-----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, TQRnrOwKdKI3dDUj9KbjaFNwP/L1wc87fAWJaZ3oT/cFjwrLdCQEwsEYmggFOUNb BmtWqKQYdd3wYoHmCTw4qw== 0000906477-97-000013.txt : 19970329 0000906477-97-000013.hdr.sgml : 19970329 ACCESSION NUMBER: 0000906477-97-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07123 FILM NUMBER: 97566846 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 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-7123 Showboat, Inc. (Exact name of registrant as specified in its charter) Nevada 88-0090766 (State or other (I.R.S. employer jurisdiction of identification no.) incorporation or organization) 2800 Fremont Street, Las Vegas, Nevada 89104 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (702) 385-9141 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 13% Senior Subordinated Notes due 2009 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. [ X ] 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 14, 1997, was approximately $280,626,000. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 14, 1997: 16,184,420. 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. - 2 - PART I ITEM 1. BUSINESS GENERAL Showboat, Inc., through subsidiaries, (collectively, the "Company") is an international gaming company with over 40 years of gaming experience that (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 24.6% interest in, and manages, the Sydney Harbour Casino in Sydney, New South Wales, Australia ("Sydney Harbour Casino"), which commenced gaming operations in an interim casino on September 13, 1995. The Company, through subsidiaries, also (i) owns a 55% partnership interest in Showboat Marina Casino Partnership, an Indiana partnership ("SMCP"), which holds a certificate of suitability for a riverboat owner's license in East Chicago, Indiana; in connection therewith, SMCP is constructing a $200.0 million state-of-the-art cruising gaming vessel and related land- based entertainment complex in East Chicago, Indiana (the "East Chicago Showboat") which is scheduled to open, subject to licensing, in the second quarter of 1997, (ii) owns 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, and (iii) entered into a contract to manage a tribal casino near Bellingham, Washington (approximately 40 miles south of Vancouver, British Columbia, Canada) for the Lummi Indian Nation on February 3, 1997. 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 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 1996 DEVELOPMENTS SYDNEY, AUSTRALIA STATUS OF CONSTRUCTION OF PERMANENT CASINO. In April 1996, the Company, through its partially owned subsidiary, undertook steps to upgrade the planned theming and decor of the permanent Sydney Harbour Casino located in Sydney, New South Wales, Australia. The design element changes were made with a view toward improving the casino's operational efficiency and product quality and to match the changing competitive environment. In addition, the scheduled opening date of the permanent casino was moved up and is currently expected to be in December 1997, rather than April 1998. As a result, the total project cost increased A$180.0 million to - 3 - A$1,413.8 million from A$1,223.8 as previously disclosed by SHCH. (As used in this Form 10-K amounts in Australian dollars are denoted as "A$." As of December 31, 1996 the exchange rate was approximately $0.794 for each A$1.00.) The increased construction costs for the upgraded project are being funded by increasing the available bank financing by A$150.0 million and by the April 1996 sale of 35,250,000 preferred ordinary shares of Sydney Harbour Casino Holdings Limited, the publicly traded holding company of the casino licensee ("SHCH"), providing net proceeds of approximately A$64.0 million. As with any construction contract, the final amount of such contract will be subject to modification based upon change orders and the costs associated with certain types of construction delays. No assurances can be given that the costs for the Sydney Harbour Casino project will not exceed A$1,413.8 million. See "Item 1. Business - Sydney Operations" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." The permanent casino will feature a 352 room hotel, 139 serviced apartments, a lyric theatre, a cabaret theatre, convention and retail facilities, 2,500 underground car spaces and a light rail link to the city. The Sydney Harbour Casino entered into an eight-year agreement with Lord Andrew Lloyd Webber's Really Useful Theatres Pty Ltd. for the management of the Lyric Theatre. Of the 2,500 parking spaces being constructed for use at the permanent casino, 1,400 spaces became available for use at the interim casino at the end of 1996. Upon opening the permanent casino, the lease for the interim casino will terminate and, as a result, the interim Sydney Harbour Casino will cease operations. AGREEMENT IN PRINCIPLE. On January 12, 1997, the Company, and Publishing & Broadcasting Limited, a public company listed on the Australian Stock Exchange ("PBL"), reached an agreement in principle with respect to the acquisition by PBL of a significant portion of the Company's interests in the Sydney Harbour Casino. Through wholly-owned subsidiaries, the Company is the largest single shareholder, holding 135 million ordinary shares or 24.6% of the issued and outstanding ordinary shares of SHCH. In addition, the Company holds, through subsidiaries, an option to purchase approximately 37.4 million ordinary shares of SHCH at an exercise price of A$1.15 per share. This option may be exercised between July 1, 1998 and June 30, 2000. The proposed acquisition contemplates that PBL will purchase from the Company approximately 55 million ordinary shares of SHCH, which represents approximately 10% of the issued voting shares of SHCH, at a price of A$1.85 per share, subject to certain adjustments. Additionally, the agreement in principle contemplates PBL granting to the Company a put option to sell to PBL another 54 million ordinary shares at an exercise price of A$1.85 per share. The put option will expire March 31, 1999. The acquisition further contemplates, under arrangements to be concluded, that PBL would succeed to the management of the casino in Sydney for which PBL would pay the Company A$204 million. The acquisition is subject to the execution of definitive agreements and the receipt of various governmental and regulatory consents and approvals. Additionally, certain third parties will need to consent to the acquisition prior to the acquisition's consummation. - 4 - EAST CHICAGO, INDIANA CERTIFICATE OF SUITABILITY. On January 8, 1996, the Indiana Gaming Commission (the "Indiana Commission") issued a certificate of suitability to Showboat Marina Partnership, an Indiana general partnership ("SMP"), for a gaming license to own and operate the East Chicago Showboat. 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 Indiana corporation. The certificate of suitability was valid for a period of 180 days from January 8, 1996. SMP applied with the Indiana Commission to transfer the certificate of suitability to a subsidiary partnership, and, on March 20, 1996, SMP received permission to transfer the certificate of suitability to SMCP. The Indiana Commission renewed the certificate of suitability in July 1996 for a period of 180 days and renewed the certificate again in January 1997 until June 1, 1997. For such time as the certificate of suitability is effective, SMCP must meet certain statutory requirements and special conditions must be followed in order for SMCP to receive a permanent riverboat owner's license. See also "Item 1. Business - Regulations and Licensing - Indiana Gaming." THE PROJECT. The operations of SMCP and of SMP, which contributed all of its assets (except for the capital stock of East Chicago Second Century, Inc.) and liabilities to SMCP as of March 28, 1996, have been limited to applying for appropriate gaming licenses and securing the land for, arranging for construction of, finalizing the design of, constructing and developing and obtaining financing for the East Chicago Showboat. The budgeted $200.0 million East Chicago Showboat will contain approximately 53,000 square feet of gaming space with approximately 1,770 slot machines and approximately 90 table games (includes five poker tables). The land based facility is expected to consist of a pavilion, parking garage and surface parking. The pavilion will be approximately 100,000 square feet and will include a coffee shop, upscale restaurant, cocktail lounge, gift shop, ticket/promotions area as well as administrative offices. A parking garage containing 1,800 spaces will connect to the pavilion through a climate controlled corridor and surface parking for an additional 1,000 vehicles will be available for use by patrons to the East Chicago Showboat. Subject to obtaining the necessary gaming licenses, other permits and financing, SMCP expects gaming operations at East Chicago Showboat to commence during the second calendar quarter of 1997. The funds necessary to design, develop, construct, equip and open the East Chicago Showboat were derived from funds contributed to SMCP in March 1996, the proceeds from the sale of debt securities also sold in March 1996 and capital lease financing. SMCP is currently finalizing agreements with its capital lease providers. ISSUANCE OF DEBT SECURITIES. On March 28, 1996, SMCP and Showboat Marina Finance Corporation, a Nevada corporation and wholly owned subsidiary of SMCP ("SMFC"), sold $140.0 million, 13 1/2% Series A First Mortgage Notes due 2003 (the "Series A Notes") through a private placement. The proceeds from the offering were approximately $133.7 million, net of underwriting discounts and commissions. The funds were raised to support the development costs for the East Chicago Showboat. On August 12, 1996, SMCP and SMFC exchanged the Series A Notes with notes registered under the Securities Act of 1933, as amended, the 13 1/2% Series B First Mortgage Notes due 2003 (the "Series B Notes"). The Series B Notes and the - 5 - Series A Notes were issued under the Indenture dated as of March 28, 1996 (the "East Chicago Note Indenture") between SMCP, SMFC and American Bank National Association as Trustee (in such capacity, the Trustee or Registrar). The form and terms of the Series A Notes were identical in all material respects to the form and terms of the Series B Notes. The Series A Notes and the Series B Notes are collectively referred to as the "East Chicago Notes." Interest is payable on the East Chicago Notes semiannually on March 15 and September 15 of each year, commencing September 15, 1996. The East Chicago Notes will not be redeemable prior to March 15, 2000, except as otherwise required by a gaming authority. On and after March 15, 2000, the East Chicago Notes will be redeemable at the option of the SMCP, in whole or in part, at redemption prices ranging from 106.75% in 2000 through 100.00% in 2002 and thereafter, as defined in the East Chicago Note Indenture for the East Chicago Notes, plus accrued and unpaid interest and liquidated damages, if any. The East Chicago Notes are senior secured obligations of SMCP and rank senior in right of payment to all existing and future subordinated indebtedness of SMCP and pari passu with SMCP's senior indebtedness. The East Chicago Notes are without recourse to the general partners of SMCP or to the Company. Terms not otherwise defined herein have the meanings assigned to them in the East Chicago Note Indenture. The East Chicago Notes are secured by a first lien on substantially all of SMCP's assets. The East Chicago Note Indenture places significant restrictions on SMCP for the incurrence of additional Indebtedness, the creation of additional Liens (defined in the East Chicago Note Indenture) on the Collateral (defined in the East Chicago Note Indenture) securing the East Chicago Notes, transactions with Affiliates (defined in the East Chicago Note Indenture) and making Restricted Payments (defined in the East Chicago Note Indenture) unless certain conditions are met. Restricted Payments include paying a management fee to SMP, the Manager of the East Chicago Showboat. In order to pay the management fee, among other things, SMCP's Fixed Charge Coverage Ratio (defined in the East Chicago Note Indenture) must be greater than 1.5 to 1.0 for the most recently ended four full fiscal quarters, after giving effect to such Restricted Payment. To make any other Restricted Payment SMCP must, among other things, have a Fixed Charge Coverage Ratio of 2.0 to 1.0 for the most recently ended four full fiscal quarters, after giving effect to such Restricted Payment. In addition, subject to certain qualifications and exceptions, the Company entered into a standby equity commitment with SMCP, pursuant to which it will cause to be made up to an aggregate of $30.0 million in additional capital contributions to SMCP if, during the first three full four fiscal quarters following the commencement of operations at the East Chicago Showboat, the East Chicago Showboat'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 SMCP more than $15.0 million in respect of any such full four quarter period. In addition, subject to certain qualifications and exceptions, the Company entered into a completion guarantee with SMCP to complete the East Chicago Showboat 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. The Company's obligation to complete the East Chicago Showboat will be suspended during the pendency of any force majeure event or other event outside the control of the Company. The Company believes that SMCP has sufficient funds for the design, development, construction, equipping and opening of the East Chicago Showboat. For additional - 6 - information relating to SMCP, please refer to the Form 10-K for SMCP (SEC File No. 001-12419) for the year ended December 31, 1996, as filed with the Commission on March 25, 1997. CHANGE OF LAW. A Coast Guard appropriations bill, which included an amendment to the Johnson Act permitting the operation of gaming equipment on the portion of Lake Michigan within Indiana's borders and jurisdiction, was presented to and signed by President William J. Clinton in November 1996. Previously, the Johnson Act prohibited gaming on federal waterways, including the Great Lakes. The Indiana casino excursion riverboats operating on Lake Michigan prior to the passage of the Coast Guard appropriations bill, were permitted to operate "mock" cruises at the dock. As a result of the bill's enactment, Indiana casino excursion riverboats will be permitted to cruise on Lake Michigan within Indiana's borders. RANDOLPH, MISSOURI In March 1995, the Company, with an unrelated corporation, formed Showboat Mardi Gras, L.L.C. ("SMG"), to own and operate, subject to licensing, a riverboat casino near Kansas City, Missouri. The Company owned 35% of the equity of SMG. SMG was not selected by the Missouri Gaming Commission for investigation for a gaming license. Due to a decline in the market value of the assets of SMG, principally a riverboat, the Company recorded a pre-tax write-down of $3.8 million. This write-down included the Company's remaining investment in SMG, and the Company has no further obligation to SMG. LUMMI INDIAN NATION The Company entered into a tribal management agreement and related documents with the Lummi Indian Nation for the financing, development and operation of a Class III casino located between Bellingham, Washington and Vancouver, British Columbia, Canada. The agreements are subject to necessary approvals and licensing by various state and federal regulatory authorities. The casino, which will be located on tribal land, will be 3 miles off of Interstate 5, approximately 45 minutes from Vancouver. It is anticipated that the casino will be approximately 65,000 square feet, featuring table games, keno and several restaurants. 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. Currently, the Company has announced gaming opportunities in Lemay, Missouri, Rockingham Park in Salem, New Hampshire and the Lummi Indian Nation, near Bellingham, Washington. See "Item 1. Business -- Narrative Description of Business -- Development Activities" "-- Rockingham Park, New Hampshire," "-- Lemay, Missouri" or "-- Lummi Indian Nation." 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 - 7 - can be no assurance that the Company will elect or be able to consummate any such acquisition or expansion opportunity. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." NARRATIVE DESCRIPTION OF BUSINESS ATLANTIC CITY OPERATIONS The Company's subsidiary, Atlantic City Showboat, Inc. ("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 approximately nine acres of land adjacent to the Atlantic City Showboat which are zoned for non-casino development and which are currently used as surface parking lots. The Atlantic City Showboat is a New Orleans-themed casino- hotel featuring, as of March 1, 1997, approximately 97,000 square feet of casino space. The casino, the other public areas and administrative offices are located on the first four floors of a 24-story hotel tower. A 16-story hotel tower, constructed in 1994, is adjacent to the 24-story hotel tower. 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 casino 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 and exhibition space and a 60-lane bowling center, including a snack bar and cocktail lounge. As of March 1, 1997, the casino offered approximately 3,600 slot machines, 100 table games, a horse race simulcast facility and a keno facility. The second and fourth floors of the 24-story hotel tower 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 24-story hotel tower. 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 parking garage. - 8 - Adjacent to the Atlantic City Showboat is the Taj Mahal Casino Hotel (the "Taj Mahal"). The Taj Mahal is connected to both the Atlantic City Showboat and 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, 1997, the Atlantic City Showboat employed approximately 3,300 persons on a full-time basis and approximately 325 persons on a part-time basis. Approximately 1,300 or 39.4% of the Atlantic City Showboat's full-time employees are covered by collective bargaining agreements. The collective bargaining agreement covering 1,172 employees expires in September 1999. 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 Las Vegas Showboat is owned by the Company and it 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, 451 hotel rooms, a 106-lane bowling center, two specialty restaurants, a buffet, a coffee shop, an approximately 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, 1997, the Las Vegas Showboat's casino offered approximately 1,480 slot machines, 28 table games, a race and sports book and a keno facility. The Las Vegas Showboat has developed a recreational vehicle park with approximately 80 spaces on leased property contiguous to the Las Vegas Showboat. The recreational vehicle park became operational in March 1997. LAS VEGAS EMPLOYEES AND LABOR RELATIONS As of March 1, 1997, the Las Vegas Showboat employed approximately 1,280 persons, of which approximately 720 or 57% of the employees were represented by collective bargaining agreements. The collective bargaining agreement covering approximately 575 employees expires on June 1, 1997. The Company considers its current labor relations to be satisfactory. - 9 - SYDNEY OPERATIONS The Company's wholly-owned subsidiary, Showboat Australia Pty Limited ("SA"), invested approximately $100.0 million 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 Sydney Harbour Casino Pty Limited ("SHCL"). Upon issuance of the license, SHCL paid an aggregate of A$376.0 million as a one time license fee and prepaid rent for the casino site. 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 3 restaurants, 5 bars, a sports lounge and a gift shop. In December 1996, 1,400 parking spaces constructed in connection with the permanent casino became available for use by patrons of the interim casino. The opening of the interim Sydney Harbour Casino marked 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 by February 1998. SHCH formed a wholly-owned subsidiary, Sydney Harbour Casino Properties Pty Limited ("SHCP"), to lease the land for the Sydney Harbour Casino from the NSWCCA and to construct the Sydney Harbour Casino. The Company anticipates that the permanent Sydney Harbour Casino will commence operations by the end of 1997. 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 lease will terminate and operations at the interim casino will cease. 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 service 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 entered into an eight-year agreement with Lord Andrew Lloyd Webber's Really Useful Theatres Pty Ltd. for the management of the lyric theatre. 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. (Of the 139 units, 78 units have been sold as of March 7, 1997.) 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 - 10 - system, a bus terminal, docking facilities for commuter ferries and parking for approximately 2,500 cars. In April 1996, the Company, through its partially-owned affiliate, undertook steps to upgrade the planned theming and decor of the permanent Sydney Harbour Casino. The design element changes were made with a view toward improving the casino's operational efficiency and product quality and to match the changing competitive environment. In addition, the scheduled opening date was moved up and is currently expected to be December 1997, rather than April 1998. As a result, the total project cost increased A$180.0 million to A$1,413.8 million from A$1,233.8 million as previously disclosed by SHCH. The current project cost includes expenditures for property, plant and equipment of approximately A$782.9 million and A$93.5 million for the permanent and interim casinos, respectively. Other project costs include preopening costs for both the permanent and interim casinos which are budgeted at approximately A$44.8 million, the license fee and prepaid rent which was A$376.0 million and equity costs, financing fees, prelicensing costs and other expenses for the project which total approximately A$116.6 million. The increased construction costs for the upgraded project are being funded by increasing the available bank financing by A$150.0 and by the April 1996 sale of 35,250,000 preferred ordinary shares of SHCH in providing net proceeds of approximately A$64.0 million. As with any construction contract, the final amount of such contract will be subject to modification based upon change orders and the occurrence of events such as costs associated with certain types of construction delays. No assurances can be given that the costs for the Sydney Harbour Casino project will not exceed A$1,413.8 million. Under the terms of the construction contract and subject to certain exceptions, the permanent casino must be completed by February 1998. 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. In addition to its 24.6% 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. 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 Pty Limited ("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 - 11 - 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$4.6 million remains as of December 31, 1996. 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$222.6 million (as adjusted) 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$222.6 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. The Company has entered into an agreement in principle with PBL to sell approximately 55 million ordinary shares of SHCH owned by the Company and contemplates that PBL would succeed to the management of the Sydney Harbour Casino for which PBL would pay the Company A$204 million. See "Item 1. Business - Fiscal Year 1996 Developments - Sydney, Australia" and "Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations" for discussion regarding the Company's agreement in principle with PBL. 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. - 12 - SYDNEY EMPLOYEES AND LABOR RELATIONS As of March 1, 1997, the Sydney Harbour Casino employed approximately 2,805 persons, of which approximately 2,255 or 80% of the employees were represented by a collective bargaining agreement. The collective bargaining agreement expires in February 1988. 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, 1996, casinos either owned or managed by the Company featured the following approximate number of slot machines and table games:
Interim Atlantic Sydney City Las Vegas Harbour Showboat Showboat Casino Total Slot Machines............ 3,605 1,478 500 5,583 "21" Tables.............. 48 15 81 144 Poker Tables............. 6 5 0 11 "Craps" Tables........... 10 2 2 14 Roulette Tables.......... 13 2 33 48 Caribbean Stud Poker..... 8 1 4 13 Pai Gow Poker Tables..... 2 1 2 5 Pai-Gow Tile Table....... 3 0 0 3 Baccarat Tables.......... 3 0 3 6 Mini-Baccarat Tables..... 1 0 18 19 Big Six Wheel............ 2 0 2 4 Sic Bo................... 1 0 4 5 Let It Ride.............. 5 2 0 7 Two Up................... 0 0 1 1
The Atlantic City Showboat also contains a horse racing simulcast area 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. 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 - 13 - for 76.1%, 73.9%, and 73.6% of casino revenues for the years ended December 31, 1996, 1995 and 1994, respectively. At the Las Vegas Showboat, slot machines accounted for 85.2%, 85.5%, and 83.0% of casino revenues for the years ended December 31, 1996, 1995 and 1994, respectively. In contrast, table games have been the principal source of casino revenues at the interim Sydney Harbour Casino. For the year ended December 31, 1996 and for the period from commencement of operations to December 31, 1995, table games accounted for 82.2% and 86.1%, respectively, 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, 1996, 1995 and 1994. 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 Showboat Star Partnership, the owner of the Showboat Star Casino ("SSP"), respectively, under the equity method of accounting. The Company's equity in the income or loss of SHCH, net of intercompany elimination, was $4,086,000 for the year ended December 31, 1996. For the year ended December 31, 1995, the company reported no earnings for SHCH due to the write off of preopening costs. 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 and income of $12,828,000 for the year ended December 31, 1994. For additional financial information, see the Company's financial statements contained in "Item 8. Financial Statements and Supplementary Data."
Year Ended Year Ended December 31, 1996 December 31, 1995 (dollar amounts in thousands) Amount Percent Amount Percent Revenues: Casino................. $382,980 88.3 $379,494 88.5 Food and beverage.......... 56,916 13.1 53,894 12.6 Rooms...................... 26,147 6.0 25,694 6.0 Sports and special events.. 3,682 .9 3,924 1.0 Other................... 5,876 1.4 5,379 1.2 Total gross revenues.... 475,601 109.7 468,385 109.3 Less complimentaries.... 41,896 9.7 39,793 9.3 Total net revenues...... $433,705 100.0 $428,592 100.0 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, and $1.9 million paid to Lake Pontchartrain Showboat, Inc., a wholly-owned subsidiary of the Company, from SSP in 1995 and 1994, respectively. Does not include interest income.
Year Ended December 31, 1994 Amount Percent Revenues: Casino.................. $351,436 87.6 Food and beverage........... 50,624 12.6 Rooms....................... 20,587 5.1 Sports and special events... 4,168 1.0 Other................... 7,799 2.0 Total gross revenues..... 434,614 108.3 Less complimentaries..... 33,281 8.3 Total net revenues..... $401,333 100.0 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, and $1.9 million paid to Lake Pontchartrain Showboat, Inc., a wholly-owned subsidiary of the Company, from SSP in 1995 and 1994, respectively. Does not include interest income. - 14 -
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 10.1%, 9.7%, and 8.8% of total net revenues for the years ended December 31, 1996, 1995 and 1994, respectively. Such promotional allowances (complimentary services) at the Las Vegas Showboat were 7.0%, 6.8%, and 6.5% of total net revenues for the years ended December 31, 1996, 1995 and 1994, 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 and 3.6% for the year ended December 31, 1996. 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 $6.3 million at December 31, 1996, before deducting allowance for doubtful accounts of approximately $2.2 million. In comparison, gaming receivables at the Atlantic City Showboat were approximately $7.1 million before deducting allowance for doubtful accounts of approximately $2.5 million for the year ended December 31, 1995. 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, 1996, 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, 1995, 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 0.4% of casino revenues for the year ended December 31, 1996, as compared to approximately 0.4% and 0.2% for the years ended December 31, 1995 and 1994, respectively. Annual gaming bad debt expense at the Las Vegas Showboat was approximately 0.3% of casino revenues for the year - 15 - ended December 31, 1996, as compared to approximately 0.2% of casino revenues for the years ended December 31, 1995 and 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. 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 the gaming and hotel revenues in Las Vegas, Nevada and the gaming revenues in Sydney, Australia are significantly seasonal. 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. 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 may in the future consider 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 1.1 million square feet of gaming space and approximately 11,000 casino hotel rooms as of December 31, 1996 (including the Atlantic City Showboat). According to the New Jersey Convention and Visitors Authority, eight expansions of existing hotel-casinos have been announced and are expected to be open and could be completed within the next four years, which will add approximately 6,800 more hotel rooms. There are several sites on the Boardwalk and in the Marina Area of Atlantic City on which hotel-casino facilities could - 16 - 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 licenses and permits 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 and the Mohegan Sun Casino near Montville, Connecticut. Delaware recently passed legislation authorizing all three racetracks in its state to operate in the aggregate 2,700 slot machines. As of December 29, 1996, Delaware racetracks operated a total of approximately 1,700 slot machines. To a lesser extent, the Atlantic City Showboat competes with casinos in Nevada and other states of the United States and internationally. 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, 1996, there were two hotel-casinos located on the Boulder Strip which the Company believes are its primary competitors. Additionally, there are approximately 40 hotel-casinos 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. 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. Two new hotel-casinos targeting a similar market as the Las Vegas Showboat are scheduled to open in 1997 and 1998, respectively, 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 99,072 rooms as of December 31, 1996, an increase of approximately 10% from the prior year. Fifteen new hotel- casinos and six hotel-casino expansions are under construction or have been announced, which will add approximately 27,520 rooms to the Las Vegas areas over the next approximately three 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 increased casino capacity in the Las Vegas market. There can be no assurance that the expanded marketing and customer service programs will attract customers to the Las Vegas Showboat. - 17 - 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. 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, 15 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 until September 2007. While only 17.8% of casino revenues were generated by slot machines, in 1996 in excess of approximately 74,000 slot machines were permitted in approximately 1,847 hotels and approximately 1,452 non-profit private clubs in New South Wales. Hotels are currently limited to a maximum of ten slot machines each and after April 1, 1997 hotels will be limited to a maximum of thirty slot machines each. In 1995, over 75% of the private clubs contained 50 slot machines or less; however, the largest private club contained in excess of 800 slot machines (the most recently available public information). 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, theaters, 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 76.1% and 85.0% of casino revenues of the Atlantic City Showboat and the Las Vegas Showboat, respectively, in 1996. 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. - 18 - DEVELOPMENT ACTIVITIES In 1993, the Company created a Development and Management Services Division to investigate and secure new properties in the United States and the world. The Company's development strategy is to identify new and existing gaming opportunities with strong demographics, in attractive and accessible locations, and which the Company believes will exceed the Company's return on investment objectives. Such opportunities may include the ownership, management and operation of gaming and entertainment facilities, either alone or with joint venture partners. The Company's Development and Management Services Division also provides management services to support new facilities upon opening, including human resources, marketing, design and construction, management information systems, regulatory compliance and operating and financial services. The following is a listing of the Company's announced expansion opportunities: EAST CHICAGO, INDIANA The East Chicago Showboat is located on approximately 27 acres of leased land at the Pastrick Marina, approximately 12 miles from Chicago, Illinois. The Pastrick Marina, previously used for private pleasure craft docking only, was expanded to serve as a marina for the East Chicago Showboat and a mooring facility for SMCP's state-of-the-art cruising gaming vessel. The East Chicago Showboat is located directly off Indiana State Highway 912, a six-lane divided highway which connects 3.5 miles south to Interstate Highway 90 and 5.5 miles south to Interstate Highway 80/94. SMCP believes that the East Chicago Showboat will have the most direct and convenient access from federal and state highways of any existing or proposed gaming operation within a 120-mile radius of the East Chicago Showboat (the "Chicago Gaming Market"). The East Chicago Showboat will consist of an approximately 100,000 square foot five level casino state-of-the-art cruising gaming vessel, an approximately 100,000 square foot land-based pavilion (the "Pavilion"), an approximately 1,800 space parking garage and surface parking for an additional 1,000 automobiles. The gaming vessel will include approximately 53,000 square feet of gaming space on four of its five levels, feature approximately 1,770 slot machines and approximately 90 table games (includes five poker tables), and accommodate approximately 3,750 passengers. The cruising gaming vessel will resemble a modern vacation cruise vessel, with escalators, elevators, eleven foot to twelve and one-half foot high ceilings, and state-of-the- art design features intended to provide customers with a smooth and comfortable ride during cruises on Lake Michigan. The East Chicago Showboat will offer gaming 365 days per year and will provide its customers a wide variety of table games and slot machines of varying denominations. SMCP expects to operate the casino gaming vessel approximately 20 hours each day in a series of excursions lasting two to three hours each. A festive Mardi Gras party atmosphere will be replicated through the use of murals, street performers and entertainers. Customers will enter the casino gaming vessel through its second or third floor via enclosed ramps from the adjacent Pavilion. Of the casino gaming vessel's five levels, the top four levels will be used for gaming with three of the four gaming levels divided into - 19 - two distinct gaming areas separated by a lobby. The fourth gaming level of the vessel will contain a single gaming area, passenger lounge, snack bar and cocktail lounge. The lowest level of the casino gaming casino will be utilized for administrative support functions. Customers will enter the Pavilion through the parking garage or through the PORTE COCHERE, a covered driveway entrance. Customers entering the Pavilion from the attached parking garage will be protected by a climate controlled enclosed walkway and directly enter the Pavilion's second floor. Customers entering the Pavilion through the PORTE COCHERE will proceed from the first floor lobby to the second floor public area. The second floor public area of the Pavilion will include a reception desk, a gift shop, a coffee shop, a hydraulic bandstand platform, an upscale restaurant and a cocktail lounge. The first floor of the Pavilion will include administrative offices, executive offices, accounting and employee support areas and receiving platforms. With respect to parking, the East Chicago Showboat will provide secure, well-lit customer parking for approximately 2,800 vehicles - 1,800 spaces in the attached parking garage and 1,000 spaces in a surface parking area. The parking garage will provide access to customers between floors via elevators, escalators and stairways. In addition, there will be 600 off- site parking spaces for employee parking. SMCP intends to implement marketing programs previously utilized by Showboat and its affiliates, such as a slot club and special promotions, to attract patrons to the East Chicago Showboat. SMCP's marketing programs will include data based marketing which will offer complimentary merchandise, coin/cash rebates based on play, complimentary food and free bus transportation to and from the East Chicago Showboat. SMCP will also utilize competitive payouts on gaming machines, value pricing of food and other amenities, entertainment, and friendly, quality customer service to maximize customer satisfaction. SMCP currently has approximately 250 employees. When the East Chicago Showboat commences operations, management anticipates the employment of approximately 1,900 employees, some of whom may be covered by a collective bargaining agreement. SMCP entered into a fixed price contract for the construction of the casino gaming vessel and entered into fixed or guaranteed maximum price contracts with specific completion dates for substantial portions of the Pavilion and other structures comprising the East Chicago Showboat. Guaranteed maximum price contracts, however, are subject to price adjustment if the plans and specifications are changed. In October 1996, the project budget for the East Chicago Showboat was revised upward by $5.0 million to $200.0 million to provide for an enhanced Pavilion and additional employee training. As of January 1997, the breakwater for the Pastrick Marina was substantially completed and the casino gaming vessel had arrived in the City of East Chicago. As of December 31, 1996, approximately $116.7 million had been spent on the construction of the East Chicago Showboat. Subject to licensing, the East Chicago Showboat will commence operations during the Second Calendar Quarter of 1997. SMCP will compete in the Chicago Gaming Market with seven operating riverboat casinos, three of which are located in Indiana and four of which are located in Illinois, and two additional casinos (including the East Chicago Showboat) have been proposed or are under - 20 - construction. Of the three Indiana operating riverboat casinos, two commenced gaming operations in June 1996 and one commenced gaming operations in July 1996. Four of the seven riverboat casinos operate in Illinois (within fifty miles of the East Chicago Showboat) and these riverboat casinos are limited to 1,200 gaming positions each by Illinois gaming law. SMCP expects to compete with the riverboat casinos in the Chicago Gaming Market based on its convenient and direct access to and from state and federal highways, availability of a wide variety of table games and slot machines of varying denominations, its spacious comfortable environment, and its Mardi Gras atmosphere. In addition to traditional riverboat casino operations, SMCP faces other forms of local competition as well. The Pokagon Band of Potawatomi Indians (the "Pokagon Band") of southern Michigan and northern Indiana has been federally recognized as an Indian tribe. In February 1995, the Pokagon Band voted to build at least one land-based casino in southern Michigan and, in April 1995, voted to accept a casino development proposal from a national casino operator. The Governor of Michigan signed a compact with the Pokagon Band in November 1995 and the Governor of Indiana has not yet begun compact negotiations with the Pokagon Band with respect to a land-based casino in Indiana. In addition, the Indiana Horse Racing Commission has issued a permit for pari-mutuel wagering on a horse racetrack in Anderson, Indiana, and that permit holder also has been issued licenses for three satellite wagering facilities, including one in Merrillville, Indiana located in the same county as the East Chicago Showboat. The legalization of additional or larger casino gaming operations in jurisdictions in close proximity to the East Chicago Showboat would have a material adverse effect on SMCP. SMCP anticipates that activity at the East Chicago Showboat will be affected by weather conditions typical to the region. Although SMCP has no operating history, SMCP anticipates that most business activity will occur from May to September rather than October through April when the region experiences harsher weather. 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 accruing interest at 8.3%, which loan is secured by a second mortgage on Rockingham Park. As of the date hereof, RVI has made all payments required to be made by the promissory note. 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 - 21 - 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 nor has the State of New Hampshire enacted any gaming legislation. 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. 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 proposed 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. 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 - 22 - Southboat Casino Site are payable as follows: (i) a $500,000 acceptance fee upon completion of a due diligence period (which was paid in May 1996); (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 (which in the aggregate is $35.0 million) 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, 1997, 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. LUMMI INDIAN NATION The Company entered into a tribal management agreement and related documents with the Lummi Indian Nation for the financing, development and operation of a Class III casino located between Bellingham, Washington and Vancouver, British Columbia. The agreements are subject to the necessary approvals and licensing by various state and federal regulatory authorities. The casino, which will be located on tribal land, will be 3 miles off of Interstate 5, approximately 45 minutes from Vancouver. It is expected that the casino will be approximately 65,000 square feet, featuring table games, keno and several restaurants. - 23 - 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 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 22, 1997 for the period commencing February 1, 1997 and ending January 31, 2001. 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 - 24 - 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, - 25 - 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. ACSI will fulfill its investment obligation in 2015. 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 net of provision for bad debt. 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. The state of New Jersey imposes 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 also imposes a $1.50 per day fee for each patron's car that is parked at an Atlantic City casino. Unlike a majority of other Atlantic City casinos, ACSI has elected to absorb the parking fee as a marketing expense and not to collect the fee from patrons. 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, 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. - 26 - 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 - 27 - 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 - 28 - 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. - 29 - 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 1996, 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 - 30 - 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 - 31 - 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 - 32 - license should continue in force. SHCL and the Company applied to the NSWCCA for the renewal of the gaming license and the NSWCCA commenced its investigation on November 8, 1996. The NSWCCA announced that the investigation would include public hearings. On February 13, 1997, the NSWCCA announced that it had received 31 submissions in relation to its investigation and made all of the submissions available to the public. Additionally, the NSWCCA is investigating PBL in connection with its purchase of approximately 55 million ordinary shares of SHCH and Showboat's interest in the management of the Sydney Harbour Casino. The NSWCCA also indicated that it would accept submissions from the public in relation to the PBL transaction once the NSWCCA receives the definitive agreements. The NSWCCA announced that it has combined the investigations of SHCL and PBL and has indicated the investigations may take until September 1997 to complete. The investigation for the license renewal must be completed by December 14, 1997. See "Item 1. Business - Fiscal Year 1996 Developments - Sydney, Australia." 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 if the person has established a deposit account with the casino operator. Checks accepted by the casino operator must be presented to the bank within one working day after the check is accepted by the casino operator. Notwithstanding the foregoing, the NSWCCA agreed to vary the presentment requirement so that Sydney Harbour Casino may hold checks drawn on an Australian bank/branch in an amount of or over A$5,000 for up to 10 banking days and may hold checks drawn on a non-Australian bank/branch for up to 20 banking days regardless of the amount of the check prior to presenting the checks for payment. - 33 - 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). With the exception of Lake County, a county must pass a referendum approving (by a majority of those who voted) riverboat gaming before riverboat gaming can be legalized in that county. If a referendum fails to pass in any county, another referendum may not be held for another two years. Once a referendum has passed in a county, the Riverboat Gambling Act requires any proposed riverboat to operate from the most populous city in that county, unless such city passes a resolution authorizing a riverboat to operate elsewhere in the county. For Lake County, the Riverboat Gambling Act provides that the second and third most populous cities of the county, Hammond and East Chicago, respectively, according to the 1990 census, may authorize riverboat gaming within such cities, by passage of a municipal referendum. Voters in both cities have passed such referenda. Gary, Lake County's most populous city, is exempted by the Riverboat Gambling Act from the gaming referendum requirement altogether. Pursuant to Indiana Commission resolution, the cost of any referendum is to be borne by all license applicants for the voting county or municipality. The Indiana Commission has jurisdiction and supervision over all riverboat gaming operations in Indiana and all persons on riverboats where gaming operations are conducted. These powers and duties include authority to (1) investigate all applicants for riverboat gaming licenses, (2) select among competing applicants those that promote the most economic development in a home dock area and that best serve the interest of the citizens of Indiana, (3) establish fees for licenses, and (4) prescribe all forms used by applicants. The Indiana Commission shall adopt rules pursuant to statute for administering the gaming statute and the conditions under which riverboat gaming in Indiana may be conducted. The Indiana Commission has promulgated certain final rules and has proposed additional rules governing the application procedure and all other aspects of riverboat gaming in Indiana. The Indiana Commission may suspend or revoke the license of a licensee or a certificate of suitability or impose civil penalties, in some cases without notice or hearing for any act in violation of the Riverboat Gambling Act or for any other fraudulent act or if the licensee or holder of such certificate of suitability has not begun regular riverboat excursions prior to the end of the twelve month period following the Indiana Commission's approval of the application for an owner's license. In addition, the Indiana Commission may revoke an owner's license if it is determined by the Indiana Commission that revocation is in the best interests of the state of Indiana. The Indiana Commission will (1) authorize the route of the riverboat and stops that the riverboat may make, (2) establish minimum amounts of insurance and (3) after consulting with the Corps of Engineers, determine which waterways are navigable waterways for purposes of the Riverboat Gambling Act and determine which navigable waterways are suitable for the operation of riverboats. The Riverboat Gambling Act requires an extensive disclosure of records and other information concerning an applicant, including disclosure of all directors, officers and persons holding one percent (1%) or more direct or indirect beneficial interest. - 34 - 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. The Indiana Commission has issued 6 of these eleven licenses--three in Lake County Indiana (2 in Gary; 1 in Hammond); one in Vanderburgh County; One in Ohio County; and one in Dearborn County. SMCP and two other applicants (one in Michigan City, LaPorte County, and one in Harrison County) have been selected by the Indiana Commission as suitable for licensure and have been awarded a certificate of suitability. The certificate of suitability for SMCP expires June 1, 1997, and is subject to renewal. A person holding an owner's gaming license issued by the Indiana Commission may not own more than a 10% interest in another such license. An owner's license expires five years after the effective date of the license; however, after three years the holder of an owner's license will undergo a reinvestigation to ensure continued suitability for licensure. Unless the license has been terminated, expired or revoked, the gaming license may be renewed if the Indiana Commission determines that the licensee has satisfied all statutory and regulatory requirements. In connection with its application for an owner's license, SMP, Waterfront, Showboat, Inc., and its affiliates declared to the Indiana Commission that if SMP, or upon the transfer of the certificate of suitability to SMCP, the SMCP, 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 SMCP, as applicable. Adherence to the non-competition declaration is a condition of the Certificate of Suitability and the owner's license. A gaming license is a revocable privilege and is not a property right. There can be no assurance that SMCP will obtain an Indiana Gaming 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 shall be at least two hours, but not more than four hours in duration unless expressly approved by the Indiana Commission. No gaming may be conducted while the boat is docked except (1) for 30-minute time periods at the beginning and end of a cruise while the passengers are embarking and disembarking, (2) if the master of the riverboat reasonably determines that specific weather or water conditions present a danger to the riverboat, 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. The Indiana Commission has adopted rules governing - 35 - cruising on Lake Michigan by a riverboat casino. The period of time during which passengers embark and disembark constitutes a portion of the gambling excursion if gambling is allowed. At the conclusion of the thirty-minute embarkation period, the gangway or its equivalent must be closed. A standard excursion schedule for a casino vessel on Lake Michigan must include at least one full excursion (a cruise into the open water on Lake Michigan, not more than three statute miles from the dock site July through September and not more than one statute mile October through June) and one intermediate excursion during which the vessel cruises in protected navigable water on or accessible to Lake Michigan. An intermediate excursion is to be conducted if the statutory conditions that permit dockside gaming are not present and if sea conditions or weather conditions, or both, do not permit a full excursion. If a casino vessel remains dockside because of statutory conditions, the embarkation and disembarkation rules still apply. Legislation has been introduced in the Indiana General Assembly to permit unlimited dockside gaming in Lake County. An admission tax of $3.00 for each person admitted to the gaming excursion is imposed upon the license owner. An additional 20% tax is imposed on the adjusted gross receipts received from gaming operations, which is defined as the total of all cash and property (including checks received by the licensee whether collected or not) received, less the total of all cash paid out as winnings to patrons and uncollected gaming receivables (not to exceed 2%). The gaming license owner shall remit the admission and wagering taxes before the close of business on the day following the day on which the taxes were incurred. Legislation has been introduced and passed one house in the 1997 Session of the Indiana General Assembly, and passed by the House Ways and Means Committee, which if enacted, would increase the tax for admission from $3 to $4 for each person admitted to a gaming excursion. In 1996, legislation was enacted in Indiana 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 Riverboat Gambling Act requires a riverboat owner licensee to directly reimburse the Indiana Commission for the costs of inspectors and agents required to be present during the conduct of gaming operations. Pursuant to agreements with the City, and as reflected in the certificate of suitability issued by the Commission, SMCP has agreed to (1) provide certain fixed incentives of approximately $16.4 million to the City of East Chicago and its agencies for transportation, job training, home buyer assistance and discrete economic development initiatives, (2) pay 3% of adjusted gross receipts to the City and two not-for-profit foundations for its public schools and housing and commercial development, and (3) pay 0.75% of adjusted gross receipts for community development projects to East Chicago Second Century, Inc., a for-profit corporation owned by SMP ("Second Century") and (4) complete the Washington High School Site town home development with a total projected cost of $5.0 million. Funding for the Washington High School Site project will be derived from contributions to Second Century from SMCP as well as funds from other third-party sources. The Indiana Commission is authorized to license suppliers and certain occupations related to riverboat gaming. Gaming equipment and supplies customarily used in conducting riverboat gaming 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 riverboat owner's license must establish goals of expending at least 10% of the total dollar value of the licensee's contracts for goods and services with minority business enterprises and 5% of the total dollar value of the licensee's contracts for goods and services with women's business enterprises. The Indiana Commission may - 36 - suspend, limit or revoke the gaming owner's license or impose a fine for failure to comply with statutory requirements. An institutional investor which acquires 5% or more of any class of voting securities of a holding company of a licensee is required to notify the Indiana Commission and to provide additional information, and may be subject to a finding of suitability. A person who acquires 5% or more of any class of voting securities of a holding company of a licensee is required to apply to the Indiana Commission for a finding of suitability. A riverboat owner licensee may not enter into or perform any contract or transaction in which it transfers or receives consideration which is not commercially reasonable or which does not reflect the fair market value of the goods or services rendered or received. All contracts are subject to disapproval by the Indiana Commission. A riverboat licensee or an affiliate may not enter into a debt transaction of $1 million or more without the prior approval of the Indiana Commission. A riverboat owner licensee or any other person may not lease, hypothecate, borrow money against or loan money against a riverboat owner's license. The Riverboat Gambling Act prohibits contributions to a candidate for a state, legislative, or local office, or to a candidate's committee or to a regular party committee by the holder of a riverboat owner's license or a supplier's license, by an officer of a licensee, by an officer of a person that holds at least a 1% interest in the licensee, or by a person holding at least a 1% interest in the licensee; and, the Indiana Commission is in the process of promulgating a rule requiring the quarterly reporting by such licensees, officers, and persons. Legislation has been introduced in the 1997 Session of the Indiana General Assembly, which if enacted, would prohibit the expansion of authorized gambling until the earlier of December 31, 1999, or the date the Governor has certified that the Commission has completed its study. Additionally, the Indiana legislature formed an Interim Study Committee on Public Gaming Issues which conducted public forums on gaming and is expected to provide a report on gaming to the legislature. A lawsuit was filed on October 25, 1996, in Harrison County Indiana by three individuals residing in counties abutting the Ohio River, which challenges the constitutionality of the Riverboat Gambling Act on grounds that (i) it allegedly creates an unequal privilege because under the Act supporters of riverboat casino gambling, having lost a county-wide vote, are allowed to resubmit a proposal to county voters for approval of riverboat casino gambling while opponents of riverboat casino gambling, having lost a county-wide vote, are not allowed to resubmit a proposal; and (ii) it was enacted as a provision attached to a state budget bill allegedly in violation of an Indiana constitutional provision requiring legislative acts to be confined to one subject and matters properly connected with the subject. The State of Indiana recently filed an answer to the complaint. The Indiana Supreme Court has previously upheld the constitutionality of the Riverboat Gambling Act, although the prior challenge was on different grounds than those contained in the recently filed lawsuit. If the Riverboat Gambling Act ultimately was held unconstitutional it would, absent timely corrective legislation, have a material adverse effect on SMCP's operations. - 37 - 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. On November 8, 1994, the people of Missouri passed 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. - 38 - 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 vessel 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. A vessel is subject to annual, quarterly, as well as unannounced, inspection by the U.S. Coast Guard and must be drydocked every five years for inspection of the hull. Such drydockings remove the vessel from service for a period of time and can result in required repairs. 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 expensive to conduct riverboat gaming than to operate land-based casinos. - 39 - 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. INDIAN GAMING The terms and conditions of management contracts and the operation of casinos and all gaming on Indian land in the United States are subject to the Indian Gaming Regulatory Act of 1988 ("IGRA"), which is administered by the National Indian Gaming Commission ("NIGC"). IGRA is subject to interpretation by the Secretary of the Interior (the "Secretary") and the NIGC and may be subject to judicial and legislative clarification or amendment. IGRA requires NIGC approval of management contracts for Class II and Class III gaming as well as the review of all agreements collateral to the management contracts. The NIGC will not approve a management contract if a director or a 10% shareholder of the management company: (i) is an elected member of the Indian tribal government which owns the facility purchasing or leasing the games; (ii) has been or is convicted of a felony gaming offense; (iii) has knowingly and willfully provided materially false information to the NIGC or the tribe; (iv) has refused to respond to questions from the NIGC; or (v) is a person whose prior history, reputation and associates pose a threat to the public interest or to effective gaming regulation and control, or create or enhance the chance of unsuitable activities in gaming or the business and financial arrangements incidental thereto. In addition, the NIGC will not approve a management contract if the management company or any of its agents have attempted to unduly influence any decision or process of tribal government relating to gaming, or if the management company has materially breached the terms of the management contract or the tribe's gaming ordinance, or a trustee, exercising due diligence, would not approve such management contract. A management contract can be approved only after the NIGC determines that the contract provides, among other things, for: (i) adequate accounting procedures and verifiable financial reports, which must be furnished to the tribe; (ii) tribal access to the daily operations of the gaming enterprise, including the right to verify daily gross revenues and income; (iii) minimum guaranteed payments to the tribe, which must have priority over the retirement of development and construction costs; (iv) a ceiling on the repayment of such development and construction costs and (v) a contract term not exceeding five years and a management fee not exceeding 30% of net revenues (as determined by the NIGC); provided that the NIGC may approve up to a seven - 40 - year term and a management fee not to exceed 40% of net revenues if NIGC is satisfied that the capital investment required, and the income projections for the particular gaming activity justify the larger fee and longer term. There is no periodic or ongoing review of approved contracts by the NIGC. The only post-approval action which could result in possible modification or cancellation of a contract would be as the result of an enforcement action taken by the NIGC based on a violation of the law or an issue affecting suitability. IGRA established three separate classes of tribal gaming-- Class I, Class II and Class III. Class I includes all traditional or social games solely for prizes or minimal value played by a tribe in connection with celebrations or ceremonies. Class II gaming includes games such as bingo, pulltabs, punchboards, instant bingo and non-banked card games (those that are not played against the house), such as poker. Class III gaming is casino-style gaming and includes banked table games such as blackjack, craps and roulette, and gaming machines such as slots, video poker, lotteries and pari-mutuel wagering. IGRA prohibits all forms of Class III gaming unless the tribe has entered into a written agreement with the state that specifically authorizes the types of Class III gaming the tribe may offer (a "tribal-state compact"). IGRA requires states to negotiate in good faith with tribes that seek tribal-state compacts and grants Indian tribes the right to seek a federal court order to compel such negotiations. Some states have refused to enter into such negotiations. Tribes in several states have sought federal court orders to compel such negotiations. The issue of whether this provision of IGRA is unconstitutional as a violation of the Eleventh Amendment to the United States Constitution which immunizes states from suit without the state's consent is presently pending before the U.S. Supreme Court in the case of SEMINOLE V. STATE OF FLORIDA AND LAWTON CHILES. If Indian tribes are unable to compel states to negotiate tribal-state compacts, the Company will not be able to develop and manage casinos offering Class III games in states that refuse to enter into tribal-state compacts. If the decision of the U.S. Supreme Court in the SEMINOLE case has the effect of voiding IGRA in its entirety, this would end the exemption provided by IGRA to the Johnson Act (15 USC 1171) concerning prohibition of gambling devices on Indian land. These compacts provide among other things, the manner and extent to which each state will conduct background investigations and certify the suitability of the manager, its officers, directors, and key employees to conduct gaming on tribal lands. The Company has not yet submitted its application to the State of Washington to conduct gaming on the Lummi Indian Nation tribal land. Title 25, Section 81 of the United States Code states that "no agreement shall be made by any person with any tribe of Indians, or individual Indians not citizens of the United States, for the payment or delivery of any money or other thing of value . . . in consideration of services for said Indians relative to their lands . . . unless such contract or agreement be executed and approved: by the Secretary of the Interior (the "Secretary") or his or her designee. An agreement or contract for services relative to Indian lands which fails to conform with the requirements of Section 81 is - 41 - void and unenforceable. All money or other thing of value paid to any person by any Indian or tribe for or on his or their behalf, on account of such services, in excess of any amount approved by the Secretary or his or her authorized representative will be subject to forfeiture. The Company intends to comply with Section 81 with respect to any contract to manage casinos located on Indian land in the United States. Indian tribes are sovereign with their own governmental systems, which have primary regulatory authority over gaming on land within the tribes' jurisdiction. Therefore, persons engaged in gaming activities, including the Company, are subject to the provisions of tribal ordinances and regulations on gaming. These ordinances are subject to review by NIGC under certain standards established by IGRA. NIGC may determine that some or all of the ordinances require amendment, and that additional requirements, including additional licensing requirements, may be imposed on the Company. OTHER FEDERAL, STATE AND LOCAL LEGISLATION AND REGULATIONS 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 1996) 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. Additionally, various federal, state and local legislation and regulations relating to safety, health and environmental matters that apply to businesses in general, such as the Clean Air Act, the Clean Water Act, the Occupational Safety and Health Act, the Resource Conservation Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act, apply to the Company as well. In addition, certain legislation and regulations that apply generally to vessels operating in United States waters, such as the Oil Pollution Act of 1990 (which among other things, deals with liability for oil spills and requires a certificate of financial responsibility for vessels operating in United States waters), or within the jurisdiction of various states would apply to SMCP. One major development in federal legislation was the passage of the Coast Guard Authorization Act of 1996 which amends a provision of the Johnson Gambling Devices- Transportation Act of 1951 prohibiting gaming on federal waters, including Lake Michigan. As a result of this amendment, riverboat casinos, such as the casino vessel to be operated by SMCP, will be able to conduct cruises on Lake Michigan within boundaries of the State of Indiana and "mock cruises" will only be permitted pursuant to the exceptions authorized by the Riverboat Gambling Act. In addition, Congress has passed a bill which would establish a National Gambling Impact and Policy Commission (the "Policy Commission") to study the economic impact of gambling on - 42 - the United States, the individual States and Native American tribes. Additional federal regulation may occur due to the initiation of hearings by the Policy Commission. Any new federal legislation could have a material adverse effect on the Company. Although the Company does not anticipate making material expenditures with respect to such laws and regulations, the applicability of such laws and regulations may result in additional costs to the Company. ITEM 2. PROPERTIES. The Company believes that its properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on the Company's business. In 1996, the Company's gaming properties operated at satisfactory levels of utilization. ATLANTIC CITY FACILITIES The Atlantic City Showboat is located on approximately 12 acres, 10 1/2 acres of which is leased from Sun International, Inc., successor in interest to Resorts International, Inc.(1) ("Sun International") pursuant to a 99-year lease dated October 26, 1983 (as amended, "Lease"). The remaining acreage is held in fee by ACSI. In addition, ACSI owns approximately nine acres of land adjacent to the Atlantic City Showboat which are zoned for non-casino development and which are currently used as surface level parking lots. Under the New Jersey Act, both Sun International and ACSI, because of their lessor-lessee relationship, are jointly and severally liable for the acts of the other with respect to any violations of the New Jersey Act by the other. In order to limit the potential liability which could result from this provision, ACSI, OSI, and Sun International have agreed to indemnify each other from all liabilities and losses which may arise as a result of the joint and several liability imposed by the New Jersey Act. However, the New Jersey Commission could determine that the party seeking indemnification is not entitled to or is barred from such indemnification. Pursuant to the New Jersey Act, the New Jersey Commission approved, subject to certain changes, an Assumption Agreement ("Assumption Agreement") executed by Trump Taj Mahal Associates Limited Partnership and Trump Taj Mahal Realty Corp. (collectively, "Trump Taj"), ACSI and Resorts International, Inc., in connection with Trump Taj's acquisition of the land on which the Taj Mahal Casino Hotel is constructed and pursuant to which Trump Taj assumed some of Sun International's obligations in the Lease. The New Jersey Commission ruled that the Assumption Agreement is a lease under the New Jersey Act for casino regulatory purposes. As a result, for casino regulatory purposes, a lessor-lessee relationship is deemed to exist among ACSI, Sun International, and Trump Taj making them jointly and severally liable for the acts of the other with respect to any violations of the New Jersey Act by the others. In order to limit their potential liability, ACSI, Sun International and Trump Taj have entered into an agreement to indemnify each other from all liabilities and losses which may arise as a result of the joint and several liability imposed upon them by the New Jersey Act. However, the New Jersey _________________ (1) Resorts International, Inc. and the Company had entered into the Lease and certain other documents relating to the Atlantic City Showboat (the "Atlantic City Showboat Agreements"). As a result of Sun International's acquisition of Resorts International, Inc. during 1996, Sun International succeeded to the rights, duties and obligations of Resorts International, Inc. under the Atlantic City Showboat Agreements. - 43 - Commission could determine that the party seeking indemnification is not entitled to or is barred from such indemnification. In the event Sun International is unable under the laws of New Jersey to act as lessor of the site to the Atlantic City Showboat ("Premises"), ACSI has an option to purchase the Premises for the greater of $66.0 million or the fair market value of the "leased fee estate" (determined by appraisal in the case of disagreement), subject to a maximum purchase price of 11 times the annual rent in the option year. However, if the appraisal is not completed within the time period specified by the New Jersey Commission, the purchase price is equal to the lesser of $66.0 million or 11 times the annual rent in the option year. If ACSI is unable to continue operating the Atlantic City Showboat under the New Jersey gaming laws, Sun International has a similar option to purchase ACSI's interest in the Premises together with the Atlantic City Showboat building and all furniture, fixtures and equipment thereon for their fair market value as of the option date (determined by appraisal in the case of disagreement). Also, should Sun International elect to sell its interest in the Lease or the Premises to an unaffiliated third party, ACSI has a first right of purchase unless such sale is made to a person who acquires all of the assets and liabilities of Sun International (subject to the Lease). Similarly, Sun International has a first right of purchase of ACSI's leasehold interest in the Premises or the Atlantic City Showboat if ACSI elects to sell the same to any person other than an affiliate of ACSI or a mortgagee of ACSI's leasehold interest and improvements on the leased land. Any such transfer by ACSI, other than to a permitted transferee, requires Sun International's consent which cannot be unreasonably withheld. The Lease and all amendments thereto are subject to review and approval by the New Jersey Commission, and Sun International and ACSI have agreed that they will accept any reasonable modification to the Lease that may be required by the New Jersey Commission. If either party determines that the requested Lease modifications are unduly burdensome, the Lease may be terminated, subject to arbitration in the case of disagreement. The Lease, as amended to date, has been approved by the New Jersey Commission. In addition, Sun International, pursuant to a ruling by the New Jersey Commission, in its capacity as lessor of the site of the Atlantic City Showboat, must obtain a casino service industry license. Sun International presently holds a casino service industry license, which must be renewed every three years. The 9 1/4% First Mortgage Bonds due 2008 (the "9 1/4% Bonds") and the Company's $25.0 million revolving loan ("$25.0 Million Revolving Loan") from Fleet Bank are each secured by leasehold mortgages on (i) ACSI's interest in the Lease, (ii) the Atlantic City Showboat (including the 24-story hotel tower as well as certain personal property therein) and future improvements on the leased rea l property, (iii) the 16-story hotel tower as well as certain personal property therein and the underlying real property held in fee, and (iv) the two surface parking lots held in fee. Such mortgages are subject and subordinate to Sun International's rights under the Lease and its fee interest in the Premises. Subject to certain limited exceptions, the Lease may not be amended without the consent of the trustee under the Indenture governing the 9 1/4% Bonds unless certain opinions are delivered to the effect that the amendment does not materially impair the security of the mortgage. An event of default under the Lease constitutes an event of default under the respective mortgage and Indenture. - 44 - In addition to its rental payment obligations under the Lease, ACSI is obligated to contribute up to one-third of the costs of certain infrastructure improvements to be constructed on a 56-acre tract ("Urban Renewal Tract"). The Atlantic City Showboat is located on a portion of the Urban Renewal Tract owned by Resorts. ACSI is obligated to contribute only toward improvements of which it is the beneficiary or which are expected to benefit ACSI and all future occupants of the Urban Renewal Tract. ACSI has contributed to infrastructure improvements involving the construction of certain sewer and water lines and the realigning of a portion of Delaware Avenue ("Realigned Delaware Avenue") to permit direct ingress and egress from the Realigned Delaware Avenue to the Atlantic City Showboat, which improvements have been completed. Realigned Delaware Avenue has not yet been dedicated to the City of Atlantic City. Pending dedication of the Realigned Delaware Avenue to the City, the Housing Authority granted to ACSI a permanent easement and right of way ("Easement") for the Realigned Delaware Avenue for the benefit of ACSI and ACSI's employees, agents, guests, suppliers, visitors, invitees and all others seeking access to the Atlantic City Showboat. Until acceptance of a deed of dedication of the Realigned Delaware Avenue by the City of Atlantic City, ACSI shall maintain at its expense and pay, if billed separately, the real property taxes associated with the Easement, or reimburse Resorts for its allocable share of such real property taxes for the Easement. ACSI leases a 63,200 square-foot warehouse and office in Egg Harbor Township, New Jersey, approximately 15 miles from the Atlantic City Showboat. The lease term is through July 31, 2001. ACSI holds an option to purchase the warehouse for $1.9 million. This option may be exercised by ACSI on or after January 1, 1996, and shall remain in effect until March 31, 2001. ACSI leases a parking area for its employees for 300 parking spaces. The lease term is 3 years unless terminated by the landlord upon one year's written notice or upon 90 days written notice by ACSI. Only in the event that the property is condemned may the lease be terminated by either party before September 15, 1998. ACSI provides, through an independent contractor, a shuttle service for its employees between the employee parking area and the Atlantic City Showboat. LAS VEGAS FACILITIES The facilities at the Las Vegas Showboat are constantly monitored to make sure that the needs of the Company's business and customers are met. During 1995, the Company completed an approximately $21.0 million renovation of the casino, dining rooms and bar areas, all of which were substantially completed in 1995. The renovation, which was initiated to bring the building into compliance with the current building code, included the replacement of the roof over a portion of the casino. 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. As a result of this extensive renovation construction during 1995, approximately 40% of the main casino space of the Las Vegas Showboat was closed for approximately six months of 1995. The Las Vegas Showboat has developed a recreational - 45 - vehicle park with approximately 80 spaces on leased property contiguous to the Las Vegas Showboat. The recreational vehicle park became operational in March 1997. The Company holds fee title to approximately 26 acres which comprises the Las Vegas Showboat. Of the 26 acres, 19.25 acres are used for buildings and improvements at the Las Vegas Showboat, which secures the Company's 9 1/4% Bonds and the $25.0 Million Revolving Loan. The Company leases such property, buildings and improvements to SBOC. SYDNEY FACILITIES SHCP subleases a site located at Wharves 12 and 13 at Pyrmont Bay in Sydney, Australia from the NSWCCA, which site is owned by the City West Development Corporation ("CWDC"). SHCH renovated an existing building on the interim site to permit the operation of the interim casino. The subleases for the interim site have a combined term which commenced on December 14, 1994 and continue until the commencement of operations at the permanent Sydney Harbour Casino. SCHP is not required to perform any material work on the interim site after the interim casino ceases operation as, at such time, the lease terminates and the site reverts to CWDC with no further obligation to SHCP. For the first three years following completion of the interim casino, SHCP pays net annual rent to the NSWCCA in the amount of A$4.125 million. After the initial three year period, the rent is subject to adjustment in accordance with the terms of the lease. Use of the interim site is restricted to the operation of the interim casino and the term of the lease expires on the commencement of commercial operations of the permanent Sydney Harbour Casino. SHCP also entered into leases with the NSWCCA for the permanent Sydney Harbour Casino site, which site is located on 8.4 acres on Pyrmont Bay adjacent to Darling Harbour. The permanent site is approximately one mile from Sydney's central business district and within walking distance of a monorail station. The permanent site will have a light rail station and is anticipated to have access to a ferry wharf. The permanent site is also close to four major parking garages in Darling Harbour and has good access to arterial road routes. The leases for the permanent site have a combined term of 99 years commencing on December 14, 1994. SHCP prepaid the net rent to the NSWCCA for the first 12 years under the leases with a payment of A$120.0 million. For the remaining term, the net annual rent is A$250,000. Upon termination of the leases, title to the improvements reverts to the NSWCCA without payment or compensation. Alternatively, SHCP could be directed by the NSWCCA to demolish any and all improvements erected on the land, leaving it in a safe condition. EAST CHICAGO FACILITIES On October 19, 1995, SMP entered into a Redevelopment Project Lease (the "Redevelopment Lease") with the City of East Chicago, Department of Redevelopment, pursuant to which the City of East Chicago granted SMP a leasehold interest for approximately 27 acres in East Chicago, Indiana on which to construct and operate the East Chicago Showboat for a period of thirty (30) years from the date SMP received the certificate of suitability from the Indiana Commission (the "Commencement Date"). As a result of the March 28, 1996 transfer of assets from SMP to SMCP, SMP assigned the Redevelopment Lease to SMCP. SMCP may elect to - 46 - renew the term for two additional thirty year terms. The Redevelopment Lease obligates SMCP to pay the City of East Chicago $400,000 in annual rent with an adjustment every three years by the same percentage as the percentage increase in the Consumer Price Index over the previous three years not to exceed 105% of the previous annual rental. The interests of SMCP in the Redevelopment Lease are subject to a leasehold mortgage executed in conjunction with the East Chicago Notes. In addition to these leasehold interests, SMCP will own the casino gaming vessel which arrived in the City of East Chicago from Jacksonville, Florida in December 1996 and continues to be constructed at its berth in the Pastrick Marina. SMCP's interests in the casino gaming vessel will be subject to a first preferred ship mortgage executed in conjunction with the East Chicago Notes at such time as the title to the casino gaming vessel is transferred from the builder of the vessel to SMCP. All of the assets of SMCP, other than certain equipment, secures the East Chicago Notes. - 47 - ITEM 3. LEGAL PROCEEDINGS. DARLING CASINO LIMITED ("DCL") V. NSWCCA, SHCL AND CHIEF SECRETARY AND MINISTER FOR ADMINISTRATIVE SERVICES ("MINISTER FOR ADMINISTRATIVE SERVICES"), Case No. 30091/94, instituted in December 1994, in the Administrative Law Division of the Supreme Court of New South Wales, Sydney Registry. DCL, the unsuccessful applicant for the casino license in New South Wales, initiated an action against NSWCCA, SHCL and the Minister for Administrative Services seeking, among other things, the revocation of the casino license awarded to SHCL on December 14, 1994. On November 8, 1995, the New South Wales Court of Appeal dismissed the legal proceedings filed by DCL. DCL has been granted leave to appeal to the High Court of Australia. The High Court proceedings were heard on June 17 and 18, 1996. The Court reserved it's decision and no indication has been given as to when the Court will deliver its judgment. Management believes that the DCL's action is without merit and intends to defend vigorously the action. DCL V. NSWCCA, SHCL AND NEW SOUTH WALES MINISTER FOR PLANNING ("MINISTER FOR PLANNING"), Case No. 40227/94 and 40230/94, instituted in December 1994, in the Land and Environment Court of the State of New South Wales, Australia. DCL initiated an action against the NSWCCA and the Minister for Planning alleging that the development plans for Sydney Harbour Casino were improperly approved. SHCL was joined as a party to those proceedings in view of its interest in their outcome. On April 21, 1995, the Land and Environmental Court dismissed the legal proceedings filed by DCL. On August 18, 1995, DCL filed an appeal with the New South Wales Court of Appeal against the April 21, 1995 decision of the Land and Environment Court. Management believes that DCL's action is without merit and intends to defend vigorously the action. WILLIAM H. AHERN V. CAESARS WORLD, INC., ET AL., Case No. 94-532-Civ-Orl-22, instituted on May 10, 1994 in the United States District Court for the Middle District of Florida, transferred to the United States District court for the District of Nevada, Southern Division; WILLIAM POULOS V. CAESARS WORLD, INC., ET AL., Case No. 94-478-Civ-Orl-22, instituted on April 26, 1994 in the United States District Court for the Middle District of Florida, transferred to the United States District court for the district of Nevada, Southern Division. LARRY SCHREIER V. CAESARS WORLD, INC. ET AL., Case No. 95-923- LDG (RJJ), instituted on September 26, 1995, in the United States District Court for the District of Nevada, Southern Division. Plaintiffs in these actions, each purportedly representing a class, filed complaints against manufacturers, distributors and casino operators of video poker and electronic slot machines, including the Company, alleging that the defendants have engaged in a course of conduct intended to induce persons to play such games based on a false belief concerning how the gaming machines operate, as well as the extent to which there is an opportunity to win on a given play. The Complaints charge defendants with violations of the Racketeer Influenced and Corrupt Organizations Act, as well as claims of common law fraud, unjust enrichment and negligent misrepresentation, and seek damages in excess of $1 billion without any substantiation of that amount. The Company filed motions to dismiss Complaints. The Nevada District Court dismissed the Complaints, granting leave to Plaintiffs to re-file, and denying as moot all other pending motions, including those of the Company. The Plaintiffs filed an amended complaint on or about May 31, 1996. The Company renewed its motions to dismiss based on abstention and related doctrines, and joined in the - 48 - motions to dismiss filed by other defendants, which were based on defects in the pleadings. The Nevada District Court consolidated the actions (and one other action styled William Poulos v. American Family Cruise Line, N.V. et al., Case No. CV-S-95-936-LDG (RLH), in which the Company is not a named defendant), ordered Plaintiffs to file a consolidated amended complaint on or before February 14, 1997, and ordered all defense motions, including those of the Company, withdrawn without prejudice. The parties have established a steering committee to address motion practice, scheduling and discovery matters. Plaintiffs filed their consolidated amended complaint on February 14, 1997. Management believes that the substantive allegations in the Complaints are without merit and that the consolidated amended complaint will be subject to the same defects addressed in earlier motions, and intends vigorously to defend the allegations. GLOBAL GAMING TECHNOLOGY, INC. V. TRUMP PLAZA FUNDING, INC., ET AL., Case No. 94-2021 (JHR), instituted on May 5, 1994, in the United States District Court for the District of New Jersey. The plaintiff, Global Gaming Technology, Inc., filed a complaint against eight casino operators in Atlantic City, New Jersey. The complaint alleges a patent infringement with respect to certain of the electronic slot machines used by the defendants, including the Atlantic City Showboat. The plaintiff seeks to recover damages for copyright infringement in excess of $500 million. The manufacturers of the slot machines in question have assumed the defense and have indemnified the Atlantic City Showboat and other casinos in this matter. The manufacturers filed a complaint against the plaintiff in the United States District Court for the District of Nevada, Southern District. The United States District Court for the District of New Jersey stayed the New Jersey action pending resolution of the issues in the pending Nevada action. Several of the manufacturers have reached a settlement with the plaintiff for the release of all claims. The United States District Court for the District of Nevada issued its decision in February 1997 which found that although the manufacturers infringed on Global Gaming Technology's patent, no liability occurred since the manufacturers sold the slot machines more than one year before Global Gaming Technology, Inc. filed its patent application. PROGRESSIVE GAMES, INC. V. ARIZONA CHARLIE'S ET AL., Case No. CV-S-96-00489-PMP (RJJ), instituted on June 5, 1996 in the United States District Court for the District of Nevada. The plaintiff filed a Complaint against 62 casinos located in Nevada, including the Las Vegas Showboat. The complaint alleges a patent infringement in connection with a live casino game including an electronic jackpot feature known as "Let It Ride the Tournament" used by the defendants. The plaintiff seeks to recover damages for patent infringement, including punitive damages. The licensor of the casino game has assumed the defense and has agreed to indemnify the Las Vegas Showboat and other casinos in this matter. On July 28, 1996, the licensor filed a motion to dismiss the action against the casino defendants until such time as certain issues in the pending action between plaintiff and licensor have been resolved. ITSI TV PRODUCTIONS, INC. V. BALLY'S GRAND, INC., ET AL., Case No. CV-N-90-314-HDM, instituted on June 29, 1990 in the United States Court, District of Nevada (the "Nevada action"). The plaintiff claims that the Company infringed on the plaintiff's copyright by displaying to the Company's sports book customers certain horse race broadcasts. Numerous other hotel- casinos located in Las Vegas, Nevada are defendants in this lawsuit. The plaintiff seeks to recover damages for copyright infringement in an unknown amount. A motion to dismiss the complaint has been filed on behalf of the Company denying the existence of an enforceable copyright and - 49 - asserting statute of limitations defenses. The motion is currently pending. The same factual issues were presented in an action filed in the United States District Court for the Eastern District of California (the "California action") in which Showboat is not a party. The United States District Court for the District of Nevada has stayed and administratively stayed the Nevada action pending resolution of the liability issues in the pending California action. The California action was tried in 1993 and therein the Court found that although the plaintiff owned the copyright, there was no infringement. The Ninth Circuit Court of Appeals subsequently affirmed the decision of the trial court in the California action. As a result of the decision in the California action the Plaintiff has executed a stipulation for dismissal of the action filed in Nevada and the dismissal is currently being circulated among all defendants. The Company (including its subsidiaries) is also a defendant in various other lawsuits, most of which relate to routine matters incidental to its business. Management does not believe that the outcome of such pending litigation, in the aggregate, will have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders during the fourth quarter of 1996. - 50 - PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is listed on the New York Stock Exchange under the symbol SBO. The range of high and low sales prices for the Company's common stock for each quarter in the last two years is as follows:
Dividends High Low Declared First quarter (through March 14, 1997) 23 3/4 17 1/4 .000 1996 First quarter 28 1/2 21 .025 Second quarter 35 1/2 24 1/2 .025 Third quarter 30 3/8 18 3/4 .025 Fourth quarter 22 5/8 17 .025 1995 First quarter 15 3/4 13 1/2 .025 Second quarter 18 5/8 13 1/2 .025 Third quarter 24 3/8 17 1/2 .025 Fourth quarter 29 3/8 21 .025
On March 14, 1997, the closing price of the Company's common stock on the New York Stock Exchange was $20 1/8. The Company has paid quarterly dividends since 1970. The declaration and payment of dividends is at the discretion of the Board of Directors. The Board of Directors considers, among other factors, the Company's earnings, financial condition and capital spending requirements in determining an appropriate dividend. The Company is restricted in the payment of dividends, loans or other similar transactions by the terms of the Indentures executed by it in connection with the issuance of 9 1/4% Bonds and the 13% Senior Subordinated Notes due 2009 (the "13% Notes"), respectively. Under both of the Indentures, the declaration and making of a dividend is a Restricted Payment. The Company may declare and make a dividend as long as (a) no default or event of default exists under the Indentures and (b) the sum of all Restricted Payments, including dividends, since May 18, 1993 (the "Issue Date") is less than (x) 50% of the Consolidated Net Income (defined in the Indentures) from April 1, 1993 to the end of the Company's most recently ended fiscal quarter for - 51 - which internal financial statements are available, plus (y) 100% of the aggregate net cash proceeds from the sale of equity interests (other than Disqualified Stock), plus (z) Excess Non-Recourse Subsidiary Proceeds (defined in the Indentures) after the Issue Date. See Note 6 to the Consolidated Financial Statements for additional discussion of the restrictions contained in the Indentures and see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Under the East Chicago Indenture, SMCP cannot make a Restricted Payment, including distributions to the holders of its partnership interests, unless, among other things, SMCP has a Fixed Charge Coverage Ratio of 2.0 to 1.0 for the most recently ended four full fiscal quarters, after giving effect to such Restricted Payment. Notwithstanding the foregoing, the East Chicago Indenture permits SMCP to distribute good faith estimates of maximum payments for state and federal income tax liabilities of the Company and Waterfront. See also "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." The approximate number of shareholders of record of the common stock as of March 14, 1997 was 1,418. ITEM 6. SELECTED FINANCIAL DATA.
Year Ended December 31, 1996 1995 1994 1993 1992 INCOME STATEMENT DATA: (In thousands, except per share data) Net revenues............................... $433,705 $428,592 $401,333 $375,727 $355,236 Income from operations..................... 42,121 46,674 51,828 45,419 46,508 Income before extraordinary items and cumulative effect of change in method of accounting for income taxes (a)(b)(c)(d)(f)..................... 6,003 13,175 15,699 13,464 15,857 Net income................................. 6,003 13,175 15,699 7,341 12,449 Income before extraordinary items and cumulative effect of change in method of accounting for income taxes per share (a)(b)(c)(d) (f)...................................... .37 .84 1.02 .89 1.37 Net income per share...................... .37 .84 1.02 .49 1.08 Cash dividends declared per common share............................. .10 .10 .10 .10 .10 - 52 - December 31, 1996 1995 1994 1993 1992 (In thousands) BALANCE SHEET DATA: Total assets (e)......................... $814,669 $649,395 $623,691 $470,700 $384,900 Long-term recourse debt (including current maturities) (a)(b)(e)................... 392,744 392,391 392,035 280,617 209,116 Long-term nonrecourse debt (including current maturities (g).......................... 140,000 -- -- -- -- Shareholders' equity (e)................. 192,145 173,941 157,461 135,158 126,018 Shares outstanding at year- end (e)................................. 16,181 15,720 15,369 14,980 14,804
(a) In the year ended December 31, 1992, the Company recognized an extraordinary loss of $3.4 million net of tax, as a result of the planned redemption of all of its outstanding 13% Subordinated Sinking Fund Debentures ("Debentures"). (b) The Company adopted FAS 109 in 1993 and reported the cumulative effect of the change in method of accounting for income taxes as of January 1, 1993 in the 1993 Consolidated Statement of Income. (c) In the year ended December 31, 1993, the Company recognized an extraordinary loss of $6.7 million, net of tax, as a result of the redemption of all of its outstanding Mortgage-Backed Bonds. (d) In 1993, the Company acquired a 30% equity interest in SSP which was engaged in the development of a riverboat casino on Lake Pontchartrain in New Orleans, Louisiana. Operation of the riverboat casino commenced on November 8, 1993. The Company's share of the partnership's loss from the commencement of operations through December 31, 1993, is included in income from operations for the year ended December 31, 1993, including the write-off of preopening costs, of $1.3 million. In March 1994, the Company increased its equity interest in SSP to 50%. The Company's share of the net income of the partnership was $12.8 million and is included in income from operations for the year ended December 31, 1994. In March 1995, the Company acquired the remaining 50% of the equity of SSP. In March 1995, SSP sold certain of its assets, and the Company sold all of its equity in SSP, resulting in a pretax gain of $2.6 million to the Company which is included in the 1995 Consolidated Statement of Income as gain on sale of affiliate. (e) In the year ended December 31, 1992, the Company sold 3.45 million shares of its common stock in a public offering. Net proceeds of the offering were $50.4 million. Proceeds of the offering were used in January 1993 to redeem all of the Company's Debentures and to prepay the outstanding balance of its construction and term loan. (f) In the years ended December 31, 1996 and 1995, the Company recognized a pre-tax write-down of $3.8 million and $1.4 million respectively on its investment in SMG. (g) In March 1996, SMCP and SMFC issued $140.0 million East Chicago Notes for the development of the East Chicago Showboat. - 53 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Showboat, Inc. and Subsidiaries (collectively, the "Company" or "SBO"), is an international gaming company with over 40 years of gaming experience that owns and operates the Atlantic City Showboat Casino Hotel in Atlantic City, New Jersey (the "Atlantic City Showboat"), the Las Vegas Showboat Casino, Hotel and Bowling Center in Las Vegas, Nevada (the "Las Vegas Showboat"), owns a 24.6% equity interest in, and manages through subsidiaries, the Sydney Harbour Casino located in Sydney, Australia, and owns through subsidiaries a 55% interest in, and will manage, the East Chicago Showboat riverboat casino project in East Chicago, Indiana, (the "East Chicago Showboat"), which is under construction and scheduled to open, subject to licensing, in the second quarter of 1997. Until March 31, 1995, the Company owned an equity interest in and managed a riverboat casino on Lake Pontchartrain in New Orleans, Louisiana (the "Star Casino"). The consolidated financial statements include all domestic and foreign subsidiaries which are more than 50% owned and controlled by the Company. Investments in unconsolidated affiliates which are at least 20% owned by the Company are carried at cost plus equity in undistributed earnings or loss since acquisition. All material intercompany balances have been eliminated in consolidation. As discussed in detail in the Liquidity and Capital Resources section of this report, the Company, on January 12, 1997, announced that the Company and Publishing & Broadcasting Limited ("PBL"), a public company listed on the Australian Stock Exchange, have reached an agreement in principle with respect to the acquisition by PBL of a significant portion of the Company's equity interests and the management company for the casino operations in Sydney, Australia. The agreement in principle is subject to the execution of definitive agreements and the receipt of certain approvals and consents of governmental authorities and third parties. Following the consummation of acquisition, the Company's equity interest in the Sydney casino will be 14.6%. As used in this management's discussion and analysis of financial condition and results of operations, amounts in Australian dollars are denoted as "A$". As of December 31, 1996, the exchange rate was approximately $0.794 for each A$1.00. MATERIAL CHANGES IN RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (1996) COMPARED TO YEAR ENDED DECEMBER 31, 1995 (1995) REVENUES Net revenues for the Company increased to $433.7 million in 1996 from $428.6 million in 1995, an increase of $5.1 million or 1.2%. Casino revenues increased $3.5 million or 0.9% to - 54 - $383.0 million in 1996 from $379.5 million in 1995. Nongaming revenues, which consist principally of room, food, beverage, management fee and bowling revenues, were $92.6 million in 1996 compared to $88.7 million in 1995, an increase of $3.9 million or 4.4%. The Company received no management fees in 1996 due to the Company's agreement to forgive the first A$19.1 million of management fees due it from Sydney Harbour Casino. As of December 31, 1996, approximately A$4.6 million of management fees remain to be forgiven. The $.2 million management fee received in 1995 was attributable to the Company's investment in the Star Casino which was sold in March of 1995. - 55 -
Revenues Year Ended ended December 31, (Unaudited) (Dollars in thousands) 1996 1995 Variance Percent ---------- ---------- ---------- ---------- Consolidated: Casino revenues $ 382,980 $ 379,494 $ 3,486 0.9% Non casino revenues 92,621 88,701 3,920 4.4% Management fees 190 (190) -100.0% Less complimentaries 41,896 39,793 (2,103) -5.3% Net revenues Consolidated $ 433,705 $ 428,592 $ 5,113 1.2% Atlantic City: Table game revenues $ 77,822 $ 82,887 $ (5,065) -6.1% Slot revenues 258,892 249,161 9,731 3.9% Other gaming revenues 3,312 5,104 (1,792) -35.1% Total casino 340,026 337,152 2,874 0.9% Non casino revenues 67,984 67,449 535 0.8% Less complimentaries 37,473 35,731 (1,742) -4.9% Net revenues Atlantic City $ 370,537 $ 368,870 $ 1,667 0.5% Las Vegas: Table game revenues $ 5,310 $ 4,532 $ 778 17.2% Slot revenues 36,521 36,195 326 0.9% Other gaming revenues 1,123 1,614 (491) -30.4% Total casino 42,954 42,341 613 1.4% Non casino revenues 24,637 21,252 3,385 15.9% Less complimentaries 4,423 4,062 (361) -8.9% Net revenues Las Vegas $ 63,168 $ 59,531 $ 3,637 6.1%
The Atlantic City Showboat generated $370.5 million of net revenues in the year ended December 31, 1996 compared to $368.9 million for the same period in the prior year, an increase of $1.7 million or 0.5%. Casino revenues were $340.0 million for the year ended December 31, 1996 compared to $337.2 million for the same period in the prior year, an increase of $2.9 million or 0.9%. The increase in casino revenues was due primarily to an increase in slot revenues of - 56 - $9.7 million or 3.9% which was attributable to an 11.6% increase in average slot units at the Atlantic City Showboat. The increase in slot revenues at the Atlantic City Showboat compares to a 2.1% growth in slot revenues in the Atlantic City market for the year ended December 31, 1996 and a 10.5% increase in average slot units in the Atlantic City market. The increase in slot revenues at the Atlantic City Showboat was partially offset by a table game revenue decrease of $5.1 million or 6.1% to $77.8 million for the year ended December 31, 1996 compared to $82.9 million for the same period in the prior year. This decline in table game revenues is attributable to a reduction in table games marketing. The Company's table game revenue decline compares to a 1.4% growth in table game revenues in the Atlantic City market for the year ended December 31, 1996. The Las Vegas Showboat achieved net revenues of $63.2 million for the year ended December 31, 1996, compared to $59.5 million in the same period in 1995, an increase of $3.6 million or 6.1%. Casino revenues increased $0.6 million or 1.4% in 1996 to $42.9 million compared to $42.3 million in 1995. The 1995 revenues reflect a reduced casino capacity due to the property's renovation project in the last six months of 1995. During 1996 the Las Vegas Showboat increased marketing to attempt to recapture its market share of slot machine players and local area residents lost to competitors during the 1995 renovation. The Company expects that the recapture, if it occurs at all, will occur over a period of years. Non-casino revenues increased to $24.6 million for the year ended December 31, 1996 from $21.3 million in the same period in 1995, an increase of $3.4 million or 15.9%. The increases in revenues were attributable to increased food and beverage capacity in 1996 as compared to the same period in the prior year. The coffee shop was closed during a portion of the renovation of the Las Vegas Showboat during 1995. INCOME FROM OPERATIONS The Company's income from operations declined $4.6 million or 9.8% to $42.1 million in 1996 from $46.7 million in 1995. The decrease is attributable to the decline in income from operations at both the Atlantic City Showboat and the Las Vegas Showboat. These declines were partially offset by the $3.9 million contribution from the Company's Australian operation and the $6.5 million or 29.5% decrease in operating expenses for the Company's corporate and development functions. - 57 -
Income From Operations Year ended December 31, (Unaudited) (in thousands) 1996 1995 Variance Percent ---------- ---------- ---------- ---------- Income from operations: Atlantic City $ 63,687 $ 72,450 $ (8,763) -12.1% Las Vegas (10,065) $ (3,749) $ (6,316) -168.5% Australia 3,918 (150) 4,068 2712.0% Corporate and development (15,419) (21,877) 6,458 29.5% Consolidated $ 42,121 $ 46,674 $ (4,553) -9.8% EBITDA:* Atlantic City $ 90,184 $ 99,747 $ (9,563) -9.6% Las Vegas (4,119) 229 (4,348) -1898.7% Australia 3,918 (150) 4,068 2712.0% Corporate and development (15,044) (21,619) 6,575 30.4% Consolidated $ 74,939 $ 78,207 $ (3,268) -4.2% Net of operating expenses and amortization of equity and debt costs at Showboat, Inc. *EBITDA is defined as income from operations before depreciation and amortization. EBITDA should not be construed as a substitute for income from operations, net earnings (loss) and cash flows from operating activities determined in accordance with Generally Accepted Accounting Principles ("GAAP"). The Company has included EBITDA because it believes it is commonly used by certain investors and analysts to analyze and compare gaming companies on the basis of operating performance, leverage and liquidity and to determine a company's ability to service debt.
Atlantic City Showboat's income from operations, before management fees, decreased to $63.7 million in the year ended December 31, 1996 compared to $72.4 million from the same period in 1995, a decrease of $8.7 million or 12.1%. This decrease is attributable to an increase in operating expenses at the Atlantic City Showboat of $10.4 million or 3.5% to $306.9 million. The increase in operating expenses is primarily attributable to increased marketing expenses, which consisted mostly of an $8.6 million increase in slot coin expense in response to aggressive competition for slot patrons in the Atlantic City market during 1996. The Atlantic City Showboat's operating margin, before management fees, decreased to 17.2 % in 1996 compared to 19.6% in 1995. The negative variance caused by the increase in operating expenses in 1996 was partially offset by the $1.6 million increase in net revenues for 1996 as compared to 1995. For the year ended December 31, 1996, the Las Vegas Showboat had a loss from operations, before management fees and intercompany rent, of $10.1 million compared to a loss of $3.7 million in the same period in 1995. This decline is due principally to an increase in operating expenses, partially offset by an increase in net revenues. Operating expenses increased - 58 - $9.6 million to $73.2 in 1996 compared to $63.6 million for the same period in 1995, an increase of 15.1%. The increase in operating expense is due primarily to the property operating at full capacity for the entire year in 1996 and increased marketing costs to offset the intensified competition for slot players in the local market. During the last six months of 1995, the casino was operating at approximately 60% of capacity due to the property's renovation project. Income from operations in 1996 included, for the first time, a contribution from Showboat's Australian operation of $3.9 million. This compared to a $0.2 million loss in 1995 due to the write-off of preopening costs, and administrative costs incurred. Corporate and development expenses totaled $15.4 million for the year ended December 31, 1996 compared to $21.9 million for the year ended December 31, 1995. This $6.5 million decrease is attributable to a reduction in the scope of development activities and general and administrative expenses in 1996 as compared to 1995. OTHER (INCOME) EXPENSE In 1996, other (income) expense consisted of $57.6 million of gross interest expense, $17.1 million of capitalized interest and $9.6 million of interest income. Interest expense increased due to the East Chicago project's interest expense of $14.3 million, capitalized interest of $5.0 million and interest income of $4.9 million. The East Chicago project's net interest expense was offset by the $2.0 million minority interest share of loss. The write-down of the investment in Showboat Mardi Gras, L.L.C. (the "Randolph Project") was $3.8 million in 1996. In 1995, other (income) expense consisted of $42.8 million of gross interest expense, $13.1 million of capitalized interest and $6.2 million of interest income. During 1995, the Company realized a net gain on the sale and write-down of affiliates totaling $1.1 million. In connection with the Company's investment in Sydney Harbour Casino, the Company capitalized interest of $12.1 million in 1996 compared to $12.6 million in 1995. INCOME TAXES In 1996, the Company incurred income taxes of $3.5 million, or an effective tax rate of 36.7% compared to $11.4 million or an effective tax rate of 46.5% in 1995. Differences between the Company's effective tax rate and the statutory federal tax rates are due to permanent differences between financial and tax reporting, state income taxes and the impact of foreign earnings which were not subjected to U.S. taxes. NET INCOME In 1996, the Company realized net income of $6.0 million or $.37 per share compared to net income of $13.2 million or $.84 per share in 1995. The 1996 results reflect an after tax loss of $2.4 million or $.15 per share for the write down of the Company's investment in a riverboat casino operation in Randolph, Missouri and the after tax increase in interest expense, net of interest income, capitalized interest and minority interest, totaling $1.5 million or $.09 per share caused by the East Chicago, Indiana project financing. - 59 - 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 - 60 - 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 - 61 - 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. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1996 the Company held cash and cash equivalents of $60.3 million compared to $106.9 million at December 31, 1995. This decline is due principally to the $36.9 million funding of the East Chicago Showboat and an increase in short-term investments. The Company's cash flow from operations was $50.9 million in 1996 compared to $53.2 million in 1995. Cash used in investing activities was $235.2 million in 1996 compared to $41.2 million in 1995. The increase in investing activities is due primarily to the East Chicago Showboat and an increase in short-term investments. Cash provided from financing activities was $137.7 million in 1996 compared to $4.5 million in 1995. The increase was primarily due to the issuance in 1996 by the East Chicago Showboat of $140.0 million of 13 1/2% First Mortgage Notes due 2003(the "East Chicago Notes"). In 1996, the Company expended approximately $115.0 million on capital improvements at the Atlantic City Showboat, the Las Vegas Showboat and construction costs at the East Chicago Showboat (which were principally funded from a portion of the proceeds of the East Chicago Notes). Approximately $89.6 million of the $115.0 million related to the East Chicago Showboat. The Company's Board of Directors has authorized a capital budget for the Atlantic City Showboat and the Las Vegas Showboat for 1997 totaling $26.7 million and $11.0 million, respectively. The Company is eligible to receive approximately $8.8 million in funding credits reserved by the Casino Reinvestment Development Authority (CRDA), as a result of the completion of the hotel expansion program at the Atlantic City Showboat, completed in 1994. To date, the Company has received approximately $2.9 million of the $8.8 million. In 1995, a court ruling disallowed the payment of CRDA credits. As a result, the CRDA suspended disbursement of the Company's funding credit. Legislation was passed in September, 1996, which allowed the CRDA to commence disbursement of funding credits to the Company. As of December 31, 1996, approximately $3.5 million in funding credits is available for distribution to the company. The remaining $2.4 million of reserved funding credits will be distributed in the future. - 62 - 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, any outstanding funds 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. As of December 31, 1996, all of the funds under this line of credit were available for use by the Company. On May 18, 1993, the Company issued $275.0 million of 9 1/4% First Mortgage Bonds due 2008 (the "9 1/4% Bonds"). The 9 1/4% Bonds were issued primarily to redeem the Company's 11 3/8% Mortgage Backed Bonds and to expand the Atlantic City Showboat. Interest on the Bonds is payable semi-annually on May 1 and November 1 of each year. The 9 1/4% Bonds are not redeemable prior to May 1, 2000. The 9 1/4% Bond Indenture was amended in July, 1994 and permitted the Company to issue up to $150.0 million of debt. On August 10, 1994, the Company issued $120.0 million of 13% Senior Subordinated Notes due 2009 (the "13% Notes"). The 13% Notes were issued in order to invest in Sydney Harbour Casino and to renovate the Las Vegas Showboat. Interest on the 13% Notes is payable semi-annually on February 1 and August 1 of each year commencing on February 1, 1995. The 13% Notes are not redeemable prior to August 1, 2001. The 13% Note Indenture permits the issuance of an additional $30.0 million of Notes at the discretion of the Company. As of December 31, 1996 the Company had not issued the additional $30.0 million of Notes. The 9 1/4% Bond Indenture and the 13% Note Indenture contain customary financial and other covenants which, among other things, govern the Company's ability to incur indebtedness. The Company continues to examine, and if appropriate, may pursue potential gaming opportunities in jurisdictions where gaming is legalized and in other jurisdictions that, in the future, may legalize private for profit casino gaming. There can be no assurance that legislation will be enacted in any additional jurisdictions, that any properties in which the Company may have invested will be compatible with any gaming legislation so enacted, that legalized gaming will continue to be authorized in any jurisdictions or the Company will be able to obtain the required licenses in any jurisdiction. Further, no assurance can be given that any of the announced or unannounced projects under development will be financed, completed, licensed or result in any significant contribution to the Company's cash flow or earnings. Casino gaming operations are highly regulated and new casino developments are subject to a number of risks and uncertainties, many of which are beyond the Company's control. The Company, on January 12, 1997, announced that Showboat, Inc. and Publishing & Broadcasting Limited ("PBL"), a public company listed on the Australian Stock Exchange, have reached an agreement in principle with respect to the acquisition by PBL of a significant portion of the Company's interests in its casino operations in Sydney, Australia. The transaction contemplates that PBL will acquire from the Company approximately 55 million ordinary shares of Sydney Harbour Casino Holdings Limited ("SHCH") (approximately 10% of the issued voting shares of SHCH) at a price per share of A$1.85 subject to adjustments in certain circumstances. It also contemplates that PBL grant a put to Showboat, Inc. to sell to PBL an additional 54 million ordinary shares at A$1.85 per share until March 31, 1999. The transaction further contemplates that PBL will succeed to the management of the casino in Sydney, under arrangements to be concluded, for which PBL will pay to the Company A$204.0 million, US - 63 - $162.0 million. The transaction is subject to the execution of definitive agreements, the receipt of all necessary government and regulatory consents and approvals, certain third party consents and the fulfillment of other closing conditions. The New South Wales Casino Control Authority ("CCA") has received a copy of the agreement in principle, but will require extensive additional submissions in order for the CCA to consider the consents and approvals which will be required before any final agreement becomes effective. SHCH and other relevant companies are not parties to the agreement in principle, nor did they participate in its negotiations. Their consent or agreement will be required. A subsidiary of the Company will continue to own approximately 80 million ordinary shares of SHCH (original ownership of 135 million shares less 55 million shares contemplated to be sold to PBL) and the existing option to purchase approximately 37.4 million ordinary shares of SHCH at an exercise price of A$1.15 per share. This option may be exercised between July 1, 1998 and June 30, 2000. Both the 9 1/4% Bond and the 13% Note Indentures place significant restrictions on the Company, one of which is the use of funds from the sale of a significant portion of the assets of a subsidiary such as SHCH. On March 28, 1996, the Company's 55% owned subsidiaries, Showboat Marina Casino Partnership ("SMCP") and Showboat Marina Finance Corporation ("SMFC"), sold the East Chicago Notes to support the development of the East Chicago Showboat. Additionally, the Company contributed $36.9 million to SMCP through Intermediary Partnerships, of which $8.9 million was contributed prior to 1996. The Company anticipates funding an additional $3.1 million in 1997 related to certain payments due to Waterfront Entertainment and Development, Inc. ("Waterfront"), its 45% partner. The Company will receive a 12% preferred return on its $40.0 million investment . In addition to its $40.0 million investment, subject to certain qualifications and exceptions, the Company entered into a standby equity commitment with SMCP, pursuant to which it will cause to be made up to an aggregate of $30.0 million in additional capital contributions to SMCP if, during the first three full four fiscal quarters following the commencement of operations at the East Chicago Showboat, the 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 SMCP more than $15.0 million in respect of any such full four quarter period. Subject to certain qualifications and exceptions, the Company entered into a completion guarantee with SMCP to complete the East Chicago Showboat 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. Waterfront agreed to compensate the Company $5.2 million for the standby equity commitment. The $5.2 million due the company shall accrue interest at 12% per annum until paid from Waterfront's share of distributable cash from SMCP. Currently, the Company believes that SMCP has sufficient resources to complete the East Chicago Showboat. However, no assurance can be given that SMCP will be able to complete the East Chicago Showboat from its available financing resources or that SMCP's annual cash flow will exceed $35.0 million. The East Chicago Note Indenture contains restrictions on payments to affiliates, including the Company, by SMCP. As a result of these restrictions, the distributable cash flow from SMCP is limited to good faith estimates of maximum payments for state and federal income tax liabilities of the Company and Waterfront, until certain financial ratios are met by SMCP. There can be no assurance that SMCP will meet their required financial ratios in order to distribute cash flow to the Company in excess of the federal and state tax liabilities. - 64 - 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"). 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. The Company has guaranteed SLP's payment of Minimum Rent for the Guarantee Period, and SLP's timely completion and construction of and payment for all improvements and installations in connection with SLP's development of the Southboat Casino Project. The aggregate gross minimum lease payments for 15 years are approximately $35.0 million 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. 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. 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. At this time, casino gaming is not permitted in the State of New Hampshire. If casino gaming is legalized, the Company will, at a minimum, contribute the promissory note as a capital contribution. Should enabling legislation permit 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. On February 4, 1997, the Company announced that it had entered into a Tribal Management Agreement, and other related agreements, with the Lummi Indian Nation for the purpose of developing a Class III casino to be located between Bellingham, Washington and Vancouver, British Columbia. The Company will be required to be licensed by the state of Washington. The agreements are subject to the necessary approvals by various state and federal authorities including the National Indian Gaming Commission. The Company's Board of Directors has approved an expenditure of up to $25.0 million to fund this project. 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 - 65 - 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. All statements contained herein that are not historical facts, including but not limited to, statements regarding the Company's current business strategy, the Company's prospective joint ventures, expansions of existing projects, and the Company's plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: the availability of sufficient capital to finance the Company's business plan on terms satisfactory to the Company; competitive factors, such as legalization of gaming in jurisdictions from which the Company draws significant numbers of patrons and an increase in the number of casinos serving the markets in which the Company's casinos are located; changes in labor, equipment and capital costs; the ability of the Company to consummate its contemplated joint ventures on terms satisfactory to the Company and to obtain necessary regulatory approvals therefore; changes in regulations affecting the gaming industry; the ability of the Company to comply with its Indentures for its 9 1/4% Bonds and 13% Notes; future acquisitions or strategic partnerships; general business and economic conditions; and other factors described from time to time in the Company's reports filed with the Securities and Exchange Commission. The Company wishes to caution the readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Litigation Reform Act of 1995 and, as such, speak only as of the date made. - 66 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Independent Auditors' Report; Consolidated Balance Sheets as of December 31, 1996 and 1995; Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994; Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994; Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994; and Notes to Consolidated Financial Statements - 67 - Independent Auditors' Report The Shareholders and Board of Directors Showboat, Inc.: We have audited the accompanying consolidated balance sheets of Showboat, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Showboat, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Las Vegas, Nevada KPMG PEAT MARWICK LLP February 21, 1997 - 68 -
SHOWBOAT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 ASSETS 1996 1995 -------- -------- (In thousands) Current assets: Cash and cash equivalents $60,287 $106,927 Short-term investments 28,848 - Receivables, net 12,402 8,448 Income tax receivable 2,396 2,076 Inventories 2,785 2,808 Prepaid expenses 4,470 4,728 Current deferred income taxes 7,802 9,744 ---------- ---------- Total current assets 118,990 134,731 ---------- ---------- Property and equipment: Land 11,545 11,536 Land improvements 14,461 12,184 Buildings 332,265 316,723 Furniture and equipment 191,872 176,127 Construction in progress 101,343 25,216 ---------- ---------- 651,486 541,786 Less accumulated depreciation and amortization 211,298 186,872 ---------- ---------- 440,188 354,914 ---------- ---------- Other assets: Restricted cash 69,601 - Investments in unconsolidated affiliates 138,964 120,090 Deposits and other assets 30,963 28,911 Debt issuance costs, net of accumulated amortization of $ 2,942,000 and $ 1,860,000 at December 31, 1996 and 1995, respectively 15,963 10,749 ---------- ---------- 255,491 159,750 ---------- ---------- $814,669 $649,395 ---------- ---------- (CONTINUED)
- 69 -
SHOWBOAT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (CONTINUED) LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995 -------- -------- (In thousands) Current liabilities: Current maturities of long-term debt $25 $22 Accounts payable 17,688 15,143 Dividends payable 405 392 Accrued liabilities 41,933 38,158 --------- -------- Total current liabilities 60,051 53,715 Long-term debt, excluding current maturities: Debt with recourse 392,719 392,369 Debt without recourse 140,000 - --------- -------- 532,719 392,369 Other liabilities 4,753 5,028 --------- -------- Deferred income taxes 24,888 22,319 --------- -------- Minority Interest 113 2,023 --------- -------- Commitments and contingencies Shareholders' equity: Preferred stock, $1 par value; 1,000,000 shares authorized; none issued Common stock, $1 par value; 50,000,000 shares authorized; issued 16,181,199 shares and 15,794,578 shares at December 31, 1996 and 1995, respectively 16,181 15,795 Additional paid-in capital 87,698 80,078 Retained earnings 84,828 80,434 188,707 176,307 ---------- -------- Cumulative foreign currency translation adjustment 4,773 285 Cost of shares in treasury, 0 shares and 74,333 shares at December 31, 1996 and 1995, respectively - (587) Unearned compensation for restricted stock (1,335) (2,064) Total Shareholders' equity ---------- --------- 192,145 173,941 ---------- --------- $814,669 $649,395 ---------- --------- ---------- ---------
See accompanying notes to consolidated financial statements. - 70 -
SHOWBOAT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS EXCEPT PER SHARE DATA) 1996 1995 1994 -------- -------- -------- Revenues: Casino $382,980 $379,494 $351,436 Food and beverage 56,916 53,894 50,624 Rooms 26,147 25,694 20,587 Sports and special events 3,682 3,924 4,168 Management fees - 190 1,861 Other 5,876 5,189 5,938 -------- -------- ------- 475,601 468,385 434,614 Less complimentaries 41,896 39,793 33,281 -------- -------- ------- Net revenues 433,705 428,592 401,333 -------- -------- ------- Operating costs and expenses: Casino 193,537 177,644 169,786 Food and beverage 32,287 32,150 34,287 Rooms 7,261 8,339 7,847 Sports and special events 2,774 3,206 3,321 General and administrative 117,355 119,568 109,058 Selling, advertising and promotion 9,638 9,456 9,647 Depreciation and amortization 32,818 31,533 28,387 -------- -------- -------- 395,670 381,896 362,333 -------- -------- -------- Income from operations from consolidated subsidiaries 38,035 46,696 39,000 Equity in income (loss) of unconsolidated affiliates 4,086 (22) 12,828 -------- -------- -------- Income from operations 42,121 46,674 51,828 -------- -------- --------
(CONTINUED) - 71 -
SHOWBOAT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS EXCEPT PER SHARE DATA) (CONTINUED) 1996 1995 1994 -------- -------- -------- Income from operations $42,121 $46,674 $51,828 -------- -------- -------- Other (income) expense: Interest income (9,572) (6,225) (4,872) Gain on sale of affiliate (2,558) - Write-down of investment in affiliate 3,789 1,426 - Foreign currency transaction gain (100) (271) - Interest expense, net of amounts capitalized 40,510 29,692 29,452 -------- -------- -------- 34,627 22,064 24,580 -------- -------- -------- Income before income tax expense and minority interest 7,494 24,610 27,248 Minority interest share of loss 1,987 - - -------- -------- -------- Income before income tax expense 9,481 24,610 27,248 -------- -------- -------- Income tax expense 3,478 11,435 11,549 -------- -------- -------- Net income $6,003 $13,175 $15,699 -------- -------- -------- -------- -------- -------- Net income per common and equivalent share $ 0.37 $ 0.84 $ 1.02 -------- -------- --------
See accompanying notes to consolidated financial statements. - 72 -
SHOWBOAT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Cumulative Additional foreign currency Common paid-in Retained translation stock capital earnings adjustment ------- ------- -------- ---------- (In thousands) Balance, December 31, 1993 $15,795 $71,162 $54,628 - Net income - - 15,699 - Cash dividends ($.10 per share) - - (1,518) - Warrants issued - 1,953 - - Share transactions under stock plans - 3,730 - - Amortization of unearned compensation - - - - Foreign currency trans- lation adjustment, net of tax - - - 3,490 ------ ------- ------- -------- Balance, December 31, 1994 15,795 76,845 68,809 3,490 Net income - - 13,175 - Cash dividends ($.10 per share) - - (1,550) - Share transactions under stock plans - 3,233 - - Amortization of unearned compensation - - - - Foreign currency trans- lation adjustment, net of tax - - - (3,205) ------ ------ ------- --------- Balance, December 31, 1995 15,795 80,078 80,434 285 Net income - - 6,003 - Cash dividends ($.10 per share) - - (1,609) - Share transactions under stock plans 386 7,620 - - Amortization of un- earned compensation - - - Foreign currency trans- lation adjustment, net of tax - - - 4,488 ------- ------- ------- -------- Balance, December 31, 1996 $16,181 $87,698 $84,828 $4,773 ------- ------- ------- -------- ------- ------- ------- --------
Unearned Treasury compen- stock sation Total ---------- ---------- ---------- Balance, December 31, 1993 ($6,370) ($57) 135,158 Net income - - 15,699 Cash dividends ($.10 per share) - - (1,518) Warrants issued - - 1,953 Share transactions under stock plans 3,006 (6,021) 715 Amortization of unearned compensation - 1,964 1,964 Foreign currency trans- lation adjustment, net of tax - - 3,490 ---------- ---------- ---------- Balance, December 31, 1994 (3,364) (4,114) 157,461 Net income - - 13,175 Cash dividends ($.10 per share) - - (1,550) Share transactions under stock plans 2,777 (116) 5,894 Amortization of unearned compensation - 2,166 2,166 Foreign currency trans- lation adjustment, net of tax - - (3,205) ---------- ---------- ---------- Balance, December 31, 1995 (587) (2,064) 173,941 Net income - - 6,003 Cash dividends ($.10 per share) - - (1,609) Share transactions under stock plans 587 (912) 7,681 Amortization of un- earned compensation - 1,641 1,641 Foreign currency trans- lation adjustment, net of tax - 4,488 ---------- ---------- ---------- Balance, December 31, 1996 $0 ($1,335) $192,145 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. - 73 -
SHOWBOAT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 1995 1994 -------- -------- -------- (In thousands) Cash flows from operating activities: Net income $6,003 $13,175 $15,699 Adjustments to reconcile net income to net cash provided by operating activities: Allowance for doubtful accounts 1,557 1,605 950 Depreciation and amortization 32,818 31,533 28,387 Amortization of original issue discount and debt issuance costs 1,458 1,281 820 Provision for deferred income taxes 2,094 2,069 256 Amortization of unearned compensation 1,641 2,166 1,964 Provision for loss on Casino Reinvestment Development Authority obligation 497 1,414 1,018 (Earnings) loss of unconsolidated affiliate, net of distributions (4,086) 2,768 (3,596) (Gain) loss on sale and write-down of affiliates 3,789 (1,132) - (Gain) loss on disposition of property and equipment 147 (36) (251) Increase in receivables, net (2,695) (2,492) (2,580) Decrease (increase) in inventories and prepaid expenses 281 (209) (924) Increase in deposits and other assets (202) (656) (1,378) Pension costs, net of payments 1,954 882 995 Increase in accounts payable 2,096 4,566 396 Increase (decrease) in income taxes payable 1,849 (5,168) 3,051 Increase in accrued liabilities 3,644 1,384 10,566 Minority interest share of loss (1,987) - - --------- --------- --------- Net cash provided by operating activities 50,858 53,150 55,373 --------- --------- ---------
(CONTINUED) - 74 -
SHOWBOAT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED) 1996 1995 1994 ---------- ---------- ---------- (In thousands) Cash flows from investing activities: Acquisition of property and equipment ($115,038) ($49,573) ($72,471) Proceeds from sale of property and equipment 477 1,065 290 Proceeds from sale of affiliate - 51,366 - Investments in unconsolidated affiliates (11,647) (36,551) (110,979) (Advances to) repayments from unconsolidated affiliates 390 1,210 (899) Increase in restricted cash (69,601) - - Increase in deposits and other assets (6,762) (4,639) (8,850) Deposit for Casino Reinvestment Development Authority obligation, net of refunds (4,140) (4,052) (599) Purchase of short-term investments (28,848) - - ---------- ---------- ---------- Net cash used in investing activities (235,169) (41,174) (193,508) ---------- ---------- ---------- Cash flows from financing activities: Principal payments of long-term debt (22) (20) (3,575) Proceeds from issuance of long-term debt 140,000 - 120,000 Proceeds from employee stock option exercises 5,510 - - Debt issuance costs (6,297) (542) (4,474) Payment of dividends (1,597) (1,543) (1,509) Distribution to bond holders - - (5,195) Issuance of common stock - 4,604 530 Minority interest contributions 77 2,023 - ---------- ---------- ---------- Net cash provided by financing activities 137,671 4,522 105,777 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (46,640) 16,498 (32,358) Cash and cash equivalents at beginning of year 106,927 90,429 122,787 Cash and cash equivalents ---------- ---------- ---------- at end of year $60,287 $106,927 $90,429 ---------- ---------- ---------- ---------- ---------- ----------
(CONTINUED) - 75 -
SHOWBOAT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (CONTINUED) 1996 1995 1994 -------- -------- -------- (In thousands) Supplemental disclosures of cash flow information and non-cash investing and financing activities: Cash paid (refunded) during the year for: Interest, net of amount capitalized $33,306 $28,021 $22,522 Income taxes (465) 14,533 8,242 Foreign currency translation adjustment 4,488 (3,205) 3,490
See accompanying notes to consolidated financial statements. - 76 - SHOWBOAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION Showboat, Inc. and subsidiaries (collectively, the "Company" or "SBO"), is an international gaming company with over 40 years of gaming experience that owns and operates the Atlantic City Showboat Casino and Hotel in Atlantic City, New Jersey (the "Atlantic City Showboat"), the Las Vegas Showboat Casino, Hotel and Bowling Center in Las Vegas, Nevada (the "Las Vegas Showboat"), owns a 24.6% equity interest in, and manages through subsidiaries, the Sydney Harbour Casino located in Sydney, Australia, and owns through subsidiaries a 55% interest in, and will manage through subsidiaries, the East Chicago Showboat riverboat casino project in East Chicago, Indiana, (the "East Chicago Showboat"), which is under construction and scheduled to open, subject to licensing, in the second quarter of 1997. Until March 31, 1995, the Company owned an equity interest in and managed a riverboat casino on Lake Pontchartrain in New Orleans, Louisiana (Star Casino). 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. CASINO REVENUE AND COMPLIMENTARIES Casino revenues represent the net win from gaming wins and losses. Revenues include the retail value of room, food, beverage, and other goods and services provided to customers without charge. Such amounts are then deducted as promotional allowances. The estimated cost of providing these promotional allowances was charged to the casino department in the following amounts:
Year Ending December 31, 1996 1995 1994 (In thousands) Food and beverage $ 28,421 $ 27,119 $ 23,893 Room 8,559 7,197 5,883 Other 1,249 1,346 2,066 Total $ 38,229 $ 35,662 $ 31,842
CASH EQUIVALENTS AND RESTRICTED CASH The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash consists of cash and short-term investments held by the East Chicago Showboat for construction and development. - 77 - 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) SHORT-TERM INVESTMENTS Short-term Investments as of December 31, 1996 consist of U.S. Treasury bills, mortgage-backed corporate debt securities and certificates of deposit with financial institutions which have an average maturity date of less than seven months. The Company classifies these securities as available-for-sale as they will be liquidated as needed to fund cash requirements of the Company. These securities are recorded at fair value as of December 31, 1996. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of shareholders' equity until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. Unrealized and realized gains were not material as of or for the period ended December 31, 1996. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. FAIR VALUE OF CERTAIN FINANCIAL INSTRUMENTS The carrying amount of cash equivalents, receivables and all current liabilities approximates fair value because of the short term maturity of these instruments. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. See Notes 5 and 6 for additional fair value disclosures. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation, including amortization of capitalized leases, is computed using the straight-line method. The cost of maintenance and repairs is charged to expense as incurred; significant renewals and betterments are capitalized. Estimated useful lives for property and equipment are 5 to 15 years for land improvements, 10 to 40 years for buildings and 2 to 10 years for furniture and equipment. INTEREST COSTS Interest is capitalized in connection with the construction of major facilities. Further, interest is capitalized on investments in unconsolidated companies accounted for by the equity method of accounting during the period the investee company is undergoing activities necessary to start its planned principal operations. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. For the years ended December 31, 1996, 1995, and 1994, $17,081,000, $13,148,000, and $3,378,000, respectively, of interest cost was capitalized. - 78 - 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) PREOPENING AND DEVELOPMENT COSTS The Company is currently investigating expansion opportunities in new and existing gaming jurisdictions. Costs associated with these investigations are capitalized and a reserve is established based on an evaluation of the viability of the development projects. The viability of a project is based on numerous factors including current or proposed gaming legislation, competition, cost of entry into a new or existing market and return on investment. Costs incurred during the preopening phase are capitalized. Types of costs capitalized include salaries and wages, temporary office expenses, marketing expenses and training costs. When the new operation opens for business, preopening costs will be expensed over a period not to exceed twelve months. INCOME TAXES Under the asset and liability method of FAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under FAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. The Company and its domestic subsidiaries file a consolidated federal income tax return. For tax reporting purposes, the Company files on a fiscal year ending June 30. The Company has filed for a change in tax year end with the Internal Revenue Service. If approved the Company's tax year end will be changed to December 31. The change will be effective December 31, 1996. AMORTIZATION OF ORIGINAL ISSUE DISCOUNT AND DEBT ISSUANCE COSTS Original issue discount is amortized over the life of the related indebtedness using the effective interest method. Costs associated with the issuance of debt have been deferred and are being amortized over the life of the related indebtedness using the straight line method which approximates the effective interest method. INCOME PER COMMON AND EQUIVALENT SHARE Income per common and equivalent share is based on the weighted average number of shares outstanding. Such averages were 16,347,058, 15,730,478, and 15,457,061 for the years ended December 31, 1996, 1995 and 1994, respectively. Equivalent shares include stock options and warrants when dilutive. Fully-diluted and primary income per common and equivalent share are the same. - 79 - 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) STOCK BASED COMPENSATION Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock-Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide proforma net income and proforma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. FOREIGN CURRENCY TRANSLATION The financial statements of foreign subsidiaries are adjusted to U.S. generally accepted accounting principles. Balance sheet accounts are then translated into U.S. dollars at current exchange rates in effect at the balance sheet date. Items of revenue and expense are translated at average exchange rates during the reporting period. Gains and losses resulting from translation of financial statements are excluded from the Consolidated Statements of Income and are credited or charged directly to a separate component of Shareholders' Equity, net of taxes. Gains and losses resulting from foreign currency transactions are included in income currently. LONG-LIVED ASSETS In March 1995, the FASB issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of", which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flow estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement 121 in the first quarter of 1996 and there was no write-down of assets. USE OF ESTIMATES Management of the Company has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. - 80 - 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to the current year's presentation. 2. RECEIVABLES, NET Receivables, net consist of the following:
December 31, ------------------------- 1996 1995 ------------ ----------- (In thousands) Casino $6,524 $7,224 Hotel 760 1,113 Other 7,535 2,792 ------------ ------------ 14,819 11,129 Less allowance for doubtful accounts 2,417 2,681 ------------ ------------ Receivables, net $12,402 $8,448 ============ ============
3. ACCRUED LIABILITIES Accrued liabilities consist of the following:
December 31, ------------ ------------ 1996 1995 ------------ ------------ (In thousands) Interest $16,296 $10,740 Salaries and wages 11,985 12,827 Medical and liability claims 4,572 4,125 Taxes, other than taxes on income 2,346 4,032 Advertising and promotion 2,326 2,113 Outstanding chips and tokens 1,692 1,713 Other 2,716 2,608 ------------ ------------ Total accrued liabilities $41,933 $38,158 ============ ============
- 81 - 4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES The Company's wholly-owned subsidiary, Showboat Australia Pty. Ltd., (SA), invested approximately $100.0 million for 135,000,000 shares (approximately 24.6% interest) in Sydney Harbour Casino Holdings Limited, (SHCH), which through its wholly owned subsidiaries, owns the Sydney Harbour Casino and holds the casino license required to operate the Sydney Harbour Casino. SA also owns 85% of the company engaged to manage the casino for a management fee. On September 13, 1995, the Sydney Harbour Casino commenced gaming operations in an interim facility and is expected to commence operations in a permanent facility in late 1997. For the year ended December 31, 1996, $4,086,000 of net income from the interim casino is included in equity in income (loss) of unconsolidated affiliates in the Consolidated Statement of Income. For the year ended December 31, 1995, no earnings were reported from the interim casino due to the write-off of preopening costs. In addition to its 24.6% equity interest in SHCH, SA has an option to purchase an additional 37,446,553 ordinary shares of the fully diluted equity 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. In March 1995, the Company, with an unrelated corporation, formed Showboat Mardi Gras, L.L.C. (SMG), formerly known as Randolph Riverboat Company, L.L.C., to own and operate, subject to licensing, a riverboat casino near Kansas City, Missouri. The Company invested approximately $5,200,000 in a combination of both equity and advances to SMG for the completion of the riverboat, costs incurred in the licensing process and other general and administrative expenses. SMG was not selected by the Missouri Gaming Commission for investigation for a gaming license. Due to a decline in the market value of the assets of SMG, principally a riverboat, the Company recorded a pre-tax write-down of $3,789,000 and $1,426,000 in the years ended December 31, 1996 and 1995, respectively, which is included in the Consolidated Statements of Income as write-down of investment in affiliate. The 1996 write-down includes the Company's remaining investment in SMG, and the Company has no further obligations to SMG. Showboat Louisiana, Inc.(SLI) was formed in 1993 to hold a 30% equity interest in Showboat Star Partnership (SSP) which owned a riverboat casino and was managed by Lake Pontchartrain Showboat, Inc. (LPSI), a wholly-owned subsidiary of the Company. In 1993, the Company invested $18,600,000 in SSP for its 30% equity interest in the riverboat casino. Operation of the riverboat casino commenced on November 8, 1993. Effective March 1, 1994, the Company purchased an additional 20% equity interest from its partner for $9,000,000. In March 1995, the Company purchased an additional 50% of the equity of SSP 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 Orleans Parish. In a series of unrelated transactions, SSP sold certain of its assets and the Company sold its equity interest in SSP resulting in a net pretax gain of $2,558,000 which is included in the 1995 Consolidated Statement of Income as gain on sale of affiliate. - 82 - 4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES (continued) The investment by SLI in SSP has been accounted for under the equity method of accounting. The Company's equity in the income or loss of SSP is included in the Consolidated Statement of Income as equity in income or loss of unconsolidated affiliates. LPSI received a management fee from SSP of 5.0% of casino revenues net of gaming taxes of 18.5% and boarding fees. Intercompany management fees have been eliminated in consolidation. Summarized condensed financial information of SHCH and SSP (the only significant unconsolidated affiliates) as of and for the years ending December 31, 1996 and 1995 is as follows:
1996 1995 ------------ ------------ (In thousands) Sydney Harbour Casino Holdings Ltd. (Unaudited) Income statement data: Net revenues $295,600 $90,800 Net income 17,700 - Company's share of net income $4,086 $ - Balance sheet data: Assets: Property and equipment, net $460,300 $229,100 Other assets 349,400 325,400 ------------ ------------ Total assets $809,700 $554,500 ============ ============ Liabilities and shareholders' equity: Liabilities $342,400 $182,200 Shareholders' equity: Company's 115,000 97,900 Other shareholders' 352,300 274,400 ------------ ------------ Total liabilities and shareholders' equity $809,700 $554,500 ============ ============
The difference between the Company's equity in SHCH shown above and the amounts reported as investments in unconsolidated affiliates in the Company's Consolidated Balance Sheets is primarily due to capitalized interest of approximately $24,200,000 and $13,100,000 in 1996 and 1995, respectively, and the Company's investment in SMG. - 83 - 4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES (continued)
1995 1994 ------------ ------------ (In thousands) Showboat Star Partnership (Unaudited): Income statement data: Net revenues $11,044 $97,989 Net income (loss) (10,719) 24,782 Company's share of net income (loss) including closing costs and loss on sale of assets (5,211) 12,828 Balance sheet data: Assets Current assets $ - $16,624 Property and equipment, net - 35,135 Other assets 19,522 ------------ ------------ Total assets $ - $71,281 ============ ============ Liabilities and partners' capital accounts: Current liabilities $ - $3,950 Partners' capital accounts - 67,331 ------------ ------------ Total liabilities and partners' capital accounts $ - $71,281 ============ ============
The amount reported above as the Company's share of net loss for the year ended December 31, 1995 from SSP is exclusive of the gain the Company realized on the ultimate disposition of its ownership interest in SSP. The Consolidated Statement of Income includes the Company's share of the loss on operations (approximately $22,000) of SSP for 1995 as equity in income (loss) of unconsolidated affiliates. The Company's share of additional losses incurred by SSP related to closing costs and sale of certain assets were offset against the Company's gain on sale of its equity interest in SSP resulting in a net gain of $2,558,000, which is reported as gain on sale of affiliate. 5. NEW JERSEY INVESTMENT OBLIGATION The New Jersey Casino Control Act (Act) provides, among other things, for an assessment on a gaming licensee based upon 1 1/4% of its gross casino revenues. This assessment is satisfied by investing in qualified direct investments or purchasing bonds issued by the Casino Reinvestment Development Authority (CRDA). In order for direct investments to be eligible, they must be approved by the CRDA. - 84 - 5. NEW JERSEY INVESTMENT OBLIGATION (CONTINUED) Deposits with the CRDA bear interest at two-thirds of market rates resulting in a current value lower than cost. At December 31, 1996 and 1995, deposits and other assets include $7,009,000 and $7,198,000, respectively, representing the Company's bond purchases and deposits with the CRDA of $10,616,000 as of December 31, 1996 and $10,458,000 as of December 31, 1995, net of a valuation allowance of $3,607,000 and $3,260,000, respectively. The carrying value of these deposits, net of the valuation allowance, approximates fair value. The Company is eligible to receive approximately $8,800,000 in funding credits reserved by the Casino Reinvestment Development Authority (CRDA), as a result of the completion of the hotel expansion program at the Atlantic City Showboat, completed in 1994. To date, the Company has received approximately $2,900,000. As of December 31, 1996, approximately $3,500,000 in funding credits is available for distribution to the company. The remaining $2,400,000 of reserved funding credits is expected to be distributed in the future. 6. LONG-TERM DEBT The Company's debt is categorized separately as debt guaranteed by the Company (generally known as recourse debt) and debt not guaranteed by the Company (generally known as non- recourse debt). Long-term debt consists of the following:
December 31, ------------ ------------ 1996 1995 ------------ ------------ (In thousands) Recourse Debt: 9 1/4% First Mortgage Bonds (Bonds) due 2008 net of unamortized discount of $4,257,000 and $4,632,000 at December 31, 1996 and 1995, respectively $270,743 $270,368 13% Senior Subordinated Notes (Notes) due 2009 120,000 120,000 Capital lease obligations 2,001 2,023 Non-recourse Debt: 13 1/2% First Mortgage Notes (East Chicago Notes) due 2003 140,000 - ------------ ------------ 532,744 392,391 Less current maturities 25 22 ------------ ------------ $532,719 $392,369 ============ ============
- 85 - 6. LONG-TERM DEBT (CONTINUED) On July 1, 1994, the Company obtained consents to amend (Amendments) its Indenture governing its Bonds (Bond Indenture). The Company received consents from holders of approximately $259,772,000 or 94% of the Bonds approving the Amendments. In consideration for their consent, the consenting Bond holders received 2% of the face value of the Bonds. On July 28, 1994, the Company paid $5,195,000 to the consenting Bond holders. As the amount paid does not represent a significant modification of the terms of the Bonds, it is reflected as a discount on the Bonds and is being amortized as an adjustment to yield over the remaining life of the Bonds using the effective interest method. The Bonds are unconditionally guaranteed by Ocean Showboat, Inc. (OSI), Atlantic City Showboat, Inc. (ACSI) and Showboat Operating Company (SOC),subsidiaries effectively owned 100% by the Company. 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 Bond Indenture. 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 collateralized by substantially all the assets of the Company. The Bond Indenture, as amended, 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 payment of certain restricted payments (as defined), including certain investments made by SBO and its subsidiaries. The Company was in compliance with the Bond Indenture Covenants as of December 31, 1996. On August 10, 1994, the Company issued its $120,000,000 13% Notes. The proceeds from the sale of the Notes (Note Offering) were $116,520,000, net of underwriting discounts and commissions. Proceeds from the Note Offering were used to renovate the Las Vegas Showboat, and to invest approximately $100,000,000 for an approximately 24.6% equity interest in SHCH. The Notes are unconditionally guaranteed by OSI, ACSI and SOC. Interest on the Notes is payable semi-annually on February 1 and August 1 of each year. The Notes will be redeemable, in whole or in part, at the option of the company at any time on or after August 1, 2001 at redemption prices specified in the Indenture for the Notes (Note Indenture). The Notes are 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 $30,000,000 of Notes at the discretion of the Company. The Note Indenture places significant restrictions on the Company, many of which are substantially similar to the restrictions placed on the Company by the Bond Indenture, as amended. The Company was in compliance with all the Note Indenture Covenants as of December 31, 1996. - 86 - 6. LONG-TERM DEBT (CONTINUED) On March 28, 1996 the Company's 55% owned subsidiaries, Showboat Marina Casino Partnership (SMCP) and Showboat Marina Finance Corporation (SMFC), sold its $140.0 million 13 1/2% East Chicago Notes. The net proceeds from the sale were $133,700,000 net of financing costs. The funds were raised to support the development of the East Chicago Showboat. The East Chicago Notes are senior secured obligations of SMCP and rank senior in right of payment to all existing and future subordinated indebtedness of SMCP and pari passu with SMCP's senior indebtedness. Interest is payable semi-annually on March 15, and September 15, of each year. The East Chicago Notes will be redeemable at the option of SMCP, in whole or in part, on or after March 15, 2000, at the redemption prices set forth in the Indenture. The East Chicago Notes are without recourse to the Company. 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, any outstanding funds may convert to a three year term loan. As of December 31, 1996, all of the funds under this line of credit were 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. Maturities of the Company's long-term debt exclusive of unamortized discount are as follows: Year Ending December 31, 1997 $ 25 1998 29 1999 19 2000 - 2001 1,928 Thereafter 535,000 ---------- $ 537,001 ========== The fair value of the Company's Bonds, Notes and East Chicago Notes were $273,625,000, $134,400,000 and $154,700,000 respectively, at December 31, 1996 based on the quoted market prices. The carrying amount of capital leases approximates fair value at December 31, 1996. - 87 - 7. LEASES The Company leases certain furniture and equipment and a warehouse under long-term capital lease agreements. The leases covering furniture and equipment expire in 1999 and the warehouse lease expires in 2001. The Company has an option to purchase the warehouse from January 1, 1996 through March 31, 2001 at an option price of approximately $1,928,000. Property leased under capital leases by major classes are as follows:
December 31, ----------------------------- 1996 1995 ---------- ---------- (In thousands) Building - warehouse $2,050 $2,050 Furniture and equipment 152 152 ------ ------ 2,202 2,202 ------ ------ Less accumulated amortization 1,520 1,361 ------ ------ $ 682 $ 841 ======= ======
ACSI is leasing 10 1/2 acres of Boardwalk property in Atlantic City, New Jersey for a term of 99 years which commenced October 1983. Annual rent payments, which are payable monthly, commenced upon opening of the Atlantic City Showboat. The rent is adjusted annually based upon changes in the Consumer Price Index. In April 1996, the annual rent increased $245,000 to $8,805,000. ACSI is responsible for taxes, assessments, insurance and utilities. The following is a schedule of future minimum lease payments for capital leases and operating leases (with initial or remaining terms in excess of one year) as of December 31, 1996:
Capital Operating Year ending December 31, Leases Leases - --------------------------------------------------- --------- ----------- (In thousands) 1997 $ 286 $ 10,967 1998 286 9,979 1999 272 9,372 2000 253 9,165 2001 1,991 8,805 Thereafter - 713,028 -------- ---------- Total minimum lease payments $3,088 $761,316 -------- ========== Less amount representing interest (10.4% to 12.9%) 1,087 Present value of net minimum capital lease payments $2,001 =========
Rent expense for all operating leases was $11,356,000, $11,241,000 and $10,380,000 for the years ended December 31, 1996, 1995 and 1994, respectively. - 88 - 8. INCOME TAXES Total income tax expense was allocated as follows:
Year ended December 31, ------------------------------ ------------ 1996 1995 1994 ------------------------------ ------------ (In thousands) Continuing operations $3,478 $11,435 $11,549 Shareholders' equity, related to cumulative foreign currency translation adjustment 2,417 (1,726) 1,879 Shareholders' equity, primarily due to the tax benefit related to the exercise of stock options (2,170) (1,471) (241) ------------------------------ ------------ $3,725 $8,238 $13,187 ============================== ============
Income tax expense (benefit) attributable to income from continuing operations consists of:
Year ended December 31, ------------------------------ ------------ 1996 1995 1994 ------------------------------ ------------ (In thousands) U.S. federal Current ($587) $5,489 $8,793 Deferred 1,786 2,477 323 ------------------------------ ------------ 1,199 7,966 9,116 ------------------------------ ------------ State and local Current 1,971 3,877 2,500 Deferred 308 (408) (67) ------------------------------ ------------ 2,279 3,469 2,433 ------------------------------ ------------ Total Current 1,384 9,366 11,293 Deferred 2,094 2,069 256 ------------------------------ ------------ $3,478 $11,435 $11,549 ============================== ============
- 89 - 8. INCOME TAXES (CONTINUED) Income tax expense attributable to income from continuing operations differed from the amounts computed by applying the U.S. federal income tax rate of 35% for the years ended December 31, 1996, 1995 and 1994 to pretax income from continuing operations as a result of the following:
Year ended December 31, ------------------------------ ------------ 1996 1995 1994 ------------------------------ ------------ (In thousands) Computed "expected" tax expense $3,318 $8,614 $9,537 Increase (reduction) in income taxes resulting from: Equity in income from foreign unconsolidated affiliate not subject to US tax (1,413) - - State and local income taxes, net of federal tax benefit 1,523 2,174 1,715 Other, net 50 647 297 ------------------------------ ------------ Income tax expense $3,478 $11,435 $11,549 ============================== ============
- 90 - 8. INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are as follows:
1996 1995 ------------ ------------ (In thousands) Deferred tax assets: Alternative minimum tax credit carryforwards $5,496 $572 Preopening costs 2,234 2,236 Accrued vacations 1,992 1,786 Executive deferred compensation 1,370 657 Casino Reinvestment Development Authority obligation 1,085 1,332 Long-term incentive plan 1,064 1,005 Accrued medical claims 1,022 803 Allowance for doubtful accounts 984 1,091 Accrued bonuses 382 2,191 Other 2,510 2,852 ------------ ------------ Total gross deferred tax assets 18,139 14,525 Less valuation allowance - 916 ------------ ------------ Net deferred tax assets 18,139 13,609 ------------ ------------ Deferred tax liabilities: Depreciation and amortization 20,639 18,894 Capitalized interest 11,056 7,034 Cumulative foreign currency translation adjustment 2,570 153 Other 960 103 ------------ ------------ Total gross deferred tax liabilities 35,225 26,184 ------------ ------------ Net deferred tax liability $17,086 $12,575 ============ ============
At December 31, 1996, the Company had available $5,496,000 of alternative minimum tax credit carryforwards which are available to reduce future federal regular income taxes, if any, over an indefinite period. - 91 - 9. EMPLOYEE BENEFIT PLANS The Company maintains a retirement and savings plan for eligible employees who are not covered by a collective bargaining agreement or by another plan to which the Company contributes. Under the terms of the plan, eligible employees may defer up to 3% of their compensation, as defined, of which 100% of the deferral is matched by the Company. Eligible employees may contribute an additional 12% of their compensation which will not be matched by the Company. Contributions by the Company vest over a five-year period. The Company contributed an aggregate of $1,947,000, $1,932,000 and $1,826,000 to this plan for the years ended December 31, 1996, 1995 and 1994, respectively. The Company's union employees are covered by union- sponsored, collectively-bargained, multi-employer pension plans. The Company contributed and charged to expense $1,315,000, $1,326,000 and $1,298,000 during the years ended December 31, 1996, 1995 and 1994, respectively. These contributions are determined in accordance with the provisions of negotiated labor contracts and generally are based on the number of hours worked. In August 1994, the Company implemented a Supplemental Executive Retirement Plan (SERP) for a select group of management personnel to ensure that the Company's overall executive compensation program will attract, retain and motivate qualified senior management personnel. The participants receive benefits based on years of service and final compensation. This defined benefit plan is noncontributory and unfunded. The pension costs are determined actuarially and are based on the assumption that all eligible personnel will participate in the SERP. The net pension cost for the years ended December 31, 1996, 1995 and 1994 consists of the following:
December 31, ------------------------------ 1996 1995 1994 --------- -------- -------- (In thousands) Service costs of benefits earned $ 391 $ 368 $376 Interest cost on projected benefit obligation 422 387 335 Amortization of unrecognized prior service costs 284 284 284 --------- -------- -------- $1,097 $1,039 $995 ========= ======== ========
- 92 - 9. EMPLOYEE BENEFIT PLANS (CONTINUED) The status of the defined benefit plan at December 31, 1996 and 1995 is as follows:
December 31, ------------ ------------ 1996 1995 ------------ ------------ (In thousands) Fair value of plan assets $ - $ - ------------ ------------ Actuarial present value of benefit obligation: Vested benefit obligation 2,489 2,558 Non-vested benefit obligation 1,210 2,470 ------------ ------------ Accumulated benefit obligation 3,699 5,028 Effect of projected future salary increases 1,955 711 ------------ ------------ Projected benefit obligation 5,654 5,739 ------------ ------------ Plan assets less than projected benefit obligation (5,654) (5,739) Unrecognized prior service costs 3,408 3,692 Unrecognized (gain)loss (531) 170 Adjustment to recognize minimum liability (922) (3,151) ------------ ------------ Accrued pension cost included in other liabilities ($3,699) ($5,028) ------------ ------------
Prior service costs to be recognized in income in future years of $922,000 and $3,151,000 at December 31, 1996 and 1995, respectively, are included in deposits and other assets in the Consolidated Balance Sheet. The assumptions used in computing the information above were as follows: 1996 1995 ------- ------- Discount rate 7.25% 7.00% Future compensation growth rate 4.50% 4.50% - 93 - 10. STOCK PLANS The Company has various incentive plans under which stock options or restricted shares may be granted to key employees, members of the Board of Directors and all other full and part- time employees. A total of 3,720,000 shares have been reserved for issuance as stock options or restricted shares under these plans. Restricted shares and options granted to key employees vest over a five-year period. All other options vest over a one- year period. The options are exercisable, subject to vesting, over ten years at option prices not less than 100% of the fair market value of the Company's common stock determined on the date of grant of the options. Unearned compensation in connection with restricted stock issued for future services is recorded on the date of grant at the fair market value of SBO's common stock and is being amortized ratably from the date of grant over the five-year vesting period as it is earned. Compensation expense of $1,641,000, $2,166,000, and $1,964,000 was recognized for the years ended December 31, 1996, 1995, and 1994, respectively. Unearned compensation has been shown as a reduction of shareholders' equity in the accompanying Consolidated Balance Sheets. The Company has four fixed option plans. Under the 1989 Long Term Incentive Plan, the Company may grant options and restricted shares to its employees for up to 600,000 shares of stock. Under the Directors Plan, the Company may grant options to the directors for up to 120,000 shares of stock. Under the 1994 Long Term Incentive Plan, the Company may grant options and restricted shares to its employees for up to 2,000,000 shares of stock. Under the 1992 Employee Plan, The Company may grant options and restricted shares to its employees for up to 1,000,000 shares of stock. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield of .47%, expected volatility of 45%, risk free interest rate of 6.15%, and expected life of 5 years for the options. - 94 - 10. STOCK PLANS (CONTINUED) A summary of the status of the Company's fixed stock option plans as of December 31, 1996, 1995 and 1994, and changes during the years then ended is presented below:
1996 1995 1994 --------- --------- --------- Shares Shares Shares (In Thousands) --------- ----------- --------- Outstanding at beginning of year 1,646 1,916 812 Granted 306 240 1,228 Exercised (355) (345) (37) Forfeited (153) (165) (87) --------- ----------- --------- Outstanding at end of year 1,444 1,646 1,916 ========== ============ ========== Options exercisable at year-end 630 670 750 Weighted average fair value of options granted during the year $11.49 $6.71 $9.30
1996 1995 1994 ---------- ---------- ---------- Weighted Weighted Weighted Avg. Avg. Avg. exercise exercise exercise price price price ---------- ---------- ---------- Outstanding at beginning of year $17 $17 $12 Granted 25 15 20 Exercised 16 13 14 Forfeited 20 19 14 Outstanding at end of year $19 $17 $17
- 95 - 10. STOCK PLANS (CONTINUED) The following table summarizes information about fixed stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ------------ ------------ ------------- ----------- ------------- ----------- Range of Number Weighted Weighted Number Weighted Exercise Outstanding Average Average Exercisable Average Price at 12/31/96 Remaining Exercise at Exercise Contractual Price 12/31/96 Price Life ------------ ------------ ------------- ----------- ------------- ----------- $7 to 8 143,000 3.1 years $8 143,000 $8 $15 to 19 280,000 7.8 15 208,000 15 $20 to 29 1,021,000 8.5 21 279,000 21 ---------- ----------- $7 to 29 1,444,000 7.8 $19 630,000 $16 =========== ===========
The Company applies APB Opinion No. 25 and related Interpretations in accounting for its fixed stock option plans. Accordingly, no compensation cost has been recognized for its fixed stock options plans. Had compensation cost for the Company's stock-based compensation plans been determined consistent with FASB Statements No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1996 1995 ----------- ---------- (Thousands except for per share data) Net income as reported $6,003 $13,175 Pro forma $5,468 $12,988 Fully diluted earnings per share: As reported $ 0.37 $ 0.84 Pro forma $ 0.33 $ 0.83
Pro forma net income reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of five years and compensation cost for options granted prior to January 1, 1995 is not considered. Also, the impact discussed above may not be indicative of the impact of future years. - 96 - 10. STOCK PLANS (CONTINUED) In 1996, the Company adopted a Stock Appreciation Rights Plan (the "Rights Plan"), subject to shareholder approval at the annual meeting to be held in May 1997. The Rights Plan provides for the granting of stock appreciation rights ("Rights") to certain key employees of the Company. Holders of Rights will be entitled to receive from the Company cash in the amount equal to the excess, if any, of the market price of the common stock on the date of change in control of the Company (as defined in the Rights Plan) over the exercise price of the Rights. 11. SHAREHOLDERS' EQUITY On May 6, 1994, in connection with the Company's investment in SHCH, the Company issued warrants to purchase 150,000 shares of Showboat, Inc. common stock with an exercise price of $15.50 per share. The warrants were exercisable on issuance. All 150,000 warrants were exercised during 1996 in a cashless exercise. The value of the warrants of $1,953,000 has been reported as part of the investment in SHCH and will be amortized over the life of the principal assets. On October 5, 1995, the Board of Directors of the Company declared a dividend distribution of one Preferred Stock Purchase Right ("Right") for each outstanding share of common stock of the Company. The distribution was payable as of October 16, 1995 to stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-hundredth (1/100th) of a share of preferred stock of the Company, designated as a Series A Junior Preferred Stock at a price of $120.00 per one one-hundredth (1/100th) of a share. The Rights expire on October 5, 2005, unless earlier redeemed. The Company may redeem the rights in whole, but not in part, at a price of $.01 per Right. The Rights, unless earlier redeemed by the Company, will become exercisable following a public announcement that a person or group has acquired 15% or more of the common stock or has commenced (or announced an intention to make) a tender or exchange offer for 30% or more of the common stock. 200,000 shares of preferred stock have been reserved for issuance upon exercise of the Rights. The Company did not believe the Rights had a material value upon declaration of the dividend. 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 or 100 times the cash dividends declared on the Company's common stock. 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. - 97 - 12. SELECTED QUARTERLY DATA (UNAUDITED) Summarized unaudited financial data for interim periods for the years ended December 31, 1996 and 1995 are as follows:
Quarter Ended (a) Year ---------------------------------------------------------- Ended 3/31/96 6/30/96 9/30/96 12/31/96 12/31/96 ------------- ------------- ------------------------------ ------------ (In thousands except per share data) Net revenues $102,590 $109,225 $122,242 $99,648 $433,705 Income from operations 8,439 10,082 16,593 7,007 42,121 Net income (loss)(b) (801) 1,136 4,901 767 6,003 Net income (loss) per share (0.05) 0.07 0.30 0.05 0.37
Quarter Ended (a) Year ---------------------------------------------------------- Ended 3/31/95 6/30/95 9/30/95 12/31/95 12/31/95 ------------- ------------- ------------------------------ ------------ (In thousands except per share data) Net revenues $98,679 $111,864 $119,569 $98,480 428,592 Income from operations 7,424 14,274 18,994 5,982 46,674 Net income (loss) (c) (d) 1,783 4,959 7,826 (1,393) 13,175 Net income per share 0.12 0.32 0.50 (0.10) 0.84
(a) Quarterly results may not be comparable due to the seasonal nature of operations. (b) In March 1996 the Company recognized an after tax loss of $2.0 million or $.12 per share for the write down of the Company's investment in SMG. (c) In March 1995, SSP sold certain of its assets and the Company sold its equity interest in SSP resulting in a net pretax gain of $2.6 million. (d) In the quarter ended December 31, 1995, the Company recognized a $1.4 million pretax write-down related to its investment in SMG. - 98 - 13. SUPPLEMENTAL FINANCIAL INFORMATION A summary of additions and deductions to the allowance for doubtful accounts receivable for the years ended December 31, 1996, 1995, and 1994 follows:
Balance at Balance beginning at end of Year Ended of year Additions Deductions Year --------------- ---------- ---------- ---------- ---------- December 31, 1996 $2,681 $1,557 $1,821 $2,417 --------------- December 31, 1995 $2,400 $1,605 $1,324 $2,681 --------------- December 31, 1994 $2,946 $950 $1,496 $2,400 ---------------
14. COMMITMENTS AND CONTINGENCIES On March 28, 1996, the Company's 55% owned subsidiaries, SMCP and SMFC, sold the East Chicago Notes to support the development of the East Chicago Showboat. Additionally, the Company contributed $36.9 million to SMCP through intermediary partnerships, of which $8.9 million was contributed prior to 1996. The Company anticipates funding an additional $3.1 million in 1997 related to certain payments due to Waterfront Entertainment and Development, Inc. ("Waterfront"), its 45% partner. The Company will receive a 12% preferred return on its $40.0 million investment. In addition to its $40.0 million investment, subject to certain qualifications and exceptions, the Company entered into a standby equity commitment with SMCP, pursuant to which it will cause to be made up to an aggregate of $30.0 million in additional capital contributions to SMCP if, during any of the first three full four quarter periods following the commencement of operations at the East Chicago Showboat, the project's combined cash flow (as defined) is less than $35.0 million for any such full four quarter period. However, in no event will the Company be required to cause to be contributed to SMCP more than $15.0 million in respect of any one such full four quarter period. Waterfront agreed to compensate the Company $5.2 million for the standby equity commitment. The $5.2 million due the Company shall accrue interest at 12% per annum until paid from Waterfront's share of distributable cash flow from SMCP. Subject to certain qualifications and exceptions, the Company entered into a completion guarantee with SMCP to complete the East Chicago Showboat 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. - 99 - 14. COMMITMENTS AND CONTINGENCIES (CONTINUED) Currently, the Company believes that SMCP has sufficient resources to complete the East Chicago Showboat. However, no assurance can be given that SMCP will be able to complete the East Chicago Showboat from its available financing resources or that SMCP's annual cash flow will exceed $35.0 million. SMCP has entered into numerous agreements and financial commitments for the construction of the East Chicago Showboat that must be completed whether or not an owner's license is issued to SMCP. In the event an owner's license is not issued, the potential failure to realize the costs already expended could have an adverse impact on the financial condition of the Company. The East Chicago First Mortgage Note Indenture contains restrictions on payments to affiliates, including the Company, by SMCP. As a result of these restrictions, the distributable cash flow from SMCP is limited to good faith estimates of maximum payments for state and federal income tax liabilities of the Company and Waterfront, until certain financial ratios are met by SMCP. There can be no assurance that SMCP will meet their required financial ratios in order to distribute cash flow to the Company in excess of the federal and state tax liabilities. 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"). 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. The Company has guaranteed SLP's payment of Minimum Rent for the Guarantee Period (15 years), and SLP's timely completion and construction of and payment for all improvements and installations in connection with SLP's development of the Southboat Casino Project. The aggregate gross minimum lease payments for 15 years are approximately $35.0 million. 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. 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. The investigation of SLP for a Missouri Gaming License has not yet commenced. - 100 - 14. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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, bearing interest at 8.3%, which loan is secured by a second mortgage on Rockingham Park. At this time, casino gaming is not permitted in the State of New Hampshire. If casino gaming is legalized, the Company will, at a minimum, contribute the promissory note as a capital contribution to a joint venture. Should enabling legislation permit 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. On February 4, 1997, the Company announced that it had entered into a Tribal Management Agreement, and other related agreements, with the Lummi Indian Nation for the purpose of developing a Class III casino to be located between Bellingham, Washington and Vancouver, British Columbia. The Company will be required to be licensed by the state of Washington. The agreements are subject to the necessary approvals of various state and federal authorities including the National Indian Gaming Commission. The Company's Board of Directors has approved an expenditure of up to $25.0 million to fund this project. The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial statements taken as a whole. 15. SUBSEQUENT EVENT The Company, on January 12, 1997, announced that SBO and Publishing & Broadcasting Limited ("PBL"), a public company listed on the Australian Stock Exchange, have reached an agreement in principle with respect to the acquisition by PBL of a significant portion of the Company's interests in its casino operations in Sydney, Australia. The transaction contemplates that PBL will acquire from the Company approximately 55 million ordinary shares of SHCH (approximately 10% of the issued voting shares of SHCH) at a price per share of A$1.85 subject to adjustments in certain circumstances. It also contemplates that PBL grant a put to SBO to sell to PBL an additional 54 million ordinary shares at A$1.85 per share until March 31, 1999. - 101 - 15. SUBSEQUENT EVENT (CONTINUED) The transaction further contemplates that PBL will succeed to the management of the Sydney Harbour Casino under arrangements to be concluded for which PBL will pay A$204 million to the Company. The transaction is subject to the execution of definitive agreements, the receipt of all necessary government and regulatory consents and approvals, certain third party consents and the fulfillment of other closing conditions. The New South Wales Casino Control Authority ("CCA") has received a copy of the agreement in principal, but will require extensive additional submissions in order for the CCA to consider the consents and approvals which will be required before any final agreement becomes effective. SHCH and other relevant companies are not parties to the agreement in principle, nor did they participate in its negotiations. Their consent or agreement will be required. A subsidiary of the Company will continue to own approximately 80 million ordinary shares of SHCH (original ownership of 135 million shares less 55 million shares contemplated to be sold to PBL) and an existing option to purchase approximately 37.4 million ordinary shares of SHCH at an exercise price of A$1.15 per share. This option may be exercised between July 1, 1998 and June 30, 2000. Both the 9 1/4% Bonds and the 13% Note Indenture place significant restrictions on the Company, one of which is the use of funds from the sale of a significant portion of the assets of a subsidiary such as SHCH. - 102 - ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. This information is incorporated by reference from the Company's Proxy Statement to be filed with the Commission in connection with the Company's Annual Meeting of Shareholders on May 29, 1997. ITEM 11. EXECUTIVE COMPENSATION. This information is incorporated by reference from the Company's Proxy Statement to be filed with the Commission in connection with the Company's Annual Meeting of Shareholders on May 29, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. This information is incorporated by reference from the Company's Proxy Statement to be filed with the Commission in connection with the Company's Annual Meeting of Shareholders on May 29, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. This information is incorporated by reference from the Company's Proxy Statement to be filed with the Commission in connection with the Company's Annual Meeting of Shareholders on May 29, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(l) The following consolidated financial statements of the Company and its subsidiaries have been filed as a part of this report (See "Item 8: Financial Statements and Supplementary Data"): Independent Auditors' Report; Consolidated Balance Sheets as of December 31, 1996 and 1995; Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994; - 103 - Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994; Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994; and Notes to Consolidated Financial Statements (a)(2) All schedules are omitted because they are not required, inapplicable, or the information is otherwise shown in the financial statements or notes thereto. (a)(3) Exhibits
EXHIBIT NO. DESCRIPTION 3.01 Restated Articles of Incorporation of Showboat, Inc. dated June 10, 1994, is incorporated herein by reference to Showboat, Inc.'s Amendment No. 1 to Registration Statement on Form S-3 (file no. 33-54325) dated July 8, 1994, Item 16, Exhibit 4.02. 3.02 Restated Bylaws of Showboat, Inc. dated October 24, 1995, is incorporated herein by reference to Showboat, Inc.'s Form 10-Q (file no. 1-7123) for the nine month period ended September 30, 1995, Part II, Item 6(a), Exhibit 3.01. 4.01 Specimen Common Stock Certificate for the Common Stock of Showboat, Inc. is incorporated herein by reference to Showboat, Inc.'s Amendment No. 1 to Registration Statement on Form S-3 (file no. 33-54325) dated July 8, 1994, Item 16, Exhibit 4.01. 4.02 Rights Agreement dated October 5, 1995, between Showboat, Inc. and American Stock Transfer and Trust Company; Form of Right Certificate; and Certificate of Designation of Rights and Preferences of Series A Junior Preferred Stock of Showboat, Inc., are incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated October 5, 1995, Item 7(c), Exhibit 4.01. 4.03 Indenture dated May 18, 1993, for the 9 1/4% First Mortgage Bonds due 2008 among Showboat, Inc., Ocean Showboat, Inc., Atlantic City Showboat, Inc., Showboat Operating Company, and IBJ Schroder Bank & Trust Company; Guaranty by Ocean Showboat, Inc., Atlantic City Showboat, Inc. and Showboat Operating Company in favor of IBJ Schroder Bank & Trust Company; and Form of Bond Certificate for the 9 1/4% First Mortgage Bonds due 2008, are incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated May 18, 1993, Item 7(c), Exhibit 28.01. First Supplemental Indenture dated July 18, 1994, for the 9 1/4% First Mortgage Bonds due 2008 among Showboat, Inc., Ocean Showboat, Inc., Atlantic City Showboat, Inc., Showboat Operating Company and IBJ Copies of exhibits to this Form 10-K will be furnished to any requesting security holder who furnishes the Company a list identifying the exhibits to be copied by the Company at a charge of $.25 per page.
- 104 -
EXHIBIT NO. DESCRIPTION Schroder Bank & Trust Company is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1- 7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 4.02. 4.04 Indenture dated August 10, 1994, for the 13% Senior Subordinated Notes due 2009 among Showboat, Inc., Ocean Showboat, Inc., Atlantic City Showboat, Inc., Showboat Operating Company, and Marine Midland Bank; Guaranty by Ocean Showboat, Inc., Atlantic City Showboat, Inc. and Showboat Operating Company in favor of Marine Midland Bank; and Form of Note Certificate for the 13% Senior Subordinated Notes due 2009, are incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1- 7123) dated August 10, 1994, Item 7(c), Exhibit 4.01. 4.05 Indenture dated as of March 28, 1996, among Showboat Marina Casino Partnership, Showboat Marina Finance Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, Nomura Securities International, Inc., Bear, Stearns & Co., Inc. and American Bank National Association, as trustee, relating to the 13 1/2 Series A and Series B First Mortgage Notes due 2003, is incorporated herein by reference to Showboat, Inc.'s Form 10-Q (file no 1-7123) for the six month period ended June 30, 1996, Part II, Item 6(a), Exhibit 4.01. 10.01 Parent Services Agreement dated November 21, 1985, between Showboat, Inc. and Atlantic City Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated November 25, 1985, Item 7(c), Exhibit 10.01. Amendment No. 1 to Parent Services Agreement dated February 1, 1987, between Showboat, Inc. and Atlantic City Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended June 30, 1987, Part IV, Item 14(a)(3), Exhibit 10.17. Amendment No. 2 to Parent Services Agreement dated December 31, 1990, between Showboat, Inc. and Atlantic City Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1- 7123) dated December 31, 1990, Item 7(c), Exhibit 28.01. Amendment No. 3 to Parent Services Agreement dated May 8, 1991, between Showboat, Inc. and Atlantic City Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1- 7123) for the year ended December 31, 1991, Part IV, Item 14(a)(3), Exhibit 10.14. Amendment No. 4 to Parent Services Agreement dated August 17, 1993, between Showboat, Inc. and Atlantic City Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1993, Part IV, Item 14(a)(3), Exhibit 10.11. 10.02 Tax Allocation Agreement effective May 10, 1993, among Showboat, Inc. and each of its subsidiaries, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended June 30, 1987, Part IV, Item 14(a)(3), Exhibit 10.11. First Amendment to Tax Allocation Agreement effective May 10, 1993, among Showboat, Inc. and each of its subsidiaries, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1993, Part IV, Item 14(a)(3), - 105 - EXHIBIT NO. DESCRIPTION Exhibit 10.07. 10.03 Management Services Agreement dated January 1, 1989, between Showboat, Inc. and Showboat Operating Company, is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated January 1, 1989, Item 7(c), Exhibit 28.03. 10.04 Showboat, Inc. 1989 Long Term Incentive Plan, as amended and restated on February 25, 1993, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1992, Part IV, Item 14(a)(3), Exhibit 10.23. 10.05 Showboat, Inc. 1989 Directors' Stock Option Plan, as amended and restated February 25, 1993, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1992, Part IV, Item 14(a)(3), Exhibit 10.27. 10.06 Showboat, Inc. 1994 Executive Long Term Incentive Plan effective May 25, 1994, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1- 7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 10.36. 10.07 Showboat, Inc. Supplemental Executive Retirement Plan effective April 1, 1994, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1- 7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 10.37. 10.08 Showboat, Inc. Restoration Plan effective April 1, 1994, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 10.38. 10.09 Statement regarding Showboat, Inc.'s Incentive Bonus Plans, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1992, Part IV, Item 14(a)(3), Exhibit 10.12. 10.10 Atlantic City Showboat, Inc. Executive Medical Reimbursement Plan, effective August 15, 1991, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1991, Part IV, Item 14(a)(3), Exhibit 10.23. 10.11 Atlantic City Showboat, Inc. Executive Health Examinations Plan effective January 1, 1989, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1989, Part IV, Item 14(a)(3), Exhibit 10.24. 10.12 Form of Severance Agreement between Showboat, Inc. and certain executive officer and key employees of Showboat, Inc. and its subsidiaries, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 10.39. - 106 - EXHIBIT NO. DESCRIPTION 10.13 Form of Indemnification Agreement between Showboat, Inc. and each director and officer of Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1987, Part IV, Item 14(a)(3), Exhibit 10.13. 10.14 Lease dated January 1, 1989, between Showboat, Inc. and Showboat Operating Company, is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1- 7123) dated January 1, 1989, Item 7(c), Exhibit 28.01. 10.15 Lease dated January 14, 1994, between Showboat, Inc. and Exber, Inc.; and Sublease dated November 5, 1966, between Dodd Smith and John D. Gaughan and Leslie C. Schwartz, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1993, Part IV, Item 14(a)(3), Exhibit 10.39. 10.16 Lease of Retail Store No. 7 dated April 10, 1987, among Atlantic City Showboat, Inc., R. Craig Bird and Debra E. Bird; and Guaranty of Lease among Atlantic City Showboat, Inc., R. Craig Bird and Debra E. Bird, are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1988, Part IV, Item 14(a)(3), Exhibit 10.24. 10.17 Promissory Note dated August 5, 1993, in the principal amount of $20,400.69 among Showboat, Inc., R. Craig Bird and Debra E. Bird, is incorporated herein by reference to Showboat, Inc.'s Form 10-K for the year ended December 31, 1993, Part IV, Item 14(a)(3), Exhibit 10.15. 10.18 Ground Lease dated October 26, 1983, between Ocean Showboat, Inc. and Resorts International, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) as amended by a Form 8 filed with the Securities and Exchange Commission on November 28, 1983. Assignment and Assumption of Leases dated December 3, 1985, between Ocean Showboat, Inc. and Atlantic City Showboat, Inc.; First Amendment to Lease Agreement dated January 15, 1985, between Resorts International, Inc. and Atlantic City Showboat, Inc.; Second Amendment to Lease Agreement dated July 5, 1985, between Resorts International, Inc. and Atlantic City Showboat, Inc., are incorporated herein by reference to the Form 10-K (file no. 1-7123) for the year ended June 30, 1985, Part IV, Item 14(a)(3), Exhibit 10.02. Restated Third Amendment to Lease Agreement dated August 28, 1986, between Resorts International, Inc. and Atlantic City Showboat, Inc., is incorporated herein by reference to the Form 10-K (file no. 1-7123) for the year ended June 30, 1986, Part IV, Item 14(a)(3), Exhibit 10.08; Fourth Amendment to Lease Agreement dated December 16, 1986, between Resorts International, Inc. and Atlantic City Showboat, Inc.; Fifth Amendment to Lease Agreement dated March 2, 1987, between Resorts International, Inc. and Atlantic City Showboat, Inc.; Sixth Amendment to Lease Agreement dated March 13, 1987, between Resorts International, Inc. and Atlantic City Showboat, Inc.; Indemnity Agreement dated January 15, 1985, among Resorts - 107- EXHIBIT NO. DESCRIPTION International, Inc., Atlantic City Showboat Inc . and Ocean Showboat, Inc.; and Amended Indemnity Agreement dated December 3, 1985, among Resorts International, Inc., Atlantic City Showboat, Inc. and Ocean Showboat, Inc., are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1- 7123) for the year ended June 30, 1987, Part IV, Item 14(a)(3), Exhibit 10.02; Seventh Amendment to Lease Agreement dated October 18, 1988, between Resorts International, Inc. and Atlantic City Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated November 16, 1988, Item 7(c), Exhibit 28.01; Eighth Amendment to Lease Agreement between Atlantic City Showboat, Inc. and Resorts International, Inc. International, Inc. dated May 18, 1993, is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated May 18, 1993, Item 7(c), Exhibit 28.06. 10.19 Closing Escrow Agreement dated September 21, 1988, among Housing Authority and Urban Redevelopment Agency of the City of Atlantic City, Resorts International, Inc., Atlantic City Showboat, Inc., Trump Taj Mahal Associates Limited Partnership, and Clapp & Eisenberg, P.C.; Agreement as to Assumption of Obligations with respect to Properties dated September 21, 1988, among Atlantic City Showboat, Inc., Trump Taj Mahal Associates Limited Partnership and Trump Taj Mahal Realty Corp.; First Amendment of Agreement as to Assumption of Obligations with respect to Properties dated September 21, 1988, among Atlantic City Showboat, Inc., Trump Taj Mahal Associates Limited Partnership and Trump Taj Mahal Realty Corp.; Settlement Agreement dated October 18, 1988, among Atlantic City Showboat, Inc., Trump Taj Mahal Associates Limited Partnership, Trump Taj Mahal Realty Corp., Resorts International, Inc. and the Housing Authority and Urban Redevelopment Agency of the City of Atlantic City; Tri-Party Agreement dated October 18, 1988, among Resorts International, Inc., Atlantic City Showboat, Inc. and Trump Taj Mahal Associates Limited Partnership; Declaration of Easement and Right of Way Agreement dated October 18, 1988, between the Housing Authority and Urban Redevelopment Agency of the City of Atlantic City, and Atlantic City Showboat, Inc.; and Certificate of Trump Taj Mahal Associates Limited Partnership and Resorts International, Inc. dated November 16, 1988, are incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated November 16, 1988, Item 7(c), Exhibit 28.01. Revised Second Amendment to Agreement as to Assumption of Obligations with respect to Properties dated May 24, 1989, among Atlantic City Showboat, Inc., Trump Taj Mahal Associates Limited Partnership and Trump Taj Mahal Realty Corp., is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1989, Part IV, Item 14(a)(3), Exhibit 10.17. 10.20 Letter agreement dated September 23, 1992, between Trump Taj Mahal Associates and Atlantic City Showboat, Inc.; and letter agreement dated October 26, 1992 to Trump Taj Mahal Associates from Atlantic City Showboat, Inc., are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1992, Part IV, Item 14(a)(3), Exhibit 10.24. - 108 - EXHIBIT NO. DESCRIPTION 10.21 Lease dated December 22, 1994, between Housing Authority and Urban Redevelopment Agency of the City of Atlantic City and Atlantic City Showboat, Inc.; Tri-Party Agreement dated May 26, 1994, among Housing Authority and Urban Redevelopment Agency of the City of Atlantic City, Forest City Ratner Companies and Atlantic City Showboat, Inc.; Terms and Conditions Part II of Contract for Sale of Land for Private Redevelopment between Housing Authority and Urban Redevelopment Agency of the City of Atlantic City and Atlantic City Showboat, Inc.; and Rider to Contract for Sale of Land for Private Redevelopment between Housing Authority and Urban Redevelopment Agency of the City of Atlantic City and Atlantic City Showboat, Inc., are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 10.46. 10.22 Agreement Amending and Restating the Tri-Party Agreement Dated as of May 26, 1994, among the Housing Authority and Urban Redevelopment Agency of the City of Atlantic City, Forest City Ratner Companies and Atlantic City Showboat, Inc. regarding Development of a Portion of the Uptown Urban Renewal Tract dated December 14, 1995; Release and Subordination Agreement dated December 14, 1995, between IBJ Schroder Bank & Trust Company and Atlantic City Showboat, Inc.; First Amendment to Leasehold in Pari Passu Mortgage, Assignment of Rents and Security Agreement and Collateral Assignment of Easement Rights-Mortgage Spreader Agreement dated December 15, 1995, between Atlantic City Showboat, Inc. and NatWest Bank, N.A.; Third Amendment to Leasehold Mortgage, Assignment of Rents and Security Agreement Dated as of May 19, 1993 - Mortgage Spreader Agreement dated December 14, 1995, between Atlantic City Showboat, Inc. and IBJ Schroder Bank & Trust Company; Fourth Amendment to Leasehold Mortgage, Assignment of Rents and Security Agreement Dated as of May 18, 1993 - Release of Part of Mortgaged Property and Subordination Agreement dated December 14, 1995, between IBJ Schroder Bank & Trust Company and Atlantic City Showboat, Inc., are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1- 7123) for the year ended December 31, 1995, Part IV, Item 14(a)(3), Exhibit 10.24. 10.23 Securities Purchase Contract dated March 29, 1988, between the Casino Reinvestment Development Authority and Atlantic City Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1988, Part IV, Item 14(a)(3), Exhibit 10.23. 10.24 Deed of Trust, Assignment of Rents, and Security Agreement dated May 18, 1993, by Showboat, Inc. to Nevada Title Company in favor of IBJ Schroder Bank & Trust Company; Showboat, Inc. Security and Pledge Agreement dated May 18, 1993, between Showboat, Inc. and the IBJ Schroder Bank & Trust Company; Trademark Security Agreement dated May 18, 1993, by Showboat, Inc. in favor of IBJ Schroder Bank & Trust Company; Unsecured Indemnity Agreement dated May 18, 1993, by Showboat, Inc. in favor of IBJ Schroder Bank & Trust Company; and Showboat Operating Company Security Agreement dated May 18, 1993, between Showboat Operating Company and IBJ - 109 - EXHIBIT NO. DESCRIPTION Schroder Bank & Trust Company, are incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated May 18, 1993, Item 5, Exhibit 28. 02. Leasehold Mortgage, Assignment of Rents, and Security Agreement dated May 18, 1993, by Atlantic City Showboat, Inc. in favor of IBJ Schroder Bank & Trust Company; Assignment of Leases and Rents dated May 18, 1993, between Atlantic City Showboat, Inc. and IBJ Schroder Bank & Trust Company; and Ocean Showboat, Inc. Security and Pledge Agreement dated May 18, 1993, between Ocean Showboat, Inc. and IBJ Schroder Bank & Trust Company, are incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated May 18, 1993, Item 7(c), Exhibit 28.03. Intercompany Note dated May 18, 1993, in the principal amount of $215.0 million; Assignment of Lease and Rents dated May 18, 1993, between Atlantic City Showboat, Inc. and Showboat, Inc.; and Issuer Collateral Assignment dated May 18, 1993, by Atlantic City Showboat, Inc. in favor of IBJ Schroder Bank & Trust Company, are incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated May 18, 1993, Item 7(c), Exhibit 28.04. Showboat Development Company Security and Pledge Agreement dated July 18, 1994, between Showboat Development Company and IBJ Schroder Bank & Trust Company; and Showboat Louisiana, Inc. Security and Pledge Agreement dated July 18, 1994, between Showboat Louisiana, Inc. and IBJ Schroder Bank & Trust Company, are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 4.02. 10.25 First Amendment to the Leasehold Mortgage, Assignment of Rents and Security Agreement dated July 9, 1993, between Atlantic City Showboat, Inc. and Showboat, Inc., is incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated July 7, 1993, Item 7(c), Exhibit 28.01. First Amendment to the Leasehold Mortgage, Assignment of Rents and Security Agreement dated July 9, 1993, between Atlantic City Showboat, Inc. and IBJ Schroder Bank & Trust Company, is incorporated by reference to Showboat, Inc.'s Form 8- K (file no. 1-7123) dated July 7, 1993, Item 7(c), Exhibit 28.02. Assignment of Rights under Agreement dated July 9, 1993, by Atlantic City Showboat, Inc. in favor of IBJ Schroder Bank & Trust Company, is incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated July 7, 1993, Item 7(c), Exhibit 28.03. Form of Deed for Sale of Land for Private Redevelopment for Tract 1 and Tract 2 each dated July 7, 1993, is incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated July 7, 1993, Item 7(c), Exhibit 28.04. Use and Occupancy Agreement dated July 7, 1993, between Atlantic City Housing Authority and Urban Redevelopment Agency and Atlantic City Showboat, Inc., is incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated July 7, 1993, Item 7(c), Exhibit 28.05. 10.26 Agreement for Sale of Partnership interests dated March 31, 1995, among Lake Pontchartrain Showboat, Inc., Showboat Louisiana, Inc., Showboat, Inc., Player Riverboat, LLC, Players Riverboat Management, Inc. and Players International, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1- 7123) dated March 31, 1995, Item 7(c), Exhibit 28.01. - 110 - EXHIBIT NO. DESCRIPTION 10.27 Casino Operations Agreement (excluding exhibits) dated April 22, 1994, among Leighton Properties Pty Limited, New South Wales Casino Control Authority, Showboat Australia Pty Limited, Showboat Operating Company, Sydney Casino Management Pty Limited, Sydney Harbour Casino Holdings Limited, Sydney Harbour Casino Pty Limited and Sydney Harbour Casino Properties Pty Limited; First Amending Deed dated October 6, 1994; Second Amending Deed (undated); Third Amending Deed dated December 13, 1994; Casino Complex Management Agreement dated April 21, 1994, among Sydney Harbour Casino Properties Pty Limited, Showboat Australia Pty Limited and Sydney Casino Management Pty Limited; and Development Agreement dated April 21, 1994, between Leighton Properties Pty Limited and Sydney Harbour Casino Properties Pty Limited, are incorporated herein by reference to Showboat, Inc.'s 10-K (file no. 1-7123) for the year ended December 31, 1995, Part IV, Item 14(a)(3), Exhibit 10.32. Amending Deed to Casino Complex Management Agreement among Showboat Australia Pty Limited, National Mutual Trustees Limited, Sydney Casino Management Pty Limited, Sydney Harbour Casino Properties Pty Limited and Sydney Harbour Casino Pty Limited - undated. 10.28 Agreement dated September 13, 1993, among Showboat, Inc., Showboat Indiana, Inc., Showboat Operating Company, Showboat Development Company, Showboat Indiana Investment Limited Partnership and Waterfront Entertainment and Development, Inc.; and Showboat Marina Partnership Agreement dated January 31, 1994, between Waterfront Entertainment and Development, Inc. and Showboat Investment Limited Partnership, are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1993, Part IV, Item 14(a)(3), Exhibit 10.38. Amended and Restated Showboat Marina Partnership Agreement dated March 1, 1996, between Waterfront Entertainment and Development, Inc. and Showboat Indiana Investment Limited Partnership; Agreement of Partnership of Showboat Marina Investment Partnership dated March 1, 1996, between Showboat Indiana Investement Limited Partnership and Waterfront Entertainment and Development, Inc.; Agreement of Partnership of Showboat Marina Casino Partnership dated March 1, 1996, between Showboat Marina Partnership and Showboat Marina Investment Partnership; Letter agreement regarding economic development dated April 8, 1994, by Showboat Marina Partnership in favor of the City of East Chicago; Letter agreement regarding economic development dated April 18, 1995, by Showboat Marina Partnership in favor of the City of East Chicago; and Redevelopment Project Lease dated October 19, 1995, between Showboat Marina Partnership and the City of East Chicago, are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1995, Part IV, Item 14(a)(3), Exhibit 10.33. Second Amended and Restated Showboat Marina Partnership Agreement dated June 30, 1996, between Waterfront Entertainment and Development, Inc. and Showboat Indiana Investment Limited Partnership; and Promissory Note dated January 1, 1997, in principal amount of $41,887,158 by Showboat Indiana Investment Limited Partnership in favor of Showboat, Inc. - 111 - EXHIBIT NO. DESCRIPTION 10.29 Agreement of Limited Partnership of Soutboat Limited Partnership effective May 1, 1995, between Showboat Lemay, Inc. and Futuresouth, Inc.; Management Agreement dated May 2, 1995, between Southboat Partnership (a predecessor of Southboat Limited Partnership) and Showboat Operating Company; Trademark Licese Agreement dated May 2, 1995, between Southboat Partnership and Showboat, Inc.; Lease and Development Agreement dated October 13, 1995, between the St. Louis Port Authority and Southboat Limited Partnership; Escrow Agreement dated October 13, 1995, between the St. Louis Port Authority, Southboat Limited Partnership, Showboat, Inc. and Boatmen's Trust Company; Guarantee of Minimum Rent dated October 13, 1995, by Showboat, Inc.; Guarantee of Completion dated October 13, 1995, by Showboat, Inc., are incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated October 1, 1995, Item 7(c), Exhibits 10.01 through 10.06, inclusive. First Amendment to Lease and Development Agreement by and between St. Louis County Port Authority and Southboat Limited Partnership dated May 1996; Second Amendment to lease and Development Agreement by and between St. Louis County Port Authority and Southboat Limited Partnership dated December 12, 1996. 10.30 Non-Negotiable Mortgage Promissory Note dated December 28, 1994, in the principal amount of $8,850,000, by Rockingham Venture, Inc. in favor of Showboat, Inc.; Mortgage and Security Agreement dated December 28, 1994, between Rockingham Venture, Inc. and Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 10.42. Limited Liability Company Agreement of Showboat Rockingham Company, L.L.C. dated July 27, 1995, among Rockingham Venture, Inc., Showboat New Hampshire, Inc. and Showboat Rockingham Company, L.L.C.; Management Agreement dated July 27, 1995, amon g Showboat Rockingham Company L.L.C., Showboat Operating Company and Rockingham Venture, Inc.; Administrative Services Agreement dated July 27, between Showboat Operating Company and Showboat Rockingham Company, L.L.C.; and Trademark License Agreement dated July 27, 1995, between Showboat, Inc. and Showboat Rockingham Company, L.L.C., are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1995, Part IV, Item 14(a)(3), Exhibit 10.35. 10.31 Promissory Note dated March 19, 1996, in the principal amount of $15,000,000 by Atlantic City Showboat, Inc. in favor of Showboat, Inc. 10.32 Loan and Guaranty Agreement dated July 14, 1995, among NatWest Bank, N.A., Showboat, Inc. and Atlantic City Showboat, Inc., Ocean Showboat, Inc. and Showboat Operating Company; Revolving Note dated July 14, 1995, in the principal amount of $25.0 million by Showboat, Inc. in favor of NatWest Bank, N.A.; Deed of Trust, Assignment of Rents and Security Agreement dated July 14, 1995, by Showboat, Inc. in favor of Nevada Title Company for the benefit of NatWest Bank, N.A.; Leasehold in Pari Passu Mortgage, Assignment of Rents and Security Agreement dated July 14, 1995, between NatWest Bank - 112 - EXHIBIT NO. DESCRIPTION and Atlantic City Showboat, Inc.; Assignment of Leases and Rents dated July 14, 1995, between NatWest Bank and Atlantic City Showboat, Inc.; Intercreditor Agreement for Pari Passu Indebtedness Relating to Atlantic City Showboat dated July 14, 1995, among Showboat, Inc., Atlantic City Showboat, Inc., IBJ Schroder Bank & Trust Company and NatWest Bank, N.A.; and Intercreditor Agreement for Pari Passu Indebtedness Relating to Las Vegas Showboat dated July 14, 1995, among Showboat, Inc., IBJ Schroder Bank & Trust Company and NatWest Bank, N.A., are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1995, Part IV, Item 14(a)(3), Exhibit 10.38. 10.33 Promissory Note dated January 1, 1996, in the principal amount of $34,011,720 by Showboat Fifteen, Inc. in favor of Showboat, Inc. 10.34 Completion Guaranty dated March 28, 1996, by and between Showboat, Inc. and American Bank National Association, as trustee, is incorporated herein by reference to Showboat, Inc.'s Form 10-Q (file no. 1-7123) for the three month period ended March 31, 1996, Part II, Item 6(a), Exhibit 10.01. 10.35 Standby Equity Commitment dated March 28, 1996, by and among Showboat Marina Casino Partnership, Showboat Marina Finance Corporation and Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 10-Q (file no. 1-7123) for the three month period ended March 3, 1996, Part II, Item 6(a), Exhibit 10.02. 10.36 Escrow and Disbursement Agreement dated March 28, 1996, by and among Showboat Marina Casino Partnership, Showboat Marina Finance Corporation and Showboat, Inc. (as escrow agent and disbursement agent) and American Bank National Association, as trustee, is incorporated herein by reference to Showboat, Inc.'s Form 10-Q (file no. 1-7123) for the six month period ended June 30, 1996, Part II, Item 6(a), Exhibit 10.01. 10.37 Showboat, Inc. 1996 Stock Appreciation Rights Plan, effective date September 3, 1996, is incorporated herein by reference to Showboat, Inc.'s Form 10-Q (file no. 1- 7123) for the nine month period ended September 30, 1996, Part II, Item 6(a), Exhibit 10.01. 10.38 Promissory Note dated January 1, 1997, in the principal amount of $8,197,293 by Showboat Operating Company in favor of Showboat, Inc.; Promissory Note dated January 1, 1997, in the principal amount of $12,344,192 by Showboat Operating Company in favor of Showboat, Inc.; and Promissory Note dated January 1, 1997, in the principal amount of $9,641,821 by Showboat Operating Company in favor of Showboat, Inc. - 113 - 10.39 Promissory Note dated January 1, 1997, in the principal amount of $53,109,002 by Showboat Development Company in favor of Showboat, Inc.; and Promissory Note dated January 1, 1997, in the principal amount of $6,292,083 by Showboat Development Company in favor of Showboat, Inc. 21.01 List of Subsidiaries. 23.01 Consent of KPMG Peat Marwick LLP. 27.01 Financial Data Schedule.
(b) REPORTS ON FORM 8-K. None. - 114 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by this undersigned, thereunto duly authorized. REGISTRANT: SHOWBOAT, INC. By: /s/ J. Kell Houssels, III J. Kell Houssels, III, President and Chief Executive Officer (principal executive officer) DATE: March 27, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 27, 1997 By: /s/ J. K. Houssels J.K. Houssels, Chairman of the Board March 27, 1997 By: /s/ J. Kell Houssels, III J. Kell Houssels, III, President, Chief Executive Officer and Director March 27, 1997 By: /s/ R. Craig Bird R. Craig Bird, Executive Vice President- Finance Administration and Chief Financial Officer (principal accounting officer) March 27, 1997 By: /s/ William C. Richardson William C. Richardson, Director - 115 - March 27, 1997 By: /s/ John D. Gaughan John D. Gaughan, Director March 27, 1997 By: /s/ Jeanne S. Stewart Jeanne S. Stewart, Director March 27, 1997 By: /s/ Frank A. Modica Frank A. Modica, Director March 27, 1997 By: /s/ H. Gregory Nasky H. Gregory Nasky, Executive Vice President, Secretary and Director March 27, 1997 By: /s/ George A. Zettler George A. Zettler, Director March 27, 1997 By: /s/ Carolyn M. Sparks Carolyn M. Sparks, Director - 116 -
EXHIBIT INDEX EXHIBIT PAGE NO. DESCRIPTION NO. 3.01 Restated Articles of Incorporation of Showboat, Inc. dated June 10, 1994, is incorporated herein by reference to Showboat, Inc.'s Amendment No. 1 to Registration Statement on Form S-3 (file no. 33-54325) dated July 8, 1994, Item 16, Exhibit 4.02. 3.02 Restated Bylaws of Showboat, Inc. dated October 24, 1995, is incorporated herein by reference to Showboat, Inc.'s Form 10-Q (file no. 1-7123) for the nine month period ended September 30, 1995, Part II, Item 6(a), Exhibit 3.01. 4.01 Specimen Common Stock Certificate for the Common Stock of Showboat, Inc. is incorporated herein by reference to Showboat, Inc.'s Amendment No. 1 to Registration Statement on Form S-3 (file no. 33-54325) dated July 8, 1994, Item 16, Exhibit 4.01. 4.02 Rights Agreement dated October 5, 1995, between Showboat, Inc. and American Stock Transfer and Trust Company; Form of Right Certificate; and Certificate of Designation of Rights and Preferences of Series A Junior Preferred Stock of Showboat, Inc., are incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated October 5, 1995, Item 7(c), Exhibit 4.01. 4.03 Indenture dated May 18, 1993, for the 9 1/4% First Mortgage Bonds due 2008 among Showboat, Inc., Ocean Showboat, Inc., Atlantic City Showboat, Inc., Showboat Operating Company, and IBJ Schroder Bank & Trust Company; Guaranty by Ocean Showboat, Inc., Atlantic City Showboat, Inc. and Showboat Operating Company in favor ofIBJ Schroder Bank & Trust Company; and Form of Bond Certificate for the 9 1/4% First Mortgage Bonds due 2008, are incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated May 18, 1993, Item 7(c), Exhibit 28.01. First Supplemental Indenture dated July 18, 1994, for the 9 1/4% First Mortgage Bonds due 2008 among Showboat, Inc., Ocean Showboat, Inc., Atlantic City Showboat, Inc., Showboat Operating Company and IBJ Schroder Bank & Trust Company is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 4.02. 4.04 Indenture dated August 10, 1994, for the 13% Senior Subordinated Notes due 2009 among Showboat, Inc., Ocean Showboat, Inc., Atlantic City Showboat, Inc., Showboat Operating Company, and Marine Midland Bank; Guaranty by Ocean Showboat, Inc., Atlantic City Showboat, Inc. and Showboat Operating - 117 - EXHIBIT PAGE NO. DESCRIPTION NO. Company in favor of Marine Midland Bank; and Form of Note Certificate for the 13% Senior Subordinated Notes due 2009, are incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated August 10, 1994, Item 7(c), Exhibit 4.01. 4.05 Indenture dated as of March 28, 1996, among Showboat Marina Casino Partnership, Showboat Marina Finance Corporation, Donaldson, Lufkin & Jenrette Securities Corporation, Nomura Securities International, Inc., Bear, Stearns & Co., Inc. and American Bank National Association, as trustee, relating to the 13 1/2 Series A and Series B First Mortgage Notes due 2003, is incorporated herein by reference to Showboat, Inc.'s Form 10-Q (file no 1-7123) for the six month period ended June 30, 1996, Part II, Item 6(a), Exhibit 4.01. 10.01 Parent Services Agreement dated November 21, 1985, between Showboat, Inc. and Atlantic City Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated November 25, 1985, Item 7(c), Exhibit 10.01. Amendment No. 1 to Parent Services Agreement dated February 1, 1987, between Showboat, Inc. and Atlantic City Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended June 30, 1987, Part IV, Item 14(a)(3), Exhibit 10.17. Amendment No. 2 to Parent Services Agreement dated December 31, 1990, between Showboat, Inc. and Atlantic City Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated December 31, 1990, Item 7(c), Exhibit 28.01. Amendment No. 3 to Parent Services Agreement dated May 8, 1991, between Showboat, Inc. and Atlantic City Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 10- K (file no. 1-7123) for the year ended December 31, 1991, Part IV, Item 14(a)(3), Exhibit 10.14. Amendment No. 4 to Parent Services Agreement dated August 17, 1993, between Showboat, Inc. and Atlantic City Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1993, Part IV, Item 14(a)(3), Exhibit 10.11. 10.02 Tax Allocation Agreement effective May 10, 1993, among Showboat, Inc. and each of its subsidiaries, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended June 30, 1987, Part IV, Item 14(a)(3), Exhibit 10.11. First Amendment to Tax Allocation Agreement effective May 10, 1993, among Showboat, Inc. and each of its subsidiaries, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1993, Part IV, Item 14(a)(3), Exhibit 10.07. - 118 - EXHIBIT PAGE NO. DESCRIPTION NO. 10.03 Management Services Agreement dated January 1, 1989, between Showboat, Inc. and Showboat Operating Company, is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated January 1, 1989, Item 7(c), Exhibit 28.03. 10.04 Showboat, Inc. 1989 Long Term Incentive Plan, as amended and restated on February 25, 1993, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1992, Part IV, Item 14(a)(3), Exhibit 10.23. 10.05 Showboat, Inc. 1989 Directors' Stock Option Plan, as amended and restated February 25, 1993, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1992, Part IV, Item 14(a)(3), Exhibit 10.27. 10.06 Showboat, Inc. 1994 Executive Long Term Incentive Plan effective May 25, 1994, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 10.36. 10.07 Showboat, Inc. Supplemental Executive Retirement Plan effective April 1, 1994, is incorporated herein by reference to Showboat, Inc.'s Form 10- K (file no. 1-7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 10.37. 10.08 Showboat, Inc. Restoration Plan effective April 1, 1994, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 10.38. 10.09 Statement regarding Showboat, Inc.'s Incentive Bonus Plans, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1992, Part IV, Item 14(a)(3), Exhibit 10.12. 10.10 Atlantic City Showboat, Inc. Executive Medical Reimbursement Plan, effective August 15, 1991, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1991, Part IV, Item 14(a)(3), Exhibit 10.23. 10.11 Atlantic City Showboat, Inc. Executive Health Examinations Plan effective January 1, 1989, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1989, Part IV, Item 14(a)(3), Exhibit 10.24. - 119 - EXHIBIT PAGE NO. DESCRIPTION NO. 10.12 Form of Severance Agreement between Showboat, Inc. and certain executive officer and key employees of Showboat, Inc. and its subsidiaries, is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 10.39. 10.13 Form of Indemnification Agreement between Showboat, Inc. and each director and officer of Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1987, Part IV, Item 14(a)(3), Exhibit 10.13. 10.14 Lease dated January 1, 1989, between Showboat, Inc. and Showboat Operating Company, is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated January 1, 1989, Item 7(c), Exhibit 28.01. 10.15 Lease dated January 14, 1994, between Showboat, Inc. and Exber, Inc.; and Sublease dated November 5, 1966, between Dodd Smith and John D. Gaughan and Leslie C. Schwartz, is incorporated herein by reference to Showboat, Inc.'s Form 10- K (file no. 1-7123) for the year ended December 31, 1993, Part IV, Item 14(a)(3), Exhibit 10.39. 10.16 Lease of Retail Store No. 7 dated April 10, 1987, among Atlantic City Showboat, Inc., R. Craig Bird and Debra E. Bird; and Guaranty of Lease among Atlantic City Showboat, Inc., R. Craig Bird and Debra E. Bird, are incorporated herein by reference to Showboat, Inc.'s Form 10- K (file no. 1-7123) for the year ended December 31, 1988, Part IV, Item 14(a)(3), Exhibit 10.24. 10.17 Promissory Note dated August 5, 1993, in the principal amount of $20,400.69 among Showboat, Inc., R. Craig Bird and Debra E. Bird, is incorporated herein by reference to Showboat, Inc.'s Form 10-K for the year ended December 31, 1993, Part IV, Item 14(a)(3), Exhibit 10.15. 10.18 Ground Lease dated October 26, 1983, between Ocean Showboat, Inc. and Resorts International, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) as amended by a Form 8 filed with the Securities and Exchange Commission on November 28, 1983. Assignment and Assumption of Leases dated December 3, 1985, between Ocean Showboat, Inc. and Atlantic City Showboat, Inc.; First Amendment to Lease Agreement dated January 15, 1985, between Resorts International, Inc. and Atlantic City Showboat, Inc.; Second Amendment to Lease Agreement dated July 5, 1985, between Resorts International, Inc. and Atlantic City Showboat, Inc., are incorporated herein by reference to the Form 10-K (file no. 1-7123) for the year - 120 - EXHIBIT PAGE NO. DESCRIPTION NO. ended June 30, 1985, Part IV, Item 14(a)(3), Exhibit 10.02. Restated Third Amendment to Lease Agreement dated August 28, 1986, between Resorts International, Inc. and Atlantic City Showboat, Inc., is incorporated herein by reference to the Form 10-K (file no. 1-7123) for the year ended June 30, 1986, Part IV, Item 14(a)(3), Exhibit 10.08; Fourth Amendment to Lease Agreement dated December 16, 1986, between Resorts International, Inc. and Atlantic City Showboat, Inc.; Fifth Amendment to Lease Agreement dated March 2, 1987, between Resorts International, Inc. and Atlantic City Showboat, Inc.; Sixth Amendment to Lease Agreement dated March 13, 1987, between Resorts International, Inc. and Atlantic City Showboat, Inc.; Indemnity Agreement dated January 15, 1985, among Resorts International, Inc., Atlantic City Showboat, Inc. and Ocean Showboat, Inc.; and Amended Indemnity Agreement dated December 3, 1985, among Resorts International, Inc., Atlantic City Showboat, Inc. and Ocean Showboat, Inc., are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended June 30, 1987, Part IV, Item 14(a)(3), Exhibit 10.02; Seventh Amendment to Lease Agreement dated October 18, 1988, between Resorts International, Inc. and Atlantic City Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated November 16, 1988, Item 7(c), Exhibit 28.01; Eighth Amendment to Lease Agreement between Atlantic City Showboat, Inc. and Resorts International, Inc. International, Inc. dated May 18, 1993, is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated May 18, 1993, Item 7(c), Exhibit 28.06. 10.19 Closing Escrow Agreement dated September 21, 1988, among Housing Authority and Urban Redevelopment Agency of the City of Atlantic City, Resorts International, Inc., Atlantic City Showboat, Inc., Trump Taj Mahal Associates Limited Partnership, and Clapp & Eisenberg, P.C.; Agreement as to Assumption of Obligations with respect to Properties dated September 21, 1988, among Atlantic City Showboat, Inc., Trump Taj Mahal Associates Limited Partnership and Trump Taj Mahal Realty Corp.; First Amendment of Agreement as to Assumption of Obligations with respect to Properties dated September 21, 1988, among Atlantic City Showboat, and Trump Taj Mahal Realty Corp.; Settlement Agreement dated October 18, 1988, among Atlantic City Showboat, Inc., Trump Taj Mahal Associates Limited Partnership, Trump Taj Mahal Realty Corp., Resorts International, Inc. and the Housing Authority and Urban Redevelopment Agency of the City of Atlantic City; Tri-Party Agreement dated October 18, 1988, among Resorts International, Inc., Atlantic City Showboat, Inc. and Trump Taj Mahal Associates Limited Partnership; Declaration of Easement and Right of Way Agreement dated October 18, 1988, between the Housing Authority and Urban Redevelopment Agency of the City of Atlantic - 121 - EXHIBIT PAGE NO. DESCRIPTION NO. City, and Atlantic City Showboat, Inc.; and Certificate of Trump Taj Mahal Associates Limited Partnership and Resorts International, Inc. dated November 16, 1988, are incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated November 16, 1988, Item 7(c), Exhibit 28.01. Revised Second Amendment to Agreement as to Assumption of Obligations with respect to Properties dated May 24, 1989, among Atlantic City Showboat, Inc., Trump Taj Mahal Associates Limited Partnership and Trump Taj Mahal Realty Corp., is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1989, Part IV, Item 14(a)(3), Exhibit 10.17. 10.20 Letter agreement dated September 23, 1992, between Trump Taj Mahal Associates and Atlantic City Showboat, Inc.; and letter agreement dated October 26, 1992 to Trump Taj Mahal Associates from Atlantic City Showboat, Inc., are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1992, Part IV, Item 14(a)(3), Exhibit 10.24. 10.21 Lease dated December 22, 1994, between Housing Authority and Urban Redevelopment Agency of the City of Atlantic City and Atlantic City Showboat, Inc.; Tri-Party Agreement dated May 26, 1994, among Housing Authority and Urban Redevelopment Agency of the City of Atlantic City, Forest City Ratner Companies and Atlantic City Showboat, Inc.; Terms and Conditions Part II of Contract for Sale of Land for Private Redevelopment between Housing Authority and Urban Redevelopment Agency of the City of Atlantic City and Atlantic City Showboat, Inc.; and Rider to Contract for Sale of Land for Private Redevelopment between Housing Authority and Urban Redevelopment Agency of the City of Atlantic City and Atlantic City Showboat, Inc., are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 10.46. 10.22 Agreement Amending and Restating the Tri- Party Agreement Dated as of May 26, 1994, among the Housing Authority and Urban Redevelopment Agency of the City of Atlantic City, Forest City Ratner Companies and Atlantic City Showboat, Inc. regarding Development of a Portion of the Uptown Urban Renewal Tract dated December 14, 1995; Release and Subordination Agreement dated December 14, 1995, between IBJ Schroder Bank & Trust Company and Atlantic City Showboat, Inc.; First Amendment to Leasehold in Pari Passu Mortgage, Assignment of Rents and Security Agreement and Collateral Assignment of Easement Rights- Mortgage Spreader Agreement dated December 15, 1995, between Atlantic City Showboat, Inc. and NatWest Bank, N.A.; Third Amendment to Leasehold Mortgage, Assignment of Rents - 122 - EXHIBIT PAGE NO. DESCRIPTION NO. and Security Agreement Dated as of May 19, 1993 - Mortgage Spreader Agreement dated December 14, 1995, between Atlantic City Showboat, Inc. and IBJ Schroder Bank & Trust Company; Fourth Amendment to Leasehold Mortgage, Assignment of Rents and Security Agreement Dated as of May 18, 1993 - Release of Part of Mortgaged Property and Subordination Agreement dated December 14, 1995, between IBJ Schroder Bank & Trust Company and Atlantic City Showboat, Inc., are incorporated herein by reference to Showboat, Inc.'s Form 10- K (file no. 1-7123) for the year ended December 31, 1995, Part IV, Item 14(a)(3), Exhibit 10.24. 10.23 Securities Purchase Contract dated March 29, 1988, between the Casino Reinvestment Development Authority and Atlantic City Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1988, Part IV, Item 14(a)(3), Exhibit 10.23. 10.24 Deed of Trust, Assignment of Rents, and Security Agreement dated May 18, 1993, by Showboat, Inc. to Nevada Title Company in favor of IBJ Schroder Bank & Trust Company; Showboat, Inc. Security and Pledge Agreement dated May 18, 1993, between Showboat, Inc. and the IBJ Schroder Bank & Trust Company; Trademark Security Agreement dated May 18, 1993, by Showboat, Inc. in favor of IBJ Schroder Bank & Trust Company; Unsecured Indemnity Agreement dated May 18, 1993, by Showboat, Inc. in favor of IBJ Schroder Bank & Trust Company; and Showboat Operating Company Security Agreement dated May 18, 1993, between Showboat Operating Company and IBJ Schroder Bank & Trust Company, are incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated May 18, 1993, Item 5, Exhibit 28.02. Leasehold Mortgage, Assignment of Rents, and Security Agreement dated May 18, 1993, by Atlantic City Showboat, Inc. in favor of IBJ Schroder Bank & Trust Company; Assignment of Leases and Rents dated May 18, 1993, between Atlantic City Showboat, Inc. and IBJ Schroder Bank & Trust Company; and Ocean Showboat, Inc. Security and Pledge Agreement dated May 18, 1993, between Ocean Showboat, Inc. and IBJ Schroder Bank & Trust Company, are incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated May 18, 1993, Item 7(c), Exhibit 28.03. Intercompany Note dated May 18, 1993, in the principal amount of $215.0 million; Assignment of Lease and Rents dated May 18, 1993, between Atlantic City Showboat, Inc. and Showboat, Inc.; and Issuer Collateral Assignment dated May 18, 1993, by Atlantic City Showboat, Inc. in favor of IBJ Schroder Bank & Trust Company, are incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated May 18, 1993, Item 7(c), Exhibit 28.04. Showboat Development Company Security and Pledge Agreement dated July 18, 1994, between Showboat Development Company and IBJ Schroder Bank & Trust - 123 - EXHIBIT PAGE NO. DESCRIPTION NO. Company; and Showboat Louisiana, Inc. Security and Pledge Agreement dated July 18, 1994, between Showboat Louisiana, Inc. and IBJ Schroder Bank & Trust Company, are incorporated herein by reference to Showboat, Inc.'s Form 10- K (file no. 1-7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 4.02. 10.25 First Amendment to the Leasehold Mortgage, Assignment of Rents and Security Agreement dated July 9, 1993, between Atlantic City Showboat, Inc. and Showboat, Inc., is incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated July 7, 1993, Item 7(c), Exhibit 28.01. First Amendment to the Leasehold Mortgage, Assignment of Rents and Security Agreement dated July 9, 1993, between Atlantic City Showboat, Inc. and IBJ Schroder Bank & Trust Company, is incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated July 7, 1993, Item 7(c), Exhibit 28.02. Assignment of Rights under Agreement dated July 9, 1993, by Atlantic City Showboat, Inc. in favor of IBJ Schroder Bank & Trust Company, is incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated July 7, 1993, Item 7(c), Exhibit 28.03. Form of Deed for Sale of Land for Private Redevelopment for Tract 1 and Tract 2 each dated July 7, 1993, is incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated July 7, 1993, Item 7(c), Exhibit 28.04. Use and Occupancy Agreement dated July 7, 1993, between Atlantic City Housing Authority and Urban Redevelopment Agency and Atlantic City Showboat, Inc., is incorporated by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated July 7, 1993, Item 7(c), Exhibit 28.05. 10.26 Agreement for Sale of Partnership interests dated March 31, 1995, among Lake Pontchartrain Showboat, Inc., Showboat Louisiana, Inc., Showboat, Inc., Player Riverboat, LLC, Players Riverboat Management, Inc. and Players International, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated March 31, 1995, Item 7(c), Exhibit 28.01. 10.27 Casino Operations Agreement (excluding exhibits) dated April 22, 1994, among Leighton Properties Pty Limited, New South Wales Casino Control Authority, Showboat Australia Pty Limited, Showboat Operating Company, Sydney Casino Management Pty Limited, Sydney Harbour Casino Holdings Limited, Sydney Harbour Casino Pty Limited and Sydney Harbour Casino Properties Pty Limited; First Amending Deed dated October 6, 1994; Second Amending Deed (undated); Third Amending Deed dated December 13, 1994; Casino Complex Management Agreement dated April 21, 1994, among Sydney Harbour Casino Properties Pty Limited, Showboat Australia Pty Limited and Sydney Casino Management Pty Limited; and Development Agreement dated April 21, 1994, between Leighton Properties Pty Limited and Sydney Harbour Casino - 124 - EXHIBIT PAGE NO. DESCRIPTION NO. Properties Pty Limited, are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1995, Part IV, Item 14(a)(3), Exhibit 10.32. Amending Deed to Casino Complex Management Agreement among Showboat Australia Pty Limited, National Mutual Trustees Limited, Sydney Casino Management Pty Limited, Sydney Harbour Casino Properties Pty Limited and Sydney Harbour Casino Pty Limited - undated. 10.28 Agreement dated September 13, 1993, among Showboat, Inc., Showboat Indiana, Inc., Showboat Operating Company, Showboat Development Company, Showboat Indiana Investment Limited Partnership and Waterfront Entertainment and Development, Inc.; and Showboat Marina Partnership Agreement dated January 31, 1994, between Waterfront Entertainment and Development, Inc. and Showboat Investment Limited Partnership, are incorporated herein by reference to Showboat, Inc.'s Form 10- K (file no. 1-7123) for the year ended December 31, 1993, Part IV, Item 14(a)(3), Exhibit 10.38. Amended and Restated Showboat Marina Partnership Agreement dated March 1, 1996, between Waterfront Entertainment and Development, Inc. and Showboat Indiana Investment Limited Partnership; Agreement of Partnership of Showboat Marina Investment Partnership dated March 1, 1996, between Showboat Indiana Investment Limited Partnership and Waterfront Entertainment and Development, Inc.; Agreement of Partnership of Showboat Marina Casino Partnership dated March 1, 1996, between Showboat Marina Partnership and Showboat Marina Investment Partnership; Letter agreement regarding economic development dated April 8, 1994, by Showboat Marina Partnership in favor of the City of East Chicago; Letter agreement regarding economic development dated April 18, 1995, by Showboat Marina Partnership in favor of the City of East Chicago; and Redevelopment Project Lease dated October 19, 1995, between Showboat Marina Partnership and the City of East Chicago are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1995, Part IV, Item 14(a)(3), Exhibit 10.33. Second Amended and Restated Showboat Marina Partnership Agreement dated June 30, 1996 between Waterfront Entertainment and Development, Inc. and Showboat Indiana Investment Limited Partnership; and Promissory Note dated January 1, 1997, in principal amount of $41,887,158 by Showboat Indiana Investment Limited Partnership in favor of Showboat, Inc. 10.29 Agreement of Limited Partnership of Southboat Limited Partnership effective May 1, 1995, between Showboat Lemay, Inc. and Futuresouth, Inc.; Management Agreement dated May 2, 1995, between Southboat Partnership (a predecessor of Southboat Limited Partnership) and Showboat Operating Company; Trademark License Agreement dated May 2, 1995, between Southboat Partnership and Showboat, Inc.; Lease and Development Agreement - 125 - EXHIBIT PAGE NO. DESCRIPTION NO. dated October 13, 1995, between the St. Louis County Port Authority and Southboat Limited Partnership; Escrow Agreement dated October 13, 1995, between the St. Louis County Port Authority, Southboat Limited Partnership, Showboat, Inc. and Boatmen's Trust Company; Guarantee of Minimum Rent dated October 13, 1995, by Showboat, Inc.; Guarantee of Completion dated October 13, 1995, by Showboat, Inc., are incorporated herein by reference to Showboat, Inc.'s Form 8-K (file no. 1-7123) dated October 1, 1995, Item 7(c), Exhibits 10.01 through 10.06, inclusive. First Amendment to Lease and Development Agreement by and between St. Louis County Port Authority and Southboat Limited Partnership dated May 1996; Second Amendment to lease and Development Agreement by and between St. Louis County Port Authority and Southboat Limited Partnership dated December 12, 1996. 10.30 Non-Negotiable Mortgage Promissory Note dated December 28, 1994, in the principal amount of $8,850,000, by Rockingham Venture, Inc. in favor of Showboat, Inc.; Mortgage and Security Agreement dated December 28, 1994, between Rockingham Venture, Inc. and Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1994, Part IV, Item 14(a)(3), Exhibit 10.42. Limited Liability Company Agreement of Showboat Rockingham Company, L.L.C. dated July 27, 1995, among Rockingham Venture, Inc., Showboat New Hampshire, Inc. and Showboat Rockingham Company, L.L.C.; Management Agreement dated July 27, 1995, among Showboat Rockingham Company L.L.C., Showboat Operating Company and Rockingham Venture, Inc.; Administrative Services Agreement dated July 27, between Showboat Operating Company and Showboat Rockingham Company, L.L.C.; and Trademark License Agreement dated July 27, 1995, between Showboat, Inc. and Showboat Rockingham Company, L.L.C., are incorporated herein by reference to Showboat, Inc.'s Form 10-K (file no. 1-7123) for the year ended December 31, 1995, Part IV, Item 14(a)(3), Exhibit 10.35. 10.31 Promissory Note dated March 19, 1996, in the principal amount of $15,000,000 by Atlantic City Showboat, Inc. in favor of Showboat, Inc. 10.32 Loan and Guaranty Agreement dated July 14, 1995, among NatWest Bank, N.A., Showboat, Inc. and Atlantic City Showboat, Inc., Ocean Showboat, Inc. and Showboat Operating Company; Revolving Note dated July 14, 1995, in the principal amount of $25.0 million by Showboat, Inc. in favor of NatWest Bank, N.A.; Deed of Trust, Assignment of Rents and Security Agreement dated July 14,1995, by Showboat, Inc. in favor of Nevada Title Company for the benefit of NatWest Bank, N.A.; Leasehold in Pari Passu Mortgage, Assignment of Rents and Security Agreement dated July 14, 1995, between NatWest Bank and Atlantic City Showboat, Inc.; Assignment of Leases and Rents dated - 126 - EXHIBIT PAGE NO. DESCRIPTION NO. July 14, 1995, between NatWest Bank and Atlantic City Showboat, Inc.; Intercreditor Agreement for Pari Passu Indebtedness Relating to Atlantic City Showboat dated July 14, 1995, among Showboat, Inc., Atlantic City Showboat, Inc., IBJ Schroder Bank & Trust Company and NatWest Bank, N.A.; and Intercreditor Agreement for Pari Passu Indebtedness Relating to Las Vegas Showboat dated July 14, 1995, among Showboat, Inc., IBJ Schroder Bank & Trust Company and NatWest Bank, N.A., are incorporated herein by reference to Showboat, Inc.'s Form 10- K (file no. 1-7123) for the year ended December 31, 1995, Part IV, Item 14(a)(3), Exhibit 10.38. 10.33 Promissory Note dated January 1, 1996, in the principal amount of $34,011,720 by Showboat Fifteen, Inc. in favor of Showboat, Inc. 10.34 Completion Guarantee dated March 28, 1996, by and between Showboat, Inc. and American Bank National Association, as trustee, is incorporated herein by reference to Showboat, Inc.'s Form 10-Q (file no 1-7123) for the three month period ended March 31, 1996, Part II, Item 6(a), Exhibit 10.01. 10.35 Standby Equity Commitment dated March 28, 1996, by and among Showboat Marina Casino Partnership, Showboat Marina Finance Corporation and Showboat, Inc., is incorporated herein by reference to Showboat, Inc.'s Form 10- Q (file no 1-7123) for the three month period ended March 31, 1996, Part II, Item 6(a), Exhibit 10.02. 10.36 Escrow and Disbursement Agreement dated March 28, 1996, by and among Showboat Marina Casino Partnership, Showboat Marina Finance Corporation and Showboat, Inc. (as escrow agent and disbursement agent) and American Bank National Association, as trustee, is incorporated herein by reference to Showboat, Inc.'s Form 10-Q (file no 1-7123) for the six month period ended June 30, 1996, Part II, Item 6(a), Exhibit 10.01. 10.37 Showboat, Inc. 1996 Stock Appreciation Rights Plan, effective date September 3, 1996, is incorporated herein by reference to Showboat, Inc.'s Form 10-Q (file no 1-7123) for the nine month period ended September 30, 1996, Part II, Item 6(a), Exhibit 10.01. 10.38 Promissory Note dated January 1, 1997, in the principal amount of $8,197,293 by Showboat Operating Company in favor of Showboat, Inc.; Promissory Note dated January 1, 1997, in the principal amount of $12,344,192 by Showboat Operating Company in favor of Showboat, Inc.; and Promissory Note dated January 1, 1997, in the principal amount of $9,641,821 by Showboat Operating Company in favor of Showboat, Inc. - 127 - EXHIBIT PAGE NO. DESCRIPTION NO. 10.39 Promissory Note dated January 1, 1997, in the principal amount of $53,109,002 by Showboat Development Company in favor of Showboat, Inc.; and Promissory Note dated January 1, 1997, in the principal amount of $6,292,083 by Showboat Development Company in favor of Showboat, Inc. 21.01 List of Subsidiaries. 23.01 Consent of KPMG Peat Marwick LLP. 27.01 Financial Data Schedule.
- 128 - EX-10 2 EXHIBIT 10.27 DATED 1997 BETWEEN SHOWBOAT AUSTRALIA PTY LIMITED (A.C.N. 061 299 625) NATIONAL MUTUAL TRUSTEES LIMITED (ACN 004 029 841) (THE "PARTNERS") AND SYDNEY CASINO MANAGEMENT PTY LIMITED (ACN 060 462 053) (THE "MANAGER") AND SYDNEY HARBOUR CASINO PROPERTIES PTY LIMITED (ACN 050 045 120) SYDNEY HARBOUR CASINO PTY LIMITED (ACN 060 510 410) (THE "SHC GROUP") AMENDING DEED D U N H I L L M A D D E N B U T L E R SOLICITORS Sydney 16 Barrack Street, Sydney 2000 New South Wales, Australia GPO Box 427, Sydney 2001 DX 254 SYDNEY Telephone (02) 295 9999 International: 612 295 9999 Fax: (02) 295 9990 Email: 100252.1033@compuserve.com Ref: ATT:831006 SYDNEY MELBOURNE BRISBANE TABLE OF CONTENTS PAGE 1. INTERPRETATION AND DEFINITIONS 2 2. AMENDMENT TO MANAGEMENT ARRANGEMENTS 4 3. FURTHER ACKNOWLEDGEMENTS WITH REGARD TO MANAGEMENT ARRANGEMENTS 4 4. AMENDMENTS TO THE CASINO COMPLEX MANAGEMENT AGREEMENT 5 5. COFIRMATION 10 6. COSTS 10 7. MISCELLANEOUS 10 DEED made the day of 1997 BETWEEN: SHOWBOAT AUSTRALIA PTY LIMITED (A.C.N. 061 299 625) c/- Showboat Inc, 3720 Howard Hughes Parkway, Suite 200, Las Vegas, Nevada 89109 USA and NATIONAL MUTUAL TRUSTEES LIMITED (ACN 004 029 841) of 11th Floor, 44 Market Street, Sydney (collectively the "Partners") AND: SYDNEY CASINO MANAGEMENT PTY LIMITED (ACN 060 462 053) of Level 7, 154 Sussex Street, Sydney (the "Manager") AND: SYDNEY HARBOUR CASINO PROPERTIES PTY LIMITED (ACN 050 045 120) of Level 7, 154 Sussex Street, Sydney and SYDNEY HARBOUR CASINO PTY LIMITED (ACN 060 510 410) of Level 7, 154 Sussex Street, Sydney (collectively the "SHC Group") WHEREAS: A. By Agreement dated 21 April 1994, the Original Partners, Manager and SHC Group entered into the Casino Complex Management Agreement whereby the Manager agreed to undertake management of Casino Complex (as therein defined) on the terms and conditions set out therein. B. By Agreement dated 22 April 1994, the Original Partners set out the terms of the partnership arrangements between themselves and determined that the Manager would act as nominee for the partnership and in that capacity undertake the management of the said Casino Complex. C. On 7 December 1994 by Deed of Trust National Mutual Trustees Limited became the holder as trustee for Leighton Properties Pty Limited of the interest of Leighton Properties Pty Limited in the partnership referred to in Recital B and thereby in such capacity succeeded to the benefit of and became bound by the terms applying to such interest. D. On or around 22 April 1994, the Original Partners agreed as to the matters recorded in this Deed with regard to the management fees to be paid to the Manager under the Casino Complex Management Agreement. E. The parties have in addition agreed as to various matters affecting the operation of the Casino Complex and the respective responsibilities of the Manager and the SHC Group in this regard. 2 F. The parties wish by this Deed to record the arrangements referred to in Recitals D and E and to effect the necessary amendments to the Casino Complex Management Agreement and the Partnership Agreement for such purposes. THIS DEED WITNESSES: 1. INTERPRETATION AND DEFINITIONS 1.1 DEFINITIONS "CASINO COMPLEX MANAGEMENT AGREEMENT" means the agreement dated 21 April 1994 between SHC Group, Showboat Australia Pty Limited, Leighton Properties Pty Limited and the Manager under which the Manager was appointed to undertake the management of the Casino Complex (as therein defined) on the terms set out therein. "CASINO COMPLEX" shall have the meaning ascribed to that term in the Casino Complex Management Agreement. "ORIGINAL PARTNERS" shall mean Leighton Properties Pty Limited and Showboat Australia Pty Limited. "PARTNERSHIP" means the partnership evidenced by the Partnership Agreement. "PARTNERSHIP AGREEMENT" means the agreement dated 22 April 1994 between Showboat Australia Pty Limited and Leighton Properties Pty Limited. "RECOUPMENT PERIOD" means the period of time commencing on the commencement of the Operating Term (as defined in the Casino Complex Management Agreement) and ending when eighty five percent (85%) of the amount of the fees which, but for the provisions of this Deed would be payable to the Manager under clause 12 of the Casino Complex Management Agreement equal nineteen million, one hundred thousand dollars ($19,100,000). 1.2 INTERPRETATION In this Deed, unless the context otherwise requires: 3 (i) a reference to this Deed or to any other deed, agreement, document or instrument includes this Deed or that other deed, agreement, document or instrument as amended, supplemented, novated, replaced or varied from time to time; (ii) a reference to a person includes a reference to an individual firm, company, corporation, body corporate, statutory body, body politic, trust, partnership, joint venture, association whether incorporated or unincorporated, or an authority as the case may be; (iii) a reference to a clause is a reference to a clause of this Deed; (iv) a reference to the singular includes a reference to the plural and vice versa and words denoting a given gender shall include all other genders; (v) headings are for convenience only and do not affect interpretation; (vi) where any word or phrase is given a defined meaning any other part of speech or other grammatical form in respect of such word or part of speech has a corresponding meaning; (vii) a reference to any legislation, statute, ordinance, cord or other law or to any section or provision thereof includes all ordinances, by-laws, regulations, rules, rulings and directions and other statutory instruments issued thereunder and any modifications, consolidations, re-enactments, replacements and substitutions of any of them; (viii) a reference to any monetary amount or payment to be made hereunder is a reference to an Australian dollar amount or payment in Australian dollars as the case may require; (ix) where a reference is made to any body or authority which has ceased to exist, such reference shall be deemed a reference to the body or authority as then serves substantially the same objects as that body or authority; and (x) terms used in this Deed which are not defined in this Deed shall have the same meaning as defined in the Corporations Law. 4 2. AMENDMENT TO MANAGEMENT ARRANGEMENTS 2.1 It is hereby recorded and acknowledged that during the Recoupment Period the amount of the entitlement of Showboat Australia Pty Limited to the profits of the Partnership in accordance with the Partnership Agreement, (which profits derive ultimately from the management fees paid to the Manager under the Casino Complex Management Agreement) shall be nil. 2.2 It is hereby further recorded and acknowledged that during the Recoupment Period the amount of the entitlement of National Mutual Trustees Limited to the profits of the Partnership under the Partnership Agreement shall be equivalent to the total profits derived through management fees paid to the Manager under Clause 12 of the Casino Complex Management Agreement. 2.3 The Partners, the Manager and SHC Group agree that the amount of the management fees to be paid to the Manager under Casino Complex Management Agreement, during the Recoupment Period shall be equivalent to fifteen per cent (15%) of the amount that would otherwise by payable under the Casino Complex Management Agreement for the period in question. 2.4 In calculating the amount of any fees to be paid or retained by SHC Group in accordance with the provisions of this Deed, there shall only be adjustments to the management fees payable to the Manager under Clause 12 of Casino Complex Management Agreement and there shall be no adjustment or variation to any other fees or payments to be paid or made by SHC Group including without limitation, any "supplemental management fees" under Clause 7.2 of Casino Complex Management Agreement or any other amounts by way of reimbursement of expenses or costs incurred by the Manager. 3. FURTHER ACKNOWLEDGEMENTS WITH REGARD TO MANAGEMENT ARRANGEMENTS 3.1 It is acknowledged and agreed that during the Recoupment Period SHC Group does not and has never had any liability to pay management fees equal to the said amount of nineteen million one hundred thousand dollars ($19,100,000). 5 4. AMENDMENTS TO THE CASINO COMPLEX MANAGEMENT AGREEMENT The Casino Complex Management Agreement is amended as set out below to reflect the agreements between the parties as to the conduct of the business of the Casino. (i) Recital I shall be amended and replaced in its entirety with the following: "I Owner wishes to obtain the benefits of Showboat's and Leighton's expertise in the foregoing areas by engaging the Casino Manager as manager of the Casino Complex on the terms set out in this Agreement subject to the obligations of the parties under the Act and under the Transaction Documents including, in particular the COA. The Showboat Leighton Partnership through the Casino Manager for a fee, and subject to the terms of this Agreement agrees to accept such appointment as manager." (ii) The following five new Recitals are to be added: J. The decision of Showboat, its subsidiaries and affiliated companies to pursue the Sydney Harbour Casino was premised on two essential factors: (i) due to Showboat's experience as detailed in Recital D, Showboat or a related company would be retained as manager of Sydney Harbour Casino and as manager would be granted board authority and discretion to implement such responsibilities, and (ii) Showboat or a related company would receive management fees for acting as manager of Sydney Harbour Casino. The expertise and standing of Showboat as the major shareholder in the management company was a key factor in attracting and maintaining investor commitments to SHC Holdings. K. Casino Manager and Owner are committed to: (i) a harmonious and mutually beneficial relationship; 6 (ii) making full effort to freely exchange information; (iii) achieving results that benefit both the Casino Manager and Owner; and (iv) seeking expeditious and non-confrontational clarification or resolution of any misunderstandings or conflicts. L. Casino Manager through Showboat has extensive knowledge and skill in the construction, opening and management of gaming and entertainment businesses. Therefore, because of such skill and knowledge, it is appropriate and proper for Casino Manager to have responsibility to manage the Sydney Harbour Casino. The directors of Owner have satisfied themselves as to the experience and skill of Casino Manager and on that basis have satisfied themselves that the engagement of Casino Manager will result in the Casino Complex being managed consistent with the appropriate standards of industry and corporate practice so as to protect and enhance the investment of the shareholders in SHC Holdings. M. The Invitation Document prepared by the New South Wales Casino Control Authority, dated May 1993, established the criteria that (i) "the Applicant has or is able to obtain the services of persons who have sufficient experience in the management and operation of the Casino," and (ii) the Applicant "has sufficient business ability to establish and maintain a successful Casino." N. Through the licensing of Showboat and its subsidiaries, Showboat and such subsidiaries have satisfied the New South Wales Casino Control Authority that Showboat has the experience and skill to construct, open, and manage the Casino Complex. (iii) The following paragraph is to be added immediately before Clause 1.1: "1.01 Owner and Casino Manager agree that the foregoing Recitals are true and correct and by this reference incorporate the Recitals into this Agreement as if such Recitals were fully set forth herein." 7 (iv) The words "and approved by Owner" are to be added after the words "Casino Manager" where appearing in the definition of "Accounting Period" in Clause 1.1. (v) The words "Subject to Clause 6.2A" are to be added before the word "determination" where appearing in Clause 6.2(a). (vi) The following clause to be numbered 6.2A is to be added immediately after Clause 6.2: "6.2A Casino Manager and Owner shall meet together for the purposes of agreeing the formulation of the Industrial Relations Policy of the Casino. Such policy shall include coverage of such matters as the policies with respect to hiring and discharge of employees, relations with trade unions and other organised labour bodies and other such matters. Once agreed such policies shall be documented and shall be used as a guide for Casino Manager in the discharge of its obligations under Clause 6.2(a). In addition such policy shall define the division of responsibility with respect to industrial relations between the Casino Manager on the one hand and the Remuneration Committee of the Board of Directors of Owner on the other hand. Any changes or modifications to any of the policies so documented may only be made with the agreement of Casino Manager and Owner. (vii) The first sentence of Clause 6.4 is to be deleted and the following is to be substituted in its stead: "Subject always to the provisions of any Industrial Relations Policy formulated under Clause 6.2A but notwithstanding any other provision contained in this Clause 6, no Casino Complex employee shall receive compensation (including salary and benefits) greater than at the rate of $750,000 per year (or such greater amount if approved by the Manager and Owner) exclusive of the value of food and lodging and the use of Casino Complex facilities (increased at the end of each of Fiscal Year by the CPI) without prior consent of the Owner of the pay rate". 8 (viii) Clause 6.11 is to be deleted in its entirety and the following substituted in its stead: "Not later than sixty (60) days prior to the commencement of each Fiscal Year Casino Manager shall submit to Owner a draft annual budget for the operation of the Casino Complex in accordance with the Uniform Systems accompanied by full supporting data and assumptions and a business plan. Such business plan shall contain such information and items which are normally found in a business plan in respect of businesses comparable to the Casino and shall include references to special projects extraordinary expenditures or anticipated receipts and such other items as would reasonably be considered material. Owner and Casino Manager shall consult in good faith with a view to agreeing the relevant budget and business plan. Owner expressly acknowledges Casino Manager's expertise in the operation of businesses similar to the Casino. Owner further expressly acknowledges the obligation of the Casino Manager to perform its obligations under this Agreement consistent with the overall obligations of the parties under the Transaction Documents. Should the parties fail to agree on a budget and business plan within a reasonable time prior to the commencement of the relevant Fiscal Year, then either party may determine that a dispute exists and upon such party notifying the other as to its determination, there shall be deemed to be a dispute under this Agreement and the provisions of Clause 34 of this Agreement shall apply. The parties hereby record their intention that no resort whatsoever will be had to any court proceedings in respect of a dispute of the kind referred to in this clause 6.11. Should the budget and business plan for any particular Fiscal Year not be agreed prior to the commencement of that Fiscal Year because of a dispute or for any other reason, then the Manager shall implement any parts of the budget and business plan which have been agreed between the parties but otherwise, the Manager shall implement as far as practicable the budget and business plan which applied for the immediately preceding Fiscal Year." (ix) The following clause to be numbered 9.2 is to be added immediately following Clause 9.1: 9 "9.2 The budget and business plan in respect of any Fiscal Year shall detail the objectives and course of action of the Casino in regard to the external affairs of its business. The implementation of this aspect of the business shall be the responsibility of Casino Manager. Casino Manager recognises and shall utilise the capabilities of the Owner and its related companies to assist in achieving the external affairs objectives of the Casino business. The Casino Manager shall not however make any donation or contribution on behalf of the Owner to any political candidates causes or other organisations of similar nature except for donations or contributions not exceeding one thousand dollars ($1,000) made in accordance with any policy directives or guidelines determined by Owner. The Casino Manager shall not however be prevented from making any such contribution or donation in its own right but in such circumstances it must ensure that any such donation or contribution is made in such manner as the source is clearly differentiated from the Casino business." (x) The opening sentence of Clause 11.2 is to be deleted in its entirety and the following inserted in its stead: "11.2 Following every accounting period Casino Manager shall deliver to Owner a balance sheet and profit and loss statement showing the results of the operation of the Casino Complex for the immediately preceding accounting period and for the Fiscal Year to date. Casino Manager shall be obliged to deliver such financial statements not later than one week following the accounting period that follows the accounting period for which the information is reported but shall endeavour to deliver such financial statements prior to the end of the accounting period which follows the one for which the information is reported." (xi) Clause 11.3(a) is to be deleted in its entirety and the following inserted in its stead: "(a) Owner shall be entitled to receive the financial statements in relation to the Casino Complex and have the opportunity to 10 consider them for a reasonable period (which shall not be less than fourteen (14) days) prior to those financial statements being required to be lodged under the Listing Rules of the Australian Stock Exchange Limited and any other applicable statutory requirements." 5. CONFIRMATION Other than as set out in this Deed, all other terms and provisions of the Casino Complex Management Agreement and the Partnership Agreement are hereby acknowledged and confirmed. 6. COSTS 6.1 COSTS Each party to this Deed must bear its own costs and expenses in connection with the negotiation execution and completion of this Deed. 7. MISCELLANEOUS The provisions of clauses 22, 23, 32, and 33 of the Casino Complex Management Agreement shall apply to and shall be deemed to be incorporated in this Deed. 11 THE COMMON SEAL of ) SHOWBOAT AUSTRALIA PTY ) LIMITED (A.C.N. 061 299 ) 625) was hereunto ) affixed by authority of ) the directors in the ) presence of: ) /s/ Steven Alperstein /s/ J.K. Houssels, III Signature of Secretary Signature of Director /s/ Steven Alperstein Full Name of Signatory Full Name of Signatory SIGNED SEALED and DELIVERED ) by the said NATIONAL MUTUAL ) TRUSTEES LIMITED ) (ACN 004 029 841) by ) its duly appointed attorney ) in the presence of: Signature of Witness Signature of Attorney Print full name of Witness 12 THE COMMON SEAL of SYDNEY ) CASINO MANAGEMENT PTY ) LIMITED (ACN 060 462 053) ) was hereunto affixed by ) authority of the directors) in the presence of: ) /s/ Steven Alperstein /s/ J.K. Houssels, III Signature of Secretary Signature of Director /s/ Steven Alperstein Full Name of Signatory Full Name of Signatory THE COMMON SEAL of SYDNEY ) HARBOUR CASINO PROPERTIES ) PTY LIMITED (ACN 050 045 120) ) was hereunto affixed by ) authority of the directors ) in the presence of: ) /s/ /s/ Signature of Secretary Signature of Director /s/ Steven Alperstein Full Name of Signatory 13 THE COMMON SEAL of SYDNEY ) HARBOUR CASINO PTY LIMITED) (ACN 060 510 410) was ) hereunto affixed by ) authority of the directors) in the presence of: ) /s/ Steven Alperstein /s/ Signature of Secretary Signature of Director /s/ Steven Alperstein Full Name of Signatory Full Name of Signatory EX-10 3 EXHIBIT 10.28 SECOND AMENDED & RESTATED SHOWBOAT MARINA PARTNERSHIP AGREEMENT SECOND AMENDED & RESTATED SHOWBOAT MARINA PARTNERSHIP AGREEMENT TABLE OF CONTENTS PAGE 1. DEFINITIONS 2 1.1. AFFILIATE 2 1.2. AGREEMENT 2 1.3. BUDGET 2 1.4. CAPITAL ACCOUNT 3 1.5. CAPITAL BUDGET 3 1.6. CAPITAL CONTRIBUTION 3 1.7. CARRYING VALUE 3 1.8. CASINO FACILITIES 3 1.9. CODE 4 1.10. COMMISSION 4 1.11. COMPARABLE COMPANIES 4 1.12. DEVELOPMENT EXPENSES 4 1.13. DISTRIBUTABLE CASH 4 1.14. EFFECTIVE DATE 4 1.15. GROUND 5 1.16. INDIANA UNIFORM PARTNERSHIP ACT 5 1.17. INTEREST 5 1.18. LOSSES 5 1.19. MANAGING PARTNER 5 1.20. MINIMUM GAIN 5 1.21. NONRECOURSE DEDUCTIONS 5 1.22. OPENING 5 1.23. OPERATING BUDGET 5 1.24. PARTNERS 5 1.25. PARTNERSHIP 6 1.26. PARTNERSHIP'S AUDITOR 6 1.27. PERCENTAGE INTEREST 6 1.28. PROJECT 6 1.30. REGULATIONS 6 1.31. VESSEL 6 2. CONTINUATION OF PARTNERSHIP 6 2.1. CONTINUATION OF PARTNERSHIP 6 2.2. APPLICABLE LAW 6 2.3. THE SCOPE OF PARTNER'S AUTHORITY 6 2.4. BUSINESS PURPOSES 7 i 2.5. TERM OF PARTNERSHIP 7 2.6. PRINCIPAL PLACE OF BUSINESS 7 2.7. PROPERTY OF THE PARTNERSHIP 7 2.8. CERTIFICATE 7 2.9. LICENSING 7 3. FUNDING OF THE PARTNERSHIP 8 3.1. THE PERCENTAGE INTEREST OF EACH PARTNER IN THE PARTNERSHIP 8 3.2. CAPITAL ACCOUNTS 8 3.3. RETURN OF CAPITAL CONTRIBUTIONS 9 3.4. NO PRIORITY 10 3.5. PREFERENTIAL RETURN 10 3.6. LOANS 10 3.7. (DELETED - NO LONGER USED) 10 3.8. CONTRIBUTIONS 10 3.9. FAILURE TO CONTRIBUTE 11 4. ALLOCATIONS AND DISTRIBUTIONS 12 4.1. DEFINITIONS 12 4.2. ALLOCATION OF INCOME, GAIN, LOSS, DEDUCTION (INCLUDING DEPRECIATION), AND CREDIT 12 4.3. DISTRIBUTIONS AND INVESTMENT OF CASH 16 4.4. DEVELOPMENT FEE 18 5. MANAGEMENT OF THE PARTNERSHIP 18 5.1. MANAGING PARTNER 18 5.2. RESTRICTIONS 19 5.3. ACTIONS REQUIRING UNANIMOUS CONSENT OF THE PARTNERS 20 5.4. DEALINGS WITH AFFILIATES 20 5.5. REMOVAL OF MANAGING PARTNER 21 5.6. GROUND 21 5.7. PARTNERSHIP DEBTS 21 5.8. DELEGATION OF AUTHORITY 21 5.9. OTHER VENTURES 21 5.10. EXCULPATION FROM LIABILITY; INDEMNIFICATION 21 5.11. MEETINGS OF PARTNERS 22 5.12. REPORTS 22 5.13. PARTNERSHIP DEVELOPMENT FINANCING 22 5.14. MANAGEMENT AGREEMENT 25 6. PUT OPTION 25 7. TRANSFER OF PARTNER'S INTEREST 26 7.1. RESTRICTIONS ON TRANSFER 26 7.2. RIGHT OF FIRST REFUSAL 26 7.3. CONTINUING LIABILITY 27 8. PARTNER DEFAULT 27 8.1. DEFINITION OF DEFAULT 27 8.2. DEFAULTS 27 8.3. BUYOUT REMEDY 28 8.4. INJUNCTIVE RELIEF 28 ii 9. DETERMINATION OF FAIR MARKET VALUE 28 9.1. FAIR MARKET VALUE 28 10. FORCE MAJEURE 29 10.1. FORCE MAJEURE DEFINED 29 10.2. ACTIONS TO RESOLVE FORCE MAJEURE EVENTS 30 11. TERMINATION AND LIQUIDATION OF PARTNERSHIP 30 11.1. TERMINATION 30 11.2. WINDING UP AND LIQUIDATION 31 11.3. BANKRUPTCY OR INSOLVENCY; INVOLUNTARY TRANSFER 32 12. DISCLOSURE OF OTHER BUSINESS INTEREST CONFLICTS; BUSINESS OPPORTUNITY 33 12.1. OTHER BUSINESS INTERESTS 33 12.2. COMPETITION 33 12.3. BUSINESS OPPORTUNITY 34 13. TAX MATTERS; BOOKS AND RECORDS; ACCOUNTING 34 13.1. TAX MATTERS 34 13.2. INDEMNITY AGAINST BREACH 34 13.3. RECORDS 35 13.4. NOTICES 36 13.5. REPORTS TO PARTNERS 36 14. TRADEMARKS AND LICENSES 37 14.1. SHOWBOAT MARKS 37 14.2. USE OF MARKS BY PARTNERSHIP 37 15. GENERAL PROVISIONS 37 15.1. FOREIGN GAMING LICENSES 37 15.2. ENTIRE AGREEMENT 37 15.3. COUNTERPARTS 37 15.4. CAPTIONS 38 15.5. AMENDMENT 38 15.6. GRAMMATICAL CHANGES 38 15.7. SUCCESSORS AND ASSIGNS 38 15.8. CONSENT OF PARTNERS 38 15.9. NO WAIVER 38 15.10.DISPUTES 38 15.11.PARTIAL INVALIDITY 39 15.12.COOPERATION WITH GAMING AUTHORITIES 39 15.13.ADMINISTRATIVE/DEVELOPMENT/TRADEMARK/LICENSE FEES 39 15.14.APPLICABLE LAW: JURISDICTION 39 15.15.FINANCING FEES 40 iii SECOND AMENDED & RESTATED SHOWBOAT MARINA PARTNERSHIP AGREEMENT This Amended & Restated Showboat Marina Partnership Agreement, dated as of the ____ day of ________, 1996, is executed by and between: WATERFRONT ENTERTAINMENT AND DEVELOPMENT, INC. ("Waterfront"), an Indiana corporation with its registered office at 8101 Polo Club Drive, Suite D, Merrillville, Indiana 46410, appearing herein by and through Michael Pannos, its President, duly authorized hereunto: and SHOWBOAT INDIANA INVESTMENT LIMITED PARTNERSHIP ("Showboat"), a Nevada limited partnership with its registered office at 2800 Fremont Street, Las Vegas, Nevada 89104, appearing herein by and through J. Kell Houssels, III, Chairman of the Board of its general partner, Showboat Indiana, Inc., duly authorized hereunto; W I T N E S S E T H: WHEREAS, Waterfront and Showboat formed the Partnership pursuant to a Partnership Agreement dated January 31, 1994 (the "Original Agreement")to construct, acquire, own, and operate an excursion cruise vessel casino on Lake Michigan from a port in East Chicago, Indiana, including all equipment and other facilities required to own and operate the excursion cruise vessel casino, including, but not limited to, docks, piers, restaurants, entertainment facilities, vehicular parking area(s), waiting areas, administrative offices for, but not limited to, accounting, purchasing, and management information services (including offices for management personnel) and other areas utilized in support of the operations of the excursion cruise vessel, and for the other purposes set forth in the Original Agreement ; and WHEREAS, since January 31, 1994, Waterfront and Showboat have submitted applications with the Indiana Gaming Commission ("Commission") to operate a licensed excursion cruise vessel casino on Lake Michigan from a port in East Chicago, Indiana; and WHEREAS, as a part of the applications filed with the Commission, Waterfront and Showboat have continuously evaluated the total costs and expenses of constructing the excursion cruise vessel casino and related facilities and believe that the total costs and expenses have increased to an amount of up to $195 million, which is $105 million higher than originally specified in the Partnership Agreement; and WHEREAS, following discussions with investment bankers and other consultants, the parties have determined that development financing for the Project may not be obtained by the Partnership at interest rates of 15% per annum or less; and WHEREAS, under the Original Agreement, either the increase of costs or the inability to obtain development financing at interest rates of 15% or less permits either Partner to terminate the Partnership unless the Partners can mutually agree to appropriate courses of action to resolve the condition; and WHEREAS, the Partnership has been advised by its financial advisors that it should form a subsidiary partnership to own and operate the Project and to obtain the Development Financing making the Partnership the holder of partnership interests instead of the operator and owner of the Project; and WHEREAS, Waterfront and Showboat amended the original Partnership Agreement by the Amended and Restated Showboat Marina Partnership Agreement dated as of the 1st day of March, 1996; and WHEREAS, the Partners, following good faith discussions, are executing this Second Amended & Restated Showboat Marina Partnership Agreement to make additional changes to the Original Agreement as the Partners deem necessary and advisable. Now, Therefore, in consideration of the covenants herein contained and intending to be mutually bound thereby, the parties hereto agree as follows: 1. DEFINITIONS 1.1. AFFILIATE The term "Affiliate" when used with respect to any Person specified herein, shall mean any other Person who (i) controls, is controlled by or is under common control with such specified Person; (ii) is an officer or director of, partner in, shareholder of, or trustee of, or serves in a similar capacity with respect to, a Person specified in clause (i); or (iii) is a twenty-five percent (25%) or more owned subsidiary, spouse, father, mother, son, daughter, brother, sister, uncle, aunt, nephew or niece or any Person described in clauses (i) or (ii). The term "control" shall mean and include ownership of a 25% or greater equity interest in such other Person. 1.2. AGREEMENT This Amended & Restated Showboat Marina Partnership Agreement, as originally executed and as amended, modified, supplemented, or restated, from time to time, as the context may require. 1.3. BUDGET A Capital Budget or an Operating Budget. All Budgets shall set forth the assumptions and qualifications underlying their preparation. 2 1.4. CAPITAL ACCOUNT A separate account maintained for each Partner and determined strictly in accordance with the rules set forth in Section 704(b) of the Code, as amended, and Section 1.704-1(b)(2)(iv) of the Regulations. In accordance with those sections, a Partner's capital account shall be equal to the amount of money contributed by the Partner and the fair market value of any property contributed by the Partner (net of any liability secured by the property or to which the property is subject), increased by allocations of Net Income to the Partner and decreased by (a) the amount of money distributed to the Partner, (b) the fair market value of any property distributed to the Partner by the Partnership (net of any liability secured by the property or to which the property is subject), (c) the Partner's share of expenditures of the Partnership described in Section 705(a)(2)(B) of the Code and (d) the net losses allocated to the Partner. To the extent that anything contained herein shall be inconsistent with Section 1.704-1(b)(2)(iv) of the Regulations, the Regulations shall control. 1.5. CAPITAL BUDGET A budget setting forth all estimated sources and uses of funds for the initial development, including related road improvements to the Project, renovation, repair or replacement of the Project. 1.6. CAPITAL CONTRIBUTION The amount of cash and the Carrying Value of any property (net of any liabilities secured by such property that the Partnership is considered to assume or take subject to under Code Sec. 752) contributed by a party in exchange for an Interest in the Partnership. 1.7. CARRYING VALUE The adjusted basis of any assets of the Partnership, as determined for federal income tax purposes, except: (a) The initial Carrying Value of any asset contributed (or deemed contributed) to the Partnership shall be such asset's gross fair market value at the time of such contribution; (b) The Carrying Values of all Partnership assets shall be adjusted to equal their respective gross fair market values at the times specified in Section 3.2(c) and (d) of this Agreement if the Partnership has elected to adjust the Partners' Capital Accounts as provided in such Section; and (c) If the Carrying Values of the Partnership assets have been determined pursuant to clause (a) or (b) of this section, such Carrying Values shall be adjusted thereafter in the same manner as the assets' adjusted bases for federal income tax purposes, except that the depreciation deductions shall be computed in accordance with this Agreement. 1.8. CASINO FACILITIES All equipment and other property used in connection with the ownership and operation of the Vessel and anything used in connection with or in support of the Vessel including, but not limited to, docks, piers, restaurants, entertainment facilities, vehicular parking area(s), working 3 areas, restrooms, administrative offices for, but not limited to, accounting, purchasing, and management information services (including offices for Showboat management personnel). 1.9. CODE The Internal Revenue Code of 1986, as amended, including the corresponding provisions of any succeeding law. 1.10. COMMISSION The Indiana Gaming Commission. 1.11. COMPARABLE COMPANIES The following seven (7) companies: Argosy Gaming Co.; Presidents Riverboat Casinos, Inc.; Grand Casinos, Inc.; Aztar Corp.; Caesar's World, Inc.; Bally Manufacturing Corp.; and Showboat, Inc. A substitution may be made only by unanimous agreement of the Partners. The Partners agree that Empress River Casino Corporation ("Empress") shall be a Comparable Company only if, at the time any calculations shall be made using data related to Comparable Companies, the Empress shall have issued to the public any security in an offering registered with the Securities and Exchange Commission. In the event that Empress is included as a Comparable Company, it shall replace Aztar Corp. or, if that company is not then a Comparable Company, it shall replace one of the companies deriving the principal portion of its net revenue from riverboat operations as mutually agreed between the Partners. 1.12. DEVELOPMENT EXPENSES All expenses incurred in connection with the development of the Project which were paid by either Partner and not reimbursed by the Partnership. Each partner agrees to prepare a budget reasonably detailing the Development Expenses to be incurred by such Partner. Within thirty (30) days of the Effective Date each Partner shall submit to the other Partner, for the other Partner's approval (which approval cannot be unreasonably withheld or delayed) its Development Expenses budget. The other Partner shall have twenty (20) days to review the Development Expenses budget. Any dispute regarding the budget shall be resolved by arbitration. The Development Expenses budget may be amended from time to time with both Partners' written consent which neither Partner may unreasonably withhold or delay. Expenses not included in the Development Expenses budget shall not be reimbursed by the Partnership. Each Partner shall provide to the Partnership a monthly detailed accounting, with supporting documentation, of said Development Expenses paid by the Partner. 1.13. DISTRIBUTABLE CASH All cash receipts of the Partnership, excluding Capital Contributions and the proceeds of any sale or financing, less cash expenditures, including but not limited to, working capital reserves or other amounts as the Partners reasonably determine to be necessary or appropriate for the proper operation of the Partnership business, discharge of current indebtedness, and, where appropriate, its winding up and liquidation. 1.14. EFFECTIVE DATE The Effective Date of this Agreement shall be the date upon which Waterfront and Showboat executed the Original Agreement. 4 1.15. GROUND The site for the Casino Facilities located on land which the Partnership will have acquired by a ground lease, option to purchase, acquisition in fee or other agreement conveying control of the site to the Partnership. 1.16. INDIANA UNIFORM PARTNERSHIP ACT The law of the State of Indiana governing general partnerships codified at IC 23-4-1-1 et seq., as amended. 1.17. INTEREST The entire ownership interest of a Partner in the Partnership at any particular time, including the right of such Partner to any and all benefits to which a Partner may be entitled pursuant to this Agreement, together with the obligation of such Partner to comply with the terms of this Agreement. 1.18. LOSSES The taxable losses (the excess of allowable deductions over recognizable income items) of the Partnership for a period, or as a result of a transaction, for federal income tax purposes as determined in accordance with Code Sec. 703(a) computed with the adjustments required under this Agreement. 1.19. MANAGING PARTNER The Managing Partner of the Partnership will be Showboat, subject to removal as provided herein. 1.20. MINIMUM GAIN The amount determined strictly in accordance with the principles of Section 1.704-2(b)(2) of the Regulations. 1.21. NONRECOURSE DEDUCTIONS The Partnership's deductions characterized as "nonrecourse deduction" under Section 1.704-2(b)(1) of the Treasury Regulations. 1.22. OPENING The date the Project opens to the public for business for gaming activities by paying customers. 1.23. OPERATING BUDGET A budget setting forth all of the estimated sources and uses of funds for the operation of the Project for a specified period. The Operating Budget shall be reviewed and evaluated quarterly. 1.24. PARTNERS The Partners of the Partnership are Waterfront and Showboat. 5 1.25. PARTNERSHIP This Showboat Marina Partnership, an Indiana general partnership, and its successor entities. 1.26. PARTNERSHIP'S AUDITOR The initial independent auditor for the Partnership shall be KPMG Peat Marwick. 1.27. PERCENTAGE INTEREST With respect to each Partner, the Interest of such Partner expressed as a percentage of the total of the Interests of all Partners as set forth in Section 3.1 of the Agreement. 1.28. PERSON Any individual, partnership, limited partnership, corporation, limited liability company, unincorporated association, or other entity. 1.29. PROJECT The excursion cruise vessel casino development to be acquired, developed in the City of East Chicago, in the State of Indiana, and operated on Lake Michigan. Total costs and expenses associated with the Project shall not exceed $195,000,000 or be less than $170,000,000, subject to Section 10. 1.30. REGULATIONS The regulations of the United States Treasury Department pertaining to the Code, as amended, and any successor provision(s). 1.31. VESSEL 1. The excursion cruise vessel casino to be owned and operated by the Partnership on Lake Michigan, Indiana, in conjunction with the Casino Facilities. The gaming area, to be contained in the Vessel, shall be approximately 51,000 square feet. 2. CONTINUATION OF PARTNERSHIP 2.1. CONTINUATION OF PARTNERSHIP The Partners hereby agree to continue the Partnership originally formed on the Effective Date as a general partnership under the Indiana Uniform Partnership Act under the name and style of Showboat Marina Partnership, and on the terms and conditions set forth herein. This Agreement shall amend and restate the Original Agreement in its entirety effective as of the date hereof. 2.2. APPLICABLE LAW The rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Indiana Uniform Partnership Act and this Agreement. 2.3. THE SCOPE OF PARTNER'S AUTHORITY Except as otherwise expressly provided herein, no Partner shall have any authority to act on behalf of, or in the name of, the Partnership, or to enter into or assume any commitment or obligation or responsibility on behalf of any other Partner or the Partnership. 6 2.4. BUSINESS PURPOSES The purposes of the Partnership are (a) to acquire, design, construct, own and operate the Project, (b) to acquire, lease, sell, or otherwise dispose of other properties used or useful in connection with the foregoing, (c) to carry on any other activities necessary or incidental to the foregoing, and (d) to engage in any other business if such business is approved and agreed upon unanimously by the Partners prior to entering into such business. 2.5. TERM OF PARTNERSHIP (a) INITIAL TERM. The Partnership is constituted for an initial term ending December 31, 2023, and shall be continued for successive 1-year terms thereafter until terminated as provided in section "b" below, by operation of law or as otherwise provided in this Agreement. (b) TERMINATION BY PARTNER. If a Partner desires that the Partnership terminate upon the expiration of the initial term of the Partnership or any renewal term thereafter, such Partner shall give written notice to the other Partner of its intention to cause such termination at least 90 days prior to the end of the initial term or any renewal term thereafter, and the Partnership shall terminate at the end of the initial term or such renewal term, as the case may be, and shall thereafter be liquidated in accordance with the provisions of Section 11 hereof. 2.6. PRINCIPAL PLACE OF BUSINESS The principal business establishment of the Partnership shall be located in East Chicago, Indiana and shall be mutually chosen by the Partners. The Managing Partner may, in its sole discretion, change the location of the principal place of business of the Partnership, and, if it does so, it shall promptly notify Waterfront of such new location within five (5) days of such change. Notwithstanding the foregoing, in the event the Managing Partner desires to change the location of the principal business establishment of the Partnership to a location outside of East Chicago, the Managing Partner shall obtain the consent to such change from Waterfront, whose consent may not be unreasonably withheld or delayed. 2.7. PROPERTY OF THE PARTNERSHIP All personal property and real property owned or leased by the Partnership shall be deemed to be owned or leased by the Partnership and none of the Partners shall have any right, title, or interest therein; provided, however, that a Partner may be a lessor or sublessor of property which is leased to the Partnership. To the extent permitted by law, title to all property owned by the Partnership shall be held by the Partnership in its name. 2.8. CERTIFICATE Upon the execution of the Original Agreement, the Managing Partner shall perform all acts necessary to assure the prompt filing of such certificate of fictitious or assumed business name as is required by Indiana law, and shall perform all other acts required by Indiana law or any other law to perfect and maintain the Partnership as a Partnership under the laws of the State of Indiana. 2.9. LICENSING Each Partner covenants to use its best efforts to diligently obtain all state and local licenses, including gaming licenses, necessary to conduct gaming operations in the Project. The 7 Partners agree to provide each other with copies of all applications, reports, letters and other documents filed or provided to the state or local licensing authorities. In the event that either Partner as a result of a communication or action by the Commission or on the basis of consultations with its gaming counsel and/or other professional advisors, reasonably believes in good faith, with the concurrence of the other Partner's board of directors, that the Commission is likely to: (i) fail to license and/or approve the Partnership or its Affiliates to own and operate any gaming related businesses; (ii) grant required gaming licensing and/or approval only upon terms and conditions which are unacceptable to Showboat and Waterfront; (iii) significantly delay the licensing and/or approval contemplated under this Agreement; or (iv) revoke any existing license or casino operating contract of the Partnership or its Affiliates, due to concerns of any aspect of the suitability of a particular shareholder or owner of an interest in a Partner or its Affiliate, then the Partner shall divest itself of its interest in the Affiliate or cause such shareholder or owner of an interest in the Partner or the Affiliate to divest itself of such interest. If, however, the events described in subparagraphs (i) through (iv) arise from concerns with respect to the suitability of a particular Partner ("Selling Party") then the Selling Party's entire interest in the Partnership may be purchased by the other Partner at a purchase price equal to the greater of the then fair market value of the Selling Party's Partnership Interest or the unreturned Capital Contributions and unreimbursed Development Expenses of the Selling Party. The fair market value shall be determined in accordance with Section 9.1. 3. FUNDING OF THE PARTNERSHIP 3.1. THE PERCENTAGE INTEREST OF EACH PARTNER IN THE PARTNERSHIP The Percentage Interests of the Partners shall be: Waterfront 45% Showboat 55% 100% 3.2. CAPITAL ACCOUNTS (a) A separate Capital Account shall be maintained by the Partnership for each Partner in accordance with Sec. 704(b) of the Code and Regulations Sec. 1.704-1(b)(2)(iv). Each Partner's capital account shall be (i) credited for each contribution of capital (at net fair market value) and allocations to the Partner of Partnership Income and Gain, and (ii) debited for each allocation of Partnership Loss and Deduction (including Depreciation), all as set forth in Section 4 hereof, and by the amount of money and other property (at net fair market value) distributed to the Partner by the Partnership. (b) If the Partnership at any time distributes any of its assets in kind to any Partner, the Capital Account of each Partner shall be adjusted to account for that Partner's allocable share (as determined in this Agreement) of the profits or losses that would have been realized by the Partnership had it sold the assets that were distributed at their respective fair market values immediately prior to their distribution. 8 (c) In the event the Partnership makes an election under Code Sec. 754, the amounts of any adjustment to the basis (or Carrying Value) of assets of the Partnership made pursuant to Code Sec. 743 shall be reflected in the Capital Accounts of the Partners, and the amounts of any adjustments to the basis (or Carrying Value) of assets of the Partnership made pursuant to Code Sec. 734 as a result of the distribution of property by the Partnership to a Partner (to the extent that such adjustments have not previously been reflected in the Partner's capital accounts) shall be reflected in the Capital Accounts of the Partner in the manner prescribed in regulations promulgated under Code Sec. 704(b). (d) If elected by the Partnership, upon the occurrence of any of the following events, the Capital Account balance of each Partner shall be adjusted to reflect the Partner's allocable share (as determined under this Agreement) of the profits and losses that would be realized by the Partnership if it sold all of its property at its fair market value on the day of the adjustment: (i) any increase in any new or existing Partner's Interest resulting from the contribution of cash or property by such Partner to the Partnership; (ii) any reduction in any Partner's Interest resulting from a distribution of such Partner in redemption of all or a portion of such Partner's Interest in the Partnership; and (iii) whenever else allowed under applicable Regulations. (e) In the event of a permitted transfer of an Interest of a Partner pursuant to the terms of this Agreement, the Capital Account of the Transferor Partner shall become the Capital Account of the transferee Partner to the extent it relates to the transferred interest. (f) The provisions of this section relating to the maintenance of Capital Accounts are intended to comply with Regulation Section 1.704-1(b) and shall be interpreted and applied in a manner consistent with such Regulations. If it is determined that it is a burden to modify the manner in which Capital Accounts or any debits or credits thereto (including, without limitation, debits or credits relating to liability secured by property contributed to or distributed by the Partnership or which are assumed by the Partnership or any of the Partners) in order to comply with such Regulation, after obtaining advice from the Partnership's Auditor the Partners may make such modification provided that there is no material effect upon the amounts otherwise distributable to any Partner upon dissolution of the Partnership. 3.3. RETURN OF CAPITAL CONTRIBUTIONS Except as may otherwise be provided herein, no Partner shall be entitled to demand or receive the return of any Capital Contribution made by such Partner. No Partner shall be entitled to demand and receive property other than cash in return for such Partner's Capital Contribution. Notwithstanding the foregoing: (a) at such time as the Partnership and its Partners are licensed by the Commission, one-half (1/2) of Waterfront's Capital Contribution and unreimbursed Development Expenses, in each case together with the preferred return thereon provided for in Section 3.5, shall be returned to Waterfront by the Partnership; and (b) within six months after the Opening, the Partnership shall return to Waterfront its remaining unpaid Capital Contribution and unreimbursed Development Expenses, in each case together with the preferred return thereon provided for in Section 3.5. 9 If the Partnership has insufficient funds to return such amounts, Showboat shall make an immediate cash Capital Contribution or loan to the Partnership in an amount sufficient for the Partnership to discharge its obligations to Waterfront. 3.4. NO PRIORITY Unless otherwise agreed or as provided in this Agreement, no Partner shall have any priority over any other Partner with respect to distributions or the return of Capital Contributions. 3.5. PREFERENTIAL RETURN Each Partner shall be entitled to a preferential, cumulative, but not compounded, annual return of twelve percent (12%) on such Partner's outstanding Capital Contribution and unreimbursed Development Expenses until the Capital Contribution, unreimbursed Development Expenses and interest thereon are paid in full. 3.6. LOANS The Partners, or any of them, upon prior unanimous consent of the Partners, may lend, or procure the lending of, money or property to or for the Partnership upon such terms and conditions as may be agreed upon at that time. Except as otherwise provided herein, any loans made to the Partnership by the Partners shall be entitled to a cumulative, but not compounded, annual return of twelve percent (12%) on the outstanding loan balance until the loan and such return thereon has been paid in full. Such loans shall not be considered contributions to the capital of the Partnership. Except as otherwise provided herein, the annual return on such loans shall be paid out of Distributable Cash or the proceeds of the sale or refinancing of part or all of the assets of the Partnership (in connection with the termination of the Partnership or otherwise) in the same priority as the preferred return on the Partners' outstanding Capital Contributions and unreimbursed Development Expenses is payable pursuant to Sections 4.3.b(iv), 4.3.d(iv) or 11.2(f), as the case may be. The principal amount of any such loans shall be paid out of Distributable Cash or the proceeds of the sale or refinancing of part or all of the assets of the Partnership (in connection with the termination of the Partnership or otherwise) in the same priority as the Partners' outstanding Capital Contributions and unreimbursed Development Expenses is payable pursuant to Sections 4.3.b(v), 4.3.d(v) or 11.2(g), as the case may be. 3.7. (DELETED - NO LONGER USED) 3.8. CONTRIBUTIONS (a) INITIAL CAPITAL CONTRIBUTION. Immediately after the Effective Date, the Partners shall contemporaneously each make the following initial Capital Contributions (each Partner's contribution shall be conditioned on the other making its contribution): (i) Waterfront - $2,100,000 (ii) Showboat - $2,600,000 (b) ADDITIONAL CAPITAL CONTRIBUTIONS. The Partners shall make additional Capital Contributions to the Partnership under the following circumstances, which amounts shall be credited to their respective Capital Accounts: 10 (i) (Deleted - No Longer Used) (ii) Showboat -- In lieu of an additional Capital Contribution, Showboat shall loan the Partnership a total of $37.4 million. The first $29.525 million of this loan shall bear a preferential return at 12% per annum as provided in Section 3.6 and the remaining $7.875 million shall bear interest as provided in Section 3.9.(a)(iii). Interest on said loan shall be paid in the same manner and priority as provided for the preferred return on loans from Partners pursuant to Section 3.6; or (iii) At such other times as the Partners shall unanimously determine that additional funds are needed to carry on the business of the Partnership. In the absence of such agreement, Showboat shall, subject to the limitations in Section 10.2, make such additional Capital Contributions or loans as are needed to carry on the business of the Partnership. (c) Additional Capital Contributions pursuant to the first sentence of (iii) above shall be made by the Partners in the following percentages: Waterfront 45% Showboat 55% -------- 100% ======== 3.9. FAILURE TO CONTRIBUTE (a) If either Waterfront or Showboat should fail to make any Capital Contribution or a required loan on or before the date such contribution or loan is due (the "Defaulting Partner"), such failure shall constitute a default under this Agreement and the other Partner (the "Non-Defaulting Partner") may, at any time thereafter while the contribution remains unpaid, serve written notice ("Notice of Demand") upon the Defaulting Partner requiring it to make the Capital Contribution or loan, together with all costs and expenses that may have been incurred by the Partnership by reason of the nonpayment. The Notice of Demand shall specify a date (which shall be not less than ten (10) days after the date of the notice) on which, and the place at which, the contribution or loan and such costs and expenses are to be paid. In the event of the nonpayment of the additional Capital Contribution or loan on such date and at such place, the Non-Defaulting Partner shall have the right: (i) To buy the Defaulting Partner's Interest for an amount equal to the fair market value of the Defaulting Partner's Interest, computed as set forth in Section 9.1 (and for purposes of such computation, the valuation date shall be the end of the month next preceding the month in which such contribution or loan should have been made, as set forth in the notice contemplated by this Section), such amount to be payable in cash at a closing to be held in East Chicago, Indiana on a date set by the Non-Defaulting Partner not later than ninety (90) days after the Non-Defaulting Partner gives written notice of such election to the Defaulting Partner, which notice must be given thirty (30) days after the expiration of the period specified in the Notice of Demand, provided, however, that 11 the closing may be extended for a reasonable period of time in the event the procedures set forth in Section 9 have not been completed within said 90-day period; (ii) To sue the Defaulting Partner or any guarantor to cause such Capital Contribution or loan to be made or to sue for damages for the failure to do so; or (iii) To advance to the Partnership an amount equal to the Defaulting Partner's required additional Capital Contribution or loan, and the amount so advanced, together with any corresponding Capital Contribution made by the Non- Defaulting Partner for its own account shall be considered loans to the Partnership and shall be repaid by the Partnership to such Non-Defaulting Partner with interest thereon at an annual rate four (4) percentage points above the rate shown in the Wall Street Journal (or its successor publication) from time to time as the prime rate for money center banks but with a floor of twelve percent (12%) per annum, which rate shall be determined on the first day of each month and shall be applied to the loan balance for the month. However, in no event shall the interest rate exceed the maximum lawful rate. Such interest shall be payable quarterly. (b) A Non-Defaulting Partner entitled to the remedies set out in subsections (ii) and (iii) above may pursue both simultaneously. 4. ALLOCATIONS AND DISTRIBUTIONS 4.1. DEFINITIONS As used herein, the terms "Income," "Gain," "Loss," "Deduction," and "Credit" shall have the same meanings as are generally used and understood in the context of subchapter K of the Code, and the term "Depreciation" shall have the same meaning as is generally used and understood in the context of Sections 167 and 168 of the Code. 4.2. ALLOCATION OF INCOME, GAIN, LOSS, DEDUCTION (INCLUDING DEPRECIATION), AND CREDIT (a) GENERAL. Each item of Partnership Income, Gain, Loss, Deduction (including Depreciation), and Credit, as determined for federal income tax purposes, shall be allocated between the Partners and shall be credited to (in the case of Income, Gain, and Credit) or charged against (in the case of Loss or Deduction (including Depreciation)), their respective capital accounts in proportion to their Percentage Interests in the Partnership. (b) COMPLIANCE WITH SECTION 704(C) OF THE CODE. In accordance with Section 704(c) of the Code and applicable Regulations, items of Income, Gain, Loss and Deduction (including Depreciation) with respect to any property contributed to the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and the fair market value ascribed to that property under this Agreement. In addition, in the event the value of any Partnership asset is required to be adjusted pursuant to the provisions of Section 704(b) and the Regulations thereunder, subsequent allocations of items of Income, Gain, Loss and Deduction (including Depreciation) for tax purposes with respect to such assets shall take account of any 12 variation between the adjusted basis of such asset for federal income tax purposes and its adjusted value, in the same manner as under Section 704(c) of the Code and the applicable Regulations. (c) SPECIAL ALLOCATIONS. Notwithstanding the provisions of Section 4.2(a) above, the following allocations of Profits and Losses shall be made: (i) MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Section 1.704-2(f) of the Regulations, in the event that there is a net decrease in the Partnership Minimum Gain during any taxable year, each Partner shall be allocated items of income and gain for such year, and, if necessary, subsequent years, in an amount equal to such Partner's share of the net decrease in such Partnership Minimum Gain during such year in accordance with Section 1.704-2(g) of the Regulations. Any such allocation for a given year shall consist first of gains from the disposition of property subject to Partner non-recourse debt and then, if necessary, a pro rata portion of the Partnership's other items of income and gain for such year. If there is insufficient income and gain in a year to make the allocations specified in this section for all Partners for such year, the income and gain shall be allocated among the Partners in proportion to the respective amounts they would have been allocated had there been an unlimited amount of income and gain for such year. This section is intended to comply with the Minimum Gain Chargeback requirement of Section 1.704-2(f) of the Regulations and shall be interpreted consistent with that section. (ii) PARTNERSHIP MINIMUM GAIN CHARGEBACK. Except as otherwise provided in Section 1.704-2(i)(4) of the Regulations, in the event there is a net decrease in the Minimum Gain attributable to a Partner non-recourse debt during any taxable year, each Partner with a share of such Minimum Gain shall be allocated income and gain for the year (and, if necessary, subsequent years) in accordance with Section 1.704-2(i) of the Regulations. Any such allocation for a given year shall consist first of gains from the disposition of property subject to Partner non-recourse debt, and then, if necessary, a pro rata portion of the Partnership's other items of income and gain. If there is insufficient income and gain in a year to make the allocations specified in this section for all such Partners for such year, the income and gain shall be allocated among such Partners in proportion to their respective amounts they would have been allocated had there been an unlimited amount of income and gain for such year. This section is intended to comply with the Chargeback requirement of Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistent with that section. (iii) QUALIFIED INCOME OFFSET. Any Partner who unexpectedly receives an adjustment, allocation, or distribution described in subparagraphs (4), (5) or (6) of Section 1.704-1(b)(2)(ii)(d) of the Regulations, which adjustment, allocation or distribution creates or increases a deficit balance in that Partner's Capital Account, shall be allocated items of "book" income and gain in an amount and manner sufficient to eliminate or to reduce the deficit balance in that Partner's Capital Account so created or increased as quickly as possible in accordance with Section 1.704-1(b)(2)(ii)(d) of the Regulations and its requirements for a "qualified income offset." 13 For purposes of this section, Capital Accounts shall be adjusted as provided for in Sections 1.704-1(b)(2)(ii)(d), 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations. The Partners intend that the provisions set forth in this section will constitute a "qualified income offset" as described in the Regulations. Regulations shall control in the case of any conflict between those Regulations and this subjection. (iv) ALLOCATION OF NET INCOME. The net income of the Partnership shall be allocated as follows: (i) to each Partner with a negative Capital Account, pro rata in an amount equal to (or in proportion to if less than) the amount of the negative Capital Account of each such party; and thereafter (ii) to the Partners in accordance with their Percentage Interests. (v) ALLOCATION OF NET LOSSES AND NON-RECOURSE DEDUCTIONS. (a) Net losses shall be allocated as follows: (A) To the Partners with positive Capital Accounts, in accordance with the ratio of their positive Capital Account balances, until no Partner has a positive Capital Account; and thereafter, (B) To the Partners, in accordance with the ratio of their Percentage Interests. (b) After the allocations of net losses, non-recourse deductions shall be allocated in accordance with the Partner's Percentage Interests. (c) After the allocations of net losses and non-recourse deductions, Partner non-course deductions shall be allocated between the Partners as required in Section 1.704-2(i)(1) of the Regulations, in accordance with the manner in which the Partner or Partners bear the economic risk of loss for the Partner non-recourse debt corresponding to the Partner non-recourse deductions, and if more than one Partner bears such economic risk of loss for a Partner non-recourse debt, the corresponding Partner non-course deductions must be allocated among such Partners in accordance with the ratios in which the Partners share the economic risk of loss for the party non-recourse debt. (vi) TAX ALLOCATIONS. To the extent permitted by Section 1.704-1(b)(4)(i) of the Regulations, all items of income, gain, loss and deductions for federal and state income tax purposes shall be allocated in accordance with corresponding "book" items in accordance with the principles of Section 704(c) of the Code and Section 1.704-1(b)(4)(i) of the Regulations. Where any provision depends on the Capital Account of any Partner, that Capital Account shall be determined after the operation of all preceding provisions for the year. (vii) VARYING INTEREST. Where any Partner's interest, or proportion thereof, is acquired or transferred during a taxable year, the Partnership may choose to implement the provisions of Section 706(d) of the Code in allocating among the varying interests. The 14 methods, hereinabove set forth, by which net income, net losses and distributions are allocated and distributed are hereby expressly consented to by the Partners as an express condition of becoming a Partner. (d) DETERMINATION OF PROFITS AND LOSSES. For purposes of this Agreement, profits and losses shall be determined in accordance with the accounting method utilized by the Partnership for federal income tax purposes, with the following adjustments: (i) Items of gain, loss and deduction shall be computed based upon the Carrying Value of each of the Partnerships' assets rather than upon each such asset's adjusted basis for federal income tax purposes. (ii) Any tax exempt income received by the Partnership shall be included as an item of gross income. (iii) The difference between the adjusted basis of any assets for federal income tax purposes and the Carrying Value of any assets of the Partnership contributed or deemed contributed to the Partnership shall not be taken into account. (iv) Any expenditures of the Partnership described in Section 705(a)(2)(B) (including any expenditures treated as being described in Section 705(a)(2)(B) pursuant to the regulation promulgated under Section 704(b) of the Code) shall be treated as a deductible expense. (e) RECAPTURE. In making the allocation of Gain or Profit among the Partners, the ordinary income portion, if any, of such Gain or Profit caused by the recapture of cost recovery or any other deductions shall be allocated among those Partners who were previously allocated the cost recovery or any other deductions in proportion to the amount of such deductions previously allocated to them. It is intended that the Partners, as between themselves, shall bear the burden of recapture caused by cost recovery or other deductions which were previously allocated to them, in proportion to the amount of such deductions which had been allocated to them, notwithstanding that a Partner's share of Profits, Losses or Liabilities may increase or decrease from time to time. Nothing in this Section 4.3(e), however, shall cause the Partners to be allocated more or less Gain or Profit than would otherwise be allocated to them pursuant to this Section 4. (f) ALLOCATION SAVINGS PROVISION. The allocation method set forth in this Section 4 is intended to allocate Profits and Losses to the Partners for federal income tax purposes in accordance with their economic interests in the Partnership while complying with the requirements of Section 704(b) of the Code and the Regulations promulgated thereunder. If in the opinion of the Managing Partner, the allocation of Profits or Losses pursuant to the preceding provisions of this Section 4 shall not (1) satisfy the requirements of Section 704(b) of the Code or the Regulations thereunder, (2) comply with any other provisions of the Code or Regulations, or (3) properly take into account any expenditure made by the Partnership or transfer of an interest in the Partnership, then withstanding anything to the contrary contained in the preceding provisions of this Section 4, Profits and Losses shall be allocated in such a manner so as to reflect 15 properly (1), (2) or (3) as the case may be. The Managing Partner shall have the right to amend this Agreement with the consent of Waterfront (whose consent shall not be unreasonably withheld or delayed) to reflect any such change in the method of allocating Profits and Losses. 4.3 DISTRIBUTIONS AND INVESTMENT OF CASH (a) (Deleted - No longer used) (b) Distributable Cash from operations shall be distributed not less frequently than quarterly. All such distributions shall be made to the Partners as follows: (i) first, payment of the Development Fee if not previously paid pursuant to this Section 4.3 or pursuant to Section 4.4, below; (ii) second, return of Waterfront's Capital Contribution plus unreimbursed Development Expenses, in each case together with the preferred return thereon provided for in Section 3.5, if not previously paid pursuant to this Section 4.3 or pursuant to Section 3.3 above; (iii) third, to the Partners in an amount equal to the good faith estimate of the income tax liability of each Partner (or each Partners' owner or owners) with respect to the income realized by each partner, including, without limitation, any income realized pursuant to Section 4.2(c)(iii) hereof, calculated by multiplying such estimated income by the highest combined federal and state income tax rates of each such Partner (or its owners), taking into account whether such Partner (or its owners) will be subject to corporate or individual taxes. (iv) fourth, any accrued and unpaid preferred return on each Partner's outstanding Capital Contribution and expenses pursuant to Section 3.5 above; (iv) fifth, to the extent not previously repaid by this partnership or by Showboat Marina Casino Partnership, one-fifth (1/5th) (calculated on an annualized basis together with all prior distributions to such Partner in that calendar year) of each Partner's outstanding Capital Contributions, loans (including the Standby Equity Commitment Loan (as defined in Section 5.13(e))but excluding the Guarantee Fee (as defined in Section 5.13(e)) and unreimbursed Development Expenses shall be repaid to the Partners annually beginning one year after the Opening; subject, however, to the limitation that (a) no more than 80% of the Distributable Cash available for disbursement pursuant to the provisions of this subsection shall be distributed pursuant hereto, provided, however, the Partners may mutually agree to repay more than one-fifth (1/5) of each Partner's outstanding Capital Contributions, loans and unreimbursed Development Expenses; (b) the balance of the 80% of such Distributable Cash available for distribution shall be distributed pursuant to subsection 4.3.b(vi) below and (c) the balance of such Distributable Cash shall be available for distribution pursuant to subsection 4.3.b(vii) below; and (vi) sixth, to the extent not previously repaid, to the payment of the Guarantee Fee as provided under Section 5.13 (e), including interest thereon, subject, however, to 16 the limitation that (a) no more than 80% of the Distributable Cash available for disbursement pursuant to the provisions of this subsection shall be distributed pursuant hereto, and (b) the balance of such Distributable Cash shall be available for distribution pursuant to subsection 4.3.b(vii) below; and (vii) the balance, if any, to the Partners in proportion to their respective Percentage Interests. (c) All distributions of cash, except for payment of the Development Fee, reimbursement of Development Expenses, payment of any preferred return on Partners' Capital Contributions or Development Expenses and repayment to Partners of loans and interest thereon, shall be charged to the Partners' respective Capital Accounts. (d) All proceeds of the sale or refinancing of part or all of the assets of the Partnership, net of transaction costs, repayment of debt and reasonable reserves, shall be distributed in the following manner to the Partners: (i) first, payment of the Development Fee if not previously paid pursuant to this Section 4.3 or pursuant to Section 4.4, below; (ii) second, return of Waterfront's Capital Contribution plus unreimbursed Development Expenses, in each case together with the preferred return thereon provided for in Section 3.5, if not previously paid pursuant to this Section 4.3 or pursuant to Section 3.3 above; (iii) third, to the Partners in an amount equal to the good faith estimate of the income tax liability of each Partner (or each Partners' owner or owners) with respect to the income realized by each partner, including, without limitation, any income realized pursuant to Section 4.2(c)(iii) hereof, calculated by multiplying such estimated income by the highest combined federal and state income tax rates of each such Partner (or its owners), taking into account whether such Partner (or its owners) will be subject to corporate or individual taxes. (iv) fourth, any accrued and unpaid preferred return on each Partner's outstanding Capital Contribution and expenses pursuant to Section 3.5 above; (v) fifth, to the extent not previously repaid by this partnership or by Showboat Marina Casino Partnership, one-fifth (1/5) (calculated on an annualized basis together with all other distributions to such Partner in that calendar year) of each Partner's outstanding Capital Contributions, loans (including the Standby Equity Commitment Loan (as defined in Section 5.13(e)) but excluding the Guarantee Fee (as defined in Section 5.13(e))) and unreimbursed Development Expenses shall be repaid to the Partners annually (beginning one year after the Opening); subject, however, to the limitation that (a) no more than eighty percent (80%) of the proceeds available for distribution pursuant to the provisions of this subsection shall be distributed pursuant hereto, provided, however, the Partners may mutually agree to repay more than one-fifth (1/5) of each Partner's outstanding 17 Capital Contributions, loans and unreimbursed Development Expenses; (b) the balance of the 80% of such Distributable Cash available for distribution shall be distributed pursuant to subsection 4.3.d(vi) below and (c) the balance of such Distributable Cash shall be available for distribution pursuant to subsection 4.3.d(vii) below; and (vi) sixth, to the extent not previously repaid, to the payment of the Guarantee Fee as provided under Section 5.13 (e), including interest thereon, subject, however, to the limitation that (a) no more than 80% of the Distributable Cash available for disbursement pursuant to the provisions of this subsection shall be distributed pursuant hereto, and (b) the balance of such Distributable Cash shall be available for distribution pursuant to subsection 4.3.b(vii) below; and (vii) the balance, if any, to the Partners in proportion to their respective Percentage Interests. (e) All liquidating distributions shall be made in accordance with the provisions of Section 11.2 hereof. (f) All cash distributions, except for repayment to Partners of loans and interest thereon, shall be made to the Partners simultaneously. 4.4. DEVELOPMENT FEE At such time as the Partnership (a) gains control of the Ground pursuant to Sections 1.14 and 5.6 and (b) has been licensed to operate a gaming facility by the Commission, each Partner shall become entitled to a development fee of no less than $1,000,000. One-half of the development fee shall be paid to each Partner at the time that the conditions specified in the preceding sentence have been met. The balance of the development fee shall be payable in six (6) equal monthly installments commencing one (1) month after the payment specified in the preceding sentence, with the balance, if any, payable upon the Opening. If the Partnership has insufficient funds to make such payments, Showboat shall make an immediate Cash Capital Contribution or loan to the Partnership to allow such payments. 5. MANAGEMENT OF THE PARTNERSHIP 5.1. MANAGING PARTNER The management of the Partnership shall be vested in the Managing Partner. The Managing Partner shall represent and act for and on behalf of the Partnership in any matter or thing whatsoever, being hereby expressly authorized and empowered in its sole and unlimited discretion to conduct, manage and transact the business, affairs, and concerns of the Partnership in accordance with a Budget preapproved by the Partners, except for those matters described in Sections 5.2 and 5.3 that require the consent of Waterfront. The Budget shall contain provisions for economic incentives as specified by the certificate of suitablility issued to the Partnership by the Indiana Gaming Commission or the riverboat owner's license, if one is issued. The Managing Partner shall submit a proposed initial Capital Budget and a pro-forma five (5) year projection ("Projection") of operations to Waterfront within thirty (30) days after the Effective Date and a proposed Operating and Capital Budget to Waterfront at least thirty days prior to the 18 commencement of each calendar year. Waterfront agrees to review the proposed Budget and to present objections or comments to Showboat within thirty (30) days of receipt of the Budget. Showboat agrees to review any such communications from Waterfront within ten (10) business days of the receipt of such comments. Waterfront and Showboat shall then promptly meet in person or by telephone at a time and location mutually convenient and acceptable to Mr. Michael Pannos on behalf of Waterfront and Mr. J. Kell Houssels on behalf of Showboat to approve or appropriately revise and approve the Budget. Waterfront and Showboat may freely substitute their representatives for this purpose upon reasonable notice. A dispute over a Budget not resolved within sixty (60) days of original receipt of such Budget shall be resolved by arbitration. The Managing Partner shall continue to operate under a prior approved Operating Budget if one exists, and has authority to make all payments for taxes, utilities, insurance and other amounts to third parties outside of its control necessary for the uninterrupted operation of the Project. Managing Partner shall designate the placement of all gaming equipment and ancillary furnishings and the configuration of ancillary areas within the vessel. Once operating, the Managing Partner shall have exclusive control and responsibility for the operation of the Casino Facilities. 5.2. RESTRICTIONS The Managing Partner may not do any of the following without the concurrence of Waterfront which concurrence cannot be unreasonably withheld or delayed: (a) Except as otherwise expressly provided for herein, construct, improve, buy, own, sell, convey, exchange, assign, rent, or lease any property (real, personal or mixed), or any interest therein totaling, during any one calendar year, more than $500,000 unless in an approved Capital Budget; (b) Borrow money, issue evidence of indebtedness, secure any such indebtedness by mortgage, deed of trust, pledge, or other lien, or execute agreements, notes, mortgages, deeds of trust, assignments, security agreements, financing statements or other documents relating thereto which involve a credit facility to carry out the same totaling, during any one calendar year, more than $500,000 unless consented to by the other Partner; (c) Make or revoke any election permitted the Partnership by any taxing authority (including, without limitation, those within the contemplation of Code Subtitle A, Chapter 1, Subchapter K), and to act as the tax matters partner for purposes of Code Subtitle F, Chapter 63, Subchapter C; (d) Abandon any of the assets of the Partnership in excess of $50,000; (e) Perform any act in violation of the terms and conditions of this Agreement, the Indiana Uniform Partnership Act, or any other applicable law or regulation; (f) Make, execute, or deliver any general assignment for the benefit of creditors or any bond, confession of judgment, guaranty, indemnity bond or surety bond; 19 (g) Initiate or settle any litigation by or against the Partnership for more than $100,000 or settle any proceeding before any governmental or regulatory body for more than $100,000; (h) Vote any shares of stock owned by the Partnership. (i) Disburse funds that exceed an approved Operating Budget by more than five percent (5%) without prior concurrence of Waterfront. Any such variance in excess of five percent (5%) shall be promptly reported to Waterfront with reasonable explanations. (j) Sell, lease or otherwise dispose of the Vessel. 5.3. ACTIONS REQUIRING UNANIMOUS CONSENT OF THE PARTNERS (a) So long as Waterfront retains a Partnership Interest in excess of twenty percent (20%), the following actions or decisions shall require the unanimous consent of the Partners which consent shall not be unreasonably withheld or delayed; (i) sale of all or substantially all of the assets of the Partnership; (ii) approval of the initial development plan, initial Capital Budget and pro-forma Operating Budget for the Project; (iii) approval of the annual Operating Budget and annual Capital Budget, and any amendments thereto; (iv) amendments to the Partnership Agreement; (v) material changes in the nature of the business of the Partnership; (vi) application for additional gaming licenses by the Partnership; (vii) a change in the economic incentives as described in Section 5.1 of this Agreement; or (viii) a change in the Partnership auditor. (b) Notwithstanding subsection 5.3(a)(iv) above, the Partners agree that any amendment to the Partnership Agreement which would materially impair the rights of Waterfront contained herein shall require the consent of Waterfront. 5.4. DEALINGS WITH AFFILIATES All fees paid or goods or services purchased from a Partner or its Affiliate shall be at "arms length" on terms no less favorable to the Partnership than are commercially available to the Partnership from other customarily available sources. All such transactions shall require the consent of the unaffiliated or unrelated Partner, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, consent to a specific transaction shall not be required if the transaction is expressly included within and identified in an approved Operating Budget or Capital Budget. 20 5.5. REMOVAL OF MANAGING PARTNER A Managing Partner may be removed by the other Partner in the event that the Managing Partner shall ultimately be proven, by an unappealable order or judgment of a court of competent jurisdiction, to have engaged in criminal acts or acts of fraud or willful misconduct with respect to the business of the Partnership. If a Partner is removed as the Managing Partner pursuant to this section, such removal shall have no effect on such Partner's Partnership Interest. 5.6. GROUND Waterfront shall be responsible for locating the Ground, subject to the approval of Showboat, for the Project and negotiating a site control agreement, such as a ground lease with the City of East Chicago, or other appropriate party with respect to the Ground, allowing the Partnership to develop, construct and operate the Project. Showboat shall assist Waterfront in locating the Ground and negotiating the site control agreement. Wherever possible, Waterfront shall consult with Showboat with respect to all aspects of negotiating the site control agreement and any other actions taken by Waterfront in connection with the development and operation of the Project. The site control agreement shall be subject to the prior written consent of Showboat, which consent shall not be unreasonably withheld. Waterfront shall use its best efforts to obtain the longest possible term for the site control agreement. 5.7. PARTNERSHIP DEBTS The Partnership shall be primarily liable to creditors of the Partnership for all Partnership debts. Each Partner shall be proportionately liable to such creditors on the basis of such Partner's Percentage Interest. Each Partner agrees to indemnify the other Partner to the extent such other Partner may pay to a creditor of the Partnership any amounts in excess of such Partner's proportionate share of a Partnership debt. Notwithstanding anything in this Section to the contrary, the Partners are responsible for their respective obligations under Section 11. 5.8. DELEGATION OF AUTHORITY The Partners may delegate all or any of their powers, rights, and obligations hereunder, and the person so delegated may appoint, employ, contract, or otherwise deal with any person, including any other Partner(s), for the transaction of the business of the Partnership, which person, under the supervision of the Partners, may perform any acts or services for the Partnership as the Partners may approve in writing. 5.9. OTHER VENTURES Nothing contained herein shall be construed to prevent any of the Partners from engaging in any other business venture. Except as expressly provided herein, neither the Partnership nor any other Partner shall have any rights in and to any such ventures or the profits, losses, or cash flow derived therefrom. 5.10. EXCULPATION FROM LIABILITY; INDEMNIFICATION (a) No Partner shall be liable to the Partnership or to any other Partner because any taxing authority contests, disallows, or adjusts any item of income, gain, loss, deduction, credit, or tax preference in the Partnership income tax returns. 21 (b) The Managing Partner shall not be liable to the Partnership or any of the other Partners for, and the Managing Partner shall be indemnified and held harmless by the Partnership from and against, any and all claims, demands, liabilities, costs, expenses (including attorney's fees and court costs), and damages of any nature whatsoever arising out of or incidental to the Managing Partner's management of the Partnership's affairs, except where such claim is based upon the criminal acts, fraud or willful misconduct of the Managing Partner, or by the breach by the Managing Partner of any provision of this Agreement. The indemnification rights herein contained shall be cumulative of, and in addition to, any and all other rights, remedies, and recourse of the Managing Partner, whether available pursuant to this Agreement or at law. (c) The Partners shall not be liable to the Partnership or to any of the other Partners for, and the Partners shall be indemnified and held harmless by the Partnership from and against, any and all claims, demands, liabilities, costs, expenses (including attorney's fees and court costs), and damages of any nature whatsoever arising out of or incidental to the Partners' management of the Partnership's affairs, except where such claim is based upon the criminal acts, fraud or willful misconduct of the Partners, or by the breach by the Partners of any provision of this Agreement. The indemnification rights herein contained shall be cumulative of, and in addition to, any and all other rights, remedies, and recourse of the Partners, whether available pursuant to this Agreement or at law. 5.11. MEETINGS OF PARTNERS The Partners shall meet in person or by telephone at least once each month to discuss the operations of the Partnership. The Managing Partner shall distribute daily reports of operations to the Partners. 5.12. REPORTS Deleted - not used. 5.13. PARTNERSHIP DEVELOPMENT FINANCING (a) Showboat shall obtain on behalf of the Partnership and with the assistance of Waterfront, third-party debt financing in an amount reasonably required for the development of the Project and operating cash flow deficits for a period of up to one year after Opening in accord with the initial Capital Budget and the Projection (collectively "Development Financing"). The Development Financing shall be nonrecourse to Waterfront and may be secured by the Partnership's assets or cash flows only. Any financing obtained by Showboat shall not require the Partnership to issue warrants, participation of equity or cash flow or other equity "kickers" except as may be specifically agreed to by all Partners. Subject to Force Majeure, if Showboat is unable to obtain the Development Financing, or if it elects not to pursue the Development Financing, it shall make an additional Capital Contribution or loan to fund such necessary amounts. Showboat shall, on or before one hundred twenty (120) days after the issuance of a certificate of suitability to the Partnership or such later date as the Securities and Exchange Commission has permitted for the effectiveness of the Registration Statement for the proposed debt financing if such financing is raised in a public offering required to be registered under the Securities Act of 1933 (the "Funding Date") and further subject to market conditions, (i) obtain the Development Financing, (ii) make such capital contribution in lieu thereof, or (iii) obtain an unconditional letter of credit, a guaranty of timely and sufficient financing from a reputable financial institution with sufficient assets, a 22 bridge loan in the amount of the Development Financing or other similar instrument demonstrating the clear availability of the funds equal to the Development Financing from a reputable financial institution with sufficient assets, all in a time frame consistent with that set forth in the Capital Budget. Showboat shall use its best efforts to timely and in good faith complete all financing arrangements by such Funding Date. The failure of Showboat to timely provide the Development Financing or, in the alternative, to make a sufficient Capital Contribution or loan, shall constitute a breach of this Agreement and a failure of Showboat to make the Capital Contribution or loan shall entitle Waterfront to the remedies resulting therefrom in Section 3.9 of this Agreement. (b) The Partnership will form another Indiana general partnership called Showboat Marina Casino Partnership ("Casino") and a finance corporation (the "Financing Corporation" and together with Casino, the "Issuers") to serve as joint issuers of a portion of the Development Financing. The Issuers shall be formed by Showboat pursuant to organizational documents in form and substance acceptable to both Partners. The only other partner of Casino shall be an Indiana general partnership formed for that purpose called Showboat Marina Investment Partnership ("Investment"). Investment shall be formed by the Partners and the equity interests in Investment shall be owned by the Partners in the same percentages as the Percentage Interests of the Partners in this Partnership. The Partnership shall hold a ninety-nine percent (99%) interest in Casino and Investment shall hold a one percent (1%) interest in Casino. The Partnership shall be the managing partner of Casino. (c) The Partnership shall enter into a management agreements (the "Management Agreement") with Casino providing, among other things, for the payment of a management fee to the Partnership of at least two percent (2%) of net revenue (as defined in the Management Agreement)of the Project and five percent (5%) of earnings before interest expense, taxes, depreciation and amortization of the Project. The Management Agreement shall further provide that all costs, expenses, funding, operating deficits, operating capital and other liabilities incurred due to the operation of the Project shall be the sole and exclusive obligation of Project. (d) Showboat, Inc., the parent of Showboat, has agreed that, if the proceeds of the Development Financing and the Capital Contributions or loans are insufficient to meet the costs of developing, constructing and opening the Project, Showboat, Inc. will provide additional funds up to a maximum of $30.0 million to complete the Project, subject to the debt covenants in Showboat Inc.'s indentures for its 9 1/4% First Mortgage Bonds, its 13% Senior Subordinated Notes, and in connection with the Development Financing (the "Completion Guaranty"). Showboat shall cause Showboat, Inc. to (i) provide the Completion Guaranty in form and substance acceptable to Showboat, Inc. and the initial purchasers of the Development Financing, (ii) to perform all of its obligations under the Completion Guaranty, and (iii) agree not to enter into additional covenants which would materially further limit its ability to comply with the Completion Guaranty. Moreover, the Partners recognize and acknowledge that, (i) in the current interest rate climate for debt transactions for gaming operations, equity or cash flow participation is commonly sought by prospective bond purchasers; and (ii) the Partners are currently discussing a possible debt transaction that may include a cash flow participation in the net income from operations of 23 the Partnership in favor of bondholders. The Partners agree that neither shall unreasonably withhold consent to cash flow participation as long as such participation is similar to participation rights required by debt transactions completed within six months of the Development Financing. Any such cash flow participation shall be in the nature of that currently being discussed by the Partners with Donaldson, Lufkin & Jenrette Securities Corporation as underwriters of the Development Financing. (e) The Partners anticipate that, in connection with the Development Financing, Showboat, Inc. will agree to provide to the Issuers a written standby equity commitment (the "Standby Equity Commitment"), which will provide that if the cash flow (as defined therein) of the Issuers is less than $35.0 million for any of the first three full fiscal four-quarter periods after Opening, Showboat, Inc. will contribute to the Issuers cash in an amount equal to the difference between $35.0 million and the amount of such cash flow, subject to limits of $15.0 million in any one such period and $30.0 million in the aggregate. Any payments made by Showboat, Inc. to the Issuers pursuant to the Standby Equity Commitment shall be treated as a loan to the Partnership for purposes of this Agreement. Showboat shall be entitled to receive a fee from Waterfront (the "Guaranty Fee") in the amount of $5.2 million for agreeing to provide the Standby Equity Commitment. The Guaranty Fee shall become due and payable upon the occurrance of both of the following events: (1) the issuance of the Standby Equity Commitment and (2) sufficient Distributable Cash to meet all of the obligations of Section 4.3 (b)(i) through Section 4.3 (b)(v), Section 4.3 (d)(i) through Section 4.3 (d)(v) and/or Section 11.2 (a) through Section 11.2 (g); as may be applicable. Until it becomes due and payable, the Guarantee Fee shall be treated as a loan from Showboat to the Partnership under Section 3.6. Upon issuance of the Standby Equity Commitment, the Partnership shall book a receivable from Waterfront in an amount equal to $5.2 million (the "Waterfront Receivable"). The Partnership shall pay the Guaranty Fee only from Distributable Cash or, should the Put Option described in Article 6 be exercised at a time at which the Waterfront Receivable has not been paid in full, such remaining portion of the Waterfront Receivable shall be due and payable from the Put Option proceeds. At such time as the Partnership pays the Guaranty Fee from Distributable Cash pursuant to Sections 4.3(b)(v), 4.3(d)(v) or 11.2(g), the Waterfront Receivable will be reduced dollar for dollar, with an offsetting reduction in Waterfront's Capital Account. In accordance with Section 4.2(c)(iii) hereof, Waterfront shall be allocated items of gross income by the Partnership to the extent such reduction in their Capital Account causes or increases a deficit balance in such Capital Account. In addition to any amounts otherwise distributable to Waterfront pursuant to Sections 4.3(b)(iii), 4.3(d)(iii) or 11.2(e) to the extent it is determined that the payment of the Guaranty Fee to Showboat results in income to Waterfront other than as income allocated to Waterfront by the Partnership, such income shall be taken into account in determining the distribution to be made to Waterfront pursuant to such sections. (f) The Partners expect that Showboat, Inc. will be required to provide support to assist the Partnership in obtaining a bond as directed by the Commission for certain economic development obligations to the City of East Chicago. Showboat, Inc. has agreed to provide the support for such a bond, if required to do so by the Commission, and Showboat shall cause Showboat, Inc. to provide this support, if so required. Neither Showboat nor Showboat, Inc. shall be entitled to any fee or other compensation from the Partnership or the Issuers for agreeing to provide or providing such support. 24 5.14. MANAGEMENT AGREEMENT Subject to the provision of Section 6, in the event that the Project is sold by the Partnership, a provision in the sale contract shall require that the purchaser enter into a management agreement with Showboat, Inc. for the balance of the term of the site control agreement for the Ground substantially in the form of the Management Agreement. 6. PUT OPTION Upon the third anniversary of the commencement of the Opening and ending sixty (60) days thereafter, Waterfront may elect to require Showboat to purchase all or a portion of Waterfront's Partnership interest (the "Disposition Portion") either by (i) a series of three (3) payments as described below or (ii) by distributing the entire Partnership Distributable Cash, cash from sales or refinancings and liquidating distributions to Waterfront for a period of four (4) years on account of Showboat's acquisition of Waterfront's Disposition Portion. Showboat shall have a period of sixty (60) days to elect option (i) or (ii). If Showboat elects option (i) above, Showboat shall immediately purchase, at a minimum, one-third (1/3) of Waterfront's Disposition Portion. The remaining portion of Waterfront's Disposition Portion shall be purchased by Showboat in no more than two (2) additional installments, on the fifth anniversary and the seventh anniversary of the Opening. At the fifth anniversary Showboat shall purchase, at a minimum, one-half (1/2) of Waterfront's remaining Disposition Portion not purchased on the third anniversary. Any remaining Disposition Portion shall subsequently be purchased by Showboat on the seventh anniversary of the Opening. The purchase price of Waterfront's Disposition Portion under either option shall be calculated by multiplying the percentage Disposition Portion being purchased by Showboat by the equity market value of the Project ("Fair Value"). The Fair Value shall be determined by multiplying the Project's earnings before interest, taxes, depreciation and amortization ("EBITDA") for the most recent four (4) calendar quarters for which quarterly financial statements have been prepared immediately preceding the respective anniversary dates under option (i) and immediately preceding the date of election under option (ii) by the average of the ratios of the sum of the market value of equity plus long- term debt divided by EBITDA of the seven (7) Comparable Companies for the same period, provided, however, the EBITDA multiplier shall not be less than five (5) nor more than ten (10). Attached hereto and incorporated herein by reference as Exhibit B is a calculation format of the Fair Value of Waterfront's Disposition Portion. The Partnership may not incur additional indebtedness to fund the purchase price of Waterfront's Disposition Portion unless (i) Waterfront's entire Partnership interest is purchased or (ii) Showboat obtains Waterfront's written consent, which may be granted or withheld in Waterfront's discretion. The purchase price may be paid in cash or with registered shares of common stock of Showboat, Inc., Showboat's parent corporation. In the event Showboat elects option (ii) above, sums distributed to Waterfront in excess of amounts otherwise distributable to it shall be deemed a payment on account of the purchase price of Waterfront's Disposition Portion. Upon the seventh anniversary of the Opening all of 25 Disposition Portion must be purchased. Waterfront's Percentage Interest in the Disposition Portion shall pass to Showboat upon full payment therefore. The Partners agree that, notwithstanding the foregoing provisions of this Section, if Showboat, in its sole discretion, determines within ten (10) days after Waterfront's election that it is unwilling for any reason to pay the Fair Value for Waterfront's Disposition Portion as determined by the formula set forth in this Section, then the Partnership shall retain reputable investment bankers who shall market the Partnership or its assets for sale to the highest reputable bidder, but free and clear of the Management Agreement described in Section 5.14. Waterfront and Showboat shall be permitted to submit bids for the purchase of the Partnership or its assets in such event. 7. TRANSFER OF PARTNER'S INTEREST 7.1. RESTRICTIONS ON TRANSFER Except as may otherwise be expressly provided herein, no Partner shall sell, assign, pledge, encumber, hypothecate, or otherwise transfer or dispose of all or any part of its Interest or share of its Interest, as amended, without the written consent of the other Partner. No transfer of an Interest shall be made except in accordance with 68 IAC 5-2 and other applicable regulations of the Commission. Any sale or other transfer or attempted transfer in violation of this Agreement shall be null and void and of no force and effect. Further, no partner shall be admitted to the Partnership without the unanimous consent of the Partners. Each Partner acknowledges the reasonableness of the restrictions on transfers imposed by this Agreement in view of the relationship of the Partners. Any transfer, with consent, must be of all of such Partner's Interest, unless Waterfront and Showboat otherwise agree. This prohibition shall include the direct disposition of an Interest, as well as any voluntary transfer (by sale, contract for sale, assignment, pledge, hypothecation or otherwise) of a controlling interest in the stock of a Partner, or the merger or other consolidation of a Partner with or into another Person, but in such event, the consent of Waterfront and Showboat shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Waterfront's shareholders may transfer portions of their equity interests, or Waterfront may issue new shares to new shareholders so long as Michael Pannos and Thomas Cappas remain officers, directors and collectively, including immediate family holdings, at least 25% shareholders of Waterfront. At all times stated herein Waterfront shall have not more than 35 shareholders each of whom shall be individuals and a majority of whom shall be residents of the State of Indiana. 7.2. RIGHT OF FIRST REFUSAL In the event that a Partner ("Transferring Partner") intends to make a voluntary transfer of part or all of its Interest to a third party, it shall first offer such Interest to the other Partner ("Remaining Partner"), who shall have a right of first refusal with respect to the acquisition of such Interest. In the event that the Transferring Partner receives a bona fide offer to purchase acceptable to such Partner, then the Remaining Partner shall have a right of first refusal to purchase such Interest at the same price and under the same terms and conditions as are contained in such written offer, provided that if the transfer of such Interest is made pursuant to Section 15.1 of this Agreement, the purchase price shall be that which is set forth in Section 15.1 of this 26 Agreement. Upon receipt of any such acceptable offer, the Transferring Partner shall certify a complete, true and correct copy of such offer to the Remaining Partner. The Remaining Partner shall have a period of thirty (30) days from the date of receipt of such written offer to elect whether or not it intends to accept or reject such offer. If the Remaining Partner desires to purchase the interest from the Transferring Partner upon the same terms and conditions as are set forth in such acceptable offer (or at a price specified in Section 15.1 of this Agreement, if applicable), then the Remaining Partner shall notify the Transferring Partner within ten (10) days of the receipt of such written offer and shall accompany such notice with an earnest money deposit equivalent to any earnest money deposit that was made with the original offer. If the Remaining Partner fails to notify the Transferring Partner within such ten (10) day period, such failure to so notify shall be deemed a rejection of such offer. Rejection of such offer shall not terminate this right of first refusal as to any other or subsequent sales of the Interest. In the event of the exercise of the right of first refusal, the Remaining Partner shall consummate the sale and purchase of the Interest in accordance with, and within the time limitations set forth in, the terms and conditions of such offer to purchase as originally submitted (except with respect to price if the transfer is made pursuant to Section 15.1 of this Agreement). In the event that such offer should include as a part of the consideration to be paid any particular or unique property, or the exchange of any other property, the Remaining Partner shall not be required to deliver to the Transferring Partner such property, but may satisfy such obligations by the payment to the Transferring Partner of cash in an amount equivalent in value to such other property. The Transferring Partner may not combine the sale of an interest with the sale of any other asset. A transfer shall include a sale or a contract for sale of all or part of an Interest as well as the sale, contract for sale or assignment of a controlling interest in the Stock of a Partner or a merger or other consolidation of a Partner with or into another Person. 7.3. CONTINUING LIABILITY Unless otherwise agreed, in the event a Partner sells, exchanges, assigns or otherwise transfers its Interest (including any transfer in accordance with Section 8 of this Agreement), such Partner shall remain liable for all obligations and liabilities incurred by such Partner as a Partner prior to the effective date of such transfer (including any tax liability of such Partner), but shall be free of any obligations or liabilities incurred on account of the activities of the Partnership after such date. 8. PARTNER DEFAULT 8.1. DEFINITION OF DEFAULT The occurrence of any one or more of the following events which is not cured within the time permitted shall constitute a default under this Agreement (hereinafter referred to as a "Default" or an "Event of Default," as the case may be) as to the Partner failing in the performance or effecting the breach act. 8.2. DEFAULTS (a) A Partner fails in a material way to properly staff and timely perform its duties and obligations hereunder. 27 (b) A Partner fails to perform or materially comply with any of the covenants, agreements, terms or conditions contained in the Agreement applicable to it, provided that the remedy of a nondefaulting Partner for a Partner's failure to make a Capital Contribution or a required loan is treated exclusively in Section 3.9 of this Agreement. 8.3. BUYOUT REMEDY Ten (10) days after notice of the occurrence of a default where such default is not cured, an Event of Default shall be deemed to exist. Upon the occurrence of an Event of Default, the Partner not in default ("Offering Partner") shall have ten (10) days to provide a notice ("Offering Notice") to the other Partner (the "Non-Offering Partner"), propose a price per one percent (1%) Partnership Interest (the "Offering Price") at which the Offering Partner is ready, willing and able either to (i) sell to the Non-Offering Partner all of the Offering Partner's Interest, or (ii) purchase from the Non-Offering Partner all of its Interest. The Offering Notice shall be presented in the alternative as described in the previous sentence. The Non- Offering Partner shall have a period of thirty (30) days after delivery of the Offering Notice in which to elect, by timely written notice to the Offering Partner, either to (i) purchase the Interest of the Offering Partner at the Offering Price, or (ii) sell all of its Interest to the Offering Partner at the Offering Price. During such 30-day period and an additional 30- day period, the Non-Offering Partner may not make any offer of its own pursuant to this section. If the Non-Offering Partner fails to elect either alternative within such 30-day period, then the Offering Partner may, within 15 days thereafter, elect one of the alternatives. If the Offering Partner fails to select an alternative within that 15-day period, the Offer shall lapse. If one of the alternatives is elected by Waterfront or Showboat in accordance with the terms of this section, payment for the affected Interest shall be made in cash at a closing to be held in East Chicago, Indiana on a date set by the party electing one of the alternatives not later than ninety (90) days after such election. 8.4. INJUNCTIVE RELIEF If a Partner violates any provision of Sections 5.4, 5.5, 7 or 12 of this Agreement, the other Partner shall also be entitled to remedies in equity. 9. DETERMINATION OF FAIR MARKET VALUE 9.1. FAIR MARKET VALUE If Waterfront and Showboat cannot agree within fifteen (15) days following the commencement of circumstances calling for a determination of the fair market value of a Partnership Interest ("Valuation Interest"), they shall thereupon attempt in good faith, to agree upon a single appraiser to appraise the Valuation Interest. If they cannot agree upon a single appraiser within fifteen (15) days, either of them (the "Electing Partner") may give the other (the "Other Partner") a written notice calling for appointment of an appraisal panel (the "Appraisal Panel"), and such notice shall designate a disinterested person who is familiar with the gaming operations and recognized by those in the business of operating gaming facilities as one who could fairly and accurately evaluate a gaming operation (the "First Appraiser") to serve on the Appraisal Panel. 28 Upon receipt of such notice, the Other Partner shall have seven (7) days in which to designate a disinterested person who is familiar with gaming operations and recognized by those in the business of operating gaming facilities as one who could fairly and accurately evaluate a gaming operation (the "Second Appraiser") to serve on the Appraisal Panel by serving notice of such designation on the Electing Partner. If the Second Appraiser is not so appointed and designated within or by the time so specified, then the First Appraiser shall be the sole appraiser to determine the fair market value of the Valuation Interest. Upon the designation, if any, of the Second Appraiser, the First Appraiser and the Second Appraiser shall themselves appoint a third disinterested person who is familiar with gaming operations and recognized by those in the business of operating gaming facilities as one who could fairly and accurately evaluate a gaming operation (the "Third Appraiser") within seven (7) days. If the First Appraiser and the Second Appraiser are unable to agree upon such appointment within seven (7) days, then the Electing Partner shall request such appointment by the president and executive committee of the Indiana Chapter of the American Institute of Real Estate Appraisers. In the event of failure, refusal or inability of any appraiser to act, a new appraiser shall be appointed in the stead thereof, which appointment shall be made in the same manner as provided in this Section 9 for the appointment of such appraiser so failing, refusing or being unable to act. The one or three appraisers appointed as the Appraisal Panel shall each determine the fair market value of the Valuation Interest, taking into account appropriate indicators of the fair market value thereof in a cash sale between a willing buyer and seller not under undue duress and shall report their findings to the Partners in writing. In the case of a three appraiser Appraisal Panel, if one or more appraisers fail to deliver their reports within sixty (60) days after the appointment of the Third Appraiser, a new appraiser shall be appointed in the stead thereof, which appointment shall be made in the same manner as provided in this Section 9 for the appointment of such appraiser failing to deliver his report. The fair market value of the Valuation Interest shall be equal to the mean of the two closest appraised values reported by the Appraisal Panel; provided that if such values are equally distributed, the fair market value of the Valuation Interest shall be equal to the mean of the three appraised values reported by the Appraisal Panel. Such determination shall be conclusive and shall be binding upon the Partners. Except as otherwise provided herein, a Partner shall pay the fees and expenses of the appraiser it appointed, and the fees and expenses of the third appraiser, and all other expenses, if any, shall be borne equally by both parties. To be qualified to be selected or designated as an appraiser for purposes of this Section 9, an appraiser must demonstrate (a) current good standing as a licensed appraiser, and (b) past appraising experience of at least five years, which experience shall include the appraisal of casino gaming operations. 10. FORCE MAJEURE 10.1. FORCE MAJEURE DEFINED The following events are beyond the control of either Partner (a "Force Majeure Event"): 29 (a) The unavailability of financing in the marketplace except at rates in excess of twenty percent (20%), inclusive of any cash flow participation, per annum; provided that an obligation to repurchase or prepay at a premium any Development Financing using a specified percentage of cash flow shall not be deemed "cash flow participation" for purposes of this subsection. (b) The passage of material new legislation which reduces the projected internal rate of return to Showboat for the Project by more than thirty percent (30%) compared to the Projection. (c) An increase in the cost of the Project beyond $200 million, with the understanding that the current Capital Budget is $195 million, including contingencies. (d) The receipt of material new conditions imposed by the City of East Chicago or the Indiana Gaming Commission or any other governmental entity which reduces the projected internal rate of return to Showboat by more than thirty percent (30%) compared to the Projection. (e) A delay in the opening of the Project for more than one hundred eighty (180) days after the opening date is established by the Partners or a closure of the Project after Opening for more than one hundred eighty (180) days. (f) Any other event which materially alters the assumptions and underlying facts upon which this Agreement is based and which is reasonably expected by both Partners to reduce the projected internal rate of return to Showboat by more than thirty percent (30%) compared to the Projection. 10.2. ACTIONS TO RESOLVE FORCE MAJEURE EVENTS In the event of a Force Majeure Event the Partners agree to first meet in good faith effort to mutually agree on appropriate courses of action to be taken in connection with a Force Majeure Event, including the economic effect thereof. In the event that the Partners fail to agree on a course of action then either Partner may terminate this Agreement on thirty (30) days written notice to the other Partner. Provided, however, if the Force Majeure Event can be cured by the contribution of additional capital, Showboat shall contribute such capital only in the event that the contribution shall not be more than thirty-five percent (35%) of the initial Capital Budget. If amounts beyond that limitation are required to cure the Force Majeure Event and Showboat does not provide such additional capital, then Waterfront shall be entitled to contribute additional capital. If neither Partner contributes the additional capital, then Showboat may locate additional capital from qualifying third parties. If Showboat is unable to do so, Waterfront may then attempt to locate additional capital from qualifying third parties. 11. TERMINATION AND LIQUIDATION OF PARTNERSHIP 11.1. TERMINATION In addition to the provisions for termination of the Partnership set forth elsewhere in this Agreement, the Partnership will also terminate upon the sale, assignment or other disposition of all or substantially all of the tangible assets of the Partnership unless Waterfront and Showboat 30 agree in writing to the contrary. No termination of the Partnership shall relieve or release any Partner from its obligation to reimburse the other Partners as a result of such termination if such termination has been caused by a breach of any duty or obligation owed by such Partner. 11.2. WINDING UP AND LIQUIDATION Upon the termination of the Partnership, the Managing Partner shall act as liquidator of the Partnership in disposing of and distributing the Partnership's assets. Unless otherwise agreed upon, the property of the Partnership shall be sold as soon as practicable following termination of the Partnership, and any Partner or former Partner may purchase property of the Partnership on terms mutually agreed upon. After the disposition of Partnership property and the appropriate allocation of all items of Income, Gain, Loss, Deductions (including Depreciation), and Credit in accordance with the provisions of Section 4 hereof, the proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed in the following order: (a) First, to the payment and discharge of all the Partnership's debts and liabilities to creditors other than Partners; (b) Second, to the payment and discharge of all the Partnership's debts and liabilities to Partners (other than for the Development Fee, any unreimbursed Development Expenses, and accrued and unpaid preferred return pursuant to Section 3.5 and any loans made by a Partner pursuant to Section 3.6); (c) Third, to the payment of the Development Fee if not previously paid pursuant to this Agreement; (d) Fourth, to the return of Waterfront's Capital Contribution plus unreimbursed Development Expenses, in each case together with the preferred return thereon provided for in Section 3.5, if not previously paid pursuant to this Agreement; (e) Fifth, to the Partners in an amount equal to the good faith estimate of the income tax liability of each Partner (or each Partners' owner or owners) with respect to the income realized by each Partner, including, without limitation, any income realized pursuant to Section 4.2(c)(iii) hereof, calculated by multiplying such estimated income by the highest combined federal and state income tax rates of each such Partner (or its owners), taking into account whether such Partner (or its owners) will be subject to corporate or individual taxes. (f) Sixth, to the payment of any accrued and unpaid preferred return on each Partner's outstanding Capital Contribution, loans and unreimbursed Development Expenses pursuant to Section 3.5 above; (g) Seventh, to the extent not previously repaid by this partnership or by Showboat Marina Casino Partnership, to the repayment of each Partner's entire unpaid Capital Contribution, loans (including the Standby Equity Commitment Loan (as defined in Section 5.13(e))but excluding the Guarantee Fee (as defined in Section 5.13(e))) and unreimbursed Development Expenses; 31 (h) Eighth, to the extent not previously repaid, to the payment of the Guarantee Fee as provided under Section 5.13 (e), including interest thereon. (i) Ninth, the balance, if any, to the Partners in proportion to their respective positive Capital Account balances. Upon complete liquidation, dissolution and winding up, the Partners shall cease to be Partners of the Partnership. 11.3. BANKRUPTCY OR INSOLVENCY; INVOLUNTARY TRANSFER (a) Subject to the rights and powers of a trustee and court in bankruptcy under the Bankruptcy Code of 1978 or any similar, succeeding law, if: (i) any Partner files a petition in bankruptcy or a petition to take advantage of any insolvency law, makes an assignment for the benefit of creditors, consents to or acquiesces in the appointment of a receiver, liquidator, or trustee of the whole or any substantial portion of such Partner's properties or assets, or files a petition or answer seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under the federal bankruptcy laws or any other applicable laws; or (ii) a court of competent jurisdiction shall enter an order, judgment, or decree appointing a receiver, liquidator, or trustee of any Partner of the whole or any substantial portion of the property or assets of such Partner or approving a petition filed against such Partner seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under the federal bankruptcy laws or any other applicable laws, and such order, judgment or decree is not vacated, set aside or stayed within two (2) months from the date of entry thereof; then the other Partner shall have the right, but not the obligation, to purchase the entire Interest of such bankrupt or insolvent Partner. In the absence of such an election, the business of the Partnership shall be continued in the name of the Partnership, in which case there shall be compliance with all of the terms and conditions of this Agreement. (b) If a Partner suffers an Involuntary Transfer of part or all of its Interest, the transferee shall not be a partner hereunder and shall take such Interest or part thereof subject to an option in favor of the remaining Partner to acquire such Interest or part thereof. Until the closing of a sale upon such election by the remaining Partner, the transferee shall be entitled to any cash distributions, but shall not be entitled to any vote, consent or similar rights, if any. An "Involuntary Transfer" shall mean a transfer due to dissolution of a Partner or a transfer without the choice of a Partner, including but not limited to a transfer to a judgment creditor, lienholder or the holder of a security interest or encumbrance, or a transfer ordered by a court. (c) If the other Partner elects to purchase the Interest of such bankrupt or insolvent Partner or the Interest from a transferee after an involuntary transfer, such remaining Partner shall inform the bankrupt or insolvent Partner or transferee of such election within thirty (30) days after receipt of notice of institution of bankruptcy proceedings, assignment for the benefit of creditors, 32 or appointment of receiver, liquidator or trustee or transfer. In such event, the entire Interest shall be purchased at a price equal to eighty percent (80%) of the fair market value of such Interest as determined in accordance with Section 9 of this Agreement, payable in cash at a closing set by the purchasing Partner within ninety (90) days after the determination of such value. 12. DISCLOSURE OF OTHER BUSINESS INTEREST CONFLICTS; BUSINESS OPPORTUNITY 12.1. OTHER BUSINESS INTERESTS (a) No Partner shall be required to devote its entire time or attention to the business of the Partnership. (b) All of the Partners understand that the Partners and the stockholders of corporate Partners may be interested, directly or indirectly, individually, or through one or more Affiliates, in various other businesses outside of Cook County, Illinois and the State of Indiana, and non-gaming businesses in East Chicago or elsewhere, not included in this Partnership ("Unrelated Businesses"). The Partners hereby agree that the creation of the Partnership and the assumption by each of the Partners of its duties hereunder shall be without prejudice to its right (or the right of its Affiliates) to have Unrelated Businesses and to receive and enjoy profits or compensation therefrom. 12.2. COMPETITION Waterfront agrees that Showboat and its Affiliates ("Showboat Parties") are pursuing gaming opportunities throughout the United States and other jurisdictions and may be pursuing gaming opportunities in Cook County, Illinois. Waterfront acknowledges that the Showboat Parties may pursue such opportunities, including opportunities in Cook County, Illinois. Neither the Showboat Parties nor Waterfront shall engage in other gaming activities in Indiana. If Showboat or Waterfront or any of their Affiliates commence gaming operations in Cook County, Illinois, the other Partner may purchase fifteen percent (15%) of the first Partner's or its Affiliates' interest in such gaming venture at the first Partner's or its Affiliates' purchase price at any time within one (1) year of the opening of such operation(s). In the event that the Showboat Parties or Waterfront or their Affiliates enter into a gaming opportunity in Cook County, Illinois such Partner shall covenant that key customers of the Project shall not be solicited by such Partner to become customers of the gaming venture in Cook County nor may such Partner assign management talent from the Project to the Cook County gaming venture without the consent of the other Partner, which consent shall not be unreasonably withheld or delayed. The Partners acknowledge that Showboat and/or its Affiliates operate other casinos and may in the future operate additional casinos in different areas of the world, including, without limitation, casinos in the state of Illinois and that marketing efforts may cross over in the same market and with respect to the same potential customer base. Showboat, in the course of its Affiliates managing the Vessel, may refer customers of the Vessel and other parties to other facilities operated by Affiliates of Showboat to utilize gaming, entertainment and other amenities, without payment of any fees to the Partnership or the Partners. The Partnership and the Partners acknowledge and agree that Showboat or its Affiliates may distribute promotional materials for Showboat or its Affiliates and facilities, including casinos, at the Riverboat. However, if such 33 facility to which a customer of the Project would be referred or which is promoted is within a county identified below, the consent of Waterfront shall be required, which consent may be withheld in Waterfront's sole discretion. MICHIGAN COUNTIES ILLINOIS COUNTIES Berrien Cook Van Buren DuPage Allegan Grundy Cass Lake St. Joseph Will Branch Kentall Kankakee 12.3. BUSINESS OPPORTUNITY In the event that a Partner or any of its Affiliates has the opportunity to acquire an interest in any Unrelated Business (a "Business Opportunity"), whether individually or as a member of a partnership or joint venture or other entity or as a shareholder of a corporation, such Partner or its Affiliate shall not be required to offer such Business Opportunity to the Partnership or to the other Partners except as expressly required hereunder, and the failure of such Partner or its Affiliate to do so shall not constitute a breach of such Partner's fiduciary duty to the Partnership or to the other Partners. 13. TAX MATTERS; BOOKS AND RECORDS; ACCOUNTING 13.1. TAX MATTERS If unanimously approved by the Partners, the Partnership shall file an election under Section 754 of the Code in accordance with applicable regulations, to cause the basis of the Partnership's property to be adjusted for federal income tax purposes as provided by Sections 734 and 743 of the Code. No election shall be made by the Partnership or by any of the Partners to be excluded from the application of the provisions of Subchapter K of the Code or any similar provisions of the state tax laws. The Managing Partner is designated as the "Tax Matters Partner." 13.2. INDEMNITY AGAINST BREACH Each Partner agrees that it will indemnify and hold the Partnership and the other Partners harmless from and against any and all losses, costs, liabilities and expenses, including, but not limited to, attorneys' fees of every kind and description, absolute and contingent, which result from any breach of this Agreement by such indemnifying Partner. Except as may otherwise be decided pursuant to Section 13.1, in the event any claim or liability (which if proved would constitute, or create a liability subject to indemnification under this Section 13.2) is made or asserted against the Partnership or a Partner (collectively the 34 "Accused party") it shall notify the Partner which the Accused party believes should indemnify the Accused party pursuant to the provisions of this Section 13.2 (the "Notified Partner") in writing that such claim or demand has been made. Upon receipt of such notice, the Notified Partner (a) shall be entitled to participate at its own expense in the defense of such suit brought to enforce any claim, or (b) in the event the Notified Partner and the Accused party agree that the Notified Partner would be wholly liable for, and is financially able to satisfy, such claim, the Notified Partner may elect to assume the defense thereof, in which event it shall not be liable for attorneys' fees and court costs thereafter incurred by the Accused party in defense of such action, or (c) the Notified Partner and the Accused party may agree to conduct a defense jointly and to share expenses in any manner in which they agree. Payment of sums finally determined to be due hereunder shall be made upon demand to the Partner or Partnership to whom a right of indemnity has accrued under this Section 13.2. The Partner entitled to payment shall also be entitled to receive reasonable attorneys' fees for collection of such payment if not paid within thirty (30) days after demand is made, if such Partner or the Partnership prevails in any claims against another Partner for any such payment hereunder. 13.3 RECORDS Accurate, current, and complete books, shall be maintained on a calendar year and accrual basis in accordance with generally accepted accounting principles consistently applied and for tax purposes the Partnership's tax year will be the tax year of the Managing Partner in accordance with the federal tax laws. The Partnership shall keep any and all other records necessary, convenient, or incidental to recording the business and affairs of the Partnership. The Managing Partner shall provide monthly, quarterly and annual unaudited income statements, balance sheets and changes in cash position to Waterfront not later than twenty- eight (28) days after each calendar month, forty-five (45) days after each calendar quarter and sixty (60) days after each calendar year. Waterfront shall keep monthly statements confidential at its board level. The Managing Partner shall select the Partnership's Auditor and shall determine all matters regarding methods of depreciation and accounting and shall make all tax elections and decisions relating to taxes. The Partnership's Auditor shall audit the books and records of the Partnership annually and render an opinion on the financial statements of the Partnership as of the end of each calendar year. Copies of the financial statements certified by the Partnership's Auditor shall be provided to the Partners within ninety (90) days following the end of each calendar year. Waterfront may designate an additional reputable accounting firm ("Special Auditor") to conduct an audit of the operations of the Partnership at Waterfront's expense; provided, however, that if the additional audit by the Special Auditor shall reveal a discrepancy in gross revenues, net income or cash to be distributed to the Partners of more than three percent (3%), Showboat shall bear the costs of such audit. The Partners and their representatives shall have the right to inspect the books and records of the Partnership at any time during normal business hours. 35 13.4. NOTICES Any notice which may be or is required to be given hereunder shall be deemed given 3 days after such notice has been deposited, by registered or certified mail, in the United States mail, addressed to the Partnership or the Partners at the addresses set forth after their respective names below, or at such different addresses as to the Partnership or any Partner as it shall have theretofore advised the other parties in writing: Partnership: Showboat Indiana, Inc. 2800 Fremont Street Las Vegas, Nevada 89104 with a copy to: Waterfront Entertainment and Development, Inc. 8101 Polo Club Drive, Suite D Merrillville, Indiana 46410 Waterfront: Waterfront Entertainment & Development, Inc. 8101 Polo Club Drive, Suite D Merrillville, Indiana 46410 with a copy to: Phillip L. Bayt, Esq. Ice Miller Donadio & Ryan One American Square Indianapolis, Indiana 46282 Showboat: Showboat Indiana, Inc. 2800 Fremont Street Las Vegas, Nevada 89104 with a copy to: John N. Brewer, Esq. Kummer Kaempfer Bonner & Renshaw Seventh Floor 3800 Howard Hughes Parkway Las Vegas, Nevada 89109 13.5. REPORTS TO PARTNERS The Partners agree that the Managing Partner will provide all of the information necessary for the preparation of a U.S. Partnership Return of Income (Form 1065) for the Partnership accounts within two (2) months after the close of each calendar year. The Managing Partner agrees to provide each of the Partners with all information necessary for their timely preparation of the required U.S. Income tax returns. 36 14. TRADEMARKS AND LICENSES 14.1. SHOWBOAT MARKS Showboat, Inc., the parent corporation of Showboat, is the owner of the marks and trade names listed on Exhibit C (collectively "Showboat Marks"). Showboat, Inc. has reserved to itself certain rights, most particularly those rights concerned with the exploitation of the Showboat Marks. Showboat, Inc. believes that the Showboat Marks have and will increasingly become a popular and valuable asset in various fields of use not only throughout the United States but also in foreign countries. 14.2. USE OF MARKS BY PARTNERSHIP Showboat shall cause Showboat, Inc. to grant to the Partnership the non-exclusive license to use the Showboat Marks in connection with the Project at no cost to the Partnership only for such period of time that Showboat is the Managing Partner (the "Use Period"), provided that such use is in accord with reasonable criteria established by Showboat, Inc. Upon termination of the Use Period all uses of the Showboat Marks shall cease and the Partnership shall remove from the vessel and the Casino Facilities any furnishings, personal property, fixtures and other items which contain any of the Showboat Marks. 15. GENERAL PROVISIONS 15.1. FOREIGN GAMING LICENSES If Showboat determines, at its sole discretion, that any of its gaming licenses in other jurisdictions may be adversely affected or in jeopardy because of its status as a Partner, Showboat shall have the option at any such time to sell its Interest, subject to the right of first refusal granted to Waterfront. If this occurs prior to or within the first six (6) months after Opening and Waterfront elects its right of first refusal, Showboat shall receive as sole compensation for Waterfront's purchase of its Interest, the Capital Contribution Showboat has made to the Partnership plus interest thereon at the Federal funds rate for the period during which its Capital Contribution was made to the Partnership. If this occurs after the first six (6) months after Opening and Waterfront elects its right of first refusal, Showboat shall receive as sole compensation for Waterfront's purchase of its interest the fair market value of such interest determined in accordance with Section 9, payable within ninety (90) days after the determination of the fair market value. In case of a sale by Showboat of its Interest under this Section, the Management Agreement shall terminate upon the consummation of such sale. 15.2. ENTIRE AGREEMENT This Agreement constitutes the entire understanding of the Partners with respect to the subject matter hereof, and there are no understandings, representations, or warranties of any kind between the Partners except as expressly set forth herein and as set forth in that certain agreement of even date among Showboat, Waterfront and Showboat, Inc. 15.3. COUNTERPARTS This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. 37 15.4. CAPTIONS The captions in this Agreement are solely for the convenience of the parties and do not constitute a part of this Agreement. 15.5. AMENDMENT All additions, changes, corrections or amendments to the terms, responsibilities, obligations, and conditions contained herein must and will be in writing signed by all the Partners before they become effective. 15.6. GRAMMATICAL CHANGES Whenever from the context it appears appropriate, each term stated in either the singular or the plural shall include the singular and the plural, and pronouns stated in either the masculine, the feminine or the neuter gender shall include the masculine, feminine and neuter gender as the circumstances require. 15.7. SUCCESSORS AND ASSIGNS Subject to the restrictions on transfer expressly set forth in this Agreement, this Agreement shall inure to the benefit of and be binding upon, the successors and assigns of the parties hereto. 15.8. CONSENT OF PARTNERS Whenever consent of the Partners is required for any action, such consent shall be by a written instrument signed by the Partners, sent to the Partners in the manner provided for notices or by facsimile transmission and deposited in the regular mail prior to the action requiring the consent being made. 15.9. NO WAIVER (a) The failure of any Partner or the Partnership to insist, in any one or more instances, upon observance and performance of any provision of this Agreement shall not be construed as a waiver of such provision or the relinquishment of any other right granted herein or of the right to require future observance and performance of any such provision or right. (b) The waiver by any Partner or the Partnership of any breach of any provision herein contained shall not be deemed to be a waiver of such provision on account of any other breach of the same or any other provision of this Agreement. (c) No provision of this Agreement shall be deemed to have been waived, unless such waiver be in writing and signed by the person sought to be charged with a waiver of such provision. 15.10. DISPUTES In the event any dispute should arise between the parties hereto where the parties cannot agree on a matter requiring unanimity, to enforce any provision hereof, for damages by reason of any alleged breach hereunder, for a declaration of such party's rights or obligations hereunder, or for any other remedy, such dispute shall be settled by arbitration by a single arbitrator pursuant to the rules of the American Arbitration Association. Such arbitration shall be conducted in East 38 Chicago, Indiana in accordance with the rules then in effect by the American Arbitration Association, provided that the parties shall be entitled to afford themselves of the discovery allowed under the then current rules of Federal Civil Procedures for the Northern District of Indiana. The decision of the arbitrator shall be final and may be entered as a judgment by a court of competent jurisdiction for any matter in controversy below $1,000,000. The decision of the arbitrator where the matter in controversy is in excess of that amount shall be appealable to a circuit or superior court in Lake County, Indiana for a mistake of law or fact. The prevailing party (as determined by the arbitrator) shall be entitled to recover such amounts, if any, as the arbitrator may adjudge to be reasonable attorneys' fees for the prevailing party; and such amount shall be included in any judgment rendered in such action or proceeding. 15.11. PARTIAL INVALIDITY If any term, covenant, or condition of this Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement or the application of such term, covenant, or condition to persons or circumstances, other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term, covenant, or condition of this Agreement shall be valid and enforced to the fullest extent permitted by law. 15.12. COOPERATION WITH GAMING AUTHORITIES The Partners shall use their best efforts to cause its officers, directors, employees and stockholders to provide the Nevada Gaming Authorities, the New Jersey Casino Control Commission or such other gaming authority having jurisdiction over Showboat or its affiliates with such documents and information necessary for Showboat to (i) obtain the approval of the Nevada Gaming Authorities or the New Jersey Casino Control Commission to conduct gaming operations in the state of Indiana, and (ii) maintain Showboat's and Showboat's Affiliates gaming licenses. 15.13. ADMINISTRATIVE/DEVELOPMENT/TRADEMARK/LICENSE FEES Showboat is a subsidiary of Showboat, Inc. Showboat, Inc. through another subsidiary ("Related Subsidiary") provides development, management, administrative, trademark and licensing services (the "Services") to its operating subsidiaries for a fee. The Partners agree that Showboat may enter into agreements for such Services for the benefit of the Project. Provided, however, the fees earned by the Related Subsidiary for Services rendered to the Partnership shall be paid only from Partnership distributions to Showboat unless otherwise consented to in writing by Waterfront. 15.14. APPLICABLE LAW: JURISDICTION (a) The laws of the State of Indiana shall govern the validity, performance, and enforcement of the terms and conditions of this Agreement and any other obligation secured hereby. (b) The Partners agree that any proceedings with respect to the performance or enforcement of this Agreement shall be brought in the state of Indiana. 39 15.15. FINANCING FEES The Partners agree that, except with respect to the Development Financing, neither Partner nor any of their affiliates, shareholders, parents, or other related entities will seek fees from the Partnership or any other related person or entity for arranging financing, extending guaranties or otherwise lending comfort, security or credit support for Partnership financing or for bringing other assets to the Partnership other than as specified herein. This Section 15.15 shall not prohibit the Partnership from paying fees to third parties unrelated to the Partners. IN WITNESS WHEREOF, the parties have executed this Agreement in multiple originals as of the date first hereinabove written. WATERFRONT ENTERTAINMENT AND DEVELOPMENT, INC. By: /s/ Michael Pannos MICHAEL PANNOS, PRESIDENT SHOWBOAT INDIANA INVESTMENT LIMITED PARTNERSHIP, a Nevada Limited Partnership By: Showboat Indiana, Inc., its General Partner By: /s/ J. Kell Houssels, III J. KELL HOUSSELS, III, CHAIRMAN OF THE BOARD 40 PROMISSORY NOTE $41,887,157.78 January 1, 1997 FOR VALUE RECEIVED, Showboat Indiana Investment Limited Partnership, a limited partnership organized and existing under the laws of the State of Nevada ("Maker"), promises to pay to Showboat, Inc., a corporation organized and existing under the laws of the State of Nevada, or order ("Holder"), at 3720 Howard Hughes Parkway, Ste. 200, Las Vegas, NV 89109, or at such other place as Holder may designate in writing, up to the principal balance of Forty-One Million Eight Hundred Eighty-Seven Thousand, One Hundred Fifty-Seven & 78/One Hundredths Dollars ($41,887,157.78), plus interest as hereinafter provided. Interest shall be calculated on a daily basis (based on a 365-day year), at 14% ("Base Rate"). Principal and interest shall be payable upon the earlier to occur of (i) demand or (ii) December 31, 1997 (the "Maturity Date"). All payments on this Promissory Note shall be applied first to discharge all accrued but unpaid interest on the unpaid principal balance hereof, and the remainder to be applied to the principal balance. The Holder's acceptance of any payment less than the amount then due shall not, in any manner, effect or prejudice the rights of the Holder to receive the unpaid balance then due and payable. The failure to pay the unpaid principal sum on the Maturity Date or the failure to pay any other sum when the same shall become due and payable shall constitute an event of default ("EVENT OF DEFAULT") hereunder, and upon the occurrence of an Event of Default, all sums evidenced hereby, including the entire principal balance, all accrued and unpaid interest and all other amounts due hereunder shall, at the election of Holder, and without demand or notice to Maker, become immediately due and payable and the Holder may exercise its rights under this Note, and other rights under applicable law. Upon the occurrence of an Event of Default by Maker, the unpaid principal balance, and all accrued and unpaid interest due hereunder and all other costs shall together be treated as the principal balance of this Promissory Note and shall bear interest at the rate of three (3) percentage points per annum greater than the Base Rate (the "DEFAULT RATE"), from the date of the Event of Default until the entire principal sum and such interest and costs have been paid in full. Maker shall have the right to prepay at any time all or any portion of this Promissory Note without penalty. It is not the intent of Holder to collect interest or other loan charges in excess of the maximum amount permitted by Nevada law. If interest or other loan charges collected or to be collected by the Holder exceed any applicable permitted limits then (i) any such interest or other loan charges shall be reduced by the amount necessary to reduce the interest or other loan charges to the permitted limits, and (ii) any sums already collected from the Maker which exceeded permitted limits will be refunded to the Maker. The Holder may choose to make such refund by reducing the principal balance of the indebtedness hereunder or by making a direct payment to the Maker. Maker agrees to waive demand, diligence, presentment for payment and protest, notice of acceleration, extension, dishonor, maturity, protest, and default hereunder. The Holder may accept late or partial payments even though they are marked "payment in full," without losing, prejudicing or waiving any rights hereunder. Maker agrees to pay all costs of collection, and all costs of suit and preparation for such suit (whether at trial or appellate level), in the event the unpaid principal sum of this Promissory Note, or any payment of principal or interest is not paid when due. No amendment, modification, change, waiver or discharge shall be effective unless evidenced by an instrument in writing and signed by the party against whom enforcement of any waiver, amendment, change, modification or discharge is sought. If any provision hereof is invalid, or unenforceable, the other provisions hereof shall remain in full force and effect and shall be construed to effectuate the provisions hereof. The provisions of this Promissory Note shall be binding and inure to the benefit of the successors and assigns of the parties hereto. A waiver by Holder or failure to enforce any covenant or condition of this Promissory Note, or to declare any default hereunder, shall not operate as a waiver of any subsequent default or affect the right of Holder to exercise any right or remedy not expressly waived in writing. This Promissory Note shall be construed in accordance with and governed by Nevada law. All payments of principal and interest are hereby required to be made in the form of lawful money of the United States of America. Time is of the essence with respect to this Promissory Note and each and every covenant, condition, term and provision hereof. Whenever the context requires or permits, the singular shall include the plural, the plural shall include the singular and the masculine, feminine and neuter shall be freely interchangeable. IN WITNESS WHEREOF, Maker has executed this Promissory Note at Las Vegas, Nevada as of the day first above written. Maker: SHOWBOAT INDIANA INVESTMENT LIMITED PARTNERSHIP, a Nevada limited partnership ITS GENERAL PARTNER: SHOWBOAT INDIANA, INC. By: /s/ H. Gregory Nasky Its: Secretary EX-10 4 EXHIBIT 10.29 FIRST AMENDMENT TO LEASE AND DEVELOPMENT AGREEMENT THIS FIRST AMENDMENT TO LEASE AND DEVELOPMENT AGREEMENT (this "Amendment") is made and entered as of the ___ day of ______________, 1996 and is by and between the St. Louis County Port Authority, a public body corporate and politic of the State of Missouri ("Landlord"), and Southboat Limited Partnership, a Missouri Limited Partnership ("Tenant"). RECITALS WHEREAS, in October 1995, Landlord and Tenant executed that certain Lease and Development Agreement (the "Lease") in connection with certain real property (the "Property") more particularly described in Attachments A, B and C to the Lease. WHEREAS, Section 2(b) of the Lease provides that Tenant shall have a certain period during which Tenant may satisfy or waive certain conditions subsequent to the continuing effectiveness of the Lease, including, without limitation, conditions relating to Landlord's title to the Premises (as that term is defined in the Lease). WHEREAS, Section 2(d) of the Lease provides that Tenant may object to any matter contained in the commitment for the leasehold policy of title insurance (the "Commitment") issued to Tenant on the effective date of the Lease and that, in certain circumstances, Tenant may cancel the Lease without further obligation or liability as a result of the matters to which it has objected pursuant to Section 2(d) of the Lease. WHEREAS, upon review of the Commitment, Tenant objected to certain exceptions to title of the Premises including (i) a 25 foot wide right-of-way and easement (the "Strip") granted to the Mississippi River Transmission Corporation along the western boundary of the Premises; (ii) the location of a sewer line running west to east across the Premises, (the "Sewer Line") and (iii) the right-of-way in favor of St. Louis County for the extension of Arlee Avenue (collectively, the "Exceptions"). WHEREAS, to address Tenant's objection to the Strip, the Board of Commissioners of the Landlord approved on March 19, 1996 a substitution (the "Substitution") of 25 feet of land to the north of the Premises (the "Land") for the Strip, on condition that any increase in cost resulting from the Substitution be borne by Tenant. WHEREAS, to address Tenant's objection to the Sewer Easement, Landlord has agreed to grant a replacement easement to the Metropolitan St. Louis Sewer District ("MSD") subject to the Tenant paying all costs of inspections and removal, relocation or replacement of the Sewer Line. WHEREAS, to address Tenant's objection to the right-of-way for Arlee Avenue, Landlord has agreed to use its best efforts to cause St. Louis County to vacate the right-of-way upon dedication to St. Louis County of the extension of Hoffmeister Avenue. WHEREAS, Landlord has also agreed to provide for the dedication of alternative wetland areas for wetland areas located on the Premises. NOW, THEREFORE, for and in consideration of the foregoing, and of the mutual premises and undertakings contained in this Amendment, and intending to be legally bound hereby, Landlord and Tenant hereby agree that the Recitals set forth above are true and accurate and further agree as follows: 1. MODIFICATION OF DESCRIPTION OF PREMISES. Landlord and Tenant hereby agree that Attachment B to the Lease (legal description of the Premises) is hereby amended and modified to effectuate the Substitution. The legal description of the Premises, as amended herein, is set forth on Exhibit "A" attached hereto and incorporated herein by this reference. Tenant hereby agrees that any increase in cost resulting from the Substitution shall be borne by Tenant. 2. RELOCATION OF THE SEWER LINE. Landlord hereby agrees to the relocation of the Sewer Line in accordance with plans approved by MSD and to grant to MSD an easement as reasonably necessary to accommodate such relocation and Tenant has agreed to provide for all costs related to the inspection and removal, relocation or replacement of the Sewer Line. 3. PROVISION FOR ADDITIONAL WETLAND AREAS. Landlord hereby agrees to designate wetland areas to replace the wetland areas located on the Premises and Tenant hereby agrees to pay for any costs associated with the replacement of the wetland areas located on the Premises. 4. ENVIRONMENTAL REMEDIATION. Tenant agrees to bear all costs related to clean-up and remediation of any hazardous wastes on the Premises. 5. ACCEPTANCE OF PREMISES. Tenant hereby agrees that it accepts the Premises. 6. RESERVATION OF RIGHTS. Landlord and Tenant hereby agree that except as otherwise specifically provided in this Amendment, nothing in this Amendment waives or otherwise relinquishes (or shall be construed to waive or otherwise relinquish) any of the rights of Landlord or Tenant under the Lease. 7. MISCELLANEOUS PROVISIONS. a. MERGER AND MODIFICATION. This Amendment contains and/or incorporates the entire agreement of Landlord and Tenant with respect to the specific subject matter hereof and neither Landlord nor Tenant shall be bound by anything not expressed in this writing. No alteration or other modification of this Amendment shall be effective unless such alteration or other modification shall be in writing and signed by Landlord and Tenant. b. HEADINGS. The subject headings of the Sections and Subsections of this Amendment are included only for purposes of convenience, and shall not effect the construction or interpretation of any of the provisions herein. 2 c. ATTORNEYS' FEES. In the event that any action is filed in relation to this Amendment, the unsuccessful party to such action shall pay to the successful party, in addition to any other sum or performance that either party may be called upon to pay or render, a reasonable sum for the successful party's attorneys' fees and costs incurred as a result of such action. d. SEVERABILITY. If any provision or section of this Amendment is declared invalid by a court of competent jurisdiction, the remaining provisions hereof shall not be affected thereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. "LANDLORD" "TENANT" ST. LOUIS COUNTY PORT SOUTHBOAT LIMITED PARTNERSHIP AUTHORITY By: Showboat Lemay, Inc., its general partner By:_______________________ By:______________________ Its:______________________ Its:_____________________ EXHIBIT A (Legal description of the Property and the Premises, as those terms are defined in the Lease) 3 SECOND AMENDMENT TO LEASE AND DEVELOPMENT AGREEMENT THIS SECOND AMENDMENT to the Lease and Development Agreement dated October 1995, as amended on May 21, 1996 (together the "Lease"), is made and entered into as of the 12th day of December, 1996, by and between the ST. LOUIS COUNTY PORT AUTHORITY, a public body corporate and politic of the State of Missouri ("Landlord"), and SOUTHBOAT LIMITED PARTNERSHIP, a Missouri limited partnership ("Tenant"). WHEREAS, the parties to this Amendment have entered into a Lease and Development Agreement dated October 1995 in connection with certain real property more particularly described in Attachments A, B and C to the Lease; and WHEREAS, Section 3(c) provides, in part, that the Landlord or Tenant shall have the right to terminate the Lease in the event that, if for any reason other than Unavoidable Delay or a delay caused by the Landlord or St. Louis County, and notwithstanding Tenant's diligent pursuit of Gaming Licensure, the Investigation Date has not occurred on or before the expiration of the fourteen month period commencing on the Effective Date (the "Investigation Deadline") or the Tenant reasonably determines, based upon communications with or information received from the Gaming Commission staff, that the Commission will not commence the investigation before the Investigation Deadline; and WHEREAS, based upon information received from the Gaming Commission staff, the Commission will not commence its investigation of Tenant before the Investigation Deadline; and WHEREAS, the Landlord and Tenant believe that it will be in their respective best interests to extend the fourteen month period referred to in Section 3(c) for an additional twelve month period; and WHEREAS, both Landlord and Tenant desire to enter into a written modification of Section 3(c) of the Lease; NOW, THEREFORE, for and in consideration of the foregoing and the mutual considerations contained in this Amendment, the parties agree as follows: 1. The Lease dated October 1995 between Landlord and Tenant shall be modified by this Second Amendment effective the 12th day of December, 1996, as follows: Section (c)(i) is hereby amended to read as follows: (i) notwithstanding Tenant's diligent pursuit of Gaming Licensure, if the Investigation Date has not occurred on or before the expiration of the 26 month period commencing on the Effective Date (the "Investigation Deadline") or Tenant reasonably determines, based on communications with or information received from the Commission staff, that the Commission will not commence the Investigation before the Investigation Deadline. 2. Except as modified by this Second Amendment to the Lease, the Lease and the First Amendment to the Lease shall remain in full force and effect and the parties shall remain bound by all of their terms and conditions. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and year first above written. ST. LOUIS COUNTY PORT AUTHORITY ("Landlord") By: /s/ Its: Chairman SOUTHBOAT LIMITED PARTNERSHIP ("Tenant") By: Showboat Lemay, Inc., its general partner By: /s/ H. Gregory Nasky Its: Secretary EX-10 5 EXHIBIT 10.31 $15,000,000.00 US Atlantic City, New Jersey As of March 19, 1996 PROMISSORY NOTE On March 18, 1997, for value received, Atlantic City Showboat, Inc. ("ACSI") promises to pay to the order of Showboat, Inc. ("SBO") at 2800 Fremont Street, Las Vegas, Nevada or such other place as SBO shall designate in writing to ACSI, the sum of Fifteen Million and no/one-hundredths Dollars ($15,000,000.00) (or such lesser principal sum which is the aggregate unpaid principal amount of all loans made by SBO and ACSI as indicated on the Schedule of Advances attached as page 3 of this promissory note). ACSI also promises to pay interest to SBO on the unpaid principal amount outstanding from time-to-time prior to maturity at an annual rate equal to the average prime rate for money center banks as published on the first business day of each calendar month in the WALL STREET JOURNAL called "daily composite rates" ("prime rate"), plus one percent (1%) the ("Contract Rate"). The Contract Rate shall be adjusted on the first day of each calendar month to reflect the prime rate, but shall not be adjusted at any other time during the calendar month. In no event shall the interest rate be in excess of the maximum rate of interest permitted under applicable law. Interest at the Contract Rate or Default Rate (as hereinafter defined) shall be paid by ACSI on the first day of each month commencing on the first day of the month occurring after the date of said promissory note. If any payment becomes due on any day which is not a business day, such payment shall be made on the next succeeding business day. The term "business day" means Monday through Friday excepting national (federal) legal holidays. Interest hereunder shall be calculated for the actual number of days elapsed on the basis of a 360-day year. All payments of principal and/or interest shall be paid in lawful money of the United States of America. ACSI hereby expressly authorizes SBO to record on the schedule to this promissory note the amount and date of all/any such loan(s) made hereunder and the date and amount of each payment of principal thereon. All such notations shall be presumed to be correct and the aggregate unpaid amount of all/any loan(s) set forth on the schedule shall be presumed to be the aggregate unpaid principal amount due under this promissory note. Any loan may be prepared in whole or in part at any time and from time to time without premium or penalty together with interest accrued on the amount prepaid to the date of any such prepayment. Upon ACSI's (i) failure to pay when due any accrued interest or principal or (ii) failure to duly keep, perform and observe each and every term, condition, covenant, agreement or provision of this promissory note, or (iii) assignment for the benefit of creditors, declaration of bankruptcy (either voluntary or involuntary) or initiation of proceedings in any court seeking or acquiescing to any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief with its creditors, in any manner, in or for the payment of its debts when due under any state or federal law including, without limitation, the seeking, consenting to, or acquiescing to or being subject to the appointment of any trustee, receiver, assignee, custodian, master or liquidator of itself or any of its property or any of the rent, revenue, issue, earnings, profits or income thereof, SBO may, at its option, and without notice to ACSI, declare immediately due and payable the entire unpaid aggregate balance of principal, together with all accrued interest thereon, so that the same shall become immediately due and payable. The foregoing shall be events of default and any singular one shall be a default. In the event of a default or an event of default, interest shall accrue from time thereof until such default or event of default is cured, at a default rate of interest ("Default Rate") which shall be calculated as that rate of interest equal to the prime rate plus two percent (2%) from the date of default or event of default. Payment thereof may be enforced and recovered in whole or in part at any time by one or more of the remedies provided in this note or available to SBO either at law or in equity. Each and every right and remedy granted to SBO or allowed to it by law shall be cumulative and not exclusive for one or the other. No delay, failure or omission by SBO upon any default of ACSI to exercise any right or remedy granted to it or allowed to it by law shall constitute a waiver by SBO of the right to exercise any such right or remedy upon such default or upon any subsequent default. ACSI hereby waives and releases all errors, defects and imperfections in any proceedings instituted by SBO under the terms of this note. ACSI hereby waives presentment for payment, demand, notice of demand, notice of nonpayment or dishonor, protest and notice of protest of this promissory note, and all other notices in connection with the delivery, acceptance, performance, default or enforcement of this promissory note. Any demand or notice if made or given shall be sufficiently made upon or given to ACSI if made in writing and mailed to ACSI by certified mail, return receipt requested, to the last address of ACSI known to SBO. This promissory note shall be governed by and construed in accordance with the laws of the State of Nevada. If any provision of this note shall be prohibited by or invalid under such laws, such provisions shall be ineffective to the extent of such prohibition or invalidity only, without invalidating the remainder of such provision or the remaining provisions of this promissory note. IN WITNESS WHEREOF, ACSI has caused this promissory note to be executed by its duly authorized officers and its corporate seal affixed hereto as of the day and year written on the first page of this note. ATLANTIC CITY SHOWBOAT , INC. By: /s/ Herb Wolfe Herb Wolfe President and Chief Executive Officer Attest: /s/ Luther Anderson Luther Anderson Assistant Secretary 2 SCHEDULE OF ADVANCES DATE AMOUNT OF AMOUNT OF AGGREGATE ADVANCE PAYMENT AMOUNT DUE 3 EX-10 6 EXHIBIT 10.33 PROMISSORY NOTE $34,011,720.56 January 1, 1997 FOR VALUE RECEIVED, Showboat Fifteen, Inc., a corporation organized and existing under the laws of the State of Nevada ("Maker"), promises to pay to Showboat, Inc., a corporation organized and existing under the laws of the State of Nevada, or order ("Holder"), at 3720 Howard Hughes Parkway, Ste. 200, Las Vegas, NV 89109, or at such other place as Holder may designate in writing, up to the principal balance of Thirty-Four Million Eleven Thousand Seven Hundred Twenty & 56/One Hundredths Dollars ($34,011,720.56), plus interest as hereinafter provided. Interest shall be calculated on a daily basis (based on a 365-day year), at 10.25% ("Base Rate"). Principal and interest shall be payable upon the earlier to occur of (i) demand or (ii) December 31, 1997 (the "Maturity Date"). All payments on this Promissory Note shall be applied first to discharge all accrued but unpaid interest on the unpaid principal balance hereof, and the remainder to be applied to the principal balance. The Holder's acceptance of any payment less than the amount then due shall not, in any manner, effect or prejudice the rights of the Holder to receive the unpaid balance then due and payable. The failure to pay the unpaid principal sum on the Maturity Date or the failure to pay any other sum when the same shall become due and payable shall constitute an event of default ("EVENT OF DEFAULT") hereunder, and upon the occurrence of an Event of Default, all sums evidenced hereby, including the entire principal balance, all accrued and unpaid interest and all other amounts due hereunder shall, at the election of Holder, and without demand or notice to Maker, become immediately due and payable and the Holder may exercise its rights under this Note, and other rights under applicable law. Upon the occurrence of an Event of Default by Maker, the unpaid principal balance, and all accrued and unpaid interest due hereunder and all other costs shall together be treated as the principal balance of this Promissory Note and shall bear interest at the rate of three (3) percentage points per annum greater than the Base Rate (the "DEFAULT RATE"), from the date of the Event of Default until the entire principal sum and such interest and costs have been paid in full. Maker shall have the right to prepay at any time all or any portion of this Promissory Note without penalty. It is not the intent of Holder to collect interest or other loan charges in excess of the maximum amount permitted by Nevada law. If interest or other loan charges collected or to be collected by the Holder exceed any applicable permitted limits then (i) any such interest or other loan charges shall be reduced by the amount necessary to reduce the interest or other loan charges to the permitted limits, and (ii) any sums already collected from the Maker which exceeded permitted limits will be refunded to the Maker. The Holder may choose to make such refund by reducing the principal balance of the indebtedness hereunder or by making a direct payment to the Maker. Maker agrees to waive demand, diligence, presentment for payment and protest, notice of acceleration, extension, dishonor, maturity, protest, and default hereunder. The Holder may accept late or partial payments even though they are marked "payment in full," without losing, prejudicing or waiving any rights hereunder. Maker agrees to pay all costs of collection, and all costs of suit and preparation for such suit (whether at trial or appellate level), in the event the unpaid principal sum of this Promissory Note, or any payment of principal or interest is not paid when due. No amendment, modification, change, waiver or discharge shall be effective unless evidenced by an instrument in writing and signed by the party against whom enforcement of any waiver, amendment, change, modification or discharge is sought. If any provision hereof is invalid, or unenforceable, the other provisions hereof shall remain in full force and effect and shall be construed to effectuate the provisions hereof. The provisions of this Promissory Note shall be binding and inure to the benefit of the successors and assigns of the parties hereto. A waiver by Holder or failure to enforce any covenant or condition of this Promissory Note, or to declare any default hereunder, shall not operate as a waiver of any subsequent default or affect the right of Holder to exercise any right or remedy not expressly waived in writing. This Promissory Note shall be construed in accordance with and governed by Nevada law. All payments of principal and interest are hereby required to be made in the form of lawful money of the United States of America. Time is of the essence with respect to this Promissory Note and each and every covenant, condition, term and provision hereof. Whenever the context requires or permits, the singular shall include the plural, the plural shall include the singular and the masculine, feminine and neuter shall be freely interchangeable. IN WITNESS WHEREOF, Maker has executed this Promissory Note at Las Vegas, Nevada as of the day first above written. Maker: SHOWBOAT FIFTEEN, INC., a Nevada corporation By: /s/ H. Gregory Nasky Its: Secretary EX-10 7 EXHIBIT 10.38 PROMISSORY NOTE $8,197,293.06 January 1, 1997 FOR VALUE RECEIVED, Showboat Operating Company, a corporation organized and existing under the laws of the State of Nevada ("Maker"), promises to pay to Showboat, Inc., a corporation organized and existing under the laws of the State of Nevada, or order ("Holder"), at 3720 Howard Hughes Parkway, Ste. 200, Las Vegas, NV 89109, or at such other place as Holder may designate in writing, up to the principal balance of Eight Million One Hundred Ninety-Seven Thousand, Two Hundred Ninety- Three & 06/One Hundredths Dollars ($8,197,293.06), plus interest as hereinafter provided. Interest shall be calculated on a daily basis (based on a 365-day year), at 14% ("Base Rate"). Principal and interest shall be payable upon the earlier to occur of (i) demand or (ii) December 31, 1997 (the "Maturity Date"). All payments on this Promissory Note shall be applied first to discharge all accrued but unpaid interest on the unpaid principal balance hereof, and the remainder to be applied to the principal balance. The Holder's acceptance of any payment less than the amount then due shall not, in any manner, effect or prejudice the rights of the Holder to receive the unpaid balance then due and payable. The failure to pay the unpaid principal sum on the Maturity Date or the failure to pay any other sum when the same shall become due and payable shall constitute an event of default ("EVENT OF DEFAULT") hereunder, and upon the occurrence of an Event of Default, all sums evidenced hereby, including the entire principal balance, all accrued and unpaid interest and all other amounts due hereunder shall, at the election of Holder, and without demand or notice to Maker, become immediately due and payable and the Holder may exercise its rights under this Note, and other rights under applicable law. Upon the occurrence of an Event of Default by Maker, the unpaid principal balance, and all accrued and unpaid interest due hereunder and all other costs shall together be treated as the principal balance of this Promissory Note and shall bear interest at the rate of three (3) percentage points per annum greater than the Base Rate (the "DEFAULT RATE"), from the date of the Event of Default until the entire principal sum and such interest and costs have been paid in full. Maker shall have the right to prepay at any time all or any portion of this Promissory Note without penalty. It is not the intent of Holder to collect interest or other loan charges in excess of the maximum amount permitted by Nevada law. If interest or other loan charges collected or to be collected by the Holder exceed any applicable permitted limits then (i) any such interest or other loan charges shall be reduced by the amount necessary to reduce the interest or other loan charges to the permitted limits, and (ii) any sums already collected from the Maker which exceeded permitted limits will be refunded to the Maker. The Holder may choose to make such refund by reducing the principal balance of the indebtedness hereunder or by making a direct payment to the Maker. Maker agrees to waive demand, diligence, presentment for payment and protest, notice of acceleration, extension, dishonor, maturity, protest, and default hereunder. The Holder may accept late or partial payments even though they are marked "payment in full," without losing, prejudicing or waiving any rights hereunder. Maker agrees to pay all costs of collection, and all costs of suit and preparation for such suit (whether at trial or appellate level), in the event the unpaid principal sum of this Promissory Note, or any payment of principal or interest is not paid when due. No amendment, modification, change, waiver or discharge shall be effective unless evidenced by an instrument in writing and signed by the party against whom enforcement of any waiver, amendment, change, modification or discharge is sought. If any provision hereof is invalid, or unenforceable, the other provisions hereof shall remain in full force and effect and shall be construed to effectuate the provisions hereof. The provisions of this Promissory Note shall be binding and inure to the benefit of the successors and assigns of the parties hereto. A waiver by Holder or failure to enforce any covenant or condition of this Promissory Note, or to declare any default hereunder, shall not operate as a waiver of any subsequent default or affect the right of Holder to exercise any right or remedy not expressly waived in writing. This Promissory Note shall be construed in accordance with and governed by Nevada law. All payments of principal and interest are hereby required to be made in the form of lawful money of the United States of America. Time is of the essence with respect to this Promissory Note and each and every covenant, condition, term and provision hereof. Whenever the context requires or permits, the singular shall include the plural, the plural shall include the singular and the masculine, feminine and neuter shall be freely interchangeable. IN WITNESS WHEREOF, Maker has executed this Promissory Note at Las Vegas, Nevada as of the day first above written. Maker: SHOWBOAT OPERATING COMPANY A NEVADA CORPORATION By: /s/ H. Gregory Nasky Its: Secretary PROMISSORY NOTE $12,344,992.01 January 1, 1997 FOR VALUE RECEIVED, Showboat Operating Company, a corporation organized and existing under the laws of the State of Nevada ("Maker"), promises to pay to Showboat, Inc., a corporation organized and existing under the laws of the State of Nevada, or order ("Holder"), at 3720 Howard Hughes Parkway, Ste. 200, Las Vegas, NV 89109, or at such other place as Holder may designate in writing, up to the principal balance of Twelve Million Three Hundred Forty - Four Thousand, Nine Hundred Ninety - - Two & 01/One Hundredths Dollars ($12,344,992.01), plus interest as hereinafter provided. Interest shall be calculated on a daily basis (based on a 365-day year), at 14% ("Base Rate"). Principal and interest shall be payable upon the earlier to occur of (i) demand or (ii) December 31, 1997 (the "Maturity Date"). All payments on this Promissory Note shall be applied first to discharge all accrued but unpaid interest on the unpaid principal balance hereof, and the remainder to be applied to the principal balance. The Holder's acceptance of any payment less than the amount then due shall not, in any manner, effect or prejudice the rights of the Holder to receive the unpaid balance then due and payable. The failure to pay the unpaid principal sum on the Maturity Date or the failure to pay any other sum when the same shall become due and payable shall constitute an event of default ("EVENT OF DEFAULT") hereunder, and upon the occurrence of an Event of Default, all sums evidenced hereby, including the entire principal balance, all accrued and unpaid interest and all other amounts due hereunder shall, at the election of Holder, and without demand or notice to Maker, become immediately due and payable and the Holder may exercise its rights under this Note, and other rights under applicable law. Upon the occurrence of an Event of Default by Maker, the unpaid principal balance, and all accrued and unpaid interest due hereunder and all other costs shall together be treated as the principal balance of this Promissory Note and shall bear interest at the rate of three (3) percentage points per annum greater than the Base Rate (the "DEFAULT RATE"), from the date of the Event of Default until the entire principal sum and such interest and costs have been paid in full. Maker shall have the right to prepay at any time all or any portion of this Promissory Note without penalty. It is not the intent of Holder to collect interest or other loan charges in excess of the maximum amount permitted by Nevada law. If interest or other loan charges collected or to be collected by the Holder exceed any applicable permitted limits then (i) any such interest or other loan charges shall be reduced by the amount necessary to reduce the interest or other loan charges to the permitted limits, and (ii) any sums already collected from the Maker which exceeded permitted limits will be refunded to the Maker. The Holder may choose to make such refund by reducing the principal balance of the indebtedness hereunder or by making a direct payment to the Maker. Maker agrees to waive demand, diligence, presentment for payment and protest, notice of acceleration, extension, dishonor, maturity, protest, and default hereunder. The Holder may accept late or partial payments even though they are marked "payment in full," without losing, prejudicing or waiving any rights hereunder. Maker agrees to pay all costs of collection, and all costs of suit and preparation for such suit (whether at trial or appellate level), in the event the unpaid principal sum of this Promissory Note, or any payment of principal or interest is not paid when due. No amendment, modification, change, waiver or discharge shall be effective unless evidenced by an instrument in writing and signed by the party against whom enforcement of any waiver, amendment, change, modification or discharge is sought. If any provision hereof is invalid, or unenforceable, the other provisions hereof shall remain in full force and effect and shall be construed to effectuate the provisions hereof. The provisions of this Promissory Note shall be binding and inure to the benefit of the successors and assigns of the parties hereto. A waiver by Holder or failure to enforce any covenant or condition of this Promissory Note, or to declare any default hereunder, shall not operate as a waiver of any subsequent default or affect the right of Holder to exercise any right or remedy not expressly waived in writing. This Promissory Note shall be construed in accordance with and governed by Nevada law. All payments of principal and interest are hereby required to be made in the form of lawful money of the United States of America. Time is of the essence with respect to this Promissory Note and each and every covenant, condition, term and provision hereof. Whenever the context requires or permits, the singular shall include the plural, the plural shall include the singular and the masculine, feminine and neuter shall be freely interchangeable. IN WITNESS WHEREOF, Maker has executed this Promissory Note at Las Vegas, Nevada as of the day first above written. Maker: SHOWBOAT OPERATING COMPANY A NEVADA CORPORATION By: /s/ H. Gregory Nasky Its: Secretary PROMISSORY NOTE $9,641,821.00 January 1, 1997 FOR VALUE RECEIVED, Showboat Operating Company, a corporation organized and existing under the laws of the State of Nevada ("Maker"), promises to pay to Showboat, Inc., a corporation organized and existing under the laws of the State of Nevada, or order ("Holder"), at 3720 Howard Hughes Parkway, Ste. 200, Las Vegas, NV 89109, or at such other place as Holder may designate in writing, up to the principal balance of Nine Million Six Hundred Forty - One Thousand, Eight Hundred Twenty - One & 00/One Hundredths Dollars ($9,641,821.00), plus interest as hereinafter provided. Interest shall be calculated on a daily basis (based on a 365-day year), at 14% ("Base Rate"). Principal and interest shall be payable upon the earlier to occur of (i) demand or (ii) December 31, 1997 (the "Maturity Date"). All payments on this Promissory Note shall be applied first to discharge all accrued but unpaid interest on the unpaid principal balance hereof, and the remainder to be applied to the principal balance. The Holder's acceptance of any payment less than the amount then due shall not, in any manner, effect or prejudice the rights of the Holder to receive the unpaid balance then due and payable. The failure to pay the unpaid principal sum on the Maturity Date or the failure to pay any other sum when the same shall become due and payable shall constitute an event of default ("EVENT OF DEFAULT") hereunder, and upon the occurrence of an Event of Default, all sums evidenced hereby, including the entire principal balance, all accrued and unpaid interest and all other amounts due hereunder shall, at the election of Holder, and without demand or notice to Maker, become immediately due and payable and the Holder may exercise its rights under this Note, and other rights under applicable law. Upon the occurrence of an Event of Default by Maker, the unpaid principal balance, and all accrued and unpaid interest due hereunder and all other costs shall together be treated as the principal balance of this Promissory Note and shall bear interest at the rate of three (3) percentage points per annum greater than the Base Rate (the "DEFAULT RATE"), from the date of the Event of Default until the entire principal sum and such interest and costs have been paid in full. Maker shall have the right to prepay at any time all or any portion of this Promissory Note without penalty. It is not the intent of Holder to collect interest or other loan charges in excess of the maximum amount permitted by Nevada law. If interest or other loan charges collected or to be collected by the Holder exceed any applicable permitted limits then (i) any such interest or other loan charges shall be reduced by the amount necessary to reduce the interest or other loan charges to the permitted limits, and (ii) any sums already collected from the Maker which exceeded permitted limits will be refunded to the Maker. The Holder may choose to make such refund by reducing the principal balance of the indebtedness hereunder or by making a direct payment to the Maker. Maker agrees to waive demand, diligence, presentment for payment and protest, notice of acceleration, extension, dishonor, maturity, protest, and default hereunder. The Holder may accept late or partial payments even though they are marked "payment in full," without losing, prejudicing or waiving any rights hereunder. Maker agrees to pay all costs of collection, and all costs of suit and preparation for such suit (whether at trial or appellate level), in the event the unpaid principal sum of this Promissory Note, or any payment of principal or interest is not paid when due. No amendment, modification, change, waiver or discharge shall be effective unless evidenced by an instrument in writing and signed by the party against whom enforcement of any waiver, amendment, change, modification or discharge is sought. If any provision hereof is invalid, or unenforceable, the other provisions hereof shall remain in full force and effect and shall be construed to effectuate the provisions hereof. The provisions of this Promissory Note shall be binding and inure to the benefit of the successors and assigns of the parties hereto. A waiver by Holder or failure to enforce any covenant or condition of this Promissory Note, or to declare any default hereunder, shall not operate as a waiver of any subsequent default or affect the right of Holder to exercise any right or remedy not expressly waived in writing. This Promissory Note shall be construed in accordance with and governed by Nevada law. All payments of principal and interest are hereby required to be made in the form of lawful money of the United States of America. Time is of the essence with respect to this Promissory Note and each and every covenant, condition, term and provision hereof. Whenever the context requires or permits, the singular shall include the plural, the plural shall include the singular and the masculine, feminine and neuter shall be freely interchangeable. IN WITNESS WHEREOF, Maker has executed this Promissory Note at Las Vegas, Nevada as of the day first above written. Maker: SHOWBOAT OPERATING COMPANY A NEVADA CORPORATION By: /s/ H. Gregory Nasky Its: Secretary EX-10 8 EXHIBIT 10.39 PROMISSORY NOTE $53,109,002.87 January 1, 1997 FOR VALUE RECEIVED, Showboat Operating Company, a corporation organized and existing under the laws of the State of Nevada ("Maker"), promises to pay to Showboat, Inc., a corporation organized and existing under the laws of the State of Nevada, or order ("Holder"), at 3720 Howard Hughes Parkway, Ste. 200, Las Vegas, NV 89109, or at such other place as Holder may designate in writing, up to the principal balance of Fifty-Three Million One Hundred Nine Thousand Two & 87/One Hundredths Dollars ($53,109,002.87), plus interest as hereinafter provided. Interest shall be calculated on a daily basis (based on a 365-day year), at 14% ("Base Rate"). Principal and interest shall be payable upon the earlier to occur of (i) demand or (ii) December 31, 1997 (the "Maturity Date"). All payments on this Promissory Note shall be applied first to discharge all accrued but unpaid interest on the unpaid principal balance hereof, and the remainder to be applied to the principal balance. The Holder's acceptance of any payment less than the amount then due shall not, in any manner, effect or prejudice the rights of the Holder to receive the unpaid balance then due and payable. The failure to pay the unpaid principal sum on the Maturity Date or the failure to pay any other sum when the same shall become due and payable shall constitute an event of default ("EVENT OF DEFAULT") hereunder, and upon the occurrence of an Event of Default, all sums evidenced hereby, including the entire principal balance, all accrued and unpaid interest and all other amounts due hereunder shall, at the election of Holder, and without demand or notice to Maker, become immediately due and payable and the Holder may exercise its rights under this Note, and other rights under applicable law. Upon the occurrence of an Event of Default by Maker, the unpaid principal balance, and all accrued and unpaid interest due hereunder and all other costs shall together be treated as the principal balance of this Promissory Note and shall bear interest at the rate of three (3) percentage points per annum greater than the Base Rate (the "DEFAULT RATE"), from the date of the Event of Default until the entire principal sum and such interest and costs have been paid in full. Maker shall have the right to prepay at any time all or any portion of this Promissory Note without penalty. It is not the intent of Holder to collect interest or other loan charges in excess of the maximum amount permitted by Nevada law. If interest or other loan charges collected or to be collected by the Holder exceed any applicable permitted limits then (i) any such interest or other loan charges shall be reduced by the amount necessary to reduce the interest or other loan charges to the permitted limits, and (ii) any sums already collected from the Maker which exceeded permitted limits will be refunded to the Maker. The Holder may choose to make such refund by reducing the principal balance of the indebtedness hereunder or by making a direct payment to the Maker. Maker agrees to waive demand, diligence, presentment for payment and protest, notice of acceleration, extension, dishonor, maturity, protest, and default hereunder. The Holder may accept late or partial payments even though they are marked "payment in full," without losing, prejudicing or waiving any rights hereunder. Maker agrees to pay all costs of collection, and all costs of suit and preparation for such suit (whether at trial or appellate level), in the event the unpaid principal sum of this Promissory Note, or any payment of principal or interest is not paid when due. No amendment, modification, change, waiver or discharge shall be effective unless evidenced by an instrument in writing and signed by the party against whom enforcement of any waiver, amendment, change, modification or discharge is sought. If any provision hereof is invalid, or unenforceable, the other provisions hereof shall remain in full force and effect and shall be construed to effectuate the provisions hereof. The provisions of this Promissory Note shall be binding and inure to the benefit of the successors and assigns of the parties hereto. A waiver by Holder or failure to enforce any covenant or condition of this Promissory Note, or to declare any default hereunder, shall not operate as a waiver of any subsequent default or affect the right of Holder to exercise any right or remedy not expressly waived in writing. This Promissory Note shall be construed in accordance with and governed by Nevada law. All payments of principal and interest are hereby required to be made in the form of lawful money of the United States of America. Time is of the essence with respect to this Promissory Note and each and every covenant, condition, term and provision hereof. Whenever the context requires or permits, the singular shall include the plural, the plural shall include the singular and the masculine, feminine and neuter shall be freely interchangeable. IN WITNESS WHEREOF, Maker has executed this Promissory Note at Las Vegas, Nevada as of the day first above written. Maker: SHOWBOAT OPERATING COMPANY A NEVADA CORPORATION By: /s/ H. Gregory Nasky Its: Secretary PROMISSORY NOTE $6,292,083.06 January 1, 1997 FOR VALUE RECEIVED, Showboat Development Company, a corporation organized and existing under the laws of the State of Nevada ("Maker"), promises to pay to Showboat, Inc., a corporation organized and existing under the laws of the State of Nevada, or order ("Holder"), at 3720 Howard Hughes Parkway, Ste. 200, Las Vegas, NV 89109, or at such other place as Holder may designate in writing, up to the principal balance of Six Million Two Hundred Ninety - Two Thousand, Eighty - Three Hundred & 06/One Hundredths Dollars ($6,292,083.06), plus interest as hereinafter provided. Interest shall be calculated on a daily basis (based on a 365-day year), at 14% ("Base Rate"). Principal and interest shall be payable upon the earlier to occur of (i) demand or (ii) December 31, 1997 (the "Maturity Date"). All payments on this Promissory Note shall be applied first to discharge all accrued but unpaid interest on the unpaid principal balance hereof, and the remainder to be applied to the principal balance. The Holder's acceptance of any payment less than the amount then due shall not, in any manner, effect or prejudice the rights of the Holder to receive the unpaid balance then due and payable. The failure to pay the unpaid principal sum on the Maturity Date or the failure to pay any other sum when the same shall become due and payable shall constitute an event of default ("EVENT OF DEFAULT") hereunder, and upon the occurrence of an Event of Default, all sums evidenced hereby, including the entire principal balance, all accrued and unpaid interest and all other amounts due hereunder shall, at the election of Holder, and without demand or notice to Maker, become immediately due and payable and the Holder may exercise its rights under this Note, and other rights under applicable law. Upon the occurrence of an Event of Default by Maker, the unpaid principal balance, and all accrued and unpaid interest due hereunder and all other costs shall together be treated as the principal balance of this Promissory Note and shall bear interest at the rate of three (3) percentage points per annum greater than the Base Rate (the "DEFAULT RATE"), from the date of the Event of Default until the entire principal sum and such interest and costs have been paid in full. Maker shall have the right to prepay at any time all or any portion of this Promissory Note without penalty. It is not the intent of Holder to collect interest or other loan charges in excess of the maximum amount permitted by Nevada law. If interest or other loan charges collected or to be collected by the Holder exceed any applicable permitted limits then (i) any such interest or other loan charges shall be reduced by the amount necessary to reduce the interest or other loan charges to the permitted limits, and (ii) any sums already collected from the Maker which exceeded permitted limits will be refunded to the Maker. The Holder may choose to make such refund by reducing the principal balance of the indebtedness hereunder or by making a direct payment to the Maker. Maker agrees to waive demand, diligence, presentment for payment and protest, notice of acceleration, extension, dishonor, maturity, protest, and default hereunder. The Holder may accept late or partial payments even though they are marked "payment in full," without losing, prejudicing or waiving any rights hereunder. Maker agrees to pay all costs of collection, and all costs of suit and preparation for such suit (whether at trial or appellate level), in the event the unpaid principal sum of this Promissory Note, or any payment of principal or interest is not paid when due. No amendment, modification, change, waiver or discharge shall be effective unless evidenced by an instrument in writing and signed by the party against whom enforcement of any waiver, amendment, change, modification or discharge is sought. If any provision hereof is invalid, or unenforceable, the other provisions hereof shall remain in full force and effect and shall be construed to effectuate the provisions hereof. The provisions of this Promissory Note shall be binding and inure to the benefit of the successors and assigns of the parties hereto. A waiver by Holder or failure to enforce any covenant or condition of this Promissory Note, or to declare any default hereunder, shall not operate as a waiver of any subsequent default or affect the right of Holder to exercise any right or remedy not expressly waived in writing. This Promissory Note shall be construed in accordance with and governed by Nevada law. All payments of principal and interest are hereby required to be made in the form of lawful money of the United States of America. Time is of the essence with respect to this Promissory Note and each and every covenant, condition, term and provision hereof. Whenever the context requires or permits, the singular shall include the plural, the plural shall include the singular and the masculine, feminine and neuter shall be freely interchangeable. IN WITNESS WHEREOF, Maker has executed this Promissory Note at Las Vegas, Nevada as of the day first above written. Maker: SHOWBOAT DEVELOPMENT COMPANY A NEVADA CORPORATION By: /s/ H. Gregory Nasky Its: Secretary EX-21 9
EXHIBIT 21.01 LIST OF SUBSIDIARIES STATE OF INCORPORATION/ NAME ORGANIZATION NAMES USED IN DOING BUSINESS Alantic City Showboat, Inc. New Jersey Showboat; Showboat Hotel and Casino; Atlantic City Showboat Ocean Showboat, Inc. New Jersey Ocean Showboat Ocean Showboat Finance New Jersey Ocean Showboat Finance Corporation Corporation Showboat Operating Company Nevada Showboat; Showboat Hotel, Casino & Bowling Center; Las Vegas Showboat Showboat Development Company Nevada Showboat Development Company Showboat Australia Pty Australia Not applicable Limited Sydney Harbour Casino Australia Not applicable Holdings Limited Sydney Casino Management Pty Australia Not applicable Limited Sydney Harbour Casino Australia Sydney Harbour Casino Properties Pty Limited Showboat Indiana, Inc. Nevada Not applicable Showboat Indiana Investment, Nevada Not applicable L.P. Showboat Marina Partnership Indiana Showboat Marina; East Chicago Showboat Showboat Marina Casino Indiana Showboat Marina; East Partnership Chicago Showboat Showboat Marina Finance Indiana Not applicable Corporation Showboat Marina Investment Indiana Not applicable Partnership Showboat New Hampshire, Inc. Nevada Not applicable Showboat Rockingham Company, New Hampshire Not applicable L.L.C. Showboat Lemay, Inc. Nevada Not applicable Southboat Limited Partnership Missouri Not applicable Showboat LMI, Inc. Nevada Not applicable Showboat Louisiana, Inc. Nevada Not applicable
EX-23 10 CONSENT OF INDEPENDENT AUDITORS' The Board of Directors Showboat, Inc.: We consent to incorporation by reference in the registration statements (Nos. 33-36048, 33-56044, 33-47945 and 33-58315) on Form S-8 of Showboat, Inc. of our report dated February 21, 1997, relating to the consolidated balance sheets of Showboat, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Showboat, Inc. /s/ KPMG Peat Marwick KPMG Peat Marwick Las Vegas, Nevada March 27, 1997 EX-27 11
5 1,000 12-MOS DEC-31-1996 DEC-31-1996 26,748 62,387 14,819 2,417 2,785 118,990 651,486 211,298 814,669 60,051 530,743 0 0 16,181 171,191 814,669 427,829 433,705 0 235,859 159,811 2,417 30,938 9,481 3,478 6,003 0 0 0 6,003 0.37 0.37
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