-----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, JL7T2wZPyrgpCu95LMC0IrSQqomLBtLg8MJWpEN2duksHtU8DFCilINZFWHbiQNn qZBpgIUC3DA/NnA3XuOACA== 0000906477-96-000012.txt : 19960325 0000906477-96-000012.hdr.sgml : 19960325 ACCESSION NUMBER: 0000906477-96-000012 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960322 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHOWBOAT INC CENTRAL INDEX KEY: 0000089966 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880090766 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-07123 FILM NUMBER: 96537204 BUSINESS ADDRESS: STREET 1: 2800 FREMONT ST CITY: LAS VEGAS STATE: NV ZIP: 89104 BUSINESS PHONE: 7023859123 FORMER COMPANY: FORMER CONFORMED NAME: NEW HOTEL SHOWBOAT INC DATE OF NAME CHANGE: 19690122 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K/A (AMENDMENT NO. 1) (Mark One) [X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [FEE REQUIRED] For the fiscal year December 31, 1995 ended [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 1-7123 Showboat, Inc. (Exact name of registrant as specified in its charter) Nevada 88-0090766 (State or other jurisdiction (I.R.S. employer of incorporation or identification no.) organization) 2800 Fremont Street, Las Vegas, Nevada 89104 (Address of principal executive offices) (Zip code) (702) 385-9141 (Registrant's telephone number, including area code) Securities registered pursuant to section 12(b) of the Act: Name of each Title of each class exchange on which registered Common Stock, $1.00 par value, and New York Stock Preferred Stock Purchase Rights Exchange 9 1/4% First Mortgage Bonds due 2008 New York Stock Exchange 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 [ ] 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. [ ] The aggregate market value of voting stock held by non- affiliates of the registrant, based on the closing price of registrant's common stock on the New York Stock Exchange on March 15, 1996, was approximately $342,272,000. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 15, 1996: 15,762,285 DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Report is incorporated by reference from the Showboat, Inc. Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Report. The undersigned registrant hereby amends the following items, financial statements, exhibits or portions of its annual report on Form 10-K for the fiscal year ended December 31, 1995, as set forth in the pages attached hereto: Item 1. Business Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation PART I ITEM 1. BUSINESS GENERAL Showboat, Inc. (the "Company"), through subsidiaries, (i) owns and operates the Showboat Casino Hotel fronting the Boardwalk in Atlantic City, New Jersey (the "Atlantic City Showboat"), (ii) owns and operates the Showboat Hotel, Casino and Bowling Center in Las Vegas, Nevada (the "Las Vegas Showboat"), and (iii) beneficially owns a 26.3% interest in, and manages, the Sydney Harbour Casino in Sydney, New South Wales, Australia, which commenced gaming operations in an interim casino on September 13, 1995. The Company, through subsidiaries, also owns (i) a 55% partnership interest in Showboat Marina Partnership, which received a certificate of suitability on January 8, 1996 for a riverboat owner's license in East Chicago, Indiana, and (ii) an 80% interest in Southboat Limited Partnership which has submitted an application with the Missouri Gaming Commission for a riverboat gaming license near Lemay, Missouri. From July 1993 to March 31, 1995, the Company owned an interest in, and managed the Showboat Star Casino, a riverboat casino then located on Lake Pontchartrain in New Orleans, Louisiana. The Company commenced operations in September 1954, as a partnership, and was incorporated in Nevada in 1960. The Company operated only in Nevada until the Atlantic City Showboat commenced operations in 1987. The Company became a publicly traded company on December 9, 1968. It was listed on the American Stock Exchange from 1973 to 1984 and on the New York Stock Exchange from 1984 to the present. Unless the context otherwise requires, the "Company" or "Showboat," as applicable, refers to Showboat, Inc. and its subsidiaries. The Company's executive offices are located at 2800 Fremont Street, Las Vegas, Nevada 89104, and its telephone number is (702) 385-9141. FISCAL YEAR 1995 DEVELOPMENTS SYDNEY, AUSTRALIA The Sydney Harbour Casino commenced gaming operations in an interim casino in Sydney, New South Wales, Australia on September 13, 1995. Showboat Australia Pty Limited ("SA"), a corporation formed under the laws of the State of New South Wales and wholly-owned by subsidiaries of Showboat, is the largest single shareholder at 26.3% of Sydney Harbour Casino Holdings Limited ("SHCH"). SHCH, through wholly-owned subsidiaries, owns the Sydney Harbour Casino and holds the casino license required to operate the Sydney Harbour Casino. SA also has an 85% interest in the management company which manages the Sydney Harbour Casino pursuant to the terms of a 99-year management agreement. The interim casino, which has approximately 60,000 square feet of casino space, is located approximately one mile from the Sydney central business district at Pyrmont Bay adjacent to Darling Harbour on Wharves 12 and 13. An existing building was renovated to permit the operation of the interim casino containing 500 slot machines and 150 table games. The interim casino is open 24 hours per day, every day of the year. The interim casino features restaurants, bars, a sports lounge and a gift shop. The opening of the Sydney Harbour Casino marks the beginning of Sydney Harbour Casino's 12-year monopoly as the only full- service casino in the State of New South Wales. This exclusive 12-year period is included in the 99-year casino license awarded to Sydney Harbour Casino Pty Limited ("SHCL"), a wholly-owned subsidiary of SHCH. Pursuant to the terms of a construction contract and subject to certain exceptions, the permanent Sydney Harbour Casino must be completed within 38 months of the December 1994 award of the casino license to SHCL. The Company anticipates that the permanent Sydney Harbour Casino will commence operations by early 1998. The permanent Sydney Harbour Casino will be located at Pyrmont Bay next to the interim casino site. Pursuant to the terms of the casino license, upon opening the permanent casino, the interim casino will cease operations. The permanent Sydney Harbour Casino will feature approximately 153,000 square feet of casino space, including an approximately 22,000 square foot private gaming area to be located on a separate level which will target a premium clientele. The Sydney Harbour Casino will have 1,500 slot machines and 200 table games. The permanent Sydney Harbour Casino will also contain several themed restaurants, cocktail lounges, a 2,000 seat lyric theatre, a 900 seat cabaret style theatre and extensive public areas. The Sydney Harbour Casino complex will include a 352-room hotel tower and an adjacent condominium tower containing 139 privately-owned units with full hotel services. The complex will also include extensive retail facilities, a station for Sydney's proposed light rail system, a bus terminal, docking facilities for commuter ferries and parking for approximately 2,500 cars. EAST CHICAGO, INDIANA On January 8, 1996, the Showboat Marina Partnership ("SMP") was issued a certificate of suitability by the Indiana Gaming Commission (the "Indiana Commission") for a gaming license to own and operate a riverboat casino and related facilities (collectively, the "East Chicago Showboat") in East Chicago, Indiana. SMP is owned 55% by Showboat Indiana Investment Limited Partnership, a wholly-owned limited partnership of the Company, and 45% by Waterfront Entertainment and Development, Inc. ("Waterfront"), an unrelated corporation. SMP has applied to the Indiana Commission to transfer the certificate of suitability to a subsidiary partnership. The subsidiary partnership would then, if the transfer is approved, own and operate the East Chicago Showboat. No assurance can be given that the Indiana Commission will approve the transfer of the certificate of suitability to the subsidiary partnership. The certificate of suitability is valid for a period of 180 days from January 8, 1996, during which time SMP or the subsidiary partnership, as applicable, must comply with certain statutory requirements and special conditions in order to receive a permanent riverboat owner's license. The time period of the certificate of suitability may be extended at the discretion of the Indiana Commission. During the 180 day (or subsequently extended) interim compliance period, SMP or the subsidiary partnership, as applicable, must (i) invest at least $154.5 million in project development costs for the East Chicago Showboat, including, but not limited to site improvements, preopening expenses and contingency; (ii) obtain all permits, licenses and certificates required for lawful operation of the East Chicago Showboat, including those related to zoning, building, fire safety and health; (iii) obtain any required financing; (iv) post a bond in an amount the local community will spend for infrastructure and any other facilities associated with the East Chicago Showboat; (v) obtain insurance; and (vi) obtain licensure for gaming equipment. Failure to substantially comply with the foregoing requirements may result in the Indiana Commission not extending the certificate of suitability beyond the initial 180 day period. The certificate of suitability also provides that failure to commence excursions within twelve months of January 8, 1996, may result in the revocation of the certificate of suitability; however, to date, the Indiana Commission has not revoked any gaming operator's certificate of suitability for failure to commence excursions within twelve months of issuance. No assurance can be given, however, that the Indiana Commission will not revoke the certificate of suitability if SMP or the subsidiary partnership, as applicable, fails to commence excursions within 12 months of the date of issuance thereof. If the Indiana Commission determines SMP or the subsidiary partnership, as applicable, has complied with the requirements of the certificate of suitability and all other applicable statutory and regulatory requirements required during the interim compliance period, it may issue an owner's license. The East Chicago Showboat will be located approximately 12 miles from downtown Chicago, Illinois. The current plans for the East Chicago Showboat contemplate a 100,000 square foot state-of- the-art riverboat casino containing approximately 51,000 square feet of gaming space on four levels and will feature approximately 1,700 slot machines and approximately 86 table games. The riverboat casino is designated to accommodate up to 3,750 customers. Adjacent to the riverboat will be an approximately 100,000 square foot pavilion which will feature restaurants, cocktail lounges and retail space. The East Chicago Showboat will provide secure, well-lit customer parking for approximately 2,500 vehicles, which includes a parking garage for approximately 1,000 vehicles and surface level parking for approximately 1,500 vehicles. The East Chicago Showboat is expected to cost approximately $195.0 million and is expected to commence gaming operations by July 1, 1997. Showboat will invest approximately $40.0 million in SMP of which $39.0 million will be contributed to the subsidiary partnership. SMP, or the subsidiary partnership, as applicable, intends to obtain a combination of debt and equipment financings for an aggregate of approximately $156.0 million to develop the East Chicago Showboat. No assurance can be given that SMP, or the subsidiary partnership, as applicable, will be successful in obtaining such financings. Under the current partnership agreement, the Company will receive a 12% preferred return on its investment in SMP. In addition, subject to certain qualifications and exceptions, the Company has agreed to provide a completion guarantee to complete the East Chicago Project so that it becomes operational, including the payment of all costs owing prior to such completion, up to a maximum aggregate amount of $30.0 million should a lender require a completion guarantee in connection with any development financing. In addition, subject to certain qualifications and exceptions, the Company has agreed to provide a standby equity commitment should a lender require a standby equity commitment in connection with any development financing, pursuant to which it will cause to be made up to an aggregate of $30.0 million in additional capital contributions to SMP or the subsidiary partnership if, during the first three full four fiscal quarters following the commencement of operations, the East Chicago Project's combined cash flow (as defined) is less than $35.0 million for any one such full four quarter period. However, in no event will the Company be required to cause to be contributed to the subsidiary partnership more than $15.0 million in respect of any one such full four quarter period. If the Company is required to provide a standby equity commitment, Waterfront has agreed to pay the Company $5.2 million, which amount shall accrue interest at 12% per annum until paid, from Waterfront's share of distributable cash from SMP. Among other things, SMP agreed to contribute the following economic incentives to the City of East Chicago: (i) 3% of its adjusted gross receipts for the benefit of economic development, education and community development in the City of East Chicago, (ii) .75% of its adjusted gross receipts for the benefit of commercial and housing development in the City of East Chicago, (iii) to reimburse certain expenses of the City of East Chicago, (iv) to fund certain projects and programs designated by the City of East Chicago, and (v) to provide job training for residents of the City of East Chicago who are hired as employees of East Chicago Showboat. SMP committed to fund the following projects in the approximate amounts specified, regardless of the issuance of a gaming license: (1) Healthy East Chicago Wellness Program, with estimated expenditures of $200,000 in 1996; (2) comprehensive market development assessment for various transportation corridors in the City, with estimated expenditures of $70,000 in 1996; (3) various capital improvements to the City, with expenditures of $500,000 in 1996; and (4) engineering fees related to the water marketing project for extension of the City's water main, with estimated expenditures of $500,000 in 1996. Fifty percent of the funds expended by SMP or the subsidiary partnership, as applicable, in connection with these four projects shall be credited against the 1% share payable to the City of East Chicago during the first and, if necessary second years of operations, only, unless otherwise approved by the City of East Chicago. On October 19, 1995, SMP entered into a lease with the City of East Chicago for certain real property and improvements in Lake County, Indiana. The term of the lease which commenced upon the issuance of the certificate of suitability is 30 years with two options to extend for 30 years each. Annual rent for the SMP Casino Site is $400,000, subject to adjustment. On December 6, 1995, the U.S. Army Corps of Engineers issued a final development permit to the City of East Chicago for the East Chicago Showboat. LAS VEGAS, NEVADA In December 1995, the Company completed an approximately $21.0 million renovation of the Las Vegas Showboat that primarily improved the quality of the public areas of the Las Vegas Showboat. Approximately 30,000 square feet or 40% of the casino space was closed from July 1995 to December 1995 as a result of the renovation, which closure caused a significant disruption in operations and earnings at the Las Vegas Showboat. The renovation project included the replacement of the roof over a portion of the casino which resulted in higher ceilings and the removal of a number of support pillars, giving the casino a more expansive appearance. An internal balcony was added which provides an overview of the casino. The renovation also included a number of alterations and expansions to the dining and bar areas to improve their variety and overall ambiance. The coffee shop was expanded to include patio seating which looks into the casino. The Mardi Gras Lounge, formerly the Carnival Lounge, was doubled in size to meet the demand of patrons when popular entertainers perform, and the casino bar adjacent to the lounge was expanded to include an additional raised seating area and a large screen television. Additionally, the facilities power plant and HVAC systems were replaced, a new pool building was constructed, new carpeting was installed throughout the property, the buffet and coffee shop kitchens and the employee dining room were remodeled and enlarged and an employee learning center was added. ATLANTIC CITY, NEW JERSEY During 1995, the Atlantic City Showboat restructured the layout of its casino. Jake's Betting Parlor, which contained approximately 15,000 square feet of casino space, approximately 40 table games, a horse race simulcast facility, a keno facility and a poker room, was converted into the Carousel Room, a premium slot area. The simulcast and keno facilities were relocated to the main casino floor. Approximately 400 slot machines were added in connection with this restructuring. In connection with the settlement of certain litigation in December 1995 for cash and non-cash consideration, Atlantic City Showboat, Inc. ("ACSI"), a wholly-owned subsidiary of the Company, received title to certain real property adjacent to the Atlantic City Showboat upon which it constructed a surface level parking area for approximately 500 vehicles. LEMAY, MISSOURI On May 1, 1995, Southboat Limited Partnership ("SLP") was formed by Showboat Lemay, Inc. ("Showboat Lemay"), a corporation wholly-owned by the Company, and Futuresouth, Inc. ("Futuresouth"), an unrelated corporation, for the purpose of designing, developing, constructing, owning and operating a riverboat casino and related facilities (collectively, the "Southboat Casino Project"). SLP is owned 80% by Showboat Lemay, the sole general partner, and 20% by Futuresouth, the sole limited partner. The Southboat Casino Project is expected to be located on approximately 29 acres at the southernmost portion of the St. Louis County Port Authority Site on the Mississippi River near Lemay, Missouri (the "Southboat Casino Site"). The Southboat Casino Project is intended to be a multi-level gaming and entertainment facility within a New Orleans-themed riverboat and permanently-moored barge complex. The total cost of the Southboat Casino Project is anticipated to be approximately $117.0 million. The limited partnership agreement provides that the Company's initial capital contribution is $19.5 million and that Showboat Lemay, on behalf of SLP, will arrange for a $75.0 million loan to develop the Southboat Casino Project and to arrange for equipment financing for the remaining costs of the project. SLP has entered into a commitment letter to receive up to $75.0 million of financing for the construction of the Southboat Casino Project, subject to certain conditions. The commitment letter expires on May 10, 1996. No assurance can be given that SLP will be selected for investigation prior to the expiration of the commitment letter. No assurance can be given that SLP will be successful in obtaining the necessary funds to finance the Southboat Casino Project or that SLP will be successful in obtaining a casino license. The Company has also agreed to provide a loan to SLP in the amount of approximately $4.5 million to assist in the development of the Southboat Casino Project. Pursuant to the terms of a management agreement, an administrative services agreement and a trademark license agreement, each dated May 2, 1995, the Company has agreed to manage and to provide other services to the proposed operations at the Southboat Casino Project. The Company will receive an aggregate fee equal to 5 1/4 % of gross gaming revenues net of all gaming taxes, plus an incentive management fee equal to (i) 20% of earnings between $30.0 to $35.0 million before any interest expense, income taxes, capital lease rent, depreciation and amortization, and (ii) 10% of earnings in excess of $35.0 million before any interest expense, income taxes, capital lease rent, depreciation and amortization. On October 13, 1995, SLP entered into a lease and development agreement with the St. Louis County Port Authority ("Port Authority") for the lease of the Southboat Casino Site for a term of 99 years, commencing upon the investigation of SLP for a Missouri gaming license and the receipt of all permits from the U.S. Army Corps of Engineers. Fees and rent for the Southboat Casino Site are payable as follows: (i) a $500,000 acceptance fee upon completion of a due diligence period; (ii) a $750,000 security deposit on the commencement date of the lease; (iii) a $2.5 million fee on the commencement date of the lease; (iv) a $2.5 million fee on the opening date of the Southboat Casino Project; (v) rent in the amount of $2.0 million per annum payable in equal monthly installments, beginning on the commencement date and continuing until the opening of the Southboat Casino Project; and (iv) rent in the amount of the greater of 4% of adjusted gross receipts or Minimum Rent (as defined below), beginning on the opening date of the Southboat Casino Project and continuing until the expiration of the term of the lease. "Minimum Rent" means $3.0 million during the first 12-month period occurring after the opening of the Southboat Casino Project; $2.8 million during the second 12-month period; $2.6 million during the third 12-month period; $2.4 million during the fourth 12-month period; $2.2 million during the fifth 12-month period; and $2.0 million beginning on the fifth anniversary of the opening of the Southboat Casino Project and continuing through the 15th lease year ("Guarantee Period"). The Company has guaranteed SLP's payment of Minimum Rent for the Guarantee Period and SLP's timely completion of, construction of, and payment for all improvements and installations in connection with SLP's development of the Southboat Casino Project. If SLP fails to pay any monthly installment of Minimum Rent, or if the lease is terminated at any time within the Guarantee Period due to an event of default by SLP, the Company must pay either (i) the full sum of unpaid Minimum Rent due for the remainder of the Guarantee Period, or (ii) if it posts a $2.0 million letter of credit, make monthly payments of Minimum Rent. In addition, the Company agreed to provide a Guarantee of Completion to the Port Authority which provides, in material part, that the Company will complete the construction of the Southboat Casino Project should SLP, after the commencement of work, abandon the project for a period of 30 days after receipt of notice from the Port Authority. On October 17, 1995, SLP submitted an application to the Missouri Gaming Commission (the "Missouri Commission") for the necessary gaming licenses to own and operate the Southboat Casino Project. In the event SLP is selected for investigation by the Missouri Commission for a casino license, SLP will submit an application to the U.S. Army Corps of Engineers for the necessary permits. In the event that SLP is issued such permits by the U.S. Army Corps of Engineers, SLP will commence construction of the Southboat Casino Project, which construction the Company believes will take approximately 12 to 18 months to complete. As of March 15, 1996, SLP had not been selected for investigation by the Missouri Commission for a casino license and there can be no assurance that such a selection will occur or, if such selection occurs, that a gaming license will be granted to SLP. PREFERRED STOCK PURCHASE RIGHTS On October 5, 1995, the Board of Directors of the Company declared a dividend to shareholders of record on October 16, 1995 of one Preferred Stock Purchase Right (the "Right(s)") for each outstanding share of Common Stock, par value $1.00 per share (the "Common Stock"), of the Company. Each Right entitles the registered holder to purchase from the Company one one-hundredth (1/100) of a share of a new series of preferred shares of the Company, designated as Series A Junior Preferred Stock ("Preferred Stock"), at a price of $120.00 per one one-hundredth (1/100) of a share (the "Exercise Price"), subject to certain adjustments. Initially, the Rights are not exercisable and automatically trade with the Common Stock. The Rights are not represented by a separate certificate, but are evidenced, with respect to any of the Common Stock certificates outstanding as of October 16, 1995, by such Common Stock certificate with a copy of a summary of the Rights attached thereto. The Rights, unless earlier redeemed by the Board of Directors, become exercisable upon the close of business on the day (the "Distribution Date") which is the earlier of (i) the tenth day following a public announcement that a person or group of affiliated or associated persons, with certain exceptions set forth below, has acquired beneficial ownership of 15% or more of the outstanding voting stock of the Company (an "Acquiring Person") and (ii) the tenth business day (or such later date as may be determined by the Board of Directors prior to such time as any person or group of affiliated or associated persons becomes an Acquiring Person) after the date of the commencement or announcement of a person's or group's intention to commence a tender or exchange offer the consummation of which would result in the ownership of 30% or more of the Company's outstanding voting stock (even if no shares are actually purchased pursuant to such offer). An Acquiring Person does not include (A) the Company, (B) any subsidiary of the Company, (C) any employee benefit plan or employee stock plan of the Company or of any subsidiary of the Company, or any trust or other entity organized, appointed, established or holding Common Stock for or pursuant to the terms of any such plan or (D) any person or group whose ownership of 15% or more of the shares of voting stock of the Company then outstanding results solely from (i) any action or transaction or transactions approved by the Board of Directors before such person or group became an Acquiring Person or (ii) a reduction in the number of issued and outstanding shares of voting stock of the Company pursuant to a transaction or transactions approved by the Board of Directors (provided that any person or group that does not become an Acquiring Person by reason of clause (i) or (ii) above shall become an Acquiring Person upon acquisition of an additional 1% of the Company's voting stock unless such acquisition of additional voting stock will not result in such person or group becoming an Acquiring Person by reason of such clause (i) or (ii)). The Rights are not exercisable until the Distribution Date. The Rights will expire at the close of business on October 5, 2005, unless earlier redeemed by the Company as described below. The Preferred Stock is non-redeemable and, unless otherwise provided in connection with the creation of a subsequent series of preferred stock, subordinate to any other series of the Company's preferred stock. The Preferred Stock may not be issued except upon exercise of Rights. Each share of Preferred Stock will be entitled to receive when, as and if declared, a quarterly dividend in an amount equal to the greater of $120.00 per share and 100 times the cash dividends declared on the Company's Common Stock. In addition, the Preferred Stock is entitled to 100 times any non-cash dividends (other than dividends payable in equity securities) declared on the Common Stock, in like kind. In the event of liquidation, the holders of Preferred Stock will be entitled to receive for each share of Series A Preferred Stock, a liquidation payment in an amount equal to the greater of $12,000.00 or 100 times the payment made per share of Common Stock. Each share of Preferred Stock will have 100 votes, voting together with the Common Stock. In the event of any merger, consolidation or other transaction in which Common Stock is exchanged, each share of Preferred Stock will be entitled to receive 100 times the amount received per share of Common Stock. The rights of Preferred Stock as to dividends, liquidation and voting are protected by anti-dilution provisions. The number of shares of Preferred Stock issuable upon exercise of the Rights is subject to certain adjustments from time to time in the event of a stock dividend on, or a subdivision or combination of, the Common Stock. The Exercise Price for the Rights is subject to adjustment in the event of extraordinary distributions of cash or other property to holders of Common Stock. Unless the Rights are earlier redeemed or the transaction is approved by the Board of Directors and the Continuing Directors, in the event that, after the time that the Rights become exercisable, the Company were to be acquired in a merger or other business combination (in which any shares of the Company's Common Stock are changed into or exchanged for other securities or assets) or more than 50% of the assets or earning power of the Company and its subsidiaries (taken as a whole) were to be sold or transferred in one or a series of related transactions, the Rights Agreement provides that proper provision will be made so that each holder of record of a Right will from and after such date have the right to receive, upon payment of the Exercise Price, that number of shares of common stock of the acquiring company having a market value at the time of such transaction equal to two times the Exercise Price. In addition, unless the Rights are earlier redeemed, if a person or group (with certain exceptions) becomes the beneficial owner of 15% or more of the Company's voting stock (other than pursuant to a tender or exchange offer (a "Qualifying Tender Offer") for all outstanding shares of Common Stock that is approved by the Board of Directors, after taking into account the long-term value of the Company and all other factors they consider relevant in the circumstances), the Rights Agreement provides that proper provision will be made so that each holder of record of a Right, other than the Acquiring Person (whose Rights will thereupon become null and void), will thereafter have the right to receive, upon payment of the Exercise Price, that number of shares of the Company's Preferred Stock having a market value at the time of the transaction equal to two times the Exercise Price (such market value to be determined with reference to the market value of the Company's Common Stock as provided in the Rights Agreement). At any time on or prior to the close of business on the tenth day after the time that a person has become an Acquiring Person (or such later date as a majority of the Board of Directors and a majority of the Continuing Directors (as defined in the Rights Agreement) may determine), the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right ("Redemption Price"). The Rights may be redeemed after the time that any person has become an Acquiring Person only if approved by a majority of the Continuing Directors. Immediately upon the effective time of the action of the Board of Directors of the Company authorizing redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of the Rights will be to receive the Redemption Price. For as long as the Rights are then redeemable, the Company may, except with respect to the redemption price or date of expiration of the Rights, amend the Rights in any manner, including an amendment to extend the time period in which the Rights may be redeemed. At any time when the Rights are not then redeemable, the Company may amend the Rights in any manner that does not materially adversely affect the interests of holders of the Rights as such. Amendments to the Rights Agreement from and after the time that any person becomes an Acquiring Person requires the approval of a majority of the Continuing Directors (as provided in the Rights Agreement). 200,000 shares of Preferred Stock have been reserved for issuance upon exercise of the Rights. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group who attempts to acquire the Company on terms not approved by the Company's Board of Directors. The Rights should not interfere with any merger or other business combination approved by the Board since they may be redeemed by the Company at $.01 per Right at any time until the close of business on the tenth day (or such later date as described above) after a person or group has obtained beneficial ownership of 15% or more of the voting stock. NEW ORLEANS, LOUISIANA In a series of unrelated transactions in 1995, Showboat Star Partnership ("SSP") sold certain of its assets, and the Company sold all of its equity interest in SSP, resulting in a pretax gain to the Company of $2.6 million. SSP owned the Showboat Star Casino that was located on the south shore of Lake Pontchartrain in New Orleans, Louisiana, approximately seven miles from the New Orleans' "French Quarter." The Showboat Star Casino commenced gaming operations on November 8, 1993. The riverboat contained approximately 21,900 square feet of gaming space on three levels, with approximately 770 slot machines and 40 table games. On- shore facilities included a 34,000 square foot terminal building, which contained a restaurant, a cocktail lounge and administrative offices. SSP elected to cease all gaming operations on March 9, 1995 due to conflicting interpretations by the Orleans Parish District Attorney and an administrative law judge regarding the Louisiana Riverboat Gaming Act relating to circumstances under which a riverboat casino could conduct dockside gaming operations. RANDOLPH, MISSOURI In March 1995, the Company, through a subsidiary, purchased a 35% interest in Showboat Mardi Gras, L.L.C. ("SMG") (f/k/a Randolph Riverboat Company, L.L.C.), which applied for a gaming license with the Missouri Commission to own and operate a riverboat casino in Randolph, Missouri. In May 1995, the Missouri Commission selected the applicants for the then available gaming licenses in the Kansas City, Missouri metropolitan area. SMG was not selected and is currently seeking a buyer for its riverboat. The Company contributed approximately $5.1 million to SMG which was used for the construction of the riverboat, costs incurred in the license application process and other general and administrative expenses. Although additional contributions may be required from the Company in order for SMG to sell the riverboat, the Company will receive a portion of the proceeds upon the sale of the riverboat and other assets of SMG. The Company has recognized a pre-tax write-down of $1.4 million on its investment in SMG. ROCKINGHAM PARK, NEW HAMPSHIRE In July 1995, the Company, through its wholly-owned subsidiary, Showboat New Hampshire, Inc. ("SNHI"), entered into definitive agreements with Rockingham Venture, Inc. ("RVI") regarding the proposed development and management of a non-racing gaming project ("Showboat Rockingham Park") at Rockingham Park in Salem, New Hampshire. RVI is the owner and operator of Rockingham Park which is a thoroughbred racetrack. In December 1994, the Company loaned approximately $8.9 million to RVI, which loan is secured by a second mortgage on Rockingham Park. The development of Showboat Rockingham Park, among other things, is subject to the passage of enabling gaming legislation by the State of New Hampshire and the Town of Salem. SNHI owns a 50% interest in Showboat Rockingham Company, L.L.C. ("SRC") that was formed for the purpose of developing and owning Showboat Rockingham Park. Depending upon the number and types of games, if any, legalized by the necessary authorities, SNHI and RVI will make certain capital contributions to SRC. At a minimum, the Company will contribute the promissory note representing the loan. If enabling gaming legislation permits more than 500 slot machines or any combination of slot machines and table games, the Company, subject to available financing, will contribute funds not to exceed 30% of the cash funds required for the project. At this time, the cost of the project has not been determined. Pursuant to the terms of a management agreement, an administrative services agreement and a trademark license agreement, each dated June 1995, the Company has agreed to manage and to provide other services to the proposed operations at Showboat Rockingham Park. The Company will receive an aggregate fee equal to (i) 1.5% of gross gaming revenue up to a maximum fee of $1.0 million per year, and (ii) 7% of earnings before any interest expense, income taxes, capital lease rentals, depreciation and amortization. The horse racing activities will continue to be operated by RVI. FUTURE EXPANSION The Company regularly evaluates and pursues potential expansion and acquisition opportunities in both domestic and international markets. Such opportunities may include the ownership, management and operation of gaming and entertainment facilities, either alone or with joint venture partners. Development and operation of any gaming facility is subject to numerous contingencies, several of which are outside of the Company's control and may include the enactment of appropriate gaming legislation, the issuance of requisite permits, licenses and approvals, the availability of appropriate financing and the satisfaction of other conditions. There can be no assurance that the Company will elect or be able to consummate any such acquisition or expansion opportunity. NARRATIVE DESCRIPTION OF BUSINESS ATLANTIC CITY OPERATIONS The Company's subsidiary, ACSI, owns and operates the Atlantic City Showboat, which commenced operations in 1987. ACSI is a wholly-owned subsidiary of Ocean Showboat, Inc. ("OSI"), which is a wholly-owned subsidiary of the Company. The Atlantic City Showboat is located at the eastern end of the Boardwalk on approximately 12 acres, 10 1/2 acres of which are leased to ACSI. In addition, ACSI owns two nearby surface parking lots which consist of approximately nine acres in the aggregate. The Atlantic City Showboat is a New Orleans-themed hotel- casino featuring, as of March 1, 1996, approximately 97,000 square feet of casino space located in an expansive four-story podium facility. The four-story podium houses the casino and a 20-story hotel tower and is adjacent to a 17-story hotel tower constructed in 1994. The Atlantic City Showboat has been designed to promote ease of customer access to the casino and all other public areas of the hotel-casino. Access to the Atlantic City Showboat's four-story podium is provided by two main entrances, one on the Boardwalk and one on Pacific Avenue, which runs parallel to the Boardwalk. The Atlantic City Showboat contains two public levels. Two pairs of large escalators, which are directly accessible from the two ground level entrances, and ten elevators provide easy access to the second public level. Public areas located on the ground level, in addition to the casino space, include a show lounge, five restaurants, two cocktail lounges, a pizza snack bar, an ice cream parlor, and retail shopping. Public areas located on the second level include a buffet, a coffee shop, a private players club, a beauty salon, a health spa, a video game arcade, approximately 27,000 square feet of meeting rooms, convention, board room and exhibition space and a 60-lane bowling center, including a snack bar and cocktail lounge. As of March 1, 1996, the casino offered approximately 3,300 slot machines, 95 table games, a horse race simulcast facility and a keno facility. The second and fourth levels of the four-story podium are occupied by kitchens, storage for food, beverage and other perishables, surveillance and security areas, an employee cafeteria, computer equipment and executive and administrative offices. The two hotel towers feature a total of 800 hotel rooms. Many of the hotel rooms have a view of the ocean. Included in the number of hotel rooms are 59 suites, 40 of which have ocean- front decks. A nine-story parking garage is located on-site at the Pacific Avenue entrance. The facility provides self-parking for approximately 2,000 cars and a 14-bus depot integrated with the casino podium. In addition, on-site underground parking accommodates valet parking for approximately 500 cars. This design permits Atlantic City Showboat's customers to enter the casino hotel protected from the weather. The Atlantic City Showboat also has surface level self-parking for approximately 950 cars. Adjacent to the Atlantic City Showboat is the Taj Mahal Casino Hotel (the "Taj Mahal"). The Taj Mahal is the largest casino in Atlantic City and is connected to both the Atlantic City Showboat and Merv Griffin's Resorts International Casino Hotel by pedestrian passageways. These three properties form an "uptown casino complex" in which patrons can pass from property to property, either on the ocean-front Boardwalk or through the pedestrian connectors. ATLANTIC CITY EMPLOYEES AND LABOR RELATIONS As of March 1, 1996, the Atlantic City Showboat employed approximately 3,300 persons on a full-time basis and approximately 350 persons on a part-time basis. Approximately 1,330 or 40.3% of the Atlantic City Showboat's full-time employees are covered by collective bargaining agreements. The number of employees at the Atlantic City Showboat is expected to fluctuate, with the highest number during the summer months and the lowest number during the winter months. All employees of the Atlantic City Showboat whose responsibilities involve or relate to the casino or the simulcast area must be licensed by or registered with the applicable New Jersey regulatory authorities before commencing work at the Atlantic City Showboat. The Company considers its current labor relations to be satisfactory. LAS VEGAS OPERATIONS The Company owns the Las Vegas Showboat which commenced operations in September 1954. The Las Vegas Showboat is managed by Showboat Operating Company ("SBOC"), a wholly-owned subsidiary of the Company. The Las Vegas Showboat, which covers approximately 26 acres, is located near the Boulder Highway approximately two and one-half miles from the hotel-casinos in downtown Las Vegas or on the Las Vegas Strip. The Las Vegas Showboat is a New Orleans-themed hotel casino in an 18-story hotel tower and low-rise complex. The Las Vegas Showboat features an approximately 75,000 square foot casino, 453 hotel rooms, a 106-lane bowling center, two specialty restaurants, a buffet, a coffee shop, a 1,300-seat bingo parlor garden and a showroom. In addition, 8,300 square feet of meeting room area is available with a seating capacity of 1,000 persons. As of March 1, 1996, the Las Vegas Showboat's casino offered approximately 1,450 slot machines, 28 table games, a race and sports book and a keno facility. The Las Vegas Showboat also plans to develop a recreational vehicle park with approximately 80 spaces on leased property near the Las Vegas Showboat. Assuming there are no delays in the design and construction phases, the recreational vehicle park is expected to be operational in September 1996. The Las Vegas Showboat sponsors a variety of special events designed to produce a high volume of traffic through the casino. The Las Vegas Showboat sponsors such events as the Professional Bowlers Association Tour and Superstar Bingo, a high-stakes bingo game, and is the site of the annual High Rollers Million Dollar Bowling Tournament. The Las Vegas Showboat also regularly hosts small conventions and groups. In addition, the Las Vegas Showboat provides a slot club which is designed to attract and reward frequent slot players at the Las Vegas Showboat. LAS VEGAS EMPLOYEES AND LABOR RELATIONS As of March 1, 1996, the Las Vegas Showboat employed approximately 1,275 persons, of which approximately 724 or 56.8% of the employees were represented by collective bargaining agreements. The Company considers its current labor relations to be satisfactory. SYDNEY OPERATIONS The Company's wholly-owned subsidiary, SA, invested approximately $100.0 million for a 26.3% interest in SHCH, which, through wholly-owned subsidiaries, owns the Sydney Harbour Casino and holds the casino license required to operate the Sydney Harbour Casino. SA also has an 85% interest in the management company which manages the Sydney Harbour Casino. In December 1994, the New South Wales Casino Control Authority ("NSWCCA") granted the only full-service casino license in the State of New South Wales to SHCL. The Sydney Harbour Casino commenced gaming operations in an interim casino in Sydney, Australia on September 13, 1995. The interim casino, which has approximately 60,000 square feet of casino space, is located approximately one mile from the Sydney central business district at Pyrmont Bay adjacent to Darling Harbour on Wharves 12 and 13. An existing building was renovated to permit the operation of the interim casino containing 500 slot machines and 150 table games. The interim casino is open 24 hours per day, every day of the year. The interim casino also features restaurants, bars, a sports lounge and a gift shop. The opening of the Sydney Harbour Casino marks the beginning of Sydney Harbour Casino's 12-year monopoly as the only full- service casino in the State of New South Wales. This exclusive 12-year period is included in the 99-year casino license awarded to SHCL. Pursuant to the terms of a construction contract and subject to certain exceptions, the permanent Sydney Harbour Casino must be completed within 38 months of the award of the casino license to SHCL. The Company anticipates that the permanent Sydney Harbour Casino will commence operations by early 1998. The permanent Sydney Harbour Casino will be located at Pyrmont Bay next to the interim casino site. Pursuant to the terms of the casino license, upon opening the permanent casino, the interim casino will cease operations. The permanent Sydney Harbour Casino will feature approximately 153,000 square feet of casino space, including an approximately 22,000 square foot private gaming area to be located on a separate level which will target a premium clientele. The Sydney Harbour Casino will have 1,500 slot machines and 200 table games. The permanent Sydney Harbour Casino will also contain several themed restaurants, cocktail lounges, a 2,000 seat lyric theatre, a 900 seat cabaret style theatre and extensive public areas. The Sydney Harbour Casino complex will include a 352 room hotel tower and an adjacent condominium tower containing 139 privately-owned units with full hotel services. When available, some of the 139 privately-owned units may also be used by the hotel for its guests. The complex will also include extensive retail facilities, a station for Sydney's proposed light rail system, a bus terminal, docking facilities for commuter ferries and parking for approximately 2,500 cars on site. In April 1994, Sydney Harbour Casino Properties Pty Limited ("SHCP"), a wholly-owned subsidiary of SHCH, entered into an agreement with Leighton Properties Pty Limited ("Leighton Properties") to design and construct the interim and permanent Sydney Harbour Casino for a total of A$691.0 million. (As used in this Form 10-K, amounts in Australian dollars are denoted as "A$." As of March 15, 1996, the exchange rate was approximately $0.7744 for each A$1.00.) SHCP is currently reviewing the design of the permanent Sydney Harbour Casino with the view to improving its operational efficiency and product quality and to match the changing competitive environment. SHCP has announced project cost estimates of up to A$771.0 million, a portion of which is subject to obtaining financing, required approvals and agreements. Additionally, SHCP and Leighton Properties are discussing matters in relation to the administration and management of the project under the construction contract, including an accelerated completion date for the project, firming up on monetary allowances and resolution of certain claims notified by Leighton Properties to SHCP. The total development cost is subject to change based upon the outcome of these discussions. As with any construction contract, the final amount of such contract will be subject to modification based upon change orders and the occurrence of certain events such as costs associated with certain types of construction delays. No assurance can be given that the construction costs for the Sydney Harbour Casino will not exceed the announced project cost estimates. SHCP has incurred approximately A$276.1 million of the project costs as of December 31, 1995. Under the terms of the construction contract and subject to certain exceptions, the permanent casino must be completed within 38 months of December 1994, the date of issuance of the casino license. In the event that the permanent Sydney Harbour Casino is not completed within such time period, the construction contract provides for the payment of liquidated damages of not more than A$150,000 per day to an aggregate maximum amount of A$30.0 million. Additionally, SHCH is indemnified against any loss arising from the contractor's failure to perform its obligations under the construction contract. The cost of the Sydney Harbour Casino, excluding the cost components for construction of the interim and permanent casinos, is anticipated to be approximately A$518.0 million. In addition to its 26.3% equity interest in SHCH, SA has an option to purchase an additional 37,446,553 ordinary shares of SHCH at an exercise price of A$1.15 per share. SA's option may be exercised no earlier than July 1, 1998 and expires June 30, 2000. If all of the options to purchase equity in SHCH were exercised, including the exercise by SA of its options, SA's ownership in SHCH would increase to 28.3%. However, depending on various factors, including the number of options exercised by the holders of options, the issuance of additional shares or options by SHCH and the purchase or sale of shares of SHCH by SA, SA's ownership interest in SHCH could vary. SA is restricted to remain the beneficial owner of not less than 10% of the issued capital of SHCH for a period of not less than five years after completion of the permanent Sydney Harbour Casino and remain the beneficial owner of not less than 5% of the issued capital of SHCH for an additional two years thereafter. SHCH became a publicly listed company on the Australian Stock Exchange in June 1995. Sydney Casino Management Pty Limited (the "Manager"), a company which is 85% owned by SA and 15% owned by National Mutual Trustees Limited in trust for Leighton Properties, manages the interim casino and will manage the permanent Sydney Harbour Casino pursuant to a 99-year management agreement (the "Management Agreement"). The terms of the Management Agreement require the Manager to advise SHCL or SHCP as to the casino design and configuration and the placement of all gaming equipment. The Manager also has agreed to train all employees of the Sydney Harbour Casino and to manage a high quality international class casino in accordance with the operating standards required by the NSWCCA. The NSWCCA requires a service audit to be conducted yearly by a third party so that areas of non-compliance can be identified and remedied by the Manager. The Manager will be paid a management fee equal to the sum of (i) 1 1/2% of casino revenue, (ii) 6% of casino gross operating profit, (iii) 3 1/2% of total non-casino revenue, and (iv) 10% of total gross non-casino operating profit, for each fiscal year for services rendered by the Manager pursuant to the Management Agreement. SA has agreed to forego the first A$19.1 million of its 85% portion of the fees due under the Management Agreement, of which amount approximately A$15.1 million remains as of December 31, 1995. Gaming revenue from the Sydney Harbour Casino will be taxed at a rate of (i) 22.5% of slot machine revenue and (ii) 20% of the first A$200.0 million of gross table game revenue with the rate increasing by 1.0% for each additional A$5.0 million of gross table game revenue up to a maximum rate of 45.0% payable on gross table game revenue in excess of A$320.0 million per annum. The A$200.0 million of base gross table game revenue will be adjusted annually in accordance with changes in the Consumer Price Index (Sydney All Groups) from the first week in July each year. The base year of the index is 1992. SHCL will also pay a community benefit levy of 2.0% of gross gaming revenue. As with any major construction effort, the permanent Sydney Harbour Casino involves many risks, including, without limitation, shortages of materials and labor, work stoppages, labor disputes, weather interference, unforeseen engineering, environmental or geological problems and unanticipated cost increases, any of which could give rise to delays or cost overruns. Construction, equipment or staffing problems or difficulties in obtaining any of the requisite permits, allocations and authorizations from regulatory authorities could increase the cost or delay the construction or opening of the permanent facilities or otherwise affect their design and features. The final budgets and construction plans for the permanent Sydney Harbour Casino may vary significantly from that which is currently anticipated. Accordingly, there can be no assurance that the permanent Sydney Harbour Casino will be completed within the time periods or budgets which are currently contemplated. In addition, the Company's participation in foreign operations in New South Wales, Australia involves a number of risks. These risks include, without limitation, currency and exchange control problems, operating in highly inflationary environments, fluctuations in monetary exchange rates, the possible inability to execute and enforce agreements, the future regulations governing the repatriation of funds, political, regulatory and economic instability or changes in policies of the foreign government, and the dependence on other future events which can influence the success or failure of such foreign operations. There can be no assurance that these factors will not have an adverse impact on the Company's operating results. SYDNEY EMPLOYEES AND LABOR RELATIONS As of March 1, 1996, the Sydney Harbour Casino employed approximately 2,750 persons, of which approximately 2,290 or 83% of the employees were represented by collective bargaining agreements. The Sydney Harbour Casino considers its current labor relations to be satisfactory. FINANCIAL INFORMATION ABOUT THE COMPANY The primary source of revenue and income to the Company is its casinos, although the hotels, restaurants, bars, buffets, shops, bowling, sports and other special events and services are important adjuncts to the casinos. At December 31, 1995, casinos either owned or managed by the Company featured the following approximate number of slot machines and table games:
Interim Sydney Atlantic City Las Vegas Harbour SHOWBOAT SHOWBOAT CASINO TOTAL Slot Machines 3,450 1,450 500 5,400 "21" Tables 47 15 83 147 Poker Tables 6 0 0 6 "Craps" Tables 12 2 2 16 Roulette Tables 13 2 31 46 Caribbean Stud Poker 7 1 4 12 Pai Gow Poker Tables 1 1 4 6 Baccarat Tables 3 0 3 6 Mini-Baccarat Tables 2 0 14 16 Big Six Wheel 2 0 3 5 Sic Bo 1 0 3 5 Let It Ride 0 2 0 2 Two Up 0 0 1 1
The Atlantic City Showboat also contains a horse racing simulcast room and a keno facility. The Las Vegas Showboat also contains a race and sports book, a 1,300-seat bingo parlor and a keno facility. On March 1, 1996, the Las Vegas Showboat reintroduced five poker tables. Slot machines have been the principal source of casino revenues at the Atlantic City Showboat and the Las Vegas Showboat. At the Atlantic City Showboat, slot machines accounted for 73.9%, 73.6% and 73.2% of casino revenues for the years ended December 31, 1995, 1994 and 1993, respectively. At the Las Vegas Showboat, slot machines accounted for 85.5%, 83.0% and 84.2% of casino revenues for the years ended December 31, 1995, 1994 and 1993, respectively. In contrast, table games have been the principal source of casino revenues at the interim Sydney Harbour Casino. For the period from commencement of operations to December 31, 1995, table games accounted for 86.1% of casino revenues at the Sydney Harbour Casino. Gaming operations at the Atlantic City Showboat, the Las Vegas Showboat and the interim Sydney Harbour Casino are each conducted 24 hours a day, every day of the year. The following table sets forth the contribution to total net revenues on a dollar and percentage basis of the Company's major activities at the Atlantic City Showboat and the Las Vegas Showboat for the years ended December 31, 1995, 1994 and 1993. Net revenues for the interim Sydney Harbour Casino and the Showboat Star Casino are not included in the table since the Company accounts for its investment in SHCH and the SSP, respectively, under the equity method of accounting. The Company's equity in the income or loss of SHCH, net of intercompany elimination, was reduced to zero due to the write- off of preopening costs for the period from commencement of operations to December 31, 1995. Approximately, A$44.0 million in preopening costs were incurred as of December 31, 1995, and approximately A$23.4 million in preopening costs were expensed as of December 31, 1995. The remaining preopening costs will be expensed in 1996. The Company's equity in the income or loss of SSP, net of intercompany elimination, was a loss of $22,000 through March 31, 1995, income of $12,828,000 for the year ended December 31, 1994 and a loss of $850,000 for the period from commencement of operations to December 31, 1993. For other financial information, see the Company's financial statements contained in Item 8. Financial Statements and Supplementary Data.
Year Ended Year Ended DECEMBER 31, 1995 DECEMBER 31, 1994 (dollar amounts in thousands) AMOUNT PERCENT AMOUNT PERCENT Revenues: Casino $379,494 88.5 $351,436 87.6 Food and beverage 53,894 12.6 50,624 12.6 Rooms 25,694 6.0 20,587 5.1 Sports and special events 3,924 1.0 4,168 1.0 Other 5,379 1.2 7,799 2.0 Total gross revenues 468,385 109.3 434,614 108.3 Less compli- mentaries 39,793 9.3 33,281 8.3 Total net revenues $428,592 100.0 $401,333 100.0
Year Ended DECEMBER 31, 1993 (dollar amounts in thousands) AMOUNT PERCENT Revenues: Casino $329,522 87.7 Food and beverage 48,669 12.9 Rooms 19,355 5.2 Sports and special events 4,251 1.1 Other 5,982 1.6 Total gross revenues 407,779 108.5 Less compli- mentaries 32,052 8.5 Total net revenues $375,727 100.0 Casino revenues are the net difference between the sums paid as winnings and the sums received as losses. Complimentaries consist primarily of rooms, food and beverages furnished gratuitously to customers. The sales value of such services is included in the respective revenue classifications and is then deducted as complimentaries. Complimentary rates are periodically reviewed and adjusted by management. See Note 1 of Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data. Includes management fee revenues, net of intercompany elimination, in the amount of $.2 million, $1.9 million and $.3 million paid to Lake Pontchartrain Showboat, Inc., a wholly-owned subsidiary of the Company, from SSP in 1995, 1994 and 1993, respectively. Does not include interest income.
The Atlantic City Showboat offers complimentary meals, drinks and room accommodations to a larger percentage of customers than does the Las Vegas Showboat or the Sydney Harbour Casino. Such promotional allowances (complimentary services) at the Atlantic City Showboat were 9.7%, 8.8% and 9.3% of total net revenues for the years ended December 31, 1995, 1994 and 1993, respectively. Such promotional allowances (complimentary services) at the Las Vegas Showboat were 6.4%, 6.5% and 5.9% of total net revenues for the years ended December 31, 1995, 1994 and 1993, respectively. At the interim Sydney Harbour Casino, such complimentary services were 2.7% of the total net revenues for the period from commencement of operations to December 31, 1995. GAMING CREDIT POLICY A relatively minimal dollar amount of credit is extended to a limited number of gaming customers at the Las Vegas Showboat. The Sydney Harbour Casino is prohibited by regulation from extending any credit to its gaming customers. The Atlantic City Showboat, however, offers substantially more credit to a greater number of customers than the Las Vegas Showboat. At the Atlantic City Showboat, gaming receivables were approximately $7.1 million at December 31, 1995, before deducting allowance for doubtful accounts of approximately $2.5 million. In comparison, gaming receivables at the Atlantic City Showboat were approximately $6.9 million at December 31, 1994, before deducting allowance for doubtful accounts of approximately $2.2 million. The Atlantic City Showboat's gaming credit, as a percentage of total gaming revenues, is at a level which is consistent with that of the average credit levels for all other hotel-casinos in Atlantic City. Overall, the Company's gaming receivables were approximately $7.2 million at December 31, 1995, before deducting allowance for doubtful accounts of approximately $2.6 million. In comparison, the Company's gaming receivables were approximately $7.0 million at December 31, 1994, before deducting allowance for doubtful accounts of approximately $2.2 million. The non-collectibility of gaming receivables can have a material adverse effect on results of operations, depending upon the amount of credit extended and the size of uncollected amounts. The Company maintains strict controls over the issuance of credit and aggressively pursues collection of its customer receivables. These collection efforts parallel those procedures commonly followed by most large corporations, including the mailing of statements and delinquency notices, personal contacts, the use of outside collection agencies and civil litigation. Gaming debts evidenced by credit instruments are enforceable under the laws of New Jersey and Nevada, respectively. All other states are required to enforce a judgment on a gaming debt entered in New Jersey or Nevada pursuant to the Full Faith and Credit Clause of the United States Constitution. Although gaming debts are not legally enforceable in some foreign countries, the United States assets of foreign debtors may be reached to satisfy a judgment entered in the United States. Annual gaming bad debt expense at the Atlantic City Showboat was approximately .4% of casino revenues for the year ended December 31, 1995, as compared to approximately .2% for the year ended December 31, 1994. Annual gaming bad debt expense at the Las Vegas Showboat was approximately .2% of casino revenues for the year ended December 31, 1995, as compared to approximately .2% of casino revenues for the year ended December 31, 1994. CONTROL PROCEDURES In connection with its gaming activities, the Company follows a policy of stringent internal controls, cross-checks and recording of all receipts and disbursements in accordance with industry practice. The audit and cash controls developed and utilized by the Company include locked cash boxes, independent counters, checkers and observers to perform the daily cash and coin counts, floor observation of the gaming areas, closed- circuit television observation of certain areas, daily computer tabulation of receipts and disbursements for each slot machine, table and other games, and the rapid identification, analysis and resolution of discrepancies or deviations from normal performance. All dealers and other personnel are internally trained by the Company, however, dealers in New Jersey must also obtain certification from an independent dealer's school in order to meet licensing requirements. The Company presently intends to promote qualified employees to supervisory and management levels. However, staffing requirements for the Company's hotel-casinos and for the Company's Gaming Development Division have required that certain supervisory and management personnel be hired from other hotel-casinos. Gaming operations are subject to risk of loss as a result of employee or customer dishonesty due to the large amount of cash and gaming chips handled. However, the Company has not experienced significant losses related to employee dishonesty. SEASONAL FACTORS The Company does not believe that gaming and hotel revenues are significantly seasonal in Las Vegas, Nevada. In contrast, the Company believes that gaming and hotel revenues are seasonal in Atlantic City, New Jersey due to the harsher weather in the mid-eastern seaboard during winter months. Due to the limited operating history of the Sydney Harbour Casino, the Company is currently evaluating whether gaming and hotel revenues are seasonal in Sydney, Australia. COMPETITION The gaming industry includes land-based casinos, dockside casinos, riverboat casinos, casinos located on Native American land, card parlors, state-sponsored lotteries, on-track and off- track wagering and other forms of legalized gaming in the United States and internationally. Competition is intense among companies in the gaming industry, and the Company expects it to remain so in the future. Many states have legalized, and other states are currently considering legalizing, casino gaming. The Company believes that the growth in the legalization of gaming is fueled by a combination of increasing popularity and acceptability of gaming activities and the desire and need for states and local communities to generate revenues without increasing general taxation. ATLANTIC CITY, NEW JERSEY The Atlantic City Showboat competes with 11 other hotel- casinos in Atlantic City containing a total of approximately 961,000 square feet of gaming space and approximately 9,200 casino hotel rooms as of December 31, 1995 (including the Atlantic City Showboat). According to the New Jersey Convention and Visitors Authority, seven expansions of existing hotel- casinos have been announced and are expected to be complete within the next two years, which will add approximately 3,600 more hotel rooms. There are several sites on the Boardwalk and in the Marina Area of Atlantic City on which hotel-casino facilities could be built in the future. Several established gaming companies, are at various stages in the licensing process with the New Jersey Casino Control Commission to obtain gaming licenses to develop major casino resorts in Atlantic City. Hotel- casinos in Atlantic City generally compete on the basis of promotional allowances, bus programs and packages, entertainment, advertising, service provided to patrons, caliber of personnel, attractiveness of the hotel-casino areas and related amenities. The Atlantic City Showboat targets slot machine customers by utilizing a variety of marketing techniques. The Atlantic City Showboat also competes with Foxwood's High Stakes Bingo and Casino on the Mashantucket Pequot Indian Reservation in Ledyard, Connecticut. To a lesser extent, the Atlantic City Showboat competes with casinos in Nevada and other states of the United States and internationally. Delaware recently passed legislation authorizing all three racetracks in its state to operate slot machines. On December 29, 1995, two of those racetracks opened casinos containing a total of approximately 1,200 slot machines. The Company believes that the commencement or expansion of casino and other gaming ventures in states close to New Jersey, particularly, Delaware, Maryland, New York or Pennsylvania, could have an adverse effect on the Company's Atlantic City operations. LAS VEGAS, NEVADA The Las Vegas Showboat competes with casinos located in the Las Vegas area, including competitors located on the Boulder Strip, on the Las Vegas Strip, in downtown Las Vegas and at the Nevada-California stateline. Such competition includes a number of hotel-casinos, as well as numerous non-hotel gaming facilities, targeted toward slot machine players and local residents. As of December 31, 1995, there were approximately four hotel-casinos located on the Boulder Strip (including the Las Vegas Showboat), 37 located on or near the Las Vegas Strip, 14 located in the downtown area and 11 located in other areas in or near Las Vegas. In recent months, several of the Company's direct competitors have opened new hotel-casinos or have commenced or completed major expansion projects, and other expansions are in progress or are planned. A new hotel-casino targeting a similar market as the Las Vegas Showboat is scheduled to open in April 1997 in Henderson, Nevada, approximately eight miles from the Las Vegas Showboat. According to the Las Vegas Convention and Visitors Authority, the Las Vegas hotel-motel room inventory was approximately 90,046 rooms as of December 31, 1995, an increase of approximately 1.7% from the prior year. Seven new hotel-casinos and seven hotel-casino expansions are under construction or have been announced, which will add approximately 19,000 rooms to the Las Vegas areas over the next approximately two years. As a result of increased competition primarily for slot machine players and Las Vegas area residents, the Las Vegas Showboat has experienced declines in revenues and earnings from operations. The Company has expanded marketing and customer service programs in response to excess casino capacity in the Las Vegas market. In December 1995, the Company completed an approximately $21.0 million renovation of the Las Vegas Showboat that primarily improved the quality of the public areas of the Las Vegas Showboat. Approximately 30,000 square feet or 40% of the casino space was closed from July 1995 to December 1995 as a result of the renovation. The increased competition and the construction activities caused a significant disruption in operations and earnings at the Las Vegas Showboat. To a lesser extent, the Las Vegas Showboat competes with casinos located in Mesquite, Laughlin and Reno-Lake Tahoe areas of Nevada and in New Jersey and other states of the United States and internationally. According to the Attorney General of California, as of January 1996, there were approximately 9,000 slot machines illegally located in approximately 30 casinos on Native American land throughout California, including four casinos in the Palm Springs area. In November 1995, a proposed initiative for the approval of gaming on Native American land in California was submitted to the California Attorney General's office but is facing opposition from certain government, law enforcement and religious leaders. The Company believes that the commencement or expansion of casino and other gaming ventures in states close to Nevada, particularly California, could have a material adverse effect on the Company's Las Vegas operations. SYDNEY, NEW SOUTH WALES The Sydney Harbour Casino competes with casinos in Australia and other casinos located within the Pacific Rim. Currently, 16 full-service casinos operate in Australia and New Zealand. Sydney Harbour Casino will remain the only full-service casino in the State of New South Wales for 12 years following commencement of gaming operations in the interim casino. While only 13.9% of casino revenues were generated by slot machines, in 1994 (the most recently available public information), in excess of approximately 70,000 slot machines were permitted in approximately 1,800 hotels and approximately 1,500 non-profit private clubs in New South Wales. Hotels are limited to a maximum of ten slot machines each. In 1994, over 50% of the private clubs contained 25 slot machines or less; however, the largest private club contained in excess of 800 slot machines. Sydney Harbour Casino expects to compete with the local slot clubs and with the casinos throughout Australia and the Pacific Rim by offering excellent service and an attractive facility containing hotel operations, bars and restaurants, sports and recreation facilities, entertainment centers, car parking, theatres, convention facilities and retail shopping. MARKETING The Company's revenues and operating income depend primarily upon the level of gaming activity at its casinos, although the Company also seeks to maximize revenues from food and beverage, lodging and other retail operations. Therefore, the primary goal of the Company's marketing efforts is to attract gaming customers to its casinos. Specifically, the Company's marketing strategy at the Atlantic City Showboat and the Las Vegas Showboat is to develop a high volume of traffic through the casinos, emphasizing slot machine play which accounted for 73.9% and 85.5% of casino revenues of the Atlantic City Showboat and the Las Vegas Showboat, respectively, in 1995. The Atlantic City Showboat targets slot machine customers by providing competitive games and excellent service in an attractive convenient facility and by using a variety of marketing techniques. Customers are attracted to the Las Vegas Showboat by competitive slot machines, bingo, moderately priced food and accommodations, a friendly "locals" atmosphere and a 106-lane bowling center. The Sydney Harbour Casino intends to target gaming patrons by positioning itself as a complete entertainment venue with restaurants, bars, free live entertainment and gaming. The Company advertises its hotel- casinos on television and radio, in newspapers and magazines and on outdoor signs and billboards. The Company markets its slot machine customers by means of promotions, including players' clubs, and direct mailings. The Company also sponsors special events designed to attract its target customers. REGULATION AND LICENSING NEW JERSEY GAMING Casino gaming activities in Atlantic City are subject to the New Jersey Casino Control Act ("New Jersey Act") and the regulations of the New Jersey Casino Control Commission (the "New Jersey Commission"). No casino may operate unless the required licenses and approvals are obtained from the New Jersey Commission. The New Jersey Commission is authorized under the New Jersey Act to adopt regulations covering a broad spectrum of gaming, gaming-related activities and non-gaming-related activities and to prescribe the methods and forms of applications for licenses. The New Jersey Commission: (i) approves license applications; (ii) regulates the design of casino facilities and determines the allowable amount of casino space based upon the number of hotel rooms; (iii) monitors operating methods and financial accounting practices of licensees; and (iv) determines and imposes sanctions for violations of the New Jersey Act and the New Jersey Commission regulations. The New Jersey Act also establishes a Division of Gaming Enforcement (the "Division") which is a branch of the New Jersey Attorney General's office. The Division investigates all applications for the granting and renewal of licenses, enforces the provisions of the New Jersey Act and prosecutes before the New Jersey Commission proceedings for violations of the New Jersey Act. The Division conducts audits and continuing reviews of all casino operations. The New Jersey Commission has extremely broad discretion with regard to the issuance, renewal and revocation or suspension of licenses. A casino license is not transferable and must be renewed by the licensee at certain intervals. The first two license renewal periods are one year. Thereafter, the casino licenses may be renewed for up to four years, subject to the New Jersey Commission's authority to reconsider license eligibility during any term. A casino license may be revoked or suspended at any time by the New Jersey Commission upon a finding of disqualification or noncompliance. The holder of a casino license must also obtain an operation certificate which may be revoked or suspended at any time by the New Jersey Commission upon a finding of noncompliance. In order to obtain or renew a casino license, an applicant must demonstrate to the New Jersey Commission: (i) its financial stability, integrity and responsibility; (ii) its business ability and casino experience; (iii) its good character, honesty and integrity; and (iv) the qualification of all its financial sources, security holders and holding and intermediate companies. Moreover, each officer, director, principal employee, lender or person directly or indirectly holding any beneficial interest or ownership of the securities of the corporate licensee, and any person deemed by the New Jersey Commission as having the ability to control the corporate licensee or elect a majority of the board of directors of the corporate licensee or other person deemed appropriate by the New Jersey Commission must be found qualified. ACSI's casino license was granted on March 27, 1987, effective April 2, 1987. ACSI's casino license was renewed on January 25, 1995 for the period commencing January 31, 1995 and ending January 31, 1997. In connection therewith, the Company and OSI were required to satisfy the licensure standards set forth above. The New Jersey Commission imposes certain restrictions upon the ownership of securities issued by a corporation which holds a casino license or is a holding company of a corporate casino licensee. Among other restrictions, the sale, assignment, transfer, pledge or other disposition of any security issued by a corporation which holds a casino license is subject to approval by the New Jersey Commission. If the New Jersey Commission finds an individual owner or holder of any security of a corporate casino licensee or any of its holding companies or a "financial source," or any of its security holders to be disqualified, the New Jersey Commission may take any necessary remedial action, including requiring divestiture by the disqualified security holder. If disqualified security holders of either the corporate licensee or the holding company fail to divest themselves of such security interests, the New Jersey Commission may revoke or suspend ACSI's casino license. Disqualified security holders are prohibited from: (i) receiving any dividends or interest on their securities; (ii) exercising, directly or through any trustee or nominee, any rights conferred by such securities; and (iii) receiving any remuneration in any form from the corporate licensee for services rendered or otherwise. The corporate licensee and its non-publicly traded holding companies are required to include in their charter or articles of incorporation a provision establishing the right of prior approval by the New Jersey Commission with regard to transfers of securities, shares and other interests in the corporation. The corporate licensees' publicly traded holding companies are required to provide in their charter or articles of incorporation a provision that any securities of the corporation are held subject to the condition that if a holder thereof is disqualified, such holder shall dispose of his interest. The Company and OSI are holding companies of ACSI, a New Jersey casino licensee. The Company, OSI and ACSI have charters or articles of incorporation that comply with these regulatory requirements. The New Jersey Commission regulations include detailed provisions concerning, among others: (i) the rules of games, including minimum and maximum wagers, and methods of supervision of games and of selling and redeeming gaming chips; (ii) the granting and duration of credit, the operation of junkets, and the extension of and accounting for complimentary services; (iii) the manufacture, distribution and sale of gaming equipment; (iv) the security standards, management control procedures, accounting and cash control methods and the reporting of such matters to gaming authorities; (v) casino advertising; (vi) the deposit of checks from patrons of casinos; (vii) the reporting of currency transactions with patrons in amounts exceeding $10,000 to the Division; and (viii) the standards for entertainment and distribution of alcoholic beverages in hotel-casinos. All contracts and leases entered into by a casino licensee are subject to the review of the New Jersey Commission and, if reviewed and found unacceptable, may be voided. All enterprises providing gaming-related equipment or services to a casino licensee must be licensed or good cause must be shown for a waiver of such licensing requirements. All other enterprises dealing with a casino licensee must register with the New Jersey Commission, which may require that they be licensed if they regularly engage in business with casino licensees. The New Jersey Commission could appoint a conservator upon the revocation of or failure to renew a casino license. A conservator would be vested with title to the hotel-casino of the former or suspended licensee, subject to valid liens and encumbrances. The conservator would act subject to the general supervision of the New Jersey Commission and would be charged with the duty of conserving, preserving and continuing the operation of the hotel-casino. 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 a portion 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 out of net earnings, if any. Except during the pendency of a suspension or during any appeal from any action precipitating the appointment of a conservator, and after appropriate consultations with the former licensee, a conservator, subject to the prior approval of the New Jersey Commission, would be authorized to sell, assign, convey or otherwise dispose of the hotel-casino of a former licensee subject to all valid liens, claims and encumbrances, and to remit the net proceeds to the former licensee. After completion of its first full year of operation, and continuing for 30 years thereafter, a casino licensee is subject to a New Jersey investment obligation. To satisfy this obligation, the Company may either: (i) pay an investment alternative tax equal to 2 1/2% of its annual gross revenues from gaming operations; or (ii) purchase bonds issued by, or invest in other development projects approved by, the Casino Reinvestment Development Authority, a state agency, in an amount equal to 1 1/4% of its annual gross revenues from gaming operations. All corporations doing business in New Jersey are subject to a corporate franchise tax, based on allocated net income, at a 9% annual rate. Interest on indebtedness is deductible under New Jersey law. There is also an 8% tax on the gross win revenues of New Jersey casinos, in addition to an annual $500 fee for each slot machine. Atlantic City imposes a real property tax and a luxury tax applicable to certain sales, including, but not limited to, the sale of alcoholic beverages, tickets to entertainment events and rental of hotel rooms. In 1992, the New Jersey legislature adopted laws imposing a fee of $2.00 per occupied casino hotel room per day ($1.00 for non-casino hotel rooms). These fees are dedicated exclusively to a fund to market Atlantic City as a tourist destination and resort. In addition, the state of New Jersey, effective July 1, 1993, imposed a $1.50 per day fee for each patron's car that is parked at an Atlantic City casino. ACSI has elected to absorb the parking fee as a marketing expense, and not to collect the fee from patrons as do the majority of Atlantic City casinos. ACSI has incurred parking fees of approximately $1.9 million, $1.8 million and $.8 million in 1995, 1994 and 1993, respectively. From time to time new laws and regulations, as well as amendments to existing laws and regulations, relating to gaming activities in New Jersey are proposed or adopted. In addition, the New Jersey casino regulatory authorities from time to time may change their laws, regulations or procedures, including their procedures for renewing licenses. The Company cannot predict what effect, if any, new or amended laws, regulations or procedures would have on the Company. While in the last few years the changes to New Jersey gaming laws, regulations or procedures have generally not been restrictive to New Jersey licenses, changes in such laws, regulations or procedures could have an adverse effect on the Company. The Company is subject to various other federal, state and local laws and regulations and, on a periodic basis, has to obtain various licenses and permits, including those required to sell alcoholic beverages. In particular, the United States Department of the Treasury has adopted regulations pursuant to which a casino is required to file a report of each deposit, withdrawal or exchange of currency or other payment or transfer by, through or to a casino which involves a transaction in currency of more than a predetermined amount ($10,000 for 1995) per gaming day. Such reports are required to be made on forms prescribed by the Secretary of the Treasury and must be filed with the Commissioner of the Internal Revenue Service. In addition, a casino is required to maintain detailed records (including the names, addresses, social security numbers or other information with respect to its customers) dealing with, among other items, a customer's deposit and withdrawal of funds and the maintenance of a line of credit. The Company, through SBOC, conducts casino gaming operations in Las Vegas, Nevada. The Company is not required to obtain the prior approval of the Nevada Gaming Authorities to conduct casino gaming operations outside Nevada. However, the Company must submit quarterly reports to the Nevada Board regarding (i) any changes in ownership or control of any interest in ACSI or OSI; (ii) any changes in officers, directors or key employees of ACSI or OSI; (iii) all complaints, disputes, orders to show cause and disciplinary actions, related to gaming, instituted or presided over by an entity of the United States, a state or any other governmental jurisdiction concerning ACSI or OSI; (iv) any arrest of an employee of ACSI or OSI involving cheating or theft related to gaming in New Jersey; and (v) any arrest or conviction of an officer, director, key employee or equity owner of ACSI or OSI for certain offenses. The Company, through its New Jersey subsidiaries, must provide to the Nevada Board all documents filed with the state of New Jersey relating to the Atlantic City Showboat, the systems of accounting and internal control utilized in connection with the Atlantic City Showboat, and annual operational and regulatory reports describing compliance with regulations, procedures for audit, and procedures for surveillance relating to the Atlantic City Showboat. The Company must also comply with any additional reporting requirements which may be imposed by the Nevada Board. New laws and regulations as well as amendments to existing laws and regulations pertaining to gaming activities in Nevada from time to time are proposed or adopted. Changes in such laws, regulations and procedures could have an adverse effect on the Company. NEVADA GAMING 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 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"), and the City Council of the City of Las Vegas ("City Board"). The Nevada Commission, the Nevada Board, and the City Board are collectively 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 Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) to provide a source of state and local revenues through taxation and licensing fees. Change in such laws, regulations and procedures could have an adverse effect on the Company's gaming operations. SBOC, which operates the Las Vegas Showboat, is required to be licensed by the Nevada Gaming Authorities. The gaming license requires the periodic payment of fees and taxes and is not transferable. The Company is registered by the Nevada Commission as a publicly traded corporation ("Registered Corporation") and as such, it is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. No person may become a shareholder of, or receive any percentage of profits from, SBOC without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company and SBOC have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or SBOC 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 SBOC 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 the Company who are actively and directly involved in gaming activities of SBOC 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 the Company or SBOC, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company or SBOC to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company and SBOC 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 SBOC must be reported to, or approved by, the Nevada Commission. If it were determined that the Nevada Act was violated by SBOC the gaming licenses it holds could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, SBOC, the Company, 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 the Company's gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the Company's 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 the Company's gaming operations. Any beneficial holder of the Company's 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 the Company's 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 more than 5% of the Company's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of the Company's 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 the Company's 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 the Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Company's 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 30 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 shareholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of the Company beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a shareholder or to have any other relationship with the Company or SBOC, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (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. 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. The Company is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities 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. The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power at any time 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 the Company. The Company may not make a public offering of its 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 retire or extend obligations incurred for such purposes. In November 1995, the Nevada Commission granted the Company prior approval to make public offerings for a period of one year, subject to certain conditions ("Shelf Approval"). The Shelf Approval also applies to any affiliated company wholly owned by the Company (a "Gaming 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 Company's licensed Nevada subsidiaries to guaranty any security issued by, or to hypothecate their assets to secure the payment or performance of any obligations issued by the Company or a Gaming Affiliate in a public offering under the Shelf Approval. However, the Shelf Approval may be rescinded for good cause without prior notice upon the issuance of an interlocutory stop order by the Chairman of the Nevada Board and the Shelf Approval must be renewed annually. 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. Changes in control of the Company 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 Company 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 by the Nevada Commission of a plan of recapitalization proposed by the Company's Board of Directors in response to a tender offer made directly to its shareholders for the purpose of acquiring control of the Company. The sale of alcoholic beverages by the casino is subject to licensing, control and regulation by the applicable local authorities. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could (and revocation would) have a material adverse affect upon the operations of the casino. 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 Nevada licensee's 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 of food or refreshments. 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 it knowingly violates any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engages in activities that are harmful to the state of Nevada or its ability to collect gaming taxes and fees, or employs a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. NEW SOUTH WALES GAMING The 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. 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 is to determine an application by either granting a casino license to the applicant or declining to grant a casino license. 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 or 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 insuring 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. 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 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 the casino license should continue in force. 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 are 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 made otherwise than by means of money or chips, (ii) lend money, chips or any other valuable thing; 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. INDIANA GAMING In 1993, the state of Indiana passed a Riverboat Gambling Act which created the 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 formal rules and has proposed additional rules governing the application procedure. The Indiana Commission may suspend or revoke the license of a licensee or impose civil penalties, in some cases without notice or hearing. 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 U.S. Army Corps of Engineers, determine which waterways are navigable waterways for purposes of the Indiana Riverboat Gambling Act and determine which navigable waterways are suitable for the operation of riverboats. Additionally, the Indiana Commission may adopt emergency orders concerning navigability of waters for extreme weather conditions or other extreme circumstances. The Indiana 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 an additional investigation fee of $55,000. If the applicant is selected, the applicant must pay an initial license fee of $25,000 and post a bond. A person holding an owner's gaming license issued by the Indiana Commission may not own more than a ten percent (10%) interest in another such license. An owners 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. A gaming license is a revocable privilege and is not a property right. In connection with its application for an owner's license, the Company, SMP and Waterfront declared to the Indiana Commission that if SMP, or upon the transfer of the certificate of suitability to the subsidiary partnership, the subsidiary partnership receives a riverboat owner's license for East Chicago, Indiana, 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 SMP or the subsidiary partnership, as applicable. Adherence to the non-competition declaration is a condition of the certificate of suitability and the owner's license. There can be no assurance that SMP or the subsidiary partnership will obtain an owner's license. Some municipalities have initiated their own review process. The Indiana Commission has passed a resolution stating that certain evaluations by local governments will be important factors in the Indiana Commission's economic development evaluation process, however, the Indiana Commission retains the sole authority to award a license. 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 are limited to a duration of four hours 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, its passengers and crew, (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. An admission tax of $3.00 for each person admitted to the gaming excursion is imposed upon the license owner. An additional twenty percent (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 uncollected gaming receivables. 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. Legislation is currently before the Indiana Legislature permitting the imposition of property taxes on the riverboats at rates to be determined by local taxing authorities of the jurisdiction in which a riverboat operates. 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 may be purchased or leased only from licensed suppliers. The Indiana Riverboat Gambling Act places special emphasis upon minority and women's business enterprise participation in the riverboat industry. Any person issued a gaming owners license must establish goals of expending at least ten percent (10%) of the total dollar value of the licensee's contracts for goods and services with minority business enterprises and five percent (5%) of the total dollar value of the licensees contracts for goods and services with women's business enterprises. The Indiana Commission may suspend, limit or revoke the gaming owners license or impose a fine for failure to comply with statutory requirements. MISSOURI GAMING Gaming was originally authorized in the state of Missouri in November 1992. On April 29, 1993, new legislation (the "Missouri Act") was enacted which replaced the 1992 legislation. In January 1994 the Missouri Supreme court handed down a decision which held that the operation of certain games of chance such as traditional slot machines was prohibited by the constitution of the state of Missouri. On November 8, 1994, the people of Missouri voted in favor of an amendment to the Missouri constitution to allow slot machine gaming in the state. The Missouri Act provides for the licensing and regulation of excursion gambling boat operations on the Mississippi and Missouri Rivers in the state of Missouri and the licensing and regulation of persons who distribute gaming equipment and supplies to gaming licensees. An excursion gambling boat is a boat, ferry or other floating facility on which gaming is allowed. The Missouri Act limits the loss per individual on each excursion to $500, but does not otherwise limit the amount which may be wagered on any bet or the amount of space in the vessel which may be utilized for gaming. The Missouri Act is to be implemented and enforced by a five- member Missouri Commission. The Missouri Commission is empowered to issue such number of riverboat gaming licenses as it determines to be appropriate. A gaming license cannot be granted to any gaming operator unless the voters in such operator's "home dock" city or county have authorized gaming activities on gaming riverboats. Gaming boats in Missouri must generally resemble boats from Missouri's riverboat history and must contain nongaming areas, food service and a Missouri theme gift shop. The boats must cruise unless public safety requires continuous docking. Annual license fees will be set by the Missouri Commission but may not be less than $25,000. Each licensee also must post a bond or other form of surety (in an amount determined by the Missouri Commission) to secure performance of its obligations under the Missouri Act and the regulations of the Missouri Commission. On September 1, 1993, the Missouri Commission adopted rules and regulations (the "Missouri Regulations") governing the licensing, operation and administration of riverboat gaming in the state of Missouri and the form of application for such licensure. SLP has submitted its gaming application. There can be no assurance that SLP will be selected for investigation for licensing or if so selected that a Missouri gaming license will be issued. In addition, the Missouri Regulations remain subject to amendment and interpretation, and may further limit or otherwise adversely affect the Company and its Missouri gaming operations. Directors and certain officers and key persons of the Company and SLP must file personal disclosure forms with the gaming license application and must be found suitable by the Missouri Commission. Further, the Missouri Regulations require that all employees of SLP who are involved in gaming operations must file applications for and receive Missouri gaming occupational licenses. The Missouri Regulations require disclosure by the Company and SLP of any person or entity holding any direct or indirect ownership interest in SLP. SLP is also required to disclose the names of the holders of all of SLP's debt including a description of the nature and terms of such debt. The Missouri Commission may, in its sole discretion, request additional information with respect to such holders. Missouri gaming licenses must be renewed annually during the first two years of an entity's licensure and renewed every two years thereafter. Under Missouri law, gaming licenses are not transferable, and under the Missouri Regulations the transfer of (i) any ownership interest in a privately held business entity or (ii) a 5% or greater interest in a publicly traded company directly or indirectly holding a Missouri gaming license is prohibited without the approval of the Missouri Commission. Further, without the prior approval of the Missouri Commission, the Missouri Regulations prohibit withdrawals of capital, loans, advances or distribution of any assets in excess of 5% of accumulated earnings by a license holder to anyone with an ownership interest in the license holder. The Missouri Regulations specifically provide that any action of the Missouri Commission shall not indicate or suggest that the Missouri Commission has considered or passed in any way on the marketability of the applicant or licensee's securities, or on any other matter, other than the applicant or licensee's suitability for licensure under Missouri law. A Missouri gaming license holder can be disciplined in Missouri for gaming related acts occurring in another jurisdiction which results in disciplinary action in the other jurisdiction. In addition to any other taxes or fees payable to state and local governmental authorities, gaming licensure in the state of Missouri will subject SLP to a 20% Adjusted Gross Receipts tax. Adjusted Gross Receipts is generally defined as gross receipts from gaming less payouts to customers as winnings. Also, a $2.00 admission is payable to the Missouri Commission for each person admitted to the riverboat. The Missouri Commission has broad powers to require additional disclosure by an applicant during the processing of a gaming application, to deny gaming licensure and to administratively fine or suspend or revoke a gaming license for failure to comply with or for violation of the Missouri Act or Missouri Regulations. Further, in certain situations, the Missouri Commission can appoint a supervisor to continue the operations of a license holder after lapse, suspension or revocation of a gaming license. The supervisor may operate and sell the facility with earnings or proceeds being paid to the former owners only after deduction of the costs and expenses of the supervisorship and establishment of reserves. U.S. COAST GUARD Each riverboat also is regulated by the U.S. Coast Guard, whose regulations affect boat design, construction, operation (including requirements that each vessel be operated by a minimum complement of licensed personnel) and maintenance, in addition to restricting the number of persons who can be aboard the boat at any one time. All vessels operated by the Company must hold a Certificate of Inspection. Loss of the Certificate of Inspection of a vessel would preclude its use as an operating riverboat. The vessel must be drydocked periodically for inspection of the hull, which will result in a loss of service that can have an adverse effect on the Company. For vessels of the Company's type, the inspection cycle is every five years. Less stringent rules apply to permanently moored vessels. The Company believes that these regulations, and the requirements of operating and managing cruising gaming vessels generally, make it more difficult to conduct riverboat gaming than to operate land-based casinos. All shipboard employees of the Company employed on U.S. Coast Guard regulated vessels, even those who have nothing to do with the actual operation of the vessel, such as dealers, cocktail hostesses and security personnel, may be subject to the Jones Act which, among other things, exempts those employees from state limits on workers' compensation awards. The Company intends to obtain such insurance to cover employee claims. SHIPPING ACT OF 1916; MERCHANT MARINE ACT OF 1936 In order for the Company's vessels to have United States flag registry, the Company must maintain "United States citizenship" as defined in the Merchant Marine Act of 1920, as amended, and the Shipping Act of 1916. A corporation or partnership operating any vessel in the coastwise trade is not considered a United States citizen unless United States citizens own 75% of the equity of the Company or the partnership and, if a partnership, all general partners must be United States citizens. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Showboat, Inc. and subsidiaries (collectively, the "Company" or "SBO"), (i) owns and operates the Showboat Casino Hotel fronting the Boardwalk in Atlantic City, New Jersey (the "Atlantic City Showboat"), (ii) owns and operates the Showboat Hotel, Casino and Bowling Center in Las Vegas, Nevada (the "Las Vegas Showboat"), and (iii) beneficially owns a 26.3% interest in, and manages the Sydney Harbour Casino in Sydney, New South Wales, Australia, which commenced gaming operations in an interim casino on September 13, 1995. The Company, through subsidiaries, also owns (i) a 55% partnership interest in Showboat Marina Partnership, which received a certificate of suitability on January 8, 1996 for a riverboat owner's license in East Chicago, Indiana, and (ii) an 80% interest in Southboat Limited Partnership which has submitted an application with the Missouri Gaming Commission for a riverboat gaming license near Lemay, Missouri. From July 1993 to March 31, 1995, the Company owned an interest in, and managed the Showboat Star Casino, a riverboat casino then located on Lake Pontchartrain in New Orleans, Louisiana. The consolidated financial statements include all domestic and foreign subsidiaries which are more than 50% owned and controlled by Showboat, Inc. Investments in unconsolidated affiliates which are at least 20% owned by Showboat, Inc. are carried at cost plus equity in undistributed earnings or loss since acquisition. All material intercompany balances have been eliminated in consolidation. In March 1995, the Company purchased an additional 50% of the equity of Showboat Star Partnership ("SSP"), which operated the Showboat Star Casino on Lake Pontchartrain in New Orleans, Louisiana, bringing the Company's total equity interest in SSP to 100%. The purchase price of the additional equity interest was $25.0 million coupled with a distribution of certain of the current assets of SSP to partners other than the Company. On March 9, 1995, the Company ceased all operations at the Showboat Star Casino as a result of certain legal issues related to conducting dockside gaming in the Orleans Parish. In a series of unrelated transactions, SSP sold certain of its assets, and the Company sold all of its equity interest in SSP, resulting in a pretax gain to the Company of $2.6 million which is included in the 1995 Consolidated Statement of Income as gain on sale of affiliate. In August, 1994, Showboat Australia Pty Limited ("SA"), a wholly-owned subsidiary of the Company, invested approximately $100.0 million for a 26.3% interest in Sydney Harbour Casino Holdings Limited ("SHCH"), which, through wholly-owned subsidiaries, owns the Sydney Harbour Casino and holds the casino license required to operate the Sydney Harbour Casino. In December 1994, the New South Wales Casino Control Authority granted the only full-service casino license in the State of New South Wales to Sydney Harbour Casino Pty Limited ("SHCL"). SA also has an 85% interest in the management company which manages the Sydney Harbour Casino. SA has agreed to forego the first A$19.1 million of its 85% portion of the fees due under the management agreement, of which amount approximately A$15.1 million remains as of December 31, 1995. SHCL commenced gaming operations on September 13, 1995 in a 60,000 square foot interim casino. Pursuant to the terms of the construction contract and subject to certain exceptions, the permanent facility must be completed within 38 months of the award of the casino license to SHCL. SHCL anticipates that the permanent facility will commence operations by early 1998. The Company's equity in earnings of SHCL's operations has been reduced to zero due to the write-off of certain preopening costs. MATERIAL CHANGES IN RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 (1995) COMPARED TO YEAR ENDED DECEMBER 31, 1994 (1994) REVENUES Net revenues for the Company increased to $428.6 million in 1995 from $401.3 million in 1994, an increase of $27.3 million or 6.8%. Casino revenues increased $28.1 million or 8.0% to $379.5 million in 1995 from $351.4 million in 1994. Nongaming revenues, which consist principally of room, food, beverage, management fee and bowling revenues, were $88.9 million in 1995 compared to $83.2 million in 1994, an increase of $5.7 million or 6.9%. The Atlantic City Showboat generated $368.9 million of net revenues in the year ended December 31, 1995 compared to $320.2 million for the same period in the prior year, an increase of $48.7 million or 15.2%. Casino revenues were $337.2 million for the year ended December 31, 1995 compared to $292.4 million for the same period in the prior year, an increase of $44.8 million or 15.3%. The increase in casino revenues was due primarily to an increase in gross slot revenues of $35.4 million or 16.1% with a 14.7% increase in slot units at the Atlantic City Showboat. The increase in slot revenues compares to a 12.0% growth in slot revenues in the Atlantic City market for the year ended December 31, 1995 and a 10.0% increase in average slot units in the Atlantic City market. Also contributing to the increase in casino revenues was the mild winter weather during the first quarter 1995 compared to the harsh winter weather during the same period in the prior year. The favorable comparison to the prior year is attributed to the addition of 15,000 square feet of casino space and approximately 600 slot machines added throughout 1994, and the addition of approximately 200 slot machines in May 1995. The Atlantic City Showboat also added approximately 200 slot machines in December 1995 raising the total number of machines to approximately 3,450 as of December 31, 1995. Atlantic City Showboat slot revenues accounted for 73.9% of total casino revenues for the year ended December 31, 1995 and 73.6% for the year ended December 31, 1994. Table game revenues increased $11.3 million or 15.9% to $82.9 million for the year ended December 31, 1995 compared to $71.6 million for the same period in the prior year. Contributing to the increase in table game revenues was the 1995 expanded marketing programs and the introduction of the Caribbean stud poker in late 1994. The Company's table game growth of 15.9% compares to a 4.5% growth in table game revenues in the Atlantic City market for the year ended December 31, 1995. Food and beverage revenues were $42.1 million for the year ended December 31, 1995 compared to $36.2 million for the same period in the prior year, an increase of $5.9 million or 16.4%. This increase is attributable to increased food promotional programs during the year ended December 31, 1995. The Las Vegas Showboat achieved net revenues of $59.5 million for the year ended December 31, 1995, compared to $79.2 million in the same period in 1994, a decrease of $19.7 million or 24.9%. Casino revenues decreased to $42.3 million in 1995 from $59.0 million in 1994, a decrease of $16.7 million or 28.3%. Food and beverage revenues decreased to $11.8 million for the year ended December 31, 1995 from $14.4 million in the same period in 1994, a decrease of $2.6 million or 18.1%. The decreases in revenues were attributable to construction activities within the property for the second half of 1995 and increased competition along the Boulder Strip throughout the entire year. The Company anticipates that revenues at the Las Vegas Showboat will continue to be impacted until the excess casino capacity is absorbed by the Las Vegas market. During the construction period, casino capacity was reduced by approximately 40% and service to food outlets was substantially disrupted. INCOME FROM OPERATIONS The Company's income from operations declined $5.1 million or 9.9% to $46.7 million in 1995 from $51.8 million in 1994. The decline is attributable to the cessation of operations of SSP (which resulted in a $12.8 million reduction in income from operations), a decline in operating results at the Las Vegas Showboat and an increase in corporate and development expenses. These decreases were partially offset by the improved performance at the Atlantic City Showboat. Atlantic City Showboat's income from operations, before management fees, increased to $72.4 million in the year ended December 31, 1995 compared to $50.7 million from the same period in 1994, an increase of $21.7 million or 42.9%. Operating expenses at the Atlantic City Showboat increased $26.9 million or 10.0% to $296.4 million for the year ended December 31, 1995 compared to $269.5 million for the same period in the prior year. The increased operating expenses included a $14.2 million increase in casino division expenses (which includes: $4.1 million increase in marketing expenses, $5.4 million increase in promotional allowance costs and $3.6 million increase in gaming taxes), a $8.0 million increase in general and administrative expenses which is primarily related to increased payroll, real estate taxes, and rent related to the expanded property, and a $3.4 million increase in depreciation expense for the Atlantic City Showboat's expanded facility. The Atlantic City Showboat's operating margin, before management fees, increased to 19.6% in 1995 compared to 15.8% in 1994. For the year ended December 31, 1995, the Las Vegas Showboat had a loss from operations, before management fees and intercompany rent, of $3.7 million compared to income of $4.4 million in the same period in 1994. Operating expenses declined to $63.3 million in 1995 compared to $74.8 million in 1994, a decrease of $11.6 million or 15.5%. The Company anticipated a reduction in revenues during the construction period and concentrated on reducing expenses. Expenses declined in all departments for the year ended December 31, 1995. However, significant decreases were not realized in certain promotional and marketing utilized at the Las Vegas Showboat in order to compete with the other gaming facilities on the Boulder Strip during the renovation of the facility. Corporate and development expenses totaled $21.7 million in 1995 compared to $17.0 million in 1994. The increased development expense is attributed to (i) the maintenance of a comprehensive development effort to pursue expansion opportunities, which includes $2.9 million expended for the proposed riverboat casino project near Lemay, Missouri, (ii) preopening support for new projects, and (iii) $1.2 million for insurance costs which were previously recorded by the respective operating properties. OTHER (INCOME) EXPENSE In 1995, other (income) expense consisted of $29.7 million of interest expense, net of $13.1 million of capitalized interest, and $6.2 million of interest income. Foreign currency gain was $.3 million during 1995 and a net gain on the sale and write-down of affiliates totaled $1.1 million. In 1994, other (income) expense consisted of $29.5 million of interest expense, net of $3.3 million of capitalized interest, and $4.9 million of interest income. In connection with its renovation project at the Las Vegas Showboat and the Company's investment in Sydney Harbour Casino, the Company capitalized interest of $.5 million and $12.6 million respectively in 1995. INCOME TAXES In 1995, the Company incurred income taxes of $11.4 million, or an effective tax rate of 46.5% compared to $11.5 million or an effective tax rate of 42.4% in 1994. Differences between the Company's effective tax rate and the statutory federal tax rates are due to permanent differences between financial and tax reporting and state income taxes. NET INCOME In 1995, the Company realized net income of $13.2 million or $.84 per share. In 1994, the Company realized net income of $15.7 million or $1.02 per share. YEAR ENDED DECEMBER 31, 1994 (1994) COMPARED TO YEAR ENDED DECEMBER 31, 1993 (1993) REVENUES Net revenues for the Company increased to $401.3 million in 1994 from $375.7 million in 1993, an increase of $25.6 million or 6.8%. Casino revenues increased $21.9 million or 6.7% to $351.4 million in 1994 from $329.5 million in 1993. Nongaming revenues, which consist principally of room, food, beverage, management fee and bowling revenues, were $83.2 million in 1994 compared to $78.3 million in 1993, an increase of $4.9 million or 6.3%. The Atlantic City Showboat generated $320.2 million of net revenues in 1994 compared to $294.2 million in 1993, an increase of $26.0 million or 8.8%. Casino revenues were $292.4 million in 1994 compared to $268.8 million in 1993, an increase of $23.6 million or 8.8%. The increase in casino revenues was primarily due to increases in both slot machine and table game revenues. Slot machine revenues at the Atlantic City Showboat increased $18.3 million or 9.3% in 1994. This compares favorably to 3.7% growth in slot machine revenues in the Atlantic City market during the same period. The improved slot revenue growth experienced by the Atlantic City Showboat is primarily attributed to the addition of 609 slot machines throughout 1994 for a total of 3,027 slot machines by December 31, 1994. Table game revenues increased $2.9 million or 4.2% in 1994. Casino revenues were also favorably impacted by the mid-1994 addition of keno and the mid-1993 addition of poker and horse race simulcasting. Nongaming revenues increased $3.3 million or 6.2% in 1994 to $56.0 million from $52.7 million in 1993. This increase was primarily due to increased complimentary room revenue of $1.2 million and non-complimentary food revenues of $2.2 million. At the Las Vegas Showboat, net revenues decreased to $79.2 million in 1994 from $81.1 million in 1993, a decrease of $1.9 million or 2.3%. The decrease in net revenues primarily resulted from an approximate 37% increase in slot machine capacity on the Boulder Strip in the third quarter of 1994. The Company anticipates that revenues at the Las Vegas Showboat will be negatively impacted until the excess casino capacity on the Boulder Strip is absorbed by the Las Vegas market. Casino revenues decreased to $59.0 million in 1994 from $60.7 million in 1993, a decrease of $1.7 million or 2.8%. Nongaming revenues increased $.2 million in 1994 primarily as a result of increased hotel occupancy due to increased effectiveness of certain hotel marketing programs. Lake Pontchartrain Showboat, Inc., a wholly-owned subsidiary of the Company, managed the Showboat Star Casino and generated $3.5 million of management fee revenues, before an intercompany elimination of $1.6 million, in 1994 compared to $.4 million in 1993. Showboat Star Casino, which opened November 8, 1993, generated net revenues of $98.4 million in 1994 consisting primarily of casino revenues of $97.2 million. In 1993, Showboat Star Casino generated net revenues of $12.1 million and casino revenues of $10.9 million. INCOME FROM OPERATIONS The Company's income from operations increased to $51.8 million in 1994 from $45.4 million in 1993, an increase of $6.4 million or 14.1%. Improvements in income from operations at the Atlantic City Showboat and the Showboat Star Casino were offset by a decline in income from operations at the Las Vegas Showboat and by an increase in corporate and development expenses. Income from operations at the Atlantic City Showboat, before intercompany management fees, was $50.7 million in 1994 compared to $44.0 million in 1993, an increase of $6.7 million or 15.3%. The increase in income from operations was primarily due to increased revenues that were offset by a $19.3 million or 7.7% increase in operating expenses before intercompany management fees to $269.5 million in 1994 from $250.2 million in 1993. The increase in operating expenses was primarily due to the increased capacity and volume of business as a result of the expansion of the Atlantic City facility. General and administrative expenses were also impacted by a $1.5 million or 22.0% increase in real estate taxes and an increase of $1.0 million in a parking assessment absorbed by the Atlantic City Showboat. Partially offsetting these increases was the decrease of $1.0 million in insurance costs borne by the parent company. Income from operations at the Las Vegas Showboat, before intercompany management fees, declined $3.8 million or 46.4% in 1994 to $4.4 million in 1994 from $8.2 million in 1993. The decrease was primarily due to increased competition on the Boulder Strip that resulted in a decrease in net revenue. In addition, operating expenses increased to $74.8 million in 1994 from $72.9 million in 1993, an increase of $1.9 million or 2.7%. Increases in expenses were due to increased payroll and payroll related costs and increased advertising costs. SSP realized net income of $24.8 million on net revenues of $98.4 million in 1994. Operations at the Showboat Star Casino contributed $13.7 million in 1994 to the Company's income from operations. In 1993, SSP recognized a loss of $2.8 million primarily as a result of the write-off of preopening costs. Corporate and development expenses totaled $17.0 million in 1994 compared to $5.5 million in 1993. The Company established a separate corporate and development office in late 1993. Prior to this time, a significant portion of corporate expenses were absorbed by operating subsidiaries. In addition, the Company has expanded the scope of its activities related to the pursuit of expansion opportunities in jurisdictions outside Nevada and New Jersey. OTHER (INCOME) EXPENSE In 1994, other (income) expense consisted of $29.5 million of interest expense, net of $3.3 million of capitalized interest, and $4.9 million of interest income. In 1993, other (income) expense consisted of $24.7 million of interest expense, net of capitalized interest, and $3.2 million of interest income. The increase in interest expense is due to an increase in long-term debt during the period. In connection with its expansion project at the Atlantic City Showboat and the Company's 1994 investment in Sydney Harbour Casino, the Company capitalized interest of $2.7 million and $.6 million, respectively, in 1994. INCOME TAXES In 1994, the Company incurred income taxes of $11.5 million, or an effective tax rate of 42.4% compared to $10.5 million, before the income tax benefit of an extraordinary loss, or an effective tax rate of 43.8% in 1993. Differences between the Company's effective tax rate and the statutory federal tax rates are due to permanent differences between financial and tax reporting and state income taxes. NET INCOME In 1994, the Company realized net income of $15.7 million or $1.02 per share. In 1993, income before an extraordinary loss and a cumulative effect adjustment was $13.4 million or $.89 per share. In 1993, the Company recognized an extraordinary loss net of tax of $6.7 million, or $.44 per share, as a result of the redemption of all of its 11 3/8% Mortgage-Backed Bonds Due 2002. Net income for 1993, after recognition of the extraordinary loss and the cumulative effect adjustment, was $7.3 million or $.49 per share. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flow from operations was $53.2 million in 1995 compared to $55.4 million in 1994. Cash used in investing activities was $41.2 million in 1995 compared to $193.5 million in 1994. The decrease resulted from fewer capital expenditures in 1995 and a reduction in investments in unconsolidated affiliates, offset by the proceeds from the sale of SSP in 1995. Cash provided from financing activities was $4.5 million in 1995 compared to $105.8 million in 1994. The decrease was primarily due to the issuance of $120.0 million of 13% Senior Subordinated Notes in 1994. In 1995, the Company expended approximately $49.6 million on capital improvements primarily related to its Atlantic City and Las Vegas facilities which were funded from operations and proceeds of the 1994 sale of $120.0 million of 13% Senior Subordinated Notes due 2009. The Board of Directors has authorized capital expenditures for the Atlantic City Showboat and Las Vegas Showboat for 1996 totaling $21.7 million and $6.0 million, respectively. In addition, cash requirements include capital improvements approved during 1995 that will be incurred in 1996 totaling $5.3 million and $6.0 million for the Atlantic City Showboat and the Las Vegas Showboat, respectively. The Company is eligible to receive approximately $8.8 million in credits reserved by the Casino Reinvestment Development Authority ("CRDA"), which is being redistributed in cash, as a result of the completion of additional hotel rooms added as part of the approximately $93.0 million expansion and renovation program at the Atlantic City Showboat. To date the Company has received approximately $2.9 million of the $8.8 million. In 1995, a court ruling not involving the Company, disallowed the payment of CRDA disbursement of funding credits for an unrelated expansion project. As a result, the CRDA has suspended disbursement of funding credits until such time as the appeal court overturns the lower court's decision. ACSI, in December 1995, entered into an agreement with the Atlantic City Housing Authority and Forest City Ratner Companies in which ACSI conditionally covenanted to donate $2.5 million of its CRDA funds toward construction of planned community facilities in the Urban Renewal Tract, including, but not limited to, a public skating rink. The Company completed a $21.0 million renovation of the Las Vegas Showboat. The construction project required the closure of approximately 40% of casino space for six months during the second half of 1995. As a result, revenues and results of operations at the Las Vegas Showboat were adversely impacted by business disruption during the construction period. The Company anticipates that the renovated facility will improve its competitive position on the Boulder Strip. No assurance can be given, however, that the renovated facility will be successful in attracting former or new customers to the Las Vegas Showboat. On August 4, 1995, the Company obtained a two year secured line of credit for general working capital purposes totaling $25.0 million. At the end of the two year term, the line of credit may convert to a three year term loan. The bank received security pari passu with the holders of the Company's $275.0 million 9 1/4% First Mortgage Bonds due 2008. Interest is payable monthly at the bank's prime rate plus .5% or LIBOR plus 2.5% at the election of the Company. The interest rate charged at the date the line of credit is converted to a term loan will be the bank's prime rate plus 1% or the fixed rate designated by the bank at the election of the Company. In the event the line of credit is utilized for equity investments in or loans to entities constituting new projects, the Company will be required to pay the bank a fee equal to .75% of the advance. As of December 31, 1995, all the funds under this line of credit are available for use by the Company. This line of credit replaced the Atlantic City Showboat's unsecured line of credit which expired in August of 1995. On May 18, 1993, the Company issued $275.0 million of 9 1/4% First Mortgage Bonds due 2008 (the "Bonds"). The Bonds are unconditionally guaranteed by Showboat Operating Company ("SBOC"), a wholly-owned subsidiary of the Company, Ocean Showboat, Inc. ("OSI"), a wholly-owned subsidiary of the Company, and Atlantic City Showboat, Inc. ("ACSI"), a wholly-owned subsidiary of OSI. The Bond Indenture was amended in July 1994. Interest on the Bonds is payable semi-annually on May 1 and November 1 of each year. The Bonds are not redeemable prior to May 1, 2000. Thereafter, the Bonds will be redeemable, in whole or in part, at redemption prices specified in the Indenture for the Bonds (the "Bond Indenture"), as amended. The Bonds are senior secured obligations of the Company and rank senior in right of payment to all existing and future subordinated indebtedness of the Company and pari passu with the Company's senior indebtedness. The Bonds are secured by a deed of trust representing a first lien on the Las Vegas Showboat (other than certain assets), by a pledge of all outstanding shares of capital stock of OSI, an intercompany note by ACSI in favor of the Company and a pledge of certain intellectual property rights of the Company. OSI's obligation under its guarantee is secured by a Pledge of all outstanding shares of capital stock of ACSI. ACSI's obligation under its guarantee is secured by a leasehold mortgage representing a first lien on the Atlantic City Showboat (other than certain assets). SBOC's guarantee is secured by a pledge of certain assets related to the Las Vegas Showboat. Additional security is or will be provided to the holders of the Bonds from other subsidiaries of SBO which are not unrestricted subsidiaries. The Bond Indenture, as amended, place significant restrictions on SBO and its subsidiaries including restrictions on making loans and advances by SBO to subsidiaries that are Non- Recourse subsidiaries or subsidiaries in which SBO owns less than 50% of the equity. All capitalized terms not otherwise defined in this paragraph have the meanings assigned to them in the Bond Indenture, as amended. The Bond Indenture, as amended, also places significant restrictions on the incurrence of additional Indebtedness by SBO and its subsidiaries, the creation of additional Liens on the Collateral securing the Bonds, transactions with Affiliates and the investment by SBO and its subsidiaries in certain investments. In addition, the terms of the Bond Indenture, as amended, prohibit SBO and its subsidiaries from making a Restricted Payment unless, at the time of such Restricted Payment: (i) no Default or Event of Default has occurred or would occur as a consequence of such Restricted payment; (ii) SBO, at the time of such Restricted Payment other than in an investment in a subsidiary in a gaming related business or a Quarterly Dividend, and after giving pro forma effect thereto as if such Restricted payment had been made at the beginning of the applicable four-quarter period, would have been permitted to incur at least $1.00 of additional Indebtedness, and; (iii) such Restricted Payment, together with the aggregate of all other Restricted Payments by SBO and its subsidiaries is less than the sum of (x) 50% of the Consolidated Net Income of SBO for the period (taken as one accounting period) from April 1, 1993 to the end of SBO's most recently ended fiscal quarter for which internal financial statements are available plus, (y) 100% of the aggregate net cash proceeds received by SBO from the issuance of sale of Equity Interests of SBO since the Issue Date, plus (z) Excess Non-Recourse Subsidiary Cash Proceeds received after the Issue Date. The term Restricted Payment does not include, among other things, the payment of any dividend if, at the time of declaration of such dividend, the dividend would have complied with the provisions of the Bond Indenture, as amended; the redemption, repurchase, retirement, or other acquisition of any Equity Interest of SBO out of proceeds of the substantially concurrent sale of other Equity Interests of SBO; Investments by SBO in an amount not to exceed $75.0 million in the aggregate in any Non-Recourse Subsidiary engaged in a Gaming Related Business, Investments by SBO in any Non-Recourse Subsidiary engaged in a Gaming Related Business in an amount not to exceed in the aggregate 100% of all cash received by SBO from any Non-Recourse Subsidiary up to $75.0 million in the aggregate and thereafter, 50% of all cash received by SBO from any Non-Recourse Subsidiary other than cash required to be repaid or returned to such Non- Recourse Subsidiary provided that the aggregate amount of Investments pursuant thereto does not exceed $125.0 million in the aggregate; Investments in Controlled Entities; and the purchase, redemption, defeasance of any pari passu indebtedness with a substantially concurrent purchase, redemption, defeasance, or retirement of the Bonds (on a pro rata basis). Notwithstanding the foregoing, the Company is permitted to make investments in a Controlled Entity only if from July 18, 1994 until December 31, 1996 the Company's Fixed Charge Coverage Ratio for the Company's most recently ended twelve months is greater than 1.5 to 1 and for the period commencing after December 31, 1996 the Company's Fixed Charge Coverage Ratio is greater than 1.75 to 1. For all other Restricted Payments, other than a Regular Quarterly Dividend or a Restricted Investment in a Subsidiary engaged in a Gaming Related Business, the Company's Fixed Charge Coverage Ratio for the most recently ended four full fiscal quarters, after giving effect to such Restricted Payment must be greater than 2.25 to 1. As of December 31, 1995, the Company's Fixed Charge Coverage Ratio was 3.41 to 1. Additionally, the Bond Indenture, as amended, permits the Company to issue up to $150.0 million of debt (of which $120.0 million has been issued) without compliance with the debt incurrence tests stated therein. On August 10, 1994, the Company issued $120.0 million of 13% Senior Subordinated Notes due 2009 (the "Notes"). The Notes are unconditionally guaranteed by OSI, ACSI and SBOC. Interest on the Notes is payable semi-annually on February 1 and August 1 of each year commencing on February 1, 1995. The Notes are not redeemable prior to August 1, 2001. Thereafter, the Notes will be redeemable, in whole or in part, at redemption prices specified in the Indenture for the Notes (the "Note Indenture"). The Notes are unsecured general obligations of the Company, subordinated in right of payment to all Senior Debt (as defined in the Note Indenture) of the Company. The Note Indenture permits the issuance of an additional $30.0 million of Notes at the discretion of the Company. The Note Indenture places significant restrictions on the Company, many of which are similar to the restrictions placed on the Company by the Bond Indenture, as amended, including covenants restricting or limiting the ability of the Company and its Restricted Subsidiaries (as defined in the Note Indenture) to, among other things, (i) pay dividends or make other Restricted Payments, (ii) incur additional Indebtedness and issue Preferred Stock, (iii) create Liens, (iv) create dividend and other payment restrictions affecting Restricted Subsidiaries, (v) enter into mergers, consolidations, or make sale of all or substantially all assets, (vi) enter into transactions with Affiliates and (vii) engage in other lines of business. The Company is actively pursuing potential opportunities in certain jurisdictions where gaming has recently been legalized, as well as jurisdictions where gaming is not yet legalized. There can be no assurance that (i) legislation to legalize gaming will be enacted in any additional jurisdictions, (ii) properties in which the Company has invested will be compatible with any gaming legislation so enacted, (iii) legalized gaming will continue to be authorized in any jurisdiction that the Company currently operates or has pending applications to operating a gaming establishment, or (iv) the Company will be able to obtain the required licenses in any jurisdiction. Further, no assurance can be given that any of the announced projects, or any project under development will be completed, or result in any significant contribution to the Company's cash flow or earnings. Casino gaming operations are highly regulated and new casino development is subject to a number of risks. In April 1994, Sydney Harbour Casino Properties Pty Limited ("SHCP"), a wholly-owned subsidiary of SHCH, entered into an agreement with Leighton Properties Pty Limited ("Leighton Properties") to design and construct the interim and permanent Sydney Harbour Casino for a total of A$691.0 million. (As used in this Form 10-K, amounts in Australian dollars are denoted as "A$". As of March 15, 1996, the exchange rate was approximately $0.7744 for each A$1.00.) SHCP is currently reviewing the design of the permanent Sydney Harbour Casino with the view to improving its operational efficiency and product quality and to match the changing competitive environment. SHCP has announced project cost estimates of up to A$771.0 million, a portion of which is subject to obtaining financing, required approvals and agreements. Additionally, SHCP and Leighton Properties are discussing matters in relation to the administration and management of the project under the construction contract, including an accelerated completion date for the project, firming up on monetary allowances and resolution of certain claims notified by Leighton Properties to SHCP. The total development cost is subject to change based upon the outcome of these discussions. As with any construction contract, the final amount of such contract will be subject to modification based upon change orders and the occurrence of certain events such as costs associated with certain types of construction delays. No assurance can be given that the construction costs for the Sydney Harbour Casino will not exceed the announced project cost estimate. The Company is a member of a partnership, Showboat Marina Partnership ("SMP"), consisting of Showboat Indiana Investment Limited Partnership, a limited partnership owned by the Company, and Waterfront Entertainment and Development, Inc. ("Waterfront"), an unrelated Indiana corporation. SMP received its certificate of suitability from the Indiana Gaming Commission ("Indiana Commission") for a riverboat owner's license allocated by statute to East Chicago, Indiana on January 8, 1996. SMP has applied to the Indiana Commission to transfer the certificate of suitability to a subsidiary partnership. No assurance can be given that the Indiana Commission will approve the transfer of the certificate of suitability to the subsidiary partnership. Additionally, no assurance can be given that SMP or the subsidiary partnership, as applicable, will receive an owner's license from the Indiana Commission. A certificate of suitability indicates that the recipient has been chosen for licensure and is valid for 180 days, unless extended by the Indiana Commission. The Company will apply to the Indiana Commission to extend the effectiveness of the certificate of suitability beyond its initial 180 days. Although the Indiana Commission has extended the effectiveness of certificates of suitability held by other gaming operators, no assurance can be given that the Indiana Commission will extend the effectiveness of SMP's certificate of suitability beyond 180 days from the date of issuance. The certificate of suitability requires SMP or the subsidiary partnership, as applicable, to invest no less than, in the aggregate, $170.0 million in the proposed riverboat casino and related facilities (collectively, the "East Chicago Project") and in economic incentives to East Chicago. The East Chicago Project is expected to cost approximately $195.0 million. The Company anticipates that it will contribute approximately $40.0 million to SMP of which $8.9 million had been funded as of December 31, 1995. In addition to funds contributed by the partners, SMP or the subsidiary partnership, as applicable, intends to obtain a combination of debt and equipment financings for an aggregate of approximately $156.0 million to develop the East Chicago Project. No assurance can be given that SMP or the subsidiary partnership will successfully obtain the necessary financings, or if such financings are available, the financings will be available on favorable terms. Under the current partnership agreement, the Company will receive a 12% preferred return on its investment in SMP. In addition, subject to certain qualifications and exceptions, the Company has agreed to provide a completion guarantee to complete the East Chicago Project so that it becomes operational, including the payment of all costs owing prior to such completion, up to a maximum aggregate amount of $30.0 million, should a lender require a completion guarantee in connection with any development financing. In addition, subject to certain qualifications and exceptions, the Company has agreed to provide a standby equity commitment pursuant to which it will cause to be made up to an aggregate of $30.0 million in additional capital contributions to the SMP or the subsidiary partnership if, during the first three full four fiscal quarters following the commencement of operations, the East Chicago Project's combined cash flow (as defined) is less than $35.0 million for any one such full four quarter period. However, in no event will the Company be required to cause to be contributed to SMP or the subsidiary partnership more than $15.0 million in respect of any one such full four quarter period. If the Company is required to provide a standby equity commitment, Waterfront has agreed to pay the Company $5.2 million, which amount shall accrue interest at 12% per annum until paid, from Waterfront's share of distributable cash from SMP. The Company through its subsidiary, Showboat Lemay, Inc. ("Showboat Lemay"), has an 80% general partner interest in Southboat Limited Partnership ("SLP") which, subject to licensing, plans to build and operate a riverboat casino project and related facilities (the "Southboat Casino Project") on the Mississippi River near Lemay, Missouri (the "Southboat Casino Site"). On June 1, 1995, the St. Louis County Council named SLP as the preferred developer/operator for a dockside gaming facility at the Southboat Casino Site. On October 13, 1995, SLP entered into a lease agreement with the St. Louis County Port Authority ("Port Authority") for the lease of the Southboat Casino Site for a term of 99 years, commencing upon the investigation of SLP for a Missouri gaming license and the receipt of all permits from the U.S. Army Corps of Engineers. Fees and rent for the Southboat Casino Site are payable as follows: (i) a $500,000 acceptance fee upon completion of a due diligence period; (ii) a $750,000 security deposit on the commencement date of the lease; (iii) a $2.5 million fee on the commencement date of the lease; (iv) a $2.5 million fee on the opening date of the Southboat Casino Project; (v) rent in the amount of $2.0 million per annum payable in equal monthly installments, beginning on the commencement date and continuing until the opening of the Southboat Casino Project; and (iv) rent in the amount of the greater of 4% of adjusted gross receipts or Minimum Rent (as defined below), beginning on the opening date of the Southboat Casino Project and continuing until the expiration of the term of the lease. "Minimum Rent" means $3.0 million during the first 12-month period occurring after the opening of the Southboat Casino Project; $2.8 million during the second 12- month period; $2.6 million during the third 12-month period; $2.4 million during the fourth 12-month period; $2.2 million during the fifth 12-month period; and $2.0 million beginning on the fifth anniversary of the opening of the Southboat Casino Project and continuing through the 15th lease year ("Guarantee Period"). The Company has guaranteed SLP's payment of Minimum Rent for the Guarantee Period and SLP's timely completion of, construction of, and payment for all improvements and installations in connection with SLP's development of the Southboat Casino Project. If SLP fails to pay any monthly installment of Minimum Rent, or if the lease is terminated at any time within the Guarantee Period due to an event of default by SLP, the Company must pay either (i) the full sum of unpaid Minimum Rent due for the remainder of the Guarantee Period, or (ii) if it posts a $2.0 million letter of credit, make monthly payments of Minimum Rent. In addition, the Company agreed to provide a Guarantee of Completion to the Port Authority which provides, in material part, that the Company will complete the construction of the Southboat Casino Project should SLP, after the commencement of work, abandon the project for a period of 30 days after receipt of notice from the Port Authority. On October 17, 1995, SLP filed its application for a gaming license with the Missouri Gaming Commission. The total cost of the Southboat Casino Project is expected to be $117.0 million. The limited partnership agreement provides that the Company's initial capital contribution is $19.5 million and that Showboat Lemay, on behalf of SLP, will arrange for a $75.0 million loan to develop the Southboat Casino Project and to arrange for equipment financing for the remaining costs of the Southboat Casino Project. The Company has also agreed to provide a loan to SLP in the amount of approximately $4.5 million to assist in the development of the Southboat Casino Project. SLP has entered into a commitment letter to receive up to $75.0 million of financing from an unrelated party for the construction of a riverboat and related site improvements subject to certain conditions. The financing commitment expires May 10, 1996. No assurance can be given that SLP will be selected for investigation for a gaming license prior to the expiration of the financing commitment. No assurance can be given that SLP will be successful in obtaining the necessary funds to finance its gaming project or that SLP will successfully obtain a casino license. In July 1995, the Company and Rockingham Venture, Inc. ("RVI"), which owns the Rockingham Park, a thoroughbred racetrack in New Hampshire, entered into agreements to develop and manage any additional gaming that may be authorized at Rockingham Park. In December 1994, the Company loaned RVI approximately $8.9 million, which loan is secured by a second mortgage on Rockingham Park. The unpaid principal and all accrued interest with respect to the loan becomes due on December 28, 1999. Subject to certain conditions, RVI may extend the maturity date of the loan up to an additional 24 months. At this time, casino gaming is not permitted in the State of New Hampshire. No assurance can be given that casino gaming legislation will be enacted in the State of New Hampshire or, if enacted, such legislation will authorize casino gaming at Rockingham Park. Depending upon the number and types of gaming, if any, legalized by the necessary authorities, the Company and RVI will make certain capital contributions. At a minimum, the Company will contribute the promissory note representing the loan. If casino enabling legislation permits more than 500 slot machines or any combination of slot machines and table games, then the Company, subject to available financing, will contribute funds not to exceed 30% of cash funds required for the project. At this time, the cost of the project has not been determined. The Company believes that it has sufficient capital resources, including its existing cash balances, cash provided by operations and existing borrowing capacity, to cover the cash requirements of its existing operations. The ability of the Company to satisfy its cash requirements, however, will be dependent upon the future performance of its casino hotels which will continue to be influenced by prevailing economic conditions and financial, business and other factors, certain of which are beyond the control of the Company. As the Company realizes expansion opportunities, the Company will need to make significant capital investments in such opportunities and additional financing will be required. The Company anticipates that additional funds will be obtained through loans or public offerings of equity or debt securities. Although no assurance can be made that such funds will be available or at interest rates acceptable to the Company. In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"). SFAS No. 121 becomes effective for fiscal years beginning after December 15, 1995. The Company is currently assessing the impact of SFAS No. 121 on its financial statements. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 is effective for transactions entered into in fiscal years beginning after December 15, 1995. The Company will not be adopting the recognition and measurement criteria of SFAS No. 123 and thus, the impact of SFAS No. 123 on the Company's financial statements will not be material. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by this undersigned, thereunto duly authorized. REGISTRANT: SHOWBOAT, INC. By: /s/ H. Gregory Nasky H. Gregory Nasky, Executive Vice President, Secretary and Director DATE: March 21, 1996 -----END PRIVACY-ENHANCED MESSAGE-----