchange Offer."
On September 2, 1998, the Company entered into an Agreement and Plan of
Merger with Horseshoe Gaming (Midwest), Inc. ("Horseshoe Midwest") and certain
of its affiliates which, if consummated, would result in a Change of Control
(as defined), the assumption by Horseshoe Midwest of the Company's obligations
under the Indenture dated as of June 18, 1998 (the "Indenture") among the
Company, the Guarantors and U.S. Bank Trust National Association, as trustee
(the "Trustee") and the New Notes, and the discharge of the Company from its
obligations under the Indenture and the New Notes. See "Business--Recent
Development--Plan of Merger," "Description of the New Notes--Redemption" and
"--Change of Control."
The Company will accept for exchange any and all Old Notes that are validly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date.
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date; otherwise such tenders are irrevocable. The
Exchange Offer is not conditioned upon any minimum principal amount of the Old
Notes being tendered for exchange. However, the Exchange Offer is subject to
certain customary conditions and to the terms and provisions of the
Registration Rights Agreement, dated as of June 18, 1998 (the "Registration
Rights Agreement"), among the Company, Empress Casino Hammond Corporation
("Empress Hammond"), Empress Casino Joliet Corporation ("Empress Joliet"),
Empress River Casino Finance Corporation ("Empress Finance") and Hammond
Residential, L.L.C. ("Hammond Residential," and together with Empress Hammond,
Empress Joliet and Empress Finance, collectively, the "Guarantors") and
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Wasserstein Perella Securities, Inc. (the "Initial Purchasers"). See "The
Exchange Offer" and "Registration Rights."
(continued on next page)
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SEE "RISK FACTORS" ON PAGES 13 THROUGH 23 FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY HOLDERS IN EVALUATING THE EXCHANGE OFFER.
----------------
THE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NONE OF THE ILLINOIS GAMING BOARD, THE INDIANA GAMING COMMISSION OR ANY
OTHER GAMING AUTHORITY HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
----------------
The date of this Prospectus is October 7, 1998
An aggregate of $150 million principal amount of Old Notes were sold by the
Company to the Initial Purchasers (the "Offering") on June 18, 1998 (the
"Issue Date") without registration under the Securities Act, in reliance upon
exemptions therefrom, pursuant to a Purchase Agreement, dated June 11, 1998
(the "Purchase Agreement"), among the Company, the Guarantors and the Initial
Purchasers. The Initial Purchasers subsequently resold the Old Notes in
reliance on Rule 144A under the Securities Act ("Rule 144A") and Regulation S
under the Securities Act ("Regulation S"). The Company, the Guarantors and the
Initial Purchasers also entered into the Registration Rights Agreement,
pursuant to which the Company granted certain registration rights for the
benefit of the holders of the Old Notes.
The Old Notes were, and the New Notes will be, issued under the Indenture
among the Company, the Guarantors and the Trustee. As of the date of this
Prospectus, there are $150 million aggregate principal amount of Old Notes
outstanding. The form and terms of the New Notes will be identical in all
material respects to the form and terms of the Old Notes, except that (i) the
New Notes have been registered under the Securities Act and, therefore, will
not bear legends restricting the transfer thereof, (ii) holders of New Notes
will not be entitled to any increase in the interest rate ("Additional
Interest") thereon pursuant to certain circumstances under the Registration
Rights Agreement, and (iii) holders of New Notes will no longer be entitled to
certain other rights under the Registration Rights Agreement.
Interest on the New Notes is payable semiannually in arrears on each January
1 and July 1, commencing January 1, 1999. Holders whose Old Notes are accepted
for exchange will have the right to receive interest accrued thereon from the
date of their original issuance or the last interest payment date, as
applicable, to, but not including, the date of issuance of the New Notes, such
interest to be payable with the first interest payment on the New Notes.
Interest on the Old Notes accepted for exchange will cease to accrue on the
day prior to the issuance of the New Notes. The New Notes will mature on July
1, 2006. See "Description of the New Notes--Maturity, Interest and Principal."
The New Notes will be redeemable at the option of the Company, in whole or
in part, at any time on or after July 1, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest thereon, if any, to the date of
redemption. In addition, on or prior to July 1, 2001, the Company may redeem
up to 35% of the originally issued aggregate principal amount of the Notes, at
a redemption price of 108 1/8% of the principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the redemption date, with the net
proceeds of an Equity Offering (as defined herein); provided, that not less
than $97.5 million in aggregate principal amount of New Notes remain
outstanding immediately after giving effect to such redemption. The Company
may redeem the New Notes, in whole or in part, pursuant to a Required
Regulatory Redemption (as defined) at 100% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the date of redemption. Upon a
Change of Control (as defined herein), each holder of the New Notes will,
subject to certain limitations, have the right to require the Company to
repurchase all or a portion of such holder's New Notes, at a purchase price
equal to 101% of the principal amount, plus accrued and unpaid interest, if
any, to the date of repurchase. The Company has entered into an Agreement and
Plan of Merger with Horseshoe Midwest and certain of its affiliates which, if
consummated, would result in a Change of Control, the assumption by Horseshoe
Midwest of the Company's obligations under the Indenture and the New Notes and
the discharge of the Company from its obligations under the Indenture and the
New Notes. There can be no assurance that the Company or, if the transactions
with Horseshoe Midwest are consummated and Horseshoe Midwest assumes the
Company's obligations under the Indenture and the New Notes, that Horseshoe
Midwest, will have sufficient funds available to consummate such a repurchase
as is required under the Change of Control provisions. See "Business--Recent
Developments--Plan of Merger," "Description of the New Notes--Redemption" and
"--Change of Control."
Payment of principal and interest on the Notes will be jointly, severally,
fully and unconditionally guaranteed (the "Guarantees") on an unsecured senior
subordinated basis by all existing and future Restricted Subsidiaries (as
defined) of the Company. The Notes and the Guarantees will be senior unsecured
subordinated
i
obligations of the Company and the Guarantors, respectively, and will be
subordinated in right of payment to all existing and future Indebtedness (as
defined) of the Company, including Indebtedness (as defined) under the Credit
Facility (as defined), and the Guarantors, respectively. As of June 30, 1998,
excluding $150.0 million of indebtedness (the "Defeased Debt") under the
Company's $150.0 million 10 3/4% Senior Notes due 2002 (the "10 3/4% Notes"),
which will continue to accrue interest and be an obligation of the Company
until they are redeemed, currently anticipated to occur on April 1, 1999,
substantially all of the operating covenants of which were defeased in
connection with the sale of the Old Notes (the "Covenant Defeasance") the
Company and the Guarantors had $10.0 million of Senior Indebtedness
outstanding, to which holders of the Notes are subordinated. In connection
with the Offering, the Company replaced its Existing Credit Facility (as
defined) with a new senior secured reducing revolving credit facility (the
"Credit Facility"). See "Use of Proceeds" and "Description of Certain Other
Indebtedness."
The New Notes are being offered hereby in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement. The
Company is making the Exchange Offer in reliance on the position of the staff
of the Securities and Exchange Commission (the "Commission") as set forth in
certain interpretive letters addressed to third parties in other transactions.
However, the Company has not sought its own interpretive letter and there can
be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as it has in such
interpretive letters to third parties. Based on these interpretations by the
staff of the Commission, the Company believes that New Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold and otherwise transferred by a holder (other than (i) a broker-dealer
who purchased Old Notes directly from the Company for resale pursuant to Rule
144A or any other available exemption under the Securities Act, (ii) an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act or (iii) a broker-dealer who acquired the Old Notes as a result of market-
making or other trading activities), without further compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided, that such holder is acquiring the New Notes in the ordinary course
of business and is not participating, and has no arrangement or understanding
with any person to participate, in a distribution (within the meaning of the
Securities Act) of the New Notes. Holders wishing to accept the Exchange Offer
must represent to the Company, as required by the Registration Rights
Agreement, that such conditions have been met. Any holder of Old Notes who is
not able to rely on the interpretations of the staff of the Commission set
forth in the above-mentioned interpretive letters must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale of such Old Notes, unless such sale is made pursuant
to an exemption from such requirements. See "The Exchange Offer--Resales of
New Notes."
Each broker-dealer who 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 in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging 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, even though selling broker-dealers may be
deemed "underwriters" within the meaning of the Securities Act. Based on the
position taken by the staff of the Commission in the interpretive letters
referred to above, the Company believes that broker-dealers who 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
such 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, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such New Notes. Accordingly, this Prospectus may be
used by a Participating Broker-Dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer for its own account as a result of market-making
or other trading activities. Subject to certain provisions set forth in the
Registration Rights Agreement, the Company has agreed that this Prospectus may
be used by a Participating Broker-Dealer in connection with resales of such
New Notes. See "Plan of
ii
Distribution." However, a Participating Broker-Dealer who 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 the Company, or cause the
Company to be notified, on or prior to the Expiration Date, 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 one of the addresses set forth herein under "The Exchange
Offer--The Exchange Agent; Assistance." Any Participating Broker-Dealer who is
an "affiliate" of the Company may not rely on such interpretive letters and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. See "The Exchange
Offer--Resales of New Notes."
In that regard, each Participating Broker-Dealer who surrenders 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 the Company of
the occurrence of any event or the discovery of any fact which makes any
statement contained in this Prospectus untrue in any material respect or which
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 certain other
events specified in the Registration Rights Agreement, such Participating
Broker-Dealer will suspend the sale of New Notes pursuant to this Prospectus
until the Company has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such Participating Broker-Dealer or the Company has
given notice that the sale of the New Notes may be resumed, as the case may
be.
The New Notes issued pursuant to this Exchange Offer will be issued in the
form of a Global New Note (as defined herein), which will be deposited with,
or on behalf of, The Depository Trust Company ("DTC") and registered in its
name or in the name of Cede & Co., its nominee. Beneficial interests in the
Global New Note representing the New Notes will be shown on, and transfers
thereof will be effected through, records maintained by DTC and its
participants. Notwithstanding the foregoing, Old Notes held in certificated
form, if any, will be exchanged solely for Certificated New Notes (as defined
herein). After the initial issuance of the Global New Note, Certificated New
Notes will be issued in exchange for interests in the Global New Note only on
the terms set forth in the Indenture. See "Description of the New Notes" and
"Book-Entry; Delivery and Form."
The Company will not receive any proceeds from this offering, but, pursuant
to the Registration Rights Agreement, the Company will bear certain
registration expenses. No underwriter is being utilized in connection with the
Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER
THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
AVAILABLE INFORMATION
The Company and the Guarantors have jointly filed a registration statement
on Form S-4 (together with any amendments thereto, the "Registration
Statement") with the Commission under the Securities Act with respect to the
New Notes and the related Guarantees. This Prospectus, which constitutes a
part of the Registration Statement, omits certain information contained in the
Registration Statement and reference is made to the Registration Statement and
the exhibits and schedules thereto for further information with respect to the
iii
Company and the New Notes offered hereby. This Prospectus contains summaries
of the material terms and provisions of certain documents and in each instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. Each such summary is qualified in its entirety by such
reference.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon the
effectiveness of the Registration Statement, the Company will be subject to
the reporting requirements of the Exchange Act and the interpretations issued
thereunder by the staff of the Commission. The Registration Statement, such
reports and other information can be inspected and copied at the offices of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as the following regional offices of the
Commission: Seven World Trade Center, Suite 1300, New York, New York 10048;
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Such material also may be accessed electronically by means
of the Commission's home page on the Internet (http://www.sec.gov).
So long as any of the Notes are outstanding, the Company will file with the
Commission, to the extent then permitted by the Commission, the annual
reports, quarterly reports and other documents that the Company would have
been required to file with the Commission pursuant to Sections 13(a) and 15(d)
of the Exchange Act if the Company was subject to such Sections, and the
Company will promptly provide to the Trustee copies of such reports and
documents; provided, however, that if the Company is for any reason unable to
make such filings it will make available, upon request, to any holder of Notes
or prospective purchaser of New Notes, the information specified in Rule
144A(d)(4) of the Securities Act.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus under "Prospectus Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," in addition to certain statements contained
elsewhere in this Prospectus, are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 and are thus
prospective. The safe harbor for forward-looking statements does not apply to
statements made in connection with an initial public offering. Such "forward-
looking statements" are subject to risks, uncertainties and other factors that
could cause actual results to differ materially from future results expressed
or implied by such forward-looking statements. The most significant of such
risks, uncertainties and other factors are discussed under the heading "Risk
Factors," on pages 13 through 23 of this Prospectus.
iv
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 herein, which should be read in its entirety. Unless otherwise
indicated, capitalized terms used in this Prospectus Summary have the
respective meanings ascribed to them elsewhere in this Prospectus. As used in
this Prospectus, unless the context suggests otherwise, references to "the
Company" shall include the Company and its subsidiaries. See "Forward-Looking
Statements" on page iv.
OVERVIEW
The Company is one of the largest operators of riverboat casinos serving the
Chicago Metropolitan Statistical Area (the "Chicago Market"). The Company owns
two distinctly themed casino entertainment operations, Empress Casino Hammond
Corporation ("Empress Hammond") and Empress Casino Joliet Corporation ("Empress
Joliet"), both located adjacent to major highways. Empress Hammond, located in
Hammond, Indiana, is the closest casino to downtown Chicago and Empress Joliet,
located in Joliet, Illinois, is in the fastest growing county in the Chicago
Market. During 1997, the Company's casinos registered approximately nine
million customer admissions and had the highest share of casino revenue in the
Chicago Market (approximately 27%). The Company's 1997 average daily win per
slot machine and table game of $308 and $2,168, respectively, exceeded the
averages of each of the nine U.S. riverboat casino markets. For the twelve
months ended June 30, 1998, the Company generated approximately $376.5 million
of net revenues and $84.9 million of EBITDA.
The Chicago Market is a heavily populated and economically developed region,
consisting of approximately eight million people. Based on the 1993 U.S. Census
Bureau Report, the median household income of the Chicago Market was $45,491,
approximately 46% above the national median. The Chicago Market is primarily
served by nine riverboat casinos (the "Chicago Market Casinos"), including the
Company's two casinos, operating under a limited number of licenses granted by
the States of Illinois and Indiana. The Illinois Riverboat Gambling Act
("Illinois Riverboat Act") authorized the issuance of not more than ten
licenses, all of which have been issued. The Indiana Riverboat Gambling Act
("Indiana Riverboat Act") authorized the issuance of not more than eleven
licenses, including five on Lake Michigan, all five of which have been issued.
Two Indiana licenses, for Patoka Lake and the Ohio River, have yet to be
issued. These casinos generated 1997 casino revenue of approximately $1.3
billion, ranking first among all U.S. riverboat casino markets and capturing an
estimated 6.0% of the total U.S. casino market.
Empress Hammond features a newly built, luxury-appointed catamaran style
vessel, Empress III. Following the recent completion of the fourth deck,
Empress III contains approximately 42,500 square feet of gaming space with
approximately 1,740 slot machines and 54 table games. Empress Hammond includes
an approximately 125,000 square foot mythologically themed pavilion featuring
waterfalls, undersea volcanoes and lounge and dining facilities including the
Blue Water Lounge, the Harborside Steakhouse, the Empressive Buffet and the
Waves Deli. In addition, the pavilion includes a gift shop, concierge suite and
a 150 seat banquet room. Empress Hammond provides parking for approximately
1,000 cars in a multi-story parking structure and offers 1,300 additional
surface parking spaces.
Empress Joliet features two luxury-appointed catamaran style vessels, Empress
I and Empress II, which collectively contain approximately 36,000 square feet
of gaming space, 1,011 slot machines and 52 table games. Empress Joliet
includes an approximately 150,000 square foot Egyptian themed pavilion
featuring lounge and award-winning dining facilities including the Oasis Bar,
the Steakhouse Alexandria, Cafe Casablanca and the Marrakech Buffet. The
pavilion also includes an off-track betting facility, gift shop, concierge
suite and a 400 seat banquet room. Empress Joliet is supported by a three story
hotel with 80 deluxe rooms, 17 junior suites and five king-size suites and an
80-space recreational vehicle park located on 12 acres of land adjacent to the
hotel. Empress Joliet provides surface parking for more than 2,350 cars.
The Company actively pursues opportunities to expand its customer base by
developing additional amenities and by working to attract customers from
outside the Chicago Market. Empress Joliet is the only Chicago Market
1
Casino with a hotel to accommodate overnight visitors although Harrah's has
announced plans to begin constructing a hotel on its property in Joliet. As a
part of its development plan, the Company expects to construct a 200-room
deluxe hotel and a conference center at Empress Hammond to expand its appeal to
customers outside the Chicago Market. The Company intends to further develop
dedicated transportation services to its complexes and is increasing billboard
advertising to improve visitation by customers outside the Chicago Market.
COMPANY STRENGTHS
The Company believes that the following factors contribute significantly to
its success:
. Premier Properties in Superior Locations. The Company's distinctly themed
casino entertainment complexes are strategically located to serve the
growing Chicago Market which has strong population demographics and a
legislatively limited number of licensed competitors. Empress Hammond is
the closest casino to downtown Chicago and is conveniently accessible
from major highways. Empress Joliet is located in the fastest growing
county in the Chicago Market and is the only Chicago Market Casino to
feature a hotel, an off-track betting facility or a recreational vehicle
park. The Company's casinos are equipped with the latest gaming devices
and are continually upgraded to reflect innovative games. The Company
delivers value to its customers by offering superior customer service and
maintaining clean, moderately priced gaming, dining, lodging and
entertainment amenities.
. Market Leadership. The Company was the first Chicago Market Casino and
has established market leadership during its nearly six years of
operations. The Company is the largest Chicago Market casino operator in
terms of casino revenue and number of slot machines. During 1997, the
Company's average daily slot machine and table win per unit exceeded the
averages of each of the nine U.S. riverboat casino markets. The Company's
casinos also had nearly two and one-half times as many 1997 customer
admissions as any other Chicago Market casino operator. For the past two
years, the Company's casinos received the "Best Blackjack Games in the
U.S.A." award in Indiana and Illinois from Casino Player Magazine.
. Marketing Synergies. The Company derives unique marketing advantages from
operating two riverboat casino entertainment complexes serving the
Chicago Market. The Company believes that it receives favorable rates for
television, radio, newspaper, magazine, billboard, direct mail, mass
transit and airport diorama advertising due to its higher buying volume.
Through its Empress Club frequent player reward program, the Company
promotes customer loyalty and encourages customers to visit its
complexes. Benefits of Empress Club membership include use of VIP
boarding areas, participation in special discount programs including meal
and merchandise discounts and preferred valet parking. At June 30, 1998,
approximately 925,000 customers were Empress Club members.
. Proprietary Customer Database. The Company has developed a proprietary
customer database that assists it in tracking customer characteristics
including visitation frequency, preferred gaming equipment usage and
gaming and entertainment spending. The Company uses information gathered
from Empress Club members to create targeted marketing programs to
encourage increased visitation to its complexes by its most profitable
customers. The Company also utilizes promotional programs, such as
merchandise giveaways, slot machine and table game tournaments and other
special events in order to reward customer loyalty, attract new customers
and maintain a high level of brand name recognition.
RECENT DEVELOPMENTS
Plan of Merger
On September 2, 1998, the Company, Empress Hammond and Empress Joliet entered
into an Agreement and Plan of Merger ("Plan of Merger") with Horseshoe Gaming,
L.L.C., a Delaware limited liability company ("Horseshoe"), Horseshoe Midwest,
a Delaware corporation, Empress Acquisition Illinois, Inc., a Delaware
corporation ("Empress Illinois"), Empress Acquisition Indiana, Inc., a Delaware
corporation ("Empress
2
Indiana"). Pursuant to the Plan of Merger, Horseshoe Midwest will acquire from
the Company all of the outstanding stock of Empress Hammond and Empress Joliet
via two simultaneous merger transactions (the "Proposed Mergers").
Horseshoe Midwest was formed to effect the Proposed Mergers and is a shell
corporation which has not undertaken any business activities except in
connection with the Proposed Mergers. The sole asset of Horseshoe Midwest is
$10 million, which has been placed in escrow as a deposit to secure certain of
its obligations under the Plan of Merger. Horseshoe is not an investor in
Horseshoe Midwest, but is related to Horseshoe Midwest by certain common
owners. Horseshoe became a party to the Plan of Merger solely to substantiate
the indemnification obligations of Horseshoe Midwest, Empress Illinois and
Empress Indiana. If the Plan of Merger is consummated, the Notes will become
obligations of Horseshoe Midwest, and the current Guarantees of the Notes by
the Guarantors will remain in effect.
The proposed purchase price is $609 million in cash plus adjustments for all
current assets at closing, less (i) all bank indebtedness at closing and (ii)
all current liabilities at closing, including $676,000 to pay one-half of
agreed upon stay bonuses for managers, directors and key-employees of Empress
Hammond and Empress Joliet. The Company is liable for its transaction costs;
all obligations and covenants contained in its contracts that are not
terminated or amended in the ordinary course of business; and all change of
control payments required under employment agreements with the Company's
officers. See "Management--Employment Agreements."
Until the final purchase price adjustments are determined, $4 million of the
purchase price will be withheld at closing. Upon signing the Plan of Merger,
Horseshoe Midwest deposited $10 million into escrow (the "Deposit") to be paid
to the Company in the event the Plan of Merger is terminated due to (i)
Horseshoe Midwest's failure to obtain financing to replace the commitment from
its current financing source in the event such commitment is withdrawn or is
unacceptable to the Indiana Gaming Commission or the Illinois Gaming Board;
(ii) Horseshoe Midwest's uncured material default or breach of a
representation, warranty or covenant; (iii) the uncured material default or
breach of a representation, warranty or covenant by the Company, Empress
Hammond or Empress Joliet; (iv) or a material adverse change in the financial
or capital markets or in financial, economic or industry conditions generally.
The Deposit will be returned to Horseshoe Midwest in the event that the Plan of
Merger is terminated due to (i) the default or breach of a representation,
warranty or covenant by the Company, Empress Hammond or Empress Joliet, where
such default or breach had a material adverse effect on the business,
prospects, properties, assets, operations or financial condition of Empress
Joliet and Empress Hammond, taken as a whole; (ii) a material adverse change in
the business, prospects, properties, assets, operations or financial condition
of Empress Joliet and Empress Hammond, taken as a whole (other than legislative
or regulatory changes); (iii) the Company's failure to achieve $96.5 million of
EBITDA for calendar year 1998 or any rolling twelve month period thereafter
ending prior to closing; or (iv) an order of a court or other governmental or
regulatory authority restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Plan of Merger.
Horseshoe Midwest has agreed to expressly assume the obligations of the
Company under the Notes pursuant to Section 8.01 of the Indenture. Pursuant to
the Indenture, this will be accomplished through Horseshoe Midwest's execution
of a supplemental indenture with U.S. Bank Trust National Association, as
trustee. Upon consummation of the transactions as contemplated in the Plan of
Merger, the Company will be discharged from all of its obligations under the
Indenture and the Notes. Empress Joliet and Empress Hammond will remain
Guarantors of the Notes as subsidiaries of Horseshoe Midwest. Horseshoe Midwest
has agreed to assume any prepayment obligations on the Notes and under the
Company's Credit Facility with Wells Fargo Bank, National Association (the
"Credit Facility"). See "Description of the New Notes--Certain Covenants--
Limitation on Mergers and Consolidations" and "Description of Certain Other
Indebtedness--Credit Facility."
3
Consummation of the Plan of Merger constitutes a "Change of Control" under
the Indenture and will trigger Horseshoe Midwest's obligation to make an
irrevocable offer to purchase Notes (the "Change of Control Offer") at a cash
price equal to 101% of the principal amount plus accrued and unpaid interest.
Holders of the Notes will have the option of tendering all or any portion of
their Notes for redemption, or they may retain the Notes. The Company and/or
Horseshoe Midwest intend to comply with the provisions of the Indenture and
make a Change of Control Offer to all holders of Notes within the time periods
provided in the Indenture. The Change of Control Offer must commence within 10
business days following the consummation of the transactions contemplated by
the Plan of Merger and must remain open for at least 20 business days.
Horseshoe Midwest must complete repurchase of any Notes tendered in response to
the Change of Control Offer no more than 30 business days after the
consummation of the transactions as contemplated in the Plan of Merger. See
"Description of the New Notes--Change of Control" and "--Redemption."
The inability of the Company and/or Horseshoe Midwest to consummate a Change
of Control Offer or to comply with any other provision of the Indenture would
constitute an Event of Default under the Indenture. If assumption of the
Indenture by Horseshoe Midwest would give rise to an Event of Default, then the
Notes could not be assumed by Horseshoe Midwest and, pursuant to Article VIII
of the Plan of Merger, the Proposed Mergers would not be consummated by the
Company. See "Description of the New Notes--Events of Default and Remedies."
An Event of Default under the Notes also gives rise to an event of default
under the Company's Credit Facility, although it is anticipated that the Credit
Facility will be paid off and terminated upon consummation of the Proposed
Mergers.
All holders of Notes would be required to execute a waiver in order for the
Company and/or Horseshoe Midwest not to comply with the Change of Control
provisions of the Indenture. Neither the Company nor Horseshoe Midwest
currently intend to seek any such waiver.
The Plan of Merger specifies that closing must occur by May 31, 1999,
provided that if approval is obtained from both the Indiana Gaming Commission
and Illinois Gaming Board prior to May 31, 1999, then closing may be extended
to June 30, 1999. The Company, its officers, directors and stockholders are
prevented from discussing or pursuing any alternative sale transaction with any
other party.
EXPANSION AND RENOVATION
To capitalize on excess demand, the Company opened a fourth deck on Empress
III on April 27, 1998, which increased gaming space by over 7,500 square feet,
and added 335 slot machines and space for ten table games. This addition
increased Empress III's gaming square footage and passenger capacity by
approximately 25%, making it the second largest Chicago Market Casino.
Furthermore, in an effort to increase its market share, the Company has begun
an approximately $5.0 million renovation of the Empress Joliet pavilion which
will include construction of a state-of-the-art nightclub, along with extensive
remodeling of the food and beverage outlets. In addition, the Company completed
a $1.0 million renovation of Empress I in May 1998.
THE REORGANIZATION
Concurrently with the Offering, the Company effected a reorganization (the
"Reorganization") pursuant to which (i) the Company changed its name from LMC
Leasing, Ltd. to Empress Entertainment, Inc., (ii) Empress Joliet merged into a
newly formed, wholly-owned subsidiary of the Company, with Empress Joliet
surviving the merger, (iii) Empress Joliet sold its 60% common stock interest
in Empress River Casino Finance Corporation ("Empress Finance") to the Company
and (iv) the Company contributed Empress III to Empress Hammond. As a result of
the Reorganization, Empress Joliet and Empress Finance became wholly-owned
subsidiaries of the Company. Following the Reorganization, the Company operates
Empress III through its wholly-owned subsidiary Empress Hammond and operates
Empress I and Empress II through its wholly-owned subsidiary Empress Joliet.
4
The following chart illustrates the current organizational structure of the
Company:
EMPRESS ENTERTAINMENT, INC.
(Issuer of the Notes)
-----------------------------------------------------------
100% 100% 100% 100%
EMPRESS CASINO EMPRESS EMPRESS RIVER EMPRESS CASINO
JOLIET OPPORTUNITIES, CASINO HAMMOND
CORPORATION INC. (1) FINANCE CORPORATION
(Guarantor) (Unrestricted CORPORATION (2) (Guarantor)
Subsidiary) (Guarantor)
100%
--------------------------
100% 100%
EMPRESS
EMPRESS RACING, MISSISSIPPI, HAMMOND
INC. (3) INC. (4) RESIDENTIAL
(Unrestricted (Unrestricted L.L.C. (5)
Subsidiary) Subsidiary) (Guarantor)
- -------
(1) Empress Opportunities, Inc. ("Empress Opportunities") was formed as an
Unrestricted Subsidiary (as defined) to serve as a holding company under
which the Company intends to explore certain business opportunities other
than the Company's gaming operations in Hammond, Indiana and Joliet,
Illinois.
(2) Empress Finance was formed as a single purpose entity to issue the 10 3/4%
Notes and is expected to be dissolved during 1999.
(3) Empress Racing, Inc. ("Empress Racing") was formed as an Unrestricted
Subsidiary (as defined) to hold a 50% ownership interest in a limited
liability company which has acquired certain outstanding secured
indebtedness of Sunshine Racing, Inc., the owner of the Woodlands Racetrack
in Kansas City, Kansas, and which intends, subject to certain regulatory
approvals, to ultimately bid to purchase the Woodlands Racetrack in an
auction pursuant to a proceeding under Chapter 7 of the U.S. Bankruptcy
Code. See "Business--Recent Developments--Woodlands Racetrack."
(4) Empress Mississippi, Inc. ("Empress Mississippi") was formed as an
Unrestricted Subsidiary (as defined) to investigate business opportunities
in Mississippi.
(5) Hammond Residential, L.L.C. ("Hammond Residential") was formed to satisfy
certain residential development commitments to the City of Hammond. See
"Business--Commitments to Governmental Authorities."
---------------
The Company's principal executive offices are located at 2300 Empress Drive,
Joliet, Illinois 60436 and its telephone number is (815) 744-9400.
THE EXCHANGE OFFER
Securities Offered...... Up to $150,000,000 principal amount of the Company's
8 1/8% Senior Subordinated Notes due 2006, which
have been registered under the Securities Act. The
terms of the New Notes and the Old Notes are
identical in all material respects, except for
certain transfer restrictions, additional interest
provisions and certain other registration rights
relating to the Old Notes described below under "--
Description of the New Notes."
The Exchange Offer...... The Company is offering, upon the terms and subject
to the conditions set forth herein and in the
accompanying Letter of Transmittal, to exchange
$1,000 in principal amount of New Notes for each
$1,000 in principal
5
amount of the outstanding Old Notes. The issuance
of the New Notes is intended to satisfy obligations
of the Company contained in the Registration Rights
Agreement. As of the date of this Prospectus, $150
million in aggregate principal amount of Old Notes
is outstanding, the maximum amount authorized by
the Indenture for all Notes. The Company will issue
the New Notes to holders that validly tender Old
Notes on or prior to the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer."
Expiration Date........... 5:00 p.m., New York City time, on November 6, 1998,
as the same may be extended. See "The Exchange
Offer--Expiration Date; Extensions; Amendments."
Conditions of the
Exchange Offer;
Extensions; Amendments....
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 certain customary conditions and to
the terms and provisions of the Registration Rights
Agreement. The Company expressly reserves the
right, in its sole and absolute discretion, (i) to
delay accepting any Old Notes, (ii) to extend the
Exchange Offer, (iii) if any of the conditions set
forth under "The Exchange Offer--Conditions of the
Exchange Offer" shall not have been satisfied, to
terminate the Exchange Offer, by giving oral or
written notice of such delay, extension or
termination to the Exchange Agent (as defined
herein) and (iv) 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 determined by the Company to constitute a
material change, the Company will promptly disclose
such amendments by means of a prospectus supplement
that will be distributed to the registered holders
of the Old Notes. See "The Exchange Offer--
Expiration Date; Extensions; Amendments" and "The
Exchange Offer--Conditions of the Exchange Offer."
Accrued Interest on the Holders whose Old Notes are accepted for exchange
Old Notes................. will have the right to receive interest accrued
thereon from the date of their original issuance or
the last interest payment date, as applicable, to,
but not including, the date of issuance of the New
Notes, such interest to be payable with the first
interest payment on the New Notes. Interest on the
Old Notes accepted for exchange will cease to
accrue on the day prior to the issuance of the New
Notes.
Procedures for Tendering
Old Notes; Special
Procedures for Beneficial
Owners....................
Except as otherwise provided below, each holder
desiring to accept the Exchange Offer must transmit
a properly completed and duly executed Letter of
Transmittal, including all other documents required
by the Letter of Transmittal, to the Exchange Agent
at the address set forth in "The Exchange Offer--
The Exchange Agent; Assistance" prior to 5:00 p.m.,
New York City time, on the Expiration Date. In
addition, either (i) certificates for such Old
Notes must be received by the Exchange Agent along
with the Letter of Transmittal, (ii) a timely
confirmation of book-entry transfer of such Old
Notes, if such
6
procedure is available, into the Exchange Agent's
account at DTC pursuant to the procedure for book-
entry transfer described below must be received by
the Exchange Agent prior to the Expiration Date or
(iii) the holder must comply with the guaranteed
delivery procedures described below. Any beneficial
owner of the Old Notes (a "Beneficial Owner") whose
Old Notes are registered in the name of a nominee,
such as a broker, dealer, commercial bank or trust
company, and who wishes to tender Old Notes in the
Exchange Offer should instruct such registered
holder to promptly tender on such Beneficial
Owner's behalf. If such Beneficial Owner wishes to
tender on such Beneficial Owner's own behalf, such
Beneficial Owner must, prior to completing and
executing the Letter of Transmittal and delivering
the Old Notes, make appropriate arrangements to
either register ownership of the Old Notes in such
Beneficial Owner's name or obtain a properly
completed bond power from the registered holder. By
executing the Letter of Transmittal, each holder
will represent to the Company that, among other
things, (i) the holder is not an "affiliate" of the
Company as defined in Rule 405 of the Securities
Act, (ii) the holder is not a broker-dealer that
acquired Old Notes directly from the Company in
order to resell them pursuant to Rule 144A of the
Securities Act or any other available exemption
under the Securities Act, (iii) the holder will
acquire the New Notes in the ordinary course of
business and (iv) the holder is not participating,
and does not intend to participate, and has no
arrangement or understanding with any person to
participate, in the distribution of the New Notes.
Any Old Notes not accepted for exchange for any
reason will be returned, without expense to the
tendering holder thereof, as promptly as
practicable after the Expiration Date. See "The
Exchange Offer--Procedures for Tendering Old
Notes."
Guaranteed Delivery Holders of Old Notes who wish to tender their Old
Procedures................ Notes and (i) whose Old Notes are not immediately
available or (ii) who cannot deliver their Old
Notes, the Letter of Transmittal or any other
documents required by the Letter of Transmittal to
the Exchange Agent on or prior to the Expiration
Date or (iii) who cannot complete the procedures
for delivery by book-entry transfer on a timely
basis, may tender their Old Notes according to the
guaranteed delivery procedures set forth in the
Letter of Transmittal. See "The Exchange Offer--
Guaranteed Delivery Procedures."
Acceptance of Old Notes
and Delivery of New
Notes.....................
Upon satisfaction or waiver of all conditions of
the Exchange Offer, the Company will accept any and
all 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 issued
pursuant to the Exchange Offer will be delivered
promptly after acceptance of the Old Notes. See
"The Exchange Offer--Acceptance of Old Notes for
Exchange; Delivery of New Notes."
Withdrawal Rights......... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange Offer--
Withdrawal Rights."
7
The Exchange Agent........ U.S. Bank Trust National Association is the
exchange agent (in such capacity, the "Exchange
Agent"). The address and telephone number of the
Exchange Agent are set forth in "The Exchange
Offer--The Exchange Agent; Assistance."
Fees and Expenses......... All expenses incident to the Company's consummation
of the Exchange Offer and compliance with the
Registration Rights Agreement will be borne by the
Company. The Company will also pay certain transfer
taxes, if applicable, related to the Exchange
Offer. See "The Exchange Offer--Fees and Expenses."
Resales of New Notes...... The Company is making the Exchange Offer in
reliance on the position of the staff of the
Commission as set forth in certain interpretive
letters addressed to third parties in other
transactions. However, the Company has not sought
its own interpretive letter and there can be no
assurance that the staff of the Commission would
make a similar determination with respect to the
Exchange Offer as it has in such interpretive
letters to third parties. Based on these
interpretations by the staff of the Commission, the
Company believes that New Notes issued pursuant to
the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by a holder (other than (i) a broker-
dealer who purchased Old Notes directly from the
Company for resale pursuant to Rule 144A or any
other available exemption under the Securities Act,
(ii) an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act or
(iii) a broker-dealer who acquired the Old Notes as
a result of market-making or other trading
activities) without further compliance with the
registration and prospectus delivery provisions of
the Securities Act; provided, that such holder is
acquiring the New Notes in the ordinary course of
business and is not participating, and has no
arrangement or understanding with any person to
participate, in a distribution (within the meaning
of the Securities Act) of the New Notes. Holders
wishing to accept the Exchange Offer must represent
to the Company, as required by the Registration
Rights Agreement, that such conditions have been
met. Any holder of Old Notes who is not able to
rely on the interpretations of the staff of the
Commission set forth in the above-mentioned
interpretive letters must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any sale
of such Old Notes, unless such sale is made
pursuant to an exemption from such requirements.
See "The Exchange Offer --Resales of New Notes."
Federal Income Tax The issuance of the New Notes to holders pursuant
Consequences.............. to the terms set forth in this Prospectus will not
constitute an exchange for federal income tax
purposes. Consequently, no gain or loss will be
recognized by holders upon receipt of the New
Notes. See "Certain Federal Income Tax
Considerations."
Use of Proceeds........... There will be no proceeds to the Company from the
Exchange Offer. See "Use of Proceeds."
8
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to restrictions on
transfer of such Old Notes contained in the legend thereon. In general, the Old
Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. See "Risk Factors--Restrictions on Resale" and "The Exchange Offer--
Consequences of Failure to Exchange."
DESCRIPTION OF THE NEW NOTES
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of New Notes will not be
entitled to any Additional Interest pursuant to certain circumstances under the
terms of the Registration Rights Agreement and (iii) holders of New Notes will
not be entitled to certain other rights under the Registration Rights
Agreement. The New Notes will evidence the same debt as the Old Notes and will
be entitled to the benefits of the Indenture. See "The Exchange Offer--
Termination of Certain Rights," "The Exchange Offer--Procedures for Tendering
Old Notes" and "Description of the New Notes."
Notes Offered............. Up to $150,000,000 principal amount of the
Company's 8 1/8% Senior Subordinated Notes due
2006, which have been registered under the
Securities Act.
Maturity Date............. July 1, 2006
Interest Payment Dates.... Interest on the New Notes will be payable semi-
annually in arrears on January 1, and July 1 of
each year, commencing January 1, 1999.
Guarantees................ The Notes will be jointly, severally, fully and
unconditionally guaranteed by each of Empress
Hammond, Empress Joliet, Empress Finance, Hammond
Residential and all future Restricted Subsidiaries.
Ranking................... The Notes and the Guarantees will be unsecured
senior subordinated obligations of the Company and
the Guarantors, respectively, and will be
subordinated in right of payment to all existing
and future Senior Indebtedness of the Company,
including Indebtedness under the Credit Facility
(as defined herein), and the Guarantors,
respectively. The Notes and the Guarantees will
rank pari passu in right of payment with all other
existing and future senior subordinated
indebtedness of the Company and the Guarantors,
respectively, and senior in right of payment to all
other existing and future Subordinated Indebtedness
of the Company and the Guarantors, respectively. As
of June 30, 1998, excluding the Defeased Debt, the
Company and the Guarantors had $10.0 million of
Senior Indebtedness outstanding to which holders of
the Notes are subordinated.
Change of Control......... Upon the occurrence of a Change of Control, each
holder of the Notes, subject to certain
limitations, has the right to require the Company
to repurchase all or a portion of such holder's
Notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the repurchase date.
There can be no
9
assurance that the Company will have sufficient
funds available to consummate such a repurchase as
is required under the Change of Control provisions.
See "Description of the New Notes--Change of
Control" and "Business--Recent Developments--Plan
of Merger."
Offers to Purchase........ The Company will, under certain circumstances, be
obligated to make an offer to purchase Notes in the
event of an Asset Sale. See "Description of the New
Notes--Certain Covenants--Limitation on Sale of
Assets and Subsidiary Stock; Event of Loss" and
"Business--Recent Developments--Plan of Merger."
Optional Redemption....... The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or
after July 1, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest
thereon, if any, to the date of redemption. See
"Description of the New Notes--Redemption."
In the event the Company consummates an Equity
Offering on or prior to July 1, 2001, the Company
may redeem up to 35% of the originally issued
aggregate principal amount of the Notes at a
redemption price of 108 1/8% of the principal
amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of redemption;
provided that not less than $97.5 million of the
aggregate principal amount of the Notes remains
outstanding immediately after giving effect to such
redemption. See "Description of the New Notes--
Redemption."
Regulatory Redemption..... The Notes will be subject to certain mandatory
disposition and redemption requirements following
certain determinations by the applicable Gaming
Authorities (as defined) of any jurisdiction in
which the Company conducts gaming operations. See
"Description of the New Notes--Redemption."
Registration Rights....... In the event that applicable law or Commission
policy does not permit the Company to effect the
Exchange Offer, or if certain holders of the Old
Notes are not permitted to participate in, or do
not receive the benefit of the Exchange Offer, the
Registration Rights Agreement provides that the
Company will use its best efforts to cause to
become effective a shelf registration statement
(the "Shelf Registration Statement") with respect
to the resale of the Old Notes and to keep such
Shelf Registration Statement effective until two
years after the Issue Date or such shorter period
ending when all the Old Notes have been sold
thereunder or cease to be outstanding. The interest
rate on the Old Notes is subject to increase under
certain circumstances if the Company is not in
compliance with its obligations under the
Registration Rights Agreement.
Certain Covenants......... The Indenture contains certain covenants,
including, among others: (i) limitation on
incurrence of indebtedness and preferred stock;
(ii) limitation on restricted payments; (iii)
limitation on dividends and other payment
restrictions affecting Restricted Subsidiaries;
(iv) limitation on liens; (v) limitation on sale of
assets and subsidiary stock; event of loss; (vi)
limitation on transactions with affiliates; (vii)
limitation on mergers and consolidations; (viii)
limitation on other senior subordinated
10
indebtedness; (ix) limitation on sale of capital
stock of Restricted Subsidiaries; and (x)
limitations on lines of business. See "Description
of the New Notes--Certain Covenants."
For more detailed information regarding the terms of the new Notes and for
definitions of capitalized terms not otherwise defined, see "Description of the
New Notes."
RISK FACTORS
Prospective investors should carefully consider all of the information set
forth in this Prospectus and, in particular, should evaluate the specific
factors set forth under "Risk Factors" beginning on page 13 for a discussion of
certain risks involved with the Notes.
SUMMARY HISTORICAL COMBINED FINANCIAL DATA
The following table presents summary combined financial data of the Company.
The historical financial data were derived from, and should be read in
conjunction with, the combined financial information appearing elsewhere in
this Prospectus. See "Selected Combined Financial Data."
The Company believes the results of operations for each of the five years in
the period ended December 31, 1997 are not readily comparable to each other
because Empress Hammond commenced gaming operations on June 28, 1996. See "Risk
Factors--Competition" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- ------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT CERTAIN OTHER DATA AND RATIOS)
STATEMENT OF OPERATIONS
DATA:
Revenues
Casino................ $ 181.6 $ 174.7 $ 346.0 $ 263.0 $ 202.3 $ 202.7 $ 172.8
Other, net of
promotional
allowances........... 11.1 11.2 23.6 15.7 12.3 12.6 14.5
-------- -------- ------- ------- ------- ------- -------
Total net revenues.. 192.7 185.9 369.6 278.7 214.6 215.3 187.3
Operating expenses
Casino................ 30.0 30.8 64.8 48.1 30.7 29.1 18.7
Gaming and admission
taxes................ 60.2 53.4 108.0 73.1 47.1 46.9 38.9
Other departmental
expenses............. 52.5 53.1 113.4 77.7 56.1 51.3 35.5
Pre-opening expenses.. -- -- -- 5.7 1.3 3.3 3.0
Depreciation and
amortization......... 9.6 9.4 18.8 13.9 16.9 17.8 13.2
-------- -------- ------- ------- ------- ------- -------
Total operating
expenses........... 152.3 146.7 305.0 218.5 152.1 148.4 109.3
-------- -------- ------- ------- ------- ------- -------
Income from operations.. 40.4 39.2 64.6 60.2 62.5 66.9 78.0
Interest expense........ (10.9) (10.6) (21.1) (18.3) (16.4) (11.5) (2.8)
Interest income......... 2.0 1.5 3.3 3.5 5.2 2.9 0.4
State taxes............. (0.2) (0.1) (0.5) (0.5) (0.7) (0.8) (1.2)
-------- -------- ------- ------- ------- ------- -------
Net income.............. $ 31.3 $ 30.0 $ 46.3 $ 44.9 $ 50.6 $ 57.5 $ 74.4
======== ======== ======= ======= ======= ======= =======
11
JUNE 30, 1998
-------------
ACTUAL
-------------
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.................... $ 20.0
Total assets........................................................ 409.0
Long-term debt, including current maturities........................ 300.0
Stockholders' equity................................................ 61.5
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------- ---------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------ ------ ------ ------ -------------
(IN MILLIONS, EXCEPT CERTAIN OTHER DATA AND RATIOS)
OTHER DATA:
EBITDA (1).............. $ 50.0 $ 48.6 $ 83.4 $ 74.1 $ 79.4 $ 84.7 $ 91.2
Cash provided by (used
in):
Operating activities.. 52.0 39.2 70.3 64.3 56.6 85.2 94.8
Investing activities.. (172.6) (6.7) 3.6 (91.2) (24.2) (83.8) (35.5)
Financing activities.. 69.4 (38.8) (46.1) 31.5 (48.7) 40.3 (62.0)
Capital expenditures
(2).................... 16.6 6.7 16.1 106.0 7.4 44.3 34.6
Casino square footage
(3).................... 71,156 71,156 71,156 71,156 36,266 36,266 36,266
Number of slot machines
(3).................... 2,717 2,306 2,325 2,232 978 964 688
Win per slot per day
(4).................... $ 307 $ 310 $ 308 $ 322 $ 382 $ 386 $ 480
Number of table games
(3).................... 106 105 107 110 56 59 49
Win per table per day
(4).................... $ 2,073 $ 2,309 $2,168 $2,535 $3,169 $3,107 $3,820
Ratio of Earnings to
Fixed Charges (5)...... 3.8x 3.8x 3.1x 3.1x 4.0x 5.3x 25.3x
Pro Forma Ratio of
Earnings to Fixed
Charges (5)............ 2.7x 2.2x
- -------
(1) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. This definition may not be consistent with how other
companies measure EBITDA. EBITDA should not be construed as an alternative
to operating income or net income (as determined in accordance with
generally accepted accounting principles) as an indicator of the Company's
operating performance, or as an alternative to cash flows generated by
operating, investing and financing activities (as determined in accordance
with generally accepted accounting principles) as an indicator of cash flow
or a measure of liquidity. EBITDA is presented solely as supplemental
disclosure because management believes that it is a widely used measure of
operating performance in the gaming industry and for companies with a
significant amount of depreciation and amortization. The Company has other
significant uses of cash flows, including capital expenditures, which are
not reflected in EBITDA. Included in EBITDA are pre-opening expenses of
$5.7 million, $1.3 million, $3.3 million and $3.0 million for the years
ended December 31, 1996, 1995, 1994 and 1993, respectively.
(2) Included in capital expenditures for the year ended December 31, 1996 is
$93.4 million in conjunction with the opening of Empress Hammond.
(3) Data reflected is as of the end of the respective period.
(4) Amount reflects the weighted average calculation for the respective period.
(5) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (income before state income taxes plus
fixed charges and the current period amortization of interest capitalized
in prior periods less capitalized interest) by fixed charges (interest
expense plus capitalized interest, amortization of debt issue costs and the
interest factor of rent expense). The pro forma ratio of earnings to fixed
charges reflects the increase in interest expense related to the 8 1/8%
Notes included in fixed charges and the impact on earnings of the increased
interest expense offset by the increase in interest income related to the
interest to be earned on the U.S. Treasury Securities held to effect the
Covenant Defeasance lowered by the interest income no longer earned on the
cash to be utilized to effect the Covenant Defeasance.
12
RISK FACTORS
In addition to the other information contained in this Prospectus, including
the combined financial statements and notes thereto of the Company, the
following risk factors should be carefully considered. The Risk Factors set
forth below are generally applicable to the Old Notes as well as the New
Notes. This Prospectus contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus.
REPURCHASE OF NOTES UPON A REQUIRED REGULATORY REDEMPTION OR CHANGE OF CONTROL
The Notes will be redeemable, in whole or in part, at any time, at 100% of
the principal amount thereof, plus accrued and unpaid interest to the
redemption date, (i) pursuant to, and in accordance with, any order of any
Governmental Authority (as defined) with appropriate jurisdiction and
authority relating to a Gaming License (as defined), or (ii) to the extent
necessary in the reasonable, good faith judgment of the Board of Directors of
the Company to prevent the loss, failure to obtain or material impairment of,
or to secure the reinstatement of, any Gaming License, which if lost,
impaired, not obtained or not reinstated, would reasonably be expected to have
a material adverse effect on the Company or would restrict the ability of the
Company to conduct business in any Gaming Jurisdiction, in the case of each of
(i) and (ii) where such redemption or acquisition is required because the
holder or beneficial owner of such Note is required to be found suitable, or
otherwise qualify, under any Gaming Laws and is not found suitable or so
qualified. Upon a Change of Control (as defined), each holder of the Notes
will, subject to certain limitations, have the right to require the Company to
repurchase all or a portion of such holder's Notes at a purchase price equal
to 101% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of repurchase. The Proposed Mergers would
constitute a "Change of Control" and would trigger Horseshoe Midwest's
obligation to consummate such a redemption. There can be no assurance that the
Company or Horseshoe Midwest will have sufficient funds to consummate such a
redemption or acquisition or that such a redemption or acquisition, if
consummated, would not have a material adverse effect on the Company or
Horseshoe Midwest. See "Description of the New Notes--Redemption," "--Change
of Control" and "Business--Recent Developments--Plan of Merger."
LEVERAGE AND ABILITY TO SERVICE DEBT
As a result of the Offering and future borrowings by the Company (including
the Guarantors) under the Credit Facility, the Company will incur a
significant amount of Indebtedness. At June 30, 1998, excluding the Defeased
Debt, the Company had total consolidated long-term indebtedness of $160.0
million (including $150.0 million of the Old Notes) and $90.0 million of
availability under the Credit Facility. In addition, subject to the
restrictions in the Indenture governing the Notes and in the Credit Facility,
the Company may incur additional Indebtedness from time to time. If the
Company is unable to meet its debt service obligations, or if the Proposed
Mergers are consummated and Horseshoe Midwest assumes the outstanding
obligations under the Notes and is unable to meet its debt service
obligations, the Company or Horseshoe Midwest could be required to pursue one
or more alternatives, such as refinancing or restructuring the Indebtedness or
divesting assets or operations. There can be no assurance that any of such
actions could be effected on satisfactory terms, that such actions would
enable the Company to meet its debt service obligations or that such actions
would be permitted under the terms of the Indenture or under the Credit
Facility. In addition, in the event that the Proposed Mergers are consummated,
there can be no assurance that Horseshoe Midwest will be able to satisfy its
assumed obligations under the Indenture and the Notes. See "Business--Recent
Developments--Plan of Merger," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Description of
Certain Other Indebtedness," and "Description of the New Notes."
The ability of the Company to satisfy its debt service obligations, engage
in various significant corporate transactions that may be important to its
business, and comply with the covenants contained in the Indenture and in the
Credit Facility, including the ability of the Company to repurchase Notes
pursuant to offers that must be made under certain circumstances, will be
dependent on the future performance of the Company's business.
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SUBORDINATION
The Notes and the Guarantees will be subordinated in right of payment to all
Senior Indebtedness of the Company, including Indebtedness under the Credit
Facility, and the Guarantors, respectively. Further, the Credit Facility will
be secured by substantially all of the assets of the Company and the
Guarantors and will become due prior to the time the principal on the Notes
will become due. In the event of any default in the payment in respect of
certain Senior Indebtedness, no payment with respect to the Notes may be made
by the Company unless and until such default has been cured or waived. In
addition, in the event of the bankruptcy, liquidation, dissolution,
reorganization or other winding up of the Company or the Guarantors, the
assets of the Company and the Guarantors will be available to pay obligations
on the Notes and the Guarantees only after all Indebtedness that is senior to
the Notes and the Guarantees has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the Notes or
the Guarantees outstanding. As of June 30, 1998, the Company and the
Guarantors had $10.0 million of Senior Indebtedness outstanding to which
holders of the Notes are subordinated and would have had the ability (subject
to certain conditions) to incur an additional $90.0 million of Senior
Indebtedness under the Credit Facility. Subject to certain restrictions,
exceptions and financial tests set forth in the Indenture and the Credit
Facility, the Company and the Guarantors also may incur additional
Indebtedness in the future that ranks prior to claims of holders of the Notes.
See "Description of the New Notes--Certain Covenants--Limitation on Incurrence
of Indebtedness and Preferred Stock."
COMPETITION
General
The casino gaming industry is highly fragmented and characterized by
competition from a large number of participants, including riverboat casinos,
dockside casinos, land-based casinos, video lottery and poker machines in
locations other than casinos, Native American gaming and other forms of gaming
and non-gaming entertainment in the U.S. The Company primarily competes with
the Chicago Market Casinos, five of which are located on Lake Michigan in
Indiana (including Empress Hammond) and four of which are located in Illinois
(including Empress Joliet). The seven other Chicago Market Casinos are: Trump
Casino and Majestic Star located in Gary, Indiana; Showboat Casino located in
East Chicago, Indiana; Blue Chip Casino located in Michigan City, Indiana;
Harrah's Casino located in Joliet, Illinois; Hollywood Casino located in
Aurora, Illinois; and Grand Victoria Casino located in Elgin, Illinois. On
June 1, 1998, Harrah's publicly announced the consummation of its acquisition
of Showboat, Inc. (operator of the Showboat Casino) which made Harrah's the
largest riverboat operator serving the Chicago Market in terms of gaming
square footage and number of table games and the only other operator of two
Chicago Market Casinos. In the fourth quarter of 1997, Trump Casino commenced
construction of a 300 room hotel in Gary, Indiana.
Certain of the Company's competitors are larger and have significantly
greater financial and other resources than the Company. Given these factors,
it is possible that substantial competition could have a material adverse
effect on the Company.
Indiana
Currently, Indiana gaming law limits the number of licenses to operate
riverboat casinos in northern Indiana on Lake Michigan to five in total, all
of which have been issued to casinos that are currently operating. In addition
to the five northwest Indiana riverboats located on Lake Michigan (including
Empress Hammond), the Indiana Gaming Commission has awarded gaming licenses to
three other riverboats and a certificate of suitability, a precursor to a
license, to a fourth riverboat, all four of which are located on the Ohio
River in southern Indiana and the closest of which is located over 250 miles
from downtown Chicago. Two licenses are unissued, one of which must be issued
on Patoka Lake and the other of which must be issued on the Ohio River.
There are at least two potential sources of increased competition in
Indiana: licensure of additional riverboats and the introduction of slot
machines or other forms of gaming at horse tracks. The authorization and
opening of additional Indiana riverboats could adversely effect the Company's
potential pool of customers and have a material adverse effect on the Company.
To date, there has not been any legislation introduced in the
14
Indiana General Assembly to increase the number of riverboat gaming licenses.
On January 6, 1998, a bill was introduced in the Indiana State Legislature
that would grant the Indiana Horse Racing Commission (the "Racing Commission")
the power to authorize slot machine gaming, under certain circumstances, at
Indiana racetracks. Under the bill, the Racing Commission could grant a slot
machine gaming license to a person who holds a pari-mutuel horse racing permit
and who conducted live races at the racetrack prior to January 1, 1998. To
date, there has been no action with respect to the proposed legislation. If
such legislation were to be enacted, it could have a material adverse effect
on the Company.
Illinois
The Illinois Riverboat Act authorizes ten owner's licenses for riverboat
gaming operations, all of which have been issued. Four of the licensees,
including Empress Joliet, serve the Chicago Market. The other six licenses
have been granted to operators, the closest of which is located approximately
150 miles from downtown Chicago.
In recent years, legislation has been introduced in Illinois to provide for
an expansion of gaming in Illinois, including legislation to authorize land-
based casinos in downtown Chicago and the surrounding suburbs, modify existing
regulations to decrease or eliminate certain restrictions, such as limitations
on the number of gaming positions or restrictions prohibiting dockside gaming,
and permit slot machines at horse tracks. To date, no such legislation has
been enacted. The Company is unable to predict whether any such legislation
will be enacted. If such legislation were to be enacted, it could have a
material adverse effect on the Company.
Native American Gaming
The Company competes, and expects to compete, with various gaming operations
on Native American land, including those located, or to be located, in
Michigan, Wisconsin and possibly northern Indiana. The Pokagon Band of the
Potawatomi Indians have recently proposed building a land-based casino in
northern Indiana, specifically in St. Joseph or Elkhart Counties. In addition,
the Saginaw Chippewa Tribe has substantially completed the construction of,
and is currently operating, one of the largest Native American gaming
complexes in the U.S. in Mt. Pleasant, Michigan, approximately 250 miles
northeast of Hammond, Indiana. The Governor of Michigan has recently signed a
number of Indian Compacts 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, in close
proximity to the Company, could have a material adverse effect on the Company.
Moreover, lower age limits at Native American casinos may put the Company,
with a minimum age requirement for admittance of 21, at a competitive
disadvantage.
Additional Sources of Competition
The Company competes with gaming facilities as well as other forms of
entertainment. Other jurisdictions may legalize various forms of gaming and
wagering that may compete with the Company in the future, including those
jurisdictions in close proximity to the Company's facilities. Gaming and
wagering include online computer gambling, bingo, pull tab games, card clubs,
sports books, pari-mutuel or telephonic betting on horse racing and dog
racing, state sponsored lotteries, video lottery terminals, video poker
terminals and in the future, may include in-flight gaming or gaming at other
venues. The legalization of gaming or wagering operations in jurisdictions in
close proximity to the Company's facilities could have a material adverse
effect on the Company.
In addition to Illinois and Indiana, several other states have authorized
gaming activities and other states in the future may authorize such gaming
activities. To date, riverboat and/or dockside gaming has also been approved
in nearby states such as Iowa and Missouri. Moreover, on November 20, 1997,
the Mayor of Detroit announced the three finalists to construct and operate
three land-based casinos in downtown Detroit. These casinos are not expected
to be licensed or operational until 2001.
15
EXPANSION OPPORTUNITIES
The Company is currently exploring the potential of other gaming operations
as opportunities arise, including the possible expansion of riverboat gaming
and land-based casinos in other states throughout the U.S. Empress Racing was
formed to hold a 50% ownership interest in a limited liability company which
has acquired certain outstanding secured indebtedness of Sunshine Racing,
Inc., the owner of the Woodlands Racetrack in Kansas City, Kansas, and which,
subject to certain regulatory approvals, intends to ultimately bid to purchase
the Woodlands Racetrack in an auction pursuant to a proceeding under Chapter 7
of the U.S. Bankruptcy Code. Empress Racing has been designated as an
Unrestricted Subsidiary under the Indenture and is not a Guarantor of the
Notes. There can be no assurance that the Woodlands acquisition will be
consummated or that, if consummated, that it will be successful. In addition,
there can be no assurances that other such ventures will become available to
the Company, that any opportunities made available to the Company with respect
to such ventures will be made available on terms and conditions acceptable to
the Company, or that, if suitable opportunities are found, the Company will be
successful.
GAMING LICENSING AND REGULATION
General
From time to time, various proposals have been introduced in the Indiana and
Illinois legislatures that, if enacted, could adversely affect the taxation,
regulation, operation or other aspects of the gaming industry, and the
Company. Furthermore, pursuant to the Indiana Riverboat Act and the Illinois
Riverboat Act, the Indiana Gaming Commission and the Illinois Gaming Board,
respectively, have broad rulemaking authority to adopt regulations with
respect to riverboat gaming operations. For example, in the event any
stockholder of the Company were to be found "unsuitable" by either the Indiana
Gaming Commission or the Illinois Gaming Board, such regulatory authority
could require such stockholder to divest himself of his Company stock. Since
there is no public market for the shares of the Company's stock, a transfer to
any person or entity other than the Company or its stockholders may not be
possible. The Company may be unable or unwilling to acquire such stockholder's
shares due to various factors, including, without limitation, restrictions in
the terms of the Notes or the Credit Facility, disagreements on the purchase
price, or inadequate funds available to consummate the purchase. If either
gaming authority were to order a stockholder to divest his shares of Company
stock and he failed to do so, Empress Hammond or Empress Joliet may be subject
to discipline that may have a material adverse effect on the Company.
No assurances can be given that future legislation or regulations would not
have a material adverse effect on the Company. An additional degree of
uncertainty exists in the Indiana and Illinois regulatory environment due to
the limited experience in the interpretation of the Indiana and Illinois
gaming legislation and regulations. See "Regulatory Matters."
Gas City, Ltd., a corporation owned by William McEnery, a stockholder and
director of the Company and a director of each of the Company's corporate
subsidiaries, has operated ten service stations along the Indiana Toll Road
since June 1995. Since December 1995, Gas City and Mr. McEnery have responded
to document subpoenas from the Assistant U.S. Attorney for the U.S. District
Court for the Northern District of Indiana for a grand jury. In addition,
certain Gas City employees have been subpoenaed to testify before the grand
jury. While grand jury proceedings are secret, published accounts have
indicated that the grand jury is investigating, and has indicted, certain
officials and suppliers of the Indiana Toll Road. As of this date, none of Gas
City, Mr. McEnery or any employees of Gas City have received target letters
from the Assistant U.S. Attorney with respect to the pending grand jury. In
March 1998, the Indiana Department of Transportation ("INDOT") notified Gas
City that it was terminating Gas City's lease for the ten toll road service
stations alleging that for approximately a six month period Gas City engaged
in wire fraud with respect to the price survey used to determine the gasoline
prices at its service stations on the toll road. Gas City responded by filing
a cause of action against INDOT contesting its allegations and seeking a
declaratory judgment that INDOT has no grounds for termination.
16
INDOT filed an emergency petition for injunctive relief to cause Gas City to
vacate the leased premises on May 1, 1998. The court has denied INDOT's
petition, ruling that under Indiana law INDOT must file an ejectment action.
INDOT has appealed the court's ruling. The Company cannot predict the outcome
of these actions, however, any unfavorable developments may have a material
adverse effect on the Company.
In May 1998, T.J. Lambrecht Construction, Inc., a corporation owned by
Thomas J. Lambrecht, a stockholder and director of the Company and a director
of each of the Company's corporate subsidiaries, pleaded guilty, pursuant to a
settlement agreement, to two misdemeanor charges under the Federal Clean Water
Act relating to two discharges of effluent waste into Hickory Creek without a
permit. As part of the settlement agreement, T.J. Lambrecht Construction, Inc.
paid a $200,000 fine. There were no personal allegations or charges against
Mr. Lambrecht in connection with this matter. The Company does not anticipate
that any unfavorable developments will result from this matter; however, if
any such developments do arise, they may have a material adverse effect on the
Company.
The Amended and Restated Stockholders Agreement (the "Stockholders
Agreement") which governs certain aspects of ownership and management of the
Company, specifies that upon a repurchase event, which includes a finding that
the stockholder no longer meets the minimum requirements imposed by the
Indiana Gaming Commission or the Illinois Gaming Board, the Company or the
remaining stockholders may, if the Company declines, purchase the
stockholder's shares. Although this is a viable option for the Company, there
can be no assurance the Company will have available cash or financing
necessary to consummate such a transaction. To the Company's knowledge,
neither the Indiana Gaming Commission nor the Illinois Gaming Board have
undertaken any inquiry with respect to the above mentioned issues, and it
would be premature and speculative to predict the Company's intended course of
action upon any such finding of unsuitability.
Indiana
Pursuant to the Indiana Riverboat Act, Empress Hammond's current operations
are regulated by the Indiana Gaming Commission, which initially issued Empress
Hammond a five-year gaming license (the "Indiana License") on June 21, 1996.
As a condition to maintaining the Indiana License, Empress Hammond must, among
other things, submit detailed financial and other information to the Indiana
Gaming Commission, which has broad powers to suspend or revoke gaming
licenses. In granting and renewing gaming licenses, the Indiana Gaming
Commission conducts investigations into the character, reputation, experience
and financial integrity of each owner and principal employee of the applicant.
The Indiana Gaming Commission may request a detailed personal disclosure form
from any officer, director or shareholder of Empress Hammond or any other
person or entity having a significant relationship with Empress Hammond.
The Indiana License is subject to renewal in June 2001. Although Empress
Hammond believes that its current compliance record and standing with the
Indiana Gaming Commission indicate that the Indiana License will likely be
renewed, there can be no assurance that the Indiana Gaming Commission will
renew the Indiana License. The failure of the Indiana Gaming Commission to
renew the Indiana License would cause Empress Hammond to cease its Indiana
gaming operations, and, therefore, would have a material adverse effect on the
Company. In addition, the Indiana Gaming Commission has broad regulatory
powers with respect to changes in Empress Hammond's operations. For example,
Empress Hammond was required to obtain the Indiana Gaming Commission's
approval of the Offering and the Credit Facility (which approval was obtained
on May 6, 1998). No assurance can be given that Empress Hammond will be able
to obtain the regulatory approvals necessary for other future plans. See
"Business" and "Regulatory Matters."
Illinois
Pursuant to the Illinois Riverboat Act, Empress Joliet's current operations
are regulated by the Illinois Gaming Board, which initially issued Empress
Joliet a three-year gaming license (the "Illinois License") on July 9, 1992,
with annual renewals required thereafter. The Illinois License was renewed on
July 21, 1998 through June 1999. As a condition to maintaining the Illinois
License, Empress Joliet must, among other things,
17
submit detailed financial and other information to the Illinois Gaming Board,
which has broad powers to suspend or revoke gaming licenses. In granting
gaming licenses, the Illinois Gaming Board conducts investigations into the
character, reputation, experience and financial integrity of each owner and
principal employee of the applicant. The failure of the Illinois Gaming Board
to renew the Illinois License in the future would cause Empress Joliet to
cease its Illinois gaming operations, and, therefore, would have a material
adverse effect on the Company. In addition, the Illinois Gaming Board has
broad regulatory powers with respect to changes in Empress Joliet's
operations. For example, Empress Joliet was required to obtain the Illinois
Gaming Board's approval of the Offering (which approval was obtained on April
22, 1998) and the Credit Facility (which approval was obtained on June 30,
1998). No assurance can be given that Empress Joliet will be able to obtain
the regulatory approvals necessary for other future plans. See "Business" and
"Regulatory Matters."
NON-GAMING REGULATORY REQUIREMENTS
The Company is subject to certain Federal, state and local safety and health
laws, regulations and ordinances that apply to businesses generally, such as
the Clean Air Act, Clean Water Act, Occupational Safety and Health Act,
Resource Conservation and Recovery Act and Comprehensive Environmental
Response, Compensation and Liability Act. The coverage and attendant
compliance costs associated with such laws, regulations and ordinances may
result in material costs to the Company.
Empress I, Empress II and Empress III must comply with U.S. Coast Guard
safety requirements and must hold a Certificate of Seaworthiness. These
requirements set limits on the operation of the vessels and require individual
licensing of all personnel involved with the operation of the vessels. Loss of
the Certificate of Seaworthiness of Empress I, Empress II or Empress III would
preclude use as a riverboat, which would have a material adverse effect on the
Company. Periodically, the Company's vessels must either be drydocked for an
inspection of the hull or undergo an underwater hull survey, which could
result in a loss of service for a period of time. Empress I is currently
undergoing an underwater hull survey. Empress II and Empress III will be due
for inspection prior to December 1998 and September 2000, respectively. Any
extended period of time during which any of the Company's vessels is required
to cease gaming operations to facilitate inspections or maintenance could have
a material adverse effect on the Company. See "Business--Other Applicable Non-
Gaming Regulatory Requirements."
STOCKHOLDER RELATIONSHIPS; STOCKHOLDERS AGREEMENT
Certain aspects of the ownership and management of the Company are governed
by the terms of the Stockholders Agreement. In addition to limiting the rights
of stockholders to transfer shares of stock of the Company, the Stockholders
Agreement requires each stockholder to vote in favor of the existing directors
of the Company, Empress Hammond, Empress Joliet and Empress Finance for so
long as he owns shares in the Company. The Stockholders Agreement also
requires the approval of a super majority of the stockholders in order to
undertake certain matters, including the merger of the Company or any of its
subsidiaries, the sale of all or substantially all of the assets of the
Company or any of its subsidiaries or the sale or issuance of stock of Empress
Joliet or Empress Hammond. See "Management," "Certain Transactions" and
"Principal Stockholders."
LOSS OF RIVERBOAT OR DOCKSIDE FACILITY FROM SERVICE
The Company's profitability is entirely dependent on three riverboats and
the dockside facilities in Hammond, Indiana and Joliet, Illinois. Empress I,
Empress II or Empress III could be lost from service due to casualty,
mechanical failure, a flood or other severe weather conditions or extended or
extraordinary maintenance or inspection (including routine inspections
required by the U.S. Coast Guard). Any extended period of time during which
Empress I, Empress II or Empress III is required to be out of service without
the conduct of gaming could have a material adverse effect on the Company. See
"--Non-Gaming Regulatory Requirements."
18
SINGLE MARKET
The Company's gaming operations primarily serve the Chicago Market. The
Company's future operating results will depend in part, on matters over which
the Company has no control, including, without limitation, general economic
conditions and economic conditions in the Chicago Market. Therefore, it is not
possible to estimate future operating revenues and expenses of the Company
based upon historical operating performance. There can be no assurances that
the Company will continue to be profitable.
HOLDING COMPANY STRUCTURE
The Company is a holding company that conducts its operations through direct
and indirect subsidiaries. The Company's available cash will depend upon the
cash flow of its subsidiaries and the ability of such subsidiaries to make
funds available to the Company. The subsidiaries are separate and distinct
legal entities and have no obligation to make funds available to the Company.
Concurrently with the closing of the Offering, the Company entered into the
Credit Facility, which is secured by substantially all of the assets of
Empress Hammond and Empress Joliet (excluding the Indiana License and the
Illinois License). In addition, the Guarantors, either alone or in
combination, may become parties to other financing arrangements. In the event
of any insolvency, bankruptcy or similar proceedings of such Guarantors,
creditors of any such entity would generally be entitled to priority over the
Company with respect to assets of such Guarantors.
YEAR 2000 COMPLIANCE
In the Year 2000, many existing computer programs that use only two digits
to identify a year (for example, "98" instead of "1998") could fail or create
erroneous results if not corrected. As a part of the first phase of the
Company's Year 2000 compliance program, the Company conducted an internal
review of its computer systems to identify the systems that could be affected
by the Year 2000 problem, including both "information technology" systems
(such as software that processes financial and other information) and non-
information technology. The Company is in the process of completing the second
phase of its Year 2000 compliance program, which involves (1) the
implementation of its existing remediation plan to resolve the Company's
internal Year 2000 issues, (2) the identification of any potential Year 2000
issues with the Company's significant vendors and suppliers and (3) the
evaluation of a contingency plan in the event that the Company or its
significant vendors and suppliers are unable to adequately address Year 2000
issues in time. The Company has a July 1999 target date to complete its
implementation efforts.
The Company presently believes that, with modifications to existing software
and converting to new software, the Year 2000 issue will not pose significant
operational problems for the Company's internal computer systems as so
modified and converted. However, if such modifications and conversions are not
completed on a timely basis, the Year 2000 problem may have a material adverse
impact on the operations of the Company. In addition, in the event that any of
the Company's significant suppliers do not successfully and timely achieve
Year 2000 compliance, the Company's business or operations could be adversely
affected. The Company estimates it will incur less than $300,000 in expenses
to ensure all systems will function properly with respect to dates in the year
2000. These expenses are not expected to have a material impact on the
financial position, results of operation or liquidity of the Company. However,
significant uncertainty exists concerning the potential costs and effects
associated with any Year 2000 compliance. Any unanticipated Year 2000
compliance problem of the Company or the companies doing business with it
could have a material adverse effect on the Company.
LABOR RELATIONS
Approximately 12.7% of the Company's workforce is unionized. Empress
Joliet's contract with the International Union of Operating Engineers, Local
150 expires in November 2002. On April 29, 1998, Empress Joliet and the Hotel
Employees and Restaurant Employees Union, Local 1 entered into a Memorandum of
19
Agreement, which is being converted into a formal contract, containing the
terms of their collective bargaining agreement. This Agreement will be in
effect until April 30, 2001. There can be no assurances that the Company will
be able to negotiate future labor agreements with its unions on terms
acceptable to the Company. In addition, Empress Hammond is not a party to any
collective bargaining agreements, although there are current efforts to
organize certain of its employees. Although the Company believes that its
relations with its employees and the unions are good, any labor disruptions,
whether union-related or otherwise, could have a material adverse effect on
the Company.
COMMITMENTS TO GOVERNMENTAL AUTHORITIES
The City of Hammond, Indiana
As a condition to the Indiana License, Empress Hammond made various
financial and other commitments to the City of Hammond, Indiana ("City") and
other Indiana governmental bodies pursuant to a Hammond Riverboat Gaming
Project Development Agreement (the "Development Agreement"). Of approximately
$25.0 million of such commitments for commercial development, residential
development and the construction of a hotel, the Company has expended
approximately $2.0 million to satisfy these commitments. In addition, under
the terms of the Development Agreement, Empress Hammond is required to make
annual payments of approximately $1.3 million for public safety services and
other uses and an annual payment based on a varying percentage of Empress
Hammond's adjusted gross receipts. In 1997, Empress Hammond paid approximately
$9.9 million to the City to satisfy this obligation. In the event that the
Company suffers a decrease in revenues, the costs of satisfying the foregoing
commitments may have a material adverse effect on the Company. In addition,
there can be no assurance that the actual costs of Empress Hammond's
commitments will not exceed the currently anticipated costs of such
commitments. See "Business--Commitments to Governmental Authorities."
Hammond Port Authority
Empress Hammond entered into a License Agreement ("License Agreement") with
the Hammond Port Authority ("Port Authority") on June 21, 1996, pursuant to
which Empress Hammond licenses from the Port Authority certain rights to land
and docking facilities at the Hammond marina. For the rights and privileges
granted to it under the terms of the License Agreement, Empress Hammond is
required to pay the Port Authority (i) a $1.00 per passenger fee for each
passenger visiting Empress III; and (ii) an amount equal to the aggregate
annual rental at the Hammond marina for each boat slip that was removed or
taken out of operation as a result of the construction of the docking
facilities and/or the operation of Empress III. In the event that the Company
suffers a decrease in revenues, the costs of satisfying the foregoing
commitments may have a material adverse effect on the Company. See "Business--
Commitments to Governmental Authorities."
TAXATION
The Company believes that the prospect of significant additional revenue is
one of the primary reasons that jurisdictions have legalized gaming. As a
result, gaming companies are typically subject to significant taxes and fees
in addition to normal Federal and state income taxes, and such taxes and fees
are subject to increase at any time. The Company pays substantial taxes and
fees with respect to its operations. There can be no assurance that the
Indiana or Illinois legislatures will not enact higher wagering taxes. In
addition, there have been proposals from time to time to tax all gaming
establishments (including riverboat casinos) at the Federal level. Any
increase in the Company's tax rates could have a material adverse effect on
the Company. See "--Commitments to Governmental Authorities" and "Regulatory
Matters."
DEPENDENCE ON KEY PERSONNEL; ABILITY TO ATTRACT QUALIFIED EMPLOYEES
The success of the Company is largely dependent upon the efforts and skills
of its executive officers, the loss of services of any of whom could have a
material adverse effect on the Company. A shortage of skilled
20
labor exists in the gaming industry, which may make it more difficult and
expensive to attract and retain qualified employees. While the Company
believes that it will be able to attract qualified employees, no assurance can
be given that such employees will be available to the Company. See
"Management."
FRAUDULENT TRANSFER CONSIDERATIONS
The obligations of the Company under the Notes or of the Guarantors under
their respective Guarantees may be subject to challenge under state or Federal
fraudulent transfer laws. Under such laws, if a court in a lawsuit by an
unpaid creditor or representative of creditors of the Company or a Guarantor,
such as a trustee in bankruptcy of the Company or a Guarantor, or the Company
or a Guarantor as debtor in possession, were to find that at the time the
Company or any such Guarantor incurred its obligations, it (a)(i) is or was
rendered insolvent; (ii) was engaged in a business or transaction for which
its remaining unencumbered assets constituted unreasonably small capital; or
(iii) intended to incur, or believed or reasonably should have believed that
it would incur, debts beyond its ability to pay as such debts matured; and (b)
received less than reasonably equivalent value or fair consideration therefor,
such court could void all or a portion of the Company's obligations to the
holders of the Notes or void such Guarantor's Guarantee and its obligations
thereunder, and direct the return of any amounts paid by the Company or any
such Guarantor to holders of the Notes to a fund for the benefit of their
respective creditors. A court might hold that the Company or a Guarantor
received less than fair consideration or reasonably equivalent value for
incurring the Notes or any debt being refinanced thereby, or for its Guarantee
to the extent that its liability thereunder exceeded the amount of the
proceeds of the Notes made available to the Guarantor, respectively. Moreover,
a court could void all or a portion of the Company's obligations to the
holders of the Notes or void the Guarantee and direct such repayment if it
found that the Notes or any such Guarantee was entered into with the actual
intent to hinder, delay or defraud the Company's or a Guarantor's creditors.
The measure of insolvency for purposes of the foregoing will vary depending on
the law of the jurisdiction being applied. Generally, however, an entity would
be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if the present fair salable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become due.
ENVIRONMENTAL RISKS
Pursuant to the terms of the Development Agreement, Empress Hammond
constructed certain public improvements necessary to provide improved access
to the location of its riverboat gaming facility. To satisfy this requirement,
certain parcels of real property located near the proposed complex were either
purchased by Empress Hammond or an affiliated entity or taken by the City of
Hammond pursuant to eminent domain proceedings with funds donated to the City
of Hammond by Empress Hammond. The area surrounding the Hammond complex is
heavily industrialized and may be subject to various environmental risks. At
the present time, the Company is not aware of any environmental costs that
would have a material adverse effect on the Company. However, if any
environmental clean-up costs or other related liabilities turn out to be
substantial, such costs could have a material adverse effect on the Company.
LITIGATION
On July 17, 1998, a lawsuit was filed against Empress Hammond and Empress
Joliet and four of their employees in the United States District Court for the
Northern District of Illinois. The lawsuit, brought by a current female
employee of Empress Hammond and a former female employee of Empress Hammond,
alleges that Empress Hammond and Empress Joliet committed gender
discrimination and sexual harassment in violation of Title VII of the Civil
Rights Act of 1964 and permitted a hostile work environment to exist at its
facilities. The lawsuit also alleges certain tort claims and seeks
certification as a class action on behalf of similarly situated current and
former female employees of Empress Joliet and Empress Hammond, and seeks
injunctive relief and money damages. A similar complaint has been filed by
these plaintiffs in Indiana, although the Company has not yet been served with
this complaint. The Company denies the allegations in the complaint and
intends to
21
vigorously contest this matter. There can be no assurances, however, that
Empress Joliet and Empress Hammond will not be found liable for an amount that
could have a material adverse effect on the Company.
The City of Hammond is plaintiff in a condemnation proceeding filed in
September 1995 in Lake Superior Court in Lake County, Indiana in which the
City of Hammond condemned a small parcel of land for the construction of the
overpass located near Empress Hammond. This case was transferred on a change
of venue in the summer of 1998 to Newton County, Indiana. On September 28,
1998, the jury returned a $5.2 million award, which bears prejudgment interest
at 8% since 1995. Under the terms of the Development Agreement between Empress
Hammond and the City, Empress Hammond is responsible for reimbursing the City
of Hammond for its costs, fees and any judgments. The City of Hammond is
evaluating whether to appeal this decision. As a result, it is not yet clear
how much, or when, the condemnation award will be paid. The defendant's
counterclaims in the proceeding have not yet gone to trial.
A lawsuit was filed on October 25, 1996 in Harrison County, Indiana by three
individuals residing in counties abutting the Ohio River against the State of
Indiana, the 108th Indiana General Assembly, the Indiana Gaming Commission and
individual members of the Indiana Gaming Commission. The lawsuit challenges
the constitutionality of the Indiana Riverboat Act on the grounds that (i) it
allegedly creates an unequal privilege because under the Indiana Riverboat Act
"citizens opposed to riverboat gambling must win several elections to ensure
riverboat gambling is not allowed in their county" but "citizens who support
riverboat gambling need only win once to entrench riverboat gambling
indefinitely into a county"; and (ii) it was enacted as a provision attached
to a state budget bill allegedly in violation of an Indiana constitutional
provision requiring legislative acts to be confined to one subject and to
matters properly connected with the subject. The defendants have filed an
answer to the complaint generally denying the allegations. If the Indiana
Riverboat Act ultimately were held unconstitutional it would, absent timely
corrective legislation, have a material adverse effect on the Company.
S CORPORATION STATUS
The Company is a Subchapter S Corporation under the Internal Revenue Code of
1986, and its corporate subsidiaries are Qualified Subchapter S Subsidiaries.
Accordingly, the stockholders of the Company are directly subject to tax on
their respective proportionate share of the taxable income of the Company and
its subsidiaries for Federal and certain state income tax purposes.
While the Company believes that it was properly formed and has been properly
operating as an S Corporation and that its corporate subsidiaries were
properly formed and have been properly operating as Qualified Subchapter S
Subsidiaries for Federal and state income tax purposes, if the S Corporation
tax status of the Company or the Qualified Subchapter S Subsidiary status of
any of its corporate subsidiaries were successfully challenged, such entity
could be required to pay Federal and certain state income taxes (plus interest
and possibly penalties) on its taxable income as far back as the commencement
of their respective operations. Such payments could have a material adverse
effect on the Company.
ABSENCE OF PRIOR PUBLIC MARKET FOR NEW NOTES
The New Notes will constitute a new class of securities with no established
trading market. Although the New Notes will generally be permitted to be
resold or otherwise transferred by nonaffiliates of the Company without
compliance with the registration requirements under the Securities Act, the
Company does not intend to apply for a listing of the New Notes on any
securities exchange or to arrange for the New Notes to be quoted on the NASDAQ
National Market or other quotation system, although they have been designated
for trading in the Private Offering, Resales and Trading through Automated
Linkages ("PORTAL") Market. The Initial Purchasers have advised the Company
that they currently intend to make a market in the New Notes; however, the
Initial Purchasers are not obligated to do so, and any market-making with
respect to the New Notes may be
22
discontinued at any time without notice. As a result, there can be no
assurance that an active trading market for the New Notes will develop. If a
market were to develop, the New Notes could trade at prices that may be lower
than the initial market values thereof depending on many factors, including
prevailing interest rates and the markets for similar securities.
RESTRICTIONS ON RESALE
The Old Notes were offered and sold by the Company in a private offering
exempt from registration pursuant to the Securities Act and have been resold
pursuant to Rule 144A, Regulation S and certain other available exemptions
under the Securities Act. As a result, the Old Notes may not be reoffered or
resold by purchasers, except pursuant to an effective registration statement
under the Securities Act, or pursuant to an applicable exemption from such
registration. Based on interpretations by the staff of the Commission, the
Company believes that each holder (other than (i) a broker-dealer who
purchased Old Notes directly from the Company for resale pursuant to Rule 144A
of the Securities Act or any other available exemption under the Securities
Act, (ii) an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act or (iii) a broker-dealer who acquired the Old Notes as a
result of market-making or other trading activities) who duly exchanges Old
Notes for New Notes in the Exchange Offer will receive notes that are freely
transferable under the Securities Act, provided, that such New Notes are
acquired in the ordinary course of such holder's business and that such holder
is not participating, and has no arrangement or understanding with any other
person to participate, in a distribution (within the meaning of the Securities
Act) of the New Notes. The Company has not, however, sought its own no-action
letter from the staff of the Commission regarding resales of the New Notes and
there can be no assurance that the staff of the Commission would make a
similar determination with respect to the resale of the New Notes. Any holder
of Old Notes who is not able to rely upon such staff interpretations must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale of such Old Notes, unless such sale
is made pursuant to an exemption from such requirements. See "Prospectus
Summary--The Exchange Offer."
CERTAIN MARKET CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
To the extent that Old Notes are tendered and accepted for exchange pursuant
to the Exchange Offer, the trading market for Old Notes that remain
outstanding may be more significantly limited, which might adversely affect
the liquidity of the Old Notes not tendered for exchange. The extent of the
market therefor and the availability of price quotations would depend upon a
number of factors, including the number of holders of Old Notes remaining at
such time and the interest in maintaining a market in such Old Notes on the
part of securities firms. An issue of securities with a smaller outstanding
market value available for trading (the "float") may command a lower price
than would a comparable issue of securities with a greater float. As a result,
the market price for Old Notes that are not exchanged in the Exchange Offer
may be adversely affected to the extent that the amount of Old Notes exchanged
pursuant to the Exchange Offer reduces the float. The reduced float also may
make the trading price of the Old Notes that are not exchanged more volatile.
In addition, holders of Old Notes who do not exchange their Old Notes for New
Notes pursuant to the Exchange Offer will continue to be subject to
restrictions on transfer of such Old Notes contained in the legend thereon. In
general, the Old Notes may not be offered or sold unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the Old Notes
under the Securities Act. See "Risk Factors--Restrictions on Resale" and "The
Exchange Offer--Consequences of Failure to Exchange."
23
THE EXCHANGE OFFER
The following discussion sets forth or summarizes what the Company believes
are the material terms of the Exchange Offer. This Summary is qualified in its
entirety by reference to the full text of the documents underlying the
Exchange Offer, copies of which are filed as exhibits to the Registration
Statement of which this Prospectus is a part, and are incorporated by
reference herein.
PURPOSE AND EFFECT
The Old Notes were sold by the Company to the Initial Purchasers on June 18,
1998 pursuant to the Purchase Agreement. The Initial Purchasers subsequently
resold the Old Notes in reliance on Rule 144A and Regulation S. The Company,
the Guarantors and the Initial Purchasers also entered into the Registration
Rights Agreement, pursuant to which the Company agreed to use its best efforts
(i) to file an exchange offer registration statement ("Exchange Offer
Registration Statement") with the Commission under the Securities Act
concerning the Exchange Offer within 45 days after the Issue Date, (ii) to
cause the Exchange Offer Registration Statement to be declared effective by
the Commission within 105 days after the Issue Date, (iii) to keep the
Exchange Offer Registration Statement effective until the closing of the
Exchange Offer and (iv) to cause the Exchange Offer to be consummated within
135 days after the Issue Date. Pursuant to such Registration Rights Agreement,
the Company will endeavor to, within the applicable time periods, register
under the Securities Act all of the New Notes pursuant to a registration
statement under which the Company will offer each holder of Old Notes the
opportunity to exchange any and all of the outstanding Old Notes held by such
holder for New Notes in an aggregate principal amount equal to the aggregate
principal amount of Old Notes tendered for exchange by such holder. Subject to
limited exceptions, the Exchange Offer being made hereby, if commenced and
consummated within such applicable time periods, will satisfy those
requirements under the Registration Rights Agreement. In such event, Old Notes
not exchanged for New Notes in the Exchange Offer would remain outstanding and
would continue to accrue interest, but would generally not retain any rights
under the Registration Rights Agreement. Holders of Old Notes seeking
liquidity in their investment would have to rely on an exemption to the
registration requirements under the securities laws, including the Securities
Act. This Exchange Offer is intended to satisfy the Company's exchange offer
obligations under the Registration Rights Agreement.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of the New Notes for each $1,000 in principal amount of
the outstanding Old Notes. The Company will accept for exchange any and all
Old Notes that are validly tendered on or prior to 5:00 p.m., New York City
time, on the Expiration Date. Tenders of the Old Notes may be withdrawn in
accordance with the procedures described under "--Withdrawal Rights" at any
time prior to 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
certain customary conditions that may be waived by the Company, and to the
terms and provisions of the Registration Rights Agreement. See "--Conditions
of the Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, holders may tender less than the aggregate principal amount
represented by the Old Notes held by them, provided that they appropriately
indicate this fact on the Letter Of Transmittal accompanying the tendered Old
Notes (or so indicate pursuant to the procedures for book-entry transfer).
As of the date of this Prospectus, $150 million in aggregate principal
amount of the Old Notes is outstanding, the maximum amount authorized by the
Indenture for all Notes. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about October 8, 1998, to all holders
of Old Notes known to the Company.
24
Because the Exchange Offer is for any and all Old Notes, the number of Old
Notes tendered and exchanged in the Exchange Offer will reduce the principal
amount of Old Notes outstanding. Following the consummation of the Exchange
Offer, holders who did not tender their Old Notes generally will not have any
further registration rights under the Registration Rights Agreement, and such
Old Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old Notes could be adversely
affected. The Old Notes are currently eligible for sale pursuant to Rule 144A
through the PORTAL system. Because the Company anticipates that most holders
of Old Notes will elect to exchange such Old Notes for New Notes due to the
absence of restrictions on the resale of New Notes under the Securities Act,
the Company anticipates that the liquidity of the market for any Old Notes
remaining after the consummation of the Exchange Offer may be substantially
limited. See "Risk Factors--Certain Market Consequences of Failure to Exchange
Old Notes."
The form and terms of the New Notes are generally the same as the form and
terms of the Old Notes, except that (i) the New Notes have been registered
under the Securities Act and will not bear legends restricting the transfer
thereof, (ii) the holders of New Notes will not be entitled to any Additional
Interest under the terms of the Registration Rights Agreement and (iii)
holders of New Notes will not be entitled to certain other rights under the
Registration Rights Agreement. The New Notes will evidence the same debt as
the Old Notes and will be entitled to the benefits of the Indenture.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes and for the purposes of receiving the New Notes from the Company
and delivering New Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer.
Holders of Old Notes who tender 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. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "--Fees and Expenses."
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION 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
TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, 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.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Exchange Offer shall remain open for a period of not less than 20
Business Days after notice is mailed to holders. The Expiration Date shall be
November 6, 1998 at 5:00 p.m., New York City time, unless the Company, in its
sole discretion, extends the Exchange Offer, in which case the Expiration Date
shall be the latest date and time to which the Exchange Offer is extended.
25
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, by means of a press release or any other acceptable
means, each prior to 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date.
The Company expressly reserves the right, in its sole and absolute
discretion, (i) to delay accepting any Old Notes, (ii) to extend the Exchange
Offer, (iii) if any of the conditions set forth below under "--Conditions of
the Exchange Offer" shall not have been satisfied, to terminate the Exchange
Offer, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent and (iv) to waive any condition or otherwise
amend the terms of the Exchange Offer in any manner. If such waiver or
amendment constitutes a material change to the Exchange Offer, the Company
will promptly disclose such waiver or amendment by means of a prospectus
supplement that will be distributed to the registered holders of the Old
Notes, and the Company will extend the Exchange Offer to the extent required
by Rule l4e-1 under the Exchange Act.
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent and
by making a public announcement thereof, and such announcement in the case of
an extension will be made no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date. Without
limiting the manner in which the Company may choose to make any public
announcement and subject to applicable law, the Company shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a release to the Dow Jones News Service.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Old Notes for any New Notes, and, as described
below, may terminate the Exchange Offer (whether or not any Old Notes have
theretofore been accepted for exchange) or may waive any conditions to or
amend the Exchange Offer, if any of the following conditions have occurred or
exist or have not been satisfied:
(i) the due tendering of Old Notes in accordance with the Exchange Offer;
(ii) the Exchange Offer, or the making of any exchange by a holder,
violates any applicable law, statute, rule, regulation or any applicable
interpretation of the staff of the Commission;
(iii) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company;
(iv) each holder of Old Notes exchanged in the Exchange Offer shall have
made certain customary representations, including representations that,
among other things, (i) the holder is not an "affiliate" of the Company as
defined in Rule 405 of the Securities Act, (ii) the holder is not a broker-
dealer that acquired Old Notes directly from the Company in order to resell
them pursuant to Rule 144A of the Securities Act or any other available
exemption under the Securities Act, (iii) the holder will acquire the New
Notes in the ordinary course of business and (iv) that the holder is not
participating, and does not intend to participate, and has no arrangement
or understanding with any person to participate, in the distribution of the
New Notes;
(v) all governmental approvals have been obtained, which such approval
the Company shall, in its reasonable judgment, deem necessary for the
consummation of the Exchange Offer as contemplated hereby;
(vi) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (a) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or
26
assessing or seeking any damages as a result thereof or (b) resulting in a
material delay in the ability of the Company to accept for exchange or
exchange some or all of the Old Notes pursuant to the Exchange Offer;
(vii) there shall have occurred (a) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (b) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Company to complete the transactions contemplated by the
Exchange Offer, (c) a declaration of a banking moratorium or any suspension
of payments in respect of banks in the United States or any limitation by
any governmental agency or authority which adversely affects the extension
of credit or (d) a commencement of a war, armed hostilities or other
similar international calamity directly or indirectly involving the United
States, or, in the case of any of the foregoing existing at the time of the
commencement of the Exchange Offer, a material acceleration or worsening
thereof; or
(viii) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company and its subsidiaries taken as a whole that, in the
sole judgment of the Company, is or may be adverse to the Company, or the
Company shall have become aware of facts that, in the sole judgment of the
Company, have or may have an adverse effect on the value of the Old Notes
or the New Notes.
If the Company determines in its sole and absolute discretion that any of
the foregoing events or conditions has occurred or exists or has not been
satisfied, the Company may, subject to applicable law, (i) terminate the
Exchange Offer (whether or not any Old Notes have theretofore been accepted
for exchange), (ii) extend the Exchange Offer and retain all Old Notes
tendered prior to the expiration of the Exchange Offer subject, however, to
the rights of holders to withdraw such Old Notes or (iii) waive any such
condition or otherwise amend the terms of the Exchange Offer in any respect.
If such waiver or amendment constitutes a material change to the Exchange
Offer, the Company will promptly disclose such waiver or amendment by means of
a prospectus supplement that will be distributed to the registered holders of
the Old Notes, and the Company will extend the Exchange Offer to the extent
required by Rule l4e-1 under the Exchange Act.
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company in whole or in part at any time and from time to time in
its sole discretion. The failure by the Company at any time to exercise any of
the foregoing rights shall not be deemed a waiver of such rights and each such
right shall be deemed an ongoing right which may be asserted at any time and
from time to time. Any determination by the Company concerning the events
described above will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indenture under the Trust Indenture Act of 1939.
TERMINATION OF CERTAIN RIGHTS
Holders of New Notes will not be and, upon consummation of the Exchange
Offer, holders of Old Notes who were permitted to participate in the Exchange
Offer will no longer be, entitled to (i) the right to receive Additional
Interest under the Registration Rights Agreement or (ii) certain other rights
under the Registration Rights Agreement intended for the holders of
unregistered securities; provided, that holders of Old Notes who are not
permitted to participate in the Exchange Offer or who do not receive fully
tradeable New Notes pursuant to the Exchange Offer, shall have the right to
require the Company to file a Shelf Registration Statement solely for the
benefit of such holders of Old Notes and will be entitled to receive
Additional Interest following the occurrence of a Registration Default in
connection with the filing of such Shelf Registration Statement. See
"Registration Rights." Notwithstanding anything to the contrary in the
foregoing, Old Notes not tendered in the Exchange Offer will remain
outstanding and continue to accrue interest in accordance with their terms.
27
ACCRUED INTEREST ON THE OLD NOTES
Holders whose Old Notes are accepted for exchange will have the right to
receive interest accrued thereon from the date of their original issuance or
the last interest payment date, as applicable, to, but not including, the date
of issuance of the New Notes, such interest to be payable with the first
interest payment on the New Notes. Interest on the Old Notes accepted for
exchange, which interest accrued at the rate of 8 1/8% per annum, will cease
to accrue on the day prior to the issuance of the New Notes.
PROCEDURES FOR TENDERING OLD NOTES
The tender of a holder's Old Notes as set forth below and the acceptance
thereof by the Company will constitute a binding agreement between the
tendering holder and the Company upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal.
Except as set forth below, a holder who wishes to tender Old Notes for
exchange pursuant to the Exchange Offer must transmit a properly completed and
duly executed Letter of Transmittal, including all other documents required by
such Letter of Transmittal, to the Exchange Agent at the address set forth
under "--The Exchange Agent; Assistance" prior to 5:00 p.m., New York City
time on the Expiration Date. In addition, either (i) certificates of such Old
Notes must be received by the Exchange Agent along with the Letter of
Transmittal, (ii) a timely confirmation of book-entry transfer of such Old
Notes, if such procedure is available, into the Exchange Agent's account at
DTC pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date, or (iii) the
holder must comply with the guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
ELIGIBLE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED.
INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT THE ELIGIBLE HOLDER USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTER OF TRANSMITTAL OR OLD NOTES
SHOULD BE SENT TO THE COMPANY OR DTC. HOLDERS MAY REQUEST THEIR RESPECTIVE
BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT SUCH
TENDER FOR SUCH HOLDER.
Any Beneficial Owner whose Old Notes are registered in the name of a
nominee, such as a broker, dealer, commercial bank or trust company, and who
wishes to tender Old Notes in the Exchange Offer should contact such
registered holder promptly and instruct such registered holder to tender on
such Beneficial Owner's behalf. If such Beneficial Owner wishes to tender
directly, such Beneficial Owner must, prior to completing and executing the
Letter of Transmittal and tendering Old Notes, either make appropriate
arrangements to register ownership of the Old Notes in such Beneficial Owner's
name or obtain a properly completed bond power from the registered holder.
Beneficial Owners should be aware that the transfer of registered ownership
may take considerable time.
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at DTC for the purposes of the Exchange Offer within two
business days after the date of this Prospectus. 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 such Old Notes
into the Exchange Agent's account in accordance with DTC's procedures for such
transfer. However, 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 (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees and any other required documents, must in
any case, be delivered to and received by the Exchange Agent at its address
set forth under "--The Exchange Agent; Assistance" on or prior to the
Expiration Date, or the guaranteed delivery procedure set forth below must be
complied with, within the time period provided under such procedures. Delivery
of documents to DTC does not constitute delivery to the Exchange Agent.
28
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined herein)
unless the Old Notes surrendered for exchange pursuant hereto are tendered (i)
by a registered holder of the Old Notes who has not completed either the box
entitled "Special Exchange Instructions" or the box entitled "Special Delivery
Instructions" in the Letter of Transmittal or (ii) for the account of an
Eligible Institution. In the event that a signature on a Letter of Transmittal
or a notice of withdrawal, as the case may be, is required to be guaranteed,
such signature must be guaranteed by an Eligible Institution. 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 or accompanied
by appropriate bond powers and a proxy which authorizes such person to tender
the Old Notes on behalf of the registered holder, in each case, signed by the
registered holder, with the signature thereon guaranteed by an Eligible
Institution. The term "registered holder" as used herein with respect to the
Old Notes means any person in whose name the Old Notes are registered on the
books of the Registrar. The term "Eligible Institution" as used herein means a
firm which 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 Exchange Act.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and
all Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the
Company shall 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 the Company shall determine. Neither the
Company, the Exchange Agent nor any other person shall be under any duty to
give notification of defects or irregularities with respect to tenders of Old
Notes, nor shall any of them incur any liability for failure to give
notification of defects or irregularities with respect to tenders of Old
Notes. Tenders of the Old Notes will not be deemed to have been made until
such irregularities have been cured or waived.
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 so indicate when signing, and, unless waived by the
Company, proper evidence satisfactory to the Company, in its sole discretion,
of such person's authority so to act must be submitted with the Letter of
Transmittal.
By tendering, each registered holder will represent to the Company, among
other things, that: (i) the holder is not an "affiliate" of the Company as
defined in Rule 405 of the Securities Act, (ii) the holder is not a broker-
dealer that acquired Old Notes directly from the Company in order to resell
them pursuant to Rule 144A of the Securities Act or any other available
exemption under the Securities Act, (iii) the holder will acquire the New
Notes in the ordinary course of business and (iv) the holder is not
participating, and does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the New
Notes. Any holder of Old Notes that is unable to make these representations to
the Company will not be able to rely on the interpretations of the staff of
the Commission described in "--Resales of New Notes" and therefore will be
required to comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale of such Old Notes, unless
such sale is made pursuant to an exemption from such requirements.
29
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other documents required by the Letter of Transmittal to
the Exchange Agent on or prior to the Expiration Date or (iii) who cannot
complete the procedure for book-entry transfer on a timely basis, may tender
their Old Notes according to the guaranteed delivery procedures set forth in
the Letter of Transmittal. Pursuant to such procedures: (i) such tender must
be made by or through an Eligible Institution, (ii) prior to the Expiration
Date, the Exchange Agent must have received from the holder and the Eligible
Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the holder, the certificate or registration number or
numbers of the tendered Old Notes, and the principal amount of tendered Old
Notes, stating that the tender is being made thereby and guaranteeing that, at
least within four (4) New York Stock Exchange trading days after the
Expiration Date, the tendered Old Notes, a duly executed Letter of Transmittal
(or a facsimile thereof) and any other required documents will be deposited by
the Eligible Institution with the Exchange Agent and (iii) such properly
completed and executed documents required by the Letter of Transmittal (or a
facsimile thereof) 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 at least
four (4) New York Stock Exchange trading days after the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer, the
Company will accept any and all 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 issued pursuant to the Exchange Offer will be delivered as
promptly as practicable after acceptance of the Old Notes. For purposes of the
Exchange Offer, the Company shall be deemed to have accepted validly tendered
Old Notes, when, as, and if the Company has given oral or written notice
thereof to the Exchange Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and all other required
documents (or of confirmation of a book-entry transfer of such Old Notes into
the Exchange Agent's account at DTC); provided, that the Company reserves the
absolute right to waive any defects or irregularities in the tender or
conditions of the Exchange Offer. If any tendered Old Notes are not accepted
for any reason, such unaccepted Old Notes will be returned without expense to
the tendering holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
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
herein, at any time prior to 5:00 p.m., New York City time, on the Expiration
Date after which tenders of Old Notes are irrevocable. Any such notice of
withdrawal must (i) specify the name of the person having deposited the Old
Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be
withdrawn (including the certificate or registration number or numbers and
principal amount of such Old Notes, as applicable or, in the case of notes
transferred by book-entry transfer, the name and number of the account at DTC
to be credited), (iii) be signed by the Depositor in the same manner as the
original signature on the Letter of Transmittal by which such 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 the Company in its sole discretion, duly executed by the
registered holder, with the signature thereon guaranteed by an Eligible
Institution together with the other documents required upon transfer by the
Indenture, (iv) specify the name in which such Old Notes are to be re-
registered, if different from the Depositor, pursuant to such documents of
transfer and (v) include a statement that such holder is withdrawing its
election to have such Old Notes exchanged. All questions as to the validity,
form and eligibility (including time of receipt)
30
of such notices will be determined by the Company, in its sole discretion. The
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer and no New Notes will be issued
with respect thereto unless the Old Notes so withdrawn are validly retendered.
Any Old Notes which have been tendered for exchange but which are withdrawn
will be returned to the holder thereof without cost to such holder as promptly
as practicable after withdrawal. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "--Procedures
for Tendering Old Notes" at any time on or prior to the Expiration Date.
THE EXCHANGE AGENT; ASSISTANCE
U.S. Bank Trust National Association has been appointed the Exchange Agent
for the Exchange Offer. 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 Hand, Registered or Certified Mail or Overnight Courier:
U.S. Bank Trust National Association
U.S. Bank Trust Center
180 East Fifth Street
St. Paul, MN 55101
Attention: Melina Black
By Facsimile:
651-244-1537
Attention: Melina Black
Confirm by Telephone 651-244-8161
DELIVERY OF DOCUMENTS TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF DOCUMENTS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY OF SUCH DOCUMENTS.
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. However, additional solicitations may be
made by facsimile, telephone or in person by officers and regular employees of
the Company and its affiliates.
The Company has 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. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith
and pay other registration expenses, including fees and expenses of the
Trustee, filing fees, blue sky fees and printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered or
if a transfer tax is imposed for any reason other than the exchange of Old
Notes pursuant to the Exchange Offer, then the amount of any such 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 such
taxes or exemption is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
31
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Company for accounting
purposes in connection with the Exchange Offer. The expenses of the Exchange
Offer will be amortized over the term of the New Notes.
RESALES OF NEW NOTES
Upon consummation of the Exchange Offer, holders of Old Notes who were not
prohibited from participating in the Exchange Offer and did not tender their
Old Notes will generally not have any registration rights under the
Registration Rights Agreement with respect to such nontendered Old Notes and
such Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, the Old Notes may not be offered
or sold unless registered under the Securities Act and applicable state
securities laws, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the Old Notes
under the Securities Act.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in certain interpretive letters addressed
to third parties in other transactions. However, the Company has not sought
its own interpretive letter and there can be no assurance that the staff of
the Commission would make a similar determination with respect to the Exchange
Offer as it has in such interpretive letters to third parties. Based on these
interpretations by the staff of the Commission, the Company believes that New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by a holder (other than
(i) a broker-dealer who purchased Old Notes directly from the Company for
resale pursuant to Rule 144A or any other available exemption under the
Securities Act, (ii) an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act or (iii) a broker-dealer who acquired the Old
Notes as a result of market-making or other trading activities), without
further compliance with the registration and prospectus delivery provisions of
the Securities Act, provided, that such holder is acquiring the New Notes in
the ordinary course of business and is not participating, and has no
arrangement or understanding with any person to participate, in the
distribution of the New Notes. Any holder wishing to accept the Exchange Offer
must represent to the Company, as required by the Registration Rights
Agreement, that (i) it is not an "affiliate" of the Company as defined in Rule
405 of the Securities Act, (ii) it is not a broker-dealer that acquired Old
Notes directly from the Company in order to resell them pursuant to Rule 144A
of the Securities Act or any other available exemption under the Securities
Act, (iii) it will acquire the New Notes in the ordinary course of business
and (iv) it is not participating, and does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the New Notes. Any holder of Old Notes that is unable to make
these representations to the Company will not be able to rely on the
interpretations of the staff of the Commission described above and therefore
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale of such Old
Notes unless such sale is made pursuant to an exemption from such
requirements.
Each broker-dealer who 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, because it may be deemed a statutory underwriter, must agree that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging 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, even though selling broker- dealers may be deemed
"underwriters" within the Securities Act. Based on the position taken by the
staff of the Commission in the interpretive letters referred to above, the
Company believes that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the New Notes received upon
exchange of such 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, which may be the prospectus prepared
for an
32
exchange offer so long as it contains a description of the plan of
distribution with respect to the resale of such New Notes. Accordingly, this
Prospectus 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 such Participating Broker-
Dealer for its own account as a result of market-making or other trading
activities. Subject to certain provisions and time limitations set forth in
the Registration Rights Agreement, the Company has 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 who 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 the Company, or cause the Company to be notified, on or prior to the
Expiration Date, 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 one of the addresses set forth
herein under "--The Exchange Agent; Assistance." A Participating Broker-Dealer
who delivers this Prospectus to purchasers in connection with resales of New
Notes will be subject to certain of the civil liabilities under the Securities
Act and will be bound by the provisions of the Registration Rights Agreement
(including certain indemnification rights and obligations). Any Participating
Broker-Dealer who is an "affiliate" of the Company may not rely on such
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
In that regard, each Participating Broker-Dealer who surrenders 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 the Company of
the occurrence of any event or the discovery of any fact which makes any
statement contained in this Prospectus untrue in any material respect or which
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 certain other
events specified in the Registration Rights Agreement, such Participating
Broker-Dealer will suspend the sale of New Notes pursuant to this Prospectus
until the Company has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such Participating Broker-Dealer or the Company has
given notice that the sale of the New Notes may be resumed, as the case may
be.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who are permitted to participate in the Exchange Offer
and who do not tender their Old Notes generally will not have any further
registration rights under the Registration Rights Agreement or otherwise.
Accordingly, any holder that does not exchange such holder's Old Notes for New
Notes will continue to hold the untendered Old Notes and will be entitled to
all the rights and limitations applicable thereto 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.
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will continue to be subject to the restrictions on transfer contained in
the legend thereon. In general, the Old Note may not be offered or sold,
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Old Notes under the Securities Act. Accordingly, such Old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) pursuant to an effective registration statement under the Securities Act,
(iii) so long as the Old Notes are eligible for resale pursuant to Rule 144A,
to a Qualified Institutional Buyer (as defined in the Securities Act) in a
transaction meeting the requirements of Rule 144A, (iv) outside the United
States to a foreign person pursuant to the exemption from the registration
requirements of the Securities Act provided by Regulation S, (v) to an
institutional "accredited investor" (as defined in the Securities Act) in a
transaction exempt from the registration requirements of the Securities Act,
in each case in accordance with any applicable securities laws of any state of
the United States or other applicable jurisdiction, or (vi) pursuant to any
other available exemption from the registration requirements of the Securities
Act.
33
MISCELLANEOUS
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept such offer. Holders of the Old Notes are
urged to consult their financial and tax advisors in making their own
decisions on what action to take.
The Company may in the future seek to acquire untendered Old Notes, to the
extent permitted by applicable law, in open market or privately negotiated
transactions, through subsequent exchange offers or otherwise. The Company has
no present plans to acquire any Old Notes that are not tendered in the
Exchange Offer or to file a registration statement to permit resales of any
untendered Old Notes.
HOLDERS OF OLD NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS IN
CONNECTION WITH THE EXCHANGE OFFER.
34
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange of the Old Notes
for New Notes pursuant to the Exchange Offer.
The net proceeds to the Company from the Offering were approximately $146.1
million, after deducting the Initial Purchasers' discount and other expenses
related to the Offering. The Company used the net proceeds of the Offering,
together with approximately $73.7 million of cash on hand, to (i) place $167.2
million of cash and U.S. Treasury Securities in trust with U.S. Bank Trust
National Association to effect the Covenant Defeasance; (ii) repay in full
$52.0 million of outstanding indebtedness under the Amended and Restated
Promissory Note (the "Existing Credit Facility") dated June 30, 1997 executed
by Empress Hammond in favor of Bank of America National Trust and Savings
Association; and (iii) repay in full $0.6 million of outstanding vendor
financing. See "Certain Transactions," "Description of Certain Other
Indebtedness," and "Description of the New Notes."
35
SELECTED COMBINED FINANCIAL DATA
The following selected combined financial data as of and for each of the
three years ended December 31, 1997, 1996 and 1995 have been derived from the
audited combined financial statements of the Company. The data presented below
as of and for each of the years ended December 31, 1994 and 1993 and as of and
for each of the three months ended March 31, 1998 and 1997 are unaudited. In
the opinion of the Company, such interim data includes all adjustments (which
were of a normal recurring nature) necessary for a fair presentation of the
information set forth therein. The Company's operations are subject to
seasonal factors, and therefore, the results of operations for each of the
three months ended March 31, 1998 and 1997 are not necessarily indicative of
the results of operations for the full year. The following data should be read
in conjunction with the combined financial statements and notes thereto
included elsewhere in this Prospectus. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company believes the results of operations for each of the five years in
the period ended December 31, 1997 are not readily comparable to each other
because Empress Hammond commenced gaming operations on June 28, 1996. See
"Risk Factors--Competition" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------- --------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ ------
(IN MILLIONS)
STATEMENT OF OPERATIONS
DATA:
Revenues
Casino................. $181.6 $174.7 $346.0 $263.0 $202.3 $202.7 $172.8
Other, net of
promotional
allowances............ 11.1 11.2 23.6 15.7 12.3 12.6 14.5
------ ------ ------ ------ ------ ------ ------
Total net revenues... 192.7 185.9 369.6 278.7 214.6 215.3 187.3
Operating expenses
Casino................. 30.0 30.8 64.8 48.1 30.7 29.1 18.7
Gaming and admission
taxes................. 60.2 53.4 108.0 73.1 47.1 46.9 38.9
Other departmental
expenses.............. 52.5 53.1 113.4 77.7 56.1 51.3 35.5
Pre-opening expenses... -- -- -- 5.7 1.3 3.3 3.0
Depreciation and
amortization.......... 9.6 9.4 18.8 13.9 16.9 17.8 13.2
------ ------ ------ ------ ------ ------ ------
Total operating
expenses............ 152.3 146.7 305.0 218.5 152.1 148.4 109.3
------ ------ ------ ------ ------ ------ ------
Income from operations.. 40.4 39.2 64.6 60.2 62.5 66.9 78.0
Interest expense........ (10.9) (10.6) (21.1) (18.3) (16.4) (11.5) (2.8)
Interest income......... 2.0 1.5 3.3 3.5 5.2 2.9 0.4
State taxes............. (0.2) (0.1) (0.5) (0.5) (0.7) (0.8) (1.2)
------ ------ ------ ------ ------ ------ ------
Net income.............. $ 31.3 $ 30.0 $ 46.3 $ 44.9 $ 50.6 $ 57.5 $ 74.4
====== ====== ====== ====== ====== ====== ======
OTHER DATA:
Capital expenditures
(1).................... 16.6 6.7 16.1 106.0 7.4 44.3 34.6
Ratio of earnings to
fixed charges (2)...... 3.8x 3.8x 3.1x 3.1x 4.0x 5.3x 25.3x
BALANCE SHEET DATA:
Cash, cash equivalents
and marketable
securities............. $ 20.0 $ 69.4 $ 83.3 $ 75.7 $ 67.1 $ 62.8 $ 16.3
Total assets............ 409.0 278.4 291.5 288.3 201.8 208.2 92.9
Total debt.............. 300.0 202.2 208.5 214.3 150.6 152.2 32.6
Stockholders' equity.... 61.5 53.0 55.9 49.6 36.8 33.4 48.8
- --------
(1) Included in capital expenditures for the year ended December 31, 1996 is
$93.4 million in conjunction with the opening of Empress Hammond.
(2) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (income before state income taxes
plus fixed charges and the current period amortization of interest
capitalized in prior periods less capitalized interest) by fixed charges
(interest expense plus capitalized interest, amortization of debt issue
costs and the interest factor of rent expense).
36
EMPRESS ENTERTAINMENT, INC.
UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined statements of income of the
Company have been derived from the historical actual combined statements of
income adjusted for the Offering and the Covenant Defeasance. The unaudited
pro forma combined statements of income of the Company have been prepared
assuming the Offering occurred on January 1, 1997.
The unaudited pro forma combined statements of income of the Company should
be read in conjunction with the historical combined financial statements of
the Company and the notes thereto for each of the three years in the period
ended December 31, 1997, and for the six months ended June 30, 1998 and 1997,
included elsewhere in this Registration Statement. The unaudited pro forma
statements of income of the Company are not necessarily indicative of the
financial results of the Company that would actually have been obtained had
the Offering been consummated on January 1, 1997.
The effects of the Offering and the Covenant Defeasance are reflected in the
unaudited consolidated balance sheet as of June 30, 1998 included in this
Registration Statement at page F-2 and therefore, no pro forma balance sheet
is presented.
37
EMPRESS ENTERTAINMENT, INC.
PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1998
--------------------------------
PRO FORMA AS
ACTUAL ADJUSTMENTS (1) ADJUSTED
------ --------------- --------
(IN MILLIONS)
Revenues
Casino....................................... $181.6 $ -- $181.6
Other, net of promotional allowances......... 11.1 -- 11.1
------ ------ ------
Total net revenues......................... 192.7 -- 192.7
Operating expenses
Casino....................................... 30.0 -- 30.0
Gaming and admission taxes................... 60.2 -- 60.2
Other departmental expenses.................. 52.5 -- 52.5
Depreciation and amortization................ 9.6 -- 9.6
------ ------ ------
Total operating expenses................... 152.3 -- 152.3
------ ------ ------
Income from operations......................... 40.4 -- 40.4
Interest expense............................... (10.9) (6.4) (17.3)
Interest income................................ 2.0 4.6 6.6
State taxes.................................... (0.2) -- (0.2)
------ ------ ------
Net income..................................... $ 31.3 $ (1.8) $ 29.5
====== ====== ======
YEAR ENDED DECEMBER 31, 1997
--------------------------------
PRO FORMA AS
ACTUAL ADJUSTMENTS (1) ADJUSTED
------ --------------- --------
(IN MILLIONS)
Revenues
Casino....................................... $346.0 $ -- $346.0
Other, net of promotional allowances......... 23.6 -- 23.6
------ ------ ------
Total net revenues......................... 369.6 -- 369.6
Operating expenses
Casino....................................... 64.8 -- 64.8
Gaming and admission taxes................... 108.0 -- 108.0
Other departmental expenses.................. 113.4 -- 113.4
Depreciation and amortization................ 18.8 -- 18.8
------ ------ ------
Total operating expenses................... 305.0 -- 305.0
------ ------ ------
Income from operations......................... 64.6 -- 64.6
Interest expense............................... (21.1) (12.9) (34.0)
Interest income................................ 3.3 9.2 12.5
State taxes.................................... (0.5) -- (0.5)
------ ------ ------
Net income..................................... $ 46.3 $ (3.7) $ 42.6
====== ====== ======
- --------
(1) The pro forma adjustments reflect the impact of the Offering assuming the
Offering occurred on January 1, 1998. The interest expense adjustment
reflects the interest on the New Notes and the amortization of the
deferred financing costs. The interest income adjustment reflects the
interest to be earned on the U.S. Treasury Securities held in trust to
effect the Covenant Defeasance based on the securities purchased and their
respective interest rates offset by the interest income no longer earned
on the cash to be utilized to effect the Covenant Defeasance.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the combined financial statements and the notes
thereto of the Company included elsewhere in the Prospectus.
OVERVIEW
The Company was organized in January 1994, as an S Corporation for Federal
and state income tax purposes, for the sole purpose of constructing Empress
III and leasing it to Empress Hammond. As a result of the Reorganization, the
Company is a holding company with Empress Hammond, Empress Joliet and Empress
Finance as its wholly-owned, Qualified Subchapter S Subsidiaries.
Empress Hammond was organized in November 1992 as an S Corporation for
Federal and state income tax purposes. A preliminary finding of suitability of
the owners of Empress Hammond was granted by the Indiana Gaming Commission on
November 17, 1995, and Empress Hammond was granted a five-year operating
license from the Indiana Gaming Commission on June 21, 1996. Empress Hammond
commenced gaming operations in Hammond, Indiana on June 28, 1996. On November
14, 1997, Empress Hammond became a wholly-owned, Qualified Subchapter S
Subsidiary of the Company.
Empress Joliet was organized in December 1990 as an S Corporation for
Federal and state income tax purposes. A preliminary finding of suitability of
the owners of Empress Joliet was granted by the Illinois Gaming Board on July
16, 1991. Empress Joliet commenced gaming operations in Joliet, Illinois on
June 17, 1992, and was granted a one-year renewal of its gaming license by the
Illinois Gaming Board on July 21, 1998. In connection with the Reorganization,
Empress Joliet became a wholly-owned, Qualified Subchapter S Subsidiary of the
Company.
Empress Finance was organized in January 1994 as a C Corporation for the
sole purpose of issuing the 10 3/4% Notes. In connection with the
Reorganization, Empress Finance became a wholly-owned, Qualified Subchapter S
Subsidiary of the Company. Hammond Residential is the wholly-owned subsidiary
of Empress Hammond and was formed primarily to satisfy certain residential
development commitments to the City of Hammond. Empress Finance has no
business activities except its obligations with respect to the 10 3/4% Notes
and Hammond Residential has no business activities except for satisfying such
residential development commitments.
Empress Opportunities was formed as an Unrestricted Subsidiary to serve as a
holding company under which the Company intends to explore business
opportunities other than the Company's gaming operations in Hammond, Indiana
and Joliet, Illinois. Empress Racing was formed as an Unrestricted Subsidiary
to hold a 50% ownership interest in a limited liability company which has
acquired certain outstanding secured indebtedness of Sunshine Racing, Inc.,
the owner of the Woodlands Racetrack in Kansas City, Kansas and which, subject
to certain regulatory approvals, intends to ultimately bid to purchase the
Woodlands Racetrack in an auction pursuant to a proceeding under Chapter 7 of
the U.S. Bankruptcy Code. Empress Mississippi was formed as an Unrestricted
Subsidiary to investigate business opportunities in Mississippi. As
unrestricted Subsidiaries, Empress Opportunities, Empress Racing and Empress
Mississippi are not Guarantors of the Notes.
RESULTS OF OPERATIONS
The Company's results from 1997 forward reflect full operations at Empress
Joliet and Empress Hammond, the 1996 results reflect a full year of operations
at Empress Joliet and one-half year of operations at Empress Hammond and the
1995 results reflect a full year of operations at Empress Joliet only. From
May 1994 through September 1994, Empress Hammond operated a seasonal
restaurant at its current operating site. Empress Hammond did not commence
gaming operations until June 28, 1996. The following discussion is based upon
the combined operating results of the Company.
39
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Net revenues for the three months ended June 30, 1998 were $95.8 million, an
increase of $4.1 million, or 4.5% compared to net revenues of $91.7 million
for the three months ended June 30, 1997. Empress Hammond's net revenues
increased from $54.8 million to $57.7 million and Empress Joliet's net
revenues increased from $36.9 million to $38.1 million.
Casino revenues for the three months ended June 30, 1998 were $90.3 million,
an increase of $4.1 million, or 4.8% compared to casino revenues of $86.2
million for the three months ended June 30, 1997. Empress Hammond's casino
revenues increased from $52.1 million to $54.6 million primarily due to
increased admissions and Empress Joliet's casino revenues increased from $34.1
million to $35.7 million due to an increase in win per admission.
Revenues from non-gaming operations, consisting primarily of food and
beverage, parking, gift shop and hotel revenues, for the three months ended
June 30, 1998 were $7.1 million, an increase of $0.4 million, or 6.0% compared
to $6.7 million for the three months ended June 30, 1997. Empress Hammond's
non-gaming revenues increased from $3.7 million to $4.2 million. This increase
was partially offset by a decrease in non-gaming revenues at Empress Joliet
from $3.0 million to $2.9 million.
Promotional allowances were $1.5 million for the three months ended June 30,
1998 compared to $1.2 million for the three months ended June 30, 1997.
Empress Hammond's promotional allowances increased from $0.9 million to $1.0
million and Empress Joliet's promotional allowances increased from $0.3
million to $0.5 million.
Casino expenses decreased $0.5 million, or 3.2%, to $15.0 million for the
three months ended June 30, 1998, compared to $15.5 million for the three
months ended June 30, 1997. Empress Hammond's casino expenses decreased from
$7.8 million to $7.6 million and Empress Joliet's decreased from $7.7 to $7.4
million.
Gaming and admission taxes increased $3.7 million to $29.9 million for the
three months ended June 30, 1998 compared to the three months ended June 30,
1997. Empress Hammond's gaming and admission taxes increased from $17.7
million to $19.0 million as a result of increased casino revenues and
admissions. Gaming and admission taxes at Empress Joliet increased from $8.5
million to $10.9 million as a result of increased casino revenues and the
implementation on January 1, 1998 of a graduated gaming tax by Illinois, and
were partially offset by a decline in admissions.
Expenses relating to non-gaming operations, including depreciation and
amortization, for the three months ended June 30, 1998 totaled $31.4 million,
a decrease of 3.7% or $1.2 million compared to the three months ended June 30,
1997. Expenses relating to non-gaming operations for Empress Hammond increased
from $18.0 million to $18.1 million primarily due to an increase in
advertising and sales expenses. This increase was offset by a decrease in
expenses relating to non-gaming operations at Empress Joliet which decreased
from $14.6 million to $13.3 million primarily due to a decrease in advertising
and sales expenses as well as a decrease in food and beverage expenses.
Income from operations for the three months ended June 30, 1998 increased
$2.2 million to $19.5 million compared to $17.3 million for the three months
ended June 30, 1997. Income from operations at Empress Hammond increased from
$11.2 million to $13.0 million and Empress Joliet increased from $6.1 million
to $6.5 million.
Net interest expense for the three months ended June 30, 1998 was $4.6
million, an increase of $0.2 million compared to the three months ended June
30, 1997. This increase was a result of higher interest expense associated
with increased borrowings under the Existing Credit Facility.
Net income increased from $12.8 million for the three months ended June 30,
1997 to $14.8 million for the three months ended June 30, 1998 due primarily
to the factors discussed above.
40
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net revenues for the six months ended June 30, 1998 were $192.7 million, an
increase of $6.9 million, or 3.7% compared to net revenues of $185.8 million
for the six months ended June 30, 1997. Empress Hammond's net revenues
increased from $111.8 million to $116.2 million and Empress Joliet's net
revenues increased from $74.0 million to $76.5 million.
Casino revenues for the six months ended June 30, 1998 were $181.6 million,
an increase of $6.9 million, or 4.0% compared to casino revenues of $174.7
million for the six months ended June 30, 1997. Empress Hammond's casino
revenues increased from $106.4 million to $110.0 million primarily due to
increased admissions and Empress Joliet's casino revenues increased from $68.3
million to $71.6 million due to an increase in win per admission.
Revenues from non-gaming operations, consisting primarily of food and
beverage, parking, gift shop and hotel revenues, for the six months ended June
30, 1998 were $14.0 million, an increase of $0.5 million, or 3.7% compared to
$13.5 million for the six months ended June 30, 1997. Empress Hammond's non-
gaming revenues increased from $7.1 million to $8.1 million. This increase was
partially offset by a decrease in non-gaming revenues at Empress Joliet from
$6.4 million to $5.9 million.
Promotional allowances were $2.9 million for the six months ended June 30,
1998 compared to $2.3 million for the six months ended June 30, 1997. Empress
Hammond's promotional allowances increased from $1.6 million to $1.9 million
and Empress Joliet's promotional allowances increased from $0.7 million to
$1.0 million.
Casino expenses decreased $0.8 million, or 2.6%, to $30.0 million for the
six months ended June 30, 1998, compared to $30.8 million for the six months
ended June 30, 1997. Empress Hammond's casino expenses decreased from $15.6
million to $14.9 million and Empress Joliet's decreased from $15.2 to $15.1
million.
Gaming and admission taxes increased $6.8 million to $60.2 million for the
six months ended June 30, 1998 compared to the six months ended June 30, 1997.
Empress Hammond's gaming and admission taxes increased from $36.4 million to
$38.3 million as a result of increased casino revenues and admissions. Gaming
and admission taxes at Empress Joliet increased from $17.0 million to $21.9
million as a result of increased casino revenues and the implementation on
January 1, 1998 of a graduated gaming tax by Illinois, and were partially
offset by a decline in admissions.
Expenses relating to non-gaming operations, including depreciation and
amortization, for the six months ended June 30, 1998 totaled $62.1 million, a
decrease of 0.6% or $0.4 million compared to the six months ended June 30,
1997. Expenses relating to non-gaming operations for Empress Hammond increased
from $33.4 million to $36.0 million primarily due to an increase in
advertising and sales expenses. This increase was offset by decrease in
expenses relating to non-gaming operations at Empress Joliet which decreased
from $29.1 million to $26.1 million primarily due to a decrease in advertising
and sales expenses.
Income from operations for the six months ended June 30, 1998 increased $1.2
million to $40.4 million compared to $39.2 million for the six months ended
June 30, 1997. Income from operations at Empress Hammond increased from $26.5
million to $27.0 million and Empress Joliet increased from $12.7 million to
$13.4 million.
Net interest expense for the six months ended June 30, 1998 was $8.9
million, a decrease of $0.1 million compared to the six months ended June 30,
1997. This decrease was a result of lower interest expense associated with
decreased borrowings under the Credit Facility.
Net income increased from $30.0 million for the six months ended June 30,
1997 to $31.3 million for the six months ended June 30, 1998 due primarily to
the factors discussed above.
41
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net revenues for the year ended December 31, 1997 were $369.6 million, an
increase of $90.9 million, or 32.6% compared to net revenues of $278.7 million
for the year ended December 31, 1996. This increase was primarily attributable
to a full year of operations at Empress Hammond where net revenues increased
from $99.3 million for the year ended December 31, 1996 to $221.6 million for
the year ended December 31, 1997. This increase was partially offset by a
decrease at Empress Joliet where net revenues went from $179.4 million for the
year ended December 31, 1996 to $148.0 million for the year ended December 31,
1997. This decrease at Empress Joliet was due to increased competition from
Indiana riverboats serving the Chicago Market.
Casino revenues for the year ended December 31, 1997 were $346.0 million, an
increase of $83.0 million, or 31.6% compared to casino revenues of $263.0
million for the year ended December 31, 1996. This increase was primarily
attributable to a full year of operations at Empress Hammond where casino
revenues increased from $95.2 million for the year ended December 31, 1996 to
$210.0 million for the year ended December 31, 1997. This increase was
partially offset by a decrease at Empress Joliet where casino revenues went
from $167.8 million for the year ended December 31, 1996 to $136.0 million for
the year ended December 31, 1997. This decrease at Empress Joliet was due to
increased competition from Indiana riverboats serving the Chicago Market.
Revenues from non-gaming operations, consisting primarily of food and
beverage, parking, gift shop, and hotel revenues, for the year ended December
31, 1997 were $34.9 million, an increase of $12.1 million, or 53.1% compared
to non-gaming revenues of $22.8 million for the year ended December 31, 1996.
This increase was primarily attributable to a full year of operations at
Empress Hammond where non-gaming revenues increased from $6.2 million for the
year ended December 31, 1996 to $18.5 million for the year ended December 31,
1997. This increase was partially offset by a decrease at Empress Joliet where
non-gaming revenues went from $16.6 million for the year ended December 31,
1996 to $16.4 million for the year ended December 31, 1997. This decrease at
Empress Joliet was due to a reduction in the number of casino visitors and was
partially offset by a full year of hotel revenues.
Promotional allowances for the year ended December 31, 1997 were $11.3
million compared to $7.2 million for the year ended December 31, 1996. Empress
Hammond's promotional allowances for the year ended December 31, 1997 were
$6.9 million compared to $2.0 million for the year ended December 31, 1996.
Empress Joliet's promotional allowances for the year ended December 31, 1997
were $4.4 million compared to $5.2 million for the year ended December 31,
1996.
Casino expenses for the year ended December 31, 1997 were $64.8 million, an
increase of $16.7 million, or 34.7% compared to $48.1 million for the year
ended December 31, 1996. Empress Hammond's casino expenses for the year ended
December 31, 1997 were $31.4 million compared to $12.6 million for the year
ended December 31, 1996. Empress Joliet's casino expenses for the year ended
December 31, 1997 were $33.4 million compared to $35.5 million for the year
ended December 31, 1996.
Gaming and admission taxes increased $34.9 million to $108.0 million for the
year ended December 31, 1997 compared to the year ended December 31, 1996.
Empress Hammond's gaming and admission taxes increased from $32.8 million to
$73.9 million as a result of increased casino revenues and admissions. Gaming
and admission taxes at Empress Joliet decreased from $40.3 million to $34.1
million due to decreased casino revenues and admissions from increased
competition serving the Chicago Market.
Expenses relating to non-gaming operations, including depreciation and
amortization, for the year ended December 31, 1997 totaled approximately
$132.2 million, an increase of 35.9% or approximately $34.9 million compared
to the year ended December 31, 1996. Expenses relating to non-gaming
operations for Empress Hammond increased from $33.4 million to $70.8 million
primarily due to a full year of operations. This increase was offset by a
decrease in expenses relating to non-gaming operations at Empress Joliet from
$63.8 million to $61.4 million, which was due to a reduction in the number of
casino visitors.
42
Income from operations for the year ended December 31, 1997 totaled
approximately $64.6 million compared to approximately $60.2 million for the
year ended December 31, 1996, an increase of approximately $4.4 million, or
7.3%. This increase in income from operations was primarily attributable to an
increase in the operating results at Empress Hammond from $20.5 million to
$45.4 million and was partially offset by a decline in the operating results
at Empress Joliet from $39.7 million to $19.2 million. The decline in Joliet
was due to increased competition serving the Chicago Market.
Net interest expense for the year ended December 31, 1997 was approximately
$17.8 million, an increase of approximately $3.0 million compared to the year
ended December 31, 1996. This increase was a result of the additional interest
expense associated with increased borrowings under the Existing Credit
Facility and vendor financing of gaming equipment.
Net income amounted to approximately $46.3 million and $44.9 million for the
years December 31, 1997 and 1996, respectively.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net revenues for the year ended December 31, 1996 were $278.7 million, an
increase of $64.1 million, or 29.9% from net revenues of $214.6 million for
the year ended December 31, 1995. The opening of Empress Hammond in June 1996
contributed $99.3 million in net revenues. Empress Joliet's net revenues
decreased from $214.1 million to $179.4 million due to increased competition
from Indiana riverboats serving the Chicago Market.
Casino revenues for the year ended December 31, 1996 were $263.0 million, an
increase of approximately $60.7 million, or 30.0% compared to $202.3 million
for the year ended December 31, 1995. The opening of Empress Hammond in June
1996 contributed $95.2 million in casino revenues. Empress Joliet's casino
revenues decreased from $202.3 million to $167.8 million due to increased
competition from Indiana riverboats serving the Chicago Market.
Revenues from non-gaming operations, consisting primarily of food and
beverage, admissions, parking, gift shop and hotel revenues, for the year
ended December 31, 1996 were $22.8 million, a decrease of $5.4 million, or
19.1% compared to $28.2 million for the year ended December 31, 1995. The
opening of Empress Hammond in June 1996 contributed $6.2 million in non-gaming
revenues. Empress Joliet's non-gaming revenues decreased from $27.7 million to
$16.6 million due to the full year impact of the elimination of admission
charges in August 1995 in response to customer and market demand. The decrease
at Empress Joliet was partially offset by hotel revenues.
Promotional allowances were $7.2 million for the year ended December 31,
1996 compared to $15.9 million for the year ended December 31, 1995. The
opening of Empress Hammond in June 1996 contributed $2.0 million in
promotional allowances. Empress Joliet's promotional allowances decreased from
$15.9 million to $5.2 million. This decrease for Empress Joliet was primarily
attributable to the elimination of admission fees and the implementation of a
player recognition program, which rewards guests for their number of visits
and amount of play. Guests earn points and may use them for cash back rewards,
food and beverages or valuable gifts. Costs relating to this reward program
are classified as a casino expense, rather than a promotional allowance.
Casino expenses increased $17.4 million or 56.7% to $48.1 million for the
year ended December 31, 1996, compared to $30.7 million for the year ended
December 31, 1995. The opening of Empress Hammond in June 1996 contributed
$12.6 million in casino expenses. Empress Joliet's casino expenses increased
from $30.7 million to $35.5 million, primarily attributable to a player
recognition program in effect for the entire year.
Gaming and admission taxes increased $26.0 million to $73.1 million for the
year ended December 31, 1996. The opening of Empress Hammond in June 1996
contributed $32.8 million in gaming and admission taxes. Empress Joliet gaming
and admission taxes decreased from $47.1 million to $40.3 million due to
decreased casino revenues and admissions from increased competition in the
Chicago Market.
43
Expenses relating to non-gaming operations, including depreciation and
amortization, for the year ended December 31, 1996 totaled 97.3 million, an
increase of 31% or approximately $23.0 million compared to the year ended
December 31, 1995. The opening of Empress Hammond in June 1996 contributed
$33.4 million in non-gaming operations expenses. Empress Joliet's expenses
from non-gaming operations decreased from $72.6 million to $63.8 million
primarily due to a decrease in depreciation and amortization expenses due to
an increase in the useful lives of the Company's riverboats and the expiration
of a non-compete agreement.
Income from operations for the year ended December 31, 1996 totaled
approximately $60.2 million compared to approximately $62.5 million for the
year ended December 31, 1995, a decrease of approximately $2.3 million, or
3.8%. This decrease in income from operations was primarily attributable to
the cost of opening Empress Hammond as well as a decline in the operating
results of Empress Joliet due to increased competition in the Chicago Market.
Net interest expense for the year ended December 31, 1996 was approximately
$14.8 million, an increase of approximately $3.7 million compared to the year
ended December 31, 1995. This increase was a result of the additional expenses
associated with increased borrowings under the Company's credit facilities and
vendor financing of gaming equipment.
Net income decreased from $50.6 million for the year ended December 31, 1995
to $44.9 million for the year ended December 31, 1996 due primarily to the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of capital for the Company since 1995 have been cash
provided from operations, credit facilities, non-recourse vendor financing,
the Old Notes and the 10 3/4% Notes. Concurrently with the Offering, the
Company undertook a Covenant Defeasance of the 10 3/4% Notes. See "Use of
Proceeds," "Description of Certain Other Indebtedness" and "Description of the
New Notes."
For the six months ended June 30, 1998, the Company generated cash flow from
operations of approximately $51.9 million compared to approximately $39.2
million for the six months ended June 30, 1997. This increase of approximately
$12.7 million was primarily attributable to an increase in accounts payable
and other accrued liabilities.
During the six months ended June 30, 1998, the Company used cash to purchase
approximately $16.6 million of property and equipment primarily related to the
addition of the fourth deck on Empress III, remodeling of Empress I and
interior and exterior renovations to the Joliet pavilion.
During the six months ended June 30, 1998, proceeds from borrowings were
approximately $160.0 million, and payments on borrowings were approximately
$58.5 million, which included the paydown of the $60.0 million amended and
restated credit facility.
During the six months ended June 30, 1998 and 1997, stockholder
distributions totaled approximately $25.7 million and $26.6 million,
respectively. Of these distributions, approximately $22.2 million and
approximately $19.1 million, respectively, were distributed to allow the
Company's stockholders to pay Federal and state income taxes due to the
Company's Subchapter S status.
For the year ended December 31, 1997, proceeds from borrowings were $29.0
million of which $28.1 million were proceeds from the Existing Credit Facility
and $0.9 million was from vendor financing.
For the year ended December 31, 1997, the Company generated cash flow from
operations of approximately $70.3 million compared to approximately $64.3
million for the year ended December 31, 1996. This increase of approximately
$6.0 million was primarily attributable to a full year of operations of
Empress Hammond.
44
During the year ended December 31, 1997, the Company used cash to purchase
approximately $16.1 million of property and equipment. Approximately $11.9
million was related to the following expenditures at Empress Hammond: (i)
construction of an exterior access ramp for the parking garage; (ii)
commencement of construction of the fourth deck to Empress III; and (iii)
other miscellaneous maintenance capital expenditures. Approximately $4.2
million was used in connection with the commencement of construction of
Empress Joliet's recreational vehicle park, childcare center and other
miscellaneous maintenance capital expenditures. During the year ended December
31, 1996, the Company used cash to purchase approximately $106.0 million of
property and equipment, of which $93.4 million was used in conjunction with
the opening of Empress Hammond, $6.5 million was used to construct the Empress
Joliet hotel and the remaining $6.1 million was used for other property
improvements. In addition, the Company used approximately $0.5 million and
$4.8 million in the years ended December 31, 1997 and 1996, respectively, for
the purchase of other assets associated with the development and opening of
Empress Hammond.
During the years ended December 31, 1997 and 1996, principal payments on
borrowings were approximately $34.8 million and $3.0 million, respectively.
During the years ended December 31, 1997 and 1996 stockholder distributions
totaled approximately $40.1 million and $32.3 million, respectively. Of these
distributions, approximately $24.3 million and approximately $20.1 million,
respectively, was distributed to allow the stockholders to pay Federal and
state income taxes due to the Company's Subchapter S status.
The net proceeds of the Offering, together with approximately $73.7 million
of cash on hand, was used by the Company to effect the Covenant Defeasance, to
repay all other outstanding Indebtedness of the Company and to pay fees and
expenses in connection with the Refinancing. See "Use of Proceeds" and
"Description of Certain Other Indebtedness."
The Company's 1998 operating plan includes capital expenditures totaling
approximately $22.0 million, of which $16.6 million has been expended as of
June 30, 1998. Planned capital improvements include the renovation of the
exterior and interior of the Empress Joliet complex, the addition of a
nightclub at Empress Joliet and the renovation of Empress II. The Company also
has certain outstanding commitments to the city of Hammond and other
governmental bodies. In addition, the Company intends to explore the expansion
of its operations into other gaming markets as opportunities arise, and has
recently funded Empress Racing (an Unrestricted Subsidiary) with approximately
$9.0 million, which was used by a 50% owned subsidiary of Empress Racing to
acquire certain outstanding secured indebtedness of Sunshine Racing, Inc., the
owner of the Woodlands Racetrack in Kansas City, Kansas. The Company
anticipates that cash on hand, the Credit Facility and cash flows from
operations will be sufficient to satisfy the Company's cash requirements as
currently contemplated. In the event such sources are insufficient to satisfy
the foregoing, or in the event that the Company expands its operations into
other gaming markets, the Company may need to obtain additional capital either
through debt and/or equity financings. The Indenture and the terms of the
Credit Facility restrict the ability of the Company to obtain additional
senior or subordinated financing. There can be no assurances that additional
financing will be available on terms acceptable to the Company and within the
restrictions contained in the Indenture and the Credit Facility in the event
that cash on hand, borrowings under the Credit Facility and cash flows from
operations are insufficient to satisfy the Company's cash requirements. See
"Description of the Notes--Certain Covenants--Limitation on Incurrence of
Indebtedness and Preferred Stock," "--Limitation on Other Senior Subordinated
Indebtedness," "Risk Factors--Leverage and Ability to Service Debt," "--
Expansion Opportunities," "--Commitments to Governmental Authorities" and "Use
of Proceeds."
YEAR 2000
The Year 2000 or "Y2K" problem is the result of computer programs being
written using two digits rather than four to define the applicable year. Any
of the Company's programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a major system failure or miscalculations.
45
As a part of the first phase of the Company's Year 2000 compliance program,
the Company conducted an internal review of its computer systems to identify
the systems that could be affected by the Year 2000 problem, including both
"information technology" systems (such as software that processes financial
and other information) and non-information technology. The Company is in the
process of completing the second phase of its Year 2000 compliance program,
which involves (1) the implementation of its existing remediation plan to
resolve the Company's internal Year 2000 issues, (2) the identification of any
potential Year 2000 issues with the Company's significant vendors and
suppliers and (3) the evaluation of a contingency plan in the event that the
Company or its significant vendors and suppliers are unable to adequately
address Year 2000 issues in time. The Company has a July 1999 target date to
complete its implementation efforts.
The Company presently believes that, with modifications to existing software
and converting to new software, the Year 2000 issue will not pose significant
operational problems for the Company's internal computer systems as so
modified and converted. However, if such modifications and conversions are not
completed on a timely basis, the Year 2000 problem may have a material adverse
impact on the operations of the Company. In addition, in the event that any of
the Company's significant suppliers do not successfully and timely achieve
Year 2000 compliance, the Company's business or operations could be adversely
affected. The Company estimates it will incur less than $300,000 in expenses
to ensure all systems will function properly with respect to dates in the year
2000. These expenses are not expected to have a material impact on the
financial position, results of operation or liquidity of the Company.
46
BUSINESS
OVERVIEW
The Company is one of the largest operators of riverboat casinos serving the
Chicago Market. The Company owns two distinctly themed casino entertainment
operations, Empress Hammond and Empress Joliet, both located adjacent to major
highways. Empress Hammond, located in Hammond, Indiana, is the closest casino
to downtown Chicago and Empress Joliet, located in Joliet, Illinois, is in the
fastest growing county in the Chicago Market. During 1997, the Company's
casinos registered approximately nine million customer admissions and had the
highest share of casino revenue in the Chicago Market (approximately 27%). The
Company's 1997 average daily win per slot machine and table game of $308 and
$2,168, respectively, exceeded the averages of each of the nine U.S. riverboat
casino markets. For the twelve months ended March 31, 1998, the Company
generated approximately $376.5 million of net revenues and $84.9 million of
EBITDA.
The Chicago Market is a heavily populated and economically developed region,
consisting of approximately eight million people. Based on the 1993 U.S.
Census Bureau Report, the median household income of the Chicago Market was
$45,491, approximately 46% above the national median. The Chicago Market is
primarily served by the Chicago Market Casinos, operating under a limited
number of licenses granted by the States of Illinois and Indiana. The Illinois
Riverboat Act authorized the issuance of not more than ten licenses, all of
which have been issued. The Indiana Riverboat Act authorized the issuance of
not more than eleven licenses, including five on Lake Michigan, all five of
which have been issued. Two Indiana licenses, for Patoka Lake and the Ohio
River, have yet to be issued. These casinos generated 1997 casino revenue of
approximately $1.3 billion, ranking first among all U.S. riverboat casino
markets and capturing an estimated 6.0% of the total U.S. casino market.
Empress Hammond features a newly built, luxury-appointed catamaran style
vessel, Empress III. Following the recent completion of the fourth deck,
Empress III contains approximately 42,500 square feet of gaming space with
approximately 1,740 slot machines and 54 table games. Empress Hammond includes
an approximately 125,000 square foot mythologically themed pavilion featuring
waterfalls, undersea volcanoes and lounge and dining facilities including the
Blue Water Lounge, the Harborside Steakhouse, the Empressive Buffet and the
Waves Deli. In addition, the pavilion includes a gift shop, concierge suite
and a 150 seat banquet room. Empress Hammond provides parking for
approximately 1,000 cars in a multi-story parking structure and offers 1,300
additional surface parking spaces.
Empress Joliet features two luxury-appointed catamaran style vessels,
Empress I and Empress II, which collectively contain approximately 36,000
square feet of gaming space, 1,011 slot machines and 52 table games. Empress
Joliet includes an approximately 150,000 square foot Egyptian themed pavilion
featuring lounge and award-winning dining facilities including the Oasis Bar,
the Steakhouse Alexandria, Cafe Casablanca and the Marrakech Buffet. The
pavilion also includes an off-track betting facility, gift shop, concierge
suite and a 400 seat banquet room. Empress Joliet is supported by a three
story hotel with 80 deluxe rooms, 17 junior suites and five king-size suites
and an 80-space recreational vehicle park located on 12 acres of land adjacent
to the hotel. Empress Joliet provides surface parking for more than 2,350
cars.
The Company actively pursues opportunities to expand its customer base by
developing additional amenities and by working to attract new customers from
outside the Chicago Market. Empress Joliet is the only Chicago Market Casino
with a hotel to accommodate overnight visitors, although Harrah's has
announced plans to begin constructing a hotel on its property in Joliet. As a
part of its development plan, the Company expects to construct a 200 room
deluxe hotel and a conference center at Empress Hammond to expand its appeal
to customers outside the Chicago Market. The Company intends to further
develop dedicated transportation services to its complexes and is increasing
billboard advertising to improve visitation by customers outside the Chicago
Market.
COMPANY STRENGTHS
The Company believes that the following factors contribute significantly to
its success:
. Premier Properties in Superior Locations. The Company's distinctly themed
casino entertainment complexes are strategically located to serve the
growing Chicago Market which has strong population demographics and a
legislatively limited number of licensed competitors. Empress Hammond is
the
47
closest casino to downtown Chicago and is conveniently accessible from
major highways. Empress Joliet is located in the fastest growing county in
the Chicago Market and is the only Chicago Market Casino to feature a
hotel, an off-track betting facility or a recreational vehicle park. The
Company's casinos are equipped with the latest gaming devices and are
continually upgraded to reflect innovative games. The Company delivers
value to its customers by offering superior customer service and
maintaining clean, moderately priced gaming, dining, lodging and
entertainment amenities.
. Market Leadership. The Company was the first Chicago Market Casino and
has established market leadership during its nearly six years of
operations. The Company is the largest Chicago Market casino operator in
terms of casino revenue and number of slot machines. During 1997, the
Company's average daily slot machine and table win per unit exceeded the
averages of each of the nine U.S. riverboat casino markets. The Company's
casinos also had nearly two and one-half times as many 1997 customer
admissions as any other Chicago Market casino operator. For the past two
years, the Company's casinos received the "Best Blackjack Games in the
U.S.A." award in Indiana and Illinois from Casino Player Magazine.
. Marketing Synergies. The Company derives unique marketing advantages from
operating two riverboat casino entertainment complexes serving the
Chicago Market. The Company believes that it receives favorable rates for
television, radio, newspaper, magazine, billboard, direct mail, mass
transit and airport diorama advertising due to its higher buying volume.
Through its Empress Club frequent player reward program, the Company
promotes customer loyalty and encourages customers to visit its
complexes. Benefits of Empress Club membership include use of VIP
boarding areas, participation in special discount programs including meal
and merchandise discounts and preferred valet parking. At June 30, 1998,
approximately 925,000 customers were Empress Club members.
. Proprietary Customer Database. The Company has developed a proprietary
customer database that assists it in tracking customer characteristics
including visitation frequency, preferred gaming equipment usage and
gaming and entertainment spending. The Company uses information gathered
from Empress Club members to create targeted marketing programs to
encourage increased visitation to its complexes by its most profitable
customers. The Company also utilizes promotional programs, such as
merchandise giveaways, slot machine and table game tournaments and other
special events in order to reward customer loyalty, attract new customers
and maintain a high level of brand name recognition.
EMPRESS HAMMOND
Empress Hammond commenced gaming operations on June 28, 1996 and operates
Empress III, which departs on two-hour cruises every two hours from 8:30 a.m.
to 2:30 a.m., seven days per week. Passengers can board 30 minutes prior to
the cruise time and can begin gaming immediately upon boarding. Including the
fourth deck, Empress III's gaming space is configured as follows:
EMPRESS III GAMING CONFIGURATION
NUMBER
SLOT MACHINES OF UNITS
- ------------- --------
25c......................... 682
50c......................... 97
$1.......................... 877
$2.......................... 14
$5.......................... 63
$10......................... 2
$25......................... 5
-----
Total Slot Machines..... 1,740
=====
NUMBER
TABLE GAMES OF UNITS(1)
----------- -----------
Baccarat.................... 1
Blackjack................... 37
Caribbean Stud.............. 2
Craps....................... 5
Let It Ride................. 5
Mini Baccarat............... 1
Roulette.................... 3
---
Total Table Games....... 54
===
- --------
(1) An additional 10 poker tables have been received but will not be used
until receipt of Indiana Gaming Commission approval.
48
The fourth deck on Empress III will allow the Company to offer a greater
variety of gaming than was previously offered, including a wider selection of
slot machines and additional table games, including poker.
Empress Hammond Pavilion
The Empress Hammond pavilion is a 125,000 square foot mythologically themed
facility featuring waterfalls, undersea volcanoes and a picturesque view of
Lake Michigan and the Chicago skyline. Amenities offered at the Empress
Hammond pavilion include the following:
. Three Restaurants: The Harborside Steakhouse is a steak and chops
restaurant with seating for 92 and private dining for 40. The Empressive
Buffet offers a broad selection of food items with seating for 154. The
Waves Deli offers customers quick fare such as hot dogs, sandwiches and
snack items, with seating for 62.
. Gift Shop: A gift shop offering a variety of items bearing the Company's
brand name is located in a strategic position in the pavilion to maximize
usage by customers.
. Lounge: Customers waiting for the next cruise can relax in the Blue Water
Lounge, which offers light snacks and beverages with seating for 90.
. Concierge Suite: A 1,900 square foot concierge suite overlooks the
Hammond marina. The concierge suite provides selected gaming customers
the opportunity to enjoy a well-appointed relaxation area with special
amenities and services prior to a cruise.
. Banquet Room: For private gatherings and group functions, a 2,380 square
foot room with seating for 150 is available.
. Parking Facilities: Customers are offered the convenience of valet
parking services or free access to the approximately 1,000 space
sheltered parking garage that is connected to the pavilion. The sheltered
parking facility offers benefits in inclement weather and advantages over
the remote parking/bus transportation system utilized at some of the
other Chicago Market Casinos. In August 1997, the Company completed a
$7.2 million addition to its parking garage, which further improved
customer access and traffic flow within the parking garage.
Empress Joliet
Empress Joliet commenced operations on June 17, 1992 and operates Empress I
and Empress II. With the ability to facilitate simultaneous docking of both
riverboats, Empress Joliet is able to offer to its customers a flexible cruise
schedule that limits the maximum time between boarding to 30 minutes during
peak gaming hours. Cruises depart every hour from 9:30 a.m. to 2:30 a.m., with
an additional 4:30 a.m. cruise each day, and each cruise lasts two hours.
Passengers can board 30 minutes prior to the cruise time and can begin gaming
immediately upon boarding. Empress I and Empress II's combined gaming space is
configured as follows:
COMBINED EMPRESS I AND EMPRESS II GAMING CONFIGURATION
NUMBER
SLOT MACHINES OF UNITS(1)
- ------------- -----------
25c......................... 386
50c......................... 118
$1.......................... 447
$5.......................... 52
$10......................... 3
$25......................... 5
-----
Total Slot Machines..... 1,011
=====
NUMBER
TABLE GAMES OF UNITS(1)
- ----------- -----------
Blackjack................... 32
Caribbean Stud.............. 4
Craps....................... 6
Let it Ride................. 4
Mini Baccarat............... 2
Roulette.................... 4
---
Total Table Games....... 52
===
- --------
(1) Under Illinois law, casinos are limited to a maximum of 1,200 gaming
positions.
49
The configuration of Empress Joliet's slot machines and table games outlined
above is designed to fully utilize all 1,200 gaming positions allowed under
its Illinois License. On December 2, 1993, the Illinois Gaming Board adopted a
resolution authorizing gaming operators to maintain additional gaming
equipment on riverboats as long as no more than 1,200 gaming positions are
operated at any given time. The Company currently maintains 40 tournament slot
machines, in addition to those set forth in the table above, on Empress II and
utilizes these machines during slot tournaments.
Empress Joliet Pavilion
Empress Joliet owns the dock site and other facilities from which it
operates, all of which are located on approximately 350 acres along the Des
Plaines River. In 1994, Empress Joliet completed the expansion of its land-
based Egyptian themed pavilion which features approximately 150,000 square
feet of guest amenities, including the following:
. Three Restaurants: In 1998, Empress Joliet received the Silver Platter
Award for the #1 Casino Dining in the Chicago Market from Food Industry
News. The Steakhouse Alexandria, recipient of the 1995 Award of
Excellence from Wine Spectator, features fine dining with seating for 88.
Cafe Casablanca specializes in casual fare offering a wide range of menu
items, with seating for 150. Marrakech Buffet offers a broad selection of
food items with seating for 212.
. Gift Shop: The Palace Treasures gift shop offers a wide assortment of
goods and souvenirs, including, clothing, jewelry and gaming novelties.
. Off-Track Betting: Opened in 1994, the Empress Joliet OTB was the first
off-track betting facility to operate in an Illinois casino. This
facility was renovated and reconfigured in 1998 and is the only off-track
betting facility operating in a Chicago Market Casino.
. Lounge: Guests waiting for the next cruise may relax in the Oasis Bar.
The bar features a walk-out terrace that overlooks landscaped grounds, as
well as the dock.
. Concierge Suite: The concierge suite is available adjacent to the
boarding area to provide selected gaming customers with special amenities
and services, including a bar, television viewing area and food service.
. Banquet Room: The Egyptian themed Grand Ballroom can accommodate groups
of up to 400 people for special events, such as concerts, fund-raising
telethons and player parties.
. Parking Facilities: Empress Joliet offers over 2,350 well-lit parking
spaces, including handicapped, bus and valet areas, for the convenience
of its customers.
Empress Joliet Hotel
On August 2, 1996, the Company opened a three story hotel at Empress Joliet
featuring 80 deluxe rooms, 17 junior suites and 5 king-size suites, as well as
a fitness center and an indoor pool. The structure and exterior finish are
matched to the existing Empress Joliet pavilion. Both the junior and king-size
suites offer jacuzzi baths, and the king-size suites also offer separate
living and sleeping areas, a corner bar and a refrigerator. A meeting room,
fully equipped with current audio-visual equipment, is also available.
MARKETING AND PROMOTION
The Company has capitalized on its leading market position by developing a
strong brand identity during its nearly six years of operation. In addition to
mass media marketing, the Company utilizes on-site marketing, provides
complementary items to selected customers, maintains a proprietary customer
database and organizes customer transportation to its complexes. The Company's
on-site marketing efforts include a variety of promotions, media events,
merchandise give-aways, Empress Club membership and concierge suites. The
Company's proprietary database, with information derived from Empress Club
members, allows the Company to track and direct market to its customers.
Through its up-scale concierge suites, the Company offers selected customers
complementary food and non-alcoholic beverages while they wait for the next
cruise.
50
As part of the Company's marketing campaign, the Company organizes the
transportation of local group and bus tours to its facilities. The Company
focuses on this market segment through its relationships with local and out of
town tour operators and by contacting local businesses, organizations and
other groups. To date, the Company's marketing efforts to these groups have
focused on filling cruises during off peak hours. The typical customer from
this market segment tends to be a slot machine player. The Company generally
monitors the level of slot play in order to better focus its marketing efforts
in an attempt to maximize slot win.
COMPETITION
The Company competes for customers principally on the basis of location,
variety and quality of amenities. Certain of the Company's competitors have
significantly greater financial and other resources than the Company. The
Company's primary competition consists of the Chicago Market Casinos, five of
which are located in Indiana (including Empress Hammond) and four of which are
located in Illinois (including Empress Joliet). To a lesser extent, the
Company also competes with casino operations in nearby states including Iowa
and Missouri where riverboat and/or dockside gaming have also been approved.
Additionally, the Company competes with casino gaming on Native American land,
including those located or proposed to be located in northern Indiana,
Michigan and Wisconsin. See "Risk Factors--Competition."
COMMITMENTS TO GOVERNMENTAL AUTHORITIES
City of Hammond, Indiana
As a condition to the Indiana License, Empress Hammond made various
financial and other commitments to the City of Hammond, Indiana and other
Indiana governmental bodies pursuant to the Development Agreement. Of
approximately $25.0 million of such commitments for commercial development,
residential development and the construction of a hotel, the Company has
expended approximately $2.0 million to satisfy these commitments. In addition,
under the terms of the Development Agreement, Empress Hammond is required to
make annual payments of approximately $1.3 million for public safety services
and other uses and to make an annual payment to the City of the greater of
$3.0 million or certain percentages of Empress Hammond's adjusted gross
receipts as follows: 4.0% of adjusted gross receipts up to $125.0 million;
6.0% of adjusted gross receipts over $125.0 million up to $200.0 million; and
4.0% of adjusted gross receipts in excess of $200.0 million. In 1997, Empress
Hammond paid approximately $9.9 million to the City to satisfy this
obligation.
Hammond Port Authority
Pursuant to the License Agreement with the Hammond Port Authority, Empress
Hammond licenses from the Port Authority certain rights to land and docking
facilities at the Hammond Marina. For the rights and privileges granted to it
under the terms of the License Agreement, Empress Hammond is required to pay
the Port Authority (i) a $1.00 per passenger fee for each passenger visiting
Empress III; and (ii) an amount equal to the aggregate annual rental at the
Hammond Marina for each boat slip that was removed or taken out of operation
as a result of the construction of the docking facilities and/or the operation
of Empress III.
RECENT DEVELOPMENTS
Plan of Merger
On September 2, 1998, the Company, Empress Hammond and Empress Joliet
entered into an Agreement and Plan of Merger with Horseshoe, Horseshoe
Midwest, Empress Illinois, and Empress Indiana. Pursuant to the Plan of
Merger, Horseshoe Midwest will acquire from the Company all of the outstanding
stock of Empress Hammond and Empress Joliet via two simultaneous merger
transactions (the "Proposed Mergers").
Horseshoe Midwest was formed to effect the Proposed Mergers and is a shell
corporation which has not undertaken any business activities except in
connection with the Proposed Mergers. The sole asset of Horseshoe Midwest is
$10 million, which has been placed in escrow as a deposit to secure certain of
its obligations under
51
the Plan of Merger. Horseshoe is not an investor in Horseshoe Midwest, but is
related to Horseshoe Midwest by certain common owners. Horseshoe became a
party to the Plan of Merger solely to substantiate the indemnification
obligations of Horseshoe Midwest, Empress Illinois and Empress Indiana. If the
Plan of Merger is consummated, the Notes will become obligations of Horseshoe
Midwest, and the current Guarantees of the Notes by the Guarantors will remain
in effect.
The proposed purchase price is $609 million in cash plus adjustments for all
current assets at closing, less (i) all bank indebtedness at closing and (ii)
all current liabilities at closing, including $676,000 to pay one-half of
agreed upon stay bonuses for managers, directors and key-employees of Empress
Hammond and Empress Joliet. The Company is liable for its transaction costs;
all obligations and covenants contained in its contracts that are not
terminated or amended in the ordinary course of business; and all change of
control payments required under employment agreements with the Company's
officers. See "Management--Employment Agreements."
Until the final purchase price adjustments are determined, $4 million of the
purchase price will be withheld at closing. Upon signing the Plan of Merger,
Horseshoe Midwest deposited $10 million into escrow (the "Deposit") to be paid
to the Company in the event the Plan of Merger is terminated due to (i)
Horseshoe Midwest's failure to obtain financing to replace the commitment from
its current financing source in the event such commitment is withdrawn or is
unacceptable to the Indiana Gaming Commission or the Illinois Gaming Board;
(ii) Horseshoe Midwest's uncured material default or breach of a
representation, warranty or covenant; (iii) the uncured material default or
breach of a representation, warranty or covenant by the Company, Empress
Hammond or Empress Joliet; (iv) or a material adverse change in the financial
or capital markets or in financial, economic or industry conditions generally.
The Deposit will be returned to Horseshoe Midwest in the event that the Plan
of Merger is terminated due to (i) the default or breach of a representation,
warranty or covenant by the Company, Empress Hammond or Empress Joliet, where
such default or breach had a material adverse effect on the business,
prospects, properties, assets, operations or financial condition of Empress
Joliet and Empress Hammond, taken as a whole; (ii) a material adverse change
in the business, prospects, properties, assets, operations or financial
condition of Empress Joliet and Empress Hammond, taken as a whole (other than
legislative or regulatory changes); (iii) the Company's failure to achieve
$96.5 million of EBITDA for calendar year 1998 or any rolling twelve month
period thereafter ending prior to closing; or (iv) an order of a court or
other governmental or regulatory authority restraining, enjoining or otherwise
prohibiting the transactions contemplated by the Plan of Merger.
Horseshoe Midwest has agreed to expressly assume the obligations of the
Company under the Notes pursuant to Section 8.01 of the Indenture. Pursuant to
the Indenture, this will be accomplished through Horseshoe Midwest's execution
of a supplemental indenture with U.S. Bank Trust National Association, as
trustee. Upon consummation of the transactions as contemplated in the Plan of
Merger, the Company will be discharged from all of its obligations under the
Indenture and the Notes. Empress Joliet and Empress Hammond will remain
Guarantors of the Notes as subsidiaries of Horseshoe Midwest. Horseshoe
Midwest has agreed to assume any prepayment obligations on the Notes and under
the Company's Credit Facility with Wells Fargo Bank, National Association (the
"Credit Facility"). See "Description of the New Notes--Certain Covenants--
Limitation on Mergers and Consolidations" and "Description of Certain Other
Indebtedness--Credit Facility."
Consummation of the Plan of Merger constitutes a "Change of Control" under
the Indenture and will trigger Horseshoe Midwest's obligation to make an
irrevocable offer to purchase Notes (the "Change of Control Offer") at a cash
price equal to 101% of the principal amount plus accrued and unpaid interest.
Holders of the Notes will have the option of tendering all or any portion of
their Notes for redemption, or they may retain the Notes. The Company and/or
Horseshoe Midwest intend to comply with the provisions of the Indenture and
make a Change of Control Offer to all holders of Notes within the time periods
provided in the Indenture. The Change of Control Offer must commence within 10
business days following the consummation of the transactions contemplated by
the Plan of Merger and must remain open for at least 20 business days.
Horseshoe Midwest must complete repurchase of any Notes tendered in response
to the Change of Control Offer no more than 30 business days after the
consummation of the transactions as contemplated in the Plan of Merger. See
"Description of the New Notes--Change of Control" and "--Redemption."
52
The inability of the Company and/or Horseshoe Midwest to consummate a Change
of Control Offer or to comply with any other provision of the Indenture would
constitute an Event of Default under the Indenture. If assumption of the
Indenture by Horseshoe Midwest would give rise to an Event of Default, then
the Notes could not be assumed by Horseshoe Midwest and, pursuant to Article
VIII of the Plan of Merger, the Proposed Mergers would not be consummated by
the Company. See "Description of the New Notes--Events of Default and
Remedies."
An Event of Default under the Notes also gives rise to an event of default
under the Company's Credit Facility, although it is anticipated that the
Credit Facility will be paid off and terminated upon consummation of the
Proposed Mergers.
All holders of Notes would be required to execute a waiver in order for the
Company and/or Horseshoe Midwest not to comply with the Change of Control
provisions of the Indenture. Neither the Company nor Horseshoe Midwest
currently intend to seek any such waiver.
The Plan of Merger specifies that closing must occur by May 31, 1999,
provided that if approval is obtained from both the Indiana Gaming Commission
and Illinois Gaming Board prior to May 31, 1999, then closing may be extended
to June 30, 1999. The Company, its officers, directors and stockholders are
prevented from discussing or pursuing any alternative sale transaction with
any other party.
Woodlands Racetrack
The Company recently formed Empress Racing as an Unrestricted Subsidiary to
hold a 50% ownership interest in a limited liability company which has
acquired certain outstanding secured indebtedness of Sunshine Racing, Inc.,
the owner of the Woodlands Racetrack in Kansas City, Kansas, and which,
subject to regulatory approval of the Kansas Racing and Gaming Commission,
intends to ultimately bid to purchase the Woodlands Racetrack in an auction
pursuant to a proceeding under Chapter 7 of the U.S. Bankruptcy Code. There
can be no assurance that the Woodlands acquisition will be consummated or
that, if consummated, that it will be successful. In addition, the Company
recently formed Empress Opportunities and Empress Mississippi as Unrestricted
Subsidiaries. See "Description of the New Notes--Certain Covenants--Limitation
on Designations of Unrestricted Subsidiaries."
PROPERTIES
Empress Hammond owns Empress III, which has been pledged as security under
the Credit Facility. Supporting Empress III is the Empress Hammond pavilion,
which is situated on land owned by the City of Hammond and leased to Empress
Hammond pursuant to the License Agreement. Empress Hammond owns a ten acre
parcel of land near its complex. See "--Commitments to Governmental
Authorities--Hammond Port Authority" and "Certain Transactions."
Empress Joliet owns Empress I, Empress II, the dock site from which they
operate and the surrounding land-based facilities, all of which are located on
approximately 350 acres along the Des Plaines River in Joliet, Illinois.
Additionally Empress Joliet owns a 102-room hotel and an 80 space recreational
vehicle park.
EMPLOYEES
As of June 30, 1998, the Company had approximately 3,300 full-time
employees, of which 2,780 are hourly employees and the remainder are salaried
employees. Approximately 12.7% of the Company's workforce is unionized.
Empress Joliet's contract with the International Union of Operating Engineers,
Local 150 expires in November 2002. On April 29, 1998, Empress Joliet and
Hotel Employees and Restaurant Employees Union, Local 1 entered into a
Memorandum of Agreement, which is being converted into a formal contract,
containing the terms of their collective bargaining agreement. This agreement
will expire on April 30, 2001. The Company has not experienced any work
stoppages and believes its relations with its employees and the unions are
good. See "Management."
53
THE REORGANIZATION
Concurrently with the Offering, the Company effected the Reorganization
pursuant to which (i) the Company changed its name from LMC Leasing, Ltd. to
Empress Entertainment, Inc., (ii) Empress Joliet merged into a newly-formed
wholly-owned subsidiary of the Company, with Empress Joliet surviving the
merger, (iii) Empress Joliet sold its 60% common stock interest in Empress
Finance to the Company and (iv) the Company contributed Empress III to Empress
Hammond. Immediately after the Reorganization, Empress Joliet and Empress
Finance became wholly-owned subsidiaries of the Company. Following the
Reorganization, the Company operates Empress III through its wholly-owned
subsidiary Empress Hammond and operates Empress I and Empress II through its
wholly-owned subsidiary Empress Joliet.
LEGAL PROCEEDINGS
On July 17, 1998, a lawsuit was filed against Empress Hammond and Empress
Joliet and four of their employees in the United States District Court for the
Northern District of Illinois. The lawsuit, brought by a current female
employee of Empress Hammond and a former female employee of Empress Hammond,
alleges that Empress Hammond and Empress Joliet committed gender
discrimination and sexual harassment in violation of Title VII of the Civil
Rights Act of 1964 and permitted a hostile work environment to exist at its
facilities. The lawsuit also alleges certain tort claims and seeks
certification as a class action on behalf of similarly situated current and
former female employees of Empress Joliet and Empress Hammond, and seeks
injunctive relief and money damages. A similar complaint has been filed by
these plaintiffs in Indiana, although the Company has not yet been served with
this complaint. The Company denies the allegations in the complaint and
intends to vigorously contest this matter. There can be no assurances,
however, that Empress Joliet and Empress Hammond will not be found liable for
an amount that could have a material adverse effect on the Company.
The City of Hammond is plaintiff in a condemnation proceeding filed in
September 1995 in Lake Superior Court in Lake County, Indiana in which the
City of Hammond condemned a small parcel of land for the construction of the
overpass located near Empress Hammond. This case was transferred on a change
of venue in the summer of 1998 to Newton County, Indiana. On September 28,
1998, the jury returned a $5.2 million award, which bears prejudgment interest
at 8% since 1995. Under the terms of the Development Agreement between Empress
Hammond and the City, Empress Hammond is responsible for reimbursing the City
of Hammond for its costs, fees and any judgments. The City of Hammond is
evaluating whether to appeal this decision. As a result, it is not yet clear
how much, or when, the condemnation award will be paid. The defendant's
counterclaims in the proceeding have not yet gone to trial.
A lawsuit was filed on October 25, 1996 in Harrison County, Indiana by three
individuals residing in counties abutting the Ohio River against the State of
Indiana, the 108th Indiana General Assembly, the Indiana Gaming Commission and
individual members of the Indiana Gaming Commission. The lawsuit challenges
the constitutionality of the Indiana Riverboat Act on the grounds that (i) it
allegedly creates an unequal privilege because under the Indiana Riverboat Act
"citizens opposed to riverboat gambling must win several elections to ensure
riverboat gambling is not allowed in their county" but "citizens who support
riverboat gambling need only win once to entrench riverboat gambling
indefinitely into a county"; and (ii) it was enacted as a provision attached
to a state budget bill allegedly in violation of an Indiana constitutional
provision requiring legislative acts to be confined to one subject and matters
properly connected with the subject. The defendants have filed an answer to
the complaint generally denying the allegations. The Indiana Supreme Court has
previously upheld the constitutionality of the Indiana Riverboat Act, although
the prior challenge was on different grounds than those contained in the
recently filed lawsuit. If the Indiana Riverboat Act ultimately were held
unconstitutional it would, absent timely corrective legislation, have a
material adverse effect on the Company's operations.
54
REGULATORY MATTERS
INDIANA
The Indiana Riverboat 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 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. The Indiana Riverboat Act strictly regulates the
facilities, persons, associations and practices related to gaming operations
pursuant to the police powers of the State of Indiana, including comprehensive
law enforcement provisions. The Indiana Riverboat Act vests the Indiana Gaming
Commission with the power and duties of administering, regulating and
enforcing the system of riverboat gaming in the State of Indiana. The Indiana
Gaming Commission's 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 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 under the Indiana
Riverboat Act.
The Indiana Riverboat 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.
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 pursuant to the Indiana Riverboat Act and the rules and
regulations adopted thereunder. A licensed owner undergoes a complete
investigation every three years. 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. Furthermore, the Indiana Riverboat Act requires
that officers, directors and employees of a gaming operation and suppliers of
gaming equipment, devices, and supplies and certain other suppliers be
licensed. All Indiana state excise taxes, use taxes, and gross retail taxes
apply to sales on a riverboat.
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 shareholders holding significant interests
(5% or greater) in the applicant. The Indiana Gaming Commission has the
authority to request specific information on any shareholder.
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 in accordance with the regulations promulgated under the
Indiana Riverboat Act.
55
REGULATION OF GAMING OPERATIONS
The Indiana Riverboat Act does not limit the maximum bet or per patron loss.
Minimum and maximum wagers on games are set by the licensee. 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.
Riverboats operating in Indiana must (i) have a valid certificate of
inspection from the U.S. Coast Guard to carry at least 500 passengers; and
(ii) be at least 150 feet long. 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 or water 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 conditions or water 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.
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 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 Act is void and
the holder may not conduct or continue gaming operations under the Indiana
Riverboat Act. 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 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 Act also
requires that licensees pay a $3.00 admission tax for each person admitted to
a gaming excursion. A riverboat license may be suspended for failure to pay
such tax as required pursuant to the Indiana Riverboat Act. Riverboats are
assessed for property tax purposes as real property and are taxed at rates
determined by local taxing authorities.
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 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 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.
56
An institutional investor which acquires 5% or more of any class of voting
securities of a holding company of a 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 who acquires 5% or more of any
class of voting securities of a holding company of a licensee 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 are subject to
disapproval by the Indiana Gaming Commission. 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. The Indiana
Gaming Commission has a rule requiring the reporting of certain currency
transactions, which is similar to that required by Federal authorities. See
"--Other Applicable Non-Gaming Regulations."
The Indiana Riverboat Act prohibits contributions to a candidate for a
state, legislative, or local office, or to a candidate's committee or to a
regular party committee by the holder of a riverboat owner's license or a
supplier's license, by an officer of a licensee or by an officer of a person
that holds at least a 1% interest in the licensee. The Indiana Gaming
Commission has promulgated 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 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, and the cash
reserve would 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.
ILLINOIS
The Illinois Riverboat Act authorizes the issuance of up to ten riverboat
gaming licenses by the five-member Illinois Gaming Board on navigable streams
within or forming a boundary of Illinois, except for Lake Michigan and any
waterway in Cook County, which includes the City of Chicago. The Illinois
Riverboat Act regulates the facilities, persons, associations and practices
related to riverboat gaming operations. The Illinois Riverboat Act grants the
Illinois Gaming Board specific powers and duties, and all other powers
necessary and proper to fully and effectively execute the Illinois Riverboat
Act for the purpose of administering, regulating and enforcing the system of
riverboat gaming. The Illinois Gaming Board's jurisdiction extends to every
person, association, corporation, partnership and trust involved in riverboat
gaming operations in Illinois.
Owner's Licenses
The Illinois Riverboat Act requires the owner of a riverboat gaming
operation to hold an owner's license issued by the Illinois Gaming Board. The
Illinois Gaming Board is authorized to issue ten owner's licenses statewide.
Each owner's license permits up to two boats as a part of a single riverboat
gaming operation. No entity may be licensed as the owner of more than one
riverboat gaming operation in Illinois, although a licensed owner may hold up
to 10% of a second riverboat gaming operation in Illinois.
The Illinois Riverboat Act restricts the granting of certain of the ten
owner's licenses by location. Four licenses are reserved for operators docking
at sites on the Mississippi River, one for an operator docking at a site
57
on the Illinois River south of Marshall County and one for an operator docking
at a site on the Des Plaines River in Will County. The remaining four owner's
licenses are not restricted as to location. In addition to the ten owner's
license which are authorized under the Illinois Riverboat Act, the Illinois
Gaming Board may issue special event licenses allowing persons who are not
otherwise licensed to conduct riverboat gaming and to conduct such gaming on a
specified date or series of dates. Riverboat gaming under such a license may
take place on a riverboat not normally used for riverboat gaming.
An owner's license is issued for an initial period of three years and must
be renewed annually thereafter. An owner's license is eligible for renewal
upon payment of the applicable fee and a determination by the Illinois Gaming
Board that the licensee continues to meet all of the requirements of the
Illinois Riverboat Act. The Illinois Gaming Board also requires that officers,
directors, shareholders and employees of a gaming operation and suppliers of
gaming equipment, devices and supplies and certain other suppliers be
licensed. Licenses issued by the Illinois Gaming Board may not be transferred
to another person or entity. All licensees must maintain their suitability for
licensure and have a continuing duty to disclose any material changes in
information provided to the Illinois Gaming Board.
Applicants for and holders of an owner's license are required to obtain
formal approval from the Illinois Gaming Board for changes in: (i) key
personnel, including officers, directors, managing agents, or holders of a 5%
or greater ownership interest in the business entity; (ii) its organizational
form; (iii) the equity and debt capitalization of the entity; (iv) investors
and/or debt holders; (v) sources of funds; (vi) the applicant's economic
development plan; (vii) riverboat capacity or significant design changes;
(viii) the number of gaming positions; (ix) anticipated economic impact; or
(x) oral or written agreements relating to the acquisition or disposition of
property of a value greater than $1,000,000. A holder of an owner's license is
allowed to make distributions to its partners, stockholders or itself only to
the extent that such distribution would not impair the financial viability of
the gaming operation. Factors to be considered by the licensee include, but
are not limited to, the following: (i) working capital requirements, (ii) debt
service requirements, (iii) requirements for repairs and maintenance and (iv)
capital expenditure requirements.
The Illinois Gaming Board will require a personal disclosure from any person
or entity (unless such person or entity qualifies as an institutional
investor) who or which, individually or in association with others, acquires,
directly or indirectly, beneficial ownership of more than 5% of any class of
voting securities or non-voting securities convertible into voting securities
of a publicly traded corporation which holds an ownership interest or a
beneficial interest in the holder of an owner's license. If the Illinois
Gaming Board denies an application for such an acquisition, commencing as of
the date the Illinois Gaming Board issues a notice that it denies such
application, it will be unlawful for such applicant to receive any dividends
or interest on his or its securities, to exercise, directly or indirectly, any
right conferred by such securities or to receive any remuneration in any form
from any person or entity holding any license under the Illinois Riverboat Act
for services rendered or otherwise. If the Illinois Gaming Board denies an
application for such a transfer and if no hearing is requested or if the
Illinois Gaming Board issues a final order of disqualification, the holder of
the affected owner's license shall purchase all of the disqualified person's
or entity's securities at the lesser of either the market price or the
purchase price of such securities. An ownership interest in a holder of an
owner's license may be transferred or pledged as collateral only with the
consent of the Illinois Gaming Board.
Regulation of Gaming Operations
The Illinois Riverboat Act does not limit the maximum bet or per patron
loss, and licensees may set any maximum or minimum limits on wagering. No
person under the age of 21 is permitted to wager in Illinois.
Under the Illinois Riverboat Act, vessels must have the capacity to hold a
minimum of 500 persons if operating on the Mississippi River or the Illinois
River south of Marshall County, and a minimum of 400 persons on any other
waterway.
58
The number of gaming positions is limited to a maximum of 1,200 per license.
All riverboats must be accessible to disabled persons, must be either a
replica of a 19th century Illinois riverboat or be of a casino cruise ship
design, and must comply with applicable Federal and state laws, including, but
not limited to, U.S. Coast Guard regulations.
Gaming sessions are generally 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, however, including such
embarkation and disembarkation, is limited to a maximum of four hours) and
(ii) when weather or mechanical problems prevent the boat from cruising. If a
riverboat captain reasonably determines that it is unsafe to transport
passengers on the waterway due to inclement weather or that the riverboat has
been rendered temporarily inoperable by mechanical or structural difficulties
or river icing, the captain must either not leave the dock or immediately
return to it in which event a gaming excursion may commence or continue while
the gangplank or its equivalent is raised and remains raised. Special event
extended cruises may be authorized by the Illinois Gaming Board.
A $2 per person admission tax is imposed on the owner of a riverboat
operation. Prior to January 1, 1998, the Illinois Riverboat Act imposed a 20%
tax on all adjusted gross receipts on each Illinois gaming vessel. Effective
on January 1, 1998, the Illinois Riverboat Act was amended to impose the
following graduated wagering tax rates on adjusted gross receipts from gaming:
(i) 15% of the calendar year adjusted gross receipts up to and including $25.0
million; (ii) 20% of the calendar year adjusted gross receipts in excess of
$25.0 million but not exceeding $50.0 million; (iii) 25% of the calendar year
adjusted gross receipts in excess of $50.0 million but not exceeding $75.0
million; (iv) 30% of the calendar year adjusted gross receipts in excess of
$75.0 million but not exceeding $100.0 million; and (v) 35% of the calendar
year adjusted gross receipts in excess of $100.0 million. The licensee is
required to wire transfer all such gaming tax payments to the Illinois Gaming
Board.
The Illinois Gaming Board is authorized to conduct investigations into the
conduct of gaming and into alleged violations of the Illinois Riverboat Act
and to take such disciplinary and enforcement action as it may deem necessary
and proper. Employees and agents of the Illinois Gaming Board have access to
and may inspect any facilities relating to riverboat gaming operations at all
times.
A holder of any license is subject to the imposition of penalties and fines,
suspension or revocation of such licence, or other action for any act or
failure to act by such holder or his or her agents or employees, that is
injurious to the public health, safety, morals, good order and general welfare
of the people of the State of Illinois, or that would discredit or tend to
discredit the Illinois gaming industry or the State of Illinois. Any riverboat
operation not conducted in compliance with the Illinois Riverboat Act may
constitute an illegal gaming place and consequently may be subject to criminal
penalties, which penalties include possible seizure, confiscation and
destruction of illegal gaming devices and seizure and sale of riverboats and
dock facilities to pay any unsatisfied judgment that may be recovered and any
unsatisfied fine that may be levied. The Illinois Riverboat Act also provides
for civil penalties, equal to the amount of gross receipts derived from
wagering on gaming, whether unauthorized or authorized, conducted on the day
of any violation. The Illinois Gaming Board may revoke or suspend licenses, as
the Illinois Gaming Board may see fit and in compliance with applicable laws
of the State of Illinois regarding administrative procedures, and may suspend
an owner's license, without notice or hearing, upon a determination that the
safety or health of patrons or employees is jeopardized by continuing a
riverboat's operation. The suspension may remain in effect until the Illinois
Gaming Board determines that the cause for suspension has been abated and it
may revoke the owner's license upon a determination that the owner has not
made satisfactory progress toward abating the hazard.
The Illinois Gaming Board may waive any licensing requirement or procedure
provided by rule if it determines that such waiver is in the best interests of
the public and the gaming industry.
59
NATIVE AMERICAN GAMING
The Federal Indian Gaming Regulatory Act of 1988 (the "Gaming Act") provides
that a Native American tribe may conduct defined gaming activities in a state
only in accordance with a compact between the tribe and the state in which the
gaming activities are located. The Gaming Act imposes on a state a duty to
negotiate in good faith with the tribe for purposes of forming a compact and
authorizes a tribe to file suit in Federal court to compel the state to
perform that duty. In March 1996, the U.S. Supreme Court decided, in the case
of Seminole Tribe of Florida v. Florida, that, under the Eleventh Amendment to
the U.S. Constitution (state sovereign immunity), Congress did not have the
power to grant Federal court jurisdiction under the Gaming Act over a state
that did not consent to be sued. As a result of this decision, the future of
Native American gaming under Federal and state laws and regulations is
uncertain and no assurance can be given with respect to future developments
including, among other things, rulemaking by the U.S. Department of the
Interior's Bureau of Indiana Affairs.
OTHER APPLICABLE NON-GAMING REGULATORY REQUIREMENTS
The Company is subject to certain Federal, state and local safety and health
laws, regulations and ordinances that apply to non-gaming businesses
generally, such as the Clean Air Act, Clean Water Act, Occupational Safety and
Health Act, Resource Conservation Recovery Act and the Comprehensive
Environmental Response, Compensation and Liability Act. The Company has not
made, and does not anticipate making, material expenditures with respect to
such environmental laws and regulations. However, the coverage and attendant
compliance costs associated with such laws, regulations and ordinances may
result in future additional costs to the Company's operations. For example, in
1990 Congress enacted the Oil Pollution Act to consolidate and rationalize
mechanisms under various oil spill response laws. The Department of
Transportation has proposed regulations requiring owners and operators of
certain vessels to establish through the U.S. Coast Guard evidence of
financial responsibility in the amount of $5.5 million for clean-up of oil
pollution. This requirement would be satisfied by either proof of adequate
insurance (including self-insurance) or the posting of a surety bond or
guaranty.
The riverboats operated by the Company must comply with U.S. Coast Guard
requirements as to boat design, on-board facilities, equipment, personnel and
safety. Each of them 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 of the Company, 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.
60
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and principal position of the
executive officers and directors of the Company and each of the Guarantors:
NAME AGE POSITION(1)
---- --- -------------------------------------------
Peter A. Ferro, Jr............. 48 Chief Executive Officer and Director of the
Company, Empress Hammond and Empress
Joliet, Chief Executive Officer of Hammond
Residential and President and Director of
Empress Finance
Joseph J. Canfora.............. 39 President of the Company, Empress Hammond
and Empress Joliet
John G. Costello............... 36 Vice President, Chief Financial Officer and
Treasurer of the Company and each of the
Guarantors
Michael W. Hansen.............. 47 Vice President, Chief Legal Officer and
Secretary of the Company and each of the
Guarantors
Rick S. Mazer.................. 43 Vice President--General Manager of Empress
Hammond
David F. Fendrick.............. 48 Vice President--General Manager of Empress
Joliet
Charles P. Hammersmith, Jr.(2). 47 Director of each of the Company, Empress
Joliet, Empress Hammond and Empress Finance
Robert W. Kegley, Sr.(2)....... 56 Director of each of the Company, Empress
Joliet, Empress Hammond,
and Empress Finance
Thomas J. Lambrecht(2)......... 49 Chairman of the Board and Director of each
of the Company, Empress
Joliet, Empress Hammond and Empress Finance
William J. McEnery............. 55 Director of each of the Company, Empress
Joliet, Empress Hammond and Empress Finance
Edward T. McGowan.............. 61 Director of each of the Company, Empress
Joliet, Empress Hammond and Empress Finance
William J. Sabo................ 59 Director of each of the Company, Empress
Joliet, Empress Hammond and Empress Finance
- --------
(1) Each director of the Company, Empress Hammond, Empress Joliet and Empress
Finance has been a member of the Board of Directors of such entity since
such entity's formation.
(2) Serves on the Company's audit committee.
Peter A. Ferro, Jr. Mr. Ferro has been a Director of the Company and each of
the corporate Guarantors since their respective formation. Since January 1997
Mr. Ferro has been Chief Executive Officer of each of the Company, Empress
Hammond and Empress Joliet. Mr. Ferro has been President of Empress Finance
since December 1997. From 1984 to 1997 Mr. Ferro was President and Chief
Executive Officer of P. T. Ferro Construction Company. From 1989 to 1997 Mr.
Ferro was Vice President of Ferro Asphalt Corporation. Mr. Ferro is a graduate
from the University of Illinois with a Bachelors of Science in finance which
he received in 1972.
Joseph J. Canfora. Mr. Canfora was elected President of the Company, Empress
Hammond and Empress Joliet in June 1997. From 1995 through 1997, Mr. Canfora
was President of Midwest Operations for Station Casinos, Inc. From 1992
through 1997, Mr. Canfora served as Executive Vice President and Chief
Operating Officer of Station Casinos, Inc. Prior to joining Station Casinos,
Inc., Mr. Canfora held management positions with the Maxim Hotel and Casino,
Sundance Casino and the Aladdin Hotel and Casino. Mr. Canfora graduated from
the University of Nevada, Las Vegas in 1982.
61
John G. Costello. Mr. Costello has served as the Vice President, Chief
Financial Officer and Treasurer of the Company and each of the corporate
Guarantors since June 1994 and has served in such capacity at Hammond
Residential since the date of its formation. From 1991 through 1994, Mr.
Costello was employed by Argosy Gaming Company, serving as its Controller from
1991 through 1993, and as Assistant General Manager of its Alton Belle Casino
from July 1993 through June 1994. From 1984 to 1991, Mr. Costello was in
public accounting as a Certified Public Accountant. Mr. Costello received his
Bachelor of Science degree in Business Administration from Southern Illinois
University at Edwardsville.
Michael W. Hansen. Mr. Hansen has served as Chief Legal Officer of the
Company and each of the corporate Guarantors since July 1994 and has served in
such capacity at Hammond Residential since the date of its formation. Since
1995, Mr. Hansen has served as Vice President and, since 1997, as the
Secretary, of the Company and the Guarantors. Mr. Hansen acted as outside
counsel in the formation of Empress Joliet in 1991 and oversaw the development
and construction of Empress Hammond in 1995 and 1996. From 1976 to 1994, Mr.
Hansen was in private legal practice as a partner in the Joliet, Illinois law
firm of Herschbach, Tracy, Johnson, Bertani & Wilson. Mr. Hansen is a 1973
graduate of the University of Notre Dame, and a 1976 graduate of Drake
University Law School.
Rick S. Mazer. Mr. Mazer was appointed Vice President--General Manager of
Empress Hammond in February 1996, where he oversees the operation of Empress
Hammond's gaming complex. From October 1995 to February 1996, Mr. Mazer served
as Director of Marketing and Advertising for Empress Joliet. From 1993 through
1995, Mr. Mazer was Vice President of Marketing for Par-A-Dice Riverboat
Casino in Peoria, Illinois and served in various other management capacities
from 1991 through 1993. Mr. Mazer received a B.S.B.A. degree from Boston
University in 1976.
David F. Fendrick. Mr. Fendrick was appointed Vice President--General
Manager of Empress Joliet in August 1997. From 1994 through 1997, Mr. Fendrick
served as Vice President-General Manager of Station Casinos, Inc. in Kansas
City. From 1993 through 1994, Mr. Fendrick held the position of Vice
President-General Manager of Fitzgerald's Casino in Tunica, Mississippi. He
was the Director of Casino Operations for Princess Cruises in 1993. From 1992
to 1993, Mr. Fendrick served as the Director of Casino Operations for
President Riverboat Casino in Davenport, Iowa.
Charles P. Hammersmith, Jr. Mr. Hammersmith has been a Director of each of
the Company, Empress Joliet, Empress Hammond and Empress Finance from the date
of their respective formation. Since 1973, Mr. Hammersmith has been employed
with Elmhurst-Chicago Stone Co. and since 1989 has served as its President.
Since 1983, Mr. Hammersmith has been the President of Hammerline Express, a
bulk cement transportation company.
Robert W. Kegley, Sr. Mr. Kegley has been a Director of each of the Company,
Empress Joliet, Empress Hammond and Empress Finance from the date of their
respective formation. Since 1982, Mr. Kegley has owned and operated Columbia
Properties, a real estate holding company. Since 1979, Mr. Kegley has owned
the Columbian Agency in New Lenox, Illinois, a commercial insurance brokerage
company, where he is the President.
Thomas J. Lambrecht. Mr. Lambrecht is the original founder of the Company
and has been Chairman of the Board and a Director of each of the Company,
Empress Joliet, Empress Hammond and Empress Finance from the date of their
respective formation. Since 1988, Mr. Lambrecht has been the President and
sole stockholder of T.J. Lambrecht Construction, Inc. See "Risk Factors--
Gaming Licensing and Regulation--General."
William J. McEnery. Mr. McEnery has been a Director of each of the Company,
Empress Joliet, Empress Hammond and Empress Finance from the date of their
respective formation. Since 1966, Mr. McEnery has owned and operated Gas City,
Ltd., which owns and operates approximately 40 gasoline stations and
convenience stores. Since 1975, Mr. McEnery has owned and operated Bell Valley
Farm, Inc. which is devoted to breeding and training standard-bred horses for
the harness horse racing industry. Since 1982, Mr. McEnery
62
has owned and operated A.D. Connor, Inc., a petroleum transportation company.
Since 1990, Mr. McEnery has owned and operated Green Garden Country Club.
Since 1991, Mr. McEnery has been a director and shareholder of Argosy Gaming
Company, which owns a beneficial interest in Indiana Gaming Company, L.P., the
holder of an owner's license in Lawrenceburg, Indiana, and Alton Gaming
Company, the holder of an owner's license in Alton, Illinois. See "Risk
Factors--Gaming Licensing and Regulation--General."
Edward T. McGowan. Mr. McGowan has been a Director of each of the Company,
Empress Joliet, Empress Hammond and Empress Finance from the date of their
respective formation. Since 1963, Mr. McGowan has been the President of, and
since 1977, has been the sole owner of, the EDON Construction Company. Since
1977, Mr. McGowan has been a 50% owner of Dremco Inc., a corporation that
builds, sells and/or manages various real estate developments in the Chicago
area. In 1977, Mr. McGowan was elected as a member of the Board of Directors
of Ford City Bank of Chicago which merged into Cole Taylor Bank in 1984, at
which time Mr. McGowan became a member of the Board of Directors of Cole
Taylor Bank.
William J. Sabo. Mr. Sabo was the Vice Chairman of Empress Hammond and
Empress Joliet from 1991 until 1997, and has been a Director of the Company,
Empress Hammond, Empress Joliet and Empress Finance from the date of their
respective formation. Since January 1, 1998, Mr. Sabo has served as a
consultant to Empress Hammond and Empress Joliet.
The directors of the Company, Empress Hammond, Empress Joliet and Empress
Finance are elected each year at annual meetings of stockholders. Executive
officers are elected each year by the Board of Directors of each entity.
Pursuant to the terms of the Stockholders Agreement, all stockholders have
agreed to vote their shares to establish Boards of Directors of the Company,
Empress Hammond, Empress Joliet and Empress Finance to include the following
seven persons: Peter A. Ferro, Jr., Charles P. Hammersmith, Jr., Robert W.
Kegley, Sr., Thomas J. Lambrecht, William J. McEnery, Edward T. McGowan and
William J. Sabo. See "Certain Transactions."
SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION
------------------ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3)
- --------------------------- ---- --------- -------- ---------------
Peter A. Ferro, Jr.
President and Chief Executive
Officer(4)........................... 1997 $389,231 $ -- $ 3,781
1996 -- -- --
1995 -- -- --
Joseph J. Canfora
President(4).......................... 1997 250,000 125,000 29,075
1996 -- -- --
1995 -- -- --
William J. Sabo
Former Vice Chairman of the Board(5).. 1997 220,673 -- 5,678
1996 225,000 70,000 9,132
1995 225,000 100,000 20,089
Michael W. Hansen
Chief Legal Officer................... 1997 202,539 70,000 4,564
1996 189,423 100,000 3,955
1995 160,000 100,000 2,565
John G. Costello
Chief Financial Officer............... 1997 134,423 50,000 5,470
1996 112,423 32,000 3,951
1995 90,000 22,500 1,947
- --------
(1) The services and salaries of the executive officers are allocated evenly
between Empress Hammond and Empress Joliet. The salaries listed represent
the full, unallocated amount of the named executive's salary.
Footnotes continued on following page
63
(2) Consists of bonuses paid pursuant to a management bonus plan. Under such
plan, a percentage of pretax earnings based upon operating results of each
year are distributed to the executive officers of Empress Hammond and
Empress Joliet and to other selected employees, if any, during the next
fiscal year. The bonuses distributed to each executive officer and/or
employee of Empress Hammond and Empress Joliet (other than the Chief
Executive Officer) are determined by the Chief Executive Officer of the
Company. The bonus, if any, paid to the Chief Executive Officer of the
Company is determined by the Board of Directors of the Company. The
bonuses paid are allocated between Empress Hammond and Empress Joliet. The
bonuses listed represent the full, unallocated amount of the named
executive's bonus.
(3) Consists of the Company's contribution to such executive officer's 401(k)
plan, Company paid group term life insurance premiums and automobile
expenses. Pursuant to the terms of Mr. Canfora's employment agreements
with Empress Joliet and Empress Hammond, those entities provide Mr.
Canfora with term life insurance in an amount equal to $4.0 million and
reimbursement of relocation expenses. The amount listed in the table
includes the aggregate annual premiums paid by Empress Joliet and Empress
Hammond with respect to such insurance and reimbursement of relocation
expenses.
(4) Mr. Ferro served as President of the Company, Empress Hammond and Empress
Joliet until June 22, 1997, when Mr. Canfora began his employment as
President.
(5) Mr. Sabo served as Vice Chairman of the Board of the Company, Empress
Hammond, Empress Joliet and Empress Finance until the annual stockholders
meetings of the Company in January 1998. Mr. Sabo's employment agreement
with Empress Hammond expired on December 31, 1997. Mr. Sabo currently
serves as a consultant to Empress Hammond and Empress Joliet. See "Certain
Transactions--Other Relationships."
EMPLOYMENT AGREEMENTS
Peter A. Ferro, Jr., Chief Executive Officer. Empress Hammond and Empress
Joliet are each parties to identical employment agreements dated March 7, 1997
with Peter A. Ferro, Jr. The agreements were effective as of January 1, 1997
and terminate on December 31, 1999. An allocation agreement was entered into
between Empress Hammond and Empress Joliet calling for an equal allocation of
Mr. Ferro's compensation and benefits between the two entities. Pursuant to
the terms of the employment agreements, Mr. Ferro is entitled to an aggregate
salary of $400,000 per year. In addition, Mr. Ferro is entitled to certain
customary employee benefits.
Empress Hammond and Empress Joliet may terminate the employment agreements
if (i) Mr. Ferro's gaming license in Indiana or Illinois, respectively, is
suspended or revoked; (ii) Mr. Ferro fails a drug test administered by either
entity; (iii) at least two-thirds of the members of Empress Hammond's or
Empress Joliet's Board of Directors vote to terminate his employment with
either entity; (iv) the Indiana License or the Illinois License is revoked or
not renewed; or (v) there is a change in control in Empress Hammond or Empress
Joliet during the term of the agreements, consisting of either a sale or
transfer of a majority equity interest or a sale of a substantial portion of
the assets. Notwithstanding termination due to (iii), (iv) or (v) above,
Empress Hammond's and Empress Joliet's obligations to Mr. Ferro under the
agreements continue in full force and effect until December 31, 1999.
Joseph J. Canfora, President. Empress Hammond and Empress Joliet are each
parties to identical employment agreements dated June 12, 1997 with Joseph J.
Canfora. Each of the employment agreements commenced on June 23, 1997 and
terminates on June 22, 2000. An allocation agreement was entered into between
Empress Hammond and Empress Joliet calling for an equal allocation of Mr.
Canfora's compensation and benefits between the two entities. Pursuant to the
terms of the employment agreements, Mr. Canfora is entitled to an aggregate
base salary of $500,000 per year ("Base Salary"). In addition, Mr. Canfora is
eligible to receive performance based bonuses ("Bonus") based on a percentage
of the Company's, Empress Hammond's and Empress Joliet's ("Affiliated
Companies") combined EBITDA. If the Affiliated Companies' EBITDA is greater
than $100 million, Mr. Canfora's Bonus will be 3.913% of half of the combined
after-tax earnings of the Affiliated Companies less his Base Salary. Mr.
Canfora will not be entitled to a Bonus if he resigns or is terminated for
cause. Furthermore, the Chief Executive Officer of Empress Hammond or Empress
Joliet, in his sole discretion, may increase Mr. Canfora's Base Salary and
Bonus.
64
In addition to such compensation, Mr. Canfora is entitled to term life
insurance in an amount equal to $4.0 million and certain other employee
benefits. If Mr. Canfora's employment is terminated for reasons other than
cause, death, disability or change in control, Empress Hammond and Empress
Joliet are required (i) to pay Mr. Canfora his Base Salary, Bonus and earned
benefits for services rendered prior to the date of termination; (ii) to pay
Mr. Canfora a pro rata Bonus to the date of termination in accordance with the
terms of the agreements; (iii) to make all payments of Base Salary required
under the agreements to Mr. Canfora through the next scheduled termination
date; and (iv) in the case of disability, to continue to provide health
insurance to Mr. Canfora. If Mr. Canfora resigns his employment with Empress
Hammond or Empress Joliet, other than at the expiration of the term of the
agreements, he is not entitled to any compensation or benefits beyond his last
day of employment. Unless terminated without cause or at the next scheduled
termination date, Mr. Canfora is prohibited, for a period of one year, from
competing with the Affiliated Companies' business, products or services in the
Counties of Lake, Cook, Kane, Will, DuPage and McHenry, Illinois, and the
Counties of Lake, Porter and LaPorte, Indiana.
In addition, the Affiliated Companies and Mr. Canfora are parties to a long-
term incentive bonus agreement (the "Bonus Agreement"), under which Mr.
Canfora is entitled to 3.913% of the excess of (i) the Benchmark Value (as
defined in the Bonus Agreement) of the Affiliated Companies as of the date of
termination of Mr. Canfora's employment without cause, or a Change in Control,
over (ii) the Affiliated Companies' Base Value (as defined in the Bonus
Agreement). If there is a Change of Control within the first twelve months of
the Bonus Agreement, Mr. Canfora is to receive the greater of the bonus as
determined by the above formula or $1.0 million. The Bonus Agreement provides
for differing vesting provisions depending on Mr. Canfora's length of
employment or the occurrence of a Change in Control. With the exception of a
Change in Control, Mr. Canfora's bonus under the Bonus Agreement is not to
exceed $10.0 million.
John G. Costello, Chief Financial Officer. Empress Joliet is a party to an
employment agreement dated March 12, 1998 with John G. Costello. Mr.
Costello's employment agreement was effective as of January 1, 1998 and
terminates on December 31, 1999. Pursuant to the terms of the employment
agreement, Mr. Costello is entitled to a base salary of not less than $135,000
per year. Mr. Costello's base salary is allocated equally between Empress
Joliet and Empress Hammond. In addition, Mr. Costello is entitled to
participate in the incentive compensation bonus programs and employee benefit
plans of Empress Joliet.
Empress Joliet may terminate Mr. Costello's employment for cause (as defined
in the agreement) at any time or without cause on thirty (30) days' written
notice. If terminated for cause, Mr. Costello will be paid to the date of
termination only. If terminated without cause, Mr. Costello is to receive his
present base salary and all health insurance benefits, through the later of
the expiration date of the agreement or one year from the date of termination
plus two weeks, whichever is greater. In addition, Mr. Costello is entitled to
a payment equal to his bonus payment from the prior year. Moreover, in the
event Empress Joliet fails to provide 180 days notice to Mr. Costello that his
agreement will not be renewed, Empress Joliet is required to pay Mr. Costello:
(i) a six month severance payment; (ii) a bonus payment through the scheduled
term based upon the last annual bonus payment paid; and (iii) benefits through
the scheduled term. If Mr. Costello is terminated as a result of a change of
control (as defined in the agreement), Empress Joliet must continue to pay his
base salary through the next scheduled termination date or one year, whichever
is greater, and an amount equal to the last annual bonus payment prorated to
the date termination. Upon a change of control, Mr. Costello is also entitled
to receive a bonus equal to two and one-half times ("Bonus Multiple") the sum
of his annual base salary in effect immediately prior to the change in control
plus his annual bonus for the fiscal year immediately prior to the change in
control.
Michael W. Hansen, Chief Legal Officer. Empress Joliet is a party to an
employment agreement dated March 12, 1998 and effective January 1, 1998 with
Michael W. Hansen. Mr. Hansen's employment agreement with Empress Joliet is
substantially similar to Mr. Costello's agreement, except that (i) Mr. Hansen
is to receive an annual base salary of not less than $206,000 during the term
of the agreement, and (ii) Mr. Hansen's Bonus Multiple is two.
Rick S. Mazer, Vice President--General Manager of Empress Hammond. Empress
Hammond is party to an employment agreement dated March 12, 1998 and effective
January 1, 1998 with Rick S. Mazer. Mr. Mazer's
65
employment agreement with Empress Hammond is substantially similar to Mr.
Costello's agreement, except that (i) Mr. Mazer is to receive an annual base
salary of not less than $180,000 during the term of the agreement, and (ii)
Mr. Mazer's Bonus Multiple is two.
David F. Fendrick, Vice President--General Manager of Empress Joliet.
Empress Joliet is party to an employment agreement dated March 12, 1998 and
effective August 1, 1997 with David F. Fendrick. Mr. Fendrick's employment
agreement with Empress Joliet is substantially similar to Mr. Costello's
agreement, except that (i) the term of Mr. Fendrick's contract is three years,
from August 1, 1997 through July 31, 2000, (ii) Mr. Fendrick is to receive an
annual base salary of not less than $200,000 during the term of the agreement,
and (iii) Mr. Fendrick's Bonus Multiple is one and one-half.
Pursuant to the Plan of Merger, the Company is obligated to pay all Change
of Control bonuses owed to its officers as a result of the consummation of the
Proposed Mergers. See "Business--Recent Developments--Plan of Merger."
William J. Sabo. Empress Joliet and William J. Sabo were parties to an
employment agreement dated October 23, 1991, as amended March 3, 1992. The
agreement expired on December 31, 1997. Mr. Sabo currently serves as a
consultant to Empress Hammond and Empress Joliet. See "Certain Transactions--
Other Relationships."
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY
The by-laws of the Company, Empress Hammond, Empress Joliet and Empress
Finance provide that each corporation will have the power to indemnify any
person who is or was a director, officer, employee or agent of the
corporation, or who is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust, or other enterprise to the fullest extent permitted by
law.
The Company and Empress Finance are each incorporated under the laws of the
State of Delaware. The Company's and Empress Finance's respective Certificates
of Incorporation provide that a director of such corporation shall not be
personally liable to such corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director to the fullest extent permitted by
law. The effect of this provision in the Company's and Empress Finance's
respective Certificates of Incorporation is to eliminate the rights of the
corporation and its stockholders (through stockholders' derivative suits on
behalf of the Company or Empress Finance) to recover monetary damages against
a director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in
certain limited situations. This provision does not limit or eliminate the
rights of the Company or Empress Finance or any of their respective
stockholders to seek non-monetary relief such as an injunction or rescission
in the event of a breach of a director's duty of care. These provisions do not
alter the liability of directors under Federal securities laws.
Section 145 of the Delaware General Corporation Law empowers a corporation,
subject to certain qualifications and limitations, to indemnify its directors
and officers against expenses (including attorneys' fees), judgments, fines
and certain amounts paid in settlements actually and reasonably incurred by
them in connection with any suit or proceeding to which they are a party so
long as they acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful. The Company's and Empress Finance's
respective Certificates of Incorporation and by-laws provide that such entity
shall indemnify its directors and such of its officers, employees and agents
as the Board of Directors may determine from time to time, to the fullest
extent permitted by applicable law.
Empress Hammond is incorporated under the laws of the State of Indiana.
Sections 23-1-37-8 and 23-1-37-13 of the Indiana Business Corporation Law
empower a corporation to indemnify its directors and officers against
liability incurred by them in connection with any suit or proceeding to which
they are a party so long as their conduct was in good faith and (i) in the
case of conduct in the director's or officer's capacity as a director or
officer, as the case may be, in a manner the individual reasonably believed to
be in the best interests of the corporation; (ii) in all other cases, in a
manner the individual reasonably believed to be not opposed to the best
66
interests of the corporation; and (iii) with respect to criminal proceedings,
the individual either (A) had reasonable cause to believe his conduct was
lawful; or (B) had no reasonable cause to believe his conduct was unlawful. In
addition, unless limited by its articles of incorporation, a corporation shall
indemnify a director or officer who is wholly successful, on the merits or
otherwise, in the defense of any proceeding to which the director or officer
was a party because the director or officer was a director or officer of the
corporation against reasonable expenses incurred by the director or officer in
connection with the proceeding. Section 23-1-35-1(e) of the Indiana Business
Corporation Law provides that a director of an Indiana corporation is not
liable for any action taken as a director, or any failure to take any action,
unless (1) the director has breached or failed to perform the duties of the
director's office in compliance with the statute, and (2) the breach or
failure to perform constitutes willful misconduct or recklessness. Empress
Hammond's by-laws provide that Empress Hammond shall indemnify its directors
and its officers, employees and agents in accordance with the provisions of
the Indiana Business Corporation Law.
Empress Joliet is incorporated under the laws of the State of Illinois. The
Illinois Business Corporation Act was amended effective January 1, 1994 to
permit an Illinois corporation's articles of incorporation to limit its
directors' personal exposure to liability for monetary damages. As a result
thereof, Empress Joliet amended its Articles of Incorporation to provide that
a director of Empress Joliet shall not be personally liable to Empress Joliet
or its shareholders for monetary damages for breach of fiduciary duty as a
director to the fullest extent permitted by law. The effect of this provision
in Empress Joliet's Articles of Incorporation is to eliminate the rights of
Empress Joliet and its shareholders (through shareholders' derivative suits on
behalf of Empress Joliet) to recover money damages against a director for
breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in certain
limited situations. This provision would not limit or eliminate the rights of
each of Empress Joliet or its shareholders to seek non-monetary relief such as
an injunction or recession in the event of a breach of a director's duty of
care. The provision would not alter the liability of directors under Federal
securities laws.
Section 8.75 of the Business Corporation Act of 1983 of the State of
Illinois, as amended, empowers a corporation, subject to certain
qualifications and limitations, to indemnify its directors and officers
against expenses (including attorney's fees), judgments, fines and certain
amounts paid in settlements actually and reasonably incurred by them in
connection with any suit or proceeding to which they are a party, or are
threatened to be made a party of, so long as they acted in good faith and in a
manner they reasonably believed to be in or not opposed the best interests of
the corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe their conduct to have been unlawful. Empress
Joliet's by-laws provide that Empress Joliet shall have the power to indemnify
its officers, directors, employees and agents to the full extent permitted by
law.
CERTAIN TRANSACTIONS
COMPANY AND SUBSIDIARY RELATIONSHIPS
Empress Hammond licenses certain trademarks from Empress Joliet pursuant to
the terms of a Trademark License Agreement dated as of June 30, 1997. Empress
Hammond pays an annual fixed license fee of $1.2 million to Empress Joliet for
the non-exclusive right to use certain Empress Casino trademarks in Hammond,
Indiana, with express permission to use intrastate and interstate advertising
and promotion of Empress Hammond's gaming operation in Hammond, Indiana. The
Trademark License Agreement expires on December 31, 2001. In 1997 and 1996,
the total amount paid by Empress Hammond to Empress Joliet under this
agreement was approximately $1.2 million and $0.6 million, respectively.
Using information generated from the Empress Club, Empress Joliet created
and currently maintains a database containing information about customers of
the casino. Empress Hammond contributes information to the patron database and
licenses from Empress Joliet its patron database information. Empress Hammond
is required to pay to Empress Joliet five annual payments of approximately
$0.5 million each year based on an estimated fair market value of Empress
Joliet's patron database as of June 1996. The amount charged to Empress
Hammond for the database was approximately $0.6 million and $0.1 million in
1997 and 1996, respectively.
67
The Company shares common executive officers with its subsidiaries,
including the President, Chief Executive Officer, Chief Financial Officer and
Chief Legal Officer. Prior to the Reorganization, the salaries of such
executive officers were allocated evenly between Empress Joliet and Empress
Hammond. See "Management."
Empress Joliet provides certain consulting services to Empress Hammond for a
fee of $5,000 per month. The consulting fee for each of the years ended
December 31, 1997, 1996 and 1995 was $60,000. Empress Joliet also incurs
certain indirect corporate and general and administrative costs and expenses
related to the start-up, management and operations of Empress Hammond. These
costs are then allocated to Empress Hammond. In 1997 and 1996, the total
amounts allocated to Empress Hammond were approximately $2.8 million and $2.7
million, respectively.
In accordance with Empress Hammond's original $50.0 million revolving credit
facility (the "Original Credit Facility"), which was replaced with the
Existing Credit Facility, Empress Joliet guaranteed the indebtedness and was
compensated by Empress Hammond in an amount equal to approximately $0.2
million and $0.2 million in 1997 and 1996, respectively. In addition, under
the Original Credit Facility and the Existing Credit Facility, the Company
guaranteed Empress Hammond's obligations thereunder and was compensated by
Empress Hammond in an amount equal to 0.5% of the available line of credit.
The total amount paid by Empress Hammond to the Company for such guaranty was
approximately $0.2 million for each of 1997 and 1996. On June 30, 1997,
Empress Joliet's guaranty of Empress Hammond's indebtedness terminated. These
facilities were replaced by the Credit Facility.
Pursuant to the terms of the 1994 Indenture, (i) Empress Finance loaned
Empress Joliet the principal amount of $150.0 million; (ii) Empress Joliet
loaned the Company the principal amount of $25.0 million; (iii) Empress Joliet
loaned Empress Hammond the principal amount of $33.0 million and (iv) Empress
Joliet has from time to time made intercompany loans to the Company and
Empress Hammond in the aggregate principal amount of $7.0 million and $4.0
million, respectively, all of which loans were repaid in full in connection
with the Offering.
OTHER RELATIONSHIPS
The Company is governed by an Amended and Restated Stockholders Agreement
pursuant to which, among other things, (i) the stockholders agreed to vote for
the election of Mr. Ferro, Mr. Hammersmith, Mr. Kegley, Mr. Lambrecht, Mr.
McEnery, Mr. McGowan and Mr. Sabo to the Board of Directors of the Company and
each of its subsidiaries, (ii) the Company and each of the other stockholders
have an option to purchase the stock of a stockholder upon certain events,
(iii) limitations were placed on the ability of the stockholders to sell their
stock in the Company, (iv) the approval of at least 75% of the stockholders is
required in order for the Company or any of its subsidiaries to undertake
certain transactions, including the merger of the Company or any of its
subsidiaries, the sale of all or substantially all of the assets of the
Company or any of its subsidiaries or the issuance or sale of stock of Empress
Joliet or Empress Hammond and (v) as long as the Company qualifies as a
Subchapter S Corporation, the Company has agreed to make distributions to its
stockholders in order for them to pay federal and state income taxes on the
net income of the Company.
In July 1998, in settlement of litigation, and in exchange for a general
release of all claims, the Company redeemed for $4.7 million all of the shares
of the Company's common stock held by an approximately 1% stockholder.
Empress Hammond, Empress Joliet and William J. Sabo, a stockholder and
director of the Company, and a director of each of the corporate Guarantors,
are parties to two identical consulting agreements dated as of January 1,
1998, pursuant to which Mr. Sabo provides consulting services to Empress
Hammond and Empress Joliet for an annual consulting fee of $150,000 in the
aggregate. Such consulting fee is paid equally by Empress Hammond and Empress
Joliet. The consulting agreements expire on December 31, 1999, and may be
terminated for cause (as defined in the agreements). In connection with his
consulting agreements, Mr. Sabo has agreed during his consulting period and
for a period of one year thereafter not to compete in the casino business
within a 200 mile radius of each of Hammond, Indiana and Joliet, Illinois. Mr.
Sabo has also agreed not to solicit any employee, vendor or supplier of
Empress Hammond or Empress Joliet.
68
The Company and its subsidiaries have entered into the following contracts
with certain of the companies owned by its stockholders: (i) a contract with
Gas City, Ltd., a company owned by William J. McEnery, to provide fuel for the
Company's vessels and Company-owned vehicles; (ii) a contract with P.T. Ferro
Construction Company, a company owned in part by Peter A. Ferro, Jr., to
provide construction services; (iii) a contract with Columbian Agency, an
insurance brokerage company owned by Robert W. Kegley, Sr., to provide
insurance brokerage services; (iv) a contract with T.J. Lambrecht
Construction, Inc., an entity owned by Thomas J. Lambrecht, to provide
construction services; and a contract with EDON Construction, a company owned
by Edward T. McGowan, for demolition of the OTB and for other general
maintenance matters.
From January 1, 1998 through June 30, 1998, the Company paid an aggregate of
approximately $15,763, $0.1 million, $0.3 million, $43,003 and $0.1 million to
the Columbian Agency, Gas City, Ltd., P.T. Ferro Construction Company, Inc.,
T.J. Lambrecht Construction, Inc. and EDON Construction, respectively. In
1997, the Company paid an aggregate of approximately $2.7 million, $0.5
million, $0.4 million and $0.2 million to the Columbian Agency, Gas City,
Ltd., P.T. Ferro Construction Company and T.J. Lambrecht Construction, Inc.,
respectively. In 1996, the Company paid an aggregate of approximately $2.1
million, $0.6 million, $0.3 million and $0.1 million to the Columbian Agency,
Gas City, Ltd., P.T. Ferro Construction Company and T.J. Lambrecht
Construction, Inc., respectively.
DISTRIBUTIONS TO STOCKHOLDERS
From January 1, 1993 through December 31, 1997, the Company made an
aggregate of approximately $267.0 million of distributions to stockholders,
which included distributions in the amount of approximately $122.4 million to
pay certain personal Federal and state income taxes owed by stockholders as a
result of the Company's Subchapter S tax status. In addition, from January 1,
1998 through June 30, 1998, the Company, Empress Hammond and Empress Joliet
made an aggregate of approximately $22.3 million of distributions to pay
personal income taxes to stockholders. The Company currently intends to make
periodic distributions to its stockholders in sufficient amounts to enable
them to pay Federal and state income taxes attributable to their pro rata
portion of the estimated taxable earnings of the Company, and to make other
periodic distributions to its stockholders.
69
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of shares of common stock of the Company as of the date of this Prospectus (i)
by each person known to the Company to own beneficially more than 5% of the
outstanding shares of common stock of the Company and (ii) by each of the
Company's executive officers and directors and by all of such executive
officers and directors as a group.
NON-VOTING
NAME AND ADDRESS OF COMMON % OF COMMON % OF
BENEFICIAL OWNER(1) SHARES CLASS SHARES CLASS
------------------- -------- ----- ---------- -----
Joseph J. Canfora............ -- -- -- --
John G. Costello............. -- -- -- --
David F. Fendrick............ -- -- -- --
Peter A. Ferro, Jr........... 196.14(2)(3) 11.2% 15.15(2)(3) 9.2%
Charles P. Hammersmith, Jr... 332.44 19.0 25.67 15.7
Michael W. Hansen............ -- -- -- --
Robert W. Kegley, Sr......... 166.22 9.5 12.84 7.8
Thomas J. Lambrecht.......... 302.52 17.3 23.36 14.2
Rick S. Mazer................ -- -- -- --
William J. McEnery........... 332.44(4) 19.0 25.67 15.7
Edward T. McGowan............ 332.44(5) 19.0 25.67 15.7
William J. Sabo.............. 113.03(2) 6.6 8.73(2)(3) 5.3
All executive officers and
directors as a group (12
persons).................... 1,745.33 100.0% 134.79 82.17%
======== ===== ====== =====
- --------
(1) To the Company's knowledge, the persons named in the table have sole
voting and investment power with respect to all shares of common stock
shown as beneficially owned by them, unless otherwise noted in the
footnotes to this table. The address of each of the stockholders named in
this table is c/o Empress Entertainment, Inc., 2300 Empress Drive, Joliet,
Illinois 60436.
(2) Includes the following number of shares of common stock of the Company
owned by the following trusts of which William J. Sabo and Peter A. Ferro,
Jr. are co-trustees: 9.97 common shares and 0.77 non-voting common shares
of the Company owned of record by the Trust for the benefit of Melissa
Kate Lambrecht under Trust Agreement dated May 3, 1993; 9.97 common shares
and 0.77 non-voting common shares of the Company owned of record by the
Trust for the benefit of Paul John Lambrecht under Trust Agreement dated
May 3, 1993; and 9.97 common shares and 0.77 non-voting common shares of
the Company owned of record by the Trust for the benefit of Matthew Thomas
Lambrecht under Trust Agreement dated May 3, 1993. These shares are
included twice in the table, once in the total for Mr. Sabo and once for
the total for Mr. Ferro.
(3) Includes 166.22 common shares and 12.84 non-voting common shares held by a
voting trust of which Mr. Ferro is the sole voting trustee. Mr. Ferro is
the owner of 55.4 of the shares of common stock and 4.28 of the shares of
non-voting common stock held by such voting trust and 55.4 shares of
common stock and 4.28 of the shares of non-voting common stock are owned
by each of James J. Ferro and John T. Ferro, Mr. Ferro's two brothers.
(4) Held by Trust for the benefit of William J. McEnery of which Mr. McEnery
is the sole trustee.
(5) Held by Trust for the benefit of Edward T. McGowan of which Mr. McGowan is
the sole trustee.
70
DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
As of June 30, 1998, the Company had outstanding indebtedness aggregating
approximately $160.0 million, excluding the Defeased Debt and including $150.0
million of outstanding Old Notes.
10 3/4% NOTES
The Company currently has outstanding $150.0 million of the 10 3/4% Notes.
The Company irrevocably deposited $167.2 million of cash and U.S. Treasury
Securities in trust for the purpose of effecting the Covenant Defeasance,
which, together with interest earned thereon, will be used to pay (i) the
principal amount of the 10 3/4% Notes on April 1, 1999; (ii) estimated
interest of $16.1 million on the 10 3/4% Notes through the date of redemption
(April 1, 1999): and (iii) the premium of $8.1 million upon the redemption of
the 10 3/4% Notes on April 1, 1999.
CREDIT FACILITY
Concurrently with the closing of the Offering, the Company entered into a
$100 million senior secured reducing revolving credit facility. The Company,
Empress Hammond and Empress Joliet are primary obligors under the Credit
Facility. The Company granted a first priority security interest in
substantially all of the assets of the Company, Empress Hammond and Empress
Joliet (excluding the Illinois License and the Indiana License) to secure
their obligations under the Credit Facility. The Credit Facility expires on
June 15, 2003. Credit availability starts at $100.0 million, with scheduled
reductions on December 31 of each year beginning on December 31, 1998, in the
amounts of $5.0 million, $7.5 million, $7.5 million and $15.0 million,
respectively. The Company is subject to a number of restrictive covenants,
including: (i) maintenance of a maximum Leverage Ratio; (ii) maintenance of an
Adjusted Fixed Charge Coverage Ratio; (iii) maintenance of a Minimum Tangible
Net Worth; and (iv) a Limitation on Capital Expenditures. The interest rate on
borrowings under the Credit Facility is determined by a pricing matrix based
upon, at the Company's option, either (i) LIBOR or (ii) a base rate equal to
the higher of (a) the agent's prime rate, or (b) 0.5% plus the Federal Funds
Rate, in each case, plus a sliding scale margin of up to 2.125% on LIBOR loans
and up to 1.00% on base rate loans based upon the ratio of the Company's
funded debt (excluding defeased debt) to its EBITDA (the "Leverage Ratio").
During the term of the Credit Facility, the Company must pay a commitment fee
of between 0.225% and 0.375% of the unused portion of the commitment under the
Credit Facility, determined based upon the Leverage Ratio. The Company paid at
the closing of the Credit Facility a closing fee equal to $750,000.
71
DESCRIPTION OF THE NEW NOTES
The Old Notes were issued and the New Notes will be issued under an
Indenture dated as of June 18, 1998 (the "Indenture") among the Company, the
Guarantors and U.S. Bank Trust National Association, as trustee (the
"Trustee"). For purposes of this summary, references to the "Company" means
only Empress Entertainment, Inc. and not any of its subsidiaries. References
to the Notes include the New Notes and the Old Notes unless the context
otherwise requires.
Upon the effectiveness of the Registration Statement of which this
Prospectus forms a part, the Indenture will be subject to and governed by the
Trust Indenture Act. The following is a summary of the material provisions of
the Indenture and does not purport to be complete, and where reference is made
to particular provisions of the Indenture, such provisions, including the
definitions of certain terms, are qualified in their entirety by reference to
all of the provisions of the Indenture and those terms made a part of the
Indenture by reference to the Trust Indenture Act. A copy of the Indenture is
filed as an exhibit to the Registration Statement of which this Prospectus
forms a part, and is incorporated by reference herein. For definitions of
certain capitalized terms used in the following summary, see "--Certain
Definitions" or "Exchange Offer; Registration Rights."
GENERAL
The New Notes will be unsecured senior subordinated obligations of the
Company limited to $150,000,000 aggregate principal amount. Principal of,
premium, if any, and interest on, the Notes will be payable, and the Notes may
be presented for registration of transfer or exchange, at the office or agency
of the Company maintained for such purpose in the City of New York, New York.
At the option of the Company, payment of interest may be made by check mailed
to the holders at the addresses set forth upon the registry books of the
Company. See "Book-Entry, Delivery and Form." The New Notes will be issued
solely in exchange for an equal principal amount of outstanding Old Notes
pursuant to the Exchange Offer. The form and terms of the New Notes will be
identical in all material respects to the form and terms of the Old Notes,
except that (i) the New Notes have been registered under the Securities Act
and, therefore, will not bear legends restricting the transfer thereof, (ii)
holders of New Notes will not be entitled to any Additional Interest thereon
pursuant to certain circumstances under the Registration Rights Agreement and
(iii) holders of New Notes will no longer be entitled to certain other rights
under the Registration Rights Agreement. The New Notes will be issued only in
fully registered form without coupons, in denominations of $1,000 and integral
multiples thereof. No service charge will be made for any registration of
transfer, exchange or redemption of the Notes, except in certain circumstances
for any tax or other governmental charge that may be imposed in connection
therewith.
Because the Company is a holding company which conducts substantially all of
its operations through its Subsidiaries, the Notes will be effectively
subordinated to all existing and future liabilities of the Company's
Subsidiaries. Thus, the right of the Company, and hence the right of creditors
of the Company (including the holders of the Notes), to participate in any
distribution of the assets of any Subsidiary upon its liquidation or
reorganization or otherwise is necessarily subject to the prior claims of
creditors of such Subsidiary, except to the extent that claims of the Company
itself as a creditor of the Subsidiary may be recognized.
As of the date of the Indenture, all of the Company's Subsidiaries will be
Restricted Subsidiaries. However, under certain circumstances, the Company
will be able to designate future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indenture.
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on July 1, 2006. The Notes will bear interest at the
rate per annum equal to 8 1/8% per annum from the date of issuance. Interest
will be payable semi-annually on January 1 and July 1 of each year, commencing
on January 1, 1999, to the registered holders of such Notes ("Holders") at the
close of business on the December 15 or June 15 immediately preceding such
Interest Payment Date. Interest will be calculated on the basis of a 360-day
year, consisting of twelve 30-day months.
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GUARANTEES
The Company's payment obligations under the Notes will be jointly,
severally, fully and unconditionally guaranteed on an unsecured senior
subordinated basis (the "Guarantees") by each of the Company's existing and
future Restricted Subsidiaries, as guarantors. The Guarantees will be
subordinated in right of payment to all existing and future Senior
Indebtedness of the Guarantors. The Notes are not guaranteed by Empress
Opportunities, Empress Racing, Empress Mississippi, or any future Unrestricted
Subsidiaries.
The Indenture contains provisions the intent of which is to provide that the
obligations of each Guarantor will be limited to the maximum amount that will,
after giving effect to all other contingent and fixed liabilities of such
Guarantor and after giving effect to any collections from, rights to receive
contribution from, or payments made by or on behalf of any other Guarantor in
respect of the obligations of such other Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture, result in the
obligations of such Guarantor under its Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under any applicable Federal,
state or foreign law. Each Guarantor that makes a payment or distribution
under a Guarantee shall be entitled to contribution from each other Guarantor
so long as the exercise of such right does not impair the rights of the
holders of the Notes. See "Risk Factors--Fraudulent Transfer Considerations."
The Indenture provides that in the event of (i) a sale or other disposition
of all or substantially all of the assets of any Guarantor or the sale of a
Guarantor, by way of merger, consolidation or otherwise, (ii) a Subsidiary
becoming an Unrestricted Subsidiary pursuant to terms of the Indenture or
(iii) a sale or other disposition of all of the Capital Stock of any
Guarantor, then such Guarantor or the corporation acquiring the property, as
applicable, shall be released and relieved of any obligations under its
guarantee, provided that the Company complies with the provisions of the
covenant described under "Certain Covenants--Limitation on Sale of Assets and
Subsidiary Stock; Event of Loss."
The Indenture provides that the Company shall cause each Restricted
Subsidiary hereafter formed or acquired or any Unrestricted Subsidiary that is
designated a Restricted Subsidiary to (i) execute and deliver to the Trustee a
supplemental indenture in a form satisfactory to the Trustee pursuant to which
such Restricted Subsidiary shall unconditionally guarantee all of the
Company's obligations under the Notes on the terms set forth in the Indenture
and (ii) deliver to the Trustee an opinion of counsel, subject to customary
assumptions and exclusions, stating that such supplemental indenture has been
duly executed and delivered by such Restricted Subsidiary.
REDEMPTION
Optional Redemption. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after July 1, 2002, at the
following redemption prices (expressed as percentages of the principal amount)
set forth below, plus accrued and unpaid interest thereon, if any, to the date
of redemption, if redeemed during the 12-month period commencing July 1 of the
years indicated below:
YEAR PERCENTAGE
---- ----------
2002.......................... 104.063%
2003.......................... 102.708%
2004.......................... 101.354%
2005.......................... 100.000%
Optional Redemption upon Equity Offering. On or prior to July 1, 2001, the
Company may, at its option, use the net proceeds of an Equity Offering to
redeem up to 35% of the issued aggregate principal amount of the Notes, at a
redemption price in cash equal to 108 1/8% of the principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the date of redemption;
provided, however, that not less than $97.5 million in aggregate principal
amount of Notes is outstanding following such redemption. Notice of any such
redemption must be given not later than 60 days after the consummation of the
related Equity Offering.
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As used in the preceding paragraph, an "Equity Offering" means a public sale
of common stock of the Company in a transaction registered with the
Commission.
Required Regulatory Redemption. The Notes will be redeemable, in whole or in
part, at any time, at 100% of the principal amount thereof, plus accrued and
unpaid interest to the redemption date, (i) pursuant to, and in accordance
with, any order of any Governmental Authority with appropriate jurisdiction
and authority relating to a Gaming License (a "Gaming Authority"), or (ii) to
the extent necessary in the reasonable, good faith judgment of the Board of
Directors of the Company to prevent the loss, failure to obtain or material
impairment of, or to secure the reinstatement of, any Gaming License, which if
lost, impaired, not obtained or not reinstated would reasonably be expected to
have a material adverse effect on the Company and its Restricted Subsidiaries,
considered as a whole, or would restrict the ability of the Company or any of
its Restricted Subsidiaries to conduct business in any Gaming Jurisdiction, in
the case of each of (i) and (ii) where such redemption or acquisition is
required because the Holder or beneficial owner of such Note is required to be
found suitable, or otherwise qualify, under any Gaming Laws and is not found
suitable or so qualified (a "Required Regulatory Redemption").
If a Noteholder or a beneficial owner of a Note is required by any Gaming
Authority to be found suitable, the Noteholder shall apply for a finding of
suitability within 30 days after a Gaming Authority requests or sooner if so
required by such Gaming Authority. The applicant for a finding of suitability
must pay all costs of the investigation for such finding of suitability. If a
Noteholder or beneficial owner is required to be found suitable and is not
found suitable by a Gaming Authority, the Noteholder shall, to the extent
required by applicable law, dispose of his Notes within 30 days or within that
time prescribed by a Gaming Authority, whichever is earlier.
Selection and Notice. Notice of any redemption will be sent by first-class
mail at least 30 days and not more than 60 days prior to the date fixed for
redemption, to the Holder of each Note to be redeemed to such Holder's last
address as then shown upon the registry books of the Company. The notice of
redemption must state the date fixed for redemption, the redemption price and
the amount of accrued and unpaid interest to be paid. Any notice which relates
to a Note to be redeemed in part only must state the portion of the principal
amount equal to the unredeemed portion thereof and must state that on and
after the date fixed for redemption, upon surrender of such Note, a new Note
or Notes in principal amount equal to the unredeemed portion thereof will be
issued. On and after the date fixed for redemption, interest will cease to
accrue on the Notes or portions thereof called for redemption so long as the
Company has deposited with the paying agent for the Notes funds in
satisfaction of the redemption price, plus accrued and unpaid interest,
pursuant to the Indenture.
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed
or, if the Notes are not listed on a national securities exchange, on a pro
rata basis, by lot or in such other manner as the Trustee deems appropriate
and fair; provided, however, that any such redemption made with the net
proceeds of an Equity Offering shall be made on a pro rata basis or on as
nearly a pro rata basis as practicable (subject to the procedures of the DTC).
The Notes may be redeemed in part in multiples of $1,000 only.
The Notes will not have the benefit of any sinking fund.
CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of a Change of Control,
each Holder of Notes will have the right, at such Holder's option, subject to
the terms and conditions of the Indenture, pursuant to an irrevocable,
unconditional offer by the Company (the "Change of Control Offer"), to require
the Company to repurchase all or any portion of such Holder's Notes (provided
that the principal amount of such Notes at maturity must be $1,000 or an
integral multiple thereof) on a date (the "Change of Control Purchase Date")
that is no later than 30 Business Days after the occurrence of such Change of
Control, at a cash price (the "Change of Control Purchase Price") equal to
101% of the principal amount thereof, plus accrued and unpaid interest to and
including the Change of Control Purchase Date. The Change of Control Offer
must commence within 10 Business Days following a Change of Control and must
remain open for at least 20 Business Days following its commencement, except
to the extent that a longer period is expressly required by applicable law
(the "Change of Control Offer Period"). Upon expiration of the Change of
Control Offer Period, the Company will purchase all Notes tendered in
accordance with the terms of the Indenture in response to the Change of
Control Offer. See "Business--Recent Developments--Plan of Merger."
74
On or before the Change of Control Purchase Date, (i) the Company will
accept for payment Notes or portions thereof properly tendered to the Company
pursuant to the Change of Control Offer; (ii) the Company will deposit with
the paying agent for the Notes U.S. Legal Tender sufficient to pay the Change
of Control Purchase Price (including accrued and unpaid interest) of all Notes
so tendered; and (iii) the Company will deliver to the Trustee Notes so
accepted together with an Officers' Certificate listing the Notes or portions
thereof being purchased by the Company. The joint and several obligations of
each of the Guarantors upon a Change of Control extend both to the payment of
principal and interest on the Notes and to the joint and several obligations
of each of the Guarantors to honor the Change of Control repurchase
obligations of the Company in the event that a Change of Control occurs and
the Company is unable to pay in full the Change of Control Purchase Price. The
paying agent for the Notes will promptly mail to the Holders of Notes so
accepted, payment in an amount equal to the Change of Control Purchase Price
(including accrued and unpaid interest), and the Trustee will promptly
authenticate and mail or deliver to such Holders a new Note equal to the
principal amount of any unpurchased portion of the Note surrendered. Any Notes
not so accepted will be promptly mailed or delivered by the Company to the
Holder thereof. The Company will publicly announce the results of the Change
of Control Offer on or as soon as practicable after the Change of Control
Purchase Date. The Company can give no assurances that it will have sufficient
funds or access to financing to enable it to meet its obligation to repurchase
the Notes upon a Change of Control.
To the extent applicable and if required by law, the Company will comply
with Section 14 of the Exchange Act, and the provisions of Regulation 14E and
any other tender offer rules promulgated pursuant to the Exchange Act and
other securities laws, rules and regulations which may then be applicable to
any offer by the Company to purchase the Notes at the option of Holders upon a
Change of Control or other Offer to Purchase.
SUBORDINATION
The payment of the principal of, premium, if any, and interest (including
any additional interest in respect of a Registration Default) on the Notes
will be subordinated in right of payment, as described below, to the prior
payment in full of all Senior Indebtedness.
The Indenture will provide that in the event of any insolvency or bankruptcy
case or proceeding, or any receivership, liquidation, reorganization or other
similar case or proceeding in connection therewith, relating to the Company,
or any liquidation, dissolution or other winding-up of the Company, whether
voluntary or involuntary, or any assignment for the benefit of creditors or
other marshaling of assets or liabilities of the Company, (i) all Senior
Indebtedness must be paid in full before any payment or distribution
(excluding any payment or distribution of certain permitted equity or
subordinated securities) is made on account of the principal of, premium, if
any, or interest on the Notes or the Guarantees, and (ii) until all Senior
Indebtedness is paid in full, any distribution to which Holders of the Notes
would be entitled but for this provision shall be made to holders of Senior
Indebtedness as their interests may appear, except that Holders of the Notes
may receive Capital Stock or any debt securities that are subordinated to
Senior Indebtedness to at least the same extent as the Notes.
During the continuance of any default in the payment of any Designated
Senior Indebtedness pursuant to which the maturity thereof may immediately be
accelerated beyond any applicable grace period, no payment or distribution of
any assets of the Company of any kind or character (excluding any payment or
distribution of certain permitted equity or subordinated securities) shall be
made on account of the principal of, premium, if any, or interest on, or the
purchase, redemption or other acquisition of, the Notes unless and until such
default has been cured or waived or has ceased to exist or such Designated
Senior Indebtedness shall have been discharged or paid in full.
During the continuance of any non-payment default with respect to any
Designated Senior Indebtedness pursuant to which the maturity thereof may
immediately be accelerated (a "Non-payment Default") and after the receipt by
the Trustee from the representatives of holders of such Designated Senior
Indebtedness of a written notice of such Non-payment Default, no payment or
distribution of any assets of the Company of any kind or character (excluding
any payment or distribution of certain permitted equity or subordinated
securities) may be made by the Company on account of the principal of,
premium, if any, or interest on, or the purchase, redemption or other
acquisition of, the Notes for the period specified below (the "Payment
Blockage Period").
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The Payment Blockage Period will commence upon the receipt of written notice
of a Non-payment Default by the Trustee from the representatives of holders of
Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period and will end on the earlier to occur of the following events:
(i) 179 days shall have elapsed since the receipt of such notice of a Non-
payment Default (provided that such Designated Senior Indebtedness shall not
theretofore have been accelerated), (ii) such default is cured or waived or
ceases to exist or such Designated Senior Indebtedness is discharged or (iii)
such Payment Blockage Period shall have been terminated by written notice to
the Company or the Trustee from the representatives of holders of Designated
Senior Indebtedness initiating such Payment Blockage Period. After the end of
any Payment Blockage Period, the Company shall promptly resume making any and
all required payments in respect of the Notes, including any missed payments.
Notwithstanding anything in the subordination provisions of the Indenture or
the Notes to the contrary, (x) in no event shall a Payment Blockage Period
extend beyond 179 days from the date of the receipt by the Trustee of the
notice initiating such Payment Blockage Period, (y) there shall be a period of
at least 186 consecutive days in each 365-day period when no Payment Blockage
Period is in effect and (z) not more than one Payment Blockage Period with
respect to the Notes may be commenced within any period of 365 consecutive
days. A Non-payment Default with respect to Designated Senior Indebtedness
that existed or was continuing on the date of the commencement of any Payment
Blockage Period with respect to the Designated Senior Indebtedness initiating
such Payment Blockage Period cannot be made the basis for the commencement of
a second Payment Blockage Period, whether or not within a period of 365
consecutive days, unless such default has been cured or waived for a period of
not less than 90 consecutive days and subsequently recurs.
As used herein, the term "Designated Senior Indebtedness" means (a) the Bank
Indebtedness and (b) any other Senior Indebtedness in a principal amount of at
least $10 million outstanding which, at the time of determination, is
specifically designated in the instrument governing such Senior Indebtedness
as "Designated Senior Indebtedness" by the Company.
If the Company fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of
Default under the Indenture and would enable the holders of the Notes to
accelerate the maturity thereof. See "--Events of Default and Remedies."
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the Notes and funds which would be
otherwise payable to the holders of the Notes will be paid to the holders of
Senior Indebtedness to the extent necessary to pay the Senior Indebtedness in
full, and the Company may be unable to meet its obligations fully with respect
to the Notes.
As of June 30, 1998, excluding the outstanding indebtedness under the 10
3/4% Notes, which will continue to accrue interest and be an obligation of the
Company until they are redeemed, currently anticipated to occur on April 1,
1999, the Company and the Guarantors had $10.0 million of Senior Indebtedness
outstanding. The Indenture limits, but does not prohibit, the incurrence by
the Company of additional Indebtedness which is senior to the Notes. See "Risk
Factors--Subordination."
CERTAIN COVENANTS
Limitation on Incurrence of Indebtedness and Preferred Stock
The Indenture provides that, except as set forth in any one of the
paragraphs below, the Company shall not, and shall not cause or permit any of
its Restricted Subsidiaries to, directly or indirectly, issue, assume,
guaranty, incur, suffer to exist, become directly or indirectly liable with
respect to (including as a result of an acquisition, merger or consolidation),
extend the maturity of, or otherwise become responsible for, contingently or
otherwise (individually and collectively, to "incur," or, as appropriate, an
"incurrence"), any Indebtedness or any Preferred Stock on or after the Issue
Date; provided that the Company and its Restricted Subsidiaries may incur
Indebtedness or Preferred Stock if: (i) no Default or Event of Default shall
have occurred and be continuing at the time of, or would occur after giving
effect to, on a pro forma basis, such incurrence of such Indebtedness or
Preferred Stock; and (ii) on the date of the incurrence of such Indebtedness
or Preferred Stock (the "Incurrence Date"), the Consolidated Fixed Charge
Coverage Ratio for the Reference Period immediately preceding the Incurrence
Date, after giving effect, on a pro forma basis, to the incurrence of such
Indebtedness or Preferred Stock as of the first day of the Reference Period,
would be at least 2.00 to 1.
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Notwithstanding the foregoing, the Company and its Restricted Subsidiaries,
as applicable, may incur each of the following (collectively, "Permitted
Indebtedness"):
(a) The Company may incur the Indebtedness represented by the Notes and
its Restricted Subsidiaries may incur the Subsidiary Guarantees;
(b) The Company and its Restricted Subsidiaries may incur the Existing
Indebtedness;
(c) The Company and its Restricted Subsidiaries may incur the Bank
Indebtedness in an aggregate principal amount at any one time outstanding
not to exceed $100.0 million, less the amount of all permanent repayments
thereof with the Net Cash Proceeds from an Asset Sale as set forth under
"--Limitation on Sale of Assets and Subsidiary Stock; Event of Loss";
(d) The Company and its Restricted Subsidiaries may incur Purchase Money
Indebtedness or Non-Recourse Indebtedness, provided that the amount of such
Indebtedness outstanding at any time pursuant to this paragraph (d)
(including any Indebtedness, whether or not Refinancing Indebtedness,
issued to refinance, replace or refund such Indebtedness) shall not, in the
aggregate, exceed $7.5 million;
(e) The Company and its Restricted Subsidiaries may incur FF&E
Indebtedness, provided, that the amount of such Indebtedness outstanding at
any time pursuant to this paragraph (e) (including any Indebtedness,
whether or not Refinancing Indebtedness, issued to refinance, replace or
refund such Indebtedness) shall not, in the aggregate, exceed at any time
the product of (i) $7.5 million, times (ii) the number of Facilities being
operated by the Company and its Restricted Subsidiaries;
(f) The Company and its Restricted Subsidiaries may incur Refinancing
Indebtedness with respect to any Indebtedness or Preferred Stock, as
applicable, described in clauses (b) through (e) of this covenant (so long
as, in the case of Indebtedness used to refinance, replace or retire
Indebtedness in clause (d), such Refinancing Indebtedness is non-recourse
as to any assets other than the assets that secured such Indebtedness being
refinanced, replaced or retired; and in the case of clause (b) of this
covenant, other than Refinancing Indebtedness with respect to the 10 3/4%
Notes);
(g) The Company and its Restricted Subsidiaries may incur Indebtedness
under Interest Swap Obligations, provided that in each case the notional
principal amount of such Interest Swap Obligation does not exceed the
principal amount of Indebtedness to which such Interest Swap Obligation
relates;
(h) The Company and its Restricted Subsidiaries may incur Indebtedness in
the form of (i) letters of credit and (ii) performance bonds and surety
bonds, the aggregate principal amount of which shall not at any time exceed
$7.5 million in the aggregate outstanding;
(i) The Company may incur Indebtedness to a Restricted Subsidiary, a
Restricted Subsidiary may incur Indebtedness to the Company and a
Restricted Subsidiary may incur Indebtedness to another Restricted
Subsidiary; provided that any such Indebtedness is made pursuant to an
intercompany note and is expressly subordinated in right of payment to the
payment and performance of the Company's obligations under the Notes or
such Restricted Subsidiary's obligations under the Subsidiary Guarantees,
as applicable, and, upon an Event of Default, such Indebtedness shall not
be due and payable until such Event of Default is cured, waived or
rescinded; provided, further, that any disposition, pledge or transfer of
any such Indebtedness to a Person (other than a disposition, pledge or
transfer to a Restricted Subsidiary) shall be deemed to be an incurrence of
such Indebtedness by the Company or such Restricted Subsidiary, as
applicable, not permitted by this clause (i); and
(j) The Company and its Restricted Subsidiaries may incur Indebtedness in
an aggregate principal amount outstanding at any time of up to $25 million
in the aggregate.
Limitation on Restricted Payments
The Company shall not, and shall not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, make any Restricted Payment if,
immediately prior to such proposed Restricted Payment or after giving effect
to such proposed Restricted Payment on a pro forma basis, (1) a Default or an
Event of Default
77
shall have occurred and be continuing; or (2) the Company would not be
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Fixed Charge Coverage Ratio test contained in the covenant
described under "--Limitation on Incurrence of Indebtedness and Preferred
Stock"; or (3) the aggregate amount of all Restricted Payments made by the
Company and its Restricted Subsidiaries, including after giving pro forma
effect to such proposed Restricted Payment (including Restricted Payments
described in clause (a) of the following paragraph) from and after the Issue
Date, would exceed the sum of (a) 50% of the amount by which the aggregate
Adjusted Consolidated Net Income for the period (taken as one accounting
period) commencing on the first day of the fiscal quarter that includes the
Issue Date, to and including the last day of the full fiscal quarter ended
immediately prior to the date of each such calculation, exceeds permitted
distributions of Tax Amounts (as defined) made with respect to such period
(or, in the event Adjusted Consolidated Net Income less permitted
distributions of Tax Amounts made with respect to such period is a deficit,
then minus 100% of such deficit) plus (b) 50% of all cash dividends or any
other cash payments which represent distributions of net income (determined in
accordance with GAAP) paid by an Unrestricted Subsidiary or any other person
(other than a Restricted Subsidiary) in which the Company or any Restricted
Subsidiary has an ownership interest to the Company or a Restricted Subsidiary
to the extent the same are not otherwise included in Adjusted Consolidated Net
Income or represent a return of capital, plus (c) 100% of the aggregate Net
Cash Proceeds received by the Company or any Restricted Subsidiary as a
capital contribution (other than capital contributions directly or indirectly
made from the Company or any Restricted Subsidiary and other than capital
contributions made from the proceeds of loans or advances described in clause
(g) of the following paragraph) or from the sale of Qualified Capital Stock
after the Issue Date plus (d) in the case of the disposition or repayment of
any Investment in an Unrestricted Subsidiary or any other person (other than a
Restricted Subsidiary) in which the Company or any Restricted Subsidiary has
an ownership interest constituting a Restricted Payment made after the Issue
Date, an amount equal to the lesser of the return of capital with respect to
such Investment and the initial amount of such Investment which was treated as
a Restricted Payment, in either case, less the cost of the disposition or
repayment of such Investment.
The restrictions set forth in the immediately preceding paragraph, however,
will not prohibit (a) the payment of any dividend or redemption payment within
60 days after the date of declaration thereof, if at the date of declaration
such payment would have complied with the provisions of the Indenture; (b) a
Qualified Exchange; (c) a Required Regulatory Redemption; (d) with respect to
each tax year that the Company qualifies as an S Corporation under the Code,
or any similar provision of state or local law, distributions of Tax Amounts,
provided, however, that prior to any distribution of Tax Amounts, a
knowledgeable and duly authorized officer of the Company certifies, and
counsel reasonably acceptable to the Trustee opines, to the Trustee that the
Company qualifies as an S Corporation for Federal income tax purposes and for
the states in respect of which such distributions are being made (or so
qualified for the period or periods for which such Tax Amounts are computed);
(e) for so long as no Default or Event of Default shall have occurred and be
continuing, Restricted Payments in an amount not to exceed $10 million in the
aggregate to pay for the redemption of Capital Stock of the Company held by
its directors or officers, or by its stockholders, as of the Issue Date; (f)
for so long as no Default or Event of Default shall have occurred and be
continuing, Restricted Payments in the aggregate amount of up to $10 million,
which amount shall increase by $10 million on each of the first four
anniversaries of the Issue Date, provided that the Consolidated Fixed Charge
Coverage Ratio for the Reference Period immediately preceding the date of
making any such Restricted Payment permitted solely by this clause (f) would
be at least 3.00 to 1 on a pro forma basis, as if such Restricted Payment were
made on the first day of the Reference Period; (g) for so long as no Default
or Event of Default shall have occurred and be continuing, loans or advances
to officers, directors, employees or stockholders of the Company or any
Restricted Subsidiary in an aggregate amount not to exceed $7.5 million at any
time outstanding, provided that (A) such loan or advance is used by the
officer, director, employee or stockholder receiving such loan or advance to
purchase Capital Stock of the Company or any Restricted Subsidiary, and (B)
the repayment of such loan or advance is secured by a first priority pledge of
the Capital Stock so purchased; and (h) for so long as no Default or Event of
Default shall have occurred and be continuing, Permitted Investments.
"Tax Amounts" with respect to any year means an amount equal to (a) the
higher of (i) the product of (A) the taxable income of the Company for such
year as determined in good faith by its Board of Directors; and (B)
78
the Tax Percentage (as defined); and (ii) the product of (A) the alternative
minimum taxable income attributable to the Company for such year as determined
in good faith by its Board of Directors; and (B) the Tax Percentage, plus (b)
any deficiencies, penalties or interest payable by the Company's stockholders
solely as a result of the taxable income of the Company, less (c) to the
extent not previously taken into account, any income tax benefit attributable
to the Company which could be realized by the Company's stockholders in the
current or a prior taxable year (including, without limitation, tax losses,
alternative minimum tax credits, other tax credits and carryforwards and
carrybacks thereof); provided, however, that in no event shall such Tax
Percentage exceed the lesser of (1) the highest aggregate applicable effective
marginal rate of Federal, state and local income tax or, when applicable,
alternative minimum tax, to which a corporation doing business in Chicago,
Illinois would be subject in the relevant year of determination (as certified
to the Trustee by a nationally recognized tax accounting firm) plus 500 "Basis
Points"; and (2) 60%. Any part of the Tax Amount not distributed in respect of
a tax period for which it is calculated shall be available for distribution in
subsequent tax periods (whether or not the Company ceases to qualify as an S
Corporation prior to such distribution). The term "Tax Percentage" is the
highest aggregate applicable effective marginal rate of Federal, state and
local income tax or, when applicable, alternative minimum tax, to which an
individual resident of Chicago, Illinois would be subject in the relevant year
of determination (as certified to the Trustee by a nationally recognized tax
accounting firm). Distributions of Tax Amounts may be made from time to time
with respect to a tax year based on reasonable estimates, with a
reconciliation within 40 days of the earlier of (i) the Company's filing of
the Internal Revenue Service Form 1120S for the applicable taxable year; and
(ii) the last date such form is required to be filed (without regard to any
extensions). The stockholders of the Company will enter into a binding
agreement with the Company to reimburse the Company for certain positive
differences between the distributed amount and the Tax Amount, which
difference must be paid at the time of such reconciliation; provided, that in
lieu thereof, the Company shall notify all stockholders that any such positive
differences will be set off against future distributions of Tax Amounts.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company shall not, and shall not cause or permit any of the Restricted
Subsidiaries to, directly or indirectly, create, assume or suffer to exist any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends, in cash or otherwise, or make other
distributions on its Capital Stock or pay Indebtedness owed to the Company or
any other Restricted Subsidiary, (ii) make any loans or advances to the
Company or any other Restricted Subsidiary or (iii) transfer any of its assets
to the Company or any other Restricted Subsidiary, except (a) restrictions
imposed by the Notes or the Indenture, or restrictions imposed by other Senior
Indebtedness which are substantially the same as (and apply only to the same
persons and property as) such restrictions; (b) restrictions imposed by
applicable Gaming Law; and (c) restrictions under any Acquired Indebtedness
not incurred in violation of the Indenture or any agreement relating to any
property, asset, or business acquired by the Company or any of the Restricted
Subsidiaries, which restrictions existed at the time of such acquisition, were
not incurred in connection with or in anticipation of such acquisition and are
not applicable to any person, other than the person acquired, or to any
property, asset or business, other than the property, assets and business so
acquired. Notwithstanding the foregoing, neither (a) reasonable and customary
provisions restricting subletting or assignment of any lease entered into in
the ordinary course of business, consistent with industry practice; nor (b)
Liens on assets securing Senior Indebtedness not incurred in violation of the
Indenture, shall in and of themselves be considered a restriction on the
ability of the applicable Restricted Subsidiary to transfer such property or
assets, as the case may be.
Limitation on Liens
The Company shall not, and shall not cause or permit any of the Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien in or on any right, title or interest to any of their
respective properties or assets, now owned or hereafter acquired, securing any
obligation unless the Notes are secured on an equal and ratable basis with
such Lien, other than Permitted Liens.
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Limitation on Sale of Assets and Subsidiary Stock; Event of Loss
The Company shall not, and shall not cause or permit any of its Restricted
Subsidiaries, directly or indirectly, to, make any Asset Sale unless (a) 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 Asset
Sale; (b) the Board of Directors of the Company determines in good faith that
the Company or such Restricted Subsidiary, as applicable, receives fair market
value as consideration for such Asset Sale, as evidenced by an Officers'
Certificate delivered to the Trustee; and (c) at least 75% of the
consideration for such conveyance, sale, lease, transfer or other disposition
consists of U.S. Legal Tender, Cash Equivalents or securities of a company
with a market capitalization of at least $500 million, which securities are
traded on a national securities exchange and are of a class and series of
securities with a minimum public float of $100 million. Within 360 days
following an Asset Sale, the Company and its Restricted Subsidiaries must
apply (or enter into a binding contractual commitment to apply) the Net Cash
Proceeds therefrom (a) first, to the extent the Company or a Restricted
Subsidiary elects (or is required by the terms of any Senior Indebtedness), to
permanently repay Senior Indebtedness (for purposes of this clause, a
repayment of any amount owing under a revolving credit facility shall be
deemed a permanent repayment to the extent the amount represented by such
repayment is not drawn upon by the Company for a period of six months after
such repayment); (b) second, to the extent the Company or a Restricted
Subsidiary elects, to reinvest in additional assets that are part of a Related
Business of the Company or a Restricted Subsidiary; and (c) third, to the
extent the Net Cash Proceeds, after application of (a) and (b), exceed $10
million (the "Excess Proceeds"), the Company shall make an offer (the "Asset
Sale Offer") to all Holders to purchase the Notes in the amount of the Excess
Proceeds at 100% of the principal amount thereof, plus accrued and unpaid
interest to the date of payment (the "Asset Sale Offer Price"). Each Asset
Sale Offer shall remain open for twenty (20) Business Days following its
commencement and no longer, except to the extent that a longer period is
expressly required by applicable law (the "Asset Sale Offer Period"). Upon
expiration of the Asset Sale Offer Period, the Company shall apply an amount
equal to the Excess Proceeds received from an Asset Sale included in such
Asset Sale Offer to the purchase of all Notes tendered (on a pro rata basis if
the Excess Proceeds are insufficient to purchase all Notes so tendered) at the
Asset Sale Offer Price.
Upon an Event of Loss relating to property with a fair market value in
excess of $5.0 million, the Company and any Restricted Subsidiaries will apply
the Net Cash Proceeds therefrom in accordance with the provisions of the
preceding paragraph.
Limitation on Transactions with Affiliates
The Company shall not, and shall not cause or permit any of its Restricted
Subsidiaries, on or after the Issue Date, to enter into any transaction,
including any contract, arrangement, agreement, loan, advance, guarantee or
understanding and including any series of related transactions, with or for
the benefit of any Affiliate (an "Affiliate Transaction") unless such
Affiliate Transaction or series of related Affiliate Transactions are made in
good faith and (a) the terms of such Affiliate Transaction or series of
related Affiliate Transactions are fair and reasonable to the Company or such
Restricted Subsidiary, as applicable, and are at least as favorable to the
Company or such Restricted Subsidiary, as applicable, as the terms that could
be obtained by the Company or such Restricted Subsidiary, as applicable, in a
comparable transaction made on an arm's length basis between unaffiliated
parties, (b) that with respect to any Affiliate Transaction (including any
series of related Affiliate Transactions) involving consideration to either
party in excess of $2.0 million, the Company shall have delivered to the
Trustee an Officer's Certificate certifying that such Affiliate Transaction or
series of related Affiliate Transactions complies with clause (a) above, and
(c) with respect to any Affiliate Transaction (including any series of related
Affiliate Transactions) involving consideration to either party in excess of
$5.0 million, either (A) such Affiliate Transaction or series of Affiliate
Transactions has been approved by a majority of the disinterested directors of
the Company or (B) the Company delivers to the Trustee a written favorable
opinion as to the fairness of such transaction to the Company from a financial
point of view, from an independent investment banking firm of national
reputation; provided, that any transactions solely between or among the
Company and its Restricted Subsidiaries, between or among the Restricted
Subsidiaries or between or among the
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Company and its Unrestricted Subsidiaries shall not be deemed to be Affiliate
Transactions for purposes of this covenant (as long as in the case of
Unrestricted Subsidiaries, the Capital Stock which is not owned by any of the
Company, a Restricted Subsidiary or an Unrestricted Subsidiary, is not owned
by an Affiliate of the Company or any of its Restricted Subsidiaries).
Limitation on Mergers and Consolidations
The Company shall not consolidate with or merge with or into another person
or, directly or indirectly, sell, lease or convey all or substantially all of
its assets (computed on a consolidated basis), whether in a single transaction
or a series of related transactions, to another person or group of affiliated
persons, unless (i) the resulting, surviving or transferee entity is a
corporation organized under the laws of the U.S., any state thereof or the
District of Columbia and expressly assumes by supplemental indenture all of
the obligations of the Company in connection with the Notes and the Indenture;
(ii) no Default or Event of Default shall exist or shall occur immediately
after giving effect on a pro forma basis to such transaction; (iii)
immediately after giving effect to such transaction, on a pro forma basis, the
surviving or transferee entity would immediately thereafter be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Consolidated
Fixed Charge Coverage Ratio provision contained in the covenant described
under "--Limitation on Incurrence of Indebtedness and Preferred Stock"; and
(iv) such transaction will not result in the loss of any Gaming License held
by a Significant Subsidiary of the Company. For purposes of this covenant, the
Consolidated Fixed Charge Coverage Ratio shall be determined on a pro forma
consolidated basis (after giving effect, on a pro forma basis, to the
transaction and any related incurrence of Indebtedness or Preferred Stock) for
the Reference Period which ended immediately preceding such transaction. See
"Business--Recent Developments--Plan of Merger."
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged
or to which such transfer is made, shall succeed to, and be substituted for,
and may exercise every right and power of the Company under the Indenture and
the Notes, with the same effect as if such successor corporation had been
named therein as the Company. See "Business--Recent Developments--Plan of
Merger."
Limitation on Other Senior Subordinated Indebtedness
The Company shall not, and shall not cause or permit any of the Restricted
Subsidiaries to, create, incur, assume, guarantee or in any other manner
become liable with respect to any Indebtedness (other than the Notes and the
Guarantees) that is subordinate in right of payment to any Senior Indebtedness
of the Company or such Restricted Subsidiary, as applicable, unless such
Indebtedness is either (a) pari passu in right of payment with the Notes or
the Guarantee, as applicable or (b) subordinate in right of payment to the
Notes or the Guarantee, as applicable, in the same manner and at least to the
same extent as the Notes are subordinated to Senior Indebtedness of the
Company or as such Guarantee is subordinated to Senior Indebtedness of such
Guarantor, as applicable.
Limitation on Sale of Capital Stock of Restricted Subsidiaries
The Company shall not, and shall not cause or permit any of its Restricted
Subsidiaries to, transfer, convey, sell, lease or otherwise dispose of any
Capital Stock of any Restricted Subsidiary to any person (other than the
Company or a Guarantor), unless (a) (i) such transfer, conveyance, sale, lease
or other disposition is of all of the Capital Stock of such Restricted
Subsidiary or (ii) after giving effect to such transfer, conveyance, sale,
lease or other disposition, the Company or the applicable Guarantor remains
the owner of a majority of the Capital Stock of such Restricted Subsidiary and
(b) the Net Cash Proceeds from such transfer, conveyance, sale, lease or other
disposition are applied in accordance with the covenant described above under
the caption "--Limitation on Sale of Assets and Subsidiary Stock; Event of
Loss."
Limitation on Lines of Business
The Company shall not, and shall not cause or permit any of the Restricted
Subsidiaries to, directly or indirectly, engage in any line or lines of
business activity other than in a Related Business.
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Limitation on Designations of Unrestricted Subsidiaries
The Company may designate after the Issue Date any Subsidiary of the Company
(other than a Guarantor in existence on the Issue Date) as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if, at the time of
Designation:
(i) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(ii) the Company would be permitted to make an Investment at the time of
Designation (assuming the effectiveness of such Designation) in an amount
(the "Designation Amount") equal to the amount of the Company's Investment
in such Subsidiary on such date;
(iii) neither the Company nor any Restricted Subsidiary has any
Indebtedness with respect to which such Unrestricted Subsidiary is also an
obligor or guarantor; and
(iv) the Company would be permitted under the Indenture to incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant described under "--Limitation on Incurrence of Indebtedness and
Preferred Stock" at the time of such Designation (assuming the
effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "--Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(i) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation (unless the Revocation cures such
default); and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred by the Company or its
Restricted Subsidiaries for all purposes of the Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee and an Officer's Certificate certifying
compliance with the foregoing provisions.
Limitation on Status as Investment Company
The Company and the Restricted Subsidiaries from becoming investment
companies (as that term is defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act")), or from otherwise becoming subject to
regulation under the Investment Company Act.
As used in this section, the phrase "directly or indirectly" shall not be
construed so as to prohibit an Unrestricted Subsidiary from undertaking the
otherwise prohibited action nor shall such phrase be construed to prohibit the
stockholder of an Unrestricted Subsidiary from voting its stock in favor of
such action.
REPORTS
Whether or not the Company is subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, it shall deliver to the Trustee and
to each Holder and to prospective purchasers of Notes identified to the
Company by the Initial Purchaser, within 15 days after it is or would have
been (if it were subject to such reporting obligations) required to file such
with the Commission, (i) annual and quarterly financial statements
substantially equivalent to financial statements that would have been included
in reports filed with the Commission if the Company were subject to the
requirements of Section 13 or 15(d) of the Exchange Act including, with
respect to annual information only, a report thereon by a certified
independent public accountant
82
as such would be required in such reports to the Commission and, in each case,
together with a management's discussion and analysis of financial condition
and results of operations which would be so required and (ii) all current
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. The timely filing with the
Commission of Forms 10-Q, 10-K and 8-K, as applicable, shall satisfy the
requirements of (i) and (ii) above. In addition, whether or not required by
the rules and regulations of the Commission, the Company will file a copy of
all such information and reports with the Commission for public availability
within the time periods specified in the Commission's rules and regulations
(unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, the Company has agreed that, for so long as any Notes
remain outstanding, they will furnish to the Holders and to securities
analysts and prospective investors, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by the Company
to pay any installment of interest on the Notes as and when due and payable
and the continuance of any such failure for 30 days; (ii) the failure to pay
all or any part of the principal of, or premium, if any, on, the Notes when
and as the same become due and payable at maturity, redemption, by
acceleration or otherwise, or the failure by the Company or any Restricted
Subsidiary to comply with any of its obligations described under "--Limitation
on Sale of Assets and Subsidiary Stock; Event of Loss," "--Change of Control"
or "--Limitation on Mergers and Consolidations;" (iii) the failure by the
Company to observe or perform any other covenant or agreement contained in the
Notes or the Indenture and, subject to certain exceptions, the continuance of
such failure for a period of 30 days after written notice is given to the
Company by the Trustee or to the Company and the Trustee by the Holders of at
least 25% in aggregate principal amount of the Notes outstanding; (iv) certain
events of bankruptcy, insolvency or reorganization in respect of the Company
or any of its Significant Subsidiaries; (v) default or defaults under one or
more agreements, indentures or instruments under which the Company or any
Restricted Subsidiary then has outstanding Indebtedness in excess of $10.0
million individually or in the aggregate and either (a) such Indebtedness (or
any payment of principal, interest or premium thereon) is already due and
payable or (b) such default or defaults results in the acceleration of the
maturity of such Indebtedness; (vi) final unsatisfied judgments no longer
subject to appeal not covered by insurance aggregating in excess of $10.0
million at any one time rendered against the Company or any of the Restricted
Subsidiaries and not stayed, bonded or discharged within 60 days; or (vii) the
loss for 90 days of the legal right to conduct gaming operations at any Casino
which, if the Facility of which such Casino is a part were operated by a
single Subsidiary, would constitute a Significant Subsidiary. The Indenture
will provide that if a Default occurs and is continuing, the Trustee must,
within 90 days after the occurrence of such default, give to the Holders
notice of such default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv) above relating to the Company or any of the
Significant Subsidiaries) unless the principal of all of the Notes shall have
already become due and payable, either the Trustee or the Holders of 25% of
the aggregate principal amount of the Notes then outstanding, by notice in
writing to the Company (and to the Trustee if given by Holders) (an
"Acceleration Notice"), may declare all principal of, and accrued and unpaid
interest on, the Notes due and payable immediately. If an Event of Default
specified in clause (iv) above relating to the Company or any of the
Significant Subsidiaries occurs, all principal of, and accrued and unpaid
interest on, the Notes will be immediately due and payable without any
declaration or other act on the part of Trustee or the Holders. The Holders of
no less than a majority in aggregate principal amount of Notes are generally
authorized to rescind such acceleration if all existing Events of Default,
other than the non-payment of the principal of, premium, if any, and interest
on, the Notes which have become due solely by such acceleration, have been
cured or waived.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority of the aggregate principal amount of the Notes at the
time outstanding may waive on behalf of all the Holders any Default or Event
of Default, except a Default or Event of Default in the payment of principal
of, or interest on, any Note not yet cured, or a Default or Event of Default
with respect to any covenant or provision which cannot
83
be modified or amended without the consent of the Holder of each outstanding
Note affected. Subject to the provisions of the Indenture relating to the
duties of the Trustee, the Trustee will be under no obligation to exercise any
of its rights or powers under the Indenture at the request, order or direction
of any of the Holders, unless such Holders have offered to the Trustee
reasonable security or indemnity. Subject to all provisions of the Indenture
and applicable law, the Holders of a majority of the aggregate principal
amount of the Notes at the time outstanding will have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee, or exercising any trust or power conferred on the Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option at any time within the final year of the
Stated Maturity of the Notes, elect to have its obligations discharged with
respect to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance
means that the Company shall be deemed to have paid and discharged the entire
Indebtedness represented, and the Indenture shall cease to be of further
effect as to all outstanding Notes and Subsidiary Guarantees except as to (i)
rights of Holders to receive payments in respect of the principal of, premium,
if any, and interest on, such Notes when such payments are due solely from the
trust fund described below; (ii) the Company's obligations with respect to
such Notes 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, trust, duties, and immunities of the Trustee, and the
Company's obligations in connection therewith; and (iv) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and
at any time, elect to have the obligations of the Company and all Guarantors
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter, any failure 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 and Remedies" 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
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, U.S. Legal Tender, 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, such Notes on the
stated date for payment thereof or on the redemption date of such principal or
installment of principal of, premium, if any, or interest on, such Notes, and
the Holders of Notes must have a valid, perfected, exclusive security interest
in such trust; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the U.S. reasonably
acceptable to the Trustee confirming that (A) the Company has received from,
or there has been published by the Internal Revenue Service a ruling; or (B)
since the date of the Indenture, 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 counsel shall confirm that, the Holders of such Notes 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 Company shall have delivered to the Trustee an opinion of
counsel in the U.S. reasonably acceptable to such Trustee confirming that the
Holders of such Notes 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 or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) such Legal Defeasance or
Covenant Defeasance shall not result in a breach or violation of, or
constitute a default under, the Indenture or any other material agreement or
instrument to which the Company, the Guarantors or any of their respective
Subsidiaries is a party or by which the Company, the Guarantors or any of
their respective Subsidiaries is bound; (vi) the Company shall have delivered
to the Trustee an Officers' Certificate stating that the deposit was not made
by the Company with the
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intent of preferring the Holders of such Notes over any other creditors of the
Company or with the intent of defeating, hindering, delaying or defrauding any
other creditors of the Company or others; and (vii) the Company shall have
delivered to the Trustee an Officer's Certificate and an opinion of counsel,
each stating that all conditions precedent provided for or relating to the
Legal Defeasance or the Covenant Defeasance have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect as to all such outstanding
Notes when (i) either (a) all such Notes theretofore authenticated and
delivered (except lost, stolen or destroyed Notes which have been replaced or
paid) have been delivered to the Trustee for cancellation; or (b) all such
Notes not theretofore delivered to the Trustee for cancellation have become
due and payable and the Company or any Guarantor has irrevocably deposited or
caused to be deposited with the Trustee funds in an amount sufficient to pay
and discharge the entire indebtedness on the Notes not theretofore delivered
to the Trustee for cancellation, for principal of, premium, if any, and
interest to the Stated Maturity of, the Notes; (ii) the Company or any
Guarantor has paid all other sums payable under the Indenture; and (iii) the
Company and each Guarantor has delivered to the Trustee an Officers'
Certificate and an opinion of counsel each stating that all conditions
precedent under the Indenture relating to the satisfaction and discharge of
the Indenture have been complied with.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company, the Guarantors and
the Trustee, without the consent of the Holders, to enter into a supplemental
indenture for certain limited purposes including, among other things, to cure
any ambiguity, defect or inconsistency in the Indenture; to provide for the
assumption of the Company's obligations to the Holders by a successor entity;
or to make any change that does not adversely affect the rights of any
Holders. With the consent of the Holders of not less than a majority in
aggregate principal amount of the Notes at the time outstanding, the Company,
the Guarantors and the Trustee are permitted to amend or supplement the
Indenture or any supplemental indenture or modify the rights of the Holders;
provided, that no such modification may, without the consent of each Holder
affected thereby: (i) change the Stated Maturity of any Note; or (ii) reduce
the principal amount thereof or the rate (or extend the time for payment) of
interest thereon or any premium payable upon the redemption thereof, or change
the place of payment where, or the coin or currency in which, any Note or any
premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption, on or after the Redemption Date), or
reduce any Offer to Purchase Price; or (iii) alter the redemption provisions
in a manner adverse to the Holders; or (iv) make the Notes subordinate to any
Indebtedness or other claims; (v) change the covenant described under "--
Change of Control" above; or (vi) reduce the percentage in principal amount of
the outstanding Notes, the consent of whose Holders is required for any such
amendment, supplemental indenture or waiver provided for in the Indenture; or
(vii) modify any of the waiver provisions, except to increase any required
percentage or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the Holder of each outstanding
Note affected thereby.
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
No direct or indirect owner, stockholder, employee, agent, officer or
director, as such, past, present or future of the Company or any of its
Subsidiaries or any successor entity shall have any personal liability in
respect of the obligations of the Company or any of its Subsidiaries under the
Indenture or the Notes by reason of his or its status as such owner,
stockholder, employee, agent, officer or director.
CERTAIN DEFINITIONS
"Acceleration Notice" has the meaning set forth under "--Events of Default
and Remedies."
"Acquired Indebtedness" with respect to the Company means Indebtedness of
another person existing at the time such person becomes a Restricted
Subsidiary or is merged or consolidated into or with the Company or one of its
Restricted Subsidiaries, and not incurred in connection with or in
anticipation of, such merger or consolidation or of such person becoming a
Restricted Subsidiary.
85
"Acquisition" means the purchase or other acquisition of any person or
substantially all the assets of any person by any other person, whether by
purchase, merger, consolidation or other transfer, and whether or not for
consideration.
"Adjusted Consolidated Net Income" means Consolidated Net Income, minus 100%
of the amount of any writedowns, writeoffs, or negative extraordinary charges
not otherwise reflected in Consolidated Net Income during such period.
"Affiliate" means (i) any person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company or
any of the Restricted Subsidiaries; (ii) with respect to the Company and any
Restricted Subsidiary, so long as the Company is an S Corporation, any
director or stockholder of the Company or such Restricted Subsidiary; (iii)
any spouse, immediate family member, or other relative who has the same
principal residence of any person described in clauses (i) or (ii) above; and
(iv) any trust in which any person described in clauses (i) or (ii) above has
a beneficial interest. For purposes of this definition, the term "control"
means (a) the power to direct the management and policies of a person,
directly or through one or more intermediaries, whether through the ownership
of voting securities, by contract, or otherwise; or (b) the beneficial
ownership of 10% or more of any class of voting Capital Stock of a person (on
a fully diluted basis) or of warrants or other rights to acquire such class of
Capital Stock (whether or not presently exercisable).
"Affiliate Transaction" has the meaning set forth under "--Certain
Covenants--Limitation of Transactions with Affiliates."
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease or other disposition (including, without limitation, any
merger, consolidation or sale-leaseback transaction) to any person other than
the Company or a Restricted Subsidiary, in one or a series of related
transactions, of (i) any Capital Stock of any Restricted Subsidiary; (ii) all
or substantially all of the assets of any division or line of business of the
Company or any Restricted Subsidiary; or (iii) any other properties or assets
of the Company or any Restricted Subsidiary other than in the ordinary course
of business. For the purposes of this definition, the term "Asset Sale" will
not include (a) any sale of the Capital Stock of an Unrestricted Subsidiary or
any other person (other than a Restricted Subsidiary) in which the Company or
any Restricted Subsidiary has an ownership interest or any merger or
consolidation involving only an Unrestricted Subsidiary or any other person
(other than a Restricted Subsidiary) in which the Company or any Restricted
Subsidiary has an ownership interest or any merger or consolidation involving
only an Unrestricted Subsidiary or any other person (other than a Restricted
Subsidiary) in which the Company or any Restricted Subsidiary has an ownership
interest or any sale, issuance, conveyance, transfer, lease or other
disposition of properties or assets governed by the provisions described under
"--Limitation on Mergers and Consolidations"; (b) sales of property or
equipment that have become worn out, obsolete or damaged or otherwise
unsuitable for use in connection with the business of the Company or any
Restricted Subsidiary, as the case may be; (c) any sale, conveyance, transfer,
lease or other disposition of any property or asset either (i) in the ordinary
course of business and consistent with past practice or (ii) whether in one
transaction or a series of related transactions, involving assets with a fair
market value not in excess of $2.0 million; (d) the sale of the Company's
airplane owned on the Issue Date; or (e) the sale, transfer, lease, conveyance
or other disposition of all or any portion of a parcel of real estate located
in Joliet, Illinois owned by the Company and its Restricted Subsidiaries,
comprised of approximately 350 acres, the legal description of which is set
forth on an exhibit to the Indenture (the "Joliet Real Estate").
"Asset Sale Offer" has the meaning set forth under "--Certain Covenants--
Limitation on Sale of Assets and Subsidiary Stock; Events of Loss."
"Asset Sale Offer Period" has the meaning set forth under "--Certain
Covenants--Limitation on Sale of Assets and Subsidiary Stock; Events of Loss."
"Asset Sale Offer Price" has the meaning set forth under "--Certain
Covenants--Limitation on Sale of Assets and Subsidiary Stock; Events of Loss."
86
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of the
products of the number of years from the date of determination to the date of
each successive scheduled principal (or redemption) payment of such security
or instrument and multiplied by the amount of each such respective principal
(or redemption) payment by (ii) the sum of all such principal (or redemption)
payments.
"Bank Indebtedness" means any and all amounts payable from time to time
under or in respect of the Credit Facility, including principal, premium (if
any), interest, (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether
or not a claim for post-filing interest is allowed in such a proceeding),
fees, charges, expenses, reimbursement obligations, guarantees, indemnities
and all other amounts and other liabilities payable thereunder or in respect
thereof.
"Beneficial Owner" for purposes of the definition of Change of Control has
the meaning attributed to it in Rules 13d-3 and 13d-5 under the Exchange Act,
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.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"Capitalized Lease Obligation" means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real,
personal or mixed) required to be classified and accounted for as a capital
lease obligation under GAAP, and, for the purpose of the Indenture, the amount
of such obligation at any date shall be the capitalized amount thereof at such
date, determined in accordance with GAAP consistently applied.
"Cash Equivalent" means (i) any evidence of Indebtedness with a maturity of
not more than one year 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' acceptances with a maturity of not more than
one year of any financial institution that is a member of the Federal Reserve
System having combined capital and surplus and undivided profits of not less
than $500,000,000; (iii) commercial paper with a maturity of not more than one
year issued by a corporation that is not an Affiliate of the Company organized
under the laws of any state of the U.S. or the District of Columbia and rated
at least A-1 by Standard & Poor's Rating Services, a division of the McGraw
Hill Companies, Inc. or at least P-1 by Moody's Investor's Service, Inc.; and
(iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (i) and (ii) above
entered into with any financial institution meeting the qualifications
specified in clause (ii) above.
"Casino" means a gaming establishment owned by the Company or a Restricted
Subsidiary, and containing at least 200 slot machines or at least 15 gaming
tables, or containing at least 10,000 square feet dedicated to the operation
of games of chance, and any hotel, building, restaurant, theater, parking
facilities, retail shops, land, equipment and other property or asset directly
ancillary thereto or used in connection therewith.
"Change of Control" means (i) any merger or consolidation of, or any sale,
transfer or other conveyance, whether direct or indirect, of all or
substantially all of the assets of, the Company in each case on a consolidated
basis, in one transaction or a series of related transactions, if, immediately
after giving effect to such transaction, 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 Excluded Persons or entities of which a
majority of voting power is owned by such Excluded Persons, is or becomes the
"beneficial owner," directly or indirectly, of more than
87
50% of the aggregate voting power normally entitled to vote in the election of
directors of the transferee; (ii) the time that 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 Excluded Persons or entities of
which a majority of voting power is owned by such Excluded Persons, is or
becomes the "beneficial owner," directly or indirectly, of more than 50% of
the aggregate voting power of all classes of Capital Stock then outstanding of
the Company normally entitled to vote in elections of directors; or (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 Board of
Directors of the Company (together with any new directors whose election by
such Board or whose nomination for election by the stockholders 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), cease for any reason to
constitute a majority of the Board of Directors of the Company then in office.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under
applicable law. Accordingly, the ability of a Holder of Notes to require the
Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Subsidiaries taken as a whole to another person or group may be
uncertain.
"Change of Control Offer" has the meaning set forth under "--Change of
Control."
"Change of Control Offer Period" has the meaning set forth under "--Change
of Control."
"Change of Control Purchase Date" has the meaning set forth under "--Change
of Control."
"Change of Control Purchase Price" has the meaning set forth under "--Change
of Control."
"Consolidated Depreciation and Amortization Expense" means, for any period,
the total amount of depreciation and amortization expense and other non-cash
expenses (excluding any non-cash expense that represents an accrual, reserve
or amortization of a cash expenditure for a past, present or future period)
for the Company and its Restricted Subsidiaries (but excluding its
Unrestricted Subsidiaries or other persons other than its Restricted
Subsidiaries, even though such amounts may be included in a consolidated
calculation in accordance with GAAP) for such period on a consolidated basis
as defined in accordance with GAAP.
"Consolidated EBITDA" means, for any period, Consolidated Net Income for
such period adjusted to add thereto (to the extent deducted from net revenues
in determining Consolidated Net Income), without duplication, the sum of (i)
Consolidated Income Tax Expense; (ii) Consolidated Depreciation and
Amortization Expense; and (iii) Consolidated Fixed Charges.
"Consolidated Fixed Charge Coverage Ratio" on any date of determination (the
"Transaction Date") means the ratio, on a pro forma basis, of (a) the
aggregate amount of Consolidated EBITDA attributable to continuing operations
and businesses (exclusive of amounts attributable to operations and businesses
permanently discontinued or disposed of) for the Reference Period to (b) the
aggregate Consolidated Fixed Charges (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of, but only to
the extent that the obligations giving rise to such Consolidated Fixed Charges
would no longer be obligations contributing to Consolidated Fixed Charges
subsequent to the Transaction Date) during the Reference Period; provided,
that for purposes of such calculation: (i) Acquisitions or Asset Sales (or
transactions which would constitute Asset Sales but for the exclusions set
forth in clause (a), and in the last sentence, of the definition of "Asset
Sales") which occurred during the Reference Period or subsequent to the
Reference Period and on or prior to the Transaction Date shall be assumed to
have occurred on the first day of the Reference Period; (ii) transactions
giving rise to the need to calculate the Consolidated Fixed Charge Coverage
Ratio shall be assumed to have occurred on the first day of the Reference
Period; (iii) the incurrence of any Indebtedness or
88
issuance of any Disqualified Capital Stock during the Reference Period or
subsequent to the Reference Period and on or prior to the relevant Transaction
Date (and the application of the proceeds therefrom to the extent used to
refinance or retire other Indebtedness) shall be assumed to have occurred on
the first day of such Reference Period; and (iv) the Consolidated Fixed
Charges attributable to interest on any Indebtedness or dividends on any
Disqualified Capital Stock bearing a floating interest (or dividend) rate
shall be computed on a pro forma basis as if the average rate in effect from
the beginning of the Reference Period to the relevant Transaction Date had
been the applicable rate for the entire period, unless such Person or any of
its Subsidiaries is a party to an Interest Swap Obligation (which shall remain
in effect for the 12-month period immediately following the Transaction Date)
that has the effect of fixing the interest rate on the date of computation, in
which case such rate (whether higher or lower) shall be used.
"Consolidated Fixed Charges" means, for any period, the aggregate amount
(without duplication) of (a) interest expensed or capitalized, paid, accrued,
or scheduled to be paid or accrued in accordance with GAAP (including, in
accordance with the following sentence, interest attributable to Capitalized
Lease Obligations) during such period in respect of all Indebtedness of the
Company and its Restricted Subsidiaries (but excluding its Unrestricted
Subsidiaries or other persons other than its Restricted Subsidiaries, even
though such amounts may be included in a consolidated calculation in
accordance with GAAP), including (i) original issue discount and non-cash
interest payments or accruals on any Indebtedness; (ii) the interest portion
of all deferred payment obligations, calculated in accordance with GAAP; and
(iii) all commissions, discounts and other fees and charges owed with respect
to bankers' acceptance financings and currency and Interest Swap Obligations,
in each case to the extent attributable to such period and determined on a
consolidated basis in accordance with GAAP; (b) one-third of the rental
expense for such period attributable to operating leases of the Company and
its Restricted Subsidiaries; and (c) the amount of dividends paid or payable
by the Company or any of its Restricted Subsidiaries in respect of
Disqualified Capital Stock (other than by Subsidiaries of such person to such
person or such person's wholly owned Subsidiaries). For purposes of this
definition, (x) interest on a Capitalized Lease Obligation shall be deemed to
accrue at an interest rate reasonably determined by such person to be the rate
of interest implicit in such Capitalized Lease Obligation in accordance with
GAAP; (y) interest expense attributable to any Indebtedness represented by the
guaranty by such person or a Restricted Subsidiary of such person of an
obligation of another person shall be deemed to be the interest expense
attributable to the Indebtedness guaranteed; and (z) any interest expense or
premium for the period from and after the Issue Date relating to the 10 3/4%
Notes shall be excluded from Consolidated Fixed Charges.
"Consolidated Income Tax Expense" means, for any period, the provision for
Federal, state, local and foreign income taxes of the Company and its
Restricted Subsidiaries (but excluding its Unrestricted Subsidiaries or other
persons other than its Restricted Subsidiaries, even though such amounts may
be included in a consolidated calculation in accordance with GAAP), for such
period as determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net income
(or loss) of the Company and its Restricted Subsidiaries (but excluding
Unrestricted Subsidiaries or other persons other than its Restricted
Subsidiaries, even though such amounts may be included in a consolidated
calculation in accordance with GAAP), determined on a consolidated basis in
accordance with GAAP, for such period, adjusted to exclude (only to the extent
included in computing such net income (or loss) and without duplication): (a)
all gains which are extraordinary (as determined in accordance with GAAP) or
are either unusual or nonrecurring (including, without limitation, any gain
from the sale or other disposition of assets outside the ordinary course of
business or from the sale of any Capital Stock, but gains from the sale of
Capital Stock of Unrestricted Subsidiaries (or other persons other than
Restricted Subsidiaries) or a merger or consolidation involving Unrestricted
Subsidiaries (or other persons other than Restricted Subsidiaries) shall be
included in the calculation of net income; (b) the portion of net income, if
positive, of any Restricted Subsidiary allocable to minority interests
therein, except to the extent of the amount of any dividends or distributions
actually paid in cash to the Company or a Restricted Subsidiary; (c) the net
income, if positive, of any person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition; and (d) any
interest expense or premium for the period from and after the Issue Date
relating to the 10 3/4% Notes, and any interest income relating to securities
deposited in connection with the Covenant Defeasance thereof.
89
"Credit Facility" means the $100.0 million revolving line of credit,
including a subfacility for the issuance of standby and documentary letters of
credit, established pursuant to a Credit Agreement to be dated as of June 18,
1998, as amended from time to time, among the Company, certain of the
Company's Subsidiaries, the lenders named therein and Wells Fargo Bank,
National Association, and any related documents or instruments and any
extensions, revisions, refinancings or replacements thereof by a bank or a
syndicate of institutional lenders.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designation" has the meaning set forth in "--Certain Covenants--Limitation
on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth in "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
"Disqualified Capital Stock" means (a) except as set forth in (b), with
respect to any person, Capital Stock of such person that, by its terms or by
the terms of any security into which it is convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time
would be, required to be redeemed or repurchased (including at the option of
the holder thereof) by such person or any of its Subsidiaries, in whole or in
part, on or prior to the Stated Maturity of the Notes; and (b) with respect to
any Subsidiary of such person, any Capital Stock.
"Event of Loss" means, with respect to any property or asset, any loss,
destruction or damage of such property or asset or any condemnation, seizure
or taking, by exercise of the power of eminent domain or otherwise, of any
property or asset, or confiscation or requisition of the use of such property
or asset.
"Excess Proceeds" shall have the meaning set forth in "--Certain Covenants--
Limitation on Sale of Assets and Subsidiary Stock; Event of Loss."
"Excluded Persons" means collectively, the existing stockholders of the
Company as of the Issue Date and any of their respective estates, spouses,
heirs, ancestors, lineal descendants, legatees, and legal representatives and
the trustee of any bona fide trust of which one or more of the foregoing are
the sole beneficiaries.
"Existing Indebtedness" means Indebtedness outstanding on the date of the
Indenture.
"Facility" means one or more Casinos and related facilities operated by the
Company or any of its Restricted Subsidiaries that are located within a ten-
mile radius of one another.
"FF&E Indebtedness" means Indebtedness which is secured by a Lien upon any
tangible personal property acquired after the Issue Date, constituting
operating assets, which are financed, purchased or leased for the purpose of
engaging in or developing a Related Business.
"GAAP" means U.S. generally accepted accounting principles as in effect on
the Issue Date.
"Gaming Authority" means any Governmental Authority with appropriate
jurisdiction and authority relating to a Gaming License.
"Gaming Jurisdiction" means any foreign, Federal, state or local
jurisdiction in which the Company, any Restricted Subsidiary or any of their
respective Subsidiaries has a direct or indirect beneficial, legal or voting
interest in an entity that conducts casino gaming.
"Gaming Law" means any law, rule, regulation or ordinance governing gaming
activities, including the Illinois Riverboat Act and the Indiana Riverboat
Act, any administrative rules or regulations promulgated thereunder, and any
of the corresponding statutes, rules and regulations in each Gaming
Jurisdiction.
90
"Gaming Licenses" means every license, franchise or other authorization on
the Issue Date or thereafter required to own, lease, operate or otherwise
conduct riverboat, dockside or land-based gaming in any Gaming Jurisdiction,
and any applicable liquor licenses.
"Governmental Authority" means any agency, authority, board, bureau,
commission, department, office or instrumentality of any nature whatsoever of
the U.S. or a 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.
"Guarantors" means all existing Restricted Subsidiaries of the Company and
all future Restricted Subsidiaries of the Company.
"Indebtedness" of any person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, with respect to any person, (i) in
respect of borrowed money (whether or not the recourse of the lender is to the
whole of the assets of such person or only to a portion thereof); (ii)
evidenced by bonds (other than surety or performance bonds), notes, debentures
or similar instruments; (iii) representing the balance deferred and unpaid of
the purchase price of any property or services, except such as would
constitute trade payables to trade creditors in the ordinary course of
business that are not more than 90 days past their original due date or are
being contested in good faith; (iv) evidenced by bankers' acceptances or
similar instruments issued or accepted by banks; (v) for the payment of money
relating to a Capitalized Lease Obligation; or (vi) evidenced by a letter of
credit or a reimbursement obligation of such person with respect to any letter
of credit; (b) all net obligations of such person under Interest Swap
Obligations and foreign currency hedges; (c) all liabilities of others of the
kind described in the preceding clauses (a) or (b) that such person has
guaranteed or that is otherwise its legal liability; (d) all obligations to
purchase, redeem or acquire any Capital Stock; (e) all obligations secured by
a Lien, to which the property or assets (including, without limitation,
leasehold interests and any other tangible or intangible property rights) of
such person are subject, whether or not the obligations secured thereby shall
have been assumed by or shall otherwise be such person's legal liability,
provided, that the amount of such obligations shall be limited to the lesser
of the fair market value of the assets or property to which such Lien attaches
and the amount of the obligation so secured; and (f) any and all deferrals,
renewals, extensions, refinancings and refundings (whether direct or indirect)
of, or amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clauses (a), (b), (c), (d) or (e), or this
clause (f), whether or not between or among the same parties.
"Interest Payment Date" means the stated due date of an installment of
interest on the Notes.
"Interest Swap Obligations" means the obligations of any person pursuant to
any arrangement with any other person whereby, directly or indirectly, such
person is entitled to receive from time to time periodic payments calculated
by applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such person to such other
person calculated by applying a fixed or a floating rate of interest on the
same notional amount or any other arrangement involving payments by or to such
other person based upon fluctuations in interest rates.
"Investment" by any person in any other person means (without duplication)
(a) the acquisition by such person (whether for cash, property, services,
securities or otherwise) of capital stock, bonds, notes, debentures,
partnership or other ownership interests or other securities, including any
options or warrants, of such other person or any agreement to make any such
acquisition; (b) the making by such person of any deposit with, or advance,
loan or other extension of credit to, such other person (including the
purchase of property from another person subject to an understanding or
agreement, contingent or otherwise, to resell such property to such other
person) or any commitment to make any such advance, loan or extension (but
excluding accounts receivable arising in the ordinary course of business that
are not more than 30 days past their original due date); (c) other than the
Subsidiary Guarantees, the entering into by such person of any guarantee of,
or other credit support or contingent obligation with respect to, Indebtedness
or other liability of such other person; or (d) the making of any capital
contribution by such person to such other person.
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"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Joliet Real Estate" shall have the meaning given to such term in the
definition of "Asset Sale" set forth above.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not 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).
"Net Cash Proceeds" means the aggregate amount of U.S. Legal Tender or Cash
Equivalents received by the Company or a Restricted Subsidiary in the case of
a sale of Qualified Capital Stock and by the Company or a Restricted
Subsidiary in respect of an Asset Sale, less, in each case, the sum of all
fees, commissions and other (in the case of an Asset Sale, reasonable and
customary) expenses incurred in connection with such Asset Sale or sale of
Qualified Capital Stock, and, in the case of an Asset Sale only, less the
amount (estimated reasonably and in good faith by the Company or such
Restricted Subsidiary) of income, franchise, sales and other applicable taxes
required to be paid by the Company or such Restricted Subsidiary in connection
with such Asset Sale.
"Net Proceeds" means the aggregate Net Cash Proceeds and fair market value
of property (valued at the fair market value thereof at the time of receipt in
good faith by the Board of Directors of the Company or the applicable
Restricted Subsidiary), other than securities of the Company or a Restricted
Subsidiary, received by the Company or a Restricted Subsidiary after payment
of expenses, commissions, discounts and the like incurred in connection
therewith.
"Non-Recourse Indebtedness" means Indebtedness of a person to the extent
that under the terms thereof or any other document, instrument or filing no
personal recourse shall be had against such person for the payment of the
principal of, premium, if any, or interest on, such Indebtedness, and
enforcement of obligations on such Indebtedness is limited only to recourse
against interests in property and assets purchased with the proceeds of the
incurrence of such Indebtedness and as to which none of the Company or any
Restricted Subsidiary provides any credit support or is directly or indirectly
liable. Indebtedness shall not lose its characterization as Non-Recourse
Indebtedness solely as a result of a person being personally liable for losses
caused by misappropriation, fraud or wilful breaches of representations and
warranties.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Offer to Purchase" means any Change of Control Offer or Asset Sale Offer.
"Offer to Purchase Price" means any Change of Control Purchase Price or
Asset Sale Offer Price.
"Officer's Certificate" means, with respect to the Company or any Restricted
Subsidiary, a certificate signed by two Officers of the Company or such
Restricted Subsidiary and otherwise complying with the requirements of the
Indenture.
"Payment Blockage Period" shall have the meaning set forth in "--
Subordination."
"Permitted Investments" means the aggregate of (a) any Investment in the
Company or in any Restricted Subsidiary; (b) any Investment in Cash
Equivalents or purchases by the Company or any Restricted Subsidiary of any of
the Notes in open market purchase transactions; (c) any Investment by the
Company or any Restricted Subsidiary in a Person, if as a result of such
Investment (i) such Person becomes a Restricted Subsidiary of the Company that
is engaged in a Related Business, or (ii) such Person 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
92
Restricted Subsidiary and that is engaged in a Related Business; (d) any
Restricted Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "--Limitation on Sale of
Assets and Subsidiary Stock; Event of Loss"; (e) any acquisition of assets
solely in exchange for the issuance of Qualified Capital Stock of the Company
or its Restricted Subsidiaries; (f) any Investment of the Joliet Real Estate
or proceeds from the sale of the Joliet Real Estate; and (g) Investments, the
aggregate fair market value of which (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause
(g) that are at the time outstanding, do not exceed $50.0 million.
"Permitted Liens" means any of the following:
(a) Liens existing on the date of the Indenture;
(b) Liens securing Obligations of the Company or any of the Restricted
Subsidiaries under any Senior Indebtedness permitted to be incurred under
the Indenture;
(c) Liens to secure Obligations of the Company or any of the Restricted
Subsidiaries under any FF&E Indebtedness permitted to be incurred pursuant
to clause (e) of the covenant described under "--Certain Covenants--
Limitation an Incurrence of Indebtedness and Preferred Stock," that do not
exceed $7.5 million at any one time outstanding per Facility;
(d) Liens to secure Obligations of the Company or any of its Restricted
Subsidiaries under any Purchase Money Indebtedness or Non-Recourse
Indebtedness permitted to be incurred pursuant to clause (d) of the
covenant described under "--Certain Covenants--Limitation on Incurrence of
Indebtedness and Preferred Stock" in an amount not to exceed $7.5 million
in the aggregate at any one time outstanding;
(e) Liens to secure Obligations of the Company or any of the Restricted
Subsidiaries under any Refinancing Indebtedness incurred to refinance any
Indebtedness referred to in the foregoing clauses (a) through (d), provided
that (i) the Indebtedness to be refinanced was secured and (ii) the Lien
does not extend beyond the amount of Indebtedness to be refinanced;
(f) Liens for taxes, assessments or other governmental charges not yet
due or which are being contested in good faith and by appropriate
proceedings by the Company or the applicable Restricted Subsidiary if
adequate reserves with respect thereto are maintained on the books of the
Company or such Restricted Subsidiary, as applicable, in accordance with
GAAP;
(g) statutory Liens of carriers, warehousemen, mechanics, landlords,
materialmen, repairmen or other like Liens arising by operation of law in
the ordinary course of business and consistent with industry practices and
Liens on deposits made to obtain the release of such Liens if (i) the
underlying obligations are not overdue; or (ii) such Liens are being
contested in good faith and by appropriate proceedings by the Company or
the applicable Restricted Subsidiary and adequate reserves with respect
thereto are maintained on the books of the Company or such Restricted
Subsidiary as the case may be, in accordance with GAAP;
(h) easements, rights-of-way, zoning and similar restrictions and other
similar encumbrances or title defects incurred in the ordinary course of
business and consistent with industry practices which, in the aggregate,
are not substantial in amount, and which 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 Restricted Subsidiary) or interfere with the
ordinary conduct of the business of the Company or a Restricted Subsidiary;
provided, that any such Liens are not incurred in connection with any
borrowing of money or any commitment to loan any money or to extend any
credit; and
(i) Liens created by the Indenture.
"person" means any individual, limited liability company, corporation,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof.
93
"Preferred Stock" means, with respect to any person, Capital Stock of any
class or classes (however designated) which is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such person, over
Capital Stock of any other class of such person.
"Purchase Money Indebtedness" means any Non-recourse Indebtedness of such
person owed to any seller or other person which is incurred to finance the
acquisition of any real or personal tangible property of a Related Business
within 90 days of such acquisition.
"Qualified Capital Stock" means any Capital Stock of the Company or a
Restricted Subsidiary that is not Disqualified Capital Stock.
"Qualified Exchange" means any defeasance, redemption, repurchase or other
acquisition of Capital Stock or Indebtedness of a Guarantor with the Net
Proceeds received by such Guarantor from the substantially concurrent sale of
Qualified Capital Stock of such Guarantor or in exchange for Qualified Capital
Stock of such Guarantor.
"Redeemable Capital Stock" means any class or series of Capital Stock to the
extent that, either by its terms, by the terms of any security into which it
is convertible or exchangeable, or by contract or otherwise, is or upon the
happening of an event or passage of time would be, required to be redeemed
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 Stated Maturity, or is
convertible into or exchangeable for debt securities at any time prior to such
Stated Maturity.
"Redemption Date," when used with respect to any Note to be redeemed, means
the date fixed for such redemption pursuant to the Indenture and the form of
Note included therein.
"Reference Period" with regard to any person means the four full fiscal
quarters (or such lesser period during which such person has been in
existence) ended immediately preceding the relevant date upon which such
determination is to be made pursuant to the terms of the Notes or the
Indenture.
"Refinancing Indebtedness" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of
which are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part; or
(b) constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock of such person in a principal
amount or, in the case of Disqualified Capital Stock, liquidation preference,
not to exceed (after deduction of reasonable and customary fees and expenses
incurred in connection with the Refinancing) the lesser of (i) the principal
amount or, in the case of Disqualified Capital Stock, liquidation preference,
of the Indebtedness or Disqualified Capital Stock so Refinanced and (ii) if
such Indebtedness being Refinanced was issued with an original issue discount,
the accreted value thereof (as determined in accordance with GAAP) at the time
of such Refinancing; provided, that (A) Refinancing Indebtedness of any
Restricted Subsidiary shall only be used to Refinance outstanding Indebtedness
or Disqualified Capital Stock of such Restricted Subsidiary; (B) Refinancing
Indebtedness shall not have an Average Life less than that of the Indebtedness
or Disqualified Capital Stock to be so refinanced at the time of such
refinancing; (C) such Refinancing Indebtedness shall have no installment of
principal (or redemption payment) scheduled to come due earlier than the
scheduled maturity of any installment of principal of the Indebtedness (or
Disqualified Capital Stock) to be so refinanced which was scheduled to come
due on or prior to the Stated Maturity; and (D) if the Indebtedness or
Disqualified Capital Stock to be so refinanced was subordinate or junior in
right of payment to the Guarantee, then the Refinancing Indebtedness shall be
subordinate or junior in right of payment to such Guarantee to an extent no
less favorable in respect thereof to the Holders.
"Related Business" means the gaming business conducted (or proposed to be
conducted) by the Company, its Restricted Subsidiaries and their respective
Subsidiaries as of the Issue Date and any and all related businesses in
support of, ancillary to or attracting visitors to the gaming business of the
Company, its Restricted Subsidiaries
94
and their respective Subsidiaries and additionally expressly includes any
riverboat, dockside or land-based gaming or horse racing businesses or any
business mandated by a Gaming Authority in order to obtain or retain a Gaming
License.
"Required Regulatory Redemption" shall have the meaning set forth under "--
Redemption--Required Regulatory Redemption."
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than Investments in Cash Equivalents; provided, that a
Restricted Investment shall not include (i) the extension of credit to
customers of Casinos consistent with industry practice in the ordinary course
of business; and (ii) a guaranty by a Guarantor of Indebtedness incurred by
another Guarantor or the Company in accordance with the covenant described
under "--Certain Covenants--Limitation on Incurrence of Indebtedness and
Preferred Stock."
"Restricted Payment" means, with respect to any person, (a) the declaration
or payment of any dividend or other distribution in respect of Capital Stock
of such person or any Restricted Subsidiary of such person; (b) any payment on
account of the purchase, redemption or other acquisition or retirement for
value of Capital Stock of such person or any Restricted Subsidiary of such
person; (c) any purchase, redemption, or other acquisition or retirement for
value of, any payment in respect of any amendment of the terms of or any
defeasance of, any subordinated Indebtedness, directly or indirectly, by such
person or a Restricted Subsidiary of such person prior to the scheduled
maturity, and scheduled repayment of principal, or scheduled sinking fund
payment, as the case may be, of such Indebtedness; and (d) any Restricted
Investment by such person; provided, however, that the term "Restricted
Payment" does not include (i) any dividend, distribution or other payment on
or with respect to Capital Stock of an issuer to the extent payable solely in
shares of Qualified Capital Stock of such issuer; and (ii) any Investment in
the Company or any of the Restricted Subsidiaries by any of their respective
Subsidiaries.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been Designated by the Board of Directors of the Company, by a Board
Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to
and in compliance with the covenant described under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries." Except in the case
of the current Guarantors, any such Designation may be Revoked by a Board
Resolution of the Board of Directors of the Company delivered to the Trustee,
subject to the provisions of such covenant.
"Revocation" shall have the meaning set forth in "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
"Senior Indebtedness" means (i) the Bank Indebtedness, and (ii) the
principal of, premium, if any, and interest on any Indebtedness of the
Company, whether outstanding on the Issue Date or thereafter created, incurred
or assumed, unless, in the case of any particular Indebtedness, the instrument
creating or evidencing the same or pursuant to which the same is outstanding
expressly provides that such Indebtedness shall not be senior in right of
payment to any Indebtedness of the Company. Notwithstanding the foregoing,
"Senior Indebtedness" shall not include, to the extent constituting
Indebtedness, (i) Indebtedness evidenced by the Notes, (ii) Indebtedness that
is subordinate or junior in right of payment to any Indebtedness of the
Company, (iii) Indebtedness which, when incurred and without respect to any
election under Section 1111(b) of Title 11, U.S. Code, is without recourse to
the Company, (iv) Indebtedness which is represented by Redeemable Capital
Stock, (v) Indebtedness for goods, materials or services purchased in the
ordinary course of business or Indebtedness consisting of trade payables or
other current liabilities (other than any current liabilities owing under the
Credit Facility or the current portion of any long-term Indebtedness which
would constitute Senior Indebtedness but for the operation of this clause
(v)), (vi) Indebtedness of or amounts owed by the Company for compensation to
employees or for services rendered to the Company, (vii) Indebtedness of or
amounts owed by the Company or a Restricted Subsidiary to the Company or
another Restricted Subsidiary, (viii) any liability for Federal, state, local
or other taxes owed or owing by the Company, (ix) Indebtedness of the Company
to any other Subsidiary of the Company and (x) that portion of any
Indebtedness which at the time of issuance is issued in violation of the
Indenture.
95
"Significant Subsidiary" means any Restricted Subsidiary (i) the assets of
which (after intercompany eliminations) exceed 10% of the assets of the
Company and its Restricted Subsidiaries, considered as a whole, or (ii) the
Consolidated Net Income of which (before income taxes and extraordinary items)
exceeds 10% of the Consolidated Net Income of the Company and its Restricted
Subsidiaries, considered as a whole, or (iii) that holds a Gaming License with
respect to any Casino, if the Facility of which the Casino is a part (were
such facility operated by a single Restricted Subsidiary) would be a
Significant Subsidiary as set forth in (i) or (ii) above.
"Stated Maturity," when used with respect to any Note, means July 1, 2006.
"Subordinated Indebtedness" means Indebtedness of a Restricted Subsidiary
that is subordinated in right of payment to the Subsidiary Guaranty of such
Restricted Subsidiary to any extent.
"Subsidiary," with respect to any person, means (i) a corporation at least a
majority of whose Capital Stock with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly,
owned by such person, by such person and one or more Subsidiaries of such
person or by one or more Subsidiaries of such person or (ii) any other person
(other than a corporation) in which such person, one or more Subsidiaries of
such person, or such person and one or more Subsidiaries of such person,
directly or indirectly, at the date of determination thereof has at least
majority ownership interest.
"10 3/4% Notes" means the 10 3/4% Senior Notes due 2002 issued pursuant to
the terms of an indenture, dated April 7, 1994 among Empress River Casino
Finance Corporation, as issuer, the Guarantors named therein and First Trust
National Association, as Trustee.
"Unrestricted Subsidiary" means a Subsidiary of the Company (other than a
Guarantor) designated as such pursuant to and in compliance with the covenant
described under "--Certain Covenants--Limitation on Designations of
Unrestricted Subsidiaries." Any such Designation may be Revoked by a Board
Resolution of the Company delivered to the Trustee, subject to the provisions
of such covenant.
"U.S. Legal Tender" means such coin or currency of the United States of
America as at the time of payment is legal tender for the payment of public
and private debts.
96
BOOK-ENTRY; DELIVERY AND FORM
The Old Notes offered and sold to qualified institutional buyers (as defined
under Rule 144A) ("QIBs") were each registered in book-entry form, are
represented by a global note in fully registered form without interest
coupons, which was deposited with the Trustee as custodian for DTC and
registered in the name of Cede & Co. or such other nominee as DTC may
designate.
The Old Notes offered and sold to persons outside the United States who
received such Old Notes pursuant to sales in accordance with Regulation S were
each initially represented by a global note certificate in fully registered
form without interest coupons (the "Offshore Global Old Note"). The Offshore
Global Old Note was deposited with the Trustee as custodian for DTC and
registered in the name of Cede & Co. Prior to the expiration of the "40-day
restricted period" within the meaning of Rule 903 of Regulation S, transfers
of interest in the Offshore Global Old Note were only effected through records
maintained by DTC, Cedel Bank, societe anonyme ("Cedel") or Euroclear System
("Euroclear").
The certificates representing the New Notes will be issued in fully
registered form without interest coupons. Except as described below, the New
Notes will be deposited with, or on behalf of, DTC, and registered in the name
of Cede & Co as DTC's nominee, in the form of a global New Note certificate
(the "Global New Note") or will remain in the custody of the Trustee pursuant
to the FAST Balance Certificate between DTC and the Trustee.
Holders of New Notes who elect to take physical delivery of their
certificates instead of holding their interest through the Global New Note
(collectively referred to herein as the "Non-Global Holders") will be issued
in registered form a certificated New Note ("Certificated New Note"). Upon the
transfer of any Certificated New Note initially issued to a Non-Global Holder,
such Certificated New Note will, unless the transferee requests otherwise or
the Global New Note has previously been exchanged in whole for Certificated
New Notes, be exchanged for an interest in the Global New Note.
The Global New Note. The Company expects that, pursuant to procedures
established by DTC, (a) upon deposit of the Global New Note, DTC or its
custodian will credit on its internal system the principal amount at maturity
of New Notes of the individual beneficial interests represented by such Global
New Note to the respective accounts of persons who have accounts with DTC and
(b) ownership of beneficial interests in the Global New Note will be shown on,
and the transfer of ownership thereof will be effected only through, records
maintained by DTC or its nominee (with respect to interests of Participants
(as defined herein)) and the records of Participants (with respect to
interests of persons other than Participants). Ownership of beneficial
interests in the Global New Note will be limited to persons who have accounts
with DTC ("Participants") or persons who hold interests through Participants.
QIBs may hold their interests in the Global New Note directly through DTC if
they are Participants in such system, or indirectly through organizations
which are Participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the New
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner and holder of the New Notes represented by such Global New Note for all
purposes under the Indenture. No beneficial owner of an interest in the Global
New Note will be able to transfer such interest except in accordance with
DTC's procedures, in addition to those provided for under the Indenture with
respect to the New Notes.
Payments of the principal of or premium and interest on the Global New Note
will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any paying agent under the
Indenture will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global New Note or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interest.
97
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of or premium and interest on the Global New Note, will credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global New
Note as shown on the records of DTC or its nominee. The Company also expects
that payments by Participants to owners of beneficial interests in the Global
New Note held through such Participants will be governed by standing
instructions and customary practice as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such Participants.
Transfers between Participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in federal funds. If a holder requires physical delivery of a
Certificated New Note for any reason, including to sell New Notes to persons
in states that require physical delivery of the New Notes or to pledge such
securities, such holder must transfer its interest in the Global New Note in
accordance with normal procedures of DTC and with the procedures set forth in
the Indenture.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of New Notes (including the presentation of New Notes for
exchange as described below) only at the direction of one or more Participants
to whose account the DTC interests in the Global New Note are credited and
only in respect of such portion of the aggregate principal amount of New Notes
as to which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Indenture, DTC will
exchange the Global New Note for Certificated New Notes, which it will
distribute to its Participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entry
changes in accounts of its Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
Although DTC, Euroclear and Cedel are expected to follow the foregoing
procedures in order to facilitate transfers of interest in the Global New
Notes among Participants of DTC, they are under no obligation to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Company nor the Trustee will have any responsibility for the performance by
DTC, Euroclear and Cedel or the Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations.
Certificated New Notes. Interests in the Global New Note will be
exchangeable or transferable, as the case may be, for Certificated Notes if
(i) DTC notifies the Company that it is unwilling or unable to continue as
depositary for such Global New Note, or DTC ceases to be a "Clearing Agency"
registered under the Exchange Act, and a successor depositary is not appointed
by the Company within 90 days, or (ii) an Event of Default has occurred and is
continuing with respect to such New Notes. Upon the occurrence of any of the
events described in the preceding sentence, the Company will cause the
appropriate Certificated New Notes to be delivered.
98
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement with the Initial Purchasers,
the Company agreed to file with the Commission the Exchange Offer Registration
Statement of which this Prospectus is a part on an appropriate form under the
Securities Act with respect to an offer to exchange the Old Notes for the New
Notes. Upon the effectiveness of the Exchange Offer Registration Statement,
the Company will offer to the holders of Old Notes who are able to make
certain representations the opportunity to exchange their Old Notes for New
Notes. If (i) the Company is not permitted to file the Exchange Offer
Registration Statement or to consummate the Exchange Offer because the
Exchange Offer is not permitted by applicable law or Commission policy, (ii)
the Exchange Offer is not for any other reason consummated within 180 days
after the Issue Date, (iii) any holder of Old Notes notifies the Company
within a specified time period that (a) due to a change in applicable law or
Commission policy it is not entitled to participate in the Exchange Offer, (b)
due to a change in applicable law or Commission policy it may not resell the
New Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by
such holder or (c) it is a broker-dealer and owns Old Notes acquired directly
from the Company or (iv) the holders of a majority of the Old Notes may not
resell the New Notes to be acquired by them in the Exchange Offer to the
public without restriction under the Securities Act and without restriction
under applicable blue sky or state securities laws, the Company will file with
the Commission the Shelf Registration Statement to cover resales of the
Transfer Restricted Notes (as defined herein) by the holders thereof. The
Company will use its best efforts to cause the applicable registration
statement to be declared effective as promptly as possible by the Commission.
For purposes of the foregoing, "Transfer Restricted Notes" means each Old Note
until (i) the date on which such Old Note has been exchanged by a person other
than a broker-dealer for a New Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of an Old Note for a New
Note, the date on which such New Note is sold to a purchaser who receives from
such broker-dealer on or prior to the date of such sale a copy of the
prospectus contained in the Exchange Offer Registration Statement, (iii) the
date on which such Old Note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement, (iv) the date on which such Old Note is distributed to the public
pursuant to Rule 144(k) under the Securities Act (or any similar provision
then in force, but not Rule 144A under the Securities Act), (v) such Old Note
shall have been otherwise transferred by the holder thereof and a New Note not
bearing a legend restricting further transfer shall have been delivered by the
Company and subsequent disposition of such Old Note shall not require
registration or qualification under the Securities Act or any similar state
law then in force or (vi) such Old Note ceases to be outstanding.
Under existing Commission interpretations, the New Notes would, in general,
be freely transferable after the Exchange Offer without further registration
under the Securities Act; provided, that in the case of broker-dealers
participating in the Exchange Offer, a prospectus meeting the requirements of
the Securities Act must be delivered upon resale by such broker-dealers in
connection with resales of the New Notes. The Company has agreed, for period
of 180 days after consummation of the Exchange Offer, to make available a
prospectus meeting the requirements of the Securities Act to any such broker-
dealer for use in connection with any resale of any New Notes acquired in the
Exchange Offer. A broker-dealer who delivers such a prospectus to purchasers
in connection with such resales will be subject to certain of the civil
liability provisions under the Securities Act and will be bound by the
provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations).
Each holder of Old Notes who wishes to exchange such Old Notes for New Notes
in the Exchange Offer will be required to make certain representations,
including representations that: (i) the holder is not an "affiliate" of the
Company as defined in Rule 405 of the Securities Act, (ii) the holder is not a
broker-dealer that acquired Old Notes directly from the Company in order to
resell them pursuant to Rule 144A of the Securities Act or any other available
exemption under the Securities Act, (iii) the holder will acquire the New
Notes in the ordinary course of business and (iv) the holder is not
participating, and does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the New
Notes.
99
If the holder is a broker-dealer that will receive New Notes for its own
account in exchange for Old Notes that were acquired as a result of market-
making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
The Company has agreed to pay all expenses incident to the Exchange Offer
and will indemnify the Initial Purchasers against certain liabilities,
including liabilities under the Securities Act.
The Registration Rights Agreement provides that (i) unless the Exchange
Offer would not be permitted by applicable law or Commission policy, the
Company will use its best efforts to file the Exchange Offer Registration
Statement with the Commission on or prior to 45 days after the Issue Date
(which requirement the Company has met), (ii) unless the Exchange Offer would
not be permitted by applicable law or Commission policy, the Company will use
its best efforts to have the Exchange Offer Registration Statement declared
effective by the Commission on or prior to 105 days after the Issue Date,
(iii) unless the Exchange Offer would not be permitted by applicable law or
Commission policy, the Company will use its best efforts to have the Exchange
Offer Registration Statement remain effective until the closing of the
Exchange Offer, (iv) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, the Company will commence the Exchange
Offer and use its best efforts to issue, on or prior to 135 days after the
Issue Date, New Notes in exchange for all Old Notes tendered prior thereto in
the Exchange Offer and (v) if obligated to file the Shelf Registration
Statement, the Company will use its best efforts to file the Shelf
Registration Statement prior to the later of (a) 105 days after the Issue Date
or (b) 30 days after such filing obligation arises and use its best efforts to
cause the Shelf Registration Statement to be declared effective by the
Commission on or prior to 60 days after such obligation arises; provided, that
if the Company has not consummated the Exchange Offer within 180 days of the
Issue Date, then the Company will file the Shelf Registration Statement with
the Commission on or prior to the 181st day after the Issue Date. The Company
shall use its best efforts to keep such Shelf Registration Statement
continuously effective, supplemented and amended until the second anniversary
of the Issue Date or such shorter period that will terminate when all the
Transfer Restricted Notes covered by the Shelf Registration Statement have
been sold pursuant thereto. A holder of Old Notes who intends to sell such Old
Notes pursuant to the Shelf Registration Statement will be required to be
named as a selling securityholder in the related prospectus and to deliver
such prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales
and will be bound by the provisions of the Registration Rights Agreement
applicable to such holder (including certain indemnification and contribution
obligations).
If (i) the Company fails to file any of the registration statements required
by the Registration Rights Agreement on or before the date specified for such
filing, (ii) any of such registration statements are not declared effective by
the Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), subject to certain limited exceptions, (iii) the
Company fails to consummate the Exchange Offer within 30 days of the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement or (iv) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter, subject to
certain limited exceptions, ceases to be effective or usable in connection
with the Exchange Offer or resales of Transfer Restricted Notes, as the case
may be, during the periods specified in the Registration Rights Agreement
(each such event referred to in clauses (i) through (iv) above, a
"Registration Default"), then the interest rate on the Transfer Restricted
Notes will accrue at a rate per annum equal to an additional one quarter of
one percent (0.25%) of the principal amount of the Notes upon the occurrence
of each Registration Default, which rate will increase by one quarter of one
percent (0.25%) each 90-day period that such Additional Interest continues to
accrue under any such circumstance, with an aggregate maximum increase in the
interest rate equal to one percent (1%) per annum. Following the cure of all
Registration Defaults, the accrual of additional interest will cease and the
interest rate will revert to the original rate.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy which is filed as an exhibit to the Registration Statement
of which this Prospectus forms a part.
100
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations of the issuance of 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 Note, 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 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 decision.
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 in the hands of such holder. 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 an Old Note will initially be
the holder's purchase price for the Old 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 or Redemption. The sale, exchange, redemption or other disposition of
an Old Note or a New Note (other than pursuant to the Exchange Offer)
generally will be a taxable event. A holder generally will recognize gain or
loss equal to the difference between (i) the amount of cash plus the fair
market value of any property received upon such sale, exchange, redemption or
other taxable disposition of an Old Note or a New Note (other than in respect
of accrued interest thereon) and (ii) the holder's adjusted tax basis in such
Old Note or New Note. Such gain or loss generally will be capital gain or
loss, provided that the holder has held the Note as a capital asset. The
recently enacted Taxpayer Relief Act of 1997 made certain changes to the Code
with respect to taxation of capital gains of taxpayers other than
corporations. In general, the maximum tax rate for non-corporate taxpayers on
long-term capital gains has been lowered to 20% from the previous 28% rate for
most capital assets (including the Old or New Notes) held for more than 18
months. For taxpayers in the 15% regular tax bracket, the maximum tax rate on
long-term capital gains is now 10%. Capital gain on such assets for non-
corporate holders having a holding period of more than one year but not more
than 18 months will be subject to a maximum tax rate of 28%. The holding
period of each New Note would include the holding period of the Old Notes
exchanged therefor. Recently enacted legislation eliminates the maximum 28%
rate for non-corporate holders with a holding period of more than one year but
not more than 18 months. The law is effective retroactively for a disposition
after January 1, 1998, and imposes the maximum rate of 20% on such capital
assets held more than one year.
Purchasers of Notes at Other than Original Issuance. The foregoing summary
does not discuss special rules which 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 him of the acquisition, ownership and disposition of Old Notes
and the New Notes.
101
Backup Withholding. Unless a holder or other payee provides its correct
taxpayer identification number (employer identification number or social
security number) to the Company (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) proceeds of sale or other
disposition of the Notes must be withheld and remitted to the United States
Department of the Treasury. Therefore, each holder should complete and sign
the Substitute Form W-9 included so as to provide the information and
certification necessary to avoid backup withholding. In addition, backup
withholding in the amount of 31% on the interest paid on the Notes must be
withheld and remitted if the Company is notified by the Internal Revenue
Service that the payee has under reported interest income. However, certain
exchanging holders (including, among others, certain foreign individuals) are
not subject to these backup withholding and reporting requirements. In order
for a foreign individual to qualify as an exempt foreign recipient, that
exchanging holder must submit a statement, signed under penalties 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 HEREIN FOR GENERAL INFORMATION ONLY. EACH
HOLDER OF NOTES OR NEW NOTES SHOULD CONSULT SUCH HOLDER'S TAX ADVISOR AS TO
THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE EXCHANGE OFFER, INCLUDING
THE APPLICATION OF AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
102
PLAN OF DISTRIBUTION
Pursuant to the Exchange Offer, each Participating Broker-Dealer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. This Prospectus may be used by a Participating 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. The Company has agreed that it will make this
Prospectus available to any Participating Broker-Dealer for use in connection
with any such resale and Participating Broker-Dealers shall be authorized to
deliver this Prospectus for a period not exceeding 90 days after the
Expiration Date.
The Company will not receive any proceeds from any sales of the New Notes by
Participating Broker-Dealers. New Notes received by Participating Broker-
Dealers for their own account pursuant to the Exchange Offer may be sold from
time to time, in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from such Participating Broker-Dealer or the purchasers of any
such New 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 such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such 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. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
The Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any Participating Broker-Dealer
that reasonably requests such documents in the Letter of Transmittal. See "The
Exchange Offer."
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
New Notes offered hereby will be passed upon for the Company by D'Ancona &
Pflaum, Chicago, Illinois.
EXPERTS
The combined financial statements of the Company as of December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
103
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Consolidated Balance Sheet at June 30, 1998 (unaudited)................... F-2
Consolidated Statements of Income for the three and six months ended June
30, 1998 and 1997 (unaudited)............................................ F-3
Consolidated Statements of Cash Flows for the six months ended June 30,
1998 and 1997 (unaudited)................................................ F-4
Notes to Consolidated Financial Statements for the six months ended June
30, 1998 and 1997 (unaudited)............................................ F-5
Report of Independent Auditors............................................ F-8
Combined Balance Sheets at December 31, 1997 and 1996..................... F-9
Combined Statements of Income for the years ended December 31, 1997, 1996,
and 1995................................................................. F-10
Combined Statements of Stockholders' Equity for the years ended December
31, 1997, 1996, and 1995................................................. F-11
Combined Statements of Cash Flows for the years ended December 31, 1997,
1996, and 1995........................................................... F-12
Notes to Combined Financial Statements for the years ended December 31,
1997, 1996 and 1995...................................................... F-13
F-1
EMPRESS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30,
1998
------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 22,015,998
Marketable securities, at fair value which approximates cost... --
Accounts receivable, less allowance for doubtful accounts of
$2,098,000 and $1,762,000, respectively....................... 2,515,915
Accounts receivable--Affiliate................................. --
Interest receivable
--U.S. Treasuries held for defeasance........................ 2,581,332
--Other...................................................... --
Inventories.................................................... 802,314
Prepaid expenses............................................... 1,238,578
U.S. Treasuries held for defeasance............................ 164,039,000
Premium on U.S. Treasuries, net of accumulated amortization of
$43,456....................................................... 906,415
------------
Total current assets....................................... 194,099,552
Property and equipment:
Land........................................................... 10,268,475
Building and improvements...................................... 70,182,409
Riverboat...................................................... 62,565,164
Leasehold improvements......................................... 45,416,048
Furniture, fixtures and equipment.............................. 55,416,619
Construction in progress....................................... 3,014,600
------------
246,863,315
Less: Accumulated depreciation................................. (52,923,353)
------------
Property and equipment, net...................................... 193,939,962
Noncompete agreement, less accumulated amortization of $3,680,556
and $3,055,556, respectively.................................... 69,444
Deferred financing costs, less accumulated amortization of
$3,025,532 and $2,646,916, respectively......................... 9,068,603
Other assets, less accumulated amortization of $1,914,857 and
$1,236,619, respectively........................................ 11,817,696
------------
Total assets............................................... $408,995,257
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 9,045,288
Accrued payroll and related expenses........................... 7,779,112
Other accrued liabilities...................................... 16,145,641
Interest payable............................................... 4,495,954
Current portion of long-term debt.............................. 10,000,000
------------
Total current liabilities.................................. 47,465,995
Long-term debt:
8 1/8% Senior Subordinated Notes............................... 150,000,000
10 3/4% Senior Notes........................................... 150,000,000
Credit Facility................................................ --
------------
300,000,000
Stockholders' equity:
Common stock; $.01 par value; 6,000 and 3,000 shares
authorized; 1,179.245 and 1,150 shares issued and outstanding,
respectively.................................................. 11,500,012
Additional paid-in capital..................................... 5,047,605
Retained earnings.............................................. 44,981,645
------------
61,529,262
------------
Total liabilities and stockholders' equity................. $408,995,257
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
EMPRESS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
----------- ----------- ------------ ------------
Revenues
Casino................. $90,253,385 $86,240,789 $181,590,652 $174,670,308
Food and beverage...... 5,328,876 5,068,295 10,652,868 10,044,521
Hotel.................. 448,415 374,319 798,803 703,856
Parking................ 301,732 352,964 574,429 686,306
Gift Shop.............. 386,141 485,412 757,700 968,782
Other.................. 608,204 418,479 1,216,164 1,148,671
----------- ----------- ------------ ------------
97,326,753 92,940,258 195,590,616 188,222,444
Less: Promotional
allowances............ (1,481,743) (1,232,991) (2,883,421) (2,376,215)
----------- ----------- ------------ ------------
95,845,010 91,707,267 192,707,195 185,846,229
Operating expenses
Casino................. 14,953,496 15,455,739 30,009,923 30,786,412
Gaming and admission
taxes................. 29,943,066 26,266,262 60,163,627 53,389,445
Food and beverage...... 6,138,274 6,501,409 12,482,336 12,642,249
Admissions, parking and
gift shop............. 882,107 1,034,405 1,770,815 2,506,227
Hotel.................. 243,653 255,039 466,054 486,309
Advertising and sales.. 4,861,935 5,011,419 9,109,868 8,538,407
General and
administrative........ 7,824,106 8,462,930 15,584,043 15,034,727
Security and
surveillance.......... 1,766,236 1,844,670 3,496,646 3,646,777
Facility and property.. 4,827,220 4,818,778 9,617,115 10,221,077
Depreciation and
amortization.......... 4,865,160 4,708,678 9,556,053 9,429,102
----------- ----------- ------------ ------------
76,305,253 74,359,329 152,256,480 146,680,732
----------- ----------- ------------ ------------
Income from
operations.......... 19,539,757 17,347,938 40,450,715 39,165,497
Other income (expense)
Interest expense....... (5,584,534) (5,224,180) (10,885,251) (10,573,081)
Interest income........ 1,000,439 796,194 1,981,997 1,548,207
----------- ----------- ------------ ------------
Income before state
income taxes........ 14,955,662 12,919,952 31,547,462 30,140,623
Provision for state
income taxes.......... 110,261 76,821 193,528 155,648
----------- ----------- ------------ ------------
Net Income........... $14,845,401 $12,843,131 $ 31,353,933 $ 29,984,975
=========== =========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
EMPRESS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
---------------------------
JUNE 30,
JUNE 30, 1998 1997
------------- ------------
Cash flows from operating activities:
Net income....................................... $ 31,353,933 $ 29,984,975
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization................... 10,262,537 9,583,181
Other........................................... -- 70,048
Changes in operating assets and liabilities:
Accounts and interest receivable............... (807,835) 1,193,148
Inventories.................................... 203,308 (210,472)
Prepaid expenses............................... 648,532 (379,947)
Accounts payable............................... 5,509,652 443,354
Interest payable............................... 422,001 (132,852)
Accrued payroll and related expenses........... 422,705 268,918
Other accrued liabilities...................... 3,951,966 (1,640,355)
------------- ------------
Net cash provided by operating activities..... 51,966,799 39,179,998
Cash flows from investing activities:
Purchase of investments.......................... (20,959,566) (40,483,936)
Sale of investments.............................. 30,969,594 40,475,463
Purchase of property and equipment............... (16,565,789) (6,710,270)
Purchase of U.S. Treasuries held for defeasance.. (164,988,871) --
Increase in other assets......................... (1,027,141) --
------------- ------------
Net cash used in investing activities......... (172,571,773) (6,718,743)
Cash flows from financing activities:
Proceeds from borrowings......................... 160,000,000 19,600,000
Payments on borrowings........................... (58,523,788) (31,745,147)
Cost of debt issuance............................ (6,428,878) --
Stockholder distributions........................ (25,683,384) (26,643,661)
------------- ------------
Net cash provided by (used in) financing
activities................................... 69,363,950 (38,788,808)
Net decrease in cash and cash equivalents......... (51,241,024) (6,327,553)
Cash and cash equivalents, beginning of period.... 73,257,022 45,464,963
------------- ------------
Cash and cash equivalents, end of period.......... $ 22,015,998 $ 39,137,410
============= ============
Supplemental disclosure of cash flow information
Interest paid.................................... $ 10,083,861 $ 10,292,843
Income taxes paid................................ $ 250,620 $ 475,000
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
EMPRESS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of Empress Entertainment, Inc. (the
"Company") include the accounts of its wholly-owned subsidiaries, Empress
River Casino Finance Corporation ("Empress Finance") incorporated January 7,
1994, Empress Casino Hammond Corporation ("Empress Hammond") incorporated on
November 25, 1992, and Empress Casino Joliet Corporation ("Empress Joliet")
incorporated on December 26, 1990. All significant intercompany transactions
have been eliminated.
The Company is engaged in the business of providing riverboat gaming and
related entertainment to the public. Empress Joliet was granted a three-year
operating license from the Illinois Gaming Board on July 9, 1992, which was
renewed in July 1998 and must be renewed each year thereafter, to operate the
Empress I and Empress II riverboat casinos located on the Des Plaines River in
Joliet, Illinois. Empress Hammond was granted a five-year operating license,
with annual renewals thereafter, from the Indiana Gaming Commission on June
21, 1996 to operate the Empress III riverboat casino located on Lake Michigan
in Hammond, Indiana. Empress III commenced operations on June 28, 1996. The
majority of the Company's customers reside in the Chicago metropolitan area.
The accompanying unaudited consolidated financial statements do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. Interim results may not
necessarily be indicative of results which may be expected for any other
interim period or for the year as a whole. For further information, refer to
the combined financial statements and footnotes thereto for the year ended
December 31, 1997 included elsewhere herein. The accompanying unaudited
consolidated financial statements contain all adjustments which are, in the
opinion of management, necessary to present fairly the financial position and
the results of operations for the periods indicated. Such adjustments include
only normal recurring accruals.
Impairment of Long-Lived Assets
When events or circumstances indicate that the carrying amount of long-lived
assets to be held and used might not be recoverable, the expected future
undiscounted cash flows from the assets is estimated and compared with the
carrying amount of the assets. If the sum of the estimated undiscounted cash
flows is less than the carrying amount of the assets, an impairment loss is
recorded. The impairment loss is measured by comparing the fair value of the
assets with their carrying amount. Long-lived assets that are held for
disposal are reported at the lower of the assets' carrying amount of fair
value less costs related to the assets' disposition. The Company performs an
annual evaluation to identify potential impairment of long-lived assets.
Revenue and Promotional Allowances
In accordance with industry practice, the Company recognizes as casino
revenue the net win from gaming activities, which is the difference between
gaming wins and losses.
The retail value of food, beverage and other services, which were provided
to customers without charge has been included in the respective revenue
classifications and then deducted as a promotional allowance. The estimated
direct costs of providing such complimentary services are included in
operating expenses and totaled approximately $0.6 million and $0.6 million for
the three months ended June 30, 1998 and 1997, respectively and approximately
$1.2 million and $1.1 million for the six months ended June 30, 1998 and 1997,
respectively.
F-5
EMPRESS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenues from food, beverage, gift shop and related services are recognized
at the time the related service is performed.
2. COMMITMENTS
In June 1996, the Company executed a number of agreements which secure its
rights to operate in the City of Hammond at the Hammond marina. These
commitments include, but are not limited to, the financial obligations of the
Company outstanding as of June 30, 1998:
An annual payment to the City of Hammond of the greater of $3.0 million or
certain percentages of adjusted gross receipts as follows:
--4.0% up to $125.0 million;
--6.0% over $125.0 million to $200.0 million; and
--4.0% in excess of $200.0 million.
. A passenger payment to the Hammond Port Authority in the sum of $1.00 per
passenger.
. An annual payment to the City of Hammond for police and fire purposes of
$1.0 million.
. Contributions to the City of Whiting and civic organizations in Whiting
for public safety and to promote economic development in the total sum of
$1.25 million. Payments to be made in equal installments over five years
commenced June 1996.
. Construction of a 200-room hotel and conference center with an estimated
cost of $10.0 million. No amounts have been expended as of June 30, 1998.
. Commercial development within the greater Hammond area with an estimated
cost of $10.0 million to be completed within 5 years of the date of the
Certificate of Suitability. No amounts have been expended as of June 30,
1998.
. Renovation of existing housing and construction of new market rate
housing in the greater Hammond area with an estimated cost of $5.0
million to be completed within 5 years of the date of the Certificate of
Suitability. No amounts have been expended as of June 30, 1998.
3. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30,
-------------------------
1998 1997
------------ ------------
10 3/4% Senior Notes............................ $150,000,000 $150,000,000
8 1/8% Senior Subordinated Notes................ 150,000,000 --
Revolving Credit Facility....................... 10,000,000 56,000,000
Other........................................... -- 2,523,788
------------ ------------
$310,000,000 $208,523,788
Current portion of long-term debt............... 10,000,000 18,523,788
------------ ------------
$300,000,000 $190,000,000
============ ============
The Company entered into a refinancing, the components of which included a
covenant defeasance of the $150.0 million 10 3/4% Senior Notes and the
issuance of $150.0 million 8 1/8% Subordinated Notes (the "Notes").
F-6
EMPRESS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The Company issued the Notes pursuant to a public offering (the "Offering")
on June 18, 1998. The Notes are jointly, severally and unconditionally
guaranteed on an unsecured senior subordinated basis by all existing and
future Restricted Subsidiaries.
Interest on the Notes is payable semiannually on January 1 and July 1 of
each year. The Notes are due and payable on July 1, 2006. The Company and all
of its future subsidiaries may be required to repay all or a portion of the
Notes upon the occurrences of certain repurchase events.
In June 1998, the Company entered into a $100.0 million reducing revolving
credit facility (the "Credit Agreement") which will expire June 18, 2003.
Under the terms of the Credit Agreement, the Company is required to meet
certain financial and other covenants. Interest shall accrue on the entire
outstanding principal balance of the Credit Agreement at a rate per annum
equal to the higher of (a) the Prime Rate in effect on such date and (b) the
Federal Funds Rate in effect on such date plus one-half of one percent. As of
June 30, 1998, $10.0 million was outstanding at the rate of 6.8125%.
F-7
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders Empress Entertainment, Inc.
We have audited the accompanying combined balance sheets of Empress
Entertainment, Inc. as of December 31, 1997 and 1996, and the related combined
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. 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 combined financial position of Empress
Entertainment, Inc. at December 31, 1997 and 1996, and the combined results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
April 7, 1998, except for
Note 10 as to which the
date is June 18, 1998
F-8
EMPRESS ENTERTAINMENT, INC.
COMBINED BALANCE SHEETS
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents....................... $ 73,257,022 $ 45,464,963
Marketable securities, at fair value which
approximates cost.............................. 10,010,028 30,241,843
Accounts receivable, less allowance for doubtful
accounts of $1,762,000 and $1,528,000,
respectively................................... 3,789,455 3,146,188
Interest receivable............................. 499,957 741,126
Inventories..................................... 1,005,622 1,311,034
Prepaid expenses................................ 1,887,110 3,637,170
------------ ------------
Total current assets.......................... 90,449,194 84,542,324
Property and equipment:
Land and improvements........................... 9,139,658 9,103,320
Building and improvements....................... 69,407,747 68,776,417
Riverboats, docks and improvements.............. 53,768,016 53,373,138
Leasehold improvements.......................... 45,416,048 37,392,320
Furniture, fixtures and equipment............... 49,857,048 46,289,959
Construction in progress........................ 2,709,009 47,676
------------ ------------
230,297,526 214,982,830
Less: Accumulated depreciation.................. (44,386,127) (28,258,788)
------------ ------------
Property and equipment, net....................... 185,911,399 186,724,042
Non-compete agreement, less accumulated
amortization of $3,055,556 and $1,805,556,
respectively..................................... 694,444 1,944,444
Deferred financing costs, less accumulated
amortization of $2,646,916 and $1,938,759,
respectively..................................... 3,018,341 3,726,498
Other assets, less accumulated amortization of
$1,236,619 and $462,420, respectively............ 11,468,794 11,372,654
------------ ------------
Total assets.................................. $291,542,172 $288,309,962
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 3,535,636 $ 2,944,600
Accrued payroll and related expenses............ 7,356,407 6,374,090
Other accrued liabilities....................... 12,193,675 10,831,078
Interest payable................................ 4,073,953 4,225,481
Bank line of credit............................. -- 19,600,000
Current portion of long-term debt............... 18,523,788 26,540,296
------------ ------------
Total current liabilities..................... 45,683,459 70,515,545
Long-term debt.................................... 190,000,000 168,183,457
Stockholders' equity:
Common stock of Empress Casino Joliet
Corporation; no par value; 2,000 shares
authorized; 1,150 shares issued and
outstanding; at stated value................... 11,500,000 11,500,000
Common stock of Empress Entertainment, Inc.;
$.01 par value; 6,000 and 3,000 shares
authorized; 1,179.245 and 1,150 shares issued
and outstanding, respectively.................. 12 12
Additional paid-in capital...................... 5,047,605 5,047,605
Retained earnings............................... 39,311,096 33,063,343
------------ ------------
55,858,713 49,610,960
------------ ------------
Total liabilities and stockholders' equity.... $291,542,172 $288,309,962
============ ============
F-9
EMPRESS ENTERTAINMENT, INC.
COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
REVENUES
Casino.................... $346,048,799 $263,039,586 $202,334,313
Food and beverage......... 27,344,287 17,990,942 14,094,879
Admissions, parking and
gift shop................ 3,527,033 2,680,538 11,958,453
Hotel..................... 1,484,236 524,274 --
Other..................... 2,542,231 1,630,874 2,133,341
------------ ------------ ------------
380,946,586 285,866,214 230,520,986
Less: Promotional
allowances............... (11,302,593) (7,204,548) (15,909,716)
------------ ------------ ------------
369,643,993 278,661,666 214,611,270
OPERATING EXPENSES
Casino.................... 64,799,119 48,110,983 30,659,248
Gaming and admission
taxes.................... 107,992,842 73,126,648 47,146,219
Food and beverage......... 26,903,259 18,204,758 12,467,219
Admissions, parking and
gift shop................ 4,585,876 5,704,813 5,038,836
Hotel..................... 937,504 447,832 --
Advertising and sales..... 19,554,500 12,889,608 9,195,912
General and
administrative........... 32,728,734 18,679,502 15,011,889
Pre-opening............... -- 5,671,960 1,300,530
Security and surveillance. 7,461,046 5,608,128 3,782,362
Facility and property..... 21,183,925 16,166,991 10,618,338
Depreciation and
amortization............. 18,848,950 13,895,776 16,892,216
------------ ------------ ------------
304,995,755 218,506,999 152,112,769
------------ ------------ ------------
Income from operations.. 64,648,238 60,154,667 62,498,501
OTHER INCOME (EXPENSE)
Interest expense.......... (21,153,957) (18,274,497) (16,351,561)
Interest income........... 3,323,865 3,487,434 5,238,655
------------ ------------ ------------
Income before state
income taxes........... 46,818,146 45,367,604 51,385,595
Provision for state income
taxes.................... 513,798 447,338 743,418
------------ ------------ ------------
Net income.............. $ 46,304,348 $ 44,920,266 $ 50,642,177
============ ============ ============
The accompanying notes are an integral part of these combined financial
statements.
F-10
EMPRESS ENTERTAINMENT, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
----------- ---------- ------------ -------------
Balance at December 31,
1994....................... $11,500,012 $4,929,138 $ 16,942,123 $ 33,371,273
Cash distributions to
stockholders............... -- -- (47,168,269) (47,168,269)
Net income.................. -- -- 50,642,177 50,642,177
----------- ---------- ------------ ------------
Balance at December 31,
1995....................... 11,500,012 4,929,138 20,416,031 36,845,181
Sale and issuance of common
stock...................... -- 118,467 -- 118,467
Cash distributions to
stockholders............... -- -- (32,272,954) (32,272,954)
Net income.................. -- -- 44,920,266 44,920,266
----------- ---------- ------------ ------------
Balance at December 31,
1996....................... 11,500,012 5,047,605 33,063,343 49,610,960
Cash distributions to
stockholders............... -- -- (40,056,595) (40,056,595)
Net income.................. -- -- 46,304,348 46,304,348
----------- ---------- ------------ ------------
Balance at December 31,
1997....................... $11,500,012 $5,047,605 $ 39,311,096 $ 55,858,713
=========== ========== ============ ============
The accompanying notes are an integral part of these combined financial
statements.
F-11
EMPRESS ENTERTAINMENT, INC.
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------ ------------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income........................ $ 46,304,348 $ 44,920,266 $ 50,642,177
Adjustments to reconcile net
income to cash provided by
operating activities:
Depreciation and amortization... 19,557,108 14,603,930 17,600,373
Other........................... 124,928 274,770 52,287
Allowance on advances to Hammond
Port Authority................. -- -- (1,600,000)
Changes in operating assets and
liabilities:
Advances to Hammond Port
Authority.................... -- -- (650,000)
Cash on deposit............... -- -- 500,000
Accounts and interest
receivable................... (402,098) (1,465,088) (865,022)
Inventories................... 305,412 (519,859) (427,605)
Prepaid expenses.............. 1,750,060 (104,646) (281,005)
Accounts payable.............. 591,036 (109,450) (6,359,777)
Interest payable.............. (151,528) 194,231 (9,985)
Accrued payroll and related
expenses..................... 982,317 3,314,705 (1,439,364)
Other accrued liabilities..... 1,262,595 3,191,958 (525,394)
------------ ------------- ------------
Net cash provided by
operating activities....... 70,324,178 64,300,817 56,636,685
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of investments........... (62,847,480) (61,495,163) (80,743,757)
Proceeds from the sale of
investments...................... 83,079,295 57,539,099 59,674,069
Increase in other assets.......... (480,142) (4,849,730) (2,776,560)
Decrease in restricted cash....... -- 23,610,936 10,788,426
Purchase of property and
equipment........................ (16,137,037) (105,988,320) (7,389,889)
Issuance of non-compete agreement. -- -- (3,750,000)
------------ ------------- ------------
Net cash provided by (used
in) investing activities... 3,614,636 (91,183,178) (24,197,711)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Stockholder distributions......... (40,056,595) (32,272,954) (47,168,269)
Sale of common stock.............. -- 118,467 --
Payments on borrowings............ (34,765,295) (2,990,570) (1,539,576)
Proceeds from borrowings.......... 28,965,332 66,680,592 --
Deferred financing costs.......... (290,197) -- --
------------ ------------- ------------
Net cash (used in) provided
by financing activities.... (46,146,755) 31,535,535 (48,707,845)
Net increase (decrease) in cash and
cash equivalents................... 27,792,059 4,653,174 (16,268,871)
Cash and cash equivalents, beginning
of year............................ 45,464,963 40,811,789 57,080,660
------------ ------------- ------------
Cash and cash equivalents, end of
year............................... $ 73,257,022 $ 45,464,963 $ 40,811,789
============ ============= ============
Supplemental disclosure of cash flow
information:
Interest paid..................... $ 20,635,718 $ 18,950,400 $ 16,190,396
Income taxes paid................. 475,000 825,000 865,000
The accompanying notes are an integral part of these combined financial
statements.
F-12
EMPRESS ENTERTAINMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements of Empress Entertainment, Inc. (the
"Company") (formerly referred to as Empress Casinos), include the accounts of
four affiliated entities, Empress Casino Joliet Corporation ("Empress Joliet")
incorporated on December 26, 1990, Empress River Casino Finance Corporation
("Empress Finance") incorporated on January 7, 1994, Empress Entertainment,
Inc. (f/k/a LMC Leasing, Ltd.) incorporated on January 27, 1994 and its wholly
owned subsidiary, Empress Casino Hammond Corporation ("Empress Hammond")
incorporated on November 25, 1992. All significant intercompany transactions
have been eliminated.
The Company is engaged in the business of providing riverboat gaming and
related entertainment to the public. The Company was granted a three year
operating license from the Illinois Gaming Board on July 9, 1992, which was
renewed on July 9, 1995, 1996 and 1997, and must be renewed each year
thereafter to operate the Empress I and Empress II riverboat casinos located
on the Des Plaines River in Joliet, Illinois. The Company was granted a five
year operating license, with annual renewals thereafter, from the Indiana
Gaming Commission on June 21, 1996 to operate the Empress III riverboat casino
located on Lake Michigan in Hammond, Indiana. Empress III commenced operations
on June 28, 1996. The majority of the Company's customers reside in the
Chicago metropolitan area.
Empress Joliet owns and operates the Empress I and Empress II riverboats in
Joliet, Illinois. Empress Hammond operates the Empress III riverboat in
Hammond, Indiana. The Company was originally incorporated for the sole purpose
to build and lease a riverboat casino (the "Empress III") to Empress Hammond.
On November 14, 1997, the Company became the parent of Empress Hammond through
a share exchange (the Exchange) which qualified as a transfer of a company
under common control. Prior to November 14, 1997, the Company and Empress
Hammond were affiliated through common ownership, at which time the Company
leased the riverboat casino Empress III to Empress Hammond. Accordingly, the
Exchange has been accounted for at historical cost in a manner similar to a
pooling of interests. Empress Finance was incorporated for the sole purpose of
issuing $150.0 million 10 3/4% Senior Notes due 2002 (the "10 3/4% Notes") and
is owned by Empress Joliet (60%) and the Company (40%). These financial
statements have been prepared as if this Exchange had occurred as of December
31, 1994.
Each of the four affiliated entities are owned directly or indirectly by the
same individuals and trusts with the exception of one shareholder which has a
2.33% ownership in Empress Joliet only, and one shareholder which owns 2.48%
of the Company only.
The preparation of the financial statements, in conformity with generally
accepted accounting principles, necessarily requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as revenues and expenses during the reporting
period. Actual amounts when ultimately realized could differ from those
estimates.
Reclassifications
Certain amounts in prior years' financial statements have been reclassified
to conform to the 1997 presentation.
F-13
EMPRESS ENTERTAINMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Cash Equivalents and Concentrations of Cash
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash equivalents are
placed primarily with high-credit-quality financial institutions and are
invested in short-term corporate and U.S. Government obligations.
Marketable Securities
Marketable securities consist principally of investment grade commercial
paper with original maturities at date of purchase beyond three months and
less than twelve months. Such marketable securities are carried at fair value,
which approximates original cost, due to the short period of time to maturity.
Advertising Costs
All advertising costs are expended as incurred.
Inventories
Inventories, which consist of food, beverage, gift shop and promotional
items are recorded at the lower of cost (determined by the first in, first out
method) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives:
Building and improvements..................................... 20-31 years
Leasehold improvements........................................ 20 years
Riverboats, docks and improvements............................ 20 years
Furniture, fixtures and equipment............................. 5 years
The Company capitalized interest of $0.1 million and $1.6 million in 1997
and 1996, respectively.
Revenue and Promotional Allowances
In accordance with industry practice, the Company recognizes as casino
revenue the net win from gaming activities, which is the difference between
gaming wins and losses.
The retail value of food, beverage and other services, which were provided
to customers without charge, has been included in the respective revenue
classifications and then deducted as a promotional allowance. The estimated
direct costs of providing such complimentary services are included in
operating expenses and totaled approximately $3.4 million, $2.7 million, and
$9.2 million in 1997, 1996 and 1995, respectively.
Revenues from food, beverage, gift shop and related services are recognized
at the time the related service is performed.
Non-compete Agreement
A non-compete agreement for $3.8 million was entered into in July, 1995 and
is being amortized on a straight-line basis over three years. A separate non-
compete agreement for $30.7 million was entered into in October, 1992 and was
fully amortized as of December 31, 1995.
F-14
EMPRESS ENTERTAINMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The stockholders of the Company have elected, under Subchapter S of the
Internal Revenue Code, to include the Company's income in their individual
income tax returns. Accordingly, the Company is not subject to Federal income
taxes. The Company continues to be subject to certain state income taxes.
Pre-opening Expense
Pre-opening expenses, which consist principally of lease payments and
professional fees, were expensed as incurred.
2. OTHER ASSETS
Other assets consist of the following:
DECEMBER 31,
------------------------
1997 1996
----------- -----------
Licensing costs................................. $10,003,337 $ 9,803,337
Development related legal fees.................. 1,970,044 1,589,903
Loan acquisition costs.......................... 613,565 323,367
Organizational costs............................ 118,467 118,467
----------- -----------
12,705,413 11,835,074
Accumulated amortization........................ (1,236,619) (462,420)
----------- -----------
$11,468,794 $11,372,654
=========== ===========
Licensing costs represent amounts paid or committed to be paid to various
municipalities and organizations in connection with the granting of the
operating license from the Indiana Gaming Commission (see Note 8). Such assets
as well as the development related legal fees are being amortized on a
straight-line basis over 20 years.
Approximately $0.1 million and $3.4 million, for 1997 and 1996,
respectively, of these licensing costs were recorded based on an unconditional
commitment and a corresponding accrual was made. These assets are not
reflected on the Statement of Cash Flows.
3. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
Property taxes................................... $ 2,398,256 $ 483,003
Empress Club program............................. 1,585,138 800,431
Gaming and admission taxes....................... 1,506,868 1,320,762
Progressive jackpots............................. 1,027,032 977,669
Sales and use taxes.............................. 881,073 235,748
Development related commitments.................. 875,000 3,443,750
Chip and token float............................. 756,110 540,921
State income taxes............................... 455,001 416,238
Other............................................ 2,709,197 2,612,556
----------- -----------
$12,193,675 $10,831,078
=========== ===========
F-15
EMPRESS ENTERTAINMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-------------------------
1997 1996
------------ ------------
10 3/4% Notes.................................. $150,000,000 $150,000,000
Credit Facility................................ 56,000,000 39,000,000
Other.......................................... 2,523,788 5,723,753
------------ ------------
208,523,788 194,723,753
Current portion of long-term debt.............. 18,523,788 26,540,296
------------ ------------
$190,000,000 $168,183,457
============ ============
Empress Finance issued the 10 3/4% Notes pursuant to a public offering on
April 7, 1994. The 10 3/4% Notes are irrevocably and unconditionally
guaranteed on a senior unsecured basis by the Company, Empress Joliet, Empress
Hammond and all of its future subsidiaries.
Interest on the 10 3/4% Notes is payable semiannually on April 1 and October
1 of each year. The 10 3/4% Notes are due and payable on April 1, 2002. The
Company and all of its future subsidiaries may be required to repay all or a
portion of the 10 3/4% Notes upon the occurrences of certain repurchase events
described in the 1994 Indenture (the "1994 Indenture") which was entered into
by the Company in connection with this offering.
Certain provisions of the 1994 Indenture restrict, among other things, the
Company's ability to: (i) incur additional indebtedness; (ii) pay certain
dividends or make certain other restricted payments and investments; (iii)
enter into transactions with affiliates; and (iv) merge, consolidate, or
transfer substantially all of the Company's assets.
In June 1997, the Company entered into a $60.0 million Amended and Restated
Credit Facility (the "Existing Credit Facility") which will expire June 30,
2000. The Existing Credit Facility was issued in replacement and substitution
for the original $50.0 million credit facility issued on April 12, 1996. Under
the terms of the Existing Credit Facility, the Company is required to meet
certain financial and other covenants. The initial use of the funds was for
the construction of the Empress Hammond facility and for working capital
purposes.
Interest on the Existing Credit Facility is paid quarterly and is based upon
a variable rate based on the Federal Reserve's funds rate. The rate at
December 31, 1997 was 7.72%. The amount outstanding under the Existing Credit
Facility as of December 31, 1997 was $56.0 million. Beginning on December 31,
1997, on the last banking day of each March, June, September and December the
principal amount of the Existing Credit Facility will be reduced by $4.0
million with a balloon payment of $20.0 million at June 30, 2000.
As of December 31, 1997, the Company had two unused bank lines of credit
available totaling $6.0 million. As of December 31, 1996, the Company had used
$19.6 million of a $20.0 million line of credit. Interest on the $20.0 million
bank line of credit was based on the Federal Reserve fund rate. The rate at
December 31, 1996 was 6.57%. The entire portion of the outstanding balance of
the $20.0 million line of credit was paid in full on June 30, 1997.
The other financing represents vendor financing of gaming equipment.
Interest on the equipment financing is based upon a variable rate of 3% over
prime and is paid monthly. The principal balance due as of December 31, 1997
was approximately $2.5 million. The entire principal balance is due and
payable in 1998.
F-16
EMPRESS ENTERTAINMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The total fair value of the 10 3/4% Notes was approximately $162.0 million
as of December 31, 1997. Fair value was determined based on the quoted market
price of the 10 3/4% Notes. The carrying value of all other debt instruments
approximates fair value.
Aggregate maturities of long-term debt are as follows:
Year ending December 31:
1998...................... $ 18,523,788
1999...................... 16,000,000
2000...................... 24,000,000
2001...................... --
2002...................... 150,000,000
------------
$208,523,788
============
5. LEASE COMMITMENTS
The Company entered into a lease providing for the right to use the site of
the development and the parking structure which was conveyed to the City of
Hammond upon completion. The lease expires on the fifth anniversary of the
Company's procurement of its operating license from the Indiana Gaming
Commission (see Note 1). The term of the lease will be automatically extended
for periods equal to each renewal period of the operating license provided
that the total term will not exceed seventy-five (75) years. The Company has
paid in full the rent for the amount of $1.00 per year for the term of the
lease ($75.00).
The Company pays to the Hammond Port Authority ("HPA") an amount equal to
the aggregate of the annual rental being charged by the HPA for each boat slip
that is removed or taken out of operation as a result of the operation of the
Empress III. These rental amounts will be the same as the rental amounts
charged to other users of similar boat slips. The annual amount paid in 1997
and 1996 was approximately $0.3 million and $0.4 million, respectively.
Rent expense for the years ended December 31, 1997, 1996, and 1995 was
approximately $0.8 million, $0.8 million, and $0.3 million, respectively.
6. RELATED PARTY TRANSACTIONS
The Company engages businesses owned by certain stockholders of the Company
to provide certain services. The amounts paid for insurance brokerage provided
by such businesses were $2.7 million, $2.8 million, and $1.5 million, for the
years ended December 31, 1997, 1996, and 1995, respectively. The amounts paid
for construction services by such businesses were approximately $0.6 million,
$0.5 million, and $0.9 million, for the years ended December 31, 1997, 1996,
and 1995, respectively. The amounts paid for fuel purchases and related
transportation by such businesses were $0.5 million, $0.7 million, and $0.5
million for the years ended December 31, 1997, 1996, and 1995, respectively.
7. 401(K) PLAN
In 1993, the Company adopted a 401(k) plan covering substantially all of its
employees. The Company's contribution to the plan is based on a discretionary
percentage of employee contributions and may include an additional
discretionary amount. The Company incurred approximately $0.4 million, $0.3
million and $0.4 million of contribution expense related to the plan for the
years ended December 31, 1997, 1996, and 1995, respectively.
F-17
EMPRESS ENTERTAINMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONCLUDED)
8. COMMITMENTS
In June 1996, the Company executed a number of agreements which secure its
rights to operate in the City of Hammond at the Hammond marina. Significant
among the commitments, as of December 31, 1997, are the financial obligations
of the Company which include, but are not limited to the following:
.An annual payment to the City of Hammond of the greater of $3.0 million or
certain percentages of adjusted gross receipts as follows:
--4.0% up to $125.0 million;
--6.0% over $125.0 million to $200.0 million; and
--4.0% in excess of $200.0 million.
.A passenger payment to the HPA in the sum of $1.00 per passenger.
.An annual payment to the City of Hammond for police and fire purposes of
$1.0 million.
.Contributions to the City of Whiting and civic organizations in Whiting
for public safety and to promote economic development in the total sum of
$1.25 million. Payments to be made in equal installments over five years
commenced June 1996.
.Construction of a 200 room hotel and conference center with an estimated
cost of $10.0 million.
.Commercial development within the greater Hammond area with an estimated
cost of $10.0 million to be completed within 5 years of the date of the
Certificate of Suitability. No amounts have been expended as of December
31, 1997.
.Renovate existing housing and construction of new market rate housing in
the greater Hammond area with an estimated cost of $5.0 million to be
completed within 5 years of the date of the Certificate of Suitability.
No amounts have been expended as of December 31, 1997.
9. YEAR 2000 (UNAUDITED)
The Company has determined that it may need to modify portions of its
software so that its computer systems will function properly with respect to
dates in the year 2000 and beyond. The Company also has initiated discussions
with its software providers to ensure that those parties have appropriate
plans to remedy Year 2000 issues where their systems interface with the
Company's system or otherwise impact its operations. The Company is assessing
the extent to which its operations are vulnerable should those organizations
fail to properly remedy its computer systems.
10. SUBSEQUENT EVENT
On June 18, 1998, the Company issued $150.0 million of Senior Subordinated
Notes which mature in 2006 and have an interest rate of 8 1/8%. The proceeds
from the Notes were used to purchase U.S. Treasury Securities to effect a
covenant defeasance on the Company's 10 3/4% Notes. The Company placed $167.2
million of cash and U.S. Treasury Securities irrevocably in trust to effect
the covenant defeasance and intends to redeem all of the 10 3/4% Notes on
April 1, 1999 at 105.38% of par. The Company believes this amount will be
sufficient to repay the principal, interest and prepayment penalty which will
be required as of April 1, 1999. Concurrently with the issuance of the Notes,
the Company effected a reorganization to which Empress Joliet and Empress
Finance became wholly-owned subsidiaries of the Company. Empress Hammond,
Empress Joliet and Empress Finance are all guarantors of the Notes. Audited
financial information of those guarantor subsidiaries' has been omitted
because the Notes are guaranteed on a joint, several and unconditional basis
by all direct and indirect restricted subsidiaries of the parent. The parent
Company has no significant operations or assets separate from its investments
in its subsidiaries. All unrestricted non-guarantor subsidiaries of the parent
are not significant.
F-18
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY GUARANTOR OR THE EXCHANGE
AGENT. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, ANY OF THE NOTES OFFERED HEREBY IN ANY JURISDICTION WHERE,
OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, IN ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANYTIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE
SUCH DATE.
---------------
TABLE OF CONTENTS
Prospectus Summary......................................................... 1
Risk Factors............................................................... 13
The Exchange Offer......................................................... 24
Use of Proceeds............................................................ 35
Selected Combined Financial Data........................................... 36
Pro Forma Financial Data................................................... 37
Management's Discussion and Analysis of Financial Condition And Results of
Operations................................................................ 39
Business................................................................... 47
Regulatory Matters......................................................... 55
Management................................................................. 61
Certain Transactions....................................................... 67
Principal Stockholders..................................................... 70
Description of Certain Other Indebtedness.................................. 71
Description of the New Notes............................................... 72
Book-Entry; Delivery and Form.............................................. 97
Registration Rights........................................................ 99
Certain Federal Income Tax Considerations.................................. 101
Plan of Distribution....................................................... 103
Legal Matters.............................................................. 103
Independent Auditors....................................................... 103
Index to Combined Financial Statements..................................... F-1
---------------
UNTIL JANUARY 4, 1999 (90 DAYS AS OF THE DATE OF THIS PROSPECTUS), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PAR-
TICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
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$150,000,000
LOGO
EMPRESS ENTERTAINMENT, INC.
8 1/8% SENIOR SUBORDINATED NOTES DUE 2006
---------------
PROSPECTUS
---------------
OCTOBER 7, 1998
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