Filed On 3/31/99 ˇ SEC Files 333-60361, -01, -02, -03, -04 ˇ Accession Number 950131-99-1993
As Of Filer Filing On/For/As Docs:Pgs Issuer Agent
3/31/99 Empress Entertainment Inc 10-K 12/31/98 5:83 950131
Empress River Casino Finance Corp
Empress Casino Hammond Corp
Empress Casino Joliet Corp
Hammond Residential LLC
Document/Exhibit Description Pages Size
1: 10-K Annual Report 46 270K
2: EX-2.7 1st Amend. to Agreement and Plan of Merger 7 30K
3: EX-10.24 Employment Agreement - Peter Ferro 14 60K
4: EX-10.25 Employment Agreement - Joseph Canfora 14 60K
5: EX-27.1 Financial Data Schedule 2 10K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 333-60361
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EMPRESS ENTERTAINMENT, INC. (the "Company")
EMPRESS CASINO HAMMOND CORPORATION ("Empress Hammond")
EMPRESS CASINO JOLIET CORPORATION ("Empress Joliet")
EMPRESS RIVER CASINO FINANCE CORPORATION ("Empress Finance")
HAMMOND RESIDENTIAL, L.L.C. ("Hammond Residential")
(Exact name of Registrant as specified in its charter)
Delaware 36-
Indiana 3932031
Illinois 36-
Delaware 3865868
Indiana 36-
(State or other (Primary Standard 3740765
jurisdiction of Industrial (I.R.S. Employer
36-
3929804
Identification No.)
incorporation or Classification Code)
organization) 7999
2300 Empress Drive
Joliet, Illinois 60436
(Address of principal executive offices) (Zip Code)
(815) 744-9400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Company: Voting Common Stock, $0.01 Par Value--1,745.330 Shares as of March
31, 1999; Non-Voting,
Common Stock, $0.01 Par Value--164.035 Shares as of March 31, 1999.
Empress Hammond: Common Stock, No Par Value--1,000 Shares as of March 31,
1999.
Empress Joliet: Common Stock, No Par Value--1,000 Shares as of March 31, 1999.
Empress Finance: Common Stock, $0.01 Par Value--1,000 Shares as of March 31,
1999.
Hammond Residential: 100% Interest
As of said date, there was no voting and non-voting common equity held by
non-affiliates of the Registrant.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
XYes No
Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
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TABLE OF CONTENTS
ˇ Download Table
Page
----
ITEM 1. DESCRIPTION OF THE BUSINESS.................................... 1
ITEM 2. PROPERTIES..................................................... 9
ITEM 3. LEGAL PROCEEDINGS.............................................. 9
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.............. 10
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................ 10
ITEM 6. SELECTED FINANCIAL DATA........................................ 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 14
ITEM 8. FINANCIAL STATEMENTS........................................... 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 26
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 26
ITEM 11. EXECUTIVE COMPENSATION......................................... 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 32
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K....................................................... 35
i
PART I
Item 1. Description of the Business
Empress Entertainment, Inc. (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 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 1998, the Company's
casinos registered approximately nine million customer admissions and had the
highest share of casino revenue in the Chicago Market (approximately 25%). The
Company's 1998 average daily win per slot machine and table game was $303 and
$2,100, respectively. For the twelve months ended December 31, 1998, the
Company generated approximately $396.7 million of net revenues and $102.0
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. These casinos
generated 1998 casino revenue of approximately $1.5 billion, ranking first
among all U.S. riverboat casino markets.
Empress Hammond features a 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 1,720 slot
machines and 64 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 with 1,056 slot machines and 59 table games.
Empress Joliet includes an approximately 150,000 square foot Egyptian themed
pavilion featuring lounge and award-winning dining facilities including the
Zanzibar, the Steakhouse Alexandria, the Cafe Casablanca and the Marrakech
Market 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.
Company Strengths and Strategy
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 one of two Chicago Market
Casinos with a hotel to accommodate overnight visitors. 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.
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 features a hotel, an off-
track betting facility and 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. During 1998, the Company's daily gaming win per position exceeded the
averages of each of the ten largest U.S. riverboat casino markets. In 1998,
Empress Joliet received the "Best Blackjack Games in the U.S.A." award 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 December 31, 1998, approximately 1,000,000 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
Merger Agreement
On September 2, 1998, the Company entered into an Agreement and Plan of
Merger with Horseshoe Gaming (Midwest), Inc. and certain of its affiliates
(Horseshoe Gaming (Midwest), Inc. and its affiliates are collectively referred
to herein as "Horseshoe Midwest") which, if consummated, would result in the
acquisition by Horseshoe Midwest of all of the outstanding stock of Empress
Hammond and Empress Joliet via two simultaneous merger transactions (the
"Proposed Mergers").
Consummation of the Plan of Merger constitutes a "Change of Control" under
the Indenture (as hereinafter defined) and will trigger Horseshoe Midwest's
obligation to make an irrevocable offer to purchase the Notes (as hereinafter
defined) (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. 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 the 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.
Amendment to Merger Agreement
On March 25, 1999, the Company and Horseshoe Midwest executed an amendment
to the Plan of Merger (the "Amendment"). The Amendment extends the termination
date of the Merger Agreement until September
2
30, 1999. In addition, the Company will be entitled to terminate the Merger
Agreement and retain the Escrow Funds if certain events are not completed or
consummated by certain specified dates.
Exchange Offer
On June 18, 1998 the Company sold to the Initial Purchasers (the
"Offering") an aggregate of $150 million principal amount 8 1/8% Senior
Subordinated Notes due 2006 (the "Old Notes") 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,
Empress Hammond, Empress Joliet, Empress Finance, Hammond Residential (Empress
Hammond, Empress Joliet, Empress Finance and Hammond Residential are
collectively referred to herein as the "Guarantors") and the Initial
Purchasers.
The Company offered to exchange, through an S-4 Exchange Offer Registration
Statement, an aggregate of up to $150 million principal amount of its 8 1/8%
Senior Subordinated Notes due 2006 (the "Exchange Notes"), which are
registered under the Securities Act of 1933, as amended (the "Securities
Act"). The Old Notes were, and the Exchange Notes are, issued 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 (in such
capacity, the "Trustee"). The form and terms of the Exchange Notes are
identical in all material respects to the form and terms of the Old Notes,
except that (i) the Exchange Notes were registered under the Securities Act
and, therefore, do not bear legends restricting the transfer thereof, (ii)
holders of Exchange Notes are not entitled to any increase in the interest
rate thereon pursuant to certain circumstances under a Registration Rights
Agreement entered into by the Company and the Initial Purchasers, and (iii)
holders of Exchange Notes will no longer be entitled to certain other rights
under the Registration Rights Agreement.
On November 6, 1998, the Exchange Offer was completed when the holders of
the Old Notes tendered for a $150 million aggregate principal amount of
Exchange Notes.
Covenant Defeasance
Concurrently with the Offering, the Company, Empress Hammond and Empress
Joliet entered into a $100 million Credit Facility with Wells Fargo Bank, N.A.
(the "Credit Facility") to replace its existing credit facility. Upon
consummation of the sale of the Old Notes to the Initial Purchasers and the
entering into of the Credit Facility, the Company irrevocably deposited $173.4
million (the "Covenant Defeasance") for the purpose of effecting the
redemption of all of Empress Finance's 10 3/4% Senior Notes due 2002 (the "10
3/4% Senior Notes"). On February 10, 1999, the Trustee sent out a Notice of
Redemption to the holders of the 10 3/4% Senior Notes announcing the
redemption of such Notes. The Company will redeem all of the 10 3/4% Senior
Notes on April 1, 1999 at 105.38% of par, which represents the full amount on
deposit.
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; Harrah's 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.
Certain of the Company's competitors are larger and have significantly
greater financial and other resources than the Company.
3
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 four gaming
licenses and one certificate of suitability to other riverboats located on the
Ohio River in southern Indiana, the closest of which is located over 250 miles
from downtown Chicago.
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.
Illinois
The Illinois Riverboat Gambling Act ("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. However, one
licensed operator, which operated from East Dubuque, Illinois, has ceased
operations.
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.
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.
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
4
approved in nearby states such as Iowa and Missouri. Moreover, it is
anticipated that the three land-based casinos authorized in Detroit, Michigan,
will begin gaming operations at temporary facilities by late September of
1999. The opening of such temporary facilities, however, is contingent upon
winning state licensing from the Michigan Gaming Control Board, which is not
expected to begin its review until late spring or early summer of 1999.
Employees
As of December 31, 1998, the Company had approximately 3,036 full-time
employees, of which 2,573 are hourly employees and the remainder are salaried
employees. Approximately 12.5% 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 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.
Gaming Regulation
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 Gambling Act (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.
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. Empress Hammond
believes that its current compliance record and standing with the Indiana
Gaming Commission indicate that the Indiana License will likely be renewed.
However, 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.
5
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 and is effective through June 1999. As a condition to
maintaining the Illinois License, Empress Joliet must, among other things,
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.
Non-Gaming Regulation
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. The underwater hull survey
has been completed on the Empress I and the Empress II. Empress III is due for
inspection in September 2000. 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.
Safe Harbor Statement Under The Private Securities Litigation Reform Act of
1995
The Company cautions readers that certain important factors may affect the
Company's actual results and could cause such results to differ materially
from forward-looking statements which may be deemed to have been made in this
Form 10-K, or which are otherwise made by or on behalf of the Company. Such
factors include, but are not limited to, changing market conditions; the
availability and cost of materials for the Company's products, the timely
development and market acceptance of the Company's products; and other risks
detailed under the caption "Risk Factors" below or otherwise described herein
or detailed from time to time in the Company's Securities and Exchange
Commission filings.
6
Risk Factors
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE
OTHER INFORMATION IN THIS REPORT ON FORM 10-K IN EVALUATING THE COMPANY AND ITS
BUSINESS.
Leverage and Ability to Service Debt
As a result of the Offering and borrowings by the Company under the Credit
Facility, the Company has a significant amount of Indebtedness. At December 31,
1998, excluding Defeased Debt, the Company had total consolidated long-term
indebtedness of $176.0 million (including $150.0 million of the Exchange Notes)
and $74.0 million of availability under the Credit Facility. In addition,
subject to the restrictions in the Indenture governing the Exchange 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, it
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.
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.
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, Inc.
was formed to hold a 50% ownership interest in a limited liability company that
acquired the Woodlands Racetrack in Kansas City, Kansas on December 31, 1998.
Empress Racing, Inc. has been designated as an Unrestricted Subsidiary under
the Indenture and is not a Guarantor of the Exchange Notes. There can be no
assurance that the Woodlands transaction 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.
From time to time the Company may form other subsidiaries to pursue gaming
opportunities in other jurisdictions. The Company may designate such
subsidiaries as Unrestricted Subsidiaries and therefore, the subsidiaries would
not be a Guarantor of the Exchange Notes. However, there can be no assurance
that such gaming opportunities will become available to the Company or such
opportunities will become available on terms and conditions acceptable to the
Company.
Repurchase of Notes upon a Required Regulatory Redemption or Change of Control
The Exchange 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 ("Gaming License"), 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 Exchange Note is required to be found
7
suitable, or otherwise qualify, under any Gaming Laws and is not found
suitable or so qualified. Upon a Change of Control, each holder of the
Exchange Notes will, subject to certain limitations, have the right to require
the Company to repurchase all or a portion of such holder's Exchange 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. There can be
no assurance that the Company 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.
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 in the Chicago Market. Therefore, it is not possible to estimate
future operating revenues and expenses of the Company based upon historical
operating performance.
Commitments to Governmental Authorities
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"). As of December
31, 1998, approximately $23.6 million of such commitments remained outstanding
primarily for commercial development, residential development and the
construction of a hotel. 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 1998, Empress Hammond paid approximately $10.3 million to
the City to satisfy its commitments to the City of Hammond. 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.
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.
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.
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.
8
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.
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 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.
Item 2. Properties
The Company's corporate headquarters are located within Empress Joliet's
150,000 square foot pavilion. In addition to the pavilion, Empress Joliet owns
the Empress I and Empress II, which collectively contain 36,000 square feet of
gaming space, the dock site from which they operate and the surrounding land-
based facilities, which encompass approximately 350 acres along the Des
Plaines River in Joliet, Illinois.
Empress Hammond includes an approximately 125,000 square foot pavilion.
Although the real estate is owned by the City of Hammond, Empress Hammond has
a 75 year lease for the use of such real estate. Empress Hammond owns the
Empress III, which contains approximately 42,500 square feet of gaming space.
In addition, Empress Hammond owns a ten acre parcel of land located next to
its complex.
Item 3. Legal Proceedings
The Company is from time to time a party to legal proceedings arising in
the ordinary course of business. Other than as discussed below, the Company is
unaware of any legal proceedings which, even if the outcome were unfavorable
to the Company, would have a material adverse impact on either its financial
condition or results of operations.
The City of Hammond is a 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 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 appealed
this decision to the Indiana appellate court. As a result, it is not yet clear
how much, or when, the condemnation award will be paid.
On July 21, 1998, a lawsuit was filed against Empress Joliet and Empress
Hammond and four of their employees by two former female employees of Empress
Joliet, alleging that Empress Joliet and Empress Hammond 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 their
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. The Company denies the allegations in the
complaint and intends to vigorously contest this matter. A trial date has been
set for April 3, 2000.
9
In March 1999, certain former shareholders of Empress Joliet filed suit
against Empress Joliet alleging breach of contract. In 1995, Empress Joliet
and its shareholders settled certain prior litigation with these former
shareholders and entered into a settlement agreement pursuant to which, among
other things, Empress Joliet agreed to certain reimbursements to the former
shareholders for their payment of taxes on Empress Joliet's 1995 income
through the date of settlement. The complaint alleges that Empress Joliet (and
its then shareholders) breached the settlement agreement with respect to the
reimbursement of tax payments. The Company denies the allegations and intends
to vigorously contest this matter.
Item 4. Submission of Matters to Vote of Security Holders
None.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
There is no established public market for the Company's equity securities.
In June 1998, concurrent with the Offering and the Covenant Defeasance, the
Company, Empress Hammond, Empress Joliet, Empress Finance and Hammond
Residential effected a corporate reorganization whereby (i) Empress Joliet
merged into a newly formed wholly-owned subsidiary of the Company, with
Empress Joliet surviving the merger; (ii) the Empress III was transferred to
Empress Hammond; and (iii) Empress Joliet's stock in Empress Finance was sold
to the Company so that it became a wholly-owned subsidiary of the Company. As
a result of the reorganization, the Company operates the Empress III through
its wholly-owned subsidiary Empress Hammond and operates the Empress I and
Empress II through its wholly-owned subsidiary Empress Joliet. Upon the merger
of Empress Joliet into the Company's subsidiary, the stockholders' shares in
Empress Joliet were cancelled and deemed of no further force and effect and
the stockholders were issued voting and non-voting common stock in the
Company.
In November 1997, as part of a reorganization, Empress Hammond was merged
into a wholly-owned subsidiary of the Company with Empress Hammond surviving
the merger. In connection with the reorganization, Martin J. McNally, who held
non-voting common stock in Empress Hammond was issued 29.245 shares of non-
voting common stock of the Company. The Company issued the shares to Mr.
McNally in reliance on the exemption for non-public offerings contained in
section 4(2) of the Securities Act.
Item 6. Selected Financial Data
ˇ Download Table
Year Ended December 31, (in Millions)
---------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ -----------
(Unaudited)
Statement of Operations Data:
Net revenues(1)......................... $396.7 $369.6 $278.7 $214.6 $215.3
Income from operations.................. 80.9 64.6 60.2 62.5 66.9
Net income.............................. 61.3 46.3 44.9 50.6 57.5
Balance Sheet Data:
Total assets............................ 426.8 291.5 288.3 201.8 208.2
Total debt.............................. 326.0 208.5 214.3 150.6 152.2
Stockholders' equity.................... 67.4 55.9 49.6 36.8 33.4
--------
(1) Empress Hammond commenced gaming operations on June 28, 1996.
10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding
of the consolidated financial condition and results of operations of the
Company. The discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto.
Results of Operations
The following discussion is based upon the consolidated operating results
of the Company.
Twelve Months Ended December 31, 1998 Compared to Twelve Months Ended
December 31, 1997
Net revenues for the twelve months ended December 31, 1998 were
approximately $396.7 million, an increase of approximately $27.1 million, or
7.3% compared to net revenues of approximately $369.6 million for the twelve
months ended December 31, 1997. The increase in net revenues was primarily
attributable to increased casino revenue. Empress Hammond's net revenues
increased from $221.6 million to $232.8 million and Empress Joliet's net
revenues increased from $152.7 million to $168.4 million.
Casino revenues were approximately $373.0 million for the twelve months
ended December 31, 1998 compared to approximately $346.0 million for the
twelve months ended December 31, 1997, an increase of approximately $27.0
million, or 7.8%. Empress Hammond's casino revenues increased from $210.1
million to $220.1 million primarily due to increased admissions and Empress
Joliet's casino revenues increased from $136.0 million to $152.9 million due
to an increase in win per admission.
Casino expenses totaled approximately $194.0 million for the twelve months
ended December 31, 1998, an increase of 7.6% or approximately $13.7 million
compared to $180.3 million for the twelve months ended December 31, 1997. This
increase was principally due to an increase in gaming and admission taxes
partially offset by a decrease in casino marketing and promotional expenses.
Empress Hammond's casino expenses increased from $109.2 million to $110.9
million and Empress Joliet Casino expenses increased from $71.1 million to
$83.1 million due to an increase in gaming taxes in Illinois.
Expenses relating to non-gaming operations, including depreciation and
amortization, for the twelve months ended December 31, 1998 totaled
approximately $121.8 million, a decrease of 2.3% or approximately $2.9 million
compared to the twelve months ended December 31, 1997. Expenses relating to
non-gaming operations for Empress Hammond increased from $71.7 million to
$72.5 million. This increase was offset by a decrease in expenses relating to
non-gaming operations at Empress Joliet, which decreased from $60.7 million to
$53.9 million, primarily due to a decrease in sales and general and
administration expenses.
Income from operations for the twelve months ended December 31, 1998
totaled approximately $80.9 million compared to approximately $64.6 million
for the twelve months ended December 31, 1997, an increase of approximately
$16.3 million, or 25.2%. Income from operations at Empress Hammond increased
from $40.7 million to $49.4 million and income from operations at Empress
Joliet increased from $21.0 million to $31.5 million.
Net interest expense for the twelve months ended December 31, 1998 was
approximately $18.8 million, an increase of approximately $1.0 million
compared to the twelve months ended December 31, 1997. This increase was a
result of the additional interest expense associated with the refinancing and
related Covenant Defeasance of the Company's debt.
Net income amounted to approximately $61.3 million and $46.3 million for
the twelve months ended December 31, 1998 and 1997, respectively. This
increase in net income was due to the factors discussed above.
11
Twelve Months Ended December 31, 1997 Compared to Twelve Months Ended December
31, 1996
Net revenues for the twelve months ended December 31, 1997 were
approximately $369.6 million, an increase of 32.6% from net revenues of
approximately $278.7 million for the year ended December 31, 1996. The increase
in net revenue was primarily attributable to a full year of operations at
Empress Hammond, partially offset by a decrease in revenues at Empress Joliet
due to increased competition in the Chicagoland market.
Casino revenues were approximately $346.0 million for the year ended
December 31, 1997 compared to approximately $263.0 million for the year ended
December 31, 1996, an increase of approximately $83.0 million, or 31.6%. This
change was due to a full year of operations at Empress Hammond, partially
offset by a decrease in revenues at Empress Joliet due to increased competition
in the Chicagoland market.
Revenues from non-gaming operations, consisting primarily of food and
beverage, parking, gift shop and hotel revenues, were approximately $34.9
million for the year ended December 31, 1997 compared to approximately $22.8
million for the year ended December 31, 1996, an increase of approximately
$12.1 million, or 53.1%. The increase in revenues from non-gaming operations
was primarily due to the full year impact of the Empress Hammond and hotel
revenue at Empress Joliet, partially offset by a decrease in food and beverage
revenue at Empress Joliet.
Promotional allowances increased approximately $4.1 million for the year
ended December 31, 1997 compared to the year ended December 31, 1996. This
increase was primarily attributable to a full year of operations at Empress
Hammond, partially offset by a decrease in promotional allowances at Empress
Joliet.
Casino expenses totaled approximately $180.3 million for the twelve months
ended December 31, 1997, an increase of 42.2% or approximately $53.5 million
compared to $126.8 million for the twelve months ended December 31, 1996. This
decrease was principally due to an increase in gaming and admissions taxes at
Empress Hammond as a result of a full year of operation partially offset by a
decrease in gaming and admission taxes at Empress Joliet due to a decrease in
revenues as a result of increased competition in the Chicagoland market.
Expenses relating to non-gaming operations, including depreciation and
amortization, for the twelve months ended December 31, 1997 totaled
approximately $124.7 million, an increase of 36.0% or approximately $33.0
million compared to the twelve months ended December 31, 1996. This increase
was primarily due to a full year of operations at Empress Hammond.
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, partially offset by a
decline in the results of operations at Empress Joliet.
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 additional interest
expense associated with increased borrowings under the Company's credit
facilities and vendor financing of gaming equipment.
Net income amounted to approximately $46.3 million and $44.9 million for the
years ended December 31, 1997 and December 31, 1996, respectively. This
increase in net income was due to the factors discussed above.
Liquidity and Capital Resources
For the twelve months ended December 31, 1998, the Company generated cash
flow from operations of approximately $90.9 million compared to approximately
$70.3 million for the twelve months ended December 31, 1997. This increase of
approximately $20.6 million was primarily attributable to an increase in net
income as well as an increase in interest payable due to the Company's
refinancing.
During the twelve months ended December 31, 1998, the Company contributed
$9.2 million to an unrestricted subsidiary, which holds a 50% ownership
interest in a limited liability company. The limited liability
12
company used these funds to acquire certain outstanding secured indebtedness
of Sunflower Racing, Inc., the owner of the Woodlands Racetrack in Kansas
City, Kansas. Kansas Racing subsequently acquired the Woodlands Racetrack with
a bid in an auction pursuant to a proceeding under Chapter 7 of the U.S.
Bankruptcy Code.
During the twelve months ended December 31, 1998, the Company purchased
approximately $26.5 million of property and equipment, primarily related to
the addition of the fourth deck on Empress III, remodeling of Empress I and
Empress II and interior and exterior renovations to the Empress Joliet
pavilion. During the twelve months ended December 31, 1998, proceeds from
borrowings were approximately $187.5 million, including the issuance of the
$150.0 million 8 1/8% Notes, the proceeds of which were used to purchase an
investment in U.S. Treasury securities to be held in trust for the purpose of
effecting the Covenant Defeasance of the 10 3/4% Senior Notes. During the
twelve months ended December 31, 1998, payments on borrowings were
approximately $70.0 million, which included the pay down of the outstanding
balance of the $60.0 million amended and restated credit facility and $11.5
million in repayments on the current revolving Credit Facility.
During the twelve months ended December 31, 1998 and 1997, stockholder
distributions totaled approximately $45.2 million and $40.1 million,
respectively. During the twelve months ended December 31, 1998 and 1997,
approximately $28.4 million and approximately $24.3 million, respectively, was
distributed to permit shareholders to pay federal and state income taxes.
As of December 31, 1998, the Company had $26.0 million outstanding under
its $100.0 million revolving Credit Facility.
The Company's 1999 operating plan includes capital expenditures totaling
approximately $12.4 million. Capital improvements include the renovation of
the interior of the Empress Hammond pavilion and an addition of a nightclub to
the Empress Joliet pavilion.
The Company anticipates that cash on hand and cash flows from operations
and the revolving Credit Facility will be sufficient to satisfy the Company's
cash requirements as currently contemplated.
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.
As 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 conversions 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 vendors and 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.
13
This is a Year 2000 readiness disclosure entitled to protection as provided
in the Year 2000 Information and Readiness Disclosure Act.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk--Interest Rate Sensitivity
The market risk inherent in the Company's financial instruments is the
potential loss in fair value arising from the adverse changes in interest
rates. Currently, the Company does not use interest rate derivative instruments
to manage exposure to interest rate changes as the vast majority of the
Company's indebtedness is financed at fixed rates. At December 31, 1998, the
carrying amount of the Company's long-term debt instruments approximated their
fair value.
Item 8. Financial Statements
Page
----
Report of Independent Auditors.............................................15
Consolidated Balance Sheets................................................16
Consolidated Statements of Income..........................................17
Consolidated Statements of Stockholders' Equity............................18
Consolidated Statements of Cash Flows......................................19
Notes to Consolidated Financial Statements.................................20
14
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Empress Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of Empress
Entertainment, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. 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 consolidated financial position of Empress
Entertainment, Inc. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash for each of the years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
March 26, 1999
15
EMPRESS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
ˇ Download Table
December 31,
------------------
1998 1997
-------- --------
(In Thousands
Except Share
Amounts)
Assets
Current assets:
Cash and cash equivalents................................. $ 33,555 $ 73,257
Marketable securities, at fair value which approximates
cost..................................................... -- 10,010
Accounts receivable, less allowance for doubtful accounts
of $2,235 and $1,762, respectively....................... 2,908 3,789
Other current assets...................................... 3,099 3,393
US Treasuries held for defeasance including accrued
interest and unamortized premium......................... 163,933 --
-------- --------
Total current assets.................................... 203,495 90,449
Property and equipment, net................................. 193,809 185,911
Other assets, net........................................... 29,509 15,182
-------- --------
Total assets............................................ $426,813 $291,542
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.......................................... $ 4,289 $ 3,535
Accrued payroll and related expenses...................... 6,802 7,356
Interest payable.......................................... 10,799 4,074
Other accrued liabilities................................. 11,573 12,194
Current portion of long-term debt......................... 150,000 18,524
-------- --------
Total current liabilities............................... 183,463 45,683
Long-term debt.............................................. 176,000 190,000
Commitments and contingencies
Stockholders' equity:
Common stock; $.01 par value; 6,000 shares authorized;
1,909.365
and 1,926.746 shares issued and outstanding,
respectively............................................. -- --
Treasury stock; 17.381 shares, held at cost............... (4,667) --
Additional paid-in capital................................ 16,548 16,548
Retained earnings......................................... 55,469 39,311
-------- --------
Total stockholders' equity.............................. 67,350 55,859
-------- --------
Total liabilities and stockholders' equity............ $426,813 $291,542
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
16
EMPRESS ENTERTAINMENT, INC
CONSOLIDATED STATEMENTS OF INCOME
ˇ Download Table
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
Revenues:
Casino......................................... $373,038 $346,049 $263,040
Food and beverage.............................. 27,889 27,344 17,991
Hotel, parking, retail and other............... 7,070 7,554 4,836
-------- -------- --------
Gross revenues................................. 407,997 380,947 285,867
Less: promotional allowances................... (11,331) (11,303) (7,205)
-------- -------- --------
Net revenues................................. 396,666 369,644 278,662
Operating expenses:
Casino......................................... 193,950 180,253 126,846
Food and beverage.............................. 25,986 26,903 18,205
Hotel, parking and retail...................... 4,210 5,523 6,153
Sales, general and administrative.............. 50,229 52,284 31,569
Other operating................................ 20,267 21,184 16,167
Pre-opening.................................... -- -- 5,672
Depreciation and amortization.................. 21,124 18,849 13,896
-------- -------- --------
315,766 304,996 218,508
Income from operations........................... 80,900 64,648 60,154
Other income (expense):
Interest income................................ 6,710 3,324 3,487
Interest expense............................... (25,559) (21,154) (18,274)
-------- -------- --------
Income before state income taxes................. 62,051 46,818 45,367
Provision for state income taxes................. 433 514 447
-------- -------- --------
Income before extraordinary item................. 61,618 46,304 44,920
Extraordinary loss on early extinguishment of
debt............................................ 292 -- --
-------- -------- --------
Net income................................... $ 61,326 $ 46,304 $ 44,920
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
17
EMPRESS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ˇ Download Table
Additional Total
Common Treasury Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
------ -------- ---------- -------- -------------
(In Thousands)
Balance December 31, 1995... $-- $ -- $16,430 $ 20,417 $ 36,847
Net income.................. -- -- -- 44,920 44,920
Sale and issuance of common
stock...................... -- -- 118 -- 118
Cash distributions to
stockholders............... -- -- -- (32,273) (32,273)
---- ------- ------- -------- --------
Balance December 31, 1996... -- -- 16,548 33,064 49,612
Net income.................. -- -- -- 46,304 46,304
Cash distributions to
stockholders............... -- -- -- (40,057) (40,057)
---- ------- ------- -------- --------
Balance December 31, 1997... -- -- 16,548 39,311 55,859
Net income.................. -- -- -- 61,326 61,326
Purchase of stock for
treasury................... -- (4,667) -- -- (4,667)
Cash distributions to
stockholders............... -- -- -- (45,168) (45,168)
---- ------- ------- -------- --------
Balance December 31, 1998... $-- $(4,667) $16,548 $ 55,469 $ 67,350
==== ======= ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
18
EMPRESS ENTERTAINMENT, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
ˇ Download Table
Year Ended December 31,
------------------------------
1998 1997 1996
--------- -------- ---------
(In Thousands)
Cash flows from operating activities:
Net income.................................... $ 61,326 $ 46,304 $ 44,920
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization............... 21,124 18,849 13,896
Other....................................... 696 833 983
Write off of unamortized loan costs......... 292 -- --
Change in operating assets and liabilities:
Accounts receivable......................... 881 (643) (1,770)
Other current assets........................ 294 2,297 (320)
Accounts payable............................ 754 591 (109)
Accrued payroll and related expenses........ (556) 982 3,315
Interest payable............................ 6,725 (152) 194
Other accrued liabilities................... (621) 1,263 3,192
--------- -------- ---------
Net cash provided by operating activities... 90,915 70,324 64,301
--------- -------- ---------
Cash flows from investing activities:
Purchase of investments....................... (185,948) (62,847) (61,495)
Proceeds from sale of investments............. 33,910 83,079 57,539
Increase in interest receivable on
investments.................................. (2,538) -- --
Purchase of property and equipment............ (26,476) (16,137) (105,988)
Decrease in restricted cash................... -- -- 23,611
Increase in other assets...................... (10,532) (480) (4,850)
--------- -------- ---------
Net cash provided by (used in) investing
activities................................. (191,584) 3,615 (91,183)
--------- -------- ---------
Cash flows from financing activities:
Proceeds from borrowings...................... 187,500 28,965 66,681
Payments on borrowings........................ (70,024) (34,765) (2,991)
Payment of financing costs.................... (6,674) (290) --
Sale of common stock.......................... -- -- 118
Purchase of treasury stock.................... (4,667) -- --
Stockholder distributions..................... (45,168) (40,057) (32,273)
--------- -------- ---------
Net cash provided by (used in) financing
activities................................. 60,967 (46,147) 31,535
--------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................ (39,702) 27,792 4,653
Cash and cash equivalents, beginning of year.. 73,257 45,465 40,812
--------- -------- ---------
Cash and cash equivalents, end of year........ $ 33,555 $ 73,257 $ 45,465
========= ======== =========
Supplemental disclosure of cash flow
information:
Interest paid............................... $ 18,957 $ 20,636 $ 18,950
Income taxes paid........................... $ 798 $ 475 $ 825
The accompanying notes are an integral part of these consolidated financial
statements.
19
EMPRESS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Casino
Hammond Corporation ("Empress Hammond") incorporated on November 25, 1992,
Empress Casino Joliet Corporation ("Empress Joliet") incorporated on December
26, 1990, Empress River Casino Finance Corporation ("Empress Finance")
incorporated on January 7, 1994, and Empress Opportunities, Inc. ("Empress
Opportunities") incorporated on July 14, 1998. 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.
Empress Opportunities was formed as an unrestricted subsidiary to serve as a
holding company, under which the Company is pursuing certain business
opportunities other than the Company's gaming operations in Hammond, Indiana
and Joliet, Illinois. Empress Racing, Inc. ("Empress Racing") was formed as an
unrestricted subsidiary of Empress Opportunities to hold a 50% ownership
interest in Kansas Racing, LLC, which acquired certain indebtedness of
Sunflower Racing, Inc., then the owner of the Woodlands Racetrack in Kansas
City, Kansas. Kansas Racing subsequently acquired the Woodlands Racetrack with
a bid in an auction pursuant to a proceeding under Chapter 7 of the U.S.
Bankruptcy Code.
The preparation of financial statements in conformity with generally
accepted accounting principals 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.
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.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Costs for major improvements are capitalized while
the cost of normal repairs and maintenance are expensed as incurred.
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 are 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, impairment 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 or fair value less costs
related to the assets' disposition. The Company performs an annual evaluation
to identify potential impairment of long-lived assets.
20
EMPRESS ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Debt Issuance Costs
Debt issuance costs incurred