-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RqxUdLPy7JVzCS4+Hk/ZxEwJ6po4U5H0kX8nkhfFWdV9eeCuErlnHtn+MI2ckaVz vGhNqU4oWWVzGJuF94cm6w== 0001047469-99-010478.txt : 19990322 0001047469-99-010478.hdr.sgml : 19990322 ACCESSION NUMBER: 0001047469-99-010478 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 29 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARRAHS ENTERTAINMENT INC CENTRAL INDEX KEY: 0000858339 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 621411755 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10410 FILM NUMBER: 99568735 BUSINESS ADDRESS: STREET 1: 1023 CHERRY ROAD CITY: MEMPHIS STATE: TN ZIP: 38117 BUSINESS PHONE: 9017628600 MAIL ADDRESS: STREET 1: 1023 CHERRY ROAD CITY: MEMPHIS STATE: TN ZIP: 38117 FORMER COMPANY: FORMER CONFORMED NAME: PROMUS COMPANIES INC DATE OF NAME CHANGE: 19920703 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 NO. 1-10410 HARRAH'S ENTERTAINMENT, INC. (Exact name of registrant as specified in its charter) DELAWARE I.R.S. NO. 62-1411755 (State of (I.R.S. Employer Identification No.) Incorporation)
1023 CHERRY ROAD MEMPHIS, TENNESSEE 38117 (Address of principal executive offices) (zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (901) 762-8600 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------------------------------------------------------ ---------------------------------------------- Common Capital Stock, Par Value $0.10 per share* NEW YORK STOCK EXCHANGE CHICAGO STOCK EXCHANGE PACIFIC EXCHANGE PHILADELPHIA STOCK EXCHANGE
* Common Capital Stock also has special stock purchase rights listed on each of the same exchanges SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE 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. Yes /X/ No / / Indicate 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. /X/ The aggregate market value of the voting stock held by non-affiliates of the registrant as of January 29, 1999, based upon the closing price of $14.875 for the Common Stock on the New York Stock Exchange on that date, was $1,869,450,447. As of January 29, 1999, the Registrant had 127,111,970 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the 1999 Annual Meeting of Stockholders, which will be filed within 120 days after the end of the fiscal year, are incorporated by reference into Part III hereof and portions of the Company's Annual Report to Stockholders for the year ended December 31, 1998 (the "Annual Report") are incorporated by reference into Parts I and II hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES. Harrah's Entertainment, Inc. (referred to herein, together with its subsidiaries where the context requires, as the "Company" or "Harrah's Entertainment") is one of the leading casino entertainment companies in the United States. Harrah's Entertainment, formerly named The Promus Companies Incorporated ("Promus"), was incorporated on November 2, 1989 under Delaware law. On June 30, 1995, Promus changed its name to Harrah's Entertainment, Inc., following the spin-off of its hotel business into a separate public corporation. Harrah's Entertainment conducts its business through its wholly-owned subsidiary, Harrah's Operating Company, Inc. ("HOC") (formerly named Embassy Suites, Inc. ("Embassy")), and through HOC's subsidiaries. The principal asset of Harrah's Entertainment is the stock of HOC, which holds, directly or indirectly through subsidiaries, substantially all of the assets of the Company's businesses. The principal executive offices of Harrah's Entertainment are located at 1023 Cherry Road, Memphis, Tennessee 38117, telephone (901) 762-8600. On June 1, 1998, the Company completed its acquisition of Showboat, Inc. ("Showboat"). Showboat owns and operates casinos in Atlantic City, New Jersey and Las Vegas, Nevada. It manages and is the largest single shareholder, currently owning approximately 24.6%, of the Star City casino in Sydney, New South Wales, Australia. Effective February 26, 1999, Showboat also owns approximately 99.5% of subsidiaries which own and manage the Harrah's East Chicago Casino in East Chicago, Indiana. On October 30, 1998, the Plan of Reorganization of Harrah's Jazz Company was consummated, clearing the way for the construction of the new Harrah's New Orleans Casino in New Orleans, Louisiana. On January 1, 1999, the Company completed its merger with Rio Hotel & Casino, Inc. ("Rio"). Rio owns and operates the Rio Hotel & Casino, an all-suite hotel and casino located in Las Vegas, Nevada, as well as the Rio Secco Golf Club in nearby Seven Hills, Nevada. The Company terminated its management of the Sky City casino in Auckland, New Zealand on June 30, 1998. On November 2, 1998, the Company turned over management of the Harrah's Skagit Valley casino to the Upper Skagit Valley Tribe, and the Harrah's name was removed from the property. In January 1999, Harrah's Entertainment announced plans to relocate its corporate headquarters and move its senior corporate executives and their support staffs to Las Vegas, Nevada, beginning in August 1999. The Company's national service headquarters will remain in Memphis, Tennessee. The Company believes that the relocation to the epicenter of the casino industry will improve its business by expanding its knowledge base of the gaming market, enhancing its product and service innovation, fueling its corporate development and increasing its visibility and accessibility to important industry, political and customer constituencies. The Company further believes that expanding its presence in the world's largest casino marketplace will benefit its entire national distribution network and will enhance its ability to attract and retain the highest quality senior executives in the gaming industry. The cost of the relocation is not expected to be material. Operating data for the three most recent fiscal years, together with interest expense and other income, is set forth on pages 26 through 29 of the Annual Report, which pages of the Annual Report are incorporated herein by reference. 1 For information on operating results and a discussion of those results, see "Management's Discussion and Analysis--Results of Operations" on pages 25 through 35 of the Annual Report, which pages are incorporated herein by reference. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward looking statements. Certain information included in this Annual Report on Form 10-K and other materials filed or to be filed by the Company with the Securities and Exchange Commission ("SEC") (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are forward looking. These include statements relating to the following activities, among others: (A) operations and expansions of existing properties, including future performance, anticipated scope and opening dates of expansions; (B) construction or development of casinos; (C) planned capital expenditures for 1999 and beyond and any future debt refinancing; (D) the impact of the WINet and Total Gold Programs; (E) the launch of National Airlines; and (F) Year 2000 compliance efforts and costs. These activities involve important factors that could cause actual results to differ materially from those expressed in any forward looking statements made by or on behalf of the Company. These include, but are not limited to, the following factors as well as other factors described from time to time in the Company's reports filed with the SEC: construction factors, including zoning issues, environmental restrictions, soil and water conditions, weather and other hazards, site access matters and building permit issues; access to available and feasible financing; regulatory, licensing and other governmental approvals, third party consents and approvals, and relations with partners, owners and other third parties; conditions of credit markets and other business and economic conditions; litigation, judicial actions and political uncertainties, including gaming legislative action and taxation; and effects of competition, including locations of competitors and operating and marketing competition. Any forward looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. 2 CASINO ENTERTAINMENT GENERAL The Company's casino business commenced operations more than 60 years ago and is unique among casino entertainment companies in its broad geographic diversification. At year end, Harrah's Entertainment operated casino hotels in the five traditional U.S. gaming markets of Reno, Lake Tahoe, Las Vegas and Laughlin, Nevada and Atlantic City, New Jersey. It also operated riverboat casinos in Joliet, Illinois; dockside casinos in Vicksburg and Tunica, Mississippi, Shreveport, Louisiana, and St. Louis and North Kansas City, Missouri; and casinos on three Indian reservations, one near Phoenix, Arizona, one near Topeka, Kansas and one in Cherokee, North Carolina. The Company also operates Showboat land-based casinos in Las Vegas, Nevada and Atlantic City, New Jersey, as well as a riverboat casino in East Chicago, Indiana (which, on March 15, 1999, began operating under the Harrah's brand name), and the Star City Casino in Sydney, Australia. On January 1, 1999, the Company acquired the Rio Hotel & Casino in Las Vegas, Nevada. As of December 31, 1998 (after giving effect to the Company's merger with Rio), Harrah's Entertainment operated a total of approximately 1,120,000 square feet of casino space, 30,162 slot machines, 1,167 table games, 11,685 hotel rooms or suites, approximately 206,292 square feet of convention space, 90 restaurants, 29 snack bars, twelve showrooms and five cabarets. Harrah's Entertainment continued in 1998 to implement its Total Gold program, a fully integrated national player recognition and rewards program that connects player activity and provides rewards across all Harrah's properties. Harrah's Total Gold Program is the first and only program in the casino industry that rewards and recognizes casino customers on the level of a national brand--coast to coast. The Company has obtained three U.S. patents covering the technology associated with the Total Gold program. Underpinning Harrah's Total Gold program is a database management system exclusive to the Company, The Winners Information Network system, or WINet (U.S. Patent Pending), which enhances the advantages of the Company's geographic distribution and links all of its domestic Harrah's brand locations. The Company's marketing strategy is currently designed to appeal primarily to those customers who are avid, experienced players, especially those who play in more than one market. The Company's strategic direction is focused on establishing well-defined brand identities that communicate and deliver a consistent message of high quality and excellent service. LAND-BASED CASINOS ATLANTIC CITY The Harrah's Atlantic City casino hotel is situated on 24.17 acres in the Marina area of Atlantic City and at year end had approximately 80,800 square feet of casino space with 2,570 slot machines and 80 table games. It consists of three 16-story hotel towers with 278 suites and 896 rooms and adjoining low rise buildings which house the casino space and the 26,100 square foot convention center. The facilities include nine restaurants, an 800-seat showroom, a health club with swimming pool and parking for 2,682 cars, including a substantial portion in a parking garage. The property also has a 63-slip marina. The Mardi Gras-themed Atlantic City Showboat is located on 21 acres of land on the Boardwalk next to the Trump Taj Mahal and currently has approximately 102,000 square feet of casino gaming space containing 3,700 slot machines and 95 table games. The hotel and casino also has 7 restaurants, two lounges and snackbars, a shopping center, a 60-lane bowling center, a 346-seat showroom and a total of 800 hotel rooms (including 59 suites). There are 3,450 parking spaces available. 3 Harrah's Entertainment announced plans to construct a new 1,600-space employee and valet service parking lot for the Harrah's Atlantic City Casino on a plot of land acquired in a land exchange with Mirage Resorts in February 1999. Previously, the Company had leased a lot on property belonging to Mirage Resorts, which because of development needs, will terminate the Company's parking rights in May 1999. The Company also owns approximately 14.9 acres of land adjacent to Harrah's Atlantic City and 170 acres of wetlands in the Marina area. Most of Harrah's Atlantic City's and Atlantic City Showboat's customers arrive by car from within a 150-mile radius which includes Philadelphia, New York and northern New Jersey, the casinos' primary feeder markets. LAS VEGAS Harrah's Las Vegas is located on approximately 17.3 acres on the Las Vegas Strip and consists of a 15-floor hotel tower, a 23-floor hotel tower, two 35-story hotel towers, and adjacent low-rise buildings which house a 25,000 square foot convention center and the casino. The hotel has 2,587 regular rooms and 90 suites. The Harrah's Las Vegas complex has approximately 86,700 square feet of casino space, with 1,963 slot machines and 84 table games. Also included are six restaurants, four snack bars, the 525-seat Commander's Theatre, a 367-seat cabaret, an arcade, a health club and a heated pool. There are 2,720 parking spaces available, including a substantial portion in a self-park garage. The newly-acquired Rio Hotel & Casino is situated adjacent to Interstate 15 near the heart of the Las Vegas Strip and has approximately 105,000 square feet of casino gaming space containing 2,340 slot machines, approximately 100 table games including a premium gaming area, poker room, keno and race and sports book. The carnival and Mardi Gras-themed hotel and casino also has 2,548 hotel suites, including 1,500 suites contained in the three interconnected 21-story "Ipanema Towers" and 1,000 suites in the 41-story "Masquerade Tower." In addition, the hotel contains 13 restaurants, 13 bars and two coffee bars, a 737-seat entertainment complex, a 32,000 square-foot shopping area and a 108,000 square foot outdoor entertainment area featuring a landscaped sand beach and three swimming pools. There are 6,155 parking spaces available, including self-parking and valet. Rio also owns the Rio Secco Golf Club in nearby Seven Hills, which opened for play in October 1997. Construction of the club house was completed in mid-1998. In October, 1997, Rio, having accumulated 43 acres of land adjacent to the Rio, announced the New Rio Master Plan. Most of the first phase of the New Rio Master Plan is complete, including a state-of-the-art convention and entertainment center, a complex of nine luxury "Palazzo" suites; a restaurant serving authentic Chinese food; a valet parking structure; an expanded outdoor area with an additional swimming pool; additional exhibition space in the Masquerade Village; an expansion of the Shutters premium gaming lounge; the creation of a concierge suite level in the Ipanema and Masquerade Towers; an expansion of the Rio's spa; and additional parking. A new road connecting the Rio and the Las Vegas Strip through an extension of Twain Avenue to Industrial Road and a retail shopping area are expected to be completed during 1999. Subsequent phases of the New Rio Master Plan are in the conceptual stage. These conceptual phases currently include a separate hotel-casino of up to 3,000 rooms and two additional parking structures. The timetable, theme and cost of the subsequent phases have not yet been established and there can be no assurance that the balance of the New Rio Master Plan will be implemented. In connection with its merger with Rio, the Company assumed all of Rio's outstanding debt, including its 10 5/8% Senior Subordinated Notes due 2005 and 9 1/2% Senior Subordinated Notes due 2007 (collectively, the "Notes") in the aggregate principal amount of $225 million. As required by the indentures governing the Notes, HOC made an offer to purchase the Notes at 101% of their principal 4 amount. None of the Notes were tendered as a result of the offer. The Notes are non-recourse. The Company also assumed Rio's bank credit facilities with an aggregate commitment of $400 million, of which $198.7 million was outstanding at the time of the merger. The Showboat Las Vegas property is located along the Boulder Highway, south of downtown Las Vegas. The facility contains 75,000 square feet of gaming space, including 1,450 slot machines and 18 table games. In addition the Las Vegas Showboat has four restaurants, 447 hotel rooms, a 106-lane bowling center, 8,300 square feet of meeting space and a 1,200-seat bingo parlor. There are 2,660 parking spaces available, as well as an 84-space recreational vehicle park. The Company considers the Showboat Las Vegas a non-strategic asset and is holding the property for sale. The primary feeder markets for Harrah's Las Vegas are the Midwest, California and Canada. For Rio, the primary feeder markets are Southern California, the Southwest and Asia. Showboat Las Vegas primarily attracts a local market with feeder markets in Southern California, Arizona, Utah and Texas. LAKE TAHOE Harrah's Lake Tahoe is situated on 23 acres near Lake Tahoe and consists of an 18-story tower and adjoining low-rise building which house an 18,000 square foot convention center and approximately 66,500 square feet of casino space, with 1,727 slot machines and 82 table games. The casino hotel, with 77 suites and 453 luxury rooms, has seven restaurants, two snack bars, the 688-seat South Shore Showroom, a 50-seat cabaret, a health club, retail shops, a heated pool and an arcade. The facility has customer parking for 854 cars in a garage and 1,098 additional spaces in an adjoining lot. The Company also operates Bill's Lake Tahoe Casino which is located on a 2.1 acre site adjacent to Harrah's Lake Tahoe. The casino includes approximately 18,000 square feet of casino space, with 568 slot machines and 17 table games, and one restaurant. The primary feeder markets for both casinos are California and the Pacific Northwest. RENO Harrah's Reno, situated on approximately 3.7 acres, consists of a casino hotel complex with a 24-story structure, an approximate 15,450 square foot convention center and 57,000 square feet of casino space, with 1,459 slot machines and 72 table games. The facilities include two hotel towers, with 954 rooms and 14 suites, the 420-seat Sammy's Showroom, a pool, a health club and an arcade. The property has six restaurants, including a Planet Hollywood restaurant and lounge operated by a non-affiliated restaurant company. The complex can accommodate guest parking for 1,515 cars, including a valet parking garage, a self-park garage and off-site valet parking. One of the hotel towers at Harrah's Reno had been operated by Harrah's Entertainment as a Hampton Inn pursuant to a license agreement from Promus Hotels, Inc. ("Promus Hotels"). In August 1998, the Company paid a one-time franchise termination fee to Promus Hotels and converted the hotel to the Harrah's brand name. The primary feeder markets for Harrah's Reno are northern California, the Pacific Northwest and Canada. LAUGHLIN Harrah's Laughlin is located in Laughlin, Nevada on a 44.9 acre site in a natural cove on the Colorado River and features a hotel with 1,520 standard rooms and 81 suites, a 378-seat showroom, a 3,164-seat outdoor amphitheater, five restaurants and three snack bars, including a McDonald's and a Baskin Robbins which are operated by non-affiliated companies. Harrah's Laughlin has approximately 47,000 square feet of casino space, with 1,183 slot machines and 39 table games, and approximately 5 5,000 square feet of convention center space. The facility has customer parking for 2,604 cars, including a covered parking garage, and a park for recreational vehicles. Other amenities include a health club, swimming pools, an arcade and retail shops. It is the only property in Laughlin with a developed beachfront on the River. The casino's primary feeder markets are the Los Angeles and Phoenix metropolitan areas. AUSTRALIA The Star City casino in Sydney, Australia is owned by a corporation which is approximately 25% owned by an indirect subsidiary of the Company. The subsidiary also owns 85% of the facility's management company. Star City is located in the Sydney Harbor area of the city and holds a 99-year lease and a 12-year legal monopoly for the state of New South Wales, both of which commenced in September 1995. It is themed like a "mini-city", containing 136,625 square feet of casino gaming space consisting of approximately 1,500 slot machines and 200 table games, retail stores, ten restaurants, two snack bars, 13,400 square feet of convention and banquet space, and two theaters. The casino provides parking for 2,500 cars. The casino's primary feeder market is the Sydney Metropolitan area. NEW ORLEANS A Harrah's Entertainment subsidiary owned an approximate 47% interest in Harrah's Jazz Company ("Harrah's Jazz"), a partnership formed for purposes of developing, owning and operating the exclusive land-based casino entertainment facility (the "Harrah's New Orleans Casino") in New Orleans, Louisiana, on the site of the former Rivergate Convention Center. In November 1995, Harrah's Jazz and its wholly-owned subsidiary, Harrah's Jazz Finance Corp., filed petitions for relief under Chapter 11 of the Bankruptcy Code. Harrah's Jazz filed a plan of reorganization with the Bankruptcy Court in April 1996 and filed several subsequent amendments to the plan (the "Plan"). The Bankruptcy Court confirmed the Plan as modified on October 13, 1998 and the Plan was consummated on October 30, 1998. In accordance with the terms of the plan, a newly formed limited liability company, Jazz Casino Company, L.L.C. ("JCC"), is responsible for completing construction of the Harrah's New Orleans Casino, which will feature 100,000 square feet of casino space containing an estimated 2,840 slot machines and 114 table games. A 100,000 square foot second floor will feature yet to be determined non-casino space. In exchange for an equity investment in JCC's parent, JCC Holding Company, of $75 million (including $60 million in debtor-in-possession loans to Harrah's Jazz which were converted to equity upon consummation of the Plan), a subsidiary of the Company acquired, at the time of Plan consummation, approximately 44% of the equity in JCC Holding Company. This ownership interest has been reduced to approximately 43% due to the exercise by an unrelated party of an option to acquire a portion of the Company's interest, and the ownership interest may be reduced in the future to approximately 40% in the event other unrelated parties exercise additional options to acquire portions of the Company's interest. The Company also owns a warrant which entitles the Company to acquire additional shares in JCC Holding Company sufficient to increase its ownership in JCC Holding Company to 50% for a predetermined price. A subsidiary of the Company (the "Manager") will manage the Casino pursuant to a management agreement under which it will receive a base management fee of 3% of Casino revenues and 7% of Casino EBITDA in excess of $75 million. The Company is obligated to defer receipt of management fees under certain circumstances. The Company has also entered into settlements with former partners of Harrah's Jazz whereby such partners (or their creditors) are entitled to future payments from the Company which are calculated based on management fees received by the Manager. 6 The Company (i) guarantees JCC's initial $100 million annual payment under the casino operating contract to the State of Louisiana gaming board (the "State Guarantee"), (ii) guarantees $166.5 million of a $236.5 million JCC bank credit facility, including a $25 million working capital loan, (iii) guarantees to the State of Louisiana gaming board, City of New Orleans, banks under the JCC bank credit facility and JCC bondholders, completion and opening of the Casino on or before October 30, 1999 (subject to force majeure) and (iv) is obligated to make a $22.5 million subordinated loan to JCC, if needed, to finance construction of the Casino. With respect to the State Guarantee, the Company is obligated to guarantee JCC's first $100 million annual payment obligation commencing upon the earlier of opening of the Casino or October 30, 1999 (subject to force majeure), and, if certain cash flow tests and other conditions are satisfied each year, to renew the guarantee beginning April 1, 2000, for each 12 month period ending March 31, up to the 12 month period ending March 31, 2004. The Company's obligation under the guarantee for the first year of operations or any succeeding 12 month period is limited to a guarantee of the $100 million payment obligation of JCC for the 12 month period in which the guarantee is in effect and is secured by a first priority lien on JCC's assets. JCC's payment obligation (and therefore the amount guaranteed by the Company) is $100 million at the commencement of each 12 month period under the casino operating contract and declines on a daily basis by 1/365 of $100 million to the extent payments are made each day by JCC to Louisiana's gaming board. The Company will receive for providing the State Guarantee fees from JCC of $6 million for the first and second years of operations (or the prorated amounts thereof) and $5 million for each renewal year thereafter. The Company will also receive fees for guaranteeing the JCC bank credit facility of approximately 2.75% of up to $156.5 million of guaranteed debt, payable for periods during which such debt is outstanding. The Company's credit support fees may be reduced in the event the Company's borrowing costs under its bank credit facility increase after Plan consummation. The Company is obligated to defer receipt of State Guarantee fees and a portion of the credit support fees under certain circumstances. The casino is currently expected to open by late October 1999. See "Legal Proceedings" herein for a discussion of legal actions filed in connection with the New Orleans project. RIVERBOAT CASINOS JOLIET Harrah's Joliet is located in downtown Joliet, Illinois, on the Des Plaines River. The two riverboat casinos, the Harrah's Northern Star, a modern 210-foot mega-yacht, and the 210-foot Southern Star II, a re-creation of a Mississippi riverboat, offer a combined total of 37,160 square feet of casino space with 47 table games and 1,038 slot machines. Each riverboat has the capacity to accommodate approximately 825 guests per cruise. Harrah's Joliet offers 18 to 19 cruises per day. The dockside facilities, which are situated on 6.8 acres, include a pavilion with three restaurants, two snack bars, a lounge, approximately 3,700 square feet of meeting space and a retail shop. Parking is available for 943 cars, including a portion in a 4-story parking garage. Construction is under way on a $29 million development project, which will be located in Joliet's City Center. The project includes a 204-room hotel (including four suites) with 8,000 square feet of new and renovated office space. The hotel will be located between Harrah's pavilion and Cass Street and is scheduled for completion in the fourth quarter of 1999. A partnership, in which an indirect subsidiary of the Company is the 80 percent general partner, owns the dockside facilities and underlying real property, the Harrah's Northern Star and the Southern 7 Star II vessels, and the riverboat businesses. The businesses are operated by Harrah's, as general partner in the partnership. The partnership also holds long-term rights to the boat basin/berth. The Chicago metropolitan area is the primary feeder market for Harrah's Joliet, with Joliet being only 30 miles from downtown Chicago. The Company expects that the addition of the new hotel will expand the customer base beyond that radius. TUNICA Harrah's Tunica is a riverboat casino complex located in Tunica, Mississippi, approximately 30 miles south of downtown Memphis, Tennessee. The facilities include a casino constructed on a floating stationary barge with approximately 50,000 square feet of casino space, 1,246 slot machines and 33 table games. Shoreside facilities, which are situated on 88 acres of land, include a Harrah's hotel, which features 181 rooms, 18 suites, exercise facilities, three restaurants, a snack bar, a 250-seat showroom, a child care facility, an arcade, retail shop, approximately 13,500 square feet of convention area/meeting room space and customer parking for approximately 2,600 cars. The riverboat casino facilities are owned by a partnership which is 100% owned by the Company. The underlying land is held under a long-term lease to the partnership. The partnership which owns Harrah's Tunica entered into agreements with two nearby competitors for the development of a golf course and related facilities adjacent to Harrah's Tunica. Construction on the project was completed in fourth quarter 1998 at a cost to the Company of $2 million. The primary feeder market for Harrah's Tunica is the Memphis metropolitan area. The Company also operated another dockside casino in Tunica which closed in May 1997. On March 1, 1999, this property was sold to another casino company. VICKSBURG Harrah's Vicksburg is the Company's dockside casino entertainment complex on approximately 10.3 acres in Vicksburg, Mississippi. The complex, which is located in downtown Vicksburg on the Yazoo Diversion Canal of the Mississippi River, includes a 297-foot stationary riverboat casino designed in the spirit of a traditional 1800's riverboat with approximately 18,000 square feet of casino space, 597 slot machines and 34 table games. The casino is docked next to the Company's shoreside complex which features three restaurants, child care facilities, an arcade, a retail outlet and an approximate 8,500 square foot meeting room/convention area. Adjacent to the riverboat is a Harrah's hotel, with 109 rooms and eight suites, which is operated by the Company. Two covered parking garages are across the street with combined parking for 996 cars and additional parking is available for 429 cars. The Company owns the riverboat and hotel and owns or holds long-term rights to all real property pertaining to the project. The casino's primary feeder markets are western and central Mississippi and eastern Louisiana. SHREVEPORT Harrah's Shreveport is the Company's dockside riverboat casino in downtown Shreveport, Louisiana, which includes a 254-foot 19th-century design paddlewheeler riverboat, the ShreveStar, with 22,550 square feet of gaming space with 1,138 slot machines and 32 table games. A pavilion, on 11.2 acres of land, adjoins the casino on the banks of the Red River and includes two restaurants and a 5,000 square foot area for private parties and group functions. Parking is available for 1,575 cars, including 1,365 spaces in a parking garage. Construction on expanded parking facilities at Harrah's Shreveport was completed in the third quarter of 1998, and the Company has announced plans to expand the facilities to include a 500-room 8 hotel as well as four additional restaurants (including a 160-seat steakhouse, a 180-seat coffee shop, a 360-seat buffet and a coffee/snack bar), a new convention center, health spa and 480-space valet parking garage. The expansion, scheduled to be completed by September 2000, is expected to cost $123 million. The casino and related facilities are owned by a partnership which is 100% owned by the Company. The underlying land is held by the partnership under a long-term lease from the City of Shreveport. The primary feeder markets for the casino are northwestern Louisiana and east Texas, including the Dallas/Fort Worth metropolitan area. NORTH KANSAS CITY The Company owns and operates riverboat casino facilities in North Kansas City, Missouri, which include two riverboat casinos, the North Star, a 295-foot classic sternwheeler-designed stationary riverboat, and the other, the Mardi Gras, which is constructed on a floating stationary barge. The facilities offer a combined total of approximately 62,100 square feet of casino space, 2,176 slot machines and 75 table games. Shoreside facilities, which are situated on 55 acres of land that is under a long-term lease, include a Harrah's hotel which features 181 rooms and 17 suites, a pavilion that houses four restaurants and 10,000 square feet of meeting space. Additional property amenities include two snack bars, an arcade, swimming pool and exercise room. The property also has a three-story 1,048-car parking garage as well as surface parking. Total on-site parking, including valet parking, is available for 2,942 cars. The casino's primary feeder market is the Kansas City metropolitan area. During the third quarter of 1998, the Company completed the acquisition of various assets of a closed riverboat casino in Kansas City, Missouri, including a 28,000 square foot casino riverboat, shoreside facilities, parking garage, certain land, all gaming equipment and computerized customer databases. Harrah's Entertainment does not plan, at this time, to operate a casino at the acquired location. Long range plans for the riverboat, land and shoreside facilities have not been finalized. EAST CHICAGO The Harrah's East Chicago Casino (formerly operated as Showboat Mardi Gras Casino) is a riverboat casino in East Chicago, Indiana, which contains 49,210 square feet of gaming space on four levels containing 76 table games and approximately 1,800 slot machines. The shoreside facilities, on 11 acres of land, include a 105,000 square foot pavilion featuring two restaurants and two snack bars. There is a parking garage with the capacity to hold approximately 1,800 cars, and other surface parking available for approximately 1,200 cars. The Harrah's East Chicago Casino is owned by the Showboat Marina Casino Partnership ("SMCP"), an Indiana general partnership, in which the Company now owns an almost 100% ownership interest. The Company acquired a 55% interest in SMCP in connection with its acquisition of Showboat in June 1998 and recently increased its ownership interest by buying out substantially all of the minority partners in SMCP in a transaction that closed on February 26, 1999. Some of the minority partners have retained the right to repurchase shares of SMCP at the original purchase price plus interest. If this occurs, it would reduce the Company's interest to no less than 91%. On March 15, 1999 the Company completed the conversion of the facility to the Harrah's brand name. In February 1999, HOC commenced a tender offer for the $140 million of 13 1/2% First Mortgage Notes due 2009 issued by SMCP and its subsidiary. The tender offer was consummated in March 1999 with all notes tendered. 9 The casino's primary feeder market is the Chicago metropolitan area. ST. LOUIS-RIVERPORT Harrah's St. Louis-Riverport is part of a riverboat casino complex owned and operated by the Company and Players International, Inc. ("Players") in Maryland Heights, Missouri, in northwest St. Louis County, 16 miles from downtown St. Louis. The partnership formed by Harrah's Entertainment and Players leases space to both Harrah's Entertainment and Players in which to operate their separately branded casinos and specialty restaurants. Each company operates two riverboat casinos. Harrah's two riverboats offer a combined total of approximately 60,000 square feet of gaming space, with a total of 1,677 slot machines and 48 table games. A shoreside pavilion includes four restaurants (one of which is owned and managed by Players), a snack bar, an arcade, an entertainment lounge and retail space. Additional amenities include a 10,000 square foot convention/special events center and child care facilities. Also included in the shoreside facilities are an 8-story Harrah's hotel with 275 rooms and 16 suites. Parking is available for 4,071 cars, including a portion in a parking garage. Harrah's Entertainment manages the shoreside pavilion, hotel and parking areas for the partnership for a fee. The complex is located on a site comprised of approximately 74 acres which is owned by the Company and leased to the partnership, and approximately 140 acres of additional land which is included in the development are owned by the partnership. The primary feeder market for Harrah's St. Louis-Riverport is the St. Louis metropolitan area. INDIAN GAMING AK-CHIN Harrah's Phoenix Ak-Chin casino is owned by the Ak-Chin Indian Community and is located on approximately 20 acres of land on the Community's reservation, approximately 25 miles south of Phoenix, Arizona. The casino includes 38,000 square feet of casino space with 475 slot machines, 13 poker tables, bingo, keno, two restaurants, one snack bar, an entertainment lounge, 11,050 square feet of meeting room space and a retail shop. The complex has customer parking for approximately 1,200 cars and has valet parking available. Harrah's Entertainment manages the casino for a fee under a management contract expiring in December 1999. Harrah's Entertainment and the Ak-Chin Community are currently negotiating to renew the contract for another 5-year term. Such renewal would require the approval of the National Indian Gaming Commission ("NIGC"). The primary feeder markets for the casino are Phoenix and Tucson. CHEROKEE Harrah's Entertainment developed the Harrah's Cherokee Smoky Mountains Casino for the Eastern Band of Cherokee Indians on 37 acres of land on their reservation in Cherokee, North Carolina. The casino includes 60,000 square feet of casino space, including an approximately 10,000 square foot expansion completed in June 1998, with 2,294 video gaming machines. Additional facilities consist of a multi-purpose entertainment room with 1,500 theater-style seats, two restaurants, as well as a gift shop and child care facilities. Parking is available for approximately 1,972 cars. Harrah's Entertainment manages the casino for a fee under a management contract expiring in November 2002. Renewal of the contract would require mutual agreement between Harrah's Entertainment and the Eastern Band of Cherokee Indians and approval by the NIGC. 10 The Company has guaranteed the Tribe's repayment of an $82 million bank loan, the proceeds of which were used to construct the Cherokee facility. At year end 1998, $73.8 million of the loan was outstanding. The casino's primary feeder markets are eastern Tennessee, western North Carolina, as well as northern Georgia and South Carolina. PRAIRIE BAND Harrah's Prairie Band Casino-Topeka, located approximately 17 miles north of Topeka, Kansas opened on January 13, 1998. The Company developed the casino for the Prairie Band of Potawatomi Indians ("Prairie Band") on approximately 80 acres of land owned by the tribe. The casino facilities include 25,478 square feet of casino space with 703 slot machines, 35 table games and a 366-seat bingo hall. The complex also includes a 100-room hotel, a restaurant, two snack bars, an entertainment lounge, a gift shop and parking for approximately 850 vehicles. The casino has recently completed an expansion, adding 127 slot machines, three blackjack tables and one craps table. The facilities are managed by the Company for a fee under a management contract expiring in January 2003. Renewal of the contract would require mutual agreement between Harrah's Entertainment and the Prairie Band and approval by the NIGC. The Company has guaranteed the Tribe's repayment of a $37 million bank loan, the proceeds of which were used to construct the Prairie facility. At year end 1998, $29.7 million of the loan was outstanding. Topeka and Wichita are the primary feeder markets for the casino. 11 OTHER SODAK GAMING, INC. The Company owns approximately 14% of Sodak Gaming, Inc. ("Sodak"), a publicly-owned corporation. Sodak is a leading distributor of electronic gaming machines and gaming-related products and systems. In addition, Sodak is in the business of financing, developing and managing Native American and commercial casino businesses in the United States. Under the terms of an agreement with International Game Technology ("IGT") expiring in May, 2001, Sodak is the exclusive distributor for IGT of its gaming equipment in the states of North Dakota, South Dakota and Wyoming, and on Native American Reservations in the United States (except Nevada, New Jersey and Hawaii). This distribution agreement, last revised and renewed in March, 1998, provides for 2-year renewals after May 2001, until it is canceled. Sodak also has an IGT software distribution and license agreement for IGT product software. On March 11, 1999, Sodak and IGT entered into an agreement under which IGT will acquire all the outstanding stock of Sodak for approximately $230 million in cash, subject to certain conditions, including regulatory and shareholder approval. OTHER During the third quarter of 1998, Harrah's Entertainment invested $15 million in a new airline named National Airlines. Based in Las Vegas, National Airlines plans to offer conveniently scheduled nonstop flights between Las Vegas and New York, Chicago, Los Angeles and San Francisco beginning in mid-1999. Additional routes are expected to be added. All flights will be nonstop to and from its Las Vegas hub. In addition to obtaining a 19.9% voting interest in the airline, Harrah's Entertainment has also entered into a marketing agreement to support joint promotions involving the airline and Harrah's Las Vegas. It is expected that the Company's investment in the airline will allow the Company to offer additional valued services and conveniences to customers. Harrah's Entertainment has no commitment to provide additional funds to the airline. Rio also invested $15 million in National Airlines and, consequently, the consummation of the merger with Rio increased the Company's equity interest in the airline to approximately 47.8%. However, the Company's voting power is limited to 25%. The Company also owns a minority interest in Interactive Entertainment Limited ("IEL"), a publicly-owned corporation. IEL pioneered the development of sophisticated remote control gaming entertainment software for use in the international long-haul airline industry, called "Sky Games." However, due to an inability to obtain sufficient financing for the project, IEL has ceased all operations related to its Sky Games business and is making efforts to conduct an orderly disposition of all the assets related to the Sky Games inflight gaming product line. In the fourth quarter of 1998, the Company wrote off its investment in IEL. In addition to the above, the Company is actively pursuing a variety of casino entertainment opportunities in various jurisdictions both domestically and abroad, including land-based, riverboat casino and Indian gaming projects in the United States. A number of these projects, if they go forward, could require significant capital investments by the Company. PATENTS AND TRADEMARKS The following trademarks used herein are owned by the Company: Harrah's-Registered Trademark-; Rio-Registered Trademark-; Showboat-Registered Trademark-; Bill's-Registered Trademark-; Total Gold-Registered Trademark-; WINet-Registered Trademark-; Harrah's Northern Star(SM); North Star(SM); Harrah's Southern Star II(SM); ShreveStar(SM); Mardi Gras(SM); Sammy's Showroom(SM); South Shore Showroom(SM) and Rio Secco Golf Club(SM). The Company considers all of these marks, and the associated name recognition, to be valuable to its business. The Company holds three U.S. patents covering the technology associated with its Total Gold program--U.S. Patent No. 5,613,912 issued March 25, 1997 (which is the subject of a license agreement with Mikohn Gaming Corporation), U.S. Patent No. 5,761,647 issued June 2, 1998, and U.S. Patent No. 5,809,482 issued September 15, 1998. The Company considers these patents to be valuable to its business. 12 COMPETITION Harrah's Entertainment, which operates land-based, dockside, riverboat and Indian casino facilities in all of the traditional, and most of the new, U.S. casino entertainment jurisdictions, as well as a land-based casino in Australia, competes with numerous casinos and casino hotels of varying quality and size in the market areas where its properties are located, with other non-gaming resorts and vacation areas, and with various other casino and other entertainment businesses. The casino entertainment business is characterized by competitors which vary considerably by their size, quality of facilities, number of operations, brand identities, marketing and growth strategies, financial strength and capabilities, level of amenities, management talent and geographic diversity. In certain areas such as Las Vegas, Harrah's Entertainment competes with a wide range of casinos, some of which are significantly larger and offer substantially more non-gaming activities to attract customers. In most markets, Harrah's Entertainment competes directly with other casino facilities operating in the immediate and surrounding market areas. In major casino destinations, such as Las Vegas and Atlantic City, Harrah's Entertainment faces competition from other markets in addition to direct competition in its market areas. In recent years, with fewer new markets open for development, competition in existing markets has intensified. Many casino operators, including Harrah's Entertainment, have invested in expanding existing facilities, in the development of new facilities in existing markets, such as Las Vegas, and in the acquisition of established facilities in existing markets, such as the Company's acquisition of the casinos owned by Rio and Showboat. This expansion of existing casino entertainment properties, the increase in the number of properties and the aggressive marketing strategies of many of the Company's competitors has increased competition in many markets in which the Company competes and this intense competition can be expected to continue. These competitive pressures have adversely affected the financial performance of the Company in certain markets and, the Company believes, has also adversely affected the financial performance of certain competitors operating in these markets. Harrah's Entertainment believes it is well positioned to take advantage of any further legalization of casino gaming, the continued positive consumer acceptance of casino gaming as an entertainment activity, and increased visitation to casino facilities. However, the expansion of casino entertainment into new markets also presents competitive issues for Harrah's. For example, in California's state elections in November 1998, Proposition 5 was adopted, placing no limits on the size of Indian casinos in the state or on the number of "slot-like" gambling machines offered. If the expansion of Indian casinos moves closer to the major metropolitan areas of California, the Company's operations in Nevada could be adversely affected. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations--Effects of Current Economic and Political Conditions" on page 34 and portions of "Management's Discussion and Analysis--Operating Results and Development Plans" on pages 26 and 27 of the Annual Report, which pages are incorporated herein by reference. GOVERNMENTAL REGULATION GAMING--NEW JERSEY As a holding company of Marina Associates ("Marina"), which holds a license to operate Harrah's Atlantic City, and of Atlantic City Showboat, Inc. ("Showboat"), which holds a license to operate Showboat Casino Hotel, Harrah's Entertainment is subject to the provisions of the New Jersey Casino Control Act (the "New Jersey Act"). The ownership and operation of casino hotel facilities in Atlantic City, New Jersey are the subject of pervasive state regulation under the New Jersey Act and the regulations adopted thereunder by the New Jersey Casino Control Commission (the "New Jersey Commission"). The New Jersey Commission is empowered to regulate a wide spectrum of gaming and non-gaming related activities and to approve the form of ownership and financial structure of not only the casino licensees, Marina and Showboat, but also their intermediary and ultimate holding companies, including Harrah's Entertainment and HOC. In addition to taxes imposed by the State of New Jersey on all businesses, the New Jersey Act imposes certain fees and taxes on casino licensees, including an 13 8% gross gaming revenue tax, an investment alternative obligation of 1.25% (or an investment alternative tax of 2.5%) of gross gaming revenue (generally defined as gross receipts less payments to customers as winnings) and various license fees. No casino hotel facility may operate unless the appropriate licenses and approvals are obtained from the New Jersey Commission, which has broad discretion with regard to the issuance, renewal and revocation or suspension of the non-transferable casino licenses (which licenses are issued initially for a one-year period and renewable for one-year periods for the first two renewals and four-year periods thereafter), including the power to impose conditions which are necessary to effectuate the purposes of the New Jersey Act. Each applicant for a casino license must demonstrate, among other things, its financial stability (including establishing ability to maintain adequate casino bankroll, meet ongoing operating expenses, pay all local, state and federal taxes, make necessary capital improvements and pay, exchange, refinance, or extend all long and short term debt due and payable during the license term), its financial integrity and responsibility, its reputation for good character, honesty and integrity, the suitability of the casino and related facilities and that it has sufficient business ability and casino experience to establish the likelihood of creation or maintenance of a successful, efficient casino operation. With the exception of licensed lending institutions and certain "institutional investors" waived from the qualification requirements under the New Jersey Act, each applicant is also required to establish the reputation of its financial sources including, but not limited to, its financial backers, investors, mortgagees and bond holders. The New Jersey Act requires that all officers, directors and principal employees of the casino licensees be licensed. In addition, each person who directly or indirectly holds any beneficial interest or ownership of the casino licensees and any person who in the opinion of the New Jersey Commission has the ability to control the casino licensees must obtain qualification approval. Each holding and intermediary company having an interest in the casino licensees must also obtain qualification approval by meeting essentially the same standards as that required of the casino licensees. All directors, officers and persons who directly or indirectly hold any beneficial interest, ownership or control in any of the intermediary or ultimate holding companies of the casino licensees may have to seek qualification from the New Jersey Commission. Lenders, underwriters, agents, employees and security holders of both equity and debt of the intermediary and holding companies of the casino licensees and any other person whom the New Jersey Commission deems appropriate may also have to seek qualification from the New Jersey Commission. Since Harrah's Entertainment and HOC are publicly-traded holding companies (as defined by the New Jersey Act), however, the persons described in the two previous sentences may be waived from compliance with the qualification process if the New Jersey Commission, with the concurrence of the Director of the New Jersey Division of Gaming Enforcement, determines that they are not significantly involved in the activities of Marina and/or Showboat and, in the case of security holders, that they do not have the ability to control Harrah's Entertainment (or its subsidiaries) or elect one or more of its directors. Any person holding 5% or more of a security in an intermediary or ultimate holding company, or having the ability to elect one or more of the directors of a company, is presumed to have the ability to control the company and thus may be required to seek qualification unless the presumption is rebutted. Notwithstanding this presumption of control, the New Jersey Act permits the waiver of the qualification requirements for passive "institutional investors" (as defined by the New Jersey Act), when such institutional holdings are for investment purposes only and where such securities represent less than 10% of the equity securities of a casino licensee's holding or intermediary companies or debt securities of a casino licensee's holding or intermediary companies not exceeding 20% of a company's total outstanding debt or 50% of an individual debt issue. The waiver, which is subject to certain specified conditions including, upon request, the filing of a certified statement that the investor has no intention of influencing the affairs of the issuer, may be granted to an "institutional investor" holding a higher percentage of such securities upon a showing of good cause. If an "institutional investor" is granted a waiver of the qualification requirements and subsequently changes its investment intent, the New Jersey Act provides that no action other than divestiture may be taken 14 by the investor without compliance with the Interim Casino Authorization Act (the "Interim Act") described below. In the event a security holder of either equity or debt is required to qualify under the New Jersey Act, the provisions of the Interim Act may be triggered requiring, among other things, either: (i) the filing of a completed application for qualification within 30 days after being ordered to do so, which application must include an approved Trust Agreement pursuant to which all securities of Harrah's Entertainment (or its respective subsidiaries) held by the security holder must be placed in trust with a trustee who has been approved by the New Jersey Commission; or (ii) the divestiture of all securities of Harrah's Entertainment (or its respective subsidiaries) within 120 days after the New Jersey Commission determines that qualification is required or declines to waive qualification, provided the security holder files a notice of intent to divest within 30 days after the determination of qualification. If a security holder files an application under the Interim Act, during the period the Trust Agreement remains in place, such holder may, through the approved trustee, continue to exercise all rights incident to the ownership of the securities with the exception that: (i) the security holder may only receive a return on its investment in an amount not to exceed the actual cost of the investment (as defined by the New Jersey Act) until the New Jersey Commission finds such holder qualified; and (ii) in the event the New Jersey Commission finds there is reasonable cause to believe that the security holder may be found unqualified, the Trust Agreement will become fully operative, vesting the trustee with all rights incident to ownership of the securities pending a determination on such holder's qualifications; provided, however, that during the period the securities remain in trust, the security holder may petition the New Jersey Commission to: (a) direct the trustee to dispose of the trust property; and (b) direct the trustee to distribute proceeds thereof to the security holder in an amount not to exceed the lower of the actual cost of the investment or the value of the securities on the date the Trust became operative. If the security holder is ultimately not found to be qualified, the trustee is required to sell the securities and to distribute the proceeds of the sale to the applicant in an amount not exceeding the lower of the actual cost of the investment or the value of the securities on the date the Trust became operative (if not already sold and distributed at the direction of the security holder) and to distribute the remaining proceeds to the Casino Revenue Fund. If the security holder is found qualified, the Trust Agreement will be terminated. The New Jersey Commission can find that any holder of the equity or debt securities issued by Harrah's Entertainment or its subsidiaries is not qualified to own such securities. If a security holder of Harrah's Entertainment or its subsidiaries is found disqualified, the New Jersey Act provides that it is unlawful for the security holder to: (i) receive any dividends or interest payment on such securities; (ii) exercise, directly or indirectly, any rights conferred by the securities; or (iii) receive any remuneration from the company in which the security holder holds an interest. To implement these provisions, the New Jersey Act requires, among other things, casino licensees and their holding companies to adopt provisions in their certificate of incorporation providing for certain remedial action in the event that a holder of any security of such company is found disqualified. The required certificate of incorporation provisions vary depending on whether such company is a publicly or privately traded company as defined by the New Jersey Act. The Certificates of Incorporation of Harrah's Entertainment and HOC (both "publicly-traded companies" as defined by the New Jersey Act) contain provisions which provide Harrah's Entertainment and HOC, respectively, with the right to redeem the securities of disqualified holders, if necessary, to avoid any regulatory sanctions, to prevent the loss or to secure the reinstatement of any license or franchise held by Harrah's Entertainment or HOC or their affiliates, or if such holder is determined by any gaming regulatory agency to be unsuitable, has an application for a license or permit rejected, or has a previously issued license or permit rescinded, suspended, revoked or not renewed. The Certificates of Incorporation of Harrah's Entertainment and HOC also contain provisions defining the redemption price and the rights of a disqualified security holder. In the event a security holder is disqualified, the New Jersey Commission is empowered to propose any necessary action to protect the public interest, including the suspension or 15 revocation of the casino license of Marina. The New Jersey Act provides, however, that the New Jersey Commission shall not take action against a casino licensee or its parent companies with respect to the continued ownership of the security interest by the disqualified holder, if the New Jersey Commission finds that: (i) such company has a certificate of incorporation provision providing for the disposition of such securities as discussed above; (ii) such company has made a good faith effort to comply with any order requiring the divestiture of the security interest held by the disqualified holder; and (iii) the disqualified holder does not have the ability to control the casino licensee or its parent companies or to elect one or more members to the board of directors of such company. The Certificate of Incorporation of HOC further provides that debt securities issued by HOC are held subject to the condition that if a holder is found unsuitable by any governmental agency the corporation shall have the right to redeem the securities. If, at any time, it is determined that Marina, Showboat or their holding companies have violated the New Jersey Act or regulations promulgated thereunder or that such companies cannot meet the qualification requirements of the New Jersey Act, Marina and/or Showboat could be subject to fines, or their licenses could be suspended or revoked. If Marina's or Showboat's license is suspended or revoked, the New Jersey Commission could appoint a Conservator to operate and dispose of the casino hotel facilities of Marina and/or Showboat. A Conservator would be vested with title to the assets of Marina and/or Showboat, subject to valid liens, claims and encumbrances. The Conservator would be required to act under the general supervision of the New Jersey Commission and would be charged with the duty of conserving, preserving and, if permitted, continuing the operation of the casino hotel. During the period of any such conservatorship, the Conservator may not make any distributions of net earnings without the prior approval of the New Jersey Commission. The New Jersey Commission may direct that all or part of such net earnings be paid to the Casino Revenue Fund, provided, however, that a suspended or former licensee is entitled to a fair rate of return. The New Jersey Commission granted Marina a plenary casino license in connection with Harrah's Atlantic City in November 1981, and granted Showboat a plenary casino license in connection with Showboat Casino Hotel in March 1987. Each of Marina's and Showboat's licenses has been renewed since then. In April 1996, the New Jersey Commission renewed Marina's license for a four-year period and also found Harrah's Entertainment and HOC to be qualified as holding companies of Marina. In January 1997, the New Jersey Commission renewed Showboat's license for a four-year period and, in April 1998, found Harrah's Entertainment and HOC to be qualified as holding companies of Showboat following the acquisition of Showboat, Inc. by Harrah's. GAMING--NEVADA The ownership and operation of casino gaming facilities in Nevada are subject to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, "Nevada Act"); and (ii) various local ordinances and regulations. The Company's gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State Gaming Control Board ("Nevada Board"), the City of Las Vegas, the Clark County Liquor and Gaming Licensing Board ("CCLGLB"), the City of Reno, and the Douglas County Sheriff's Department ("Douglas County"). The Nevada Commission, the Nevada State Gaming Control Board, the City of Las Vegas, the CCLGLB, the City of Reno, and Douglas County are referred to as the "Nevada Gaming Authorities." The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada 16 Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) providing a source of state and local revenues through taxation and licensing fees. Changes in such laws, regulations and procedures could have an adverse effect on the Company's Nevada gaming operations. Harrah's Entertainment is registered by the Nevada Commission as a publicly traded corporation (a "Registered Corporation") and has been found suitable to own the stock of HOC which is also a Registered Corporation by virtue of its outstanding debt securities. HOC has been found suitable to own the stock of (I) Rio Hotel & Casino, Inc. ("Rio"), which is also a Registered Corporation by virtue of its outstanding debt securities, (ii) Showboat, Inc. ("Showboat"), (iii) Harrah's Las Vegas, Inc. ("HLVI") and (iv) Harrah's Laughlin, Inc. ("HLI"). Rio has been found suitable to own the stock of Rio Properties, Inc. ("RPI") and Rio Leasing, Inc. ("RLI"). Showboat has been registered as an intermediary company and has been found suitable to own the stock of Showboat Operating Company ("SBOC"). HOC, Showboat, HLVI, HLI, RPI, SBOC and RLI (collectively, the "Gaming Subsidiaries") are required to be registered or licensed by the Nevada Gaming Authorities to enable Harrah's Entertainment to conduct gaming operations at Harrah's Lake Tahoe, Bill's Lake Tahoe Casino, Harrah's Reno, Harrah's Las Vegas, Harrah's Laughlin, Rio Suite Hotel & Casino and Las Vegas Showboat and to engage in manufacturing and distribution of gaming devices. The gaming licenses held by the Gaming Subsidiaries require the periodic payment of fees and taxes and are not transferable. HOC is also licensed as a manufacturer and distributor of gaming devices. SBOC and RLI are each licensed as a distributor of gaming devices. Such manufacturer's and distributor's licenses also require the annual payment of fees and are not transferable. As Registered Corporations, Harrah's Entertainment, HOC and Rio are required periodically to submit detailed financial and operating reports and furnish any other information which the Nevada Commission may require. No person may become a stockholder of, or receive any percentage of profits from, the Gaming Subsidiaries without first obtaining licenses and approvals from the Nevada Gaming Authorities and Harrah's Entertainment may not sell or transfer beneficial ownership of any of HOC's or Rio's voting securities without the prior approval of the Nevada Commission. Harrah's Entertainment, Rio and the Gaming Subsidiaries have obtained from the Nevada Gaming Authorities the various registrations, findings of suitability, approvals, permits and licenses required in order to engage in gaming, manufacturing and distribution activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, Harrah's Entertainment, Rio or the Gaming Subsidiaries in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of the Gaming Subsidiaries must file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of Harrah's Entertainment, HOC, Rio or Showboat who are actively and directly involved in gaming activities of the Gaming Subsidiaries may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with Harrah's Entertainment, Rio or the Gaming Subsidiaries, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require Harrah's Entertainment, Rio or the Gaming Subsidiaries to terminate the employment of any person who refuses to file appropriate applications. According to 17 the Nevada Act, determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. Harrah's Entertainment, Rio and the Gaming Subsidiaries are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by the Gaming Subsidiaries must be reported to, or approved by, the Nevada Commission. If it were determined that the Nevada Act was violated by the Gaming Subsidiaries, the gaming licenses they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Gaming Subsidiaries, Harrah's Entertainment and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate Harrah's gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the gaming properties) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect Harrah's Entertainment gaming operations. Any beneficial holder of Harrah's Entertainment voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of Harrah's Entertainment voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the state of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires beneficial ownership of more than 5% of Harrah's Entertainment voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of Harrah's Entertainment voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of Harrah's Entertainment voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of Harrah's Entertainment, any change in the Company's corporate charter, bylaws, management, policies or operations of Harrah's Entertainment, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding Harrah's Entertainment voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the voting securities of a Registered Corporation beyond such period of 18 time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. Harrah's Entertainment is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with Harrah's Entertainment or the Gaming Subsidiaries, it: (i) pays that person any dividend or interest upon voting securities of Harrah's Entertainment; (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person; (iii) pays remuneration in any form to that person for services rendered or otherwise; or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value. Additionally, the CCLGLB has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming licensee. The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. Harrah's Entertainment would normally be required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time, but instead, it has been required by the Nevada Commission to maintain its stock ledgers in its executive offices in Memphis, Tennessee, which may be examined by the Nevada Board at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. Harrah's Entertainment also is required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require the Company's stock certificates to bear a legend indicating that the securities are subject to the Nevada Act. However, to date, the Nevada Commission has not imposed such a requirement on Harrah's Entertainment. Harrah's Entertainment, HOC and Rio may not make a public offering of their securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. On November 19, 1998, the Nevada Commission granted Harrah's Entertainment, HOC and Rio prior approval to make offerings for a period of two years, subject to certain conditions ("Shelf Approval"). The Shelf Approval also applies to any affiliated company wholly owned by Harrah's Entertainment (an "Affiliate") which is a publicly traded corporation or would thereby become a publicly traded corporation pursuant to a public offering. The Shelf Approval also includes approval for the Gaming Subsidiaries to guarantee any security issued by, or to hypothecate their assets to secure the payment or performance of any obligations issued by, Harrah's Entertainment or an Affiliate in a public offering under the Shelf Registration. The Shelf Registration, however, may be rescinded for good cause without prior notice upon the issuance of an interlocutory stop order by the Chairman of the Nevada Board. The Shelf Approval does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful. 19 Changes in control of Harrah's Entertainment through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Registered Corporation can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Registered Corporation's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation. License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Gaming Subsidiaries' respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either: (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling or serving of food or refreshments or the selling of merchandise. Nevada licensees that hold a license as an operator of a slot route, or a manufacturer's or distributor's license, also pay certain fees and taxes to the State of Nevada. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees") and who proposes to become involved in a gaming venture outside of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities or enter into associations that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ, contract with or associate with a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. GAMING--NEW SOUTH WALES The New South Wales Casino Control Authority ("NSWCCA") was created pursuant to the Casino Control Act 1992 (NSW) ("Casino Act") to maintain and administer systems for licensing, supervision and control of a casino. 20 In considering an application for a casino license, Section 11 of the Casino Act requires the NSWCCA to have regard to the following matters: (i) the suitability of applicants and close associates of applicants; (ii) the standard and nature of the proposed casino, and the facilities to be provided in, or in conjunction with, the proposed casino; (iii) the likely impact of the use of the premises concerned as a casino on tourism, employment and economic development generally in the place or region in which the premises are located; (iv) the expertise of the applicant, having regard to the obligations of the holder of a casino license under the Casino Act; and (v) such other matters as the NSWCCA considers relevant. The NSWCCA determines an application by either granting or declining to grant a casino license to the applicant. The casino license may be granted subject to such conditions as the NSWCCA thinks fit and is granted for the location specified in the casino license. A casino license confers no right of property and cannot be assigned or mortgaged, charged or otherwise encumbered. The conditions of a casino license may be amended by being substituted, varied, revoked or added to by the NSWCCA subject to the right of the licensee to make submissions to the NSWCCA in regard to any such proposal. The NSWCCA may also cancel, suspend or amend the terms or conditions of a casino license where there are grounds for disciplinary action, including: (i) the casino license being improperly obtained; (ii) the casino operator, a person in charge of the casino, an agent of the casino operator or a casino employee contravening a provision of the Casino Act or a condition of the license; (iii) the casino premises no longer being suitable for the conduct of the casino operations; (iv) the licensee being considered to be no longer a suitable person to give effect to the casino license and the Casino Act; and (v) the public interest that the casino license should no longer remain in force. No right of compensation against the government arises for the cancellation, suspension or variation of the terms and conditions of the casino license. The NSWCCA must not grant an application for a casino license unless it is satisfied that the applicant and each close associate is a suitable person to be concerned in or associated with the management and operation of a casino. In making the determination as to the suitability of the applicant, the NSWCCA must consider whether: (a) the applicant and each close associate are of good repute, having regard to character, honesty and integrity; (b) the applicant and each close associate is of sound and stable financial background; (c) in the case of an applicant that is not a natural person, the applicant has or has arranged a satisfactory ownership, trust or corporate structure; (d) the applicant has or is able to obtain financial resources that are both suitable and adequate for ensuring the financial viability of the proposed casino; (e) the applicant has or is able to obtain the services of persons who have sufficient experience in the management and operation of a casino; (f) the applicant has sufficient business ability to establish and maintain a successful casino; (g) the applicant or any close associate who has any business association with any person, body or association who, in the opinion of the NSWCCA is not of good repute, having regard to character, honesty and integrity or has undesirable or unsatisfactory financial sources; and (h) each director, partner, trustee, executive officer and secretary and any other officer or person determined by the NSWCCA to be associated or connected with the ownership, administration or management of the operations or business of the applicant or a close associate of the applicant is a suitable person to act in that capacity. Following the filing of the necessary applications by Harrah's Entertainment for the approval of its acquisition of Showboat, Inc. and for the findings of suitability, the NSWCCA conducted its investigation and, in May 1998, approved the acquisition and found Harrah's Entertainment suitable. On receiving an application for a casino license, the NSWCCA must carry out all such investigations and inquiries as it deems necessary. The costs of the investigation by the NSWCCA are payable to the NSWCCA by the applicant unless the NSWCCA determines otherwise. The NSWCCA may give written direction to a casino operator as to the conduct, supervision or control of operations of the casino. The NSWCCA may investigate a casino from time to time at the 21 discretion of the NSWCCA. Not later than three years after the grant of the casino license, and thereafter in intervals not exceeding three years, the NSWCCA must investigate and form an opinion as to whether or not the casino operator is a suitable person to continue to give effect to the casino license and determine that it is in the public interest that the casino license should continue in force. The NSWCCA commenced its first such investigation on November 8, 1996, and it was completed on December 14, 1997. The Minister for Racing & Gaming issued a press release on December 18, 1997 stating that the NSWCCA had found that the licensee was a suitable person, to continue to give effect to the casino license and that it was in the public interest that the casino license should continue in force. The NSWCCA report was made public on March 3, 1998, and contained no material adverse recommendations. A casino operator must not enter into a controlled contract without first notifying the NSWCCA. A controlled contract is a contract that relates wholly or partly to the supply of goods or services to a casino, but does not include a contract that relates solely to the construction of the casino or to the alteration of premises used or to be used as a casino, or such other contracts as may be defined by the NSWCCA. Gaming is not to be conducted in the casino unless the facilities provided in relation to the conduct and monitoring of operations of the casino are in accordance with the plans, diagrams and specifications that are approved by the NSWCCA. The NSWCCA may approve the games to be played in the casino. A casino operator must not conduct a game in a casino unless there is an order in force approving the game and the game is conducted in accordance with the rules approved by such order. The casino is to be open to the public on such days and at such times as directed by the NSWCCA in writing. The casino must be closed on days and at times that are not days or times specified by the NSWCCA. A casino operator must not: (i) accept a wager otherwise than by means of money or chips; (ii) lend money or any other valuable thing or provide money or chips as part of a transaction involving a credit card or debit card; (iii) extend any other form of credit; or (iv) wholly or partly discharge any debt. The casino operator may issue chips in exchange for checks if the person has established a deposit account with the casino operator. Checks accepted by the casino operator must be presented to the bank within one working day after the check is accepted by the casino operator. Notwithstanding the foregoing, the NSWCCA agreed to vary the presentment requirement so that Star City may hold checks drawn on an Australian bank/branch in an amount of or over A$5,000 for up to 10 banking days and may hold checks drawn on a non-Australian bank/branch for up to 20 banking days regardless of the amount of the check prior to presenting the checks for payment. GAMING--INDIANA In 1993, the State of Indiana passed a Riverboat Gambling Act which created the Indiana Gaming Commission ("Indiana Commission"). The Indiana Commission is given extensive powers and duties for the purposes of administering, regulating and enforcing the system of riverboat gaming. It is authorized to award no more than 11 gaming licenses (five to counties contiguous to Lake Michigan, five to counties contiguous to the Ohio River and one to a county contiguous to Patoka Lake). The Indiana Commission has jurisdiction and supervision over all riverboat gaming operations in Indiana and all persons on riverboats where gaming operations are conducted. These powers and duties include authority to: (1) investigate all applicants for riverboat gaming licenses; (2) select among competing applicants those that promote the most economic development in a home dock area and that best serve the interest of the citizens of Indiana; (3) establish fees for licenses; and (4) prescribe all forms used by applicants. The Indiana Commission shall adopt rules pursuant to statute for administering the gaming statute and the conditions under which riverboat gaming in Indiana may be conducted. The Indiana Commission has promulgated certain final rules and has proposed additional 22 rules governing the application procedure and all other aspects of riverboat gaming in Indiana. The Indiana Commission may suspend or revoke the license of a licensee or a certificate of suitability or impose civil penalties, in some cases without notice or hearing for any act in violation of the Riverboat Gambling Act or for any other fraudulent act or if the licensee or holder of such certificate of suitability has not begun regular riverboat excursions prior to the end of the twelve month period following the Indiana Commission's approval of the application for an owner's license. In addition, the Indiana Commission may revoke an owner's license if it is determined by the Indiana Commission that revocation is in the best interests of the state of Indiana. The Indiana Commission will: (1) authorize the route of the riverboat and stops that the riverboat may make; (2) establish minimum amounts of insurance; and (3) after consulting with the Corps of Engineers, determine which waterways are navigable waterways for purposes of the Riverboat Gambling Act and determine which navigable waterways are suitable for the operation of riverboats. The Riverboat Gambling Act requires an extensive disclosure of records and other information concerning an applicant, including disclosure of all directors, officers and persons holding one percent (1%) or more direct or indirect beneficial interest. In determining whether to grant an owner's license to an applicant, the Indiana Commission shall consider: (1) the character, reputation, experience and financial integrity of the applicant and any person who (a) directly or indirectly controls the applicant, or (b) is directly or indirectly controlled by either the applicant or a person who directly or indirectly controls the applicant; (2) the facilities or proposed facilities for the conduct of riverboat gaming; (3) the highest total prospective revenue to be collected by the state from the conduct of riverboat gaming; (4) the good faith affirmative action plan to recruit, train and upgrade minorities in all employment classifications; (5) the financial ability of the applicant to purchase and maintain adequate liability and casualty insurance; (6) whether the applicant has adequate capitalization to provide and maintain the riverboat for the duration of the license; and (7) the extent to which the applicant meets or exceeds other standards adopted by the Indiana Commission. The Indiana Commission may also give favorable consideration to applicants for economically depressed areas and applicants who provide for significant development of a large geographic area. Each applicant must pay an application fee of $50,000 and additional fees may be assessed for the background investigation. If the applicant is selected, the applicant must pay an initial license fee of $25,000 and post a bond, and thereafter, pay an annual license renewal fee of $5,000. The Indiana Commission has issued nine of these eleven licenses--four in Lake County Indiana; one in LaPorte County; one in Vanderburgh County; one in Ohio County; one in Dearborn County; and one in Harrison County. The Indiana Commission has selected Switzerland County, on the Ohio River, for the tenth license. Additionally, the Indiana Commission has not considered applicants for the eleventh license since the Patoka Lake site has been determined by the U.S. Army Corp. of Engineers as an unsuitable site for development of a casino vessel project. A person holding an owner's gaming license issued by the Indiana Commission may not own more than a 10% interest in another such license. An owner's license expires five years after the effective date of the license; however, after three years the holder of an owner's license will undergo a reinvestigation to ensure continued suitability for licensure. Unless the license has been terminated, expired or revoked, the gaming license may be renewed if the Indiana Commission determines that the licensee has satisfied all statutory and regulatory requirements. In connection with the issuance of the license to Showboat Marina Casino Partnership ("SMCP"), Showboat Marina Partnership, an Indiana general partnership ("SMP"), Waterfront Entertainment and Development, Inc. ("Waterfront") and Showboat, Inc. and its affiliates declared to the Indiana Commission that if SMCP received a riverboat owner's license, they shall not commence more than one other casino gaming operation within a fifty-mile radius of East Chicago Showboat for a period of five years beginning on the date of issuance of an owner's license by the Indiana Commission to SMCP. Harrah's Joliet is within said fifty-mile 23 radius. Adherence to the non-competition declaration is a condition of the owner's license. A gaming license is a revocable privilege and is not a property right. Minimum and maximum wagers on games are not established by regulation but are left to the discretion of the licensee. Wagering may not be conducted with money or other negotiable currency. Riverboat gaming excursions shall be at least two hours, but not more than four hours in duration unless expressly approved by the Indiana Commission. No gaming may be conducted while the boat is docked except: (1) for 30-minute time periods at the beginning and end of a cruise while the passengers are embarking and disembarking; (2) if the master of the riverboat reasonably determines that specific weather or water conditions present a danger to the riverboat; (3) if either the vessel or the docking facility is undergoing mechanical or structural repair; (4) if water traffic conditions present a danger to (A) the riverboat, riverboat passengers, and crew, or (B) other vessels on the water; or (5) if the master has been notified that a condition exists that would cause a violation of federal law if the riverboat were to cruise. The Indiana Commission has adopted rules governing cruising on Lake Michigan by a riverboat casino. The period of time during which passengers embark and disembark constitutes a portion of the gambling excursion if gambling is allowed. At the conclusion of the thirty-minute embarkation period, the gangway or its equivalent must be closed. However, a riverboat licensee must allow patrons to disembark at anytime the riverboat remains at the dock and gambling continues. A standard excursion schedule for a casino vessel on Lake Michigan must include at least one full excursion (a cruise into the open water on Lake Michigan, not more than three statute miles from the dock site July through September and not more than one statute mile October through June) and one intermediate excursion during which the vessel cruises in protected navigable water on or accessible to Lake Michigan. An intermediate excursion is to be conducted if the statutory conditions that permit dockside gaming are not present and if sea conditions or weather conditions, or both, do not permit a full excursion. If a casino vessel remains dockside because of statutory conditions, the embarkation and disembarkation rules still apply. An admission tax of $3.00 for each person admitted to the gaming excursion is imposed upon the license owner. The admissions tax is paid by the riverboat licensee for each excursion or part of an excursion the patron remains on board. An additional 20% tax is imposed on the adjusted gross receipts received from gaming operations, which is defined as the total of all cash and property (including checks received by the licensee whether collected or not) received, less the total of all cash paid out as winnings to patrons and uncollectible gaming receivables (not to exceed 2%). The gaming license owner shall remit the admission and wagering taxes before the close of business on the day following the day on which the taxes were incurred. Riverboats are assessed for property tax purposes as real property and are taxed at rates to be determined by local taxing authorities of the jurisdiction in which a riverboat operates. SMCP is contesting the timing of the initial assessment of property taxes by Lake County on the riverboat vessel. The Riverboat Gambling Act requires a riverboat owner licensee to directly reimburse the Indiana Commission for the costs of inspectors and agents required to be present during the conduct of gaming operations. Pursuant to agreements with the City, and as reflected in the owner's license, SMCP has agreed to: (1) provide certain fixed incentives of approximately $16.4 million to the City of East Chicago and its agencies for transportation, job training, home buyer assistance and discrete economic development initiatives; (2) pay 3% of adjusted gross receipts divided equally among the City and two not-for-profit foundations for infrastructure improvements, education and community development; and (3) pay 0.75% of adjusted gross receipts for community development projects to East Chicago Second Century, Inc. ("Second Century"), a for-profit corporation owned by former owners of Waterfront but, in terms of expenditures, controlled by the City. Funding for the projects will be derived from contributions to Second Century from SMCP as well as funds from other third-party sources. The Indiana Commission is authorized to license suppliers and certain occupations related to riverboat gaming. Gaming equipment and supplies customarily used in conducting riverboat gaming 24 may be purchased or leased only from licensed suppliers. The Indiana Commission has adopted a rule requiring employees working on the riverboat to have a valid merchant marine document issued by the United States Coast Guard. The Indiana Riverboat Gambling Act places special emphasis upon minority and women's business enterprise participation in the riverboat industry. Any person issued a riverboat owner's license must establish goals of expending at least 10% of the total dollar value of the licensee's contracts for goods and services with minority business enterprises and 5% of the total dollar value of the licensee's contracts for goods and services with women's business enterprises. The Indiana Commission may suspend, limit or revoke the gaming owner's license or impose a fine for failure to comply with statutory requirements. 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 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 Commission for a finding of suitability. Harrah's Entertainment filed the necessary application for a transfer of 100% of Showboat's and 99% of Waterfront's beneficial interests in SMCP, including an investigatory fee of $50,000. The Indiana Commission completed its investigation of the key persons and substantial owners of Harrah's Entertainment, and Harrah's Entertainment was found to meet the criteria for licensing and suitability of riverboat owner licensees at the Indiana Commission's meeting on February 26, 1999. 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 or services rendered or received. All contracts are subject to disapproval by the Indiana Commission. A riverboat owner licensee or an affiliate may not enter into a debt transaction of $1 million or more without the prior approval of the Indiana Commission. A riverboat owner licensee or any other person may not lease, hypothecate, borrow money against or loan money against a riverboat owner's license. The Indiana Commission has a rule requiring the reporting of certain currency transactions which is similar to that required by federal authorities. The Riverboat Gambling 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, by an officer of a person holding at least a 1% interest in the licensee. The Indiana Commission has promulgated a rule requiring quarterly reporting by the holder of a riverboat owner's license or a supplier's license of 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 Commission adopted a rule that 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 gambling operation. The Indiana Commission has proposed another rule, which would, if adopted, require 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. 25 A lawsuit was filed on October 25, 1996, in Harrison County Indiana by three individuals residing in counties abutting the Ohio River, which challenges the constitutionality of the Riverboat Gambling Act on grounds that: (i) it creates an unequal privilege because under the Act supporters of riverboat casino gambling, having lost a county-wide vote, are allowed to resubmit a proposal to county voters for approval of riverboat casino gambling while opponents of riverboat casino gambling, having lost a county-wide vote, do not have a converse opportunity; 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 Indiana Supreme Court previously has upheld the constitutionality of the Riverboat Gambling Act, although the prior challenge was on different grounds than those contained in the current lawsuit. The Attorney General of the State of Indiana, on behalf of the Indiana Commission, has filed a motion for summary judgment, which is pending. If the Riverboat Gambling Act ultimately was held unconstitutional it would, absent timely corrective legislation, have a material adverse effect on SMCP's operations. GAMING--LOUISIANA (NEW ORLEANS) On October 30, 1998, the plan of reorganization of Harrah's Jazz Company, a partnership formed for the purposes of developing, owning and operating the exclusive land-based casino in New Orleans, was consummated (the "Plan"). Pursuant to the Plan, a newly formed entity, Jazz Casino Company, L.L.C. ("JCC"), is responsible for constructing the casino (the "New Orleans Casino") and operating the casino in accordance with a casino operating contract with the gaming board of the State of Louisiana (the "Amended and Renegotiated Casino Operating Contract"). In exchange for an equity investment, a subsidiary of the Company acquired, at the time of consummation of the Plan, approximately a 44% equity interest in the parent of JCC (which is subject to certain options). A subsidiary of the Company, Harrah's New Orleans Management Company ("HNOMC") will manage the New Orleans Casino pursuant to a management agreement with JCC. The ownership, management and operation of the New Orleans Casino are subject to pervasive governmental regulation, including regulation by the Louisiana Gaming Control Board ("LGCB") in accordance with the terms of the Louisiana Economic Development and Gaming Act (the "Gaming Act"), the rules and regulations promulgated thereunder from time to time ("the Rules and Regulations"), and the Amended and Renegotiated Casino Operating Contract. The LGCB is empowered to regulate a wide spectrum of gaming and nongaming related activities. The Gaming Act and the Rules and Regulations, all of which are subject to amendment or revision from time to time, establish significant regulatory requirements with respect to gaming activities, JCC, HNOMC and affiliated entities, including, without limitation, suitability standards for direct and indirect investors, requirements with respect to minimum accounting and financial practices, standards for gaming devices and surveillance, licensure requirements for vendors and employees, standards for credit extension and collection, and permissible food services. Failure to comply with the Gaming Act and the Rules and Regulations could result in disciplinary action, including fines and suspension or revocation of a license or suitability. Certain regulatory violations could also constitute an event of default under the Amended and Renegotiated Casino Operating Contract. The Gaming Act initially established a special public purpose corporation ("LEDGC") to regulate land-based gaming in Louisiana. In May 1996, a law transferred responsibility for regulation of riverboat gaming and land-based casino gaming from separate boards, and substituted in their place the LGCB. This single board is empowered to regulate most forms of gaming in the State, including the New Orleans Casino. This law also authorized the State Police to, among other things, conduct investigations and audits of gaming license applicants and to assist the LGCB in determining compliance with gaming laws and regulations. 26 The Gaming Act authorized the LEDGC (and now the LGCB), among other things, to enter into a casino operating contract with a casino operator for the conduct of casino gaming operations at a single land-based gaming establishment, having at least 100,000 square feet of usable space. The term of the contract under the Gaming Act is not to exceed a total of 20 years with one ten-year renewal option. The Gaming Act requires minimum compensation of 18 1/2% of gross revenues or $100 million, annually, whichever is greater (the "Minimum Compensation"). Under the Plan, and with certain approvals from the LGCB, Harrah's Jazz Company and JCC entered into the Amended and Renegotiated Casino Operating Contract which provides for alterations of the size and scope of the Casino and a revised opening schedule for the Casino. The Amended and Renegotiated Casino Operating Contract requires JCC to pay the Minimum Compensation and to guarantee the payment thereof in each year the New Orleans Casino opens for business. The failure of JCC to post such guarantee prior to the beginning of each fiscal year is an event of default resulting in the immediate termination of the Amended and Renegotiated Casino Operating Contract. Subject to the terms and conditions of the Amended and Renegotiated Casino Operating Contract, the term of the authorization for gaming runs to July 2014, with a ten-year renewal period. Under the Gaming Act, the LGCB has broad discretionary authority to regulate all aspects of the casino operator's operations, including the power to adopt administrative rules and regulations as may be necessary to carry out and implement its powers and duties, the conduct of gaming operations, and any other matters necessary or desirable for the efficient and effective operation of casino gaming or public convenience. The Gaming Act gives the LGCB the power, among other things, to (i) investigate the qualifications of any proposed gaming operator, each applicant for a license or permit, and all direct and indirect investors, including the Company and its shareholders, (ii) investigate violations of the Gaming Act and any rules and regulations promulgated thereunder, and any other incidents or transactions which it deems appropriate, (iii) conduct hearings and proceedings concerning, and reviews and inspections of, gaming operations and related activities, (iv) inspect and examine all premises, and all equipment or supplies thereon, where gaming activities are conducted or gaming devices or equipment are manufactured, sold, distributed, and summarily seize and remove from such premises and impound any equipment or supplies for the purpose of examination and inspection, (v) audit the records of applicants and gaming operators respecting all revenues produced by any gaming operations, (vi) issue interrogatories and subpoenas, and (vii) monitor the conduct of all casino operators, licensees, permittees and other persons having a material involvement directly or indirectly with a casino operator. Under the Gaming Act, the gaming activities that may be conducted at the New Orleans Casino, subject to the rule-making authority of the LGCB, include any banking or percentage game that is played with cards, dice or any electronic, electrical or mechanical device or machine for money, property or any thing of value, but exclude lottery, bingo, charitable games, raffles, electronic video bingo, pull tabs, cable television bingo, wagering on dog or horse races, sports betting or wagering on any type of sports contest or event. Under the Gaming Act, the LGCB is required to issue licenses or permits to certain persons associated with gaming operations, including (i) certain employees of the casino operator; (ii) certain manufacturers, distributors and suppliers of gaming devices; (iii) certain suppliers of goods or services; (iv) any person who furnishes services or property to the casino operator under an arrangement pursuant to which the person receives payments based on earnings, profits or receipts from gaming operations; and (v) any other persons deemed necessary by the LGCB. The securing of the requisite licenses and permits under the Gaming Act is a prerequisite for conducting, operating or performing any activity regulated by the LGCB or the Gaming Act. The Gaming Act provides that the LGCB has full and absolute power to deny an application, or to limit, condition, restrict, revoke or suspend any license, permit or approval, or to fine any person licensed, permitted or approved for any cause specified in the Gaming Act or rules promulgated by the LGCB. The Rules and Regulations provide that the LGCB may take any of the foregoing actions with respect 27 to any person licensed, permitted, or approved, or any person registered, found suitable, or holding a contract, for any cause deemed reasonable. The Gaming Act provides that it is the express intent, desire and policy of the legislature that no holder of the casino operating contract, applicant for a license, permit, contract or other thing existing, issued or let as a result of the Gaming Act shall have any right or action to obtain any license, permit, contract or the granting of the approval sought except as provided for and authorized by the Gaming Act. Any license, permit, contract, approval or thing obtained or issued pursuant to the provisions of the Gaming Act has been expressly declared by the legislature to be a pure and absolute revocable privilege and not a right, property or otherwise, under the constitutions of the United States or of the State. The Gaming Act also provides that no holder acquires any vested right therein or thereunder. Under the Gaming Act, no person is eligible to receive a license or enter into a contract to conduct casino gaming operations unless, among other things, the LGCB is satisfied the applicant is suitable. The Gaming Act and the Rules and Regulations also require suitability findings for, among others, HNOMC, anyone with a direct ownership interest or the ability to control JCC or HNOMC (as well as their intermediary and holding companies), certain officers and directors of such companies, and certain employees of JCC. Suitability requires a demonstration by each applicant, by clear and convincing evidence, that, among other things, (i) the applicant is a person of good character, honesty and integrity; (ii) the applicant's prior activities, criminal record, if any, reputation, habits and associations do not pose a threat to the public interest of the State or the regulation and control of casino gaming or create or enhance the dangers of unsuitable, unfair or illegal practices, methods and activities in the conduct of gaming or the carrying on of the business and financial arrangements incidental thereto; and (iii) the applicant is capable of and is likely to conduct the activities for which a license or contract is sought. In addition, to be found suitable for purposes of the Amended and Renegotiated Casino Operating Contract, JCC must demonstrate by clear and convincing evidence that: (i) it has or guarantees acquisition of adequate business competence and experience in the operation of casino gaming operations; (ii) the proposed financing is adequate for the proposed operation and is from suitable sources; and (iii) it has or is capable of and guarantees the obtaining of a bond or satisfactory financial guarantee of sufficient amount, as determined by the LGCB, to guarantee successful completion of and compliance with the Amended and Renegotiated Casino Operating Contract or such other projects that are regulated by the LGCB. Under the Gaming Act and Rules and Regulations, the LGCB can also require that the holder of debt securities issued by JCC or its affiliated companies and the holders of equity interests in holding companies of JCC, the Company or other affiliated entities be found suitable. Any person holding or controlling a five percent or more equity interest in a non-publicly traded, direct or indirect holding company of JCC or HNOMC or ten percent or more equity interest in a publicly traded, direct or indirect holding company of JCC or HNOMC, is presumed to have the ability to control JCC or HNOMC, as the case may be, requiring a finding of suitability, unless, among other things: (i) the presumption is rebutted by clear and convincing evidence; or (ii) the holder is one of several specified passive institutional investors holding a stated minimum amount of assets and, upon request, such institution files a certification stating that it does not have an intention to influence the affairs of JCC or HNOMC. To the extent any holder of the securities fails to satisfy such requirement, such holder may be required to obtain certain qualifications or approvals from the LGCB to continue to hold such securities. Any failure to obtain such qualifications or approvals may, by virtue of the requirements, subject such security holders to certain requirements, limitations or prohibitions, including a requirement that such security holders liquidate their securities at a time or at a cost that is otherwise unfavorable to such security holders. Under the Gaming Act and Rules and Regulations, the LGCB has the authority to deny, revoke, suspend, limit, condition, or restrict any finding of suitability. Under the Rules and Regulations, the LGCB also has the authority to take further action on the grounds that the person found suitable is 28 associated with, or controls, or is controlled by, or is under common control with, an unsuitable or disqualified person. Under the Rules and Regulations and the Amended and Renegotiated Casino Operating Contract, if at any time the LGCB finds that any person required to be and remain suitable has failed to demonstrate suitability, the LGCB may, consistent with the Gaming Act and the Amended and Renegotiated Casino Operating Contract, take any action that the LGCB deems necessary to protect the public interest. Under the Rules and Regulations, however, if a person associated with JCC or HNOMC or an affiliate, intermediary or holding company thereof has failed to be found or remain suitable, the LGCB shall not declare JCC or HNOMC or its affiliate, intermediary or holding company, as the case may be, unsuitable as a result if such companies comply with the conditional licensing provisions, take immediate good faith action and comply with any order of the LGCB to cause such person to dispose of its interest, and, before such disposition, ensure that the disqualified person does not receive any ownership benefits. The above safe harbor protections do not apply if: (i) HNOMC has failed to remain suitable, (ii) JCC is engaged in a relationship with the unsuitable person and had actual or constructive knowledge of the wrongdoing causing LGCB's action, (iii) JCC is so tainted by such person that it affects the suitability of JCC under the standards of the Gaming Act, or (iv) JCC cannot meet the suitability standard contained in the Gaming Act and the Rules and Regulations. JCC is not permitted to operate the Casino unless and until certain persons and entities required to be found suitable are found suitable by the LGCB. Such persons and entities include, without limitation, JCC, HNOMC, the Company and certain members, officers and directors of such companies and any other persons having the ability to significantly affect the affairs of such companies. On October 13, 1998, JCC, HNOMC and the Company and certain officers and directors of JCC, its parent company and HNOMC were found suitable after extensive background investigations by the LGCB (and its investigatory arm, the State Police). JCC and all other persons and entities required to be found suitable, including those already found suitable, have an ongoing obligation to maintain their suitability throughout the term of the Amended and Renegotiated Casino Operating Contract. The sale, transfer, assignment, or alienation of the Amended and Renegotiated Casino Operating Contract, or an interest therein, in violation of the Gaming Act is prohibited. The LGCB may approve the sale, transfer, assignment, or any grant the approval subject to conditions imposed by the LGCB. Under the Gaming Act, the sale, transfer, assignment, pledge, alienation, disposition, public offering, or acquisition of securities that result in one person's owning 5% or more of the total outstanding shares issued by JCC is void as to such person without prior approval of the LGCB. Failure to obtain prior approval by the LGCB of a person acquiring 5% or more of the total outstanding shares of a licensee of 5% or more economic interest in JCC is grounds for cancellation of the casino operating contract or license suspension or revocation. A transfer of an interest in the Company that would lead to a change in control in the ownership or management of the Company may require prior LGCB approvals and certain findings of suitability. The Gaming Act obligates JCC to give preference and priority to Louisiana residents, laborers, vendors and suppliers, except when not reasonably possible to do so without added expense, substantial inconvenience or sacrifice in operational efficiency. The Gaming Act further obligates JCC to give preference and priority to Louisiana residents in considering applicants for employment and requires that no less than 80% of the persons employed by JCC be Louisiana residents for at least one year immediately prior to employment. The Gaming Act provides that if any contract or other agreement to which the casino operator is a party contains a provision or clause establishing a different percentage or requiring more than 50% of the persons employed to be residents of any one parish, any such provision or clause shall be null and void and unenforceable as against public policy. The Gaming Act requires that JCC adopt written policies, procedures, and regulations to allow the participation of businesses owned by minorities in all design, engineering, and construction contracts and/or projects to the maximum extent practicable. The Rules and Regulations provide that JCC and 29 HNOMC must take the foregoing actions with respect to all design, engineering, construction, banking and maintenance contracts and any other projects initiated by JCC and HNOMC. The Gaming Act further requires JCC, as nearly as practicable, to employ minorities consistent with the population of the State. The Rules and Regulations extend this obligation to HNOMC as well. The Rules and Regulations provide that if at any time the LGCB shall conclude that JCC or HNOMC is conducting itself in a manner inconsistent with the requirements of State law or the Rules and Regulations, the LGCB may take enforcement action, including fines and the imposition of a plan that the LGCB determines meets the objectives of the Gaming Act and the Rules and Regulations. The Gaming Act provides that JCC shall not: (i) offer seated restaurant facilities with table food service for patrons, but may offer limited cafeteria style food services for employees and patrons as provided by rule of the LGCB, provided, however, that no food may be given away or subsidized within the New Orleans Casino by JCC or any licensee, and no facility for food service shall exceed seating for 250 persons (by rule and regulation, LGCB is empowered to allow JCC to contract with local food preparers to provide food at the restaurant at the New Orleans Casino); (ii) offer lodging in the Casino, nor engage in any practice or enter into any business relationships to give any hotel, whether or not affiliated with JCC, any advantage or preference not available to all similarly situated hotels; (iii) engage in such activities as are prohibited by the Amended and Renegotiated Casino Operating Contract; (iv) engage in the sale of products that are not directly related to gaming; or (v) cash or accept in exchange for the purchase of tokens, chips or electronic cards an identifiable employee payroll check. Any contract between JCC and any hotel or lodging facilities must be submitted to the LGCB for approval prior to entering into the contract. The Gaming Act provides that all records of the LGCB are public records and available for public inspection, subject to certain exceptions, and may, in any event, be made available to other governmental entities or regulators, under certain circumstances. The Gaming Act provides that the LGCB shall annually enter into a casino support services contract with the City of New Orleans in order to compensate it for the cost to it for providing support services resulting from the operation of the official gaming establishment and the activities therein. The amount of the contract is to be determined by negotiation and agreement between the LGCB and the City of New Orleans, subject to approval by the State legislature. The Gaming Act authorizes the LGCB to provide for the protection of the rights of holders of security interests in both immovable property and movable property used in or related to casino gaming operations ("Gaming Collateral") and to provide for the continued operation of the New Orleans Casino during the period of time that a lender, as a holder of a security interest, seeks to enforce its security interest in such property. In connection therewith, the Gaming Act provides that the holder of a security interest in Gaming Collateral may receive payments from the owner or lessee of such property out of the proceeds of casino gaming operations received by the owner or lessee, and, the holder of the security interest may be exempt from the licensing requirements of the Gaming Act with respect to such payments if the transaction(s) giving rise to such payments have been approved in advance by the LGCB and complies with all rules and regulations of the LGCB and the LGCB determines the holder to be suitable. Under the Gaming Act, a holder of a security interest in a gaming device who asserts the right to ownership or possession of the encumbered property may be granted a one-time, nonrenewable, provisional contract for a maximum of 90 days for the sole purpose of acquiring ownership or possession for resale to a licensed or approved person, all in accordance with rules and regulations to be promulgated by the LGCB. The Rules and Regulations do not yet include a rule and regulation on this provision. The license or contract shall not authorize the holder to operate the gaming device or to utilize the property in gaming activities. 30 If the holder of a security interest in immovable property comprising the New Orleans Casino wished to continue the operation during and after the filing of a suit to enforce the security interest, the Gaming Act provides that the holder of the security interest must name the LGCB as a nominal defendant in such suit and request the appointment of a receiver from among the persons on a list maintained by the LGCB. Upon proof of the debtor's default under the security instrument and the holder's right to enforce the security interest, the court shall appoint a person from the LGCB's list as a receiver of the official gaming establishment. Upon appointment of the receiver, the Gaming Act requires the receiver to furnish a fidelity bond in favor of the security interest holder, the owner or lessee of the official gaming establishment and the LGCB in an amount to be set by the court after consultation with the LGCB and all parties. The Gaming Act requires the LGCB to issue to the receiver a one-time, nonrenewable, provisional contact to continue gaming operations until the receivership is terminated. The receiver is considered to have all the rights and obligations of the casino operator under the casino operating contract. The holder of the security interest provoking the appointment of a receiver under the Gaming Act is required to pay the cost of the receiver's bond and the cost of operating the official gaming establishment or gaming operator during the term of the receivership to the extent that such costs exceed available revenues, in accordance with the rules and regulations of the LGCB. The Gaming Act further provides that the fees of the receiver and the authority for expenditures of the receiver are to be established by rules and regulations of the LGCB. The Gaming Act provides that a receivership must terminate upon: (i) the sale of the property subject to receivership to a duly approved or authorized person; (ii) the payment in full of all obligations due to the holder of the security interest in the property subject to the receivership; (iii) an agreement for termination of the receivership signed by the holder of the security interest and the debtor, and approved by the LGCB and the court; or (iv) the lapse of five years from the date of the initial appointment of the receiver. Under the Gaming Act, a receivership may also be terminated by notice from the holder of the security interest who provoked the receivership addressed to the court and the LGCB of its intention to withdraw its financial support of the receivership at a specified time not less than 90 days from the date of the notice. In the event of such notice, the Gaming Act provides that the holder of the security interest giving the notice will not be responsible for any costs or expenses of the receivership after the date specified in the notice; except for reasonable costs and fees of the receiver in concluding the receivership, and the costs of a final accounting. The Gaming Act purports to provide that LGCB, the Governor by Executive Order, subject to legislative approval or the State legislature by act or resolution, may set aside or renegotiate the provisions of Casino operating contract when the casino operator is either voluntarily or involuntarily placed in bankruptcy, receivership or similar status. The Gaming Act provides that no rule or regulation and no provision in a contract executed by the LGCB pursuant to its authority to protect the holders of security interests in Gaming Collateral shall be the basis for any cause of action in contract or in tort against the State or the LGCB, its board of directors or its agents, attorneys or employees. Because legalized gaming is a relatively new industry in the State, there has been significant attention by the Louisiana legislature over the past few years to gaming related bills dealing with a wide range of subjects that could impact the New Orleans Casino project. At various times, bills have been introduced to, among other things, constitutionally and/or legislatively repeal all forms of gaming (including the land-based casino), increase taxes on casinos, limit credit that may be extended by casinos, limit days and hours of operation and alter the regulatory oversite structure. There can be no assurances that legislation having a material detrimental impact on the New Orleans Casino will not be enacted. 31 GAMING--ILLINOIS The ownership and operation of a gaming riverboat in Illinois is subject to extensive regulation under the Illinois Riverboat Gambling Act and the rules and regulations promulgated thereunder. A five-member Illinois Gaming Board is charged with such regulatory authority, including the issuance of riverboat gaming licenses not to exceed 10 in number. The granting of an owner's license involves a preliminary approval procedure in which the Illinois Gaming Board issues a finding of preliminary suitability to a license applicant and effectively reserves a gaming license for such applicant. The Board has issued all 10 licenses. Des Plaines Development Limited Partnership, of which 80% is owned by Harrah's Illinois Corporation, an indirect subsidiary of Harrah's, received an owner's license in 1993. To obtain an owner's license (and a finding of preliminary suitability), applicants must submit comprehensive application forms, be fingerprinted and undergo an extensive background investigation by the Illinois Gaming Board. Each license granted entitles a licensee to own and operate up to two riverboats (with a combined maximum of 1,200 gaming positions) and equipment thereon from a specific location. The duration of the license initially runs for a period of three years (with a fee of $25,000 for the first year and $5,000 for the following two years). Thereafter, the license is subject to renewal on an annual basis upon payments of a fee of $5,000 and a determination by the Illinois Gaming Board that the licensee continues to be eligible for an owner's license pursuant to the Illinois legislation and the Illinois Gaming Board's rules. An applicant is ineligible to receive an owner's license if the applicant, any of its officers, directors or managerial employees or any person who participates in the management or operation of gaming operations: (i) has been convicted of a felony; (ii) has been convicted of any violation under Article 28 of the Illinois Criminal Code or any similar statutes in any other jurisdiction; (iii) has submitted an application which contains false information; or (iv) is a member of the Illinois Gaming Board. In addition, an applicant is ineligible to receive an owners' license if the applicant owns more than a 10% ownership interest in an entity holding another Illinois owner's license, or if a license of the applicant issued under the Illinois legislation or a license to own or operate gaming facilities in any other jurisdiction has been revoked. In determining whether to grant a license, the Illinois Gaming Board considers: (i) the character, reputation, experience and financial integrity of the applicants; (ii) the type of facilities (including riverboat and docking facilities) proposed by the applicant; (iii) the highest prospective total revenue to be derived by the state from the conduct of riverboat gaming; (iv) affirmative action plans of the applicant, including minority training and employment; and (v) the financial ability of the applicant to purchase and maintain adequate liability and casualty insurance. Municipal (or county, if an operation is located outside of a municipality) approval of a proposed applicant is required, and all documents, resolutions, and letters of support must be submitted with the initial application. A holder of a license is subject to the imposition of fines, suspension or revocation of its license for any act 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, including without limitation: (i) failing to comply with or make provision for compliance with the legislation, the rules promulgated thereunder or any federal, state or local law or regulation; (ii) failing to comply with any rule, order or ruling of the Illinois Gaming Board or its agents pertaining to gaming; (iii) receiving goods or services from a person or business entity who does not hold a supplier's license but who is required to hold such license by the rules; (iv) being suspended or ruled ineligible or having a license revoked or suspended in any state or gaming jurisdiction; (v) associating with, either socially or in business affairs, or employing persons of, notorious or unsavory reputation or who have extensive police records, or who have failed to cooperate with any official constituted investigatory or administrative body and would adversely affect public confidence 32 and trust in gaming; and (vi) employing in any Illinois riverboat's gaming operation any person known to have been found guilty of cheating or using any improper device in connection with any game. Fines may be made of up to $5,000 against individuals and up to the greater of $10,000 or an amount equal to the daily gross receipts against licensees for each violation. An ownership interest in a license or in a business entity, other than a publicly held business entity which holds an owner's license, may not be transferred without approval of the Illinois Gaming Board. In addition, an ownership interest in a license or in a business entity, other than a publicly held business entity, which holds either directly or indirectly an owner's license, may not be pledged as collateral without approval of the Illinois Gaming Board. A person employed at a riverboat gaming operation must hold an occupational license which permits the holder to perform only activities included within such holder's level of occupation license or any lower level of occupation license. In addition, the Illinois Gaming Board issues suppliers licenses which authorize the supplier licensee to sell or lease gaming equipment and supplies to any licensee involved in the ownership and management of gaming operations. Riverboat cruises are limited to a duration of four hours, and no gaming may be conducted while the boat is docked, with the exceptions: (i) of 30-minute time periods at the beginning of and at the end of a cruise while the passengers are embarking and debarking (total gaming time is limited to four hours, however, including the pre- and post-docking periods); and (ii) when weather or mechanical problems prevent the boat from cruising. Minimum and maximum wagers on games are set by the licensee and wagering may be conducted only with a cashless wagering system, whereby money is converted to tokens, electronic cards or chips which can only be used for wagering. 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. With respect to electronic gaming devices, the payout percentage may not be less than 80% nor more than 100%. The legislation, as amended, imposes an annual graduated wagering tax on adjusted receipts (generally defined as gross receipts less payments to customers as winnings) from gambling games, effective January 1, 1998. The graduated tax rate is as follows: up to $25 million--15%; $25 to $50 million--20%; $50 to $75 million--25%; $75 to $100 million--30%; in excess of $100 million-- 35%. The tax imposed is to be paid by the licensed owner to the Illinois Gaming Board on the day after the day when the wagers were made. Of the proceeds of that tax, 25% goes to the local government where the home dock is located, a small portion goes to the Illinois Gaming Board for administration and enforcement expenses, and the remainder goes to the state education assistance fund. The legislation also requires that licensees pay a $2.00 admission tax for each person admitted to a gaming cruise. Of this admission tax, the host municipality or county receives $1.00. The licensed owner is required to maintain public books and records clearly showing amounts received from admission fees, the total amount of gross receipts and the total amount of adjusted gross receipts. All use, occupancy and excise taxes which apply to food and beverages and all taxes imposed on the sale or use of tangible property apply to sales aboard riverboats. There have been discussions regarding increasing the number of riverboat gaming licenses and/or allowing a riverboat gaming license to be moved from one location to another. There can be no assurance that legislation increasing the number of licenses, allowing a change in license location or other legislation will not be introduced in the future, any of which could have a material adverse effect on the operating results of the Company's riverboats. 33 GAMING--MISSISSIPPI The ownership and operation of a gaming business in the State of Mississippi is subject to extensive laws and regulations, including the Mississippi Gaming Control Act (the "Mississippi Act") and the regulations (the "Mississippi Regulations") promulgated thereunder by the Mississippi Gaming Commission (the "Mississippi Commission"), which is empowered to oversee and enforce the Mississippi Act. Gaming in Mississippi can be legally conducted only on vessels of a certain minimum size in navigable waters within any county bordering the Mississippi River or in waters of the State of Mississippi which lie adjacent and to the south (principally in the Gulf of Mexico) of the Counties of Hancock, Harrison and Jackson, provided that the county in question has not voted by referendum not to permit gaming in that county. The underlying policy of the Mississippi Act is to ensure that gaming operations in Mississippi are conducted: (i) honestly and competitively; (ii) free of criminal and corruptive influences; and (iii) in a manner which protects the rights of the creditors of gaming operations. The Mississippi Act requires that a person (including any corporation or other entity) be licensed to conduct gaming activities in the State of Mississippi. A license will be issued only for a specified location which has been approved in advance as a gaming site by the Mississippi Commission. Harrah's Vicksburg Corporation, an indirect subsidiary of Harrah's, is licensed to operate a riverboat casino in Vicksburg, Mississippi. Harrah's Tunica Corporation, another indirect subsidiary, is the general partner of Tunica Partners L.P. and Tunica Partners II L.P., each of which is the licensed operator of a riverboat casino in Tunica, Mississippi. (Harrah's Vicksburg Corporation is the limited partner of both partnerships.) As stated above, the casino operated by Tunica Partners L.P. closed in May 1997, and on March 1, 1999, that casino was sold to a subsidiary of Casino America, Inc. In addition, a parent company of a company holding a license must register under the Mississippi Act. Harrah's Entertainment and HOC are registered with the Mississippi Commission. The Mississippi Act also requires that each officer or director of a gaming licensee, or other person who exercises a material degree of control over the licensee, either directly or indirectly, be found suitable by the Mississippi Commission. In addition, any employee of a licensee who is directly involved in gaming must obtain a work permit from the Mississippi Commission. The Mississippi Commission will not issue a license or make a finding of suitability unless it is satisfied, after an investigation paid for by the applicant, that the persons associated with the gaming licensee or applicant for a license are of good character, honesty and integrity, with no relevant or material criminal record. In addition, the Mississippi Commission will not issue a license unless it is satisfied that the licensee is adequately financed or has a reasonable plan to finance its proposed operations from acceptable sources, and that persons associated with the applicant have sufficient business probity, competence and experience to engage in the proposed gaming enterprise. The Mississippi Commission may refuse to issue a work permit to a gaming employee: (i) if the employee has committed larceny, embezzlement or any crime of moral turpitude, or has knowingly violated the Mississippi Act or Mississippi Regulations; or (ii) for any other reasonable cause. There can be no assurance that such persons will be found suitable by the Mississippi Commission. An application for licensing, finding of suitability or registration may be denied for any cause deemed reasonable by the issuing agency. Changes in licensed positions must be reported to the issuing agency. In addition to its authority to deny an application for a license, finding of suitability or registration, the Mississippi Commission has jurisdiction to disapprove a change in corporate position. If the Mississippi Commission were to find a director, officer or key employee unsuitable for licensing or unsuitable to continue having a relationship with the licensee, such entity would be required to suspend, dismiss and sever all relationships with such person. The licensee would have similar obligations with regard to any person who refuses to file appropriate applications. Each gaming employee must obtain a work permit which may be revoked upon the occurrence of certain specified events. 34 Any individual who is found to have a material relationship to, or material involvement with, Harrah's Entertainment may be required to submit to an investigation in order to be found suitable or be licensed as a business associate of any subsidiary holding a gaming license. Key employees, controlling persons or others who exercise significant influence upon the management or affairs of Harrah's Entertainment may be deemed to have such a relationship or involvement. The Mississippi Commission has the power to deny, limit, condition, revoke and suspend any license, finding of suitability or registration, or to fine any person, as it deems reasonable and in the public interest, subject to an opportunity for a hearing. The Mississippi Commission may fine any licensee or person who was found suitable up to $100,000 for each violation of the Mississippi Act or the Mississippi Regulations which is the subject of an initial complaint, and up to $250,000 for each such violation which is the subject of any subsequent complaint. The Mississippi Act provides for judicial review of any final decision of the Mississippi Commission by petition to a Mississippi Circuit Court, but the filing of such petition does not necessarily stay any action taken by the Mississippi Commission pending a decision by the Circuit Court. Each gaming licensee must pay a license fee to the State of Mississippi based upon "gaming receipts" (generally defined as gross receipts less payouts to customers as winnings). The license fee equals four percent of gaming receipts of $50,000 or less per month, six percent of gaming receipts over $50,000 and up to $134,000 per month, and eight percent of gaming receipts over $134,000. The foregoing license fees are allowed as a credit against Mississippi state income tax liability for the year paid. An additional license fee, based upon the number of games conducted or planned to be conducted on the gaming premises, is payable to the State of Mississippi annually in advance. Also, up to a four percent additional tax on gaming revenues may be imposed at the local level of government. The Company also is subject to certain audit and record-keeping requirements, primarily intended to ensure compliance with the Mississippi Act, including compliance with the provisions relating to the payment of license fees. Under the Mississippi Regulations, a person is prohibited from acquiring control of Harrah's Entertainment without prior approval of the Mississippi Commission. Harrah's Entertainment also is prohibited from consummating a plan of recapitalization proposed by management in opposition to an attempted acquisition of control of Harrah's Entertainment and which involves the issuance of a significant dividend to Common Stock holders, where such dividend is financed by borrowings from financial institutions or the issuance of debt securities. In addition, Harrah's Entertainment is prohibited from repurchasing any of its voting securities under circumstances (subject to certain exemptions) where the repurchase involves more than one percent of Harrah's Entertainment outstanding Common Stock at a price in excess of 110 percent of the then-current market value of Harrah's Entertainment Common Stock from a person who owns and has for less than one year owned more than three percent of Harrah's Entertainment outstanding Common Stock, unless the repurchase has been approved by a majority of Harrah's Entertainment shareholders voting on the issue (excluding the person from whom the repurchase is being made) or the offer is made to all other shareholders of Harrah's. Under the Mississippi Regulations, a gaming license may not be held by a publicly held corporation, although an affiliated corporation, such as Harrah's, may be publicly held so long as Harrah's Entertainment registers with and gets the approval of the Mississippi Commission. Harrah's Entertainment must obtain prior approval from the Mississippi Commission for any subsequent public offering of the securities of Harrah's Entertainment if any part of the proceeds from that offering are intended to be used to pay for or reduce debt used to pay for the construction, acquisition or operation of any gaming facility in Mississippi. In addition, in order to register with the Mississippi Commission as a publicly held holding corporation, Harrah's Entertainment must provide further documentation 35 which is satisfactory to the Mississippi Commission, which includes all documents filed with the Securities and Exchange Commission. Any person who, directly or indirectly, or in association with others, acquires beneficial ownership of more than five percent of the Common Stock of Harrah's Entertainment must notify the Mississippi Commission of this acquisition. Regardless of the amount of securities owned, any person who has any beneficial ownership in the Common Stock of Harrah's Entertainment may be required to be found suitable if the Mississippi Commission has reason to believe that such ownership would be inconsistent with the declared policies of the State of Mississippi. Any person who is required to be found suitable must apply for a finding of suitability from the Mississippi Commission within 30 days after being requested to do so, and must deposit a sum of money which is adequate to pay the anticipated investigatory costs associated with such finding. Any person who is found not to be suitable by the Mississippi Commission shall not be permitted to have any direct or indirect ownership in Harrah's Entertainment Common Stock. Any person who is required to apply for a finding of suitability and fails to do so, or who fails to dispose of his or her interest in Harrah's Entertainment Common Stock if found unsuitable, is guilty of a misdemeanor. If a finding of suitability with respect to any person is not applied for where required, or if it is denied or revoked by the Mississippi Commission, Harrah's Entertainment is not permitted to pay such person for services rendered, or to employ or enter into any contract with such person. Harrah's Entertainment is required to maintain current stock ledgers in the State of Mississippi which may be examined by a representative of the Mississippi Commission at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Mississippi Commission. A failure to make such disclosure may be grounds for finding the record holder unsuitable. Harrah's Entertainment also is required to render maximum assistance in determining the identity of the beneficial owner. Because Harrah's Entertainment is licensed to conduct gaming in the State of Mississippi, neither Harrah's Entertainment nor any subsidiary may engage in gaming activities in Mississippi while also conducting gaming operations outside of Mississippi without approval of the Mississippi Commission. The Mississippi Commission has approved the conduct of gaming in all jurisdictions in which Harrah's Entertainment has ongoing operations or approved projects. There can be no assurance that any future approvals will be obtained. The failure to obtain such approvals could have a materially adverse effect on Harrah's. GAMING--LOUISIANA (RIVERBOAT) The ownership and operation of a gaming riverboat in Louisiana is subject to extensive regulation under Louisiana Riverboat Economic Development and Gaming Control Act and the rules and regulations promulgated thereunder. A seven-member Louisiana Gaming Control Board ("LGCB") and the Riverboat Gaming Enforcement Division ("Division"), a part of the Louisiana State Police, are charged with such regulatory authority, including the issuance of riverboat gaming licenses. The number of licenses to conduct gaming on a riverboat is limited by statute to 15. No more than six licenses may be granted for the operation of gaming activities on riverboats in any one parish (county). In general, riverboat gaming in Louisiana can be conducted legally only on approved riverboats that cruise with certain exceptions including exceptions for certain portions of the Red River where riverboats can be continuously docked. Harrah's Shreveport Investment Company, Inc. an indirect subsidiary of Harrah's, is the general partner of, and owns 99% of, Red River Entertainment of Shreveport Partnership in Commendam ("Red River"), a Louisiana partnership which was granted a gaming license in April 1994, to operate a continuously docked gaming riverboat. Harrah's Shreveport Management Company, Inc., another subsidiary, owns the remaining one percent of the Partnership and manages the riverboat, pursuant to an agreement with the Partnership. 36 To obtain a gaming license, applicants must obtain certain Certificates of Approval from the LGCB and submit comprehensive application forms, be fingerprinted and undergo an extensive background investigation by the Division. An applicant is ineligible to receive a gaming license if the applicant has not established good character, honesty and integrity. Each license granted entitles a licensee to operate a riverboat and equipment thereon from a specific location. The duration of the license initially runs for five years; renewals are for one year terms. Red River received a conditional renewal, pending completion of investigation, in January 1999. The investigation is expected to be completed, and final renewal received, by June 1999. In determining whether to grant a license, the Division considers: (i) the good character, honesty and integrity of the applicant; (ii) the applicant's ability to conduct gaming operations; (iii) the adequacy and source of the applicant's financing; (iv) the adequacy of the design documents submitted; (v) the docking facilities to be used; (vi) applicant's plan to recruit, train, and upgrade minorities in employment and to provide for minority-owned business participation. A holder of a license is subject to the imposition of penalties, suspension or revocation of its license for any act that is injurious to the public health, safety, morals, good order, and general welfare of the people of the state of Louisiana, or that violates the gaming laws and regulations. The transfer of a license or an interest in a license is prohibited. In addition, an ownership interest of five percent or more in a business entity which holds a gaming license may not be sold, assigned, transferred or pledged without the Division's approval. No person may be employed as a gaming employee unless such person holds a gaming employee permit issued by the Division. In addition, the Division issues suppliers licenses which authorize the supplier licensee to sell or lease gaming equipment and supplies to any licensee. Minimum and maximum wagers on games are set by the licensee and wagering may be conducted only with a cashless wagering system, whereby all money is converted to tokens, electronic cards, or chips used only for wagering in the gaming establishment. No person under the age of 21 is permitted to wager, and wagers may only be taken from a person present on a licensed riverboat. The legislation imposes a franchise fee for the right to operate on Louisiana waterways of 15% of net gaming proceeds and a license fee of $50,000 (first year) and $100,000 (subsequent years) plus three and one-half percent of net gaming proceeds. All fees are paid to the Division. In addition, the legislation authorizes local governing authorities the power to levy an admission fee for each person boarding the riverboat. Currently that amount is paid by the license holder. The Company's operation is currently paying an admission fee of $3.00 per person, but in the future the Company expects to make a payment in lieu of such admission fee of 4.75% of net gaming proceeds. GAMING--MISSOURI The ownership and operation of a gaming riverboat in Missouri is subject to extensive regulation under the Missouri Riverboat Gambling Act and the rules and regulations promulgated thereunder. A five-member Missouri Gaming Commission ("Commission") is charged with such regulatory authority, including the issuance of riverboat gaming licenses. Harrah's-North Kansas City Corporation, an indirect subsidiary of Harrah's, has been issued two licenses by the Commission to conduct riverboat gaming at its North Kansas City location. Harrah's Maryland Heights LLC, also an indirect subsidiary of the Company, has been issued two licenses by the Commission to conduct riverboat gaming at its Maryland Heights location. Gaming in Missouri can be conducted legally only on either excursion gambling boats or floating facilities approved by the Commission on the Mississippi and Missouri Rivers. Unless permitted to be continuously docked by the Commission for certain stated reasons, including safety, excursion gambling boats must cruise. The Commission has approved dockside gaming for the Company's riverboats in North Kansas City and Maryland Heights. 37 To obtain a gaming license, applicants must submit comprehensive application forms, be fingerprinted and undergo an extensive background investigation by the Commission. An applicant is ineligible to receive an owner's license if the applicant has not established good reputation and moral character or if the applicant, any of its officers, directors or managerial employees or any person who participates in the management or operation of gaming operations has been convicted of a felony. There are separate licenses for owners and operators of riverboat gambling operations, which can be applied for and held concurrently. Each license granted entitles a licensee to own and/or operate an excursion gambling boat and equipment thereon from a specific location. The duration of the license initially runs for two one-year terms followed by two-year terms. The Commission also licenses the serving of alcoholic beverages on riverboats and adjacent facilities. All local income, earnings, use, property and sales taxes are applicable to licensees. In determining whether to grant a license, the Commission considers: (i) the integrity of the applicants; (ii) the types and variety of games to be offered; (iii) the quality of the physical facility, together with improvements and equipment, and how soon the project will be completed; (iv) the financial ability of the applicant to develop and operate the facility successfully; (v) the status of governmental actions required for the facility; (vi) management ability of the applicant; (vii) compliance with applicable laws, rules, charters, and ordinances; (viii) the economic, ecological and social impact of the facility as well as the cost of public improvements; (ix) the extent of public support or opposition; (x) the plan adopted by the home dock city or county; and (xi) effects on competition. A holder of a license is subject to the imposition of penalties, suspension or revocation of its license for any act that is injurious to the public health, safety, morals, good order, and general welfare of the people of the state of Missouri, or that would discredit or tend to discredit the Missouri gaming industry or the state of Missouri, including without limitation: (i) failing to comply with or make provision for compliance with the legislation, the rules promulgated thereunder or any federal, state or local law or regulation; (ii) failing to comply with any rules, order or ruling of the Commission or its agents pertaining to gaming; (iii) receiving goods or services from a person or business entity who does not hold a supplier's license but who is required to hold such license by the legislation or the rules; (iv) being suspended or ruled ineligible or having a license revoked or suspended in any state or gaming jurisdiction; (v) associating with, either socially or in business affairs, or employing persons of notorious or unsavory reputation or who have extensive police records, or who have failed to cooperate with any official constituted investigatory or administrative body and would adversely affect public confidence and trust in gaming; (vi) employing in any Missouri gaming operation any person known to have been found guilty of cheating or using any improper device in connection with any game; (vii) use of fraud, deception, misrepresentation or bribery in securing any license or permit issued pursuant to the legislation; (viii) obtaining any fee, charge, or other compensation by fraud, deception or misrepresentation; and (ix) incompetence, misconduct, gross negligence, fraud, misrepresentation or dishonesty in the performance of the functions or duties regulated by the legislation. An ownership interest in a license or in a business entity, other than a publicly held business entity which holds a license, may not be transferred without the approval of the Commission. In addition, an ownership interest in a license or in a business entity, other than a publicly held business entity, which holds either directly or indirectly a license, may not be pledged as collateral to other than a regulated bank or saving and loan association without the Commission's approval. Every employee participating in a riverboat gaming operation must hold an occupational license which permits the holder to perform only activities included within such holder's level of occupation license or any lower level of occupation license. In addition, the Commission will issue suppliers licenses which authorize the supplier licensee to sell or lease gaming equipment and supplies to any licensee involved in the ownership and management of gaming operations. 38 Even if continuously docked, licensed riverboats must establish and abide by a cruise schedule. Riverboat cruises are required to be a minimum of two hours and a maximum of four hours. For the Company's riverboats in North Kansas City and Maryland Heights, which are continuously docked, passengers may board the riverboats for a 45-minute period at the beginning of a cruise. They may disembark at any time. There is a maximum loss per person per cruise of $500. Minimum and maximum wagers on games are set by the licensee and wagering may be conducted only with a cashless wagering system, whereby money is converted to tokens, electronic cards or chips which can only be used for wagering. No person under the age of 21 is permitted to wager, and wagers may only be taken from a person present on a licensed excursion gambling boat. The legislation imposes a 20% wagering tax on adjusted gross receipts (generally defined as gross receipts less payments to customers as winnings) from gambling games. The tax imposed is to be paid by the licensed owner to the Commission on the day after the day when the wagers were made. Of the proceeds of that tax, 10% goes to the local government where the home dock is located, and the remainder goes to the state education assistance fund. The legislation also requires that licensees pay a $2.00 admission tax for each person admitted to a gaming cruise. The licensed owner is required to maintain public books and records clearly showing amounts received from admission fees, the total amount of gross receipts and the total amount of adjusted gross receipts. INDIAN GAMING The terms and conditions of management contracts and the operation of casinos and all gaming on Indian land in the United States are subject to the Indian Gaming Regulatory Act of 1988 ("IGRA"), which is administered by the NIGC and the gaming regulatory agencies of tribal governments. IGRA is subject to interpretation by the NIGC and may be subject to judicial and legislative clarification or amendment. IGRA requires NIGC approval of management contracts for Class II and Class III gaming as well as the review of all agreements collateral to the management contracts. All management contracts relating to Harrah's Phoenix Ak-Chin, Harrah's Cherokee and Harrah's Prairie Band casinos were approved by the NIGC. The NIGC will not approve a management contract if a director or a 10% shareholder of the management company: (i) is an elected member of the Indian tribal government which owns the facility purchasing or leasing the games; (ii) has been or is convicted of a felony gaming offense; (iii) has knowingly and willfully provided materially false information to the NIGC or the tribe; (iv) has refused to respond to questions from the NIGC; or (v) is a person whose prior history, reputation and associations pose a threat to the public interest or to effective gaming regulation and control, or create or enhance the chance of unsuitable activities in gaming or the business and financial arrangements incidental thereto. In addition, the NIGC will not approve a management contract if the management company or any of its agents have attempted to unduly influence any decision or process of tribal government relating to gaming, or if the management company has materially breached the terms of the management contract or the tribe's gaming ordinance, or a trustee, exercising due diligence, would not approve such management contract. A management contract can be approved only after NIGC determines that the contract provides, among other things, for: (i) adequate accounting procedures and verifiable financial reports, which must be furnished to the tribe; (ii) tribal access to the daily operations of the gaming enterprise, including the right to verify daily gross revenues and income; (iii) minimum guaranteed payments to the tribe, which must have priority over the retirement of development and construction costs; (iv) a ceiling on the repayment of such development and construction costs and (v) a contract term not exceeding five years and a management fee not exceeding 30% of net revenues (as determined by the NIGC); provided that the NIGC may approve up to a seven year term and a management fee not to exceed 40% of net revenues if NIGC is satisfied that the capital investment required, and the income projections for the particular gaming activity 39 require the larger fee and longer term. There is no periodic or ongoing review of approved contracts by the NIGC. The only post-approval action which could result in possible modification or cancellation of a contract would be as the result of an enforcement action taken by the NIGC based on a violation of the law or an issue affecting suitability. IGRA established three separate classes of tribal gaming--Class I, Class II and Class III. Class I includes all traditional or social games solely for prizes of minimal value played by a tribe in connection with celebrations or ceremonies. Class II gaming includes games such as bingo, pulltabs, punchboards, instant bingo and non-banked card games (those that are not played against the house), such as poker. Class III gaming is casino-style gaming and includes banked table games such as blackjack, craps and roulette, and gaming machines such as slots, video poker, lotteries and pari-mutuel wagering. Harrah's Phoenix Ak-Chin and Harrah's Prairie Band provide Class II gaming and, as limited by the tribal-state compact, Class III gaming. Harrah's Cherokee provides only Class III gaming. IGRA prohibits all forms of Class III gaming unless the tribe has entered into a written agreement with the state that specifically authorizes the types of Class III gaming the tribe may offer (a "tribal-state compact"). IGRA requires states to negotiate in good faith with tribes that seek tribal-state compacts and grants Indian tribes the right to seek a federal court order to compel such negotiations. Some states have refused to enter into such negotiations. Tribes in several states sought federal court orders to compel such negotiations. The U. S. Supreme Court in the case of SEMINOLE V. STATE OF FLORIDA AND LAWTON CHILES, determined that this provision of IGRA is unconstitutional as a violation of the Eleventh Amendment to the United States Constitution which immunizes states from suit without the state's consent. These compacts provide among other things the manner and extent to which each state will conduct background investigations and certify the suitability of the manager, its officers, directors, and key employees to conduct gaming on tribal lands. The Company has received its permanent certification from the Arizona Department of Gaming as management contractor for the Ak-Chin Indian Community's casino and has been licensed by the relevant tribal gaming authorities to operate the Prairie Band of Potawatomi Indians' casino and the Eastern Band of Cherokee Indians' casino, respectively. The certification for Cherokee was provided by the Tribal Gaming Commission. Title 25, Section 81 of the United States Code states that "no agreement shall be made by any person with any tribe of Indians, or individual Indians not citizens of the United States, for the payment or delivery of any money or other thing of value. .. in consideration of services for said Indians relative to their lands. .. unless such contract or agreement be executed and approved" by the Secretary or his or her designee. An agreement or contract for services relative to Indian lands which fails to conform with the requirements of Section 81 is void and unenforceable. All money or other thing of value paid to any person by any Indian or tribe for or on his or their behalf, on account of such services, in excess of any amount approved by the Secretary or his or her authorized representative will be subject to forfeiture. The Company believes that it has complied with the requirements of section 81 with respect to its management contracts for Harrah's Phoenix Ak-Chin, Harrah's Cherokee and Harrah's Prairie Band and intends to comply with Section 81 with respect to any other contract to manage casinos located on Indian land in the United States. Indian tribes are sovereign with their own governmental systems, which have primary regulatory authority over gaming on land within the tribes' jurisdiction. Therefore, persons engaged in gaming activities, including the Company, are subject to the provisions of tribal ordinances and regulations on gaming. These ordinances are subject to review by the NIGC under certain standards established by IGRA. The NIGC may determine that some or all of the ordinances require amendment, and that additional requirements, including additional licensing requirements, may be imposed on the Company. The Company has received no such notification regarding the Ak-Chin, Cherokee and/or Prairie Band casinos. The possession of valid licenses from the Ak-Chin Indian Community, the Eastern Band of 40 Cherokee Indians and the Prairie Band of Potawatomi Nation are ongoing conditions of the Company's agreements with these tribes. OTHER REGULATIONS The Company's businesses are subject to various federal, state and local laws and regulations in addition to gaming laws. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, environmental matters, employees, currency transactions, taxation, zoning and building codes, and marketing and advertising. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted. Material changes, new laws or regulations, or material differences in interpretations by courts or governmental authorities could adversely affect the operating results of the Company. FUEL SHORTAGES AND COSTS; WEATHER Although gasoline supplies are now in relative abundance, gasoline shortages and price increases may have adverse effects on the casino business of Harrah's Entertainment. Access to several Harrah's Entertainment casino entertainment facilities, including the Lake Tahoe and Reno areas of northern Nevada and Atlantic City, New Jersey, may be restricted from time to time during the winter months by bad weather which can cause road closures. Such closures have at times adversely affected operating results at Harrah's Lake Tahoe, Harrah's Reno, Bill's Lake Tahoe Casino, Harrah's Atlantic City and the Atlantic City Showboat. EMPLOYEE RELATIONS Harrah's Entertainment, through its subsidiaries, has approximately 37,400 employees. Labor relations with employees are good. The Company's subsidiaries have collective bargaining agreements covering approximately 5,400 employees. These agreements relate to certain casino, hotel and restaurant employees at Harrah's Atlantic City, Harrah's Las Vegas and all the Showboat facilities. ITEM 3. LEGAL PROCEEDINGS. NEW ORLEANS On October 30, 1998, the Plan of Reorganization for Harrah's Jazz Company was consummated. As a result, the contingencies in the already approved settlements in the IN RE HARRAH'S ENTERTAINMENT, INC. SECURITIES LITIGATION, Civil No. 95-3925, and RUSSELL M. SWODY, ET AL. V. HARRAH'S NEW ORLEANS MANAGEMENT COMPANY AND HARRAH'S ENTERTAINMENT, INC., Civil No. 95-4118, matters, both of which were pending in the United States District Court for the Eastern District of Louisiana, were removed and the settlements are now fully effective. Also in connection with the consummation of the Plan of Reorganization, releases of past events in connection with the New Orleans Casino project were obtained by the Company from various parties that had previously been in litigation with the Company. Among the releases exchanged at closing were releases from Centex-Landis, the City of New Orleans, the Louisiana Gaming Control Board, the Louisiana Economic Development and Gaming Corporation, New Orleans/Louisiana Development Corporation and its shareholders, Eddie Sapir and the Eddie Sapir Inter Vivos Trust No. 1. Also in connection with the consummation of the Plan of Reorganization, motions to dismiss with prejudice and/or notices of dismissal with prejudice were filed in the following actions involving the Company: HARRAH'S NEW ORLEANS INVESTMENT COMPANY V. NEW ORLEANS LOUISIANA DEVELOPMENT CORPORATION, Civil No. 95-3166, NEW ORLEANS LOUISIANA DEVELOPMENT CORPORATION V. HARRAH'S ENTERTAINMENT, ET AL., Civil No. 95-14653, CENTEX-LANDIS CONSTRUCTION CO., INC. V. HARRAH'S 41 ENTERTAINMENT, INC. ET AL., Civil No. 95-18101, CITY OF NEW ORLEANS AND RIVERGATE DEVELOPMENT CORPORATION V. HARRAH'S ENTERTAINMENT, INC. ET AL., Civil No. 95-19285, LOUISIANA ECONOMIC DEVELOPMENT AND GAMING CORPORATION V. HARRAH'S ENTERTAINMENT, INC. ET AL., now Civil No. 96-169, in the IN RE HARRAH'S JAZZ COMPANY BANKRUPTCY PROCEEDING, the adversary proceeding styled HARRAH'S JAZZ COMPANY V. A&D MAINTENANCE SERVICES, ET AL., 97-1174, in the IN RE NEW ORLEANS LOUISIANA DEVELOPMENT CORPORATION BANKRUPTCY PROCEEDING, the adversary proceeding styled NEW ORLEANS LOUISIANA DEVELOPMENT CORPORATION V. BANKERS TRUST COMPANY, ET AL., 97-1176, and EDDIE SAPIR ET AL. V. BANKERS TRUST COMPANY, ET AL., Civil No. 97-20643, all pending in the United States District Court for the Eastern District of Louisiana or its Bankruptcy Court. The orders effectuating these dismissals have all been entered. MISSOURI On November 25, 1997, the Missouri Supreme Court issued a ruling in AKIN V. MISSOURI GAMING COMMISSION that defined the state constitutional requirements for floating casino facilities in artificial basins. Subsequently, the Missouri Gaming Commission (the "Commission") attempted to issue disciplinary resolutions that effectively would have amended the gaming licenses of the Company's Missouri casinos, and numerous other floating casino facilities in the Commission's jurisdiction, to preclude games of chance, subject to evidentiary hearings that were to be held if the licensees filed appeals to prove compliance with the Supreme Court's ruling. Prior to the Commission's action, Harrah's Entertainment and other licensees filed petitions in the Circuit Court of Cole County, Missouri, and succeeded in having the Court issue an order restraining the Commission from taking any such disciplinary action. The Commission appealed to the Missouri Supreme Court which, on May 28, 1998, lifted the lower court's restraining order. On June 18, 1998, the Commission reissued its proposed disciplinary resolutions. All affected licensees, including Harrah's, filed timely appeals of the proposed disciplinary resolutions. Subsequently, all of the parties to the several disciplinary hearings, including Harrah's Entertainment and the Commission, agreed that all of the evidence for the hearings would be presented through documents rather than through oral testimony, so no hearings were held. Harrah's Entertainment also filed suit seeking declaratory judgment that its gaming facilities met the state constitutional mandates as established by the Missouri Supreme Court. On November 3, 1998, the people of the State of Missouri voted to amend the State's Constitution to deem all floating casino facilities in compliance with state law. The election results have been certified, and the Commission has dismissed the disciplinary resolutions. In addition to the matters described above, Harrah's Entertainment and its subsidiaries are involved in various inquiries, administrative proceedings and litigation relating to contracts, sales of property and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, management believes that the final outcome of these matters will not have a material adverse effect upon the Company's consolidated financial position or its results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On November 18, 1998, the Company held a special meeting of stockholders to approve the issuance of Company common stock in connection with the Rio merger. The results of the vote were as follows: 81,782,544 votes in favor, 358,103 votes against or withheld and 259,793 abstentions. 42 EXECUTIVE OFFICERS OF THE REGISTRANT POSITIONS AND OFFICES HELD AND PRINCIPAL NAME AND AGE OCCUPATIONS OR EMPLOYMENT DURING PAST 5 YEARS - --------------------------------------------- --------------------------------------------- Philip G. Satre (49)......................... Director since 1989, member of the three- executive Office of the President since December 1998, Chairman of the Board since January 1997, President since April 1991 and Chief Executive Officer since April 1994 of Harrah's Entertainment. Chief Operating Officer of Harrah's Entertainment (1991-1994). President (1984-1995) of Harrah's Gaming Group. He was a member of the Executive Committee of Harrah's Jazz Company and was a director and President of Harrah's Jazz Finance Corp., both of which filed petitions under Chapter 11 of the United States Bankruptcy Code in November 1995. On October 30, 1998, the Plan of Reorganization for both Companies was consummated. Colin V. Reed (51)........................... Director since 1998, member of the three- executive Office of the President since December 1998, Executive Vice President of Harrah's Entertainment since September 1995. Chief Financial Officer of Harrah's Entertainment since April 1997. Senior Vice President, Corporate Development of Harrah's Entertainment from May 1992 to September 1995. He was a member of the Executive Committee of Harrah's Jazz Company and was a director, Senior Vice President and Secretary of Harrah's Jazz Finance Corp., both of which filed petitions under Chapter 11 of the United States Bankruptcy Code in November 1995. On October 30, 1998, the Plan of Reorganization for both companies was consummated. He is also a director of Sodak Gaming, Inc. and National Airlines, Inc., as well as Chairman of the Board of JCC Holding Company. Gary W. Loveman (38)......................... Executive Vice President, Chief Operating Officer and member of the three-executive Office of the President since May 1998. Mr. Loveman was Associate Professor of Business Administration, Harvard University Graduate School of Business Administration from 1994 to 1998, where his responsibilities included teaching MBA and executive education students, research and publishing in the field of service management, and consulting and advising large service companies.
43 POSITIONS AND OFFICES HELD AND PRINCIPAL NAME AND AGE OCCUPATIONS OR EMPLOYMENT DURING PAST 5 YEARS - --------------------------------------------- --------------------------------------------- John M. Boushy (44).......................... Senior Vice President, Information Technology and Brand Operations of Harrah's Entertainment since June 1993. He is a director of Interactive Entertainment Limited and JCC Holding Company (for which he has applied for approval by the Louisiana Gaming Control Board). Ben C. Peternell (53)........................ Senior Vice President, Corporate Human Resources and Communications of Harrah's Entertainment since November 1989. E. O. Robinson, Jr. (59)..................... Senior Vice President and General Counsel of Harrah's Entertainment since April 1993 and Secretary of Harrah's Entertainment from November 1989 to October 1995.
44 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is listed on the New York Stock Exchange and traded under the ticker symbol "HET". The stock is also listed on the Chicago Stock Exchange, the Pacific Exchange and the Philadelphia Stock Exchange. The following table sets forth the high and low price per share of the Company's Common Stock for the last two years:
1998 HIGH LOW - ----------------------------------------------------------------------------- --------- --------- First Quarter................................................................ 25 1/8 18 1/8 Second Quarter............................................................... 26 3/16 21 5/8 Third Quarter................................................................ 23 1/2 13 5/16 Fourth Quarter............................................................... 17 1/4 11 1/16 1997 - ----------------------------------------------------------------------------- First Quarter................................................................ 20 3/4 17 Second Quarter............................................................... 20 1/4 15 1/2 Third Quarter................................................................ 22 15/16 17 5/16 Fourth Quarter............................................................... 22 7/16 16 15/16
The approximate number of holders of record of the Company's Common Stock as of January 29, 1999, is as follows:
APPROXIMATE NUMBER TITLE OF CLASS OF HOLDERS OF RECORD - ------------------------------------------------------------------------- --------------------- Common Stock, Par Value $0.10 per share.................................. 12,848
The Company does not presently intend to declare cash dividends. The terms of the Company's bank facility substantially limit the Company's ability to pay cash dividends on Common Stock and limitations are also contained in agreements covering other debt of the Company. See "Management's Discussion and Analysis-Intercompany Dividend Restriction" on page 35 of the Annual Report which page is incorporated herein by reference. When permitted under the terms of the bank facility and the other debt, the declaration and payment of dividends is at the discretion of the Board of Directors of the Company. The Board of Directors of the Company may reevaluate its dividend policy in the future in light of the Company's results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. ITEM 6. SELECTED FINANCIAL DATA. See the information for the years 1994 through 1998 set forth under "Financial and Statistical Highlights" on pages 22 and 23 of the Annual Report, which pages are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. See the information set forth on pages 25 through 35 of the Annual Report, which pages are incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The Company is exposed to market risk, primarily changes in interest rates. The Company has entered into derivative transactions to hedge its exposure to interest rate changes. The Company does 45 not hold or issue derivative financial instruments for trading purposes and does not enter into derivative transactions that would be considered speculative positions. The table below provides information about the Company's derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by contractual maturity dates.
MATURITY DATE ----------------------------------------------------------------------------- FAIR 1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE(1) --------- --------- --------- --------- --------- ----------- --------- --------- (DOLLARS IN MILLIONS) LIABILITIES Long-term debt Fixed rate........................ $ 2.3 $ 2.6 $ 3.9 $ 1.2 $ 1.3 $ 902.3 $ 913.6 $ 933.0 Average interest rate........... 10.2% 10.3% 8.3% 7.1% 7.1% 7.9% 7.9% Variable rate..................... $ -- $ 1,086.0 $ -- $ -- $ -- $ -- $ 1,086.0 $ 1,086.0 Average interest rate(2)........ --% 6.0% -- -- -- -- 6.0% INTEREST RATE SWAPS Variable to Fixed................. $ -- $ 300.0 $ -- $ -- $ -- $ -- $ 300.0 $ 6.2 Average pay rate................ 6.5% 6.5% Average receive rate............ 5.3% 5.3%
- ------------------------ (1) The fair values are based on the borrowing rates currently available for debt instruments with similar terms and maturities and market quotes of the Company's publicly traded debt. (2) The average interest rates were based on December 31, 1998, variable rates. Actual rates in future periods could vary. During January 1999, the Company completed a public offering of $500 million principal amount 7 1/2% Senior Notes due 2009. The proceeds from the issuance of these notes were used to retire a portion of the variable rate debt due in 2000. The interest rate swap agreements contain a credit risk to the Company that the counterparties may be unable to meet the terms of the agreements. The Company minimizes this risk by evaluating the creditworthiness of its counterparties, which are limited to major banks and financial institutions. Although the Company has an ownership interest in and manages a business in a foreign country, these operations are not material to the Company's consolidated financial position, results of operations or cash flows. Additionally, foreign currency translation gains and losses were not material to the Company's results of operations for the year ended December 31, 1998. Accordingly, the Company is not currently subject to material foreign currency exchange rate risk from the effects that exchange rate movements of foreign currencies would have on the Company's future operating results or cash flows. The Company also holds investments in various other available-for-sale equity securities. The Company's exposure to price risk arising from the ownership of these investments is not material. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See the information set forth on pages 36 through 53 of the Annual Report, which pages are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. 46 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS. DIRECTORS See the information regarding the names, ages, positions and prior business experience of the directors of the Company set forth in the section entitled "Board of Directors" of the Proxy Statement, which information is incorporated herein by reference. EXECUTIVE OFFICERS See "Executive Officers of the Registrant" on page 43 in Part I hereof. ITEM 11. EXECUTIVE COMPENSATION. See the information set forth in the sections of the Proxy Statement entitled "Compensation of Directors," "Summary Compensation Table," "Option Grants in the Last Fiscal Year," "Aggregated Option Exercises in 1998 and December 31, 1998 Option Values" and "Certain Employment Arrangements", which sections are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. See the information set forth in the sections of the Proxy Statement entitled "Ownership of Harrah's Entertainment Securities" and "Certain Stockholders," which sections are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. See the information set forth in the section of the Proxy Statement entitled "Certain Transactions," which section is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial statements (including related notes to consolidated financial statements)* filed as part of this report are listed below: Report of Independent Public Accountants. Consolidated Balance Sheets as of December 31, 1998 and 1997. Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996. Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996. - ------------------------ * Incorporated by reference from pages 36 through 53 of the Annual Report. 47 2. Schedules for the years ended December 31, 1998, 1997 and 1996, are as follows:
NO. - ----------- I -- Condensed financial information of registrant II -- Consolidated valuation and qualifying accounts Schedules III, IV, and V are not applicable and have therefore been omitted.
3. Exhibits (footnotes appear on pages 56 through 58)
NO. - -------------------- 2(1) -- Agreement and Plan of Merger, dated as of December 18, 1997, by and among Harrah's Entertainment, Inc., HEI Acquisition Corp., and Showboat, Inc. (19) 2(2) -- Agreement and Plan of Merger, dated August 9, 1998, and amended September 4, 1998, by and among Harrah's Entertainment, Inc., HEI Acquisition Corp. III, and Rio Hotel & Casino, Inc. (11) 3(1) -- Certificate of Incorporation of The Promus Companies Incorporated; Certificate of Amendment of Certificate of Incorporation of The Promus Companies Incorporated dated April 29, 1994; Certificate of Amendment of Certificate of Incorporation of The Promus Companies Incorporated dated May 26, 1995; and Certificate of Amendment of Certificate of Incorporation of The Promus Companies Incorporated dated June 30, 1995, changing its name to Harrah's Entertainment, Inc. (25) 3(2) -- Bylaws of the Company, as amended December 12, 1997. (29) 4(1) -- Rights Agreement dated as of October 5, 1996, between Harrah's Entertainment, Inc. and The Bank of New York, which includes the form of Certificate of Designations of Series A Special Stock of Harrah's Entertainment, Inc. as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Special Shares as Exhibit C. (3) 4(2) -- First Amendment, dated as of February 21, 1997, to Rights Agreement between Harrah's Entertainment, Inc. and The Bank of New York. (27) 4(3) -- Second Amendment, dated as of April 25, 1997, to Rights Agreement, dated as of October 25, 1996, between Harrah's Entertainment, Inc. and The Bank of New York. (5) 4(4) -- Letter to Stockholders dated July 23, 1997 regarding Summary of Rights To Purchase Special Shares As Amended Through April 25, 1997. (18) 4(5) -- Certificate of Elimination of Series B Special Stock of Harrah's Entertainment, Inc., dated February 21, 1997. (27) 4(6) -- Certificate of Designations of Series A Special Stock of Harrah's Entertainment, Inc., dated February 21, 1997. (27) 4(7) -- Interest Swap Agreement between Bank of America National Trust and Savings Association and Embassy Suites, Inc. dated May 14, 1993. (6) 4(8) -- Interest Swap Agreement between NationsBank of North Carolina, N. A. and Embassy Suites, Inc. dated May 18, 1993. (6)
48
NO. - -------------------- 4(9) -- Interest Swap Agreement between Bank of America National Trust and Savings Association and Harrah's Operating Company, Inc. dated December 21, 1995. (25) 4 10) -- Interest Swap Agreement between NationsBank, N. A. (Carolinas) and Harrah's Entertainment, Inc. dated December 21, 1995. (25) 4 11) -- Interest Swap Agreement between The Bank of Nova Scotia and Embassy Suites, Inc. dated January 25, 1995 and amended February 2, 1995. (7) 4 12) -- Interest Swap Agreement between Bankers Trust Company and Embassy Suites, Inc. dated May 16, 1995. (10) 4 13) -- Interest Swap Agreement between The Sumitomo Bank, Limited and Embassy Suites, Inc. dated June 5, 1995. (10) 4 14) -- Interest Swap Agreement between Bankers Trust Company and Embassy Suites, Inc. dated June 6, 1995. (10) 4 15) -- 5 Year Credit Agreement among Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., Certain Subsidiaries of Harrah's Operating Company, Inc., Various Banks, Canadian Imperial Bank of Commerce and Societe Generale, as Co-Syndication Agents, Bank of America National Trust and Savings Association, as Documentation Agent, and Bankers Trust Company, as Administrative Agent, dated as of July 22, 1993 and Amended and Restated as of June 9, 1995 and further Amended and Restated as of April 1, 1998. (16) 4 16) -- 364 Day Credit Agreement among Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., Certain Subsidiaries of Harrah's Operating Company, Inc., Various Banks, Canadian Imperial Bank of Commerce and Societe Generale, as Co-Syndication Agents, Bank of America National Trust and Savings Association, as Documentation Agent, and Bankers Trust Company, as Administrative Agent, dated as of June 9, 1995 and Amended and Restated as of April 1, 1998. (16) 4 17) -- First Amendment, dated as of September 16, 1998, to the Credit Agreement dated as of July 22, 1993, amended and restated as of June 9, 1995 and further amended and restated as of April 1, 1998 (the "5-Year Credit Agreement") and to the Credit Agreement dated as of June 9, 1995, amended and restated as of April 1, 1998 (the "364-Day Credit Agreement"), among Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., Marina Associates, the lenders party to these credit agreements, Canadian Imperial Bank of Commerce and Societe Generale, as Co-Syndication Agents, Bank of America National Trust and Savings Association, as Documentation Agent, and Bankers Trust Company, as Administrative Agent. **4 18) -- Second Amendment, dated as of November 30, 1998, to the 5-Year Credit Agreement and to the 364-Day Credit Agreement, among Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., Marina Associates, the lenders party to these credit agreements, Canadian Imperial Bank of Commerce and Societe Generale, as Co-Syndication Agents, Bank of America National Trust and Savings Association, as Documentation Agent, and Bankers Trust Company, as Administrative Agent. **4 19) -- Indenture, dated as of December 9, 1998, among Harrah's Operating Company, Inc. as Issuer, Harrah's Entertainment, Inc., as Guarantor and IBJ Schroder Bank & Trust Company, as Trustee relating to the 7 7/8% Senior Subordinated Notes Due 2005.
49
NO. - -------------------- 4 20) -- Indenture, dated as of December 18, 1998, among Harrah's Operating Company, Inc. as obligor, Harrah's Entertainment, Inc., as Guarantor, and IBJ Schroder Bank & Trust Company, as Trustee relating to the 7 1/2% Senior Notes Due 2009. 4 21) -- Indenture dated as of July 21, 1995, among Rio Hotel & Casino, Inc., Rio Properties, Inc. and IBJ Schroder Bank & Trust Company for the 10 5/8% Senior Subordinated Notes Due 2005. (31) 4 22) -- Indenture dated as of February 11, 1997, among Rio Hotel & Casino, Inc., Rio Properties, Inc. and IBJ Schroder Bank & Trust Company for the 9 1/2% Senior Subordinated Notes Due 2007. (32) 4 23) -- Amended and Restated Credit Agreement dated as of February 24, 1998 among Rio Properties, Inc. and Rio Leasing, Inc. and Bank of America National Trust and Savings Association as Agent and the other financial institutions party hereto. (33) **4 24) -- Amendment No. 1 dated December 7, 1998 to the Amended and Restated Credit Agreement dated as of February 24, 1998, among Rio Properties, Inc., Rio Leasing, Inc., Bank of America National Trust and Savings Association, and the financial institutions thereto. **4 25) -- Loan Agreement dated December 18, 1998, among Rio Properties, Inc., Rio Leasing, Inc., Bank of America National Trust and Savings Association, as Agent, NationsBanc Montgomery Securities LLC, as Lead Arranger, and the other financial institutions party hereto ("Loan Agreement dated December 18, 1998"). **4 26) -- Form of Note utilized under Loan Agreement dated December 18, 1998. **4 27) -- Guaranty dated December 18, 1998, by Rio Hotel and Casino, Inc. as guarantor under Loan Agreement dated December 18, 1998. **4 28) -- Pledge and Security Agreement dated December 18, 1998, by Rio Properties, Inc. and Rio Leasing, Inc. under Loan Agreement dated December 18, 1998. **4 29) -- Parent Pledge and Security Agreement dated December 18, 1998, by Rio Hotel & Casino, Inc. under Loan Agreement dated December 18, 1998. **4 30) -- Deed of Trust, dated December 18, 1998, by Rio Properties, Inc. under Loan Agreement dated December 18, 1998. **4 31) -- Deed of Trust, dated December 18, 1998, by Cinderlane, Inc. under Loan Agreement dated December 18, 1998. **4 32) -- Intercreditor Agreement dated December 18, 1998, among Bank of America National Trust Savings Association, as Agent, and various banks as lenders. 4 33) -- Press Release dated April 1, 1998--Harrah's Calls Notes for Redemption; Closes Bank Facility. (16) 4 34) -- Press Release dated May 13, 1998--Harrah's Commences Tender for Showboat Debt. (16) 4 35) -- Press Release dated May 26, 1998--Harrah's Revises Tender for Showboat Senior Subordinated Notes No Change In First Mortgage Bonds. (16) 4 36) -- Press Release dated May 28, 1998--Harrah's receives Requisite Consents for Showboat First Mortgage Bonds. (16)
50
NO. - -------------------- 4 37) -- Press Release dated May 29, 1998--Harrah's Receives Requisite Consents for Showboat Senior Subordinated Notes. (16) 4 38) -- Press Release dated June 9, 1998--Harrah's Prices Tender Offer for Showboat First Mortgage Bonds and Senior Subordinated Notes. (16) 4 39) -- Press Release dated June 11, 1998--Harrah's Completes Tender Offer for Showboat First Mortgage Bonds and Senior Subordinated Notes. (16) 4 40) -- Indenture dated May 18, 1993, for the 9 1/4% First Mortgage Bonds due 2008 among Showboat, Inc., Ocean Showboat, Inc., Atlantic City Showboat, Inc., Showboat Operating Company, and IBJ Schroder Bank & Trust Company; Guaranty by Ocean Showboat Operating Company in favor of IBJ Schroder Bank & Trust Company and Form of Bond Certificate for the 9 1/4% First Mortgage Bonds due 2008. (16) 4 41) -- First Supplemental Indenture dated July 18, 1994, for the 9 1/4% First Mortgage Bonds due 2008 among Showboat, Inc., Ocean Showboat, Inc., Atlantic City Showboat, Inc., Showboat Operating Company and IBJ Schroder Bank & Trust Company is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1994, Exhibit 4.02. (16) 4 42) -- Indenture dated August 10, 1994, for the 13% Senior Subordinated Notes due 2009 among Showboat, Inc., Ocean Showboat, Inc., Atlantic City Showboat, Inc., Showboat Operating Company, and Marine Midland Bank; Guaranty by Ocean Showboat, Inc., Atlantic City Showboat, Inc. and Showboat Operating Company in favor of Marine Midland Bank; and Form of Note Certificate for the 13% Senior Subordinated Notes due 2009. (34) 4 43) -- Indenture dated as of March 28, 1996, among Showboat Marina Casino Partnership, Showboat Marina Finance Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, Nomura Securities International, Inc., Bear, Stearns & Co., Inc. and American Bank National Association, as Trustee, relating to the 13 1/2 Series A and Series B First Mortgage Notes due 2003. (35) **4 44) -- First Supplemental Indenture dated as of March 1, 1999 to Indenture dated as of March 28, 1996, for $140,000,000 13 1/2% First Mortgage Notes due 2003 of Showboat Marina Casino Partnership and Showboat Marina Finance Corporation and Firstar Bank of Minnesota, N.A., as Trustee. 4 45) -- Second Supplemental Indenture dated as of May 27, 1998 to Indenture dated as of May 18, 1993, for $275,000,000 9 1/4% First Mortgage Bonds due 2008 of Showboat, Inc., Issuer, Ocean Showboat, Inc., Atlantic City Showboat, Inc. and Showboat Operating Company, Guarantors, and IBJ Schroder Bank & Trust Company as Trustee. (16) 4 46) -- First Supplemental Indenture dated as of May 28, 1998 to Indenture dated as of August 10, 1994 for $120,000,000 13% Senior Subordinated Notes due 2009 of Showboat, Inc., Company, Ocean Showboat, Inc., Atlantic City Showboat, Inc., and Showboat Operating Company, Guarantors, and Marine Midland Bank as Trustee. (16) 4 47) -- Agreement of Purchase and Sale by and between Sun International and Showboat Land LLC, dated January 29, 1998; Assignment and Assumption of Lease by and between Sun International and Showboat Land LLC, dated January 27, 1998; Landlord Estoppel Certificate by Sun International to Atlantic City Showboat, Inc. dated January 27, 1998; Tenant Estoppel Certificate by Atlantic City Showboat, Inc. to Sun International dated January 27, 1998. (36)
51
NO. - -------------------- 4 48) -- Mortgage and Security Agreement by and between Column Financial, Inc. and Showboat Land LLC, dated January 29, 1998; Promissory Note in the principal amount of $100,000,000 in favor of Column Financial Inc. by Showboat Land LLC, dated January 29, 1998; Cash Management Agreement by and between Column Financial, Inc. and Showboat Land LLC dated January 28, 1998; Guaranty of Lease by and between Showboat, Inc. and Column Financial, Inc. dated January 29, 1998; Environmental Indemnity Agreement by and between Column Financial, Inc., Showboat Land LLC and Atlantic City Showboat, Inc. dated January 29, 1998; Assignment of Leases and Rents by and between Column Financial Inc. and Showboat Land LLC, dated January 29, 1998; Tenant Estoppel Certificate by Atlantic City Showboat, Inc. to Column Financial, Inc. and Showboat Land LLC, dated January 29, 1998; Promissory Note Clarification Agreement dated January 29, 1998 between Column Financial, Inc. and Showboat Land LLC; and Lease Clarification Agreement dated February 13, 1998 among Showboat Land LLC and Atlantic City Showboat, Inc. (36) 10(1) -- Tax Sharing Agreement, dated June 30, 1995, between The Promus Companies Incorporated and Promus Hotel Corporation. (10) +10(2) -- Form of Indemnification Agreement entered into by The Promus Companies Incorporated and each of its directors and executive officers. (1) +10(3) -- Financial Counseling Plan of Harrah's Entertainment, Inc. as amended January 1996. (25) +10(4) -- The Promus Companies Incorporated 1996 Non-Management Director's Stock Incentive Plan dated April 5, 1995. (9) +10(5) -- Amendment dated February 20, 1997 to 1996 Non-Management Director's Stock Incentive Plan. (5) +10(6) -- Trust Agreement dated November 7, 1997 between Harrah's Entertainment, Inc. and NationsBank concerning the Non-Management Director's Stock Incentive Plan. (29) +10(7) -- The Promus Companies Incorporated Key Executive Officer Annual Incentive Plan dated February 24, 1995. (10) +10(8) -- Summary Plan Description of Executive Term Life Insurance Plan. (27) +10(9) -- Form of Harrah's Entertainment, Inc.'s Annual Management Bonus Plan, as amended 1995. (25) +10 10) -- Amendment dated as of December 12, 1997 to Harrah's Entertainment, Inc.'s Annual Management Bonus Plan. (29) **+10 11) -- Amendment dated December 10, 1998 to Harrah's Entertainment, Inc.'s Annual Management Bonus Plan. +10 12) -- Amended and Restated Severance Agreement dated as of October 31, 1997 entered into with Philip G. Satre. (29) +10 13) -- Form of Amended and Restated Severance Agreement dated as of October 31, 1997 entered into with John M. Boushy, Ben C. Peternell, Colin V. Reed and E. O. Robinson, Jr. (29) **+10 14) -- Severance Agreement dated October 29, 1998 entered into with Gary W. Loveman. **+10 15) -- Severance Agreement dated October 29, 1998 entered into with Philip G. Satre.
52
NO. - -------------------- **+10 16) -- Form of Severance Agreement dated October 29, 1998 entered into with John M. Boushy, Ben C. Peternell, Colin V. Reed, E. O. Robinson, Jr. and Judy T. Wormser. +10 17) -- Employment Agreement dated as of February 25, 1994, and effective April 29, 1994, between The Promus Companies Incorporated and Philip G. Satre including exhibits thereto. (17) +10 18) -- Amendment, dated May 5, 1997, to Employment Agreement of Philip G. Satre dated as of February 25, 1994. (5) **+10 19) -- Form of Employment Agreement dated April 1, 1998, between Harrah's Entertainment, Inc. and John M. Boushy, Ben C. Peternell, Colin V. Reed and E. O. Robinson, Jr. **+10 20) -- Addendum dated April 1, 1998, to Employment Agreement between Harrah's Entertainment, Inc. and John M. Boushy. **+10 21) -- Employment Agreement and Addendum dated May 4, 1998, between Harrah's Entertainment, Inc. and Gary W. Loveman. +10 22) -- Employment Agreement between Harrah's Entertainment, Inc. and J. Kell Houssels, III, dated June 1, 1998. (16) **+10 23) -- Memorandum Agreement Concerning Termination of Employment and Commencement of Consulting Agreement dated November 25, 1998, among Harrah's Entertainment, Inc. and J. Kell Houssels, III. +10 24) -- The Promus Companies Incorporated 1990 Stock Option Plan. (12) +10 25) -- The Promus Companies Incorporated 1990 Stock Option Plan (as amended as of April 30, 1993). (20) +10 26) -- The Promus Companies Incorporated 1990 Stock Option Plan, as amended April 29, 1994. (8) +10 27) -- The Promus Companies Incorporated 1990 Stock Option Plan, as amended July 29, 1994. (21) +10 28) -- Amendment, dated April 5, 1995, to The Promus Companies Incorporated 1990 Stock Option Plan as adjusted on December 12, 1996. (27) +10 29) -- Amendment, dated February 26, 1998, to the Harrah's Entertainment, Inc. 1990 Stock Option Plan. (13) +10 30) -- Amendment, dated April 30, 1998, to the Harrah's Entertainment, Inc. 1990 Stock Option Plan. (16) **+10 31) -- Amendment, dated October 29, 1998, to the Harrah's Entertainment, Inc. 1990 Stock Option Plan. +10 32) -- Revised Form of Stock Option (1990 Stock Option Plan). (25) +10 33) -- Revised Form of Stock Option with attachments (1990 Stock Option Plan). (27) +10 34) -- Form of memorandum agreement dated July 2, 1991, eliminating stock appreciation rights under stock options held by Ben C. Peternell and Philip G. Satre. (14) +10 35) -- The Promus Companies Incorporated 1990 Restricted Stock Plan. (12)
53
NO. - -------------------- +10 36) -- Amendment, dated April 5, 1995, to The Promus Companies Incorporated 1990 Restricted Stock Plan. (9) +10 37) -- Amendment, dated February 26, 1998, to the Harrah's Entertainment, Inc. 1990 Restricted Stock Plan. (13) +10 38) -- Amendment, dated April 30, 1998, to the Harrah's Entertainment, Inc. 1990 Restricted Stock Plan. (16) **+10 39) -- Amendment, dated October 29, 1998, to the Harrah's Entertainment, Inc. 1990 Restricted Stock Plan. +10 40) -- Revised Forms of Restricted Stock Award (1990 Restricted Stock Plan). (25) +10 41) -- Revised Form of Restricted Stock Award (1990 Restricted Stock Plan). (27) +10 42) Administrative Regulations, Long Term Compensation Plan (Restricted Stock Plan and Stock Option Plan) dated October 27, 1995. (25) +10 43) -- Amendment to Administrative Regulations, Long Term Compensation Plan (Restricted Stock Plan and Stock Option Plan) dated December 12, 1996. (27) +10 44) -- Description of Terms of Stock Option and TARSAP grants for Gary W. Loveman on April 30, 1998. (16) +10 45) -- Deferred Compensation Plan dated October 16, 1991. (15) +10 46) -- Amendment, dated May 26, 1995, to The Promus Companies Incorporated Deferred Compensation Plan. (2) +10 47) -- Forms of Deferred Compensation Agreement. (25) +10 48) -- Amended and Restated Executive Deferred Compensation Plan dated as of October 27, 1995. (25) +10 49) -- Amendment dated April 24, 1997 to Harrah's Entertainment, Inc.'s Executive Deferred Compensation Plan. (18) +10 50) -- Amendment dated April 30, 1998 to the Harrah's Entertainment, Inc. Executive Deferred Compensation Plan. (16) **+10 51) -- Amendment dated October 29, 1998 to the Harrah's Entertainment, Inc. Executive Deferred Compensation Plan. +10 52) -- Description of Amendments to Executive Deferred Compensation Plan. (22) +10 53) -- Restated Amendment, dated July 18, 1996, to Harrah's Entertainment, Inc. Executive Deferred Compensation Plan. (27) +10 54) -- Forms of Executive Deferred Compensation Agreement. (25) +10 55) -- Amendment dated April 24, 1997, to Harrah's Entertainment, Inc.'s Deferred Compensation Plan. (18) +10 56) -- Escrow Agreement dated February 6, 1990 between The Promus Companies Incorporated, certain subsidiaries thereof, and Sovran Bank, as escrow agent. (12) +10 57) -- First Amendment to Escrow Agreement dated January 31, 1990 among Holiday Corporation, certain subsidiaries thereof and Sovran Bank, as escrow agent. (12)
54
NO. - -------------------- +10 58) -- Amendment to Escrow Agreement dated as of October 29, 1993 among The Promus Companies Incorporated, certain subsidiaries thereof, and NationsBank, formerly Sovran Bank. (24) +10 59) -- Amendment, dated as of June 7, 1995, to Escrow Agreement among The Promus Companies Incorporated, certain subsidiaries thereof and NationsBank. (2) +10 60) -- Amendment, dated as of July 18, 1996, to Escrow Agreement between Harrah's Entertainment, Inc. and NationsBank. (26) +10 61) -- Time Accelerated Restricted Stock Award Plan ("TARSAP") program dated December 12, 1996. (27) +10 62) -- Form of TARSAP Award. (27) +10 63) -- Form of Agreement, dated October 30, 1996, regarding cancellation and reissue of stock options, entered into with Philip G. Satre, Colin V. Reed, Ben C. Peternell, E.O. Robinson, Jr. and John M. Boushy; and Form of Reissued Stock Option. (27) +10 64) -- Amendment, dated as of October 30, 1997, to Escrow Agreement between Harrah's Entertainment, Inc., Harrah's Operating Company, Inc. and NationsBank. (29) 10 65) -- Notes Completion Guarantee among Harrah's Entertainment, Inc., Harrah's Operating Company, Inc. and Norwest Bank Minnesota, National Association, as Trustee, dated October 30, 1998. (30) 10 66) -- Subordinated Loan Agreement among Jazz Casino Company, L.L.C., Harrah's Operating Company, Inc. and Harrah's Entertainment, Inc., dated October 30, 1998. (30) 10 67) -- Intercreditor Agreement among Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., Bankers Trust Company, as Administrative Agent, and Norwest Bank Minnesota, National Association, as Trustee, and The Bank of New York, as Collateral Agent, acknowledged and agreed to by JCC Holding Company, Jazz Casino Company, L.L.C., CP Development, L.L.C., FP Development, L.L.C., and JCC Development Company, L.L.C., dated as of October 29, 1998. (30) 10 68) -- Second Amended and Restated Management Agreement between Harrah's New Orleans Management Company and Jazz Casino Company, L.L.C., acknowledged and consented to by Rivergate Development Corporation, as Landlord, dated as of October 29, 1998. (30) 10 69) -- City/RDC Completion Guarantee among Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., the Rivergate Development Corporation and the City of New Orleans, dated as of October 29, 1998. (30) 10 70) -- LGCB Completion Guarantee among Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., accepted and agreed to by the Louisiana Gaming Control Board, dated as of October 30, 1998. (30) 10 71) -- Amended and Restated Subordinated Completion Loan Agreement among Jazz Casino Company, L.L.C., Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., and as to the provisions of Sections 2(C)iii and (iv) only, agreed and accepted by Bankers Trust Company as Administrative Agent for Lenders, dated October 30, 1998. (30)
55
NO. - -------------------- 10 72) -- Amended and Restated Construction Lien Indemnity Obligation Agreement between Jazz Casino Company, L.L.C. and Harrah's Operating Company, Inc., dated October 30, 1998. (30) 10 73) -- Bank Completion Guarantee among Harrah's Entertainment, Inc. and Harrah's Operating Company, Inc., accepted and agreed to by Bankers Trust Company, as Administrative Agent, dated October 29, 1998. (30) 10 74) -- HET/JCC Agreement between Harrah's Entertainment, Inc., Harrah's Operating Company, Inc. and Jazz Casino Company, L.L.C., dated October 30, 1998. (30) 10 75) -- Guaranty and Loan Purchase Agreement by Harrah's Entertainment, Inc. and Harrah's Operating Company, Inc., acknowledged and agreed to by Bankers Trust Company as Administrative Agent, dated as of October 29, 1998. (30) **11 -- Computations of per share earnings. **12 -- Computations of ratios. **13 -- Portions of Annual Report to Stockholders for the year ended December 31, 1998. (28) **21 -- List of subsidiaries of Harrah's Entertainment, Inc. **27 -- Financial Data Schedule.
- ------------------------ ** Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K. FOOTNOTES (1) Incorporated by reference from the Company's Registration Statement on Form 10, File No. 1-10410, filed on December 13, 1989. (2) Incorporated by reference from the Company's Current Report on Form 8-K, filed June 15, 1995, File No. 1-10410. (3) Incorporated by reference from the Company's Current Report on Form 8-K, filed August 9, 1996, File No. 1-10410. (4) Incorporated by reference from Amendment No. 3 to Form S-1 Registration Statement of Harrah's Jazz Company and Harrah's Jazz Finance Corp., File No. 33-73370, filed August 4, 1994. (5) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, filed May 13, 1997, File No. 1-10410. (6) Incorporated by reference from the Company's and Embassy Suites, Inc.'s Amendment No. 2 to Form S-4 Registration Statement, File No. 33-49509-01, filed July 16, 1993. (7) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, filed March 21, 1995, File No. 1-10410. (8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, filed May 12, 1994, File No. 1-10410. (9) Incorporated by reference from the Company's Proxy Statement for the May 26, 1995 Annual Meeting of Stockholders, filed April 25, 1995. 56 (10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, filed August 14, 1995, File No. 1-10410. (11) Incorporated by reference from the Company's Current Report on Form 8-K, filed August 14, 1998, and amended on September 4, 1998, File No. 1-10410. (12) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1989, filed March 28, 1990, File No. 1-10410. (13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998, filed May 14, 1998, File No. 1-10410. (14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 1991, filed November 8, 1991, File No. 1-10410. (15) Incorporated by reference from Amendment No. 2 to the Company's and Embassy's Registration Statement on Form S-1, File No. 33-43748, filed March 18, 1992. (16) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed August 7, 1998, File No. 1-10410. (17) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, filed November 14, 1994, File No. 1-10410. (18) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, filed August 13, 1997, File No. 1-10410. (19) Incorporated by reference from the Company's Current Report on Form 8-K filed December 24, 1997, File No. 1-10410. (20) Incorporated by reference from Post-Effective Amendment No. 1 to the Company's Form S-8 Registration Statement, File No. 33-32864-01, filed July 22, 1993. (21) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, filed August 11, 1994, File No. 1-10410. (22) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, filed November 13, 1997, File No. 1-10410. (23) Incorporated by reference from Amendment No. 5 to Form S-1 Registration Statement of Harrah's Jazz Company and Harrah's Jazz Finance Corp., File No. 33-73370, filed October 26, 1994. (24) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, filed March 28, 1994, File No. 1-10410. (25) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, filed March 6, 1996, File No. 1-10410. (26) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, filed November 12, 1996, File No. 1-10410. (27) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, filed March 11, 1997, File No. 1-10410. (28) Filed herewith to the extent portions of such report are specifically included herein by reference. (29) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, filed March 10, 1998, File No. 1-10410. (30) Incorporated by reference from JCC Holding Company's Registration Statement on Form 10/A, filed November 20, 1998. 57 (31) Incorporated by reference from Rio Hotel & Casino, Inc.'s Current Report on Form 8-K, filed July 18, 1995, File No. 0-13760. (32) Incorporated by reference from Rio Hotel & Casino, Inc.'s Current Report on Form 8-K, filed February 4, 1997, File No. 0-13760. (33) Incorporated by reference from Rio Hotel & Casino, Inc.'s Current Report on Form 8-K, filed February 24, 1998, File No. 0-13760. (34) Incorporated by reference from Showboat, Inc.'s Current Report on Form 8-K (file no. 1-7123) dated August 10, 1994. (35) Incorporated by reference from Showboat, Inc.'s Quarterly Report on Form 10-Q (file no. 1-7123) for the six month period ended June 30, 1996. (36) Incorporated by reference from Showboat, Inc.'s Annual Report on Form 10-K (file no. 1-7123) for the year ended December 31, 1997. (37) Incorporated by reference from the Company's Registration Statement on Form S-3 of Harrah's Entertainment, Inc. and Harrah's Operating Company, Inc., File No. 333-52949, filed May 18, 1998. (38) Incorporated by reference from the Company's Registration Statement on Form S-3 of Harrah's Entertainment, Inc. and Harrah's Operating Company, Inc., File No. 333-69263, filed December 18, 1998. (b) The following Current Reports on Form 8-K were filed by the Company during the fourth quarter of 1997 and thereafter through March 1, 1999: November 9, 1998--reporting the Company's third quarter results; December 7, 1998--reporting the Underwriting Agreement in connection with $750,000,000 7 7/8% Senior Notes Due 2005); January 7, 1999--reporting the consummation of the merger with Rio Hotel & Casino, Inc.; January 13, 1999--reporting the Underwriting Agreement in connection with $500,000,000 7 1/2% Senior Notes Due 2009); and February 12, 1999--reporting the Company's year-end results. 58 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HARRAH'S ENTERTAINMENT, INC. By: PHILIP G. SATRE ----------------------------------------- (Philip G. Satre, Chairman and Chief Executive Officer) Dated: March 19, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- SUSAN CLARK-JOHNSON - ------------------------------ Director March 19, 1999 (Susan Clark-Johnson) JAMES B. FARLEY - ------------------------------ Director March 19, 1999 (James B. Farley) JOE M. HENSON - ------------------------------ Director March 19, 1999 (Joe M. Henson) RALPH HORN - ------------------------------ Director March 19, 1999 (Ralph Horn) J. KELL HOUSSELS, III - ------------------------------ Director March 19, 1999 (J. Kell Houssels, III) R. BRAD MARTIN - ------------------------------ Director March 19, 1999 (R. Brad Martin) COLIN V. REED Director and - ------------------------------ Chief Financial Officer March 19, 1999 (Colin V. Reed) Office of the President WALTER J. SALMON - ------------------------------ Director March 19, 1999 (Walter J. Salmon) PHILIP G. SATRE Director, Chairman and - ------------------------------ Chief Executive Officer March 19, 1999 (Philip G. Satre) Office of the President BOAKE A. SELLS - ------------------------------ Director March 19, 1999 (Boake A. Sells) EDDIE N. WILLIAMS - ------------------------------ Director March 19, 1999 (Eddie N. Williams) JUDY T. WORMSER - ------------------------------ Controller and Principal March 19, 1999 (Judy T. Wormser) Accounting Officer
59 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Harrah's Entertainment, Inc: We have audited in accordance with generally accepted auditing standards, the financial statements included in the Harrah's Entertainment, Inc. 1998 annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 9, 1999. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed under Item 14(a)2 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements, and in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Memphis, Tennessee, February 9, 1999. SCHEDULE I HARRAH'S ENTERTAINMENT, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31 ---------------------- 1998 1997 ---------- ---------- ASSETS Cash...................................................................................... $ -- $ -- Investments in and advances to subsidiaries (eliminated in consolidation)................. 851,407 735,491 ---------- ---------- $ 851,407 $ 735,491 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Accrued taxes, including federal income taxes............................................. $ -- $ (12) ---------- ---------- Commitments and contingencies (Notes 2, 3, 6 and 7) Stockholders' equity (Note 4) Common stock, $0.10 par value, authorized--360,000,000 shares outstanding-- 102,188,018 and 101,035,898 shares (net of 3,036,562 and 3,001,568 held in treasury).............. 10,219 10,104 Capital surplus......................................................................... 407,691 388,925 Retained earnings....................................................................... 451,410 349,386 Accumulated other comprehensive income.................................................. 6,567 2,884 Deferred compensation related to restricted stock....................................... (24,480) (15,796) ---------- ---------- 851,407 735,503 ---------- ---------- $ 851,407 $ 735,491 ---------- ---------- ---------- ----------
The accompanying Notes to Financial Statements are an integral part of these balance sheets. S-1 SCHEDULE I (CONTINUED) HARRAH'S ENTERTAINMENT, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME (IN THOUSANDS) YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 ---------- --------- --------- Revenues........................................................................ $ -- $ -- $ -- Costs and expenses.............................................................. 165 144 150 ---------- --------- --------- Loss before income taxes and equity in subsidiaries' earnings................... (165) (144) (150) Income tax benefit.............................................................. 58 50 57 ---------- --------- --------- Loss before equity in subsidiaries' earnings.................................... (107) (94) (93) Equity in subsidiairies' earnings............................................... 121,824 107,616 98,990 ---------- --------- --------- Income before extraordinary loss................................................ 121,717 107,522 98,897 Extraordinary loss, net of tax benefit of $10,522 and $4,477 (Note 3)........... (19,693) (8,134) -- ---------- --------- --------- Net income...................................................................... $ 102,024 $ 99,388 $ 98,897 ---------- --------- --------- ---------- --------- ---------
The accompanying Notes to Financial Statements are an integral part of these statements. S-2 SCHEDULE I (CONTINUED) HARRAH'S ENTERTAINMENT, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ---------- ---------- --------- Cash flows from operating activities Net income................................................................... $ 102,024 $ 99,388 $ 98,897 Adjustment to reconcile net income to cash flows from operating activities Equity in undistributed earnings of subsidiaries......................... (121,824) (107,616) (98,990) Extraordinary loss....................................................... 29,491 12,611 -- Other non-cash activity.................................................. (9,691) (4,383) 93 ---------- ---------- --------- Cash flows from operating activities................................... -- -- -- ---------- ---------- --------- Cash flows from financing activities Distributions from subsidiary................................................ -- 41,022 13,014 Treasury stock purchases..................................................... -- (41,022) (13,014) ---------- ---------- --------- Cash flows from financing activities................................... -- -- -- ---------- ---------- --------- Net change in cash............................................................. -- -- -- Cash, beginning of period...................................................... -- -- -- ---------- ---------- --------- Cash, end of period............................................................ $ -- $ -- $ -- ---------- ---------- --------- ---------- ---------- ---------
The accompanying Notes to Financial Statements are an integral part of these statements S-3 SCHEDULE I (CONTINUED) HARRAH'S ENTERTAINMENT, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO FINANCIAL STATEMENTS NOTE 1--BASIS OF ORGANIZATION Harrah's Entertainment, Inc. ("Harrah's Entertainment" or the "Company,"), a Delaware corporation, is a holding company, the principal assets of which are the capital stock of two subsidiaries, Harrah's Operating Company, Inc. ("HOC") and Aster Insurance Ltd. ("Aster"). These condensed financial statements should be read in conjunction with the consolidated financial statements of Harrah's Entertainment and subsidiaries. NOTE 2--INVESTMENT IN ASTER The value of Harrah's Entertainment's investment in Aster has been reduced below zero. The Company's negative investment in Aster at December 31, 1998 and 1997 was $7.3 million and $8.1 million, respectively, and is included in investments in and advances to subsidiaries on the balance sheet. In addition, Harrah's Entertainment has guaranteed the future payment by Aster of certain insurance-related liabilities. NOTE 3--LONG-TERM DEBT Harrah's Entertainment has no long-term debt obligations. The Company has guaranteed certain long-term debt obligations of HOC. During second quarter 1998, HOC redeemed its $200 million 8 1/4% Senior Subordinated Notes due 2000 (the "8 1/4% Notes"). Subsequent to the acquisition of Showboat, Inc., HOC completed tender offers and consent solicitations for Showboat's 9 1/4% First Mortgage Bonds due 2008 (the "Bonds") and 13% Senior Subordinated Notes due 2008 (the "13% Notes"). 1998 extraordinary losses, net of tax benefit, were primarily results of these early extinguishments of debt. In May 1997, HOC redeemed its $200 million 10 7/8% Notes due 2002 (the "10 7/8% Notes"). As a result of the early extinguishment of the 10 7/8% Notes, an $8.1 million extraordinary loss, net of tax beneift, was recorded. During December 1998, HOC completed a public offering of $750.0 million principal amount of 7 7/8% Senior Subordinated Notes due 2005 (the "7 7/8 Notes"). Subsequent to the end of 1998, HOC completed a public offering of $500.0 million principal amount $7 1/2% Senior Notes due 2009 (the "7 1/2% Notes"). NOTE 4--STOCKHOLDERS' EQUITY In addition to its common stock, Harrah's Entertainment has the following classes of stock authorized but unissued: Preferred stock, $100 par value, 150,000 shares authorized Special stock, $1.125 par value, 5,000,000 shares authorized- Series A Special Stock, 2,000,000 shares designated Harrah's Entertainment's Board of Directors has authorized that one special stock purchase right (a "Right") be attached to each outstanding share of common stock. These Rights are exercisable only if a person or group acquires 15% or more of the Company's common stock or announces a tender offer for 15% or more of the common stock. Each Right entitles stockholders to buy one two-hundredth of a share of Series A Special Stock of the Company at an initial price of $130 per Right. If a person acquires 15% or more of the Company's outstanding common stock, each Right entitles its holder to purchase common stock of the Company having a market value at that time of twice the Right's exercise price. Under certain S-4 SCHEDULE I (CONTINUED) HARRAH'S ENTERTAINMENT, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4--STOCKHOLDERS' EQUITY (CONTINUED) conditions, each Right entitles its holder to purchase stock of an acquiring company at a discount. Rights held by the 15% holder will become void. The Rights will expire on October 5, 2006, unless earlier redeemed by the Board at one cent per Right. In October 1996, the Company's Board of Directors approved a plan, which expired on December 31, 1997, under which the Company repurchased 2,993,700 shares of its common stock at an average price of $18.05 per share. The repurchased shares are held in treasury. NOTE 5--INCOME TAXES Harrah's Entertainment files a consolidated tax return with its subsidiaries. NOTE 6--COMMITMENTS AND CONTINGENCIES In November 1995, Harrah's Jazz Company ("Jazz") and its wholly-owned subsidiary, Harrah's Jazz Finance Corp., filed petitions for relief under Chapter 11 of the Bankruptcy Code. During October 1998, the plan of reorganization (the "Plan") of Jazz was consummated. Pursuant to the Plan, a newly formed limited liability company, Jazz Casino Company, L.L.C. ("JCC") is responsible for constructing and opening the Casino. JCC leases the site for the Casino from the City of New Orleans and will operate the casino pursuant to a casino operating contract with the State of Louisiana gaming board. In exchange for an equity investment in JCC's parent of $75 million (including $60 million in debtor-in-possession loans to Jazz which were converted to equity at Plan consummation), a subsidiary of the Company acquired, at the time of plan consummation, approximately 44% of the equity in JCC's parent. The Company's ownership interest has been reduced to approximately 43% due to the exercise by an unrelated party of an option to acquire a portion of our interest. Harrah's Entertainment and HOC (i) guarantee JCC's initial $100 million annual payment under the casino operating contract to the State of Louisiana gaming board (the "State Guarantee"); (ii) guarantee $166.5 million of a $236.5 million JCC bank credit facility; (iii) guarantee to the State of Louisiana gaming board, City of New Orleans, banks under the JCC bank credit facility and JCC bondholders, completion and opening of the Casino on or before October 30, 1999 (subject to force majeure); and, (iv) are obligated to make a $22.5 million subordinated loan to JCC to finance construction of the Casino. With respect to the State Guarantee, Harrah's Entertainment and HOC are obligated to guarantee JCC's first $100 million annual payment obligation commencing upon the earlier of opening of the Casino or October 30, 1999 (subject to force majeure), and, if certain cash flow tests and other conditions are satisfied each year, to renew the guarantee beginning April 1, 2000, for each 12 month period ending March 31, 2004. The obligations under the guarantee for the first year of operations or any succeeding 12 month period is limited to a guarantee of the $100 million payment obligation of JCC for the 12 month in which the guarantee is in effect and is secured by a first priority lien on JCC's assets. JCC's payment obligation (and therefore the amount we have guaranteed) is $100 million at the commencement of each S-5 SCHEDULE I (CONTINUED) HARRAH'S ENTERTAINMENT, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED) 12 month period under the casino operating contract and declines on a daily basis by 1/365 of $100 million to the extent payments are made each day by JCC to Louisiana's gaming board. NOTE 7--LITIGATION Harrah's Entertainment and certain of its subsidiaries had been named as defendants in a number of lawsuits arising from the suspension of development of a land-based casino, and the closing of the temporary gaming facility, in New Orleans, Louisiana, by Harrah's Jazz Company, a partnership in which the Company owned an approximate 47% interest and which filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In October 1998, the plan of reorganization of Harrah's Jazz Company was consummated, and these lawsuits were dismissed. On November 25, 1997, the Missouri Supreme Court issued a ruling in Akin v. Missouri Gaming Commission that defined the state constitutional requirements for floating casino facilities in artificial basins. On November 3, 1998, the people of the state of Missouri voted to amend the State's Constitution to deem all floating casino facilities in compliance with state law, and all litigation regarding the issue which had been pending has been dismissed. NOTE 8--ACQUISITIONS On June 1, 1998, HOC completed the acquisition of Showboat, Inc. ("Showboat") for $520.0 million in cash and assumption of approximately $635 million of Showboat debt. In third quarter 1998, the Company entered into a definitive merger agreement with Rio Hotel and Casino, Inc. ("Rio"). The merger was completed on January 1, 1999. Harrah's Entertainment acquired all Rio outstanding shares in a one-for-one stock transaction valued at $525 million and transferred ownership of the Rio stock to HOC. S-6 SCHEDULE II HARRAH'S ENTERTAINMENT, INC. CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
COLUMN C ------------------- ADDITIONS COLUMN E COLUMN B ------------------- COLUMN D -------- ---------- CHARGED ---------------- BALANCE COLUMN A BALANCE AT TO COSTS CHARGED DEDUCTIONS AT CLOSE - --------------------------------------------------------------- BEGINNING AND TO OTHER FROM OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVES PERIOD - --------------------------------------------------------------- ---------- -------- -------- ---------------- -------- YEAR ENDED DECEMBER 31, 1998 Allowance for doubtful accounts Current...................................................... $11,462 $ 9,905 $ -- $ (7,011)(A) $14,356 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- Long-term.................................................... $10,421 $ -- $ -- $ 2,272 $12,693 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- Reserve against investments in and advances to nonconsolidated affiliates (B)................................................ $13,000 $ -- $ -- $ -- $13,000 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- Reserve for impairment of long-lived assets.................... $33,369 $ 2,740 $ 381 $ -- $36,490 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- Reserve for contingent liability exposure...................... $ 4,806 $ -- $ -- $ (3,765) $ 1,041 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- Insurance allowances and reserves.............................. $46,870 $ 62,262 $ -- $ (63,361) $45,771 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts Current...................................................... $14,064 $ 5,332 $ 27 $ (7,961)(A) $11,462 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- Long-term.................................................... $ 4,628 $ 1,118 $ -- $ 4,675 $10,421 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- Reserve for debtor-in-possession loans to nonconsolidated subsidiary.................................... $ -- $ 13,000 $ -- $ -- $13,000 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- Reserve for impairment of long-lived assets.................... $33,369 $ -- $ -- $ -- $33,369 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- Reserve for contingent liability exposure...................... $ 9,481 $ -- $ -- $ (4,675) $ 4,806 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- Insurance allowances and reserves.............................. $49,590 $ 54,198 $ -- $ (56,918) $46,870 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts Current...................................................... $10,910 $ 7,814 -- $ (4,660)(A) $14,064 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- Long-term.................................................... $ 75 $ -- $ -- $ 4,553 $ 4,628 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- Reserve for impairment of long-lived assets.................... $ -- $ 33,369 $ -- $ -- $33,369 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- Reserve for contingent liability exposure...................... $ -- $ 14,034 $ -- $ (4,553) $ 9,481 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- -------- Insurance allowances and reserves.............................. $49,821 $ 39,829 $ -- $ (40,060) $49,590 ---------- -------- -------- -------- -------- ---------- -------- -------- -------- --------
- ------------------------ (A) Uncollectible accounts written off, net of amounts recovered. (B) See Note 14 to the Company's Consolidated Financial Statements. S-7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated February 9, 1999, included in this Form 10-K for the year ended December 31, 1998, into the Company's previously filed Registration Statements File Nos. 333-52949, 333-65759, 333-69263, 333-52401, 333-52409, 333-70269 and 333-70265. ARTHUR ANDERSEN LLP Memphis, Tennessee March 18, 1999 EX-4.(18) 2 EXHIBIT 4.18 EXHIBIT 4(18) SECOND AMENDMENT SECOND AMENDMENT (this "Amendment"), dated as of November 30, 1998, among HARRAH'S ENTERTAINMENT, INC., a Delaware corporation ("Parent"), HARRAH'S OPERATING COMPANY, INC., a Delaware corporation (the "Company"), MARINA ASSOCIATES, a partnership organized under the laws of New Jersey ("Marina"), the lenders party to the Credit Agreements referred to below (the "Banks"), CANADIAN IMPERIAL BANK OF COMMERCE and SOCIETE GENERALE, as Co-Syndication Agents (the "Co-Syndication Agents"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Documentation Agent (the "Documentation Agent"), and BANKERS TRUST COMPANY, as Administrative Agent (the "Administrative Agent"). Unless otherwise defined herein, all capitalized terms used herein shall have the respective meanings provided such terms in the 5-Year Credit Agreement or the 364-Day Credit Agreement, as the case may be, referred to below. W I T N E S S E T H: WHEREAS, Parent, the Company, Marina, the Banks, the Co-Syndication Agents, the Documentation Agent and the Administrative Agent are parties to a Credit Agreement, dated as of July 22, 1993 and amended and restated as of June 9, 1995 and further amended and restated as of April 1, 1998 (as amended, modified or supplemented through, but not including, the date hereof, the "5-Year Credit Agreement"); WHEREAS, Parent, the Company, Marina, the Banks, the Co-Syndication Agents, the Documentation Agent and the Administrative Agent are parties to a Credit Agreement, dated as of June 9, 1995 and amended and restated as of April 1, 1998 (as amended, modified or supplemented through, but not including, the date hereof, the "364-Day Credit Agreement" and, together with the 5-Year Credit Agreement, the "Credit Agreements"); WHEREAS, Parent and the Company plan to acquire all of the outstanding capital stock of Rio Hotel & Casino, Inc. ("Rio Hotel") pursuant to a transaction whereby (x) a Wholly-Owned Subsidiary of Parent will merge with and into Rio Hotel (the "Rio Merger") and (y) immediately thereafter, Parent will contribute its equity interest in Rio Hotel to the Company; WHEREAS, the consideration to be paid by Parent to the shareholders of Rio Hotel as part of the Rio Merger shall consist of one share of common stock of Parent for every share of common stock of Rio Hotel held by such shareholders (as such amount may be adjusted pursuant to the Agreement and Plan of Merger for the Rio Merger (the "Rio Merger Agreement")); WHEREAS, as part of the Rio Merger, Rio Hotel shall keep outstanding (i) its $100,000,000 10-5/8% Senior Subordinated Notes due July 15, 2005 (the "10-5/8% Rio Subordinated Notes"), (ii) its $125,000,000 9-1/2% Senior Subordinated Notes due April 15, 2007 (the "9-1/2% Rio Subordinated Notes" and, together with the 10-5/8% Rio Subordinated Notes, the "Rio Subordinated Notes") and (iii) its $275,000,000 senior secured bank credit facility agented by Bank of America National Trust & Savings Association (the "Rio Credit Facility"); WHEREAS, as a result of the Rio Merger, a "change of control" shall occur under the Rio Subordinated Notes which will allow the holders thereof to "put" their Rio Subordinated Notes back to Rio Hotel at a purchase price of 101% of par (the "Rio Change of Control Put"); WHEREAS, to fund the purchase of any Rio Subordinated Notes "put" to Rio Hotel pursuant to the Rio Change of Control Put, Rio Hotel will either (x) increase the Rio Credit Facility by $125,000,000 (the "Rio Credit Facility Amendment") or (y) enter into a new, parallel $125,000,000 credit facility on substantially the same terms and conditions as the Rio Credit Facility (the "Additional Rio Credit Facility"); WHEREAS, Parent and the Company have requested that the Banks consent to, and the Banks have agreed to give their consent to, the Rio Merger on the terms and conditions provided for herein; and WHEREAS, the parties hereto wish to amend certain provisions of the Credit Agreements as herein provided; -2- NOW, THEREFORE, it is agreed: I. Amendments to the 5-Year Credit Agreement. 1. Section 1.08(a) of the 5-Year Credit Agreement is hereby amended by (i) deleting the words "equal to the Base Rate" appearing therein and (ii) inserting the words "equal to the sum of the Applicable Base Rate Margin plus the Base Rate" in lieu thereof. 2. Section 1.08(b) of the 5-Year Credit Agreement is hereby amended by deleting the words "Applicable Margin" appearing therein and inserting the words "Applicable Eurodollar Rate Margin" in lieu thereof. 3. Section 2.05(a) of the 5-Year Credit Agreement is hereby amended by inserting the words "sum of the Applicable Base Rate Margin plus the" immediately before the words "Base Rate" in each place such words appear therein. 4. Section 3.01(b) of the 5-Year Credit Agreement is hereby amended by deleting the words "Applicable Margin for Eurodollar Loans" appearing therein and inserting the words "Applicable Eurodollar Rate Margin" in lieu thereof. 5. The table appearing in Section 3.03(b) of the 5-Year Credit Agreement is hereby amended by (x) deleting the dates "January 31, 1999", "July 31, 1999" and "January 31, 2000" appearing therein and (y) deleting the references to (i) the amount "$75,000,000" appearing opposite the dates "January 31, 1999" and "July 31, 1999" appearing therein and (ii) the amount "$100,000,000" appearing opposite the date "January 31, 2000" appearing therein. 6. Section 3.03(e) of the 5-Year Credit Agreement is hereby amended by inserting the following new sentence at the end thereof: "In addition to any other mandatory commitment reductions pursuant to this Section 3.03, on each date on or after the Second Amendment Effective Date upon which Parent receives any proceeds from the issuance by Parent of any common or preferred (including trust preferred) equity or any Trust Preferred Subsidiary receives any proceeds from the issuance by it of any -3- trust preferred equity (other than proceeds received from the issuance of equity to officers, directors and employees of Parent or any of its Subsidiaries or Unrestricted Subsidiaries), the Total Revolving Loan Commitment shall be reduced by an amount equal to its Share of the cash proceeds of the respective equity issuance (net of underwriting or placement discounts and commissions and other reasonable costs associated therewith), provided that, to the extent that the 364-Day Banks do not require that their full Share be applied to reduce the Total 364-Day Revolving Loan Commitment, the amount of their Share not so applied shall instead be applied to reduce the Total Revolving Loan Commitment as required by clause (g) of this Section 3.03; and provided further, that the provisions of this sentence shall cease to be of any further force or effect at such time as the Total Revolving Loan Commitment and the Total 364-Day Revolving Loan Commitment shall have been reduced pursuant to this Section 3.03(e) and Section 2.03(c) of the 364-Day Credit Agreement as a result of equity issuances by Parent (and/or a Trust Preferred Subsidiary, as the case may be) and/or issuances by the Company of Additional Unsecured Senior Debt and/or Subordinated Debt generating in the aggregate at least $750,000,000 in gross cash proceeds." 7. Section 8 of the 5-Year Credit Agreement is hereby amended by inserting the following new Sections 8.15 and 8.16 at the end thereof: "8.15 Maintenance of Corporate Separateness. Parent will, and will cause each of its Subsidiaries and Unrestricted Subsidiaries to, satisfy customary corporate formalities, including the holding of regular board of directors' and shareholders' meetings or action by directors or shareholders without a meeting and the maintenance of corporate offices and records. Neither Parent nor any of its Subsidiaries shall make any payment to a creditor of any Unrestricted Subsidiaries in respect of any liability of any Unrestricted Subsidiaries, and no bank account of any Unrestricted Subsidiary shall be commingled with any -4- bank account of Parent or any of its Subsidiaries. Any financial statements distributed to any creditors of any Unrestricted Subsidiaries shall clearly establish or indicate the corporate separateness of such Unrestricted Subsidiaries from Parent and its Subsidiaries. Finally, neither Parent nor any of its Subsidiaries shall take any action, or conduct its affairs in a manner, which is likely to result in the corporate existence of (x) Parent or any of its Subsidiaries being substantively consolidated with any Unrestricted Subsidiary or (y) any Unrestricted Subsidiary being substantively consolidated with Parent or any of its Subsidiaries, in either case in a bankruptcy, reorganization or other insolvency proceeding. 8.16 Collateral. Except as otherwise provided in the immediately succeeding sentence, in the event that on or prior to June 30, 1999 the Company has not permanently reduced the Total Revolving Loan Commitment and the Total 364-Day Revolving Loan Commitment pursuant to Section 3.03(e) of this Agreement and Section 2.03(c) of the 364-Day Credit Agreement as a result of equity issuances by Parent (and/or a Trust Preferred Subsidiary, as the case may be) and/or issuances by the Company of Additional Unsecured Senior Debt and/or Subordinated Debt generating in the aggregate at least $500,000,000 in gross cash proceeds, then (A) Parent, the Company and each other Credit Party shall grant to the Collateral Agent, for the benefit of the Administrative Agent, the Collateral Agent, the Banks, the 364-Day Banks, the Letter of Credit Issuers and the Interest Rate Protection Creditors, a first priority perfected security interest in substantially all of such Credit Parties' tangible and intangible assets, with such exceptions thereto as may be acceptable to the Administrative Agent (including an exception with respect to a Lien on the Company's and its Subsidiaries' riverboat casinos), (B) each such Credit Party shall promptly enter into and/or deliver, or cause to be delivered, all such security and other documentation as may be necessary or, in the reasonable opinion of the Administrative Agent, -5- desirable to effectively create such security interest in all such assets, (C) Parent, the Company and each other Credit Party shall deliver, or cause to be delivered, to the Administrative Agent one or more opinions of counsel, in form and substance, and from counsel, reasonably acceptable to the Administrative Agent, with respect to the security interests granted by such Credit Parties as required above and such other matters incident to the transactions contemplated thereby as the Administrative Agent shall reasonably request and (D) Parent, the Company and each Subsidiary Borrower shall enter into an appropriate amendment to this Agreement, in form and substance satisfactory to the Administrative Agent and the Required Banks, in connection with the grant of the security interests as required above and such other matters incident thereto as the Administrative Agent may reasonably require. Notwithstanding anything to the contrary contained in the immediately preceding sentence, if on June 30, 1999 the senior unsecured Indebtedness of the Company is rated at least BBB- by S&P or Baa3 by Moody's, then no Credit Party shall be required to grant any such security interests or take any of the other actions otherwise required by the immediately preceding sentence." 8. Section 9.01 of the 5-Year Credit Agreement is hereby amended by (i) deleting the word "and" appearing at the end of clause (xix) thereof, (ii) deleting the period at the end of the clause (xx) thereof and inserting the text "; and" in lieu thereof and (iii) inserting the following new clause (xxi) immediately following clause (xx) thereof: "(xxi) from and after the time that any Liens are created by any Credit Party in favor of the Collateral Agent by operation of Section 8.16 (but only for so long as such Liens remain in effect), Liens on the property or assets of such Credit Party in support of such Credit Party's obligations in respect of any Additional Unsecured Senior Debt on an equal and ratable basis with the Liens on such property or assets of such Credit Party arising by operation of Section 8.16 and pursuant to documentation in form and -6- substance reasonably satisfactory to the Administrative Agent (but, in any event, only to the extent any such Liens are required to be created pursuant to the documentation evidencing such Additional Unsecured Senior Debt)." 9. Section 9.03(iv) of the 5-Year Credit Agreement is hereby amended by deleting the text "clauses (v) and (vi)" in each instance such text appears therein and inserting in each such instance the text "clauses (v), (vi) and (xi)" in lieu thereof. 10. Section 9.03 of the 5-Year Credit Agreement is hereby amended by (i) deleting the word "and" appearing at the end of clause (ix) thereof, (ii) deleting the period appearing at the end of clause (x) thereof and inserting the text "; and" in lieu thereof and (iii) inserting the following new clause (xi) immediately following clause (x) thereof: "(xi) so long as no Default or Event of Default shall exist (both before and after giving effect to the payment thereof), Parent and any Trust Preferred Subsidiary may pay cash Dividends to holders of any trust preferred stock issued by it." 11. The last paragraph of Section 9.05 of the 5-Year Credit Agreement is hereby amended by (i) deleting the word "and" appearing at the end of clause (x)(A) thereof and (ii) inserting the following new sub-clause (C) immediately following clause (x)(B) thereof: "and (C) from and after the consummation of the Rio Merger, Parent and its Subsidiaries may expend up to $50,000,000 of the Investment basket set forth in clause (i) of this Section 9.05 to make cash Investments in Rio Hotel and its Subsidiaries, provided that such $50,000,000 amount shall be increased to $100,000,000 from and after such time as the Total Revolving Loan Commitment and the Total 364-Day Revolving Loan Commitment have been reduced pursuant to Section 3.03(e) of this Agreement and Section 2.03(c) of the 364-Day Credit Agreement as a result of equity issuances by Parent (and/or a Trust Preferred -7- Subsidiary, as the case may be) and/or issuances by the Company of Additional Unsecured Senior Debt and/or Subordinated Debt generating in the aggregate at least $250,000,000 in gross cash proceeds." 12. The table appearing in Section 9.07(b) of the 5-Year Credit Agreement is hereby deleted in its entirety and the following new table is inserted in lieu thereof:
Period Ratio --------------------------------- --------- Showboat Merger Effective Date to and including June 30, 1998 5.50:1.00 July 1, 1998 to and including March 31, 1999 5.00:1.00 April 1, 1999 to and including June 30, 1999 4.75:1.00 July 1, 1999 to and including September 30, 1999 4.50:1.00 October 1, 1999 to and including December 31, 1999 4.25:1.00 January 1, 2000 to and including March 31, 2000 4.00:1.00 Thereafter 3.50:1.00
-8- 13. The table appearing in Section 9.08(b) of the 5-Year Credit Agreement is hereby deleted in its entirety and the following new table is inserted in lieu thereof:
Fiscal Quarter Ratio ----------------------------------- --------- Fiscal quarters ending June 30, 1998, September 30, 1998, December 31, 1998, March 31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999 2.00:1.00 Fiscal quarters ending March 31, 2000 and thereafter 2.50:1.00
14. Section 9.10 of the 5-Year Credit Agreement is hereby amended by deleting the following text appearing in clause (i)(B) thereof: "(i) the Company or a Wholly-Owned Subsidiary thereof owns at least 79% of the total equity interest (as determined on a fully diluted basis) in the Showboat East Chicago Riverboat Casino and (ii)". 15. Section 9.12 of the 5-Year Credit Agreement is hereby amended by inserting the following new sentence at the end thereof: "Notwithstanding anything to the contrary contained in this Section 9.12 or anything else contained in this Agreement, neither Parent nor any Subsidiary of Parent shall issue any trust preferred stock other than such issuances by Parent and a Trust Preferred Subsidiary in each case so long as all the terms and conditions of, and the documentation for, -9- such trust preferred stock shall be in form and substance reasonably satisfactory to the Administrative Agent." 16. Section 9.14 of the 5-Year Credit Agreement is hereby amended by inserting the following new sentence at the end thereof: "In addition to the foregoing, from and after the consummation of the Rio Merger, Parent will ensure that at all times (i) either the Company or a Wholly-Owned Subsidiary of the Company that is a Guarantor owns all of the outstanding capital stock of Rio Hotel and that Rio Hotel owns all of the outstanding capital stock of Rio Properties (although nothing herein shall prevent Rio Hotel and Rio Properties from merging together so long as all of the outstanding capital stock of the surviving corporation is owned by the Company or a Wholly-Owned Subsidiary of the Company that is a Guarantor) and (ii) either Rio Hotel or Rio Properties is the owner and operator of the Rio Hotel and Casino in Las Vegas, Nevada." 17. The definition of "Applicable Margin" appearing in Section 11.01 of the 5-Year Credit Agreement is hereby deleted in its entirety. 18. The definition of "Consolidated EBITDA" appearing in Section 11.01 of the 5-Year Credit Agreement is hereby amended by inserting the following proviso at the end thereof: " ; provided that for purposes of determining compliance with Section 9.07(b) only, (x) (A) prior to the consummation of the Rio Merger, Consolidated EBITDA for Parent's fiscal quarters ending on March 31, 1998, June 30, 1998 and September 30, 1998 was $124,092,000, $152,904,000 and $158,683,000, respectively and (B) from and after the consummation of Rio Merger, Consolidated EBITDA for Parent's fiscal quarters ending on March 31, 1998, June 30, 1998 and September 30, 1998 was $149,401,000, $172,983,000 and $184,543,000, respectively (which amounts represent Parent's historical Consolidated EBITDA for such quarters as adjusted to give pro forma effect for the historical -10- operating results of (I) in the case of clause (A) above, Showboat and its Consolidated Subsidiaries for the respective fiscal quarters and (II) in the case of clause (B) above, Showboat and its Consolidated Subsidiaries and Rio Hotel and its Consolidated Subsidiaries for the respective fiscal quarters) and (y) from and after the consummation of the Rio Merger, Consolidated EBITDA for Parent's fiscal quarter ending December 31, 1998 shall be adjusted to give pro forma effect for the historical operating results of Rio Hotel and its Consolidated Subsidiaries for the portion of such fiscal quarter prior to the consummation of the Rio Merger". 19. The definition of "Consolidated Interest Expense" appearing in Section 11.01 of the 5-Year Credit Agreement is hereby amended by (i) deleting the word "and" appearing at the end of clause (i) thereof and inserting a comma in lieu thereof and (ii) inserting the following new clause (iii) immediately following clause (ii) thereof: "and (iii) the amount of all Dividends paid by Parent and Trust Preferred Subsidiaries during such period to holders of their respective trust preferred stock; provided, however, that in the event that the parent company of such Trust Preferred Subsidiary is not allowed an off-setting tax deduction in respect of interest payments made by such parent company on subordinated indebtedness issued in connection with the issuance of any such trust preferred stock, then an amount equal to the product of (A) the amount of all Dividends paid by Parent and Trust Preferred Subsidiaries during such period to holders of their respective trust preferred stock and (B) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective consolidated federal, state and local income tax rate of Parent expressed as a decimal shall instead be added to Consolidated Interest Expense for such period". 20. The definition of "Consolidated Net Income" appearing in Section 11.01 of the 5-Year Credit Agreement is hereby deleted in its entirety and the following new definition of "Consolidated Net Income" is inserted in lieu thereof: -11- "Consolidated Net Income" shall mean, for any period, the net income of Parent and its Consolidated Subsidiaries (without deduction for minority interests in Subsidiaries) for such period, provided that for the purposes of determining the applicable Reduction Discount and Consolidated Net Income under Sections 9.03, 9.04 and 9.05, the net income (or loss) of any Unrestricted Subsidiary shall be included in any calculation of Consolidated Net Income only to the extent of the payment of cash dividends or distributions by such Unrestricted Subsidiary to Parent or a Wholly-Owned Subsidiary thereof during such period." 21. The definition of "Permitted Designated Indebtedness" appearing in Section 11.01 of the 5-Year Credit Agreement is hereby deleted in its entirety and the following new definition of "Permitted Designated Indebtedness" is inserted in lieu thereof: "Permitted Designated Indebtedness" shall mean (i) all Subordinated Debt incurred pursuant to Section 9.04(xi) and (ii) all Additional Unsecured Senior Debt; provided, however, after the Total Revolving Loan Commitment and the Total 364-Day Revolving Loan Commitment have been permanently reduced pursuant to Section 3.03(e) of this Agreement and Section 2.03(c) of the 364-Day Credit Agreement as a result of equity issuances by Parent (and/or a Trust Preferred Subsidiary, as the case may be) and/or issuances by the Company of Additional Unsecured Senior Debt and/or Subordinated Debt generating in the aggregate at least $750,000,000 in gross cash proceeds, then the next $200,000,000 of Subordinated Debt issued thereafter shall not be considered "Permitted Designated Indebtedness", and provided further, however, after the Total Revolving Loan Commitment and the Total 364-Day Revolving Loan Commitment have been permanently reduced pursuant to Section 3.03(e) of this Agreement and Section 2.03(c) of the 364-Day Credit Agreement in any fiscal quarter of Parent as a result of equity issuances by Parent (and/or a Trust Preferred Subsidiary, as the case may be) and/or issuances by the -12- Company of Additional Unsecured Senior Debt and/or Subordinated Debt generating in the aggregate at least $250,000,000 in gross cash proceeds during such fiscal quarter, then any additional Subordinated Debt issued thereafter during such fiscal quarter shall not be considered "Permitted Designated Indebtedness" so long as the proceeds therefrom are used within 120 days after any such issuances to refinance, repay, purchase, repurchase, redeem or otherwise retire the East Chicago Showboat Notes (including the payment of any premiums associated therewith) (it being understood and agreed that (x) until such proceeds from any such issuances of additional Subordinated Debt are used to refinance, repay, purchase, repurchase, redeem or otherwise retire the East Chicago Showboat Notes as permitted hereunder, such proceeds may be used to voluntarily prepay Loans in accordance with Section 4.01 and (y) to the extent that any portion of such proceeds from any such issuances of additional Subordinated Debt are not used within such 120 day period to refinance, repay, repurchase, redeem or otherwise retire the East Chicago Showboat Notes, the Total Revolving Loan Commitment and the 364-Day Revolving Loan Commitment shall be reduced pursuant to Section 3.03(e) of this Agreement and Section 2.03(c) of the 364-Day Credit Agreement by an amount equal to such portion not so used to the extent such portion would otherwise constitute "Permitted Designated Indebtedness" hereunder). 22. The definition of "Reduction Discount" appearing in Section 11.01 of the 5-Year Credit Agreement is hereby amended by inserting the words "and Base Rate Loans" immediately following the words "Eurodollar Loans" appearing in clauses (A)(x), (B)(x) and (C)(x) therein. 23. The definition of "Subsidiary" appearing in Section 11.01 of the 5-Year Credit Agreement is hereby amended by inserting the following new sentence at the end thereof: "Notwithstanding the foregoing (and except for purposes of (x) the definition of Unrestricted Subsidiary contained herein, (y) determining compliance with Sections 9.07(b), 9.08(b) and 9.09 only and (z) Sections 10.04 and 10.05), an Unrestricted Subsidiary -13- shall be deemed not to be a Subsidiary of Parent or any of its other Subsidiaries for purposes of this Agreement." 24. Section 11.01 of the 5-Year Credit Agreement is hereby further amended by inserting the following new definitions in the appropriate alphabetical order: "Applicable Base Rate Margin" shall mean 0% less, to the extent that such percentage has been increased by operation of the provisions set forth below in this definition, the then applicable Reduction Discount; provided, however, in the event that the Total Revolving Loan Commitment and the Total 364-Day Revolving Loan Commitment have not been reduced pursuant to Section 3.03(e) of this Agreement and Section 2.03(c) of the 364-Day Credit Agreement as a result of equity issuances by Parent (and/or a Trust Preferred Subsidiary, as the case may be) and/or issuances by the Company of Additional Unsecured Senior Debt and/or Subordinated Debt generating in the aggregate at least (x) $250,000,000 in gross cash proceeds during the period from the Second Amendment Effective Date to and including December 31, 1998, then the Applicable Base Rate Margin shall be increased from and after January 1, 1999 by 1/2 of 1%, (y) either (A) $500,000,000 in gross cash proceeds during the period from the Second Amendment Effective Date to and including March 31, 1999 or (B) $250,000,000 in gross cash proceeds during the period from January 1, 1999 to and including March 31, 1999, then the Applicable Base Rate Margin shall be increased from and after April 1, 1999 by 1/2 of 1% (after giving effect to any increase thereto effected pursuant to -14- preceding clause (x), if any) and (z) either (A) $750,000,000 in gross cash proceeds during the period from the Second Amendment Effective Date to and including June 30, 1999 or (B) $250,000,000 in gross cash proceeds during the period from April 1, 1999 to and including June 30, 1999, then the Applicable Base Rate Margin shall be increased from and after July 1, 1999 by 1/2 of 1% (after giving effect to any increases effected thereto pursuant to preceding clauses (x) and (y), if any). Notwithstanding anything to the contrary contained in this definition or elsewhere in this Agreement, in no event shall the Applicable Base Rate Margin be less than 0% (and if the Applicable Base Rate Margin would otherwise be less than 0% by operation of the applicable Reduction Discount, such Applicable Base Rate Margin shall instead be 0%). "Applicable Eurodollar Rate Margin" shall mean 1-1/4% less the then applicable Reduction Discount; provided, however, in the event that the Total Revolving Loan Commitment and the Total 364-Day Revolving Loan Commitment has not been reduced pursuant to Section 3.03(e) of this Agreement and Section 2.03(c) of the 364-Day Credit Agreement as a result of equity issuances by Parent (and/or a Trust Preferred Subsidiary, as the case may be) and/or issuances by the Company of Additional Unsecured Senior Debt and/or Subordinated Debt generating in the aggregate at least (x) $250,000,000 in gross cash proceeds during the period from the Second Amendment Effective Date to and including December 31, 1998, then the Applicable Eurodollar Rate Margin shall be increased from and after January 1, 1999 by 1/2 of 1%, (y) either (A) $500,000,000 in gross cash proceeds during the period from the Second Amendment Effective Date to and including March 31, 1999 or (B) $250,000,000 in gross cash proceeds during the period from January 1, 1999 to and including March 31, 1999, then the Applicable Base Rate Margin shall be increased from and after April 1, 1999 by 1/2 of 1% (after giving effect to any increase effected pursuant to preceding clause (x), if any) and (z) either (A) $750,000,000 in gross cash proceeds during the period from the Second Amendment Effective Date to and including June 30, 1999 or (B) $250,000,000 in gross cash proceeds during the period from April 1, 1999 to and including June 30, 1999, then the Applicable Eurodollar Rate Margin shall be increased from and after July 1, 1999 by 1/2 of 1% (after giving effect to any increases thereto effected pursuant to preceding clauses (x) and (y), if any). -15- "Rio Hotel" shall mean Rio Hotel and Casino, Inc., a Nevada corporation. "Rio Merger" shall mean the acquisition by Parent and the Company of all of the outstanding capital stock of Rio Hotel through the merger of a Wholly-Owned Subsidiary of the Company with and into Rio Hotel. "Rio Properties" shall mean Rio Properties, Inc., a Nevada corporation and a Wholly-Owned Subsidiary of Rio Hotel. "Second Amendment Effective Date" shall mean November 30, 1998. "Trust Preferred Subsidiary" shall mean a special purpose Subsidiary of the Company (other than, in any event, a Material Subsidiary) whose sole purpose is to issue trust preferred stock, which does not otherwise have any assets or liabilities and all of the common stock of which is owned by the Company or a Wholly-Owned Subsidiary thereof. "Unrestricted Subsidiary" shall mean Rio Hotel and its Subsidiaries. 25. Section 13.07(a) of 5-Year Credit Agreement is hereby amended by (i) deleting the word "and" appearing at the end of clause (ii) of the proviso thereof and inserting a comma in lieu thereof and (ii) inserting the following new clause (iv) at the end of such proviso: "and (iv) except as expressly provided herein, the financial results of Unrestricted Subsidiaries shall be ignored". II. Amendments to 364-Day Credit Agreement. 1. Section 1.09(a) of the 364-Day Credit Agreement is hereby amended by (i) deleting the words "equal to the Base Rate" appearing therein and (ii) inserting the words "equal to the sum of the Applicable Base Rate Margin plus the Base Rate" in lieu thereof. -16- 2. Section 1.09(b) of the 364-Day Credit Agreement is hereby amended by deleting the words "Applicable Margin" appearing therein and inserting the words "Applicable Eurodollar Rate Margin" in lieu thereof. 3. Section 2.03(c) of the 364-Day Credit Agreement is hereby amended by inserting the following new sentence at the end thereof: "In addition to any other mandatory commitment reductions pursuant to this Section 2.03, on each date on or after the Second Amendment Effective Date upon which Parent receives any proceeds from the issuance by Parent of any common or preferred (including trust preferred) equity or any Trust Preferred Subsidiary receives any proceeds from the issuance by it of any trust preferred equity (other than proceeds received from the issuance of equity to officers, directors and employees of Parent or any of its Subsidiaries or Unrestricted Subsidiaries), the Total Revolving Loan Commitment shall be reduced by an amount equal to its Share of the cash proceeds of the respective equity issuance (net of underwriting or placement discounts and commissions and other reasonable costs associated therewith), provided that, to the extent that the 5-Year Banks do not require that their full Share be applied to reduce the Total 5-Year Revolving Loan Commitment, the amount of their Share not so applied shall instead be applied to reduce the Total Revolving Loan Commitment as required by clause (e) of this Section 2.03; and provided further, that the provisions of this sentence shall cease to be of any further force or effect at such time as the Total Revolving Loan Commitment and the Total 5-Year Revolving Loan Commitment shall have been reduced pursuant to this Section 2.03(c) and Section 3.03(e) of the 5-Year Credit Agreement as a result of equity issuances by Parent (and/or a Trust Preferred Subsidiary, as the case may be) and/or issuances by the Company of Additional Unsecured Senior Debt and/or Subordinated Debt generating in the aggregate at least $750,000,000 in gross cash proceeds." -17- 4. Section 7 of the 364-Day Credit Agreement is hereby amended by inserting the following new Sections 7.15 and 7.16 at the end thereof: "7.15 Maintenance of Corporate Separateness. Parent will, and will cause each of its Subsidiaries and Unrestricted Subsidiaries to, satisfy customary corporate formalities, including the holding of regular board of directors' and shareholders' meetings or action by directors or shareholders without a meeting and the maintenance of corporate offices and records. Neither Parent nor any of its Subsidiaries shall make any payment to a creditor of any Unrestricted Subsidiaries in respect of any liability of any Unrestricted Subsidiaries, and no bank account of any Unrestricted Subsidiary shall be commingled with any bank account of Parent or any of its Subsidiaries. Any financial statements distributed to any creditors of any Unrestricted Subsidiaries shall clearly establish or indicate the corporate separateness of such Unrestricted Subsidiaries from Parent and its Subsidiaries. Finally, neither Parent nor any of its Subsidiaries shall take any action, or conduct its affairs in a manner, which is likely to result in the corporate existence of (x) Parent or any of its Subsidiaries being substantively consolidated with any Unrestricted Subsidiary or (y) any Unrestricted Subsidiary being substantively consolidated with Parent or any of its Subsidiaries, in either case in a bankruptcy, reorganization or other insolvency proceeding. 7.16 Collateral. Except as otherwise provided in the immediately succeeding sentence, in the event that on or prior to June 30, 1999 the Company has not permanently reduced the Total Revolving Loan Commitment and the Total 5-Year Revolving Loan Commitment pursuant to Section 2.03(c) of this Agreement and Section 3.03(e) of the 5-Year Credit Agreement as a result of equity issuances by Parent (and/or a Trust Preferred Subsidiary, as the case may be) and/or issuances by the Company of Additional Unsecured Senior Debt and/or Subordinated Debt generating in the aggregate at least -18- $500,000,000 in gross cash proceeds, then (A) Parent, the Company and each other Credit Party shall grant to the Collateral Agent, for the benefit of the Administrative Agent, the Collateral Agent, the Banks, the 364-Day Banks, the Letter of Credit Issuers and the Interest Rate Protection Creditors, a first priority perfected security interest in substantially all of such Credit Parties' tangible and intangible assets, with such exceptions thereto as may be acceptable to the Administrative Agent (including an exception with respect to a Lien on the Company's and its Subsidiaries' riverboat casinos), (B) each such Credit Party shall promptly enter into and/or deliver, or cause to be delivered, all such security and other documentation as may be necessary or, in the reasonable opinion of the Administrative Agent, desirable to effectively create such security interest in all such assets, (C) Parent, the Company and each other Credit Party shall deliver, or cause to be delivered, to the Administrative Agent one or more opinions of counsel, in form and substance, and from counsel, reasonably acceptable to the Administrative Agent, with respect to the security interests granted by such Credit Parties as required above and such other matters incident to the transactions contemplated thereby as the Administrative Agent shall reasonably request and (D) Parent, the Company and each Subsidiary Borrower shall enter into an appropriate amendment to this Agreement, in form and substance satisfactory to the Administrative Agent and the Required Banks, in connection with the grant of such security interests as required above and such other matters incident thereto as the Administrative Agent may reasonably require. Notwithstanding anything to the contrary contained in the immediately preceding sentence, if on June 30, 1999 the senior unsecured Indebtedness of the Company is rated at least BBB- by S&P or Baa3 by Moody's, then no Credit Party shall be required to grant any such security interests or take any of the other actions required by the immediately preceding sentence." -19- 5. Section 8.01 of the 364-Day Credit Agreement is hereby amended by (i) deleting the word "and" appearing at the end of clause (xix) thereof, (ii) deleting the period at the end of the clause (xx) thereof and inserting the text "; and" in lieu thereof and (iii) inserting the following new clause (xxi) immediately following clause (xx) thereof: "(xxi) from and after the time that any Liens are created by any Credit Party in favor of the Collateral Agent by operation of Section 7.16 (but only for so long as such Liens remain in effect), Liens on the property or assets of such Credit Party in support of such Credit Party's obligations in respect of any Additional Unsecured Senior Debt on an equal and ratable basis with the Liens on such property or assets of such Credit Party arising by operation of Section 7.16 and pursuant to documentation in form and substance reasonably satisfactory to the Administrative Agent (but, in any event, only to the extent any such Liens are required to be created pursuant to the documentation evidencing such Additional Unsecured Senior Debt)." 6. Section 8.03(iv) of the 364-Day Credit Agreement is hereby amended by deleting the text "clauses (v) and (vi)" in each instance such text appears therein and inserting in each such instance the text "clauses (v), (vi) and (xi)" in lieu thereof. 7. Section 8.03 of the 364-Day Credit Agreement is hereby amended by (i) deleting the word "and" appearing at the end of clause (ix) thereof, (ii) deleting the period appearing at the end of clause (x) thereof and inserting the text "; and" in lieu thereof and (iii) inserting the following new clause (xi) immediately following clause (x) thereof: "(xi) so long as no Default or Event of Default shall exist (both before and after giving effect to the payment thereof), Parent and any Trust Preferred Subsidiary may pay cash Dividends to holders of trust preferred stock issued by it." -20- 8. The last paragraph of Section 8.05 of the 364-Day Credit Agreement is hereby amended by (i) deleting the word "and" appearing at the end of clause (x)(A) thereof and (ii) inserting the following new sub-clause (C) immediately following clause (x)(B) thereof: "and (C) from and after the consummation of the Rio Merger, Parent and its Subsidiaries may expend up to $50,000,000 of the Investment basket set forth in clause (i) of this Section 8.05 to make cash Investments in Rio Hotel and its Subsidiaries, provided that such $50,000,000 amount shall be increased to $100,000,000 from and after such time as the Total Revolving Loan Commitment and the Total 5-Year Revolving Loan Commitment have been reduced pursuant to Section 2.03(c) of this Agreement and Section 3.03(e) of the 364-Day Credit Agreement as a result of equity issuances by Parent (and/or a Trust Preferred Subsidiary, as the case may be) and/or issuances by the Company of Additional Unsecured Senior Debt and/or Subordinated Debt generating in the aggregate at least $250,000,000 in gross cash proceeds." 9. The table appearing in Section 8.07(b) of the 364-Day Credit Agreement is hereby deleted in its entirety and the following new table is inserted in lieu thereof:
Period Ratio ------------------------------- --------- Showboat Merger Effective Date to and including June 30, 1998 5.50:1.00 July 1, 1998 to and including March 31, 1999 5.00:1.00 April 1, 1999 to and including June 30, 1999 4.75:1.00
-21-
Period Ratio ------------------------------- --------- July 1, 1999 to and including September 30, 1999 4.50:1.00 October 1, 1999 to and including December 31, 1999 4.25:1.00 January 1, 2000 to and including March 31, 2000 4.00:1.00 Thereafter 3.50:1.00
10. The table appearing in Section 8.08(b) of the 364-Day Credit Agreement is hereby deleted in its entirety and the following new table is inserted in lieu thereof:
Fiscal Quarter Ratio -------------------------------- --------- Fiscal quarters ending June 30, 1998, September 30, 1998, December 31, 1998, March 31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999 2.00:1.00 Fiscal quarters ending March 31, 2000 and thereafter 2.50:1.00
11. Section 8.10 of the 364-Day Credit Agreement is hereby amended by deleting the following text appearing in clause (i)(B) thereof: "(i) the Company or a Wholly-Owned Subsidiary thereof owns at least 79% of the total equity interest (as determined on a fully diluted basis) in the Showboat East Chicago Riverboat Casino and (ii)". -22- 12. Section 8.12 of the 364-Day Credit Agreement is hereby amended by inserting the following sentence at the end thereof: "Notwithstanding anything to the contrary contained in this Section 8.12 or anything else contained in this Agreement, neither Parent nor any Subsidiary of Parent shall issue any trust preferred stock other than such issuances by Parent and a Trust Preferred Subsidiary in each case so long as all the terms and conditions of, and the documentation for, such trust preferred stock shall be in form and substance reasonably satisfactory to the Administrative Agent." 13. Section 8.14 of the 364-Day Credit Agreement is hereby amended by inserting the following new sentence at the end thereof: "In addition to the foregoing, from and after the consummation of the Rio Merger, Parent will ensure that at all times (i) either the Company or a Wholly-Owned Subsidiary of the Company that is a Guarantor owns all of outstanding capital stock of Rio Hotel and that Rio Hotel owns all of the outstanding capital stock of Rio Properties (although nothing herein shall prevent Rio Hotel and Rio Properties from merging together so long as all of the outstanding capital stock of the surviving corporation is owned by the Company or a Wholly-Owned Subsidiary of the Company that is a Guarantor) and (ii) either Rio Hotel or Rio Properties is the owner and operator of the Rio Hotel and Casino in Las Vegas, Nevada." 14. The definition of "Applicable Margin" appearing in Section 10.01 of the Credit Agreement is hereby deleted in its entirety. 15. The definition of "Consolidated EBITDA" appearing in Section 10.01 of the 364-Day Credit Agreement is hereby amended by inserting the following proviso at the end thereof: -23- "; provided that for purposes of determining compliance with Section 8.07(b) only, (x) (A) prior to the consummation of the Rio Merger, Consolidated EBITDA for Parent's fiscal quarters ending on March 31, 1998, June 30, 1998 and September 30, 1998 was $124,092,000, $152,904,000 and $158,683,000, respectively and (B) from and after the Rio Merger, Consolidated EBITDA for Parent's fiscal quarters ending on March 31, 1998, June 30, 1998 and September 30, 1998 was $149,401,000, $172,983,000 and $184,543,000 respectively (which amounts represent Parent's historical Consolidated EBITDA for such quarters as adjusted to give pro forma effect for the historical operating results of (I) in the case of clause (A) above, Showboat and its Consolidated Subsidiaries for the respective fiscal quarters and (II) in the case of clause (B) above, Showboat and its Consolidated Subsidiaries and Rio Hotel and its Consolidated Subsidiaries for the respective fiscal quarters) and (y) from and after the consummation of the Rio Merger, Consolidated EBITDA for Parent's fiscal quarter ending December 31, 1998 shall be adjusted to give pro forma effect for the historical operating results of Rio Hotel and its Consolidated Subsidiaries for the portion of such fiscal period prior the consumation of the Rio Merger. 16. The definition of "Consolidated Interest Expense" appearing in Section 10.01 of the 364-Day Credit Agreement is hereby amended by (i) deleting the word "and" appearing at the end of clause (i) thereof and inserting a comma in lieu thereof and (ii) inserting the following new clause (iii) immediately following clause (ii) thereof: "and (iii) the amount of all Dividends paid by Parent and Trust Preferred Subsidiaries during such period to holders of their respective trust preferred stock; provided, however, that in the event that the parent company of such Trust Preferred Subsidiary is not allowed an off-setting tax deduction in respect of interest payments made by such parent company on subordinated indebtedness issued in connection with the issuance of any such trust preferred stock, then an amount equal to the product of (A) the amount of all -24- Dividends paid by Parent and Trust Preferred Subsidiaries during such period to holders of their respective trust preferred stock and (B) a fraction, the numerator of which is one and the denominator of which is one minus the current effective consolidated federal, state and local income tax rate of Parent expressed as a decimal shall instead be added to Consolidated Interest Expense for such period." 17. The definition of "Consolidated Net Income" appearing in Section 10.01 of the 364-Day Credit Agreement is hereby deleted in its entirety and the following new definition of "Consolidated Net Income" is inserted in lieu thereof: "Consolidated Net Income" shall mean, for any period, the net income of Parent and its Consolidated Subsidiaries (without deduction for minority interests in Subsidiaries) for such period, provided that for the purpose of determining the applicable Reduction Discount and Consolidated Net Income under Sections 8.03, 8.04 and 8.05, the net income (or loss) of any Unrestricted Subsidiary shall be included in the calculation of Consolidated Net Income only to the extent of the payment of cash dividends or distributions by such Unrestricted Subsidiary to Parent or a Wholly-Owned Subsidiary thereof during such period." 18. The definition of "Permitted Designated Indebtedness" appearing in Section 10.01 of the 364-Day Credit Agreement is hereby deleted in its entirety and the following new definition of "Permitted Designated Indebtedness" is inserted in lieu thereof: "Permitted Designated Indebtedness" shall mean (i) all Subordinated Debt incurred pursuant to Section 8.04(xi) and (ii) all Additional Unsecured Senior Debt; provided, however, after the Total Revolving Loan Commitment and the Total 5-Year Revolving Loan Commitment have been permanently reduced pursuant to Section 2.03(c) of this Agreement and Section 3.03(e) of the 5-Year Credit Agreement as a result of equity issuances by Parent (and/or a Trust Preferred Subsidiary, as the case may be) and/or issuances by the -25- Company of Additional Unsecured Senior Debt and/or Subordinated Debt generating in the aggregate at least $750,000,000 in gross cash proceeds, the next $200,000,000 of Subordinated Debt issued thereafter shall not be considered "Permitted Designated Indebtedness", and provided further, however, after the Total Revolving Loan Commitment and the 5-Year Revolving Loan Commitment have been permanently reduced pursuant to Section 2.03(c) of this Agreement and Section 3.03(e) of the 5-Year Credit Agreement in any fiscal quarter of Parent as a result of equity issuances by Parent (and/or a Trust Preferred Subsidiary, as the case may be) and/or issuances by the Company of Additional Unsecured Senior Debt and/or Subordinated Debt generating in the aggregate at least $250,000,000 in gross cash proceeds during such fiscal quarter, then any additional Subordinated Debt issued thereafter during such fiscal quarter shall not be considered "Permitted Designated Indebtedness" so long as the proceeds therefrom are used within 120 days after any such issuances to refinance, repay, purchase, repurchase, or otherwise retire the East Chicago Showboat Notes (including the payment of any premiums associated therewith) (it being understood and agreed that (x) until such proceeds from any such issuances of additional Subordinated Debt are used to refinance the East Chicago Showboat Notes as permitted hereunder, such proceeds may be used to voluntarily prepay Loans in accordance with Section 3.01 and (y) to the extent that any portion of such proceeds from any such issuances of additional Subordinated Debt are not used within such 120 day period to refinance, repay, purchase, repurchase, redeem or otherwise retire the East Chicago Showboat Notes, the Total Revolving Loan Commitment and the 5-Year Revolving Loan Commitment shall be reduced pursuant to Section 2.03(c) of this Agreement and Section 3.03(e) of the 5-Year Credit Agreement by an amount equal to such portion not so used to the extent such portion would otherwise constitute "Permitted Designated Indebtedness" hereunder). -26- 19. The definition of "Reduction Discount" appearing in Section 10.01 of the 364-Day Credit Agreement is hereby amended by inserting the words "and Base Rate Loans" immediately following the words "Eurodollar Loans" appearing in clauses (A)(x), (B)(x) and (C)(x) therein. 20. The definition of "Subsidiary" appearing in Section 10.01 of the 364-Day Credit Agreement is hereby amended by inserting the following new sentence at the end thereof: "Notwithstanding the foregoing (and except for purposes of (x) the definition of Unrestricted Subsidiary contained herein, (y) determining compliance with Sections 8.07(b), 8.08(b) and 8.09 only and (z) Sections 9.04 and 9.05), an Unrestricted Subsidiary shall be deemed not to be a Subsidiary of Parent or any of its other Subsidiaries for purposes of this Agreement." 21. Section 10.01 of the 364-Day Credit Agreement is hereby further amended by inserting the following new definitions in the appropriate alphabetical order: "Applicable Base Rate Margin" shall mean 0% less, to the extent that such percentage has been increased by operation of the provisions set forth below in this definition, the then applicable Reduction Discount; provided, however , in the event that the Total Revolving Loan Commitment and the Total 5-Year Revolving Loan Commitment have not been reduced pursuant to Section 2.03(c) of this Agreement and Section 3.03(e) of the 5-Year Credit Agreement as a result of equity issuances by Parent (and/or a Trust Preferred Subsidiary, as the case may be) and/or issuances by the Company of Additional Unsecured Senior Debt and/or Subordinated Debt generating in the aggregate at least (x) $250,000,000 in gross cash proceeds during the period from the Second Amendment Effective Date to and including December 31, 1998, then the Applicable Base Rate Margin shall be increased from and after January 1, 1999 by 1/2 of 1%, (y) either (A) $500,000,000 in gross -27- cash proceeds during the period from the Second Amendment Effective Date to and including March 31, 1999 or (B) $250,000,000 in gross cash proceeds during the period from January 1, 1999 to and including March 31, 1999, then the Applicable Base Rate Margin shall be increased from and after April 1, 1999 by 1/2 of 1% (after giving effect to any increase thereto effected pursuant to preceding clause (x), if any) and (z) either (A) $750,000,000 in gross cash proceeds during the period from the Second Amendment Effective Date to and including June 30, 1999 or (B) $250,000,000 in gross cash proceeds during the period from April 1, 1999 to and including June 30, 1999, then the Applicable Base Rate Margin shall be increased from and after July 1, 1999 by 1/2 of 1% (after giving effect to any increases effected thereto pursuant to preceding clauses (x) and (y), if any). Notwithstanding anything to the contrary contained in this definition or elsewhere in this Agreement, in no event shall the Applicable Base Rate Margin be less than 0% (and if the Applicable Base Rate Margin would otherwise be less than 0% by operation of the applicable Reduction Discount, such Applicable Base Rate Margin shall instead be 0%). "Applicable Eurodollar Rate Margin" shall mean 7/8 of 1% less the then applicable Reduction Discount, provided, however, in the event that the Total Revolving Loan Commitment and the Total 5-Year Revolving Loan Commitment have not been reduced pursuant to Section 2.03(c) of this Agreement and Section 3.03(e) of the 5-Year Credit Agreement as a result of equity issuances by Parent (and/or a Trust Preferred Subsidiary, as the case may be) and/or issuances by the Company of Additional Unsecured Senior Debt and/or Subordinated Debt generating in the aggregate at least (x) $250,000,000 in gross cash proceeds during the period from the Second Amendment Effective Date to and including December 31, 1998, then the Applicable Eurodollar Rate Margin shall be increased from and after January 1, 1999 by 1/2 of 1%, (y) either (A) $500,000,000 in gross cash proceeds during the period from the Second Amendment Effective Date to and including March 31, 1999 or (B) $250,000,000 in gross cash proceeds during the period from January 1, 1999 to and including March 31, 1999, -28- then the Applicable Eurodollar Rate Margin shall be increased from and after April 1, 1999 by 1/2 of 1% (after giving effect to any increase thereto effected pursuant to preceding clause (x), if any) and (z) either (A) $750,000,000 in gross cash proceeds during the period from the Restatement Effective Date to and including June 30, 1999 or (B) $250,000,000 in gross cash proceeds during the period from April 1, 1999 to and including June 30, 1999, then the Applicable Eurodollar Rate Margin shall be increased from and after July 1, 1999 by 1/2 of 1% (after giving effect any increases thereto effected pursuant to preceding clauses (x) and (y), if any). "Rio Hotel" shall mean Rio Hotel and Casino, Inc., a Nevada corporation. "Rio Merger" shall mean the acquisition by Parent and the Company of all of the outstanding capital stock of Rio Hotel through the merger of a Wholly-Owned Subsidiary of the Company with and into Rio Hotel. "Rio Properties" shall mean Rio Properties, Inc., a Nevada corporation and a Wholly-Owned Subsidiary of Rio Hotel. "Second Amendment Effective Date" shall mean November 30, 1998. "Trust Preferred Subsidiary" shall mean a special purpose Subsidiary of the Company (other than, in any event, a Material Subsidiary) whose sole purpose is to issue trust preferred stock and which does not otherwise have any assets or liabilities and all of the common stock of which is owned by the Company or a Wholly-Owned Subsidiary thereof. "Unrestricted Subsidiary" shall mean Rio Hotel and its Subsidiaries. -29- 22. Section 12.07(a) of 364-Day Credit Agreement is hereby amended by (i) deleting the word "and" appearing at the end of clause (ii) of the proviso thereof and inserting a comma in lieu thereof and (ii) inserting the following new clause (iv) at the end of such proviso: "and (iv) except as expressly provided herein, the financial results of Unrestricted Subsidiaries shall be ignored". III. Consent to Rio Merger. 1. The Banks hereby consent to the consummation of the Rio Merger on the terms and conditions set forth in the Rio Merger Agreement and this Amendment, provided that on or prior to the time the Rio Merger is consummated, either (x) the Rio Credit Facility Amendment or (y) the Additional Rio Credit Facility shall have been entered into and shall, in either case, be in full force and effect and the Administrative Agent shall have received a true and correct copy of the Rio Credit Facility Amendment or the Additional Rio Credit Facility, as the case may be, which shall, in either case, be in form and substance reasonably satisfactory to the Administrative Agent. IV. Miscellaneous. 1. In order to induce the Banks to enter into this Amendment, Parent and each Borrower hereby represent and warrant that (x) no Default or Event of Default exists on the Second Amendment Effective Date, both before and after giving effect to this Amendment and (y) all of the representations and warranties contained in each Credit Agreement shall be true and correct in all material respects on and as of the Second Amendment Effective Date, both before and after giving effect to this Amendment, with the same effect as though such representations and warranties had been made on and as of the Second Amendment Effective Date (it being understood that any representation or warranty made as of a specified date shall be required to be true and correct in all material respects only as of such specific date). 2. This Amendment is limited as specified and shall not constitute a modification, acceptance or waiver of any other provision of the Credit Agreements or any other Credit Document. -30- 3. This Amendment may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts shall be lodged with Parent, the Company and the Administrative Agent. 4. This Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the law of the State of New York. 5. This Amendment shall become effective on the date (the "Second Amendment Effective Date") when (i) Parent, the Borrowers and the Required Banks under, and as defined in, each Credit Agreement shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (in-cluding by way of telecopier) the same to the Administrative Agent at the Notice Office and (ii) the Administrative Agent shall have received for the account of each Bank which has executed a counterpart hereof and delivered the same to the Administrative Agent at the Notice Office by 5:30 p.m. (New York time) on December 7, 1998 an amendment fee equal to .15% of the sum of such Bank's Revolving Loan Commitment under each of the 5-Year Credit Agreement and the 364-Day Credit Agreement. 6. From and after the Second Amendment Effective Date, all references in the Credit Agreements and the other Credit Documents to each Credit Agreement shall be deemed to be references to each such Credit Agreement as modified hereby. * * * -31- IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. HARRAH'S ENTERTAINMENT, INC. By: /s/ Charles L. Atwood ----------------------------- Name: Charles L. Atwood Title: Vice President/Treasurer HARRAH'S OPERATING COMPANY, INC. By: /s/ Charles L. Atwood ------------------------------ Name: Charles L. Atwood Title: Vice President/Treasurer MARINA ASSOCIATES By: HARRAH'S ATLANTIC CITY, INC., a general partner By: /s/ Stephen H. Brammell ----------------------------- Name: Stephen H. Brammell Title: Assistant Secretary By: HARRAH'S NEW JERSEY, INC., a general partner By: /s/ Stephen H. Brammell ----------------------------- Name: Stephen H. Brammell Title: Assistant Secretary BANKERS TRUST COMPANY, Individually and as Administrative Agent By: /s/ Mary Kay Coyle ---------------------------- Name: Mary Kay Coyle Title: Managing Director BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, Individually and as Documentation Agent By: /s/ Scott Faber --------------------------- Name: Scott L. Faber Title: Vice President SOCIETE GENERALE, Individually and as a Co-Syndication Agent By: /s/ Donald L. Schubert ------------------------------ Name: Donald Schubert Title: Managing Director CANADIAN IMPERIAL BANK OF COMMERCE, Individually and as Co-Syndication Agent By: /s/ Paul J. Chakmak ---------------------------- Name: Paul J. Chakmak Title: Managing Director, CIBC Oppenheimer Corp., AS AGENT FLEET BANK, N.A. By: /s/ John T. Harrison --------------------------- Name: John T. Harrison Title: Senior Vice President WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ Suzanne Fuller --------------------------- Name: Suzanne Fuller Title: Vice President WESTDEUTSCHE LANDESBANK GIROZENTRALE, NEW YORK BRANCH By: /s/ Cynthia M. Niesen --------------------------- By: /s/ Walter T. Duffy, III ------------------------------ Name: Cynthia M. Niesen Title: Managing Director Name: Walter T. Duffy, III Title: Associate THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, NEW YORK BRANCH By: /s/ Rebecca J. S. Silbert ------------------------------ Name: Rebecca J. S. Silbert Title: SVP PNC BANK, NATIONAL ASSOCIATION By: /s/ Gary W. Wessels ---------------------------- Name: Gary W. Wessels Title: Vice President THE BANK OF NEW YORK By: /s/ Anna Marie Hughes ---------------------------- Name: Anna Marie Hughes Title: Vice President CREDIT LYONNAIS ATLANTA AGENCY By: /s/ David M. Cawrse ---------------------------- Name: David M. Cawrse Title: First Vice President & Manager DEUTSCHE BANK AG, acting through its New York Branch and/or Cayman Islands Branch By: /s/ Stephan A. Wiedemann ------------------------------ Name: Stephen A. Wiedemann Title: Director By: /s/ Hans-Josef Thiele ---------------------------- Name: Hans-Josef Thiele Title: Director THE SUMITOMO BANK, LIMITED, ATLANTA AGENCY By: /s/ Gary Franke ---------------------------- Name: Gary Franke Title: VP THE MITSUBISHI TRUST & BANKING CORP. By: /s/ Beatrice E. Kossodo ----------------------------- Name: Beatrice E. Kossodo Title: Senior Vice President U.S. BANK NATIONAL ASSOCIATION By: /s/ Dale Parshall ---------------------------- Name: Dale Parshall Title: Vice President THE SANWA BANK, LIMITED, NEW YORK BRANCH By: /s/ Masahito Okubo ---------------------------- Name: Masahito Okubo Title: Vice President ABN AMRO BANK N.V., SAN FRANCISCO BRANCH By: ABN AMRO NORTH AMERICA, INC., as its Agent By: /s/ Jeffrey A. French ---------------------------- Name: Jeffrey A. French Title: Group Vice President & Director By: /s/ Corina Fong --------------------------- Name: Corina Fong Title: Credit Officer THE BANK OF NOVA SCOTIA By: /s/ M. D. Smith ---------------------------- Name: M. D. Smith Title: Agent Operations COMMERZBANK AG, LOS ANGELES BRANCH By: /s/ Christian Jagenberg ----------------------------- Name: Christian Jagenberg Title: SVP and Manager By: /s/ Werner Schmidbauer ----------------------------- Name: Werner Schmidbauer Title: Vice President FIRST SECURITY BANK, N.A. By: /s/ David P. Williams --------------------------- Name: David P. Williams Title: Vice President THE INDUSTRIAL BANK OF JAPAN, LIMITED, ATLANTA AGENCY By: /s/ Koichi Hasegawa ---------------------------- Name: Koichi Hasegawa Title: Senior Vice President and Deputy General Manager THE TOKAI BANK, LIMITED, NEW YORK BRANCH By: /s/ Shinichi Nakatani --------------------------- Name: Shinichi Nakatani Title: Assistant General Manager BANQUE NATIONALE DE PARIS, HOUSTON AGENCY By: /s/ Warren G. Parham ---------------------------- Name: Warren G. Parham Title: Vice President MICHIGAN NATIONAL BANK By: /s/ Joseph M. Redoutey --------------------------- Name: Joseph M. Redoutey Title: Relationship Manager FIRST NATIONAL BANK OF COMMERCE By: /s/ Louis Ballero ---------------------------- Name: Louis Ballero Title: WACHOVIA BANK, N.A. By: /s/ Karin E. Reel ---------------------------- Name: Karin E. Reel Title: Vice President FIRST AMERICAN NATIONAL BANK, operating as, and successor in interest by merger to, Deposit Guaranty National Bank By: /s/ Larry C. Ratzlaff ---------------------------- Name: Larry C. Ratzlaff Title: Senior Vice President FIRST TENNESSEE BANK NATIONAL ASSOCIATION By: /s/ James H. Moore, Jr. ------------------------------ Name: James H. Moore, Jr. Title: Vice President By: --------------------------- Name: Title: THE DAI-ICHI KANGYO BANK, LTD. By: /s/ Tatsuji Noguchi ---------------------------- Name: Tatsuji Noguchi Title: Chief Representative HIBERNIA NATIONAL BANK By: /s/ Ross Wales --------------------------- Name: Ross Wales Title: Vice President DEPOSIT GUARANTY NATIONAL BANK By: --------------------------- Name: Title: ERSTE BANK DER OESTERREICHISCHEN SPARKASSEN AG By: /s/ David Manheim -------------------------- /s/ John S. Runnion ---------------------------- Name: David Manheim Title: Assistant Vice President Erste Bank New York Branch Name: John S. Runnion Title: First Vice President SUNTRUST BANK, NASHVILLE, N.A. By: /s/ Renee D. Drake --------------------------- Name: Renee D. Drake Title: Vice President By: --------------------------- Name: Title: BANK OF AMERICA NT & SA By: --------------------------- Name: Title: NBD BANK, N.A. By: /s/ William C. Corrigan ----------------------------- Name: William C. Corrigan Title: Vice President COMERICA BANK By: /s/ Eoin P. Collins ---------------------------- Name: Eoin P. Collins Title: Account Officer EX-4.(19) 3 EXHIBIT 4.19 EXHIBIT 4(19) HARRAH'S OPERATING COMPANY, INC. Issuer ------------------------- HARRAH'S ENTERTAINMENT, INC. Guarantor ------------------------- INDENTURE Dated as of December 9, 1998 ---------------------------- IBJ SCHRODER BANK & TRUST COMPANY Trustee TABLE OF CONTENTS
Page ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE.......................1 Section 1.1. Definitions...............................................1 Section 1.2. Other Definitions.........................................8 Section 1.3. Incorporation by Reference of Trust Indenture Act.........8 Section 1.4. Rules of Construction.....................................9 ARTICLE II. THE SECURITIES.................................................10 Section 2.1. Issuable in Series.......................................10 Section 2.2. Establishment of Terms of Series of Securities...........10 Section 2.3. Execution and Authentication.............................14 Section 2.4. Registrar and Paying Agent...............................15 Section 2.5. Paying Agent to Hold Money in Trust......................16 Section 2.6. Securityholder Lists.....................................17 Section 2.7. Transfer and Exchange....................................17 Section 2.8. Mutilated, Destroyed, Lost and Stolen Securities.........18 Section 2.9. Outstanding Securities...................................19 Section 2.10. Treasury Securities.....................................20 Section 2.11. Temporary Securities....................................20 Section 2.12. Cancellation............................................20 Section 2.13. Defaulted Interest......................................21 Section 2.14. Global Securities.......................................21 Section 2.15. CUSIP Numbers...........................................23 ARTICLE III. REDEMPTION....................................................24 Section 3.1. Notice to Trustee........................................24 Section 3.2. Selection of Securities to be Redeemed...................25 Section 3.3. Notice of Redemption.....................................25 Section 3.4. Effect of Notice of Redemption...........................26 Section 3.5. Deposit of Redemption Price..............................26 Section 3.6. Securities Redeemed in Part..............................27 ARTICLE IV. COVENANTS......................................................27 Section 4.1. Payment of Principal and Interest........................27 Section 4.2. SEC Reports..............................................27 Section 4.3. Compliance Certificate...................................27 Section 4.4. Stay, Extension and Usury Laws...........................28 Section 4.5. Corporate Existence......................................28 Section 4.6. Taxes....................................................29
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Page ARTICLE V. SUCCESSORS.......................................................29 Section 5.1. When Company May Merge, Etc...............................29 Section 5.2. Successor Corporation Substituted.........................30 ARTICLE VI. DEFAULTS AND REMEDIES...........................................30 Section 6.1. Events of Default.........................................30 Section 6.2. Acceleration of Maturity; Rescission and Annulment........32 Section 6.3. Collection of Indebtedness and Suits for Enforcement by Trustee. ............................................34 Section 6.4. Trustee May File Proofs of Claim..........................35 Section 6.5. Trustee May Enforce Claims Without Possession of Securities .............................................36 Section 6.6. Application of Money Collected............................36 Section 6.7. Limitation on Suits.......................................37 Section 6.8. Unconditional Right of Holders to Receive Principal and Interest ...........................................38 Section 6.9. Restoration of Rights and Remedies........................38 Section 6.10. Rights and Remedies Cumulative...........................38 Section 6.11. Delay or Omission Not Waiver.............................39 Section 6.12. Control by Holders.......................................39 Section 6.13. Waiver of Past Defaults..................................40 Section 6.14. Undertaking for Costs....................................40 ARTICLE VII. TRUSTEE........................................................41 Section 7.1. Duties of Trustee.........................................41 Section 7.2. Rights of Trustee.........................................43 Section 7.3. Individual Rights of Trustee..............................44 Section 7.4. Trustee's Disclaimer......................................44 Section 7.5. Notice of Defaults........................................44 Section 7.6. Reports by Trustee to Holders.............................45 Section 7.7. Compensation and Indemnity................................45 Section 7.8. Replacement of Trustee....................................46 Section 7.9. Successor Trustee by Merger, etc..........................48 Section 7.10. Eligibility; Disqualification............................48 Section 7.11. Preferential Collection of Claims Against Company........48 ARTICLE VIII. SATISFACTION AND DISCHARGE; DEFEASANCE........................48 Section 8.1. Satisfaction and Discharge of Indenture...................48 Section 8.2. Application of Trust Funds; Indemnification...............50 Section 8.3. Legal Defeasance of Securities of any Series..............51
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Page Section 8.4. Covenant Defeasance.......................................53 Section 8.5. Repayment to Company......................................55 ARTICLE IX. AMENDMENTS AND WAIVERS..........................................55 Section 9.1. Without Consent of Holders................................55 Section 9.2. With Consent of Holders...................................56 Section 9.3. Limitations...............................................57 Section 9.4. Compliance with Trust Indenture Act.......................58 Section 9.5. Revocation and Effect of Consents.........................58 Section 9.6. Notation on or Exchange of Securities.....................59 Section 9.7. Trustee Protected.........................................59 ARTICLE X. MISCELLANEOUS....................................................59 Section 10.1. Trust Indenture Act Controls.............................59 Section 10.2. Notices..................................................59 Section 10.3. Communication by Holders with Other Holders..............60 Section 10.4. Certificate and Opinion as to Conditions Precedent.......61 Section 10.5. Statements Required in Certificate or Opinion............61 Section 10.6. Rules by Trustee and Agents..............................62 Section 10.7. Legal Holidays...........................................62 Section 10.8. No Recourse Against Others...............................62 Section 10.9. Counterparts.............................................62 Section 10.10. Governing Laws..........................................62 Section 10.11. No Adverse Interpretation of Other Agreements...........63 Section 10.12. Successors..............................................63 Section 10.13. Severability............................................63 Section 10.14. Table of Contents, Headings, Etc........................63 Section 10.15. Securities in a Foreign Currency or in ECU..............63 Section 10.16. Judgment Currency.......................................64 ARTICLE XI. SINKING FUNDS...................................................66 Section 11.1. Applicability of Article.................................66 Section 11.2. Satisfaction of Sinking Fund Payments with Securities....66 Section 11.3. Redemption of Securities for Sinking Fund................67 ARTICLE XII. GUARANTEE .....................................................68 Section 12.1. Guarantee................................................68
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Page Section 12.2. Execution and Delivery of Guarantee......................70 Section 12.3. Release of Guarantor.....................................71 Section 12.4. When Guarantor May Merge, etc............................73
HARRAH'S OPERATING COMPANY, INC. Reconciliation and tie between Trust Indenture Act of 1939 and Indenture, dated as of December 9, 1998 ss. 310(a)(1) ............................................ 7.10 (a)(2) ............................................ 7.10 (a)(3) ............................................ Not Applicable (a)(4) ............................................ Not Applicable (a)(5) ............................................ 7.10 (b) ............................................ 7.10 ss. 311(a) ............................................ 7.11 (b) ............................................ 7.11 (c) ............................................ Not Applicable ss. 312(a) ............................................ 2.6 (b) ............................................ 10.3 (c) ............................................ 10.3 ss. 313(a) .......................................... 7.6 (b)(1) ............................................ 7.6 (b)(2) ............................................ 7.6 (c)(1) ............................................ 7.6 (d) ............................................ 7.6 ss. 314(a) ............................................ 4.2, 10.5 (b) ............................................ Not Applicable (c)(1) ............................................ 10.4 (c)(2) ............................................ 10.4 (c)(3) ............................................ Not Applicable (d) ............................................ Not Applicable (e) ............................................ 10.5 (f) ............................................ Not Applicable ss. 315(a) .......................................... 7.1 (b) ............................................ 7.5 (c) ............................................ 7.1 (d) ............................................ 7.1 (e) ............................................ 6.14 ss. 316(a) ............................................ 2.10 (a)(1)(A) ............................................ 6.12 (a)(1)(B) ............................................ 6.13 (b) ............................................ 6.8 ss. 317(a)(1) ............................................ 6.3 (a)(2) ............................................ 6.4 (b) ............................................ 2.5 ss. 318(a) ............................................ 10.1
- ---------- Note: This reconciliation and tie shall not, for any purpose, be deemed to be part of the Indenture. i Indenture dated as of December 9, 1998 between Harrah's Operating Company, Inc., a Delaware corporation ("Company"), Harrah's Entertainment, Inc., a Delaware corporation ("Guarantor"), and IBJ Schroder Bank & Trust Company, a New York banking corporation ("Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Securities issued under this Indenture. ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1. Definitions. "Additional Amounts" means any additional amounts which are required hereby or by any Security, under circumstances specified herein or therein, to be paid by the Company in respect of certain taxes imposed on Holders specified therein and which are owing to such Holders. "Affiliate" of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such person, whether through the ownership of voting securities or by agreement or otherwise. "Agent" means any Registrar, Paying Agent or Service Agent. "Authorized Newspaper" means a newspaper in an official language of the country of publication customarily published at least once a day for at least five days in each calendar week and of general circulation in the place in connection with which the term is used. If it shall be impractical in the opinion of the Trustee to make any publication of any notice required hereby in an Authorized Newspaper, any publication or other notice in lieu thereof that is made or given by the Trustee shall constitute a sufficient publication of such notice. "Bearer" means anyone in possession from time to time of a Bearer Security. "Bearer Security" means any Security, including any interest coupon appertaining thereto, that does not provide for the identification of the Holder thereof. "Board of Directors" means the Board of Directors of the Company or any duly authorized committee thereof. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been adopted by the Board of Directors or pursuant to authorization by the Board of Directors and to be in full force and effect on the date of the certificate and delivered to the Trustee. "Business Day" means, unless otherwise provided by Board Resolution, Officers' Certificate or supplemental indenture hereto for a particular Series, any day except a Saturday, Sunday or a legal holiday in the City of New York on which banking institutions are authorized or required by law, regulation or executive order to close. "Company" means the party named as such above until a successor replaces it and thereafter means the successor. "Company Order" means a written order signed in the name of the Company by two Officers, one of whom must be the Company's principal executive officer, principal financial officer or principal accounting officer. "Company Request" means a written request signed in the name of the Company by its Chairman of the Board, a President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. -2- "Consolidated Net Tangible Assets" means the total amount of assets (including investments in Joint Ventures) of the Company and its subsidiaries (less applicable depreciation, amortization and other valuation reserves) after deduction therefrom (a) all current liabilities of the Company and its subsidiaries (excluding (i) the current portion of long-term indebtedness, (ii) intercompany liabilities and (iii) any liabilities which are by their terms renewable or extendible at the option of the obligor thereon to a time more than 12 months from the time as of which the amount thereof is being computed) and (b) all goodwill, trade names, trademarks, patents, unamortized debt discount and any other like intangibles, all as set forth on the consolidated balance sheet of the Company for the most recently completed fiscal quarter for which financials are available and computed in accordance with generally accepted accounting principles. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered. "Default" means any event which is, or after notice or passage of time would be, an Event of Default. "Depository" means, with respect to the Securities of any Series issuable or issued in whole or in part in the form of one or more Global Securities, the person designated as Depository for such Series by the Company, which Depository shall be a clearing agency registered under the Exchange Act; and if at any time there is more than one such person, "Depository" as used with respect to the Securities of any Series shall mean the Depository with respect to the Securities of such Series. "Discount Security" means any Security that provides for an amount less than the stated principal amount thereof to be due and payable upon declaration of acceleration of the maturity thereof pursuant to Section 6.2. "Dollars" means the currency of The United States of America. -3- "ECU" means the European Currency Unit as determined by the Commission of the European Union. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Foreign Currency" means any currency or currency unit issued by a government other than the government of The United States of America. "Foreign Government Obligations" means with respect to Securities of any Series that are denominated in a Foreign Currency, (i) direct obligations of the government that issued or caused to be issued such currency for the payment of which obligations its full faith and credit is pledged or (ii) obligations of a person controlled or supervised by or acting as an agency or instrumentality of such government the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by such government, which, in either case under clauses (i) or (ii), are not callable or redeemable at the option of the issuer thereof. "Gaming Laws" means the gaming laws of a jurisdiction or jurisdictions to which the Company or a subsidiary of the Company is, or may at any time after the date of this Indenture be, subject. "Gaming Authority" means the Nevada Gaming Commission, the Nevada State Gaming Control Board, the New Jersey Casino Control Commission or any similar commission or agency which has, or may at any time after the date of this Indenture have, jurisdiction over the gaming activities of the Company or a subsidiary of the Company or any successor thereto. "Global Security" or "Global Securities" means a Security or Securities, as the case may be, in the form established pursuant to Section 2.2 evidencing all or part of a Series of Securities, issued to the Depository for such Series or its nominee, and registered in the name of such Depository or nominee. -4- "Guarantee" shall have the meaning set forth in Section 12.1 hereof. "Guarantor" means the party named as such above until a successor replaces it and thereafter means the successor. "Holder" or "Securityholder" means a person in whose name a Security is registered or the holder of a Bearer Security. "Indenture" means this Indenture as amended from time to time and shall include the form and terms of particular Series of Securities established as contemplated hereunder. "interest" with respect to any Discount Security which by its terms bears interest only after Maturity, means interest payable after Maturity. "Joint Venture" means any partnership, corporation or other entity, in which up to and including 50% of the partnership interests, outstanding voting stock or other equity interests is owned, directly or indirectly, by the Company and/or more subsidiaries. "Maturity," when used with respect to any Security or installment of principal thereof, means the date on which the principal of such Security or such installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption, notice of option to elect repayment or otherwise. "Non-recourse Indebtedness" means indebtedness the terms of which provide that the lender's claim for repayment of such indebtedness is limited solely to a claim against the property which secures such indebtedness. "Officer" means the Chairman of the Board, any President, any Vice-President, the Treasurer, the Secretary, any Assistant Treasurer or any Assistant Secretary of the Company. "Officers' Certificate" means a certificate signed by two Officers, one of whom must be the Company's principal executive officer, principal financial officer or principal accounting officer. -5- "Opinion of Counsel" means a written opinion of legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company. "person" means any individual, corporation, partnership, joint venture, association, limited liability company, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "principal" of a Security means the principal of the Security plus, when appropriate, the premium, if any, on, and any Additional Amounts in respect of, the Security. "Responsible Officer" means any officer of the Trustee in its Corporate Trust Office and also means, with respect to a particular corporate trust matter, any other officer to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with a particular subject. "SEC" means the Securities and Exchange Commission. "Securities" means the debentures, notes or other debt instruments of the Company of any Series authenticated and delivered under this Indenture. "Series" or "Series of Securities" means each series of debentures, notes or other debt instruments of the Company created pursuant to Sections 2.1 and 2.2 hereof. "Significant Subsidiary" means (i) any direct or indirect Subsidiary of the Company that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act of 1933, as amended, as such regulation is in effect on the date hereof, or (ii) any group of direct or indirect Subsidiaries of the Company that, taken together as a group, would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act of 1933, as amended, as such regulation is in effect on the date hereof. -6- "Stated Maturity" when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable. "Subsidiary" of any specified person means any corporation of which at least a majority of the outstanding stock having by the terms thereof ordinary voting power for the election of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by such person, or by one or more other Subsidiaries, or by such person and one or more other Subsidiaries. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code ss.ss. 77aaa-77bbbb) as in effect on the date of this Indenture; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "TIA" means, to the extent required by any such amendment, the Trust Indenture Act as so amended. "Trustee" means the person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean or include each person who is then a Trustee hereunder, and if at any time there is more than one such person, "Trustee" as used with respect to the Securities of any Series shall mean the Trustee with respect to Securities of that Series. "U.S. Government Obligations" means securities which are (i) direct obligations of The United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a person controlled or supervised by and acting as an agency or instrumentality of The United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by The United States of America, and which in the case of (i) and (ii) are not callable or redeemable at the option of the issuer thereof, and shall also include a depository -7- receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt,provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation evidenced by such depository receipt. Section 1.2. Other Definitions.
TERM DEFINED IN SECTION "Bankruptcy Law" 6.1 "Custodian" 6.1 "Event of Default" 6.1 "Journal" 10.15 "Judgment Currency" 10.16 "Legal Holiday" 10.7 "mandatory sinking fund payment" 11.1 "Market Exchange Rate" 10.15 "New York Banking Day" 10.16 "optional sinking fund payment" 11.1 "Paying Agent" 2.4 "Registrar" 2.4 "Required Currency" 10.16 "Service Agent" 2.4 "successor person" 5.1
Section 1.3. Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: -8- "Commission" means the SEC. "indenture securities" means the Securities. "indenture security holder" means a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company and any successor obligor upon the Securities. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA and not otherwise defined herein are used herein as so defined. Section 1.4. Rules of Construction. Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles; (c) references to "generally accepted accounting principles" shall mean generally accepted accounting principles in effect as of the time when and for the period as to which such accounting principles are to be applied; (d) "or" is not exclusive; (e) words in the singular include the plural, and in the plural include the singular; and (f) provisions apply to successive events and transactions. -9- ARTICLE II. THE SECURITIES Section 2.1. Issuable in Series. The aggregate principal amount of Securities that may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more Series. All Securities of a Series shall be identical except as may be set forth in a Board Resolution, a supplemental indenture or an Officers' Certificate detailing the adoption of the terms thereof pursuant to the authority granted under a Board Resolution. In the case of Securities of a Series to be issued from time to time, the Board Resolution, Officers' Certificate or supplemental indenture may provide for the method by which specified terms (such as interest rate, maturity date, record date or date from which interest shall accrue) are to be determined. Securities may differ between Series in respect of any matters, provided that all Series of Securities shall be equally and ratably entitled to the benefits of the Indenture. Section 2.2. Establishment of Terms of Series of Securities. At or prior to the issuance of any Securities within a Series, the following shall be established (as to the Series generally, in the case of Subsection 2.2.1 and either as to such Securities within the Series or as to the Series generally in the case of Subsections 2.2.2 through 2.2.22) by a Board Resolution, a supplemental indenture or an Officers' Certificate pursuant to authority granted under a Board Resolution: 2.2.1. the title of the Series (which shall distinguish the Securities of that particular Series from the Securities of any other Series); -10- 2.2.2. the price or prices (expressed as a percentage of the principal amount thereof) at which the Securities of the Series will be issued; 2.2.3. any limit upon the aggregate principal amount of the Securities of the Series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the Series pursuant to Section 2.7, 2.8, 2.11, 3.6 or 9.6); 2.2.4. the date or dates on which the principal of the Securities of the Series is payable; 2.2.5. the rate or rates (which may be fixed or variable) per annum or, if applicable, the method used to determine such rate or rates (including, but not limited to, any commodity, commodity index, stock exchange index or financial index) at which the Securities of the Series shall bear interest, if any, the date or dates from which such interest, if any, shall accrue, the date or dates on which such interest, if any, shall commence and be payable and any regular record date for the interest payable on any interest payment date; 2.2.6. the place or places where the principal of and interest, if any, on the Securities of the Series shall be payable, or the method of such payment, if by wire transfer, mail or other means; 2.2.7. if applicable, the period or periods within which, the price or prices at which and the terms and conditions upon which the Securities of the Series may be redeemed, in whole or in part, at the option of the Company; 2.2.8. the obligation, if any, of the Company to redeem or purchase the Securities of the Series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof and the period or periods within which, the -11- price or prices at which and the terms and conditions upon which Securities of the Series shall be redeemed or purchased, in whole or in part, pursuant to such obligation; 2.2.9. the dates, if any, on which and the price or prices at which the Securities of the Series will be repurchased by the Company at the option of the Holders thereof and other detailed terms and provisions of such repurchase obligations; 2.2.10. if other than denominations of $1,000 and any integral multiple thereof, the denominations in which the Securities of the Series shall be issuable; 2.2.11. the forms of the Securities of the Series in bearer or fully registered form (and, if in fully registered form, whether the Securities will be issuable as Global Securities); 2.2.12. if other than the principal amount thereof, the portion of the principal amount of the Securities of the Series that shall be payable upon declaration of acceleration of the maturity thereof pursuant to Section 6.2; 2.2.13. the currency of denomination of the Securities of the Series, which may be Dollars or any Foreign Currency, including, but not limited to, the ECU, and if such currency of denomination is a composite currency other than the ECU, the agency or organization, if any, responsible for overseeing such composite currency; 2.2.14. the designation of the currency, currencies or currency units in which payment of the principal of and interest, if any, on the Securities of the Series will be made; -12- 2.2.15. if payments of principal of or interest, if any, on the Securities of the Series are to be made in one or more currencies or currency units other than that or those in which such Securities are denominated, the manner in which the exchange rate with respect to such payments will be determined; 2.2.16. the manner in which the amounts of payment of principal of or interest, if any, on the Securities of the Series will be determined, if such amounts may be determined by reference to an index based on a currency or currencies or by reference to a commodity, commodity index, stock exchange index or financial index; 2.2.17. the provisions, if any, relating to any security provided for the Securities of the Series; 2.2.18. any addition to or change in the Events of Default which applies to any Securities of the Series and any change in the right of the Trustee or the requisite Holders of such Securities to declare the principal amount thereof due and payable pursuant to Section 6.2; 2.2.19. any addition to or change in the covenants set forth in Articles IV or V which applies to Securities of the Series; 2.2.20. any other terms of the Securities of the Series (which terms shall not be inconsistent with the provisions of this Indenture, except as permitted by Section 9.1, but which may modify or delete any provision of this Indenture insofar as it applies to such Series); and 2.2.21. any depositories, interest rate calculation agents, exchange rate calculation agents or other agents with respect to Securities of such Series if other than those appointed herein. -13- All Securities of any one Series need not be issued at the same time and may be issued from time to time, consistent with the terms of this Indenture, if so provided by or pursuant to the Board Resolution, supplemental indenture or Officers' Certificate referred to above, and the authorized principal amount of any Series may not be increased to provide for issuances of additional Securities of such Series, unless otherwise provided in such Board Resolution, supplemental indenture or Officers' Certificate. Section 2.3. Execution and Authentication. An Officer shall sign the Securities for the Company by manual or facsimile signature. If an Officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid. A Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. Subject to the provisions of this Section 2.3, the Trustee shall at any time, and from time to time, authenticate Securities for original issue in the principal amount provided in the Board Resolution, supplemental indenture hereto or Officers' Certificate, upon receipt by the Trustee of a Company Order. Such Company Order may authorize authentication and delivery pursuant to oral or electronic instructions from the Company or its duly authorized agent or agents, which oral instructions shall be promptly confirmed in writing. Each Security shall be dated the date of its authentication unless otherwise provided by a Board Resolution, a supplemental indenture hereto or an Officers' Certificate. The aggregate principal amount of Securities of any Series outstanding at any time may not exceed any limit upon the maximum principal amount for such Series set forth in the Board Resolution, supplemental indenture hereto or Officers' Certificate delivered pursuant to Section 2.2, except as provided in Section 2.8. -14- Prior to the issuance of Securities of any Series, the Trustee shall have received and (subject to Section 7.2) shall be fully protected in relying on: (a) the Board Resolution, supplemental indenture hereto or Officers' Certificate establishing the form of the Securities of that Series or of Securities within that Series and the terms of the Securities of that Series or of Securities within that Series, (b) an Officers' Certificate complying with Section 10.4, and (c) an Opinion of Counsel complying with Section 10.4. The Trustee shall have the right to decline to authenticate and deliver any Securities of such Series: (a) if the Trustee, being advised by counsel, determines that such action may not lawfully be taken; or (b) if the Trustee in good faith by its board of directors or trustees, executive committee or a trust committee of directors and/or vice-presidents shall determine that such action would expose the Trustee to personal liability to Holders of any then outstanding Series of Securities. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities. An authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate. Section 2.4. Registrar and Paying Agent. The Company shall maintain, with respect to each Series of Securities, at the place or places specified with respect to such Series pursuant to Section 2.2, an office or agency where Securities of such Series may be presented or surrendered for payment (" Paying Agent"), where Securities of such Series may be surrendered for registration of transfer or exchange ("Registrar") and where notices and demands to or upon the Company in respect of the Securities of such Series and this Indenture may be served ("Service Agent"). The Registrar shall keep a register with respect to each Series of Securities and to their transfer and exchange. The Company will give prompt -15- written notice to the Trustee of the name and address, and any change in the name or address, of each Registrar, Paying Agent or Service Agent. If at any time the Company shall fail to maintain any such required Registrar, Paying Agent or Service Agent or shall fail to furnish the Trustee with the name and address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more co-registrars, additional paying agents or additional service agents and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligations to maintain a Registrar, Paying Agent and Service Agent in each place so specified pursuant to Section 2.2 for Securities of any Series for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the name or address of any such co-registrar, additional paying agent or additional service agent. The term "Registrar" includes any co-registrar; the term "Paying Agent" includes any additional paying agent; and the term "Service Agent" includes any additional service agent. The Company hereby appoints the Trustee the initial Registrar, Paying Agent and Service Agent for each Series unless another Registrar, Paying Agent or Service Agent, as the case may be, is appointed prior to the time Securities of that Series are first issued. Section 2.5. Paying Agent to Hold Money in Trust. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust, for the benefit of Securityholders of any Series of Securities, or the Trustee, all money held by the Paying Agent for the payment of principal of or interest on the Series of Securities, and will notify the Trustee of any default by the Company in making any such payment. While any such default -16- continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall have no further liability for the money. If the Company or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of Securityholders of any Series of Securities all money held by it as Paying Agent. Section 2.6. Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders of each Series of Securities and shall otherwise comply with TIA ss. 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least ten days before each interest payment date and at such other times as the Trustee may request in writing a list, in such form and as of such date as the Trustee may reasonably require, of the names and addresses of Securityholders of each Series of Securities. Section 2.7. Transfer and Exchange. Where Securities of a Series are presented to the Registrar or a co-registrar with a request to register a transfer or to exchange them for an equal principal amount of Securities of the same Series, the Registrar shall register the transfer or make the exchange if its requirements for such transactions are met. To permit registrations of transfers and exchanges, the Trustee shall authenticate Securities at the Registrar's request. No service charge shall be made for any registration of transfer or exchange (except as otherwise expressly permitted herein), but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer tax or similar governmental charge payable upon exchanges pursuant to Sections 2.11, 3.6 or 9.6). -17- Neither the Company nor the Registrar shall be required (a) to issue, register the transfer of, or exchange Securities of any Series for the period beginning at the opening of business fifteen days immediately preceding the mailing of a notice of redemption of Securities of that Series selected for redemption and ending at the close of business on the day of such mailing, or (b) to register the transfer of or exchange Securities of any Series selected, called or being called for redemption as a whole or the portion being redeemed of any such Securities selected, called or being called for redemption in part. Section 2.8. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same Series and of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon its request the Trustee shall authenticate and make available for delivery, in lieu of any such destroyed, lost or stolen Security, a new Security of the same Series and of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. -18- Every new Security of any Series issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of that Series duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. Section 2.9. Outstanding Securities. The Securities outstanding at any time are all the Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those reductions in the interest on a Global Security effected by the Trustee in accordance with the provisions hereof and those described in this Section as not outstanding. If a Security is replaced pursuant to Section 2.8, it ceases to be outstanding until the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds on the Maturity of Securities of a Series money sufficient to pay such Securities payable on that date, then on and after that date such Securities of the Series cease to be outstanding and interest on them ceases to accrue. A Security does not cease to be outstanding because the Company or an Affiliate holds the Security. -19- In determining whether the Holders of the requisite principal amount of outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, the principal amount of a Discount Security that shall be deemed to be outstanding for such purposes shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon a declaration of acceleration of the Maturity thereof pursuant to Section 6.2. Section 2.10. Treasury Securities. In determining whether the Holders of the required principal amount of Securities of a Series have concurred in any request, demand, authorization, direction, notice, consent or waiver Securities of a Series owned by the Company or an Affiliate shall be disregarded, except that for the purposes of determining whether the Trustee shall be protected in relying on any such request, demand, authorization, direction, notice, consent or waiver only Securities of a Series that the Trustee knows are so owned shall be so disregarded. Section 2.11. Temporary Securities. Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall, subject to Section 2.3, (in the case of original issuance), authenticate temporary Securities upon a Company Order. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee upon request shall authenticate definitive Securities of the same Series and date of maturity in exchange for temporary Securities. Until so exchanged, temporary securities shall have the same rights under this Indenture as the definitive Securities. Section 2.12. Cancellation. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for -20- registration of transfer, exchange or payment. The Trustee sha ll cancel all Securities surrendered for transfer, exchange, payment, replacement or cancellation and shall destroy such canceled Securities (subject to the record retention requirement of the Exchange Act) and deliver a certificate of such destruction to the Company, unless the Company otherwise directs. The Company may not issue new Securities to replace Securities that it has paid or delivered to the Trustee for cancellation. Section 2.13. Defaulted Interest. If the Company defaults in a payment of interest on a Series of Securities, it shall pay the defaulted interest, plus, to the extent permitted by law, any interest payable on the defaulted interest, to the persons who are Securityholders of the Series on a subsequent special record date. The Company shall fix the record date and payment date. At least 30 days before the record date, the Company shall mail to the Trustee and to each Securityholder of the Series a notice that states the record date, the payment date and the amount of interest to be paid. The Company may pay defaulted interest in any other lawful manner. Section 2.14. Global Securities. 2.14.1. Terms of Securities. A Board Resolution, a supplemental indenture hereto or an Officers' Certificate shall establish whether the Securities of a Series shall be issued in whole or in part in the form of one or more Global Securities and the Depository for such Global Security or Securities. 2.14.2. Transfer and Exchange. Notwithstanding any provisions to the contrary contained in Section 2.7 of the Indenture and in addition thereto, any Global Security shall be exchangeable pursuant to Section 2.7 of the Indenture for Securities registered in the names of Holders other than the Depository for such Security or its nominee only if (i) such Depository notifies the Company that it is unwilling or unable to continue as Depository for such Global Security or -21- if at any time such Depository ceases to be a clearing agency registered under the Exchange Act, and, in either case, the Company fails to appoint a successor Depository within 90 days of such event, (ii) the Company executes and delivers to the Trustee an Officers' Certificate to the effect that such Global Security shall be so exchangeable or (iii) an Event of Default with respect to the Securities represented by such Global Security shall have happened and be continuing. Any Global Security that is exchangeable pursuant to the preceding sentence shall be exchangeable for Securities registered in such names as the Depository shall direct in writing in an aggregate principal amount equal to the principal amount of the Global Security with like tenor and terms. Except as provided in this Section 2.14.2, a Global Security may not be transferred except as a whole by the Depository with respect to such Global Security to a nominee of such Depository, by a nominee of such Depository to such Depository or another nominee of such Depository or by the Depository or any such nominee to a successor Depository or a nominee of such a successor Depository. 2.14.3. Legend. Any Global Security issued hereunder shall bear a legend in substantially the following form: "This Security is a Global Security within the meaning of the Indenture hereinafter referred to and is registered in the name of the Depository or a nominee of the Depository. This Security is exchangeable for Securities registered in the name of a person other than the Depository or its nominee only in the limited circumstances described in the Indenture, and may not be transferred except as a whole by the Depository to a nominee of the Depository, by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such a successor Depository." -22- 2.14.4. Acts of Holders. The Depository, as a Holder, may appoint agents and otherwise authorize participants to give or take any request, demand, authorization, direction, notice, consent, waiver or other action which a Holder is entitled to give or take under the Indenture. 2.14.5. Payments. Notwithstanding the other provisions of this Indenture, unless otherwise specified as contemplated by Section 2.2, payment of the principal of and interest, if any, on any Global Security shall be made to the Holder thereof. 2.14.6. Consents, Declaration and Directions. Except as provided in Section 2.14.5, the Company, the Trustee and any Agent shall treat a person as the Holder of such principal amount of outstanding Securities of such Series represented by a Global Security as shall be specified in a written statement of the Depositary with respect to such Global Security, for purposes of obtaining any consents, declarations, waivers or directions required to be given by the Holders pursuant to this Indenture. Section 2.15. CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other elements of identification printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. -23- Section 2.16. Mandatory Disposition of Debt Securities Pursuant to Gaming Laws Each Holder and beneficial owner, by accepting or otherwise acquiring an interest in the Debt Securities, shall be deemed to have agreed that if the Gaming Authority of any jurisdiction in which the Company or any of its subsidiaries conducts or proposes to conduct gaming requires that a Person who is a Holder or beneficial owner must be licensed, qualified or found suitable under the applicable Gaming Laws, such Holder or beneficial owner shall apply for a license, qualification or a finding of suitability within the required time period. If such Person fails to apply or become licensed or qualified or is found unsuitable, then the Company shall have the right, at its option, (i) to require such Person to dispose of its Debt Securities or beneficial interest therein within 30 days of receipt of notice of the Company's election or such earlier date as may be requested or prescribed by such Gaming Authority or (ii) to redeem such Debt Securities at a redemption price equal to the lesser of (a) such Person's cost or (b) 100% of the principal amount thereof, plus accrued and unpaid interest to the earlier of the redemption date and the date of the finding of unsuitability, which may be less than 30 days following the notice of redemption if so requested or prescribed by the Gaming Authority. The Company shall notify the Trustee in writing of any such redemption as soon as practicable. The Company shall not be responsible for any costs or expenses any such Holder or beneficial owner may incur in connection with its application for a license, qualification or a finding of suitability. ARTICLE III. REDEMPTION Section 3.1. Notice to Trustee. The Company may, with respect to any Series of Securities, reserve the right to redeem and pay the Series of Securities or may covenant to redeem and pay the Series of Securities or any -24- part thereof prior to the Stated Maturity thereof at such time and on such terms as provided for in such Securities. If a Series of Securities is redeemable and the Company wants or is obligated to redeem prior to the Stated Maturity thereof all or part of the Series of Securities pursuant to the terms of such Securities, it shall notify the Trustee of the redemption date and the principal amount of Series of Securities to be redeemed. The Company shall give such notice at least 45 days before the redemption date (or such shorter notice as may be acceptable to the Trustee). Section 3.2. Selection of Securities to be Redeemed. Unless otherwise indicated for a particular Series by a Board Resolution, a supplemental indenture or an Officers' Certificate, if less than all the Securities of a Series are to be redeemed, the Trustee shall select the Securities of the Series to be redeemed in any manner that the Trustee deems fair and appropriate. The Trustee shall make the selection from Securities of the Series outstanding not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities of the Series that have denominations larger than $1,000. Securities of the Series and portions of them it selects shall be in amounts of $1,000 or whole multiples of $1,000 or, with respect to Securities of any Series issuable in other denominations pursuant to Section 2.2.10, the minimum principal denomination for each Series and integral multiples thereof. Provisions of this Indenture that apply to Securities of a Series called for redemption also apply to portions of Securities of that Series called for redemption. Section 3.3. Notice of Redemption. Unless otherwise indicated for a particular Series by Board Resolution, a supplemental indenture hereto or an Officers' Certificate, at least 30 days but not more than 60 days before a redemption date, the Company shall mail a notice of redemption by first-class mail to each Holder whose Securities are to be redeemed (and provide a copy of such notice to the Trustee) and if any Bearer Securities are outstanding, publish on one occasion a notice in an Authorized Newspaper. -25- The notice shall identify the Securities of the Series to be redeemed and shall state: (a) the redemption date; (b) the redemption price; (c) the name and address of the Paying Agent; (d) that Securities of the Series called for redemption must be surrendered to the Paying Agent to collect the redemption price; (e) that interest on Securities of the Series called for redemption ceases to accrue on and after the redemption date; and (f) any other information as may be required by the terms of the particular Series or the Securities of a Series being redeemed. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense. Section 3.4. Effect of Notice of Redemption. Once notice of redemption is mailed or published as provided in Section 3.3, Securities of a Series called for redemption become due and payable on the redemption date and at the redemption price. A notice of redemption may not be conditional. Upon surrender to the Paying Agent, such Securities shall be paid at the redemption price plus accrued interest to the redemption date. Section 3.5. Deposit of Redemption Price. On or before the redemption date, the Company shall deposit with the Paying Agent money sufficient to pay the redemption price of and accrued interest, if any, on all Securities to be redeemed on that date. -26- Section 3.6. Securities Redeemed in Part. Upon surrender of a Security that is redeemed in part, the Trustee shall authenticate for the Holder a new Security of the same Series and the same maturity equal in principal amount to the unredeemed portion of the Security surrendered. ARTICLE IV. COVENANTS Section 4.1. Payment of Principal and Interest. The Company covenants and agrees for the benefit of the Holders of each Series of Securities that it will duly and punctually pay the principal of and interest, if any, on the Securities of that Series in accordance with the terms of such Securities and this Indenture. Section 4.2. SEC Reports. The Company shall deliver to the Trustee within 15 days after it files them with the SEC copies of the annual reports and of the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Company also shall comply with the other provisions of TIA ss.314(a). Section 4.3. Compliance Certificate. The Company shall deliver to the Trustee, within 90 days after the end of each fiscal year of the Company, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating, as to each such Officer signing such -27- certificate, that to the best of his knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he may have knowledge). The Company will, so long as any of the Securities are outstanding, deliver to the Trustee, forthwith upon becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. Section 4.4. Stay, Extension and Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture or the Securities; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. Section 4.5. Corporate Existence. Subject to Article V, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each Significant Subsidiary in accordance with the respective organizational documents of each Significant Subsidiary and the rights (charter and statutory), licenses and franchises of the Company and its Significant Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, -28- partnership or other existence of any Significant Subsidiary, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries taken as a whole and that the loss thereof is not adverse in any material respect to the Holders. Section 4.6. Taxes. The Company shall, and shall cause each of its Significant Subsidiaries to, pay prior to delinquency all taxes, assessments and governmental levies, except as contested in good faith and by appropriate proceedings. ARTICLE V. SUCCESSORS Section 5.1. When Company May Merge, Etc. The Company shall not consolidate with or merge into, or convey, transfer or lease all or substantially all of its properties and assets to, any person (a "successor person"), and may not permit any person to merge into, or convey, transfer or lease its properties and assets substantially as an entirety to, the Company, unless: (a) the successor person (if any) is a corporation, partnership, trust or other entity organized and validly existing under the laws of any U.S. domestic jurisdiction and expressly assumes the Company's obligations on the Securities and under this Indenture and (b) immediately after giving effect to the transaction, no Default or Event of Default, shall have occurred and be continuing. The Company shall deliver to the Trustee prior to the consummation of the proposed transaction an Officers' Certificate to the foregoing effect and an Opinion of Counsel stating that the proposed transaction and such supplemental indenture comply with this Indenture. -29- Section 5.2. Successor Corporation Substituted. Upon any consolidation or merger, or any sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.1, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, lease, conveyance or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor person has been named as the Company herein; provided, however, that the predecessor Company in the case of a sale, lease, conveyance or other disposition shall not be released from the obligation to pay the principal of and interest, if any, on the Securities. ARTICLE VI. DEFAULTS AND REMEDIES Section 6.1. Events of Default. "Event of Default," wherever used herein with respect to Securities of any Series, means any one of the following events, unless in the establishing Board Resolution, supplemental indenture or Officers' Certificate, it is provided that such Series shall not have the benefit of said Event of Default: (a) default in the payment of any interest on any Security of that Series when it becomes due and payable, and continuance of such default for a period of 30 days (unless the entire amount of such payment is deposited by the Company with the Trustee or with a Paying Agent prior to the expiration of such period of 30 days); or (b) default in the payment of the principal of any Security of that Series at its Maturity; or (c) default in the deposit of any sinking fund payment, when and as due in respect of any Security of that Series; or -30- (d) default in the performance or breach of any covenant or warranty of the Company or the Guarantor in this Indenture (other than a covenant or warranty that has been included in this Indenture solely for the benefit of Series of Securities other than that Series), which default continues uncured for a period of 60 days after there has been given, by registered or certified mail, to the Company or the Guarantor by the Trustee or to the Company, the Guarantor and the Trustee by the Holders of at least 25% in principal amount of the outstanding Securities of that Series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (e) the acceleration of the maturity of any indebtedness of the Company (other than Non-recourse Indebtedness), at any one time, in an amount in excess of the greater of (i) $25 million and (ii) 5% of Consolidated Net Tangible Assets, if such acceleration is not annulled within 30 days after written notice to the Company by the Trustee and the holders of at least 25% in principal amount of the outstanding Debt Securities of that Series. (f) the Company or any of its Significant Subsidiaries pursuant to or within the meaning of any Bankruptcy Law: (i) commences a voluntary case, (ii) consents to the entry of an order for relief against it in an involuntary case, (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property, (iv) makes a general assignment for the benefit of its creditors, or (v) generally is unable to pay its debts as the same become due; or -31- (g) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any of its Significant Subsidiaries in an involuntary case, (ii) appoints a Custodian of the Company or any of its Significant Subsidiaries or for all or substantially all of its property, or (iii) orders the liquidation of the Company or any of its Significant Subsidiaries, and the order or decree remains unstayed and in effect for 60 days; or (h) any other Event of Default provided with respect to Securities of that Series, which is specified in a Board Resolution, a supplemental indenture hereto or an Officers' Certificate, in accordance with Section 2.2.18. The term "Bankruptcy Law" means title 11, U.S. Code or any similar Federal or State law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. Section 6.2. Acceleration of Maturity; Rescission and Annulment. If an Event of Default with respect to Securities of any Series at the time outstanding occurs and is continuing (other than an Event of Default referred to in Section 6.1(f) or (g)) then in every such case the Trustee or the Holders of not less than 25% in principal amount of the outstanding Securities of that Series may declare the principal amount (or, if any Securities of that Series are Discount Securities, such portion of the principal amount as may be specified in the terms of such Securities) of and accrued and unpaid interest, if any, on all of the Securities of that Series to be due and payable immediately, -32- by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount (or specified amount) and accrued and unpaid interest, if any, shall become immediately due and payable. If an Event of Default specified in Section 6.1(f) or (g) shall occur, the principal amount (or specified amount) of and accrued and unpaid interest, if any, on all outstanding Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after such a declaration of acceleration with respect to any Series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the outstanding Securities of that Series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if: (a) the Company has paid or deposited with the Trustee a sum sufficient to pay (i) all overdue interest, if any, on all Securities of that Series, (ii) the principal of any Securities of that Series which have become due otherwise than by such declaration of acceleration and interest thereon at the rate or rates prescribed therefor in such Securities, (iii) to the extent that payment of such interest is lawful, interest upon any overdue principal and overdue interest at the rate or rates prescribed therefor in such Securities, and (iv) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and -33- (b) all Events of Default with respect to Securities of that Series, other than the non-payment of the principal of Securities of that Series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 6.13. No such rescission shall affect any subsequent Default or impair any right consequent thereon. Section 6.3. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (a) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of principal of any Security at the Maturity thereof, or (c) default is made in the deposit of any sinking fund payment when and as due by the terms of a Security, then, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal or any overdue interest, at the rate or rates prescribed therefor in such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to -34- judgment or final decree and may enforce the same against the Company or any other obligor upon such Securities and collect the moneys adjudged or deemed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Securities, wherever situated. If an Event of Default with respect to any Securities of any Series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such Series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. Section 6.4. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same, -35- and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 6.5. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. Section 6.6. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: First: To the payment of all amounts due the Trustee under Section 7.7; and -36- Second: To the payment of the amounts then due and unpaid for principal of and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and interest, respectively; and Third: To the Company. Section 6.7. Limitation on Suits. No Holder of any Security of any Series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that Series; (b) the Holders of not less than 25% in principal amount of the outstanding Securities of that Series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (c) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the outstanding Securities of that Series; it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, -37- disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all such Holders. Section 6.8. Unconditional Right of Holders to Receive Principal and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest, if any, on such Security on the Stated Maturity or Stated Maturities expressed in such Security (or, in the case of redemption, on the redemption date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. Section 6.9. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 6.10. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in Section 2.8, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter -38- existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 6.11. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. Section 6.12. Control by Holders. The Holders of a majority in principal amount of the outstanding Securities of any Series shall 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, with respect to the Securities of such Series, provided that (a) such direction shall not be in conflict with any rule of law or with this Indenture, (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (c) subject to the provisions of Section 6.1, the Trustee shall have the right to decline to follow any such direction if the Trustee in good faith shall, by a Responsible Officer of the Trustee, determine that the proceeding so directed would involve the Trustee in personal liability. -39- Section 6.13. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the outstanding Securities of any Series may on behalf of the Holders of all the Securities of such Series waive any past Default hereunder with respect to such Series and its consequences, except a Default in the payment of the principal of or interest on any Security of such Series (provided, however, that the Holders of a majority in principal amount of the outstanding Securities of any Series may rescind an acceleration and its consequences, including any related payment default that resulted from such acceleration). Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. Section 6.14. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the outstanding Securities of any Series, or to any suit instituted by any Holder for the enforcement of the payment of the principal of or interest on any Security on or after the Stated Maturity or Stated Maturities expressed in such Security (or, in the case of redemption, on the redemption date). -40- ARTICLE VII. TRUSTEE Section 7.1. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) The Trustee need perform only those duties that are specifically set forth in this Indenture and no others. (ii) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon Officers' Certificates or Opinions of Counsel furnished to the Trustee and conforming to the requirements of this Indenture; however, in the case of any such Officers' Certificates or Opinions of Counsel which by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall examine such Officers' Certificates and Opinions of Counsel to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own grossly negligent action, its own grossly negligent failure to act or its own willful misconduct, except that: (i) This paragraph does not limit the effect of paragraph (b) of this Section. -41- (ii) The Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (iii) The Trustee shall not be liable with respect to any action taken, suffered or omitted to be taken by it with respect to Securities of any Series in good faith in accordance with the direction of the Holders of a majority in principal amount of the outstanding Securities of such Series relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture with respect to the Securities of such Series. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraph (a), (b) and (c) of this Section. (e) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (g) No provision of this Indenture shall require the Trustee to risk its own funds or otherwise incur any financial liability in the performance of any of its duties, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk is not reasonably assured to it. -42- (h) The Paying Agent, the Registrar and any authenticating agent shall be entitled to the protections, immunities and standard of care as are set forth in paragraphs (a), (b) and (c) of this Section with respect to the Trustee. Section 7.2. Rights of Trustee. (a) The Trustee may rely on and shall be protected in acting or refraining from acting upon any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. No Depository shall be deemed an agent of the Trustee and the Trustee shall not be responsible for any act or omission by any Depository. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. (e) The Trustee may consult with counsel and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders -43- of Securities unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. Section 7.3. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or an Affiliate with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. The Trustee is also subject to Sections 7.10 and 7.11. Section 7.4. Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement in the Securities other than its authentication. Section 7.5. Notice of Defaults. If a Default or Event of Default occurs and is continuing with respect to the Securities of any Series and if it is known to a Responsible Officer of the Trustee, the Trustee shall mail to each Securityholder of the Securities of that Series and, if any Bearer Securities are outstanding, publish on one occasion in an Authorized Newspaper, notice of a Default or Event of Default within 90 days after it occurs or, if later, after a Responsible Officer of the Trustee has knowledge of such Default or Event of Default. Except in the case of a Default or Event of Default in payment of principal of or interest on any Security of any Series, the Trustee may withhold the notice if and so long as its corporate trust committee or a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of Securityholders of that Series. -44- Section 7.6. Reports by Trustee to Holders. Within 60 days after May 15 in each year, the Trustee shall transmit by mail to all Securityholders, as their names and addresses appear on the register kept by the Registrar and, if any Bearer Securities are outstanding, publish in an Authorized Newspaper, a brief report dated as of such May 15, in accordance with, and to the extent required under, TIA ss. 313. A copy of each report at the time of its mailing to Securityholders of any Series shall be filed with the SEC and each stock exchange on which the Securities of that Series are listed. The Company shall promptly notify the Trustee when Securities of any Series are listed on any stock exchange. Section 7.7. Compensation and Indemnity. The Company shall pay to the Trustee from time to time reasonable compensation for its services as shall be agreed upon pursuant to a separate agreement dated not later than the date hereof. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred by it. Such expenses shall include the reasonable compensation and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee (including the cost of defending itself) against any loss, liability or expense incurred by it except as set forth in the next paragraph in the performance of its duties under this Indenture as Trustee or Agent. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. This indemnification shall apply to officers, directors, employees, shareholders and agents of the Trustee. -45- The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee or by any officer, director, employee, shareholder or agent of the Trustee through gross negligence or bad faith. To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities of any Series on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Securities of that Series. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1(f) or (g) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. Section 7.8. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign with respect to the Securities of one or more Series by so notifying the Company. The Holders of a majority in principal amount of the Securities of any Series may remove the Trustee with respect to that Series by so notifying the Trustee and the Company. The Company may remove the Trustee with respect to Securities of one or more Series if: (a) the Trustee fails to comply with Section 7.10; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. -46- If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee with respect to the Securities of any one or more Series does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of at least 10% in principal amount of the Securities of the applicable Series may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee with respect to the Securities of any one or more Series fails to comply with Section 7.10, any Securityholder of the applicable Series may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after that, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee subject to the lien provided for in Section 7.7, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee with respect to each Series of Securities for which it is acting as Trustee under this Indenture. A successor Trustee shall mail a notice of its succession to each Securityholder of each such Series and, if any Bearer Securities are outstanding, publish such notice on one occasion in an Authorized Newspaper. Notwithstanding replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 hereof shall continue for the benefit of the retiring trustee with respect to expenses and liabilities incurred by it prior to such replacement. -47- Section 7.9. Successor Trustee by Merger, etc. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. Section 7.10. Eligibility; Disqualification. This Indenture shall always have a Trustee who satisfies the requirements of TIA ss. 310(a)(1), (2) and (5). The Trustee shall always have a combined capital and surplus of at least $25,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA ss. 310(b). Section 7.11. Preferential Collection of Claims Against Company. The Trustee is subject to TIA ss. 311(a), excluding any creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or been removed shall be subject to TIA ss. 311(a) to the extent indicated. ARTICLE VIII. SATISFACTION AND DISCHARGE; DEFEASANCE Section 8.1. Satisfaction and Discharge of Indenture. This Indenture shall upon Company Order cease to be of further effect (except as hereinafter provided in this Section 8.1), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (a) either -48- (i) all Securities theretofore authenticated and delivered (other than Securities that have been destroyed, lost or stolen and that have been replaced or paid) have been delivered to the Trustee for cancellation; or (ii) all such Securities not theretofore delivered to the Trustee for cancellation (1) have become due and payable, or (2) will become due and payable at their Stated Maturity within one year, or (3) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, or (4) are deemed paid and discharged pursuant to Section 8.3, as applicable; and the Company, in the case of (1), (2) or (3) above, has deposited or caused to be deposited with the Trustee as trust funds in trust an amount sufficient for the purpose of paying and discharging the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal and interest to the date of such deposit (in the case of Securities which have become due and payable on or prior to the date of such deposit) or to the Stated Maturity or redemption date, as the case may be; (b) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. -49- Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 7.7, and, if money shall have been deposited with the Trustee pursuant to clause (a) of this Section, the provisions of Sections 2.4, 2.7, 2.8, 8.1 8.2 and 8.5 shall survive. Section 8.2. Application of Trust Funds; Indemnification. (a) Subject to the provisions of Section 8.5, all money deposited with the Trustee pursuant to Section 8.1, all money and U.S. Government Obligations or Foreign Government Obligations deposited with the Trustee pursuant to Section 8.3 or 8.4 and all money received by the Trustee in respect of U.S. Government Obligations or Foreign Government Obligations deposited with the Trustee pursuant to Section 8.3 or 8.4, shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the persons entitled thereto, of the principal and interest for whose payment such money has been deposited with or received by the Trustee or to make mandatory sinking fund payments or analogous payments as contemplated by Sections 8.3 or 8.4. (b) The Company shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against U.S. Government Obligations or Foreign Government Obligations deposited pursuant to Sections 8.3 or 8.4 or the interest and principal received in respect of such obligations other than any payable by or on behalf of Holders. (c) The Trustee shall deliver or pay to the Company from time to time upon Company Request any U.S. Government Obligations or Foreign Government Obligations or money held by it as provided in Sections 8.3 or 8.4 which, in the opinion of a nationally recognized firm of independent certified public accountants expressed in a written certification thereof delivered to the Trustee, are then in -50- excess of the amount thereof which then would have been required to be deposited for the purpose for which such U.S. Government Obligations or Foreign Government Obligations or money were deposited or received. This provision shall not authorize the sale by the Trustee of any U.S. Government Obligations or Foreign Government Obligations held under this Indenture. Section 8.3. Legal Defeasance of Securities of any Series. Unless this Section 8.3 is otherwise specified, pursuant to Section 2.2.20, to be inapplicable to Securities of any Series, the Company shall be deemed to have paid and discharged the entire indebtedness on all the outstanding Securities of such Series on the 91st day after the date of the deposit referred to in subparagraph (d) hereof, and the provisions of this Indenture, as it relates to such outstanding Securities of such Series, shall no longer be in effect (and the Trustee, at the expense of the Company, shall, at Company Request, execute proper instruments acknowledging the same), except as to: (a) the rights of Holders of Securities of such Series to receive, from the trust funds described in subparagraph (d) hereof, (i) payment of the principal of and each installment of principal of and interest on the outstanding Securities of such Series on the Stated Maturity of such principal or installment of principal or interest and (ii) the benefit of any mandatory sinking fund payments applicable to the Securities of such Series on the day on which such payments are due and payable in accordance with the terms of this Indenture and the Securities of such Series; (b) the provisions of Sections 2.4, 2.7, 2.8, 8.2, 8.3 and 8.5; and (c) the rights, powers, trust and immunities of the Trustee hereunder; provided that, the following conditions shall have been satisfied: -51- (d) the Company shall have deposited or caused to be deposited irrevocably with the Trustee as trust funds in trust for the purpose of making the following payments, specifically pledged as security for and dedicated solely to the benefit of the Holders of such Securities (i) in the case of Securities of such Series denominated in Dollars, cash in Dollars (or such other money or currencies as shall then be legal tender in the United States) and/or U.S. Government Obligations, or (ii) in the case of Securities of such Series denominated in a Foreign Currency (other than a composite currency), money and/or Foreign Government Obligations, which through the payment of interest and principal in respect thereof, in accordance with their terms, will provide (and without reinvestment and assuming no tax liability will be imposed on such Trustee), not later than one day before the due date of any payment of money, an amount in cash, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge each installment of principal (including mandatory sinking fund or analogous payments) of and interest, if any, on all the Securities of such Series on the dates such installments of interest or principal are due; (e) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound; (f) no Default or Event of Default with respect to the Securities of such Series shall have occurred and be continuing on the date of such deposit or during the period ending on the 91st day after such date; (g) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel to the effect that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (ii) since the date of execution of this Indenture, there -52- 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 the Securities of such Series will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred; (h) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of the Securities of such Series over any other creditors of the company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company; (i) such deposit shall not result in the trust arising from such deposit constituting an investment company (as defined in the Investment Company Act of 1940, as amended), or such trust shall be qualified under such Act or exempt from regulation thereunder; and (j) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the defeasance contemplated by this Section have been complied with. Section 8.4. Covenant Defeasance. Unless this Section 8.4 is otherwise specified pursuant to Section 2.2.20 to be inapplicable to Securities of any Series, on and after the 91st day after the date of the deposit referred to in subparagraph (a) hereof, the Company may omit to comply with any term, provision or condition set forth under Sections 4.2, 4.3, 4.4, 4.5, 4.6, and 5.1 as well as any additional covenants contained in a supplemental indenture hereto for a particular Series of Securities or a Board Resolution or an Officers' Certificate delivered pursuant to Section 2.2.20 (and the failure -53- to comply with any such covenants shall not constitute a Default or Event of Default under Section 6.1) and the occurrence of any event described in clause (e) of Section 6.1 shall not constitute a Default or Event of Default hereunder, with respect to the Securities of such Series, provided that the following conditions shall have been satisfied: (a) With reference to this Section 8.4, the Company has deposited or caused to be irrevocably deposited (except as provided in Section 8.2(c)) with the Trustee as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities (i) in the case of Securities of such Series denominated in Dollars, cash in Dollars (or such other money or currencies as shall then be legal tender in the United States) and/or U.S. Government Obligations, or (ii) in the case of Securities of such Series denominated in a Foreign Currency (other than a composite currency), money and/or Foreign Government Obligations, which through the payment of interest and principal in respect thereof, in accordance with their terms, will provide (and without reinvestment and assuming no tax liability will be imposed on such Trustee), not later than one day before the due date of any payment of money, an amount in cash, sufficient, in the opinion of a nationally recognized firm of independent certified public accountants expressed in a written certification thereof delivered to the Trustee, to pay principal and interest, if any, on and any mandatory sinking fund in respect of the Securities of such Series on the dates such installments of interest or principal are due; (b) Such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound; (c) No Default or Event of Default with respect to the Securities of such Series shall have occurred and be continuing on the date of such deposit or during the period ending on the 91st day after such date; -54- (d) the Company shall have delivered to the Trustee an Opinion of Counsel confirming that Holders of the Securities of such Series will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and 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 deposit and defeasance had not occurred; (e) the Company shall have delivered to the Trustee an Officers' Certificate stating the deposit was not made by the Company with the intent of preferring the Holders of the Securities of such Series over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company; and (f) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the defeasance contemplated by this Section have been complied with. Section 8.5. Repayment to Company. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal and interest that remains unclaimed for two years. After that, Securityholders entitled to the money must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person. ARTICLE IX. AMENDMENTS AND WAIVERS Section 9.1. Without Consent of Holders. The Company and the Trustee may amend or supplement this Indenture or the Securities of one or more Series without the consent of any Securityholder: -55- (a) to cure any ambiguity, defect or inconsistency; (b) to comply with Article V; (c) to provide for uncertificated Securities in addition to or in place of certificated Securities; (d) to make any change that does not adversely affect the rights of any Securityholder; (e) to provide for the issuance of and establish the form and terms and conditions of Securities of any Series as permitted by this Indenture; (f) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more Series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee; or (g) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA. Section 9.2. With Consent of Holders. The Company and the Trustee may enter into a supplemental indenture with the written consent of the Holders of at least a majority in principal amount of the outstanding Securities of each Series affected by such supplemental indenture (including consents obtained in connection with a tender offer or exchange offer for the Securities of such Series), for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the Securityholders of each such Series. Except as provided in Section 6.13, the Holders of at least a majority in principal amount of the outstanding Securities of each Series affected by such waiver by notice to the Trustee (including consents obtained -56- in connection with a tender offer or exchange offer for the Securities of such Series) may waive compliance by the Company with any provision of this Indenture or the Securities with respect to such Series. It shall not be necessary for the consent of the Holders of Securities under this Section 9.2 to approve the particular form of any proposed supplemental indenture or waiver, but it shall be sufficient if such consent approves the substance thereof. After a supplemental indenture or waiver under this section becomes effective, the Company shall mail to the Holders of Securities affected thereby and, if any Bearer Securities affected thereby are outstanding, publish on one occasion in an Authorized Newspaper, a notice briefly describing the supplemental indenture or waiver. Any failure by the Company to mail or publish such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture or waiver. Section 9.3. Limitations. Without the consent of each Securityholder affected, an amendment or waiver may not: (a) change the amount of Securities whose Holders must consent to an amendment, supplement or waiver; (b) reduce the rate of or extend the time for payment of interest (including default interest) on any Security; (c) reduce the principal or change the Stated Maturity of any Security or reduce the amount of, or postpone the date fixed for, the payment of any sinking fund or analogous obligation; (d) reduce the principal amount of Discount Securities payable upon acceleration of the maturity thereof; (e) waive a Default or Event of Default in the payment of the principal of or interest, if any, on any Security (except a rescission of acceleration of the Securities of -57- any Series by the Holders of at least a majority in principal amount of the outstanding Securities of such Series and a waiver of the payment default that resulted from such acceleration); (f) make the principal of or interest, if any, on any Security payable in any currency other than that stated in the Security; (g) make any change in Sections 6.8, 6.13, 9.3 (this sentence), 10.15 or 10.16; or (h) waive a redemption payment with respect to any Security or change any of the provisions with respect to the redemption of any Securities. Section 9.4. Compliance with Trust Indenture Act. Every amendment to this Indenture or the Securities of one or more Series shall be set forth in a supplemental indenture hereto that complies with the TIA as then in effect. Section 9.5. Revocation and Effect of Consents. Until an amendment or waiver becomes effective, a consent to it by a Holder of a Security is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of a Security if the Trustee receives the notice of revocation before the date the amendment or waiver becomes effective. Any amendment or waiver once effective shall bind every Securityholder of each Series affected by such amendment or waiver unless it is of the type described in any of clauses (a) through (g) of Section 9.3. In that case, the amendment or waiver shall bind each Holder of a Security who has consented to it and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security. -58- Section 9.6. Notation on or Exchange of Securities. The Trustee may place an appropriate notation about an amendment or waiver on any Security of any Series thereafter authenticated. The Company in exchange for Securities of that Series may issue and the Trustee shall authenticate upon request new Securities of that Series that reflect the amendment or waiver. Section 9.7. Trustee Protected. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 7.1) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee shall sign all supplemental indentures, except that the Trustee need not sign any supplemental indenture that adversely affects its rights. ARTICLE X. MISCELLANEOUS Section 10.1. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required or deemed to be included in this Indenture by the TIA, such required or deemed provision shall control. Section 10.2. Notices. Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in person or mailed by first-class mail: -59- if to the Company: Harrah's Operating Company, Inc. 1023 Cherry Road Memphis, Tennessee 38117 if to the Trustee: IBJ Schroder Bank & Trust Company One State Street New York, New York 10004 Attention: Corporate Finance Trust Services The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication to a Securityholder shall be mailed by first-class mail to his address shown on the register kept by the Registrar and, if any Bearer Securities are outstanding, published in an Authorized Newspaper. Failure to mail a notice or communication to a Securityholder of any Series or any defect in it shall not affect its sufficiency with respect to other Securityholders of that or any other Series. If a notice or communication is mailed or published in the manner provided above, within the time prescribed, it is duly given, whether or not the Securityholder receives it. If the Company mails a notice or communication to Securityholders, it shall mail a copy to the Trustee and each Agent at the same time. Section 10.3. Communication by Holders with Other Holders. Securityholders of any Series may communicate pursuant to TIA ss. 312(b) with other Securityholders of that Series or any other Series with respect to their rights under this Indenture or the Securities of that Series or all Series. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA ss. 312(c). -60- Section 10.4. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Section 10.5. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA ss. 314(a)(4)) shall comply with the provisions of TIA ss. 314(e) and shall include: (a) a statement that the person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. -61- Section 10.6. Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or a meeting of Securityholders of one or more Series. Any Agent may make reasonable rules and set reasonable requirements for its functions. Section 10.7. Legal Holidays. Unless otherwise provided by Board Resolution, Officers' Certificate or supplemental indenture for a particular Series, a "Legal Holiday" is any day that is not a Business Day. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. Section 10.8. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder by accepting a Security waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. Section 10.9. Counterparts. This Indenture may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 10.10. Governing Laws. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF. -62- Section 10.11. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or a Subsidiary. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 10.12. Successors. All agreements of the Company in this Indenture and the Securities shall bind its successor. All agreements of the Trustee in this Indenture shall bind its successor. Section 10.13. Severability. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 10.14. Table of Contents, Headings, Etc. The Table of Contents, Cross-Reference Table, and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. Section 10.15. Securities in a Foreign Currency or in ECU. Unless otherwise specified in a Board Resolution, a supplemental indenture hereto or an Officers' Certificate delivered pursuant to Section 2.2 of this Indenture with respect to a particular Series of Securities, whenever for purposes of this Indenture any action may be taken by the Holders of a specified percentage in aggregate principal amount of Securities of all Series or all Series affected by a particular action at the time outstanding and, at such time, there are outstanding -63- Securities of any Series which are denominated in a coin or currency other than Dollars (including ECUs), then the principal amount of Securities of such Series which shall be deemed to be outstanding for the purpose of taking such action shall be that amount of Dollars that could be obtained for such amount at the Market Exchange Rate at such time. For purposes of this Section 10.15, "Market Exchange Rate" shall mean the noon Dollar buying rate in New York City for cable transfers of that currency as published by the Federal Reserve Bank of New York; provided, however, in the case of ECUs, Market Exchange Rate shall mean the rate of exchange determined by the Commission of the European Union (or any successor thereto) as published in the Official Journal of the European Union (such publication or any successor publication, the "Journal"). If such Market Exchange Rate is not available for any reason with respect to such currency, the Trustee shall use, in its sole discretion and without liability on its part, such quotation of the Federal Reserve Bank of New York or, in the case of ECUs, the rate of exchange as published in the Journal, as of the most recent available date, or quotations or, in the case of ECUs, rates of exchange from one or more major banks in The City of New York or in the country of issue of the currency in question or, in the case of ECUs, in Luxembourg or such other quotations or, in the case of ECUs, rates of exchange as the Trustee, upon consultation with the Company, shall deem appropriate. The provisions of this paragraph shall apply in determining the equivalent principal amount in respect of Securities of a Series denominated in currency other than Dollars in connection with any action taken by Holders of Securities pursuant to the terms of this Indenture. All decisions and determinations of the Trustee regarding the Market Exchange Rate or any alternative determination provided for in the preceding paragraph shall be in its sole discretion and shall, in the absence of manifest error, be conclusive to the extent permitted by law for all purposes and irrevocably binding upon the Company and all Holders. Section 10.16. Judgment Currency. The Company agrees, to the fullest extent that it may effectively do so under applicable law, that (a) if for the purpose of obtaining judgment in any court it is necessary to -64- convert the sum due in respect of the principal of or interest or other amount on the Securities of any Series (the "Required Currency") into a currency in which a judgment will be rendered (the "Judgment Currency"), the rate of exchange used shall be the rate at which in accordance with normal banking procedures the Trustee could purchase in The City of New York the Required Currency with the Judgment Currency on the day on which final unappealable judgment is entered, unless such day is not a New York Banking Day, then, the rate of exchange used shall be the rate at which in accordance with normal banking procedures the Trustee could purchase in The City of New York the Required Currency with the Judgment Currency on the New York Banking Day preceding the day on which final unappealable judgment is entered and (b) its obligations under this Indenture to make payments in the Required Currency (i) shall not be discharged or satisfied by any tender, any recovery pursuant to any judgment (whether or not entered in accordance with subsection (a)), in any currency other than the Required Currency, except to the extent that such tender or recovery shall result in the actual receipt, by the payee, of the full amount of the Required Currency expressed to be payable in respect of such payments, (ii) shall be enforceable as an alternative or additional cause of action for the purpose of recovering in the Required Currency the amount, if any, by which such actual receipt shall fall short of the full amount of the Required Currency so expressed to be payable, and (iii) shall not be affected by judgment being obtained for any other sum due under this Indenture. For purposes of the foregoing, "New York Banking Day" means any day except a Saturday, Sunday or a legal holiday in The City of New York on which banking institutions are authorized or required by law, regulation or executive order to close. -65- ARTICLE XI. SINKING FUNDS Section 11.1. Applicability of Article. The provisions of this Article shall be applicable to any sinking fund for the retirement of the Securities of a Series, except as otherwise permitted or required by any form of Security of such Series issued pursuant to this Indenture. The minimum amount of any sinking fund payment provided for by the terms of the Securities of any Series is herein referred to as a "mandatory sinking fund payment" and any other amount provided for by the terms of Securities of such Series is herein referred to as an "optional sinking fund payment." If provided for by the terms of Securities of any Series, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 11.2. Each sinking fund payment shall be applied to the redemption of Securities of any Series as provided for by the terms of the Securities of such Series. Section 11.2. Satisfaction of Sinking Fund Payments with Securities. The Company may, in satisfaction of all or any part of any sinking fund payment with respect to the Securities of any Series to be made pursuant to the terms of such Securities (1) deliver outstanding Securities of such Series to which such sinking fund payment is applicable (other than any of such Securities previously called for mandatory sinking fund redemption) and (2) apply as credit Securities of such Series to which such sinking fund payment is applicable and which have been redeemed either at the election of the Company pursuant to the terms of such Series of Securities (except pursuant to any mandatory sinking fund) or through the application of permitted optional sinking fund payments or other optional redemptions pursuant to -66- the terms of such Securities, provided that such Securities have not been previously so credited. Such Securities must be received by the Trustee, together with an Officers' Certificate with respect thereto, not later than 15 days prior to the date on which the Trustee begins the process of selecting Securities for redemption, and shall be credited for such purpose by the Trustee at the price specified in such Securities for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly. If as a result of the delivery or credit of Securities in lieu of cash payments pursuant to this Section 11.2, the principal amount of Securities of such Series to be redeemed in order to exhaust the aforesaid cash payment shall be less than $100,000, the Trustee need not call Securities of such Series for redemption, except upon receipt of a Company Order that such action be taken, and such cash payment shall be held by the Trustee or a Paying Agent and applied to the next succeeding sinking fund payment, provided, however, that the Trustee or such Paying Agent shall from time to time upon receipt of a Company Order pay over and deliver to the Company any cash payment so being held by the Trustee or such Paying Agent upon delivery by the Company to the Trustee of Securities of that Series purchased by the Company having an unpaid principal amount equal to the cash payment required to be released to the Company. Section 11.3. Redemption of Securities for Sinking Fund. Not less than 45 days (unless otherwise indicated in the Board Resolution, supplemental indenture hereto or Officers' Certificate in respect of a particular Series of Securities) prior to each sinking fund payment date for any Series of Securities, the Company will deliver to the Trustee an Officers' Certificate specifying the amount of the next ensuing mandatory sinking fund payment for that Series pursuant to the terms of that Series, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting of Securities of that Series pursuant to Section 11.2, and the optional amount, if any, to be added in cash to the next ensuing -67- mandatory sinking fund payment, and the Company shall thereupon be obligated to pay the amount therein specified. Not less than 30 days (unless otherwise indicated in the Board Resolution, Officers' Certificate or supplemental indenture in respect of a particular Series of Securities) before each such sinking fund payment date the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 3.2 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 3.3. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 3.4, 3.5 and 3.6. ARTICLE XII. GUARANTEE Section 12.1. Guarantee (a) Subject to subsection (b), below, the Guarantor hereby irrevocably and unconditionally guarantees (such guarantee being the "Guarantee") to each Holder of a Security authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture and the Securities hereunder, that: (i) the principal of, premium, if any, and interest on the Securities promptly will be paid in full when due, whether at the Maturity, by acceleration, call for redemption or otherwise, and interest on the overdue principal, premium, if any, and interest, if any, of the Securities, if lawful, and all other obligations of the Company to the Holders or the Trustee hereunder or thereunder will be promptly paid in full or performed, all in accordance with the terms hereof and thereof, and (ii) in case of any extension of time of payment or renewal of any Securities or any of such other obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration or otherwise. Failing -68- payment when due by the Company of any amount so guaranteed for whatever reason, the Guarantor shall be obligated to pay the same immediately. The Guarantor hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Securities or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder of the Securities with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. The Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that this Guarantee shall not be discharged except by complete performance of the obligations contained in the Securities and this Indenture. If any Holder or the Trustee is required by any court or otherwise to return to the Company or any custodian, Trustee, liquidator or other similar official acting in relation to the Company, any amount paid by the Company to the Trustee or such Holder, this Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. The Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the Holders in respect of any obligations guaranteed hereby until payment in full of all obligations is guaranteed hereby. (b) It is the intention of the Guarantor and the Company that the obligations of the Guarantor hereunder shall be, but not in excess of, the maximum amount permitted by applicable law. Accordingly, if the obligations in respect of the Guarantee would be annulled, avoided or subordinated to the creditors of the Guarantor by a court of competent jurisdiction in a proceeding actually pending before such court as a result of a determination both that such Guarantee was made without fair consideration and, immediately after giving effect thereto, the Guarantor was -69- insolvent or unable to pay its debts as they mature or left with an unreasonably small capital, then the obligations of the Guarantor under the Guarantee shall be reduced by such court if such reduction would result in the avoidance of such annulment, avoidance or subordination; provided, however, that any reduction pursuant to this paragraph shall be made in the smallest amount as is strictly necessary to reach such result. For purposes of this paragraph, "fair consideration," "insolvency," "unable to pay its debts as they mature," "unreasonably small capital" and the effective times of reductions, if any, required by this paragraph shall be determined in accordance with applicable law. (c) The Guarantor shall be subrogated to all rights of the Holders against the Company in respect of any amounts paid by Guarantor pursuant to the provisions of the Guarantee or this Indenture; provided, however, that the Guarantor shall not be entitled to enforce or to receive any payments arising out of, or based upon, such right of subrogation until the principal of, premium, if any, and interest on all Securities issued hereunder shall have been paid in full. Section 12.2. Execution and Delivery of Guarantee. To evidence the Guarantee set forth in Section 12.1, the Company and the Guarantor hereby agree that a notation of such Guarantee shall be endorsed on each Security authenticated and delivered by the Trustee, that such notation of such Guarantee shall be in such form as shall be established by or pursuant to a Board Resolution or in one or more indentures supplemental hereto, in each case with such appropriate provisions as are required or permitted by this Indenture, and that this Indenture shall be executed on behalf of the Guarantor by its Chairman of the Board, one of its Vice Chairmen of the Board, its President or one of its Vice Presidents. The Guarantor hereby agrees that the Guarantee set forth in Section 12.1 shall remain in full force and effect notwithstanding any failure to endorse on each Security a notation of the Guarantee. -70- If an officer whose signature is on this Indenture no longer holds that office at the time the Trustee authenticates the Security on which the Guarantee is endorsed, the Guarantee shall be valid nevertheless. The delivery of any Security by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Guarantee set forth in this Indenture on behalf of the Guarantor. Section 12.3. Release of Guarantor. The Guarantor shall be released from all of its obligations under the Guarantee and under this Indenture if: (a) (i) the Company or the Guarantor has transferred all or substantially all of its properties and assets to any Person (whether by sale, merger or consolidation or otherwise), or has merged into or consolidated with another Person, pursuant to a transaction in compliance with this Indenture; (ii) the corporation to whom all or substantially all of the properties and assets of the Company or the Guarantor are transferred, or whom the Company or the Guarantor has merged into or consolidated with, has expressly assumed, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Guarantor under the Guarantee and this Indenture; (iii) immediately before and immediately after giving effect to such transaction, no Event of Default, and no event or condition which, after notice or lapse of time or both, would become and Event of Default, shall have occurred and be continuing; and -71- (iv) the Guarantor has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture comply with this Section 12.3 and that all conditions precedent herein provided for relating to such transaction have been complied with; or (b) the Guarantor liquidates (other than pursuant to any Bankruptcy Law) and complies, if applicable, with the provisions of this Indenture; provided that if a Person and its Affiliates, if any, shall acquire all or substantially all of the assets of the Guarantor upon such liquidation the Guarantor shall liquidate only if: (i) the Person and each such Affiliate (or the common corporate parent of such Person and its Affiliates, if such Person and its Affiliates are wholly owned by such parent) which acquire or will acquire all or a portion of the assets of the Guarantor shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Guarantor, under the Guarantee and this Indenture and such Person or any of such Affiliates (or such parent) shall be a corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia; (ii) immediately after giving effect to such transaction, no Event of Default, and no event or condition which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing; and -72- (iii) the Guarantor has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such liquidation and such supplemental indenture comply with this Section 12.3 and that all conditions precedent herein provided for relating to such transaction have been complied with; or (c) the Company ceases for any reason to be a "wholly owned subsidiary" of the Guarantor (as such term is defined in Rule 1-02(z) of the Regulation S-X promulgated by the Commission). Upon any assumption of the Guarantee by any Person pursuant to this Section 12.3, such Person may exercise every right and power of the Guarantor under this Indenture with the same effect as if such successor corporation had been named as the Guarantor herein, and all the obligations of the Guarantor, hereunder and under the Guarantee and the Indenture shall terminate. Section 12.4. When Guarantor May Merge, etc. The Guarantor shall not consolidate with or merge with or into any other 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, unless: (a) either the Guarantor shall be the continuing person, or the Person (if other than the Guarantor) formed by such consolidation or into which the Guarantor is merged or to which the assets of the Guarantor are transferred shall be a corporation organized and validly existing under the laws of the United States or any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Guarantor under the Guarantee and this Indenture; -73- (b) immediately after giving effect to such transaction, no Event of Default, and no event or condition which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing; and (c) the Guarantor has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, sale, conveyance or lease and such supplemental indenture comply with this Section 12.4 and that all conditions precedent herein provided for relating to such transaction have been complied with. Upon any consolidation or merger, or any sale, conveyance or lease of all or substantially all of the assets of the Guarantor, in accordance with this Section 12.4, the successor corporation formed by such consolidation or into which the Guarantor 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 Guarantor under this Indenture with the same effect as if such successor corporation had been named as the Guarantor herein, and all the obligations of the predecessor Guarantor hereunder and under the Guarantee and the Indenture shall terminate. -74- IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. HARRAH'S OPERATING COMPANY, INC. By: /s/ Stephen H. Brammell ------------------------ Name: Stephen H. Brammell Its: Vice President HARRAH'S ENTERTAINMENT, INC. By: /s/ Stephen H. Brammell ------------------------- Name: Stephen H. Brammell Its: Vice President IBJ SCHRODER BANK & TRUST COMPANY By: /s/ Stephen J. Giurlando ------------------------- Name: Stephen J. Giurlando Its: Assistant Vice President -75- EX-4.(24) 4 EXHIBIT 4.24 EX 4(24) AMENDMENT NO.1 TO AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDMENT NO.1 TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") is entered into as of December 7, 1998 with reference to the Amended and Restated Credit Agreement (the "Credit Agreement") dated as of February 24, 1998 among Rio Properties, Inc., a Nevada corporation ("Rio Properties"), Rio Leasing, Inc., a Nevada corporation ("Rio Leasing" and collectively with Rio Properties, the "Borrowers"), the Banks party thereto, and Bank of America National Trust and Savings Association (the "Agent"), as agent for the Banks. Capitalized terms used but not defined herein are used with the meanings set forth for those terms in the Credit Agreement. RECITALS A. The Borrowers have notified the Lenders that their corporate parent, Rio Hotel & Casino, Inc. ("Parent"), has agreed to be acquired by Harrah's Entertainment, Inc. (the "Harrah's Acquisition"). B. The Harrah's Acquisition constitutes a "Change of Control" as defined in the Indentures governing the Parent's 10 5/8% Senior Subordinated Notes due July 15, 2005 (the "10 5/8% Notes") and the Parent's 9 1/2% Senior Subordinated Notes due April 15, 2007 (the "9 1/2% Notes"), and requires, under Section 4.08 of each such Indenture, that the Parent offer to repurchase such Parent Senior Subordinated Notes. C. Parent proposes to call the 10 5/8% Notes for redemption and to offer to redeem the 9 1/2% Notes . D. The Borrowers propose to obtain financing in the amount of $125,000,000 pursuant to a secured credit facility (the "Supplemental Bank Facility"), the proceeds of which shall be loaned to Parent to redeem all of the 10 5/8% Notes and used to redeem any of the 9 1/2% Notes tendered to Parent, and for related transactional expenses. E. By this Amendment, and subject to the terms and conditions set forth herein, the Banks consent to the Harrah's Acquisition, to the incurrence of the Supplemental Bank Facility and associated liens and guarantees, and to the redemption of the Parent Senior Subordinated Notes as described above. AGREEMENT NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Borrowers and the Agent, acting with the consent of the Majority Banks, hereby agree as follows: 1. Definitions. The definition of "EBITDA" is hereby amended to read in full as set forth below, the definition of "Unrestricted Subsidiaries" is hereby amended to read in full as set forth below, and the following new definitions are inserted in proper alphabetical order in Section 1.01 of the Credit Agreement: "EBITDA" means, for any period, for the Borrowers and their respective Restricted Subsidiaries on a combined basis, determined in accordance with GAAP, the sum of (a) net income (or net loss) plus (b) all amounts treated as expenses for depreciation and interest and the amortization of intangibles of any kind to the extent included in the determination of such net income (or loss), plus (c) all accrued taxes on or measured by income to the extent included in the determination of such net income (or loss), plus (d) all transactional expenses incurred during that period by reason of the Harrah's Acquisition, plus (e) any -2- Pre-Opening Expenses attributable to any New Venture, plus (f) severance expenses associated with the termination prior to January 1, 1999, of senior executive employees of the Company; provided, however, that net income (or loss) shall be computed for these purposes without giving effect to extraordinary losses or extraordinary gains. "Harrah's" means Harrah's Entertainment, Inc., and its successors. "Harrah's Acquisition" means the acquisition of Parent by Harrah's Entertainment, Inc. pursuant to the terms of the Harrah's Acquisition Agreement. "Harrah's Acquisition Agreement" means the Agreement and Plan of Merger between Parent and Harrah's, as amended. "Intercreditor Agreement" means an Intercreditor Agreement substantially in the form of Exhibit A hereto, entered into between the Agent and the lenders party to the Supplemental Bank Facility. "Supplemental Bank Facility" means senior secured financing in a principal amount not to exceed $125,000,000 incurred by Borrowers during the period between November 15, 1998 and June 30, 1999 to refinance Parent Senior Subordinated Notes tendered to Parent and associated transactional expenses pursuant to terms which are substantially consistent with the terms described on Exhibit B. "Unrestricted Subsidiaries" means Rio Development, Rio Resorts and each other Subsidiary of Parent which is not a Subsidiary of either Borrower formed following the Closing Date which is designated as such at the time of its formation pursuant to Section 6.13, provided that no Subsidiaries owning portions of the Cinderlane Property may be Unrestricted Subsidiaries at any time when the aggregate Investments made pursuant to Section 7.04(f) are in excess of the limitations set forth therein. -3- 2. Consent to Harrah's Acquisition. The Banks hereby consent to the Harrah's Acquisition and waive Section 8.01(o)(ii) (as in effect prior to the effectiveness of this Amendment) to the extent that such Section is violated by the Harrah's Acquisition. This is a one time waiver only, and the Banks shall be entitled to require full compliance with such Section (as amended hereby). 3. Consent to Supplemental Bank Facility and Intercreditor Agreement. The Banks hereby consent to the incurrence of the Supplemental Bank Facility and the repayment of the 10 5/8% Notes and the 9 1/2% Notes at any time prior to June 30, 1999. The Banks further consent to the granting of the liens contemplated by the Supplemental Facility and authorize the Agent to enter into the Intercreditor Agreement with the lenders under the Supplemental Bank Facility, substantially in the form of Exhibit A hereto. 4. Amendment to Financial Statement Reporting Requirements. Section 6.01 of the Credit Agreement is hereby amended so that clauses (a) and (b) read in full as follows: "(a) As soon as available, but not later than 120 days after the end of each fiscal year, a copy of the Form 10-K of Harrah's (and, for the fiscal year ending December 31, 1998, of Parent) as filed with the SEC for such fiscal year, which shall include, or be accompanied by, the opinion of Arthur Andersen or another nationally recognized independent public accounting firm which report shall state that such consolidated and consolidating financial statements present fairly the financial position of Harrah's (and/or Parent) for the periods indicated in conformity with GAAP applied on a basis consistent with prior years. Such opinion shall not be qualified or limited for any reason, including without limitation because of a restricted or limited examination by such accountant of any material portion of Harrah's, the Parent's, the Company's or any Subsidiary's records and shall be delivered to the Agent pursuant to a reliance agreement between the Agent and Banks and such accounting firm in form and substance satisfactory to the Agent; -4- (b) As soon as available, but not later than 45 days after the end of each of the first three fiscal quarters of each fiscal year a copy of the Form 10-Q of Harrah's as filed with the SEC for such fiscal quarter accompanied by a certificate of a Responsible Officer certifying the financial statements appearing therein as being complete and correct and fairly presenting, in accordance with GAAP, the financial position and the results of operations of the Parent, the Borrowers and their respective Subsidiaries;" 5. Amendment to Certificate/Other Information Reporting Requirements. Section 6.02 of the Credit Agreement is hereby amended by deleting subsection (g) thereof in its entirety. 6. Amendment to Negative Pledge. Section 7.01 of the Credit Agreement is hereby amended to add a new clause (m) thereto, to read in full as follows: "(m) pari passu Liens in favor of the agent and the lenders under the Supplemental Facility in Property of the Parent, Borrowers and their Restricted Subsidiaries which are not more extensive than the Liens in favor of the Agent and the Lenders under this Agreement, and which are subject to the Intercreditor Agreement described in Amendment No. 1 hereto." 7. Amendment to Investments Covenant. Section 7.04(e) of the Credit Agreement is hereby amended by replacing the amount "$30,000,000" therein with the amount "$35,000,000". Section 7.04(f) of the Credit Agreement is hereby amended by replacing the amount "$50,000,000" therein with the amount "$60,000,000". 8. Amendment to Indebtedness Covenant. Section 7.05 of the Credit Agreement is hereby amended so that clause (g) reads in full as follows and to add new clauses (h) and (i) thereto, as follows: "(g) Indebtedness incurred when no Default or Event of Default exists having subordination and other terms substantially the same as the Parent's outstanding 9-1/2% Senior Subordinated Notes Due -5- 2007 (other than pricing, but in any event reasonably satisfactory to the Agent and its counsel), providing in any event for no payments of principal prior to the maturity of such Senior Subordinated Notes; (h) Indebtedness consisting of the Supplemental Bank Facility incurred prior to June 30, 1999; and (i) unsecured revolving Indebtedness of the Parent (but not of the Borrowers or their Subsidiaries) to Harrah's in an aggregate principal amount not to exceed $100,000,000 at any time." 9. Amendment to Contingent Obligations Covenant. Section 7.08 of the Credit Agreement is hereby amended to add a new clause (g) thereto, to read in full as follows: "(g) Contingent Obligations consisting of guarantees of the Supplemental Bank Facility issued by Parent and the Restricted Subsidiaries which have guaranteed the obligations under this Agreement and which are pari passu with those granted to the Agent and the Lenders." 10. Amendment to Restricted Payments. Section 7.12 of the Credit Agreement is hereby amended so that clause (c) reads in full as follows, and to add a new clause (d) thereto, as follows: "(c) Dividends to the Parent made when no Default or Event of Default exists or would result therefrom; and (d) Payments of principal and interest with respect to the Indebtedness described in Section 7.05(i) mad e when no Default or Event of Default exists." 11. Amendment to Senior Leverage Ratio. Section 7.16 of the Credit Agreement is hereby amended to read in full as follows: -6- "7.16 Maximum Senior Leverage Ratio. The Borrowers shall not permit the Senior Leverage Ratio, (a) as of the last day of any fiscal quarter ending on or prior to December 31, 1999, to be greater than 3.50:1.00, (b) as of the fiscal quarter ending March 31, 1999 through June 30, 2000, to be greater than 3.25:1.00 and (c) as of the last day of any subsequent fiscal quarter, to be greater than 3.00:1.00." 12. Change of Control Provision. Section 8.01(o) of the Credit Agreement is hereby amended, effective concurrently with the consummation of the Harrah's Acquisition, to read in full as follows: "(o) Ownership Parent and Company. (i) The Parent any time: (A) ceases to maintain in the aggregate a direct or indirect beneficial equity interest in any Loan Party at least equal to 100% of the beneficial equity interest directly or indirectly held by it on the Closing Date; or (B) fails to own beneficially, directly or indirectly, capital stock representing voting control of any Loan Party; or (ii) (A) Harrah's ceases to own or control beneficially, directly or indirectly, at least 75% of the outstanding Voting Stock of the Parent, or (B) or any Person or group of Persons (as defined in the Securities Exchange Act of 1934 and regulations thereunder) shall hold or control a greater amount of the Voting Stock of the Parent than the amount owned directly or controlled by Harrah's; " 13. Representations and Warranties. The Borrowers represent and warrant to the Agent and the Banks that: (a) The Borrowers have all necessary power and have taken all corporate action necessary to enter into this Amendment and to make this Amendment and all other agreements and instruments to which they are a party executed in connection herewith, the valid and enforceable obligations they purport to be. -7- (b) No Event of Default under the Credit Agreement has occurred and remains continuing. 14. Conditions; Effectiveness. The effectiveness of this Amendment shall be subject to the conditions precedent that: (a) Borrowers shall have paid to the Agent for the account of each Bank an amendment fee of 15 basis points times the amount of each Bank's Commitment under the Credit Agreement. (b) Borrowers shall have delivered to the Agent a copy of a resolution or resolutions passed by the Board of Directors of each Borrower, certified by the Secretary or an Assistant Secretary of each Borrower as being in full force and effect on the date hereof, authorizing the execution, delivery and performance of this Amendment. (c) The Agent shall have received written consents hereto from the Majority Banks substantially in the form of Exhibit C hereto. (d) Each of Parent, Cinderlane, Inc. and HLG, Inc. shall have executed this Amendment to acknowledge their consent hereto. 15. Conditions Subsequent. There shall be conditions subsequent to the waivers and amendments contained herein that: (a) Borrowers shall have concurrently entered into the Supplemental Credit Facility and the Harrah's Acquisition shall have been concurrently consummated. (b) Cinderlane and\or Rio Properties shall have executed Deeds of Trust in form and substance satisfactory to the Agent encumbering that portion of the Cinderlane Property underlying the "Rio Convention Center" and the "Palazzo Suites" by a pari passu first priority Lien in favor of the Administrative Agent, and such Deeds of Trust shall have been duly recorded with the County Recorder's Office of Clark County, Nevada. -8- 16. No Waiver. This Amendment is specific in time and in intent and does not constitute, nor should it be construed as, a waiver of any other right, power or privilege under the Loan Documents, or under any agreement, contract, indenture, document or instrument mentioned in the Loan Documents; nor does it preclude any exercise thereof or the exercise of any other right, power or privilege, nor shall any future waiver of any right, power or privilege or default hereunder, or under any agreement, contract, indenture, document or instrument mentioned in the Loan Documents, constitute a waiver of any other default of the same or of any other term or provision. 17. Effectiveness of the Credit Agreement. Except as hereby expressly amended, the Credit Agreement remains in full force and effect, and is hereby ratified and confirmed in all respects. 18. Counterparts. This Amendment may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument. This Amendment shall not become effective until the Borrowers, the Banks and the Agent shall have signed a copy hereof, and the Parent shall have consented hereto, whether the same instrument or counterparts, and the same shall have been delivered to the Agent. -9- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the date first written above. RIO PROPERTIES, INC. By: /s/ Ronald J. Radcliffe ------------------------------ Title: Treasurer ------------------------------ RIO LEASING, INC. By: /s/ Ronald J. Radcliffe ------------------------------ Title: Secretary --------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: /s/ Janice Hammond ------------------------------ Title: Vice President Agency Specialist ---------------------------- -10- [Attach Exhibit A - Intercreditor Agreement and Exhibit B - Supplemental Bank Facility Term Sheet.] -12- [Exhibit C to Amendment No. 1] CONSENT OF BANK This Consent of Bank is delivered with reference to the Amended and Restated Credit Agreement (the "Credit Agreement") dated as of February 24, 1998 among Rio Properties, Inc., a Nevada corporation ("Rio Properties"), Rio Leasing, Inc., a Nevada corporation ("Rio Leasing" and collectively with Rio Properties, the "Borrowers"), the Banks party thereto, and Bank of America National Trust and Savings Association (the "Agent"), as agent for the Banks. Capitalized terms used but not defined herein are used with the meanings set forth for those terms in the Credit Agreement. The undersigned Bank hereby consents to the execution, delivery and performance of the proposed Amendment No. 1 to the Credit Agreement, substantially in the form provided to the undersigned as a draft, and without limitation on the foregoing, specifically to (a) the acquisition of Parent by Harrah's Entertainment, Inc., and (b) to the Supplemental Bank Facility described therein. ------------------------------- [Name of Bank] By: --------------------------- ------------------------------- [Printed Name and Title] By: --------------------------- ------------------------------- [Printed Name and Title] Date: ------------------------- -13- EX-4.(25) 5 EXHIBIT 4.25 EXHIBIT 4(25) - -------------------------------------------------------------------------------- LOAN AGREEMENT Dated as of December 18, 1998 among RIO PROPERTIES, INC. and RIO LEASING, INC. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION as Agent NATIONSBANC MONTGOMERY SECURITIES LLC as Lead Arranger and THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS ................................................. 1 1.01 Defined Terms ............................................... 1 1.02 Other Interpretive Provisions ............................... 25 1.03 Accounting Principles ....................................... 26 ARTICLE 2 THE CREDIT .................................................. 26 2.01 Amounts and Terms of Commitment ............................. 26 2.02 Notes ....................................................... 27 2.03 Procedure for Borrowing ..................................... 27 2.04 Conversion and Continuation Elections ....................... 29 2.05 Voluntary Termination or Reduction of Aggregate Commitment ........................................ 30 2.06 Optional Prepayments ........................................ 30 2.07 Mandatory Commitment Reductions; Mandatory Prepayments of Loans ........................................ 31 2.08 Repayment ................................................... 31 2.09 Interest .................................................... 31 2.10 Fees ........................................................ 32 2.11 Computation of Fees and Interest ............................ 33 2.12 Payments by the Borrowers ................................... 34 2.13 Payments by the Lenders to the Agent ........................ 35 2.14 Sharing of Payments, Etc .................................... 35 2.15 Security and Guarantees ..................................... 36 ARTICLE 3 TAXES, YIELD PROTECTION AND ILLEGALITY ........................ 36 3.01 Taxes ....................................................... 36 3.02 Illegality .................................................. 39 3.03 Increased Costs and Reduction of Return ..................... 40 3.04 Funding Losses .............................................. 41 3.05 Inability to Determine Rates ................................ 42 3.06 Certificates of Lenders ..................................... 42 3.07 Survival .................................................... 42 ARTICLE 4 CONDITIONS PRECEDENT .......................................... 42 4.01 Conditions of Initial Loans ................................. 42 4.02 Conditions to All Borrowings ................................ 46 ARTICLE 5 REPRESENTATIONS AND WARRANTIES ................................ 47 5.01 Corporate Existence and Power ............................... 47 5.02 Corporate Authorization; No Contravention ................... 48 5.03 Governmental Authorization .................................. 48 5.04 Binding Effect .............................................. 49 5.05 Litigation .................................................. 49 5.06 No Default .................................................. 49
Page ---- 5.07 ERISA Compliance ............................................ 49 5.08 Use of Proceeds; Margin Regulations ......................... 51 5.09 Title to Properties ......................................... 51 5.10 Taxes ....................................................... 52 5.11 Financial Condition/Material Adverse Effect ................. 52 5.12 Environmental Matters ....................................... 53 5.13 Collateral Documents ........................................ 54 5.14 Regulated Entities .......................................... 55 5.15 No Burdensome Restrictions .................................. 55 5.16 Solvency .................................................... 55 5.17 Labor Relations ............................................. 55 5.18 Copyrights, Patents, Trademarks and Licenses, etc ........... 55 5.19 Subsidiaries and Other Investments .......................... 55 5.20 Insurance ................................................... 56 5.21 Full Disclosure ............................................. 56 5.22 Projections ................................................. 56 5.23 Gaming Laws ................................................. 56 5.24 Management Agreement ........................................ 56 ARTICLE 6 AFFIRMATIVE COVENANTS ......................................... 56 6.01 Financial Statements ........................................ 57 6.02 Certificates; Other Information ............................. 58 6.03 Notices ..................................................... 59 6.04 Preservation of Corporate Existence, Etc .................... 61 6.05 Maintenance of Property ..................................... 61 6.06 Insurance ................................................... 61 6.07 Payment of Obligations ...................................... 62 6.08 Compliance with Laws ........................................ 62 6.09 Inspection of Property and Books and Records ................ 62 6.10 Environmental Laws .......................................... 63 6.11 Use of Proceeds ............................................. 63 6.12 Solvency .................................................... 63 6.13 New Subsidiaries ............................................ 63 6.14 Additional Collateral ....................................... 63 6.15 Requirements of Law ......................................... 64 6.16 Permits, Licenses and Approvals ............................. 64 6.17 Purchase of Materials; Conditional Sales Contracts .......... 64 6.18 Site Visits; Right to Stop Work ............................. 64 6.19 Protection Against Lien Claims .............................. 65 6.20 Signs and Publicity ......................................... 65 6.21 Leases of Company Premises .................................. 65 6.22 Further Assurances .......................................... 66 6.23 Pledge of Borrowers Stock ................................... 66
Page ---- ARTICLE 7 NEGATIVE COVENANTS .......................................... 67 7.01 Limitation on Liens ......................................... 67 7.02 Disposition of Assets ....................................... 69 7.03 Consolidations and Mergers .................................. 69 7.04 Loans and Investments ....................................... 70 7.05 Limitation on Indebtedness .................................. 71 7.06 Transactions with Affiliates ................................ 71 7.07 Use of Proceeds ............................................. 72 7.08 Contingent Obligations ...................................... 72 7.09 Joint Ventures .............................................. 73 7.10 Compliance with ERISA ....................................... 73 7.11 Lease Obligations ........................................... 73 7.12 Restricted Payments ......................................... 74 7.13 Capital Expenditures ........................................ 74 7.14 Interest Coverage Ratio ..................................... 74 7.15 Maximum Total Leverage Ratio ................................ 75 7.16 Maximum Senior Leverage Ratio ............................... 75 7.17 Change in Business .......................................... 75 7.18 Change in Structure ......................................... 75 7.19 Accounting Changes .......................................... 76 7.20 Other Contracts ............................................. 76 7.21 Management Agreement ........................................ 76 7.22 Improvement District ........................................ 76 ARTICLE 8 EVENTS OF DEFAULT ........................................... 76 8.01 Event of Default ............................................ 76 8.02 Remedies .................................................... 81 8.03 Rights Not Exclusive ........................................ 82 ARTICLE 9 THE AGENT ..................................................... 82 9.01 Appointment and Authorization ............................... 82 9.02 Delegation of Duties ........................................ 82 9.03 Liability of Agent .......................................... 83 9.04 Reliance by Agent ........................................... 83 9.05 Notice of Default ........................................... 84 9.06 Credit Decision ............................................. 84 9.07 Indemnification ............................................. 85 9.08 Agent in Individual Capacity ................................ 85 9.09 Successor Agent ............................................. 86 9.10 Collateral Matters .......................................... 86 ARTICLE 10 MISCELLANEOUS ................................................ 87 10.01 Amendments and Waivers ..................................... 87 10.02 Notices .................................................... 88 10.03 No Waiver; Cumulative Remedies ............................. 89 10.04 Costs and Expenses ......................................... 89 10.05 Indemnity .................................................. 90
Page ---- 10.06 Marshaling; Payments Set Aside ............................. 91 10.07 Successors and Assigns ..................................... 91 10.08 Assignments, Participations, etc. .......................... 91 10.09 Setoff ..................................................... 94 10.10 Notification of Addresses, Lending Offices, Etc ............ 95 10.11 Counterparts ............................................... 95 10.12 Severability ............................................... 95 10.13 No Third Parties Benefited ................................. 95 10.14 Time ....................................................... 95 10.15 Governing Law and Jurisdiction ............................. 95 10.16 Waiver of Jury Trial ....................................... 96 10.17 Notice of Claims; Claims Bar ............................... 96 10.18 Entire Agreement ........................................... 97 10.19 Interpretation ............................................. 97 10.20 Guarantor and Suretyship Provisions ........................ 97
TABLE OF CONTENTS
Page ---- SCHEDULES Schedule 1.01A Real Property Description Schedule 1.01B Cinderlane Real Property Description Schedule 1.01C Proposed Rio Expansion Description Schedule 2.01 Commitments of the Lenders Schedule 5.05 Litigation Schedule 5.07 ERISA Schedule 5.11 Indebtedness Not Shown on Financial Statements Schedule 5.12 Environmental Matters Schedule 5.19 Subsidiaries and Equity Investments Schedule 5.28 Excluded Cinderlane Property Schedule 6.26 Existing Leases Schedule 7.01 Permitted Liens Schedule 7.05 Permitted Indebtedness Schedule 7.08 Contingent Obligations EXHIBITS Exhibit A Note Exhibit B Notice of Borrowing Exhibit C Notice of Continuation/Conversion Exhibit D Compliance Certificate Exhibit E Assignment and Acceptance Agreement Exhibit F Projections
-i- LOAN AGREEMENT This LOAN AGREEMENT (as the same may be amended, supplemented or otherwise modified from time to time, this "Agreement"), dated as of December 18, 1998, is entered into by and among Rio Properties, Inc., a Nevada corporation (the "Company"), Rio Leasing, Inc., a Nevada corporation ("Rio Leasing"; the Company and Rio Leasing, each a "Borrower" and collectively, the "Borrowers"), the several financial institutions party to this Agreement, and Bank of America National Trust and Savings Association, as agent for the Lenders. In consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.01 Defined Terms. In addition to the terms defined elsewhere in this Agreement, the following terms have the following meanings: "Acquisition" means any transaction or series of related transactions entered into by the Borrowers or any of their Subsidiaries for the purpose of or resulting in (a) the acquisition, directly or indirectly, of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition, directly or indirectly, of in excess of 50% of the capital stock, partnership interests or equity of any Person or otherwise causing any Person to become a Subsidiary of a Borrower, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary of a Borrower) provided that a Borrower or a Borrower's Subsidiary is the surviving entity. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, by contract or otherwise. Without limitation, any -2- director, executive officer or beneficial owner of 10% or more of the equity of a Person shall for the purposes of this Agreement, be deemed to control the other Person. In no event shall any Lender be deemed an "Affiliate" of a Borrower or of any Subsidiary of a Borrower. "Agent" means BofA in its capacity as agent for the Lenders hereunder, and any successor agent. "Agent Related Persons" means BofA and any successor agent arising under Section 9.09, together with their respective Affiliates, and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Agent's Payment Office" means the address for payments set forth on the signature page hereto in relation to the Agent or such other address as the Agent may from time to time specify in accordance with Section 10.02. "Aggregate Commitment" means the combined Commitments of the Lenders, in the initial amount of $125,000,000, as such amount may be reduced from time to time pursuant to this Agreement. "Agreement" means this Loan Agreement, as it may from time to time be supplemented, modified, amended, renewed, or extended. "Applicable Margin" means, for each Pricing Period, the following margins over the Base Rate and the Eurodollar Rate, as applicable, and the following commitment fee rate per annum, in each case for the relevant periods when the Total Leverage Ratio for such Pricing Period is as follows:
Total Leverage Base Ratio Total LIBOR Rate Debt/EBITDA Margin Margin Commitment Fee ----------------- ------ ------ -------------- x greater than or equal to 3.00x 2.25% 1.25% 0.50% ----------------- ------ ------ -------------- x Less than 3.00X 1.75% 0.75% 0.50% ----------------- ------ ------ --------------
-3- "Appraisal" means a real estate appraisal conducted in accordance with the Uniform Standards of Professional Appraisal Practice (as promulgated by the Appraisal Standards Board of the Appraisal Foundation) and all Requirements of Law applicable to the Lenders, and applicable internal policies of the Agent, undertaken by an independent appraisal firm satisfactory to the Agent and the Majority Lenders, and providing an assessment of fair market value of a parcel of property, and taking into account any and all Estimated Remediation Costs. "Appraisal Value" means the appraised "as is" market value of the Real Property, as evidenced by a certificate of an independent appraiser selected by the Agent and determined by an Appraisal that in the opinion of such appraiser and Majority Lenders conforms to the Agent's guidelines regarding appraisal procedures and applicable regulations issued thereunder all as the same may be amended, modified or superseded from time to time. "Assignee" has the meaning specified in Section 10.08(a). "Assignment and Acceptance" has the meaning specified in Section 10.08(a). "Attorney Costs" means and includes all reasonable fees and disbursements of any law firm or other external counsel, the allocated cost of internal legal services and all disbursements of internal counsel. "Available Commitment" with respect to each Lender, means an amount equal to such Lender's Commitment Percentage of the unused portion of the Aggregate Commitment. "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. ss. 101, et seq.). "Base Rate" means the higher of: (a) the rate of interest publicly announced from time to time by BofA in San Francisco, California, as its "reference rate." It is a rate set -4- by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate; and (b) 0.50% per annum above the latest Federal Funds Rate. Any change in the reference rate announced by BofA shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan that bears interest based on the Base Rate. "BofA" means Bank of America National Trust and Savings Association, a national banking association. "Borrower" means the Company or Rio Leasing (collectively, the "Borrowers"). "Borrowers Security Agreement" means the Pledge and Security Agreement executed by the Company and Rio Leasing on the Closing Date, as it may from time to time be supplemented, modified, amended, renewed, or extended. "Borrowing" means a borrowing hereunder consisting of Loans made to a Borrower on the same day by the Lenders pursuant to Article 2. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in New York City, San Francisco, or Las Vegas, Nevada are authorized or required by law to close and, if the applicable Business Day relates to any Eurodollar Rate Loan, means such a day on which dealings are carried on in the London offshore dollar interbank market. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. -5- "Capital Expenditures" means, for any period and with respect to any Person, all expenditures by such Person and its Subsidiaries for the acquisition or leasing of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period and including any amount which is required to be treated as an asset subject to a Capital Lease) which should be capitalized under GAAP on a consolidated balance sheet of such Person and its Subsidiaries. For the purpose of this definition, the purchase price of equipment which is purchased simultaneously with the trade-in of existing equipment owned by such Person or any of its Subsidiaries or with insurance proceeds shall be included in Capital Expenditures only to the extent of the gross amount of such purchase price less the credit granted by the seller of such equipment for such equipment being traded in at such time, or the amount of such proceeds, as the case may be. "Capital Lease" has the meaning specified in the definition of Capital Lease Obligations. "Capital Lease Obligations" means all monetary obligations of a Borrower or any of its Subsidiaries under any leasing or similar arrangement which, in accordance with GAAP, is classified as a capital lease ("Capital Lease"). "Cash Equivalents" means: (a) securities issued or fully guaranteed or insured by the United States Government or any agency thereof and backed by the full faith and credit of the United States having maturities of not more than six months from the date of acquisition; (b) certificates of deposit, time deposits, Eurodollar time deposits, repurchase agreements, reverse repurchase agreements, or bankers' acceptances, having in each case a tenor of not more than six months, issued by any Lender, or by any U.S. commercial bank or any branch or agency of a non-U.S. bank licensed to conduct business in the U.S. having combined capital and surplus of not less than -6- $100,000,000 whose short term securities are rated at least A1 by Standard & Poor's Corporation and P1 by Moody's Investors Service, Inc.; (c) commercial paper of an issuer rated at least A1 by Standard & Poor's Corporation or P1 by Moody's Investors Service Inc. and in either case having a tenor of not more than three months. "CERCLA" has the meaning specified in the definition of "Environmental Laws." "Cinderlane" means Cinderlane, Inc., a Nevada corporation. "Cinderlane Property" means that certain real property located adjacent to the Rio Hotel and Casino described on Schedule 1.01B, which real property is owned by Cinderlane as of the Closing Date. "Closing Date" means the date on which all conditions precedent set forth in Section 4.01 are satisfied or waived by all Lenders. "Code" means the Internal Revenue Code of 1986, as amended from time to time and regulations promulgated thereunder. "Collateral" means all Property and interests in Property and proceeds thereof now owned or hereafter acquired by any Borrower or any of its Subsidiaries in or upon which a Lien now or hereafter exists in favor of the Lenders, or the Agent on behalf of the Lenders, whether under this Agreement or under any other documents executed by any such persons and delivered to the Agent or the Lenders. "Collateral Documents" means, collectively, (i) the Borrowers Security Agreement, the Mortgages, and all other security agreements, pledge agreements, mortgages, deeds of trust, patent and trademark assignments, lease assignments, guarantees and other similar agreements between any Borrower or any of its Subsidiaries and the Lenders or the Agent for the benefit of the Lenders now or hereafter delivered to the -7- Lenders or the Agent pursuant to or in connection with the transactions contemplated hereby, and all financing statements (or comparable documents now or hereafter filed in accordance with the UCC or comparable law) against any Borrower or any of its Subsidiaries as debtor in favor of the Lenders or the Agent for the benefit of the Lenders as secured party and (ii) any amendments, supplements, modifications, renewals, replacements, consolidations, substitutions and extensions of any of the foregoing. "Commitment" means, as to each Lender, the amount set forth opposite the Lender's name in Schedule 2.01 under the heading "Commitment" (such amount as the same may reduced pursuant to Sections 2.06 or 2.08 or as a result of one or more assignments pursuant to Section 10.08). "Commitment Percentage" means, as to any Lender, the percentage which is equal to such Lender's Commitment divided by the Aggregate Commitment. "Completion" means, with respect to the Rio Expansion Project, that (a) a temporary certificate of occupancy has been issued by the Clark County Building Department; (b) a Notice of Completion has been duly recorded; (c) all materialmen's claims, mechanics, liens or other Liens or claims for Liens directly related thereto (other than those created pursuant to the Loan Documents) have been paid or satisfactory provisions have been made for such payment; (d) certificates have been delivered, by the project architect and project manager and by a Responsible Officer of the Company, to the Agent and the Lenders certifying that the Rio Expansion Project has been substantially completed in accordance with the construction plans therefor and all applicable building laws, ordinances and regulations; and (e) the Rio Expansion Project is in a condition (including installation of fixtures, furnishings and equipment) to receive customers and fully engage in its operations in the ordinary course of business. For the purposes of the preceding sentence, satisfactory provision for payment of claims, Liens and claims for Liens shall be deemed to have been made if a bond, escrow or trust account for payment has been established with an independent third party satisfactory to the Agent in an amount at least equal to the total of such outstanding claims, Liens and claims for Liens. -8- "Compliance Certificate" means a Certificate substantially in the form of Exhibit D hereto. "Completion Guaranty" means a Guaranty Obligation given by any Borrower or any of its Subsidiaries to a holder of Indebtedness of, or an obligee of, any Person which obligates any Borrower or any of its Subsidiaries (a) to cause the completion of construction of any Person, (b) to provide funding for all or a portion of any construction cost overruns with respect thereto, and/or (c) to cause the Person to perform any of its Contractual Obligations (other than in respect of the repayment of any Indebtedness or other monetary obligation of the Person) to an obligee of the Person. "Contingent Obligation" means, as to any Person, (a) any Guaranty Obligation of that Person; and (b) any direct or indirect obligation or liability, contingent or otherwise, of that Person, (i) in respect of any letter of credit or similar instrument issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings, (ii) to purchase any materials, supplies or other property from, or to obtain the services of, another Person if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered, or (iii) in respect of any Rate Contract that is not entered into in connection with a bona fide hedging operation that provides offsetting benefits to such Person. The amount of any Contingent Obligation shall (subject, in the case of Guaranty Obligations, to the last sentence of the definition of "Guaranty Obligation") be deemed equal to the maximum reasonably anticipated liability in respect thereof, and shall, with respect to item (b)(iii) of this definition, be marked to market on a current basis. "Contractual Obligations" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. -9- "Controlled Group" means the Company and all Persons (whether or not incorporated) under common control or treated as a single employer with the Company pursuant to Section 414(b), (c), (m) or (o) of the Code. "Conversion Date" means any date on which a Borrower elects to convert a Base Rate Loan to an Eurodollar Rate Loan; or an Eurodollar Rate Loan to a Base Rate Loan. "Deed of Trust" means one or more deeds of trust covering the Real Property, as any such deed of trust may be modified, supplemented, amended, renewed or extended from time to time. "Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Disposition" means (i) the sale, lease, conveyance or other disposition of Property, other than sales or other dispositions expressly permitted under Section 7.02(a) or 7.02(b), and (ii) the sale or transfer by any Borrower or any of its Subsidiaries of any equity securities issued by any Subsidiary of a Borrower and held by such transferor Person. "Dollars", "dollars" and "$" each mean lawful money of the United States. "Domestic Lending Office" means, with respect to each Lender, the office of that Lender designated as such in the signature pages hereto or such other office of the Lender as it may from time to time specify to the Company and the Agent. "EBITDA" means, for any period, for the Borrowers and their respective Restricted Subsidiaries on a combined basis, determined in accordance with GAAP, the sum of (a) net income (or net loss) plus (b) all amounts treated as expenses for depreciation and interest and the amortization of intangibles of any kind to the extent included in the determination of such net income (or loss), plus (c) all accrued taxes on or measured -10- by income to the extent included in the determination of such net income (or loss), plus (d) all transactional expenses incurred during that period by reason of the Harrah's Acquisition, plus (e) any Pre-Opening Expenses attributable to any New Venture, plus (f) severance expenses associated with the termination prior to January 1, 1999, of senior executive employees of the Company; provided, however, that net income (or loss) shall be computed for these purposes without giving effect to extraordinary losses or extraordinary gains. "Eligible Assignee" means (i) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (ii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the United States; and (iii) any Lender Affiliate. "Environmental Claims" means all claims, however asserted, by any Governmental Authority or other Person alleging potential liability or responsibility for violation of any Environmental Law or for release or injury to the environment or threat to public health, personal injury (including sickness, disease or death), property damage, natural resources damage, or otherwise alleging liability or responsibility for damages (punitive or otherwise), cleanup, removal, remedial or response costs, restitution, civil or criminal penalties, injunctive relief, or other type of relief, resulting from or based upon (a) the presence, placement, discharge, emission or release (including intentional and unintentional, negligent and non-negligent, sudden or non-sudden, accidental or non-accidental placement, spills, leaks, discharges, emissions or releases) of any Hazardous Material at, in, or from Property, whether or not owned by a Borrower, or (b) any other circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. "Environmental Laws" means all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, -11- directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, safety and land use matters; including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Clean Air Act, the Federal Water Pollution Control Act of 1972, the Solid Waste Disposal Act, the Federal Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Emergency Planning and Community Right to Know Act, the Endangered Species Act, and any applicable law of the State of Nevada, and the rules regulations and ordinances of Clark County, Nevada. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and regulations promulgated thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414(b), 414(c) or 414(m) of the Code. "ERISA Event" means (a) a Reportable Event with respect to a Qualified Plan or a Multiemployer Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Qualified Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA); (c) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan; (d) the filing of a notice of intent to terminate, the treatment of a plan amendment as a termination under Section 4041 or 4041A of ERISA or the commencement of proceedings by the PBGC to terminate a Qualified Plan or Multiemployer Plan subject to Title IV of ERISA; (e) a failure by the Company or any member of the Controlled Group to make required contributions to a Qualified Plan or Multiemployer Plan; (f) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Qualified Plan or Multiemployer Plan; (g) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate; (h) an application for a funding waiver or an extension of any -12- amortization period pursuant to Section 412 of the Code with respect to any Plan; (i) a non-exempt prohibited transaction occurs with respect to any Plan for which the Company or any Subsidiary of the Company may be directly or indirectly liable; or (j) a violation of the applicable requirements of Section 404 or 405 of ERISA or the exclusive benefit rule under Section 401(a) of the Code by any fiduciary or disqualified person with respect to any Plan for which the Company or any member of the Controlled Group may be directly or indirectly liable. "Estimated Remediation Cost" means all costs associated with performing work to remediate contamination of real property or groundwater, including engineering and other professional fees and expenses, costs to remove, transport and dispose of contaminated soil, costs to "cap" or otherwise contain contaminated soil, and costs to pump and treat water and monitor water quality. "Eurodollar Lending Office" means with respect to each Lender, the Office of such Lender designated as such in the signature pages hereto or such other office of such Lender as such Lender may from time to time specify to the Company and the Agent. "Eurodollar Rate" means, for each Interest Period in respect of Eurodollar Rate Loans comprising part of the same Borrowing, an interest rate per annum (rounded upward to the nearest 1/16th of 1%) determined pursuant to the following formula: LIBOR Eurodollar Rate = --------------------- 1.00 minus Eurodollar Reserve Percentage The Eurodollar Rate shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. "Eurodollar Rate Loan" means a Loan that bears interest based on the Eurodollar Rate. -13- "Eurodollar Reserve Percentage" means the maximum reserve percentage (expressed as a decimal, rounded upward to the nearest 1/100th of 1%) in effect on the date LIBOR for such Interest Period is determined (whether or not applicable to any Lender) under regulations issued from time to time by the Federal Reserve Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities") having a term comparable to such Interest Period. "Event of Default" means any of the events or circumstances specified in Section 8.01. "Event of Loss" means, with respect to any Property, any of the following: (a) any loss, destruction or damage of such Property; (b) any pending or threatened institution of any proceedings for the condemnation or seizure of such Property or for the exercise of any right of eminent domain; or (c) any actual condemnation, seizure or taking, by exercise of the power of eminent domain or otherwise, of such Property, or confiscation of such Property or the requisition of the use of such Property. "Exchange Act" means the Securities and Exchange Act of 1934, and regulations promulgated thereunder. "Existing Credit Agreement" means that certain Amended and Restated Credit Agreement dated as of February 24, 1998 among the Borrowers, BofA as agent, and the other financial institutions party thereto as Banks, as supplemented, modified, amended, renewed, or extended. "Existing Credit Agreement Closing Date" means the Closing Date described in the Existing Credit Agreement. "Federal Funds Rate" means, for any period, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Board (including any such successor, "H.15(519)") for such day opposite the caption "Federal Funds (Effective)". If on any relevant day such rate is not yet published in H.15(519), the rate for such day will be the rate set forth in the daily statistical release designated as the -14- Composite 3:30 p.m. Quotations for U.S. Government Securities, or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, the "Composite 3:30 p.m. Quotation") for such day under the caption "Federal Funds Effective Rate". If on any relevant day the appropriate rate for such previous day is not yet published in either H.15(519) or the Composite 3:30 p.m. Quotations, the rate for such day will be the arithmetic mean of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System, or any successor thereto. "Funded Debt" means, as of any date of determination, without duplication, the sum of (a) all principal Indebtedness of the Borrowers and their respective Restricted Subsidiaries on a combined basis for borrowed money (including debt securities issued by any Borrower or any of its Restricted Subsidiaries) on that date, provided, however, that the Company's obligations under the Guaranty Obligations permitted under Section 7.08(f) shall not be included in this definition unless and until a demand is made under such Guaranty Obligations by a Person entitled to make demand thereunder, plus (b) the aggregate amount of all monetary obligations of the Borrowers and their respective Restricted Subsidiaries on a combined basis in respect of Capital Leases on that date, plus (c) the aggregate undrawn face amount of all letters of credit (other than letters of credit supporting workers compensation obligations and permitted pursuant to Section 7.08(d)) for which any Borrower or any of its Restricted Subsidiaries is the account party but which have not been drawn as of the date of determination, plus the aggregate amounts on which a drawing has been received or paid by an issuing bank under any such letter of credit which drawing or payment has not been reimbursed to the issuing bank by any Borrower or any of its Restricted Subsidiaries as of the date of determination, all as determined in accordance with GAAP. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements -15- of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the accounting profession), or in such other statements by such other entity as may be in general use by significant segments of the U.S. accounting profession, which are applicable to the circumstances as of the date of determination. "Gaming Authorities" means, without limitation, the Nevada Gaming Commission, the Nevada State Gaming Control Board, the Clark County Liquor and Gaming Licensing Board and any other applicable governmental or administrative state or local agency, authority, board, bureau, commission, department or instrumentality of any nature whatsoever involved in the supervision or regulation of casinos or gaming and gaming activities in the County of Clark, Nevada and State of Nevada. "Gaming Laws" means all Requirements of Law pursuant to which a Gaming Authority possesses licensing or permit authority over gambling, gaming, or casino activities conducted by a Borrower within its jurisdiction. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Guarantor" means the Parent, each Subsidiary of Parent (other than the Unrestricted Subsidiaries) and any other Person that hereafter delivers a Guaranty (collectively "Guarantors"). "Guaranty" means the Parent Guaranty, the Subsidiary Guaranties executed by HLG, Inc. and Cinderlane on the Closing Date, and any other any guaranty of all or any part of the Obligations delivered by any Subsidiary of a Borrower or by any other Person, as such document may from time to time be -16- supplemented, modified, amended, renewed, or extended (collectively the "Guaranties"). "Guaranty Obligation" means, as applied to any Person, any direct or indirect liability of that Person with respect to any Indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person, whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligations or any property constituting direct or indirect security therefor, or (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation, or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, or (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof. The amount of any Guaranty Obligation shall be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof. The amount of any Guaranty Obligation consisting of a Completion Guaranty shall be deemed to be zero unless and until any Borrower or any of its Subsidiaries has determined, or in good faith should determine based on all information then available to it, that performance by any Borrower or any of its Subsidiaries of its obligations under the Completion Guaranty is at least reasonably possible (within the meaning of such term under Financial Accounting Standards Board Statement No. 5) and, notwithstanding the preceding sentence, if such performance is at least reasonably possible the amount thereof shall, if not stated or determinable, be deemed the reasonably anticipated liability in respect thereof as determined by any Borrower or any of its Subsidiaries in good faith. "Harrah's" means Harrah's Entertainment, Inc., and its successors. -17- "Harrah's Acquisition" means the acquisition of Parent by Harrah's Entertainment, Inc. pursuant to the terms of the Harrah's Acquisition Agreement. "Harrah's Acquisition Agreement" means the Agreement and Plan of Merger dated as of August 9, 1998, and amended as of September 4, 1998 among HEI Acquisition Corp. III, the Company and Harrah's. "Hazardous Materials" means all those substances which are regulated by, or which may form the basis of liability under, any Environmental Law, including all substances identified under any Environmental Law as a pollutant, contaminant, hazardous waste, hazardous constituent, special waste, hazardous substance, hazardous material, or toxic substance, or petroleum or petroleum derived substance or waste. "HLG" means HLG, Inc., a Nevada corporation, a wholly-owned Subsidiary of the Parent. "Indebtedness" of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business pursuant to ordinary terms); (c) all reimbursement obligations with respect to surety bonds, letters of credit, bankers' acceptances and similar instruments (in each case, to the extent material or non-contingent); (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to Property acquired by the Person (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property); (f) all Capital Lease Obligations; (g) all net obligations with respect to Rate Contracts; (h) all indebtedness referred to in clauses (a) through (g) above secured by (or for which the holder of such -18- Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in Property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; and (i) all Guaranty Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (g) above. "Indemnified Liabilities" has the meaning specified in Section 10.05(a). "Indemnified Person" has the meaning specified in Section 10.05(a). "Insolvency Proceeding" means (a) any case, action or proceeding before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshaling of assets for creditors or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; in each case (a) and (b) undertaken under U.S. Federal, State or foreign law, including the Bankruptcy Code. "Intangible Assets" means assets that are considered intangible assets under GAAP, including customer lists, goodwill, computer software, copyrights, trade names, trademarks and patents. "Intercreditor Agreement" means that certain Intercreditor Agreement of even date herewith among the Agent, the Lenders and BofA as agent for the Banks under the Existing Credit Agreement. "Interest Coverage Ratio" means, as of the last day of each fiscal quarter, the ratio of (a) EBITDA for the fiscal period consisting of that fiscal quarter and the three immediately prior fiscal quarters less the sum of (i) Maintenance Capital Expenditures made by the Borrowers and their respective Restricted Subsidiaries during such fiscal period, and (ii) cash payments of federal, state (if any) or local income taxes (and including all payments of alternative -19- minimum tax) made by the Borrowers and their respective Restricted Subsidiaries during such fiscal period to (b) cash Interest Expense, including capitalized Interest Expense during such period. "Interest Expense" means, for any period, the sum of (a) gross interest expense for the period (including all commissions, discounts, fees and other charges in connection with standby letters of credit and similar instruments) for the Borrowers and their respective Restricted Subsidiaries and for the Parent with respect to the Parent Senior Subordinated Notes, provided, however, that the Company's obligations under the Guaranty Obligations permitted under Section 7.08(f) shall not be included in this definition unless and until a demand is made under such Guaranty Obligations by a Person entitled to make demand thereunder, plus (b) the portion of the upfront costs and expenses for Rate Contracts (to the extent not included in gross interest expense) fairly allocated to such Rate Contracts as expenses for such period, plus (c) the portions of rent payable with respect to that fiscal period under Capital Leases that should be treated as interest in accordance with GAAP less interest income for that period and Rate Contracts payments received as determined in accordance with GAAP. "Interest Payment Date" means, with respect to any Eurodollar Rate Loan, the last day of each Interest Period applicable to such Loan and, with respect to Base Rate Loans, the last Business Day of each quarter and each date a Base Rate Loan is converted into an Eurodollar Rate Loan; provided, however, that if any Interest Period for an Eurodollar Rate Loan exceeds three months, interest shall also be paid on the date which falls three months after the beginning of such Interest Period. "Interest Period" means, with respect to any Eurodollar Rate Loan, the period commencing on the Business Day the Loan is disbursed or continued or on the Conversion Date on which the Loan is converted to the Eurodollar Rate Loan and ending on the date one, two, three or six months thereafter, as selected by a Borrower in its Notice of Borrowing or Notice of Conversion/Continuation; -20- provided that: (i) if any Interest Period pertaining to an Eurodollar Rate Loan would otherwise end on a day which is not a Business Day, that Interest Period shall be extended to the next succeeding Business Day unless, in the case of an Eurodollar Rate Loan, the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period pertaining to an Eurodollar Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; (iii) no Interest Period shall extend beyond any Reduction Date unless, giving effect to the Loan for which that Interest Period has been requested, the aggregate principal amount of the Loans having Interest Periods ending prior to such Reduction Date will not exceed the Aggregate Commitment (after giving effect to the reduction therein on such Reduction Date); and (iv) no Interest Period for any Loan shall extend beyond the Maturity Date. "Joint Venture" means a partnership, joint venture or other legal arrangement (whether created pursuant to contract or conducted through a separate legal entity) now or hereafter formed by any Borrower or any of its Subsidiaries with another Person in order to conduct a common venture or enterprise with such Person. "Lead Arranger" means NationsBanc Montgomery Securities LLC. The Lead Arranger shall have no obligations or liabilities under this Agreement or the Loan Documents, but shall be entitled to the benefits of Sections 2.10(a), 10.04 and 10.05. -21- "Lender" means the financial institutions party to this Agreement from time to time, whether as parties to this Agreement as originally signed, as parties by joinder or amendment to this Agreement or as parties by assignment pursuant to Section 10.08 (collectively, "Lenders"). "Lender Affiliate" means a Person engaged primarily in the business of commercial banking and that is a Subsidiary of a Lender or of a Person of which a Lender is a Subsidiary. "Lending Office" means, with respect to any Lender, the office or offices of the Lender specified as its "Lending Office" or "Domestic Lending Office" or "Eurodollar Lending Office", as the case may be, opposite its name on the applicable signature page hereto, or such other office or offices of the Lender as it may from time to time notify the Company and the Agent. "LIBOR" means the rate of interest per annum determined by the Agent to be the rate of interest at which dollar deposits in the approximate amount of BofA's pro rata share of the Loan to be made or continued as, or converted into, a Eurodollar Rate Loan and having a maturity comparable to such Interest Period would be offered by BofA's London Branch to major banks in the London interbank market at their request at or about 11:00 a.m. (London time) on the second Business Day prior to the commencement of such Interest Period. "License Revocation" means the revocation of, or failure to renew, a casino, gambling or gaming license issued by any Gaming Authority to any Borrower or any of its Subsidiaries. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other) or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a Capital Lease Obligation, any financing lease having substantially the -22- same economic effect as any of the foregoing, or the filing of any financing statement naming the owner of the asset to which such lien relates as debtor, under the UCC or any comparable law) and any contingent or other agreement to provide any of the foregoing, but not including the interest of a lessor under an Operating Lease. "Loan" means an extension of credit by a Lender to a Borrower pursuant to Article 2, and may be a Base Rate Loan or an Eurodollar Rate Loan. "Loan Documents" means the Agreement, the Notes, the Collateral Documents, the Parent Guaranty, any Subsidiary Guaranties, the Parent Collateral Documents, the Subsidiary Collateral Documents, any Notice of Borrowing and all certificates, agreements or documents of any type or nature heretofore or hereafter delivered to the Agent in connection therewith and all Rate Contracts between a Borrower and any of the Lenders. "Loan Parties" means the Parent, each Borrower, Cinderlane and any other Affiliate or Subsidiary of any of the foregoing executing and delivering any Loan Document from time to time (individually, a "Loan Party"). "Maintenance Capital Expenditures" means a Capital Expenditure for the maintenance, repair, restoration or refurbishment of any component of the Rio Hotel and Casino (including after completion thereof, the Rio Expansion Project), but excluding any Capital Expenditure which adds to or further improves any such property. "Majority Lenders" means at any time Lenders then holding at least 66 2/3% of the then aggregate unpaid principal amount of the Loans, or, if no such principal amount is then outstanding, Lenders then having at least 66 2/3% of the Aggregate Commitment. "Margin Stock" means "margin stock" as such term is defined in Regulation T, U or X of the Federal Reserve Board. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the -23- operations, business, properties, condition (financial or otherwise) or prospects of a Borrower or the Borrowers and their respective Subsidiaries taken as a whole; (b) a material impairment of the ability of a Borrower or the Parent to perform under any Loan Document and avoid any Event of Default; or (c) a material adverse effect upon (i) the legality, validity, binding effect or enforceability of any Loan Document, or (ii) the perfection or priority of any Lien granted to the Lenders or to the Agent for the benefit of the Lenders under any of the Collateral Documents, the Parent Collateral Documents or the Subsidiary Collateral Documents. "Maturity Date" means June 30, 2000 or such earlier date upon which the Aggregate Commitment shall terminate in accordance with the provisions of this Agreement. "Mortgage" means the Deed of Trust and any other deed of trust, mortgage or other document creating a Lien on the Real Property or any interest in the Real Property. "Multiemployer Plan" means a "multiemployer plan" (within the meaning of Section 4001(a)(3) of ERISA) and to which any member of the Controlled Group makes, is making, or is obligated to make contributions or, during the preceding three calendar years, has made, or been obligated to make, contributions. "Negative Pledge" means any covenant binding on a Person that prohibits the creation of Liens on any Property thereof, except a covenant contained in an instrument creating a Permitted Lien or Permitted Right of Others on Property that prohibits the creation of other Liens on that Property and no other Property of such Person. "Net Income" means, with respect to any fiscal period, the combined net income of the Borrowers and their respective Subsidiaries for that period, determined in accordance with GAAP. "New Venture" means a casino, hotel, casino/hotel, resort, casino/resort, riverboat casino, dockside casino, golf course, entertainment center or similar facility (or any site or proposed site for any of the foregoing) directly or indirectly owned or to be owned by the Parent or any of its Subsidiaries. -24- "New Project Entities" means one or more Persons formed by Parent or any of its Subsidiaries following the Closing Date for the exclusive purpose of developing all or any portion of the Cinderlane Property. A New Project Entity may be designated by Borrowers as an Unrestricted Subsidiary at the time of its acquisition or formation in accordance with Section 6.13. "Note" means a promissory note of a Borrower payable to the order of a Lender in substantially the form of Exhibit A, evidencing the aggregate indebtedness of such Borrower to such Lender resulting from Loans made by such Lender. "Notice of Borrowing" means a notice given by a Borrower to the Agent pursuant to Section 2.03, in substantially the form of Exhibit B. "Notice of Conversion/Continuation" means a notice given by a Borrower to the Agent pursuant to Section 2.04, in substantially the form of Exhibit C. "Notice of Lien" means any "notice of lien" or similar document intended to be filed or recorded with any court, registry, recorder's office, central filing office or other Governmental Authority for the purpose of evidencing, creating, perfecting or preserving the priority of a Lien securing obligations owing to a Governmental Authority. "Obligations" means all Loans, and other Indebtedness, advances, debts, liabilities, obligations, covenants and duties owing by the Loan Parties to the Lenders, the Agent, or any other Person required to be indemnified under any Loan Document, of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, arising under this Agreement, under any other Loan Document, or in respect of any Rate Contract, whether or not for the payment of money, whether arising by reason of an extension of credit, loan, guaranty, indemnification or in any other manner, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to -25- become due, now existing or hereafter arising and however acquired, including any interest which arises after the commencement of any proceeding under the United States Federal Bankruptcy Reform Act of 1986 or any similar statute providing for debtor relief with respect to any Loan Party. "Operating Lease" means, as applied to any Person, any lease of Property which is not a Capital Lease. "Ordinary Course of Business" means, in respect of any transaction involving any Borrower or any of its respective Subsidiaries, the ordinary course of such Person's business, as conducted by any such Person in accordance with casino industry practice in Las Vegas, Nevada, undertaken by such Person in good faith and not for purposes of evading any covenant or restriction in any Loan Document. "Organization Documents" means, for any corporation, the certificate or articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation. "Other Taxes" has the meaning specified in Section 3.01(b). "Parent" means Rio Hotel and Casino, Inc., a Nevada corporation. "Parent Collateral" means all Property and interests in Property and proceeds thereof now owned or hereafter acquired by the Parent in or upon which a Lien now or hereafter exists in favor of the Lenders, or the Agent on behalf of the Lenders, whether under this Agreement or under any other documents executed by any such persons and delivered to the Agent or the Lenders. "Parent Collateral Documents" means, collectively, (i) the Parent Security Agreement, and all other security agreements, pledge agreements, mortgages, deeds of trust, patent and trademark assignments, lease assignments, guarantees and other similar agreements between the Parent and the Lenders -26- or the Agent for the benefit of the Lenders now or hereafter delivered to the Lenders or the Agent pursuant to or in connection with the transactions contemplated hereby, and all financing statements (or comparable documents now or hereafter filed in accordance with the UCC or comparable law) against the Parent as debtor in favor of the Lenders or the Agent for the benefit of the Lenders as secured party and (ii) any amendments, supplements, modifications, renewals, replacements, consolidations, substitutions and extensions of any of the foregoing. "Parent Guaranty" means the Rio Hotel and Casino, Inc. Guaranty executed by Parent on the Closing Date with respect to the Obligations of Borrowers hereunder, as it may from time to time be supplemented, modified, amended, renewed, or extended. "Parent Security Agreement" means the Parent Pledge and Security Agreement executed by Parent on the Closing Date to secure its obligations under the Parent Guaranty, as it may from time to time be supplemented, modified, amended, renewed, or extended. "Parent Senior Subordinated Notes" means (a) the $100,000,000 10-5/8% Senior Subordinated Notes Due 2005 issued by the Parent, (b) the $125,000,000 9-1/2% Senior Subordinated Notes Due 2007 issued by Parent, and (c) other senior subordinated indebtedness incurred pursuant to Section 7.05(g). "Participant" has the meaning specified in Section 10.08(d). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Liens" has the meaning specified in Section 7.01. "Permitted Right of Others" means a Right of Others consisting of (a) an interest (other than a legal or equitable co-ownership interest, an option or right to acquire a legal or equitable co-ownership interest and any interest of a ground -27- lessor under a ground lease) that does not materially impair the value or use of property for the purposes for which it is or may reasonably be expected to be held and does not impair the security interest of the Lenders in such Property, (b) an option or right to acquire a Lien that would be a Permitted Lien, and (c) the reversionary interest of a landlord under a lease of Property. "Person" means an individual, partnership, corporation, business trust, joint stock company, limited liability company, trust, unincorporated association, joint venture or Governmental Authority. "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) which the Company or any member of the Controlled Group sponsors or maintains or to which the Company or any member of the Controlled Group makes, is making or is obligated to make contributions, and includes any Multiemployer Plan or Qualified Plan. "Pledged Collateral" has the meaning specified in the Parent Security Agreement. "Pre-Opening Expenses" means, with respect to any fiscal period, the amount of expenses (other than Interest Expense) classified as "pre-opening expenses" on the applicable financial statements of the Parent and its Subsidiaries for such period, prepared in accordance with GAAP. "Pricing Period" means, with respect to the last day of each calendar month (as of which a Total Leverage Ratio is determined), the one (1) calendar month period commencing on the first day of the third calendar month to commence after such day. "Projections" means the financial projections for the Company attached hereto as Exhibit F. "Property" means any estate or interest in any kind of property or asset, whether real, personal or mixed, and whether tangible or intangible. -28- "Qualified Plan" means a pension plan (as defined in Section 3(2) of ERISA) intended to be tax-qualified under Section 401(a) of the Code and which any member of the Controlled Group sponsors, maintains, or to which it makes, is making or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding period covering at least five (5) plan years, but excluding any Multiemployer Plan. "Rate Contracts" means interest rate and currency swap agreements, cap, floor and collar agreements, interest rate insurance, currency spot and forward contracts and other agreements or arrangements designed to provide protection against fluctuations in interest or currency exchange rates. "Real Property" means all of the Loan Parties' right, title and interest, whether now existing or hereafter acquired, in and to the real property described in Schedule 1.01A together with all easements and other rights now or hereafter made appurtenant thereto, all improvements and fixtures now or hereafter located thereon, and all additions and accretions thereto. "Reportable Event" means, as to any Plan, (a) any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC, (b) a withdrawal from a Plan described in Section 4063 of ERISA, or (c) a cessation of operations described in Section 4062(e) of ERISA. "Requirement of Law" means, (i) as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject, and (ii) as to the Real Property, all laws, ordinances, regulations, orders, building codes, restrictions and requirements of, and all agreements with and commitments to, all governmental judicial or legal authorities having jurisdiction over the Real Property. -29- "Responsible Officer" means, for any Person, the chief executive officer or the president or any other officer having substantially the same authority and responsibility; or, with respect to compliance with financial covenants by any Person or financial reporting by such Person, the chief financial officer or the treasurer of such Person, or any other officer having substantially the same authority and responsibility, and with respect to delivery of Notices of Borrowing, any of the foregoing officers of such Person or other individuals designated in writing by any one of such officers. "Restricted Subsidiary" means each Subsidiary of Parent which is not an Unrestricted Subsidiary. "Right of Others" means, as to any Property in which a Person has an interest, any legal or equitable right, title or other interest (other than a Lien) held by any other Person in that Property, and any option or right held by any other Person to acquire any such right, title or other interest in that Property, including any option or right to acquire a Lien; provided, however, that (a) any covenant restricting the use or disposition of Property of such Person contained in any Contractual Obligation of such Person and (b) any provision contained in a contract creating a right of payment or performance in favor of a Person that conditions, limits, restricts, diminishes, transfers or terminates such right, shall not be deemed to constitute a Rights of Others. "Rio Development" means Rio Development Company, Inc., a Nevada corporation, a wholly-owned Unrestricted Subsidiary of the Parent. "Rio Expansion Project" means the proposed expansion to the existing Rio Hotel and Casino described on Schedule 1.01C. "Rio Leasing" means Rio Leasing, Inc., a Nevada corporation. "Rio Resorts" means Rio Resort Properties, Inc., a Nevada corporation, a wholly-owned Unrestricted Subsidiary of the Parent. -30- "Rio Secco Golf Course" means the Rio Secco Golf Course, formerly known as the Seven Hills Golf Course, a golf course in Henderson, Nevada owned by Rio Development, together with all related improvements, equipment and fixtures. "SEC" means the Securities and Exchange Commission, or any successor thereto. "Senior Indebtedness" means Indebtedness that is not subordinated to the Obligations on terms and conditions satisfactory to the Agent and the Majority Lenders. "Senior Leverage Ratio" means, as of the last day of each fiscal quarter, the ratio of (a) the average outstanding principal amount of the Senior Indebtedness of the Borrowers and their combined Restricted Subsidiaries which constitutes Funded Debt as of the last day of that fiscal quarter (determined by averaging all such Senior Indebtedness of the Borrowers and their combined Restricted Subsidiaries as of the last date of each of the three-months constituting the fiscal quarter ending on that date using the Senior Indebtedness reported for each such month pursuant to Section 6.01(c)) to (b) EBITDA for the four fiscal quarter period ending on that date. "Shareholders' Equity" means, as of any date of determination and with respect to any Person, the consolidated shareholders' equity of the Person as of that date determined in accordance with GAAP. "Solvent" means, as to any Person at any time, that (a) the fair value of the Property of such Person is greater than the amount of such Person's liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated for purposes of Section 101(31) of the Bankruptcy Code and, in the alternative, for purposes of the Nevada Uniform Fraudulent Transfer Act; (b) the present fair saleable value of the Property of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person is able to realize upon its Property and pay its debts and other liabilities (including -31- disputed, contingent and unliquidated liabilities) as they mature in the normal course of business; (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature; and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute unreasonably small capital. "Subsidiary" of a Person means any corporation, association, partnership, joint venture or other business entity of which more than 50% of the voting stock or other equity interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. "Subsidiary Collateral" means all Property and interests in Property and proceeds thereof now owned or hereafter acquired by the Guarantors other than Parent in or upon which a Lien now or hereafter exists in favor of the Lenders, or the Agent on behalf of the Lenders, whether under this Agreement or under any other documents executed by any such persons and delivered to the Agent or the Lenders. "Subsidiary Collateral Documents" means, collectively, (i) the Subsidiary Security Agreement and all other security agreements, pledge agreements, mortgages, deeds of trust, patent and trademark assignments, lease assignments, guarantees and other similar agreements between the Subsidiaries of the Borrowers and the Lenders or the Agent for the benefit of the Lenders now or hereafter delivered to the Lenders or the Agent pursuant to or in connection with the transactions contemplated hereby, and all financing statements (or comparable documents now or hereafter filed in accordance with the UCC or comparable law) against such Persons as debtor in favor of the Lenders or the Agent for the benefit of the Lenders as secured party and (ii) any amendments, supplements, modifications, renewals, replacements, consolidations, substitutions and extensions of any of the foregoing. "Subsidiary Guarantors" means each Subsidiary of a Borrower that has executed and delivered a Guaranty to the Agent. -32- "Subsidiary Guaranty" means each Guaranty executed and delivered by a Subsidiary of any Borrower, as such document may from time to time be supplemented, modified, amended, renewed, or extended (collectively the "Subsidiary Guaranties"). "Subsidiary Security Agreement" means a Security Agreement executed by each of Cinderlane and HLG on the Closing Date to secure its obligations under the Subsidiary Guaranty, as it may from time to time be supplemented, modified, amended, renewed, or extended. "Tangible Net Worth" means, as of any date of determination, the Shareholders' Equity of the Borrowers and their respective Subsidiaries on that date minus the aggregate Intangible Assets of the Borrowers and their respective Subsidiaries on that date. "Taxes" has the meaning specified in Section 3.01(a). "Total Leverage Ratio" means, as of the last day of each fiscal quarter, the ratio of (a) average outstanding total principal Indebtedness of the Borrowers and their combined Restricted Subsidiaries which constitutes Funded Debt plus outstanding principal Indebtedness under the Parent Senior Subordinated Notes (determined by averaging all such Senior Indebtedness of the Borrowers and their combined Restricted Subsidiaries as of the last date of each of the three months constituting the fiscal quarter ending on that date using the Senior Indebtedness and Parent Senior Subordinated Notes reported for each such month pursuant to Section 6.01(c)) to (b) EBITDA for the four fiscal quarter period ending on the same date. "Transferee" has the meaning specified in Section 10.08(e). "UCC" means the Uniform Commercial Code as in effect in any jurisdiction. -33- "Unfunded Pension Liabilities" means the excess of a Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used by the Plan's actuaries for funding the Plan pursuant to section 412 for the applicable plan year. "United States" and "U.S." each means the United States of America. "Unrestricted Subsidiaries" means Rio Development, Rio Resorts and each other Subsidiary of Parent which is not a Subsidiary of either Borrower formed following the Closing Date which is designated as such at the time of its formation pursuant to Section 6.13, provided that no Subsidiaries owning portions of the Cinderlane Property may be Unrestricted Subsidiaries at any time when the aggregate Investments made pursuant to Section 7.04(f) are in excess of the limitations set forth therein. "Unsecured Indemnity Agreement" means an Unsecured Indemnity Agreement executed by Parent and the Borrowers on the Closing Date, as it may from time to time be supplemented, modified, amended, renewed, or extended. "Voting Stock" means the shares of common stock or preferred stock in a Person having ordinary voting power under ordinary circumstances for the election of directors of such Person and for carrying out the ordinary functions of shareholders under the law of the jurisdiction of incorporation or formation of such Person. "Withdrawal Liabilities" means, as of any determination date, the aggregate amount of the liabilities, if any, pursuant to Section 4201 of ERISA if the Controlled Group made a complete withdrawal from all Multiemployer Plans and any increase in contributions pursuant to Section 4243 of ERISA. 1.02 Other Interpretive Provisions. (a) Defined Terms. Unless otherwise specified herein or therein, all terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or -34- delivered pursuant hereto. The meaning of defined terms shall be equally applicable to the singular and plural forms of the defined terms. Terms (including uncapitalized terms) not otherwise defined herein and that are defined in the UCC shall have the meanings therein described. (b) The Agreement. The words "hereof", "herein", "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; and section, schedule and exhibit references are to this Agreement unless otherwise specified. (c) Certain Common Terms. (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii) The term "including" is not limiting and means "including without limitation." (d) Performance; Time. Whenever any performance obligation hereunder (other than a payment obligation) shall be stated to be due or required to be satisfied on a day other than a Business Day, such performance shall be made or satisfied on the next succeeding Business Day. In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." If any provision of this Agreement refers to any action taken or to be taken by any Person, or which such Person is prohibited from taking, such provision shall be interpreted to encompass any and all means, direct or indirect, of taking, or not taking, such action. -35- (e) Contracts. Unless otherwise expressly provided herein, references to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document. (f) Laws. References to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (g) Captions. The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (h) Independence of Provisions. The parties acknowledge that this Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters, and that such limitations, tests and measurements are cumulative and must each be performed, except as expressly stated to the contrary in this Agreement. 1.03 Accounting Principles (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied. (b) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Borrowers. -36- ARTICLE 2 THE CREDIT 2.01 Amounts and Terms of Commitment. From time to time following the Closing Date and prior to June 30, 1999 (the "Cutoff Date"), each Lender severally agrees, on the terms and conditions hereinafter set forth, to make term loans to the Borrowers (each a "Loan") in an aggregate principal amount not exceeding the amount set forth opposite such Lender's name on Schedule 2.01 under the heading "Commitment" (such amount as the same may be reduced pursuant to Section 2.05 or Section 2.07 or as a result of one or more assignments pursuant to Section 10.08, such Lender's "Commitment"); provided, however, that, after giving effect to any Borrowing of Loans, (i) each Lender's Loans shall not exceed its Commitment, and (ii) the aggregate principal amount of all outstanding Loans shall not exceed the Aggregate Commitment. Following the Cutoff Date, each Lender shall, on the terms and conditions hereinafter set forth, make term Loans to the Borrowers in the amount necessary to refinance outstanding Loans on the last day of the related Interest Periods for such Loans, but no such Loan shall result in an increase in the aggregate principal outstanding amount of the Loans. The Commitments are in the nature of multiple draw term loans, and no Loan, once repaid, may be reborrowed. 2.02 Notes (a) The Loans made by each Lender shall be evidenced by a Note payable to the order of that Lender in an amount equal to its Commitment. (b) Each Lender may endorse on the schedules annexed to its Note, the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Borrowers with respect thereto. Each Lender is irrevocably authorized by the Borrowers to endorse its Note and each Lender's record shall be conclusive absent manifest error; provided, however, that the failure of a Lender to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Borrowers hereunder or under any such Note to such Lender. (c) The Loans made by each Lender may, in lieu of Notes, be evidenced by one or more accounts or -37- records maintained by such Lender in the ordinary course of business. The accounts or records maintained by each Lender shall be conclusive absent manifest error of the amount of the Loans made by the Lenders to the Borrowers, and the interest and payments thereon; provided, however, that the failure of a Lender to make, or an error in making, a notation with respect to any Loan shall not limit or otherwise affect the obligations of the Borrowers hereunder to such Lender. 2.03 Procedure for Borrowing (a) Each Borrowing shall be made upon a Borrower's irrevocable written notice delivered to the Agent in accordance with Section 10.02 in the form of a Notice of Borrowing (which notice must be received by the Agent prior to 9:00 a.m. San Francisco time) (i) three Business Days prior to the requested Borrowing date, in the case of Eurodollar Rate Loans; and one Business Day prior to the requested Borrowing date, in the case of Base Rate Loans, specifying: (i) the amount of the Borrowing, which shall be, for Eurodollar Rate Loans and for Base Rate Loans, in an aggregate minimum principal amount of Five Million dollars ($5,000,000) or any multiple of One Million dollars ($1,000,000) in excess thereof; (ii) the requested Borrowing date, which shall be a Business Day; (iii) whether the Borrowing is to be comprised of Eurodollar Rate Loans or Base Rate Loans; and (iv) the duration of the Interest Period applicable to such Loans included in such notice. If the Notice of Borrowing of Loans shall fail to specify the duration of the Interest Period for any Borrowing comprised of -38- Eurodollar Rate Loans, such Interest Period shall be three months; provided that, with respect to the Borrowing to be made on the Closing Date, the Notice of Borrowing shall be delivered to the Agent not later than 9:00 a.m. (San Francisco time) one Business Day before the Closing Date and such Borrowing will consist of Base Rate Loans only. (b) Upon receipt of each Notice of Borrowing, the Agent will promptly notify each Lender thereof and of the amount of such Lender's Commitment Percentage of the Borrowing. (c) Each Lender will make the amount of its Commitment Percentage of the Borrowing available to the Agent for the account of the relevant Borrower at the Agent's Payment Office by 11:00 a.m. (San Francisco time) on the Borrowing Date requested by the relevant Borrower in funds immediately available to the Agent. The proceeds of all such Loans will then be made available by the Agent to the holders of Parent Senior Subordinated Notes (or to the representative thereof) for the account of the Borrowers (or, to the extent that the same constitute related transactional expenses, to Borrowers) by wire transfer of like funds in accordance with written instructions provided to the Agent by the relevant Borrower. (d) Unless the Majority Lenders shall otherwise agree, during the existence of an Event of Default, the Borrowers may not elect to have a Loan be made as, or converted into or continued as, an Eurodollar Rate Loan. (e) After giving effect to any Borrowing, there shall not be more than 12 different Interest Periods in effect for Eurodollar Rate Loans outstanding. -39- 2.04 Conversion and Continuation Elections. (a) A Borrower may upon irrevocable written notice to the Agent in accordance with Section 2.04(b): (i) elect to convert on any Business Day, any Base Rate Loans (or any part thereof in an amount not less than $3,000,000, or that is in an integral multiple of $1,000,000 in excess thereof) into Eurodollar Rate Loans; (ii) elect to convert on any Interest Payment Date any Eurodollar Rate Loans maturing on such Interest Payment Date (or any part thereof in an amount not less than $1,000,000, or that is in an integral multiple of $1,000,000 in excess thereof) into Base Rate Loans; or (iii) elect to renew on any Interest Payment Date any Eurodollar Rate Loans maturing on such Interest Payment Date (or any part thereof in an amount not less than $3,000,000, or that is in an integral multiple of $1,000,000 in excess thereof); provided, that if the aggregate amount of Eurodollar Rate Loans shall have been reduced, by payment, prepayment, or conversion of part thereof to be less than $3,000,000, the Eurodollar Rate Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the relevant Borrower to continue such Loans as, and convert such Loans into, Eurodollar Rate Loans shall terminate. (b) The relevant Borrower shall deliver a Notice of Conversion/Continuation in accordance with Section 10.02 to be received by the Agent not later than 9:00 a.m. (San Francisco time) at least (i) three Business Days in advance of the Conversion Date or continuation date, if the Loans are to be converted into or continued as Eurodollar Rate Loans; (ii) one Business Day in advance of the Conversion Date, if the Loans are to be converted into Base Rate Loans; specifying: -40- (i) the proposed Conversion Date or continuation date; (ii) the aggregate amount of Loans to be converted or renewed; (iii) the nature of the proposed conversion or continuation; and (iv) the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to Eurodollar Rate Loans, a Borrower has failed to select a new Interest Period to be applicable to such Eurodollar Rate Loans, as the case may be, or if any Default or Event of Default shall then exist, such Borrower shall be deemed to have elected to convert such Eurodollar Rate Loans into Base Rate Loans effective as of the expiration date of such current Interest Period. (d) Upon receipt of a Notice of Conversion/Continuation, the Agent will promptly notify each Lender thereof, or, if no timely notice is provided by a Borrower, the Agent will promptly notify each Lender of the details of any automatic conversion. All conversions and continuations shall be made pro rata according to the respective outstanding principal amounts of the Loans with respect to which the notice was given held by each Lender. (e) Unless the Majority Lenders shall otherwise agree, during the existence of a Default or Event of Default, a Borrower may not elect to have a Loan converted into or continued as an Eurodollar Rate Loan. (f) Notwithstanding any other provision contained in this Agreement, after giving effect to any conversion or continuation of any Loans, there -41- shall not be more than 12 different Interest Periods in effect at any one time. 2.05 Voluntary Termination or Reduction of Aggregate Commitment. Borrowers may, upon not less than five Business Days' prior notice to the Agent, terminate or permanently reduce the Aggregate Commitment by an aggregate minimum amount of $5,000,000 or any multiple of $1,000,000 in excess thereof; provided that no such reduction or termination shall be permitted if, after giving effect thereto and to any prepayments of the Loans made on the effective date thereof, the then outstanding principal amount of the Loans would exceed the Aggregate Commitment then in effect and; provided, further, that once reduced in accordance with this Section 2.05, the Commitment may not be increased. Any reduction of a Commitment shall be applied to each Lender's Commitment in accordance with such Lender's Commitment Percentage. All accrued commitment fees to but not including the effective date of any reduction or termination of the Aggregate Commitment, shall be paid on the effective date of such reduction or termination. No voluntary reduction shall reduce the amount of any mandatory reduction of the Aggregate Commitment pursuant to any other provision of this Agreement. 2.06 Optional Prepayments. Subject to Section 3.04, a Borrower may, at any time or from time to time, upon at least three Business Days' notice in the case of prepayment of an Eurodollar Rate Loan, and one Business Day's notice in the case of prepayment of a Base Rate Loan, to the Agent, ratably prepay Loans in whole or in part, in amounts of $3,000,000 or any multiple of $1,000,000 in excess thereof in the case of prepayment of Eurodollar Rate Loans and in amounts of $1,000,000 or any multiple of $1,000,000 in excess thereof in the case of prepayment of Base Rate Loans. Such notice of prepayment shall specify the date and amount of such prepayment and whether such prepayment is of Base Rate Loans or Eurodollar Rate Loans, or any combination thereof. Such notice shall not thereafter be revocable by a Borrower and the Agent will promptly notify each Lender thereof and of such Lender's Commitment Percentage of such prepayment. If such notice is given by a Borrower, Borrowers shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued -42- interest to each such date on the amount prepaid and any amounts required pursuant to Section 3.04. 2.07 Mandatory Commitment Reductions; Mandatory Prepayments of Loans. (a) Automatic Commitment Reductions. The Aggregate Commitment shall be reduced to zero on the Maturity Date. Such automatic reduction shall occur without regard to any other reductions of the Aggregate Commitment occurring pursuant to Sections 2.05 or 2.07 or pursuant to any other provision of this Agreement. (b) Automatic Commitment Termination. All Commitments shall automatically terminate upon the occurrence of a (a) Disposition consisting of (i) all or substantially all of the assets of a Borrower or (ii) all or substantially all of the assets of the Parent or (b) an Event of Loss affecting all or substantially all of the Rio Hotel and Casino. (c) Effect of Commitment Reductions. Any termination of the Aggregate Commitment will be accompanied by prepayment in full of the unpaid principal amount of the Loans then outstanding thereunder, together with the payment of any accrued and unpaid interest or fees, or both, on the amount prepaid. Any reduction of the Aggregate Commitment will be accompanied by the prepayment of Loans to the extent, if any, that the aggregate unpaid principal amount thereof outstanding exceeds the relevant commitment as then reduced. (d) General. Any prepayments pursuant to this Section 2.07 shall be applied first to any Base Rate Loans then outstanding and then to Eurodollar Rate Loans with the shortest Interest Periods remaining. 2.08 Repayment. The Borrowers shall repay to the Lenders in full on the Maturity Date the aggregate principal amount of the Loans outstanding on the Maturity Date. -43- 2.09 Interest. (a) Subject to Section 2.09(d), each Loan shall bear interest on the outstanding principal amount thereof from the date when made until it becomes due at a rate per annum equal to the Eurodollar Rate or the Base Rate, as the case may be, plus the Applicable Margin as the same may be adjusted pursuant to the provisions of Section 2.09(b). (b) The Applicable Margin for any Loan during any month (such calendar month being the Pricing Period) shall be based on the Total Leverage Ratio as of the last day of the third calendar month prior to the first day of the Pricing Period as shown in the financial reports and certificates delivered pursuant to the provisions of Section 6.01(c) and Section 6.02(c). If the Borrowers fail to deliver the financial reports and certificates required under Section 6.01(c) and Section 6.02(c) within 15 days of the date for delivery set forth therein, the Total Leverage Ratio for such Pricing Period shall be conclusively presumed to be greater than 3.00:1.00 and amounts payable following late delivery of reports and application of the foregoing presumption in respect of the Total Leverage Ratio shall be due and payable upon demand and shall be in addition to amounts that may otherwise become due pursuant to Section 2.09(d). (c) Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Loans pursuant to Section 2.06 and 2.07 for the portion of the Loans so prepaid and upon payment (including prepayment) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand. (d) While any Event of Default exists or after acceleration, the Borrowers shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law), as required by the -44- Requisite Lenders, on the principal amount of all Loans unpaid at a rate per annum which is determined by adding 2% per annum to the Applicable Margin then in effect for such Loans (whether the same are Eurodollar Rate Loans or Base Rate Loans) and, in the case of Obligations not subject to an Applicable Margin, at a rate per annum equal to the Base Rate plus 2%; provided, however, that, on and after the expiration of any Interest Period applicable to any Eurodollar Rate Loan outstanding on the date of occurrence of such Event of Default or acceleration, the principal amount of such Loan shall, during the continuation of such Event of Default or after acceleration, bear interest at a rate per annum equal to the Base Rate plus the Applicable Margin plus 2%. 2.10 Fees. (a) Arrangement Fee. The Company shall pay to the Lead Arranger for its own account an arrangement fee in an amount and at the times set forth in a letter agreement between the Company and the Lead Arranger. (b) Upfront Fee. On the Closing Date, the Company shall pay to each Lender hereto a fee in an amount set forth in the applicable letter agreement between the Company and such Lender. Each such fee paid to a Lender hereunder shall be solely for the account of such Lender and need not be shared with the Agent or any other Lender. (c) Commitment Fees. The Company shall pay to the Agent for the account of each Lender a commitment fee on the average daily unused portion of that Lender's Available Commitment, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the daily utilization for that quarter as calculated by the Agent, equal to the Applicable Margin based on the applicable Total Leverage Ratio in effect on the last day of such calendar quarter. Commitment fees shall accrue from the Closing Date to the Maturity Date -45- (whether or not Loans are available hereunder) and shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter and on the Maturity Date; provided that, in connection with any reduction or termination of Commitments pursuant to Section 2.05 or Section 2.07, the accrued commitment fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the next succeeding quarterly payment being calculated on the basis of the period from the reduction or termination date to such quarterly payment date. (d) Agency Fee. The Company shall pay to the Agent for the Agent's own account an agency fee in the amount and at the times set forth in a letter agreement between the Company and the Agent. 2.11 Computation of Fees and Interest (a) All computations of fees and interest under this Agreement shall be made on the basis of a 360-day year and actual days elapsed, which results in more interest being paid than if computed on the basis of a 365 day year. Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. (b) The Agent will, with reasonable promptness, notify the Borrowers and the Lenders of each determination of an Eurodollar Rate; provided that any failure to do so shall not relieve the Borrowers of any liability hereunder or provide the basis for any claim against the Agent. Any change in the interest rate on a Loan resulting from a change in the Eurodollar Reserve Percentage shall become effective as of the opening of business on the day on which such change in the Eurodollar Reserve Percentage becomes effective. The Agent will with reasonable promptness notify the Borrowers and the Lenders of the effective date and the amount of each such change, provided that any failure to do so shall -46- not relieve the Borrowers of any liability hereunder or provide the basis for any claim against the Agent. (c) Each determination of an interest rate by the Agent pursuant hereto shall be conclusive and binding on the Borrowers and the Lenders in the absence of manifest error. (d) All fees are non-refundable and earned on the date when payment is due. 2.12 Payments by the Borrowers (a) All payments (including prepayments) to be made by the Borrowers on account of principal, interest, fees and other amounts required hereunder shall be made without setoff, recoupment or counterclaim and shall, except as otherwise expressly provided herein, be made to the Agent for the ratable account of the Lenders at the Agent's Payment Office, in dollars and in immediately available funds, no later than 11:00 a.m. (San Francisco time) on the date specified herein, San Francisco time, on the day of payment (which must be a Business Day). The Agent will promptly distribute to each Lender its Commitment Percentage (or other applicable share as expressly provided herein) of such principal, interest, fees or other amounts, in like funds as received. Any payment which is received by the Agent later than 11:00 a.m. (San Francisco time) shall be deemed to have been received on the immediately succeeding Business Day and any applicable interest or fee shall continue to accrue. (b) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be, subject to the provisions set forth in the definition of "Interest Period" herein. -47- (c) Unless the Agent shall have received notice from a Borrower prior to the date on which any payment is due to the Lenders hereunder that such Borrower will not make such payment in full as and when required hereunder, the Agent may assume that such Borrower has made such payment in full to the Agent on such date in immediately available funds and the Agent may (but shall not be so required), in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent such Borrower shall not have made such payment in full to the Agent, each Lender shall repay to the Agent on demand such amount distributed to such Lender, together with interest thereon for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Agent, at the Federal Funds Rate as in effect for each such day. 2.13 Payments by the Lenders to the Agent. (a) Unless the Agent shall have received notice from a Lender on the Closing Date or, with respect to each Borrowing after the Closing Date, at least one Business Day prior to the date of any proposed Borrowing, that such Lender will not make available to the Agent as and when required hereunder for the account of the relevant Borrower the amount of that Lender's Commitment Percentage of the Borrowing, the Agent may assume that each Lender has made such amount available to the Agent in immediately available funds on the Borrowing date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the relevant Borrower on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to the Agent in immediately available funds and the Agent in such circumstances has made available to the relevant Borrower such amount, that Lender shall on the next Business Day following the date of such Borrowing make such amount available to the Agent, together with interest at the -48- Federal Funds Rate for and determined as of each day during such period. A notice of the Agent submitted to any Lender with respect to amounts owing under this Section 2.13(a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Lender's Loan on the date of borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the next Business Day following the date of such Borrowing, the Agent shall notify the relevant Borrower of such failure to fund and, upon demand by the Agent, the relevant Borrower shall pay such amount to the Agent for the Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing. (b) The failure of any Lender to make any Loan on any date of borrowing shall not relieve any other Lender of any obligation hereunder to make a Loan on the date of such borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Loan to be made by such other Lender on the date of any borrowing. 2.14 Sharing of Payments, Etc. If, other than as expressly provided elsewhere herein, any Lender shall obtain on account of the Loans made by it any payment (whether voluntary, involuntary, through the exercise of any right of setoff, or otherwise) in excess of its Commitment Percentage of payments on account of the Loans obtained by all the Lenders, such Lender shall forthwith (a) notify the Agent of such fact, and (b) purchase from the other Lenders such participations in the Loans made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Lender, such purchase shall to that extent be rescinded and each other Lender shall repay to the purchasing Lender the purchase price paid therefor, together with an amount equal to such paying Lender's Commitment Percentage (according to the proportion of (i) the amount of such paying Lender's required -49- repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrowers agree that any Lender so purchasing a participation from another Lender pursuant to this Section 2.14 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of setoff, but subject to Section 10.09) with respect to such participation as fully as if such Lender were the direct creditor of the Borrowers in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased pursuant to this Section 2.14 and will in each case notify the Lenders following any such purchases or repayments. 2.15 Security and Guarantees (a) All obligations of the Borrowers under this Agreement, the Notes and all other Loan Documents shall be secured in accordance with the Collateral Documents. (b) All obligations of the Borrowers under this Agreement, each of the Notes and all other Loan Documents shall be unconditionally guaranteed by the Guarantors pursuant to the Guaranties. (c) The obligations of the Borrowers under any Rate Contracts shall be entitled to the ratable and pari passu benefits of the security provided by the Collateral Documents and the Guaranties in the same manner as other obligations and indebtedness under the other Loan Documents to the extent of the risk assessment factor typically utilized by the Agent in assessing the credit risk associated with Rate Contracts, and shall be entitled to the subordinate benefit of the Collateral Documents and the Guaranties to the extent of any excess, provided that the counterparties to Rate Contracts shall not (prior to the repayment of the other obligations and indebtedness under the Loan Documents) be entitled to exercise any additional voting rights hereunder by reason of their being parties to such Rate Contracts over those otherwise allocated to Lenders hereunder. -50- ARTICLE 3 TAXES, YIELD PROTECTION AND ILLEGALITY 3.01 Taxes (a) Subject to Section 3.01(g), any and all payments by the Borrowers to each Lender or the Agent under this Agreement shall be made free and clear of, and without deduction or withholding for, any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Agent, such taxes (including income taxes or franchise taxes) as are imposed on or measured by each Lender's net income by the jurisdiction under the laws of which such Lender or the Agent, as the case may be, is organized or maintains a Lending Office or any political subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). (b) In addition, the Borrowers shall pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Documents (hereinafter referred to as "Other Taxes"). (c) Subject to Section 3.01(g), the Borrowers shall indemnify and hold harmless each Lender and the Agent for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 3.01) paid by the Lender or the Agent and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other -51- Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days from the date the Lender or the Agent makes written demand therefor. (d) If the Borrowers shall be required by law to deduct or withhold any Taxes or Other Taxes from or in respect of any sum payable hereunder to any Lender or the Agent, then, subject to Section 3.01(g): (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.01) such Lender or the Agent, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made; (ii) the Borrowers shall make such deductions; and (iii) the Borrowers shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (e) Within 30 days after the date of any payment by the Borrowers of Taxes or Other Taxes, the Borrowers shall furnish to the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to the Agent. (f) Each Lender which is a foreign person (i.e., a person other than a United States person for United States Federal income tax purposes) agrees that: (i) it shall, no later than the Closing Date (or, in the case of a Lender which becomes a party hereto pursuant to Section 10.08 after the Closing Date, the date upon which the Lender -52- becomes a party hereto) deliver to the Borrowers through the Agent two accurate and complete signed originals of Internal Revenue Service Form 4224 or any successor thereto ("Form 4224"), or two accurate and complete signed originals of Internal Revenue Service Form 1001 or any successor thereto ("Form 1001"), as appropriate, in each case indicating that the Lender is on the date of delivery thereof entitled to receive payments of principal, interest and fees under this Agreement free from withholding of United States Federal income tax; (ii) if at any time the Lender makes any changes necessitating a new Form 4224 or Form 1001, it shall with reasonable promptness deliver to the Borrowers through the Agent in replacement for, or in addition to, the forms previously delivered by it hereunder, two accurate and complete signed originals of Form 4224; or two accurate and complete signed originals of Form 1001, as appropriate, in each case indicating that the Lender is on the date of delivery thereof entitled to receive payments of principal, interest and fees under this Agreement free from withholding of United States Federal income tax; (iii) it shall, before or promptly after the occurrence of any event (including the passing of time but excluding any event mentioned in (ii) above) requiring a change in or renewal of the most recent Form 4224 or Form 1001 previously delivered by such Lender, deliver to the Borrowers through the Agent two accurate and complete original signed copies of Form 4224 or Form 1001 in replacement for the forms previously delivered by the Lender; and (iv) it shall, promptly upon the Borrowers' or the Agent's reasonable request to that effect, deliver to the Borrowers or the Agent (as the case may be) such other forms or similar -53- documentation as may be required from time to time by any applicable law, treaty, rule or regulation in order to establish such Lender's tax status for withholding purposes. (g) The Borrowers will not be required to pay any additional amounts in respect of United States Federal income tax pursuant to Section 3.01(d) to any Lender for the account of any Lending Office of such Lender: (i) if the obligation to pay such additional amounts would not have arisen but for a failure by such Lender to comply with its obligations under Section 3.01(f) in respect of such Lending Office; (ii) if such Lender shall have delivered to the Borrowers a Form 4224 in respect of such Lending Office pursuant to Section 3.01(f), and such Lender shall not at any time be entitled to exemption from deduction or withholding of United States Federal income tax in respect of payments by the Borrowers hereunder for the account of such Lending Office for any reason other than a change in United States law or regulations or in the official interpretation of such law or regulations by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such Form 4224; or (iii) if the Lender shall have delivered to the Borrowers Form 1001 in respect of such Lending Office pursuant to Section 3.01(f), and such Lender shall not at any time be entitled to exemption from deduction or withholding of United States Federal income tax in respect of payments by the Borrowers hereunder for the account of such Lending Office for any reason other than a change in United States law or regulations or any applicable tax treaty or -54- regulations or in the official interpretation of any such law, treaty or regulations by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such Form 1001. (h) If, at any time, the Borrowers request any Lender to deliver any forms or other documentation pursuant to Section 3.01(f)(iv), then the Borrowers shall, on demand of such Lender through the Agent, reimburse such Lender for any costs and expenses (including Attorney Costs) reasonably incurred by such Lender in the preparation or delivery of such forms or other documentation. (i) If the Borrowers are required to pay additional amounts to any Lender or the Agent pursuant to Section 3.01(d), then such Lender shall use its reasonable best efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to eliminate any such additional payment by the Borrowers which may thereafter accrue if such change, in the judgment of such Lender, is not otherwise disadvantageous to such Lender. 3.02 Illegality. (a) If any Lender shall determine that the introduction of any Requirement of Law, or any change in any Requirement of Law or in the interpretation or administration thereof, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Lender or its Lending Office to make Eurodollar Rate Loans, then, on notice thereof by the Lender to the Company through the Agent, the obligation of that Lender to make Eurodollar Rate Loans shall be suspended until the Lender shall have notified the Agent and the Company that the circumstances giving rise to such determination no longer exists. -55- (b) If a Lender shall determine that it is unlawful to maintain any Eurodollar Rate Loan, the relevant Borrower shall prepay in full all Eurodollar Rate Loans of that Lender then outstanding, together with interest accrued thereon, either on the last day of the Interest Period thereof if the Lender may lawfully continue to maintain such Eurodollar Rate Loans to such day, or immediately, if the Lender may not lawfully continue to maintain such Eurodollar Rate Loans, together with any amounts required to be paid in connection therewith pursuant to Section 3.04. (c) If a Borrower is required to prepay any Eurodollar Rate Loan immediately as provided in Section 3.02(b), then concurrently with such prepayment, such Borrower shall borrow from the affected Lender, in the amount of such repayment, a Base Rate Loan. (d) Before giving any notice to the Agent pursuant to this Section 3.02, the affected Lender shall designate a different Lending Office with respect to its Eurodollar Rate Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Lender, be illegal or otherwise disadvantageous to the Lender. 3.03 Increased Costs and Reduction of Return (a) If any Lender shall determine that, due to either (i) the introduction of or any change in reserve requirements included in the calculation of the Eurodollar Rate) in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining any Eurodollar Rate Loans, then the Borrowers shall be liable for, and shall from time to time, upon demand therefor by such -56- Lender (with a copy of such demand to the Agent), pay to such Lender, additional amounts as are sufficient to compensate such Lender for such increased costs. (b) If any Lender shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Lender (or its Lending Office) or any corporation controlling the Lender, with any Capital Adequacy Regulation; affects or would affect the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender and (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy and such Lender's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitment, loans, credits or obligations under this Agreement, then, upon demand of such Lender (with a copy to the Agent), the Borrowers shall upon demand pay to the Lender, from time to time as specified by the Lender, additional amounts sufficient to compensate the Lender for such increase. 3.04 Funding Losses. Each Borrower agrees to reimburse each Lender and to hold each Lender harmless from any loss or expense which the Lender may sustain or incur as a consequence of: (a) the failure of such Borrower to make any payment or prepayment of principal of any Eurodollar Rate Loan (including payments made after any acceleration thereof); (b) the failure of such Borrower to borrow, continue or convert a Loan after such Borrower has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/Continuation; -57- (c) the failure of such Borrower to make any prepayment after such Borrower has given a notice in accordance with Section 2.06; (d) the prepayment (including pursuant to Section 2.07) of an Eurodollar Rate Loan on a day which is not the last day of the Interest Period with respect thereto; or (e) the conversion pursuant to Section 2.04 of any Eurodollar Rate Loan to a Base Rate Loan on a day that is not the last day of the respective Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Eurodollar Rate Loans hereunder or from fees payable to terminate the deposits from which such funds were obtained. Solely for purposes of calculating amounts payable by such Borrower to the Lenders under this Section 3.04, each Eurodollar Rate Loan made by a Lender (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the LIBOR used in determining the Eurodollar Rate for such Eurodollar Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Eurodollar Rate Loan is in fact so funded. 3.05 Inability to Determine Rates. If the Agent shall have determined that for any reason adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan or that the Eurodollar Rate applicable pursuant to Section 2.09(a) for any requested Interest Period with respect to a proposed Eurodollar Rate Loan does not adequately and fairly reflect the cost to the Lenders of funding such Loan, the Agent will forthwith give notice of such determination to the relevant Borrower and each Lender. Thereafter, the obligation of the Lenders to make or maintain -58- Eurodollar Rate Loans, as the case may be, hereunder shall be suspended until the Agent revokes such notice in writing. Upon receipt of such notice, such Borrower may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it. If such Borrower does not revoke such notice, the Lenders shall make, convert or continue the Loans, as proposed by such Borrower, in the amount specified in the applicable notice submitted by such Borrower, but such Loans shall be made, converted or continued as Base Rate Loans instead of Eurodollar Rate Loans, as the case may be. 3.06 Certificates of Lenders. Any Lender claiming reimbursement or compensation pursuant to this Article 3 shall deliver to the Borrowers (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Lender hereunder and such certificate shall be conclusive and binding on the Borrowers in the absence of manifest error. 3.07 Survival. The agreements and obligations of the Borrowers in this Article 3 shall survive the payment of all other Obligations. ARTICLE 4 CONDITIONS PRECEDENT 4.01 Conditions of Initial LoansConditions of Initial Loans. The obligation of each Lender to make its initial Loan hereunder is subject to the following conditions precedent. All documents delivered hereunder shall, at the request of the Agent, be delivered in sufficient copies for each Lender, and shall in any event be in form and substance acceptable to the Agent. (a) Loan Agreement and Notes. The Agent shall have received this Agreement executed by the Borrowers, the Agent and each of the Lenders and the Notes executed by the Borrowers. (b) Collateral Documents. The Agent shall have received the Collateral Documents, executed by the Borrowers, and the Parent Guaranty, and Parent Collateral Documents executed by the Parent, and the Subsidiary Guaranty and the Subsidiary Collateral Documents executed by HLG and Cinderlane. -59- (c) Unsecured Indemnity Agreement. The Agent shall have received the Unsecured Indemnity Agreement executed by each of the Borrowers and the Parent. (d) Articles of Incorporation; By-laws and Good Standing. The Agent shall have received each of the following documents: (i) the articles or certificate of incorporation of the Parent and of the Borrowers as in effect on the Closing Date, certified by the Secretary of State of the state of incorporation of the Parent and of each of the Borrowers as of a recent date and by the Secretary or Assistant Secretary of the applicable Borrower as of the Closing Date, and the bylaws of the Parent and of the Borrowers as in effect on the Closing Date, certified by the Secretary or Assistant Secretary, respectively of the Parent and of the applicable Borrower as of the Closing Date; and (ii) a good standing certificate for the Parent and for each Borrower from the Secretary of State of its state of incorporation and each state where the Parent or the Borrower, as the case may be, is qualified to do business as a foreign corporation as of a recent date. (e) Resolutions; Incumbency. The Agent shall have received the following: (i) Copies of the resolutions of the board of directors of the Parent, each Borrower and each Guarantor approving and authorizing the execution, delivery and performance by the Loan Parties of this Agreement and the other Loan Documents to be delivered hereunder, and authorizing the borrowing of the Loans, certified as of the Closing Date by the Secretary or an Assistant Secretary of the appropriate Loan Party; -60- (ii) Copies of the resolutions of the board of directors of each such Loan Party approving and authorizing the execution, delivery and performance by such Loan Party of the Loan Documents to be delivered by it hereunder, certified as of the Closing Date by the Secretary or an Assistant Secretary thereof; and (iii) A certificate of the Secretary or Assistant Secretary of each such Loan Party certifying the names and true signatures of the officers of that Loan Party who are authorized to execute, deliver and perform, as applicable, this Agreement, and all other Loan Documents to be delivered by such Loan Party hereunder. (f) Certificate. The Agent shall have received a certificate signed by a Responsible Officer of the Borrowers, dated as of the Closing Date: (i) certifying that the representations and warranties contained in Article 5 are true and correct on and as of such date, as though made on and as of such date; (ii) certifying that no Default or Event of Default exists or would result from the initial Borrowing; (iii) certifying that there has occurred since December 31, 1997 no event or circumstance that could reasonably be expected to result in a Material Adverse Effect; (iv) certifying as to such other matters as the Agent and the Lenders may reasonably request. (g) Financial Statements. The Agent shall have received a certified copy of financial statements of Parent and its Subsidiaries referred to in Section 5.11. -61- (h) Recordation of Deed of Trust. The Deed of Trust shall have been duly recorded with the County Recorder's Office of Clark County, Nevada, second in order of filing only to the deed of trust filed in connection with the Existing Credit Agreement. (i) Pledged Collateral. The Agent shall have received all certificates and instruments representing the Pledged Collateral (other than the certificates and instruments representing the stock of Borrowers and any other Persons who are gaming licensees in the State of Nevada) and undated stock transfer powers executed in blank, or, in the alternative, arrangements satisfactory to the Agent shall have been made concerning the Pledged Collateral with the agent and lenders under the Existing Credit Agreement. (j) Financing Statements. The Agent shall have received acknowledgment copies of all UCC-l financing statements filed, registered or recorded to perfect the security interests of the Agent for the benefit of the Lenders, or other evidence satisfactory to the Agent that there has been filed, registered or recorded all financing statements and other filings, registrations and recordings necessary and advisable to perfect the Liens of the Agent for the benefit of the Lenders in accordance with applicable law. (k) Lien Searches. The Agent shall have received written advice relating to such Lien and judgment searches as the Agent shall have requested of the Borrowers, and such termination statements or other documents as may be necessary to confirm that the Collateral and the Parent Collateral is subject to no other Liens in favor of any Persons (other than Permitted Liens). (l) Worker's Compensation Insurance. The Borrowers shall have provided such policy or policies of worker's compensation insurance as may be required -62- by applicable worker's compensation insurance laws (including employer's liability insurance, if required by the Agent), covering all employees of the Borrowers. (m) Liability Insurance. The Borrowers shall have provided comprehensive liability insurance naming Agent as an additional insured, on an "occurrence" basis against claims for "personal injury" liability, including bodily injury, death or property damage liability, with a limit of not less than One Million Dollars ($1,000,000). (n) Loss Payable Endorsements. The Borrowers shall have provided the Agent with evidence that the Agent has been named as loss payee under all policies of casualty insurance, and as additional insured under all policies of liability insurance, required by the Deed of Trust and with respect to the insurance policies or other instruments or documents evidencing insurance coverage on the properties of the Borrowers in accordance with Section 6.06. (o) Environmental Questionnaire. The Agent shall have received an Environmental Questionnaire and Disclosure Statement prepared and certified by each Borrower using Agent's prescribed form, and the information set forth in it shall be acceptable to Agent. (p) Legal Opinions. The Agent shall have received an opinion of Kummer, Kaempfer, Bonner & Renshaw, counsel to the Borrowers and addressed to the Agent and the Lenders. (q) Payment of Fees. The Borrowers shall have paid all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with Attorney Costs to the extent invoiced prior to or on the Closing Date, together with such additional amounts of Attorney Costs as shall constitute the Agent's reasonable estimate of Attorney Costs incurred or to be incurred through the -63- closing proceedings, provided that such estimate shall not thereafter preclude final settling of accounts between the Borrowers and the Agent; including any such costs, fees and expenses arising under or referenced in Sections 2.11, 3.01 and 10.04. (r) Gaming Approvals. The Agent shall have received a copy of a duly completed and executed form prepared in accordance with Nevada Gaming Commission Regulation 8.130 with respect to this Agreement and the Loans thereunder and the Borrowers shall have made such other filings and disclosures as may be required by the Gaming Authorities. (s) Notice of Borrowing; Arrangements for Refinancing. The Agent shall have received a Notice of Borrowing, and arrangements acceptable to the Agent for the repurchase and retirement of Parent's 10-5/8% senior subordinated notes due 2005 (and all related interest and fees), as contemplated in Section 6.11, shall have been made. (t) Intercreditor Agreement. The Agent shall have received copies of the Intercreditor Agreement signed by the Lenders and the agent under the Existing Credit Agreement. (u) Cinderlane Property. Cinderlane shall have executed a Deed of Trust, substantially in the form of the Deed of Trust executed by the Company and in any event in form and substance satisfactory to the Agent, encumbering that portion of the Cinderlane Property underlying the "Rio Convention Center" and the "Palazzo Suites", and such Deed of Trust shall have been duly recorded with the County Recorder's Office of Clark County, Nevada. (v) Other Documents. The Agent shall have received evidence that all other actions necessary or, in the opinion of the Agent or the Lenders, desirable to perfect and protect the first priority Lien created by the Collateral Documents and the Parent Collateral Documents and to enhance the -64- Agent's ability to preserve and protect its interests in and access to the Collateral and the Parent Collateral Documents, have been taken, and shall have received such other approvals, opinions or documents as the Agent or any Lender may request. Notwithstanding the provisions of this Section 4.01, the Borrowers shall not be required to cause the Parent to deliver the stock of Borrowers to the Agent in pledge pursuant to the Parent Security Agreement, and the Company shall not be required to deliver the stock of HLG to the Agent in pledge pursuant to the Borrowers Security Agreement (and no negative pledge with respect to such stock shall in any manner be effective) unless and until the consents referred to in Section 6.23 are obtained. 4.02 Conditions to All Borrowings. The obligation of each Lender to make any Loan to be made by it hereunder (including its initial Loan) or to continue or convert any Loan pursuant to Section 2.04 is subject to the satisfaction of the following conditions precedent on the relevant borrowing, or continuation or conversion date: (a) Notice of Borrowing or Continuation/ Conversion. The Agent shall have received (with, in the case of the initial Loan only, a copy for each Lender) a Notice of Borrowing or a Notice of Continuation/Conversion, as applicable. (b) Continuation of Representations and Warranties. The representations and warranties made by the Borrowers contained in Article 5 shall be true and correct on and as of such borrowing, continuation or conversion date with the same effect as if made on and as of such borrowing or continuation or conversion date. (c) No Existing Default. No Default or Event of Default shall exist or shall result from such Borrowing or continuation or conversion. (d) Gaming Conditions. No Gaming Authority shall have entered any order or imposed any -65- requirement requiring (i) approval of the Loans prior to further advances or (ii) rescission or repayment of any Loan or Loan Document. (e) Title Insurance. In the case of the initial Loans, a title insurance company acceptable to the Lenders shall have issued or committed to issue an ALTA Lender's extended coverage policy of title insurance, including an LP10 Construction Loan Package or its equivalent, in a liability amount satisfactory to the Agent and the Lenders. The title policy shall insure the Deed of Trust and the similar deed of Trust executed by Cinderlane as first priority liens on the Real Property, subject only to exceptions consented to by the Agent in writing, and shall contain such endorsements as the Agent and/or any of the Lenders may require. In addition, one or more other title insurance companies acceptable to the Agent and the Lenders shall have issued such reinsurance as the Agent and the Lenders may require. No title matter may be insured over by any title company without the express written consent of the Agent. Each Notice of Borrowing and Notice of Continuation/Conversion submitted by the Borrowers hereunder shall constitute a representation and warranty by the Borrowers hereunder, as of the date of each such notice or application and as of the date of each Borrowing or continuation or conversion, as applicable, that the conditions in Section 4.02 are satisfied. ARTICLE 5 REPRESENTATIONS AND WARRANTIES The Borrowers jointly and severally represent and warrant to the Agent and each Lender that: 5.01 Corporate Existence and Power. Each Loan Party and each of its Subsidiaries: (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; -66- (b) has the power and authority and all governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and execute, deliver, and perform its obligations under, the Loan Documents; (c) is duly qualified as a foreign corporation, licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification; and (d) is in compliance with all Requirements of Law; except, in each case referred to in clause (c) or clause (d), to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. 5.02 Corporate Authorization; No Contravention. The execution, delivery and performance by each Loan Party and its Subsidiaries of this Agreement, and any other Loan Document to which such Person is party, have been duly authorized by all necessary corporate action, and do not and will not: (a) contravene the terms of any of that Person's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any Contractual Obligation to which such Person is a party or any order, injunction, writ or decree of any Governmental Authority to which such Person or its Property is subject; (c) violate any Requirement of Law; (d) constitute a "transfer of an interest" or an "obligation incurred" that is avoidable by a trustee under Section 548 of the Bankruptcy Code of 1978, as amended, or constitute a "fraudulent conveyance," "fraudulent obligation" or "fraudulent -67- transfer" within the meaning of the Uniform Fraudulent Conveyances Act or Uniform Fraudulent Transfer Act, as enacted in any jurisdiction; (e) result in or require the creation or imposition of any Lien or Right of Others upon or with respect to any Property now owned or leased or hereafter acquired by such party; or (f) require any consent or approval not heretofore obtained of any partner, director, stockholder or creditor of such party. 5.03 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority (except for recordings or filings in connection with the Liens granted to the Agent under the Collateral Documents) is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Loan Parties or any of their respective Subsidiaries of the Agreement or any other Loan Document. 5.04 Binding EffectBinding Effect. This Agreement and each other Loan Document to which each Loan Party or any of its Subsidiaries is a party constitute the legal, valid and binding obligations of each Loan Party and any of its Subsidiaries to the extent it is a party thereto, enforceable against such Person in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 5.05 Litigation. Except as specifically disclosed in Schedule 5.05, there are no actions, suits, proceedings, claims or disputes pending, or to the best knowledge of Loan Parties, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against the Loan Parties or their respective Subsidiaries or any of their respective Properties which: -68- (a) purport to affect or pertain to this Agreement, or any other Loan Document, or any of the transactions contemplated hereby or thereby or the Real Property; or (b) if determined adversely to the Loan Parties or their respective Subsidiaries, would reasonably be expected to have a Material Adverse Effect. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery and performance of this Agreement or any other Loan Document, or directing that the transactions provided for herein or therein not be consummated as herein or therein provided. 5.06 No Default. No Default or Event of Default exists or would result from the incurring of any Obligations by the Loan Parties or the grant or perfection of the Agent's Liens on the Collateral. Neither the Loan Parties nor any of their respective Subsidiaries is in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, could reasonably be expected to have a Material Adverse Effect. 5.07 ERISA Compliance. (a) Schedule 5.07 lists all Plans and separately identifies Plans intended to be Qualified Plans and Multiemployer Plans. All written descriptions thereof provided to the Agent are true and complete in all material respects. (b) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other Federal or state law, including all requirements under the Code or ERISA for filing reports (which are true and correct in all material respects as of the date filed), and benefits have been paid in accordance with the provisions of the Plan. -69- (c) Except for the Qualified Plans and Multiemployer Plans listed on Schedule 5.07, each Qualified Plan and Multiemployer Plan has been determined by the IRS to qualify under Section 401 of the Code, and the trusts created thereunder have been determined to be exempt from tax under the provisions of Section 501 of the Code, and to the best knowledge of the Loan Parties nothing has occurred which would cause the loss of such qualification or tax-exempt status. With respect to the Qualified Plans and Multiemployer Plans listed on Schedule 5.07, a favorable determination letter has not yet been obtained from the Internal Revenue Service under Sections 401(a) and 501(a) of the Code regarding the current status of each such Qualified Plan and Multiemployer Plan. After due execution of each such Plan by the Loan Parties, an application for a favorable determination letter will be submitted to the Internal Revenue Service within the remedial amendment period prescribed by Section 401(b) of the Code, and each such Plan will be amended to the extent required to secure a favorable determination letter from the Internal Revenue Service. (d) Except as specifically disclosed in Schedule 5.07, there is no outstanding liability under Title IV of ERISA with respect to any Plan maintained or sponsored by the Loan Parties or any ERISA Affiliate, nor with respect to any Plan to which the Loan Parties or any ERISA Affiliate contributes or is obligated to contribute. (e) Except as specifically disclosed in Schedule 5.07, no Plan subject to Title IV of ERISA has any Unfunded Pension Liability. (f) Except as specifically disclosed in Schedule 5.07, no member of the Controlled Group has ever represented, promised or contracted (whether in oral or written form) to any current or former employee (either individually or to employees as a group) that such current or former employee(s) would be provided, at any cost to any member of the -70- Controlled Group, with life insurance or employee welfare plan benefits (within the meaning of section 3(1) of ERISA) following retirement or termination of employment. To the extent that any member of the Controlled Group has made any such representation, promise or contract, such member has expressly reserved the right to amend or terminate such life insurance or employee welfare plan benefits with respect to claims not yet incurred. (g) Members of the Controlled Group have complied in all material respects with the notice and continuation coverage requirements of Section 4980B of the Code. (h) Except as specifically disclosed in Schedule 5.07, no ERISA Event has occurred or is reasonably expected to occur with respect to any Plan. (i) There are no pending or, to the best knowledge of the Loan Parties, threatened claims, actions or lawsuits, other than routine claims for benefits in the usual and ordinary course, asserted or instituted against (i) any Plan maintained or sponsored by the Loan Parties or its assets, (ii) any member of the Controlled Group with respect to any Qualified Plan, or (iii) any fiduciary with respect to any Plan for which the Loan Parties may be directly or indirectly liable, through indemnification obligations or otherwise. (j) Except as specifically disclosed in Schedule 5.07, neither the Loan Parties nor any ERISA Affiliate has incurred nor reasonably expects to incur (i) any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan or (ii) any liability under Title IV of ERISA (other than premiums due and not delinquent under Section 4007 of ERISA) with respect to a Plan. -71- (k) Except as specifically disclosed in Schedule 5.07, neither the Loan Parties nor any ERISA Affiliate has transferred any Unfunded Pension Liability to a Person other than the Loan Parties or an ERISA Affiliate or otherwise engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. (l) No member of the Controlled Group has engaged, directly or indirectly, in a nonexempt prohibited transaction (as defined in Section 4975 of the Code or Section 406 of ERISA) in connection with any Plan which could reasonably be expected to have a Material Adverse Effect. 5.08 Use of Proceeds; Margin Regulations. The proceeds of the Loans are intended to be and shall be used solely for the purposes set forth in and permitted by Section 6.11, and are intended to be and shall be used in compliance with Section 7.07. 5.09 Title to Properties. The Property subject to the Deed of Trust constitutes the entire Rio Resort Hotel & Casino and the associated parcel(s) of real property underlying the associated hotel towers, casino, convention and meeting facilities, parking garages, kitchens and other amenities associated therewith. Each Loan Party and each of its Subsidiaries has good record and marketable title in fee simple to, or valid leasehold interests in, the Collateral and all Property necessary or used in the ordinary conduct of its business, except for such defects in title as could not, individually or in the aggregate, have a Material Adverse Effect. As of the Closing Date, the Property of each Loan Party and its Subsidiaries is subject to no Liens, other than Permitted Liens. 5.10 Taxes. Each Loan Party and its Subsidiaries have filed all Federal and other material tax returns and reports required to be filed, and have paid all Federal and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their Properties, income or assets otherwise due and payable, except those which are -72- being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP and no Notice of Lien has been filed or recorded. There is no proposed tax assessment against any Loan Party or any of its Subsidiaries which would, if the assessment were made, have a Material Adverse Effect. 5.11 Financial Condition/Material Adverse Effect. (a) The audited consolidated financial statements of financial condition of the Parent and its Subsidiaries dated December 31, 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the fiscal year ended on that date and the unaudited consolidated balance sheet, statement of operations and cash flow summary of the Company dated December 31, 1997: (i) except for the cash flow summary of the Company, were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; (ii) are complete, accurate and fairly present the financial condition of the Parent and its Subsidiaries and the Company and its Subsidiaries, as of the date thereof and results of operations for the period covered thereby; and (iii) except as specifically disclosed in Schedule 5.11, show all material indebtedness and other liabilities, direct or contingent of the Parent and its consolidated Subsidiaries and of the Company and its consolidated Subsidiaries, respectively, as of the date thereof, including liabilities for taxes, material commitments and Contingent Obligations. (b) The unaudited consolidated statements of financial condition of the Parent and its -73- consolidated Subsidiaries dated September 30, 1998, and the related consolidated statements of operations, and cash flows for the fiscal quarter ended on that date and the unaudited consolidated financial statements of financial condition of Parent and its Subsidiaries dated September 30, 1998, and the related consolidated statement of operations and cash flow summary for the fiscal quarter ended on that date: (i) except for the cash flow summary of the Company, were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; (ii) are complete, accurate and fairly present the financial condition of both Parent and its Subsidiaries and the Company and its Subsidiaries as of the date thereof and results of operations for the period covered thereby; and (iii) except as specifically disclosed in Schedule 5.11, show all material indebtedness and other liabilities, direct or contingent of the Company and its consolidated Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Contingent Obligations. (c) Since December 31, 1997 there has been no Material Adverse Effect. 5.12 Environmental Matters. (a) Except as specifically disclosed in Schedule 5.12, the on-going operations of each Loan Party and each of its Subsidiaries comply in all respects with all Environmental Laws. (b) Except as specifically disclosed in Schedule 5.12, each Loan Party and each of its -74- Subsidiaries has obtained all licenses, permits, authorizations and registrations required under any Environmental Law ("Environmental Permits") and necessary for its ordinary course operations, all such Environmental Permits are in good standing, and each Loan Party and each of its Subsidiaries is in compliance with all material terms and conditions of such Environmental Permits. (c) Except as specifically disclosed in Schedule 5.12, none of the Loan Parties, any of their respective Subsidiaries or any of their respective present Property or operations is subject to any outstanding written order from or agreement with any Governmental Authority nor subject to any judicial or docketed administrative proceeding, respecting any Environmental Law, Environmental Claim or Hazardous Material. (d) Except as specifically disclosed in Schedule 5.12, there are no Hazardous Materials or other conditions or circumstances existing with respect to any Property, or arising from operations prior to the Closing Date, of the Loan Parties or any of their respective Subsidiaries that would reasonably be expected to give rise to Environmental Claims with a potential liability of the Loan Parties and their respective Subsidiaries in excess of $100,000 in the aggregate for any such condition, circumstance or Property. In addition, (i) neither the Loan Parties nor any of their respective Subsidiaries has any underground storage tanks (x) that are not properly registered or permitted under applicable Environmental Laws, or (y) that are leaking or disposing of Hazardous Materials offsite, and (ii) the Loan Parties and their respective Subsidiaries have notified all of their employees of the existence, if any, of any health hazard arising from the conditions of their employment and have met all notification requirements under Title III of CERCLA and all other Environmental Laws. -75- 5.13 Collateral Documents. (a) The provisions of each of the Collateral Documents are effective to create in favor of the Agent for the benefit of the Lenders, a legal, valid and enforceable first priority (subject only to the security interest of BofA as agent for the lenders under the Existing Credit Agreement) security interest in all right, title and interest of each Loan Party and its Subsidiaries in the collateral described therein; and financing statements have been filed in the appropriate offices of the State of Nevada. (b) The Deed of Trust and each other Mortgage when delivered will be effective to grant to the Agent for the benefit of the Lenders a legal, valid and enforceable deed of trust lien on all the right, title and interest of the mortgagor under the Deed of Trust or such Mortgage in the mortgaged Property described therein. When the Deed of Trust or each such other Mortgage is duly recorded in Clark County, Nevada and the mortgage recording fees and taxes in respect thereof are paid and compliance is otherwise had with the formal requirements of state law applicable to the recording of real estate mortgages generally, each such mortgaged Property, subject to the encumbrances and exceptions to title set forth therein and except as noted in the title policies delivered to the Agent pursuant to Section 4.01 is subject to a legal, valid, enforceable and perfected first priority deed of trust (subject to the priority of the deed of trust in favor of BofA as agent for the lenders under the Existing Credit Agreement); and when financing statements have been filed in Clark County, Nevada, such Mortgage also creates a legal, valid, enforceable and perfected first lien (subject, as to priority, only to the lien of BofA as agent for the lenders under the Existing Credit Agreement) on, and security interest in, all right, title and interest of each Loan Party or such Subsidiary under the Deed of Trust or such other Mortgage in all personal property and fixtures which is covered by such Mortgage, subject to no other Liens, except the -76- encumbrances and exceptions to title set forth therein and except as noted in the title policies delivered to the Agent pursuant to Section 4.01, and Permitted Liens. (c) All representations and warranties of each Loan Party, of any of its Subsidiaries and of the Parent contained in the Collateral Documents or in any Guaranty or any Parent Collateral Document are true and correct. 5.14 Regulated Entities. None of the Loan Parties, any Person controlling the Loan Parties or any Subsidiary of the Loan Parties, is (a) an "Investment Company" within the meaning of the Investment Company Act of 1940; or (b) subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness, with the exception of Nevada Gaming Laws, the provisions of which have been complied with by each Loan Party. 5.15 No Burdensome Restrictions. Neither the Loan Parties nor any of their respective Subsidiaries is a party to or bound by any Contractual Obligation, or subject to any charter or corporate restriction, or any Requirement of Law, which could reasonably be expected to have a Material Adverse Effect. 5.16 Solvency. Each Loan Party is and each of its Subsidiaries are Solvent. 5.17 Labor Relations. There are no strikes, lockouts or other labor disputes against the Loan Parties or any of their respective Subsidiaries, or, to the best of the Loan Parties' knowledge, threatened against or affecting the Loan Parties or any of their respective Subsidiaries, and no significant unfair labor practice complaints are pending against the Loan Parties or any of their respective Subsidiaries or, to the best knowledge of the Loan Parties, threatened against any of them before any Governmental Authority. -77- 5.18 Copyrights, Patents, Trademarks and Licenses, etc. The Loan Parties and their consolidated Subsidiaries own or are licensed or otherwise have the right to use all of the patents, trademarks, service marks, trade names, copyrights, franchises, authorizations and other rights that are reasonably necessary for the operation of their respective businesses, without conflict with the rights of any other Person. To the best knowledge of the Loan Parties, no slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed by the Loan Parties or any of their respective Subsidiaries infringes upon any rights held by any other Person; no claim or litigation regarding any of the foregoing is pending or threatened, and no patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code is pending or, to the knowledge of the Loan Parties, proposed, which, in either case, could reasonably be expected to have a Material Adverse Effect. 5.19 Subsidiaries and Other Investments. The Parent does not have any Subsidiaries or any equity investments in any other corporation or entity other than those specifically disclosed in Schedule 5.19, in each case as such Schedule is updated from time to time (which updates shall be deemed to update any previous Schedule from the date received by the Agent without further action by any party hereto). 5.20 Insurance. The Properties of each Loan Party and its Subsidiaries are insured with financially sound and reputable insurance companies, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar Properties in localities where each Loan Party or such Subsidiary operates. 5.21 Full Disclosure. None of the representations or warranties made by the Loan Parties or any of their respective Subsidiaries in the Loan Documents as of the date such representations and warranties are made or deemed made, and none of the statements contained in each exhibit, report, statement or certificate furnished by or on behalf of the Loan Parties or any of their respective Subsidiaries in connection -78- with the Loan Documents, contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading. 5.22 Projections. As of the date of their preparation, the assumptions set forth in the Projections were reasonable and consistent with each other and with all facts known to the Company and no material assumption was omitted as a basis for the Projections, and the Projections were reasonably based on such assumptions. As of the date of this Agreement, and as of the Closing Date, no fact or circumstance has come to the attention of either Borrower to cause it to believe, and it does not believe, that such assumptions are not reasonable or consistent with each other and with all facts known to the Borrowers or that any material assumption is omitted as a basis for the Projections or that the Projections are not reasonably based on the assumptions. Nothing in this Section shall be construed as a representation or covenant that the Projections in fact will be achieved. 5.23 Gaming Laws. Each Loan Party and each of its Subsidiaries are in substantial compliance with all Gaming Laws that are applicable to it. 5.24 Management Agreement. The Loan Parties are the sole manager of the Real Property, the entirety of the existing Rio Hotel and Casino and the Rio Expansion Project. The Loan Parties have not executed a management agreement with any other Person with respect to the Real Property. ARTICLE 6 AFFIRMATIVE COVENANTS The Borrowers hereby jointly and severally covenant and agree that, so long as any Lender shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Majority Lenders waive compliance in writing: 6.01 Financial Statements. The Company shall deliver to the Agent in form and detail satisfactory to the Agent and the Majority Lenders, with sufficient copies for each Lender: -79- (a) As soon as available, but not later than 120 days after the end of each fiscal year, a copy of the Form 10-K of Harrah's as filed with the SEC for such fiscal year, which shall include, or be accompanied by, the opinion of Arthur Andersen or another nationally recognized independent public accounting firm which report shall state that such consolidated and consolidating financial statements present fairly the financial position of Harrah's for the periods indicated in conformity with GAAP applied on a basis consistent with prior years. Such opinion shall not be qualified or limited for any reason, including without limitation because of a restricted or limited examination by such accountant of any material portion of Harrah's, the Parent's, the Company's or any Subsidiary's records and shall be delivered to the Agent pursuant to a reliance agreement between the Agent and Lenders and such accounting firm in form and substance satisfactory to the Agent; (b) As soon as available, but not later than 45 days after the end of each of the first three fiscal quarters of each fiscal year a copy of the Form 10-Q of Harrah's as filed with the SEC for such fiscal quarter accompanied by a certificate of a Responsible Officer certifying the financial statements appearing therein as being complete and correct and fairly presenting, in accordance with GAAP, the financial position and the results of operations of the Parent, the Borrowers and their respective Subsidiaries; (c) As soon as available, but not later than 30 days after the end of each calendar month of each year, a copy of the unaudited combined balance sheet of the Borrowers and their respective Subsidiaries as of the end of such month and the related combined statement of income and for the period commencing on the first day and ending on the last day of such month, and for the year to date and, in each case -80- showing comparisons with the prior year and certified by an appropriate Responsible Officer as being complete and correct and fairly presenting, in accordance with GAAP, the financial position and the results of operations of the Borrowers and their respective Subsidiaries; and (d) As soon as available, and in any event within 60 days after the commencement of each fiscal year of the Parent and of the Company, a budget and projection by fiscal quarter for that fiscal year and for the next two succeeding fiscal years, including for the first such fiscal year, projected consolidated and consolidating (in accordance with past consolidating practices of the Parent and the Company) balance sheets and statements of operations and a summary of cash flow and, for the second and third such fiscal years projected consolidated condensed balance sheets and statements of operations and summaries of cash flow of the Parent, the Company and their Subsidiaries, all in reasonable detail. 6.02 Certificates; Other Information. The Company shall furnish to the Agent, with sufficient copies for each Lender: (a) Concurrently with the delivery of the financial statements referred to in Section 6.01(a) above, a certificate of the independent certified public accountants reporting on such financial statements which accountants' report and opinion shall be accompanied by a certificate stating that, in making the examination pursuant to generally accepted auditing standards necessary for the certification of such financial statements an such report, such accountants have obtained no knowledge of any Default or Event of Default or, if, in the opinion of such accountant and such Default or Event of Default shall exist, stating the nature and status of such Default or Event of Default; (b) Concurrently with the delivery of the financial statements referred to in Sections 6.01(a) -81- and (b) above, a Compliance Certificate signed by a Responsible Officer (i) stating that, to the best of such officer's knowledge, the Loan Parties, during such period, have observed and performed in all material respects all of their covenants and other agreements, and satisfied every condition contained in this Agreement to be observed, performed or satisfied by them, and that such officer has obtained no knowledge of any Default or Event of Default except as specified (by applicable Section reference) in such certificate, and (ii) showing in detail the calculations supporting such statement in respect of Sections 7.13, 7.14, 7.15 and 7.16; (c) Promptly after the same are sent, copies of all financial statements and reports which the Parent or the Company sends to its shareholders; and promptly after the same are filed, copies of all financial statements and regular, periodical or special reports which the Parent or the Company may make to, or file with, the Securities and Exchange Commission or any successor or similar Governmental Authority; (d) Promptly after the same are available, copies of all copies of all reports and any correspondence relating thereto prepared pursuant to Nevada Gaming Commission Regulation 6.090(9) and 6A.110(2) and copies of any written communications to the Loan Parties or any of their respective Subsidiaries from any Gaming Authority relating any order to show cause, any disciplinary action or to a License Revocation with respect to the Parent, any Borrower or any of its Subsidiaries; (e) promptly, such additional business, financial, corporate affairs and other information as the Agent, at the request of any Lender, may from time to time reasonably request; and (f) Concurrently with the delivery of the financial statements referred to in Sections 6.01(a) and (b), a written report, in form and detail -82- reasonably acceptable to the Agent describing the revenues of the Rio Secco Golf Course. 6.03 Notices. The Company shall promptly notify the Agent and each Lender: (a) of the occurrence of any Default or Event of Default, and of the occurrence or existence of any event or circumstance that foreseeably will become a Default or Event of Default; (b) of any communication, whether written or oral, that the Loan Parties may receive from any governmental, judicial or legal authority, giving notice of any claim or assertion that the Real Property fails in any material respect to comply with any Requirement of Law; (c) of any material adverse change in the physical condition of the Real Property (including any damage suffered as a result of earthquakes or floods) or any Loan Party's financial condition or operations; (d) of (i) any breach or nonperformance of, or any default under, any Contractual Obligations of the Loan Parties or any of their respective Subsidiaries which could result in a Material Adverse Effect; and (ii) any dispute, litigation, investigation, proceeding or suspension which may exist at any time between the Loan Parties or any of their respective Subsidiaries and any Governmental Authority; (e) of the commencement of, or any material development in, any litigation or proceedings affecting the Loan Parties or any of their respective Subsidiaries (i) in which the amount of damages claimed is $100,000 (or its equivalent in another currency or currencies) or more, (ii) in which injunctive or similar relief is sought and which, if adversely determined, would reasonably be expected to have a Material Adverse Effect, or (iii) in which the relief sought is an injunction or other stay of the performance of this Agreement or any Loan Document; -83- (f) upon, but in no event later than 10 days after, becoming aware of (i) any and all enforcement, cleanup, removal or other governmental or regulatory actions instituted, completed or threatened against the Loan Parties or any of their respective Subsidiaries or any of their respective Properties pursuant to any applicable Environmental Laws, (ii) all other Environmental Claims, and (iii) any environmental or similar condition on any real property adjoining or in the vicinity of the properties of the Loan Parties or any of their respective Subsidiaries that could reasonably be anticipated to cause such properties or any parts thereof to be subject to any restrictions on the ownership, occupancy, transferability or use of such properties under any Environmental Laws; (g) of any other litigation or proceedings affecting the Loan Parties or any of their respective Subsidiaries which any Loan Party would be required to report to the SEC pursuant to the Exchange Act, within four days after reporting the same to the SEC; (h) of any of the following ERISA events affecting any Loan Party or any member of its Controlled Group (but in no event more than 10 days after such event), together with a copy of any notice with respect to such event that may be required to be filed with a Governmental Authority and any notice delivered by a Governmental Authority to any Loan Party or any member or its Controlled Group with respect to such event: (i) an ERISA Event; (ii) the adoption of any new Plan that is subject to Title IV of ERISA or section 412 of the Code by any member of the Controlled Group; (iii) the adoption of any amendment to a Plan that is subject to Title IV of ERISA or -84- section 412 of the Code, if such amendment results in a material increase in benefits or unfunded liabilities; or (iv) the commencement of contributions by any member of the Controlled Group to any Plan that is subject to Title IV of ERISA or section 412 of the Code; (i) any Material Adverse Effect subsequent to the date of the most recent audited financial statements of any Loan Party delivered to the Lenders pursuant to Sections 6.01(a) or 4.01(g); (j) of any change in accounting policies or financial reporting practices by the Loan Parties or any of their respective Subsidiaries; and (k) of any labor controversy resulting in or threatening to result in any strike, work stoppage, boycott, shutdown or other labor disruption against or involving the Loan Parties or any of their respective Subsidiaries. Each notice pursuant to this Section shall be accompanied by a written statement by a Responsible Officer setting forth details of the occurrence referred to therein, and stating what action any Loan Party proposes to take with respect thereto and at what time. Each notice under Section 6.03(a) shall describe with particularity any and all clauses or provisions of this Agreement or other Loan Document that have been breached or violated. 6.04 Preservation of Corporate Existence, Etc. Each Loan Party shall, and shall cause each of its Subsidiaries to: (a) preserve and maintain in full force and effect its corporate existence and good standing under the laws of its state or jurisdiction of incorporation; -85- (b) preserve and maintain in full force and effect all rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business; (c) use its reasonable efforts, in the Ordinary Course of Business, to preserve its business organization and preserve the goodwill and business of the customers, suppliers and others having material business relations with it; and (d) preserve or renew all of its registered trademarks, trade names and service marks, the nonpreservation of which could reasonably be expected to have a Material Adverse Effect. 6.05 Maintenance of Property. Each Loan Party shall maintain, and shall cause each of its Subsidiaries to maintain, and preserve all their Properties which are used or useful in their businesses in good working order and condition, ordinary wear and tear excepted and make all necessary repairs thereto and renewals and replacements thereof except where the failure to do so could not reasonably be expected to have a Material Adverse Effect, except as permitted by Section 7.02. 6.06 Insurance. In addition to insurance requirements set forth in the Collateral Documents, the Loan Parties shall maintain, and shall cause each of their respective Subsidiaries to maintain, with financially sound and reputable independent insurers, insurance with respect to its Properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons; including workers' compensation insurance, flood insurance, earthquake insurance public liability and property and casualty insurance the amounts of which shall not be reduced by the Loan Parties in the absence of 30 days' prior notice to the Agent. All such insurance shall name the Agent as loss payee/mortgagee and as additional insured, for the benefit of the Lenders, as their interests may appear. Upon request of the Agent or any Lender, the Loan Parties shall furnish the Agent, with sufficient copies for each Lender, at reasonable intervals (but not more than once per calendar year) -86- a certificate of a Responsible Officer (and, if requested by the Agent, any insurance broker of the Loan Parties) setting forth the nature and extent of all insurance maintained by the Loan Parties and their respective Subsidiaries in accordance with this Section 6.06 or any Collateral Documents (and which, in the case of a certificate of a broker, were placed through such broker). 6.07 Payment of Obligations. Each Loan Party shall, and shall cause its Subsidiaries to, pay and discharge as the same shall become due and payable, all their respective obligations and liabilities, including: (a) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by each Loan Party or such Subsidiary; (b) all lawful claims which, if unpaid, would by law become a Lien upon its Property; and (c) all Indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness. 6.08 Compliance with Laws. Each Loan Party shall comply, and shall cause each of its Subsidiaries to comply, in all material respects with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business (including the Federal Fair Labor Standards Act), except such as may be contested in good faith or as to which a bona fide dispute may exist. 6.09 Inspection of Property and Books and RecordsInspection of Property and Books and Records. Each Loan Party shall maintain and shall cause each of its Subsidiaries to maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and businesses of -87- each Loan Party and such Subsidiaries. Subject to compliance with applicable Gaming Laws, including restrictions on access to security and surveillance systems and the casino cage, each Loan Party shall permit, and shall cause each of its Subsidiaries to permit, representatives and independent contractors of the Agent or any Lender to visit and inspect any of their respective Properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and independent public accountants, all at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to each Loan Party; provided, however, when an Event of Default exists the Agent or any Lender may do any of the foregoing at the reasonable expense of each Loan Party at any time during normal business hours and without advance notice. 6.10 Environmental Laws (a) Each Loan Party shall, and shall cause each of its Subsidiaries to, conduct their operations and keep and maintain their Properties in compliance with all Environmental Laws. (b) Upon the written request of the Agent or any Lender, each Loan Party shall submit and cause each of its Subsidiaries to submit, to the Agent with sufficient copies for each Lender, at each Loan Party's sole cost and expense, at reasonable intervals, a report providing an update of the status of any environmental, health or safety compliance, hazard or liability issue identified in any notice or report required pursuant to Section 6.03(f), that could, individually or in the aggregate, result in liability in excess of $1,000,000. 6.11 Use of Proceeds. The Borrowers shall use the proceeds of the Loans solely to provide financing for the repurchase and retirement of the Parent Senior Subordinated Notes as a result of the Harrah's Acquisition and related transactional expenses. -88- 6.12 Solvency. Each Loan Party shall at all times be, and shall cause each of their respective Subsidiaries to be, Solvent. 6.13 New Subsidiaries. Borrowers shall designate each Subsidiary of Parent formed or acquired after the Closing Date as a Restricted Subsidiary or an Unrestricted Subsidiary by a writing delivered to the Agent within 30 days following such formation or acquisition. Borrowers shall cause each such Person designated as a Restricted Subsidiary to promptly and in any event within 30 days execute and deliver to the Agent a Guaranty and Collateral Documents in form and substance satisfactory to the Agent pledging substantially all of the real and personal property of such Restricted Subsidiary, and the corporate parent of such Restricted Subsidiary shall pledge all of the capital stock of such Restricted Subsidiary; provided, however, that Cinderlane shall not be required to pledge any real property other than that described on Schedule 5.28. No Unrestricted Subsidiaries shall be required to be Guarantors or to pledge any of their assets, or to have any of their capital stock or other ownership interests pledged. In connection with any new Subsidiary, the Borrowers shall deliver a certificate signed by a Responsible Officer certifying that Section 5.12 is true and correct after giving effect to the formation or acquisition of new Subsidiary, and shall cause such Subsidiary to also deliver documents of the type referred to in Sections 4.01(d) and (e) and to otherwise comply with Sections 4.01(h) through (k) and 6.22 with respect thereto. 6.14 Additional Collateral. The Company shall execute and deliver to the Agent Mortgages as appropriate containing restrictions and granting Liens in a manner similar to the Deed of Trust and in any event reasonably acceptable to the Majority Lenders, with respect to each fee, fixture and leasehold interest in real property acquired by any Borrower or any of their respective Subsidiaries, except as provided in the proviso to Section 6.13. 6.15 Requirements of Law. The Company shall construct any and all improvements to the Real Property in a good and workmanlike manner in accordance with sound building practices. The Company shall comply with all existing and future laws, regulations, orders, building codes, restrictions -89- and requirements of, and all agreements with and commitments to, all governmental, judicial or legal authorities having jurisdiction over the Real Property, including those pertaining to the construction, sale, leasing or financing of such improvements, and with all recorded covenants and restrictions affecting the Real Property. 6.16 Permits, Licenses and Approvals. Each Loan Party shall properly obtain, comply with and keep in effect all permits, licenses and approvals which are required to be obtained from Governmental Authorities in order to construct, occupy and operate the Real Property. Each Loan Party shall promptly deliver copies of all such permits, licenses and approvals to the Agent. 6.17 Purchase of Materials; Conditional Sales Contracts. Except as permitted under Section 7.01(i) or 7.05(e) the Loan Parties shall not purchase or contract for any materials, equipment, furnishings, fixtures or articles of personal property to be placed or installed on the Real Property or in any Improvements in connection with the Rio Expansion Project under any security agreement or other agreement where the seller reserves or purports to reserve title or the right of removal or repossession, or the right to consider them personal property after their incorporation in the work of construction, unless the Agent in each instance has authorized the Loan Parties to do so in writing. 6.18 Site Visits; Right to Stop Work (a) The Agent, or any Lender and its agents and representatives shall have the right at any reasonable time to enter and visit the Real Property for the purposes of performing an appraisal, observing the work of construction and examining all materials, plans, specifications, working drawings and other matters relating to the construction of the Rio Expansion Project. For purposes of these site visits, the Loan Parties shall at all times maintain a full set of working drawings at the construction site. The Agent shall also have the right to examine, copy and audit the books, records, accounting data and other documents of the Loan -90- Parties and their contractors which relate to the Rio Expansion Project. In each instance, the Agent or Lender, as the case may be, shall give the Loan Parties reasonable notice before entering the Property. The Agent or Lender, as the case may be, shall make reasonable efforts to avoid interfering with the Loan Parties' use of the Property when exercising any of the rights granted in this Section. (b) If Majority Lenders in their reasonable judgment determine that any work or materials associated with the Rio Expansion Project fail to conform to sound building practices, or that they otherwise depart from any of the requirements of this Agreement, Majority Lenders may require the work to be stopped and withhold disbursements until the matter is corrected. If this occurs, the Loan Parties shall promptly correct the work to the Agent's satisfaction, and pending completion of such corrective work shall not allow any other work to proceed. (c) Neither the Agent nor any Lender is under any duty to visit the construction site for the Rio Expansion Project, or to supervise or observe construction or to examine any books or records. Any site visit, observation or examination shall be solely for the purpose of protecting the Agent's and the Lenders' rights and interests. No site visit, observation or examination by the Agent shall impose any liability on the Agent or the Lenders or result in a waiver of any default of the Loan Parties. In no event shall any site visit, observation or examination be a representation that there has been or shall be compliance with any construction plans delivered to the Agent or the Lenders, that the construction is free from defective materials or workmanship, or that the construction complies with the Requirements of Law or any other applicable law of a Governmental Authority. Neither the Loan Parties nor any other party is entitled to rely on any site visit, observation or examination by the Agent or any Lender. Neither the Agent nor any -91- Lender owes any duty of care to protect the Loan Parties or any other party against, or to inform the Loan Parties or any other party of, any negligent or defective design or construction of the Improvements, or any other adverse condition affecting the Real Property. 6.19 Protection Against Lien Claims. Each Loan Party shall promptly pay or otherwise discharge all claims and liens for labor done and materials and services furnished in connection with the Rio Expansion Project. Each Loan Party shall have the right to contest in good faith any claim or lien, provided that they do so diligently and without prejudice to the Agent or delay in completing the Rio Expansion Project. Upon the Agent's request, each Loan Party shall promptly provide a bond, cash deposit or other security which the Agent in the exercise of its reasonable judgment determines to be satisfactory. 6.20 Signs and Publicity. At the Agent's request, The Loan Parties shall post signs on the Real Property for the purpose of identifying the Lenders as the construction lenders for the Rio Expansion Project, and shall use its best efforts to identify the Lenders in publicity concerning the Rio Expansion Project. In addition, the Agent shall have the right to refer to the Rio Expansion Project in its own promotional and advertising materials. The Loan Parties shall not post signs, or otherwise identify any of the Lenders as the construction lender, except with the Agent's prior written consent in each instance. 6.21 Leases of Company Premises. Each Loan Party shall notify the Agent promptly of any lease of all or any portion of the Real Property to any Person. Except for the leases set forth on Schedule 6.26 all leases to any Person of any portion of the Real Property (and any renewal or extension of the leases set forth on Schedule 6.26) shall include provisions requiring the tenant to provide the Agent with estoppel certificates in form and substance satisfactory to Majority Lenders within 10 days of the Agent's request. Each Loan Party shall diligently work to obtain such estoppel certificates within such 10 day period. The Agent is hereby authorized to execute, on behalf of the Lenders, non- -92- disturbance agreements in favor of the tenants under each lease described on Schedule 6.26 and in favor of each tenant under any lease hereafter entered into by a Loan Party with a tenant for retail sales, consumer services or restaurant space, in each case in a form reasonably acceptable to the Agent. 6.22 Further Assurances. (a) Each Loan Party shall ensure that all written information, exhibits and reports furnished to the Agent or the Lenders do not and will not contain any untrue statement of a material fact and do not and will not omit to state any material fact or any fact necessary to make the statements contained therein not misleading in light of the circumstances in which made, and will promptly disclose to the Agent and the Lenders and correct any defect or error that may be discovered therein or in any Loan Document or in the execution, acknowledgment or recordation thereof. (b) Promptly upon request by the Agent or the Majority Lenders, each Loan Party shall (and shall cause any of its Subsidiaries to) do, execute, acknowledge, deliver, record, rerecord, file, refile, register and re-register, any and all such further acts, deeds, conveyances, security agreements, Mortgages, assignments, estoppel certificates, financing statements and continuations thereof, termination statements, notices of assignment, transfers, certificates, assurances and other instruments the Agent or such Lenders, as the case may be, may reasonably require from time to time in order (i) to carry out more effectively the purposes of this Agreement or any other Loan Document, (ii) to subject to the Liens created by any of the Collateral Documents any of the Properties, rights or interests covered by any of the Collateral Documents, (iii) to perfect and maintain the validity, effectiveness and priority of any of the Collateral Documents and the Liens intended to be created thereby, and (iv) to better assure, convey, grant, assign, transfer, preserve, protect and confirm to the Agent and -93- Lenders the rights granted or now or hereafter intended to be granted to the Lenders under any Loan Document or under any other document executed in connection therewith. 6.23 Pledge of Borrowers Stock. Not later than 90 days following the Closing Date, (a) the Borrowers shall cause the Parent obtain the approval of the Nevada Gaming Commission to the pledge by the Parent to the Agent, pursuant to the terms of the Parent Security Agreement, of 100% of the capital stock of Borrowers, and (b) the Company shall obtain the approval of the Nevada Gaming Commission to the pledge by the Company to the Agent, pursuant to the terms of the Borrower Security Agreement, of 100% of the capital stock of HLG. ARTICLE 7 NEGATIVE COVENANTS The Borrowers hereby jointly and severally covenant and agree that, so long as any Lender shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Majority Lenders waive compliance in writing: 7.01 Limitation on Liens. The Loan Parties shall not, and shall not suffer or permit any of their respective Subsidiaries to, directly or indirectly, make, create, incur, assume or suffer to exist any Negative Pledges, Rights of Others or Liens upon or with respect to any parts of their Property, whether now owned or hereafter acquired, or grant any Negative Pledge to any other creditor, other than the following ("Permitted Liens"): (a) any Lien (other than Liens on the Collateral) existing on the Property of the Loan Parties or their respective Subsidiaries on the Closing Date and set forth in Schedule 7.01 securing Indebtedness outstanding on such date; (b) any Negative Pledge or Lien created under any Loan Document; -94- (c) Liens for taxes, fees, assessments or other governmental charges which are not delinquent or remain payable without penalty, or to the extent that nonpayment thereof is permitted by Section 6.07, provided that no Notice of Lien has been filed or recorded under the Code; (d) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar Liens arising in the Ordinary Course of Business which are not delinquent or remain payable without penalty; (e) Liens (other than any Lien imposed by ERISA and other than on the Collateral) consisting of pledges or deposits required in the Ordinary Course of Business in connection with workers' compensation, unemployment insurance and other social security legislation; (f) Liens (other than Liens on the Collateral) on the Property of the Loan Parties or any of their respective Subsidiaries securing (i) the non-delinquent performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, (ii) contingent obligations on surety and appeal bonds, and (iii) other non-delinquent obligations of a like nature; in each case, incurred in the Ordinary Course of Business, provided all such Liens in the aggregate would not (even if enforced) cause a Material Adverse Effect; (g) Liens (other than Liens on the Collateral) consisting of judgment or judicial attachment liens, provided that the enforcement of such Liens is effectively stayed and all such liens in the aggregate at any time outstanding for the Loan Parties and their respective Subsidiaries do not exceed $1,000,000; (h) easements, rights of way, restrictions and other similar encumbrances incurred in the Ordinary Course of Business which, in the aggregate, are not substantial in amount, and which do not in any case -95- materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the businesses of the Loan Parties and their respective Subsidiaries; (i) Purchase money security interests on equipment and slot machines only, which are acquired or held by the Loan Parties or their respective Subsidiaries in the Ordinary Course of Business, securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring such equipment or slot machines; provided that (i) any such Lien attaches to such equipment or slot machines concurrently with or within 20 days after the acquisition thereof, (ii) such Lien attaches solely to the equipment or slot machines so acquired in such transaction, (iii) the principal amount of the debt secured thereby does not exceed 100% of the cost of such equipment or slot machines, (iv) the outstanding principal amount of the Indebtedness incurred following the Existing Credit Agreement Closing Date which is secured by such purchase money security interests shall not at any time exceed, when aggregated with Indebtedness permitted under Section 7.05(e), $30,000,000, and (v) the terms and conditions of any such purchase money loan and the related security interest are acceptable to Majority Lenders; (j) Liens securing Capital Lease Obligations on assets subject to such Capital Leases, provided that such Capital Leases are permitted under Section 7.11(c); (k) Liens on cash in an amount not to exceed $1,000,000 securing obligations of the Loan Parties as account party under workers' compensation letters of credit permitted under Section 7.08(d); (l) Liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds -96- maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Loan Parties in excess of those set forth by regulations promulgated by the Federal Reserve Board, and (ii) such deposit account is not intended by the Loan Parties or any of their respective Subsidiaries to provide collateral to the depository institution; and (m) pari passu Liens in favor of the agent and the lenders under the Existing Credit Agreement in Property of the Parent, Borrowers and their Restricted Subsidiaries which is not more extensive than the Liens in favor of the Agent and the Lenders under this Agreement, and which are subject to the Intercreditor Agreement. 7.02 Disposition of Assets. The Loan Parties shall not, and shall not suffer or permit any of their respective Subsidiaries to, directly or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of (whether in one or a series of transactions) any Property (including accounts and notes receivable, with or without recourse) or enter into any agreement to do any of the foregoing, except: (a) dispositions of inventory, or used, worn-out or surplus equipment, all in the Ordinary Course of Business; (b) the sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement equipment; and (c) transfers of assets by any Subsidiary or any Borrower to any Borrower, or transfers of assets by any Subsidiary or any Borrower to any Restricted Subsidiaries with respect to which Sections 6.13 and 6.14 have been complied with. -97- 7.03 Consolidations and Mergers. The Loan Parties shall not, and shall not suffer or permit any of their respective Subsidiaries to, merge, consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person, except: (a) any Subsidiary of the Loan Parties may merge with the Loan Parties, provided that the Loan Parties shall be the continuing or surviving corporation, or with any one or more Subsidiaries of the Loan Parties, provided that if any transaction shall be between a Subsidiary and a wholly owned Subsidiary, the wholly owned Subsidiary shall be the continuing or surviving corporation; and (b) any Subsidiary of the Loan Parties may sell all or substantially all of its assets (upon voluntary liquidation or otherwise), to the Loan Parties or another wholly owned Subsidiary of the Loan Parties. 7.04 Loans and Investments. The Loan Parties shall not purchase or acquire, or suffer or permit any of their respective Subsidiaries to purchase or acquire, or make any commitment therefor, any capital stock, equity interest, all or substantially all of the assets of, or any obligations or other securities of, or any interest in, any Person, or make any advance, loan, extension of credit or capital contribution to or any other investment in, any Person including any Affiliate of the Loan Parties (collectively, "investments"), except for: (a) investments in Cash Equivalents; (b) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the Ordinary Course of Business and all extensions of credit to gaming customers to the extent, and of amounts, customarily made available by the Loan Parties in the Ordinary Course of its Business; -98- (c) Investments in Borrowers and Restricted Subsidiaries with respect to which Sections 6.13 and 6.14 have been complied with; (d) Existing Investments through Rio Development in the Rio Secco Golf Course; (e) Investments made following the Existing Credit Agreement Closing Date in Rio Development in an aggregate amount not to exceed $35,000,000 for the purpose of further development of the Rio Secco Golf Course made when no Default or Event of Default exists or would result therefrom; and (f) Investments following the Existing Credit Agreement Closing Date in Cinderlane or New Project Entities for the purpose of constructing improvements to the Cinderlane Property, provided that the aggregate amount of such Investments shall not exceed $60,000,000 unless (i) Cinderlane, the relevant New Project Entity or a Borrower, or another Restricted Subsidiary which is the owner of such real property has granted a guaranty to the Agent pursuant to Section 6.13 and has executed and delivered a deed of trust with respect to the Cinderlane Property to the Agent for the benefit of the Lenders, which deed of trust shall be substantially in the form of the Deed of Trust, (ii) the Borrowers shall have provided the Agent with endorsements to its policy of title insurance assuring the deed of trust to be of first priority, subject only to such exceptions to title as may be acceptable to the Agent and as are disclosed in writing to the Lenders, and (iii) Borrowers or the Restricted Subsidiary owning the Cinderlane Real Property has provided to the Agent such other assurances, opinions, instruments, documents and agreements as the Agent may reasonably request. 7.05 Limitation on Indebtedness. The Loan Parties shall not, and shall not suffer or permit any of their respective Subsidiaries to, create, incur, assume, suffer to exist, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness, except: -99- (a) Indebtedness incurred pursuant to this Agreement and Indebtedness incurred pursuant to the Existing Credit Agreement; (b) accounts payable to trade creditors for goods and services and current operating liabilities (not the result of the borrowing of money) incurred in the Ordinary Course of Business of the Loan Parties or such Subsidiary in accordance with customary terms and paid within the specified time, unless contested in good faith by appropriate proceedings and reserved for in accordance with GAAP; (c) Indebtedness consisting of Contingent Obligations permitted pursuant to Section 7.08; (d) Indebtedness existing on the Existing Credit Agreement Closing Date and set forth in Schedule 7.05; (e) Indebtedness secured by Liens permitted by Section 7.01(i) incurred following the Existing Credit Agreement Closing Date in an aggregate principal amount which does not exceed $30,000,000 at any time; (f) Indebtedness incurred in connection with leases permitted pursuant to Section 7.11; (g) Indebtedness incurred when no Default or Event of Default exists having subordination and other terms substantially the same as the Parent's outstanding 9-1/2% Senior Subordinated Notes Due 2007 (other than pricing, but in any event reasonably satisfactory to the Agent and its counsel), providing in any event for no payments of principal prior to the maturity of such Senior Subordinated Notes; and (h) unsecured revolving Indebtedness of the Parent (but not of the Borrowers or their Subsidiaries) to Harrah's in an aggregate principal amount not to exceed $100,000,000 at any time. -100- 7.06 Transactions with Affiliates. The Loan Parties shall not, and shall not suffer or permit any of their respective Subsidiaries to, enter into any transaction with any Affiliate of the Loan Parties or of any such Subsidiary, except (a) as expressly permitted by this Agreement, or (b) in the Ordinary Course of Business and pursuant to the reasonable requirements of the businesses of the Loan Parties or such Subsidiary; in each case (a) and (b), upon fair and reasonable terms no less favorable to the Loan Parties or such Subsidiary than would be obtained in a comparable arm's length transaction with a Person not an Affiliate of the Loan Parties or such Subsidiary. 7.07 Use of Proceeds. The Loan Parties shall not use any portion of the Loan proceeds, directly or indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise refinance indebtedness of the Loan Parties or others incurred to purchase or carry Margin Stock, (iii) to extend credit for the purpose of purchasing or carrying any Margin Stock, or (iv) to acquire any security in any transaction that is subject to Section 13 or 14 of the Exchange Act. 7.08 Contingent Obligations. The Loan Parties shall not, and shall not suffer or permit any of their respective Subsidiaries to, create, incur, assume or suffer to exist any Contingent Obligations except: (a) endorsements for collection or deposit in the Ordinary Course of Business; (b) Rate Contracts entered into with respect to the obligations and indebtedness evidenced by this Agreement; (c) Contingent Obligations of the Loan Parties and their respective Subsidiaries existing as of the Existing Credit Agreement Closing Date and listed in Schedule 7.08; (d) Contingent Obligations of the Loan Parties for workers' compensation letters of credit the aggregate face amount of which shall at no time exceed $1,000,000; -101- (e) Guaranty Obligations of the Parent Senior Subordinated Notes not exceeding an aggregate principal potential liability of $225,000,000 (until the repayment of Parent Senior Subordinated Notes in connection herewith, at which time such amount shall be permanently reduced in the principal amount so repaid), together with interest thereon and of any additional senior subordinated notes of Parent issued following the Closing Date pursuant to Section 7.05(g); provided, that any Guaranty Obligations with respect to Parent Senior Subordinated Notes issued following the Closing Date shall be subordinated to the Obligations on terms and conditions which are similar to those in existence as of the Closing Date with respect to the then outstanding Parent Senior Subordinated Notes and in any event reasonably satisfactory to the Agent and its counsel; and (f) Guaranty Obligations of the Company and/or Rio Resorts with respect to Indebtedness of Rio Development and/or Rio Resorts permitted by Section 7.05(e). (g) Contingent Obligations consisting of guaranties of the Indebtedness incurred pursuant to the Existing Credit Agreement issued by Parent and the Restricted Subsidiaries which have guaranteed the obligations under this Agreement and which are pari passu with those granted to the Agent and the Lenders. 7.09 Joint Ventures. The Loan Parties shall not, and shall not suffer or permit any of their respective Subsidiaries to, enter into any Joint Venture, other than in the Ordinary Course of Business. 7.10 Compliance with. The Loan Parties shall not, and shall not suffer or permit any of their respective Subsidiaries to, (i) terminate any Plan subject to Title IV of ERISA so as to result in any material (in the opinion of the -102- Majority Lenders) liability to the Loan Parties or any ERISA Affiliate, (ii) permit to exist any ERISA Event or any other event or condition, which presents the risk of a material (in the opinion of the Majority Lenders) liability to any member of the Controlled Group, (iii) make a complete or partial withdrawal (within the meaning of ERISA Section 4201) from any Multiemployer Plan so as to result in any material (in the opinion of the Majority Lenders) liability to Loan Parties or any ERISA Affiliate, (iv) enter into any new Plan or modify any existing Plan so as to increase its obligations thereunder which could result in any material (in the opinion of the Majority Lenders) liability to any member of the Controlled Group, or (v) permit the present value of all nonforfeitable accrued benefits under any Plan (using the actuarial assumptions utilized by the PBGC upon termination of a Plan) materially (in the opinion of the Majority Lenders) to exceed the fair market value of Plan assets allocable to such benefits, all determined as of the most recent valuation date for each such Plan. 7.11 Lease Obligations. The Loan Parties shall not, and shall not suffer or permit any of their respective Subsidiaries to, create or suffer to exist any obligations for the payment of rent for any Property under lease or agreement to lease, except for: (a) leases of the Loan Parties and their respective Subsidiaries in existence on the Existing Credit Agreement Closing Date and any renewal, extension or refinancing thereof; (b) Operating Leases entered into by the Loan Parties or any of their respective Subsidiaries after the Existing Credit Agreement Closing Date in the Ordinary Course of Business; (c) Capital Leases, other than those permitted under clause (a) of this Section 7.11, entered into by the Loan Parties or any of their respective Subsidiaries after the Existing Credit Agreement Closing Date to finance the acquisition of equipment; provided that the aggregate annual rental payments for all such Capital Leases shall not exceed, when -103- aggregated with all other Capital Expenditures during such year, the limits on Capital Expenditures set forth in Section 7.13. 7.12 Restricted Payments. The Loan Parties shall not, and shall not suffer or permit any of their respective Subsidiaries to, declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any shares of any class of its capital stock, or purchase, redeem or otherwise acquire for value any shares of its capital stock or any warrants, rights or options to acquire such shares, now or hereafter outstanding, except for: (a) Dividends, payments or other distributions paid to the Loan Parties by their wholly-owned Subsidiaries; (b) Dividends to the Parent made when no Default or Event of Default exists or would result therefrom; and (c) Payments of principal and interest with respect to the Indebtedness described in Section 7.05(h) made when no Default or Event of Default exists. 7.13 Capital Expenditures. The Loan Parties and their respective Subsidiaries and Unrestricted Subsidiaries shall not make, or become legally obligated to make, any Capital Expenditures except: (a) Capital Expenditures associated with the Rio Expansion Project in an aggregate amount not to exceed $258,000,000; and (b) Other Capital Expenditures (including Maintenance Capital Expenditures) which do not exceed $142,000,000. 7.14 Interest Coverage Ratio. The Borrowers shall not permit the Interest Coverage Ratio, as of the last day of any fiscal quarter, to be less than the ratio set forth opposite that fiscal quarter below: -104-
Fiscal Quarters Ending Ratio --------------------------- ------- December 31, 1998 through and including December 31, 1999 1.75:1.00 Thereafter 2.00:1.00
7.15 Maximum Total Leverage Ratio. The Borrowers shall not permit the Total Leverage Ratio, as of the last day of any fiscal quarter, to be greater than the ratio set forth opposite that fiscal quarter below:
Fiscal Quarters Ending Ratio --------------------------- ------ September 30, 1998 5.00:1.00 December 31, 1998 5.25:1.00 March 31, 1999 5.75:1.00 June 30, 1999 5.75:1.00 September 30, 1999 4.75:1.00 December 31, 1999 4.50:1.00 Thereafter 4.00:1.00
7.16 Maximum Senior Leverage. The Borrowers shall not permit the Senior Leverage Ratio, (a) as of the last day of any fiscal quarter ending on or prior to December 31, 1999, to be greater than 3.50:1.00 and (b) as of the last day of any subsequent fiscal quarter, to be greater than 3.25:1.00. 7.17 Change in Business. The Loan Parties shall not, and shall not permit any of their respective Subsidiaries to, engage in any material line of business substantially different from those lines of businesses carried on by them on the date hereof. The Loan Parties shall not, and shall not permit any of their respective Subsidiaries to, engage in any activity which would jeopardize any liquor, casino, gambling or gaming license held by the Loan Parties or which would cause a License Revocation. -105- 7.18 Change in Structure. Except as expressly permitted under Section 7.03 or Section 7.04, the Loan Parties shall not and shall not permit any of their respective Subsidiaries to, make any changes in its equity capital structure (including in the terms of its outstanding stock), or amend its certificate of incorporation or bylaws in any material respect. 7.19 Accounting Changes. The Loan Parties shall not, and shall not suffer or permit any of their respective Subsidiaries to, make any significant changes in accounting treatment or reporting practices, except as required by GAAP or by Gaming Authorities, or change the fiscal year of the Loan Parties or of any of their consolidated Subsidiaries. 7.20 Other Contracts. The Loan Parties shall not enter into any employment contracts or other employment or service-retention arrangements whose terms, including salaries, benefits and other compensation, are not normal and customary in the industry. 7.21 Management Agreement. The Loan Parties shall not enter into a management agreement with any other Person with respect to the Real Property and the Improvements unless the form of such agreement and such Person are approved by the Agent. 7.22 Improvement District. The Loan Parties shall not vote in favor of, or directly or indirectly advocate or assist in the incorporation of any part of the Real Property or the Project into any improvement or community facilities district, special assessment district or other district without the Agent's prior written consent in each instance. ARTICLE 8 EVENTS OF DEFAULT 8.01 Event of Default. Any of the following shall constitute an "Event of Default": (a) Non-Payment. Any Loan Party fails to pay, (i) when and as required to be paid herein, any -106- amount of principal of any Loan, or (ii) within 5 days after the same shall become due, any interest, fee or any other amount payable hereunder or pursuant to any other Loan Document; (b) Representation or Warranty. Any representation or warranty by any Loan Party or any of its Subsidiaries or the Parent made or deemed made herein, in any Loan Document, or which is contained in any certificate, document or financial or other statement by any Loan Party, any of its Subsidiaries, or the Parent or their respective Responsible Officers, furnished at any time under this Agreement, or in or under any Loan Document, shall prove to have been incorrect in any material respect on or as of the date made or deemed made; (c) Specific Defaults. Any Loan Party fails to perform or observe any term, covenant or agreement contained in Sections 6.01, 6.02, 6.03, 6.09, 6.11, 6.15, 6.16 or 6.17 or Article 7; (d) Other Defaults. Any Loan Party fails to perform or observe any other term or covenant contained in this Agreement or any Loan Document, and such default shall continue unremedied for a period of 15 days after the earlier of (i) the date upon which a Responsible Officer knew or should have known of such failure or (ii) the date upon which written notice thereof is given to any Loan Party by the Agent or any Lender; (e) Abandonment of Construction. If, following commencement thereof, construction of the Rio Expansion Project is abandoned, or construction of the Rio Expansion Project is not completed on or before December 31, 1999; (f) Government Stoppage. Any Governmental Authority having jurisdiction over the Project orders or requires that construction of the Rio Expansion Project, once commenced, be stopped in whole or in part, or any required approval, license or permit is -107- withdrawn or suspended, and the order, requirement, withdrawal or suspension remains in effect either (i) for a period of thirty (30) consecutive days ("Initial Cure Period"), or (ii) for a total period of ninety (90) days, so long as any Loan Party begins within the Initial Cure Period and diligently continues to take steps to remove the effect of the order, requirement, withdrawal or suspension, and the Agent, exercising reasonable judgment, determines that any Loan Party is reasonably likely to prevail; (g) Condemnation. All or a substantial or material portion of the Real Property is condemned, seized or appropriated by any Governmental Authority; provided, however, that the foregoing shall not constitute an Event of Default if (i) all sums secured by the Deed of Trust are paid in full within 30 days after the date of any such condemnation, seizure or appropriation, and (ii) any Loan Party has executed such documents as the Agent or the Lenders may require evidencing the termination of the Lenders' obligation to make any further Loans under this Agreement; (h) Cross Default. Any Loan Party or any of its Subsidiaries (i) fails to make any payment in respect of any Indebtedness or Contingent Obligation when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure continues after the applicable grace or notice period, if any, specified in the document relating thereto on the date of such failure; or (ii) fails to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such Indebtedness or Contingent Obligation, and such failure continues after the applicable grace or notice period, if any, specified in the document relating thereto on the date of such failure if the effect of such failure, event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on behalf of such -108- holder or holders or beneficiary or beneficiaries) to cause such Indebtedness to be declared to be due and payable prior to its stated maturity, or such Contingent Obligation to become payable or cash collateral in respect thereof to be demanded; (i) Insolvency; Voluntary Proceedings. Any Loan Party or any of its Subsidiaries (i) ceases or fails to be Solvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing; (j) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against any Loan Party or any Subsidiary of any Loan Party, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of any Loan Party's or any of its Subsidiaries' Properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) any Loan Party or any of its Subsidiaries admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) any Loan Party or any of its Subsidiaries acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its Property or business; (k) ERISA. (i) A member of the Controlled Group shall fail to pay when due, after the -109- expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under a Multiemployer Plan; (ii) any Loan Party or an ERISA Affiliate shall fail to satisfy its contribution requirements under Section 412(c)(11) of the Code, whether or not it has sought a waiver under Section 412(d) of the Code; (iii) in the case of an ERISA Event involving the withdrawal from a Plan of a "substantial employer" (as defined in Section 4001(a)(2) or Section 4062(e) of ERISA), the withdrawing employer's proportionate share of that Plan's Unfunded Pension Liabilities is more than $1,000,000; (iv) in the case of an ERISA Event involving the complete or partial withdrawal from a Multiemployer Plan, the withdrawing employer has incurred a withdrawal liability in an aggregate amount exceeding $1,000,000; (v) in the case of an ERISA Event not described in clause (iii) or (iv), the Unfunded Pension Liabilities of the relevant Plan or Plans exceed $1,000,000; (vi) a Plan that is intended to be qualified under Section 401(a) of the Code shall lose its qualification, and the loss can reasonably be expected to impose on members of the Controlled Group liability (for additional taxes, to Plan participants, or otherwise) in the aggregate amount of $1,000,000 or more; (vii) the commencement or increase of contributions to, or the adoption of or the amendment of a Plan by, a member of the Controlled Group shall result in a net increase in unfunded liabilities to the Controlled Group in excess of $1,000,000; (viii) any member of the Controlled Group engages in or otherwise becomes liable for a non-exempt prohibited transaction and the initial tax or additional tax under section 4975 of the Code relating thereto might reasonably be expected to exceed $1,000,000; (ix) a violation of section 404 or 405 of ERISA or the exclusive benefit rule under section 401(a) of the Code if such violation might reasonably be expected to expose a member or members of the Controlled Group to monetary liability in excess of $1,000,000; (x) any member of the Controlled Group is assessed a tax under section 4980B of the Code in excess of $1,000,000; or (xi) -110- the occurrence of any combination of events listed in clauses (iii) through (x) that involves a potential liability, net increase in aggregate Unfunded Pension Liabilities, unfunded liabilities, or any combination thereof, in excess of $1,000,000; (l) Monetary Judgments. One or more final (non-interlocutory) judgments, orders or decrees shall be entered against any Loan Party or any of its Subsidiaries involving in the aggregate a liability (not fully covered by independent third-party insurance) as to any single or related series of transactions, incidents or conditions, of $1,000,000 or more, and the same shall remain unsatisfied, unvacated and unstayed pending appeal for a period of 30 days after the entry thereof; or (m) Non-Monetary Judgments. Any non-monetary judgment, order or decree shall be rendered against any Loan Party or any of its Subsidiaries which does or would reasonably be expected to have a Material Adverse Effect, and there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (n) Guaranties and Collateral. (i) any provision of any Collateral Document, Guaranty or any Parent Collateral Document shall for any reason cease to be valid and binding on or enforceable against any Loan Party or any Subsidiary of any Loan Party or any Guarantor party thereto or any Loan Party or any Subsidiary of any Loan Party or any Guarantor shall so state in writing or bring an action to limit its obligations or liabilities thereunder; or (ii) any Collateral Document or Parent Collateral Documents shall for any reason (other than pursuant to the terms thereof) cease to create a valid security interest in the -111- Collateral purported to be covered thereby or such security interest shall for any reason cease to be a perfected and first priority security interest subject only to Permitted Liens and such failure shall continue unremedied for a period of 10 days after the earlier of (i) the date upon which a Responsible Officer knew or should have known of such failure or (ii) the date upon which written notice thereof is given to any Loan Party by the Agent or any Lender; and provided that such failure is remedied with no loss of priority and that the Lenders or the Agent on behalf of the Lenders are returned to the position they would have been in had no lapse of the security interest, or the priority or perfection thereof ever occurred; (o) Ownership Parent and Company. (i) The Parent any time: (A) ceases to maintain in the aggregate a direct or indirect beneficial equity interest in any Loan Party at least equal to 100% of the beneficial equity interest directly or indirectly held by it on the Existing Credit Agreement Closing Date; or (B) fails to own beneficially, directly or indirectly, capital stock representing voting control of any Loan Party; or (ii) (A) Harrah's ceases to own or control beneficially, directly or indirectly, at least 75% of the outstanding Voting Stock of the Parent, or (B) or any Person or group of Persons (as defined in the Securities Exchange Act of 1934 and regulations thereunder) shall hold or control a greater amount of the Voting Stock of the Parent than the amount owned directly or controlled by Harrah's; (p) Guaranty Obligations. If any claim, demand or request for payment shall be made on any Loan Party or any Subsidiary under or in respect of any Guaranty Obligations permitted by Section 7.08(e); -112- (q) Loss of Licenses. (i) There shall occur any License Revocation; or (ii) any Governmental Authority (other than a Gaming Authority shall revoke or fail to renew any material license, permit or franchise of any Loan Party or any of its Subsidiaries or any Loan Party or any of its Subsidiaries shall for any reason lose any material license, permit or franchise or any Loan Party or any of its Subsidiaries shall suffer the imposition of any restraining order, escrow, suspension or impound of funds in connection with any proceeding (judicial or administrative) with respect to any material license, permit or franchise; (r) Adverse Change. There shall occur a Material Adverse Effect; (s) Rate Contracts. Any Loan Party shall breach or default under any Rate Contract to which any Lender is a party, if the effect of such breach or default is to allow the Lender to proceed against, or otherwise realize from, any Loan Party or any Collateral to satisfy any claim of the Lender against any Loan Party in respect of such Rate Contract; (t) Guarantor Defaults. The Parent shall fail in any material respect to perform or observe any term, covenant or agreement in the Parent Guaranty; or the Parent Guaranty shall for any reason be partially (including with respect to future advances) or wholly revoked or invalidated, or otherwise cease to be in full force and effect, or the Parent or any other Person shall contest in any manner the validity or enforceability thereof or deny that it has any further liability or obligation thereunder; or any event described at paragraphs (i) or (j) shall occur with respect to any Guarantor; or -113- (u) Use of Dividends by Parent. Any dividends received by the Parent from any other Loan Party as permitted by Section 7.12(c) are not promptly (i) used to make required interest payments on the Parent Senior Subordinated Notes as and when due, or to redeem the Parent Senior Subordinated Notes, (ii) contributed to the Company, or (iii) used for operating expenses of the Parent in the Ordinary Course of Business. 8.02 Remedies. If any Event of Default occurs, the Agent shall, at the request of, or may, with the consent of, the Majority Lenders, (a) declare the Commitment of each Lender to make Loans to be terminated, whereupon such Commitments shall forthwith be terminated; (b) declare all or any portion of the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable; without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by Borrowers; and (c) exercise on behalf of itself and the Lenders all rights and remedies available to it and the Lenders under the Loan Documents or applicable law (subject to any necessary approvals from Gaming Authorities); provided, however, that upon the occurrence of any event specified in paragraph (i) or (j) of Section 8.01 above (in the case of clause (i) of paragraph (j) upon the expiration of the 60-day period mentioned therein), the obligation of each Lender to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Agent or any Lender. -114- Also, if any Event of Default occurs before Completion of the Rio Expansion Project, the Agent shall have the right in its sole discretion to enter and take possession of the Real Property, whether in person, by agent or by court-appointed receiver, and to take any and all actions which the Agent in its sole discretion may consider necessary to complete construction of the Improvements, including making changes in the construction plans, work or materials and entering into, modifying or terminating any contractual arrangements, all subject to the Agent's right at any time to discontinue any work without liability. If the Agent chooses to complete the Improvements, neither it nor the Lenders shall assume any liability to the Company or any other person for completing the Improvements, or for the manner or quality of construction of the Improvements, and the Company expressly waives any such liability. If the Company exercises any of the rights or remedies provided in this clause, that exercise shall not make the Agent, or cause the Agent to be deemed to be, a partner or joint venturer of the Company. The Agent in its sole discretion may choose to complete construction in its own name. All sums which are expended by the Agent and/or the Lenders in completing construction shall be considered to have been disbursed to the Company and shall be secured by the Collateral; any sums of principal shall be considered to be an additional loan to the Company bearing interest at the Default Rate, as defined in the Note, and shall be secured by the Collateral. 8.03 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. ARTICLE 9 THE AGENT 9.01 Appointment and Authorization. Each Lender hereby irrevocably appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise -115- such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Agent will distribute to Lenders copies of documents received by the Agent pursuant to Sections 2.03, 6.01 and 6.02 from the Loan Parties or the Parent, as the case may be. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. 9.02 Delagation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 9.03 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by the Loan Parties or any Subsidiary or Affiliate of the Loan Parties, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or for the value of any Collateral or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Loan Parties or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained -116- in, or conditions of, this Agreement or any other Loan Document, or to inspect the Properties, books or records of the Loan Parties or any of the Loan Party's Subsidiaries or Affiliates. 9.04 Reliance by Agent. (a) The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Loan Parties), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Majority Lenders as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Majority Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. (b) For purposes of determining compliance with the conditions specified in Article 4, each Lender that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with each document or other matter either sent by the Agent to such Lender for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Lender, unless an -117- officer of the Agent responsible for the transactions contemplated by the Loan Documents shall have received notice from the Lender prior to the initial Borrowing specifying its objection thereto and either such objection shall not have been withdrawn by notice to the Agent to that effect or the Lender shall not have made available to the Agent the Lender's ratable portion of such Borrowing. 9.05 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Lenders, unless the Agent shall have received written notice from a Lender or the Loan Parties referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be requested by the Majority Lenders in accordance with Article 8; provided, however, that unless and until the Agent shall have received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Lenders. 9.06 Credit Decision. Each Lender expressly acknowledges that none of the Agent-Related Persons has made any representation or warranty to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Loan Parties and their respective Subsidiaries shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Loan Parties and their respective Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated thereby, and made its own decision to enter into this Agreement -118- and extend credit to the Loan Parties hereunder. Each Lender also represents that it will, independently and without reliance upon the Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Loan Parties. Except for notices, reports and other documents expressly herein required to be furnished to the Lenders by the Agent, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Loan Parties which may come into the possession of any of the Agent-Related Persons. 9.07 Indemnification. Whether or not the transactions contemplated hereby shall be consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Loan Parties and without limiting the obligations of the Loan Parties to do so), ratably from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind whatsoever which may at any time (including at any time following the repayment of the Loans and the termination or resignation of the related Agent) be imposed on, incurred by or asserted against any such Person any way relating to or arising out of this Agreement or any document contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by any such Person under or in connection with any of the foregoing; provided, however, that no Lender shall be liable for the payment to the Agent-Related Persons of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, -119- execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Loan Parties. Without limiting the generality of the foregoing, if the Internal Revenue Service or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Lenders in this Section shall survive the payment of all Obligations hereunder. 9.08 Agent in Individual Capacity. BofA and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory or other business with the Loan Parties and their respective Subsidiaries and Affiliates as though BofA were not the Agent hereunder and without notice to or consent of the Lenders. With respect to its Loans, BofA shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Agent, and the terms "Lender" and "Lenders" shall include BofA in its individual capacity. 9.09 Successor Agent. The Agent may, and at the request of the Majority Lenders shall, resign as Agent upon 30 days' notice to the Lenders. If the Agent shall resign as Agent under this Agreement, the Majority Lenders shall appoint from among the Lenders a successor agent for the Lenders. If no successor agent is appointed prior to the effective date of -120- the resignation of the Agent, the Agent may appoint, after consulting with the Lenders and the Loan Parties, a successor agent from among the Lenders. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article 9 and Sections 10.04 and 10.05 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of the Agent hereunder until such time, if any, as the Majority Lenders appoint a successor agent as provided for above. 9.10 Collateral Matters. (a) The Agent is authorized on behalf of all the Lenders, without the necessity of any notice to or further consent from the Lenders, from time to time to take any action with respect to any Collateral, Parent Collateral or the Collateral Documents or Parent Collateral Documents which may be necessary to perfect and maintain perfected the security interest in and Liens upon the Collateral and the Parent Collateral. (b) The Lenders irrevocably authorize the Agent, at its option and in its discretion, to release any Guaranty and to release any Lien granted to or held by the Agent upon any Collateral or Parent Collateral (i) upon termination of the Commitments and payment in full of all Loans and all other Obligations payable under this Agreement and under any other Loan Document; (ii) constituting Property sold or to be sold or disposed of as part of or in connection with any disposition permitted hereunder; (iii) constituting Property in which the Loan Parties or any Subsidiary of Loan Parties, or Guarantor, as -121- applicable, owned no interest at the time the Lien was granted or at any time thereafter; (iv) constituting Property leased to the Loan Parties or any Subsidiary of the Loan Parties or any Guarantor under a lease which has expired or been terminated in a transaction permitted under this Agreement or is about to expire and which has not been, and is not intended by the Loan Parties or such Subsidiary or Guarantor to be, renewed or extended; (v) consisting of an instrument evidencing Indebtedness or other debt instrument, if the indebtedness evidenced thereby has been paid in full; or (vi) if approved, authorized or ratified in writing by the Majority Lenders or all the Lenders, as the case may be, as provided in Section 10.01(f). Upon request by the Agent at any time, the Lenders will confirm in writing the Agent's authority to release particular types or items of Collateral or Parent Collateral pursuant to this Section 9.10(b). (c) Each Lender agrees with and in favor of each other (which agreement shall not be for the benefit of the Loan Parties or any of their respective Subsidiaries) that the Loan Parties' obligation to such Lender under this Agreement and the other Loan Documents is not and shall not be secured by any real property collateral now or hereafter acquired by such Lender other than the real property described in the Deed of Trust or any other Mortgage entered into pursuant to the Loan Documents. ARTICLE 10 MISCELLANEOUS 10.01 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Borrowers therefrom, shall be effective unless the same shall be in writing and signed by the Majority Lenders, the Borrowers and acknowledged by the Agent, and then such waiver shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and -122- signed by all the Lenders, the Borrowers and acknowledged by the Agent, do any of the following: (a) increase the Aggregate Commitment; (b) increase or extend the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 8.02(a)) or subject any Lender to any additional obligations without the consent of that Lender; (c) postpone or delay any date fixed for any payment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any Loan Document; (d) reduce the principal of, or the rate of interest specified herein on any Loan, or of any fees or other amounts payable hereunder or under any Loan Document; (e) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which shall be required for the Lenders or any of them to take any action hereunder; (f) amend this Section 10.01 or Section 2.14; or (g) discharge any Guarantor, or release any material portion of the Collateral or Parent Collateral except as otherwise may be provided in the Collateral Documents or Parent Collateral Documents or except where the consent of the Majority Lenders only is specifically provided for; and, provided further, that no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Majority Lenders or all the Lenders, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Loan Document. -123- 10.02 Notices. ((a) All notices, requests and other communications provided for hereunder shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by any Borrower by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified on the applicable signature page hereof, and (ii) shall be followed promptly by a hard copy original thereof) and mailed, faxed or delivered, to the address or facsimile number specified for notices on the applicable signature page hereof; or, as directed to any Borrower or the Agent, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to each other party, at such other address as shall be designated by such party in a written notice to any Borrower and the Agent. Any notice given to any Borrower shall be deemed to have been given to all Loan Parties. (b) All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered for overnight (next day) delivery, or transmitted by facsimile machine, respectively, or if delivered, upon delivery, except that notices pursuant to Article 2 or 9 shall not be effective until actually received by the Agent. (c) The Loan Parties acknowledge and agree that any agreement of the Agent and the Lenders at Article 2 herein to receive certain notices by telephone and facsimile is solely for the convenience and at the request of the Loan Parties. The Agent and the Lenders shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Loan Parties to give such notice and the Agent and the Lenders shall not have any liability to the Loan Parties or other Person on account of any action taken or not taken by the Agent or the Lenders in -124- reliance upon such telephonic or facsimile notice. The obligation of the Loan Parties to repay the Loans shall not be affected in any way or to any extent by any failure by the Agent and the Lenders to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Lenders of a confirmation which is at variance with the terms understood by the Agent and the Lenders to be contained in the telephonic or facsimile notice. 10.03 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 10.04 Costs and Expenses. The Borrowers jointly and severally shall, whether or not the transactions contemplated hereby shall be consummated: (a) pay or reimburse Agent and Lead Arranger within five Business Days after demand (subject to Section 4.01(r)) for all costs and expenses incurred by Agent or Lead Arranger, as applicable, in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including the reasonable Attorney Costs incurred with respect thereto upon presentation of an invoice therefor together with reasonable supporting documentation; (b) pay or reimburse each Lender and the Agent within five Business Days after demand (subject to Section 4.01(r)) for all costs and expenses incurred by them in connection with the enforcement, attempted -125- enforcement, or preservation of any rights or remedies (including in connection with any "workout" or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding) under this Agreement, any other Loan Document, and any such other documents, including Attorney Costs incurred by the Agent and any Lender upon presentation of an invoice therefor together with reasonable supporting documentation; and (c) pay or reimburse BofA (including in its capacity as Agent) within five Business Days after demand (subject to Section 4.01(r) for all appraisal (including the allocated cost of internal appraisal services), audit, environmental inspection and review (including the allocated cost of such internal services), search and filing costs, fees and expenses, incurred or sustained by BofA (including in its capacity as Agent) in connection with the matters referred to under Sections (a) and (b) of this Section upon presentation of an invoice therefor together with reasonable supporting documentation. 10.05 Indemnity. Whether or not the transactions contemplated hereby shall be consummated: (a) General Indemnity. The Borrowers jointly and severally shall pay, indemnify, and hold each Lender, the Lead Arranger, the Agent and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, and the reasonable costs, charges, expenses or disbursements (including Attorney Costs) of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement and any other Loan Documents, or the transactions contemplated hereby and thereby, and with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to this Agreement or -126- the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Borrowers jointly and severally shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of such Indemnified Person. (b) Environmental Indemnity. (i) The Borrowers jointly and severally hereby agree to indemnify, defend and hold harmless each Indemnified Person, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, and the reasonable costs, charges, expenses or disbursements (including Attorney Costs and the allocated cost of internal environmental audit or review services), which may be incurred by or asserted against such Indemnified Person in connection with or arising out of any pending or threatened investigation, litigation or proceeding, or any action taken by any Person, with respect to any Environmental Claim arising out of or related to any Property subject to a Mortgage in favor of the Agent or any Lender. No action taken by legal counsel chosen by the Agent or any Lender in defending against any such investigation, litigation or proceeding or requested remedial, removal or response action shall vitiate or any way impair the Borrowers' obligation and duty hereunder to indemnify and hold harmless the Agent and each Lender. (ii) In no event shall any site visit, observation, or testing by the Agent or any Lender be deemed a representation or warranty that Hazardous Materials are or are not present in, on, or under the site, or that there has been or shall be compliance with any Environmental Law. Neither the Borrowers nor -127- any other Person is entitled to rely on any site visit, observation, or testing by the Agent or any Lender. Neither the Agent nor any Lender owes any duty of care to protect the Borrowers or any other Person against, or to inform the Borrowers or any other party of, any Hazardous Materials or any other adverse condition affecting any site or Property. Neither the Agent nor any Lender shall be obligated to disclose to the Borrowers or any other Person any report or findings made as a result of, or in connection with, any site visit, observation, or testing by the Agent or any Lender. (c) Survival; Defense. The obligations in this Section 10.05 shall survive payment of all other Obligations. At the election of any Indemnified Person, the Company shall defend such Indemnified Person using legal counsel satisfactory to such Indemnified Person in such Person's sole discretion, at the sole reasonable cost and expense of the Company. All amounts owing under this Section 10.05 shall be paid within 30 days after demand. 10.06 Marshaling; Payments Set Aside. Neither the Agent nor the Lenders shall be under any obligation to marshall any assets in favor of the Borrowers or any other Person or against or in payment of any or all of the Obligations. To the extent that the Borrowers makes a payment or payments to the Agent or the Lenders, or the Agent or the Lenders enforce their Liens or exercise their rights of set-off, and such payment or payments or the proceeds of such enforcement or set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party in connection with any Insolvency Proceeding, or otherwise, then to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or set-off had not occurred. 10.07 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit -128- of the parties hereto and their respective successors and assigns, except that the Borrowers may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Lender. 10.08 Assignments, Participations, etc (a) Any Lender may, with the written consent of the Borrowers at all times other than during the existence of an Event of Default and the Agent, which consents shall not be unreasonably withheld, at any time assign and delegate to one or more Eligible Assignees (provided that no written consent of the Borrowers or the Agent shall be required in connection with any assignment and delegation by a Lender to a Lender Affiliate of such Lender or to another Lender) (each an "Assignee") all, or any ratable part of all, of the Loans, the Commitments and the other rights and obligations of such Lender hereunder, in a minimum amount of the lesser of $5,000,000 or such Lender's entire remaining interest in the Loans, the Commitments and the other rights and obligations hereunder; provided, however, that (i) the Borrowers and the Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (A) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the Borrowers and the Agent by such Lender and the Assignee; (B) such Lender and its Assignee shall have delivered to the Borrowers and the Agent an Assignment and Acceptance in the form of Exhibit E ("Assignment and Acceptance") together with any Note or Notes subject to such assignment and (C) the assignor Lender or Assignee has paid to the Agent a processing fee in the amount of $2500. (b) From and after the date that the Agent notifies the assignor Lender that it has received an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent -129- that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents. (c) Within five Business Days after its receipt of notice by the Agent that it has received an executed Assignment and Acceptance and payment of the processing fee, the Borrowers shall execute and deliver to the Agent, new Notes evidencing such Assignee's assigned Loans and Commitment and, if the assignor Lender has retained a portion of its Loans and its Commitment, replacement Notes in the principal amount of the Loans retained by the assignor Lender (such Notes to be in exchange for, but not in payment of, the Notes held by such Lender). Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance, this Agreement, shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto. (d) Any Lender may at any time sell to one or more commercial banks or other Persons not Affiliates of the Borrowers (a "Participant") participating interests in any Loans, the Commitment of that Lender and the other interests of that Lender (the "originating Lender") hereunder and under the other Loan Documents; provided, however, that (i) the originating Lender's obligations under this Agreement shall remain unchanged, (ii) the originating Lender shall remain solely responsible for the performance of such obligations, (iii) the Borrowers and the -130- Agent shall continue to deal solely and directly with the originating Lender in connection with the originating Lender's rights and obligations under this Agreement and the other Loan Documents, and (iv) no Lender shall transfer or grant any participating interest under which the Participant shall have rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent of the Lenders as described in the first proviso to Section 10.01. In the case of any such participation, the Participant shall be entitled to the benefit of Sections 3.01, 3.03 and 10.05 as though it were also a Lender hereunder, and if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. (e) Each Lender agrees to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information identified as "confidential" by the Borrowers and provided to it by the Borrowers or any Subsidiary of the Borrowers, or by the Agent on such Borrower's or Subsidiary's behalf, in connection with this Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information for any purpose or in any manner other than pursuant to the terms contemplated by this Agreement; except to the extent such information (i) was or becomes generally available to the public other than as a result of a disclosure by the Lender, or (ii) was or becomes available on a nonconfidential basis from a source other than the Borrowers, provided that such source is not bound by a confidentiality agreement with the Borrowers known to -131- the Lender; provided further, however, that any Lender may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which the Lender is subject or in connection with an examination of such Lender by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable Requirement of Law; and (D) to such Lender's independent auditors and other professional advisors. Notwithstanding the foregoing, the Borrowers authorizes each Lender to disclose to any Participant or Assignee (each, a "Transferee") and to any prospective Transferee, such financial and other information in such Lender's possession concerning the Borrowers or its Subsidiaries which has been delivered to Agent or the Lenders pursuant to this Agreement or which has been delivered to the Agent or the Lenders by the Borrowers in connection with the Lenders' credit evaluation of the Borrowers prior to entering into this Agreement; provided that, unless otherwise agreed by the Borrowers, such Transferee agrees in writing to such Lender to keep such information confidential to the same extent required of the Lenders hereunder. The Borrowers acknowledge that from time to time financial advisory, investment banking and other services may be offered or provided to the Borrowers, or one or more of its Affiliates (in connection with this Agreement or otherwise) by any Lender or by one or more Subsidiaries or Affiliates of such Lender and the Borrowers hereby authorize each Lender to share any information delivered to such Lender by the Borrowers and their Affiliates pursuant to this Agreement, or in connection with the decision of such Lender to enter into this Agreement, to any such Subsidiary or Affiliate of such Lender, it being understood that any such Subsidiary or Affiliate of any Lender receiving such information shall be bound by any obligation of confidentiality as if it were a Lender hereunder. Such Authorization shall survive the repayment of the Loans and other Obligations and the termination of the Commitments. -132- (f) Notwithstanding any other provision contained in this Agreement or any other Loan Document to the contrary, any Lender may assign all or any portion of the Loans or Notes held by it to any Federal Reserve Bank or the United States Treasury as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank, provided that any payment in respect of such assigned Loans or Notes made by the Borrowers to or for the account of the assigning or pledging Lender in accordance with the terms of this Agreement shall satisfy the Borrowers' obligations hereunder in respect to such assigned Loans or Notes to the extent of such payment. No such assignment shall release the assigning Lender from its obligations hereunder. (g) Upon the assignment pursuant to this Section 10.08 of all, or any ratable part of, the Loans, the Commitments and the other rights and obligations of a Lender to an Assignee, such Assignee shall become a party to the Intercreditor Agreement and be bound by all terms and conditions contained therein. 10.09 Setoff. In addition to any rights and remedies of the Lenders provided by law, if an Event of Default exists, each Lender is authorized at any time and from time to time, without prior notice to the Borrowers, any such notice being waived by the Borrowers to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing to, such Lender to or for the credit or the account of the Borrowers against any and all Obligations owing to such Lender, now or hereafter existing, irrespective of whether or not the Agent or such Lender shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Lender agrees promptly to notify the Borrowers and the Agent after any such setoff and application made by -133- such Lender; provided, however, that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section 10.09 are in addition to the other rights and remedies (including other rights of setoff) which the Lender may have. NOTWITHSTANDING THE FOREGOING, NO LENDER SHALL EXERCISE, OR ATTEMPT TO EXERCISE, ANY RIGHT OF SETOFF, BANKER'S LIEN, OR THE LIKE, AGAINST ANY DEPOSIT ACCOUNT OR PROPERTY OF THE BORROWERS OR ANY SUBSIDIARY OF THE BORROWERS HELD OR MAINTAINED BY THE LENDER WITHOUT THE PRIOR WRITTEN CONSENT OF THE MAJORITY LENDERS. 10.10 Notification of Addresses, Lending Offices, Etc. Each Lender shall notify the Agent in writing of any changes in the address to which notices to the Lender should be directed, of addresses of its Eurodollar Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. 10.11 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrowers and the Agent. 10.12 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 10.13 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Borrowers, the Lenders and the Agent, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. Neither the -134- Agent nor any Lender shall have any obligation to any Person not a party to this Agreement or other Loan Documents. 10.14 Time. Time is of the essence as to each term or provision of this Agreement and each of the other Loan Documents. 10.15 Governing Law and Jurisdiction. (a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEVADA; PROVIDED THAT THE AGENT AND THE LENDERS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT AND ANY OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEVADA OR OF THE UNITED STATES FOR THE DISTRICT OF NEVADA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE BORROWERS, THE AGENT AND THE LENDERS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE BORROWERS, THE AGENT AND THE LENDERS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE BORROWERS, THE AGENT AND THE LENDERS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY NEVADA LAW. -135- 10.16 Waiver of Jury Trial. THE BORROWERS, THE LENDERS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWERS, THE LENDERS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 10.17 Notice of Claims; Claims Bar. THE BORROWERS HEREBY AGREE THAT IT SHALL GIVE PROMPT WRITTEN NOTICE OF ANY CLAIM OR CAUSE OF ACTION IT BELIEVES IT HAS, OR MAY SEEK TO ASSERT OR ALLEGE AGAINST THE AGENT OR ANY LENDER, WHETHER SUCH -136- CLAIM IS BASED IN LAW OR EQUITY, ARISING UNDER OR RELATED TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, OR TO THE LOANS (OR THE COLLATERAL THEREFOR), OR ANY ACT OR OMISSION TO ACT BY THE AGENT OR ANY LENDER WITH RESPECT HERETO OR THERETO, AND THAT IF IT SHALL FAIL TO GIVE SUCH PROMPT NOTICE TO THE AGENT WITH REGARD TO ANY SUCH CLAIM OR CAUSE OF ACTION, IT SHALL BE DEEMED TO HAVE WAIVED, AND SHALL BE FOREVER BARRED FROM BRINGING OR ASSERTING SUCH CLAIM OR CAUSE OF ACTION IN ANY SUIT, ACTION OR PROCEEDING IN ANY COURT OR BEFORE ANY GOVERNMENTAL AGENCY. 10.18 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Borrowers, the Lenders and the Agent, and supersedes all prior or contemporaneous Agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof, except for the fee letter referenced in Sections 2.10, and any prior arrangements made with respect to the payment by the Borrowers of (or any indemnification for) any fees, costs or expenses payable to or incurred (or to be incurred) by or on behalf of the Agent or the Lenders. 10.19 Interpretation. This Agreement is the result of negotiations between and has been reviewed by counsel to the Agent, the Borrowers and other parties, and is the product of all parties hereto. Accordingly, this Agreement and the other Loan Documents shall not be construed against the Lenders or the Agent merely because of the Agent's or Lenders' involvement in the preparation of such documents and agreements. 10.20 Guarantor and Suretyship Provisions. (a) Each Borrower shall be jointly and severally liable for the repayment of all Loans. (b) Conditions to Exercise of Rights. Each Borrower hereby waives any right it may now or hereafter have to require the Agent or the Lenders, as a condition to the exercise of any remedy or other right against such Debtor hereunder or under any other document executed by such Debtor in connection with any Obligation, (i) to proceed against any -137- Borrower or other Person, or against any other collateral assigned to the Agent by such Debtor or any other Person, (ii) to pursue any other right or remedy in the Agent or any Lender's power, (iii) to give notice of the time, place or terms of any public or private sale of real or personal property collateral assigned to the Agent by any Borrower or other Person (other than such Borrower), or otherwise to comply with the Nevada enactment of the Uniform Commercial Code (as modified or recodified from time to time) with respect to any such personal property collateral, or (iv) to make or give (except as otherwise expressly provided in the Loan Documents) any presentment, demand protest, notice of dishonor, notice of protest or other demand or notice of any kind in connection with any Obligation. (c) Defenses. Each Borrower hereby waives any defense it may now or hereafter have that relates to: (i) any disability or other defense of any Borrower or other Person; (ii) the cessation, from any cause other than full performance, of the obligations of any Borrower or other Person; (iii) the application of the proceeds of any Obligation, by any Borrower or other Person, for purposes other than the purposes represented to such Debtor by any Borrower or otherwise intended or understood by such Debtor; (iv) any act or omission by the Agent or the Lenders which directly or indirectly results in or contributes to the release of any Borrower or other Person or any collateral for any Obligations; (v) the unenforceability or invalidity of any collateral assignment or guaranty with respect to any Obligation, or the lack of perfection or continuing perfection or lack of priority of any lien which secures any Obligation; (vi) any failure of the Agent or the Lenders to marshal assets in favor of such Borrower or any other Person; (vii) any modification of any Obligation, including any renewal, extension, acceleration or increase in interest rate; (viii) any election of remedies by the Agent or the Lenders that impairs any subrogation or other right of any Borrower to proceed against any other Borrower or -138- other Person, including any loss of rights resulting from anti-deficiency laws relating to nonjudicial foreclosures of real property or other laws limiting, qualifying or discharging obligations or remedies; (ix) any law which provides that the obligation of a surety or guarantor must neither be larger in amount nor in other respects more burdensome than that of the principal or which reduces a surety's or guarantor's obligation in proportion to the principal obligation; (x) any failure of the Agent or the Lenders to file or enforce a claim in any bankruptcy or other proceeding with respect to any Person; (xi) the election by the Agent or the Lenders, in any bankruptcy proceeding of any Person, of the application or non-application of Section 1111(b)(2) of the United States Bankruptcy Code; (xii) any extension of credit or the grant of any lien under Section 364 of the United States Bankruptcy Code; (xiii) any use of cash collateral under Section 363 of the United States Bankruptcy Code; or (xiv) any agreement or stipulation with respect to the provision of adequate protection in any bankruptcy proceeding of any Person. (d) Subrogation. Each Borrower hereby waives (i) any right of subrogation which such Borrower may now or hereafter have against any other Borrower that relates to any Obligation, (ii) any right to enforce any remedy such Borrower may now or hereafter have against any other Borrower that relates to any Obligation (including without limitation any right of reimbursement, indemnity or contribution), and (iii) any right to participate in any collateral now or hereafter assigned to the Agent or the Lenders with any collateral now or hereafter assigned to the Agent or the Lenders with respect to any Obligation (and each Borrower further agrees that, if and to the extent that any waiver set forth in this section is ever held to be unenforceable, all such rights of subrogation, enforcement and participation shall be junior and subordinate to the right of the Agent or the Lenders to obtain payment and performance of the Obligations and to all rights of the Agent or the -139- Lenders in and to any property which now or hereafter serves as collateral security for any Obligation). (e) Borrower Information. Each Borrower warrants and agrees: (i) that such Borrower has not relied, and will not rely, on any representations or warranties by the Agent or the Lenders to such Borrower with respect to the creditworthiness of any Borrower or the prospects of payment of any Obligation from sources other than the Collateral; (ii) that such Borrower has established and/or will establish adequate means of obtaining from each Borrower on a continuing basis financial and other information pertaining to the business operations, if any, and financial condition of such Borrower; (iii) that such Borrower assumes full responsibility for keeping informed with respect to any Borrower's business operation, if any, and financial condition; and (iv) that the Agent or the Lenders shall have no duty to disclose or report to such Borrower any information now or hereafter known to the Agent or the Lenders with respect to any information now or hereafter known to the Agent or the Lenders with respect to any Borrower, including without limitation information relating to any Borrower's business operation or financial condition. (f) Other Rights of Sureties. Each Borrower hereby waives all other rights it may now or hereafter have, whether or not similar to any of the foregoing, by reason of laws of the State of Nevada pertaining to sureties or guarantors. (g) Subordination. Until all of the Obligations have been fully paid and performed, (i) each Borrower hereby agrees that all existing and future indebtedness and other obligations of such Borrower to any other Borrower (collectively, the "Subordinated Debt") shall be and are hereby subordinated to all Obligations which constitute obligations of the applicable Borrower, and the payment thereof is hereby deferred in right of payment to the prior payment and performance of all -140- such Obligations; (ii) such Borrower shall not collect or receive any cash or non-cash payments on any Subordinated Debt or transfer all or any portion of the Subordinated Debt; and (iii) in the event that, notwithstanding the foregoing, any payment by, or distribution of assets of, any Borrower with respect to any Subordinated Debt is received by such Borrower such payment or distribution shall be held in trust and immediately paid over to the Agent or the Lenders, is hereby assigned to the Agent or the Lenders as security for the Obligations, and shall by held by the Agent or the Lenders in an interest bearing account until all Obligations have been fully paid and preformed. (h) Lawfulness and Reasonableness. Each Borrower warrants that all of the waivers in this Agreement are made with full knowledge of their significance, and of the fact that events giving rise to any defense or other benefit waived by such Borrower may destroy or impair right which such Borrower would otherwise have against the Agent or the Lenders, any Borrower and other Persons, or against collateral. Each Borrower agrees that all such waivers are reasonable under the circumstances and further agrees that, if any such waiver is determined (by a court of competent jurisdiction) to be contrary to any law or public policy, such waiver shall be effective to the fullest extent permitted by law. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. -141- RIO PROPERTIES, INC., a Nevada corporation By: /s/ Ronald J. Radcliffe ------------------------- Title: Treasurer ---------------------- By: /s/ I. Scott Bogatz ------------------------ Title: Secretary ---------------------- RIO LEASING, INC., a Nevada corporation By: /s/ Ronald J. Radcliffe ------------------------ Title: Secretary --------------------- By: /s/ I. Scott Bogatz ------------------------ Title: Counsel --------------------- Address for notices for both Borrowers: 3700 West Flamingo Road Las Vegas, Nevada 89103 Attn: Chief Executive Officer Facsimile: (702) Tel: (702) -142- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: /s/ Janice Hammond ------------------------------------- Title: Vice President, Agency Specialist ----------------------------------- Address for notices: 555 South Flower Street, 11th Floor Los Angeles, CA 90017 Attn: Global Agency #5596 Facsimile: (213) 228-9861 Tel: (213) 228-2299 Address for payments: 1850 Gateway Blvd. Concord, California 94520 -143- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Lender By: /s/ Scott L. Faber -------------------------------------- Title: Vice President Bank of America NT&SA ----------------------------------- Address for notices: Domestic and Eurodollar Lending Office: 1850 Gateway Boulevard Concord, California 94520 -144- LENDERS BANKS WELLS FARGO BANK, N.A. By: /s/ Sue Fuller ------------------------------- Title: Vice President ---------------------------- Address for notices: 1 East First Street, Suite 300 MAC 4611-031 Reno, NV 89504 Attn: Sue Fuller, Vice President Facsimile: (702) 334-5637 Tel: (702) 334-5633 Address for Domestic and Eurodollar Lending Office: 201 3rd Street, 8th Floor San Francisco, CA 94103 Attn: Oscar Enriquez Facsimile: (415) 979-0675 Tel: (415) 477-5425 -145- THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Mark A. Isley -------------------------------- Title: First Vice President ----------------------------- Address for notices and Domestic and Eurodollar Lending Office: Robert F. Simon, CSA The First National Bank of Chicago 1132/1-10 One First National Plaza Chicago, Illinois 60670 312/732-8543 312/732-4840 FAX SOCIETE GENERALE By: /s/ Donald L. Schubert -------------------------------- Title: Managing Director ----------------------------- Address for notices and Domestic and Eurodollar Lending Office: 2029 Century Park East, Suite 2900 Los Angeles, CA 90067 Attn: Donald L. Schubert Facsimile: (310) 551-1537 Tel: (310) 788-7104 -146- ABN AMRO BANK N.V. By: /s/ Jeffrey A. French --------------------------------- Title: Group Vice President & Director ------------------------------ By: /s/ Michael M. Tolentino --------------------------------- Title: Vice President ------------------------------ Address for notices: ABN AMRO Bank N.V. 101 California Street, Suite 4550 San Francisco, California 94111-5812 Attn: Jeffrey A. French Group Vice President & Director 415/984-3703 telephone 415/362-3524 telecopier Address for Domestic and Eurodollar Lending Office: ABN AMRO Bank N.V. Loan Administration 208 South LaSalle Street, Suite 1500 Chicago, Illinois 60604-1003 312/992-5153 telephone 312/992-5158 telecopier -147- U.S. BANK OF NEVADA By: /s/ David Walquist ----------------------------------- Title: Vice President -------------------------------- Address for notices: 2300 W. Sahara, Suite 120 Las Vegas, NV 89102 Attn: David Walquist, Vice President Facsimile: (702) 386-3916 Tel: (702) 386-3938 Domestic and Eurodollar Lending Office: U.S. Bank, N.A. 555 Southwest Oak Street Portland, OR 97204 Attn: J. Rameriz Commercial Loan Servicing West PL-7 -148- BANK OF SCOTLAND By: /s/ Annie Chin Tat ---------------------------------- Title: Senior Vice President ------------------------------- By: ---------------------------------- Title: ------------------------------- Address for notices: Bank of Scotland 565 5th Avenue, 5th Floor New York, New York 10017 Attn: Annie Chin Tat, Senior Vice President Telephone: 212/450-0871 Facsimile: 212/557-9460 and Bank of Scotland Suite 1760 660 South Figueroa Street Los Angeles, California 90017-3548 Attn: Allan Jackson, Regional Director 213/629-3057 213/489-3594 FAX -149- Address for Domestic and Eurodollar Lending Office: Bank of Scotland 565 5th Avenue, 5th Floor New York, New York 10017 Attn: Annie Chin Tat, Senior Vice President Telephone: 212/450-0871 Facsimile: 212/557-9460 -150- Schedule 2.01 RIO PROPERTIES, INC./ RIO LEASING, INC. $125,000,000 SENIOR SECURED CREDIT FACILITY
Lender Amount Percentage - ---------------------------------- ------------ ----------- Bank of America National Trust and Savings Association $ 23,000,000 18.40000000% SG $ 20,000,000 16.00000000% The First National Bank of Chicago $ 20,000,000 16.00000000% Wells Fargo Bank, N.A $ 20,000,000 16.00000000% ABN AMRO Bank N.V $ 14,000,000 11.20000000% U.S. Bank, National Association $ 14,000,000 11.20000000% Bank of Scotland $ 14,000,000 11.20000000% Total $125,000,000 100.00000000%
EX-4.(26) 6 EXHIBIT 4.26 EXHIBIT 4(26) NOTE [$Amount] Las Vegas, Nevada December 18, 1998 FOR VALUE RECEIVED, RIO PROPERTIES, INC., a Nevada corporation (the "Company") and RIO LEASING, INC., a Nevada corporation ("Rio Leasing" and collectively with the Company, "Borrowers"), jointly and severally promise to pay to the order of [Bank] (the "Lender"), the principal amount of [Amount] or, if different, the aggregate principal amount of Loans made by the Lender to the Company and Rio Leasing under the Loan Agreement referred to below outstanding on the Maturity Date. The Borrowers also jointly and severally promise to pay interest on the unpaid principal amount hereof from the date hereof until paid at the rates and at the times which shall be determined in accordance with the provisions of the Loan Agreement dated as of December 18, 1998, among the Company and Rio Leasing, as co-borrowers, the Lenders named therein and Bank of America National Trust and Savings Association, as Agent (as further amended from time to time, the "Loan Agreement"). This Note is one of the Notes issued pursuant to and entitled to the benefits of the Loan Agreement to which reference is hereby made for a more complete statement of the terms and conditions under which the Loans evidenced hereby are made and are to be repaid. Capitalized terms used herein without definition shall have the meanings set forth in the Loan Agreement. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the office of Bank of America for credit to: BANCONTROL Account No. 12337-14196, Reference: Rio Properties, Inc., at 1850 Gateway Boulevard, Concord, California 94520 or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Loan Agreement. Each of the Lender and any subsequent holder of this Note agrees that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; provided that the failure to make a notation of any payment made on this Note shall not limit or otherwise affect the obligation of the Company hereunder with respect to payments of principal or interest on this Note. This Note is subject to prepayment as provided in the Loan Agreement. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Loan Agreement. The Company and Rio Leasing jointly and severally promise to pay all actual and reasonable costs and expenses, including reasonable attorneys' fees and the reasonably allocated cost of in-house counsel and staff, incurred in the collection and enforcement of this Note. The Company, Rio Leasing and endorsers of this Note hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand and notice of every kind and, to the full extent permitted by law, the right to plead any statute of limitations as a defense to any demand hereunder. THE LOAN AGREEMENT AND THIS NOTE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEVADA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. IN WITNESS WHEREOF, the Company and Rio Leasing have caused this Note to be executed and delivered by its duly authorized officers, as of the day and year and the place first above written. RIO PROPERTIES, INC. By ------------------------------------- Title ---------------------------------- RIO LEASING, INC. By ------------------------------------ Title ---------------------------------- -2- TRANSACTIONS ON NOTE
Amount of Principal Outstanding Type of Amount of End of or Interest Principal Loan Made Loan Made Interest Paid This Balance This Notation Date This Date This Date Period Date Date Made by - ---- --------- --------- -------- ----------- ------------ --------
EX-4.(27) 7 EXHIBIT 4.27 EXHIBIT 4(27) RIO HOTEL AND CASINO, INC. GUARANTY THIS GUARANTY (as amended, supplemented or otherwise modified from time to time, this "Guaranty") is made as of December 18, 1998 by the undersigned ("Guarantor") in favor of Bank of America National Trust and Savings Association, as agent (the "Agent"), with reference to the Loan Agreement of even date herewith among Rio Properties, Inc. (the "Company"), Rio Leasing, Inc. ("Rio Leasing" and collectively with the Company, the "Borrowers"), the Lenders therein named, and the Agent (as amended, supplemented or otherwise modified from time to time, the "Loan Agreement"). All terms used herein and not otherwise defined in this Guaranty are used as defined in the Loan Agreement. RECITALS A. Financial accommodations extended by the Lenders and the Agent (collectively, the "Guaranteed Parties") to Borrowers will benefit the Guarantor directly and indirectly. B. The Guaranteed Parties are willing to extend such financial accommodations to Borrowers on the condition that such accommodations be guaranteed by the Guarantor. Now, therefore, based upon the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby agreed and acknowledged: 1. As set forth in this Guaranty, Guarantor unconditionally guarantees and promises to pay to the Guaranteed Parties, on order, or demand, in lawful money of the United States, any and all of the Indebtedness (as hereafter defined) owing to each of the Guaranteed Parties. This guarantee is a guarantee of prompt payment and performance of the guaranteed obligations when due and is not merely a guarantee of collection. 2. "Indebtedness" as used herein shall mean all principal, interest, fees, charges, penalties, expenses, payments, and all other amounts due from Borrowers to the Guaranteed Parties or any of them from time to time under the Loan Agreement or any other Loan Document whether now existing or hereafter arising, whether by reason of amendment or otherwise, whether due or to become due, absolute or contingent, liquidated or unliquidated, whether Borrowers may be liable individually or jointly with others. 3. The liability of Guarantor under this Guaranty shall be absolute and unconditional, and shall not be affected or released in any way, irrespective of: (a) any lack of validity or enforceability of the Loan Agreement or any other Loan Document or other agreement or instrument relating thereto; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Indebtedness or of any of the Loan Documents, or any other amendment or waiver of or any consent to any departure from the Loan Agreement or any other Loan Document including, without limitation, any increase in the Indebtedness or other obligations under the Loan Documents resulting from the extension of additional credit to Borrowers or otherwise; (c) any enforcement of any Loan Document, including the taking, holding or sale of any collateral or any termination or release of any Collateral from the Liens created by any Collateral Documents, or the non-perfection of any Liens created by any Collateral Documents; (d) whether recovery upon such Indebtedness may be or hereafter become barred by any statute of limitation; or (e) any change, restructuring or termination of the corporate structure or existence of the Company, Rio Leasing or any other party. This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Indebtedness is rescinded or must otherwise be returned by any Guaranteed Party or any other Person upon the insolvency, bankruptcy or reorganization of the Company, Rio Leasing, Guarantor or otherwise, all as though such payment had not been made. -2- 4. This is a continuing Guaranty relating to any Indebtedness, including Indebtedness arising under successive transactions which shall either continue the Indebtedness or from time to time renew any portion of it after satisfaction. Any payment by Guarantor shall not reduce its obligations hereunder, unless written notice to that effect be actually received by the Agent at or prior to the time of such payment. 5. The obligations hereunder are independent of the obligations of Borrowers or Guarantor, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Borrowers or Guarantor or whether Borrowers or Guarantor be joined in any such action or actions; and Guarantor waives the benefit of any statute of limitations affecting its liability hereunder. 6. Guarantor authorizes each of the Guaranteed Parties, without notice or demand and without affecting its liability hereunder, from time to time, either before or after revocation hereof, to (a) renew, compromise, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of the Indebtedness or any part thereof, including increase or decrease of the principal amount of such Indebtedness or the rate of interest thereon; (b) take and hold security for the payment of this Guaranty or the Indebtedness guaranteed, and exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any such security; (c) apply such security and direct the order or manner of sale thereof; and (d) release or substitute any one or more of the endorsers or guarantors. 7. Guarantor hereby waives, to the extent permitted by applicable law: (a) promptness, diligence, notice of acceptance and any other notice with respect to any of the Indebtedness or any other obligations under the Loan Documents or this Guaranty; (b) any requirement that the Agent, any other Guaranteed Party or any other Person protect, secure or insure any Lien or any collateral or other property subject thereto or exhaust any right or take any action against Borrowers or any other Person or any Collateral; (c) any defense arising by reason of any claim or defense based upon an election of remedies by the Agent or any other Guaranteed Party which in any manner impairs, reduces, releases or otherwise adversely affects its subrogation, -3- contribution or reimbursement rights or other rights to proceed against Borrowers or any other Person or any Collateral; (d) any duty on the part of the Agent or any other Guaranteed Party to disclose to the Guarantor any matter, fact or thing relating to the business, operation or condition of Borrowers or any other party to any of the Loan Documents and its assets now known or hereafter known by the Agent or any other Guaranteed Party; (e) all presentments, demands for performance, demands for payment, notices of nonperformance, protests, notices of protests, notices of dishonor or default to the Guarantor or any other party with respect to the Indebtedness or Loan Documents, and notices of acceptance of this Guaranty and of the existence, creation, or incurrence of new or additional Indebtedness; (f) any rights to extension, composition or otherwise under the Bankruptcy Code or any amendments thereof, or under any state or other federal statute; and (i) any right to claim or claim of right to cause a marshaling of Borrowers' assets. No notice to or demand on the Guarantor shall be deemed a waiver of the obligation of the Guarantor or the right of the Guaranteed Parties to take further action without notice or demand as provided herein; nor in any event shall any modification or waiver of the provisions of this Guaranty be effective unless in writing nor shall any such waiver be applicable except in the specific instance for which given. 8. Except to the extent otherwise permitted under the Loan Agreement, Guarantor hereby irrevocably waives any claim or other rights which it may now or hereafter acquire against Borrowers or Guarantor, whether due or to become due, voluntary or involuntary, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether in respect of reimbursement, exoneration, contribution, indemnification, any right to participate in any claim or remedy of any Guaranteed Party against Borrowers or Guarantor or any Collateral which any Guaranteed party now has or hereafter acquires, or otherwise, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including without limitation, the right to take or receive from Borrowers, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim or other rights. If any amount shall be paid to Guarantor in violation of the preceding sentence and the Indebtedness shall not have been paid in full, such amount shall be deemed to have been paid to Guarantor for the benefit of, and held in trust for -4- the benefit of, the Guaranteed Parties and shall forthwith be paid to the Agent for the benefit of the Guaranteed Parties to be credited and applied to the Indebtedness. Guarantor understands that if the Guaranteed Parties foreclose against any Property securing the Indebtedness, that foreclosure may impair or destroy any ability that Guarantor may have to seek reimbursement, contribution or indemnification from Borrowers or others based on any right Guarantor may have of subrogation, reimbursement, contribution or indemnification for any amount paid by Guarantor under this Guaranty. By executing this Guaranty, guarantor (i) waives and relinquishes any defense based on the foregoing and agrees that Guarantor will be fully liable under this Guaranty even though the Guaranteed Parties foreclose against any Property security for the Indebtedness; and (ii) agrees that Guarantor will not assert any such defense in any action or proceeding which any of the Guaranteed Parties may commence to enforce this Guaranty and (iii) in accordance with NRS 40.495, waives the provisions of NRS 40.430. Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Loan Agreement and that the waivers set forth in this Section 8 are knowingly made in contemplation of such benefits and that such waivers are a material part of the consideration the Guaranteed Parties are receiving for extending financial accommodations to Borrowers. 9. Guarantor agrees that, to the extent that any of Borrowers or Guarantor makes a payment or payments to any Guaranteed Party or any Guaranteed Party receives any proceeds of Collateral, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or otherwise required to be repaid to Borrowers or Guarantor, any estate, trustee, receiver or other party in respect thereof, including, without limitation, under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such payment or repayment, the obligation or part thereof which has been paid, reduced or satisfied by such amount shall be reinstated and continued in full force and effect as of the date such initial payment, reduction or satisfaction occurred. Guarantor shall defend and indemnify each Guaranteed Party from and against any claim or loss under this Section 9 (including reasonable attorneys' fees and expenses (including the allocated costs of inhouse counsel)) in the defense of any such action or suit. -5- 10. Guarantor acknowledges and agrees that it shall have the sole responsibility for obtaining from Borrowers such information concerning Borrowers' financial condition or business operations as Guarantor may require, and that no Guaranteed Party has any duty at any time to disclose to Guarantor any information relating to the business operations or financial condition of Borrowers. 11. To secure all of the Guarantor's obligations hereunder, Guarantor assigns, pledges and grants to each of the Guaranteed Parties a security interest in property of Guarantor as more fully set forth in the Parent Pledge and Security Agreement. 12. To the extent not otherwise waived hereby, any obligations of Borrowers to Guarantor, now or hereafter existing are hereby subordinated to the Indebtedness. Such obligations of Borrowers to Guarantor, if the Agent so requests after the occurrence of any Event of Default, shall be enforced and performance received by the Guarantor as trustee for each of the Guaranteed Parties and the proceeds thereof shall be paid over to the Agent, for the benefit of the Guaranteed Parties, on account of the Indebtedness, but without reducing or affecting in any manner the maximum liability of Guarantor under the other provisions of this Guaranty. 13. This Guarantee may not be revoked at any time by the Guarantor. If Guarantor seeks to revoke, return, or cancel its obligations under this Guaranty, and subsequently any payment or transfer of any interest in property by Borrowers to any Guaranteed Party is rescinded or must be returned by such Guaranteed party to Borrowers, this Guaranty by Guarantor shall be reinstated with respect to any such payment or transfer, regardless of any such prior revocation, return, or cancellation. 14. Guarantor hereby represents and warrants as follows: (a) Corporate Existence and Power. It is a corporation duly organized or formed, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated or formed, has all requisite power and authority, including, without limitation, all licenses, -6- permits, franchises, patents, copyrights, trademarks, trade names, consents and approvals, to owns its property and assets and to carry on its business as presently conducted and is duly qualified and is in good standing as a foreign corporation and is authorized to do business in each jurisdiction where such qualification or authorization is required, except where the failure to so qualify, to be authorized or to be in good standing would not result in a Material Adverse Effect upon the business, operations, assets or financial or other condition of Guarantor. It has the corporate power to execute, deliver and perform its obligations under this Guaranty and the Parent Pledge and Security Agreement. (b) Corporate authorization; No Contravention. The execution, delivery and performance by it of this Guaranty and the Parent Pledge and Security Agreement (i) have been duly authorized by all requisite corporate and, if required, stockholder or other action, and (ii) will not (A) violate (1) any Requirement of Law or its certificate or articles of incorporation or other constitutive documents or its by-laws or regulations, (2) any order of any court, or any rule, regulation or order of any other agency of government bringing upon it, or (3) any provisions of any indenture, agreement or other instrument to which it is a party, or by which it or any of its properties or assets is or may be bound, which violation would be likely to result in a Material Adverse Effect upon its business assets or financial or other condition, (B) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any indenture, agreement or other instrument referred to in (ii)(A)(3) above which violation would be likely to result in a Material Adverse Effect upon its business assets or financial or other condition, or (iii) result in the creation or imposition of any Lien, charge or encumbrance of any nature whatsoever upon any of its Property other than as contemplated by the Parent Pledge and Security Agreement. (c) Governmental Authorization. All consents and approvals of, filings and registrations with, and other actions in respect of, all governmental agencies, authorities or instrumentalities which are or will be required by it in connection with the execution, delivery -7- and performance of this Guaranty and the Parent Pledge and Security Agreement have been, obtained, given, filed or taken and are in full force and effect, other than any which the failure to obtain, give, file or take would not have a Material Adverse Effect upon the legality, validity, binding effect or enforceability of or its ability to perform under this Guaranty or the Parent Pledge and Security Agreement to perform timely its obligations under or in connection with this Guaranty or the Parent Pledge and Security Agreement. (d) Binding Effect. This Guaranty and any other Loan Document to which it is a party constitutes its legal, valid and binding obligations enforceable in accordance with their respective terms (subject, as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting creditors' rights generally and to general principles of equity). (e) Litigation. There are no actions, suits, proceedings, claims or disputes pending, at law, in equity, in arbitration or before any Governmental Authority, against it or its Subsidiaries or any of their respective properties (or to its best knowledge, threatened or contemplated by any Governmental Authority against it or its Subsidiaries or any of its properties) which: (i) purport to affect or pertain to this Guaranty or any Loan Document, or any of the transactions contemplated hereby or thereby; or (ii) is reasonably likely to have a Material Adverse Effect upon (A) the consummation of the transactions contemplated by the Loan Agreement, (B) the legality, validity or enforceability of this Guaranty or any other Loan Document, or (C) its the business, operations, assets or financial or other condition. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery and performance of this Guaranty or any other Loan Document. (f) Conditions Precedent. There are no conditions precedent to the effectiveness of this Guaranty that have not been satisfied or waived. -8- (g) No Reliance. It has, independently and without reliance upon any Guaranteed Party and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Guaranty. 15. Guarantor hereby covenants and agrees that it will comply with all of the obligation, requirements and restrictions in the covenants contained in Articles 6 and 7 of the Loan Agreement to the extent that they are applicable to such Guarantor. Guarantor further covenants and agrees that it will cause each of its Subsidiaries to comply with all terms of the Loan Agreement and each other Loan Document. Guarantor further covenants and agrees that, except as otherwise permitted by the Loan Agreement, it will: (a) Unless otherwise delivered by Borrowers, deliver to the Agent, with sufficient copies for each of the other Guaranteed Parties, in form and detail satisfactory to the Agent and the Majority Lenders, financial information relating to Guarantor as set forth in Sections 6.01 and 6.02 of the Loan Agreement; (b) Not sell or exchange its assets (including the stock of any Subsidiary thereof), other than as may be permitted by any Loan Document; and (c) Not merge into or consolidate or combine with any other Person, except that it may be merged, consolidated or liquidated into or combined with either Borrower (i) if permitted under the Loan Documents and (ii) the Person which shall become the legal or beneficial owner of one or more shares of the capital stock of the applicable Borrower or other interest in, or right to acquire an interest in, the applicable Borrower shall, prior to the consummation of such merger, enter into a security agreement with the Agent, for the benefit of the other Guaranteed Parties, upon substantially the same terms and conditions as the Parent Pledge and Security Agreement and in all respects satisfactory to the Guaranteed Parties, pursuant to which such Person shall agree to pledge all of such shares, interests and rights to the Agent for the benefit of the Guaranteed Parties. -9- 16. Each Guaranteed Party may, without notice to Guarantor and without affecting Guarantor's obligations hereunder, assign the Indebtedness and this Guaranty, in whole or in part in accordance with the provisions of the Loan Agreement. Guarantor agrees that each Guaranteed Party may, subject to the provisions of the Loan Agreement, disclose to any prospective purchaser and any purchaser of all or part of the Indebtedness any and all information in such Guaranteed Party's possession concerning such Guarantor, this Guaranty and any security for this Guaranty. 17. Guarantor agrees to pay all reasonable attorneys' fees, the allocated costs of the Agent's in-house counsel, and all other and expenses which may be incurred by any Guaranteed Party in the enforcement of this Guaranty. 18. This Guaranty shall be governed by and construed according to the laws of the State of Nevada. EXECUTED AS OF THE DATE FIRST ABOVE WRITTEN. GUARANTOR: RIO HOTEL AND CASINO, INC., a Nevada corporation By: /s/ Ronald J. Radcliffe ------------------------------------ Title: Vice President - Treasurer --------------------------------- By: ------------------------------------ Title: --------------------------------- Address: 3700 W. Flamingo Road Las Vegas, Nevada, 89103 Attn: Chief Executive Officer -10- EX-4.(28) 8 EXHIBIT 4.28 EXHIBIT 4(28) PLEDGE AND SECURITY AGREEMENT This PLEDGE AND SECURITY AGREEMENT (as amended, supplemented or otherwise modified from time to time, this "Security Agreement"), dated as of December 18, 1998, is jointly and severally executed by RIO PROPERTIES, INC., a Nevada corporation (the "Company") and RIO LEASING, INC., a Nevada corporation (each a "Debtor" and collectively, the "Debtors"), in favor of BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("Secured Party"), as agent for itself and the other lenders (individually, a "Lender" and collectively, the"Lenders") now or hereafter a party to that certain Loan Agreement (as amended, supplemented or otherwise modified from time to time, the "Loan Agreement") of even date herewith among Debtors, as borrowers, Secured Party and the Lenders. This Security Agreement is executed to induce the Lenders to make the loans (collectively, the "Loan") to Debtors described in the Loan Agreement and evidenced in whole or in part by promissory notes of even date herewith (collectively, the "Notes"). Capitalized terms used and not otherwise defined herein shall have the same meanings as set forth in the Loan Agreement. 1. Assignment. Subject to approval of the applicable Gaming Authorities as to the Pledged Stock of HLG only, for valuable consideration, Debtors hereby jointly and severally pledge and assign to Secured Party (and grant to Secured Party, pursuant to Article 104.9101 et seq. of the Nevada Revised Statutes (the Nevada enactment of the Uniform Commercial Code), a security interest in and to, and a lien upon) all of Debtors' right, title and interest, whether now existing or hereafter arising, in and to the tangible and intangible property (collectively, the "Collateral") described in Schedule 1 attached hereto and incorporated herein by this reference, as security for the prompt payment and performance of each of the obligations described in Section 2, below (collectively, the "Secured Obligations"). 2. Obligations Secured. This Security Agreement secures the prompt payment and performance of each of the following Secured Obligations: 2.1 The Indebtedness evidenced by the Notes. 2.2 Each of Debtors' obligations to Secured Party and the Lenders under the Loan Agreement and all other Loan Documents (but not including the Unsecured Indemnity Agreement). 2.3 Each of Debtors' obligations hereunder. 2.4 All other obligations owing to Secured Party and/or the Lenders, but only to the extent that any such obligation is described or referred to in a document, executed by Debtors at Secured Party's request, which states that such obligation is secured hereby. 2.5 Any and all amendments, extensions and other modifications of any of the foregoing, including without limitation amendments, extensions and other modifications that are evidenced by new or additional documents or that change the rate of interest on any Secured Obligation. 3. Representations and Warranties. Each Debtor hereby jointly and severally represents and warrants that: 3.1 Each Debtor is the true and lawful owner of and has good and clear title to its portion of the Collateral, subject only to the rights of Secured Party hereunder and to the rights of other lenders with respect to each security interest granted by Debtors that is described in the Loan Agreement as a "Permitted Lien" or that is described therein as a "Permitted Right of Others". 3.2 Debtors' principal place of business and chief executive and accounting offices are located at 3700 West Flamingo Road, Las Vegas, Nevada 89103. 3.3 The Company owns all of the issued and outstanding stock of Cinderlane, Inc., a Nevada corporation ("Cinderlane") and HLG, Inc., a Nevada corporation ("HLG"), and there are no outstanding warrants, options or other rights to subscribe to or acquire any of such stock in favor of any third person. -2- 4. Covenants by Debtors. Each Debtor hereby jointly and severally agrees, subject to all rights such Debtor has under the Loan Agreement, that: 4.1 Prior to or simultaneously with Debtors' execution of this Security Agreement, Debtors will execute and cause to be filed in accordance with the Nevada Uniform Commercial Code, financing statements in form and substance satisfactory to Secured Party. Thereafter at any time and from time to time, upon demand of Secured Party, Debtors shall give, execute, acknowledge, file and record any notice, financing statement, continuation statement, assignment, instrument, document or agreement that Secured Party reasonably deems necessary or desirable to create, preserve, continue, perfect or validate any security interest intended to be created hereunder or to enable Secured Party to enforce its rights with respect to any such security interest. 4.2 Concurrently with the execution of this Security Agreement or, as to the stock of HLG, upon the approval of the relevant Gaming Authorities to the pledge by Debtors to Secured Party of all shares of stock of HLG owned by Debtors, Debtors shall deliver to Secured Party all of the certificates ("Certificates") evidencing the Pledged Stock. Debtors agree that they will upon obtaining any additional shares of stock of any issuer of Pledged Stock or any other securities that may be converted into, or exchanged for Pledged Stock, including any options or other rights with respect thereto, upon the approval of the relevant Gaming Authorities, if required, to the pledge by Debtors to Secured Party of such additional shares or other securities, promptly deliver to Secured Party: (i) a duly executed Security Agreement Supplement in substantially the form of Schedule 3 hereto (a "Security Agreement Supplement") identifying the additional shares of stock which are pledged pursuant to this second sentence of this Section 4.2 and (ii) Certificates evidencing such shares of stock. Debtors hereby authorize Secured Party to attach the Security Agreement Supplement to this Security Agreement and agree that all shares of stock listed on the Security Agreement Supplement delivered to Secured Party shall for all purposes hereunder constitute Pledged Stock. -3- 4.3 Debtors shall notify Secured Party prior to changing its principal place of business and chief executive and accounting offices from the location set forth in Section 3.2 of this Security Agreement. 4.4 Debtors shall at all times maintain the Collateral in good condition and will from time to time make all needed and proper replacements, repairs, renewals and improvements so that the value of the Collateral is not impaired. 4.5 Debtors shall keep the Collateral free of all liens, claims, security interests and encumbrances other than those described in Section 3.1, above. 4.6 Notwithstanding Secured Party's claim to proceeds, Debtors shall not sell, lease or otherwise transfer or dispose of any Collateral (and shall not permit any such act) unless Debtors shall concurrently replace such Collateral with other Collateral that is of equivalent quality and quantity and reasonably acceptable to Secured Party; provided, however, that, so long as Debtors are not in default hereunder, Debtors may sell or lease any Collateral but only in accordance with Sections 7.02 and 7.05 and other applicable sections of the Loan Agreement. 4.7 Debtors shall not, without Secured Party's prior written consent, remove any of the Collateral from the Real Property described in Exhibit "A" to Schedule 1 of this Security Agreement. 4.8 Debtors shall, at Debtors' own cost, defend any and all actions, proceedings and claims affecting the Collateral, including without limitation actions, proceedings and claims challenging Debtors' title to the Collateral or the validity or priority of Secured Party's security interest hereunder. 4.9 Debtors shall promptly pay all taxes, assessments, license fees and other public or private charges levied or assessed against any Collateral, this Security Agreement or any promissory note evidencing any debt secured hereunder. -4- 4.10 Debtors shall maintain such insurance with respect to the Collateral as Secured Party reasonably requires from time to time, with insurers satisfactory to Secured Party and with loss payable to Secured Party as its interests may appear. Debtor shall, if so requested, deliver the original of any such policy to Secured Party. 4.11 Debtors shall not use any Collateral in violation of any applicable laws, rules or regulations. 4.12 All of the Collateral shall at all times remain personal property unless otherwise determined by Secured Party. 4.13 Debtors shall fully perform all of their respective obligations under and with respect to the Collateral and shall diligently enforce all of the obligations of each obligor thereunder. 4.14 Debtors shall not modify, amend, supplement or cancel any of the Collateral without the prior written consent of Secured Party. 4.15 Debtors will at all times keep accurate and complete records with respect to the Collateral and agrees that the representatives of Secured Party shall have the right, at any time during normal business hours or at any other reasonable time, and from time to time, to call at Debtors' places of business where the Collateral or any part thereof may be located or the records pertaining to the Collateral may be kept and to inspect the Collateral and/or examine such records and to make abstracts therefrom or copies thereof; in addition, Debtors shall furnish Secured Party with periodic reports as to the Collateral, in such form and detail and at such times as Secured Party may require. 4.16 Monies received because of any court or arbitration award or settlement or insurance payment, for any loss or damage to the Collateral, and proceeds from any condemnation award or settlement relating to the Collateral shall be treated as provided in the Loan Documents with regard to the related Property. -5- 4.17 As soon as practicable, and in any event within ten (10) days, Debtors shall notify Secured Party of: (a) Any attachment or other legal process levied against any of the Collateral; (b) Any information received by Debtors which may in any manner materially and adversely affect the value of the Collateral or the rights and remedies of Secured Party with respect thereto; and (c) The removal of any of the Collateral to a new location and the removal of any records of Debtors relating to the Collateral to any location other than that set forth in Section 3.2, above. Any notice delivered pursuant to this Section 4.16 shall set forth the nature of such event and the action which Debtors proposes to take with respect thereto. 5. Events of Default. The occurrence of any of the following shall constitute a default hereunder: 5.1 The occurrence of any Event of Default under the Loan Agreement. 5.2 Default in any other obligation secured hereunder. 5.3 Default in any obligation contained herein. 5.4 Any statement, representation or warranty made by Debtors herein or in any document secured hereunder proves to have been false or inaccurate in any material respect when made. 6. Remedies. In the event of any default hereunder, and subject to applicable Gaming Laws (as defined in the Loan Agreement), Secured Party shall have all of the following rights and remedies, each of which may be exercised with or without further notice to Debtors: -6- 6.1 To notify any and all obligors on any and all accounts assigned hereunder (collectively, the "Accounts") that such Accounts have been assigned to Secured Party and/or that all payments on such Accounts are to be made directly to Secured Party; 6.2 To settle, compromise or release on terms acceptable to Secured Party, in whole or in part, any amounts owing on any and all Accounts; 6.3 To enforce payment and prosecute any action or proceeding with respect to any and all Accounts; 6.4 To extend the time of payment, make allowances and adjustments and issue credits with respect to Accounts in Secured Party's name or in the name of Debtors; 6.5 To foreclose the liens and security interests created under this Security Agreement or under any other agreement relating to any Collateral by any available judicial procedure or without judicial process; 6.6 To sell, assign, lease, or otherwise dispose of the Collateral or any part thereof, either at public or private sale, in lots or in bulk, for cash, on credit or otherwise, with or without representations or warranties, and upon such terms as shall be acceptable to Secured Party, all at Secured Party's sole option and as Secured Party may deem advisable in its sole discretion; 6.7 To hold, operate, and manage the same and from time to time make all needed repairs and such alterations, additions, advances and improvements as Secured Party shall deem appropriate; 6.8 To manage, or retain a manager for, the operation of the business or businesses being conducted on the Real Property; 6.9 To declare all Secured Obligations immediately due and payable; and -7- 6.10 To exercise any and all other rights and remedies that Secured Party may have in any jurisdiction where enforcement of this Security Agreement is sought, including without limitation all rights and remedies of a secured party under any applicable Uniform Commercial Code. Secured Party shall have the right to enforce one or more of its remedies successively or concurrently, and such action shall neither estop nor prevent Secured Party from pursuing any and all further remedies that it may have. In the event that Debtors fails to perform any obligation set forth herein, Secured Party may, but shall not be obligated to, perform the same, and the cost thereof shall be payable by Debtors to Secured Party on demand and shall bear interest at the default rate of interest set forth in the Loan Agreement (or, if there is no such default rate, at the rate of interest set forth in the Loan Agreement). No failure on the part of Secured Party to exercise, and no delay in exercising, any right or remedy shall operate as a waiver thereof or of any default, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. 7. Sale of Collateral. The following shall apply with respect to any sale, assignment, lease or other disposition of the Collateral by Secured Party pursuant to Article 6, above, after Secured Party's compliance with applicable Gaming Laws. 7.1 Debtors shall, at Secured Party's request, assemble any and all Collateral and make it available to Secured Party at such places as Secured Party designates that are reasonably convenient to both parties, whether at the premises of Debtors or elsewhere, and shall make available to Secured Party all premises and facilities of Debtors for the purpose of Secured Party's taking possession of the Collateral or removing or putting the Collateral in saleable form. 7.2 If any Collateral requires repair, maintenance, preparation or the like, or is in process or other unfinished state, Secured Party shall have the right to perform all repairs, maintenance, preparation and other processing and completion of manufacture required to put the same in such saleable form as Secured Party deems appropriate, but Secured Party shall also have the right to sell or dispose of such Collateral without any such processing. -8- 7.3 Secured Party shall give Debtors ten (10) days' prior written notice of any such sale, assignment, lease or other disposition. Debtors agree that such notice is commercially reasonable and Debtors hereby waive all other notices, demands and advertisements of any kind. 7.4 Secured Party may bid or purchase at any such sale, if public, free from any right of redemption that Debtors may have, which right of redemption is hereby waived, and Secured Party may restrict the prospective bidders or purchasers at any such sale to persons who will represent and warrant that they are acquiring the Collateral for their own account and otherwise in compliance with the federal Securities Act of 1933, as amended. 7.5 Because of present or future circumstances, a question may arise under the federal Securities Act of 1933, as amended, as now or hereafter in effect, or any similar statute hereafter enacted analogous in purpose or effect (such Act and any such similar statute as from time to time in effect being hereinafter called the Federal Securities Laws) with respect to any disposition of the Collateral. Debtors acknowledge that compliance with the Federal Securities Laws and/or Gaming Laws may strictly limit Secured Party's course of conduct in disposing of all or any part of the Collateral and may also limit the extent to which or the manner in which any subsequent transferee of the Collateral may dispose of the same, and that there may be other legal restrictions or limitations affecting Secured Party in any attempts to dispose of all or any part of the Collateral under applicable Blue Sky or other state securities laws or similar laws analogous in purpose or effect. 8. Facilitation of Rights and Remedies. To facilitate the exercise by Secured Party of the rights and remedies set forth in this Security Agreement, Debtors authorize Secured Party, subject to Secured Party's compliance with applicable Gaming Laws, to exercise any or all of the following powers: 8.1 To enter any premises where any Collateral may be located for the purpose of taking possession of or removing such Collateral, to remove from any premises where any Collateral may be located the Collateral and any and all -9- documents, instruments, files and records relating to the Collateral, and any receptacles and cabinets containing the same, and to use the supplies and space of Debtors at any or all of its places of business as may be necessary or appropriate to properly administer and control the Collateral or the handling of collections and realizations thereon, at Debtors' cost and expense; 8.2 To receive, open and dispose of all mail addressed to Debtors and notify postal authorities to change the address for delivery thereof to such address as Secured Party may designate; 8.3 To manage, or to retain a manager for, the operation of the business or businesses being conducted on the Real Property; 8.4 To take or bring, in Secured Party's name or in the name of Debtors, all steps, actions, suits or proceedings deemed necessary or desirable by Secured Party to effect collection or to realize upon Accounts and any other Collateral; and 8.5 To prepare, sign and file or record, for Debtors in Debtors' name, financing statements, applications for registration and like papers. 9. Application of Proceeds. The net cash proceeds resulting from any collection, liquidation, sale or other disposition of the Collateral by Secured Party shall be applied first to the expenses (including reasonable attorneys' fees) of retaking, holding, storing, processing, preparing for sale, selling, collecting, liquidating and the like, and then to the satisfaction of other Secured Obligations then due, application as to particular obligations or against principal or interest to be in Secured Party's absolute discretion. 10. Actions by Secured Party Following Default. While any default hereunder remains uncured, Secured Party shall have the right (but no obligation) to take such actions (in its name or in the name of Debtors) as Secured Party reasonably deems appropriate to cure any default by Debtors under any agreement which constitutes part of the Collateral or to otherwise -10- protect the rights and interests of Debtors and/or Secured Party under any such agreement. Neither Secured Party nor any of the Lenders shall incur any liability as a result of any such action if such action is taken in good faith in accordance with the foregoing, and Debtors shall defend, indemnify and hold Secured Party and each of the Lenders harmless from and against all claims, demands, causes of action, liabilities, losses, costs and expenses (including cost of suit and reasonable attorneys' fees) arising from or in connection with any such good faith action. 11. Specific Assignments and Consents. Upon Secured Party's demand from time to time, (a) Debtors shall execute and deliver to Secured Party an assignment of contract(s), in form and substance satisfactory to Secured Party, which specifically describes one or more of the agreements assigned hereunder and (b) Debtors shall use their best efforts to obtain and deliver to Secured Party a consent to assignment, in form and substance satisfactory to Secured Party, pursuant to which any party other than Debtors to any agreement assigned hereunder consents to such assignment and agrees to recognize Secured Party as Debtors' successor in the event that Secured Party succeeds to Debtors' interests. 12. Secured Party's Costs and Expenses. Debtors shall reimburse Secured Party on demand for all reasonable costs and expenses (including reasonable attorneys' fees) incurred by Secured Party in connection with the enforcement of this Security Agreement, regardless of whether any suit is filed, including without limitation all reasonable costs and expenses incurred in checking, retaking, holding, handling, preparing for sale and selling or otherwise disposing of any and all Collateral, or for managing, or retaining a manager for, the operation of the business or businesses being conducted on the Real Property. Such reimbursement obligations shall bear interest from the date of demand at the default rate of interest set forth in the Loan Agreement (or, if there is no such default rate, at the rate of interest set forth in the Loan Agreement). 13. Obligations Unconditional. Debtors's obligation to perform and observe the agreements and covenants contained herein shall be absolute and unconditional. Until such time as all Secured Obligations have been fully paid and performed, -11- Debtors (i) shall perform and observe all of its agreements and covenants contained in this Security Agreement; and (ii) shall not terminate this Security Agreement for any cause, including without limitation any acts or circumstances that may constitute failure of consideration, destruction of, or damage to, the Collateral, commercial frustration of purpose, any change in the laws of the United States of America or of the State of Nevada or any political subdivision of either, or any failure of Secured Party to perform or observe any agreement, whether express or implied, or any duty, liability or obligation, arising out of or in connection with this Security Agreement. 14. Nonliability and Indemnity of Secured Party. Debtors hereby agree that neither Secured Party's acceptance of the security interests granted hereunder nor any exercise by Secured Party of its rights and remedies hereunder shall be deemed to be an assumption by Secured Party or any of the Lenders of any of Debtors' obligations and liabilities under the terms of any of the Collateral, and Debtors jointly and severally agree to indemnify and hold Secured Party and each of the Lenders harmless against any and all claims, damages, costs and expenses (including reasonable attorneys' fees) suffered or incurred by Secured Party in connection therewith. 15. Miscellaneous Waivers. Presentment, protest, notice of protest, notice of dishonor and notice of nonpayment are waived with respect to any proceeds to which Secured Party is entitled hereunder. 16. Successors and Assigns. Subject to any applicable restrictions on assignment contained herein or in any of the Loan Documents, this Security Agreement shall bind, and shall inure to the benefit of, the respective heirs, executors, administrators, successors and assigns of Debtors and Secured Party. The term "Secured Party" shall include any successor agent for the Lenders, the Lenders individually if there is no agent representing then, and any other holder and owner from time to time (including any pledgee or assignee) of any of the Notes or any other Secured Obligation. 17. Attorney-in-Fact. Debtors hereby constitute and appoint Secured Party as their respective attorney-in-fact for the purposes of (a) carrying out the provisions of this -12- Security Agreement and (b) taking any and all actions and executing any and all instruments that Secured Party reasonably deems necessary or advisable to accomplish the purposes of this Security Agreement and/or to protect Secured Party's interests with respect to the Collateral, and (c) while any default hereunder remains uncured, enforcing Debtors' rights (in Secured Party's name or in Debtors' name) under any agreement which constitutes part of the Collateral. In furtherance of clause (c), Debtors shall deliver to Secured Party, upon Secured Party's demand while any default hereunder remains uncured, all documents which Secured Party reasonably deems appropriate to permit Secured Party's succession to Debtors' rights and interests and to facilitate the enforcement by Secured Party of Debtors' rights with respect to such agreements. The power of attorney granted hereunder is coupled with an interest and is irrevocable. 18. Voting Rights; Dividends; Etc. 18.1 Rights in Absence of Default. So long as no Default remains uncured: 18.1.1 Voting Rights. Debtors shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Stock, or any part thereof, for any purpose not inconsistent with the terms of the Loan Agreement, this Security Agreement, or any other Loan Document; provided, that Debtors shall not exercise any such right if it would result in a default hereunder. 18.1.2 Dividend and Distribution Rights. Debtors shall be entitled to receive and to retain and use any and all dividends or distributions paid in respect of the Pledged Stock; provided, that any and all such dividends or distributions received in the form of capital stock shall be Pledged Stock, and the Certificates representing such capital stock shall be delivered to Secured Party immediately upon receipt by Debtors, subject, in the case of stock of HLG, to the approval of the applicable Gaming Authorities, to be held by Secured Party hereunder; and such stock shall, if received by Debtors and until so delivered, be received and held in trust for the benefit of Secured Party. 18.2 Rights Following Event of Default. While any Default remains uncured, subject to compliance with applicable Gaming Laws: -13- 18.2.1 Voting, Dividend and Distribution Rights. At the option of Secured Party exercised by written notice to Debtors, all rights of Debtors to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 18.1.1, above, and to receive the dividends and distributions which it would otherwise be authorized to receive and retain pursuant to Section 18.1.2, above, shall cease, and all such rights shall thereupon become vested in Secured Party, who shall thereupon have the sole right to exercise such voting and other consensual rights and to receive and to hold as Collateral such dividends and distributions. 18.2.2 Dividends and Distributions Held in Trust. All dividends and other distributions which are received by Debtors contrary to the provisions of this Security Agreement shall be received and held in trust for the benefit of Secured Party and shall be delivered to Secured Party as Collateral immediately upon receipt, in the same form as received (with any necessary endorsements). 18.2.3 Irrevocable Proxy. Debtors hereby revoke all previous proxies with regard to the Pledged Stock and appoints Secured Party as its proxyholder to attend and vote at any and all meetings of the shareholders of the issuer of any Pledged Stock held on or after the date of the giving of this proxy and prior to the termination of this proxy, and to execute any and all written consents of shareholders of any such issuer executed on or after the date of the giving of this proxy and prior to the termination of this proxy, with the same effect as if Debtors had attended the meetings or voted its respective shares or signed the written consents, as applicable; provided, that the proxyholder shall only have the rights described in this paragraph while any default hereunder remains uncured. Debtors hereby authorize Secured Party as the proxyholder and hereby authorizes and directs any such proxyholder to file this proxy and the substitution instrument with the secretary of the appropriate issuer of the Pledged Stock. This proxy is coupled with an interest and is irrevocable until such time as no part of any Secured Obligation remains outstanding. -14- 19. Additional Provisions re Pledged Stock. 19.1 No Obligation to Act. Secured Party shall have no responsibility for ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Stock. 19.2 Reliance on Agreement. Subject to compliance with applicable Gaming Laws, Debtors hereby consent and agree that the issuers of any Pledged Stock, or any registrar or transfer agent or trustee for any of the Pledged Stock, shall be entitled to accept the provisions of this Security Agreement as conclusive evidence of the right of Secured Party to effect any transfer or exercise any right hereunder, notwithstanding any other notice or direction to the contrary heretofore or hereafter given by Debtors or any other Person to such issuers or obligors or to any such registrar, transfer agent or trustee. 19.3 Covenant Not to Issue Uncertificated Securities. Debtors jointly and severally represent and warrant to Secured Party that all of the capital stock of Cinderlane and HLG are in certificated form (as contemplated by Article 104.8101 et seq. of the Nevada Revised Statutes), and covenant to Secured Party that it will not cause or permit Cinderlane or HLG (or any other issuer of any Pledged Stock) to issue any capital stock in uncertificated form or seek to convert all or any part of its existing capital stock into uncertificated form (as contemplated by Article 104.8101 et seq. of the Nevada Revised Statutes). 19.4 Covenant Not to Dilute Interests of Secured Party. Debtors shall not at any time cause or permit Cinderlane or HLG (or any other issuer of any Pledged Stock) to issue any additional capital stock, or any warrants, options or other rights to acquire any additional capital stock, if the effect thereof would be to dilute in any way the interests of Secured Party in Cinderlane or HLG or any such issuer. 19.5 Foreclosure By Private Sale. By virtue of the Securities Act of 1933, as amended ("1933 Act"), or any other Laws or regulations, legal restrictions or limitations may -15- apply and affect Secured Party in any attempts to dispose of all or any portion of the Collateral in the enforcement of Secured Party's rights and remedies hereunder. For these reasons, Secured Party is hereby authorized by Debtors, but not obligated, in the event of any Event of Default giving rise to Secured Party's rights to sell or otherwise dispose of any Collateral consisting of securities, to sell all or any part of the securities at private sale, subject to investment letter restrictions or in any other manner which will not require the securities, or any part thereof, to be registered in accordance with the 1933 Act, as amended, or the rules and regulations promulgated thereunder, or any other law or regulation ("Registration"), at the best price reasonably obtainable by Secured Party at any such private sale or other disposition in any such manner mentioned above. Secured Party is hereby further authorized by Debtors, provided Secured Party has complied with all applicable portions of the Gaming Laws, but not obligated, in the event of any Event of Default giving rise to Secured Party's rights to sell or otherwise dispose of Collateral, to sell all or any part of Collateral consisting of securities at a public sale at the best price obtainable by Secured Party at any such public sale. A commercially reasonable public sale of securities shall be deemed to include, but not be limited to, the following: (i) Secured Party shall publish a notice of the sale in a newspaper of general circulation in the county of the office of the Secured Party or the county of the place of sale chosen by Secured Party, if not at its office, and elsewhere as chosen by the Secured Party; (ii) the notice of sale shall state that Secured Party reserves the right to bid for and purchase the collateral; (iii) all securities of equal class and series of the same issuer shall be sold only as a block and shall not be sold jointly or broken down; (iv) the purchaser of the securities shall provide an investment letter; (v) the securities sold shall bear a legend to the effect that the securities are restricted and may not be sold or transferred without registration under the 1933 Act and under applicable state securities laws or under a valid exemption from the 1933 Act and from applicable state securities laws; and (vi) any other procedures or restrictions necessary to sell or dispose of the securities, or any part thereof, without Registration of the securities or to comply with any other express requirements of the Uniform Commercial Code. Secured Party is also hereby -16- authorized by Debtors, but not obligated, to take such actions, give such notices, obtain such consents, and do such other things as Secured Party may deem required or appropriate in the event of a sale or disposition of any of Collateral consisting of securities. Debtors understand that Secured Party may in its discretion approach a restricted number of potential purchasers in a private sale and that a sale under such circumstances may yield a lower price for Collateral, or any part or parts thereof, than would otherwise be obtainable if the same were registered and sold in the open market. Debtors also understand that a public sale of securities in any manner that will not require the registration of the securities or any part thereof, may yield a lower price for the securities, or any part or parts thereof, than would otherwise be obtainable if the same were registered and sold in the open market. Debtors agree (i) that in the event Secured Party shall, upon any default hereunder, sell Collateral consisting of securities, or any portion thereof, at such private sale or sales or at such public sale, Secured Party shall have the right to rely upon the advice and opinion of any member firm of a national securities exchange as to the best price reasonably obtainable upon such private sale or public sale thereof, and (ii) that such reliance shall be conclusive evidence that Secured Party handled such matter in a commercially reasonable manner under the Uniform Commercial Code. 20. Notices. All notices or communications herein required or permitted to be given shall be in writing and shall be governed in all respects by the notice provisions of the Loan Agreement. 21. Entire Agreement; Amendment; Waiver. This Security Agreement, together with any and all other documents referred to herein, constitutes the entire agreement between Debtors and Secured Party pertaining to the subject matter contained herein. This Security Agreement may not be amended, changed, modified, altered or terminated except by a written instrument signed by Secured Party and Debtors. Neither Secured Party nor Debtors may waive any right hereunder except by a signed written instrument. -17- 22. Severability. In the event any provision of this Security Agreement is held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. 23. Section Headings. The subject headings and the sections and subsections of this Security Agreement are included for convenience only and shall not affect the construction or interpretation of any provision. 24. Governing Law. This Security Agreement shall be construed in accordance with and governed by the laws of the State of Nevada. 25. Definitions. Unless otherwise defined, words used herein have the meanings given them in the Uniform Commercial Code of Nevada. 26. Execution of Counterparts. This Security Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which shall constitute but one and the same instrument. -18- IN WITNESS WHEREOF, Debtors have caused this Security Agreement to be duly executed as of the date first written above. "Debtors": RIO PROPERTIES, INC., a Nevada corporation By /s/ Ronald J. Radcliffe ------------------------------------- Its Treasurer --------------------------------- By ------------------------------------- Its --------------------------------- RIO LEASING, INC., a Nevada corporation By /s/ Ronald J. Radcliffe ------------------------------------- Its Secretary --------------------------------- By ------------------------------------- Its --------------------------------- -19- SCHEDULE 1 All of Debtors' right, title and interest in, to and under the following: (a) All Accounts of Debtors; (b) All Chattel Paper of Debtors; (c) All Contracts of Debtors; (d) All Documents of Debtors; (e) All Equipment of Debtors; (f) All Fixtures of Debtors; (g) All General Intangibles of Debtors; (h) All Instruments of Debtors; (i) All Inventory of Debtors; (j) All Pledged Stock; (k) The Restricted Loan Proceeds Account; (l) All property of Debtors held by Secured Party, or any other party for whom Secured Party is acting as agent hereunder, including, without limitation, all property of every description now or hereafter in the possession or custody of or in transit to Secured Party or such other party for any purpose, including, without limitation, safekeeping, collection or pledge, for the account of Debtors, or as to which Debtors may have any right or power; (m) To the extent not otherwise included, all Proceeds of each of the foregoing and all accessions to, substitutions and replacements for, and rents, profits and products of each of the foregoing. (n) In addition to the foregoing, and without limiting any of the foregoing, all present and future personal property of every kind and nature whatsoever, tangible or intangible, now or hereafter located at, upon or about the real property described in Exhibit "A" attached hereto and incorporated herein by this reference (the "Real Property") or used or to be used in connection with the Real Property, or relating or arising with respect to the Real Property and/or the use thereof or any improvements thereto, including without limitation: (1) All present and future goods, inventory and equipment, as those terms are defined in the Nevada Uniform Commercial Code, including without limitation: furniture and furnishings; fixtures and trade fixtures; gaming equipment (to the extent permitted under applicable law); consumer goods; appliances; machinery; cabinets; doors; plumbing and plumbing material and supplies; electrical wiring and electrical material and supplies; heating, air conditioning and ventilation material and supplies; roofing material and supplies; window material and supplies; ceramic material and supplies; flooring and carpeting; insulation; fencing; landscaping; concrete, lumber, hardware, paint, drywall, and all other building materials, supplies and equipment of every kind and nature. (2) All present and future accounts, accounts receivable, general intangibles, chattel paper, contract rights, rights to payment, deposit accounts, and instruments and documents as those terms are defined in the Nevada Uniform Commercial Code, including without limitation: (i) all rights to the payment of money, including escrow proceeds arising out of the sale or other disposition of all or any portion of the Real Property; (ii) all plans, specifications, drawings, soils tests, appraisals, engineering reports and other documents and materials relating to the development of the Real Property and/or any construction thereon; (iii) all use permits, occupancy permits, construction and building -2- permits, zoning authorizations, development agreements, and all other permits, approvals and other authorizations of any governmental or quasi-governmental authority in connection with the ownership, development, construction, use or operation of the Real Property; (iv) all easements, covenants running with the land, equitable servitudes, tract and/or parcel maps, surveys, appraisals, entitlements, subdivision or other bonds, and all engineering, architectural and governmental compliance papers; (v) any and all agreements relating to the development, use, occupancy and/or operation of the Real Property, including without limitation construction, engineering, architectural, service, property management, landscaping, gardening, consulting and other contracts of every nature; (vi) all leases, licenses and other agreements relating to the occupancy or use of any portion of the Real Property; (vii) all names under which the Real Property is now or hereafter known and all rights to carry on business under any such names or any variant thereof; (viii) all trademarks, trade names, logos, designs and symbols (collectively, "names and marks") relating to the Property and/or the development, construction, use, occupancy or operation thereof, including without limitation any name or mark now or hereafter used in connection with any restaurant, cocktail lounge, night club, banquet room or meeting rooms on the Property, together with the goodwill appurtenant to each such name and mark; (ix) all goodwill, chooses in action, trade secrets, computer programs, software, customer lists, advertising material, patents, licenses, copyrights, technology, processes and proprietary information relating to the Real Property and/or the development, construction, use, occupancy or operation thereof; (x) all insurance proceeds and condemnation awards arising out of or incidental to the ownership, development, construction, use, occupancy or operation of the Real Property; (xi) all reserves, deferred payments, deposits, refunds, cost savings, bonds, insurance policies and payments of any kind -3- relating to the Real Property; (xii) all loan commitments issued to Debtors in connection with any sale or financing of the Real Property; (xiii) all water stock, if any, relating to any Real Property and all shares of stock or other evidence of ownership of any part of or interest in any property that is owned by Debtors in common with others; (xiv) all accounts receivable and rights to payment relating to the development, operation, use, occupancy or maintenance of, and the services rendered in connection with, the Real Property, whether or not yet earned by performance and whether or not evidenced by an instrument, including without limitation all rights to payment from any consumer credit or charge card organization or entity, and all leases, issues, profits, room charges, utility deposits, rent, security and/or cleaning deposits, service charges, food and beverage charges, sundry and gift shop receipts, conference and meeting room charges, equipment rental fees and laundry service charges, and all other forms of obligations owing to Debtors or in which Debtors may have any interest, however created or arising; (xv) that certain Standard Form of Agreement Between Owner and Architect dated September 21, 1992, between Debtors and Anthony A. Marnell II, Chtd. ("Architect"), (xvi) that certain Standard Form of Agreement Between Owner and Architect dated May 3, 1993, between Debtors and Architect, (xvii) that certain Building Contract dated January 4, 1993, between Debtors and Marnell Corrao Associates, Inc., a Nevada corporation ("Contractor"), (xviii) that certain Building Contract dated June 11, 1993, between Debtors and Contractor, (xix) all credit instruments commonly known as "markers" and (xx) all supplements, modifications and amendments to the foregoing. (3) All fixtures located upon or within the Real Property or now or hereafter attached to, installed in, or used or intended for use in connection with the Real Property, including without limitation any and all signs, partitions, generators, screens, awnings, boilers, furnaces, pipes, plumbing, -4- elevators, cleaning, call and sprinkler systems, fire extinguishing apparatus and equipment, water tanks, hot water heaters, heating, ventilating, air conditioning and air cooling equipment, and gas and electric machinery and equipment. (4) All present and future books and records used in connection with the development, operation, use, occupancy or maintenance of the Real Property, including without limitation books of account and ledgers of every kind and nature, all electronically recorded data relating to Debtors or the business thereof, all receptacles and containers for such records, and all files and correspondence; (5) All present and future inventory and merchandise located upon or within the Real Property, including without limitation all present and future goods held for sale or lease or to be furnished under a contract of service, all raw materials, work in process and finished goods, all packing materials, supplies and containers relating to or used in connection with any of the foregoing, and all bills of lading, warehouse receipts or documents of title relating to any of the foregoing; (6) All present and future stocks, bonds, debentures, securities, subscription rights, options, warrants, puts, calls, certificates, partnership interests, joint venture interests, investments and/or brokerage accounts relating to or affecting the Real Property and all rights, preferences, privileges, dividends, distributions, redemption payments, or liquidation payments with respect thereto; (7) All trees, plants, irrigation systems and other items of landscaping and decoration; (8) All rights and interests relating to any parking facilities used in connection with or related to the Real Property, including without limitation all covenants, conditions and -5- restrictions, easements, accounts, accounts receivable and other rights to payment arising in connection with the use and operation thereof, including without limitation, parking fees, valet parking fees and other parking charges; (9) All present and future interests of Debtors in and to any franchise, hotel or restaurant operator's agreement, management agreement, license agreement or reservation agreement used in connection with the development, operation, use, occupancy or maintenance of the Real Property, including without limitation all related service, maintenance, union and employment contracts (including pension plans); (10) All appliances, furnishings, furniture, machinery, systems, apparatus, equipment, trade fixtures and personal property located upon or used in connection with the development, operation, use, occupancy or maintenance of the Real Property, including without limitation: (i) all furniture and furnishings, including without limitation tables, chairs, desks, sofas, beds, dressers, cabinets, office furniture and all other indoor and outdoor furniture of every kind; carpets, rugs and other floor coverings; wall coverings; shades, venetian blinds, drapes, drapery rods and brackets, curtains and other window coverings; tapestries, pictures, paintings and other artworks and decorative elements; screens; shelves; lockers, safes and vaults; mirrors; clocks; lamps and other lighting fixtures and elements; and sinks, tubs, toilets and all other bathroom fixtures and furniture; (ii) all machinery and equipment of every kind, including without limitation laundry equipment, washers, dryers, vacuum cleaners, stoves, ovens, ranges, refrigerators, ice boxes, microwave ovens and timers, dishwashers, disposals, air conditioning -6- equipment, beauty shop and barber equipment, fire extinguishers and other safety equipment and systems, dumbwaiters, conveyors, motors, engines, and food and drink preparation, storing and service apparatus and systems; (iii) all office equipment, including without limitation safes and cash registers; and accounting, duplicating, data processing, communication, switchboard and reservation equipment; (iv) all operating supplies, including without limitation chinaware, glassware, linens, bedding, silverware, tableware, uniforms, inventories of food, liquor and beverages, kitchen utensils, upholstery supplies, cleaning supplies, paint supplies, janitor's equipment and supplies, laundry supplies, unlaid carpeting, mechanical stores and printed hotel forms; (v) all recreation equipment and supplies, including without limitation equipment and supplies used in connection with any gymnasium, sauna, hot tub, steam room or swimming pool and game and sports equipment; (vi) all entertainment equipment, including without limitation radios, tape players, phonograph sets, speakers, phonograph records, tapes, arcade games, television sets, antennas and antenna systems, intercoms, and public address systems; and (vii) all surveillance and security systems; (11) All rights in connection with any business, trade, advertising or promotional association or similar group; -7- (12) All present and future accessions, additions, attachments, replacements and substitutions of or to any or all of the foregoing. (13) All cash and noncash proceeds and products of any or all of the foregoing, including without limitation all monies, deposit accounts, insurance proceeds and other tangible or intangible property received upon a sale or other disposition of any of the foregoing, whether voluntary or involuntary. Defined Terms. As used in this Schedule 1, the following terms shall have the following meanings (such meanings being equally applicable to both the singular and plural forms of the terms defined): "Account Debtors" means any "account Debtors," as such term is defined in Section 9105(1)(a) of the UCC. "Accounts" means any "account," as such term is defined in Section 9106 of the UCC, now owned or hereafter acquired by Debtors and, in any event, shall include, without limitation, all gaming accounts, accounts receivable, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper, Documents or Instruments) now owned or hereafter received or acquired by or belonging or owing to Debtors (including, without limitation, under any trade name, style or division thereof) whether arising out of goods sold or services rendered by Debtors or from any other transaction, whether or not the same involves the sale of goods or services (including, without limitation, any such obligation which may be characterized as an account or contract right under the UCC) and all of Debtors' rights in, to and under all purchase orders or receipts now owned or hereafter acquired by it for goods or services, and all of Debtors' rights to any goods represented by any of the foregoing (including, without limitation, unpaid seller's rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or -8- repossessed goods), and all monies due or to become due to Debtors under all purchase orders and contracts for the sale of goods or the performance of services or both by Debtors (whether or not yet earned by performance on the part of Debtors or in connection with any other transaction), now in existence or hereafter occurring, including, without limitation, the right to receive the proceeds of said purchase orders and contracts, and all collateral security and guarantees of any kind given by any Person with respect to any of the foregoing. "Chattel Paper" means any "chattel paper," as such term is defined in Section 9105(l)(b) of the UCC, now owned or hereafter acquired by Debtors. "Contracts" means all contracts, undertakings, franchise agreements or other agreements (other than rights evidenced by Chattel Paper, Documents or Instruments) in or under which Debtors may now or hereafter have any right, title or interest, including, without limitation, with respect to an Account, any agreement relating to the terms of payment or the terms of performance thereof. "Documents" means any "document," as such term is defined in Section 9105(l)(f) of the UCC, now owned or hereafter acquired by Debtors. "Equipment" means any "equipment," as such term is defined in Section 9109(2) of the UCC, now or hereafter owned or acquired by Debtors and, in any event, shall include, without limitation, all ambulances and other vehicles, gaming equipment, machinery, furnishings, computers and other electronic data-processing equipment of any nature whatsoever, any and all additions, substitutions and replacements of any of the foregoing, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto. "Fixtures" means "fixtures," as such term is defined in Section 9313-(1)(a) of the UCC, now or hereafter owned or acquired by Debtors and, in any event shall include, without limitation, regardless of where -9- located, all of the fixtures, systems, machinery, apparatus, equipment and fittings of every kind and nature whatsoever and all appurtenances and additions thereto and substitutions or replacements thereof, now or hereafter attached or affixed to or constituting a part of, or located in or upon, real property wherever located, including, without limitation, all security systems, heating, electrical, mechanical, lighting, lifting, plumbing, ventilating, air-conditioning and air cooling, refrigerating, food preparation, incinerating and power, loading and unloading, signs, escalators, elevators, boilers, communication, switchboards, sprinkler and other fire prevention and extinguishing fixtures, systems, machinery, apparatus and equipment, and all engines, motors, dynamos, machinery, pipes, pumps, tanks, conduits and ducts constituting a part of any of the foregoing, together with all right, title and interest of Debtors in and to all extensions, improvements, betterments, renewals, substitutes, and replacements of, and all additions and appurtenances to any of the foregoing property, and all conversions of the security constituted thereby, immediately upon any acquisition or release thereof or any such conversion, as the case may be. "General Intangibles" means any "general intangibles," as such term is defined in Section 9106 of the UCC now owned or hereafter acquired by Debtors and, in any event shall include, without limitation, all right, title and interest which Debtors may now or hereafter have in or under any Contract, all customer lists, Trademarks, Patents, rights or intellectual property, interests in partnerships, joint ventures and other business associations, Licenses, permits, copyrights, trade secrets, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, recipes, experience, processes, models, drawings, materials and records, goodwill (including, without limitation, the goodwill associated with any Trademark, Trademark registration or Trademark licensed under any Trademark License), claims in or under insurance policies, -10- including unearned premiums, uncertificated securities, deposit accounts, rights to receive tax refunds and other payments and rights of indemnification. "Instruments" means any "instrument," as such term is defined in Section 9105(1)(i) of the UCC now owned or hereafter acquired by Debtors, including, without limitation, all notes, certificated securities, credit instruments commonly known as "markers" and other evidences of indebtedness, other than instruments that constitute or are a part of a group of writings that constitute, Chattel Paper. "Inventory" means any "inventory," as such term is defined in Section 9109(4) of the UCC, wherever located, now or hereafter owned or acquired by, Debtors and, in any event, shall include, without limitation, all inventory, merchandise, goods and other personal property which are held by or on behalf of Debtors for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in process or materials used or consumed or to be used or consumed in Debtors' business, or the processing, packaging, promotion, delivery or shipping of the same, and all furnished goods whether or not such inventory is listed on any schedules, assignments or reports furnished to Secured Party from time to time and whether or not the same is in transit or in the constructive, actual or exclusive occupancy or possession of Debtors or is held by Debtors or by others for Debtors' account, including, without limitation, all goods covered by purchase orders and contracts with suppliers and all goods billed and held by suppliers and all inventory which may be located on premises of Debtors or of any carriers, forwarding agents, truckers, warehousemen, vendors, selling agents or other persons. "License" means any Patent License, Trademark License or other license of rights or interests now held or hereafter acquired by Debtors. -11- "Patent License" means any of the following now owned or hereafter acquired by Debtors: any written agreement granting any right with respect to any invention on which a Patent is in existence. "Patents" means all of the following in which Debtors now hold or hereafter acquire any interest: (a) letters patent of the United States or any other country, all registrations and recordings thereof, and all applications for letters patent of the United States or any other country, including, without limitation, registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country and (b) all reissues, continuations, continuations-in-part or extensions thereof; all petty patents, divisionals, and patents of addition; and (c) all patents to issue on such applications. "Pledged Stock" means all of the shares of stock described in Schedule 2 hereto and issued by the issuers named therein and all additional shares of stock of any such issuer from time to time acquired by Debtors in any manner and any other securities, options or rights received by Debtors pursuant to any reclassification, reorganization, increase or reduction of capital or stock dividend or in substitution of or in exchange for any such shares of stock (all of which shares of stock shall be deemed part of the Pledged Stock) and all shares of stock acquired, received or owned by Debtors of any issuer who, after the date of this Security Agreement, becomes, as a result of any occurrence, a Subsidiary (as that term is defined in the Loan Agreement) of Parent or either Debtor. "Proceeds" means "proceeds," as such term is defined in Section 9306(1) of the UCC and, in any event, shall include, without limitation, (a) any and all Accounts, Chattel Paper, Instruments, cash or other proceeds payable to Debtors from time to time in respect of the Collateral or any Contract, (b) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to Debtors from time to time with respect to any of the Collateral or any Contract, (c) any and all payments (in any form whatsoever) made or due and payable -12- to Debtors from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral above by any governmental body, authority, bureau or agency (or any person acting under color of governmental authority), (d) any claim of Debtors against third parties (i) for past, present or future infringement of any Patent or Patent License or (ii) for past, present or future infringement or dilution of any Trademark or Trademark License or for injury to the goodwill associated with any Trademark, Trademark registration or Trademark licensed under any Trademark License and (e) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral or any Contract. "Restricted Loan Proceeds Account" means the Restricted Loan Proceeds Account defined in Section 2.01(a) of the Loan Agreement. "Trademark License" means any of the following now owned or hereafter acquired by Debtors: any written agreement granting any right to use any Trademark or Trademark registration. "Trademarks" means any of the following now owned or hereafter acquired by Debtors: (a) any trademarks, tradenames, corporate names, business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and any applications in connection therewith, including, without limitation, registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof and (b) any reissues, extensions or renewals thereof. "UCC" means the Uniform Commercial Code as the same may, from time to time, be in effect in the State of Nevada; provided, however, in the event that, by reason of mandatory provisions of law, any or all of the attachment, -13- perfection or priority of Secured Party's security interest in any collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Nevada, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection of priority and for purposes of definitions related to such provisions. -14- EXHIBIT "A" All that certain real property located in the County of Clark, State of Nevada, described as follows: SCHEDULE 2 PLEDGED STOCK
Percentage Number of of Stock Issuer Class of Stock Ownership Shares Cert. No. - ------------ -------------- --------- ------ --------- Cinderlane, Inc. common 100% 100 1 HLG, Inc. common 100% 100 2
SCHEDULE 3 SECURITY AGREEMENT SUPPLEMENT This Security Agreement Supplement, dated as of , is delivered pursuant to Section 4.2 of the Security Agreement referred to below. The undersigned hereby agrees that this Security Agreement Supplement may be attached to the Pledge and Security Agreement, dated as of , 1998 (as amended, supplemented or otherwise modified, from time to time, the "Security Agreement", the terms defined therein and not otherwise defined herein being used as therein defined), made by Rio Properties, Inc. and Rio Leasing, Inc. in favor of Bank of America National Trust and Savings Association as agent for itself and the Lenders and that the shares of stock listed on this Security Agreement Supplement shall be and become part of the Pledged Stock referred to in the Security Agreement and shall secure all Secured Obligations in accordance therewith. The undersigned agrees that the securities listed on Exhibit A attached to this Security Agreement Supplement shall for all purposes constitute Pledged Stock and shall be subject to the security interest created by the Security Agreement in favor of the Secured Party. The undersigned hereby certifies that the representations and warranties set forth in Section 3 of the Security Agreement and Article 5 of the Loan Agreement are true and correct as to the Pledged Stock listed herein on and as of the date hereof. RIO PROPERTIES, INC. By: ------------------------------------ Title: --------------------------------- RIO LEASING, INC. By: ------------------------------------ Title: --------------------------------- EXHIBIT A TO SECURITY AGREEMENT SUPPLEMENT
Percentage Number of of Stock Issuer Class of Stock Ownership Shares Cert. No. - ------------ -------------- --------- ------ ---------
EX-4.(29) 9 EXHIBIT 4.29 EXHIBIT 4(29) PARENT PLEDGE AND SECURITY AGREEMENT THIS PARENT PLEDGE AND SECURITY AGREEMENT (as amended, supplemented or otherwise modified from time to time, the "Security Agreement"), dated as of December 18, 1998, is executed by RIO HOTEL AND CASINO, INC., a Nevada corporation ("Debtor"), in favor of BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("Secured Party"), as agent for itself and the other lenders (individually, a "Lender" and collectively, the"Lenders") now or hereafter a party to that certain Loan Agreement (the "Loan Agreement") of even date herewith among Rio Properties, Inc., a Nevada corporation (the"Company"), Rio Leasing, Inc., a Nevada corporation ("Rio Leasing"; collectively with the Company, the "Borrowers") as borrowers, Secured Party and the Lenders. This Security Agreement is the Parent Pledge and Security Agreement referred to in the Loan Agreement. This Security Agreement is executed to induce the Lenders to make the loans (collectively, the "Loan") to Borrowers described in the Loan Agreement and evidenced in whole or in part by promissory notes of even date herewith (collectively, the "Notes"). Debtor has guaranteed the obligations of Borrowers under the Loan Agreement (and all documents executed in connection therewith) under the Rio Hotel and Casino, Inc. Guaranty (as amended, supplemented or otherwise modified from time to time, the "Parent Guaranty") of even date herewith executed by Debtor in favor of Secured Party. Capitalized terms used and not otherwise defined herein or in Schedule 1 attached hereto shall have the same meanings as set forth in the Loan Agreement. 1. Assignment. Subject to approval of the applicable Gaming Authorities as to the Pledged Stock of the Company and Rio Leasing only, for valuable consideration, Debtor hereby pledges and assigns to Secured Party (and grants to Secured Party, pursuant to Article 104.9101 et seq. 9 of the Nevada Revised Statutes (the Nevada enactment of the Uniform Commercial Code), a security interest in and to, and a lien upon), all of Debtor's right, title and interest, whether now existing or hereafter arising, in and to the tangible and intangible property (collectively, the "Collateral") described in Schedule 1 attached hereto and incorporated herein by this reference, as security for the prompt payment and performance of each of the obligations described in Section 2, below (collectively, the "Secured Obligations"). 2. Obligations Secured. This Security Agreement secures the prompt payment and performance of each of the following Secured Obligations: 2.1 Each of Debtor's obligations to Secured Party and the Lenders under the Parent Guaranty. 2.2 Each of Debtor's obligations hereunder. 2.3 All other obligations owing to Secured Party and/or the Lenders, but only to the extent that any such obligation is described or referred to in a document, executed by Debtor at Secured Party's request, which states that such obligation is secured hereby. 2.4 Any and all amendments, extensions and other modifications of any of the foregoing, including without limitation amendments, extensions and other modifications that are evidenced by new or additional documents or that change the rate of interest on any Secured Obligation. 3. Representations and Warranties. Debtor hereby represents and warrants that: 3.1 Debtor is the true and lawful owner of and has good and clear title to the Collateral, subject only to the rights of Secured Party hereunder. 3.2 Debtor owns all of the issued and outstanding stock of Borrowers, and there are no outstanding warrants, options or other rights to subscribe to or acquire any of such stock in favor of any third person. 3.3 True and complete copies of all of the existing documents respecting the Collateral (the "Collateral Documents") together with all the amendments, supplements and other modifications to each, written or oral, have been or will be promptly delivered to Secured Party. 3.4 Debtor is not presently in default under any Collateral Document nor has any event occurred which, with the giving of notice or the passage of time or both, would constitute such a default, and there are no existing defenses or offsets against any amounts due or to become due from any party to Debtor under any Collateral Document. -2- 3.5 Debtor is the legal and equitable owner of the Collateral, free and clear of all liens, encumbrances and other rights and claims of other persons (other than Secured Party's interest hereunder). 3.6 Except as disclosed to Secured Party in writing prior to the execution of this Security Agreement or the incorporation of such Collateral into this Security Agreement, each of the presently existing and future Collateral Documents is genuine, valid and enforceable against all applicable parties in accordance with its terms (except to the extent that enforceability is limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally). 3.7 No consent, license, approval, or authorization of, exemption by, or registration with any governmental instrumentality is required to be obtained by Debtor in connection with the execution, delivery, performance, validity, or enforceability of this Security Agreement, except for (i) the approval, if required, of the applicable Gaming Authorities as to the Pledged Stock only and (ii) the filing of applicable financing statements; and no consent of any other party is required for any of the foregoing. 3.8 Subject to the approval, if required, of the applicable Gaming Authorities as to the Pledged Stock only, the execution, delivery, and performance of this Security Agreement does not and will not violate any provision of applicable law, rule or regulation or of any order, judgment, writ, award or decree of any court, arbitrator, or governmental instrumentality, domestic or foreign, applicable to Debtor, or of any indenture, contract, agreement (including any trust agreement), or other undertaking to which Debtor is a party or which affects any of its properties and does not and will not result in a creation or position of any lien, charge, or encumbrance on or security interest in any of the properties of Debtor except as contemplated by this Security Agreement. 3.9 All financial information furnished to Secured Party and/or the Lenders with respect to Debtor (a) is complete and correct in all material respects, (b) accurately presents the financial condition of Debtor and (c) has been prepared in accordance with generally accepted accounting principles -3- consistently applied. All other documents and information furnished Secured Party and/or the Lenders with respect to Debtor are correct and all material respects and complete in so far as completeness is necessary to give Secured Party and the Lenders an accurate knowledge of their subject matter. 3.10 Debtor's principal place of business and chief executive and accounting offices are located at 3700 West Flamingo Road, Las Vegas, Nevada 89103. 4. Covenants by Debtor. Debtor hereby agrees, subject to all rights Debtor, as Guarantor, has under the Loan Agreement, that: 4.1 Prior to or simultaneously with the Debtor's execution of this Security Agreement, Debtor will execute and cause to be filed in accordance with the Nevada Uniform Commercial Code financing statements in form and substance satisfactory to Secured Party. Thereafter, at any time and from time to time, upon demand of Secured Party, Debtor shall give, execute, acknowledge, file and record any notice, financing statement, continuation statement, assignment, instrument, document or agreement that Secured Party reasonably deems necessary or desirable to create, preserve, continue, perfect or validate any security interest intended to be created hereunder, including, without limitation, any security interest in after-acquired property, or to enable Secured Party to enforce its rights with respect to any such security interest. 4.2 Upon the approval of the relevant Gaming Authorities to the pledge by Debtor to Secured Party of all shares of stock of the Company and Rio Leasing owned by Debtor, and, as to all other Pledged Stock, concurrently with the execution of this Security Agreement, Debtor shall deliver to Secured Party all of the certificates ("Certificates") evidencing the Pledged Stock. Debtor agrees that it will upon obtaining any additional shares of stock of any issuer of Pledged Stock or any other securities that may be converted into, or exchanged for Pledged Stock, including any options or other rights with respect thereto, upon the approval of the relevant Gaming Authorities, if required, to the pledge by Debtors to Secured Party of such additional shares or other securities, promptly deliver to Secured Party: (i) a duly -4- executed Security Agreement Supplement in substantially the form of Schedule 3 hereto (a "Security Agreement Supplement") identifying the additional shares of stock which are pledged pursuant to this second sentence of this Section 4.2 and (ii) Certificates evidencing such shares of stock. Debtor hereby authorizes Secured Party to attach the Security Agreement Supplement to this Security Agreement and agrees that all shares of stock listed on the Security Agreement Supplement delivered to Secured Party shall for all purposes hereunder constitute Pledged Stock. 4.3 Debtor shall notify Secured Party prior to changing its principal place of business and chief executive and accounting offices from the location set forth in Section 3.10 of this Security Agreement. 4.4 Debtor shall at all times maintain the Collateral in good condition and will from time to time make all needed and proper replacements, repairs, renewals and improvements so that the value of the Collateral is not impaired. 4.5 Debtor shall keep the Collateral, including, without limitation, all after-acquired property included in the definition of Collateral, free of all liens, claims, security interests and encumbrances other than those described in Section 3.1, above. 4.6 Notwithstanding Secured Party's claim to proceeds, Debtor shall not sell, lease or otherwise transfer or dispose of any Collateral (and shall not permit any such act) unless Debtor shall concurrently replace such Collateral with other Collateral that is of equivalent quality and quantity and reasonably acceptable to Secured Party; provided, however, that, (i) so long as Debtor is not in default hereunder, Debtor may sell any Collateral consisting of inventory in the ordinary course of Debtor's business and may receive and dispose of collections on the same, and (ii) notwithstanding the foregoing, Debtor shall not sell, transfer or otherwise dispose of any of the Pledged Stock without the prior written consent of Secured Party. 4.7 Debtor shall keep Secured Party informed as to the location of the Collateral and shall not relocate any of the Collateral without Secured Party's prior written consent. -5- 4.8 Debtor shall, at Debtor's own cost, defend any and all actions, proceedings and claims affecting the Collateral, including without limitation actions, proceedings and claims challenging Debtor's title to the Collateral or the validity or priority of Secured Party's security interest hereunder, and pay the cost of all license approvals affecting the Collateral. 4.9 Debtor shall promptly pay all taxes, assessments, license fees and other public or private charges levied or assessed against any Collateral, this Security Agreement or any promissory note evidencing any debt secured hereunder. 4.10 Debtor shall maintain such insurance with respect to the Collateral as Secured Party reasonably requires from time to time, with insurers satisfactory to Secured Party and with loss payable to Secured Party as its interests may appear. Debtor shall, if so requested, deliver the original of any such policy to Secured Party. 4.11 Debtor shall not use any Collateral in violation of any applicable laws, rules or regulations. 4.12 All of the Collateral shall at all times remain personal property. 4.13 Debtor shall fully perform all of its obligations under and with respect to the Collateral and shall diligently enforce all of the obligations of each obligor thereunder. 4.14 Debtor shall not modify, amend, supplement or cancel any of the Collateral without the prior written consent of Secured Party. 4.15 Debtor will at all times keep accurate and complete records with respect to the Collateral and agrees that the representatives of Secured Party shall have the right, at any time during normal business hours or at any other reasonable time, and from time to time, to call at Debtor's places of business where the Collateral or any part thereof may be located or the records pertaining to the Collateral may be -6- kept and to inspect the Collateral and/or examine such records and to make abstracts therefrom or copies thereof; in addition, Debtor shall furnish Secured Party with periodic reports as to the Collateral, in such form and detail and at such times as Secured Party may require. 4.16 Monies received because of any court or arbitration award or settlement or insurance payment, for any loss or damage to the Collateral, and proceeds from any condemnation award or settlement relating to the Collateral shall be treated as provided in the Loan Documents. 4.17 As soon as practicable, and in any event within ten (10) days, Debtor shall notify Secured Party of: (a) Any attachment or other legal process levied against any of the Collateral; (b) Any information received by Debtor which may in any manner materially and adversely affect the value of the Collateral or the rights and remedies of Secured Party with respect thereto; (c) The removal of any of the Collateral to a new location and the removal of any records of Debtor relating to the Collateral to any location other than that set forth in Section 3.10, above; and (d) An adequate description and the location of any tangible or intangible property acquired by Debtor after the execution of this Security Agreement, which after-acquired property shall be included, subject to the approval, if required, of the applicable Gaming Authorities as to after-acquired Pledged Stock only, within the definition of "Collateral" hereunder. Any notice delivered pursuant to this Section 4.17 shall set forth the nature of such event and the action which Debtor proposes to take with respect thereto. 5. Events of Default. The occurrence of any of the following shall constitute a default hereunder: -7- 5.1 The occurrence of any Event of Default under the Parent Guaranty. 5.2 The occurrence of any Event of Default under the Loan Agreement or any other Loan Document. 5.3 Default in any other obligation secured hereunder. 5.4 Default in any obligation contained herein. 5.5 Any statement, representation or warranty made by Debtor herein or in any document secured hereunder proves to have been false or inaccurate in any material respect when made. 6. Remedies. In the event of any default hereunder, Secured Party shall have all of the following rights and remedies, each of which may be exercised with or without further notice to Debtor, subject to applicable Gaming Laws (as defined in the Loan Agreement): 6.1 To notify any and all obligors on any and all Accounts (as that term is defined in Schedule 1 attached hereto) assigned hereunder that such Accounts have been assigned to Secured Party and/or that all payments on such Accounts are to be made directly to Secured Party; 6.2 To settle, compromise or release on terms acceptable to Secured Party, in whole or in part, any amounts owing on any and all Accounts; 6.3 To enforce payment and prosecute any action or proceeding with respect to any and all Accounts; 6.4 To extend the time of payment, make allowances and adjustments and issue credits with respect to Accounts in Secured Party's name or in the name of Debtor; 6.5 To foreclose the liens and security interests created under this Security Agreement or under any other agreement relating to any Collateral by any available judicial procedure or without judicial process; -8- 6.6 To sell, assign, lease, or otherwise dispose of the Collateral or any part thereof, either at public or private sale, in lots or in bulk, for cash, on credit or otherwise, with or without representations or warranties, and upon such terms as shall be acceptable to Secured Party, all at Secured Party's sole option and as Secured Party may deem advisable in its sole discretion; 6.7 To hold, operate, and manage the same and from time to time make all needed repairs and such alterations, additions, advances and improvements as Secured Party shall deem appropriate; 6.8 To manage, or retain a manager for, the operation of the business or businesses being conducted on any real property, including, without limitation, any after-acquired real property, which is part of the Collateral; 6.9 To collect interest, dividends, principal and or other sums payable upon or on account of the Collateral; 6.10 To declare all Secured Obligations immediately due and payable; and 6.11 To exercise any and all other rights and remedies that Secured Party may have in any jurisdiction where enforcement of this Security Agreement is sought, including without limitation all rights and remedies of a secured party under any applicable Uniform Commercial Code. Secured Party shall have the right to enforce one or more of its remedies successively or concurrently, and such action shall neither estop nor prevent Secured Party from pursuing any and all further remedies that it may have. In the event that Debtor fails to perform any obligation set forth herein, Secured Party may, but shall not be obligated to, perform the same, and the cost thereof shall be payable by Debtor to Secured Party on demand and shall bear interest at the default rate of interest set forth in the Notes evidencing the Loan (or, if there is no such default rate, at the rate of interest set forth in the Notes). No failure on the part of Secured Party to exercise, and no delay in exercising, any right or remedy shall operate as a waiver thereof or of any default, nor shall any single or partial exercise of any right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. -9- 7. Sale of Collateral. The following shall apply with respect to any sale, assignment, lease or other disposition of the Collateral by Secured Party pursuant to Article 6, above, after Secured Party has complied with applicable Gaming Laws. 7.1 Debtor shall, at Secured Party's request, assemble any and all Collateral and make it available to Secured Party at such places as Secured Party designates that are reasonably convenient to both parties, whether at the premises of Debtor or elsewhere, and shall make available to Secured Party all premises and facilities of Debtor for the purpose of Secured Party's taking possession of the Collateral or removing or putting the Collateral in saleable form. 7.2 If any Collateral requires repair, maintenance, preparation or the like, or is in process or other unfinished state, Secured Party shall have the right to perform all repairs, maintenance, preparation and other processing and completion of manufacture required to put the same in such saleable form as Secured Party deems appropriate, but Secured Party shall also have the right to sell or dispose of such Collateral without any such processing. 7.3 Secured Party shall give Debtor ten (10) days' prior written notice of any such sale, assignment, lease or other disposition. Debtor agrees that such notice is commercially reasonable and Debtor hereby waives all other notices, demands and advertisements of any kind. 7.4 Secured Party may bid or purchase at any such sale, if public, free from any right of redemption that Debtor may have, which right of redemption is hereby waived, and Secured Party may restrict the prospective bidders or purchasers at any such sale to persons who will represent and warrant that they are acquiring the Collateral for their own account and otherwise in compliance with the federal Securities Act of 1933, as amended. 7.5 Because of present or future circumstances, a question may arise under the federal Securities Act of 1933, as amended, as now or hereafter in effect, or any similar statute hereafter enacted analogous in purpose or effect (such Act and any such similar statute as from time to time in effect being -10- hereinafter called the Federal Securities Laws) with respect to any disposition of the Collateral. Debtor acknowledges that compliance with the Federal Securities Laws and/or Gaming Laws may strictly limit Secured Party's course of conduct in disposing of all or any part of the Collateral and may also limit the extent to which or the manner in which any subsequent transferee of the Collateral may dispose of the same, and that there may be other legal restrictions or limitations affecting Secured Party in any attempts to dispose of all or any part of the Collateral under applicable Blue Sky or other state securities laws or similar laws analogous in purpose or effect. 8. Facilitation of Rights and Remedies. To facilitate the exercise by Secured Party of the rights and remedies set forth in this Security Agreement, Debtor authorizes Secured Party, subject to Secured Party's compliance with applicable Gaming Laws, to exercise any or all of the following powers: 8.1 To enter any premises where any Collateral may be located for the purpose of taking possession of or removing such Collateral, to remove from any premises where any Collateral may be located the Collateral and any and all documents, instruments, files and records relating to the Collateral, and any receptacles and cabinets containing the same, and to use the supplies and space of Debtor at any or all of its places of business as may be necessary or appropriate to properly administer and control the Collateral or the handling of collections and realizations thereon, at Debtor's cost and expense; 8.2 To receive, open and dispose of all mail addressed to Debtor and notify postal authorities to change the address for delivery thereof to such address as Secured Party may designate; 8.3 To manage, or to retain a manager for, the operation of the business or businesses being conducted on any real property, including, without limitation, after-acquired real property, which is part of the Collateral; 8.4 To take or bring, in Secured Party's name or in the name of Debtor, all steps, actions, suits or proceedings deemed necessary or desirable by Secured Party to effect collection or to realize upon Accounts and any other Collateral; and -11- 8.5 To prepare, sign and file or record, for Debtor in Debtor's name, financing statements, applications for registration, applications for approval by the Gaming Authorities of the assignment to Secured Party of all stock of Borrowers owned by Debtor, and like papers. 9. Application of Proceeds. The net cash proceeds resulting from any collection, liquidation, sale or other disposition of the Collateral by Secured Party shall be applied first to the expenses (including reasonable attorneys' fees) of retaking, holding, storing, processing, preparing for sale, selling, collecting, liquidating and the like, and then to the satisfaction of other Secured Obligations then due, application as to particular obligations or against principal or interest to be in Secured Party's absolute discretion. 10. Actions by Secured Party Following Default. While any default hereunder remains uncured, Secured Party shall have the right (but no obligation) to take such actions (in its name or in the name of Debtor) as Secured Party reasonably deems appropriate to cure any default by Debtor under any agreement which constitutes part of the Collateral or to otherwise protect the rights and interests of Debtor and/or Secured Party under any such agreement. Neither Secured Party nor any of the Lenders shall incur any liability as a result of any such action if such action is taken in good faith in accordance with the foregoing, and Debtor shall defend, indemnify and hold Secured Party and each of the Lenders harmless from and against all claims, demands, causes of action, liabilities, losses, costs and expenses (including costs of suit and reasonable attorneys' fees) arising from or in connection with any such good faith action. 11. Specific Assignments and Consents. Upon Secured Party's demand from time to time, (a) Debtor shall execute and deliver to Secured Party an assignment of contract(s), in form and substance satisfactory to Secured Party, which specifically describes one or more of the agreements assigned hereunder and (b) Debtor shall use its best efforts to obtain and deliver to Secured Party a consent to assignment, in form and substance satisfactory to Secured Party, pursuant to which any party other than Debtor to any agreement assigned hereunder consents to such assignment and agrees to recognize Secured Party as Debtor's successor in the event that Secured Party succeeds to Debtor's interests. -12- 12. Secured Party's Costs and Expenses. Debtor shall reimburse Secured Party on demand for all reasonable costs and expenses (including reasonable attorneys' fees) incurred by Secured Party in connection with the enforcement of this Security Agreement, regardless of whether any suit is filed, including without limitation all reasonable costs and expenses incurred in checking, retaking, holding, handling, preparing for sale and selling or otherwise disposing of any and all Collateral, or for managing, or retaining a manager for, the operation of the business or businesses being conducted on the Real Property. Such reimbursement obligations shall bear interest from the date of demand at the maximum rate permitted by law. 13. Obligations Unconditional. Debtor's obligation to perform and observe the agreements and covenants contained herein shall be absolute and unconditional. Until such time as all Secured Obligations have been fully paid and performed, Debtor (i) shall perform and observe all of its agreements and covenants contained in this Security Agreement; and (ii) shall not terminate this Security Agreement for any cause, including without limitation any acts or circumstances that may constitute failure of consideration, destruction of, or damage to, the Collateral, commercial frustration of purpose, any change in the laws of the United States of America or of the State of Nevada or any political subdivision of either, or any failure of Secured Party to perform or observe any agreement, whether express or implied, or any duty, liability or obligation, arising out of or in connection with this Security Agreement. 14. Nonliability and Indemnity of Secured Party. Debtor hereby agrees that neither Secured Party's acceptance of the security interests granted hereunder nor any exercise by Secured Party of its rights and remedies hereunder shall be deemed to be an assumption by Secured Party or any of the Lenders of any of Debtor's obligations and liabilities under the terms of any of the Collateral, and Debtor agrees to indemnify and hold Secured Party and each of the Lenders harmless against any and all claims, damages, costs and expenses (including reasonable attorneys' fees) suffered or incurred by Secured Party in connection therewith. -13- 15. Waiver of NRS 40.430. Debtor hereby waives all defenses and benefits that it would otherwise have under Section 40.430 of the Nevada Revised Statutes. 16. Miscellaneous Waivers. Presentment, protest, notice of protest, notice of dishonor and notice of nonpayment are waived with respect to any proceeds to which Secured Party is entitled hereunder. 17. Successors and Assigns. Subject to any applicable restrictions on assignment contained herein or in any of the Loan Documents, this Security Agreement shall bind, and shall inure to the benefit of, the respective heirs, executors, administrators, successors and assigns of Debtor and Secured Party. The term "Secured Party" shall include any successor agent for the Lenders, the Lenders individually if there is no agent representing them, and any other holder and owner from time to time (including any pledgee or assignee) of any of the Notes or any other Secured Obligation. 18. Attorney-in-Fact. Debtor hereby constitutes and appoints Secured Party as its attorney-in-fact for the purposes of (a) carrying out the provisions of this Security Agreement and (b) taking any and all actions and executing any and all instruments that Secured Party reasonably deems necessary or advisable to accomplish the purposes of this Security Agreement and/or to protect Secured Party's interests with respect to the Collateral, and (c) while any default hereunder remains uncured, enforcing Debtor's rights (in Secured Party's name or in Debtor's name) under any agreement which constitutes part of the Collateral. In furtherance of clause (c), Debtor shall deliver to Secured Party, upon Secured Party's demand while any default hereunder remains uncured, all documents which Secured Party reasonably deems appropriate to permit Secured Party's succession to Debtor's rights and interests and to facilitate the enforcement by Secured Party of Debtor's rights with respect to such agreements. The power of attorney granted hereunder is coupled with an interest and is irrevocable. 19. Voting Rights; Dividends; Etc. 19.1 Rights in Absence of Default. So long as no default hereunder remains uncured: -14- 19.1.1 Voting Rights. Debtor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Stock, or any part thereof, for any purpose not inconsistent with the terms of this Security Agreement, or the Parent Guaranty; provided, that Debtor shall not exercise any such right if it would result in a default hereunder. 19.1.2 Dividend and Distribution Rights. Debtor shall be entitled to receive and to retain and use any and all dividends or distributions paid in respect of the Pledged Stock; provided, that any and all such dividends or distributions received in the form of capital stock shall be Pledged Stock, and the Certificates representing such capital stock shall be delivered to Secured Party immediately upon receipt by Debtor, subject, in the case of stock of the Company and Rio Leasing, to the approval of the applicable Gaming Authorities, to be held by Secured Party hereunder; and such stock shall, if received by Debtor and until so delivered, be received and held in trust for the benefit of Secured Party. 19.2 Rights Following Event of Default. While any default hereunder remains uncured, subject to compliance with applicable Gaming Laws: 19.2.1 Voting, Dividend and Distribution Rights. At the option of Secured Party exercised by written notice to Debtor, all rights of Debtor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 19.1.1, above, and to receive the dividends and distributions which it would otherwise be authorized to receive and retain pursuant to Section 19.1.2, above, shall cease, and all such rights shall thereupon become vested in Secured Party, who shall thereupon have the sole right to exercise such voting and other consensual rights and to receive and to hold as Collateral such dividends and distributions. 19.2.2 Dividends and Distributions Held in Trust. All dividends and other distributions which are received by Debtor contrary to the provisions of this Security Agreement shall be received and held in trust for the benefit of Secured Party and shall be delivered to Secured Party as Collateral immediately upon receipt, in the same form as received (with any necessary endorsements). -15- 19.2.3 Irrevocable Proxy. Debtor hereby revokes all previous proxies with regard to the Pledged Stock and appoints Secured Party as its proxyholder to attend and vote at any and all meetings of the shareholders of the issuer of any Pledged Stock held on or after the date of the giving of this proxy and prior to the termination of this proxy, and to execute any and all written consents of shareholders of any such issuer executed on or after the date of the giving of this proxy and prior to the termination of this proxy, with the same effect as if Debtor had attended the meetings or voted its shares or signed the written consents, as applicable; provided, that the proxyholder shall only have the rights described in this paragraph while any default hereunder remains uncured. Debtor hereby authorizes Secured Party as the proxyholder and hereby authorizes and directs any such proxyholder to file this proxy and the substitution instrument with the secretary of the appropriate issuer of the Pledged Stock. This proxy is coupled with an interest and is irrevocable until such time as no part of any Secured Obligation remains outstanding. 20. Additional Provisions re Pledged Stock. 20.1 No Obligation to Act. Secured Party shall have no responsibility for ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Stock. 20.2 Reliance on Agreement. Subject to compliance with applicable Gaming Laws, Debtor hereby consents and agrees that the issuers of any Pledged Stock, or any registrar or transfer agent or trustee for any of the Pledged Stock, shall be entitled to accept the provisions of this Security Agreement as conclusive evidence of the right of Secured Party to effect any transfer or exercise any right hereunder, notwithstanding any other notice or direction to the contrary heretofore or hereafter given by Debtor or any other Person to such issuers or obligors or to any such registrar, transfer agent or trustee. 20.3 Covenant Not to Issue Uncertificated Securities. Debtor represents and warrants to Secured Party that all of the capital stock of Borrowers is in certificated form (as contemplated by Article 104.8101 et seq. of the Nevada Revised Statutes), and covenants to Secured Party that it will -16- not cause or permit Borrowers (or any other issuer of any Pledged Stock) to issue any capital stock in uncertificated form or seek to convert all or any part of its existing capital stock into uncertificated form (as contemplated by Article 104.8101 et seq. of the Nevada Revised Statutes). 20.4 Covenant Not to Dilute Interests of Secured Party. Debtor shall not at any time cause or permit Borrowers (or any other issuer of any Pledged Stock) to issue any additional capital stock, or any warrants, options or other rights to acquire any additional capital stock, if the effect thereof would be to dilute in any way the interests of Secured Party in Borrowers or any such issuer. 20.5 Foreclosure By Private Sale. By virtue of the Securities Act of 1933, as amended ("1933 Act"), or any other Laws or regulations, legal restrictions or limitations may apply and affect Secured Party in any attempts to dispose of all or any portion of the Collateral in the enforcement of Secured Party's rights and remedies hereunder. For these reasons, Secured Party is hereby authorized by Debtor, but not obligated, in the event of any Event of Default giving rise to Secured Party's rights to sell or otherwise dispose of any Collateral consisting of securities, to sell all or any part of the securities at private sale, subject to investment letter restrictions or in any other manner which will not require the securities, or any part thereof, to be registered in accordance with the 1933 Act, as amended, or the rules and regulations promulgated thereunder, or any other law or regulation ("Registration"), at the best price reasonably obtainable by Secured Party at any such private sale or other disposition in any such manner mentioned above. Secured Party is hereby further authorized by Debtor, provided Secured Party has complied with all applicable portions of the Gaming Laws, but not obligated, in the event of any Event of Default giving rise to Secured Party's rights to sell or otherwise dispose of Collateral, to sell all or any part of Collateral consisting of securities at a public sale at the best price obtainable by Secured Party at any such public sale. A commercially reasonable public sale of securities shall be deemed to include, but not be limited to, the following: (i) Secured Party shall publish a notice of the sale in a newspaper of general circulation in the county of the office of the Secured Party or the county of the place of sale chosen by Secured -17- Party, if not at its office, and elsewhere as chosen by the Secured Party; (ii) the notice of sale shall state that Secured Party reserves the right to bid for and purchase the collateral; (iii) all securities of equal class and series of the same issuer shall be sold only as a block and shall not be sold jointly or broken down; (iv) the purchaser of the securities shall provide an investment letter; (v) the securities sold shall bear a legend to the effect that the securities are restricted and may not be sold or transferred without registration under the 1933 Act and under applicable state securities laws or under a valid exemption from the 1933 Act and from applicable state securities laws; and (vi) any other procedures or restrictions necessary to sell or dispose of the securities, or any part thereof, without Registration of the securities or to comply with any other express requirements of the Uniform Commercial Code. Secured Party is also hereby authorized by Debtor, but not obligated, to take such actions, give such notices, obtain such consents, and do such other things as Secured Party may deem required or appropriate in the event of a sale or disposition of any of Collateral consisting of securities. Debtor understands that Secured Party may in its discretion approach a restricted number of potential purchasers in a private sale and that a sale under such circumstances may yield a lower price for Collateral, or any part or parts thereof, than would otherwise be obtainable if the same were registered and sold in the open market. Debtor also understands that a public sale of securities in any manner that will not require the registration of the securities or any part thereof, may yield a lower price for the securities, or any part or parts thereof, than would otherwise be obtainable if the same were registered and sold in the open market. Debtor agrees (i) that in the event Secured Party shall, upon any default hereunder, sell Collateral consisting of securities, or any portion thereof, at such private sale or sales or at such public sale, Secured Party shall have the right to rely upon the advice and opinion of any member firm of a national securities exchange as to the best price reasonably obtainable upon such private sale or public sale thereof, and (ii) that such reliance shall be conclusive evidence that Secured Party handled such matter in a commercially reasonable manner under the Uniform Commercial Code. -18- 21. Guarantor and Suretyship Provisions. The following provisions shall apply to the extent that all or any portion of the Secured Obligations now or hereafter constitute obligations of person(s) (collectively, "Borrowers") other than, or in addition to, Debtor: 21.1 Conditions to Exercise of Rights. Debtor hereby waives any right it may now or hereafter have to require Secured Party, as a condition to the exercise of any remedy or other right against Debtor hereunder or under any other document executed by Debtor in connection with any Secured Obligation, (a) to proceed against any Borrower or other person, or against any other collateral assigned to Secured Party by Debtor or any other person, (b) to pursue any other right or remedy in Secured Party's power, (c) to give notice of the time, place or terms of any public or private sale of real or personal property collateral assigned to Secured Party by any Borrower or other person (other than Debtor), or otherwise to comply with the Nevada enactment of the Uniform Commercial Code (as modified or recodified from time to time) with respect to any such personal property collateral, or (d) to make or give (except as otherwise expressly provided in the Loan Documents) any presentment, demand, protest, notice of dishonor, notice of protest or other demand or notice of any kind in connection with any Secured Obligation or any collateral (other than the Collateral) for any Secured Obligation. 21.2 Defenses. Debtor hereby waives any defense it may now or hereafter have that relates to: (a) any disability or other defense of any Borrower or other person; (b) the cessation, from any cause other than full performance, of the obligations of any Borrower or other person; (c) the application of the proceeds of any Secured Obligation, by any Borrower or other person, for purposes other than the purposes represented to Debtor by any Borrower or otherwise intended or understood by Debtor; (d) any act or omission by Secured Party which directly or indirectly results in or contributes to the release of any Borrower or other person or any collateral for any Secured Obligation; (e) the unenforceability or invalidity of any collateral assignment (other than this Security Agreement) or guaranty with respect to any Secured Obligation, or the lack of perfection or continuing perfection or lack of -19- priority of any lien (other than the lien hereof) which secures any Secured Obligation; (f) any failure of Secured Party to marshal assets in favor of Debtor or any other person; (g) any modification of any Secured Obligation, including any renewal, extension, acceleration or increase in interest rate; (h) any election of remedies by Secured Party that impairs any subrogation or other right of Debtor to proceed against any Borrower or other person, including any loss of rights resulting from anti-deficiency laws relating to nonjudicial foreclosures of real property or other laws limiting, qualifying or discharging obligations or remedies; (i) any law which provides that the obligation of a surety or guarantor must neither be larger in amount nor in other respects more burdensome than that of the principal or which reduces a surety's or guarantor's obligation in proportion to the principal obligation; (j) any failure of Secured Party to file or enforce a claim in any bankruptcy or other proceeding with respect to any person; (k) the election by Secured Party, in any bankruptcy proceeding of any person, of the application or non-application of Section 1111(b)(2) of the United States Bankruptcy Code; (l) any extension of credit or the grant of any lien under Section 364 of the United States Bankruptcy Code; (m) any use of cash collateral under Section 363 of the United States Bankruptcy Code; or (n) any agreement or stipulation with respect to the provision of adequate protection in any bankruptcy proceeding of any person. 21.3 Subrogation. Debtor hereby waives (a) any right of subrogation which Debtor may now or hereafter have against any Borrower that relates to any Secured Obligation, (b) any right to enforce any remedy Debtor may now or hereafter have against any Borrowers that relates to any Secured Obligation (including without limitation any right of reimbursement, indemnity or contribution), and (c) any right to participate in any collateral now or hereafter assigned to Secured Party with respect to any Secured Obligation (and Debtor further agrees that, if and to the extent that any waiver set forth in this paragraph is ever held to be unenforceable, all such rights of subrogation, enforcement and participation shall be junior and subordinate to the right of Secured Party to obtain payment and performance of the Secured Obligations and to all rights of Secured Party in and to any property which now or hereafter serves as collateral security for any Secured Obligation). -20- 21.4 Borrowers' Information. Debtor warrants and agrees: (a) that Debtor has not relied, and will not rely, on any representations or warranties by Secured Party to Debtor with respect to the creditworthiness of any Borrower or the prospects of payment of any Secured Obligation from sources other than the Collateral; (b) that Debtor has established and/or will establish adequate means of obtaining from each Borrower on a continuing basis financial and other information pertaining to the business operations, if any, and financial condition of such Borrower; (c) that Debtor assumes full responsibility for keeping informed with respect to any Borrower's business operations, if any, and financial condition; and (d) that Secured Party shall have no duty to disclose or report to Debtor any information now or hereafter known to Secured Party with respect to any Borrower, including without limitation information relating to any Borrower's business operations or financial condition. 21.5 Other Rights of Sureties. Debtor hereby waives all other rights it may now or hereafter have, whether or not similar to any of the foregoing, by reason of laws of the State of Nevada pertaining to sureties or guarantors. 21.6 Duration. The lien of this Security Agreement on the Collateral shall continue until the expiration of all periods within which any amount at any time paid on account of the obligations secured hereby may be required to be restored or returned by Secured Party upon the bankruptcy, insolvency or reorganization of any Borrower, any guarantor or surety or any other person. In the event that any amount at any time paid on account of the obligations secured hereby is required to be restored or returned by Secured Party as a result of any such bankruptcy, insolvency or reorganization, this Security Agreement shall secure such amount as if such amount was never paid. 21.7 Subordination. Until all of the Secured Obligations have been fully paid and performed, (a) Debtor hereby agrees that all existing and future indebtedness and other obligations of each Borrower to Debtor (collectively, the "Subordinated Debt") shall be and are hereby subordinated to all Secured Obligations which constitute obligations of the -21- applicable Borrower, and the payment thereof is hereby deferred in right of payment to the prior payment and performance of all such Secured Obligations; (b) Debtor shall not collect or receive any cash or non-cash payments on any Subordinated Debt or transfer all or any portion of the Subordinated Debt; and (c) in the event that, notwithstanding the foregoing, any payment by, or distribution of assets of, any Borrower with respect to any Subordinated Debt is received by Debtor such payment or distribution shall be held in trust and immediately paid over to Secured Party, is hereby assigned to Secured Party as security for the Secured Obligations, and shall be held by Secured Party in an interest bearing account until all Secured Obligations have been fully paid and performed. 21.8 Lawfulness and Reasonableness. Debtor warrants that all of the waivers in this Security Agreement are made with full knowledge of their significance, and of the fact that events giving rise to any defense or other benefit waived by Debtor may destroy or impair rights which Debtor would otherwise have against Secured Party, any Borrower and other persons, or against collateral. Debtor agrees that all such waivers are reasonable under the circumstances and further agrees that, if any such waiver is determined (by a court of competent jurisdiction) to be contrary to any law or public policy, such waiver shall be effective to the fullest extent permitted by law. 220 Waiver of Jury Trial. DEBTOR, AGENT AND THE LENDERS EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED ON OR ARISING OUT OF OR RELATED TO THIS SECURITY AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. DEBTOR, THE LENDERS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. -22- 23. Notices. All notices or communications herein required or permitted to be given shall be in writing and shall be governed in all respects by the notice provisions of the Loan Agreement. 24. Entire Agreement; Amendment; Waiver. This Security Agreement, together with any and all other documents referred to herein, constitutes the entire agreement between Debtor and Secured Party pertaining to the subject matter contained herein. This Security Agreement may not be amended, changed, modified, altered or terminated except by a written instrument signed by Secured Party and Debtor. Neither Secured Party nor Debtor may waive any right hereunder except by a signed written instrument. 25. Severability. In the event any provision of this Security Agreement is held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof. 26. Section Headings. The subject headings and the sections and subsections of this Security Agreement are included for convenience only and shall not affect the construction or interpretation of any provision. 27. Governing Law. This Security Agreement shall be construed in accordance with and governed by the laws of the State of Nevada. 28. Definitions. Unless otherwise defined, words used herein have the meanings given them in the Uniform Commercial Code of Nevada. -23- 29. Execution of Counterparts. This Security Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which shall constitute but one and the same instrument. IN WITNESS WHEREOF, Debtor has caused this Security Agreement to be duly executed as of the date first written above. "Debtor": RIO HOTEL AND CASINO, INC., a Nevada corporation By /s/ Ronald J. Radcliffe ------------------------------------- Its Vice President - Treasurer ---------------------------------- By ------------------------------------- Its ---------------------------------- -24- SCHEDULE 1 DESCRIPTION OF COLLATERAL All of Debtor's right, title and interest in, to and under the following: (a) All Accounts of Debtor; (b) All Chattel Paper of Debtor; (c) All Contracts of Debtor; (d) All Documents of Debtor; (e) All Equipment of Debtor; (f) All Fixtures of Debtor; (g) All General Intangibles of Debtor; (h) All Instruments of Debtor; (i) All Inventory of Debtor; (j) All Pledged Stock; (k) All property of Debtor held by Secured Party, or any other party for whom Secured Party is acting as agent hereunder, including, without limitation, all property of every description now or hereafter in the possession or custody of or in transit to Secured Party or such other party for any purpose, including, without limitation, safekeeping, collection or pledge, for the account of Debtor, or as to which Debtor may have any right or power; and (l) To the extent not otherwise included, all Proceeds of each of the foregoing and all accessions to, substitutions and replacements for, and rents, profits and products of each of the foregoing. Defined Terms. As used in this Schedule 1, the following terms shall have the following meanings (such meanings being equally applicable to both the singular and plural forms of the terms defined): "Account Debtor" means any "account debtor," as such term is defined in Section 9105(1)(a) of the UCC. "Accounts" means any "account," as such term is defined in Section 9106 of the UCC, now owned or hereafter acquired by Debtor and, in any event, shall include, without limitation, all accounts receivable, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper, Documents or Instruments) now owned or hereafter received or acquired by or belonging or owing to Debtor (including, without limitation, under any trade name, style or division thereof) whether arising out of goods sold or services rendered by Debtor or from any other transaction, whether or not the same involves the sale of goods or services (including, without limitation, any such obligation which may be characterized as an account or contract right under the UCC) and all of Debtor's rights in, to and under all purchase orders or receipts now owned or hereafter acquired by it for goods or services, and all of Debtor's rights to any goods represented by any of the foregoing (including, without limitation, unpaid seller's rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods), and all monies due or to become due to Debtor under all purchase orders and contracts for the sale of goods or the performance of services or both by Debtor (whether or not yet earned by performance on the part of Debtor or in connection with any other transaction), now in existence or hereafter occurring, including, without limitation, the right to receive the proceeds of said purchase orders and contracts, and all collateral security and guarantees of any kind given by any Person with respect to any of the foregoing. -2- "Chattel Paper" means any "chattel paper," as such term is defined in Section 9105(l)(b) of the UCC, now owned or hereafter acquired by Debtor. "Contracts" means all contracts, undertakings, franchise agreements or other agreements (other than rights evidenced by Chattel Paper, Documents or Instruments) in or under which Debtor may now or hereafter have any right, title or interest, including, without limitation, with respect to an Account, any agreement relating to the terms of payment or the terms of performance thereof. "Documents" means any "documents," as such term is defined in Section 9105(l)(f) of the UCC, now owned or hereafter acquired by Debtor. "Equipment" means any "equipment," as such term is defined in Section 9109(2) of the UCC, now or hereafter owned or acquired by Debtor and, in any event, shall include, without limitation, all ambulances and other vehicles, gaming equipment, machinery, furnishings, computers and other electronic data-processing equipment of any nature whatsoever, any and all additions, substitutions and replacements of any of the foregoing, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto. "Fixtures" means "fixtures," as such term is defined in Section 9313-(1)(a) of the UCC, now or hereafter owned or acquired by Debtor and, in any event shall include, without limitation, regardless of where located, all of the fixtures, systems, machinery, apparatus, equipment and fittings of every kind and nature whatsoever and all appurtenances and additions thereto and substitutions or replacements thereof, now or hereafter attached or affixed to or constituting a part of, or located in or upon, real property wherever located, including, without limitation, all security systems, heating, electrical, mechanical, lighting, lifting, plumbing, ventilating, air-conditioning and air cooling, refrigerating, food preparation, incinerating and power, -3- loading and unloading, signs, escalators, elevators, boilers, communication, switchboards, sprinkler and other fire prevention and extinguishing fixtures, systems, machinery, apparatus and equipment, and all engines, motors, dynamos, machinery, pipes, pumps, tanks, conduits and ducts constituting a part of any of the foregoing, together with all right, title and interest of Debtor in and to all extensions, improvements, betterments, renewals, substitutes, and replacements of, and all additions and appurtenances to any of the foregoing property, and all conversions of the security constituted thereby, immediately upon any acquisition or release thereof or any such conversion, as the case may be. "General Intangibles" means any "general intangibles," as such term is defined in Section 9106 of the UCC now owned or hereafter acquired by Debtor and, in any event shall include, without limitation, all right, title and interest which Debtor may now or hereafter have in or under any Contract, all customer lists, Trademarks, Patents, rights or intellectual property, interests in partnerships, joint ventures and other business associations, Licenses, permits, copyrights, trade secrets, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, recipes, experience, processes, models, drawings, materials and records, goodwill (including, without limitation, the goodwill associated with any Trademark, Trademark registration or Trademark licensed under any Trademark License), claims in or under insurance policies, including unearned premiums, uncertificated securities, deposit accounts, rights to receive tax refunds and other payments and rights of indemnification. "Instruments" means any "instrument," as such term is defined in Section 9105(1)(i) of the UCC now owned or hereafter acquired by Debtor, including, without limitation, all notes, certificated securities, and other evidences of indebtedness, other than instruments that constitute or are a part of a group of writings that constitute, Chattel Paper. -4- "Inventory" means any "inventory," as such term is defined in Section 9109(4) of the UCC, wherever located, now or hereafter owned or acquired by, Debtor and, in any event, shall include, without limitation, all inventory, merchandise, goods and other personal property which are held by or on behalf of Debtor for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in process or materials used or consumed or to be used or consumed in Debtor's business, or the processing, packaging, promotion, delivery or shipping of the same, and all furnished goods whether or not such inventory is listed on any schedules, assignments or reports furnished to Secured Party from time to time and whether or not the same is in transit or in the constructive, actual or exclusive occupancy or possession of Debtor or is held by Debtor or by others for Debtor's account, including, without limitation, all goods covered by purchase orders and contracts with suppliers and all goods billed and held by suppliers and all inventory which may be located on premises of Debtor or of any carriers, forwarding agents, truckers, warehousemen, vendors, selling agents or other persons. "License" means any Patent License, Trademark License or other license of rights or interests now held or hereafter acquired by Debtor. "Patent License" means any of the following now owned or hereafter acquired by Debtor: any written agreement granting any right with respect to any invention on which a Patent is in existence. "Patents" means all of the following in which Debtor now holds or hereafter acquires any interest: (a) letters patent of the United States or any other country, all registrations and recordings thereof, and all applications for letters patent of the United States or any other country, including, without limitation, registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof -5- or any other country and (b) all reissues, continuations, continuations-in-part or extensions thereof; all petty patents, divisionals, and patents of addition; and (c) all patents to issue on such applications. "Pledged Stock" means all of the shares of stock described in Schedule 2 hereto and issued by the issuers named therein and all additional shares of stock of any such issuer from time to time acquired by Debtor in any manner and any other securities, options or rights received by Debtor pursuant to any reclassification, reorganization, increase or reduction of capital or stock dividend or in substitution of or in exchange for any such shares of stock (all of which shares of stock shall be deemed part of the Pledged Stock) and all shares of stock acquired, received or owned by Debtor of any issuer who, after the date of this Security Agreement, becomes, as a result of any occurrence, a Subsidiary (as that term is defined in the Loan Agreement) of Debtor. "Proceeds" means "proceeds," as such term is defined in Section 9306(1) of the UCC and, in any event, shall include, without limitation, (a) any and all Accounts, Chattel Paper, Instruments, cash or other proceeds payable to Debtor from time to time in respect of the Collateral or any Contract, (b) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to Debtor from time to time with respect to any of the Collateral or any Contract, (c) any and all payments (in any form whatsoever) made or due and payable to Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral above by any governmental body, authority, bureau or agency (or any person acting under color of governmental authority), (d) any claim of Debtor against third parties (i) for past, present or future infringement of any Patent or Patent License or (ii) for past, present or future infringement or dilution of any Trademark or Trademark License or for injury to the goodwill associated with any Trademark, Trademark registration or Trademark licensed under any Trademark License and (e) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral or any Contract. -6- "Trademark License" means any of the following now owned or hereafter acquired by Debtor: any written agreement granting any right to use any Trademark or Trademark registration. "Trademarks" means any of the following now owned or hereafter acquired by Debtor: (a) any trademarks, tradenames, corporate names, business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and any applications in connection therewith, including, without limitation, registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof and (b) any reissues, extensions or renewals thereof. "UCC" or "Uniform Commercial Code" means the Uniform Commercial Code as the same may, from time to time, be in effect in the State of Nevada; provided, however, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of Secured Party's security interest in any collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Nevada, the term "UCC" or "Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection of priority and for purposes of definitions related to such provisions. -7- SCHEDULE 2 PLEDGED STOCK
Percentage Number of of Stock Issuer Class of Stock Ownership Shares Cert. No. - ------------ -------------- ---------- ------ --------- Rio Properties, Inc. Common 100% 100 1 Rio Leasing, Inc. Common 100% 99,000 12
SCHEDULE 3 SECURITY AGREEMENT SUPPLEMENT This Security Agreement Supplement, dated as of , is delivered pursuant to Section 4.2 of the Security Agreement referred to below. The undersigned hereby agrees that this Security Agreement Supplement may be attached to the Parent Pledge and Security Agreement, dated as of , 1998 (as amended, supplemented or otherwise modified from time to time, the "Security Agreement", the terms defined therein and not otherwise defined herein being used as therein defined), made by Rio Hotel and Casino, Inc. in favor of Bank of America National Trust and Savings Association as agent for itself and the Lenders and that the shares of stock listed on this Security Agreement Supplement shall be and become part of the Pledged Stock referred to in the Security Agreement and shall secure all Secured Obligations in accordance therewith. The undersigned agrees that the securities listed on Exhibit A attached to this Security Agreement Supplement shall for all purposes constitute Pledged Stock and shall be subject to the security interest created by the Security Agreement in favor of the Secured Party. The undersigned hereby certifies that the representations and warranties set forth in Section 3 of the Security Agreement are true and correct as to the Pledged Stock listed herein on and as of the date hereof. RIO HOTEL AND CASINO, INC., a Nevada corporation By: ------------------------------------ Title: --------------------------------- EXHIBIT A TO SECURITY AGREEMENT SUPPLEMENT
Percentage Number of of Stock Issuer Class of Stock Ownership Shares Cert. No. - ------------ -------------- ---------- ------- ---------
EX-4.(30) 10 EXHIBIT 4.30 EXHIBIT 4(30) RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: Sheppard, Mullin, Richter & Hampton, LLP 333 South Hope Street, 48th Floor Los Angeles, California 90071 Attention: William M.Scott IV, Esq. INSTRUCTIONS TO COUNTY RECORDER: Index this document as (1) a deed of trust and (2) a fixture filing. - -------------------------------------------------------------------------------- (Space above for Recorder's Use) DEED OF TRUST with Assignment of Rents and Fixture Filing NOTICE: THE OBLIGATIONS SECURED HEREBY PROVIDE THE PERIODIC INCREASES AND/OR DECREASES IN THE APPLICABLE INTEREST RATE. NOTICE: THE OBLIGATIONS SECURED HEREBY INCLUDE REVOLVING CREDIT OBLIGATIONS WHICH PERMIT BORROWING, REPAYMENT AND REBORROWING. This Deed of Trust with Assignment of Rents and Fixture Filing ("Deed of Trust") is made as of December 18, 1998 by RIO PROPERTIES, INC., a Nevada corporation, as trustor ("Trustor"), in favor of EQUITABLE DEED COMPANY, a California corporation, as trustee ("Trustee"), for the benefit of BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association ("Beneficiary"), as agent ("Agent") for itself and the other lenders (collectively, the "Lenders") now or hereafter a party to that certain Loan Agreement (the "Loan Agreement") of even date herewith, among Beneficiary (in its individual capacity) and the Lenders as the lenders, Trustor and Rio Leasing, Inc., a Nevada corporation ("Rio Leasing"), as the borrowers (collectively, the "Borrowers"), and Beneficiary as Agent. Pursuant to the Loan Agreement, Beneficiary and the Lenders have agreed to make loans to Borrowers in the aggregate maximum principal amount (including future advances) of $125,000,000 (collectively, the "Loan"). 1. Grant in Trust and Secured Obligations. 1.1 Grant in Trust. For the purpose of securing payment and performance of the Secured Obligations defined and described in Section 1.2, Trustor hereby irrevocably and unconditionally grants, conveys, transfers and assigns to Trustee, in trust for the benefit of Beneficiary, with power of sale and right of entry and possession, all estate, right, title and interest which Trustor now has or may later acquire in and to the following property (all or any part of such property, or any interest in all or any part of it, as the context may require, the "Property"): (a) The real property located in the County of Clark, State of Nevada, as described in Exhibit A, together with all existing and future easements and rights affording access to it (the "Land"); together with (b) All buildings, structures and improvements now located or later to be constructed on the Land (the "Improvements"); together with (c) All existing and future appurtenances, privileges, easements, franchises, hereditaments and tenements of the Land, including all minerals, oil, gas, other hydrocarbons and associated substances, sulphur, nitrogen, carbon dioxide, helium and other commercially valuable substances which may be in, under or produced from any part of the Land, all development rights and credits, air rights, water, water rights (whether riparian, appropriative or otherwise, and whether or not appurtenant) and water stock, and any land lying in the streets, roads or avenues, open or proposed, in front of or adjoining the Land and Improvements; together with (d) All existing and future leases, subleases, subtenancies, licenses, occupancy agreements and concessions (collectively the "Leases") relating to the use and enjoyment of all or any part of the Land and Improvements, and any and all guaranties and other agreements relating to or made in connection with any of such leases; together with -2- (e) All real property and improvements on it, and all appurtenances and other property and interests of any kind or character, whether described in Exhibit A or not, which may be reasonably necessary or desirable to promote the present and any reasonable future beneficial use and enjoyment of the Land and Improvements; together with (f) All goods, materials, supplies, chattels, furniture, fixtures, equipment and machinery now or later to be attached to, placed in or on, or used in connection with the use, enjoyment, occupancy or operation of all or any part of the Land and Improvements, whether stored on the Land or elsewhere, including all pumping plants, engines, pipes, ditches and flumes, and also all gas, electric, cooking, heating, cooling, air conditioning, lighting, refrigeration and plumbing fixtures and equipment, all of which shall be considered to the fullest extent of the law to be real property for purposes of this Deed of Trust; together with (g) All building materials, equipment, work in process or other personal property of any kind, whether stored on the Land or elsewhere, which have been or later will be acquired for the purpose of being delivered to, incorporated into or installed in or about the Land or Improvements; together with (h) All rights to the payment of money and all value arising from any and all existing and future Interest Rate Protection Agreements, and any and all other existing and future transactions between Trustor and Beneficiary or any other party which may afford interest rate protection to all or part of the Loan; together with (i) All rights to the payment of money, accounts, accounts receivable, reserves, deferred payments, refunds, cost savings, payments and deposits, room revenues, food revenues, beverage revenues and casino revenues, whether now or later to be received from third parties or deposited by Trustor with third parties (including all utility deposits), contract rights, development and use rights, governmental permits and licenses, applications, architectural and engineering -3- plans, specifications and drawings, as-built drawings, chattel paper, instruments, documents, notes, drafts and letters of credit (other than letters of credit in favor of Beneficiary), which arise from or relate to construction on the Land or to any business now or later to be conducted on it, or to the Land and Improvements generally; together with (j) All proceeds, including all claims to and demands for them, of the voluntary or involuntary conversion of any of the Land, Improvements or the other property described above into cash or liquidated claims, including proceeds of all present and future fire, hazard or casualty insurance policies and all condemnation awards or payments now or later to be made by any public body or decree by any court of competent jurisdiction for any taking or in connection with any condemnation or eminent domain proceeding, and all causes of action and their proceeds for any damage or injury to the Land, Improvements or the other property described above or any part of them, or breach of warranty in connection with the construction of the Improvements, including causes of action arising in tort, contract, fraud or concealment of a material fact; together with (k) All books and records pertaining to any and all of the property described above, including computer readable memory and any computer hardware or software necessary to access and process such memory ("Books and Records"); together with (l) All proceeds of, additions and accretions to, substitutions and replacements for, and changes in any of the property described above, including all proceeds of any voluntary or involuntary disposition or claim respecting any such property (arising out of any judgment, condemnation or award, or otherwise arising) and all goods, documents, general intangibles, chattel paper and accounts, wherever located, acquired with cash proceeds of any of the foregoing or its proceeds. Capitalized terms used above without definition have the meanings given them in the Loan Agreement. -4- 1.2 Secured Obligations. (a) Trustor makes the grant, conveyance, transfer and assignment set forth in Section 1.1 for the purpose of securing the following obligations (the "Secured Obligations") in any order of priority that Beneficiary may choose: (i) Payment of all obligations at any time owing under each of the promissory notes (collectively, the "Notes") issued from time to time pursuant to the Loan Agreement, payable by Trustor and\or Rio Leasing, as makers, in the aggregate principal amount of One Hundred Twenty-Five Million Dollars ($125,000,000); (ii) Payment and performance of all obligations of Trustor under this Deed of Trust; (iii) Payment and performance of all obligations of Trustor and Rio Leasing under the Loan Agreement; (iv) Except as specified in subsection 1.2(b) below, payment and performance of any obligations of Trustor and\or Rio Leasing under any of the "Loan Documents," as defined in the Loan Agreement, which are executed by Trustor and the other Loan Documents referred to therein, including without limitation any and all interest rate and currency rate hedging arrangements hereafter entered into by Trustor and\or Rio Leasing and any Lender (the "Rate Contracts" referred to in the Loan Agreement); (v) Payment and performance of all future advances and other obligations that Trustor or any successor in ownership of all or part of the Property may agree to pay and/or perform (whether as principal, surety or guarantor) for the benefit of Beneficiary and/or any of the Lenders, when a writing evidences the parties' agreement that the advance or obligation be secured by this Deed of Trust; and -5- (vi) Payment and performance of all modifications, amendments, extensions and renewals, however evidenced, of any of the Secured Obligations. (b) In addition to certain other Loan Documents, Trustor is executing an Unsecured Indemnity Agreement (the "Indemnity Agreement") in connection with the Loan. Notwithstanding any provision of this Deed of Trust or any other Loan Document, the obligations of Trustor arising from the Indemnity Agreement are not and shall not be Secured Obligations under this Deed of Trust. (c) All persons who may have or acquire an interest in all or any part of the Property will be considered to have notice of, and will be bound by, the terms of the Secured Obligations and each other agreement or instrument made or entered into in connection with each of the Secured Obligations. Such terms include any provisions in the Notes or the Loan Agreement which permit borrowing, repayment and reborrowing, or which provide that the interest rate on one or more of the Secured Obligations may vary from time to time. 2. Assignment of Rents. 2.1 Assignment. Effective upon the recordation of this Deed of Trust, Trustor hereby irrevocably, absolutely, presently and unconditionally assigns to Beneficiary all rents, royalties, issues, profits, revenue, income and proceeds of the Property, whether now due, past due or to become due, including all prepaid rents and security deposits, and further including, without limitation, all rights to payment for hotel room occupancy by hotel guests or otherwise, which includes any payment or monies received or to be received in whole or in part, whether actual or deemed to be, for the sale of services or products in connection with such occupancy, advance registration fees by hotel guests, tour or junket proceeds and deposits, deposits for convention and/or party reservations, and other benefits from the Property (some or all collectively, as the context may require, "Rents"). This is an absolute assignment, not an assignment for security only. 2.2 Grant of License. Beneficiary hereby confers upon Trustor a license ("License") to collect and retain the Rents as they become due and payable, so long as no Event of Default, as defined in Section 5.2, shall exist and be -6- continuing. If an Event of Default has occurred and is continuing, Beneficiary shall have the right, which it may choose to exercise in its sole discretion, to terminate this License without notice to or demand upon Trustor, and without regard to the adequacy of Beneficiary's security under this Deed of Trust. 2.3 Collection and Application of Rents. Subject to the License granted to Trustor under Section 2.2, Beneficiary has the right, power and authority to collect any and all Rents. Subject to applicable Gaming Laws, Trustor hereby appoints Beneficiary its attorney-in-fact to perform any and all of the following acts, if and at the times when Beneficiary in its sole discretion may so choose: (a) Demand, receive and enforce payment of any and all Rents; or (b) Give receipts, releases and satisfactions for any and all Rents; or (c) Sue either in the name of Trustor or in the name of Beneficiary for any and all Rents. Beneficiary's right to the Rents does not depend on whether or not Beneficiary takes possession of the Property as permitted under subsection 5.3(c). In Beneficiary's sole discretion, Beneficiary may choose to collect Rents either with or without taking possession of the Property. Beneficiary shall apply all Rents collected by it in the manner provided under Section 5.6. If an Event of Default occurs while Beneficiary is in possession of all or part of the Property and is collecting and applying Rents as permitted under this Deed of Trust, Beneficiary, Trustee and any receiver shall nevertheless be entitled to exercise and invoke every right and remedy afforded any of them under this Deed of Trust and at law and in equity, including the right to exercise the power of sale granted under Section 1.1 and subsection 5.3(g). 2.4 Beneficiary Not Responsible. Under no circumstances shall Beneficiary have any duty to produce Rents from the Property. Regardless of whether or not Beneficiary, in person or by agent, takes actual possession of the Land and Improvements, Beneficiary is not and shall not be deemed to be: -7- (a) A "mortgagee in possession" for any purpose; or (b) Responsible for performing any of the obligations of the lessor under any lease; or (c) Responsible for any waste committed by lessees or any other parties, any dangerous or defective condition of the Property, or any negligence in the management, upkeep, repair or control of the Property; or (d) Liable in any manner for the Property or the use, occupancy, enjoyment or operation of all or any part of it. 2.5 Leasing. Except for the leases listed in Schedule 6.26 of the Loan Agreement, Trustor shall not accept any deposit or prepayment of Rents for any rental period exceeding one (1) month without Beneficiary's prior written consent. Trustor shall not lease the Property or any part of it except strictly in accordance with the Loan Agreement. Trustor shall apply all Rents in the manner required by the Loan Agreement. 3. Fixture Filing. This Deed of Trust shall be effective as a financing statement filed as a fixture filing from the date of the recording hereof in accordance with NRS 104.9402. In connection therewith, the addresses of the Trustor as debtor ("Debtor") and Beneficiary as secured party ("Secured Party") are as set forth in the signature pages hereof. This address of Beneficiary, as the Secured Party, is also the address from which information concerning the security interest may be obtained by any interested party. (a) The property subject to this fixture filing is described in Section 1.1 above. (b) Portions of the property subject to this fixture filing as identified in (a) above are or are to become fixtures related to the real estate described on Exhibit "A" to this Deed of Trust. -8- (c) Secured Party is: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS AGENT, under the Loan Agreement referred to above, whose address is set forth after the signatures as the Notice address. (d) Debtor is: RIO PROPERTIES, INC., whose address is set forth after the signatures as the Notice address. 4. Rights and Duties of the Parties. 4.1 Representations and Warranties. Trustor represents and warrants that, except as previously disclosed to Beneficiary in a writing making reference to this Section 4.1: (a) Trustor lawfully possesses and holds fee simple title to all of the Land and Improvements; (b) Trustor has or will have good title to all Property other than the Land and Improvements; (c) Trustor has the full and unlimited power, right and authority to encumber the Property and assign the Rents; (d) This Deed of Trust creates a first and prior lien on the Property; (e) The Property includes all property and rights which may be reasonably necessary or desirable to promote the present and any reasonable future beneficial use and enjoyment of the Land and Improvements; (f) Trustor owns any Property which is personal property free and clear of any security agreements, reservations of title or conditional sales contracts, and there is no financing statement affecting such personal property on file in any public office; and (g) Trustor's place of business, or its chief executive office if it has more than one place of business, is located at the address specified below. -9- 4.2 Taxes and Assessments. Trustor shall pay prior to delinquency all taxes, levies, charges and assessments, including assessments on appurtenant water stock, imposed by any public or quasi-public authority or utility company (collectively, "Impositions") which are (or if not paid, may become) a lien on all or part of the Property or any interest in it, or which may cause any decrease in the value of the Property or any part of it. If any such taxes, levies, charges or assessments become delinquent, Beneficiary may require Trustor to present evidence that they have been paid in full, on ten (10) days' written notice by Beneficiary to Trustor. Notwithstanding the foregoing, Trustor shall not be required to pay any Imposition so long as (i) its validity is being actively contested in good faith and by appropriate proceedings, and (ii) Trustor has demonstrated to Beneficiary's reasonable satisfaction that leaving such Imposition unpaid pending the outcome of such proceedings could not result in conveyance of the Property in satisfaction of such Imposition or otherwise impair Beneficiary's interest under this Deed of Trust. 4.3 Performance of Secured Obligations. Trustor shall promptly pay and perform each Secured Obligation in accordance with its terms. 4.4 Liens, Charges and Encumbrances. Trustor shall immediately discharge any lien on the Property which Beneficiary has not consented to in writing. Trustor shall pay when due each obligation secured by or reducible to a lien, charge or encumbrance which now does or later may encumber or appear to encumber all or part of the Property or any interest in it, whether the lien, charge or encumbrance is or would be senior or subordinate to this Deed of Trust. This Section 4.4 is subject to Trustor's right, granted in the Loan Agreement, to contest in good faith claims and liens for labor done and materials and services furnished in connection with construction of the Improvements. 4.5 Damages and Insurance and Condemnation Proceeds. (a) Trustor hereby absolutely and irrevocably assigns to Beneficiary, and authorizes the payor to pay to Beneficiary the following claims, causes of action, awards, payments and rights to payment: -10- (i) All awards of damages and all other compensation payable directly or indirectly because of a condemnation, proposed condemnation or taking for public or private use which affects all or part of the Property or any interest in it; and (ii) All other awards, claims and causes of action, arising out of any warranty affecting all or any part of the Property, or for damage or injury to or decrease in value of all or part of the Property or any interest in it; and (iii) All proceeds of any insurance policies payable because of loss sustained to all or part of the Property in excess of $1,000,000; and (iv) All interest which may accrue on any of the foregoing. (b) Trustor shall immediately notify Beneficiary in writing if: (i) Any damage occurs or any injury or loss is sustained in the amount of $1,000,000 or more to all or part of the Property, or any action or proceeding relating to any such damage, injury or loss is commenced; or (ii) Any offer is made, or any action or proceeding is commenced, which relates to any actual or proposed condemnation or taking of all or part of the Property. (c) If Beneficiary chooses to do so, Beneficiary may in its own name appear in or prosecute any action or proceeding to enforce any cause of action based on warranty, or for damage, injury or loss to all or part of the Property, and Beneficiary may make any compromise or settlement of the action or proceeding. Beneficiary, if it so chooses, may participate in any action or proceeding relating to condemnation or taking of all or part of the Property, and may join Trustor in adjusting any loss covered by insurance. -11- (d) All proceeds of these assigned claims, other property and rights which Trustor may receive or be entitled to shall be paid to Beneficiary. In each instance, Beneficiary shall apply such proceeds first toward reimbursement of all of Beneficiary's reasonable costs and expenses of recovering the proceeds, including reasonable attorneys' fees. Such attorneys' fees shall include the allocated costs for services of in-house counsel. If, in any instance, each and all of the following conditions are satisfied in Beneficiary's reasonable judgment, Beneficiary must permit Trustor to use the balance of such proceeds ("Net Claims Proceeds") to pay costs of repairing or reconstructing the Property in the manner described below: (i) The plans and specifications, cost breakdown, construction contract, construction schedule, contractor and payment and performance bond for the work of repair or reconstruction must all be acceptable to Beneficiary; and (ii) Beneficiary must receive evidence satisfactory to it that after repair or reconstruction, the Property would be at least as valuable as it was immediately before the damage or condemnation occurred; and (iii) The Net Claims Proceeds must be sufficient in Beneficiary's determination to pay for the total cost of repair or reconstruction, including all associated development costs and interest projected to be payable on the Secured Obligations until the repair or reconstruction is complete; or Trustor must provide its own funds in an amount equal to the difference between the Net Claims Proceeds and a reasonable estimate, made by Trustor and found acceptable by Beneficiary, of the total cost of repair or reconstruction; and (iv) Beneficiary must receive evidence satisfactory to it that all leases which Beneficiary may find acceptable will continue after the repair or reconstruction is complete; and -12- (v) No Event of Default shall have occurred and be continuing. If Beneficiary finds that such conditions have been met, Beneficiary shall hold the Net Claims Proceeds and any funds which Trustor is required to provide in a noninterest-bearing account and shall disburse them to Trustor to pay costs of repair or reconstruction upon presentation of evidence reasonably satisfactory to Beneficiary that repair or reconstruction has been completed satisfactorily and lien-free. However, if Beneficiary finds that one or more of such conditions have not been satisfied, Beneficiary may apply the Net Claims Proceeds to pay or prepay (without premium) some or all of the Secured Obligations in such order and proportions as Beneficiary in its sole discretion may choose. (e) Trustor hereby specifically, unconditionally and irrevocably waives all rights of a property owner under all laws which provide for allocation of condemnation proceeds between a property owner and a lienholder, and any other law or successor statute of similar import. 4.6 Maintenance and Preservation of Property. (a) Trustor shall insure the Property as required by the Loan Agreement and keep the Property in good condition and repair. (b) Trustor shall not remove or demolish any material portion of the Property or any part of it, or make any material alteration, restoration or addition to the Property (other than the Rio Expansion Project referred to in the Loan Agreement), or initiate or allow any change in any zoning or other land use classification which affects the Property or any part of it, except as permitted or required by the Loan Agreement or with Beneficiary's express prior written consent in each instance. -13- (c) If all or part of the Property becomes damaged or destroyed, Trustor shall promptly and completely repair and/or restore the Property in a good and workmanlike manner in accordance with sound building practices, regardless of whether or not Beneficiary agrees to disburse insurance proceeds or other sums to pay costs of the work of repair or reconstruction under Section 4.5. (d) Trustor shall not commit or allow any act upon or use of the Property which would violate: (i) any applicable law or order of any governmental authority, whether now existing or later to be enacted and whether foreseen or unforeseen; or (ii) any public or private covenant, condition, restriction or equitable servitude affecting the Property. Trustor shall not bring or keep any article on the Property or cause or allow any condition to exist on it, if that could invalidate or would be prohibited by any insurance coverage required to be maintained by Trustor on the Property or any part of it under the Loan Agreement. (e) Trustor shall not commit or allow waste of the Property. (f) Trustor shall perform all other acts which from the character or use of the Property may be reasonably necessary to maintain and preserve its value. 4.7 Trustee's Acceptance of Trust. Trustee accepts this trust when this Deed of Trust is recorded. 4.8 Releases, Extensions, Modifications and Additional Security. (a) From time to time, Beneficiary may perform any of the following acts without incurring any liability or giving notice to any person, and without affecting the personal liability of any person for the payment of the Secured Obligations (except as provided below), and without affecting the security hereof for the full amount of the Secured Obligations on all Property remaining subject hereto, and without the necessity that any sum representing the value of any portion of the Property affected by the Beneficiary's action be credited on the Secured Obligations: -14- (i) Release any person liable for payment of any Secured Obligation; (ii) Extend the time for payment, or otherwise alter the terms of payment, of any Secured Obligation; (iii) Accept additional real or personal property of any kind as security for any Secured Obligation, whether evidenced by deeds of trust, mortgages, security agreements or any other instruments of security; or (iv) Alter, substitute or release any property securing the Secured Obligations. (b) From time to time when requested to do so by Beneficiary in writing, Trustee may perform any of the following acts without incurring any liability or giving notice to any person: (i) Consent to the making of any plat or map of the Property or any part of it; (ii) Join in granting any easement or creating any restriction affecting the Property; (iii) Join in any subordination or other agreement affecting this Deed of Trust or the lien of it; or (iv) Reconvey the Property or any part of it without any warranty. 4.9 Reconveyance. When all of the Secured Obligations have been paid in full and the commitments to extend credit to Borrowers under the Loan Agreement have been terminated, Beneficiary shall request Trustee in writing to reconvey the Property, and shall surrender this Deed of Trust and all notes and instruments evidencing the Secured Obligations to Trustee. When Trustee receives Beneficiary's written request for reconveyance and all fees and other sums owing to Trustee by Trustor under Section 4.10, Trustee shall reconvey the Property, or so much of it as is then held under -15- this Deed of Trust, without warranty to the person or persons legally entitled to it. Such person or persons shall pay any costs of recordation. In the reconveyance, the grantee may be described as "the person or persons legally entitled thereto," and the recitals of any matters or facts shall be conclusive proof of their truthfulness. Neither Beneficiary nor Trustee shall have any duty to determine the rights of persons claiming to be rightful grantees of any reconveyance. 4.10 Compensation, Exculpation, Indemnification. (a) Trustor agrees to pay fees in the maximum amounts legally permitted, or reasonable fees as may be charged by Beneficiary and Trustee when the law provides no maximum limit, for any services that Beneficiary or Trustee may render in connection with this Deed of Trust, including Beneficiary's providing a statement of the Secured Obligations or Trustee's rendering of services in connection with a reconveyance. Trustor shall also pay or reimburse all of Beneficiary's and Trustee's reasonable costs and expenses which may be incurred in rendering any such services. Trustor further agrees to pay or reimburse Beneficiary for all reasonable costs, expenses and other advances which may be incurred or made by Beneficiary or Trustee in any efforts to enforce any terms of this Deed of Trust, including any rights or remedies afforded to Beneficiary or Trustee or both of them under Section 5.3, whether any lawsuit is filed or not, or in defending any action or proceeding arising under or relating to this Deed of Trust, including reasonable attorneys' fees and other legal costs, costs of any Foreclosure Sale (as defined in subsection 5.3(h)) and any cost of evidence of title. If Beneficiary chooses to dispose of Property through more than one Foreclosure Sale, Trustor shall pay all costs, expenses or other advances that may be incurred or made by Trustee or Beneficiary in each of such Foreclosure Sales. (b) Beneficiary shall not be directly or indirectly liable to Trustor or any other person as a consequence of any of the following: (i) Beneficiary's exercise of or failure to exercise any rights, remedies or powers granted to Beneficiary in this Deed of Trust; -16- (ii) Beneficiary's failure or refusal to perform or discharge any obligation or liability of Trustor under any agreement related to the Property or under this Deed of Trust; or (iii) Any loss sustained by Trustor or any third party resulting from Beneficiary's failure to lease the Property, or from any other act or omission of Beneficiary in managing the Property, after an Event of Default, unless the loss is caused by the willful misconduct and bad faith of Beneficiary. To the extent permitted by applicable law, Trustor hereby expressly waives and releases all liability of the types described above, and agrees that no such liability shall be asserted against or imposed upon Beneficiary. (c) Trustor agrees to indemnify Trustee and Beneficiary against and hold them harmless from all losses, damages, liabilities, claims, causes of action, judgments, court costs, attorneys' fees and other reasonable legal expenses, cost of evidence of title, cost of evidence of value, and other reasonable costs and expenses which either may suffer or incur: (i) In performing any act required or permitted by this Deed of Trust or any of the other Loan Documents or by law; (ii) Because of any failure of Trustor to perform any of Trustor's obligations; or (iii) Because of any alleged obligation of or undertaking by Beneficiary to perform or discharge any of the representations, warranties, conditions, covenants or other obligations in any document relating to the Property other than the Loan Documents. This agreement by Trustor to indemnify Trustee and Beneficiary shall survive the release and cancellation of any or all of the Secured Obligations and the full or partial release and/or reconveyance of this Deed of Trust. -17- (d) Trustor shall pay all obligations to pay money arising under this Section 4.10 immediately upon demand by Trustee or Beneficiary. Each such obligation shall be added to, and considered to be part of, the principal of the Notes, and shall bear interest from the date the obligation arises at the "Base Rate" plus the "Applicable Margin," as defined in the Loan Agreement. 4.11 Defense and Notice of Claims and Actions. At Trustor's sole expense, Trustor shall protect, preserve and defend the Property and title to and right of possession of the Property, and the security of this Deed of Trust and the rights and powers of Beneficiary and Trustee created under it, against all adverse claims. Trustor shall give Beneficiary and Trustee prompt notice in writing if any claim is asserted which does or could affect any of such matters, or if any action or proceeding is commenced which alleges or relates to any such claim. 4.12 Substitution of Trustee. From time to time, Beneficiary may substitute a successor to any Trustee named in or acting under this Deed of Trust in any manner now or later to be provided at law, or by a written instrument executed and acknowledged by Beneficiary and recorded in the office(s) of the recorder(s) of the county or counties where the Land and Improvements are situated. Any such instrument shall be conclusive proof of the proper substitution of the successor Trustee, who shall automatically upon recordation of the instrument succeed to all estate, title, rights, powers and duties of the predecessor Trustee, without conveyance from it. 4.13 Subrogation. Beneficiary shall be subrogated to the liens of all encumbrances, whether released of record or not, which are discharged in whole or in part by Beneficiary in accordance with this Deed of Trust or with the proceeds of any loan secured by this Deed of Trust. 4.14 Site Visits, Observation and Testing. Subject to compliance with Gaming Laws, including restrictions on access to security and surveillance systems and the casino cage, Beneficiary and its agents and representatives shall have the right at any reasonable time to enter and visit the Property for the purpose of performing appraisals. In addition, the Indemnified Parties (as defined in the Indemnity Agreement) and their agents and representatives shall have the -18- right at any reasonable time to enter and visit the Property for the purposes of observing the Property, taking and removing soil or groundwater samples, and conducting tests on any part of the Property. The Indemnified Parties have no duty, however, to visit or observe the Property or to conduct tests, and no site visit, observation or testing by any Indemnified Party shall impose any liability on any Indemnified Party. In no event shall any site visit, observation or testing by any Indemnified Party be a representation that "Hazardous Substances" (as defined in the Indemnity Agreement) are or are not present in, on, or under the Property, or that there has been or shall be compliance with any law, regulation or ordinance pertaining to Hazardous Substances or any other applicable governmental law. Neither Trustor nor any other party is entitled to rely on any site visit, observation or testing by any Indemnified Party. The Indemnified Parties owe no duty of care to protect Trustor or any other party against, or to inform Trustor or any other party of, any Hazardous Substances or any other adverse condition affecting the Property. Any Indemnified Party shall give Trustor reasonable notice before entering the Property. The Indemnified Party shall make reasonable efforts to avoid interfering with Trustor's use of the Property in exercising any rights provided in this Section. 4.15 Notice of Change. Trustor shall give Beneficiary prior written notice of any change in (a) the location of Trustor's place of business or its chief executive office if it has more than one place of business, (b) the location of any of the Property, including the Books and Records and (c) Trustor's name or business structure. Unless otherwise approved by Lender in writing, all Property that consists of personal property (other than the Books and Records) will be located on the Land and all Books and Records will be located at Trustor's place of business or chief executive office if Trustor has more than one place of business. 5. Accelerating Transfers, Default and Remedies. 5.1 Accelerating Transfers. (a) "Accelerating Transfer" means any sale, contract to sell, conveyance, encumbrance, lease not expressly permitted under the Loan Agreement, or other transfer of all or any material part of the Property or -19- any interest in it, whether voluntary, involuntary, by operation of law or otherwise. If Trustor is a corporation, "Accelerating Transfer" also means any transfer or transfers of shares possessing, in the aggregate, more than fifty percent (50%) of the voting power. If Trustor is a partnership, "Accelerating Transfer" also means withdrawal or removal of any general partner, dissolution of the partnership under Nevada law, or any transfer or transfers of, in the aggregate, more than fifty percent (50%) of the partnership interests. (b) Trustor acknowledges that Beneficiary is making advances under the Loan Agreement in reliance on the expertise, skill and experience of Trustor; thus, the Secured Obligations include material elements similar in nature to a personal service contract. In consideration of Beneficiary's reliance, Trustor agrees that Trustor shall not make any Accelerating Transfer, unless the transfer is preceded by Beneficiary's express written consent to the particular transaction and transferee. Beneficiary may withhold such consent in its sole discretion. If any Accelerating Transfer occurs, Beneficiary, in its sole discretion may declare all of the Secured Obligations to be immediately due and payable, and Beneficiary and Trustee may invoke any rights and remedies provided by Section 5.3 of this Deed of Trust. 5.2 Events of Default. Trustor will be in default under this Deed of Trust upon the occurrence of any one or more of the following events (some or all collectively, "Events of Default;" any one singly, an "Event of Default"): (a) Trustor fails to perform any obligation to pay money which arises under this Deed of Trust, and does not cure that failure within fifteen (15) days after written notice from Beneficiary or Trustee; or (b) Trustor fails to perform any obligation arising under this Deed of Trust other than one to pay money, and does not cure that failure either within thirty (30) days ("Initial Cure Period") after written notice from Beneficiary or Trustee, or within ninety (90) days after such written notice, so long as Trustor begins within the Initial Cure Period and diligently continues to -20- cure the failure, and Beneficiary, exercising reasonable judgment, determines that the cure cannot reasonably be completed at or before expiration of the Initial Cure Period; or (c) An Event of Default (as defined in the Loan Agreement) occurs under the Loan Agreement. 5.3 Remedies. At any time after an Event of Default, Beneficiary and Trustee will be entitled to invoke any and all of the following rights and remedies, all of which will be cumulative, and the exercise of any one or more of which shall not constitute an election of remedies: (a) Acceleration. Subject to applicable Gaming Laws, Beneficiary may declare any or all of the Secured Obligations to be due and payable immediately. (b) Receiver. Subject to applicable Gaming Laws, Beneficiary may apply to any court of competent jurisdiction for, and obtain appointment of, a receiver for the Property. (c) Entry. Subject to applicable Gaming Laws, Beneficiary, in person, by agent or by court-appointed receiver, may enter, take possession of, manage and operate all or any part of the Property, and may also do any and all other things in connection with those actions that Beneficiary may in its sole discretion consider necessary and appropriate to protect the security of this Deed of Trust. Such other things may include: taking and possessing all of Trustor's or the then owner's Books and Records; entering into, enforcing, modifying, or canceling leases on such terms and conditions as Beneficiary may consider proper; obtaining and evicting tenants; fixing or modifying Rents; collecting and receiving any payment of money owing to Trustor; completing construction; and/or contracting for and making repairs and alterations. If Beneficiary so requests, Trustor shall assemble all of the Property that has been removed from the Land and make all of it available to Beneficiary at the site of the Land. Trustor hereby irrevocably constitutes and appoints Beneficiary as Trustor's attorney-in-fact to perform such acts and execute such documents as Beneficiary in its sole -21- discretion may consider to be appropriate in connection with taking these measures, including endorsement of Trustor's name on any instruments. Regardless of any provision of this Deed of Trust or the Loan Agreement, Beneficiary shall not be considered to have accepted any property other than cash or immediately available funds in satisfaction of any obligation of Trustor to Beneficiary, unless Beneficiary has given express written notice of Beneficiary's election of that remedy in accordance with the Nevada Uniform Commercial Code, as it may be amended or recodified from time to time. (d) Cure; Protection of Security. Either Beneficiary or Trustee may cure any breach or default of Trustor, and if it chooses to do so in connection with any such cure, Beneficiary or Trustee may also, subject to applicable Gaming Laws, enter the Property and/or do any and all other things which it may in its sole discretion consider necessary and appropriate to protect the security of this Deed of Trust, including, without limitation, the right to complete the Improvement. Such other things may include: appearing in and/or defending any action or proceeding which purports to affect the security of, or the rights or powers of Beneficiary or Trustee under, this Deed of Trust; paying, purchasing, contesting or compromising any encumbrance, charge, lien or claim of lien which in Beneficiary's or Trustee's sole judgment is or may be senior in priority to this Deed of Trust, such judgment of Beneficiary or Trustee to be conclusive as among the parties to this Deed of Trust; obtaining insurance and/or paying any premiums or charges for insurance required to be carried under the Loan Agreement; otherwise caring for and protecting any and all of the Property; and/or employing counsel, accountants, contractors and other appropriate persons to assist Beneficiary or Trustee. Beneficiary and Trustee may take any of the actions permitted under this subsection 5.3(d) either with or without giving notice to any person. (e) Uniform Commercial Code Remedies. Subject to applicable Gaming Laws, Beneficiary may exercise any or all of the remedies granted to a secured party under the Nevada enactment of the Uniform Commercial Code. -22- (f) Judicial Action. Beneficiary may bring an action in any court of competent jurisdiction to foreclose this instrument or to obtain specific enforcement of any of the covenants or agreements of this Deed of Trust. (g) Power of Sale. Under the power of sale hereby granted, Beneficiary shall have the discretionary right to cause some or all of the Property, including any Property which constitutes personal property to be sold or otherwise disposed of in any combination and in any manner permitted by applicable law. (i) Sales of Personal Property. (A) For purposes of this power of sale, Beneficiary may elect to treat as personal property any Property which is intangible or which can be severed from the Land or Improvements without causing structural damage. If it chooses to do so, Beneficiary may dispose of any personal property separately from the sale of real property, in any manner permitted by or under Nevada Revised Statues Article 104.9101 et seq. (the Nevada enactment of the Uniform Commercial Code), including any public or private sale, or in any manner permitted by any other applicable law. (B) The following provision shall apply in the absence of any specific statutory requirement which permits or requires a different notice period: In connection with any sale or other disposition of such Property, Trustor agrees that the following procedures constitute a commercially reasonable sale: Beneficiary shall mail written notice of the sale to Trustor not later than forty-five (45) days prior to such sale. Once per week during the four weeks immediately preceding such sale, Beneficiary will publish notice of the sale in a local daily newspaper of general circulation. Upon receipt of any written request, Beneficiary will make the Property available to any bona fide prospective purchaser for inspection during -23- reasonable business hours. Notwithstanding, Beneficiary shall be under no obligation to consummate a sale if, in its judgment, none of the offers received by it equals the fair value of the Property offered for sale. The foregoing procedures do not constitute the only procedures that may be commercially reasonable. (ii) Trustee's Sales of Real Property or Mixed Collateral. (A) Beneficiary may choose to dispose of some or all of the Property which consists solely of real property in any manner then permitted by applicable law. In its discretion, Beneficiary may also or alternatively choose to dispose of some or all of the Property, in any combination consisting of both real and personal property, together in one sale to be held in accordance with the law and procedures applicable to real property. Trustor agrees that such a sale of personal property together with real property constitutes a commercially reasonable sale of the personal property. For purposes of this power of sale, either a sale of real property alone, or a sale of both real and personal property together in accordance with law, will sometimes be referred to as a "Trustee's Sale." (B) Before any Trustee's Sale, Beneficiary or Trustee shall give and record such notice of default and election to sell as may then be required by law. When all time periods then legally mandated have expired, and after such notice of sale as may then be legally required has been given, Trustee shall sell the property being sold at a public auction to be held at the time and place specified in the notice of sale. Neither Trustee nor Beneficiary shall have any obligation to make demand on Trustor before any Trustee's Sale. From time to time in accordance with then applicable law, Trustee may, and in any event at Beneficiary's request shall, postpone any Trustee's Sale by public announcement at the time and place noticed for that sale. -24- (C) At any Trustee's Sale, Trustee shall sell to the highest bidder at public auction for cash in lawful money of the United States. Trustee shall execute and deliver to the purchaser(s) a deed or deeds conveying the property being sold without any covenant or warranty whatsoever, express or implied. The recitals in any such deed of any matters or facts, including any facts bearing upon the regularity or validity of any Trustee's Sale, shall be conclusive proof of their truthfulness. Any such deed shall be conclusive against all persons as to the facts recited in it. (h) Single or Multiple Foreclosure Sales. If the Property consists of more than one lot, parcel or item of property, Beneficiary may: (i) Designate the order in which the lots, parcels and/or items shall be sold or disposed of or offered for sale or disposition; and (ii) Elect to dispose of the lots, parcels and/or items through a single consolidated sale or disposition to be held or made under the power of sale granted in subsections 5.3(g) and 5.7, or in connection with judicial proceedings, or by virtue of a judgment and decree of foreclosure and sale; or through two or more such sales or dispositions; or in any other manner Beneficiary may deem to be in its best interests (any such sale or disposition, a "Foreclosure Sale;" any two or more, "Foreclosure Sales"). If Beneficiary chooses to have more than one Foreclosure Sale, Beneficiary at its option may cause the Foreclosure Sales to be held simultaneously or successively, on the same day, or on such different days and at such different times and in such order as Beneficiary may deem to be in its best interests. No Foreclosure Sale shall terminate or affect the liens of this Deed of Trust on any part of the Property which has not been sold, until all of the Secured Obligations have been paid in full. -25- 5.4 Credit Bids. At any Foreclosure Sale, any person, including Trustor, Trustee or Beneficiary, may bid for and acquire the Property or any part of either to the extent permitted by then applicable law. Instead of paying cash for such property, Beneficiary may settle for the purchase price by crediting the sales price of the property against the following obligations: (a) First, the portion of the Secured Obligations attributable to the expenses of sale, costs of any action and any other sums for which Trustor is obligated to pay or reimburse Beneficiary or Trustee under Section 4.10; and (b) Second, all other Secured Obligations in any order and proportions as Beneficiary in its sole discretion may choose. 5.5 Application of Foreclosure Sale Proceeds. Beneficiary and Trustee shall apply the proceeds of any Foreclosure Sale in the following manner: (a) First, to pay the portion of the Secured Obligations attributable to the expenses of sale, costs of any action and any other sums for which Trustor is obligated to reimburse Beneficiary or Trustee under Section 4.10; (b) Second, to pay the portion of the Secured Obligations attributable to any sums expended or advanced by Beneficiary or Trustee under the terms of this Deed of Trust which then remain unpaid; (c) Third, to pay all other Secured Obligations in any order and proportions as Beneficiary in its sole discretion may choose; and (d) Fourth, to remit the remainder, if any to the person or persons entitled to it. 5.6 Application of Rents and Other Sums. Beneficiary shall apply any and all Rents collected by it, and any and all sums other than proceeds of a Foreclosure Sale which Beneficiary may receive or collect under Section 5.3, in the following manner: -26- (a) First, to pay the portion of the Secured Obligations attributable to the costs and expenses of operation and collection that may be incurred by Trustee, Beneficiary or any receiver; (b) Second, to pay all other Secured Obligations in any order and proportions as Beneficiary in its sole discretion may choose; and (c) Third, to remit the remainder, if any, to the person or persons entitled to it. Beneficiary shall have no liability for any funds which it does not actually receive. 5.7 Incorporation of Certain Nevada Covenants. The following covenants nos. 1, 2 (full replacement value), 3, 4 (at the applicable Default Rate), 5, 6, 7 (reasonable), 8 and 9 of NRS 107.030, where not in conflict with the provisions of the Loan Documents, are hereby adopted and made a part of this Deed of Trust. Upon any Event of Default by Trustor hereunder, Beneficiary may (a) declare all sums secured immediately due and payable without demand or notice or (b) have a receiver appointed as a matter of right without regard to the sufficiency of said property or any other security or guaranty and without any showing as required by NRS.ss. 107.100, but subject to applicable Gaming Laws. All remedies provided in this Deed of Trust are distinct and cumulative to any other right or remedy under this Deed of Trust or afforded by law or equity and may be exercised concurrently, independently or successively. The sale of said property conducted pursuant to Covenants Nos. 6, 7 and 8 of NRS 107.030 may be conducted either as to the whole of said property or in separate parcels and in such order as Trustee may determine. 6. Miscellaneous Provisions. 6.1 Additional Provisions. The Loan Documents fully state all of the terms and conditions of the parties' agreement regarding the matters mentioned in or incidental to this Deed of Trust. The Loan Documents also grant further rights to Beneficiary and contain further agreements and affirmative and negative covenants by Trustor which apply to this Deed of Trust and to the Property. -27- 6.2 No Waiver or Cure. (a) Each waiver by Beneficiary or Trustee must be in writing, and no waiver shall be construed as a continuing waiver. No waiver shall be implied from any delay or failure by Beneficiary or Trustee to take action on account of any default of Trustor. Consent by Beneficiary or Trustee to any act or omission by Trustor shall not be construed as a consent to any other or subsequent act or omission or to waive the requirement for Beneficiary's or Trustee's consent to be obtained in any future or other instance. (b) If any of the events described below occurs, that event alone shall not: cure or waive any breach, Event of Default or notice of default under this Deed of Trust or invalidate any act performed pursuant to any such default or notice; or nullify the effect of any notice of default or sale (unless all Secured Obligations then due have been paid and performed and all other defaults under the Loan Documents have been cured); or impair the security of this Deed of Trust; or prejudice Beneficiary, Trustee or any receiver in the exercise of any right or remedy afforded any of them under this Deed of Trust; or be construed as an affirmation by Beneficiary of any tenancy, lease or option, or a subordination of the lien of this Deed of Trust. (i) Beneficiary, its agent or a receiver takes possession of all or any part of the Property in the manner provided in subsection 5.3(c). (ii) Beneficiary collects and applies Rents as permitted under Sections 2.3 and 5.6, either with or without taking possession of all or any part of the Property. (iii) Beneficiary receives and applies to any Secured Obligation proceeds of any Property, including any proceeds of insurance policies, condemnation awards, or other claims, property or rights assigned to Beneficiary under Section 4.5. -28- (iv) Beneficiary makes a site visit, observes the Property and/or conducts tests as permitted under Section 4.14 or under the Loan Agreement. (v) Beneficiary receives any sums under this Deed of Trust or any proceeds of any collateral held for any of the Secured Obligations, and applies them to one or more Secured Obligations. (vi) Beneficiary, Trustee or any receiver invokes any right or remedy provided under this Deed of Trust. 6.3 Powers of Beneficiary and Trustee. (a) Trustee shall have no obligation to perform any act which it is empowered to perform under this Deed of Trust unless it is requested to do so in writing and is reasonably indemnified against loss, cost, liability and expense. (b) If either Beneficiary or Trustee performs any act which it is empowered or authorized to perform under this Deed of Trust, including any act permitted by Section 4.8 or subsection 5.3(d) or by the Loan Agreement, that act alone shall not release or change the personal liability of any person for the payment and performance of the Secured Obligations then outstanding, or the lien of this Deed of Trust on all or the remainder of the Property for full payment and performance of all outstanding Secured Obligations. The liability of the original Trustor shall not be released or changed if Beneficiary grants any successor in interest to Trustor any extension of time for payment, or modification of the terms of payment, of any Secured Obligation. Beneficiary shall not be required to comply with any demand by the original Trustor that Beneficiary refuse to grant such an extension or modification to, or commence proceedings against, any such successor in interest. -29- (c) Beneficiary may take any of the actions permitted under subsections 5.3(b), 5.3(c), 5.7 and/or the Loan Agreement regardless of the adequacy of the security for the Secured Obligations, or whether any or all of the Secured Obligations have been declared to be immediately due and payable, or whether notice of default and election to sell has been given under this Deed of Trust. (d) From time to time, Beneficiary or Trustee may apply to any court of competent jurisdiction for aid and direction in executing the trust and enforcing the rights and remedies created under this Deed of Trust. Beneficiary or Trustee may from time to time obtain orders or decrees directing, confirming or approving acts in executing this trust and enforcing these rights and remedies. 6.4 Merger. No merger shall occur as a result of Beneficiary's acquiring any other estate in or any other lien on the Property unless Beneficiary consents to a merger in writing. 6.5 Joint and Several Liability. If Trustor consists of more than one person, each shall be jointly and severally liable for the faithful performance of all of Trustor's obligations under this Deed of Trust. 6.6 Applicable Law. This Deed of Trust shall be governed by Nevada law. 6.7 Successors in Interest. The terms, covenants and conditions of this Deed of Trust shall be binding upon and inure to the benefit of the heirs, successors and assigns of the parties. However, this Section 6.7 does not waive the provisions of Section 5.1. 6.8 Interpretation. (a) Whenever the context requires, all words used in the singular will be construed to have been used in the plural, and vice versa, and each gender will include any other gender. The captions of the sections of this Deed of Trust are for convenience only and do not -30- define or limit any terms or provisions. The word "include(s)" means "include(s), without limitation," and the word "including" means "including, but not limited to." (b) The word "obligations" is used in its broadest and most comprehensive sense, and includes all primary, secondary, direct, indirect, fixed and contingent obligations. It further includes all principal, interest, prepayment charges, late charges, loan fees and any other fees and charges accruing or assessed at any time, as well as all obligations to perform acts or satisfy conditions. (c) No listing of specific instances, items or matters in any way limits the scope or generality of any language of this Deed of Trust. The Exhibits to this Deed of Trust are hereby incorporated in this Deed of Trust. (d) The terms of the Loan Agreement shall prevail over the terms of this Deed of Trust in the event of any conflict. 6.9 In-House Counsel Fees. Whenever Trustor is obligated to pay or reimburse Beneficiary or Trustee for any attorneys' fees, those fees shall include the allocated costs for services of in-house counsel. 6.10 Waiver of Marshaling. Trustor waives all rights, legal and equitable, it may now or hereafter have to require marshalling of assets or to require upon foreclosure sales of assets in a particular order. Each successor and assign of Trustor, including any holder of a lien subordinate to this Deed of Trust, by acceptance of its interest or lien agrees that it shall be bound by the above waiver, as if it had given the waiver itself. 6.11 Severability. If any provision of this Deed of Trust should be held unenforceable or void, that provision shall be deemed severable from the remaining provisions and in no way affect the validity of this Deed of Trust, except that if such provision relates to the payment of any monetary sum, then Beneficiary may, at its option, declare all Secured Obligations immediately due and payable. -31- 6.12 Notices. Trustor hereby requests that a copy of notice of default and notice of sale be mailed to it at the address set forth below. That address is also the mailing address of Trustor as debtor under the Nevada Uniform Commercial Code. Beneficiary's address given below is the address for Beneficiary as secured party under the Nevada Uniform Commercial Code. "Trustor": RIO PROPERTIES, INC., a Nevada corporation By /s/ Ronald J. Radcliffe ------------------------------------ Ronald J. Radcliffe, Treasurer ------------------------------------ (Printed Name and Title) By /s/ I. Scott Bogatz ------------------------------------ I. Scott Bogatz, Secretary ------------------------------------ (Printed Name and Title) Addresses Where Notices to Trustor Are to Be Sent: Rio Properties, Inc. 3700 West Flamingo Road Las Vegas, Nevada 89103 Attn: Chief Executive Officer Accepted and Agreed: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent under the Loan Agreement By: /s/ Gina Meador ----------------------------------- Gina Meador, Vice President -32- Address Where Notices to Beneficiary Are to Be Sent: Bank of America NT & SA 555 South Flower Street 11th Floor Los Angeles, CA 90017 Attn: Agency Management Services Address Where Notices to Trustee Are to Be Sent: Equitable Deed Company 555 South Flower Street 11th Floor Los Angeles, CA 90017 Attn: Agency Management Services -33- Acknowledgement for Rio Properties, Inc. STATE OF NEVADA ) ) ss. COUNTY OF CLARK ) On December 18, 1998, personally appeared before me, a notary public (or judge or other authorized person, as the case may be), Ronald J. Radcliffe, personally known (or proved) to me to be the person whose name is subscribed to the above instrument, and who acknowledged that (s)he executed the instrument. /s/ Suzanne V. Hall --------------------------------------- (Signature) Notary Public-State of Nevada COUNTY OF CLARK SUZANNE V. HALL My Appointment Expires September 26, 2001 No. 97-4138-1 Acknowledgment for Rio Properties, Inc. STATE OF NEVADA ) ) ss. COUNTY OF CLARK ) On December 18, 1998, personally appeared before me, a notary public (or judge or other authorized person, as the case may be), I. Scott Bogatz, personally known (or proved) to me to be the person whose name is subscribed to the above instrument, and who acknowledged that (s)he executed the instrument. /s/ Lea Ann Spalding --------------------------------------- (Signature) Notary Public-State of Nevada COUNTY OF CLARK LEA ANN SPALDING My Appointment Expires February 19, 2000 No. 96-1306-1 -34- Acknowledgement for Bank of America National Trust and Savings Association STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On December 22, 1998, personally appeared before me, a notary public (or judge or other authorized person, as the case may be), Gina Meador, personally known (or proved) to me to be the person whose name is subscribed to the above instrument, and who acknowledged that (s)he executed the instrument. /s/ Hilda Espy --------------------------------------- (Signature) HILDA ESPY Commission #1128821 Notary Public - California Los Angeles County My Comm. Expires Mar. 24, 2001 -35- EX-4.(31) 11 EXHIBIT 4.31 EXHIBIT 4(31) RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: Sheppard, Mullin, Richter & Hampton, LLP 333 South Hope Street, 48th Floor Los Angeles, California 90071 Attention: William M.Scott IV, Esq. INSTRUCTIONS TO COUNTY RECORDER: Index this document as (1) a deed of trust and (2) a fixture filing. - -------------------------------------------------------------------------------- (Space above for Recorder's Use) DEED OF TRUST with Assignment of Rents and Fixture Filing NOTICE: THE OBLIGATIONS SECURED HEREBY PROVIDE THE PERIODIC INCREASES AND/OR DECREASES IN THE APPLICABLE INTEREST RATE. NOTICE: THE OBLIGATIONS SECURED HEREBY INCLUDE REVOLVING CREDIT OBLIGATIONS WHICH PERMIT BORROWING, REPAYMENT AND REBORROWING. This Deed of Trust with Assignment of Rents and Fixture Filing ("Deed of Trust") is made as of December 18, 1998 by CINDERLANE, INC., a Nevada corporation, as trustor ("Trustor"), in favor of CHICAGO TITLE INSURANCE COMPANY ("Trustee"), for the benefit of BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a national banking association ("Beneficiary"), as agent ("Agent") for itself and the other lenders (collectively, the "Lenders") now or hereafter a party to that certain Loan Agreement (the "Loan Agreement") of even date herewith, among Beneficiary (in its individual capacity) and the Lenders as the lenders, Rio Properties, Inc., a Nevada corporation ("Rio Properties") and Rio Leasing, Inc., a Nevada corporation ("Rio Leasing"), as the borrowers (collectively, the "Borrowers"), and Beneficiary as Agent. Pursuant to the Loan Agreement, Beneficiary and the Lenders have agreed to make loans to Borrowers in the aggregate maximum principal amount (including future advances) of $125,000,000 (collectively, the "Loan"). Trustor has issued a Subsidiary Guaranty in favor of Beneficiary dated as of the date hereof pursuant to which Trustor guarantees the obligations of Borrowers under the Loan Agreement and the other Loan Documents as further set forth therein (the "Guaranty"). 1. Grant in Trust and Secured Obligations. 1.1 Grant in Trust. For the purpose of securing payment and performance of the Secured Obligations defined and described in Section 1.2, Trustor hereby irrevocably and unconditionally grants, conveys, transfers and assigns to Trustee, in trust for the benefit of Beneficiary, with power of sale and right of entry and possession, all estate, right, title and interest which Trustor now has or may later acquire in and to the following property (all or any part of such property, or any interest in all or any part of it, as the context may require, the "Property"): (a) The real property located in the County of Clark, State of Nevada, as described in Exhibit A, together with all existing and future easements and rights affording access to it (the "Land"); together with (b) All buildings, structures and improvements now located or later to be constructed on the Land (the "Improvements"); together with (c) All existing and future appurtenances, privileges, easements, franchises, hereditaments and tenements of the Land, including all minerals, oil, gas, other hydrocarbons and associated substances, sulphur, nitrogen, carbon dioxide, helium and other commercially valuable substances which may be in, under or produced from any part of the Land, all development rights and credits, air rights, water, water rights (whether riparian, appropriative or otherwise, and whether or not appurtenant) and water stock, and any land lying in the streets, roads or avenues, open or proposed, in front of or adjoining the Land and Improvements; together with -2- (d) All existing and future leases, subleases, subtenancies, licenses, occupancy agreements and concessions (collectively the "Leases") relating to the use and enjoyment of all or any part of the Land and Improvements, and any and all guaranties and other agreements relating to or made in connection with any of such leases; together with (e) All real property and improvements on it, and all appurtenances and other property and interests of any kind or character, whether described in Exhibit A or not, which may be reasonably necessary or desirable to promote the present and any reasonable future beneficial use and enjoyment of the Land and Improvements; together with (f) All goods, materials, supplies, chattels, furniture, fixtures, equipment and machinery now or later to be attached to, placed in or on, or used in connection with the use, enjoyment, occupancy or operation of all or any part of the Land and Improvements, whether stored on the Land or elsewhere, including all pumping plants, engines, pipes, ditches and flumes, and also all gas, electric, cooking, heating, cooling, air conditioning, lighting, refrigeration and plumbing fixtures and equipment, all of which shall be considered to the fullest extent of the law to be real property for purposes of this Deed of Trust; together with (g) All building materials, equipment, work in process or other personal property of any kind, whether stored on the Land or elsewhere, which have been or later will be acquired for the purpose of being delivered to, incorporated into or installed in or about the Land or Improvements; together with (h) All rights to the payment of money and all value arising from any and all existing and future Interest Rate Protection Agreements, and any and all other existing and future transactions between Trustor and Beneficiary or any other party which may afford interest rate protection to all or part of the Loan; together with -3- (i) All rights to the payment of money, accounts, accounts receivable, reserves, deferred payments, refunds, cost savings, payments and deposits, room revenues, food revenues, beverage revenues and casino revenues, whether now or later to be received from third parties or deposited by Trustor with third parties (including all utility deposits), contract rights, development and use rights, governmental permits and licenses, applications, architectural and engineering plans, specifications and drawings, as-built drawings, chattel paper, instruments, documents, notes, drafts and letters of credit (other than letters of credit in favor of Beneficiary), which arise from or relate to construction on the Land or to any business now or later to be conducted on it, or to the Land and Improvements generally; together with (j) All proceeds, including all claims to and demands for them, of the voluntary or involuntary conversion of any of the Land, Improvements or the other property described above into cash or liquidated claims, including proceeds of all present and future fire, hazard or casualty insurance policies and all condemnation awards or payments now or later to be made by any public body or decree by any court of competent jurisdiction for any taking or in connection with any condemnation or eminent domain proceeding, and all causes of action and their proceeds for any damage or injury to the Land, Improvements or the other property described above or any part of them, or breach of warranty in connection with the construction of the Improvements, including causes of action arising in tort, contract, fraud or concealment of a material fact; together with (k) All books and records pertaining to any and all of the property described above, including computer readable memory and any computer hardware or software necessary to access and process such memory ("Books and Records"); together with -4- (l) All proceeds of, additions and accretions to, substitutions and replacements for, and changes in any of the property described above, including all proceeds of any voluntary or involuntary disposition or claim respecting any such property (arising out of any judgment, condemnation or award, or otherwise arising) and all goods, documents, general intangibles, chattel paper and accounts, wherever located, acquired with cash proceeds of any of the foregoing or its proceeds. Capitalized terms used herein without definition have the meanings given them in the Loan Agreement. 1.2 Secured Obligations. (a) Trustor makes the grant, conveyance, transfer and assignment set forth in Section 1.1 for the purpose of securing the following obligations (the "Secured Obligations") in any order of priority that Beneficiary may choose: (i) Payment of all obligations at any time owing under the Guaranty; (ii) Payment and performance of all obligations of Trustor under this Deed of Trust; (iii) Payment and performance of all future advances and other obligations that Trustor or any successor in ownership of all or part of the Property may agree to pay and/or perform (whether as principal, surety or guarantor) for the benefit of Beneficiary and/or any of the Lenders, when a writing evidences the parties' agreement that the advance or obligation be secured by this Deed of Trust; and (iv) Payment and performance of all modifications, amendments, extensions and renewals, however evidenced, of any of the Secured Obligations. -5- (b) All persons who may have or acquire an interest in all or any part of the Property will be considered to have notice of, and will be bound by, the terms of the Secured Obligations and each other agreement or instrument made or entered into in connection with each of the Secured Obligations. 2. Assignment of Rents. 2.1 Assignment. Effective upon the recordation of this Deed of Trust, Trustor hereby irrevocably, absolutely, presently and unconditionally assigns to Beneficiary all rents, royalties, issues, profits, revenue, income and proceeds of the Property, whether now due, past due or to become due, including all prepaid rents and security deposits, and further including, without limitation, all rights to payment for hotel room occupancy by hotel guests or otherwise, which includes any payment or monies received or to be received in whole or in part, whether actual or deemed to be, for the sale of services or products in connection with such occupancy, advance registration fees by hotel guests, tour or junket proceeds and deposits, deposits for convention and/or party reservations, and other benefits from the Property (some or all collectively, as the context may require, "Rents"). This is an absolute assignment, not an assignment for security only. 2.2 Grant of License. Beneficiary hereby confers upon Trustor a license ("License") to collect and retain the Rents as they become due and payable, so long as no Event of Default, as defined in Section 5.2, shall exist and be continuing. If an Event of Default has occurred and is continuing, Beneficiary shall have the right, which it may choose to exercise in its sole discretion, to terminate this License without notice to or demand upon Trustor, and without regard to the adequacy of Beneficiary's security under this Deed of Trust. 2.3 Collection and Application of Rents. Subject to the License granted to Trustor under Section 2.2, Beneficiary has the right, power and authority to collect any and all Rents. Subject to applicable Gaming Laws, Trustor hereby appoints Beneficiary its attorney-in-fact to perform any and all of the following acts, if and at the times when Beneficiary in its sole discretion may so choose: -6- (a) Demand, receive and enforce payment of any and all Rents; or (b) Give receipts, releases and satisfactions for any and all Rents; or (c) Sue either in the name of Trustor or in the name of Beneficiary for any and all Rents. Beneficiary's right to the Rents does not depend on whether or not Beneficiary takes possession of the Property as permitted under subsection 5.3(c). In Beneficiary's sole discretion, Beneficiary may choose to collect Rents either with or without taking possession of the Property. Beneficiary shall apply all Rents collected by it in the manner provided under Section 5.6. If an Event of Default occurs while Beneficiary is in possession of all or part of the Property and is collecting and applying Rents as permitted under this Deed of Trust, Beneficiary, Trustee and any receiver shall nevertheless be entitled to exercise and invoke every right and remedy afforded any of them under this Deed of Trust and at law and in equity, including the right to exercise the power of sale granted under Section 1.1 and subsection 5.3(g). 2.4 Beneficiary Not Responsible. Under no circumstances shall Beneficiary have any duty to produce Rents from the Property. Regardless of whether or not Beneficiary, in person or by agent, takes actual possession of the Land and Improvements, Beneficiary is not and shall not be deemed to be: (a) A "mortgagee in possession" for any purpose; or (b) Responsible for performing any of the obligations of the lessor under any lease; or (c) Responsible for any waste committed by lessees or any other parties, any dangerous or defective condition of the Property, or any negligence in the management, upkeep, repair or control of the Property; or -7- (d) Liable in any manner for the Property or the use, occupancy, enjoyment or operation of all or any part of it. 2.5 Leasing. Except for the leases listed in Schedule 6.26 of the Loan Agreement, Trustor shall not accept any deposit or prepayment of Rents for any rental period exceeding one (1) month without Beneficiary's prior written consent. Trustor shall not lease the Property or any part of it except strictly in accordance with the Loan Agreement. Trustor shall apply all Rents in the manner required by the Loan Agreement. 3. Fixture Filing. This Deed of Trust shall be effective as a financing statement filed as a fixture filing from the date of the recording hereof in accordance with NRS 104.9402. In connection therewith, the addresses of the Trustor as debtor ("Debtor") and Beneficiary as secured party ("Secured Party") are as set forth in the signature pages hereof. This address of Beneficiary, as the Secured Party, is also the address from which information concerning the security interest may be obtained by any interested party. (a) The property subject to this fixture filing is described in Section 1.1 above. (b) Portions of the property subject to this fixture filing as identified in (a) above are or are to become fixtures related to the real estate described on Exhibit "A" to this Deed of Trust. (c) Secured Party is: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS AGENT, under the Loan Agreement referred to above, whose address is set forth after the signatures as the Notice address. (d) Debtor is: CINDERLANE, INC., whose address is set forth after the signatures as the Notice address. -8- 4. Rights and Duties of the Parties. 4.1 Representations and Warranties. Trustor represents and warrants that, except as previously disclosed to Beneficiary in a writing making reference to this Section 4.1: (a) Trustor lawfully possesses and holds fee simple title to all of the Land and Improvements; (b) Trustor has or will have good title to all Property other than the Land and Improvements; (c) Trustor has the full and unlimited power, right and authority to encumber the Property and assign the Rents; (d) This Deed of Trust creates a first and prior lien on the Property; (e) The Property includes all property and rights which may be reasonably necessary or desirable to promote the present and any reasonable future beneficial use and enjoyment of the Land and Improvements; (f) Trustor owns any Property which is personal property free and clear of any security agreements, reservations of title or conditional sales contracts, and there is no financing statement affecting such personal property on file in any public office; and (g) Trustor's place of business, or its chief executive office if it has more than one place of business, is located at the address specified below. 4.2 Taxes and Assessments. Trustor shall pay prior to delinquency all taxes, levies, charges and assessments, including assessments on appurtenant water stock, imposed by any public or quasi-public authority or utility company (collectively, "Impositions") which are (or if not paid, may become) a lien on all or part of the Property or any interest in it, or which may cause any decrease in the value of the Property or any part of it. If any such taxes, levies, charges or assessments become delinquent, Beneficiary may require Trustor to present evidence that they have been paid in full, on ten (10) days' written notice by Beneficiary to Trustor. -9- Notwithstanding the foregoing, Trustor shall not be required to pay any Imposition so long as (i) its validity is being actively contested in good faith and by appropriate proceedings, and (ii) Trustor has demonstrated to Beneficiary's reasonable satisfaction that leaving such Imposition unpaid pending the outcome of such proceedings could not result in conveyance of the Property in satisfaction of such Imposition or otherwise impair Beneficiary's interest under this Deed of Trust. 4.3 Performance of Secured Obligations. Trustor shall promptly pay and perform each Secured Obligation in accordance with its terms. 4.4 Liens, Charges and Encumbrances. Trustor shall immediately discharge any lien on the Property which Beneficiary has not consented to in writing. Trustor shall pay when due each obligation secured by or reducible to a lien, charge or encumbrance which now does or later may encumber or appear to encumber all or part of the Property or any interest in it, whether the lien, charge or encumbrance is or would be senior or subordinate to this Deed of Trust. 4.5 Damages and Insurance and Condemnation Proceeds. (a) Trustor hereby absolutely and irrevocably assigns to Beneficiary, and authorizes the payor to pay to Beneficiary the following claims, causes of action, awards, payments and rights to payment: (i) All awards of damages and all other compensation payable directly or indirectly because of a condemnation, proposed condemnation or taking for public or private use which affects all or part of the Property or any interest in it; and (ii) All other awards, claims and causes of action, arising out of any warranty affecting all or any part of the Property, or for damage or injury to or decrease in value of all or part of the Property or any interest in it; and -10- (iii) All proceeds of any insurance policies payable because of loss sustained to all or part of the Property in excess of $1,000,000; and (iv) All interest which may accrue on any of the foregoing. (b) Trustor shall immediately notify Beneficiary in writing if: (i) Any damage occurs or any injury or loss is sustained in the amount of $1,000,000 or more to all or part of the Property, or any action or proceeding relating to any such damage, injury or loss is commenced; or (ii) Any offer is made, or any action or proceeding is commenced, which relates to any actual or proposed condemnation or taking of all or part of the Property. (c) If Beneficiary chooses to do so, Beneficiary may in its own name appear in or prosecute any action or proceeding to enforce any cause of action based on warranty, or for damage, injury or loss to all or part of the Property, and Beneficiary may make any compromise or settlement of the action or proceeding. Beneficiary, if it so chooses, may participate in any action or proceeding relating to condemnation or taking of all or part of the Property, and may join Trustor in adjusting any loss covered by insurance. (d) All proceeds of these assigned claims, other property and rights which Trustor may receive or be entitled to shall be paid to Beneficiary. In each instance, Beneficiary shall apply such proceeds first toward reimbursement of all of Beneficiary's reasonable costs and expenses of recovering the proceeds, including reasonable attorneys' fees. Such attorneys' fees shall include the allocated costs for services of in-house counsel. If, in any instance, each and all of the following conditions are satisfied in Beneficiary's -11- reasonable judgment, Beneficiary must permit Trustor to use the balance of such proceeds ("Net Claims Proceeds") to pay costs of repairing or reconstructing the Property in the manner described below: (i) The plans and specifications, cost breakdown, construction contract, construction schedule, contractor and payment and performance bond for the work of repair or reconstruction must all be acceptable to Beneficiary; and (ii) Beneficiary must receive evidence satisfactory to it that after repair or reconstruction, the Property would be at least as valuable as it was immediately before the damage or condemnation occurred; and (iii) The Net Claims Proceeds must be sufficient in Beneficiary's determination to pay for the total cost of repair or reconstruction, including all associated development costs and interest projected to be payable on the Secured Obligations until the repair or reconstruction is complete; or Trustor must provide its own funds in an amount equal to the difference between the Net Claims Proceeds and a reasonable estimate, made by Trustor and found acceptable by Beneficiary, of the total cost of repair or reconstruction; and (iv) Beneficiary must receive evidence satisfactory to it that all leases which Beneficiary may find acceptable will continue after the repair or reconstruction is complete; and (v) No Event of Default shall have occurred and be continuing. If Beneficiary finds that such conditions have been met, Beneficiary shall hold the Net Claims Proceeds and any funds which Trustor is required to provide in a noninterest-bearing account and shall disburse them to Trustor to pay costs of repair or reconstruction upon presentation of evidence reasonably satisfactory to Beneficiary that repair or reconstruction has been -12- completed satisfactorily and lien-free. However, if Beneficiary finds that one or more of such conditions have not been satisfied, Beneficiary may apply the Net Claims Proceeds to pay or prepay (without premium) some or all of the Secured Obligations in such order and proportions as Beneficiary in its sole discretion may choose. (e) Trustor hereby specifically, unconditionally and irrevocably waives all rights of a property owner under all laws which provide for allocation of condemnation proceeds between a property owner and a lienholder, and any other law or successor statute of similar import. 4.6 Maintenance and Preservation of Property. (a) Trustor shall insure the Property as required by the Loan Agreement and keep the Property in good condition and repair. (b) Trustor shall not remove or demolish any material portion of the Property or any part of it, or make any material alteration, restoration or addition to the Property, or initiate or allow any change in any zoning or other land use classification which affects the Property or any part of it, except as permitted or required by the Loan Agreement or with Beneficiary's express prior written consent in each instance. (c) If all or part of the Property becomes damaged or destroyed, Trustor shall promptly and completely repair and/or restore the Property in a good and workmanlike manner in accordance with sound building practices, regardless of whether or not Beneficiary agrees to disburse insurance proceeds or other sums to pay costs of the work of repair or reconstruction under Section 4.5. (d) Trustor shall not commit or allow any act upon or use of the Property which would violate: (i) any applicable law or order of any governmental authority, whether now existing or later to be enacted and whether foreseen or unforeseen; or (ii) any public or private covenant, condition, restriction or equitable servitude affecting the Property. Trustor shall not bring or keep -13- any article on the Property or cause or allow any condition to exist on it, if that could invalidate or would be prohibited by any insurance coverage required to be maintained by Trustor on the Property or any part of it under the Loan Agreement. (e) Trustor shall not commit or allow waste of the Property. (f) Trustor shall perform all other acts which from the character or use of the Property may be reasonably necessary to maintain and preserve its value. 4.7 Trustee's Acceptance of Trust. Trustee accepts this trust when this Deed of Trust is recorded. 4.8 Releases, Extensions, Modifications and Additional Security. (a) From time to time, Beneficiary may perform any of the following acts without incurring any liability or giving notice to any person, and without affecting the personal liability of any person for the payment of the Secured Obligations (except as provided below), and without affecting the security hereof for the full amount of the Secured Obligations on all Property remaining subject hereto, and without the necessity that any sum representing the value of any portion of the Property affected by the Beneficiary's action be credited on the Secured Obligations: (i) Accept additional real or personal property of any kind as security for any Secured Obligation, whether evidenced by deeds of trust, mortgages, security agreements or any other instruments of security; or (ii) Alter, substitute or release any property securing the Secured Obligations. (b) From time to time when requested to do so by Beneficiary in writing, Trustee may perform any of the following acts without incurring any liability or giving notice to any person: -14- (i) Consent to the making of any plat or map of the Property or any part of it; (ii) Join in granting any easement or creating any restriction affecting the Property; (iii) Join in any subordination or other agreement affecting this Deed of Trust or the lien of it; or (iv) Reconvey the Property or any part of it without any warranty. 4.9 Reconveyance. When all of the Secured Obligations have been paid in full and the commitments to extend credit to Borrowers under the Loan Agreement have been terminated, Beneficiary shall request Trustee in writing to reconvey the Property, and shall surrender this Deed of Trust and all notes and instruments evidencing the Secured Obligations to Trustee. When Trustee receives Beneficiary's written request for reconveyance and all fees and other sums owing to Trustee by Trustor under Section 4.10, Trustee shall reconvey the Property, or so much of it as is then held under this Deed of Trust, without warranty to the person or persons legally entitled to it. Such person or persons shall pay any costs of recordation. In the reconveyance, the grantee may be described as "the person or persons legally entitled thereto," and the recitals of any matters or facts shall be conclusive proof of their truthfulness. Neither Beneficiary nor Trustee shall have any duty to determine the rights of persons claiming to be rightful grantees of any reconveyance. 4.10 Compensation, Exculpation, Indemnification. (a) Trustor agrees to pay fees in the maximum amounts legally permitted, or reasonable fees as may be charged by Beneficiary and Trustee when the law provides no maximum limit, for any services that Beneficiary or Trustee may render in connection with this Deed of Trust, including Beneficiary's providing a statement of the Secured Obligations or Trustee's rendering of services in connection with a reconveyance. Trustor shall also pay or reimburse all of Beneficiary's and Trustee's reasonable -15- costs and expenses which may be incurred in rendering any such services. Trustor further agrees to pay or reimburse Beneficiary for all reasonable costs, expenses and other advances which may be incurred or made by Beneficiary or Trustee in any efforts to enforce any terms of this Deed of Trust, including any rights or remedies afforded to Beneficiary or Trustee or both of them under Section 5.3, whether any lawsuit is filed or not, or in defending any action or proceeding arising under or relating to this Deed of Trust, including reasonable attorneys' fees and other legal costs, costs of any Foreclosure Sale (as defined in subsection 5.3(h)) and any cost of evidence of title. If Beneficiary chooses to dispose of Property through more than one Foreclosure Sale, Trustor shall pay all costs, expenses or other advances that may be incurred or made by Trustee or Beneficiary in each of such Foreclosure Sales. (b) Beneficiary shall not be directly or indirectly liable to Trustor or any other person as a consequence of any of the following: (i) Beneficiary's exercise of or failure to exercise any rights, remedies or powers granted to Beneficiary in this Deed of Trust; (ii) Beneficiary's failure or refusal to perform or discharge any obligation or liability of Trustor under any agreement related to the Property or under this Deed of Trust; or (iii) Any loss sustained by Trustor or any third party resulting from Beneficiary's failure to lease the Property, or from any other act or omission of Beneficiary in managing the Property, after an Event of Default, unless the loss is caused by the willful misconduct and bad faith of Beneficiary. To the extent permitted by applicable law, Trustor hereby expressly waives and releases all liability of the types described above, and agrees that no such liability shall be asserted against or imposed upon Beneficiary. -16- (c) Trustor agrees to indemnify Trustee and Beneficiary against and hold them harmless from all losses, damages, liabilities, claims, causes of action, judgments, court costs, attorneys' fees and other reasonable legal expenses, cost of evidence of title, cost of evidence of value, and other reasonable costs and expenses which either may suffer or incur: (i) In performing any act required or permitted by this Deed of Trust or any of the other Loan Documents or by law; (ii) Because of any failure of Trustor to perform any of Trustor's obligations; or (iii) Because of any alleged obligation of or undertaking by Beneficiary to perform or discharge any of the representations, warranties, conditions, covenants or other obligations in any document relating to the Property other than the Loan Documents. This agreement by Trustor to indemnify Trustee and Beneficiary shall survive the release and cancellation of any or all of the Secured Obligations and the full or partial release and/or reconveyance of this Deed of Trust. (d) Trustor shall pay all obligations to pay money arising under this Section 4.10 immediately upon demand by Trustee or Beneficiary. Each such obligation shall bear interest from the date the obligation arises at the "Base Rate" plus the "Applicable Margin," as defined in the Loan Agreement. 4.11 Defense and Notice of Claims and Actions. At Trustor's sole expense, Trustor shall protect, preserve and defend the Property and title to and right of possession of the Property, and the security of this Deed of Trust and the rights and powers of Beneficiary and Trustee created under it, against all adverse claims. Trustor shall give Beneficiary and Trustee prompt notice in writing if any claim is asserted which does or could affect any of such matters, or if any action or proceeding is commenced which alleges or relates to any such claim. -17- 4.12 Substitution of Trustee. From time to time, Beneficiary may substitute a successor to any Trustee named in or acting under this Deed of Trust in any manner now or later to be provided at law, or by a written instrument executed and acknowledged by Beneficiary and recorded in the office(s) of the recorder(s) of the county or counties where the Land and Improvements are situated. Any such instrument shall be conclusive proof of the proper substitution of the successor Trustee, who shall automatically upon recordation of the instrument succeed to all estate, title, rights, powers and duties of the predecessor Trustee, without conveyance from it. 4.13 Subrogation. Beneficiary shall be subrogated to the liens of all encumbrances, whether released of record or not, which are discharged in whole or in part by Beneficiary in accordance with this Deed of Trust. 4.14 Site Visits. Subject to compliance with Gaming Laws, including restrictions on access to security and surveillance systems and the casino cage, Beneficiary and its agents and representatives shall have the right at any reasonable time to enter and visit the Property for the purpose of performing appraisals. 4.15 Notice of Change. Trustor shall give Beneficiary prior written notice of any change in (a) the location of Trustor's place of business or its chief executive office if it has more than one place of business, (b) the location of any of the Property, including the Books and Records and (c) Trustor's name or business structure. Unless otherwise approved by Beneficiary in writing, all Property that consists of personal property (other than the Books and Records) will be located on the Land and all Books and Records will be located at Trustor's place of business or chief executive office if Trustor has more than one place of business. -18- 5. Accelerating Transfers, Default and Remedies. 5.1 Accelerating Transfers. (a) "Accelerating Transfer" means any sale, contract to sell, conveyance, encumbrance, lease not expressly permitted under the Loan Agreement, or other transfer of all or any material part of the Property or any interest in it, whether voluntary, involuntary, by operation of law or otherwise. If Trustor is a corporation, "Accelerating Transfer" also means any transfer or transfers of shares possessing, in the aggregate, more than fifty percent (50%) of the voting power. If Trustor is a partnership, "Accelerating Transfer" also means withdrawal or removal of any general partner, dissolution of the partnership under Nevada law, or any transfer or transfers of, in the aggregate, more than fifty percent (50%) of the partnership interests. (b) Trustor acknowledges that Beneficiary is making advances under the Loan Agreement in reliance on the expertise, skill and experience of Trustor; thus, the Secured Obligations include material elements similar in nature to a personal service contract. In consideration of Beneficiary's reliance, Trustor agrees that Trustor shall not make any Accelerating Transfer, unless the transfer is preceded by Beneficiary's express written consent to the particular transaction and transferee. Beneficiary may withhold such consent in its sole discretion. If any Accelerating Transfer occurs, Beneficiary, in its sole discretion may declare all of the Secured Obligations to be immediately due and payable, and Beneficiary and Trustee may invoke any rights and remedies provided by Section 5.3 of this Deed of Trust. 5.2 Events of Default. Trustor will be in default under this Deed of Trust upon the occurrence of any one or more of the following events (some or all collectively, "Events of Default;" any one singly, an "Event of Default"): -19- (a) Trustor fails to perform any obligation to pay money which arises under this Deed of Trust, and does not cure that failure within fifteen (15) days after written notice from Beneficiary or Trustee; or (b) Trustor fails to perform any obligation arising under this Deed of Trust other than one to pay money, and does not cure that failure either within thirty (30) days ("Initial Cure Period") after written notice from Beneficiary or Trustee, or within ninety (90) days after such written notice, so long as Trustor begins within the Initial Cure Period and diligently continues to cure the failure, and Beneficiary, exercising reasonable judgment, determines that the cure cannot reasonably be completed at or before expiration of the Initial Cure Period; or (c) An Event of Default (as defined in the Loan Agreement) occurs under the Loan Agreement. 5.3 Remedies. At any time after an Event of Default, Beneficiary and Trustee will be entitled to invoke any and all of the following rights and remedies, all of which will be cumulative, and the exercise of any one or more of which shall not constitute an election of remedies: (a) Acceleration. Subject to applicable Gaming Laws, Beneficiary may declare any or all of the Secured Obligations to be due and payable immediately. (b) Receiver. Subject to applicable Gaming Laws, Beneficiary may apply to any court of competent jurisdiction for, and obtain appointment of, a receiver for the Property. (c) Entry. Subject to applicable Gaming Laws, Beneficiary, in person, by agent or by court-appointed receiver, may enter, take possession of, manage and operate all or any part of the Property, and may also do any and all other things in connection with those actions that Beneficiary may in its sole discretion consider necessary and appropriate to protect the security of this Deed of Trust. Such other things may include: taking and -20- possessing all of Trustor's or the then owner's Books and Records; entering into, enforcing, modifying, or canceling leases on such terms and conditions as Beneficiary may consider proper; obtaining and evicting tenants; fixing or modifying Rents; collecting and receiving any payment of money owing to Trustor; completing construction; and/or contracting for and making repairs and alterations. If Beneficiary so requests, Trustor shall assemble all of the Property that has been removed from the Land and make all of it available to Beneficiary at the site of the Land. Trustor hereby irrevocably constitutes and appoints Beneficiary as Trustor's attorney-in-fact to perform such acts and execute such documents as Beneficiary in its sole discretion may consider to be appropriate in connection with taking these measures, including endorsement of Trustor's name on any instruments. Regardless of any provision of this Deed of Trust, the Loan Agreement or the Guaranty, Beneficiary shall not be considered to have accepted any property other than cash or immediately available funds in satisfaction of any obligation of Trustor to Beneficiary, unless Beneficiary has given express written notice of Beneficiary's election of that remedy in accordance with the Nevada Uniform Commercial Code, as it may be amended or recodified from time to time. (d) Cure; Protection of Security. Either Beneficiary or Trustee may cure any breach or default of Trustor, and if it chooses to do so in connection with any such cure, Beneficiary or Trustee may also, subject to applicable Gaming Laws, enter the Property and/or do any and all other things which it may in its sole discretion consider necessary and appropriate to protect the security of this Deed of Trust, including, without limitation, the right to complete the Improvements. Such other things may include: appearing in and/or defending any action or proceeding which purports to affect the security of, or the rights or powers of Beneficiary or Trustee under, this Deed of Trust; paying, purchasing, contesting or compromising any encumbrance, charge, lien or claim of lien which in Beneficiary's or Trustee's sole judgment is or may be senior in priority to this Deed of Trust, such judgment of Beneficiary or Trustee to be conclusive as -21- among the parties to this Deed of Trust; obtaining insurance and/or paying any premiums or charges for insurance required to be carried under the Loan Agreement; otherwise caring for and protecting any and all of the Property; and/or employing counsel, accountants, contractors and other appropriate persons to assist Beneficiary or Trustee. Beneficiary and Trustee may take any of the actions permitted under this subsection 5.3(d) either with or without giving notice to any person. (e) Uniform Commercial Code Remedies. Subject to applicable Gaming Laws, Beneficiary may exercise any or all of the remedies granted to a secured party under the Nevada enactment of the Uniform Commercial Code. (f) Judicial Action. Beneficiary may bring an action in any court of competent jurisdiction to foreclose this instrument or to obtain specific enforcement of any of the covenants or agreements of this Deed of Trust. (g) Power of Sale. Under the power of sale hereby granted, Beneficiary shall have the discretionary right to cause some or all of the Property, including any Property which constitutes personal property to be sold or otherwise disposed of in any combination and in any manner permitted by applicable law. (i) Sales of Personal Property. (A) For purposes of this power of sale, Beneficiary may elect to treat as personal property any Property which is intangible or which can be severed from the Land or Improvements without causing structural damage. If it chooses to do so, Beneficiary may dispose of any personal property separately from the sale of real property, in any manner permitted by or under Nevada Revised Statutes Article 104.9101 et seq. (the Nevada enactment of the Uniform Commercial Code), including any public or private sale, or in any manner permitted by any other applicable law. -22- (B) The following provision shall apply in the absence of any specific statutory requirement which permits or requires a different notice period: In connection with any sale or other disposition of such Property, Trustor agrees that the following procedures constitute a commercially reasonable sale: Beneficiary shall mail written notice of the sale to Trustor not later than forty-five (45) days prior to such sale. Once per week during the four weeks immediately preceding such sale, Beneficiary will publish notice of the sale in a local daily newspaper of general circulation. Upon receipt of any written request, Beneficiary will make the Property available to any bona fide prospective purchaser for inspection during reasonable business hours. Notwithstanding, Beneficiary shall be under no obligation to consummate a sale if, in its judgment, none of the offers received by it equals the fair value of the Property offered for sale. The foregoing procedures do not constitute the only procedures that may be commercially reasonable. (ii) Trustee's Sales of Real Property or Mixed Collateral. (A) Beneficiary may choose to dispose of some or all of the Property which consists solely of real property in any manner then permitted by applicable law. In its discretion, Beneficiary may also or alternatively choose to dispose of some or all of the Property, in any combination consisting of both real and personal property, together in one sale to be held in accordance with the law and procedures applicable to real property. Trustor agrees that such a sale of personal property together with real property constitutes a commercially reasonable sale of the personal property. For purposes of this power of sale, either a sale of real property alone, or a sale of both real and personal property together in accordance with law, will sometimes be referred to as a "Trustee's Sale." -23- (B) Before any Trustee's Sale, Beneficiary or Trustee shall give and record such notice of default and election to sell as may then be required by law. When all time periods then legally mandated have expired, and after such notice of sale as may then be legally required has been given, Trustee shall sell the property being sold at a public auction to be held at the time and place specified in the notice of sale. Neither Trustee nor Beneficiary shall have any obligation to make demand on Trustor before any Trustee's Sale. From time to time in accordance with then applicable law, Trustee may, and in any event at Beneficiary's request shall, postpone any Trustee's Sale by public announcement at the time and place noticed for that sale. (C) At any Trustee's Sale, Trustee shall sell to the highest bidder at public auction for cash in lawful money of the United States. Trustee shall execute and deliver to the purchaser(s) a deed or deeds conveying the property being sold without any covenant or warranty whatsoever, express or implied. The recitals in any such deed of any matters or facts, including any facts bearing upon the regularity or validity of any Trustee's Sale, shall be conclusive proof of their truthfulness. Any such deed shall be conclusive against all persons as to the facts recited in it. (h) Single or Multiple Foreclosure Sales. If the Property consists of more than one lot, parcel or item of property, Beneficiary may: (i) Designate the order in which the lots, parcels and/or items shall be sold or disposed of or offered for sale or disposition; and (ii) Elect to dispose of the lots, parcels and/or items through a single consolidated sale or disposition to be held or made under the power of sale granted in subsections 5.3(g) and 5.7, or in -24- connection with judicial proceedings, or by virtue of a judgment and decree of foreclosure and sale; or through two or more such sales or dispositions; or in any other manner Beneficiary may deem to be in its best interests (any such sale or disposition, a "Foreclosure Sale;" any two or more, "Foreclosure Sales"). If Beneficiary chooses to have more than one Foreclosure Sale, Beneficiary at its option may cause the Foreclosure Sales to be held simultaneously or successively, on the same day, or on such different days and at such different times and in such order as Beneficiary may deem to be in its best interests. No Foreclosure Sale shall terminate or affect the liens of this Deed of Trust on any part of the Property which has not been sold, until all of the Secured Obligations have been paid in full. 5.4 Credit Bids. At any Foreclosure Sale, any person, including Trustor, Trustee or Beneficiary, may bid for and acquire the Property or any part of either to the extent permitted by then applicable law. Instead of paying cash for such property, Beneficiary may settle for the purchase price by crediting the sales price of the property against the following obligations: (a) First, the portion of the Secured Obligations attributable to the expenses of sale, costs of any action and any other sums for which Trustor is obligated to pay or reimburse Beneficiary or Trustee under Section 4.10; and (b) Second, all other Secured Obligations in any order and proportions as Beneficiary in its sole discretion may choose. 5.5 Application of Foreclosure Sale Proceeds. Beneficiary and Trustee shall apply the proceeds of any Foreclosure Sale in the following manner: -25- (a) First, to pay the portion of the Secured Obligations attributable to the expenses of sale, costs of any action and any other sums for which Trustor is obligated to reimburse Beneficiary or Trustee under Section 4.10; (b) Second, to pay the portion of the Secured Obligations attributable to any sums expended or advanced by Beneficiary or Trustee under the terms of this Deed of Trust which then remain unpaid; (c) Third, to pay all other Secured Obligations in any order and proportions as Beneficiary in its sole discretion may choose; and (d) Fourth, to remit the remainder, if any to the person or persons entitled to it. 5.6 Application of Rents and Other Sums. Beneficiary shall apply any and all Rents collected by it, and any and all sums other than proceeds of a Foreclosure Sale which Beneficiary may receive or collect under Section 5.3, in the following manner: (a) First, to pay the portion of the Secured Obligations attributable to the costs and expenses of operation and collection that may be incurred by Trustee, Beneficiary or any receiver; (b) Second, to pay all other Secured Obligations in any order and proportions as Beneficiary in its sole discretion may choose; and (c) Third, to remit the remainder, if any, to the person or persons entitled to it. Beneficiary shall have no liability for any funds which it does not actually receive. 5.7 Incorporation of Certain Nevada Covenants. The following covenants nos. 1, 2 (full replacement value), 3, 4 (at the applicable Default Rate), 5, 6, 7 (reasonable), 8 and 9 of NRS 107.030, where not in conflict with the provisions of the Loan Documents, are hereby adopted and made a part of this -26- Deed of Trust. Upon any Event of Default by Trustor hereunder, Beneficiary may (a) declare all sums secured immediately due and payable without demand or notice or (b) have a receiver appointed as a matter of right without regard to the sufficiency of said property or any other security or guaranty and without any showing as required by NRS.ss. 107.100, but subject to applicable Gaming Laws. All remedies provided in this Deed of Trust are distinct and cumulative to any other right or remedy under this Deed of Trust or afforded by law or equity and may be exercised concurrently, independently or successively. The sale of said property conducted pursuant to Covenants Nos. 6, 7 and 8 of NRS 107.030 may be conducted either as to the whole of said property or in separate parcels and in such order as Trustee may determine. 6. Miscellaneous Provisions. 6.1 Additional Provisions. The Loan Documents fully state all of the terms and conditions of the parties' agreement regarding the matters mentioned in or incidental to this Deed of Trust. The Loan Documents also grant further rights to Beneficiary and contain further agreements and affirmative and negative covenants by Trustor which apply to this Deed of Trust and to the Property. 6.2 No Waiver or Cure. (a) Each waiver by Beneficiary or Trustee must be in writing, and no waiver shall be construed as a continuing waiver. No waiver shall be implied from any delay or failure by Beneficiary or Trustee to take action on account of any default of Trustor. Consent by Beneficiary or Trustee to any act or omission by Trustor shall not be construed as a consent to any other or subsequent act or omission or to waive the requirement for Beneficiary's or Trustee's consent to be obtained in any future or other instance. (b) If any of the events described below occurs, that event alone shall not: cure or waive any breach, Event of Default or notice of default under this Deed of Trust or invalidate any act performed pursuant to any such default or notice; or nullify the effect of any notice of default or sale (unless all Secured Obligations -27- then due have been paid and performed and all other defaults under the Loan Documents have been cured); or impair the security of this Deed of Trust; or prejudice Beneficiary, Trustee or any receiver in the exercise of any right or remedy afforded any of them under this Deed of Trust; or be construed as an affirmation by Beneficiary of any tenancy, lease or option, or a subordination of the lien of this Deed of Trust. (i) Beneficiary, its agent or a receiver takes possession of all or any part of the Property in the manner provided in subsection 5.3(c). (ii) Beneficiary collects and applies Rents as permitted under Sections 2.3 and 5.6, either with or without taking possession of all or any part of the Property. (iii) Beneficiary receives and applies to any Secured Obligation proceeds of any Property, including any proceeds of insurance policies, condemnation awards, or other claims, property or rights assigned to Beneficiary under Section 4.5. (iv) Beneficiary makes a site visit, observes the Property and/or conducts tests as permitted under Section 4.14 or under the Loan Agreement. (v) Beneficiary receives any sums under this Deed of Trust or any proceeds of any collateral held for any of the Secured Obligations, and applies them to one or more Secured Obligations. (vi) Beneficiary, Trustee or any receiver invokes any right or remedy provided under this Deed of Trust. 6.3 Powers of Beneficiary and Trustee. (a) Trustee shall have no obligation to perform any act which it is empowered to perform under this Deed of Trust unless it is requested to do so in writing and is reasonably indemnified against loss, cost, liability and expense. -28- (b) If either Beneficiary or Trustee performs any act which it is empowered or authorized to perform under this Deed of Trust, including any act permitted by Section 4.8 or subsection 5.3(d) or by the Loan Agreement, that act alone shall not release or change the personal liability of any person for the payment and performance of the Secured Obligations then outstanding, or the lien of this Deed of Trust on all or the remainder of the Property for full payment and performance of all outstanding Secured Obligations. The liability of the original Trustor shall not be released or changed if Beneficiary grants any successor in interest to Trustor any extension of time for payment, or modification of the terms of payment, of any Secured Obligation. Beneficiary shall not be required to comply with any demand by the original Trustor that Beneficiary refuse to grant such an extension or modification to, or commence proceedings against, any such successor in interest. (c) Beneficiary may take any of the actions permitted under subsections 5.3(b), 5.3(c), 5.7 and/or the Loan Agreement regardless of the adequacy of the security for the Secured Obligations, or whether any or all of the Secured Obligations have been declared to be immediately due and payable, or whether notice of default and election to sell has been given under this Deed of Trust. (d) From time to time, Beneficiary or Trustee may apply to any court of competent jurisdiction for aid and direction in executing the trust and enforcing the rights and remedies created under this Deed of Trust. Beneficiary or Trustee may from time to time obtain orders or decrees directing, confirming or approving acts in executing this trust and enforcing these rights and remedies. 6.4 Merger. No merger shall occur as a result of Beneficiary's acquiring any other estate in or any other lien on the Property unless Beneficiary consents to a merger in writing. 6.5 Joint and Several Liability. If Trustor consists of more than one person, each shall be jointly and severally liable for the faithful performance of all of Trustor's obligations under this Deed of Trust. -29- 6.6 Applicable Law. This Deed of Trust shall be governed by Nevada law. 6.7 Successors in Interest. The terms, covenants and conditions of this Deed of Trust shall be binding upon and inure to the benefit of the heirs, successors and assigns of the parties. However, this Section 6.7 does not waive the provisions of Section 5.1. 6.8 Interpretation. (a) Whenever the context requires, all words used in the singular will be construed to have been used in the plural, and vice versa, and each gender will include any other gender. The captions of the sections of this Deed of Trust are for convenience only and do not define or limit any terms or provisions. The word "include(s)" means "include(s), without limitation," and the word "including" means "including, but not limited to." (b) The word "obligations" is used in its broadest and most comprehensive sense, and includes all primary, secondary, direct, indirect, fixed and contingent obligations. It further includes all principal, interest, prepayment charges, late charges, loan fees and any other fees and charges accruing or assessed at any time, as well as all obligations to perform acts or satisfy conditions. (c) No listing of specific instances, items or matters in any way limits the scope or generality of any language of this Deed of Trust. The Exhibits to this Deed of Trust are hereby incorporated in this Deed of Trust. (d) The terms of the Loan Agreement shall prevail over the terms of this Deed of Trust in the event of any conflict. 6.9 In-House Counsel Fees. Whenever Trustor is obligated to pay or reimburse Beneficiary or Trustee for any attorneys' fees, those fees shall include the allocated costs for services of in-house counsel. -30- 6.10 Waiver of Marshaling. Trustor waives all rights, legal and equitable, it may now or hereafter have to require marshalling of assets or to require upon foreclosure sales of assets in a particular order. Each successor and assign of Trustor, including any holder of a lien subordinate to this Deed of Trust, by acceptance of its interest or lien agrees that it shall be bound by the above waiver, as if it had given the waiver itself. 6.11 Severability. If any provision of this Deed of Trust should be held unenforceable or void, that provision shall be deemed severable from the remaining provisions and in no way affect the validity of this Deed of Trust, except that if such provision relates to the payment of any monetary sum, then Beneficiary may, at its option, declare all Secured Obligations immediately due and payable. -31- 6.12 Notices. Trustor hereby requests that a copy of notice of default and notice of sale be mailed to it at the address set forth below. That address is also the mailing address of Trustor as debtor under the Nevada Uniform Commercial Code. Beneficiary's address given below is the address for Beneficiary as secured party under the Nevada Uniform Commercial Code. "Trustor": CINDERLANE, INC., a Nevada corporation By /s/ Ronald J. Radcliffe ----------------------- Ronald J. Radcliffe, Secretary ------------------------- (Printed Name and Title) By /s/ I. Scott Bogatz ------------------------- I. Scott Bogatz, Counsel ------------------------- (Printed Name and Title) Addresses Where Notices to Trustor Are to Be Sent: Cinderlane, Inc. 3700 West Flamingo Road Las Vegas, Nevada 89103 Attn: Chief Executive Officer Accepted and Agreed: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent under the Loan Agreement By: /s/ Gina Meador --------------------------- Gina Meador, Vice President -32- Address Where Notices to Beneficiary Are to Be Sent: Bank of America NT & SA 555 South Flower Street 11th Floor Los Angeles, CA 90017 Attn: Agency Management Services Address Where Notices to Trustee Are to Be Sent: Chicago Title Insurance Company 555 South Flower Street 11th Floor Los Angeles, CA 90017 Attn: Agency Management Services -33- Acknowledgment for Cinderlane, Inc. STATE OF NEVADA ) ) ss. COUNTY OF CLARK ) On December 18, 1998, personally appeared before me, a notary public (or judge or other authorized person, as the case may be), Ronald J. Radcliffe, personally known (or proved) to me to be the person whose name is subscribed to the above instrument, and who acknowledged that (s)he executed the instrument. /s/ Suzanne V. Hall --------------------------- (Signature) Notary Public - State of Nevada Notary Public - State of Nevada COUNTY OF CLARK COUNTY OF CLARK SUZANNE V. HALL LEA ANN SPALDING My Appointment Expires My Appointment Expires September 26, 2001 February 19, 2000 No. 97-4136-1 No. 96-1306-1 (Lea Ann Spalding, Notary Public for I. Scott Bogatz)
Acknowledgment for Bank of America National Trust and Savings Association STATE OF CALIFORNIA ) ) ss. COUNTY OF LOS ANGELES ) On December 22, 1998, personally appeared before me, a notary public (or judge or other authorized person, as the case may be), Gina Meador, personally known (or proved) to me to be the person whose name is subscribed to the above instrument, and who acknowledged that (s)he executed the instrument. /s/ Hilda Espy ---------------------------- (Signature) HILDA ESPY Commission # 1128821 Notary Public - California Los Angeles County My Comm. Expires Mar. 24, 2001 -34- EX-4.(32) 12 EXHIBIT 4.32 EXHIBIT 4(32) INTERCREDITOR AGREEMENT This Intercreditor Agreement dated as of December 18, 1998, is entered into between Bank of America National Trust and Savings Association, as Agent under the Existing Credit Agreement referred to below, and the New Lenders (as defined herein) under the Supplemental Bank Facility described below, with reference to the following facts: A. Pursuant to an Amended and Restated Credit Agreement dated as of February 24, 1998 ("the "Existing Credit Agreement") entered into by and among Rio Properties, Inc., a Nevada corporation ("Properties"), Rio Leasing, Inc., a Nevada corporation ("Leasing" and collectively with Properties, the "Borrowers"), the Banks named therein, and Bank of America National Trust and Savings Association, as Agent, the Banks have committed to extend credit facilities in an amount of $275,000,000 to Borrowers. B. The obligations of Borrowers under the Existing Credit Agreement have been guaranteed by the Rio Hotel & Casino, Inc. ("Parent"), HLG, Inc. and Cinderlane, Inc. (the "Guarantors") and are secured by substantially all of the property of Borrowers, Parent and the other Guarantors. C. Borrowers propose to enter into a $125,000,000 credit facility (the "Supplemental Bank Facility") with the lenders initially party to this Agreement and described as such on the signature pages hereto (with assignees thereof, the "New Lenders") pursuant to a Loan Agreement of even date herewith among Borrowers, the New Lenders and Bank of America National Trust and Savings Association, as Agent (the "New Agent"). D. The obligations and indebtedness of Borrowers under the Supplemental Bank Facility (i) are to be guaranteed by the Parent and the other Guarantors, and (ii) shall be secured by the same property of Borrowers, Parent and the other Guarantors which acts as security for the Existing Credit Agreement and the related Loan Documents referred to therein (subject, as to certain capital stock, to Section 6 of this Agreement). E. By and subject to the terms of this Agreement, the parties desire to provide that the Agent's Liens and the New Lenders' Liens shall be pari passu and of equal priority. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Definitions. As used herein, the following terms have the meanings set forth after each: "Agent's Liens" means each of the liens and security interests now held or hereafter acquired by the Agent for the benefit of the Banks under the Existing Credit Agreement in the property of Borrowers, the Parent and the other Guarantors. "Banks" means the Banks described in the Existing Credit Agreement, including without limitation the Banks and the Agent. "Existing Facility Obligations" means all obligations and indebtedness of Borrowers, the Parent and the Guarantors under the Existing Credit Agreement and the related Loan Documents described therein. "Creditor Group" means, (a) in respect of the Agent, the Banks, and (b) in respect of the New Agent, the New Lenders. "Supplemental Bank Facility" means the Supplemental Bank Facility described in the recitals hereto, as it may from time to time be amended, supplemented, modified, amended, restated or extended. "Supplemental Bank Facility Obligations" means all obligations and indebtedness of Borrowers, the Parent and the Guarantors under the Supplemental Bank Facility, and the related Loan Documents described therein. -2- "Existing Credit Agreement" means the Amended and Restated Credit Agreement described in the recitals hereto, as it may from time to time be further amended, supplemented, modified, amended, restated or extended. "Obligations" means, collectively, the Existing Facility Obligations and the Supplemental Bank Facility Obligations. "Qualified Obligations" means (a) in the case of the New Agent and the New Lenders, all principal Supplemental Bank Facility Obligations which are incurred prior to the delivery of notice by the Agent to the New Agent of a Trigger Event, provided that the aggregate amount thereof shall not exceed the principal amount of $125,000,000, together with interest, fees, premiums, costs and expenses allocable to such principal, and (b) in the case of the Banks, all principal Existing Facility Obligations which are incurred prior to the delivery of notice by the New Agent to the Agent of a Trigger Event (including, without limitation, the amount of any letters of credit and related reimbursement obligations or other contingent obligations issued by the Agent and the Banks and any currency or interest rate hedging arrangements entered into with the Agent or any Bank). "Guarantors" means HLG, Inc., Cinderlane, Inc. and each other guarantor of the obligations under the Existing Credit Agreement and the Supplemental Bank Facility. "Trigger Event" means any of the following: (a) the occurrence of any Event of Default of the type described in Section 9.1(k) of the Existing Credit Agreement with respect to Parent, any Borrower or any Guarantor having assets in excess of $50,000,000; or (b) the actual acceleration of any Obligations by the holder or holders thereof or their representatives. -3- "New Lenders' Liens" means each of the liens and security interests now held or hereafter acquired by the New Agent for the benefit of the New Lenders under the Supplemental Bank Facility in the property of Borrowers, the Parents and the Guarantors. 2. Liens Pari Passu. Subject to Section 4 hereof, the parties hereto hereby agree that, to the extent that the same are perfected and unavoidable (whether by means of preference, fraudulent conveyance or transfer or otherwise), and in each case to the extent that the same secure Qualified Obligations, the Agent's Liens and the New Lenders' Liens shall be pari passu and entitled to equal priority in distribution. The relative priority of such liens and security interests described in this Agreement shall apply irrespective of the time, order or manner of attachment or perfection of such liens and security interests, and shall not be affected by any bankruptcy, insolvency or similar event with respect to Borrowers, the Parent or any Guarantors. 3. Sharing of Proceeds; Turnover. The Agent agrees on behalf of itself and the Banks, and the New Lenders agree that: (a) if, through the exercise of the Agent's Liens and the New Lenders' Liens, either Creditor Group receives any amount which is in excess of the amount to which that Creditor Group would otherwise be entitled to pursuant to Section 2, then, subject to applicable laws, the members of that Creditor Group shall purchase, and shall be deemed to have simultaneously purchased, from the members of the other Creditor Group, participations in the Obligations held by the other Creditor Group, and shall pay a purchase price for such participations in the amount which is necessary to ssure that the total amount received by the each Creditor Group is in the amount contemplated by Section 2; and (b) such other adjustments and purchases of participations shall be made from time to time as shall be equitable to ensure that the Agent and the Banks and the New Agent and the New Lenders share the proceeds of their respective liens and security interests ratably in accordance with Section 2; -4- provided that, if all or any portion of a disproportionate payment obtained as a result of the exercise of the Agent's Liens or the New Lenders' Liens is thereafter recovered from the purchasing Creditor Group by Borrowers, the Parent or any Guarantor or any other person claiming through or succeeding to the rights of a Borrower, Parent, or a Guarantor the purchase of a participation shall be rescinded and the purchase price thereof shall be restored to the extent of the recovery, but without interest. 4. Limitation on Indebtedness Entitled to the Benefits Hereof. The aggregate principal amount of Supplemental Bank Facility Obligations (whether for loans or for any other credit accommodations) which are entitled to the benefits of this Agreement shall be limited to indebtedness of Borrower to the New Lenders in an aggregate amount not to exceed the principal amount of $125,000,000, plus interest, fees, premiums, costs and expenses allocable to such principal. No other obligations or indebtedness to the New Agent or the New Lenders for the payment of principal under the Supplemental Bank Facility (nor any interest, fees, premiums, cost, expenses or other amounts payable with respect to any such excess principal) shall be entitled to the benefits of this Agreement, but the priority of any liens or security interests therefor shall instead be as determined by applicable law; provided that, (a) notwithstanding the existence of any such excess principal amount, the benefits of this Agreement shall continue to apply to the principal amount described in the first sentence of this Section (plus any interest, fees, premiums, expenses or other amounts payable with respect to any such principal), and (b) subject to the limitation as to the amount of such Supplemental Bank Facility Obligations set forth in (a), nothing contained herein shall limit the right of the New Agent and the New Lenders to amend, modify or extend the Supplemental Bank Facility, the Loan Documents described therein and the related notes as set forth in Section 9(b) of this Agreement. -5- 5. Increase to Bank Facility. The New Agent and the New Lenders agree that the Agent and the Banks may enter into any amendment, modification or extension of the Existing Credit Agreement without affecting the relative priority of the Agent's Liens contemplated herein, it being understood that there is no limit to the amount of the indebtedness entitled to the benefits of the Agent's Liens and that in the event that the credit commitments of the Banks under the Existing Credit Agreement are hereafter increased, such increased commitments shall be entitled to the equal, ratable and pari passu benefit of the Agent's Liens. 6. Stock and Instruments Held By Agent. The Agent hereby agrees to hold any capital stock and instruments delivered to it in pledge pursuant to the terms of the Existing Credit Agreement and the other Loan Documents for the mutual benefit of the Banks and the New Lenders in accordance with the terms of, and subject to the limitations contained in, this Agreement, provided that the Agent: (a) shall not be deemed to hold the capital stock of Properties or Leasing (or of any other subsidiary of Parent which is now or hereafter becomes the holder of a gaming license under the law of the State of Nevada or any other State) unless and until all required approvals of the Nevada Gaming Commission and the Nevada State Gaming Control Board (or the relevant gaming authorities of such other State) are obtained by the beneficiaries of such pledge; (b) may designate any bank, trust company or other financial institution (which in the case of any person holding stock of a Nevada Gaming Licensee shall be a person located in the State of Nevada acceptable to the Nevada Gaming Commission) to hold any and all such collateral in accordance with the terms of this Agreement in lieu of the Agent (which designee shall be deemed the representative of both the New Agent and the Agent) at the sole expense of Borrowers; -6- (c) shall not be deemed to be in a relation of trust or confidence with the New Agent or the New Lenders by reason of this Agreement, and shall not owe any fiduciary, trust or other special duties to the New Agent or the New Lenders by reason of this Agreement. (d) shall be deemed to have exercised reasonable care in the custody and preservation of such collateral if it is accorded treatment substantially similar to that which the Agent accords its own property, it being understood that the Agent shall not have any responsibility for ascertaining or taking action with respect to maturities, calls, conversions, exchanges, tenders or other matters relative to any such collateral, whether or not the Agent has or is deemed to have knowledge of such matters, or taking any necessary steps to preserve rights with respect to any such collateral. (e) shall not be under any duty or obligation to preserve, maintain or protect any such collateral, exercise any voting rights with respect thereto, or make or give any notices of default, presentments, demands for performance, notices of nonperformance or dishonor, protests, notices of protest or notice of any other nature whatsoever in connection therewith. (f) in the event of any dispute regarding any such pledged collateral may implead the same with a court of competent jurisdiction. (g) shall not be liable to the New Agent or any New Lender for any act or omission of the Agent, unless and to the extent that the same is determined, by the final decision of a court of competent jurisdiction, to arise solely from the gross negligence or willful misconduct of the Agent. (h) shall not be deemed to have made any representation about the existence, condition or sufficiency of any such collateral or its liens therein. -7- 7. Title Insurance; Insurance, Casualty and Condemnation Proceeds. (a) It is the intention of both the Agent and the New Agent that they shall cooperatively arrange for an increase in the amount of the lenders' policy of title insurance now held by the Agent with respect to the Rio Hotel & Casino, in Las Vegas, Nevada, to an aggregate coverage of $400,000,000. (b) The proceeds of policy of title insurance referred to in (a), and all other policies of insurance maintained by Borrower and its Subsidiaries as to which each of the parties are loss payees or additional insureds, or in which the parties hereto have any other interest, shall be shared in the same manner as the proceeds of collateral described above. In the event that any insurance or condemnation proceeds are payable to the Agent or the New Agent pursuant to the Loan Documents executed in connection with the Existing Bank Facility or the Supplemental Bank Facility, but are conditionally available to Borrower or any of its Subsidiaries for the purpose of repair, reconstruction or replacement of the related collateral, the Agent and the New Agent shall cooperate with one another to establish an escrow for the retention of such proceeds pending such repair, reconstruction or replacement (subject to the application of such proceeds in the manner contemplated by such Loan Documents), and shall be entitled to ratable and pari passu application, in accordance with the terms hereof, of any funds not returned to Borrower and the Guarantors. 8. Amendments; Marshaling of Assets; Election of Remedies. (a) Each of the parties hereto waives any right it may now or hereafter have to require the other party to marshal assets, to exercise rights or remedies in a particular manner, or to forbear exercising such rights and remedies in any particular manner or order. -8- (b) Each of the parties hereto will be free to exercise in such manner and order as it elects in its discretion, fail to exercise, waive, suspend, terminate or suffer expiration of, any of its rights and remedies with respect to the collateral for the Obligations to its Creditor Group. Each of the parties hereto will have the unfettered right, at any time or from time to time, to release, subordinate or otherwise diminish (whether intentionally, negligently or otherwise) any lien or security interest on any collateral not required to be released hereunder, without affecting the liens and security interests of the other party in such collateral or the rights of the releasing or subordinating party hereunder with respect to other collateral. 9. Notice of Foreclosure; Sharing of Proceeds. Each of the parties agrees to give notice to the other party of any action to foreclosure upon or enforce a lien or security interest upon collateral securing both the Existing Facility Obligations and the Supplemental Bank Facility Obligations promptly as practicable and in any event no later than the time that any legally required notices are given to Borrower or its affiliates. In the event of any realization upon collateral securing both the Existing Facility Obligations and the Supplemental Bank Facility Obligations, whether as a result of any action to foreclose upon or enforce a lien or security interest against particular property or otherwise, the proceeds of such realization of collateral (net of expenses incurred in connection with such realization of collateral) shall be shared so that the then outstanding amount of Existing Facility Obligations and the then outstanding amount of Supplemental Bank Facility Obligations are repaid on a pro rata basis (or in the event such realization of collateral does not result in cash available for payment, such property shall be shared as collateral on the basis set forth in this Agreement). 10. Further Assurances, etc. Each party hereto shall execute and deliver such other documents and instruments, in form and substance reasonably satisfactory to the other parties hereto, and shall take such other action, in each case as any other party hereto may reasonably have requested (at the cost and expense of Borrower) to effectuate and carry out the provisions of this Agreement, including by recording or filing this Agreement or short form memoranda hereof or such other -9- documents or instruments in such places as the requesting party may reasonably request. In the event that the Obligations under the Supplemental Bank Facility or the Existing Credit Agreement are repaid in full, each party agrees that they shall enter into a replacement intercreditor agreement on substantially identical terms with this agreement with any institutional creditor holding indebtedness designated by Borrower which (a) is permitted by the surviving agreement, and (b) substantially refinances or replaces the Obligations so repaid, provided that the Agent or the New Agent, as the case may be, shall be provided at the expense of Borrower with any instruments, documents, opinions and certificates as may reasonably be requested by such party or required by law to confirm the authority and obligation of such party to enter into such an agreement. 11. Attorneys Fees. In the event of any litigation between the parties to this Agreement arising out of the subject matter hereof, the prevailing party shall be entitled, in addition to any other relief awarded by the court, arbitrator or other tribunal, to an award of its reasonable attorneys' fees and expenses. 12. Notices. All notices, requests, demands, directions and other communications provided for hereunder must be in writing and must be mailed (by registered or certified mail), telecopied, dispatched by commercial courier or delivered to the appropriate party at the address set forth in the records of the Administrative Agent or to such other address as may be designated by a party in a written notice sent to all other parties in accordance with this Section. 13. Additional New Lenders. Each New Lender which hereafter becomes a party to the Supplemental Facility shall be deemed to be a party hereto in accordance with Section 10.08 of the Loan Agreement governing the Supplemental Bank Facility, and shall be bound by and entitled to the benefits of this Agreement. 14. Integration. This Agreement sets forth the entire understanding of the Parties with respect to the within matters and may not be modified or amended except upon a writing signed by all parties. -10- 15. Counterparts. This Agreement may be executed in one or more counterparts, each one of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the same agreement. 16. No Third Parties Benefitted. This Agreement is solely for the benefit of the Agent and the Banks from time to time party to the Existing Credit Agreement, the New Agent (in such capacity) and the New Lenders under the Supplemental Bank Facility, and their respective successors and assigns, and neither Parent, Borrowers, the Guarantors or their respective affiliates nor any other persons or entities are intended to be third party beneficiaries hereunder or to have any right, benefit, priority, or interest under, or because of the existence of, or to have any right to enforce, this Agreement, provided that Borrowers shall be entitled to rely upon the last sentence of Section 10 hereof. 17. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the internal laws of the State of Nevada, without reference to the choice of law or conflicts of law provisions thereof. -11- IN WITNESS WHEREOF, the parties hereto have executed this Intercreditor Agreement as of the date first written above by their duly authorized representatives. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent under the Existing Credit Agreement and as New Agent under the Supplemental Bank Facility By: /s/ Janice Hammond ------------------------------ Janice Hammond, Vice President Address for Notices: Bank of America National Trust and Savings Association Agency Management Services 555 South Flower Street, 11th Floor Los Angeles, California 90017 Attn: Janice Hammond, Vice President Telecopier: (213) 228-2299 Telephone: (213) 228-9861 -12- WELLS FARGO BANK, N.A. By: /s/ Sue Fuller ------------------------ Title: Vice President --------------------- Address for notices: 1 East First Street, Suite 300 MAC 4611-031 Reno, NV 89504 Attn: Sue Fuller, Vice President Facsimile: (702) 334-5637 Tel: (702) 334-5633 Address for Domestic and Eurodollar Lending Office: 201 3rd Street, 8th Floor San Francisco, CA 94103 Attn: Oscar Enriquez Facsimile: (415) 979-0675 Tel: (415) 477-5425 THE FIRST NATIONAL BANK OF CHICAGO By: /s/ Mark A. Isley ------------------------ Title: First Vice President --------------------- Address for notices and Domestic and Eurodollar Lending Office: Robert F. Simon, CSA The First National Bank of Chicago 1132/1-10 One First National Plaza Chicago, Illinois 60670 312/732-8543 312/732-4840 FAX -13- SOCIETE GENERALE By: /s/ Donald L. Schubert ------------------------ Title: Managing Director --------------------- Address for notices and Domestic and Eurodollar Lending Office: 2029 Century Park East, Suite 2900 Los Angeles, CA 90067 Attn: Donald L. Schubert Facsimile: (310) 551-1537 Tel: (310) 788-7104 -14- ABN AMRO BANK N.V. By: /s/ Jeffrey A. French ------------------------ Title: Group Vice President & Director --------------------- By: /s/ Michael M. Tolentino ------------------------ Title: Vice President --------------------- Address for notices: ABN AMRO Bank N.V. 101 California Street, Suite 4550 San Francisco, California 94111-5812 Attn: Jeffrey A. French Group Vice President & Director 415/984-3703 telephone 415/362-3524 telecopier Address for Domestic and Eurodollar Lending Office: ABN AMRO Bank N.V. Loan Administration 208 South LaSalle Street, Suite 1500 Chicago, Illinois 60604-1003 312/992-5153 telephone 312/992-5158 telecopier -15- U.S. BANK OF NEVADA By: /s/ David Walquist ------------------------- Title: Vice President --------------------- 2300 W. Sahara, Suite 120 Las Vegas, NV 89102 Attn: David Walquist, Vice President Facsimile: (702) 386-3916 Tel: (702) 386-3938 Domestic and Eurodollar Lending Office: U.S. Bank, N.A. 555 Southwest Oak Street Portland, OR 97204 Attn: J. Rameriz Commercial Loan Servicing West PL-7 -16- BANK OF SCOTLAND By: /s/ Annie Chin Tat ------------------------- Title: Senior Vice President --------------------- Address for notices: 565 5th Avenue, 5th Floor New York, New York 10017 Attn: Annie Chin Tat, Senior Vice President Telephone: 212/450-0871 Facsimile: 212/557-9460 and 660 South Figueroa Street, Suite 1760 Los Angeles, California 90017-3548 Attn: Allan Jackson, Regional Director 213/629-3057 213/489-3594 FAX Address for Domestic and Eurodollar Lending Office: Bank of Scotland 565 5th Avenue, 5th Floor New York, New York 10017 Attn: Annie Chin Tat, Senior Vice President Telephone: 212/450-0871 Facsimile: 212/557-9460 -17- EX-4.(44) 13 EXHIBIT 4.44 EXHIBIT 4(44) $140,000,000 13 1/2% First Mortgage Notes due 2003 of Showboat Marina Casino Partnership Showboat Marina Finance Corporation -------------------- FIRST SUPPLEMENTAL INDENTURE Dated as of March 1, 1999 to the INDENTURE Dated as of March 28, 1996 -------------------- Firstar Bank of Minnesota, N.A. (formerly known as American Bank National Association), as Trustee This FIRST SUPPLEMENTAL INDENTURE, dated as of March 1, 1999 (this "Supplemental Indenture"), to the Indenture (as defined below) is by and between FIRSTAR BANK OF MINNESOTA, N.A. (formerly known as AMERICAN BANK NATIONAL ASSOCIATION), as Trustee (the "Trustee"), and SHOWBOAT MARINA CASINO PARTNERSHIP, an Indiana general partnership, and SHOWBOAT MARINA FINANCE CORPORATION, a Nevada corporation (collectively, the "Company"). RECITALS A. The Company is a party to that certain Indenture, dated as of March 28, 1996 (the "Indenture"), pursuant to which the Company's First Mortgage Notes due 2003 (the "Notes") were originally issued. B. Section 9.02 of the Indenture provides that, with the consent of at least a majority in principal amount of the outstanding Notes, the Company and the Trustee may amend the Indenture and the Notes as set forth below (other than Section 4.16), and, with the consent of at least two-thirds of the principal amount of the outstanding Notes, the Company and the Trustee may amend Section 4.16 of the Indenture as set forth below. C. Harrah's Operating Company, Inc., a Delaware corporation, has offered to purchase any and all of the Notes for cash, upon the terms and subject to the conditions set forth in that certain Offer to Purchase and Consent Solicitation dated February 12, 1999 and accompanying Letter of Transmittal and Consent (collectively, the "Offer to Purchase"). D. Under the terms of the Offer to Purchase, holders that tender their Notes in accordance with the terms of the Offer to Purchase and who deliver a duly executed Letter of Transmittal and Consent are deemed to consent to certain amendments to the Indenture which would permanently delete or amend certain of the covenants, events of default and other related provisions of the Indenture (the "Proposed Amendments"). E. In accordance with the terms of the Indenture, holders of more than two-thirds in principal amount of the Notes have tendered their Notes and consented to the Proposed Amendments to be effected by this Supplemental Indenture. F. The Company has authorized the execution and delivery of this Supplemental Indenture and the Trustee has received an Opinion of Counsel pursuant to Section 9.06 and 12.04 of the Indenture and an Officers' Certificate of the Company pursuant to Section 9.06 and 12.04 of the Indenture, and therefore the Company and the Trustee are authorized to execute and deliver this Supplemental Indenture. G. All other conditions precedent and requirements necessary to make this Supplemental Indenture, when duly executed and delivered, a valid and binding agreement, enforceable in accordance with its terms (subject to the provisions of this Supplemental Indenture becoming operative as provided in Section 2 below), have been performed and fulfilled. NOW, THEREFORE, the parties hereto agree as follows (defined terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Indenture): 1. Amendments to the Indenture. 1.1 Deletions. (a) The text contained in each of the following Sections of the Indenture is hereby deleted in its entirety and replaced, in each case, with "Intentionally omitted.": Section 4.03 (Reports); Section 4.04 (Compliance Certificate); Section 4.05 (Taxes); Section 4.06 (Stay, Extension and Usury Laws); Section 4.07 (Restricted Payments); Section 4.08 (Dividend and Other Payment Restrictions Affecting Subsidiaries); Section 4.09 (Limitations on Incurrence of Indebtedness and Issuance of Disqualified Stock); Section 4.10 (Asset Sales); Section 4.11 (Event of Loss); Section 4.12 (Transactions with Affiliates); Section 4.13 (Liens); Section 4.14 (Line of Business); Section 4.15 (Corporate or Partnership Existence); Section 4.16 (Change of Control); Section 4.17 (Designation of Unrestricted Subsidiary); Section 4.18 (Maintenance of -2- Insurance); Section 4.22 (Restrictions on Leasing and Dedication of Property); Section 4.23 (Note Guarantees); Section 4.24 (Excess Cash Flow Offers); Section 4.25 (Use of Proceeds); Section 4.26 (Gaming Licenses); Section 4.27 (Construction); Section 4.28 (Transfer of Certificate of Suitability; Section 4.29 (Filing of First Preferred Ship Mortgage); Section 4.30 (Payment and Performance Bond); Section 4.31 (Transfer of Certificate of Suitability). (b) All definitions set forth in Section 1.01 of the Indenture that relate to defined terms used solely in sections deleted hereby are deleted in their entirety. 1.2 Amendments. The following Sections of the Indenture are hereby amended as set forth below: 1.2.1 Section 5.01. Merger, Consolidation or Sale of Assets. Section 5.01 of the Indenture is hereby amended by (a) deleting the text in clause (iv) and replacing the deleted text with "Intentionally omitted;" (b) deleting the text in clause (v) and replacing the deleted text with "Intentionally omitted; and" and (c) deleting the text in clause (vi) and replacing the deleted text with "Intentionally omitted." 1.2.2 Section 5.02. Successor Corporation Substituted. Section 5.02 of the Indenture is hereby amended by (a) deleting the text in clause (ii)(B) and replacing the deleted text with "Intentionally omitted," and (b) deleting the text in clause (ii)(C) and replacing the deleted text with "Intentionally omitted." 1.2.3 Section 6.01. Events of Default and Remedies. Section 6.01 of the Indenture is hereby amended by (a) deleting the text contained in clauses (iii), (vi) and (vii) and in each case, replacing the deleted text with "Intentionally omitted;" (b) deleting the text contained in clause (x) and replacing the deleted text with "Intentionally omitted; or" (c) deleting the text contained in clause (xi) and replacing the deleted text with "Intentionally omitted." and (d) deleting all references to "Note Guarantee or any" from clause (viii). -3- 1.2.4 Section 8.04. Conditions to Legal or Covenant Defeasance. Section 8.04 of the Indenture is hereby amended by (a) deleting the text contained in clauses (iii) and (iv) and, in each case, replacing it with "Intentionally omitted;" and (b) deleting "and an opinion of counsel in the United States (which opinion of counsel may be subject to customary assumptions and exclusions), each" from clause (viii). 1.3 Additions. The following section is added to the Indenture: Section 11.07. No New Note Guarantees. Notwithstanding anything in this Article 11 to the contrary, the provisions of this Article 11 shall apply only to Subsidiaries of the Company that exist on or prior to the Acceptance Date (as such term is defined in the Offer to Purchase). 2. Confirmations; Effectiveness. As amended by this Supplemental Indenture, the Indenture and the Notes are ratified and confirmed in all respects, and the Indenture as so amended shall be read, taken and construed as one and the same instrument. The provisions of this Supplemental Indenture shall become operative only upon the Acceptance Date. This Supplemental Indenture may be executed in any number of counterparts, each of which counterparts together shall constitute but one and the same instrument. 3. Trust Indenture Act. If and to the extent that any provision of this Supplemental Indenture limits, qualifies or conflicts with another provision included in this Supplemental Indenture or in the Indenture, which is required to be included in this Supplemental Indenture or the Indenture by the Trust Indenture Act of 1939, as amended (the "TIA"), such required provision of the TIA shall control. 4. Exchanged Notes. Pursuant to Section 9.05 of the Indenture, all Notes authenticated and delivered after the date hereof in exchange for or in lieu of any Notes theretofore issued shall have imprinted or stamped thereon a legend in substantially the following form: -4- "The Indenture has been amended pursuant to a First Supplemental Indenture dated as of March 1, 1999, copies of which are available from the Company or the Trustee." 5. Governing Law. This Supplemental Indenture shall be deemed governed by, and construed in accordance with, the internal laws of the State of New York, but without giving effect to applicable principles of conflicts of law thereof to the extent that the application of the laws of another jurisdiction would be required thereby. 6. Rights of Trustee. Without limiting any other protections or rights afforded the Trustee at law, by contract or otherwise, the Trustee will be entitled to the full benefits afforded by Sections 7.02 and 7.03 of the Indenture in connection with its execution and delivery of this Supplemental Indenture. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Company. -5- IN WITNESS WHEREOF, the parties have caused this Supplemental Indenture to be duly executed as of the date first written above. SHOWBOAT MARINA CASINO PARTNERSHIP, an Indiana general partnership By: SHOWBOAT MARINA PARTNERSHIP, an Indiana general partnership, its general partner By: SHOWBOAT INDIANA INVESTMENT LIMITED PARTNERSHIP, a Nevada limited partnership, its general partner By: SHOWBOAT INDIANA, INC., a Nevada corporation, its general partner By: /s/ Colin V. Reed ----------------- Colin V. Reed Executive Vice President and Secretary SHOWBOAT MARINA FINANCE CORPORATION, a Nevada corporation By: /s/ Charles L. Atwood ----------------------------- Charles L. Atwood Vice President and Treasurer [Seal] Attest: By: /s/ George W. Loveland, II ---------------------------- George W. Loveland Assistant Secretary -6- FIRSTAR BANK OF MINNESOTA, N.A., as Trustee By: /s/ Frank Leslie ----------------------------- Frank Leslie Vice President [Seal] Attest: By: /s/ Angela M. Weidell-LaBathe ----------------------------------- Angela M. Weidell-LaBathe Assistant Vice President -7- EX-10.(11) 14 EXHIBIT 10.11 EXHIBIT-10(11) Amendment dated December 10, 1998 to the Harrah's Entertainment, Inc. Annual Management Bonus Plan (the "Plan") ----------------------------------------- Pursuant to approval by the Human Resources Committee of the Harrah's Entertainment, Inc. Board of Directors, the Plan is amended as follows: 1. The following paragraph is added at the end of the Section "Personal Eligibility": "Commencing with the plan year 1999, eligibility is extended to employees of an Operating Unit who are in grades 18 and 19, with the Chief Executive Officer having discretion to make exceptions regarding the eligibility of positions within these grade levels." 2. The following paragraph is added at the end of the Section"Meeting Operating Unit Objectives, The Bonus Pool": "The Chief Executive shall have discretion to approve and modify the Bonus Matrix for employees in grades 18 through 29." 3. The following paragraph is added at the end of the Section "Approval and Payment of Annual Bonus Plan Awards": "The Chief Executive Officer shall have discretion to resolve and approve exceptions and adjustments to objectives and bonus points and other bonus plan issues that have their source or basis at operating properties, which decisions will also roll up to Division bonus calculations." IN WITNESS WHEREOF, this Amendment has been executed as of the date written above. Harrah's Entertainment, Inc. By: /s/ Neil F. Barnhart --------------------------- Title: Vice President --------------------------- -2- EX-10.(14) 15 SEVERENCE AGREE. DATED 10/29/98 EXHIBIT 10(14) HARRAH'S ENTERTAINMENT, INC October 29, 1998 Mr. Gary W. Loveman c/o Harrah's Entertainment, Inc. 1023 Cherry Road Memphis, Tennessee 38117 Re: Severance Agreement Dear Mr. Loveman: Harrah's Entertainment, Inc. (the "Company") considers it essential to the best interest of its stockholders to foster the continuous employment of key management personnel. In this connection, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company, although no such change is now contemplated. In order to induce you to remain in the employ of the Company or its subsidiaries and in consideration of your agreements set forth in Subsection 2(b) hereof, the Company agrees that you shall receive the severance benefits set forth in this letter agreement ("this Agreement") in the event your employment with the Company or its subsidiaries terminates upon or subsequent to a "Change in Control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. Term of Agreement. This Agreement shall commence on May 3, 1998 and shall continue in effect through December 31, 1998; provided, however, that commencing on January 1, 1999 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than January 1 of the preceding year, the Company with the approval of the Board of Directors shall have given you written notice that it does not wish to extend this Agreement; provided, further, if a Change in Control of the Company shall have occurred during the original or extended term of this Agreement, this Agreement shall automatically continue in effect for a period of twenty-four months beyond the month in which such Change in Control occurred. 2. Change in Control. (a) No benefit shall be payable to you hereunder unless there shall have been a Change in Control of the Company, as set forth below. For purposes of this Agreement, a "Change in Control of the Company" shall be deemed to have occurred, subject to subparagraph (iv) hereof, if any of the events in subparagraphs (i), (ii) or (iii) occurs: (i) Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than an employee benefit plan of the Company, or a trustee or other fiduciary holding securities under an employee benefit plan of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 25% or more of the Company's then outstanding voting securities carrying the right to vote in elections of persons to the Board, regardless of comparative voting power of such voting securities, and regardless of whether or not the Board shall have approved the acquisition of such securities by the acquiring person; or -2- (ii) During any period of two consecutive years, individuals who, at the beginning of such period, constitute the Board together with any new director(s) (other than a director designated by a person who shall have entered into an agreement with the Company to effect a transaction described in clauses (i) or (iii) of this Subsection) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two year period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (iii) The holders of securities of the Company entitled to vote thereon approve the following: (A) A merger or consolidation of the Company with any other corporation regardless of which entity is the surviving company, other than a merger or consolidation which would result in the voting securities of the Company carrying the right to vote in elections of persons to the Board outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of (a) the Company's then outstanding voting securities carrying the right to vote in elections of persons to the Board, or (b) the voting securities of such surviving entity outstanding immediately after such merger or consolidation, or (B) A plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (iv) Notwithstanding the definition of a "Change in Control" of the Company as set forth in this Section 2(a), the Human Resources Committee of the Board (the "Committee") shall have full and final authority, which shall be exercised in its discretion, to determine conclusively -3- whether a Change in Control of the Company has occurred, and the date of the occurrence of such Change in Control and any incidental matters relating thereto, with respect to a transaction or series of transactions which have resulted or will result in a substantial portion of the assets or business of the Company (as determined, prior to the transaction or series of transactions, by the Committee in its sole discretion which determination as to whether a substantial portion is involved shall be final and conclusive) being held by a corporation at least 80% of whose voting securities are held, immediately following such transaction or series of transactions, by holders of the voting securities of the Company (as determined by the Committee in its sole discretion prior to such transaction or series of transactions which determination as to whether the 80% amount will be satisfied shall be final and conclusive). The Committee may exercise any such discretionary authority without regard to whether one or more of the transactions in such series of transactions would otherwise constitute a Change in Control of the Company under the definition set forth in this Section 2(a). (b) For purposes of this Agreement, a "Potential Change in Control of the Company" shall be deemed to have occurred if any of the following occurs: (i) The Company enters into a written agreement or letter of intent, the consummation of which would result in the occurrence of a Change in Control of the Company; (ii) Any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control of the Company; (iii) Any person (other than an employee benefit plan of the Company, or a trustee or other fiduciary holding securities under an employee benefit plan of the Company) who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 9.5% or more of the Company's then outstanding voting securities carrying the right to vote in elections of persons to the Board increases such beneficial ownership of such securities by an additional five percentage points or more thereby beneficially owning 14.5% or more of such securities; or -4- (iv) The Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control of the Company has occurred. You agree that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control of the Company, you will remain in the employ of the Company (or the subsidiary thereof by which you are employed at the date such Potential Change in Control occurs) until the earliest of (x) a date which is six months from the occurrence of such Potential Change in Control of the Company, (y) the termination by you of your employment by reasons of Disability or Retirement (at your normal retirement age), as defined in Subsection 3(a), or (z) the occurrence of a Change in Control of the Company. (c) Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence, without your express written consent, after a Change in Control of the Company, of any of the following circumstances unless, in the case of paragraphs (i), (v), (vi), (vii) or (viii), such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination, as such terms are defined in Subsections 3(e) and 3(d), respectively, given in respect thereof: (i) The assignment to you of any duties inconsistent with your status as an executive officer of the Company (or your status in the position held by you immediately prior to the Change in Control) or a substantial adverse alteration in the nature or status of your responsibilities from those in effect immediately prior to the Change in Control of the Company; (ii) A reduction by the Company in your annual base salary as in effect on the date hereof or as the same may be increased from time to time except for an across-the-board salary reduction of a specific percentage applied to all employees at grade levels 26 and above and all employees in similar grade levels of any person, corporation or other entity (a "Person") in control of the Company; -5- (iii) The relocation of the Company's principal executive offices where you are working immediately prior to the Change in Control of the Company to a location more than 50 miles from the location of such offices immediately prior to the Change in Control of the Company or the Company's requiring you to be based anywhere other than the location of the Company's principal executive offices where you were working immediately prior to the Change in Control of the Company except for required travel on the Company's business to an extent substantially consistent with your business travel obligations during the year prior to the Change in Control; (iv) The failure by the Company, without your consent, to pay to you any portion of your current compensation except pursuant to an across-the-board compensation deferral of a specific percentage applied to all individuals in grade levels 26 or above and all individuals in similar grades of any Person in control of the Company, or to pay to you any portion of an installment of deferred compensation under any deferred compensation program of the Company, within thirty days of the date such compensation is due; (v) The failure by the Company to continue in effect any compensation plan in which you are participating immediately prior to the Change in Control of the Company which is material to your total compensation, including but not limited to, the Company's Bonus Plan, Executive Deferred Compensation Plan, Deferred Compensation Plan, Restricted Stock Plan, Stock Option Plan, or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue your participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed immediately prior to the Change in Control of the Company; (vi) The failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's pension, savings and -6- retirement plan, life insurance, medical, health and accident, or disability plans in which you were participating at the time of the Change in Control of the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the Change in Control of the Company, or the failure by the Company to provide you with the number of paid vacation or PTO days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy and/or PTO policy in effect at the time of the Change in Control of the Company; (vii) The failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 5 hereof; or (viii) Any purported termination of your employment by the Company which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection 3(d) hereof and the requirements of Subsection 3(b), hereof; for purposes of this Agreement, no such purported termination shall be effective. Your right to terminate your employment pursuant to this Agreement for Good Reason shall not be affected by your incapacity due to physical or mental illness. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. 3. Termination Following Change in Control (or Prior to a Change in Control in Specific Circumstances). If any of the events described in Subsection 2(a) hereof constituting a Change in Control of the Company shall have occurred, then following such Change in Control, you shall be entitled to the benefits provided in Subsection 4(c) hereof: (1) if your employment was terminated during the term of this Agreement within six months prior to a Change of Control under the circumstances described in Section 4.(2) below, or (2) if your employment is terminated -7- during the term of this Agreement after such Change in Control if such termination is (y) by the Company, other than for Cause, or (z) by you for Good Reason as provided in Subsection 3(c)(i) hereof or by your Voluntary Termination as provided in Subsection 3(c)(ii) hereof. (a) Disability; Retirement. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for six consecutive months, and within thirty days after written notice of termination is given you shall not have returned to the full-time performance of your duties, your employment may be terminated for "Disability". Any such termination shall be a termination by the Company other than for Cause for purposes of Section 4(c) hereof. Termination by the Company or you of your employment based on "Retirement" shall mean termination at age 65 (or later) with ten years of service or retirement in accordance with any retirement contract between the Company and you. (b) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon your engaging in willful and continued misconduct, or your willful and continued failure to substantially perform your duties with the Company (other than due to physical or mental illness), if such failure or misconduct is materially damaging or materially detrimental to the business and operations of the Company, provided that you shall have received written notice of such failure or misconduct and shall have continued to engage in such failure or misconduct after 30 days following receipt of such notice from the Board, which notice specifically identifies the manner in which the Board believes that you have engaged in such failure or misconduct. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without your reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an -8- opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of failure to substantially perform your duties or of misconduct in accordance with the first sentence of this Subsection, and of continuing such failure to substantially perform your duties or misconduct as aforesaid after notice from the Board, and specifying the particulars thereof in detail. (c) Voluntary Resignation. Upon or after a Change in Control of the Company and for purposes of receiving the benefits provided in Subsection 4(c) hereof, you shall be entitled to terminate your employment by voluntary resignation given at any time during the two years following the occurrence of a Change in Control of the Company hereunder, provided such resignation is (i) by you for Good Reason or (ii) by you voluntarily without the necessity of asserting or establishing Good Reason and regardless of your age or any disability and regardless of any grounds that may exist for the termination of your employment if such voluntary termination occurs by written notice given by you to the Company during the thirty days immediately following the one year anniversary of the Change in Control (your "Voluntary Termination"), provided, however, for purposes of this Subsection 3(c)(ii) only, the language "25% or more" in Subsection 2(a)(i) hereof is changed to "a majority". Such resignation shall not be deemed a breach of any employment contract between you and the Company. (d) Notice of Termination. Any purported termination of your employment by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (e) Date of Termination, Etc. "Date of Termination" shall mean: (i) If your employment is terminated for Disability, thirty days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty day period), and -9- (ii) If your employment is terminated pursuant to Subsection (b) or (c) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to Subsection (b) above shall not be less than thirty days, and in the case of a termination pursuant to Subsection (c) above shall not be less than fifteen nor more than sixty days (thirty days in case of your Voluntary Termination), respectively, from the date such Notice of Termination is given); provided that if within fifteen days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this provision), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation, bonus, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. Amounts paid under this Subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. Nothing herein shall be construed as limiting your right to take other employment, or engage in self-employment, before the resolution of a dispute described in this Section 3(e). A Date of Termination extended pursuant to this Section 3(e) which by reason of such extension falls outside the twenty-four month -10- period described in the first sentence of this Section 3 or the two-year period described in Section 3(c) shall be deemed to have fallen within such period for purposes of ensuring your entitlement to the benefits described at Section 4(c) below. 4. Compensation Upon Termination Following a Change of Control (or if Termination Occurs Prior to a Change in Specific Circumstances). Following a Change in Control of the Company as defined in Subsection 2(a), then: (1) upon termination of your employment after such Change in Control, or (2) notwithstanding anything in this Agreement to the contrary, if termination of your employment occurred within six months prior to the Change in Control if such termination was by the Company without Cause by reason of the request of the person or persons (or their representatives) who subsequently acquire control of the Company in the Change of Control transaction, you shall be entitled to the following benefits: (a) Deleted (b) If your employment shall be terminated by the Company for Cause, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus the Company shall pay all other amounts and honor all rights to which you are entitled under any compensation or benefit plan of the Company at the time such payments are due, and the Company shall have no other obligations to you under this Agreement. (c) If your employment shall be terminated (y) after a Change of Control, by the Company other than for Cause or (z) after a Change of Control, by you for Good Reason or by your Voluntary Termination as provided in Subsection 3(c)(ii), or (yy) within six months prior to a Change of Control, by the Company under the circumstances described in Section 4.(2) above, then you shall be entitled to the benefits provided below: (i) The Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation or benefit plan of the Company, at the time such payments are due; -11- (ii) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as severance pay to you a lump sum severance payment (the "Severance Payment") equal to 1.5 times the average of the Annual Compensation (as defined below) payable to you by the Company or any corporation affiliated with the Company within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"). Annual Compensation is defined to consist of two components: (a) Your annual salary in effect immediately prior to the Change in Control or in effect as of the Date of Termination, whichever annual salary is higher. Your annual salary for this purpose will be determined without any reduction for deferrals of such salary under any deferred compensation plan (qualified or unqualified) and without any reduction for any salary reductions used for making contributions to any group insurance plan of the Company or its affiliates and also without reduction for any other deductions from salary for any reason; plus (b) The average of your annual bonuses under the Company's Annual Management Bonus Plan, or any substitute or successor plan including the Key Executive Officer Annual Incentive Plan, for the three highest calendar years, in terms of annual bonus paid to you in such years, during the five calendar years preceding the calendar year in which the Change in Control occurred. Your annual bonuses for this purpose will be determined without any reduction for deferrals under any deferred compensation plan (qualified or unqualified) and without any reduction for salary reductions used for making contributions to any group insurance plan of the Company or its affiliates and also without reduction for any other deductions from bonus for any reason. If you were not employed by the Company or its affiliates for a sufficient period of time to receive annual bonuses during each of the five calendar years before the Change in Control occurred, then the average bonus will be measured using the three highest calendar years, in terms of annual bonus paid to you, in all the consecutive calendar years immediately preceding the date the Change in Control occurred. If you were not eligible for three years of bonuses paid during the calendar years immediately preceding the date the Change in Control occurred, then the average bonus will be the average of the annual bonuses that were paid to you during such time -12- under such Plan. If you were not eligible for any bonus during such time because of not being employed by the Company for a sufficient period of time to qualify for a previous bonus payment, then Annual Compensation will only consist of the salary component as provided above and will not include a bonus component. (iii) The Company shall also pay to you a pro rata amount of your target bonus (the bonus amount for your grade level assuming 100 bonus points are earned) as shown on the matrix for the Annual Management Bonus Plan (or any substitute or successor plan) attributable to the bonus plan year which contains your Date of Termination, regardless of whether or not any bonus is determined to be actually earned for such year, provided that the target bonus for calculating this pro rata payment will not be less than the target bonus under such Plan for the Plan year that contains the day immediately prior to the Change in Control (which target bonus will be the one that applies to your grade level at that time) regardless of whether or not any bonus was payable for such year. The pro-rata amount will be based on the percentage of days of your employment in the calendar year of the Date of Termination. For example, if the Date of Termination is October 1 in a year with 365 days, with October 1 counted as the last day of employment for a total of 274 days of employment that year, then the pro-rata amount will be 75.06849% of target bonus (274 days / 365 days). In addition, the Company shall pay to you the amounts of any compensation or awards payable to you or due to you under any incentive compensation plan of the Company including, without limitation, the Company's Restricted Stock Plan, Stock Option Plan (the "Option Plan") and Annual Management Bonus Plan (or any substitute or successor plan including the Key Executive Officer Annual Incentive Plan) and under any agreements with you in connection therewith, and shall make any other payments and take any other actions and honor such rights you may have accrued under such plans and agreements including any rights you may have to payments after the Date of Termination, which will include the payment to you of any bonus earned during the bonus year fully completed prior to the Date of Termination if such Date of Termination occurs prior to the payment date for -13- such bonus, it being understood, however, that the pro-rata payment provided for in the first sentence of this paragraph 4(c)(iii) is in lieu of any bonus earned for the bonus plan year during which occurred the Date of Termination. (iv) In lieu of shares of common stock of the Company or any securities of a successor company which shall have replaced such common stock ("Company Shares") issuable upon exercise of outstanding and unexercised options (whether or not they are fully exerciseable or "vested"), if any, granted to you under the Option Plan including options granted under the plan of any successor company that replaced or assumed the options under said Option Plan ("Options") (which Options shall be cancelled upon the making of the payment referred to below), you shall receive an amount in cash equal to the product of (y) the excess of the higher of the closing price of Company Shares as reported on the New York Stock Exchange on or nearest the Date of Termination (or, if not listed on such exchange, on a nationally recognized exchange or quotation system on which trading volume in Company Shares is highest) or the highest per share price (including cash, securities and any other consideration) for Company Shares actually paid in connection with any change in control of the Company, over the per share exercise price of each Option held by you (whether or not then fully exercisable or "vested"), times (z) the number of Company Shares covered by each such option. (v) The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder). (vi) In the event that you become entitled to the payments (the "Severance Payments") provided under paragraphs (ii), (iii), and (iv), above (and Subsections (d) and (e), below), and if as a result of any of the Severance -14- Payments or any other payments or benefits provided you, you will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code, the Company shall pay to you at the time specified in paragraph (vii), below, an additional amount (the "Gross-Up Payment") such that the net amount retained by you (such net amount to be the amount remaining after deducting any Excise Tax on the Severance Payments and any federal, state and local income tax and Excise Tax payable on the payment provided for by this paragraph), shall be equal to the amount of the Severance Payments after deducting normal and ordinary taxes but not deducting (a) the Excise Tax and (b) any federal, state and local income tax and Excise tax payable on the payment provided for by this paragraph. For example, if the Severance Payments are $1,000,000 and if you are subject to the Excise Tax, then the Gross-Up Payment will be such that you will retain an amount of $1,000,000 less only any normal and ordinary taxes on such amount. (The Excise Tax and federal, state and local taxes and any Excise Tax on the payment provided by this paragraph will not be deemed normal and ordinary taxes). For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, the following will apply: (A) Any other payments or benefits received or to be received by you in connection with a Change in Control of the Company or your termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control of the Company or any person affiliated with the Company or such person) shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and acceptable to you such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually -15- rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax; (B) The amount of the Severance Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (y) the total amount of the Severance Payments or (z) the amount of excess parachute payments within the meaning of Section 280G(b)(1) (after applying clause (A), above); and (C) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with proposed, temporary or final regulations under Sections 280G(d)(3) and (4) of the Code or, in the absence of such regulations, in accordance with the principles of Section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay Federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of your residence on the Date of Termination, net of the maximum reduction in Federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the amount of Excise Tax attributable to Severance Payments is subsequently determined to be less than the amount taken into account hereunder at the time of termination of your employment, you shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and Federal (and state and local) income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax and/or a Federal (and state and local) income tax deduction) plus interest on the amount of such repayment at the rate -16- provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax attributable to Severance Payments is determined to exceed the amount taken into account hereunder at the time of the termination of your employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional gross-up payment to you in respect of such excess (plus any interest and penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. (vii) The payments provided for in paragraphs (ii), (iii), (iv) and (vi) above, shall be made not later than the fifth day following the Date of Termination (or following the date of the Change in Control if your employment is terminated under the circumstances described in Section 4.(2) above), provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth day after the Date of Termination (or following the date of the Change in Control if your employment is terminated under the circumstances described in Section 4.(2) above). In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (d) If your employment shall be terminated (y) by the Company other than for Cause, or (z) by you voluntarily for Good Reason or by your Voluntary Termination, or by the Company within six months prior to a Change in Control under the circumstances described in Section 4.(2) hereof, then for a twenty-four month period after such termination, the Company shall arrange to provide you with life, disability, accident and health insurance -17- benefits substantially similar to those which you are receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by you pursuant to this Subsection 4(d) shall be reduced to the extent comparable benefits are actually received by you during the twenty-four month period following your termination, and any such benefits actually received by you shall be reported to the Company. (e) In the event a Change in Control of the Company occurs while you are employed with the Company or its affiliates but after you and the Company have executed an agreement that expressly provides for your subsequent retirement including an agreement that expressly provides for your early retirement, then the present value, computed using a discount rate of 8% per annum, of (i) the total amount of all unpaid deferred payments as payable to you in accordance with the payment schedule that you elected when the deferral was agreed to and using the plan interest rate applicable to your situation, including, without limitation, any unpaid deferred payments to be paid to you under the Company's Executive Deferred Compensation Plan and the Company's other deferred compensation plans, and (ii) the total amount of all other payments payable or to become payable to you or your estate or beneficiary under such retirement agreement (other than payments payable pursuant to a plan qualified under Section 401(a) of the Internal Revenue Code) shall be accelerated and paid to you (or your estate or beneficiary if applicable) in a lump sum cash payment within five business days after the occurrence of the Change in Control of the Company. In addition, if you and the Company or its affiliates have executed such a retirement agreement and if the Change in Control of the Company occurs before the effective date of your retirement, then you shall receive the Severance Payment payable under Subsection 4(c)(ii) herein in addition to the lump sum cash payment of the present value of your total unpaid deferred payments and other payments under the retirement agreement as aforesaid. All benefits (other than the payments accelerated and paid out to you in a lump sum as provided above) to which you or your estate or any beneficiary are entitled under such retirement agreement shall continue in effect notwithstanding the Change in Control of the Company. This Subsection 4(e) shall survive your retirement. -18- (f) Notwithstanding that a Change in Control shall not have yet occurred, if you so elect, by written notice to the Company given at any time after the date hereof and prior to the time such amounts are otherwise payable to you: (i) The Company shall deposit with a trustee or escrow agent (an "escrow agent"), pursuant to a trust or escrow agreement ("escrow agreement") between the Company and such escrow agent, a sum of money, or other property permitted by such escrow agreement, which are substantially sufficient in the opinion of the Company's management to fund payment of the following amounts to you, as such amounts become payable (provided such deposit will not be necessary to the extent the trust or escrow ("escrow") already contains funds or other assets which are substantially sufficient in the opinion of the Company's management to fund such payments) : (A) Amounts payable, or to become payable, to you or to your beneficiaries or your estate under the Company's Executive Deferred Compensation Plan and under any agreements related thereto in existence at the time of your election to make the deposit into escrow. (B) Amounts payable, or to become payable, to you or to your beneficiaries or your estate by reason of your deferral of payments payable to you prior to the date of your election to make the deposit into escrow under any other deferred compensation agreements between you and the Company in existence at the time of your election to make the deposit into escrow, including but not limited to deferred compensation agreements relating to the deferral of salary or bonuses. (C) Amounts payable, or to become payable, to you or to your beneficiaries or your estate under any executed agreement that expressly provides for your retirement from the Company (including payments described under Subsection 4(e) above) which agreement is in existence at the time of your election to make the deposit into escrow, other than amounts payable by a plan qualified under Section 401(a) of the Code. -19- (D) Subject to the approval of the Committee, amounts then due and payable to you, but not yet paid, under any other benefit plan or incentive compensation plan of the Company (whether such amounts are stock or cash) other than amounts payable to you under a plan qualified under Section 401(a) of the Code. (ii) Within 5 days after the occurrence of a Potential Change of Control, the Company shall deposit with an escrow agent (which shall be the same escrow agent, if one exists, acting pursuant to clause (i) of this Subsection 4(f)), pursuant to an escrow agreement between the Company and such escrow agent, a sum of money, or other property permitted by such escrow agreement, substantially sufficient in the opinion of Company management to fund the payment to you of the amounts specified in Subsection 4(c) of this Agreement. (iii) It is intended that any amounts deposited in escrow pursuant to the provisions of clause (i) or (ii) of this Subsection 4(f), shall be subject to the claims of the Company's creditors, as set forth in the form of such escrow agreement. (g) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by you to the Company, or otherwise (except as specifically provided in this Section 4). (h) In addition to all other amounts payable to you under this Section 4, you shall be entitled to receive all benefits payable to you under any benefit plan of the Company in which you participate to the extent such benefits are not paid under this Agreement. 5. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the -20- Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled to hereunder if you terminate your employment voluntarily for Good Reason following a Change in Control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 6. Notices. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, by FAX if available, or by overnight courier service, addressed as follows: To the Company: Secretary Harrah's Entertainment, Inc. 1023 Cherry Road Memphis, TN 38117 FAX: 901-762-8735 -21- To you: Addressed to your name at your office address (or FAX number) with the Company or its affiliates (or any successor thereto) at the time the notice is sent and your home address at that time; and if you are not employed by the Company at the time of the notice, your home address as shown on the records of the Company or its affiliates (or any successor thereto) on the date of the notice. To such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 7. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Section 4 shall survive the expiration of the term of this Agreement. 8. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. -22- 9. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Memphis, Tennessee in accordance with the American Arbitration Association National Rules of the Resolution of Employment Disputes then in effect and the federal Arbitration Act. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek in any court having jurisdiction specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 11. Similar Provisions in Other Agreement. Severance Payment made under this Agreement shall be in lieu of severance payments under any previous agreement between you and the Company or its subsidiaries. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our binding agreement on this subject. Very truly yours, HARRAH'S ENTERTAINMENT, INC. By: /s/ Stephen H. Brammell ------------------------- Stephen H. Brammell Vice President Agreed: /s/ Gary W. Loveman - --------------------- Gary W. Loveman -23- EX-10.(15) 16 AMENDMENT TO SEVER AGREEMENT EXHIBIT 10(15) HARRAH'S ENTERTAINMENT, INC. October 29, 1998 Mr. Philip G. Satre Harrah's Entertainment, Inc. 1023 Cherry Road Memphis, Tennessee 38117 Re: Amendment to Severance Agreement Dear Phil: This letter agreement ("this Amendment") will amend the Severance Agreement (the "Agreement") between you and Harrah's Entertainment, Inc. In consideration of the mutual covenants herein contained and for other good and valuable consideration, receipt of which is hereby acknowledged, it is agreed as follows: 1. Effective Date. This Amendment is effective October 29, 1998. 2. Amendment of Section 1, "Term of Agreement". The language of this section stating "September 30 of the preceding year, the Company shall have given notice" is changed to read as follows: "January 1 of the preceding year, the Company with the approval of the Board of Directors shall have given you written notice" 3. Amendment of Section 3, "Termination Following Change in Control." Section 3 is amended by changing the opening paragraph to read as follows: "3. Termination Following Change in Control (or Prior to a Change in Control in Specific Circumstances). If any of the events described in Subsection 2(a) hereof constituting a Change in Control of the Company shall have occurred, then following such Change in Control, you shall be entitled to the benefits provided in Subsection 4(c) hereof: (1) if your employment was terminated during the term of this Agreement within six months prior to the Change of Control under the circumstances described in Section 4.(2) below, or (2) if your employment is terminated (whether or not such termination is voluntary) during the term of this Agreement after such Change in Control, unless such termination is (y) because of your death or (z) by the Company for Cause." 4. Amendment of Section 4, "Compensation Upon Termination Following a Change in Control." (a) Section 4 is amended by changing the language prior to Subsection (a) to read as follows: "4. Compensation Upon Termination Following a Change in Control (or if Termination Occurs Prior to a Change in Control in Specific Circumstances). Following a Change in Control of the Company as defined in Subsection 2(a), then: (1) upon termination of your employment after such Change in Control, or (2) notwithstanding anything in this Agreement to the contrary, if termination of your employment occurred within six months prior to the Change in Control if such termination was by the Company without Cause by reason of the request of the person or persons (or their representatives) who subsequently acquire control of the Company in the Change of Control transaction, you shall be entitled to the following benefits:" (b) Subsection 4(c) is amended by changing the language before subparagraph (i) to read as follows: "(c) If your employment shall be terminated (y) after the Change of Control, by the Company other than for Cause, or (z) after the Change of Control, by you by voluntary resignation, or (yy) within six months prior to the Change of Control, by the Company under the circumstances described in Section 4.(2) above, then you shall be entitled to the following benefits:" -2- (c) Subsection 4(c)(vii) is amended by adding the following language after the words "Date of Termination" wherever these words appear in this Subsection : "(or following the date of the Change in Control if your employment is terminated under the circumstances described in Section 4.(2) above)" (d) Subsection 4(d) is amended by changing the language in the first sentence that reads: ", then for a twenty-four month period after such termination," to read as follows: ", or by the Company within six months prior to a Change in Control under the circumstances described in Section 4.(2) hereof, then for a twenty-four month period after such termination," 5. Defined Terms. Unless otherwise defined herein, all terms used in this Amendment that are defined in the Agreement will have the meanings given to such terms in the Agreement. 6. No Other Modifications. Except as specifically modified herein, all terms and conditions of the Agreement will remain unchanged and in full force and effect. If this letter sets forth our agreement on the subject matter hereof, please sign and return to the Company the enclosed copy of this letter which will then constitute our binding agreement on this subject. Very truly yours, HARRAH'S ENTERTAINMENT, INC. By: /s/ E. O. Robinson, Jr. ----------------------- E. O. Robinson, Jr. Senior Vice President Agreed to: /s/ Philip G. Satre - ------------------- Philip G. Satre -3- EX-10.(16) 17 AMENDMENT TO SEVER AGREEMENT EXHIBIT 10(16) HARRAH'S ENTERTAINMENT, INC. October 29, 1998 [Name of Officer] Harrah's Entertainment, Inc. 1023 Cherry Road Memphis, Tennessee 38117 Re: Amendment to Severance Agreement Dear [Officer]: This letter agreement ("this Amendment") will amend the Severance Agreement (the "Agreement") between you and Harrah's Entertainment, Inc. In consideration of the mutual covenants herein contained and for other good and valuable consideration, receipt of which is hereby acknowledged, it is agreed as follows: 1. Effective Date. This Amendment is effective October 29, 1998. 2. Amendment of Section 1, "Term of Agreement". The language of this section stating "September 30 of the preceding year, the Company shall have given notice" is changed to read as follows: "January 1 of the preceding year, the Company with the approval of the Board of Directors shall have given you written notice" 3. Amendment of Section 3, "Termination Following Change in Control." Section 3 is amended by changing the opening paragraph to read as follows: "3. Termination Following Change in Control (or Prior to a Change in Control in Specific Circumstances). If any of the events described in Subsection 2(a) hereof constituting a Change in Control of the Company shall have occurred, then following such Change in Control, you shall be entitled to the benefits provided in Subsection 4(c) hereof: (1) if your employment was terminated during the term of this Agreement within six months prior to the Change of Control under the circumstances described in Section 4.(2) below, or (2) if your employment is terminated during the term of this Agreement after such Change in Control if such termination is (y) by the Company, other than for Cause, or (z) by you for Good Reason as provided in Subsection 3(c)(i) hereof or by your Voluntary Termination as provided in Subsection 3(c)(ii) hereof." 4. Amendment of Section 4, "Compensation Upon Termination Following a Change in Control." (a) Section 4 is amended by changing the language prior to Subsection (a) to read as follows: "4. Compensation Upon Termination Following a Change in Control (or if Termination Occurs Prior to a Change in Control in Specific Circumstances). Following a Change in Control of the Company as defined in Subsection 2(a), then: (1) upon termination of your employment after such Change in Control, or (2) notwithstanding anything in this Agreement to the contrary, if termination of your employment occurred within six months prior to the Change in Control if such termination was by the Company without Cause by reason of the request of the person or persons (or their representatives) who subsequently acquire control of the Company in the Change of Control transaction, you shall be entitled to the following benefits:" (b) Subsection 4(c) is amended by changing the language before subparagraph (i) to read as follows: "(c) If your employment shall be terminated (y) after a Change of Control, by the Company other than for Cause or (z) after a Change of Control, by you for Good Reason or by your Voluntary Termination as provided in Subsection -2- 3(c)(ii), or (yy) within six months prior to a Change of Control, by the Company under the circumstances described in Section 4.(2) above, then you shall be entitled to the benefits provided below:" (c) Subsection 4(c)(vii) is amended by adding the following language after the words "Date of Termination" wherever these words appear in this Subsection : "(or following the date of the Change in Control if your employment is terminated under the circumstances described in Section 4.(2) above)" (d) Subsection 4(d) is amended by changing the language in the first sentence that reads: ", then for a twenty-four month period after such termination," to read as follows: ", or by the Company within six months prior to a Change in Control under the circumstances described in Section 4.(2) hereof, then for a twenty-four month period after such termination," 5. Defined Terms. Unless otherwise defined herein, all terms used in this Amendment that are defined in the Agreement will have the meanings given to such terms in the Agreement. 6. No Other Modifications. Except as specifically modified herein, all terms and conditions of the Agreement will remain unchanged and in full force and effect. If this letter sets forth our agreement on the subject matter hereof, please sign and return to the Company the enclosed copy of this letter which will then constitute our binding agreement on this subject. Very truly yours, HARRAH'S ENTERTAINMENT, INC. By: ------------------------- Agreed to: - --------------------- [Name of Officer] -3- EX-10.(19) 18 EMPLOYMENT AGREEMENT EXHIBIT 10(19) EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of April 1, 1998, by and between Harrah's Operating Company, Inc. and/or one or more of its subsidiaries ("Company") and [Name of Executive] ("Executive"). The Company and the Executive agree as follows: 1. Employment. The Company hereby employs the Executive as [Title] or in such other capacity as the Company reasonably shall designate. 2. Duties. During the term of this Agreement ("Active Employment"), the Executive shall devote substantially all of his working time, energies, and skills to the benefit of the Company's business. The Executive agrees to serve the Company diligently and to the best of his ability, and to follow the policies and directions of the Company. 3. Compensation. The Executive's compensation and benefits during his Active Employment shall be as follows: (a) Base Salary. The Company shall pay the Executive a base salary ("Base Salary") of [$Salary] per year, which will be reviewed annually by the Company during the term of this Agreement in accordance with its compensation practices regarding senior executives. The Executive's Base Salary shall be paid biweekly in accordance with the Company's normal payroll schedule. All payments shall be subject to the Executive's chosen benefit deductions and the deduction of payroll taxes and similar assessments as required by law. (b) Bonus. In addition to the Base Salary, the Executive shall be eligible for an annual bonus in accordance with the Company's bonus plan. 4. Insurance and Benefits. The Executive will be eligible to participate in each employee benefit plan and receive each executive benefit that the Company provides for its senior executives, in accordance with the applicable plan rules. 5. Term. The term of this Agreement shall be for four (4) years, beginning April 1, 1998, and ending March 31, 2002. 6. No Cause Termination/Non-Renewal of Agreement. The Company may terminate the Executive's Active Employment at any time without cause upon thirty (30) days' prior written notice ("no cause termination"). The Company also, in its sole discretion, may elect not to renew this Agreement upon its expiration ("non-renewal of Agreement"). In the event of such termination or non-renewal by the Company, the Executive shall remain an employee of the Company and shall be entitled only to the salary and benefits set forth below, unless otherwise specified in this Agreement.
Benefit Termination Date Base Salary (rate as of 18 months (78 weeks) ("Salary Separation Date) Continuation Period") from last day worked ("Separation Date"). PTO and Service Credit Separation Date. Use of Credit Cards Separation Date. Bonus--Payment and Eligibility (i) Eligible for prior year bonus if termi-nated during payment year but prior to payment; (ii) eligible for prorated bonus for current year if in job for more than 6 months and termination occurs after June 30; (iii) not eligible for bonus for year following termination year. Group Health and Life End of Salary Continuation Period. Insurance 18-month COBRA rights period for health insurance will commence on Separation Date. (See also Paragraph 10.)
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Benefit Termination Date Retaining Existing Stock (i) Options from grants made prior Options for Vesting and Other to 4/1/98 that have vested prior to Rights Separation Date can be exercised through end of Salary Continuation Period, but unvested options from such grants forfeited as of Separation Date; (ii) options from grants made after 4/1/98 retained for exercise and vesting through end of Salary Continuation Period. Exercise of vested options after Salary Continuation Period per plan rules. Accelerated vesting of all options if Change of Control occurs during Salary Continuation Period Eligibility for New Separation Date. Restricted Stock or New Stock Options TARSAP Next potential vesting, based on Performance targets, after Separation Date, at CEO's and HRC's discretion. Accelerated vesting of all shares if Change of Control occurs during Salary Continuation. Use of Financial Counseling End of Salary Continuation Period. per Plan Provisions The maximum remaining benefit shall be annual benefit remaining as of Separation Date. Savings and Retirement Plan End of year of Separation Date. Deduction (Active Participation)
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Benefit Termination Date Executive Deferred End of year of Separation Date. Compensation Plan/Deferred Distribution will commence after Compensation Plan (Active Salary Continuation Period, in Participation) accordance with previously made elections, and at the termination rate unless the Executive qualifies for the retirement rate. (See also Paragraph 11.) 3X death benefit provision waived for death after Separation Date. EDCP and other deferred compensation balances will continue to be protected by then-existing Escrow Agreement subject to all terms and conditions thereof.
7. Death of Executive. Upon the death of the Executive during his Active Employment, his salary and all rights and benefits hereunder will terminate, and his estate and beneficiary(ies) will receive the benefits to which they are entitled under the terms of the Company's benefit plans and programs by reason of a participant's death during employment, including the 3X death benefit provided by the EDCP (applies only if death during Active Employment) and the applicable rights and benefits under the Company's stock plans. If the Executive dies during the Salary Continuation Period, all of the provisions of the previous sentence apply except that the remaining salary continuation will be paid in a lump sum to the Executive's estate. 8. Termination by Company for Cause. The Company shall have the right to terminate the Executive's Active Employment for cause. All salary and benefits shall cease, except COBRA rights and as otherwise provided in applicable benefit plans. Termination for cause shall be effective immediately upon notice sent or given to the Executive. For purposes of this Agreement, the term "cause" shall mean and be strictly limited to: (i) -4- conviction of any crime that materially discredits the Company or is materially detrimental to the reputation or goodwill of the Company; (ii) commission of any material act of fraud or dishonesty against the Company, or commission of an immoral or unethical act that materially reflects negatively on the Company, or engaging in willful misconduct; provided that the Executive shall first be provided with written notice of the claim against him under this provision (ii) and with an opportunity to contest said claim before the Board of Directors; or (iii) material breach of the Executive's obligations under Paragraph 2. of this Agreement, as so determined by the Board of Directors. 9. Voluntary Termination/Notice Period. The Executive may terminate this Agreement voluntarily at any time and for any or no reason during its term upon thirty (30) days' prior written notice to the Company, except as specified in this paragraph. If the Executive is going to work or act in competition with the Company as described in Paragraph 14. of this Agreement, the Executive must give the Company six (6) months' prior written notice of his intention to do so. The written notice provided by the Executive shall specify the last day to be worked by the Executive ("Separation Date"), which Separation Date must be at least thirty (30) days or six (6) months (as appropriate) after the date the notice is received by the Company. Unless otherwise specified herein, or in a writing executed by both parties, the Executive shall not receive any of the benefits provided in this Agreement after the Separation Date set forth in his written notice. 10. Certain Health Insurance Benefits. If (i) the Executive reaches the age of 50 and, when added to his number of years of continuous service with the Company, the sum of his age and years of service equals or exceeds 65, and at any time after the occurrence of both such events the Executive's employment is terminated pursuant to Paragraph 6., above; or (ii) the Executive reaches the age of 55 and has attained 10 years of continuous service with the Company, and at any time after the occurrence of both such events the Executive's employment terminates for any reason other than by the Company for "cause" as described in paragraph 8., above, the Executive and his then-eligible dependents shall be entitled to participate in the Company's group health insurance plan, as amended from time to time by the -5- Company, after the Executive's Separation Date or the end of the Salary Continuation Period, as applicable, for the remainder of the Executive's life ("Life Coverage Period"). During the Life Coverage Period, the Executive shall pay 20% of the current premium (revised annually) on an after-tax basis each quarter, and the Company shall pay 80% of said premium on an after-tax basis, which contribution will be imputed income to the Executive. As soon after the Separation Date as the Executive becomes eligible for Medicare coverage, the Company's group health insurance plan shall become secondary to Medicare. If the Executive engages in any of the activities described in Paragraph 14.(a), below, during the Life Coverage Period, the entitlement of the Executive and his then-eligible dependents to participate in the Company's group health insurance plan shall terminate automatically, without any further action or notice by either party, subject to applicable COBRA rights, which shall commence on the Separation Date. If the Executive engages in any of the activities described in said Paragraph 14.(a)(i) in a business which does not compete with the Company or any of its subsidiaries during the Life Coverage Period, the Company's group health insurance plan shall become secondary to any primary health insurance plan or coverage made available to the Executive by that business. 11. EDCP Retirement Rate. If the Executive reaches the age of 50 and, when added to his number of years of continuous service with the Company, the sum of his age and years of service equals or exceeds 65, and at any time after the occurrence of both such events the Executive's employment is terminated pursuant to Paragraph 6., above, the Executive shall be entitled to receive his distributions from EDCP at the retirement rate. For EDCP retirement rate purposes, the Executive will receive service credit for the Salary Continuation Period. 12. Change in Control. If a Change in Control, as defined in the Executive's Severance Agreement, occurs during the Executive's Active Employment, and if the Severance Agreement is in force when the Change in Control occurs, then the Severance Agreement supersedes and replaces this Agreement. If, prior to a Change in Control (as defined above), the Executive's Active Employment has been terminated for any reason by either party or this Agreement is not renewed by the Company, then the Executive's Severance Agreement terminates automatically. -6- 13. Disability. If the Executive becomes disabled prior to the termination of his Active Employment or the non-renewal of this Agreement, he will be entitled to apply at his option for the Company's long-term disability benefits. If he is accepted for such benefits, then the terms and provisions of the Company's benefit plans and the programs (including the EDCP and the Company's Stock Option and Restricted Stock Plans) that are applicable in the event of such disability of an employee shall apply in lieu of the salary and benefits under this Agreement, except that (i) the Escrow Agreement (if then in force) and his indemnification agreement will continue in force (the Escrow Agreement will be subject to amendment or termination in accordance with its terms), and (ii) he will be entitled to the lifetime group insurance benefits described in Paragraph 10. If the Executive is disabled so that he cannot perform his duties (as determined by the Human Resources Committee (HRC), and if he does not apply for long-term disability benefits or is not accepted for such benefits, then the Company may terminate his duties under this Agreement. In such event, he will receive eighteen months salary continuation, together with all other benefits, and during such period of salary continuation any stock options and restricted stock grants then in existence will continue in force for vesting purposes. However, during such period of salary continuation for disability, Executive will not be eligible to participate in the annual bonus plan, nor will he be eligible to receive stock option or restricted stock grants or any other long-term incentive awards except to the extent approved by the HRC. If the Executive becomes disabled during the Salary Continuation Period, he will be entitled only to the salary and benefits described in Paragraphs 6. and 10., above, for the periods set forth in those respective paragraphs. 14. Non-competition. (a) Non-competition. During the Executive's Active Employment, and during the Salary Continuation Period described in Paragraph 6., above, the Executive: (i) shall not engage in any activity, whether as employer, proprietor, partner, stockholder (other than the holder of less than 5% of the stock of a corporation the securities of which are traded on a national securities exchange or in the over-the-counter market), director, officer, employee, consultant -7- or otherwise, in competition with (x) the casino, casino/hotel and/or casino/resort businesses conducted at the date hereof by the Company or any subsidiary or affiliate ("Company" for purposes of this paragraph 14) or (y) any casino, casino/hotel and/or casino/resort business in which the Company is substantially engaged at any time during the active employment period; (ii) shall not solicit, in competition with the Company, any person who is a customer of the businesses conducted by the Company at the date hereof or of any business in which the Company is substantially engaged at any time during the term of this Agreement. (b) Scope of Covenants; Remedies. The following provisions shall apply to the covenants of the Executive contained in this Paragraph 14.: (i) the covenants contained in paragraphs (i) and (ii) of Paragraph 14.(a) shall apply within the United States, Canada and Mexico, plus any territories in which Company is actively engaged in the conduct of business while the Executive is employed under this Agreement, including, without limitation, the territories in which customers are then being solicited; (ii) without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Paragraph 14., it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief to prevent any such violation or any continuing violation thereof; (iii) each party intends and agrees that if, in any action before any court or agency legally empowered to enforce the covenants contained in this Paragraph 14., any term, restriction, covenant or promise contained therein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency; and (iv) the covenants contained in this Paragraph 14. shall survive the conclusion of Executive's employment with the Company. -8- 15. Post Employment Cooperation. Upon the termination of his Active Employment, the Executive will cooperate with, and provide information to, the Company in assuring an orderly transition of all matters being handled by him. Upon the Company providing reasonable notice to him, he will also appear as a witness at the Company's request and/or assist the Company in any litigation, bankruptcy or similar matter in which the Company or any affiliate thereof is a party; provided that the Company will defray any approved out-of-pocket expenses incurred by him in connection with any such appearance and that, if the Executive is no longer receiving salary compensation from the Company, the Company will compensate him for all time spent, at either his then current compensation rate or his salary rate as of the Separation Date, whichever is higher. The Company agrees further to indemnify him as prescribed in his Indemnification Agreement and Article TENTH of the Certificate of Incorporation of Harrah's Entertainment, Inc., as amended, filed on November 2, 1989, in the Office of the Secretary of State of the State of Delaware and recorded in Book 935, Page 780, et seq. 16. Release. Upon the termination of the Executive's Active Employment, and in consideration of the receipt of the salary and benefits described in this Agreement, except for claims arising from the covenants, agreements, and undertakings of the Company as set forth herein and except as prohibited by statutory language, the Executive forever and unconditionally waives, and releases Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., their subsidiaries and affiliates, and their officers, directors, agents, benefit plan trustees, and employees ("Released Parties") from any and all claims, whether known or unknown, and regardless of type, cause or nature, including but not limited to claims arising under all salary, vacation, insurance, bonus, stock, and all other benefit plans, and all state and federal anti-discrimination, civil rights and human rights laws, ordinances and statutes, including Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act, concerning his employment with Harrah's Operating Company, Inc., its subsidiaries and affiliates, and the cessation of that employment -9- 17. General Provisions. (a) Notices. Any notice to be given hereunder by either party to the other may be effected by personal delivery, in writing, or by mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses set forth below, but each party may change his or its address by written notice in accordance with this Paragraph 17.(a). Notices shall be deemed communicated as of the actual receipt or refusal of receipt. If to Executive: --------------------------- --------------------------- --------------------------- If to Company: Harrah's Operating Company, Inc. 1023 Cherry Rd. Memphis, TN 38117 Attn: General Counsel (b) Partial Invalidity. If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provision shall, nevertheless, continue in full force and without being impaired or invalidated in any way. (c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee, without regard to its conflict of laws provisions. (d) No Conflicting Agreement. By signing this Agreement, Executive warrants that he is not a party to any restrictive covenant, agreement or contract which limits the performance of his duties and responsibilities under this Agreement or under which such performance would constitute a breach. (e) Headings. The Section, paragraph, and subparagraph headings are for convenience or reference only and shall not define or limit the provisions hereof. (f) Amendments. Any amendments to this Agreement must be in writing and signed by both parties. (g) Binding Agreement. This Agreement is binding on the parties and their heirs, successors and assigns. -10- (h) Survival of Provisions. The provisions of this Agreement shall survive any termination thereof if so provided herein and if necessary or desirable fully to accomplish the purposes of such provisions, including without limitation the rights and obligations of the Executive under Paragraphs 6, 14, 15, and 16 hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. Harrah's Operating Company, Inc. By: ---------------------------- --------------------------------- (typed name) Executive -11- EX-10.(20) 19 ADDENDUM TO EMPLOYMENT AGREEMENT EXHIBIT 10(20) ADDENDUM TO EMPLOYMENT AGREEMENT This Addendum to Employment Agreement ("Addendum") is entered into as of April 1, 1998, by and between Harrah's Operating Company, Inc. and/or one or more of its subsidiaries ("Company") and John M. Boushy ("Executive"). The Company and the Executive agree that, so long as the Executive is actively employed and is a member of the Senior Partners Group at the time of the renewal specified herein, the Company will renew the Executive's Agreement for an additional four (4) year term on or about March 1, 1999, such that the term of said Agreement will run from March 1, 1999, through February 28, 2003. In Witness Whereof, the parties have executed this Addendum as of the date first written above. Harrah's Operating Company, Inc. By: /s/ Philip G. Satre ----------------------------- Philip G. Satre Chairman, President and Chief Executive Officer /s/ John M. Boushy ------------------------------ John M. Boushy Executive EX-10.(21) 20 EMPLOYMENT AGREE. (GARY LOVEMAN) EXHIBIT 10(21) EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of May 4, 1998, by and between Harrah's Operating Company, Inc. and/or one or more of its subsidiaries ("Company") and Gary W. Loveman ("Executive"). The Company and the Executive agree as follows: 1. Employment. The Company hereby employs the Executive as VP and COO. 2. Duties. During the term of this Agreement ("Active Employment"), the Executive shall devote substantially all of his working time, energies, and skills to the benefit of the Company's business. The Executive agrees to serve the Company diligently and to the best of his ability, and to follow the policies and directions of the Company. 3. Compensation. The Executive's compensation and benefits during his Active Employment shall be as follows: (a) Base Salary. The Company shall pay the Executive a base salary ("Base Salary") of $500,000 per year, which will be reviewed annually by the Company during the term of this Agreement in accordance with its compensation practices regarding senior executives and which shall not be reduced during the Executive's Active Employment without his written consent. The Executive's Base Salary shall be paid biweekly in accordance with the Company's normal payroll schedule. All payments shall be subject to the Executive's chosen benefit deductions and the deduction of payroll taxes and similar assessments as required by law. (b) Bonus. In addition to the Base Salary, the Executive shall be eligible for an annual bonus, as described in the attached Addendum. 4. Insurance and Benefits. The Executive will be eligible to participate in each employee benefit plan and receive each executive benefit that the Company provides for its senior executives, in accordance with the applicable plan rules, except as provided herein or in the Addendum to this Agreement. 5. Term. The term of this Agreement shall be for three (3) years, beginning May 4, 1998, and ending May 3, 2001. 6. No Cause Termination/Non-Renewal of Agreement. The Company may terminate the Executive's Active Employment at any time without cause upon thirty (30) days' prior written notice ("no cause termination"). The Company also, in its sole discretion, may elect not to renew this Agreement upon its expiration ("non-renewal of Agreement"). In the event of such termination or non-renewal by the Company, the Executive shall remain an employee of the Company and shall be entitled only to the salary and benefits set forth below, unless otherwise specified in this Agreement.
Benefit Termination Date - ------- ---------------- Base Salary (rate as of 12 months (52 weeks) ("Salary Separation Date) Continuation Period") from last day worked ("Separation Date"). PTO and Service Credit Separation Date. Use of Credit Cards Separation Date. Bonus--Payment and Eligibility (i) Eligible for prior year bonus if termi-nated during payment year but prior to payment; (ii) eligible for prorated bonus for current year if in job for more than 6 months and termination occurs after June 30; (iii) not eligible for bonus for year following termination year. Group Health and Life End of Salary Continuation Period. Insurance 18-month COBRA rights period for health insurance will commence on Separation Date.
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Benefit Termination Date - ------- ---------------- Retaining Existing Stock See attached Addendum and Matrix. Options for Vesting and Other Rights Eligibility for New Separation Date. Restricted Stock or New Stock Options TARSAP See attached Addendum and Matrix. Use of Financial Counseling End of Salary Continuation Period. per Plan Provisions The maximum remaining benefit shall be annual benefit remaining as of Separation Date. Savings and Retirement Plan End of year of Separation Date. Deduction (Active Participation) Executive Deferred End of year of Separation Date. Distribution Compensation Plan/Deferred will commence after Salary Continuation Compensation Plan (Active Period, in accordance with previously made Participation) elections, and at the termination rate unless the Executive qualifies for the retirement rate. 3X death benefit provision waived for death after Separation Date. EDCP and other deferred compensation balances will continue to be protected by then-existing Escrow Agreement subject to all terms and conditions thereof.
-3- Subject to the provisions of Paragraph 12, below, nothing herein shall be construed as limiting the Executive's right to take other employment or engage in self-employment following his termination pursuant to this Paragraph 6, without adversely affecting his rights under this same Paragraph. 7. Death of Executive. Upon the death of the Executive during his Active Employment, his salary and all rights and benefits hereunder will terminate, and his estate and beneficiary(ies) will receive the benefits to which they are entitled under the terms of the Company's benefit plans and programs by reason of a participant's death during employment, including the 3X death benefit provided by the EDCP (applies only if death during Active Employment) and the applicable rights and benefits under the Company's stock plans. If the Executive dies during the Salary Continuation Period, all of the provisions of the previous sentence apply except that the remaining salary continuation will be paid in a lump sum to the Executive's estate. 8. Termination by Company for Cause. The Company shall have the right to terminate the Executive's Active Employment for cause. All salary and benefits shall cease, except COBRA rights and as otherwise provided in applicable benefit plans. Termination for cause shall be effective immediately upon notice received by the Executive. For purposes of this Agreement, the term "cause" shall mean and be strictly limited to: (i) conviction of any crime that materially discredits the Company or is materially detrimental to the reputation or goodwill of the Company; (ii) commission of any material act of fraud or dishonesty against the Company, or commission of an immoral or unethical act that materially reflects negatively on the Company, or engaging in willful misconduct; provided that the Executive shall first be provided with written notice of the claim against him under this provision (ii) and with an opportunity to contest said claim before the Board of Directors of the Company (excluding the Executive); or (iii) material breach of the Executive's obligations under Paragraph 2. of this Agreement, as so determined by the Board of Directors (excluding the Executive), after (x) the Executive has received notice of the breach and has failed to cure same within 10 business days thereafter, and (y) the Executive has had an opportunity to appear and contest said claim before said Board of Directors. -4- 9. Voluntary Termination/Notice Period. The Executive may terminate this Agreement voluntarily at any time and for any or no reason during its term upon thirty (30) days' prior written notice to the Company, except as specified in this paragraph. If the Executive is going to work or act in competition with the Company as described in Paragraph 12. of this Agreement, the Executive must give the Company six (6) months' prior written notice of his intention to do so. The written notice provided by the Executive shall specify the last day to be worked by the Executive ("Separation Date"), which Separation Date must be at least thirty (30) days or six (6) months (as appropriate) after the date the notice is received by the Company. Unless otherwise specified herein, or in a writing executed by both parties, the Executive shall not receive any of the benefits provided in this Agreement after the Separation Date set forth in his written notice. 10. Change in Control. If a Change in Control, as defined in the Executive's Severance Agreement, occurs during the Executive's Active Employment, and if the Severance Agreement is in force when the Change in Control occurs, then the Severance Agreement supersedes and replaces this Agreement, except that the documents attached to and made part of this Agreement (the Addendum to Employment Agreement, the Matrix captioned "Extended Vesting/Exercisability", and the document entitled "Gary Loveman-TARSAP) shall remain in full force and effect except to the extent the Severance Agreement provides greater benefits. If, prior to a Change in Control (as defined above), the Executive's Active Employment has been terminated for any reason by either party or this Agreement is not renewed by the Company, then the Executive's Severance Agreement terminates automatically. 11. Disability. If the Executive becomes disabled prior to the termination of his Active Employment or the non-renewal of this Agreement, he will be entitled to apply at his option for the Company's long-term disability benefits. If he is accepted for such benefits, then the terms and provisions of the Company's benefit plans and the programs (including the EDCP and the Company's Stock Option and Restricted Stock Plans) that are applicable in the event of such disability of an employee shall apply in lieu of the salary and benefits under this Agreement, except that the Escrow Agreement (if then in force) and his -5- indemnification agreement will continue in force (the Escrow Agreement will be subject to amendment or termination in accordance with its terms). If the Executive is disabled so that he cannot perform his duties (as determined by the Human Resources Committee (HRC), and if he does not apply for long-term disability benefits or is not accepted for such benefits, then the Company may terminate his duties under this Agreement. In such event, he will receive twelve months salary continuation, together with all other benefits, and during such period of salary continuation any stock options and restricted stock grants then in existence will continue in force for vesting purposes. However, during such period of salary continuation for disability, Executive will not be eligible to participate in the annual bonus plan, nor will he be eligible to receive stock option or restricted stock grants or any other long-term incentive awards except to the extent approved by the HRC. If the Executive becomes disabled during the Salary Continuation Period, he will be entitled only to the salary and benefits described in Paragraph 6., above, for the period set forth in that paragraph. 12. Non-competition. (a) Non-competition. During the Executive's Active Employment, and during the Salary Continuation Period described in Paragraph 6., above, the Executive: (i) shall not engage in any activity, whether as employer, proprietor, partner, stockholder (other than the holder of less than 5% of the stock of a corporation the securities of which are traded on a national securities exchange or in the over-the-counter market), director, officer, employee, consultant or otherwise, in competition with (x) the casino, casino/hotel and/or casino resort businesses conducted at the date hereof by the Company or any subsidiary or affiliate ("Company" for purposes of this Paragraph 12.) or (y) any casino, casino/hotel and/or casino resort business in which the Company is substantially engaged at any time during the Active Employment period; (ii) shall not solicit, in competition with the Company, any person who is a customer of the businesses conducted by the Company at the date hereof or of any business in which the Company is substantially engaged at any time during the term of this Agreement. -6- (b) Scope of Covenants; Remedies. The following provisions shall apply to the covenants of the Executive contained in this Paragraph 12.: (i) the covenants contained in paragraphs (i) and (ii) of Paragraph 12.(a) shall apply within the United States, Canada and Mexico, plus any territories in which Company is actively engaged in the conduct of business while the Executive is employed under this Agreement, including, without limitation, the territories in which customers are then being solicited; (ii) without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Paragraph 12., it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief to prevent any such violation or any continuing violation thereof; (iii) each party intends and agrees that if, in any action before any court or agency legally empowered to enforce the covenants contained in this Paragraph 12., any term, restriction, covenant or promise contained therein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency; and (iv) the covenants contained in this Paragraph 12. shall survive the conclusion of Executive's employment with the Company. 13. Post Employment Cooperation. Upon the termination of his Active Employment, the Executive will cooperate with, and provide information to, the Company in assuring an orderly transition of all matters being handled by him. Upon the Company providing reasonable notice to him, he will also appear as a witness at the Company's request and/or assist the Company in any litigation, bankruptcy or similar matter in which the Company or any affiliate thereof is a party; provided that the Company will defray any approved out-of-pocket expenses incurred by him in connection with any such appearance and that, if the Executive is no longer receiving salary from the Company, the Company will compensate the Executive for all time spent, at the rate of compensation of (i) his then current employment or (ii) his Base -7- Salary on the Separation Date/Agreement expiration date, whichever is higher. The Company agrees further to indemnify him as prescribed in his Indemnification Agreement and Article TENTH of the Certificate of Incorporation of Harrah's Entertainment, Inc., as amended, filed on November 2, 1989, in the Office of the Secretary of State of the State of Delaware and recorded in Book 935, Page 780, et seq. 14. Release. Upon the termination of the Executive's Active Employment, and in consideration of the receipt of the salary and benefits described in this Agreement, except for claims arising from the covenants, agreements, and undertakings of the Company as set forth herein and except as prohibited by statutory language, the Executive forever and unconditionally waives, and releases Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., their subsidiaries and affiliates, and their officers, directors, agents, benefit plan trustees, and employees ("Released Parties") from any and all claims, whether known or unknown, and regardless of type, cause or nature, including but not limited to claims arising under all salary, vacation, insurance, bonus, stock, and all other benefit plans, and all state and federal anti-discrimination, civil rights and human rights laws, ordinances and statutes, including Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act, concerning his employment with Harrah's Operating Company, Inc., its subsidiaries and affiliates, and the cessation of that employment. 15. General Provisions. (a) Notices. Any notice to be given hereunder by either party to the other may be effected by personal delivery, in writing, or by mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses set forth below, but each party may change his or its address by written notice in accordance with this Paragraph 15.(a). Notices shall be deemed communicated as of the actual receipt or refusal of receipt. If to Executive: --------------------------- --------------------------- --------------------------- -8- If to Company: Harrah's Operating Company, Inc. 1023 Cherry Rd. Memphis, TN 38117 Attn: General Counsel (b) Partial Invalidity. If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provision shall, nevertheless, continue in full force and without being impaired or invalidated in any way. (c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee, without regard to its conflict of laws provisions. (d) No Conflicting Agreement. By signing this Agreement, Executive warrants that he is not a party to any restrictive covenant, agreement or contract which limits the performance of his duties and responsibilities under this Agreement or under which such performance would constitute a breach. (e) Headings. The Section, paragraph, and subparagraph headings are for convenience or reference only and shall not define or limit the provisions hereof. (f) Amendments. Any amendments to this Agreement must be in writing and signed by both parties. (g) Binding Agreement. This Agreement is binding on the parties and their heirs, successors and assigns. (h) Survival of Provisions. The provisions of this Agreement shall survive any termination thereof if so provided herein and if necessary or desirable fully to accomplish the purposes of such provisions, including without limitation the rights and obligations of the Executive under Paragraphs 6, 12, 13, and 14 hereof. -9- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. Harrah's Operating Company, Inc. By: /s/ Philip G. Satre --------------------------- Philip G. Satre Chairman, President and Chief Executive Officer /s/ Gary W. Loveman ------------------------ Gary W. Loveman Executive -10- ADDENDUM TO EMPLOYMENT AGREEMENT This Addendum to Employment Agreement ("Addendum") is entered into as of May 4, 1998, by and between Harrah's Operating Company, Inc. and/or one or more of its subsidiaries ("Company") and Gary W. Loveman ("Executive"). The Company and the Executive agree to add the provisions set forth below to the Employment Agreement between the parties also entered into as of May 4, 1998. 1. Management Bonus. As a salary grade 35 employee, the Executive will have a target bonus of 60%, with a maximum of 120%, in accordance with the provisions of the management bonus plan. For 1998, the Executive will receive a pro-rated bonus based on his hire date, if a bonus is paid. 2. TARSAP. An award of 75,000 restricted shares for the Executive was approved by the Human Resources Committee ("HRC") at its April 30, 1998, meeting. Vesting will be identical to vesting for previous TARSAP grants under the TARSAP program, except that for 3/1/99, the vesting will be 2/3 of any achieved performance vesting percentage. For annual performance vesting thereafter, the incremental target will be 30%, similar to other participants. See attached Matrix dated 4/30/98 and the document entitled "Gary Loveman-TARSAP," which are made a part of this Addendum, for provisions regarding extended vesting and exercisability of TARSAP shares. 3. Stock Options. An award of 175,000 stock options for the Executive was approved by the HRC at its April 30, 1998, meeting. The exercise price of all such options will be $26.125 per share. The vesting schedule will be: 33,500 shares (1/1/99); 50,000 shares (1/1/00); 50,000 shares (1/1/01); and 41,500 shares (1/1/02). See attached Matrix dated 4/30/98, which is made a part of this Addendum, for provisions regarding extended vesting and exercisability of the award of stock options described above. Provisions regarding extended vesting and exercisability of any further award of stock options and/or restricted stock, if made, will be the same as those applying to other Executives with Employment Agreements, which provisions are detailed in Paragraph 6 of those Agreements. 4. Temporary Housing and Commuting. During the term of the Agreement, the Company will provide to the Executive an apartment in Memphis. To the extent that said provision of housing constitutes taxable income to the Executive, the Company will pay him an amount equal to (a) the tax on the cost of the housing, plus (b) the tax on the amount described in (a), plus the tax on any payments described in (b), so that the Executive will be held harmless from any taxes due on the provision of housing. The Company also will reimburse the Executive for reasonable weekend commuting expenses to/from Boston. It is understood that this reimbursement is not taxable to the Executive. In Witness Whereof, the parties have executed this Addendum as of the date first written above. Harrah's Operating Company, Inc. By: /s/ Philip G. Satre ----------------------- Chairman, President and Chief Executive Officer /s/ Gary W. Loveman ---------------------------- Gary W. Loveman Executive -2- 4/30/98 Gary W. Loveman Extended Vesting/Exercisability
---------------------------------------------------------------------------------------- Years of Active Employment ---------------------------------------------------------------------------------------- Event Benefit Plan Less Than Two Years Two-Three Years Three Years + - ------------------- ------------ ---------------------------- -------------------------- --------------------------- Stock No further vesting Next annual vesting Next annual vesting Options No further 1 year to exercise after 2 years to exercise after exercisability termination termination Resigns ------------ ---------------------------- -------------------------- --------------------------- TARSAP No further vesting Next vesting at CEO and Next vesting at CEO and HRC HRC discretion discretion - ------------------- ------------ ---------------------------- -------------------------- --------------------------- Termination Stock Next annual vesting Next annual vesting Next annual vesting Without Cause Options 1 year to exercise 1 year to exercise after 2 years to exercise after after termination termination termination ------------ ---------------------------- -------------------------- --------------------------- TARSAP Next performance vesting at Next vesting at CEO and Next vesting at CEO and HRC CEO and HRC discretion HRC discretion discretion - ------------------- ------------ ---------------------------- -------------------------- --------------------------- Resigns, Then Change No further vesting Next annual vesting Next annual vesting is in Control Within Stock is accelerated upon Change accelerated upon Change in One Year Options in Control Control No further exercisability 1 year to exercise after 2 years to exercise after termination unless cashed termination unless cashed out per merger out per merger ------------ ---------------------------- -------------------------- --------------------------- TARSAP No further vesting Next vesting accelerated Next vesting accelerated at at CEO and HRC discretion CEO and HRC discretion - ------------------- ------------ ---------------------------- -------------------------- ---------------------------
Termination Accelerated vesting of Accelerated vesting of Accelerated vesting of Without Cause, Stock all remaining options all remaining options upon all remaining options upon Then Change in Options upon Change in Control Change in Control Change in Control Control Within One Year 1 year to exercise 1 year to exercise 2 years to exercise after termination unless after termination unless after termination unless cashed out per merger cashed out per merger cashed out per merger ----------- ------------------------ -------------------------- -------------------------- TARSAP Accelerated vesting of Accelerated vesting of Accelerated vesting of all all remaining shares all remaining shares upon remaining shares upon upon Change in Control Change in Control Change in Control - -------------- ----------- ------------------------ -------------------------- -------------------------- * Stock 50% vesting of 50% vesting of 50% vesting of Options remaining shares remaining shares remaining shares 1 year for estate to 1 year for estate to 1 year for estate to Death exercise after death exercise after death exercise after death ----------- ------------------------ -------------------------- -------------------------- TARSAP No acceleration or No acceleration or No acceleration or further vesting further vesting further vesting - -------------- ----------- ------------------------ -------------------------- -------------------------- * Stock 50% vesting of 50% vesting of 50% vesting of Options remaining shares remaining shares remaining shares Disability Under 1 year to exercise 1 year to exercise 1 year to exercise LTD after disability after disability after disability plan ----------- ------------------------ -------------------------- -------------------------- TARSAP No acceleration or No acceleration or No acceleration or further vesting further vesting further vesting ----------- ------------------------ -------------------------- --------------------------
-2-
- -------------- ----------- ------------------------ -------------------------- -------------------------- Continued vesting Continued vesting Continued vesting Disability As Stock during 1 year salary during 1 year salary during 1 year salary Determined Options continuation continuation continuation by HRC (not under LTD) Exercisable during Exercisable during Exercisable during 1 year salary 1 year salary 1 year salary continuation continuation continuation ----------- ------------------------ -------------------------- -------------------------- TARSAP Continued vesting Continued vesting Continued vesting during 1 year salary during 1 year salary during 1 year salary continuation continuation continuation - -------------- ----------- ------------------------ -------------------------- --------------------------
* These rights are the same as currently provided under the Stock Option plan and TARSAP program. -3- Corrected Gary Loveman - TARSAP
Gary Loveman Others Year Vesting Percentage Vesting Percentage Vest Date - ------ ------------------- ------------------ --------- 1998 13.4 20 3/1/99 20.0 30 26.8 40 1999 43.4 50 3/1/00 50.0 60 56.8 70 2000 73.4 80 3/1/01 80.0 90 86.8 100 2001 100 100 1/1/02
EX-10.(23) 21 TERMINATION OF EMPLOYMENT AGREEMENT EXHIBIT 10(23) INTEROFFICE MEMO TO: Kell Houssels FROM: Phil Satre DATE: November 25, 1998 RE: Termination of Employment and Commencement of Consulting Agreement Kell, this memo will outline the terms of the mutual understanding between you and Harrah's Entertainment, Inc. and Showboat, Inc. regarding the termination of your employment and the commencement of your consulting services. In setting forth these terms, it is our mutual intention to fulfill and reflect the provisions of your employment agreement dated June 1, 1998, and your consulting agreement which is attached to your employment agreement. 1. In accordance with our mutual understanding, your employment will terminate effective December 31, 1998. This will be considered termination without cause under your employment agreement. You will continue to receive your current salary through December 31, 1998. 2. You will receive all of the financial remuneration as provided in your employment agreement upon termination without cause, as follows: (a) A $1.1 million cash payment which will be paid on December 31, 1998. (b) Payment of PTO accrued under our PTO plan through December 31, 1998. (c) Payment of accrued Showboat vacation of 205.33 hours x $192.31 ($39,487.01). (d) Payment of any financial counseling services incurred through December 31, 1998, per the Company's financial counseling plan (up to $7,500 for the period 6/1/98 - 1/3/99). (e) Payment of any deferred compensation per your deferral elections. (f) Reimbursement of any expenses accrued through December 31, 1998. (g) Entitlement to any prorata bonus earned by you under the Harrah's annual management bonus plan for seven months during 1998 (from 7/1/98 to 12/31/98). Bonus points are approved by the Harrah's Human Resources Committee in February and any bonus earned will be payable by March 15, 1999. It is understood applicable tax withholdings will be deducted from the payments made to you. 3. Your one year consulting agreement will become effective January 1, 1999. Per this agreement, you will receive a consulting fee of $800,000. Of this amount, $400,000 will be paid on Monday, January 4, 1999 (which is the first business day after December 31), and the remaining $400,000 will be paid in 12 equal installments with the first of such installments payable on January 4, 1999 and the second through the twelfth installments payable each successive 30 days after January 1 pursuant to the terms of the consulting agreement. In conjunction with your termination of employment and the commencement of your consulting agreement, it is understood your benefits as an employee will terminate December 31, 1998 including cancellation of stock options and future participation in incentive compensation plans. 4. In regard to your consulting agreement, your assigned services will be consistent with the duties outlined in the agreement and will include: - Service at my direction as a member of the Board of Directors of Star City Holdings Ltd. including attendance at Board meetings in Sydney, Australia. -2- - Consulting services and assistance regarding the sale of Showboat Las Vegas and other ongoing Showboat matters related to personnel, political and development issues. - Other similar projects that I may assign as needed. 5. You will continue to serve as a member of the Board of Directors of Harrah's Entertainment, Inc. pursuant to the terms of your employment agreement. Commencing January 1, 1999, you will receive the fees of an outside director while your Board service continues. 6. Commencing January 1, 1999, you will receive the insurance benefits called for by your consulting agreement. It is understood that the provisions concerning your termination of employment and your consulting services are governed by your employment and consulting agreements. Please sign this memorandum indicating your understanding that the financial terms of your termination of employment and the commencement of your consulting services, as outlined above, are consistent with your agreements. I have appreciated your valuable work and insight as Division President of Showboat and I look forward to your future services as a consultant and your continuing work as a director of Harrah's Entertainment, Inc. /s/ Philip G. Satre ---------------------------- Philip G. Satre for Harrah's Entertainment, Inc. and Showboat, Inc. /s/ J. Kell Houssels, III - ----------------------------- J. Kell Houssels, III -3- EX-10.(31) 22 AMENDMENT TO 1990 S.O.P. EXHIBIT 10(31) Amendment to The Harrah's Entertainment, Inc. 1990 Stock Option Plan (the "Plan") ----------------------------------- Harrah's Entertainment, Inc. (the "Company") hereby adopts this Amendment to the Plan effective October 29, 1998: Section L of the Plan is amended by adding the following language at the end thereof: "Notwithstanding the above, the options of an employee who terminates employment with the Company or a Subsidiary and who, within 30 days, becomes employed ("JCC Employment") by Jazz Casino Company, L.L.C. or an affiliate or parent thereof ("JCC") will continue in force and continue to vest for such an individual while in JCC Employment. Termination of JCC Employment will be considered termination of employment under the Plan (unless the individual is re-employed by the Company or a Subsidiary within 30 days). Termination of the Company's or a Subsidiary's equity and management interests in the New Orleans casino property will also be considered termination of employment under the Plan, provided, however, the status of any unvested options at that time as to any individual will be decided by the Company's Chief Executive Officer who will have discretion to accelerate vesting, allow vesting to continue, or deem the unvested options to be forfeited as he or she deems appropriate." This Amendment was duly approved by the Human Resources Committee of the Board of Directors on October 29, 1998. /s/ Rebecca W. Ballou ------------------------------- Rebecca W. Ballou Secretary of Harrah's Entertainment, Inc. EX-10.(39) 23 AMENDMENT TO RESTRICTED STOCK PLAN EXHIBIT 10(39) Amendment to Harrah's Entertainment, Inc. 1990 Restricted Stock Plan (the "Plan") ---------------------------------- Harrah's Entertainment, Inc. (the "Company") hereby adopts this Amendment to the Plan effective October 29, 1998. 1. The reference to "Section 4(e)" in the Amendment dated April 30, 1998, is corrected to "Section 5(e)." 2. Section 5(a) of the Plan is amended by changing "200" to "500". 3. Section 5(e) of the Plan is amended by adding the following language at the end thereof: "Notwithstanding the above, the restricted shares of an employee who terminates employment with the Company or a Subsidiary and who, within 30 days, becomes employed ("JCC Employment") by Jazz Casino Company, L.L.C. or an affiliate or parent thereof ("JCC") will continue in force and continue to vest for such an individual while in JCC Employment. Termination of JCC Employment will be considered termination of employment under the Plan (unless the individual is re-employed by the Company or a Subsidiary within 30 days). Termination of the Company's or a Subsidiary's equity and management interests in the New Orleans casino property will also be considered termination of employment under the Plan, provided, however, the status of any invested restricted shares at that time as to any individual will be decided by the Company's Chief Executive Officer who will have discretion to accelerate vesting, allow vesting to continue, or deem the unvested shares to be forfeited as he or she deems appropriate." This Amendment was duly approved by the Human Resources Committee of the Board of Directors on October 29, 1998. /s/ REBECCA W. BALLOU ----------------------------------- Rebecca W. Ballou Secretary of Harrah's Entertainment, Inc. EX-10.(51) 24 AMENDMENT TO EXEC. DEFERRED COMPENSATION EXHIBIT 10(51) Amendment dated as of October 29, 1998 to the Harrah's Entertainment, Inc. ("Company") Executive Deferred Compensation Plan ("Plan") --------------------------------------------- Pursuant to approval granted by the Human Resources Committee of the Company's Board of Directors, the following amendments to the Plan are hereby adopted: 1. Section 2.6 of the Plan is amended to add the following sentence at the end thereof: "Compensation includes deferrals into this Plan derived from the Rio Properties, Inc. d/b/a Rio Suite Hotel and Casino Supplemental Retirement and Deferred Compensation Plan (the "Rio SERP")." 2. The first sentence of Section 2.7(a) is amended to read as follows: "a) "Deferral Commitment" means a Salary Deferral Commitment, a Bonus Deferral Commitment, a Fee Deferral Commitment or another deferral commitment allowed by the Company under this Plan and for which a Participation Agreement or other appropriate agreement has been filed with the Company." 3. Section 2.14 is amended to read as follows: "2.14 "Participant" means any individual who is participating or has participated in this Plan as provided in Article III." 4. Section 3.2 (b) is amended to read as follows: "(b) Savings and Retirement Plan Exception. In addition to the deferrals permitted under (a) above, any Participant that participates at the before-tax percentage of six percent (6%) under the 401(k) plan or Savings and Retirement Plan of the Participant's Employer shall be deemed to have elected to defer into this Plan that portion of eligible 401(k) plan or Savings and Retirement Plan earnings which the Participant elected to defer under such 401(k) plan or Savings and Retirement Plan up to six percent (6%) which could not be deferred on a before-tax basis under any such plan due to any law or regulation, but excluding any amount which was actually deferred into any such plan but distributed back to the Participant in a following plan year." 5. Section 3.2 is amended by adding the following subsection (e): "(e) Certain executives of Rio Hotel & Casino, Inc. will be permitted to defer specified amounts in the Rio SERP into the EDCP pursuant to agreements with such executives." 6. Section 2.17 is amended to add the following sentence at the end thereof: "Unless otherwise determined by the Chief Executive Officer of the Company, a Participant who is or was an employee of an acquired subsidiary of the Company will also receive credit under this Plan for his or her prior years of credited service with the acquired subsidiary which service was accrued immediately prior to the acquisition of such subsidiary provided the Participant attains the status of an employee of the Company or a Company subsidiary (directly or indirectly owned by the Company) as a result of the acquisition and continues in such employment until his or her participation in this Plan commences. The determination of such credited service will be made by the Company's Corporate Compensation Department and the Participant's years of credited service under the acquired subsidiary's qualified pension or retirement plan may be used for this purpose." 7. Sections 4.3 (a) and (b) are amended to read as follows: "(a) Eligibility. Matching contributions shall be credited to Participants who are eligible to participate in the 401(k) plan or Savings and Retirement Plan of their Employer and elect to make a six percent (6%) before-tax contribution -2- into such 401(k) plan or Savings and Retirement Plan and such before-tax contribution is limited due to any law or regulation. (b) Amount. The Employer shall credit to each Participant's Account a matching contribution for each calendar year equal to one-hundred percent (100%) of the Participant's Compensation elected to be deferred under this Plan for the year, such compensation being limited for purposes of this calculation to a maximum of six percent (6%) of the Participant eligible 401(k) plan or Savings and Retirement Plan earnings (which shall for this purpose include salary deferrals but will not include bonus amounts or board fees). The matching contribution amount will be offset by the actual matching contribution allocated to the Participant under the 401(k) plan or Savings and Retirement Plan of the Participant's Employer." 8. Section 4.4(b) is amended to read as follows: "(b) Employer Matching Contribution. A Participant who terminates Employment for reasons other than Retirement, Total and Permanent Disability or Death shall be vested in the Employer matching contributions made for any particular year in accordance with the vesting provisions of the 401(k) plan or Savings and Retirement Plan of the Participant's Employer as any such plan may be amended from time to time." 9. Section 5.4 is amended by changing 5.4(a) (ii) to read as follows: "(ii) three (3) times the sum of all amounts deferred by the Participant under this Plan (not including interest or earnings thereon) until the date of death, provided the amounts counted for this purpose will not include deferrals derived from the SERP or similar plan of an acquired subsidiary." 7. Section 5.4(b) (I) is amended by adding the following language at the end thereof: "and shall not include deferrals derived from the SERP or similar plan of an acquired subsidiary." -3- IN WITNESS WHEREOF, this Amendment has been executed as of the date written above. Harrah's Entertainment, Inc. By: /s/ Neil F. Barnhart ----------------------- Title: Vice President --------------------- -4- EX-11 25 COMPUTATIONS OF PER SHARE EARNINGS EXHIBIT 11 HARRAH'S ENTERTAINMENT, INC. COMPUTATIONS OF PER SHARE EARNINGS
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 -------------- -------------- ------------- Income before extraordinary losses............................... $ 121,717,000 $ 107,522,000 $ 98,897,000 Extraordinary losses, net........................................ (19,693,000) (8,134,000) -- -------------- -------------- ------------- Net income................................................... $ 102,024,000 $ 99,388,000 $ 98,897,000 -------------- -------------- ------------- -------------- -------------- ------------- BASIC EARNINGS PER SHARE Weighted average number of common shares outstanding............. 100,231,327 100,618,139 102,598,281 -------------- -------------- ------------- -------------- -------------- ------------- BASIC EARNINGS PER COMMON SHARE Income before extraordinary losses............................... $ 1.21 $ 1.07 $ 0.96 Extraordinary losses, net........................................ (0.19) (0.08) -- -------------- -------------- ------------- Net income................................................... $ 1.02 $ 0.99 $ 0.96 -------------- -------------- ------------- -------------- -------------- ------------- DILUTED EARNINGS PER SHARE Weighted average number of common shares outstanding............. 100,231,327 100,618,139 102,598,281 Additional shares based on average market price for period applicable to: Restricted stock........................................... 215,513 86,827 88 Stock options.............................................. 1,072,833 549,101 1,137,792 -------------- -------------- ------------- -------------- -------------- ------------- Average number of common and common equivalent shares outstanding.................................................... 101,519,673 101,254,067 103,736,161 -------------- -------------- ------------- -------------- -------------- ------------- DILUTED EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Income before extraordinary losses............................... $ 1.19 $ 1.06 $ 0.95 Extraordinary losses, net........................................ (0.19) (0.08) -- -------------- -------------- ------------- Net income................................................... $ 1.00 $ 0.98 $ 0.95 -------------- -------------- ------------- -------------- -------------- -------------
EX-12 26 COMPUTATION OF RATIO EXHIBIT 12 HARRAH'S ENTERTAINMENT, INC. COMPUTATIONS OF RATIOS (IN THOUSANDS, EXCEPT RATIO AMOUNTS)
1998(A) 1997(B) 1996(C) 1995(D) 1994(E) ------------ ------------ ------------ ------------ ------------ RETURN ON REVENUES-CONTINUING Income from continuing operations............ $ 121,717 $ 107,522 $ 98,897 $ 78,810 $ 49,984 Revenues..................................... 2,004,015 1,619,210 1,586,020 1,578,795 1,349,941 Return..................................... 6.1% 6.6% 6.2% 5.0% 3.7% RETURN ON AVERAGE INVESTED CAPITAL Income from continuing operations............ $ 121,717 $ 107,522 $ 98,897 $ 78,810 $ 49,984 Add: Interest expense after tax.............. 72,707 48,233 43,187 56,650 46,993 ------------ ------------ ------------ ------------ ------------ $ 194,424 $ 155,755 $ 142,084 $ 135,460 $ 96,977 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Average invested capital..................... $ 2,426,028 $ 1,815,869 $ 1,619,880 $ 1,377,354 $ 1,229,524 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Return..................................... 8.0% 8.6% 8.8% 9.8% 7.9% ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ RETURN ON AVERAGE EQUITY (F) Income before extraordinary items and cumulative effect of change in accounting policy..................................... $ 121,717 $ 107,522 $ 98,897 $ 78,846 $ 86,303 Average equity............................... 793,492 722,298 682,489 618,778 606,009 Return..................................... 15.3% 14.9% 14.5% 12.7% 14.2% RATIO OF EARNINGS TO FIXED CHARGES (G) Income from continuing operations............ $ 121,717 $ 107,522 $ 98,897 $ 78,810 $ 49,984 Add: Provision for income taxes................. 74,600 68,746 67,316 60,677 75,391 Interest expense........................... 117,270 79,071 69,968 73,890 76,363 Interest included in rental expense........ 9,718 7,692 7,663 6,738 5,244 Amortization of capitalized interest....... 1,444 606 763 580 628 (Income) or loss from equity investments... 4,709 (473) (473) -- -- Adjustment to include 100% of nonconsolidated, majority-owned affiliate (h)...................................... 12,254 -- -- (34,775) (7,438) ------------ ------------ ------------ ------------ ------------ Earnings as defined.......................... $ 341,712 $ 263,164 $ 244,134 $ 185,920 $ 200,172 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Fixed charges: Interest expense........................... $ 117,270 $ 79,071 $ 69,968 $ 73,890 $ 76,363 Capitalized interest....................... 2,526 6,860 11,025 3,636 3,764 Interest included in rental expense........ 9,718 7,692 7,663 6,738 5,244 Adjustment to include 100% of nonconsolidated, majority-owned affiliate (h)...................................... 12,071 -- -- 56,652 17,069 ------------ ------------ ------------ ------------ ------------ Total fixed charges.......................... $ 141,585 $ 93,623 $ 88,656 $ 140,916 $ 102,440 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Ratio of earnings to fixed charges......... 2.4 2.8 2.8 1.3 2.0 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
EXHIBIT 12 (CONTINUED) HARRAH'S ENTERTAINMENT, INC. COMPUTATIONS OF RATIOS (IN THOUSANDS, EXCEPT RATIO AMOUNTS)
1998(A) 1997(B) 1996(C) 1995(D) 1994(E) ------------ ------------ ------------ ------------ ------------ COMPUTATION OF EBITDA AND ADJUSTED EBITDA Income from continuing operations............ $ 121,717 $ 107,522 $ 98,897 $ 78,810 $ 49,984 Add/(less): Income tax provision....................... 74,600 68,746 67,316 60,677 75,391 Interest expense........................... 117,270 79,071 69,968 73,890 76,363 Depreciation and amortization.............. 159,183 122,396 102,338 95,388 86,644 Amortization of deferred finance charge.... (4,866) (3,021) (3,151) (3,626) (2,844) Amortization of debt discounts and premiums................................. 74 (12) (21) (53) (176) ------------ ------------ ------------ ------------ ------------ Earnings before interest, taxes, depreciation and amortization (EBITDA) (i).............. 467,978 374,702 335,347 305,086 285,362 Add/(less): Write-downs and reserves................... 7,474 13,806 52,188 93,348 -- Project opening costs...................... 11,066 19,518 5,907 450 15,313 Venture restructuring costs................ 6,013 6,944 14,601 -- -- Gains on sales of ownership interests in nonconsolidated affiliates............... (13,155) (37,388) -- (11,773) -- Gain on sale of land....................... (6,607) -- -- -- -- Management contract termination fee........ (10,254) -- -- -- -- Costs in connection with Missouri initiative............................... 4,994 -- -- -- -- Provision for settlement of litigation and related costs............................ -- -- -- -- 53,449 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Adjusted EBITDA (i).......................... $ 467,509 $ 377,582 $ 408,043 $ 387,111 $ 354,124 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
- ------------------------ (a) 1998 includes $7.5 million in pretax charges for write-downs and reserves and a $13.2 million gain on the sale of equity interests in a nonconsolidated subsidiary. 1998 also includes the financial results of Showboat, Inc., from its June 1, 1998, date of acquisition. (b) 1997 includes $13.8 million in pretax charges for write-downs and reserves and a $37.4 million gain on the sale of equity in a New Zealand subsidiary. (c) 1996 includes $52.2 million in pretax charges for write-downs and reserves. (d) 1995 includes $93.3 million in pretax charges for write-downs. (e) 1994 includes a $53.4 million provision for settlement of all claims and related costs related to the Merger Agreement and Tax Sharing Agreement arising from the 1990 spin-off of the Company and acquisition of the Holiday Inn business by Bass PLC. (f) Amounts for periods prior to the June 30, 1995, dividend of PHC common stock to the Company's stockholders reflect the impact of the financial position and results of operations for the discontinued hotel business in those periods. EXHIBIT 12 (CONTINUED) HARRAH'S ENTERTAINMENT, INC. COMPUTATIONS OF RATIOS (IN THOUSANDS, EXCEPT RATIO AMOUNTS) (g) As discussed in Note 11 to the Consolidated Financial Statements in the 1998 Harrah's Entertainment Annual Report, the Company has guaranteed certain third party loans in connection with its casino development activities. The above ratio computation excludes estimated fixed charges associated with these guarantees as follows: 1998, $7.9 million; 1997, $7.8 million; 1996, $5.2 million; 1995, $6.8 million; and 1994, $5.5 million. (h) For purposes of computing this ratio, "earnings" consist of income before income taxes plus fixed charges (excluding capitalized interest) and minority interests (relating to subsidiaries whose fixed charges are included in the computation), excluding equity in undistributed earnings of less than 50% owned investments. "Fixed charges" include interest whether expensed or capitalized, amortization of debt expense, discount or premium related to indebtedness and such portion of rental expense that we deem to be representative of interest. As required by the rules which govern the computation of this ratio, both earnings and fixed charges are adjusted where appropriate to include the financial results for the Company's nonconsolidated majority-owned subsidiaries. Accordingly, 1994 and 1995 have been adjusted to include the financial results and fixed charges for Harrah's Jazz Company. For 1998, the computation of the ratio has been adjusted to include the financial results and fixed charges of the East Chicago partnership from its June 1, 1998, date of acquisition. (i) Adjusted EBITDA consists of EBITDA (earnings before interest, taxes, depreciation and amortization) before write-downs and reserves, project opening costs, venture restructuring costs, gains on sales of equity interests and nonoperating assets and provisions for settlement of litigation and related costs. EBITDA and Adjusted EBITDA are supplemental financial measures used by management, as well as by industry analysts, to evaluate Harrah's operations. However, EBITDA and Adjusted EBITDA should not be construed as an alternative to Income from operations (as an indicator of Harrah's operating performance) or to Cash flows from operating activities (as a measure of liquidity) as determined in accordance with generally accepted accounting principles and presented in the Company's Consolidated Financial Statements. All companies do not calculate EBITDA in the same manner. As a result, EBITDA as presented by our Company may not be comparable to similarly titled measures presented by other companies. EX-13 27 PORTIONS OF ANNUAL REPORT DATED 12/31/98 FINANCIAL AND STATISTICAL HIGHLIGHTS (IN MILLIONS, EXCEPT COMMON STOCK DATA AND FINANCIAL PERCENTAGES AND RATIOS) (SEE NOTES 1 AND 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS)
COMPOUND GROWTH 1998(a) 1997(b) 1996(c) 1995(d) 1994(e) RATE --------- --------- --------- --------- --------- ----------- OPERATING DATA Revenues............................................ $ 2,004.0 $ 1,619.2 $ 1,586.0 $ 1,578.8 $ 1,349.9 10.4% Income from operations.............................. 287.8 213.5 236.9 209.4 267.2 1.9% Income before income taxes and minority interest.... 203.3 183.6 172.1 151.6 139.3 9.9% Income from continuing operations................... 121.7 107.5 98.9 78.8 50.0 24.9% Net income (f)...................................... 102.0 99.4 98.9 78.8 78.4 6.8% COMMON STOCK DATA Earnings per share--diluted Continuing operations............................. 1.19 1.06 0.95 0.76 0.49 25.1% Net income (f).................................... 1.00 0.98 0.95 0.76 0.76 7.1% FINANCIAL POSITION Total assets (f).................................... 3,286.3 2,005.5 1,974.1 1,636.7 1,738.0 17.3% Total assets of continuing operations............... 3,286.3 2,005.5 1,974.1 1,636.7 1,595.0 19.8% Long-term debt...................................... 1,999.4 924.4 889.5 753.7 727.5 28.8% Stockholders' equity (f)............................ 851.4 735.5 719.7 585.5 623.4 8.1% CASH FLOWS Provided by operating activities.................... 300.4 255.1 285.7 213.7 227.3 7.2% EBITDA (g).......................................... 468.0 374.7 335.3 305.1 285.4 13.2% Adjusted EBITDA (g)................................. 467.5 377.6 408.0 387.1 354.1 7.2% Capital expenditures................................ 245.2 290.5 390.0 231.8 301.8 (5.1)% FINANCIAL PERCENTAGES AND RATIOS Return on revenues--continuing...................... 6.1% 6.6% 6.2% 5.0% 3.7% Return on average invested capital (h).............. 8.0% 8.6% 8.8% 9.8% 7.9% Return on average equity (h)........................ 15.3% 14.9% 14.5% 12.7% 14.2% Ratio of earnings to fixed charges.................. 2.4 2.8 2.8 1.3 2.0
- ------------------------ (a) 1998 includes $7.5 million in pretax charges for write-downs and reserves (see Note 7) and a $13.2 million gain on the sale of equity interests in a nonconsolidated restaurant subsidiary. 1998 also includes the financial reports of Showboat, Inc., from its June 1, 1998, date of acquisition. (b) 1997 includes $13.8 million in pretax charges for write-downs and reserves (see Note 7) and a $37.4 million gain on the sale of equity in a New Zealand subsidiary. (c) 1996 includes $52.2 million in pretax charges for write-downs and reserves (see Note 7). (d) 1995 includes $93.3 million in pretax charges for write-downs, primarily related to our New Orleans casino development project. (e) 1994 includes a $53.4 million provision for settlement of all claims and related costs related to the Merger Agreement and Tax Sharing Agreement arising from the 1990 spin-off of the Company and acquisition of the Holiday Inn business by Bass PLC. (f) Amounts for periods prior to the June 30, 1995, dividend of PHC common stock to our stockholders reflect the impact of the financial position and results of operations for the discontinued hotel business in those periods. (g) EBITDA consists of earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA consists of EBITDA before write-downs and reserves, project opening costs, venture FINANCIAL AND STATISTICAL HIGHLIGHTS (IN MILLIONS, EXCEPT COMMON STOCK DATA AND FINANCIAL PERCENTAGES AND RATIOS) (SEE NOTES 1 AND 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS) (CONTINUED) restructuring costs, gains on sales of subsidiary equity interests and nonoperating assets and provisions for settlement of litigation and related costs. See Exhibit 12 to our 1998 Form 10-K for the computations of EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are supplemental financial measures used by management, as well as industry analysts, to evaluate our operations. However, EBITDA and Adjusted EBITDA should not be construed as an alternative to Income from operations (as an indicator of our operating performance) or to Cash flows from operating activities (as a measure of liquidity) as determined in accordance with generally accepted accounting principles and presented in the accompanying Consolidated Financial Statements. All companies do not calculate EBITDA in the same manner. As a result, EBITDA as presented by our Company may not be comparable to similarly titled measures presented by other companies. (h) Ratio computed based on Income before extraordinary items and cumulative effect of change in accounting policy. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this discussion, the words "Harrah's Entertainment," "Company," "we," "our" and "us" refer to Harrah's Entertainment, Inc., together with its subsidiaries where appropriate. We are one of the leading casino entertainment companies in the United States, operating casinos in more markets than any other casino company. We seek to differentiate ourselves through a unique strategy aimed at building loyalty to our brands from our guests. To accomplish this objective, we have invested significant time and resources learning who the best customers in our industry are and what they want from casino entertainment experiences. We are building our brands with a focus on those customers who are avid, experienced players, especially those who play in more than one market. Our strategy is comprised of four integrated components: national geographic distribution, quality facilities, proprietary technology and superior customer service. We believe these four components combine to create a sustainable competitive advantage for Harrah's Entertainment. We begin our review of our 1998 results with a discussion of two acquisitions which reflect our pursuit of our strategy. STRATEGIC ACQUISITIONS We completed our acquisition of Showboat, Inc. ("Showboat") on June 1, 1998. We paid approximately $520.0 million in cash and assumed approximately $635.0 million in Showboat debt. Our acquisition of Showboat gives us a stronger presence in the key growth and feeder markets of Atlantic City and Chicago. In Atlantic City, Showboat provides us with a very strong additional brand in a strategic Boardwalk location that complements our existing Harrah's location in the Marina district. In the Chicago market, the combination of Showboat's riverboat casino complex southeast of Chicago in neighboring Indiana and Harrah's in Joliet, Illinois, southwest of Chicago, makes it possible for us to seek the loyalty of a broader share of visitors from the Chicago area. The acquisition also gives us a presence in Sydney, Australia, through Showboat's management and partial ownership of the Star City casino. A Showboat property in Las Vegas is a nonstrategic asset for us and is reported as an asset held-for-sale in our financial statements. Our acquisition of Showboat is being accounted for as a purchase. On January 1, 1999, we completed our merger with Rio Hotel & Casino, Inc. ("Rio"). In connection with the merger, we issued approximately 25 million shares of our common stock and assumed Rio's outstanding debt. Rio is an all-suite hotel-casino with more than 2,500 suites and 116,000 square feet of gaming space featuring approximately 2,400 slot machines and 100 table games. Rio Secco, an 18-hole championship golf course, is located nearby and is owned by Rio. In addition, Rio owns or has the right to acquire approximately 35 acres of land adjacent to its existing facilities available for further development. The addition of Rio to the family of Harrah's Entertainment properties provides our customers who frequent Las Vegas a choice between two distinct, high-quality experiences, a high quality Las Vegas strip destination and a high quality resort experience. Our merger with Rio is being accounted for as a purchase. Two of our technology initiatives will enable us to expand the benefits of these strategic acquisitions beyond the simple addition of casino square footage to our Company: - Total Gold, our national player rewards and recognition program, was introduced late in 1997 and has proven a successful and valuable means of serving our target customers. Total Gold allows customers to earn points for slot play and redeem those points for cash, merchandise, food, lodging or show tickets at any of our Harrah's casinos across the country. We plan to expand this program to include the player card programs offered by Rio and Showboat. - The Winner's Information Network, or WINet, our national database of customers, enables us to more effectively recognize every Harrah's customer at any Harrah's property, to more efficiently communicate with our customers, to better understand how and where our customers like to play and to better target promotions and offers. The addition of Showboat's and Rio's customer 2 databases to WINet will enable us to reach new customers, many of whom are outside of traditional Harrah's feeder markets, with the appropriate offers and promotions to encourage cross-market play within the Harrah's Entertainment family of casinos. RELOCATION OF CORPORATE HEADQUARTERS In January 1999, we announced plans to relocate our corporate headquarters and move our senior corporate executives and their support staffs to Las Vegas, Nevada, beginning in 1999. The Company's national service headquarters will remain in Memphis, Tennessee. We feel that immersing our senior executives in the epicenter of the casino industry will improve our business and market knowledge base, enhance product and service innovation, fuel our corporate development and increase our visibility and accessibility to important employee, industry, political and customer constituencies. We believe our entire national distribution network will benefit from this exposure within the world's largest casino marketplace and that establishing a headquarters in Las Vegas will enhance our ability to attract and retain the highest quality senior executives in gaming industry roles. The cost of this relocation is not expected to be material. OPERATING RESULTS AND DEVELOPMENT PLANS OVERALL
PERCENTAGE INCREASE/(DECREASE) ----------------------- (IN MILLIONS, EXCEPT EARNINGS PER SHARE) 1998 1997 1996 98 VS 97 97 VS 96 - ----------------------------------------------------------------- -------- -------- -------- -------- ---------- Revenues......................................................... $2,004.0 $1,619.2 $1,586.0 23.8% 2.1% Operating profit................................................. 346.7 258.7 284.7 34.0% (9.1)% Income from operations........................................... 287.8 213.5 236.9 34.8% (9.9)% Income before extraordinary items................................ 121.7 107.5 98.9 13.2% 8.7% Net income....................................................... 102.0 99.4 98.9 2.6% 0.5% Earnings per share-diluted before extraordinary items............ 1.19 1.06 0.95 12.3% 11.6% Net income....................................................... 1.00 0.98 0.95 2.0% 3.2% Operating margin................................................. 14.4% 13.2% 14.9% 1.2pts (1.7)pts
Comparisons of our overall financial results between years can be difficult due to the inclusion in each period of various nonrecurring charges and credits, including write-downs and reserves, project opening costs, venture restructuring costs, gains on the sales of our ownership interests in nonconsolidated subsidiaries, a 1998 gain on the sale of land and proceeds from the cancellation of a management contract. Please see Other Factors Affecting Net Income for further discussion of these 3 charges and credits. The table below presents pro forma comparisons of our operating results, which have been adjusted to exclude these items.
PERCENTAGE INCREASE/(DECREASE) ---------------------- (IN MILLIONS, EXCEPT EARNINGS PER SHARE) 1998 1997 1996 98 VS 97 97 VS 96 - ----------------------------------------------------------------- -------- -------- -------- ---------- --------- Revenues......................................................... $2,004.0 $1,619.2 $1,586.0 23.8% 2.1% Operating profit................................................. 352.1 290.1 342.8 21.4% (15.4)% Income from operations........................................... 299.2 251.9 309.6 18.8% (18.6)% Income before extraordinary items................................ 116.5 108.1 142.2 7.8% (24.0)% Earnings per share-diluted before extraordinary items............ 1.15 1.07 1.37 7.5% (21.9)% Operating margin................................................. 14.9% 15.6% 19.4% (0.7)pts (3.8)pts
RIVERBOAT CASINOS
PERCENTAGE INCREASE/(DECREASE) ------------------------ (IN MILLIONS) 1998 1997 1996 98 VS 97 97 VS 96 - ----------------------------------------------------------------- ------ ------ ------ ---------- ---------- Casino revenues.................................................. $661.9 $614.8 $596.0 7.7% 3.2% Total revenues................................................... 702.7 656.2 629.1 7.1% 4.3% Operating profit................................................. 121.0 124.2 141.2 (2.6)% (12.0)% Operating margin................................................. 17.2% 18.9% 22.4% (1.7)pts (3.5)pts
Year-over-year revenue increases reported by our riverboat casinos resulted primarily from the March 1997 opening of Harrah's St. Louis-Riverport and the operating improvements by that property in 1998. However, overall operating profits and margins declined over this three year period due to new and increased competition in all riverboat markets, higher gaming taxes paid by Harrah's Joliet, and costs related to a successful ballot initiative in Missouri. CHICAGOLAND. While revenues increased 6.0% at Harrah's Joliet in 1998 compared to the prior year, operating profit declined 14.4% due to the impact of higher Illinois gaming taxes. The addition of riverboat casinos in neighboring Indiana beginning in June 1996 caused declines in revenues, operating profit and margin. However, during the last half of 1997 and continuing in 1998 Harrah's Joliet has regained the gaming volume that was initially lost. Operating profit and margin in 1997 compared to 1996 at Joliet reflected the impact of higher marketing and promotional expenses that resulted from the increased competition. During first quarter 1998, we completed construction of a climate-controlled walkway joining Harrah's Joliet's self-parking garage to its pavilion, and a new VIP lounge was opened. During third quarter 1998, we began construction of a 204-suite hotel at this property. Estimated cost of this project is $29.1 million, and completion is projected for fourth quarter 1999. We own a 55% noncontrolling interest in the partnership owning the East Chicago Showboat property. Our share of income from the partnership, which totaled $0.6 million in 1998, is included in Equity in losses of nonconsolidated affiliates and reported separately in the Consolidated Statements of Income (see Other Factors Affecting Net Income). We have entered into an acquisition agreement with the partners owning the remaining 45% ownership interest in the East Chicago Showboat property which will increase our ownership interest to approximately 99.5%. Upon consummating such agreement, we will also amend the partnership agreements to give us greater flexibility in operating the East Chicago property. The transaction is subject to receipt of necessary regulatory approvals and is 4 expected to close during first quarter 1999. We also plan to rebrand the East Chicago Showboat Casino as a "Harrah's" property during first quarter 1999. In anticipation of acquiring the additional interest in the East Chicago property and the amendment of the partnership agreements, we will begin consolidating this partnership with the financial results of our other businesses in first quarter 1999. LOUISIANA. Harrah's Shreveport's 1998 revenues declined 3.0% compared to 1997 and operating profit declined 10.6% due to substantial new hotel and entertainment amenities added by our competitors in 1998. This performance follows a 1.9% decline in revenues in 1997 compared to 1996; however, operating profit increased 2.5% in 1997, despite the entrance of a new competitor into the market in third quarter 1996. Construction was completed in third quarter 1998 on expanded parking facilities at Harrah's Shreveport. In fourth quarter 1998, we announced plans to construct a 503-room hotel with almost 17,000 square feet of convention center space. Groundbreaking for the new hotel is slated for April 1999 and it is expected to open in late third quarter 2000. Estimated cost for the new hotel and amenities is $123.0 million. MISSISSIPPI. Combined revenues from our Mississippi operations decreased 6.6% in 1998 from 1997 levels, due to the closing in second quarter 1997 of our original Tunica property. Our Mississippi properties' combined operations netted a combined loss for 1998 due to disrupted operations at Harrah's Tunica for much of the year in connection with the on-going testing of service initiatives. Combined revenues increased 3.3% in 1997 over 1996, while operating income increased $6.0 million. We have reached an agreement to sell our original Tunica property to another casino company, who has announced its intention to renovate and operate a casino in this location. Subject to regulatory approval and customary closing conditions, we expect to consummate the sale during first quarter 1999. Our gain from the disposition of this asset will be immaterial. MISSOURI. Revenues at Harrah's North Kansas City increased 3.1% in 1998 over the prior year and operating profit increased 10.7%. 1997 revenues were up from 1996 due primarily to the addition of a second riverboat casino in May 1996. However, operating profit for 1997 declined 24.9% from 1996, due to increased marketing and promotional costs as a result of additional competition, including a major new property that opened in January 1997. Also contributing to the decline for 1997 was the decision during first quarter 1996 to discontinue the property's admission charge. Harrah's St. Louis-Riverport reported operating income of $15.8 million for 1998, compared to a loss of approximately $1.4 million for 1997. Revenues were $44.1 million higher in 1998 than they were for the approximate ten-month period in which the property was open in 1997. The St. Louis-Riverport casino entertainment complex in Maryland Heights, Missouri, a suburb of St. Louis, opened on March 11, 1997. The facility includes four riverboat casinos, two of which are owned and operated by Harrah's Entertainment, and shoreside facilities jointly-owned with another casino company. Our pro rata share of the operating losses of the shoreside facilities joint venture was $10.9 million for 1998 and $11.5 million for 1997. These losses are included in Equity in losses of nonconsolidated affiliates, which is reported separately in the Consolidated Statements of Income (see Other Factors Affecting Net Income). During 1998, we incurred $5.0 million of nonrecurring costs in connection with a successful campaign for a referendum in Missouri seeking approval of games of chance on riverboats in artificial basins. In November 1998, the people of Missouri voted to amend that state's Constitution to deem all floating casino facilities in compliance with state law. In third quarter 1998, we acquired the assets of a riverboat casino in Kansas City formerly operated by a third party, including a 28,000 square feet casino riverboat, shoreside facilities, certain 5 land, all gaming equipment and computerized customer databases. Our plans for the acquired riverboat, land and shoreside facilities have not been finalized. ATLANTIC CITY
PERCENTAGE INCREASE/(DECREASE) ---------------------- (IN MILLIONS) 1998 1997 1996 98 VS 97 97 VS 96 - ----------------------------------------------------------------- ------ ------ ------ -------- ----------- Casino revenues.................................................. $540.8 $314.9 $310.1 71.7% 1.5% Total revenues................................................... 590.8 349.5 338.6 69.0% 3.2% Operating profit................................................. 129.2 73.3 75.0 76.3% (2.3)% Operating margin................................................. 21.9% 21.0% 22.2% 0.9pts (1.2)pts
Harrah's Atlantic City achieved record revenues for the second consecutive year in 1998, and operating profit increased 12.1% in 1998 compared to 1997. 1998 results also include seven months of operations of Showboat Atlantic City, which was acquired on June 1, 1998. A new 416-room hotel tower was opened at Harrah's Atlantic City in late second quarter 1997. The tower was the final component of an expansion and enhancement project that also added 13,500 square feet of casino space and 500 slot machines in June 1996 and a new marine-themed buffet restaurant in fourth quarter 1996. No decisions regarding a possible further expansion of our Harrah's Atlantic City property have been made. Such decisions are dependent, in part, upon substantive progress on development of new casino hotel projects in the Marina area of Atlantic City by other companies. SOUTHERN NEVADA
PERCENTAGE INCREASE/(DECREASE) -------------------- (IN MILLIONS) 1998 1997 1996 98 VS 97 97 VS 96 - ----------------------------------------------------------------- ------ ------ ------ -------- --------- Casino revenues.................................................. $230.8 $191.0 $190.8 20.8% 0.1% Total revenues................................................... 346.3 288.2 289.8 20.2% (0.6)% Operating profit................................................. 48.1 41.9 68.0 14.8% (38.4)% Operating margin................................................. 13.9% 14.5% 23.5% (0.6)pts (9.0)pts
1998 record revenues in Southern Nevada were driven by Harrah's Las Vegas, which set revenue records in each quarter of 1998. 1997 results in Southern Nevada were impacted by construction disruptions at Harrah's Las Vegas, where a $200 million expansion and renovation project was completed in the fourth quarter of that year. The construction activity, which began in mid-1996, often impeded access to the Las Vegas property, and operating profits and margins were further impacted due to the difficulty in adjusting certain operating costs proportionately with the revenue fluctuations, as well as by higher operating costs associated with the construction disruptions. With completion of the renovations, Harrah's Las Vegas now offers 86,700 square feet of casino space and 2,677 hotel rooms. The property's 1998 operating profit was 20.3% above 1997 levels; however, operating margin declined slightly. Operating profit and margin declines from 1996 to 1997 were due to higher operating costs associated with completing construction and reopening the renovated areas. 6 NORTHERN NEVADA
PERCENTAGE INCREASE/(DECREASE) ------------------------ (IN MILLIONS) 1998 1997 1996 98 VS 97 97 VS 96 - ----------------------------------------------------------------- ------ ------ ------ ---------- ---------- Casino revenues.................................................. $226.8 $217.3 $226.5 4.4% (4.1)% Total revenues................................................... 296.3 287.8 299.2 3.0% (3.8)% Operating profit................................................. 46.5 44.5 59.8 4.5% (25.6)% Operating margin................................................. 15.7% 15.5% 20.0% 0.2pts (4.5)pts
In Northern Nevada, revenues increased 3.0% over 1997 revenues and operating profit was 4.5% higher. These results were driven by Harrah's Lake Tahoe where operating profit was 17.2% more than in 1997. Operating results for 1997 were significantly impacted by weather conditions occurring during first quarter 1997, when flooding in the region twice closed the primary access road to Lake Tahoe for a combined total of forty-five days, and closed Harrah's Reno for one day. Additionally, during September and October 1997, Route 50, the preferred and most direct route from California to Lake Tahoe, was closed for repairs on weekdays. MANAGED CASINOS-INDIAN LANDS AND OTHER Our Indian and other managed results were led by the addition of management fees from managed tribal-owned casinos for the Eastern Band of Cherokee in Cherokee, North Carolina, which opened in November 1997, and the Prairie Band of Potawatomi north of Topeka, Kansas, which opened in January 1998, and from the Star City casino in Sydney, Australia, for which we assumed management with the Showboat acquisition on June 1, 1998. On June 30, 1998, we ceased management of the Sky City casino complex in Auckland, New Zealand. Our management contract was bought out by the owner, Sky City Limited, and a $10.3 million termination fee was received. During third quarter 1997, we sold our remaining 12.5% equity interest in Sky City Limited (see Other Factors Affecting Net Income). On November 2, 1998, we ceased management of the casino owned by the Upper Skagit Tribe, located on Indian lands near Seattle, Washington. We have guaranteed the Upper Skagit Tribe's development financing, but under the terms of the termination agreement the Tribe has agreed to fund the retirement of the mortgage. However, there is no assurance that payment will be made and we have continued exposure of up to $11.4 million under that guarantee. See Debt and Liquidity for further discussion of our guarantees of debt related to Indian projects. OTHER GAMING OPERATIONS In fourth quarter 1998, Interactive Entertainment Limited ("IEL") announced plans to discontinue all operations of its Sky Games business and to write off assets related to that business. In conjunction with that announcement, we wrote off our remaining investment in IEL of $0.8 million. During 1997, we recognized $2.3 million of non-cash nonrecurring income from IEL in consideration for the termination of our management contract with that entity. The termination of the management contract occurred in conjunction with IEL's reorganization and transformation into a publicly traded company. During 1998, we launched the first national brand advertising campaign by a casino company. A portion of the cost of the brand advertising campaign was funded by the displacement of advertising and marketing dollars spent in the past by the individual properties. The cost for the campaign in excess of the amounts contributed to this effort by the properties totaled approximately $9.3 million in 1998. 7 OTHER FACTORS AFFECTING NET INCOME
PERCENTAGE INCREASE/(DECREASE) ----------------------- (INCOME)/EXPENSE (IN MILLIONS) 1998 1997 1996 98 VS 97 97 VS 96 - ----------------------------------------------------------------- -------- -------- -------- -------- ---------- Development costs................................................ $ 9.0 $ 10.5 $ 12.0 (14.3)% (12.5)% Write-downs and reserves......................................... 7.5 13.8 52.2 (45.7)% N/M Project opening costs............................................ 8.1 17.6 5.9 (54.0)% N/M Equity in (income) losses of nonconsolidated affiliates.......... 15.0 11.1 (1.2) 35.1% N/M Corporate expense................................................ 37.9 27.2 34.3 39.3% (20.7)% Venture restructuring costs...................................... 6.0 6.9 14.6 (13.0)% (52.7)% Interest expense, net............................................ 117.3 79.1 70.0 48.3% 13.0% Gain on sales of equity interests in nonconsolidated affiliates..................................................... (13.2) (37.4) -- (64.7)% N/M Other income..................................................... (19.6) (11.8) (5.2) 66.1% 126.9% Effective tax rate............................................... 36.7% 37.4% 39.1% (0.7)pts (1.7)pts Minority interests............................................... $ 7.0 $ 7.4 $ 5.9 (5.4)% 25.4% Extraordinary losses, net of income taxes........................ 19.7 8.1 -- N/M N/M
Development costs have decreased over the years presented due to the decrease in new casino development opportunities. Write-downs and reserves for 1998 included write-offs of obsolete assets, write-down to market value of an idle riverboat, a reserve for the termination of a development agreement with an Indian tribe and certain Year 2000 costs. Write-downs and reserves for 1997 were primarily related to a $13.0 million reserve against debtor-in-possession financing provided to the casino project in New Orleans in which we are a minority partner. 1996 Write-downs and reserves included write-downs for the impairment of certain long-lived assets, primarily our original Tunica, Mississippi, casino property, as well as the accrual of reserves for certain contingent obligations. Project opening costs for 1998 were incurred in connection with an initiative to develop and implement the strategies and employee training programs designed to better focus our employees on serving our targeted customers. Project opening costs for 1997 include costs incurred in connection with the first quarter 1997 opening of Harrah's St. Louis-Riverport casino property, costs related to expansions at Harrah's Las Vegas and the newer Harrah's Tunica property and the costs incurred in connection with the initiative to develop and implement the strategies and employee training programs which were continued in 1998. 1996 project opening costs related to the second quarter opening of the newer Tunica property and an expansion at Harrah's North Kansas City. Equity in (income) losses of nonconsolidated affiliates for 1998 included our pro rata share of the losses incurred by the joint venture portion of the St. Louis development, our share of losses from the Jazz Casino Company, L.L.C., and our share of losses (to the extent of our investment) in IEL. These losses were partially offset by our share of income from the East Chicago partnership, our Star City investment and a restaurant affiliate. 1997 consists primarily of our pro rata share of the losses incurred by the joint venture portion of the St. Louis development, including our $1.9 million share of the joint venture's preopening costs, and our share of losses incurred by IEL. These losses are partially offset by our share of income from a restaurant affiliate. Corporate expense increased in 1998 versus 1997 due to additional costs arising from the Showboat acquisition, higher training and development costs and higher benefits costs. Corporate expense decreased in 1997 versus 1996 due primarily to cost savings efforts. Venture restructuring costs for all years represent our costs, including legal fees, associated with the pursuit and successful development of a reorganization plan for the New Orleans casino (see Capital Spending and Development). Interest 8 expense increased in 1998 over 1997 due to debt assumed and incurred in connection with the acquisition of Showboat (see Debt and Liquidity). 1997 interest expense increased over 1996 primarily as a result of higher debt levels incurred to fund a stock repurchase program and expansion projects. Other income increased in 1998 due to higher interest earned on the cash surrender value of certain life insurance policies and the sale of land in the Atlantic City area. In 1997, Other income increased over 1996 due to higher interest income earned on the cash surrender value of certain life insurance policies, the inclusion in 1997 of dividend income from our New Zealand investment and gains on sales of nonoperating property. In 1998, we sold our interest in a restaurant affiliate and recorded a pretax gain of $13.2 million. During 1997, we sold our remaining equity interest in Sky City Limited, and recorded a pretax gain on the sale of $37.4 million. We sold our ownership interest in an entertainment, business and retail center in Pittsburgh, Pennsylvania, to our partner for cash during fourth quarter 1997. Under the terms of the sale agreement, we retain the right to pursue development of a casino entertainment facility at the site if casino gaming is legalized in this jurisdiction. No gain or loss was recognized by the Company as a result of this transaction. The effective tax rates for all years are higher than the federal statutory rate primarily due to state income taxes. Minority interests reflect joint venture partners' shares of income at joint venture riverboat casinos. Extraordinary losses reported in 1998 and 1997 are due primarily to the early extinguishments of debt and include the premium paid to holders of the debt retired and the write-off of related unamortized deferred finance charges. (See Debt and Liquidity-Early Extinguishments of Debt.) CAPITAL SPENDING AND DEVELOPMENT NEW ORLEANS CASINO On October 30, 1998, Harrah's Jazz Company ("Jazz"), a partnership in which one of our former subsidiaries was a partner, consummated a plan of reorganization. Jazz originally was formed to develop, own and operate the only land-based casino entertainment facility in New Orleans, Louisiana. Jazz filed for bankruptcy protection on November 22, 1995, before completing construction of a permanent casino facility. As a result of consummating its reorganization, Jazz ended its bankruptcy, all litigation relating to the bankruptcy filing has been dismissed and a newly formed limited liability company, Jazz Casino Company, L.L.C. ("JCC"), has recommenced construction of the casino. We own approximately 43% of the equity of JCC's publicly-held parent company (which may be reduced to approximately 40% as a result of certain option exercises) and will manage the casino under a management agreement. We have guaranteed (i) JCC's initial $100.0 million annual tax payment to the State of Louisiana (and, subject to certain conditions, agreed to provide the guarantee for four additional years), (ii) $166.5 million of JCC bank debt, and (iii) completion and opening of the casino on or before October 30, 1999 (subject to force majeure). We are also obligated to make a $22.5 million subordinated loan to JCC as a part of the financing of construction of the casino. We will receive certain fees in connection with the management of the casino and for providing the bank and state guarantees, subject to deferral in certain circumstances. The casino is currently expected to open by late October 1999. YEAR 2000 We are working to address the potential impact of the Year 2000 ("Y2K") on the systems and equipment that are essential to our operations, including information technology systems, gaming operations and equipment, facilities, and suppliers. In late 1996, we began an assessment of all 9 technology systems and infrastructure supporting operations and in 1997 developed a strategy and approach for addressing Y2K issues across the Company. We have created a Y2K Task Force and a Y2K Support Office. Representatives from the Task Force meet periodically with senior management to discuss status, accomplishments, issues, and costs. The Y2K Support Office has three teams: Core Information Technology, responsible for company-wide, standard systems; Property, responsible for property-specific systems and equipment, which includes the Company's non-information technology (i.e., embedded technology) equipment; and Suppliers/ Procurement, responsible for ensuring that external suppliers and new equipment purchases are Y2K ready. It is our position that we should not eliminate all impacts of Y2K. Instead, we are focusing our energies in areas that would more likely impact our operations. To accomplish our overarching objective, the Y2K Task Force has prioritized its efforts according to the potential impact to our business if a system is not Y2K ready. Priorities, in order, are: Business Critical-required to operate the business; High Priority-significant impact to revenues, operating costs, or customer services; and Other-used by the business but not considered Business Critical or High Priority. The major phases of our approach are Awareness, Assessment, Renovation, Testing and Certification, Implementation, and Contingency Planning. Each phase is fully in progress, and Awareness and Assessment are nearly complete. The following table sets forth the expected date of final completion as of December 31, 1998, with respect to each priority area: Business Critical............................................................. July 1999 High Priority................................................................. October 1999 Other......................................................................... No date set
The following table provides an overview of Business Critical items for Harrah's brand properties and Memphis-based facilities and our progress to date.
Y2K Y2K READINESS INTERNALLY VENDOR BUSINESS CRITICAL ITEMS STRATEGY STATUS(1) TESTED CERTIFIED - ---------------------------------------------------- ---------------- ------------- ------------- ----------- Casino Management System............................ Renovate/Test Y2K Ready Complete N/A Elevators........................................... Test Y2K Ready Complete Complete Financial Systems................................... Renovate/Test 2nd Qtr '99 2nd Qtr '99 Complete Fire Alarm/Sprinkler Systems........................ Test Y2K Ready Complete Complete GPS/Navigational Systems............................ Test Y2K Ready Complete Complete HVAC................................................ Test/Renovate 1st Qtr '99 Complete Complete Key Lock System..................................... Renovate/Test 2nd Qtr '99 Complete Complete IBM AS400/OS400..................................... Renovate/Test Y2K Ready Complete Complete Kiosks.............................................. Test Y2K Ready Complete Complete Lodging Management System........................... Test Y2K Ready Complete Complete Payroll............................................. Renovate/Test 2nd Qtr '99 2nd Qtr '99 Complete Phone System-PBX.................................... Renovate/Test 1st Qtr '99 1st Qtr '99 Complete Point-of-Sale System (Micros)....................... Renovate/Test Y2K Ready Complete Complete Procurement and Payables............................ Replace/Test 2nd Qtr '99 2nd Qtr '99 Complete Slot Data System.................................... Renovate/Test 2nd Qtr '99 Complete Complete Scales/Countroom Equipment.......................... Test Y2K Ready Complete Complete Slot Devices........................................ Test 1st Qtr '99 2nd Qtr '99 In Progress Surveillance/Security............................... Test 1st Qtr '99 1st Qtr '99 Complete Time & Attendance................................... Replace/Test 4th Qtr '99 2nd Qtr '99 Complete UPS/Generator....................................... Test Y2K Ready Complete Complete WINet (Customer Database)........................... Renovate/Test Y2K Ready Complete Complete
- ------------------------ (1) For purposes of this document, "Y2K Ready" means it is anticipated that the product, process, or mechanism will operate during and after the Year 2000 in a manner that will not create a material and adverse impact on our operations. 10 As noted in the table above, we intend to test the majority of Business Critical items to verify vendor Y2K compliance claims. Such testing generally entails creating a test environment to roll the date forward to simulate the transition from December 31, 1999, to January 1, 2000, test that the year 2000 is recognized as a Leap Year, and perform other tests such as end of month, quarter, and year processing. Contingency plans have been developed for some Business Critical areas, including Time and Attendance and Procurement. Contingency plans will be developed and tested for selected Business Critical and High Priority items, identified on the basis of risk assessment, by November 1999. We have been identifying and communicating with Business Critical and High Priority suppliers about their plans and progress in addressing Y2K problems. Detailed evaluations of the most critical suppliers have been initiated. These evaluations will be followed by the development of contingency plans, which are scheduled to be complete by November 1999. The process of evaluating suppliers began in October 1998 and is largely complete. Follow-up reviews are scheduled through June 1999. The total costs of system replacements and upgrades to address potential Y2K problems, as well as enhancing business and operational functionality in some areas, are currently estimated to be approximately $9.5 million. The total amount expended through December 31, 1998, was approximately $3.3 million, of which approximately $1.7 million related to the cost to repair, replace, and improve software and related hardware and equipment, approximately $1.6 million related to the cost of replacing embedded-technology equipment (primarily in the Property area), and approximately $20,000 related to the costs of identifying and communicating with significant suppliers. The estimated future cost is approximately $6.2 million, of which approximately $5 million relates to the cost to repair, replace, and improve software and related hardware and equipment, approximately $1.2 million relates to the cost of replacing embedded-technology equipment (primarily in the Property area), and approximately $5,000 relates to the costs of identifying and communicating with significant suppliers. These costs, along with internal resource hours, are being separately tracked. We continue to evaluate the estimated costs associated with Y2K issues, and if significant issues are identified in the future, such costs could increase. Although we are devoting considerable resources to resolve Y2K issues, we continue to support and implement other systems, operations and initiatives. In connection with the acquisition of Rio, we have conducted a Y2K readiness review and assessment. Rio is currently incorporated into our Y2K program, as are the Showboat properties. Rio Y2K costs are currently estimated at approximately $3 million, the majority of which represents the replacement of the Rio property's slot system. Such estimated costs could increase if significant issues are identified in the future. Based upon our efforts to date and the status of the plans to address identified issues, we believe that our Business Critical systems are compliant or will be made compliant by December 1999. One of the greatest challenges of the Y2K issue is the potential impact of items outside of our control, such as those of utility companies, phone and network systems, and financial institutions. We are assessing the Y2K status of such items on an ongoing basis and developing contingency plans for Business Critical areas. However, should we and/or our significant suppliers fail to timely correct material Y2K issues, such failure could have a significant impact on our ability to operate as we did before Y2K. In such an event, we will develop contingency plans designed to minimize any impact to the extent possible. The impact on our operating results of such failures and of any contingency plans to be designed to address such events cannot be determined at this time. We believe the "most likely reasonable worst case scenario" is one in which there are power outages. Although we have backup power supplies and generators and contingency plans to address this type scenario, an extended power outage could impact our operating results. Like all other businesses, our ability to predict the impact of the Y2K Problem and the efficacy of our solutions with respect thereto is limited by the unprecedented nature of the problem. 11 AIRLINE INVESTMENT During third quarter 1998, we invested $15.0 million in a new airline based in Las Vegas. Beginning in mid-1999, the new airline plans to offer conveniently scheduled nonstop flights between its Las Vegas hub and New York, Miami, Los Angeles and San Francisco. Additional routes are expected to be added within the first year of operations. In addition to obtaining a 19.9% voting interest in the airline, we also entered into a marketing agreement to support joint promotions involving the airline and our Las Vegas properties. Our investment in the airline allows us to offer additional valued services and conveniences to our customers. We have no commitment to provide additional funds to the airline. Rio also made a $15 million investment in this airline; therefore, upon the closing of the Rio acquisition, our equity interest in the new airline increased to approximately 47.8%, but our voting power is limited by contract to 25%. SUMMARY In addition to the specific development and expansion projects discussed in Operating Results and Development Plans, we perform on-going refurbishment and maintenance at our casino entertainment facilities in order to maintain our quality standards. We also continue to pursue development and acquisition opportunities for additional casino entertainment facilities that meet our strategic and return on investment criteria. Prior to the receipt of necessary regulatory approvals, the costs of pursuing development projects are expensed as incurred. Construction-related costs incurred after the receipt of necessary approvals are capitalized and depreciated over the estimated useful life of the resulting asset. Our planned development projects, if they go forward, will require, individually and in the aggregate, significant capital commitments and, if completed, may result in significant additional revenues. The commitment of capital, the timing of completion and the commencement of operations of casino entertainment development projects are contingent upon, among other things, negotiation of final agreements and receipt of approvals from the appropriate political and regulatory bodies. Cash needed to finance projects currently under development as well as additional projects being pursued are expected to be made available from operating cash flows, the Bank Facility (see Debt and Liquidity), joint venture partners, specific project financing, guarantees of third party debt and, if necessary, additional debt and/or equity offerings. Our capital spending for 1998, excluding the Showboat acquisition, totaled approximately $245.2 million. Estimated total capital expenditures for 1999 are expected to be between $360 million and $440 million, excluding the acquisition of Rio and the possible further expansion of Harrah's Atlantic City. DEBT AND LIQUIDITY ISSUANCE OF SENIOR NOTES It has been our intention to refinance a portion of our short-term, floating-rate borrowings under our revolving credit facility (the "Bank Facility") with debt that has fixed rates and longer maturities. In connection with obtaining consent from our bank lenders for the Rio merger, we agreed to refinance a significant portion of our current short-term, floating-rate debt with long-term, fixed-rate debt. In December 1998, we issued $750 million of 7 7/8% Senior Subordinated Notes due 2005 and used the proceeds to reduce the amount outstanding under our Bank Facility. In January 1999, we issued $500 million of 7 1/2% Senior Notes due 2009 and used the proceeds to further reduce amounts outstanding under our Bank Facility. BANK FACILITY During April 1998, our Bank Facility was amended and restated to increase total borrowing capacity to $2.1 billion and to modify the debt covenants. The terms of the Bank Facility provided for 12 scheduled reductions in borrowing capacity, and the first such scheduled reduction occurred on July 31, 1998, when borrowing capacity was reduced by $50 million. The Bank Facility was further amended in December 1998 to facilitate our merger with Rio and to eliminate further scheduled reductions in borrowing capacity. With the issuance of the 7 7/8% Senior Subordinated Notes discussed above, our available borrowing capacity under the Bank Facility was reduced by $537 million. As of December 31, 1998, $1.1 billion in borrowings were outstanding under the Bank Facility, with an additional $28.6 million committed to back letters of credit. After consideration of these borrowings, $398.5 million of additional borrowing capacity was available to the Company as of December 31, 1998. With the issuance in January 1999 of the 7 1/2% Senior Notes discussed above, our outstanding borrowings and total borrowing capacity under the Bank Facility were further reduced by $495 million. During third quarter 1998, the borrowing cost on the Bank Facility increased from a base rate of either Eurodollar plus 50 basis points or the prime lending rate to a base rate of either Eurodollar plus 75 basis points or the prime lending rate in accordance with the terms of the Bank Facility agreement. EARLY EXTINGUISHMENTS OF DEBT On May 1, 1998, our principal operating subsidiary, Harrah's Operating Company, Inc. ("HOC,") redeemed all $200 million of its 8 3/4% Senior Subordinated Notes due 2002 (the "8 3/4% Notes") at a call price of 102.0%, plus accrued and unpaid interest through the May 1, 1998, redemption date. We retired the 8 3/4% Notes using proceeds from our Bank Facility. An extraordinary charge, net of tax, of $3.3 million was recorded during second quarter 1998 in conjunction with this early extinguishment of debt. On June 15, 1998, our newly acquired subsidiary, Showboat, redeemed approximately $218.6 million face amount of its 9 1/4% First Mortgage Bonds due 2008 and approximately $117.9 million face amount of its 13% Senior Notes due 2009 (collectively, the "Showboat Notes"). We recorded the liabilities assumed in the Showboat acquisition, including the Showboat Notes, at their fair value as of the consummation date of the transaction. The difference between the consideration paid to the holders of the Showboat Notes pursuant to this tender offer and the carrying value of the Showboat Notes on the consummation date, together with the cost of conducting the tender offer, were recorded in the second quarter as an extraordinary loss of $13.3 million, net of tax. Concurrently with the tender offer, we solicited and obtained the necessary consents to amend the respective Indentures governing each of the Showboat Notes to eliminate or modify substantially all of the negative covenants, certain events of default, and to make certain other changes to the Indentures. During third quarter, we defeased the remaining balance of the Showboat Notes. Treasury securities were purchased and deposited with trustees to pay the scheduled interest payments to the first call date and the premium and principal on the securities outstanding on such date. These treasury securities are reported as assets and the remaining balance of the Showboat Notes is reported in Long-term debt in the Consolidated Balance Sheets. As a result of the permanent reduction in the capacity of our Bank Facility in December 1998, a proportionate amount of the deferred financing charges were written off and recorded as an extraordinary loss of $1.4 million, net of tax. In conjunction with our pending agreement to increase our ownership in the entities which own and operate the Showboat Casino in East Chicago, we announced in February 1999 our commencement of a fixed spread cash tender offer for all outstanding 13 1/2% First Mortgage Bonds due 2003 (the "13 1/2% Bonds") of Showboat Marina Casino Partnership and Showboat Marina Finance Corporation. The consideration for each $1,000 principal amount of 13 1/2% Bonds validly tendered and accepted for purchase will be a price resulting in a yield to the first redemption date of the 13 1/2% Bonds equal to 50 basis points over the yield of a reference security maturing at the first redemption date, plus accrued 13 interest. The tender offer is scheduled to expire on March 13, 1999, unless extended by HOC. Concurrently with the tender offer, we are soliciting consents from holders of the 13 1/2% Bonds to amend the Indenture under which the 13 1/2% Bonds were issued. INTEREST RATE AGREEMENTS To manage the relative mix of our debt between fixed and variable rate instruments, we have entered into interest rate swap agreements to modify the interest characteristics of our outstanding debt without an exchange of the underlying principal amount. The differences to be paid or received under the terms of our interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense for the related debt. Changes in the variable interest rates to be paid or received pursuant to the terms of our interest rate swap agreements will have a corresponding effect on our future cash flows. These agreements contain a credit risk that the counterparties may be unable to meet the terms of the agreements. We minimize that risk by evaluating the creditworthiness of our counterparties, which are limited to major banks and financial institutions, and do not anticipate nonperformance by the counterparties. For more information regarding our interest rate swap agreements as of December 31, 1998, please see Note 5 to our Consolidated Financial Statements. GUARANTEES OF THIRD PARTY DEBT AND OTHER COMMITMENTS The agreements under which we manage casinos on Indian lands contain provisions required by law which provide that a minimum monthly payment be made to the tribe. That obligation has priority over scheduled repayments of borrowings for development costs. In the event that insufficient cash flow is generated by the operations to fund this payment, we must pay the shortfall to the tribe. Such advances, if any, would be repaid to us in future periods in which operations generate cash flow in excess of the required minimum payment. These commitments will terminate upon the occurrence of certain defined events, including termination of the management contract. Our aggregate monthly commitment pursuant to the contracts for the three Indian-owned facilities we now manage, which extend for periods of up to 48 months from December 31, 1998, is $1.2 million. We may guarantee all or part of the debt incurred by Indian tribes with which we have entered into a management contract to fund development of casinos on the Indian lands. For all existing guarantees of Indian debt, we have obtained a first lien on certain personal property (tangible and intangible) of the casino enterprise. There can be no assurance, however, the value of such property would satisfy our obligations in the event these guarantees were enforced. Additionally, we have received limited waivers from the Indian tribes of their sovereign immunity to allow us to pursue our rights under the contracts between the parties and to enforce collection efforts as to any assets in which a security interest is taken. The aggregate outstanding balance of such debt as of December 31, 1998, was $103.5 million, excluding the guarantee related to the Upper Skagit Tribe's debt. See Capital Spending and Development for discussion of our guarantees of debt and other commitments related to the New Orleans casino. SHELF REGISTRATION To provide for additional financing flexibility, Harrah's Entertainment, together with its wholly-owned subsidiary, HOC, have available until December 2000 an effective shelf registration statement with the Securities and Exchange Commission. The registration allowed for the issuance of up to $750 million of HOC debt securities. $500 million of Senior Notes was issued on January 12, 1999, thereby reducing the amount available under the shelf registration to $250 million. The terms and 14 conditions of the HOC debt securities, which would be unconditionally guaranteed by Harrah's Entertainment, would be determined by market conditions at the time of issuance. EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS COMPETITIVE PRESSURES Due to the limited number of new markets opening for development, the focus of many casino operators has shifted to investing in existing markets in an effort to attract new customers, thereby increasing competition in those markets. Our properties in the long-established gaming markets of Nevada and New Jersey have generally reacted less significantly to the changing competitive conditions. With the exception of the additional supply being added in Las Vegas, the amount of supply change within these markets has represented a smaller percentage change than that experienced in some riverboat markets. In riverboat markets, the additions to supply had a more noticeable impact due to the fact that competition was limited in the early stages of many of these markets. As companies have completed expansion projects, supply has typically grown at a faster pace than demand in some markets and competition has increased significantly. Furthermore, several operators, including Harrah's Entertainment, have announced plans for additional developments or expansions in some markets. In the Las Vegas market, a new "mega" facility opened in October 1998, and others are planned and under development. The impact that the additional supply will have on our operations cannot be determined at this time. Over the last decade, there has also been a significant increase in the number of casinos on Indian lands, made possible by the Indian Gaming Regulatory Act of 1988. We manage three such facilities. The future growth potential from Indian casinos is also uncertain, however. See Political Uncertainties for information concerning a California referendum. Although the short-term effect of these competitive developments on our Company has been negative, we are not able to determine the long-term impact, whether favorable or unfavorable, that these trends and events will have on our current or future markets. We believe that the geographic diversity of our operations; our focus on multi-market customer relationships; our service training, measurements and rewards programs; and our continuing efforts to establish our brands as premier brands upon which we have built strong customer loyalty have well-positioned us to face the challenges present within our industry. We have introduced WINet, a sophisticated nationwide customer database, and our Total Gold Card, a nationwide reward and recognition card, both of which we believe provide competitive advantages, particularly with players who visit more than one market. INDUSTRY CONSOLIDATION As evidenced by the number of public announcements by casino entertainment companies over the last year of plans to acquire or be acquired by other companies, including our acquisitions of Showboat and Rio, consolidation in the gaming industry is now underway. We believe we are well-positioned to, and may from time to time, pursue additional strategic acquisitions to further enhance our distribution, strengthen our access to target customers and leverage our technological and centralized services infrastructure. POLITICAL UNCERTAINTIES The casino entertainment industry is subject to political and regulatory uncertainty. In 1996, the U.S. government formed a federal commission to study gambling in the United States, including the casino gaming industry. During fourth quarter 1998, voters in the state of California approved a referendum to allow an expansion of gaming offerings on Indian lands in that state. At this time, the ultimate impacts that the federal commission and the approval of the California referendum will have on the industry are uncertain. From time to time, individual jurisdictions have also considered 15 legislation or referendums which could adversely impact Harrah's Entertainment's operations, and the likelihood or outcome of similar legislation and referendums in the future is difficult to predict. The casino entertainment industry represents a significant source of tax revenues to the various jurisdictions in which casinos operate. From time to time, various state and federal legislators and officials have proposed changes in tax laws, or in the administration of such laws, which would affect the industry. It is not possible to determine with certainty the scope or likelihood of possible future changes in tax laws or in the administration of such laws. If adopted, such changes could have a material adverse effect on our financial results. EFFECTS OF INFLATION Inflation has had little effect on our historical operations. Generally, we have not experienced any significant negative impact on gaming volume or on wagering propensity of our customers as a result of inflationary pressures. Further, we have been successful in increasing the amount of wagers and playing time of our casino customers through effective marketing programs. We have also, from time to time, adjusted our required minimum bets at table games and changed the relative mix of slot machines in favor of machines with higher denominations. These strategies, supplemented by effective cost management programs, have offset the impact of inflation on our operations. Inflation tends to increase the value of our casino entertainment properties. INTERCOMPANY DIVIDEND RESTRICTION Agreements governing the terms of our bank debt require us to abide by covenants which, among other things, limit HOC's ability to pay dividends and make other restricted payments, as defined, to Harrah's Entertainment. The amount of HOC's restricted net assets, as defined, computed in accordance with these covenants regarding restricted payments was approximately $856.1 million at December 31, 1998. Harrah's Entertainment's principal asset is the stock of HOC, a wholly-owned subsidiary which holds, directly and through subsidiaries, the principal assets of our businesses. Given this ownership structure, these restrictions should not impair our ability to conduct our business through our subsidiaries or to pursue our development plans. RECENTLY ISSUED ACCOUNTING STANDARDS We are currently evaluating the provisions of two recently issued accounting pronouncements. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative financial instruments. The provisions of SFAS No. 133 require that a company recognize all derivatives as either assets or liabilities on its balance sheet and that the instruments be valued at their fair value. The Statement also defines the criteria and conditions which govern the recognition of subsequent changes in the fair value of the instrument as being either balance sheet or income statement events. SFAS No. 133 is effective for years beginning after June 15, 1999. The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants has issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up Activities." SOP 98-5 requires that the costs of all start-up activities, as defined in the SOP, be expensed as incurred. The SOP is effective for years beginning after December 15, 1998. We do not expect the adoption of these pronouncements to materially impact our results of operations or financial position. 16 PRIVATE SECURITIES LITIGATION REFORM ACT The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward looking statements. Certain information included in our Annual Report on Form 10-K and other materials filed or to be filed by the Company with the Securities and Exchange Commission ("SEC") (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are forward looking. These include statements relating to the following activities, among others: (A) operations and expansions of existing properties, including future performance, anticipated scope and opening dates of expansions; (B) planned development of casinos and hotels that would be owned or managed by the Company and the pursuit of strategic acquisitions; (C) the redevelopment of the casino in New Orleans; (D) planned capital expenditures for 1999 and beyond; (E) the impact of the WINet and Total Gold Card Programs; (F) any future impact of the Showboat acquisition or the Rio merger; and (G) Year 2000 compliance plans. These activities involve important factors that could cause actual results to differ materially from those expressed in any forward looking statements made by or on behalf of the Company. These include, but are not limited to, the following factors as well as other factors described from time to time in the Company's reports filed with the SEC: construction factors, including zoning issues, environmental restrictions, soil conditions, weather and other hazards, site access matters and building permit issues; access to available and feasible financing; regulatory, licensing and other government approvals, third party consents and approvals, and relations with partners, owners and other third parties; conditions of credit markets and other business and economic conditions, including international and national economic problems; litigation, judicial actions and political uncertainties, including gaming legislative action, referenda, and taxation; actions or inactions of suppliers and vendors regarding Year 2000; and the effects of competition including locations of competitors and operating and marketing competition. Any forward looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. 17 HARRAH'S ENTERTAINMENT, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, -------------------------- 1998 1997 ------------ ------------ ASSETS Current assets Cash and cash equivalents........................................................... $ 158,995 $ 116,443 Receivables, less allowance for doubtful accounts of $14,356 and $11,462............ 55,043 43,767 Deferred income taxes (Note 8)...................................................... 22,478 17,436 Prepayments and other............................................................... 27,521 21,653 Inventories......................................................................... 15,306 13,011 ------------ ------------ Total current assets.............................................................. 279,343 212,310 ------------ ------------ Land, buildings, riverboats and equipment Land and land improvements.......................................................... 323,692 218,703 Buildings, riverboats and improvements.............................................. 1,624,346 1,334,279 Furniture, fixtures and equipment................................................... 711,966 600,358 ------------ ------------ 2,660,004 2,153,340 Less: accumulated depreciation...................................................... (789,847) (675,286) ------------ ------------ 1,870,157 1,478,054 Excess of purchase price over net assets of businesses acquired, net of amortization of $40,051 and $33,580 (Note 2)..................................................... 383,450 43,363 Investments in and advances to nonconsolidated affiliates (Note 14)................... 273,508 152,401 Deferred costs and other (Note 4)..................................................... 479,874 119,378 ------------ ------------ $ 3,286,332 $ 2,005,506 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable.................................................................... $ 57,864 $ 45,233 Construction payables............................................................... 629 7,186 Accrued expenses (Note 4)........................................................... 172,021 156,694 Current portion of long-term debt (Note 5).......................................... 2,332 1,837 ------------ ------------ Total current liabilities......................................................... 232,846 210,950 Long-term debt (Note 5)............................................................... 1,999,354 924,397 Deferred credits and other............................................................ 112,362 98,177 Deferred income taxes (Note 8)........................................................ 75,457 22,361 ------------ ------------ 2,420,019 1,255,885 ------------ ------------ Minority interests.................................................................... 14,906 14,118 ------------ ------------ Commitments and contingencies (Notes 6 and 11 through 14) Stockholders' equity (Notes 3, 13 and 14) Common stock, $0.10 par value, authorized--360,000,000 shares, outstanding--102,188,018 and 101,035,898 shares (net of 3,036,562 and 3,001,568 shares held in treasury).......................................................... 10,219 10,104 Capital surplus..................................................................... 407,691 388,925 Retained earnings................................................................... 451,410 349,386 Accumulated other comprehensive income.............................................. 6,567 2,884 Deferred compensation related to restricted stock................................... (24,480) (15,796) ------------ ------------ 851,407 735,503 ------------ ------------ $ 3,286,332 $ 2,005,506 ------------ ------------ ------------ ------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated balance sheets. 36 HARRAH'S ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Revenues Casino................................................................... $ 1,660,313 $ 1,338,003 $ 1,323,466 Food and beverage........................................................ 231,568 196,765 188,081 Rooms.................................................................... 153,538 128,354 115,456 Management fees.......................................................... 64,753 24,566 16,227 Other.................................................................... 78,320 78,954 78,729 Less: casino promotional allowances...................................... (184,477) (147,432) (135,939) ----------- ----------- ----------- Total revenues......................................................... 2,004,015 1,619,210 1,586,020 ----------- ----------- ----------- Operating expenses Direct Casino................................................................. 868,622 685,942 649,720 Food and beverage...................................................... 116,641 103,604 95,909 Rooms.................................................................. 41,871 39,719 35,460 Depreciation of buildings, riverboats and equipment...................... 130,128 103,670 92,130 Development costs........................................................ 8,989 10,524 12,021 Write-downs and reserves (Note 7)........................................ 7,474 13,806 52,188 Project opening costs.................................................... 8,103 17,631 5,907 Other.................................................................... 475,449 385,630 358,000 ----------- ----------- ----------- Total operating expenses............................................... 1,657,277 1,360,526 1,301,335 ----------- ----------- ----------- Operating profit..................................................... 346,738 258,684 284,685 Corporate expense........................................................ (37,890) (27,155) (34,348) Equity in (losses) income of nonconsolidated affiliates (Note 14)........ (14,989) (11,053) 1,182 Venture restructuring costs.............................................. (6,013) (6,944) (14,601) ----------- ----------- ----------- Income from operations..................................................... 287,846 213,532 236,918 Interest expense, net of interest capitalized (Note 1)..................... (117,270) (79,071) (69,968) Gains on sales of equity interests in nonconsolidated affiliates........... 13,155 37,388 -- Other income, including interest income.................................... 19,575 11,799 5,160 ----------- ----------- ----------- Income before income taxes and minority interests.......................... 203,306 183,648 172,110 Provision for income taxes (Note 8)........................................ (74,600) (68,746) (67,316) Minority interests......................................................... (6,989) (7,380) (5,897) ----------- ----------- ----------- Income before extraordinary losses......................................... 121,717 107,522 98,897 Extraordinary losses, net of tax benefit of $10,522 and $4,477 (Note 9).... (19,693) (8,134) -- ----------- ----------- ----------- Net income................................................................. $ 102,024 $ 99,388 $ 98,897 ----------- ----------- ----------- ----------- ----------- ----------- Earnings (loss) per share-basic Before extraordinary losses.............................................. $ 1.21 $ 1.07 $ 0.96 Extraordinary losses, net................................................ (0.19) (0.08) -- ----------- ----------- ----------- Net income............................................................. $ 1.02 $ 0.99 $ 0.96 ----------- ----------- ----------- ----------- ----------- ----------- Earnings (loss) per share-diluted Before extraordinary losses.............................................. $ 1.19 $ 1.06 $ 0.95 Extraordinary losses, net................................................ (0.19) (0.08) -- ----------- ----------- ----------- Net income............................................................. $ 1.00 $ 0.98 $ 0.95 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common shares outstanding................................. 100,231 100,618 102,598 Dilutive effect of stock compensation programs............................. 1,289 636 1,138 ----------- ----------- ----------- Weighted average common and common equivalent shares outstanding........... 101,520 101,254 103,736 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. 2 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (NOTES 3, 13 AND 14) (IN THOUSANDS)
DEFERRED COMMON STOCK COMPENSATION ------------------------ OTHER RELATED TO SHARES CAPITAL RETAINED COMPREHENSIVE RESTRICTED OUTSTANDING AMOUNT SURPLUS EARNINGS INCOME STOCK TOTAL ----------- ----------- --------- ----------- --------------- ------------- --------- Balance--December 31, 1995........ 102,674 $ 10,267 $ 362,783 $ 204,838 $ 10,552 $ (2,891) $ 585,549 Net income...................... 98,897 98,897 Unrealized gain on available- for-sale securities, less deferred tax provision of $26,112....................... 40,842 40,842 Treasury stock purchases........ (759) (76) (12,938) (13,014) Net shares issued under incentive compensation plans, including income tax benefit of $1,576..................... 1,055 106 23,158 (15,792) 7,472 1996 Comprehensive Income... ----------- ----------- --------- ----------- --------------- ------------- --------- ----------- ----------- --------- ----------- --------------- ------------- --------- Balance-December 31, 1996......... 102,970 10,297 385,941 290,797 51,394 (18,683) 719,746 Net income...................... 99,388 99,388 Realization of gain due to sale of equity interest in New Zealand subsidiary, net of deferred taxes of $14,653..... (22,735) (22,735) Decline in market value of other available-for-sale securities, less deferred tax benefit of $16,362....................... (25,775) (25,775) Treasury stock purchases.......... (2,234) (223) (40,799) (41,022) Net shares issued under incentive compensation plans, including income tax benefit of $702...... 300 30 2,984 2,887 5,901 1997 Comprehensive Income... ----------- ----------- --------- ----------- --------------- ------------- --------- ----------- ----------- --------- ----------- --------------- ------------- --------- Balance--December 31, 1997........ 101,036 10,104 388,925 349,386 2,884 (15,796) 735,503 Net income...................... 102,024 102,024 Unrealized gain on available- for-sale securities, less deferred tax provision of $2,110........................ 3,567 3,567 Foreign currency adjustment..... 116 116 Net shares issued under incentive compensation plans, including income tax benefit of $787....................... 1,152 115 18,766 (8,684) 10,197 1998 Comprehensive Income... ----------- ----------- --------- ----------- --------------- ------------- --------- Balance--December 31, 1998........ 102,188 $ 10,219 $ 407,691 $ 451,410 $ 6,567 $ (24,480) $ 851,407 ----------- ----------- --------- ----------- --------------- ------------- --------- ----------- ----------- --------- ----------- --------------- ------------- --------- COMPREHENSIVE INCOME -------------- Balance--December 31, 1995........ Net income...................... $ 98,897 Unrealized gain on available- for-sale securities, less deferred tax provision of $26,112....................... 40,842 Treasury stock purchases........ Net shares issued under incentive compensation plans, including income tax benefit of $1,576..................... 1996 Comprehensive Income... $ 139,739 -------------- -------------- Balance-December 31, 1996......... Net income...................... $ 99,388 Realization of gain due to sale of equity interest in New Zealand subsidiary, net of deferred taxes of $14,653..... (22,735) Decline in market value of other available-for-sale securities, less deferred tax benefit of $16,362....................... (25,775) Treasury stock purchases.......... Net shares issued under incentive compensation plans, including income tax benefit of $702...... 1997 Comprehensive Income... $ 50,878 -------------- -------------- Balance--December 31, 1997........ Net income...................... $ 102,024 Unrealized gain on available- for-sale securities, less deferred tax provision of $2,110........................ 3,567 Foreign currency adjustment..... 116 Net shares issued under incentive compensation plans, including income tax benefit of $787....................... 1998 Comprehensive Income... $ 105,707 -------------- Balance--December 31, 1998........ -------------- --------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. 2 CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 10) (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- Cash flows from operating activities Net income.................................................................. $ 102,024 $ 99,388 $ 98,897 Adjustments to reconcile net income to cash flows from operating activities Extraordinary losses, before income taxes................................. 29,491 12,611 -- Depreciation and amortization............................................. 159,183 122,396 102,338 Write-downs and reserves.................................................. 6,535 13,806 52,188 Other noncash items....................................................... 28,835 27,712 27,985 Minority interests' share of net income................................... 6,989 7,380 5,897 Equity in losses (income) of nonconsolidated affiliates................... 14,989 11,053 (1,182) Realized gains on sales of equity interests in nonconsolidated affiliates.............................................................. (13,155) (37,388) -- Net gains from asset sales................................................ (6,536) (4,117) -- Net change in long-term accounts.......................................... 17,260 (1,452) (375) Net change in working capital accounts.................................... (45,244) 3,713 (14) ---------- ---------- ---------- Cash flows provided by operating activities............................. 300,371 255,102 285,734 ---------- ---------- ---------- Cash flows from investing activities.......................................... Payment for purchase of Showboat, Inc., net of cash acquired................ (475,334) -- -- Land, buildings, riverboats and equipment additions......................... (140,386) (229,529) (314,465) (Decrease) increase in construction payables................................ (6,557) (10,789) 13,257 Investments in and advances to nonconsolidated affiliates................... (76,052) (54,477) (75,553) Purchase of marketable equity securities for defeasance of debt............. (65,898) -- -- Proceeds from sales of equity interests in nonconsolidated affiliates....... 17,000 53,755 -- Proceeds from other asset sales............................................. 12,728 26,570 1,355 Other....................................................................... (28,739) (6,483) (8,255) ---------- ---------- ---------- Cash flows used in investing activities................................. (763,238) (220,953) (383,661) ---------- ---------- ---------- Cash flows from financing activities Proceeds from issuance of senior subordinated notes, net of issue costs of $12,552................................................................... 737,448 -- -- Net borrowings under Revolving Credit Facility, net of financing costs of $9,332 in 1998 and $982 in 1996........................................... 362,262 239,500 133,518 Debt retirements............................................................ (563,522) (202,115) (2,488) Premiums paid on early extinguishments of debt.............................. (24,569) (9,666) -- Minority interests' distributions, net of contributions..................... (6,200) (9,952) (10,840) Purchases of treasury stock................................................. -- (41,022) (13,014) Other....................................................................... -- (45) -- ---------- ---------- ---------- Cash flows provided by (used in) financing activities................... 505,419 (23,300) 107,176 ---------- ---------- ---------- Net increase in cash and cash equivalents..................................... 42,552 10,849 9,249 Cash and cash equivalents, beginning of year.................................. 116,443 105,594 96,345 ---------- ---------- ---------- Cash and cash equivalents, end of year........................................ $ 158,995 $ 116,443 $ 105,594 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. 2 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) In these footnotes, the words "Company," "Harrah's Entertainment," "we," "our" and "us" refer to Harrah's Entertainment, Inc., a Delaware corporation, and its wholly-owned subsidiaries, unless otherwise stated or the context requires otherwise. 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Organization. We are one of the leading casino entertainment companies in the United States, operating in more markets than any other casino company. Our U.S. operations include nine land-based casinos, seven riverboat or dockside casinos, and three casinos on Indian reservations. We also own a partial interest in and manage a land-based casino in Sydney, Australia, and own a noncontrolling interest in and will manage a land-based casino in New Orleans, Louisiana, upon its anticipated completion in late October 1999. PRINCIPLES OF CONSOLIDATION. Our Consolidated Financial Statements include the accounts of Harrah's Entertainment and its subsidiaries after elimination of all significant intercompany accounts and transactions. We follow the equity method of accounting for our investments in 20% to 50% owned companies and joint ventures and for our 55% noncontrolling interest in a partnership. (See Note 14.) CASH AND CASH EQUIVALENTS. Cash includes the minimum cash balances required to be maintained by a state gaming commission, which totaled approximately $14.0 million and $8.3 million at December 31, 1998 and 1997, respectively. Cash equivalents are highly liquid investments with a maturity of less than three months and are stated at the lower of cost or market value. INVENTORIES. Inventories, which consist primarily of food, beverage and operating supplies, are stated at average cost. LAND, BUILDINGS, RIVERBOATS AND EQUIPMENT. Land, buildings, riverboats and equipment are stated at cost. Land includes land held for future development or disposition which totaled $21.7 million and $31.2 million at December 31, 1998 and 1997, respectively. We capitalize the costs of improvements and extraordinary repairs that extend the life of the asset. We expense maintenance and repairs costs as incurred. Interest expense is capitalized on internally constructed assets at our overall weighted average borrowing rate of interest. Capitalized interest amounted to $2.5 million, $6.9 million and $11.0 million in 1998, 1997 and 1996, respectively. We depreciate our buildings, riverboats and equipment using the straight-line method over the shorter of the estimated useful life of the asset or the related lease term, as follows: Buildings and improvements.................................. 10 to 40 years Riverboats.................................................. 30 years Furniture, fixtures and equipment........................... 2 to 15 years
TREASURY STOCK. The shares of Harrah's Entertainment common stock we hold in treasury are reflected in our Consolidated Balance Sheets and Consolidated Statements of Stockholders' Equity and Comprehensive Income as if those shares were retired. REVENUE RECOGNITION. Casino revenues consist of net gaming wins. Food and beverage and rooms revenues include the aggregate amounts generated by those departments at all consolidated casinos and casino hotels. Casino promotional allowances consist principally of the retail value of complimentary food and beverages, accommodations, admissions and entertainment provided to casino patrons. The estimated 2 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) costs of providing such complimentary services, which we classify as casino expenses through interdepartmental allocations, were as follows:
1998 1997 1996 ---------- ---------- ---------- Food and beverage........................................ $ 97,934 $ 83,491 $ 81,857 Rooms.................................................... 28,473 19,290 15,673 Other.................................................... 6,138 3,768 4,491 ---------- ---------- ---------- $ 132,545 $ 106,549 $ 102,021 ---------- ---------- ---------- ---------- ---------- ----------
AMORTIZATION. We amortize Excess of purchase price over net assets of businesses acquired and other intangibles on a straight-line basis over periods up to 40 years. We use the interest method to amortize deferred financing charges over the term of the related debt agreement. PROJECT OPENING COSTS. Project opening costs represent primarily the direct salaries and other operating costs we incur prior to the opening of new facilities and in connection with the expansion of existing facilities. For new facilities, these costs are deferred and expensed upon opening of the facility. For expansion projects, we expense the costs as incurred. Costs we have incurred in connection with an initiative to develop and implement strategies and employee training programs designed to better focus the Company on serving our targeted customers are also expensed as incurred and included in project opening costs. EARNINGS PER SHARE. In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," we compute our basic earnings per share by dividing Net income by the number of weighted average common shares outstanding during the year. Our diluted earnings per share is computed by dividing Net income by the number of weighted average common shares and common stock equivalents outstanding during the year. For each of the three years ended December 31, 1998, common stock equivalents consisted solely of net restricted shares and stock options outstanding under our employee stock benefit plans (see Note 13). RECLASSIFICATIONS. We have reclassified certain amounts for prior years to conform with our presentation for 1998. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting period. Our actual results could differ from those estimates. 2) ACQUISITIONS We are accounting for each of the transactions described below as a purchase. Accordingly, the purchase price is being allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We determine the estimated fair values based on independent appraisals, discounted cash flows, quoted market prices and estimates made by management. For each transaction, the allocation of the purchase price will be completed within one year from the date of the acquisition. To the extent that the purchase price exceeds the fair value of 3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 2) ACQUISITIONS (CONTINUED) the net identifiable tangible and intangible assets acquired, such excess will be allocated to goodwill and amortized over 40 years. For periods prior to the completion of the purchase price allocation, our financial statements include estimated goodwill amortization expense. SHOWBOAT, INC. On June 1, 1998, we completed our acquisition of Showboat, Inc. ("Showboat") for $520.0 million in cash and assumption of approximately $635 million of Showboat debt. The operating results for Showboat are included in our Consolidated Financial Statements from the date of acquisition. As a result of this transaction, we now own and operate the Showboat casinos in Atlantic City, New Jersey, and Las Vegas, Nevada. The Las Vegas Showboat property is a non-strategic asset and is recorded as an asset held-for-sale. At December 31, 1998, the estimated net realizable value of this property, net of estimated selling expenses, carrying costs and interest costs through the assumed date of sale, is included in Deferred costs and other assets in the Consolidated Balance Sheets. We also own a 55% noncontrolling interest in the partnership which owns and operates the Showboat East Chicago casino. Accordingly, this investment is accounted for under the equity method. We also own a 24.6% equity ownership interest in and manage the Star City casino in Sydney, Australia. We account for our investment in this entity under the equity method one month in arrears. Subsequent to the closing of the acquisition, we completed tender offers and consent solicitations for Showboat's 9 1/4% First Mortgage Bonds due 2008 (the "Bonds") and 13% Senior Subordinated Notes due 2009 (the "Notes"). As a result of these tender offers, $218.6 million face amount of the Bonds and $117.9 million face amount of the Notes were retired on June 15, 1998. Due to the early extinguishment of the Bonds and the Notes, we reported extraordinary losses totaling $13.3 million, after income tax benefit, equaling the excess of the premium paid over the carrying value of the Bonds and the Notes retired and the related costs of the tender offers and consent solicitations. As a result of the receipt of the requisite consents, we eliminated or modified substantially all of the negative covenants, certain events of default, and made other changes to the respective indentures governing the Bonds and the Notes. During third quarter 1998, we defeased the remaining balance of the Showboat Bonds and Notes. Treasury securities were purchased and deposited with trustees to pay the scheduled interest payments to the first call date and the premium and principal on the securities outstanding on such date. These treasury securities are reported as other assets, and the remaining balances of the Showboat Bonds and Notes are reported in Long-term debt in our Consolidated Balance Sheets. In fourth quarter 1998, we entered into an agreement with the partners in the East Chicago property to increase our ownership in that partnership to approximately 99.5%. Upon consummation of this agreement, we also will amend the partnership agreements to give us control of the partnership and greater flexibility in operating this property. This transaction is subject to receipt of necessary regulatory approvals and is expected to close during first quarter 1999. We plan to rebrand the property as a "Harrah's" property during first quarter 1999. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 2) ACQUISITIONS (CONTINUED) The following unaudited pro forma consolidated financial information for the Company has been prepared assuming that the Showboat acquisition and the debt extinguishments discussed above had occurred on the first day of the respective periods:
YEAR ENDED DECEMBER 31, -------------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1998 1997 - ------------------------------------------------------------------ --------- --------- Revenues.......................................................... $ 2,163.4 $ 1,997.1 --------- --------- --------- --------- Income from operations............................................ $ 304.4 $ 233.7 --------- --------- --------- --------- Income before extraordinary losses................................ $ 106.7 $ 76.8 --------- --------- --------- --------- Net income........................................................ $ 87.0 $ 68.7 --------- --------- --------- --------- Earnings per share-diluted Income before extraordinary losses.............................. $ 1.05 $ 0.76 --------- --------- --------- --------- Net income...................................................... $ 0.86 $ 0.68 --------- --------- --------- ---------
These unaudited pro forma results are presented for comparative purposes only. The pro forma results are not necessarily indicative of what our actual results would have been had the Showboat acquisition been completed as of the beginning of these periods, or of future results. RIO HOTEL & CASINO, INC. In third quarter 1998, we entered into a definitive merger agreement with Rio Hotel & Casino, Inc. ("Rio"). The merger was completed on January 1, 1999. Harrah's Entertainment acquired all Rio outstanding shares in a one-for-one stock transaction valued at $525 million and assumed Rio's outstanding debt. OTHER. During third quarter 1998, we completed the acquisition of various assets of a riverboat casino operated by a third party in Kansas City, Missouri. The assets we acquired included a 28,000 square foot casino riverboat and related shoreside facilities, land, gaming equipment and computerized customer databases. 3) STOCKHOLDERS' EQUITY In addition to its common stock, Harrah's Entertainment has the following classes of stock authorized but unissued: Preferred stock, $100 par value, 150,000 shares authorized Special stock, $1.125 par value, 5,000,000 shares authorized- Series A Special Stock, 2,000,000 shares designated Harrah's Entertainment's Board of Directors has authorized that one special stock purchase right (a "Right") be attached to each outstanding share of common stock. These rights are exercisable only if a person or group acquires 15% or more of Harrah's Entertainment common stock or announces a tender offer for 15% or more of the common stock. Each Right entitles stockholders to buy one two-hundredth of a share of Series A Special Stock of the Company at an initial price of $130 per Right. If a person acquires 15% or more of the Company's outstanding common stock, each Right entitles its holder to purchase common stock of the Company having a market value at that time of twice the Right's exercise price. Under certain conditions, each Right entitles its holder to purchase 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 3) STOCKHOLDERS' EQUITY (CONTINUED) stock of an acquiring company at a discount. Rights held by the 15% holder will become void. The Rights will expire on October 5, 2006, unless earlier redeemed by our Board at one cent per Right. In October 1996, our Board of Directors approved a plan, which expired on December 31, 1997, under which we repurchased 2,993,700 shares of Harrah's Entertainment common stock at an average price of $18.05 per share. The repurchased shares are held in treasury. Under the terms of employee stock benefit programs previously approved by our stockholders, we have reserved shares of Harrah's Entertainment common stock for issuance under the Restricted Stock and Stock Option Plans. (See Note 13 for a description of the plans.) The following table summarizes the total number of shares authorized for issuance under each of these plans and the remaining unissued shares as of December 31, 1998:
RESTRICTED STOCK STOCK PLAN OPTION PLAN ----------- ------------- Total shares authorized for issuance under the plans............. 8,400,000 13,850,000 Shares issued and options granted, net of cancellations.......... (6,196,054) (12,260,278) ----------- ------------- Shares held in reserve for issuance or grant under the plans as of December 31, 1998........................................... 2,203,946 1,589,722 ----------- ------------- ----------- -------------
4) DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS Deferred costs and other consisted of the following:
1998 1997 ----------- ---------- Star City management contract, net of amortization of $1,976........ $ 133,524 $ -- Trademark, net of amortization of $981.............................. 66,319 -- U.S. Treasury securities held for defeasance of debt................ 64,510 -- Cash surrender value of life insurance (Note 13).................... 52,904 45,835 Deferred finance charges, net of amortization of $16,453 and $11,471........................................................... 21,913 6,056 Other............................................................... 140,704 67,487 ----------- ---------- $ 479,874 $ 119,378 ----------- ---------- ----------- ----------
Accrued expenses consisted of the following:
1998 1997 ---------- ---------- Insurance claims and reserves......................................... $ 45,770 $ 46,870 Payroll and other compensation........................................ 48,521 45,413 Accrued interest payable.............................................. 18,465 9,287 Other accruals........................................................ 59,265 55,124 ---------- ---------- $ 172,021 $ 156,694 ---------- ---------- ---------- ----------
6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 5) LONG-TERM DEBT Long-term debt consisted of the following:
1998 1997 ------------ ---------- Revolving Credit Facilities 5.4%-8.5% at December 31, 1998, maturities to 2000................ $ 1,086,000 $ 720,500 Secured Debt 7.1%, maturity 2028............................................... 99,232 -- 9 1/4%, maturity 2008............................................. 58,269 -- 13%, maturity 2009................................................ 2,393 -- Unsecured Senior Subordinated Notes 7 7/8%, maturity 2005............................................. 750,000 -- 8 3/4%, redeemed in 1998.......................................... -- 200,000 Unsecured Notes Payable 10.00%-12.67%, maturities to 2001................................. 3,605 5,326 Capitalized lease obligations, 4.9%-7.2%, maturities to 2001........ 2,187 408 ------------ ---------- 2,001,686 926,234 Current portion of long-term debt................................... (2,332) (1,837) ------------ ---------- $ 1,999,354 $ 924,397 ------------ ---------- ------------ ----------
As of December 31, 1998, aggregate annual principal maturities for the four years subsequent to 1998 were: 1999, $2.3 million; 2000, $1.1 billion; 2001, $3.9 million; and 2002, $1.2 million. REVOLVING CREDIT FACILITIES. During April 1998, our reducing revolving and letter of credit facility (the "Facility") was amended and restated to increase the total available borrowing capacity to $2.1 billion. Pursuant to its terms, $1 billion of the amended and restated Facility was restricted as to its use: $800 million was only available to fund the Showboat acquisition and $200 million could only be used to retire the Company's 8 3/4% Notes. These funds were used for the designated purposes during second quarter 1998. In connection with obtaining the consent of the lenders under the Facility to our merger with Rio, we agreed in December 1998 to modify certain terms of the Facility relating to mandatory principal reductions, financial covenants and the interest rates charged under such Facility (the "Amended Facility"). Our Amended Facility provided for us to repay a total of $750.0 million of amounts available under the Amended Facility by June 30, 1999. We satisfied this provision using the proceeds from debt offerings completed in December 1998 and January 1999. The Amended Facility is unsecured. The Amended Facility agreement contains financial covenants requiring us to maintain a specific tangible net worth and to meet other financial ratios. Its covenants limit our ability to pay dividends and to repurchase our outstanding shares. As of December 31, 1998, the Amended Facility consisted of a $1.4 billion reducing revolving and letter of credit facility maturing July 31, 2000, and a separate $111.0 million revolving credit facility, renewable annually at the lenders' option through the July 31, 2000, maturity date. Of the $1.5 billion total borrowing capacity available to us under the Amended Facility, there is a sub-limit of $50 million for letters of credit. Our borrowings under the Amended Facility bear interest at either a base rate or a Eurodollar rate, each adjusted for an applicable margin (as defined in the Amended Facility agreement). The base rate is equal to the higher of the following: (i) a certificate of deposit rate plus 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 5) LONG-TERM DEBT (CONTINUED) 0.50%; (ii) the prime rate; or (iii) the overnight federal funds rate plus 0.50%. At December 31, 1998, the weighted average annual fees on letters of credit and commitment fees on the unutilized portion of the Amended Facility were 0.88% and 0.14%, respectively. As of December 31, 1998, our borrowings under the Amended Facility were $1.1 billion and an additional $28.6 million was committed to back certain letters of credit. After consideration of these borrowings, $398.5 million of the Amended Facility was available to us. EARLY EXTINGUISHMENTS OF DEBT. During May 1998, our principal operating subsidiary, Harrah's Operating Company, Inc. ("HOC"), redeemed its $200 million 8 3/4% Senior Subordinated Notes due 2000 (the "8 3/4% Notes"). In May 1997, HOC redeemed its $200 million 10 7/8% Senior Subordinated Notes due 2002 (the "10 7/8% Notes"). Both redemptions were funded using proceeds from the Facility. See Note 2 for discussion of the early extinguishments in June 1998 of certain debts assumed in the Showboat acquisition and of the defeasance of the remaining Showboat Bonds and Notes in August 1998. See Note 9 for a discussion of the extraordinary items arising from the early extinguishments of these debts. ISSUANCE OF NOTES. During December 1998, HOC completed a public offering of $750.0 million principal amount of 7 7/8% Senior Subordinated Notes due 2005 (the "7 7/8% Notes"). The 7 7/8% Notes are unsecured and contain covenants which, among other things, place limitations on HOC's ability to incur liens. Subsequent to the end of 1998, HOC completed a public offering of $500.0 million principal amount 7 1/2% Senior Notes due 2009 (the "7 1/2% Notes"). The 7 1/2% Notes, which are unsecured, were issued with essentially the same financial covenants as the 7 7/8% Notes. The net proceeds from both debt offerings were used to reduce our outstanding borrowings under the Amended Facility. Harrah's Entertainment has unconditionally guaranteed HOC's obligations under both the 7 7/8% Notes and the 7 1/2% Notes. INTEREST RATE AGREEMENTS. To manage the relative mix of our debt between fixed and variable rate instruments, we have entered into interest rate swap agreements to modify the interest characteristics of our outstanding debt without an exchange of the underlying principal amount. At December 31, 1998, we were a party to six interest rate swap agreements to effectively convert a total of $300 million in variable rate debt to a fixed rate. Pursuant to the terms of these swaps, we receive variable payments tied to LIBOR in exchange for our payments at a fixed interest rate. The fixed rates we pay and the variable rates we receive are summarized in the following table:
SWAP RATE SWAP RATE RECEIVED PAID (VARIABLE) AT NOTIONAL AMOUNT (FIXED) DEC. 31, 1998 SWAP MATURITY - ---------------------------------------------------- ----------- ------------- -------------- $50 million......................................... 6.985% 5.221% March 2000 $50 million......................................... 6.951% 5.234% March 2000 $50 million......................................... 6.945% 5.234% March 2000 $50 million......................................... 6.651% 5.384% May 2000 $50 million......................................... 5.788% 5.251% June 2000 $50 million......................................... 5.785% 5.251% June 2000
8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 5) LONG-TERM DEBT (CONTINUED) The differences to be paid or received under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense for the related debt. Changes in the variable interest rates to be received by us pursuant to the terms of our interest rate agreements will have a corresponding effect on our future cash flows. These agreements contain a credit risk that the counterparties may be unable to meet the terms of the agreements. We minimize that risk by evaluating the creditworthiness of our counterparties, which are limited to major banks and financial institutions, and do not anticipate nonperformance by the counterparties. FAIR MARKET VALUE. Based on the borrowing rates currently available for debt with similar terms and maturities and market quotes of our publicly traded debt, the fair value of our long-term debt, including the interest rate swap agreements, at December 31, 1998 and 1997, was as follows:
DECEMBER 31, --------------------- 1998 1997 ---------------------- -------------------- CARRYING MARKET CARRYING MARKET (IN MILLIONS) VALUE VALUE VALUE VALUE - ----------------------------------------------- ---------- ---------- --------- --------- Outstanding debt............................... $ (2,001.7) $ (2,019.0) $ (926.2) $ (930.9) Interest rate swap agreements (used for hedging purposes).................................... (0.2) (6.2) (0.4) (4.6)
The amounts reflected as the "Carrying Value" of the interest rate swap agreements represent the accrual balance as of the date reported. The "Market Value" of the interest rate swap agreements represents the estimated amount, considering the prevailing interest rates, that we would pay to terminate the agreements as of the date reported. 6) LEASES We lease both real estate and equipment used in our operations and classify those leases as either operating or capital leases following the provisions of SFAS No. 13, "Accounting for Leases." At December 31, 1998, the remaining lives of our real estate operating leases ranged from one to five years, with various automatic extensions totaling up to 44 years. The average remaining term for other operating leases, which generally contain renewal options, extends approximately five years. Rental expense associated with operating leases is charged to expense in the year incurred and was included in the Consolidated Statements of Income as follows:
1998 1997 1996 --------- --------- --------- Noncancelable Minimum.................................................... $ 15,409 $ 16,455 $ 14,774 Contingent................................................. 4,029 2,929 2,032 Sublease................................................... (258) (294) (313) Other........................................................ 4,168 3,584 3,435 --------- --------- --------- $ 23,348 $ 22,674 $ 19,928 --------- --------- --------- --------- --------- ---------
9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 6) LEASES (CONTINUED) Our future minimum rental commitments as of December 31, 1998, were as follows:
NONCANCELABLE OPERATING LEASES ------------- 1999........................................................................... $ 10,774 2000........................................................................... 9,727 2001........................................................................... 9,145 2002........................................................................... 8,286 2003........................................................................... 7,975 Thereafter..................................................................... 74,840 ------------- Total minimum lease payments............................................... $ 120,747 ------------- -------------
In addition to these minimum rental commitments, certain of these operating leases provide for contingent rentals based on a percentage of revenues in excess of specified amounts. 7) WRITE-DOWNS AND RESERVES Our operating results include various pretax charges to record asset impairments, contingent liability reserves and project write-offs. In 1998, such charges related primarily to our write-off of abandoned assets and write-down of other assets to estimated market value. The 1997 charge was primarily a reserve against the debtor-in-possession financing provided to Harrah's Jazz Company. During 1996, in recognition of changing economic conditions and competitive environments in which certain long-lived assets are deployed, we re-evaluated the recoverability of our original Tunica, Mississippi, casino facility and of an idle riverboat casino and recorded write-downs of the carrying values of those assets in accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This casino facility was closed during 1997. We also recorded a reserve during 1996 pursuant to the provisions of SFAS No. 5, "Accounting for Contingencies," in recognition of our estimated liability arising from the guarantee of third party debt. We believe that the estimates used to evaluate the amounts of such write-downs and reserves were reasonable. However, actual results could differ from our estimates made for purposes of these evaluations. The components of our write-downs and reserves were as follows:
1998 1997 1996 --------- --------- --------- Write-off of abandoned assets and other costs............... $ 4,734 $ -- $ 2,644 Impairment of long-lived assets............................. 2,740 806 33,369 Reserve for debtor-in-possession loans to Harrah's Jazz Company................................................... -- 13,000 -- Reserve for contingent liability exposure................... -- -- 14,034 Write-off of investment in and advances to nonconsolidated affiliate................................................. -- -- 2,141 --------- --------- --------- $ 7,474 $ 13,806 $ 52,188 --------- --------- --------- --------- --------- ---------
10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 8) INCOME TAXES Our federal and state income tax provision (benefit) allocable to identified income statement and balance sheet line items was as follows:
1998 1997 1996 --------- --------- --------- Income before income taxes and minority interests............ $ 74,600 $ 68,746 $ 67,316 Extraordinary losses......................................... (10,522) (4,477) -- Stockholders' equity Unrealized gain (loss) on marketable equity securities..... 2,110 (16,362) 26,112 Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes.............. (787) (702) (1,576) Other........................................................ -- -- 1,045 --------- --------- --------- $ 65,401 $ 47,205 $ 92,897 --------- --------- --------- --------- --------- ---------
Income tax expense attributable to Income before income taxes and minority interests consisted of the following:
1998 1997 1996 --------- --------- --------- Current Federal.................................................... $ 45,084 $ 78,306 $ 42,003 State...................................................... 6,531 5,407 6,622 Deferred..................................................... 22,985 (14,967) 18,691 --------- --------- --------- $ 74,600 $ 68,746 $ 67,316 --------- --------- --------- --------- --------- ---------
The differences between the statutory federal income tax rate and the effective tax rate expressed as a percentage of Income before income taxes and minority interest were as follows:
1998 1997 1996 --------- --------- --------- Statutory tax rate.............................................. 35.0% 35.0% 35.0% Increases (decreases) in tax resulting from: State taxes, net of federal tax benefit....................... 2.2 2.2 2.5 Excess of purchase price over net assets of businesses acquired.................................................... 1.1 -- -- Minority interests in partnership earnings.................... (1.2) (1.4) (1.2) Other......................................................... (0.4) 1.6 2.8 --- --- --- 36.7% 37.4% 39.1% --- --- --- --- --- ---
11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 8) INCOME TAXES (CONTINUED) The components of our net deferred tax balance included in the Consolidated Balance Sheets were as follows:
1998 1997 ----------- ---------- Deferred tax assets Investments in nonconsolidated affiliates.......................... $ 31,773 $ -- Compensation programs.............................................. 25,447 24,232 Self-insurance reserves 5,302 5,838 Bad debt reserve................................................... 4,735 4,281 Project opening expenses........................................... 2,573 2,400 Debt costs......................................................... 1,592 902 Deferred income.................................................... 1,137 1,114 Other.............................................................. 4,423 6,014 ----------- ---------- 76,982 44,781 ----------- ---------- Deferred tax liabilities Property........................................................... (60,016) (45,806) Management contract................................................ (46,733) -- Trademarks......................................................... (23,212) -- Investment in nonconsolidated affiliates........................... -- (3,900) ----------- ---------- (129,961) (49,706) ----------- ---------- Net deferred tax liability......................................... $ (52,979) $ (4,925) ----------- ---------- ----------- ----------
9) EXTRAORDINARY ITEMS The components of our extraordinary losses for 1998 and 1997 were as follows:
1998 1997 ---------- ---------- Losses on early extinguishments of debt............................... $ (27,824) $ (12,611) Harrah's share of nonconsolidated affiliate's extraordinary loss...... (2,391) -- ---------- ---------- (30,215) (12,611) Income tax benefit.................................................... 10,522 4,477 ---------- ---------- Extraordinary losses, net of income taxes............................. $ (19,693) $ (8,134) ---------- ---------- ---------- ----------
The losses on early extinguishments of debt in both 1998 and 1997 are due to the premiums paid to the holders of the debt retired and the write-off of related unamortized deferred finance charges. See Note 5 for information regarding the specific debt issues retired in each period. Our 1998 results also include our share of an extraordinary loss incurred by a nonconsolidated affiliate as a result of that entity's reorganization and refinancing of its debt. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 10) SUPPLEMENTAL CASH FLOW INFORMATION The increase (decrease) in Cash and cash equivalents due to the changes in long-term and working capital accounts, net of effect of business acquired, was as follows:
1998 1997 1996 ---------- --------------- ---------- Long-term accounts Deferred costs and other assets.................... $ (6,457) $ (1,746) $ (2,279) Deferred credits and other long-term liabilities... 23,717 294 1,904 ---------- --------------- ---------- Net change in long-term accounts..................... $ 17,260 $ (1,452) $ (375) ---------- --------------- ---------- ---------- --------------- ---------- Working capital accounts Receivables........................................ $ (21,734) $ (12,062) $ 8,088 Inventories........................................ (1,269) (565) 1,202 Prepayments and other.............................. (2,134) (3,427) 2,902 Accounts payable................................... 13,561 5,606 (18,373) Accrued expenses................................... (33,668) 14,161 6,167 ---------- --------------- ---------- Net change in working capital accounts........... $ (45,244) $ 3,713 $ (14) ---------- --------------- ---------- ---------- --------------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR INTEREST AND TAXES. The following table reconciles our Interest expense, net of interest capitalized, per the Consolidated Statements of Income, to cash paid for interest:
1998 1997 1996 ---------- --------- --------- Interest expense, net of amount capitalized................. $ 117,270 $ 79,071 $ 69,968 Adjustments to reconcile to cash paid for interest Net change in accruals.................................... (16,917) (5,961) (8,664) Amortization of deferred finance charges.................. (4,982) (3,021) (3,151) Net amortization of discounts and premiums................ 74 (12) (21) ---------- --------- --------- Cash paid for interest, net of amount capitalized........... $ 95,445 $ 70,077 $ 58,132 ---------- --------- --------- ---------- --------- ---------
Cash payments, net of refunds, for income taxes amounted to $51,785, $36,479 and $34,578 for 1998, 1997 and 1996, respectively (see Note 8). 11) COMMITMENTS AND CONTINGENCIES CONTRACTUAL COMMITMENTS. We continue to pursue additional casino development opportunities that may require, individually and in the aggregate, significant commitments of capital, up-front payments to third parties, guarantees by the Company of third party debt and development completion guarantees. Excluding guarantees and commitments for the New Orleans casino development project (see Note 14), as of December 31, 1998, we had guaranteed third party loans and leases of $120 million, which are secured by certain assets, and had commitments of $36 million, primarily construction-related. The amount of guaranteed third party loans includes our continuing exposure under a guaranty of the remaining $11.4 million balance outstanding under the development loan for a casino facility owned by the Upper Skagit Tribe that we ceased managing in 1998. Under the terms of the termination agreement, the Tribe has agreed to fund the retirement of the loan. The guaranty 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 11) COMMITMENTS AND CONTINGENCIES (CONTINUED) contains an element of risk that, should the Tribe be unable to perform, the Company would be responsible for repayment of the loan. The agreements under which we manage casinos on Indian lands contain provisions required by law which provide that a minimum monthly payment be made to the tribe. That obligation has priority over scheduled payments of borrowings for development costs. In the event that insufficient cash flow is generated by the operations to fund this payment, we must pay the shortfall to the tribe. Such advances, if any, would be repaid to us in future periods in which operations generate cash flow in excess of the required minimum payment. These commitments will terminate upon the occurrence of certain defined events, including termination of the management contract. As of December 31, 1998, the aggregate monthly commitment pursuant to these contracts, which extend for periods of up to 48 months from December 31, 1998, was $1.2 million. SEVERANCE AGREEMENTS. As of December 31, 1998, the Company has severance agreements with 45 of its senior executives, which provide for payments to the executives in the event of their termination after a change in control, as defined. These agreements provide, among other things, for a compensation payment of 1.5 to 3.0 times the executive's average annual compensation, as defined, as well as for accelerated payment or accelerated vesting of any compensation or awards payable to the executive under any of the Company's incentive plans. The estimated amount, computed as of December 31, 1998, that would be payable under the agreements to these executives based on earnings and stock options aggregated approximately $38.8 million. TAX SHARING AGREEMENTS. In connection with the 1995 spin-off of certain hotel operations (the "PHC Spin-off") to Promus Hotel Corporation ("PHC"), Harrah's Entertainment entered into a Tax Sharing Agreement with PHC wherein each company is obligated for those taxes associated with their respective businesses. Additionally, Harrah's Entertainment is obligated for all taxes for periods prior to the PHC Spin-off date which are not specifically related to PHC operations and/or PHC hotel locations. Our obligations under this agreement are not expected to have a material adverse effect on our consolidated financial position or results of operations. SELF-INSURANCE. We are self-insured for various levels of general liability, workers' compensation and employee medical coverage. Insurance claims and reserves include accruals of estimated settlements for known claims, as well as accruals of actuarial estimates of incurred but not reported claims. 12) LITIGATION Harrah's Entertainment and certain of its subsidiaries had been named as defendants in a number of lawsuits arising from the suspension of development of a land-based casino, and the closing of the temporary gaming facility, in New Orleans, Louisiana, by Harrah's Jazz Company, a partnership in which the Company owned an approximate 47% interest and which filed for protection under Chapter 11 of the U.S. Bankruptcy Code (see Note 14). In October 1998, the plan of reorganization of Harrah's Jazz Company was consummated, and these lawsuits were dismissed. On November 25, 1997, the Missouri Supreme Court issued a ruling in Akin v. Missouri Gaming Commission that defined the state constitutional requirements for floating casino facilities in artificial basins. On November 3, 1998, the people of the State of Missouri voted to amend the State's 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 12) LITIGATION (CONTINUED) Constitution to deem all floating casino facilities in compliance with state law, and all litigation regarding the issue which had been pending has been dismissed. In addition to the matters described above, we are involved in various inquiries, administrative proceedings and litigation relating to contracts, sales of property and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, we believe that the final outcome of these matters will not have a material adverse effect upon our consolidated financial position or our results of operations. 13) EMPLOYEE BENEFIT PLANS We have established a number of employee benefit programs for purposes of attracting, retaining and motivating our employees. The following is a description of the basic components of these programs. STOCK OPTION PLAN. Our employees may be granted options to purchase shares of Harrah's Entertainment common stock under the Harrah's Entertainment Stock Option Plan ("SOP"). An SOP grant typically vests in equal installments over a four year period and allows the option holder to purchase stock over specified periods of time, generally ten years from the date of grant, at a fixed price equal to the market value at the date of grant. No options may be granted under the SOP after February 2008. A summary of SOP activity for 1996, 1997 and 1998 is as follows:
-------------------- NUMBER OF WEIGHTED AVG. COMMON SHARES EXERCISE -------------------- PRICE OPTIONS AVAILABLE (PER SHARE) OUTSTANDING FOR GRANT ------------- --------- --------- Balance-December 31, 1995 $ 21.21 5,418,826 3,647,874 Granted................................ 18.71 3,706,759 (3,706,759) Exercised.............................. 9.97 (225,510) -- Canceled............................... 27.59 (2,927,557) 2,927,557 --------- --------- Balance-December 31, 1996 16.95 5,972,518 2,868,672 Granted................................ 18.93 2,495,903 (2,495,903) Exercised.............................. 7.70 (196,905) -- Canceled............................... 19.29 (946,944) 946,944 --------- --------- Balance-December 31, 1997 17.57 7,324,572 1,319,713 Additional shares authorized........... N/A -- 3,500,000 Granted................................ 15.94 3,891,119 (3,891,119) Exercised.............................. 10.29 (241,409) -- Canceled............................... 19.71 (661,128) 661,128 --------- --------- Balance-December 31, 1998.............. 16.99 10,313,154 1,589,722 --------- --------- --------- ---------
15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 13) EMPLOYEE BENEFIT PLANS (CONTINUED)
1998 1997 1996 ---------- ---------- ---------- Options exercisable at December 31..................... 2,257,662 1,536,964 1,079,125 Weighted average fair value per share of options granted during year.................................. $ 7.39 $ 9.98 $ 9.13
Options granted and canceled during 1996 include the activity resulting from a special program approved by the Company during that year designed to restore the intended incentive offered to employees by SOP grants. This special program enabled option holders to consent to the cancellation of certain outstanding stock options, whether vested or unvested, in exchange for a grant of new unvested stock options with an option price based on the then current market price of the Company's stock. For each three options canceled, the consenting option holder received two new stock options. The new options vest in four equal annual installments commencing January 1, 1998. In total, 2,755,291 options with an average exercise price of $27.71 per share were canceled in exchange for 1,830,951 new options with an exercise price of $16.875 per share. The following table summarizes additional information regarding the options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------- ----------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACT EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - --------------- ------------ ----------- ----------- ---------- ----------- $ 2.80-$14.32 4,118,017 8.3 years $ 12.96 1,027,354 $ 8.98 15.88- 21.22 5,447,059 10.0 years 18.98 837,135 18.53 22.55- 27.45 711,896 7.1 years 24.25 357,286 23.34 29.72- 35.59 36,182 5.7 years 32.27 35,887 32.25 ------------ ---------- 10,313,154 2,257,662 ------------ ---------- ------------ ----------
As allowed under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," we apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations to account for the SOP and, accordingly, do not recognize compensation expense. Had compensation expense for the SOP been determined in accordance with SFAS No. 123, our Net income and Earnings per share would have been reduced to the pro forma amounts indicated in the following table:
1998 1997 1996 --------------------- -------------------- -------------------- AS AS AS REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA ---------- --------- --------- --------- --------- --------- Net income......................... $ 102,024 $ 93,628 $ 99,388 $ 89,570 $ 98,897 $ 93,787 Earnings per share Basic............................ 1.02 0.93 0.99 0.89 0.96 0.91 Diluted.......................... 1.00 0.92 0.98 0.88 0.95 0.90
16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 13) EMPLOYEE BENEFIT PLANS (CONTINUED) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1998 1997 1996 --------- --------- --------- Expected dividend yield......................................... 0.0% 0.0% 0.0% Expected stock price volatility................................. 47.0% 41.0% 39.0% Risk-free interest rate......................................... 4.3% 5.8% 6.2% Expected average life of options (years)........................ 5 7 6
Because the provisions of SFAS No. 123 have not been applied to options granted prior to January 1, 1995, and due to the issuance in 1996 of a large option grant under the special program discussed above, the resulting pro forma compensation cost may not be representative of that to be expected in future years. RESTRICTED STOCK PLAN. Employees may be granted shares of common stock under the Harrah's Entertainment Restricted Stock Plan ("RSP"). Shares granted under the RSP are restricted as to transfer and subject to forfeiture during a specified period or periods prior to vesting. The shares generally vest in equal installments over a period of four years. No awards of RSP shares may be made under the current plan after February 2008. The compensation arising from an RSP grant is based upon the market price at the grant date. Such expense is deferred and amortized to expense over the vesting period. The Company has issued time accelerated restricted stock ("TARSAP") awards to certain key executives which will fully vest on January 1, 2002, if the executive continues in active employment until that date. However, the vesting of some or all of these shares can be accelerated into the years 1999, 2000 and 2001 on the basis of our financial performance. The expense arising from the TARSAP awards is being amortized to expense over the periods in which the restrictions lapse. The number and weighted-average grant-date fair value of RSP shares granted, and the amortization expense recognized, during 1998, 1997 and 1996, including the TARSAP awards, were as follows:
1998 1997 1996 --------- --------- --------- Number of shares granted..................................... 990,893 309,833 825,406 Weighted-average grant price per share....................... $ 17.26 $ 19.46 $ 20.52 Amortization expense (in millions)........................... 6.9 4.5 0.9
SAVINGS AND RETIREMENT PLAN. We maintain a defined contribution savings and retirement plan, which, among other things, allows pretax and after-tax contributions to be made by employees to the plan. Under the plan, participating employees may elect to contribute up to 16 percent of their eligible earnings, the first six percent of which is fully matched. Amounts contributed to the plan are invested, at the participant's direction, in a Harrah's Entertainment company stock fund, a diversified stock fund, an aggressive stock fund, a long-term bond fund, an income fund and/or a treasury fund. Participants become vested in the matching contribution over five years of credited service. Our contribution expense for this plan was $18.1 million, $14.6 million and $14.1 million in 1998, 1997 and 1996, respectively. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 13) EMPLOYEE BENEFIT PLANS (CONTINUED) DEFERRED COMPENSATION PLANS. The Company maintains deferred compensation plans under which certain employees may defer a portion of their compensation. Amounts deposited into these plans are unsecured liabilities of the Company and earn interest at rates approved by the Human Resources Committee of our Board of Directors. The total liability included in Deferred credits and other liabilities for these plans at December 31, 1998 and 1997, was $49.6 million and $46.7 million, respectively. In connection with the administration of one of these plans, we have purchased company-owned life insurance policies insuring the lives of certain directors, officers and key employees. MULTI-EMPLOYER PENSION PLAN. Approximately 4,800 of our employees are covered by union sponsored, collectively bargained multi-employer pension plans. We contributed and charged to expense $4.4 million, $2.4 million and $2.1 million in 1998, 1997 and 1996, respectively, for such plans. The plans' administrators do not provide sufficient information to enable us to determine our share, if any, of unfunded vested benefits. 14) NONCONSOLIDATED AFFILIATES NEW ORLEANS CASINO DEVELOPMENT. In November 1995, Harrah's Jazz Company ("Jazz"), a partnership formed for purposes of developing, owning and operating the exclusive land-based casino entertainment facility (the "Casino") in New Orleans, Louisiana, and its wholly-owned subsidiary, Harrah's Jazz Finance Corp., filed petitions for relief under Chapter 11 of the Bankruptcy Code. During October 1998, the plan of reorganization (the "Plan") of Jazz was consummated. Pursuant to the Plan, a newly formed limited liability company, Jazz Casino Company, L.L.C. ("JCC") is responsible for constructing and opening the Casino. JCC leases the site for the Casino from the City of New Orleans and will operate the Casino pursuant to a casino operating contract with the State of Louisiana gaming board. In exchange for an equity investment in JCC's parent of $75 million (including $60 million in debtor-in-possession loans to Jazz which were converted to equity at Plan consummation), a subsidiary of our Company acquired, at the time of Plan consummation, approximately 44% of the equity in JCC's parent. Our ownership interest has been reduced to approximately 43% due to the exercise by an unrelated party of an option to acquire a portion of our interest, and our ownership interest may be reduced in the future to approximately 40% in the event other unrelated parties exercise additional options to acquire portions of our interest. We also own a warrant which entitles us to acquire additional shares in JCC's parent sufficient to increase our ownership interest in JCC's parent to 50% for a predetermined price. We will manage the Casino pursuant to a management agreement under which a subsidiary of our Company (the "Manager") will receive a base management fee of 3% of Casino revenues and 7% of Casino EBITDA, as defined, in excess of $75 million. We are obligated to defer receipt of management fees under certain circumstances. We have also entered into settlements with former partners of Jazz whereby such partners (or their creditors) are entitled to future payments from us which are conditioned on the receipt of management fees by the Manager. We (i) guarantee JCC's initial $100 million annual payment under the casino operating contract to the State of Louisiana gaming board (the "State Guarantee"); (ii) guarantee $166.5 million of a $236.5 million JCC bank credit facility; (iii) guarantee to the State of Louisiana gaming board, City of New Orleans, banks under the JCC bank credit facility and JCC bondholders, completion and opening 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 14) NONCONSOLIDATED AFFILIATES (CONTINUED) of the Casino on or before October 30, 1999 (subject to force majeure); and, (iv) are obligated to make a $22.5 million subordinated loan to JCC to finance construction of the Casino. With respect to the State Guarantee, we are obligated to guarantee JCC's first $100 million annual payment obligation commencing upon the earlier of opening of the Casino or October 30, 1999 (subject to force majeure), and, if certain cash flow tests and other conditions are satisfied each year, to renew the guarantee beginning April 1, 2000, for each 12 month period ending March 31 up to the 12 month period ending March 31, 2004. Our obligations under the guarantee for the first year of operations or any succeeding 12 month period is limited to a guarantee of the $100 million payment obligation of JCC for the 12 month period in which the guarantee is in effect and is secured by a first priority lien on JCC's assets. JCC's payment obligation (and therefore the amount we have guaranteed) is $100 million at the commencement of each 12 month period under the casino operating contract and declines on a daily basis by 1/365 of $100 million to the extent payments are made each day by JCC to Louisiana's gaming board. For providing the State Guarantee, we will receive fees from JCC of $6 million for the first and second years of operations (or the prorated amounts thereof) and $5 million for each renewal year thereafter. We will also receive fees for guaranteeing the JCC bank credit facility of approximately 2.75% of up to $156.5 million of guaranteed debt, payable for periods during which such debt is outstanding. Our credit support fees may be reduced in the event our borrowing costs under our Facility increase after Plan consummation. We are obligated to defer receipt of State Guarantee fees and a portion of the credit support fees under certain circumstances. DISPOSITIONS OF EQUITY INTERESTS. During 1997, we sold our remaining 12.5% ownership interest in Sky City Limited ("Sky City"), a New Zealand publicly-traded company which owns a casino entertainment facility in Auckland, New Zealand, and recorded a pretax gain of $37.4 million. We continued to manage the Sky City facility for a fee under a management contract until June 1998, at which time Sky City terminated the management contract for a fee based upon an agreed upon formula in the management contract. As a result of these transactions, we no longer have any involvement with the Sky City facility. During 1998, we sold our remaining equity interest in a restaurant affiliate and recognized a gain on the sale of $13.1 million. ACQUISITIONS OF EQUITY INTERESTS. As discussed in Note 2, in connection with our acquisition of Showboat we acquired an equity interest in and the management contract for Star City casino in Sydney, Australia. We also acquired a 55% noncontrolling ownership interest in the partnership which owns and operates a riverboat casino in East Chicago, Indiana. We have reached an agreement with the partners to acquire a controlling ownership interest in the East Chicago entity. As a result, we will consolidate the operations of this entity into our Company in 1999. During 1998, we acquired an ownership interest in a new airline based in Las Vegas, Nevada. In addition to obtaining a 19.9% voting interest, we also entered into a marketing agreement to support joint promotions involving the airline and our Harrah's Las Vegas property. Rio is also an equity investee in the airline and has a similar marketing arrangement with the airline for joint promotions involving the Rio property. After completion of the Rio merger, our voting interest in the airline increased to 25%. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 14) NONCONSOLIDATED AFFILIATES (CONTINUED) COMBINED FINANCIAL INFORMATION. Summarized balance sheet and income statement information of nonconsolidated affiliates, which we accounted for using the equity method, as of December 31, 1998 and 1997, and for the three fiscal years ended December 31, 1998, is included in the following tables.
1998 1997 1996 ------------ ---------- ---------- Combined Summarized Balance Sheet Information Current assets........................................ $ 111,218 $ 18,937 Land, buildings and equipment, net.................... 1,094,195 379,147 Other assets.......................................... 355,505 179,976 ------------ ---------- Total assets........................................ 1,560,918 578,060 ------------ ---------- Current liabilities................................... 96,095 108,406 Long-term debt........................................ 808,334 467,970 ------------ ---------- Total liabilities................................... 904,429 576,376 ------------ ---------- Net assets........................................ $ 656,489 $ 1,684 ------------ ---------- ------------ ---------- Combined Summarized Statements of Operations Revenues.............................................. $ 299,292 $ 23,464 $ 30,930 ------------ ---------- ---------- ------------ ---------- ---------- Operating income (loss)............................... $ (2,774) $ (44,115) $ (18,194) ------------ ---------- ---------- ------------ ---------- ---------- Net loss.............................................. $ (33,245) $ (39,290) $ (22,080) ------------ ---------- ---------- ------------ ---------- ----------
Our Investments in and advances to nonconsolidated affiliates are reflected in the accompanying Consolidated Balance Sheets as follows:
1998 1997 ---------- ---------- Investments in and advances to nonconsolidated affiliates Accounted for under the equity method............................... $ 231,366 $ 132,049 Accounted for at historical cost.................................... 15,087 -- Available for sale and recorded at market value..................... 27,055 20,352 ---------- ---------- $ 273,508 $ 152,401 ---------- ---------- ---------- ----------
In accordance with the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," we adjust the carrying value of our available for sale equity investments to include unrealized gains or losses. A corresponding adjustment is recorded in the combination of our Stockholders' equity and Deferred income tax accounts. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, UNLESS OTHERWISE STATED) 15) SUMMARIZED FINANCIAL INFORMATION HOC is a wholly-owned subsidiary and the principal asset of Harrah's Entertainment. Summarized financial information of HOC as of December 31, 1998 and 1997, and for the three fiscal years ended December 31, 1998, prepared on the same basis as Harrah's Entertainment, was as follows:
1998 1997 1996 ------------ ------------ ------------ Current assets...................................... $ 271,247 $ 206,009 Land, buildings, riverboats and equipment, net...... 1,870,157 1,478,054 Other assets........................................ 1,136,750 315,060 ------------ ------------ 3,278,154 1,999,123 ------------ ------------ Current liabilities................................. 209,651 196,394 Long-term debt 1,999,354 924,397 Other liabilities................................... 187,247 123,838 Minority interests.................................. 14,906 14,118 ------------ ------------ 2,411,158 1,258,747 ------------ ------------ Net assets...................................... $ 866,996 $ 740,376 ------------ ------------ ------------ ------------ Revenues............................................ $ 2,003,861 $ 1,618,998 $ 1,588,013 ------------ ------------ ------------ ------------ ------------ ------------ Income from operations.............................. $ 286,703 $ 213,942 $ 236,921 ------------ ------------ ------------ ------------ ------------ ------------ Income before extraordinary losses.................. $ 120,632 $ 105,343 $ 96,727 ------------ ------------ ------------ ------------ ------------ ------------ Net income.......................................... $ 100,939 $ 97,209 $ 96,727 ------------ ------------ ------------ ------------ ------------ ------------
The agreements governing the terms of our bank debt contain certain covenants which, among other things, place limitations on HOC's ability to pay dividends and make other restricted payments, as defined, to Harrah's Entertainment. The amount of HOC's restricted net assets, as defined, computed in accordance with these covenants regarding restricted payments was approximately $856.1 million at December 31, 1998. 21 MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS Harrah's Entertainment is responsible for preparing the financial statements and related information appearing in this report. Management believes that the financial statements present fairly its financial position, its results of operations and its cash flows in conformity with generally accepted accounting principles. In preparing its financial statements, Harrah's Entertainment is required to include amounts based on estimates and judgments which it believes are reasonable under the circumstances. Harrah's Entertainment maintains accounting and other control systems designed to provide reasonable assurance that financial records are reliable for purposes of preparing financial statements and that assets are properly accounted for and safeguarded. Compliance with these systems and controls is reviewed through a program of audits by an internal auditing staff. Limitations exist in any internal control system, recognizing that the system's cost should not exceed the benefits derived. The Board of Directors pursues its responsibility for Harrah's Entertainment's financial statements through its Audit Committee, which is composed solely of directors who are not Harrah's Entertainment officers or employees. The Audit Committee meets from time to time with the independent public accountants, management and the internal auditors. Harrah's Entertainment internal auditors report directly to the Audit Committee pursuant to gaming regulations. The independent public accountants have direct access to the Audit Committee, with and without the presence of management representatives. /S/ PHILIP G. SATRE Philip G. Satre Chairman of the Board and Chief Executive Officer /S/ JUDY T. WORMSER Judy T. Wormser Vice President, Controller and Chief Accounting Officer 2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Harrah's Entertainment, Inc.: We have audited the accompanying consolidated balance sheets of Harrah's Entertainment, Inc. (a Delaware corporation) and subsidiaries ("Harrah's Entertainment") as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows for each of the three years ended December 31, 1998. These financial statements are the responsibility of Harrah's Entertainment's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Harrah's Entertainment as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years ended December 31, 1998, in conformity with generally accepted accounting principles. /S/ ARTHUR ANDERSEN LLP Memphis, Tennessee, February 9, 1999. 2 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER YEAR ---------- ---------- ---------- ---------- ------------ 1998(1) Revenues......................................... $ 414,447 $ 478,634 $ 586,242 $ 524,692 $ 2,004,015 Income from operations........................... 58,066 71,855 109,202 48,723 287,846 Net income....................................... 23,236 20,406 44,202 14,180 102,024 Earnings per share(3) Basic.......................................... 0.23 0.20 0.44 0.14 1.02 Diluted........................................ 0.23 0.20 0.44 0.14 1.00 1997(2) Revenues......................................... $ 374,099 $ 408,893 $ 438,248 $ 397,970 $ 1,619,210 Income from operations........................... 45,291 61,199 67,749 39,293 213,532 Net income....................................... 17,111 17,239 52,889 12,149 99,388 Earnings per share (3) Basic.......................................... 0.17 0.17 0.53 0.12 0.99 Diluted........................................ 0.17 0.17 0.52 0.12 0.98
(1) 1998 includes $13.2 million in pretax income from the second quarter 1998 sale of our interest in a restaurant subsidiary. 1998 also includes the operating results for Showboat, Inc., for periods after its June 1, 1998, acquisition. (2) 1997 includes $37.4 million in pretax income from the third quarter 1997 sale of our equity interest in our New Zealand subsidiary (see Note 14), net of $13.8 million in pretax charges for write-downs and reserves, including $12.3 million recorded in third quarter (see Note 7). (3) The sum of the quarterly per share amounts may not equal the annual amount reported, as per share amounts are computed independently for each quarter and for the full year. 2 EX-21 28 LIST OF SUBSIDIARIES HARRAH'S ENTERTAINMENT, INC. SUBSIDIARIES
Jurisdiction Percentage of of Date of Name Incorporation Ownership Incorporation - ---- ------------- --------- ------------- Aster Insurance Ltd. Bermuda 100% 02/06/90 HEI Acquisition Corp. II Nevada 100% 07/22/98 Harrah's Operating Company, Inc. Delaware 100% 08/08/83 Dusty Corporation Nevada 100% 07/02/98 Harrah South Shore Corporation California 100% 10/02/59 Harrah's - Holiday Inns of New Jersey, Inc. New Jersey 100% 09/19/79 Harrah's Alabama Corporation Nevada 100% 09/09/93 Harrah's Arizona Corporation Nevada 100% 01/26/93 Harrah's Asia Development Company Nevada 100% 09/20/96 Harrah's Asia Investment Company Nevada 100% 09/20/96 Harrah's Asia Management Company Nevada 100% 09/20/96 Harrah's Atlantic City, Inc. New Jersey 100% 02/13/79 Harrah's Aviation, Inc. Tennessee 100% 03/11/63 Harrah's California Corporation Nevada 100% 02/02/94 Harrah's Crescent City Investment Company Nevada 100% 03/28/97 Harrah's Huntington Corporation W. Virginia 100% 03/03/95 Harrah's Illinois Corporation Nevada 100% 12/18/91 Van Buren Leasing Corporation(1) Nevada 100% 08/30/96 Harrah's Indiana Casino Corporation Nevada 100% 09/09/93 Harrah's Indiana Management Corporation Nevada 100% 09/09/93 Harrah's Interactive Entertainment Nevada 100% 09/21/94 Company Harrah's Interactive Investment Company Nevada 100% 09/21/94 Harrah's Kansas Casino Corporation Nevada 100% 11/12/93 HPB Corporation Kansas 100% 11/13/97 Harrah's Las Vegas, Inc. Nevada 100% 03/21/68 Harrah's Laughlin, Inc. Nevada 100% 07/10/87 Harrah's Louisiana Investment Company Nevada 100% 10/22/98 Harrah's Management Company Nevada 100% 04/07/83 Harrah's Marketing Services Corporation Nevada 100% 08/21/97 Harrah's Maryland Heights Corporation Nevada 100% 07/30/93 Harrah's Maryland Heights LLC(2) Delaware 99% 10/16/95 Harrah's Maryland Heights Operating Company Nevada 100% 06/20/95 Harrah's Michigan Corporation Nevada 100% 06/15/93 Harrah's Minnesota Corporation Nevada 100% 10/20/92 Harrah's NC Casino Company, LLC(3) North Carolina 99% 04/21/95 Harrah's New Jersey, Inc. New Jersey 100% 09/13/78 Harrah's New Orleans Management Company Nevada 100% 05/21/93 Harrah's New Zealand Inc. Nevada 100% 02/18/92 Harrah's-North Kansas City Corporation Nevada 100% 02/23/93 Harrah's of Jamaica, Ltd. Bahamas 100% 07/12/85 Harrah's Pennsylvania Development Co. Nevada 100% 05/18/94 Harrah's Pittsburgh Management Company Nevada 100% 06/08/94 Harrah's Red River Corporation Nevada 100% 08/05/96 Harrah's Reno Holding Company, Inc. Nevada 100% 02/23/88
HARRAH'S ENTERTAINMENT, INC.
Jurisdiction Percentage of of Date of Name Incorporation Ownership Incorporation - ---- ------------- --------- ------------- Harrah's Shreveport Investment Nevada 100% 04/23/92 Company, Inc. Harrah's Shreveport Management Nevada 100% 04/23/92 Company, Inc. Harrah's Skagit Valley Agency Corporation Nevada 100% 11/08/95 Harrah's Southeast Washington Casino Nevada 100% 11/21/95 Corporation Harrah's Southwest Michigan Casino Nevada 100% 04/06/95 Corporation Harrah's Travel, Inc. Nevada 100% 07/30/98 Harrah's Tunica Corporation Nevada 100% 08/10/92 Harrah's Vicksburg Corporation Nevada 100% 07/13/92 Harrah's Washington Corporation Nevada 100% 02/03/94 Harrah's West Virginia Corporation W. Virginia 100% 03/03/95 Harrah's Wheeling Corporation Nevada 100% 04/29/94 Rio Hotel & Casino, Inc. Nevada 100% 06/14/88 Rio Resort Properties, Inc. Nevada 100% 09/04/87 Rio Properties, Inc. Nevada 100% 02/24/92 Cinderlane, Inc. Nevada 100% 12/29/94 Twain Avenue, Inc. Nevada 100% 08/08/97 HLG, Inc. Nevada 100% 10/28/96 Rio Leasing, Inc. Nevada 100% 09/10/96 Rio Development Company, Inc. Nevada 100% 08/28/96 Rio Vegas Hotel Casino, Inc. Nevada 100% 09/28/88 Showboat, Inc. Nevada 100% 02/16/60 Showboat Australia PTY Limited(4) Australia 50% 08/11/93 Ocean Showboat, Inc. New Jersey 100% 09/12/83 Atlantic City Showboat, Inc. New Jersey 100% 01/10/84 Ocean Showboat Finance Corporation New Jersey 100% 12/22/86 Showboat Development Company Nevada 100% 06/09/83 Lake Pontchartrain Showboat, Inc. Nevada 100% 03/18/93 Showboat Canada, Inc. Canada 100% 06/28/93 Dion Showboat, Inc. Canada 100% 06/28/93 Showboat Grande, Inc. Nevada 100% 06/08/93 Showboat Indiana, Inc. Nevada 100% 09/13/93 Showboat LMI, Inc. Nevada 100% 07/26/94 Showboat Louisiana, Inc. Nevada 100% 05/18/93 Showboat Missouri, Inc. Nevada 100% 07/26/94 Showboat Mohawk, Inc. Nevada 100% 07/07/93 Showboat New Hampshire, Inc. Nevada 100% 07/26/94 Showboat One, Inc. Nevada 100% 07/26/94 Showboat Six, Inc. Nevada 100% 07/26/94 Showboat Seven, Inc. Nevada 100% 07/26/94 Showboat Eight, Inc. Nevada 100% 07/26/94 Showboat Nine, Inc. Nevada 100% 07/27/94 Showboat Ten, Inc. Nevada 100% 07/27/94 Showboat Eleven, Inc. Nevada 100% 07/27/94 Showboat Twelve, Inc. Nevada 100% 07/27/94 Showboat Thirteen, Inc. Nevada 100% 07/27/94 Showboat Fourteen, Inc. Nevada 100% 07/27/94 Showboat Fifteen, Inc. Nevada 100% 07/27/94
HARRAH'S ENTERTAINMENT, INC.
Jurisdiction Percentage of of Date of Name Incorporation Ownership Incorporation - ---- ------------- --------- ------------- Showboat Finance Corporation Nevada 100% 05/10/94 Showboat Intellectual Property, Inc. Nevada 100% 01/25/94 Showboat Land Company Nevada 100% 11/12/97 Showboat Operating Company Nevada 100% 04/10/73 Showboat Land LLC(5) Nevada 1% 11/04/97 Trigger Real Estate Corporation Nevada 100% 07/02/98 Waterfront Entertainment and Development, Indiana 100% 07/19/93 Inc. Subsidiaries of Partnerships East Chicago Second Century, Inc.(6) Indiana 03/16/94 Showboat Marina Finance Corporation(7) Nevada 03/07/96 Sydney Casino Management PTY Ltd.(8) Australia 06/09/93
Note: (1) 100% owned by Des Plaines Development Limited Partnership of which Harrah's Illinois Corporation is 80% partner (2) 99% Harrah's Operating Company, Inc., 1% Harrah's Maryland Heights Operating Company (3) 99% Harrah's Operating Company, Inc., 1% Harrah's Management Company (4) 50% Showboat, Inc., 50% Showboat Development Company (5) 1% owned by Showboat Operating Company, 99% owned by Showboat Land Holding Limited Partnership (6) 100% owned by Showboat Marina Partnership. Stock has not been issued. (7) 100% owned by Showboat Marina Casino Partnership (8) Owned by Showboat Leighton Partnership and is the nominee corporation for that partnership Note: Harrah's Operating Company. Inc. was formerly Embassy Suites, Inc. - name changed on 6/30/95. Harrah's merged into Harrah's Operating Company, Inc. on 8/31/95. Harrah's Club merged into Harrah's Operating Company, Inc. on 8/31/95. Showboat, Inc. merged into HEI Acquisition Corp. on 6/1/98 and was the surviving entity. PUBLIC COMPANY OWNERSHIP Interactive Entertainment Limited(9) Bermuda 35.5% 01/28/81 JCC Holding Company Delaware 43% 08/20/96 National Airlines, Inc.(11) Delaware 47.8% 04/12/95 Sodak Gaming, Inc.(12) South Dakota 14.1% 06/29/89 Star City Holdings Ltd.(13) Australia 24.6% (fka Sydney Harbour Casino Holdings Ltd.)
(9) Harrah's Operating Company, Inc., stockholder. (10) Harrah's Crescent City Investment Company, stockholder. JCC Holding Company owns 100% of Jazz Casino Company, L.L.C., which operates the New Orleans casino. (11) Harrah's Entertainment, Inc. owns 3,000,000 shares of common stock (23.9%) and Rio Hotel & Casino, Inc. owns 3,000,000 shares of common stock (23.9%) of National Airlines, Inc. (12) Harrah's Operating Company, Inc., stockholder. (13) Showboat Australia PTY Ltd., stockholder. EX-27 29 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 DEC-31-1998 158,995 0 69,399 14,356 15,306 279,343 2,660,004 789,847 3,286,332 232,846 1,999,354 0 0 10,219 841,188 3,286,332 0 2,004,015 0 1,657,277 0 0 117,270 203,306 74,600 121,717 0 19,693 0 102,024 1.02 1.00
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