-----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, WE68diisUBUOvY31lUnMsbd2oVE63EIvrSsMJxUfAE089s4jzlqxTa5BT7EG8R5T NO4o8WQKqwIS6fAH6I1hTA== 0001047469-98-000903.txt : 19980114 0001047469-98-000903.hdr.sgml : 19980114 ACCESSION NUMBER: 0001047469-98-000903 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19980113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOARDWALK CASINO INC CENTRAL INDEX KEY: 0000915281 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 880304201 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-12780 FILM NUMBER: 98505760 BUSINESS ADDRESS: STREET 1: 3750 LAS VEGAS BLVD SOUTH CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027352400 MAIL ADDRESS: STREET 1: 3750 LAS VEGAS BLVD SOUTH CITY: LAS VEGAS STATE: NV ZIP: 89109 10KSB 1 10-KSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997 Commission File Number 1-12780 BOARDWALK CASINO, INC. ------------------------------------------- (Name of small business issuer in its charter) Nevada 88-0304201 - ------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 3750 Las Vegas Blvd. South Las Vegas, Nevada 89109 - --------------------------------- ---------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (702) 735-2400 Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, $.001 Par Value Pacific Stock Exchange Common Stock Purchase Warrants Pacific Stock Exchange Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 Par Value ----------------------------- (Title of Class) Common Stock Purchase Warrants ------------------------------ (Title of Class) Check whether the issuer (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year: $41,700,045. State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant: As of January 7, 1998: $15,244,000 (*) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: $.001 Par Value Common Stock--7,179,429 shares as of January 7, 1998. Transitional Small Business Disclosure Format: Yes ; No X --- --- - --------------------- * The aggregate market value was determined by multiplying the number of outstanding shares (excluding those shares held of record by officers, directors and greater than five percent shareholders) by $4.625, the last sales price of the Registrant's common stock as of January 7, 1998, such date being within 60 days prior to the date of filing. PART I The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Form 10-KSB and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are forward-looking, such as statements relating to plans for future expansion and other business development activities as well as other capital spending, financing sources and the effects of regulation (including gaming and tax regulation) and competition. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to development and construction activities, dependence on existing management, debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, changes in federal or state tax laws or the administration of such laws and changes in gaming laws or regulations (including the legalization of gaming in certain jurisdictions). ITEM 1. DESCRIPTION OF BUSINESS. GENERAL Boardwalk Casino, Inc. (the "Company") is a Nevada corporation that owns and operates the Holiday Inn-Registered Trademark- Casino Boardwalk in Las Vegas, Nevada and leases the 1.07 acre shopping center next to the hotel-casino. The Holiday Inn-Registered Trademark- Casino Boardwalk is situated on a 7.8-acre site on the Las Vegas Strip between Flamingo Road and Tropicana Avenue. It includes 653 hotel rooms, approximately 33,000 square feet of casino space, a coffee shop, a full-service restaurant, a snack bar, an entertainment lounge, two bars, two outdoor swimming pools and 1,125 garage and surface parking spaces (including those spaces acquired with the shopping center lease). It also contains a small gift shop under lease to Holiday Gifts, Inc. ("HGI"), a Nevada corporation owned by Avis P. Jansen, the Chairman of the Board of Directors and a principal shareholder of the Company. The Company has recently completed a substantial hotel and casino renovation and expansion program. Boardwalk Casino, Inc. was incorporated under the laws of the State of Nevada on July 27, 1993; Holiday gifts, Inc. was incorporated under the laws of the State of Nevada on December 23, 1971. The Company's principal executive office is located at 3750 Las Vegas Boulevard South, Las Vegas, Nevada 89109 and its telephone number is (702) 735-2400. AGREEMENT AND PLAN OF MERGER On December 22, 1997 the Company and Mirage Resorts, Incorporated ("Mirage") entered into an agreement whereby a subsidiary of Mirage will merge with the Company. See "Plan of Merger" for a further description of the agreement. LOCATION The Holiday Inn-Registered Trademark- Casino Boardwalk is strategically located to take advantage of adjacent mega-hotel/casino projects. Las Vegas Boulevard, more commonly known as "The Strip," is currently the center of gambling activity in Las Vegas. There are other concentrations of casinos located in downtown Las Vegas and suburban locations. The Las Vegas Strip has the highest concentration of casino space and hotel rooms in Southern Nevada and it is the location of substantially all of the premier Las Vegas hotels. The Company believes that its highly visible and accessible location is an important factor in attracting visitors as gaming customers. BACKGROUND The Company was granted a Holiday Inn ten-year franchise license on June 16, 1994 upon completing the renovation of its existing hotel. In September 1995, the Company substantially completed a renovation of the casino by expanding the casino floor space by 18,000 square feet and remodeling the front facade of the property. In May 1996, the Company substantially completed the development and construction of a new 16-story 451-room hotel tower on its property in addition to the existing four- and six-story towers. As a result of these expansions and other incremental additions, the Holiday Inn-Registered Trademark- Casino Boardwalk currently consists of a 653-room hotel and a casino of approximately 33,000 square feet with 661 slot machines, 20 table games and a full-service race and sports book. BUSINESS STRATEGY Management believes that the following key principles have been and will continue to be integral to its success as a gaming operator. TARGETED CUSTOMER BASE The Company's business strategy emphasizes attracting and retaining customers from two primary market segments, tourism and local patronage. As the Company's property has developed by the increase of its room base from 202 rooms to 653 rooms and the completion of its buffet and meeting rooms, the Company has focused its emphasis on marketing a larger room base and capturing the added traffic generated by the development of the mega resorts surrounding the Boardwalk Casino. The Boardwalk Casino is disproportionately large in relation to its room count, thus allowing for the increase in pedestrian traffic generated by the room base of surrounding mega resorts and new mega resorts under construction. The Company believes that its visitor patrons are discerning customers who enjoy the Company's hotel and casino as an alternate to the larger surrounding attractions on the Las Vegas Strip. FOCUS ON REPEAT CUSTOMERS Generating customer satisfaction and loyalty is a critical component of the Company's business strategy. The Company attracts customers from both the tourist and local markets by offering significant value in its dining experiences and its promotional programs. The Company markets its rooms through the Holiday Inn reservation system and its internal group tour, meeting and travel department. The Company believes the local market is primarily influenced by the actual value of its food operations coupled with specific promotions. Although perceived value attracts customers to the Holiday Inn-Registered Trademark- Casino Boardwalk initially, actual value generates customer loyalty and satisfaction. Management believes that actual value becomes apparent during the customer's visit through an enjoyable and high quality entertainment experience. AFFORDABLE QUALITY Because the Company targets the frequent repeat customer, management is committed to providing a quality entertainment experience for its customers at an affordable price. Dining is a primary motivation for a majority of all casino visits by both tourists and local residents, and management believes that the value offered by the Company's restaurants, snack bar, and ice cream parlor is a major factor in attracting its customers. The Company offers generous portions of high quality food at reasonable prices. In addition, the Company provides a high level of value to its hotel guests by offering moderately priced rooms which are well-appointed relative to comparably priced Las Vegas hotels. Management believes that providing affordable quality to customers contributes significantly to casino patronage. STRATEGIC LOCATION Management believes that the location of the Holiday Inn-Registered Trademark- Casino Boardwalk provides the Company with a significant competitive advantage. With 436 feet of frontage on The Strip, the Company is able to offer inviting opportunities for the pedestrian traffic generated by the surrounding mega resorts. The 3,000-room Monte Carlo Hotel and Casino immediately south of the Company, the January 1997 opening of the 2,200-room New York-New York Hotel and Casino, and the 2,000-room addition to the Luxor Hotel and Casino have significantly increased the pedestrian traffic on the boardwalk. Mirage Resort's "Bellagio" (expected to open in October 1998) is also expected to increase pedestrian traffic. EMPHASIS ON SLOT PLAY An integral part of the Company's business strategy is an emphasis on slot machine play. The Company's target market consists of frequent gaming patrons who seek not only a friendly atmosphere and convenience, but also higher-than-average payout rates. Accordingly, the Company's slot machine play provides players with payout rates that are higher than the Las Vegas Strip average payout rates. EXPANSION MASTER PLAN Currently, the Holiday Inn-Registered Trademark- Casino Boardwalk consists of a 33,000 square feet casino and a hotel containing a total of 653 rooms within a four-story, a six-story and a 16-story building located on the property site. The Company's master expansion plan for the Holiday Inn-Registered Trademark- Casino Boardwalk consisted of three phases: (i) the renovation and refurbishment of the original hotel rooms, which was completed in May 1994, (ii) the expansion of the casino, which was substantially completed in September 1995, and (iii) the development and construction of a 16-story, 451-room hotel tower, a parking garage and surface parking (accommodating 1,125 cars) and the completion of the 27,000 square foot second floor of the casino. The development and construction of the 16-story, 451-room hotel tower was substantially completed in May 1996. The Company opened its new buffet in March 1997 and completed the construction of its meeting rooms in June 1997. The buffet and the meeting rooms are located on the second floor of the casino. The Company has expanded the casino floor space from 15,000 square feet to 33,000 square feet and increased the number of slot machines from 212 to 661 and the number of table games from six to 20. In addition, the casino also features a full-service race and sports book. As part of the casino expansion project, the Company relocated and increased the seating capacities of its restaurant and its new coffee shop. Management believes that this expansion was necessary to respond to its expanding customer base and target markets. As part of its expansion master plan, the Company remodeled the front facade of the Holiday Inn-Registered Trademark- Casino Boardwalk to present a "Coney Island Amusement Park" theme conforming to the historical character and general architecture of Coney Island, New York's famous amusement park. The casino has been combined with the new construction, creating a new exterior with 436 feet of horizontal frontage and an estimated height of 53 feet. The "boardwalk" consists of amusement games and specialty food and/or gift shops. New state-of-the-art outdoor signage has completed the design renovation and casino expansion. The boardwalk consists of a total of 6,000 square feet of retail space, including shops, amusement games and food services. Each of the shops along the boardwalk offers access into the casino. The facade features a full-size model roller coaster rising 90 feet above the boardwalk. A rotating ferris wheel, complete with mannequins, is in place on the facade above the boardwalk, as is a parachute drop with mannequins. The facade features the Company's logo, Jocko the Clown, whose face stands approximately 45 feet high and whose likeness is reproduced on certain of the retail merchandise which is sold by the Company's retail shops. In May 1996, the Company substantially completed the development and construction of a new 16-story 451-room hotel tower on its property in addition to the existing four- and six-story towers. The new 27,000 square foot second level of the existing casino provides a 370-seat buffet area and additional meeting rooms. On December 16, 1993, the Company entered into a license agreement with Holiday Inns Franchising, Inc. to operate a "Holiday Inn-Registered Trademark-" hotel at its location. The agreement, as amended, required the Company to perform certain construction and renovation work and to open 200 rooms as a Holiday Inn by May 1, 1994 and a minimum of 300 additional rooms as a Holiday Inn by April 1, 1996. Thereafter, the Company may open a maximum of 1,000 rooms as a Holiday Inn by October 1998. The agreement provides that the Company will pay (i) a monthly royalty of 5% of the gross rooms revenues; (ii) a "marketing contribution" of 1.5% of the gross rooms revenues; (iii) a "reservation contribution" of 1.0% of the gross rooms revenues; and (iv) a monthly Holidex fee of $6.43 for each guest room on the Holidex reservation system. The license granted under the agreement expires ten years from the date of the opening of the hotel under the "Holiday Inn" system (June 16, 1994), subject to earlier termination as set forth therein. $40 MILLION FIRST MORTGAGE NOTE OFFERING On April 12, 1995, the Company completed the private sale of a $40 Million 16.5% First Mortgage Note due 2005 (the "Note"). The Note was issued under the Indenture between Boardwalk Casino, Inc., Issuer and Shawmut Bank, N.A., Trustee for $40,000,000 16.5% First Mortgage Notes Due March 31, 2005, Dated as of April 7, 1995 (the "Indenture"). During fiscal 1997, the Note was sold by the holder to Mirage. The Note is a senior secured obligation of the Company, limited in aggregate principal amount to $40,000,000, secured by all of the current property and assets of the Company. The Note bears interest at the rate of 16.5% per annum, payable in cash semi-annually on March 31 and September 30 of each year, commencing on September 30, 1995. Interest will be paid to the holder of the Note at the close of business on the March 15 or the September 15, as the case may be, immediately preceding the respective interest payment date, or if no interest has yet been paid, on the date of original issue. The Company may not redeem or prepay the Note without penalty prior to the date of its Stated Maturity. Commencing on September 30, 2001, the Company may redeem the Note in whole but not in part at a redemption price equal to (i) the remaining principal amount thereof, plus (ii) accrued interest to the date of redemption, plus (iii) a premium equal to the Yield Maintenance Premium. The Indenture contains certain covenants of the Company, including limitations on use of proceeds, limitations on restricted payments, limitations on incurrence of additional indebtedness, limitations on restrictions on distributions from Restricted Subsidiaries, limitations on capital stock of Restricted Subsidiaries, limitations on transactions with Affiliates, limitations on Liens, limitations on activities, limitations on sales of assets, limitation on merger, sale or consolidation and maintenance of consolidated net worth. The foregoing summary of the Note and the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by, reference to all of the provisions of the Note and the Indenture, including the definitions contained therein of certain terms and those terms made part of the Indenture by reference to the Trust Indenture Act of 1939 as in effect on the date of the Indenture. Capitalized terms used herein and not otherwise defined have the meanings ascribed to them in the Indenture. As part of the private sale of the Note, the Company issued to the Note purchaser 1,281,869 common stock purchase warrants exercisable to purchase 1,281,869 shares of Common Stock at $6.00 per share anytime before April 11, 2005. Further, in connection with the private placement and sale of the Note, the Company issued to the Placement Agent and Financial Advisor (and its affiliates) an aggregate of 626,823 common stock purchase warrants exercisable to purchase 626,823 shares of Common Stock at $6.00 per share anytime before April 11, 2000. The proceeds of the Note were applied to (i) finance approximately $29.6 million of construction costs for the 16-story 451-room hotel tower, parking facility, 27,000 square foot second level addition to the existing casino and related improvements; (ii) finance the retirement of approximately $5.9 million of existing indebtedness; (iii) pay approximately $1.5 million of fees and expenses incurred in connection with the offering and sale of the Note; and (iv) provide approximately $3.0 million for working capital and other corporate purposes. PRIVATE FINANCING WITH DIVERSIFIED OPPORTUNITIES GROUP LTD. On September 25, 1996, the Company completed a private transaction (the "Transaction") entered into by and among Diversified Opportunities Group Ltd., an Ohio limited liability company ("Diversified"), the Company, and Norbert W. Jansen, individually and as trustee under an agreement dated July 14, 1993 ("Jansen"). Pursuant to the terms of a Purchase Agreement dated as of September 24, 1996 (the "Purchase Agreement") among Diversified, the Company and Jansen, the first phase of the Transaction was consummated on September 25, 1996. In the first phase of the Transaction, the Company sold to Diversified 571,429 shares of common stock (the "Shares") at a price of $7.00 per share for a total purchase price of $4,000,000 and issued to Diversified a convertible subordinated note (the "Note") in the principal amount of $5,000,000. In the first phase, Jansen also sold to Diversified 182,411 Shares pursuant to the terms of an Option and Proxy Agreement (the "Option Agreement"). In addition, as of September 24, 1996, the Company and Diversified also executed a Registration Agreement (the "Registration Agreement"). The following is a summary of certain terms of the Purchase Agreement, the Note, the Option Agreement and the Registration Agreement (collectively, "the Transaction Documents"). This summary of the Transaction Documents is qualified in its entirety by reference to the Transaction Documents, copies of which have been previously filed with the Commission. The principal business of Diversified is developing and acquiring investments in the gaming industry and managing, supervising, selling or otherwise disposing of such investments and engaging in activities incidental or ancillary thereto. There are two members of Diversified, (i) Gary L. Bryenton and Jeffrey P. Jacobs, as trustees under the Opportunities Trust Agreement dated February 1, 1996 (the "Trust") and (ii) Jacobs Entertainment Ltd., an Ohio limited liability company ("Entertainment"). Entertainment is the Manager of Diversified. Jeffrey P. Jacobs ("Jacobs") and Jacobs Entertainment Inc. (a corporation in which Jacobs owns 100% of the outstanding capital stock) are the members of Entertainment and Jacobs is the manager of Entertainment. Both the Trust and Entertainment were formed primarily to hold their interest in Diversified. The first phase of the Transaction closed on September 25, 1996. At such time, Boardwalk sold to Diversified 571,429 Shares. Pursuant to the Option Agreement, Jansen sold to Diversified 182,411 Shares. In addition, Boardwalk issued the Note to Diversified. Diversified has the right, at its option, to convert the Note into Shares at any time following its receipt of all necessary licensing approvals from the Nevada State Gaming Control Board (the "Gaming Board"), the Nevada Gaming Commission (the "Commission") and local licensing authorities. The Note is convertible into a number of Shares determined by dividing the then unpaid principal balance of the Note by $7.50. The Note provides for a variable interest rate of LIBOR plus 2% and interest thereon is payable on a quarterly basis. The principal of the Note is due and payable in September 1998. On November 25, 1996, Diversified was advised by the Gaming Board that the second phase of the Transaction will not result in a change in control of the Company pursuant to the regulations of the Gaming Board and the Commission. On December 2, 1996, phase two of the Transaction was consummated. In phase two, Diversified purchased an additional 317,589 Shares from Jansen pursuant to the Option Agreement, and the Company's Board of Directors (the "Board") was expanded to six directors, with Jacobs being appointed as the sixth director. The final phase of the Transaction provides Diversified the option to acquire an additional 1,000,000 shares from Jansen pursuant to the Option Agreement. The exercise of this option is subject to Diversified obtaining all necessary licensing approvals from the Gaming Board, the Commission and the Nevada local licensing authorities. At such time as Diversified acquires a total of 1,000,000 shares from Jansen pursuant to the Option Agreement, the Company's Board will be expanded to seven directors with the additional director being designated by Diversified. The Option Agreement further provides for the refusal and first offer rights for Diversified on Shares to be sold by Jansen, his estate and family. The Option Agreement requires that Jansen vote all of his Shares and any other securities of the Company over which he has control and that he take all necessary or desirable actions within his control so that: (i) the Board is established at six directors; (ii) Jacobs is elected to the Board as one of the six directors; and (iii) once Diversified acquires 1,000,000 or more shares from Jansen pursuant to the Option Agreement, the Board is expanded to seven directors with the additional director to be designated by Diversified. Diversified is also granted an irrevocable proxy to vote Jansen's shares if Jansen fails to comply with the terms of the Option Agreement relating to the Board, or any restrictive covenants imposed on the Company pursuant to the Note. The Registration Agreement gives Diversified certain rights with respect to registering for sale under the Securities Act of 1933, as amended (the "Act"), and applicable state laws the Shares that it may acquire pursuant to the Transaction. The Registration Agreement gives Diversified the right, through September 24, 2001, to demand that the Company effect up to three registrations (two of which are to be paid by the Company and one of which will be paid by Diversified) of such Shares subject to the conditions set forth in the Registration Agreement. In addition, Diversified has the right to have such Shares included in certain registrations under the Act that the Company may effect other than pursuant to such demand, subject to the conditions set forth in the Registration Agreement. MEMORANDUM OF UNDERSTANDING Effective October 29, 1997, the Company entered into a Memorandum of Understanding with ("Diversified"), Jacobs Entertainment Nevada, Inc. ("Jacobs") and Avis P. Jansen ("Jansen") pursuant to which the Company issued, and Jacobs and Jansen purchased, at a price of $1,000 per share 2,650 shares and 600 shares of 6% Non-voting Cumulative Preferred Shares, respectively. The proceeds from the sale of the Preferred Shares were used to retire debt and for general working capital purposes. In addition, the Company granted to Jacobs an option to acquire up to an additional 15,000 Preferred Shares at a purchase price of $1,000 per share for a period of two years. Further, under certain terms and conditions, Jacobs was granted a purchase option and a development right to a parcel of property controlled by the Company. PLAN OF MERGER On December 22, 1997 the Company and Mirage entered into an agreement (the "Acquisition Agreement") whereby a subsidiary of Mirage will merge with the Company. Mirage has simultaneously entered into separate agreements with the Jansen Family Trust and Diversified (the "Stockholder Agreements") to acquire their common and preferred stock in the Company, a subordinated note issued by the Company, an adjacent parcel of land leased by the Company, and certain other rights. The Company's shareholders will receive $5 per share in cash pursuant to the merger. The merger is contingent upon several approvals, including shareholder approval, expiration of the waiting period under the Hart-Scott-Rodino Act, and the approval of gaming authorities, and is to be completed by no later than June 30, 1998 or the Plan of Merger is subject to termination and the Company will become liable to Mirage for $1,000,000. Based on representations made in their respective Stockholder Agreements, as further described below, the Jansen Family Trust and Diversified beneficially own, and have agreed to sell under the Stockholder Agreements, an aggregate of 3,821,429 shares of Common Stock, or approximately 53.2% of the total outstanding shares of Common Stock, based on the total number of shares of Common Stock represented by the Company in the Merger Agreement to have been outstanding as of December 22, 1997. Pursuant to the agreements with the Jansen Family Trust, Mirage has agreed to purchase 2,750,000 share of Common Stock for $5.00 per share in cash and 600 shares of Preferred Stock for a purchase price of $600,000, plus any accumulated but unpaid dividends on the Preferred Stock as of the date of payment. Mirage has also agreed to purchase a parcel of land located at 3734 Las Vegas Boulevard South owned by Jansen and leased to the Company. Pursuant to the agreement with Diversified, Mirage has agreed to purchase 1,071,429 shares of Common Stock for $5.00 per share in cash, a $5,000,000 Subordinated Note and 2,650 shares of Preferred Stock for a purchase price of $2,650,000, plus any accumulated but unpaid interest and dividends on the Subordinated Note and Preferred Stock, respectively, as of the date of payment. MARKETING The Holiday Inn-Registered Trademark- Casino Boardwalk has historically relied upon limited casino and other promotions designed to appeal to local residents. With the completion of the expansion of the casino and the hotel, the Company has implemented an aggressive marketing plan to promote the hotel and the casino. The Company believes that the "Coney Island" theme exterior facade will enhance its ability to attract pedestrian traffic currently generated by the existing mega resorts as well as those mega resorts under construction and in the planning phase which surround the Holiday Inn-Registered Trademark- Casino Boardwalk. With its oversized casino in relation to its room inventory, the "Coney Island" facade, and the Company's inexpensive dining value offerings, the Company believes that it is positioned to attract the mega resort customer as an addition to its established local and hotel customer bases. CURRENT OPERATIONS GAMING. Historically, the casino has accounted for approximately 40% of the net revenues of the Holiday Inn-Registered Trademark- Casino Boardwalk. These revenues were primarily derived from the 212 slot machines and four table games. With the expanded casino, it is anticipated that the gaming revenue provided by slot machines will continue to be the primary component of the Company's gaming revenues and income from operations. Currently, the Holiday Inn-Registered Trademark- Casino Boardwalk has 661 slot machines and 20 table games on its casino floor and operates a full-service race and sports book. On average, the preponderance of the weekly gaming net revenues are generated on weekends. The gaming revenues are provided by a broad base of customers and are not dependent on high-stakes players. In connection with its gaming activities, the Company follows a policy of stringent controls in compliance with the standards set by the Nevada Gaming Authorities. As a matter of policy, the Company does not extend credit to its gaming customers. NON-GAMING. The Holiday Inn-Registered Trademark- Casino Boardwalk has 653 rooms, two outdoor pools and a retail gift shop leased to HGI. The Company offers its hotel rooms at modest prices (as of September 30, 1997, the average room rate was approximately $61.00). For fiscal year 1996, the Holiday Inn-Registered Trademark- Casino Boardwalk's average occupancy was approximately 76.4%. For the fiscal year ended September 30, 1997, the average occupancy was approximately 81.6%. See "Item 6. Management's Discussion and Analysis or Plan of Operation" for more information regarding the Company's gaming and non-gaming operations and revenues. The Company offers a full service coffee shop, a buffet, a snack bar, an entertainment lounge and two bars for its casino and restaurant patrons. As with its hotel accommodations, the Company's food and beverage services are moderately priced. COMPETITION There is intense competition among companies in the gaming industry, many of which have significantly greater financial resources than the Company. The Holiday Inn-Registered Trademark- Casino Boardwalk faces competition from all other casinos and hotels in the Las Vegas areas. The Holiday Inn-Registered Trademark- Casino Boardwalk competes directly with a number of other operations targeted to local residents. Indirectly and to a lesser extent, its operations compete generally with gaming operations in other parts of the State of Nevada, such as Reno, Laughlin and Lake Tahoe, with facilities in Atlantic City, New Jersey and other parts of the world and with state-sponsored lotteries, on- and off-track wagering, card parlors, riverboat and Native American gaming ventures and other forms of legalized gambling. Certain states have recently legalized, and several other states are currently considering legalizing, casino gaming in designated areas. Legalized casino gaming in other states and on Native American reservations represents additional competition to the Company and could adversely affect the Company's operations, particularly if such gaming were to occur in areas close to the Company's operations. EMPLOYEES As of September 30, 1997, the Company employed 650 full-time employees, including its two executive officers, 43 managers and supervisors, 170 casino personnel, 245 food and beverage personnel, 165 hotel personnel and 25 administrative personnel. The Company occasionally employs part-time workers as needed. None of the Company's employees is covered by a collective bargaining agreement. The Company believes that its relationship with its employees is excellent. REGULATION AND LICENSING The ownership and operation of casino gaming facilities in Nevada are subject to (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (the "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 (the "Nevada Commission"), the Nevada State Gaming Control Board (the "Nevada Board") and the Clark County Liquor and Gaming Licensing Board (the "CCB"). The Nevada Commission, the Nevada Board and the CCB 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 that 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) providing 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. The Company is required to be licensed by the Nevada Gaming Authorities. The gaming licenses require the periodic payment of fees and taxes and are not transferable. The Company is also required to be 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 that the Nevada Commission may require. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of the Company must file applications with the Nevada Gaming Authorities and 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. An applicant for licensing or an applicant for a finding of suitability must pay all 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 licensing, the Nevada Gaming Authorities have the 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, the Company would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company to terminate the employment of any person who refused to file appropriate applications. Determinations of suitability or questions pertaining to licensing are not subject to judicial review in Nevada. The Company is required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions of the Company must be reported to, or approved by, the Nevada Commission. If it were determined that the Nevada Act was violated by the Company, the gaming licenses it holds could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, 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 property and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the gaming property) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license of the Company or the appointment of a supervisor could (and revocation of any gaming license would) have a material adverse effect on the Company's gaming operations. Any beneficial holder of Common Stock or any other voting security of the Company ("Company Voting Securities") regardless of the number of shares owned, may be required to file an application, be investigated, and have such person's suitability as a beneficial holder of Company 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 the investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires beneficial ownership of more than 5% of Company Voting Securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of Company 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 beneficial ownership of more than 10%, but not more than 15%, of Company Voting Securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds Company Voting Securities for investment purposes only. An institutional investor shall not be deemed to hold Company Voting Securities for investments purposes unless Company 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 other action which the Nevada Commission finds to be inconsistent with holding Company 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 management, policies or operation; 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, limited partnership, limited liability company 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. Avis P. Jansen, the Company's largest stockholder, has been found suitable as a controlling stockholder of the Company. 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 by the Chairman of the Nevada Board may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of Company Voting Securities 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 stockholder or to have any other relationship with the Company, the Company (i) pays that person any dividend or interest upon any Company Voting Securities; (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 the voting securities for cash at fair market value. Additionally, the CCB has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming licensee. The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own such 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 of any Company Voting Securities. The Nevada Commission has the power to require the Company's stock certificates to bear a legend indicating that the securities are subject to the Nevada Act. However, to date, the Nevada Commission has not imposed such a requirement on the Company. The Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Any approval, if granted, does not constitute a finding, recommendation or approval of the Nevada Gaming Authorities as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered thereby. 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 such person 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 of a plan of recapitalization proposed by the Company's Board of Directors in response to a tender offer made directly to its stockholders for the purpose of acquiring control of the Company. 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 Company's 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 operators where entertainment is furnished in connection with the selling of food or refreshments. Nevada Corporate 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 by the Nevada Board of the Licensee's 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. A Licensee is 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 operations 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. The sale of alcoholic beverages by the Company is subject to licensing, control and regulation by applicable local regulatory agencies. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could (and revocation would) have a material adverse effect upon the operations of the Company. ITEM 2. DESCRIPTION OF PROPERTY. See "Item 1. Description of Business" for a complete description of the Company's property. Effective October 1, 1996, in connection with the private transaction with Diversified Opportunities Group Ltd., the Company entered into a lease agreement (the "Lease Agreement") as the tenant with The Jansen Trust (as hereinafter defined) as the landlord. The Lease Agreement covers certain land to the north of the hotel and casino (the "Property") which enables the Company to control the use of the Property and provides the Company with an option to purchase the Property for possible expansion of the hotel and casino. The Property consists of approximately 1.07 acres of land and has 150 feet of frontage on the Strip. It currently contains a two-story office building which is leased to several retail and office tenants, including the executive and administrative offices of the Company. The Lease Agreement commenced October 1, 1996 and has a term of 24 months, with an option to extend the lease term for an additional five years and a second, successive, option to extend it an additional 23 years. The base rent of $70,000 per month ($840,000 per year) is subject to adjustment after five years. In addition, the Lease Agreement grants the Company an option to purchase the Property under certain terms and conditions. The Company believes that the terms of the Lease Agreement are fair and reasonable and on as beneficial terms as could be obtained from an unaffiliated third party consistent with other rentals assessed in the market area for similar facilities. Pursuant to the Memorandum of Understanding entered into on October 29, 1997, Diversified was granted, under certain conditions, a purchase option and a development right to the 1.07 acres of land controlled by the Company. As part of the Stockholder Agreements (see Item 1 - "Plan of Merger") Mirage will acquire the land parcel from the landlord and Diversified has agreed to terminate its rights granted under the Memorandum of Understanding for consideration of approximately $3,700,000 from Mirage. The Company does not invest in, and has not adopted any policy with respect to investments in, real estate or interests in real estate, real estate mortgages or securities of or interests in persons primarily engaged in real estate activities. It is not the Company's policy to acquire assets primarily for possible capital gain or primarily for income. ITEM 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings, other than routine litigation incidental to the Company's business, to which the Company is a party or of which any of its property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) Annual meeting of shareholders held September 24, 1997. (b) All five directors of the Company were nominated and elected September 24, 1997 as follows: Avis Jansen, Louis J. Sposato, James Scibelli, Keven J. Picardo and Jeffrey P. Jacobs. (c) Two matters were voted upon at the annual meeting as follows: Proposal 1: Election of Directors A. Jansen For: 5,632,417 Withhold: 23,244 L. Sposato For: 5,634,017 Withhold: 21,644 J. Scibelli For: 5,633,192 Withhold: 22,469 K. Picardo For: 5,634,017 Withhold: 20,944 J. Jacobs For: 5,633,617 Withhold: 22,044 Proposal 2: To ratify the appointment of Coopers & Lybrand L.L.P. as independent accountants and auditors for the Corporation for the year ending September 30, 1997. For: 5,645,417 Against: 10,144 Abstain: 100 Not Voted: -0- PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) The Common Stock is traded in the over-the-counter market and is quoted on the Nasdaq SmallCap Market under the symbol "BWLK" and on the Pacific Stock Exchange under the symbol "BWK". For the past two fiscal years, the high and low bid prices of the Common Stock as reported to the Company by the National Association of Securities Dealers, Inc. were as follows: FYE 1997 QUARTER ENDED: HIGH LOW ----------------------- ---- --- December 31, 1996 7 1/8 4 3/8 March 31, 1997 6 7/8 4 3/8 June 30, 1997 5 5/8 3 7/8 September 30, 1997 5 3 1/2 FYE 1996 QUARTER ENDED: HIGH LOW ----------------------- ---- --- December 31, 1995 6 5/8 5 1/4 March 31, 1996 8 1/2 5 3/4 June 30, 1996 8 9/16 7 1/2 September 30, 1996 6 5/8 5 3/4 The over-the-counter quotations set forth herein reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The Warrants are traded in the over-the-counter market and are quoted on the Nasdaq SmallCap Market under the symbol "BWLKW" and on the Pacific Stock Exchange under the symbol "BWKW." (b) On January 7, 1998, the last sale price of the Common Stock as reported by Nasdaq was $4.625 per share. As of January 7, 1998, there were at least 1,900 record and beneficial holders of the Common Stock. (c) The Company has not paid any dividends on its Common Stock and does not presently anticipate paying dividends in the foreseeable future. The Company currently intends to retain all of its earnings from operations for use in expanding and developing its business. Any future decision as to the payment of dividends will be at the discretion of the Company's Board of Directors and will depend upon the Company's earnings, financial position, capital requirements and such other factors as the Board of Directors deems relevant. Further, the Indenture between the Company as Issuer and Shawmut Bank, N.A. as Trustee for $40,000,000 16.5% First Mortgage Notes Due March 31, 2005, Dated as of April 7, 1995 and the Note issued to Diversified Opportunities Group Ltd. contain significant limitations on the Company's ability to pay dividends on its capital stock. (d) During the fiscal year ended September 30, 1997, the Company did not sell any equity securities that were not registered under the Securities Act of 1933, as amended. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. GENERAL Boardwalk Casino, Inc. ("BCI" or the "Company") was formed in July 1993 for the purpose of operating a casino and a hotel in Las Vegas, Nevada. See "Notes to Financial Statements". YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 -------------- -------------- REVENUES: Casino. . . . . . . . . . . . . . . . $ 23,149,451 $ 16,897,527 Rooms . . . . . . . . . . . . . . . . 11,839,744 7,224,324 Food and beverage . . . . . . . . . . 6,977,697 4,031,278 Other . . . . . . . . . . . . . . . . 1,785,545 837,895 -------------- --------------- Gross revenues . . . . . . . . . 43,752,437 28,991,024 Promotional allowances. . . . . . . . (2,052,392) (1,079,467) -------------- --------------- 41,700,045 27,911,557 -------------- --------------- COSTS AND EXPENSES: Casino. . . . . . . . . . . . . . . . 14,160,946 10,787,868 Rooms . . . . . . . . . . . . . . . . 5,192,093 3,460,334 Food and beverage . . . . . . . . . . 7,131,585 4,168,259 Other . . . . . . . . . . . . . . . . 230,862 173,138 Selling, general and administrative . 7,480,641 5,174,502 Depreciation and amortization . . . . 3,524,249 2,525,044 -------------- --------------- 37,720,376 26,289,145 -------------- --------------- Income (loss) from operations. . . . . . 3,979,669 1,622,412 -------------- --------------- OTHER (INCOME) EXPENSE: Interest income . . . . . . . . . . . (81,842) (395,416) Interest expense. . . . . . . . . . . 8,054,164 7,874,115 Interest capitalized. . . . . . . . . (507,286) (1,442,493) -------------- --------------- 7,465,036 6,036,206 -------------- --------------- Income (loss) before income taxes & extraordinary item. . . . . . . . . . $ (3,485,367) $ (4,413,794) -------------- --------------- RESULTS OF OPERATIONS In June of 1997 the Company completed the third phase of its three-phase project to expand and renovate the former existing hotel and casino facilities (the "Expansion"). Phase one of the Expansion was completed in May 1994 which was the renovation of the original 202 existing hotel rooms. Phase two of the Expansion was completed in September 1995 with the addition of a new casino facility that increased floor space from 15,000 square feet to 33,000 square feet and the first of two parking garages consisting of 550 spaces was completed in December 1995. The third phase of the Expansion consisted of the development and construction of a new 16-story (451 room) hotel tower completed in stages from February 1996 to July 1996, the second garage, consisting of 440 spaces was completed in May 1996, the completion of the 27,000 square foot buffet and meeting rooms on the second floor of the casino in March and June of 1997 respectively. YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1996 The results of operations for the year ended September 30, 1997 reflect the revenues and costs associated with the new casino facility and the additional 451 rooms in the new tower which were open for the entire year. The Company incurred a net loss for the year ended September 30, 1997 of $3,485,367 compared to a net loss of $4,413,794 in the prior year, a decrease in the net loss of $928,427 (21%). The reduction in loss was attributable to a $2,357,257 (145.3%) increase in income from operations, from an operating profit of $1,622,412 in 1996 to an operating profit of $3,979,669 in 1997 which was offset by an increase in net interest expense of $1,428,830. Net revenues at BCI increased $13,788,488 (49.4%), to $41,700,045 in 1997 from $27,911,557 in 1996. The increase in revenues for fiscal 1997 was attributable to the following: (i) an increase of $6,251,924 in casino revenues, (ii) $4,615,420 in additional room revenue attributable to a completed new hotel tower for the full fiscal year, (iii) an increase in food and beverage revenues of $2,946,419 due to the opening of a new buffet during the year and a greater number of hotel guests, (iv) an increase in other revenues by $947,650 with a large portion of that increase generated from additional retail space and (v) offset by an increase in promotional allowances of $972,925. Operating expenses, including depreciation and amortization, increased $11,431,231 (43.5%) to $37,720,376 in 1997 from $26,289,145 in the prior year. The increase in operating expenses was primarily due to the addition of a new casino facility and start-up and increased operating costs of the new hotel tower for an entire year. CASINO OPERATIONS For fiscal 1997, casino revenues increased $6,251,924 or 37% to $23,149,451. The increase is attributable to (i) a $2,163,548 increase in revenue from the race and sports books to $9,314,035 in fiscal 1997 from $7,150,487 for the same period in 1996, (ii) a $3,035,783 increase in slot machine revenues to $10,437,652 in fiscal 1997 from $7,401,869 for the same period in 1996 and (iii) a $1,052,593 increase in revenue from table games to $3,397,764 in fiscal 1997 from $2,345,171 for the same period in 1996. Casino expenses increased $3,373,078 (31.3%) to $14,160,946 for fiscal year 1997 from $10,787,868 for the same period of 1996. The increase in casino expenses was primarily due to: (i) increased revenue in the race and sports book resulting in related increases in race track and system operator fees of $1,326,066, (ii) additional staffing which resulted in higher payroll and employee benefit costs of $1,294,741 and (iii) increases in slot participation expenses, gaming tax and licenses of $662,372. ROOM OPERATIONS Room revenues increased $4,615,420, or 63.9%, to $11,839,744 for fiscal 1997 from $7,224,324 for the comparable 1996 period. The increase in room revenues reflects an increase in room nights sold by 72,862 or 60%, to 194,248 for fiscal 1997 from 121,386 for the comparable 1996 period. This increase was enhanced by an increase in the average daily room rate by $1.43 to $60.95 for fiscal 1997 from $59.52 for the same period of 1996. Fiscal year 1997 had an additional 79,133 room nights available for occupancy compared to fiscal year 1996. The increased room availability during 1997 over 1996 was due to the hotel tower being open for the entire fiscal year. The 16th floor, which is comprised of 11 suites, was available for occupancy by late July 1996. During the year the Company employed a professional sales department which had opened several corporate accounts, including a national airline for its flight crews. Despite the 79,133 additional room nights available, the hotel occupancy percentage increased 5.2% to 81.6% for the fiscal year 1997 compared to 76.4% for fiscal 1996. Rooms expense increased $1,731,759, or 50%, for fiscal 1997 to $5,192,093 from $3,460,334 for the same period in 1996. This increase is primarily attributable to (i) an increase in personnel to service the new hotel tower for the entire year at an additional cost of $1,127,704, (ii) related franchise fees and travel agent commissions on the additional revenues totaled $489,025, (iii) additional uniforms, laundry and room supplies totaled $173,280 (iv) additional credit card fees and equipment rental costs of $111,611. These expenses were offset by decreases in legal fees, linen replacement, repairs and maintenance, and miscellaneous expenses. The Company in the next fiscal year, has committed a block of rooms for casino program patrons that are expected to increase the percentage of hotel guests that play the Company's various gaming venues. The Company has an arrangement, with an established program promoter, to fill the block of rooms with qualified casino patrons. FOOD AND BEVERAGE OPERATIONS Food and beverage revenues increased by $2,946,419 (73.1%), to $6,977,697 for fiscal 1997 from $4,031,278 for the comparable 1996 period. The increase is directly a result of opening the new buffet for six months of operations during fiscal 1997, as well as the new hotel tower which had a full year of operations during fiscal 1997. Food and beverage expenses increased $2,963,326 (71.1%), to $7,131,585 for fiscal 1997 from $4,168,259 for 1996 reflecting increases in food and beverage costs associated with the increased sales. Food and beverage expenses as a percentage of gross food and beverage revenues decreased to 102.2% for fiscal 1997 from 103.4% for fiscal year 1996. This decrease is a result of increased casino promotional activity with an increase in food and beverage served on a complimentary basis, which food and beverage costs are included in casino expense. The opening of the buffet in March 1997 added capacity to the existing food facilities, which were operating close to maximum capacity. The initial opening and market positioning costs were heavy, but for the most part, under control by year end. Higher operating costs associated with operating a second kitchen were reduced dramatically by year end. Additionally, the coffee shop operation was negatively affected by the buffet opening. Management switched its marketing emphasis from utilizing the coffee shop as a loss leader to marketing the buffet effectively and repositioning the coffee shop as an inexpensive, cost effective, alternative for its guests. OTHER OPERATING REVENUES AND EXPENSES Other revenues increased by $947,650 (113.1%) to $1,785,545 for fiscal 1997 compared to $837,895 for 1996. The increase was attributable to (i) an increase of $555,290 in rental income derived from the new retail facilities, (ii) an increase of $362,994 in telephone and movie revenues and (iii) the balance of the increased revenues coming from arcade and vending facilities. The other costs increased $57,724 (33.3%) to $230,862 in fiscal 1997 compared to $173,138 in fiscal 1996. The increase is primarily due to the cost of movies purchased. DEPRECIATION AND AMORTIZATION Depreciation and amortization totaled $3,524,249 in 1997, reflecting a $999,205 (39.6%) increase over the 1996 amount of $2,525,044. The increase was due to the following: (i) a new casino facility was opened in September 1995 at a cost of $10,897,881, (ii) a new hotel tower was placed in service May 1996 at a cost of $19,893,988, (iii) two new parking facilities were completed during the fiscal year at a cost of $6,268,874, (iv) a central plant was completed September 1995 at a cost of $1,825,842 and (iv) additional gaming devices and casino equipment at a cost of $3,321,176 were placed in service starting in September 1995 through fiscal year 1997. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased $2,306,139 (44.6%) to $7,480,641 in 1997 from $5,174,502 in 1996. The increase in administrative expenses was primarily due to (i) utilities and rent increased $995,704, (ii) advertising and promotional expenses increased $759,673, (iii) increase in legal and professional fees of $306,344, (iv) small equipment, supplies and maintenance service contract costs increased $194,542. OTHER (INCOME) EXPENSE AND EXTRAORDINARY ITEM In 1997, the Company received $81,842 in interest income as compared to $395,416 in 1996. The $313,574 (79.3%) decrease is attributable to the lower invested balance of marketable securities in the 1997 period. Net interest costs increased to $7,546,878 in 1997 from $6,431,622 in 1996 (an increase of $1,115,256 or 17.3%). Approximately $507,286 of interest was capitalized in 1997 in connection with the Expansion compared to $1,442,493 of interest that was capitalized in 1996. LIQUIDITY AND CAPITAL RESOURCES Although the net loss for the year ended September 30, 1997 was $3,485,000, the Company's operations generated a positive cash flow of approximately $3,962,000, due primarily to the accruing of interest payable on September 30, 1997 of $3,300,000 on the $40,000,000 BCI Notes, which was subsequently paid during fiscal year 1998. Investing activities for fiscal 1997 used approximately $4,483,000, which were primarily comprised of approximately $4,273,000 expended for the construction and furnishing of the new buffet and meeting rooms located on the second floor above the casino. Financing activities provided approximately $600,000 from additional borrowings. Such proceeds were offset by $2,615,000 of principal payments on long-term debt notes payable and capital leases during fiscal 1997. The Company had unrestricted cash assets of $2,236,018 (3.5% of total assets) at September 30, 1997 compared to $4,722,549 (7.6% of total assets) at September 30, 1996. The ratio of current assets to current liabilities was .08 to 1 at September 30, 1997 and .82 to 1 at September 30, 1996. The Company's $40,000,000 BCI Notes are classified as a current liability at September 30, 1997 (see "Notes to Financial Statements"). On December 22, 1997, the Company entered into a merger and acquisition agreement (the "Acquisition Agreement") with Mirage Resorts, Incorporated ("Mirage") where the Company agreed to be acquired by Mirage. In connection with the Acquisition Agreement, Mirage has entered into separate purchase agreements (the "Stockholder Agreements") with certain selling shareholders of the Company to purchase their respective shares of common and preferred stock. The Stockholder Agreements, which are subject to regulatory approval, provide Mirage with an approximate 53% interest in the Company. The Acquisition Agreement also authorizes Mirage to purchase all of the remaining outstanding shares (the remaining 47% interest) of the Company's common stock for $5.00 per share (the closing price of the Company's common stock on the day prior to the execution of the Acquisition Agreement was $4.16). Completion of the Acquisition Agreement is subject to regulatory approval and approval of a majority of the Company's shareholders and is to be completed by no later than June 30, 1998 or the Acquisition Agreement is subject to termination and the Company will become liable to Mirage for $1,000,000. Under the terms of the Stockholder Agreements, the selling shareholders have agreed with Mirage to vote in favor of the Acquisition Agreement, should such vote take place prior to the closing of Stock Agreements. As part of the Stockholders Agreements, Mirage (i) on January 5, 1998 purchased from one of the selling shareholders the $5,000,000 note payable by the Company which is due on September 30, 1998 (as more fully described in Note 6), and (ii) will acquire a land parcel from one of the selling stockholders which is adjacent to the Company's hotel-casino and currently under lease to the Company. One of the selling shareholders has agreed to terminate rights granted under the Memorandum of Understanding executed in October 1997, for consideration of approximately $3,700,000 from Mirage. During fiscal 1997, and prior to the execution of the Acquisition Agreement and the Stock Agreements, Mirage acquired the $40,000,000 BCI Notes from the previous noteholder. In connection with the Acquisition Agreement, Mirage has agreed to defer the $3,300,000 March 31, 1998 interest payment on the BCI Notes until September 30, 1998, at the Company's option (the "Deferral Option"). Interest will accrue on the deferred interest at the same rate as the BCI Notes (16.5%) and will also be due and payable on September 30, 1998. Mirage also waived its redemption rights under the BCI Notes which becomes effective upon a change in control. Notwithstanding the Deferral Option, management of the Company believes that the combination of existing cash and cash flows from operations will not be sufficient to meet the Company's obligations as they become due during fiscal 1998. These obligations include scheduled interest payments on the BCI Notes (approximately $6,600,000 for the year) and the scheduled interest and principal repayment on the $5,000,000 note payable due September 30, 1998. Management expects that the need for cash will be significantly relieved upon completion of the Acquisition Agreement and merger with Mirage. Should the Acquisition Agreement not be approved, or should the closing be delayed, the Company would not have sufficient resources to pay interest and scheduled principal of the indebtedness acquired by Mirage, without modification of the terms of such indebtedness. Although management believes that the necessary approvals required to complete the Acquisition Agreement will be received prior to June 30, 1998, there is no assurance that the Acquisition Agreement will be approved, that such approval would be received on a timely basis, nor that modifications to the terms of the indebtedness would be obtained, if necessary. Should the Acquisition Agreement not be approved on a timely basis, management will investigate other options to remedy its financial obligations. Accordingly, these matters raise substantial doubt about the ability of the Company to continue as a going concern. The final outcome of these matters is not presently determinable and the September 30, 1997 financial statements of the Company do not include any adjustments that might result from the outcome of this uncertainty. IMPACT OF THE YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. The Company determined that it will be required to modify or replace significant portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 Issue can be mitigated. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. During fiscal 1998 the Company plans to initiate formal communications with all of its significant suppliers and large customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Issue. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The Company will utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications as is deemed to be necessary. However, as the Company has not completed a formal assessment of the systems affected by the Year 2000 Issue, the Company does not have a reasonable basis to conclude that the impacts of the Year 2000 Issue on its systems will not materially affect future financial results, or cause reported financial information not to be necessarily indicative of future operating results or future financial condition. ITEM 7. FINANCIAL STATEMENTS. INDEX TO FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 1997 AND 1996 ------ Report Of Independent Accountants Financial Statements: Balance Sheets As Of September 30, 1997 And 1996 Statements Of Income (Loss) For The Years Ended September 30, 1997 And 1996 Statements Of Cash Flows For The Years Ended September 30, 1997 And 1996 Statements Of Shareholders' Equity For The Years Ended September 30, 1997 And 1996 Notes To Financial Statements REPORT OF INDEPENDENT ACCOUNTANTS --------- Board of Directors Boardwalk Casino, Inc. Las Vegas, Nevada We have audited the accompanying balance sheets of Boardwalk Casino, Inc. as of September 30, 1997 and 1996, and the related statements of income (loss), shareholders' equity and cash flows for the years ended September 30, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Boardwalk Casino, Inc. as of September 30, 1997 and 1996, and the results of its operations and its cash flows for the years ended September 30, 1997 and 1996 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that Boardwalk Casino, Inc. will continue as a going concern. As more fully described in Note 2, the Company has entered into a merger and acquisition agreement (the "Acquisition Agreement") with Mirage Resorts, Incorporated ("Mirage"). The Acquisition Agreement is subject to certain conditions, including regulatory and shareholder approvals. Mirage is currently the holder of approximately $45 million principal amount of the Company's indebtedness. Should the Acquisition Agreement not be approved, or should the closing be delayed, the Company would not have sufficient resources to pay interest and scheduled principal of the indebtedness acquired by Mirage, without modification of the terms of such indebtedness. There is no assurance that the Acquisition Agreement will be approved, that such approval would be received on a timely basis, nor that modifications to the terms of the indebtedness would be obtained, if necessary. Accordingly, these matters raise substantial doubt about the ability of the Company to continue as a going concern. The final outcome of these matters is not presently determinable and the September 30, 1997 financial statements of the Company do not include any adjustment that might result from the outcome of this uncertainty. /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. Las Vegas, Nevada November 24, 1997 except for Note 2 as to which the date is January 5, 1998 BOARDWALK CASINO, INC. BALANCE SHEETS SEPTEMBER 30, 1997 AND 1996 -------
1997 1996 ---- ---- A S S E T S: Current assets: Cash and cash equivalents $2,236,018 $4,772,549 Receivables, net of allowance for doubtful accounts of $8,276 (1997) and $17,105 (1996) 1,258,170 439,857 Inventory 130,436 73,719 Prepaid expenses 746,965 573,964 ---------- ---------- Total current assets 4,371,589 5,860,089 ---------- ---------- Property and equipment, net of accumulated depreciation of $8,885,392 (1997) and $5,705,685 (1996) 57,305,457 55,486,285 ---------- ---------- Other assets: Deferred costs, net of accumulated amortization of $583,158 (1997) and $239,435 (1996) 1,416,761 1,645,090 Restricted cash 173,385 66,394 Other 100,969 113,091 ---------- ---------- Total other assets 1,691,115 1,824,575 ---------- ---------- Total assets $63,368,161 $63,170,949 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $1,520,268 $1,281,657 Construction accounts payable 461,126 171,283 Accrued expenses 3,224,525 2,497,615 Accrued interest expense 3,426,870 - Related party payables 400,000 50,000 Notes payable 600,000 - Current portion of obligations under capital leases 2,517,920 3,115,522 Term debt classified as current, net of original issue discount of $3,875,773 (Notes 2 and 6) 41,124,227 - ---------- ---------- Total current liabilities 53,274,936 7,116,077 ---------- ---------- Term debt, net of original issue discount of $4,090,477 - 40,909,523 Obligations under capital leases, less current portion 1,833,477 3,400,234 ---------- ---------- Total liabilities 55,108,413 51,425,834 ---------- ---------- Commitments and contingencies Shareholders' equity: Preferred stock, $.001 par value; 15,000,000 shares authorized; none issued and outstanding - - Common stock, $.001 par value; 50,000,000 shares authorized; 7,179,429 (1997 and 1996) shares issued and outstanding 7,179 7,179 Additional paid-in capital 22,435,083 22,435,083 Accumulated deficit (14,182,514) (10,697,147) ---------- ---------- Total shareholders' equity 8,259,748 11,745,115 ---------- ---------- Total liabilities and shareholders' equity $63,368,161 $63,170,949 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements. BOARDWALK CASINO, INC. STATEMENTS OF INCOME (LOSS) FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996 -------- 1997 1996 ---- ---- Revenues: Casino $23,149,451 $16,897,527 Rooms 11,839,744 7,224,324 Food and beverage 6,977,697 4,031,278 Other 1,785,545 837,895 ---------- ---------- Gross revenues 43,752,437 28,991,024 Less promotional allowances (2,052,392) (1,079,467) ---------- ---------- Net revenues 41,700,045 27,911,557 ---------- ---------- Costs and expenses: Casino 14,160,946 10,787,868 Rooms 5,192,093 3,460,334 Food and beverage 7,131,585 4,168,259 Other 230,862 173,138 Selling, general and administrative 7,480,641 5,174,502 Depreciation and amortization 3,524,249 2,525,044 ---------- ---------- 37,720,376 26,289,145 ---------- ---------- Income from operations 3,979,669 1,622,412 ---------- ---------- Other (income) expense: Interest income (81,842) (395,416) Interest expense 8,054,164 7,874,115 Interest capitalized (507,286) (1,442,493) ---------- ---------- 7,465,036 6,036,206 ---------- ---------- Net income (loss) ($3,485,367) ($4,413,794) ---------- ---------- ---------- ---------- Net income (loss) per share of common stock ($.49) ($.70) --- --- --- --- Weighted average common shares outstanding 7,179,429 6,292,287 ---------- ---------- ---------- ---------- The accompanying notes are an integral part of these financial statements. BOARDWALK CASINO, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996 --------
1997 1996 ---- ---- Cash flows from operating activities: Net income (loss) ($3,485,367) ($4,413,794) --------- --------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,524,249 2,525,044 Provision for doubtful accounts 4,999 11,705 Amortization of original issue discount 214,704 462,472 Changes in operating assets and liabilities: (Increase) in receivables (809,484) (420,475) (Increase) in inventory (56,717) (8,168) Increase in related party payables 350,000 50,000 (Increase) in prepaid expenses (173,001) (197,331) Increase in accounts payable, net of amounts for capital expenditures 238,611 130,827 Increase in accrued expenses 726,910 1,732,181 Increase (decrease) in accrued interest payable 3,426,870 (2,600,297) --------- --------- Net cash provided by (used in) operating activities 3,961,774 (2,727,836) --------- ---------- Cash flows from investing activities: Capital expenditures, net of amounts in accounts payable (4,273,148) (21,209,818) Net (additions) deductions to restricted cash equivalents in escrow accounts (106,991) 17,856,729 (Increase) in deferred costs (115,393) (93,812) Decrease in other assets 12,122 21,920 --------- --------- Net cash used by investing activities (4,483,410) (3,424,981) --------- --------- Cash flows from financing activities: Proceeds from notes payable borrowings 600,000 3,429,611 Principal payments of notes payable - (6,303,639) Proceeds from long-term debt borrowings, net of issuance costs - 4,668,993 Principal payments of capital lease obligations (2,614,895) (1,062,235) Proceeds from issuance of common stock and warrants, net of issuance costs - 6,542,400 --------- --------- Net cash (used in) provided by financing activities (2,014,895) 7,275,130 --------- --------- Net (decrease) increase in cash and cash equivalents (2,536,531) 1,122,313 Cash and equivalents, beginning of period 4,772,549 3,650,236 --------- --------- Cash and equivalents, end of period $2,236,018 $4,772,549 --------- --------- --------- --------- Supplemental cash flow information: Cash paid for interest $4,627,294 $10,474,412 --------- --------- --------- --------- Schedule of non-cash investing and financing activities: Property and equipment acquisitions included in accounts payable $461,126 $171,283 ------- ------- ------- ------- Capitalized lease obligations incurred $450,606 $5,242,336 ------- --------- ------- ---------
The accompanying notes are an integral part of these financial statements. BOARDWALK CASINO, INC. STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Common Stock ------------------------ Additional Shares Paid-In Accumulated Outstanding Amount Capital Deficit Total ----------- ------ ------- ----------- ----- Balances, September 30, 1995 6,077,800 $6,078 $15,893,784 ($6,283,353) $9,616,509 Issuance of warrants to purchase common stock - - 51,617 - 51,617 Issuance of common stock, net of issuance costs 721,429 721 4,639,107 - 4,639,828 Exercises of warrants, net of issuance costs 380,200 380 1,850,575 - 1,850,955 Net loss - - - (4,413,794) (4,413,794) --------- ------- ---------- ----------- ---------- Balances, September 30, 1996 7,179,429 7,179 22,435,083 (10,697,147) 11,745,115 Net loss - - - (3,485,367) (3,485,367) --------- ------- ---------- ----------- ---------- Balances, September 30, 1997 7,179,429 $7,179 $22,435,083 ($14,182,514) $8,259,748 --------- ----- ---------- ----------- ---------- --------- ----- ---------- ----------- ----------
The accompanying notes are an integral part of these financial statements. BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS --------- 1. Summary Of Significant Accounting Policies: NATURE OF OPERATIONS Boardwalk Casino, Inc. ("BCI" or the "Company") is a Nevada corporation and was formed in July 1993 for the purpose of operating a casino and a hotel (collectively, the "Boardwalk Hotel and Casino") in Las Vegas, Nevada. CASINO REVENUE In accordance with industry practice, BCI recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. PROMOTIONAL ALLOWANCES The retail value of hotel accommodations, food and beverage provided to customers without charge is included in gross revenues and then deducted as promotional allowances to arrive at net revenues. The estimated costs of providing such promotional allowances have been classified as casino expenses through interdepartmental allocations, as follows: Year Ended September 30, ------------------------ 1997 1996 ---- ---- Hotel $126,254 $79,615 Food and beverage 1,046,396 923,362 --------- --------- $1,172,650 $1,002,977 --------- --------- CASH EQUIVALENTS, CONCENTRATION OF CREDIT RISK AND RESTRICTED CASH The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At September 30, 1997, the Company has approximately $913,400 on deposit with a single financial institution in excess of federally insured limits. At September 30, 1997 and 1996, the Company had $173,385 and $66,394, respectively on deposit as required by the Nevada Gaming Authorities which was restricted for use by the Company. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method. Estimated useful lives for property and equipment are 10 to 40 years for building and improvements and 5 to 7 years for furniture and equipment. Accelerated depreciation methods are generally used for income tax purposes. Repairs and maintenance are charged to expense when incurred. A gain or loss is recognized upon disposal of property and equipment, and the asset and related accumulated depreciation and amortization amounts are removed from the accounts. ADVERTISING COSTS Advertising costs are expensed as incurred and totaled $933,560 and $387,312 for the years ended September 30, 1997 and 1996, respectively. BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED --------- 1. Summary Of Significant Accounting Policies, Continued: PREOPENING COSTS Preopening costs associated with the expansion of the hotel-casino are expensed as incurred. DEFERRED COSTS Costs associated with the issuance of debt are deferred and amortized over the life of the related indebtedness using the effective interest method. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are recognized for the expected 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 SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. EARNINGS PER SHARE Earnings per share is based on the weighted average number of shares of common stock outstanding during each period. Warrants and options to purchase common stock which were issued in 1996, 1995 and 1994 were excluded form the calculation of earnings (loss) per share, as their inclusion would have been anti-dilutive (by reducing the loss per share). In February 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 is effective for periods ending after December 15, 1997 and replaces currently reported earnings per share with "basic", or undiluted, earnings per share and "diluted" earnings per share. Basic earnings per share is computed as detailed above while diluted earnings per share reflects the additional dilution for all potentially dilutive securities, such as stock options and warrants. The Company will adopt the provisions of SFAS 128 in its fiscal 1998 financial statements and the Company will be required to retroactively adopt this standard when it reports its operating results for the quarters and year ended September 30, 1998. When the Company presents this information, it expects to report the following restated amounts for 1997 and 1996: September 30, September 30, 1997 1996 ---- ---- Basic earnings per share: Income before extraordinary item $(.49) $(.70) Net income (loss) (.49) (.70) Diluted earnings per share: Income before extraordinary item (.49) (.70) Net income (loss) (.49) (.70) BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENS, CONTINUED --------- 1. Summary Of Significant Accounting Policies, Continued: STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123"). SFAS 123 established fair value-based financial accounting and reporting standards for all transactions in which a company acquires goods or services by issuing its equity instruments or by incurring a liability to its supplier in amounts based on the price of its common stock or other equity instruments. SFAS 123 provides that companies may continue to account for employee stock compensation plans using the accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Companies that elect not to adopt the fair-value based accounting approach under SFAS 123 for employee stock compensation plans must nevertheless comply with certain disclosure requirements and disclose pro forma net income and earnings per share as if such approach under SFAS 123 had been adopted. The disclosure requirements of SFAS 123 are effective for financial statements for fiscal years beginning after December 15, 1995 and the pro forma disclosure requirements are effective for stock awards granted in the first fiscal year beginning after December 15, 1994. The Company plans to utilize the disclosure option allowed by SFAS 123 and continue to account for stock-based compensation under APB 25. The Company did not issue any stock as compensation to employees during fiscal years 1997 and 1996. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates, particularly with respect to those matters discussed in Notes 2 and 6. ACCOUNTING PRONOUNCEMENT In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and display of comprehensive income and its components. SFAS 130 requires a separate statement to report components of comprehensive income for each period presented. The provisions of SFAS 130 are effective for fiscal years beginning after December 15, 1997. Management believes that they currently do not have items that would require presentation in a separate statement of comprehensive income. RECLASSIFICATIONS Certain amounts in the 1996 financial statements have been reclassified to conform with the 1997 presentation. 2. Subsequent Event - Acquisition Agreement and Going Concern On December 22, 1997, the Company entered into a merger and acquisition agreement (the "Acquisition Agreement") with Mirage Resorts, Incorporated ("Mirage") where the Company agreed to be acquired by Mirage. In connection with the Acquisition Agreement, Mirage has entered into separate purchase agreements (the "Stock Agreements") with certain selling shareholders of the Company to purchase their respective shares of common and preferred stock. The preferred stock was issued by the Company in October 1997, as more fully described in Note 10. The Stock Agreements, which are subject to regulatory approval, provide Mirage with an approximate 53% interest in the Company. The Acquisition Agreement also authorizes Mirage to purchase all of the remaining outstanding shares (the remaining 47% interest) of the Company's common stock for $5.00 per share (the closing price of the Company's common stock on the day BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENS, CONTINUED --------- 2. Subsequent Event - Acquisition Agreement and Going Concern, Continued prior to the execution of the Acquisition Agreement was $4.16). Completion of the Acquisition Agreement is subject to regulatory approval and approval of a majority of the Company's shareholders and is to be completed by no later than June 30, 1998 or the Acquisition Agreement is subject to termination and the Company will become liable to Mirage for $1,000,000. Under the terms of the Stock Agreements, the selling shareholders have agreed with Mirage to vote in favor of the Acquisition Agreement, should such vote take place prior to the closing of Stock Agreements. Under the terms of the Acquisition Agreement, all issued and outstanding warrants and stock options (other than options issued under the Company's 1994 Stock Compensation Plan or Outside Directors Stock Option Plan) will terminate or constitute only the right to receive the excess, if any, of the per share merger consideration ($5.00) over the per share exercise price of such warrant or option. As part of the Stock Agreements, Mirage (i) on January 5, 1998 purchased from one of the selling shareholders the $5,000,000 note payable by the Company which is due on September 30, 1998 (as more fully described in Note 6), and (ii) will acquire a land parcel from one of the selling stockholders which is adjacent to the Company's hotel-casino and currently under lease to the Company (as more fully described in Note 10). One of the selling shareholders has agreed to terminate rights granted under the Memorandum of Understanding executed in October 1997, for consideration of approximately $3,700,000 from Mirage. During fiscal 1997, and prior to the execution of the Acquisition Agreement and the Stock Agreements, Mirage acquired the $40,000,000 BCI Notes from the previous noteholder in a private placement transaction. In connection with the Acquisition Agreement, Mirage has agreed to defer the $3,300,000 March 31, 1998 interest payment on the BCI Notes until September 30, 1998, at the Company's option (the "Deferral Option"). Interest will accrue on the deferred interest at the same rate as the BCI Notes (16.5%) and will also be due and payable on September 30, 1998. Mirage also waived its redemption rights under the BCI Notes which become effective upon a change in control. Notwithstanding the Deferral Option, management of the Company believes that the combination of existing cash and cash flows from operations will not be sufficient to meet the Company's obligations as they become due during fiscal 1998. These obligations include scheduled interest payments on the BCI Notes (approximately $6,600,000 for the year) and the scheduled interest and principal repayment on the $5,000,000 note payable due September 30, 1998. Management expects that the need for cash will be significantly relieved upon completion of the Acquisition Agreement and merger with Mirage. However, as more fully described above, the Acquisition Agreement is subject to certain conditions, including regulatory and shareholder approvals. Should the Acquisition Agreement not be approved, or should the closing be delayed, the Company would not have sufficient resources to pay interest and scheduled principal of the indebtedness acquired by Mirage, without modification of the terms of such indebtedness. There is no assurance that the Acquisition Agreement will be approved, that such approval would be received on a timely basis, nor that modifications to the terms of the indebtedness would be obtained, if necessary. Accordingly, these matters raise substantial doubt about the ability of the Company to continue as a going concern. The final outcome of these matters is not presently determinable and the September 30, 1997 financial statements of the Company do not include any adjustment that might result from the outcome of this uncertainty. BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENS, CONTINUED --------- 3. Property And Equipment: Property and equipment consists of the following: September 30, -------------------------- 1997 1996 ---- ---- Land and improvements $3,218,499 $3,042,769 Buildings and improvements 47,499,476 38,736,144 Gaming equipment 6,574,006 6,163,617 Furniture and other equipment 8,790,209 8,077,178 ---------- ---------- 66,082,190 56,019,708 Less: accumulated depreciation (8,885,392) (5,705,685) ---------- ---------- 57,196,798 50,314,023 Construction in progress 108,659 5,172,262 ------- --------- $57,305,457 $55,486,285 ---------- ---------- Construction in progress at September 30, 1996 represents costs associated with an expansion of the second floor of the casino which included entertainment and meeting room space and a buffet facility. The second floor construction was substantially completed in June 1997 at a total cost of approximately $7,500,000. Construction in progress at September 30, 1997 represents architectural plans and construction costs related to the porte cochere and bridge between the parking garages and the casino. 4. Notes Payable: In November 1995, the Company executed a $600,000, 10% uncollateralized promissory note with principal and interest due in May 1996. The note was paid off with no gain or loss in September 1996 with proceeds from the $5,000,000 subordinated, convertible note payable executed in September 1996 as more fully described in Note 6. In December 1995, the Company executed a $500,000, 12% uncollateralized promissory note to the Company's majority shareholder and CEO with principal and interest due in September 1996. The note was paid off with no gain or loss in September 1996 with proceeds from the $5,000,000 subordinated, convertible note payable executed in September 1996 as more fully described in Note 6. In March 1996, the Company executed a $500,000, 10% uncollateralized promissory note to a director of the Company with principal and interest due in September 1996. The note was paid off with no gain or loss in September 1996 with proceeds from the $5,000,000 subordinated, convertible note payable executed in September 1996 as more fully described in Note 6. In March 1996, the Company executed a $750,000, 12% uncollateralized promissory note to the Company's majority shareholder and CEO with principal and interest due in September 1996. The note was paid off with no gain or loss in September 1996 with proceeds from the $5,000,000 subordinated convertible note payable executed in September 1996, as more fully described in Note 6. In March 1997, the Company issued a $600,000 short-term note with 13.5% annual interest payable monthly with the principal due September 25, 1997, to a private investor who has provided other short-term financing to the Company in the past. The note's principal and interest were paid in October 1997, with the proceeds from sale of preferred shares as more fully described in Note 6. 5. Leases: The Company has entered into capital lease agreements whereby the Company leases various equipment under two-, three-, five-, seven-, and twenty-year leases which expire at various dates through 2015. BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENS, CONTINUED --------- 5. Leases, Continued: Capital lease obligations consist of the following: September 30, --------------------- 1997 1996 ---- ---- Capital lease obligation, interest rate of prime plus 3%, monthly principal and interest payments of $57,744 through August 1998, collateralized by slot equipment $599,661 $1,519,684 Capital lease obligation, effective interest rate of 12.50%, due in monthly installments of $41,817, including interest, through November 1998, collateralized by casino and hotel equipment 542,134 948,248 Capital lease obligation, interest rate of 10%, semi-annual principal and interest payments of $20,721 through August 2015, uncollateralized 320,201 337,988 Capital lease obligation, effective interest rate of 12.50%, due in monthly installments of $23,418 through May 1999, collateralized by slot equipment 382,683 600,732 Capital lease obligation, effective interest rate of 12.50%, due in monthly installments of $61,794 through September 1999, collateralized by hotel furniture, fixtures and equipment 1,315,172 1,822,938 Capital lease obligations, effective interest rates ranging from 9.36% to 12.90%, due in aggregate monthly installments of $7,619, and ending at various times in 2001, collateralized by phone equipment 286,053 346,070 Capital lease obligation, effective interest rate of 12.50%, due in monthly installments of $9,083 through October 2000, collateralized by signage equipment 271,595 347,222 Other 633,898 592,874 --------- --------- 4,351,397 6,515,756 Less amounts classified as current (2,517,920) (3,115,522) --------- --------- $1,833,477 $3,400,234 --------- --------- Property and equipment include the following property leased under capital leases as of September 30, 1997 and 1996: 1997 1996 ---- ---- Cost of equipment under capital leases $7,125,873 $7,001,501 Less, accumulated depreciation (1,777,304) (1,018,864) --------- --------- $5,348,569 $5,982,637 --------- --------- BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENS, CONTINUED --------- 5. Leases, Continued: Future minimum lease payments, by year and in the aggregate, under capital leases with initial or remaining terms of one year or more consist of the following at September 30, 1997. 1998 $2,801,265 1999 1,341,589 2000 283,719 2001 102,388 2002 18,724 Thereafter 231,311 ------- Total minimum lease payments 4,778,996 Less amount representing interest ( 427,599) --------- Present value of minimum lease payments 4,351,397 Less current portion (2,517,920) --------- Long-term obligations under capital leases $1,833,477 --------- Total aggregate rental expense under various operations leases, including the rental expense under the office building lease, as more fully described in Note 10, for the years ended September 30, 1997 and 1996 was $1,064,292 and $366,780, respectively. The Company leases as lessor certain retail space in its casino facilities under operating lease agreements. Additionally, as more fully described in Note 10, in October 1997, the Company began subleasing (as lessor under operating lease agreements) certain office and retail space in a building it leases from its majority shareholder. The leases are short-term and renewable based upon mutual agreement between the Company and the lessee. Rental income under these agreements totaled $807,169 and $230,566 for the years ended September 30, 1997 and 1996, respectively. 6. Term Debt: As more fully described in Note 2, management of the Company believes that the combination of existing cash and cash flows from operations will not be sufficient to meet the scheduled interest payments on the $40,000,000 First Mortgage Notes and the scheduled interest and principal repayment on the $5,000,000 shareholder note payable, which would cause the Company to violate the respective provisions of the note agreements and cause the debt to be immediately due and payable. Accordingly, the term debt has been classified as a current obligation as of September 30, 1997. Term debt consists of the following: September 30, -------------- 1997 1996 ---- ---- $40,000,000, 16.50% First Mortgage Notes due March 31, 2005 (the"BCI Notes") with interest payable semi-annually, net of unamortized original issue discount of $3,875,773 (1997) and $4,090,477 (1996) (a) $36,124,227 $35,909,523 Eurodollar rate plus 2% convertible subordinated note payable to a shareholder, due September 30, 1998 with interest payable quarterly (b) 5,000,000 5,000,000 ---------- ---------- $41,124,227 $40,909,523 ---------- ---------- (a) On April 11, 1995, the Company completed a private placement of the BCI Notes. The offering generated net proceeds of approximately $38,449,000 after deducting debt issuance costs. The BCI Notes are collateralized by a first mortgage on substantially all of the assets of the Company, including the expansion project. The Company recorded an original issue discount of $4,345,772 in connection with the BCI Notes, related to the issuance of 1,908,692 warrants to purchase common stock (exercisable at $6.00 per share), based on the estimated market value of the warrants at the date of issuance. Terms of the warrants are more fully described in Note 7. BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENS, CONTINUED --------- 6. Term Debt, Continued: The Indenture governing the BCI Notes (the "Indenture") limited the use of the net proceeds from the offering to fund the cost of a hotel and casino expansion completed in 1996 (the "Expansion"). The proceeds were placed in escrow with a trustee pending draw-downs for qualifying project expenditures and were classified as restricted cash equivalents. All of the proceeds from the BCI Notes were used as of September 30, 1996. The BCI Notes are not subject to mandatory redemption, except upon a change of control, decline in net worth, or certain asset sales, all as defined in the Indenture. The Company has the option to redeem the BCI Notes, beginning after September 2001 at a premium, as defined in the Indenture. The Indenture contains covenants that, among other things, limit the ability of the Company to pay dividends or incur additional indebtedness. Additional indebtedness is limited to $5,000,000 of additional uncollateralized debt issuances and $7,000,000 of equipment leases of which the recourse portion cannot exceed $2,000,000. The Indenture also requires the Company to maintain a minimum net worth. The net worth can be no less than the sum of $6,000,000 plus the proceeds from the sale of common stock and 50% of the net income of the Company for all periods beginning after April 1, 1995 (any net loss during that period may not be deducted for purposes of the calculation). As of September 30, 1997, the Company was in default of certain debt covenants under the Indenture. These covenant violations included: (i) the Company entered into recourse debt agreements totaling approximately $480,000 which were in excess of the $2,000,000 allowed by the Indenture; (ii) certain payable balances incurred in the ordinary course of business remained unpaid in excess of 60 days as of September 30, 1997; and (iii) in March 1997, the Company issued a $600,000 uncollateralized note payable to an unrelated third party which is in excess of the $5,000,000 of uncollateralized indebtedness allowed by the Indenture. In addition to the above matters, the Company made its September 30, 1997 interest payment related to the BCI Notes on October 29, 1997 which was within a 30 day grace period allowed for by the Indenture. During the first quarter of fiscal 1998, the Company cured the above defaults under the Indenture. The terms of one of the recourse debt agreements was modified to state that the agreement was no longer with recourse and the unpaid principal balances of the other recourse debt agreements were paid by the Company with cash flows from operations. The Company has also paid the certain payable balances incurred in the ordinary course of business which were in excess of 60 days past due with cash flows from operations. On October 29, 1997, the Company entered into a Memorandum of Understanding (the "Memorandum"). In connection with the Memorandum, and as more fully described in Note 10, the Company raised $3,250,000 through the issuance of 3,250 shares of $.001 preferred stock at a price of $1,000 per share to certain related parties. Proceeds from the preferred stock issuance were used to make the Company's September 30, 1997 interest payment in relation to the BCI Notes and retire the $600,000 uncollateralized note payable described in item (iii) above. (b) In September 1996, the Company executed a $5,000,000 subordinated, convertible promissory note collateralized by a second deed of trust on the assets of the Company. Interest is payable quarterly at the applicable Eurodollar rate plus 2% with principal due September 23, 1998 if not converted by the noteholder. In connection with the Memorandum, the conversion rights of the note were canceled by the Company with mutual agreement of the noteholder. The note agreement includes certain covenants that, among others things, limit the ability of the Company to pay dividends, sell certain assets or incur indebtedness not allowed by the Indenture. As discussed above, the Company incurred additional indebtedness which was not allowed by the Indenture. However, these defaults were cured during the first quarter of fiscal 1998. BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENS, CONTINUED --------- 6. Term Debt, Continued: The weighted average interest rate on notes payable, term debt, and capital leases outstanding as of September 30, 1997 and 1996 was approximately 15%. 7. Shareholders' Equity: A summary of the Company's equity transactions and issuances of warrants to purchase common stock are summarized in the following paragraphs. At September 30, 1997, 1996 and 1995, the Company had the following warrants to purchase shares of common stock outstanding:
Warrants Issued In Connection With Warrants Issued In 1994 Bridge Warrants Issued In Issuance Connection With Financing Connection With Of BCI Private Placement And IPO (a) Notes Payable (b) Notes (c) Offering (d) Total ----------- ------------------ ------------------- ------------------ ------ Exercise price $5.00 $5.625, $6.00 $6.00 $7.50 and $8.00 Expiration date Feb. 1998 Mar. 1996 to April 2000 to June 2000 Sept. 2000 Apr. 1, 2005 Balances, September 30, 1995 3,967,200 208,000 1,908,692 - 6,083,892 Issued - - - 75,000 75,000 Exercised (380,200) - - - (380,200) ---------- ------------ ----------- ---------- --------- Balances, September 30, 1996 3,587,000 208,000 1,908,692 75,000 5,778,692 Issued - - - - - Exercised - - - - - ---------- ------------ ----------- ---------- --------- Balances, September 30, 1997 3,587,000 208,000 1,908,692 75,000 5,778,692 ---------- ------------ ----------- ---------- --------- ---------- ------------ ----------- ---------- ---------
BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED --------- 7. Shareholders' Equity, Continued: (a) 1994 bridge financing, common stock offering and warrant exercises: In 1994, the Company issued 450,000 warrants to purchase its common stock in connection with a bridge financing (the "Bridge Warrants"). Each Bridge Warrant entitles the holder thereof to purchase one share of common stock at an exercise price of $5.00 per share and expires in February 1998. The Bridge Warrants contain provisions that protect the bridge warrantholders against dilution by adjustment of the exercise price in certain events including, but not limited to, stock dividends, stock splits, reorganizations or mergers. Upon completion of the initial public offering of the Company's common stock in February 1994, the Bridge Warrants were automatically converted into warrants identical to the Offering Warrants (described below). A bridge warrantholder does not possess any rights as a shareholder of the Company. The Company may redeem the Bridge Warrants at a price of $0.001 per Bridge Warrant upon 60 days' prior written notice if the closing bid quotation of the common stock has been at least $10.00 on all 20 of the trading days ending on the third day prior to the day on which notice of redemption is given. On February 11, 1994, the Company completed an initial public offering of its common stock. The Company issued 1,840,000 shares of common stock at a selling price of $5.00 per share and issued 3,680,000 warrants (the "Offering Warrants") at a selling price of $0.10 per warrant. The Company received net proceeds of $7,706,109 for the stock and warrants, after deducting underwriters' commissions and offering expenses. Each Offering Warrant entitles the holder thereof to purchase one share of common stock at a price of $5.00 per share until February 11, 1998, at which time the Offering Warrant expires. The Offering Warrants contain provisions that protect the warrantholders against dilution by adjustment of the exercise price in certain events including, but not limited to, stock dividends, stock splits, reorganizations or mergers. A warrantholder does not possess any rights as a shareholder of the Company. The Company may redeem the Offering Warrants at a price of $0.001 per Warrant upon 60 days' prior written notice if the closing bid quotation of the common stock has been at least $10.00 on all 20 of the trading days ending on the third day prior to the day on which notice of redemption is given. In connection with the offering, the Company also sold the underwriter, for $100, an option (the "Option") to purchase 160,000 shares of common stock and 320,000 Warrants. The Option has an exercise price of $7.00 per share of common stock and $0.14 per Warrant (140% of the respective original offering prices). The Option is exercisable for a 36-month period, commencing on February 11, 1995 and expiring on February 11, 1998. During 1996, 380,200 warrants to purchase the Company's common stock were exercised for an equal number of shares of the Company's common stock. All of the warrants had an exercise price of $5.00, resulting in net proceeds to the Company of $1,850,955 after issuance costs. (b) 1995 bridge financing transactions: The Company issued 50,000 warrants to purchase its common stock in connection with $1,000,000 of bridge loans, which loans have been repaid. Each warrant entitles the holder thereof to purchase one share of common stock at an exercise price of $6.00 per share. The warrants expire in February 2000. The warrants contain provisions that protect the warrantholders against dilution by adjustment of the exercise price in certain events including, BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED --------- 7. Shareholders' Equity, Continued: but not limited to, stock dividends, stock splits, reorganizations or mergers. A warrantholder does not possess any rights as a shareholder of the Company. The Company issued 150,000 warrants to purchase its common stock in connection with a 10% note payable issued in 1995, which note has been repaid. Each warrant entitles the holder thereof to purchase one share of common stock at an exercise price of $5.625 per share. The warrants are exercisable between March 1996 and September 2000. The warrants contain provisions that protect the warrantholders against dilution by adjustments of the exercise price in certain events including, but not limited to, stock dividends, stock splits, reorganizations or mergers. A warrantholder does not possess any rights as a shareholder of the Company. The Company issued 8,000 warrants to purchase its common stock in connection with a $400,000, 12% note payable issued in 1995, which note has been repaid. Each warrant entitles the holder thereof to purchase one share of common stock at an exercise price of $8.00 per share. The warrants expire in September 2005. A warrantholder does not possess any rights as a shareholder of the Company. (c) BCI Notes offering: As discussed in Note 6, the Company issued 1,908,692 warrants to purchase its common stock in connection with the BCI Notes. Each warrant entitles the holder thereof to purchase one share of common stock at an exercise price of $6.00 per share and 626,823 and 1,281,869 of the warrants expire in April 2000 and April 2005, respectively. The warrants contain provisions that protect the warrantholders against dilution by adjustment of the exercise price in certain events including, but not limited to, stock dividends, stock splits, reorganizations or mergers. A warrantholder does not possess any rights as a shareholder of the Company. (d) 1996 private placement equity offering: During 1996, the Company completed a private placement offering in which it issued 150,000 shares of its common stock for $6.25 per share. In connection with the issuance of the common stock, the Company also sold 75,000 warrants to purchase common stock for $.25 per warrant. Each warrant entitles the holder thereof to purchase one share of common stock at a price of $7.50 per share until June 2000, at which time the warrant expires. The Company received net proceeds of $956,250 for the issuance of the stock and warrants. SEPTEMBER 1996 PRIVATE PLACEMENT EQUITY OFFERING In September 1996, the Company completed a private placement offering of 571,429 shares of its common stock at a selling price of $7.00 per share. The Company received net proceeds of $3,735,195 for the stock, after deducting offering expenses. INCREASE IN AUTHORIZED SHARES OF COMMON STOCK In December 1996, the Company's shareholders voted to amend the Company's articles of incorporation to increase the number of authorized shares of common stock from 15,000,000 to 50,000,000. STOCK OPTION PLANS On April 26, 1994, the Board of Directors adopted (and on March 15, 1995 the shareholders approved) the 1994 Stock Compensation Plan (the "1994 Plan"). The 1994 Plan provides that incentive stock options and nonqualified stock options may be granted to certain officers, directors (other than Outside Directors), employees and advisors of the Company or its subsidiaries, if any, selected by the Compensation Committee. BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED --------- 7. Shareholders' Equity, Continued: The Company has granted a total of 745,000 options exercisable at prices ranging from $6.25 to $9.00 expiring between April 26, 1999 and September 26, 2005. The options were granted at exercise prices equal to the fair market value (or in the case of options granted to the president and majority shareholder at 110% of market value) as of the date of grant. The options vest in 25% increments annually, subject to acceleration upon a change in control of the Company, as defined in the 1994 Plan agreement. The grants of 450,000 of the options described above were subject to shareholder approval of an increase in the authorized number of shares reserved for issuance under the 1994 Plan to 2,000,000 shares. Such approval was received during 1996. No options were granted in the years ended September 30, 1996 or 1997. OUTSIDE DIRECTORS STOCK OPTION PLAN On April 26, 1994, the Board of Directors adopted (and on March 15, 1995 the shareholders approved) the Outside Directors Stock Option Plan (the "Plan"). The Company has granted nonqualified options to three of its directors to purchase 100,000 shares of the Company's common stock. The options are exercisable at prices of $6.75 and $6.25 expiring between April 26, 2004 and April 26, 2005. The foregoing options were granted at an exercise price equal to the fair market value of the common stock as of the date of grant. The options vest in 25% increments annually, subject to acceleration upon a change in control of the Company, as defined in the Plan agreement. No options were granted in the years ended September 30, 1996 or 1997. BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED --------- 8. Income Taxes: For the fiscal years ended September 30, 1997 and 1996, the Company incurred net operating losses for federal income tax purposes, and accordingly, these financial statements do not include a provision for federal income taxes. The following is a reconciliation of income taxes at the Federal statutory rate with income taxes recorded by the Company:
1997 1996 ---- ---- Tax benefit computed at federal statutory income tax rate (35%) ($1,220,000) ($1,545,000) Unrecognized tax benefit from operating losses 1,163,000 1,494,000 Other, net 57,000 51,000 --------- --------- Total income tax provision (benefit) $ - $ - --------- --------- --------- ---------
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities consist of the following at September 30, 1997 and 1996:
1997 1996 ---- ---- Deferred tax assets: ------------------- Federal net operating loss carryforward $5,008,000 $3,524,000 Gaming tax assessment 194,000 175,000 Other 44,000 30,000 --------- --------- Total deferred tax assets 5,246,000 3,729,000 --------- --------- Deferred tax liabilities: ------------------------- Depreciation (882,000) (674,000) ------- ------- Total deferred tax liabilities (882,000) (674,000) ------- ------- Valuation allowance (4,364,000) (3,055,000) --------- --------- Net deferred taxes $ - $ - --------- --------- --------- ---------
No income tax provision (benefit) has been recorded in the 1997 and 1996 financial statements, and the Company operates wholly in Nevada and, therefore, has no state income tax liability. Management has considered certain tax planning strategies as permitted by SFAS 109. However, management has determined that tax benefits associated with net recorded tax assets will most likely not be realized through future taxable income. Accordingly, a full valuation allowance has been recorded against the net deferred tax assets of the Company. As of September 30, 1997, the Company had federal net operating loss carryforwards of approximately $14,307,000 which expire between 2009 and 2012. BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED --------- 9. Commitments And Contingencies: The Company has pending certain legal actions and claims incurred in the normal course of business and is actively pursuing the defense thereof. In the opinion of management, these actions and claims are either without merit or are covered by insurance and will not have a material adverse effect on the Company's financial position, results of operations or cash flows. HOLIDAY INN-REGISTERED TRADEMARK- FRANCHISE AGREEMENT The Company was granted a Holiday Inn-Registered Trademark- ten-year franchise license on June 16, 1994 after completing renovation of its existing hotel, consisting of 126 rooms in a high-rise tower and 75 annex rooms. The agreement required an original application fee of $77,500 and a fee of $125,400 for an additional 451 rooms opened in the expansion (which is reflected in other assets and is being amortized over the life of the agreement). The agreement provides that the Company will pay to Holiday Inn-Registered Trademark- (i) a monthly royalty of 5% of the gross rooms revenues; (ii) a "marketing contribution" of 1.5% of the gross rooms revenues; (iii) a "reservation contribution" of 1.0% of the gross rooms revenues; and (iv) a monthly Holidex fee of $6.43 for each guest room. The license granted under the agreement expires ten years from the date of the opening of the hotel under the "Holiday Inn" system, subject to earlier termination as set forth therein. GAMING TAX ASSESSMENT As of September 30, 1997, based on the advice of legal counsel, the Company has accrued approximately $555,000 (which includes $64,000 of accrued interest) related to an anticipated gaming tax assessment from the Nevada Gaming Control Board ("NGCB"). The NGCB has audited the Company's gaming tax returns in 1996 and the Company believes it is probable that the NGCB will determine that the Company has improperly deducted certain promotional wagers by patrons in calculating gross revenue for gaming tax purposes. The Company plans to appeal an assessment; however, the likelihood of a successful outcome cannot be determined. 10. Related-Party Transactions: OFFICE SPACE LEASE During October 1997, the Company modified the existing lease agreement for office space and storage facilities for its corporate offices from its majority shareholders to increase the rent to $70,000 per month. The modified lease term is for two years and allows the Company to use the facilities for any purpose. The Company has options to extend the lease up to an additional 28 years. Total aggregate rental expense related to the office space and storage facilities was $840,000 and $101,375 for the years ended September 30, 1997 and 1996, respectively. The lease agreement entitles the Company to the rental income from the existing leases during the lease term. The existing leases are on short-term, renewable leases with current rents totaling approximately $28,000 per month. The lease agreement also allowed the Company the first right of refusal to purchase the land and building at their fair value should the shareholder decide to sell them (the "First Refusal Right"). The Company has accrued $350,000 of rental payments in relation to the office lease which is reflected as a current obligation as of September 30, 1997. Effective November 1, 1997, in connection with the Memorandum described below, the Company has the option to defer payment of up to $40,000 per month of the rent due under the office space lease until the earlier of November 1, 1998 or the date of a sale of the building and land. MEMORANDUM OF UNDERSTANDING On October 27, 1997, the Company entered a Memorandum of Understanding (the "Memorandum") with a shareholder of the Company. Such shareholder had previously lent the Company $5,000,000 under a note payable due September 23, 1998, as more fully described in Note 6. The Memorandum called for the Company to issue 3,250 shares of $.001 par value, 6% non-voting, cumulative preferred stock, series A BOARDWALK CASINO, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED --------- 10. Related-Party Transactions, Continued: ("Preferred Stock") at a price of $1,000 per share. The offering generated proceeds of $3,250,000. As more fully described in Note 6, proceeds from the preferred stock issuance were used to make the Company's September 30, 1997 interest payment in relation to the BCI Notes and retire a $600,000 uncollateralized note payable. The shareholder also acquired the First Refusal Right. The Preferred Stock has a liquidation preference over the Company's common stock in the event of liquidation. The Company shall be permitted to redeem the Preferred Stock only upon the written request of any holder thereof on or after April 1, 2005 at a price of $1,000 per share, plus all accrued and unpaid dividends. The Memorandum includes an option issued to the purchasing shareholder to purchase up to an additional 15,000 shares of Preferred Stock at a purchase price of $1,000 per share. The option expires on October 29, 1999. The Memorandum also restricts the Company from modifying, extending or changing the strike price of the terms of any of the warrants to purchase common stock outstanding as of the date of the Memorandum. In connection with the Memorandum, the shareholder also agreed to undertake a feasibility study of a $20,000,000 development on the land (the "Project"), which includes a termination fee of $2,000,000 payable by the Company to the shareholder upon the occurrence of certain events which interfere with or negatively impact the Project including the sale of the land and building to another party. HOLIDAY GIFTS, INC. The Company leases retail space, as lessor, in the above-described facilities to Holiday Gifts, Inc. (HGI), a company affiliated through common ownership. During the years ended September 30, 1997 and 1996, rental income from HGI was $62,000 and $11,000, respectively. Rental income from HGI is based at $5,000 per month plus 10% of sales over the $5,000 base. 11. Fair Value Of Financial Instruments: The estimated fair value of the Company's financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, capital lease obligations and notes payable approximate their respective fair values due to the short-term maturities and approximate market interest rates of these instruments. As of September 30, 1997, the fair market value of the BCI Notes is estimated to be approximately $50,500,000. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the names and ages of the Company's directors and executive officers and the positions they hold with the Company. All directors are elected at the annual meeting of stockholders to serve one year or until their successors are elected and qualified. NAME AGE POSITION - ---- --- --------- Forrest J. Woodward, II 55 President and Chief Operating Officer Avis P. Jansen 70 Chairman of the Board of Directors and Vice President Louis J. Sposato 47 Chief Financial Officer, Secretary, Treasurer and Director James Scibelli * 47 Director Keven J. Picardo 41 Director Jeffrey P. Jacobs 44 Director ________________ * Mr. Scibelli resigned as a director of the Company effective October 31, 1997. FORREST J. WOODWARD, II serves as the President and Chief Operating Officer of the Company. . From 1986 to 1988, Mr. Woodward served as executive vice president of the Dunes Hotel and Country Club, with responsibility for the management of the hotel and gaming areas. During 1990, he served as general manager of the Landmark Hotel and Casino, having been appointed by the Federal Bankruptcy Court to operate the property. In addition, from 1987 to 1993, Mr. Woodward served as chairman, president and majority shareholder of Las Vegas Resorts Corporation, a public company engaged in land acquisitions related to casino hotels. From 1992 to 1993, Mr. Woodward served as senior vice president - administration for the Stars' Desert Inn Hotel and Country Club. Thereafter, from 1993 until joining the Company in August 1995, he served as senior vice president - administration for Sheraton Desert Inn. His responsibilities at the Desert Inn included all domestic casino marketing, marketing and operations of gaming activities and operations of the country club, security and surveillance. Mr. Woodward received his Bachelor of Science degree from the University of Nevada at Las Vegas in 1968. AVIS P. JANSEN serves as the Chairman of the Board of Directors and Vice President of the Company. Since 1971, she has served as the president, secretary and treasurer of Holiday Gifts, Inc., the former operator of the Company's casino. LOUIS J. SPOSATO serves as the Chief Financial Officer, Secretary, Treasurer and a director of the Company. He received his Bachelor of Science degree in accounting from Fordham University in 1972. From 1983 to 1988, Mr. Sposato served as comptroller of Union Plaza Hotel & Casino, Las Vegas, Nevada, where he directed the hotel and casino's administrative functions and compliance requirements, including Nevada Gaming Commission Regulation 6 (internal control procedure for all licensees) and Regulation 6A (casino currency transaction record keeping and reporting requirements). From 1988 to 1989, Mr. Sposato served as assistant controller for Electronic Data Technologies, Las Vegas, Nevada, with responsibility for implementing their slot machine route accounting system. From 1989 to 1990, he served as assistant controller of Alexis Park Resort Hotel, Las Vegas, Nevada, with responsibility for all accounting functions. JAMES SCIBELLI served as a director of the Company until his resignation effective October 31, 1997. Since March 1986, Mr. Scibelli has served as president of Roberts & Green, Inc., a New York investment banking firm offering a variety of investment services. Since August 1991, he has also been an officer and director of SG Capital Corp., a financial consulting company. Mr. Scibelli serves as a director and a member of the compensation committee of Acclaim Entertainment, Inc. and a director of B.U.M. International, Inc. KEVEN J. PICARDO serves as a director of the Company. From 1990 to 1994, he served as an associate vice president of Kemper Securities, Inc. From 1994 until October 1995, Mr. Picardo served as senior vice president of USA Capital Management Group, Inc., Las Vegas, Nevada. From October 1995 to January 1997, he served as senior financial consultant with Signal USA Securities, Inc., Las Vegas, Nevada. From January 1997 to June 1997, Mr. Picardo served as senior investment executive with RAF Financial Corporation, Las Vegas, Nevada. Since June 1997, he serves as president of Wall Street Financial Services, Inc., Las Vegas, Nevada. Mr. Picardo devotes such time as necessary to the affairs of the Company. JEFFREY P. JACOBS serves as a director of the Company. Beginning in 1984, Mr. Jacobs developed the riverfront entertainment district, known as the "Flats", in Cleveland, Ohio. He also has developed, owns and manages several apartment complexes in Cleveland and throughout Ohio. In 1996, Mr. Jacobs became the Chief Executive Officer and Co-Chairman of the Board of Directors of BlackHawk Gaming & Development Co. ("BlackHawk"), a publicly traded gaming company headquartered in Boulder, Colorado that is co-owner and manager of the Gilpin Hotel & Casino in BlackHawk, Colorado. In 1996, Mr. Jacobs became the Chief Executive Officer and Chairman of the Board of Directors of Colonial Downs, which presently owns and operates two off-track betting parlors in the State of Virginia. Mr. Jacobs received his Bachelor of Business Administration degree from the University of Kentucky in 1975, his Masters of Business Administration from Ohio State University in 1977 and his Masters of Urban Planning from Cleveland State University in 1979. He served as a member of the Ohio House of Representatives from 1984 through 1986. Mr. Jacobs devotes such time as is necessary to the affairs of the Company. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company pursuant to Rule 16a-3(e) during its most recent fiscal year and Forms 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, and any written representation from the reporting person (as hereinafter defined) that no Form 5 is required, the Company is not aware of any person who, at any time during the fiscal year, was a director, officer, beneficial owner of more than ten percent of any class of equity securities of the Company registered pursuant to Section 12 of the Exchange Act ("reporting person"), that failed to file on a timely basis, as disclosed in the above Forms, reports required by Section 16(a) of the Exchange Act during the most recent fiscal year. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has not established any separate nominating committee. The Board has established a Compensation Committee which functions are to review and approve annual salaries and bonuses for all executive officers, review, approve and recommend to the Board of Directors the terms and conditions of all employee benefits or changes thereto, and manage and administer the Company's 1994 Stock Compensation Plan. The Board of Directors has established an Audit Committee which functions are to recommend annually to the Board of Directors the appointment of the independent public accountants of the Company, discuss and review the scope and the fees of the prospective annual audit and review the results thereof with the independent public accountants, review and approve non-audit services of the independent public accountants, review compliance with existing accounting and financial policies of the Company, review the adequacy of the financial organization of the Company and review management's procedures and policies relative to the adequacy of the Company's internal accounting controls and compliance with federal and state laws relating to financial reporting. The Board of Directors has also established a Stock Option Committee to manage and administer the Company's Outside Directors Stock Option Plan. ITEM 10. EXECUTIVE COMPENSATION. The following table, and the accompanying explanatory footnotes, includes annual and long-term compensation information on (i) the Company's Chief Executive Officer for services rendered in all capacities during the fiscal years ended September 30, 1997, 1996 and 1995 and (ii) each executive officer who received total annual salary and bonus for the fiscal year ended September 30, 1997 in excess of $100,000. SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------------------- ANNUAL COMPENSATION LONG TERM COMPENSATION - ---------------------------------------------------------------------------------------------------------------------------------- NAME AND PRINCIPAL FISCAL OTHER ANNUAL OPTIONS POSITION YEAR SALARY BONUS COMPENSATION GRANTED - ---------------------------------------------------------------------------------------------------------------------------------- Norbert W. Jansen, Chairman of 1997 $68,750 0 0 0 the Board of Directors and Chief --------------------------------------------------------------------------------------------- Executive Officer (1) 1996 238,000 0 0 0 --------------------------------------------------------------------------------------------- 1995 225,000 0 0 170,000 - ---------------------------------------------------------------------------------------------------------------------------------- Steve Greathouse, Chief Executive Officer (2) 1997 135,000 0 0 0 - ---------------------------------------------------------------------------------------------------------------------------------- Forrest J. Woodward, Chief 1997 180,000 0 0 0 Operating Officer --------------------------------------------------------------------------------------------- 1996 180,000 0 0 0 --------------------------------------------------------------------------------------------- 1995 21,000 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Jansen died on January 6, 1997. (2) Mr. Greathouse served as CEO from March 19, 1997 until his resignation on August 12, 1997. EMPLOYMENT AGREEMENTS Effective as of January 1, 1995, the Company entered into a three-year employment agreement with Louis J. Sposato as Chief Financial Officer, Secretary and Treasurer of the Company which currently provides for an annual base salary of $95,000. Effective as of August 15, 1995, the Company entered into a five-year employment agreement with Forrest J. Woodward, II as President and Chief Operating Officer of the Company which currently provides for an annual base salary of $180,000. DIRECTORS' COMPENSATION Each non-employee director of the Company receives $1,000 for each meeting of the Board of Directors attended. In addition, pursuant to the Outside Directors Stock Option Plan, outside directors may be granted options to purchase shares of Common Stock (subject to certain vesting requirements). See "- The Outside Directors Stock Option Plan." THE 1994 STOCK COMPENSATION PLAN The Company and its shareholders have adopted and approved the 1994 Stock Compensation Plan, as amended (the "1994 Plan"). Options granted pursuant to the 1994 Plan constitute either incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options which constitute nonqualified options at the time of issuance of such options. The 1994 Plan provides that incentive stock options and/or nonqualified stock options may be granted to certain officers, directors (other than Outside Directors), employees and advisors of the Company or its subsidiaries, if any, selected by the Compensation Committee. A total of 2,000,000 shares of Common Stock are authorized and reserved for issuance under the 1994 Plan, subject to adjustment to reflect changes in the Company's capitalization in the case of a stock split, stock dividend or similar event. The 1994 Plan is administered by the Compensation Committee which has the sole authority to interpret the 1994 Plan and make all determinations necessary or advisable for administering the 1994 Plan. The exercise price for any incentive option must be at least equal to the fair market value of the shares covered thereby as of the date of grant of such option. Upon the exercise of the option, the exercise price thereof must be paid in full either in cash, shares of Common Stock of the Company or a combination thereof. If and to the extent that any option to purchase reserved shares shall not be exercised by an optionee for any reason or if such option to purchase shall terminate as provided by the 1994 Plan, such shares which have not been so purchased thereunder shall again become available for the purposes of the 1994 Plan unless the 1994 Plan shall have been terminated. During the fiscal years ended September 30, 1996 and 1997, the Company did not grant any options under the 1994 Plan. THE OUTSIDE DIRECTORS STOCK OPTION PLAN The Company and its shareholders have adopted and approved the Outside Directors Stock Option Plan, as amended (the "Plan"). The Plan was adopted in order to enhance the Company's ability to secure and retain highly qualified and experienced individuals who are not regularly salaried employees of the Company to serve as directors of the Company. The Plan provides generally that: (i) the purchase price of the Common Stock under each option granted shall not be less than the fair market value of the Common Stock on the date of grant; (ii) no director may be granted during any calendar year options to purchase more than 20,000 shares of Common Stock; (iii) no option may be granted for a period of greater than ten years from the date of grant; and (iv) a maximum of 400,000 shares of Common Stock have been authorized and reserved for issuance under the Plan. During the fiscal years ended September 30, 1996 and 1997, the Company did not grant any options under the Plan. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding beneficial ownership of the Common Stock as of January 7, 1998, by (i) all persons known by the Company to be the owner, of record or beneficially, of more than five percent of the outstanding Common Stock, (ii) each executive officer and director of the Company and (iii) all directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options currently exercisable or exercisable within 60 days of January 7, 1998 are deemed outstanding for computing the percentage of the person holding such securities but are not outstanding for computing the percentage of any other person. As far as is known to management of the Company, no person owned beneficially more than five percent of the outstanding shares of Common Stock as of January 7, 1998 except as set forth below.
SHARES BENEFICIALLY NAME OWNED PERCENT OF SHARES ------ ------- ----------------- Norbert W. Jansen and Avis Jansen, 2,750,000 38.3 Trustees u/a/d 07/14/93 (1) Avis P. Jansen (1)(2) 2,775,000 (3) 38.7 Forrest J. Woodward (9) 75,000 (4) 1.0 Louis J. Sposato (9) 112,500 (5) 1.5 James Scibelli (9) 430,000 (6) 5.7 Keven J. Picardo (9) 19,500 (7) * Jeffrey P. Jacobs (10) 1,071,429 14.9 Franklin Custodian Funds, Inc. - Income 1,281,869 (8) 15.1 Series (9) Diversified Opportunities Group Ltd. (10) 1,071,429 14.9 All Executive Officers and Directors as a 4,053,429 54.8 group (7 persons)
* Represents beneficial ownership of less than 1% of the outstanding shares of Common Stock. (1) The business address of Norbert W. Jansen and Avis Jansen, Trustees u/a/d 07/14/93 (the "Jansen Trust") and Avis P. Jansen is 3750 Las Vegas Boulevard South, Las Vegas, Nevada, 89109. Such shares are held of record and beneficially by The Jansen Trust but may be deemed to also be beneficially owned by Mrs. Jansen (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) since, as trustee of The Jansen Trust, Mrs. Jansen has the power to direct the voting and disposition of such shares. (2) Avis P. Jansen is deemed to beneficially own the 2,750,000 shares beneficially owned by the Jansen Trust. (3) Includes options currently exercisable to acquire 25,000 shares of Common Stock owned by Avis P. Jansen. (4) Includes options currently exercisable to acquire 65,000 shares of Common Stock. (5) Includes options currently exercisable to acquire 112,500 shares of Common Stock. (6) Includes options currently exercisable to acquire 25,000 shares of Common Stock and 355,000 redeemable common stock purchase warrants sold by the Company in its initial public offering dated February 11, 1994 (the "Warrants"). Each Warrant entitles the holder thereof to purchase one share of Common Stock at $5.00 per share at any time until February 11, 1998, subject to earlier redemption under certain circumstances. (7) Includes options currently exercisable to acquire 17,500 shares of Common Stock. (8) Represents warrants currently exercisable to acquire 1,281,869 shares of Common Stock. (9) The business address of Messrs. Woodward, Sposato, Scibelli and Picardo is 3750 Las Vegas Boulevard South, Las Vegas, Nevada 89109. The business address of Franklin Custodian Funds, Inc. - Income Series is 777 Mariners Island Blvd., San Mateo, California 94404. 10) The business address of Jeffrey P. Jacobs and Diversified Opportunities Group Ltd. ("Diversified") is c/o Jacobs Entertainment Ltd., 425 Lakeside Avenue, Cleveland, Ohio 44114. Such shares are held of record and beneficially by Diversified but may be deemed to also be beneficially owned by Mr. Jacobs (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) since Mr. Jacobs has the power to direct the voting and disposition of such shares. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In September 1996, the Company executed a $5,000,000 subordinated, convertible promissory note collateralized by a second deed of trust on the assets of the Company with Diversified Opportunities Group Ltd. ("Diversified"). Effective October 1, 1996, in connection with the private transaction with Diversified, the Company entered into a lease agreement (the "Lease Agreement") as the tenant with The Jansen Trust as the landlord. The Lease Agreement covers certain land to the north of the hotel and casino (the "Property") which enables the Company to control the use of the Property and provided the Company with an option to purchase the Property for possible expansion of the hotel and casino. The Property consists of approximately 1.07 acres of land and has 150 feet of frontage on the Strip. It currently contains a two-story office building which is leased to several retail and office tenants, including the executive and administrative offices of the Company. The Lease Agreement commenced October 1, 1996 and has a term of 24 months, with an option to extend the lease term for an additional five years and a second, successive, option to extend it an additional 23 years. The base rent of $70,000 per month ($840,000 per year) is subject to adjustment after five years. In addition, the Lease Agreement granted the Company an option to purchase the Property under certain terms and conditions (the "First Refusal Right"). The Company believes that the terms of the Lease Agreement are fair and reasonable and on as beneficial terms as could be obtained from an unaffiliated third party consistent with other rentals assessed in the market area for similar facilities. For the fiscal year ended September 30, 1997, the Company paid $490,000 in rent, deferring the balance due of $350,000. On October 27, 1997, the Company entered into a Memorandum of Understanding (the "Memorandum") with a shareholder of the Company. Such shareholder had previously lent the Company $5,000,000 under a note payable due September 23, 1998. The Memorandum called for the Company to issue 3,250 shares of $.001 par value, 6% non-voting, cumulative preferred stock, series A ("Preferred Stock") at a price of $1,000 per share. The offering generated proceeds of $3,250,000. Proceeds from the preferred stock issuance were used to make the Company's September 30, 1997 interest payment in relation to the BCI Notes and retire a $600,000 uncollateralized note payable. The shareholder also acquired the First Refusal Right. The Preferred Stock has a liquidation preference over the Company's common stock in the event of liquidation. The Company shall be permitted to redeem the Preferred Stock only upon the written request of any holder thereof on or after April 1, 2005 at a price of $1,000 per share, plus all accrued and unpaid dividends. The Memorandum included an option issued to the purchasing shareholder to purchase up to an additional 15,000 shares of Preferred Stock at a purchase price of $1,000 per share. The option expires on October 29, 1999. The Memorandum also restricts the Company from modifying, extending or changing the strike price of the terms of any of the warrants to purchase common stock outstanding as of the date of the Memorandum. In connection with the Memorandum, the shareholder also agreed to undertake a feasibility study of a $20,000,000 development on the land (the "Project"), with a termination fee of $2,000,000 payable by the Company to the shareholder upon the occurrence of certain events which interfere with or negatively impact the Project including the sale of the land and building to another party. As part of the Acquisition Agreement and Stockholder Agreements (see Item I - "Plan of Merger"), Mirage will acquire the land and building currently under lease to the Company. The shareholder has agreed to terminate its rights granted under the Memorandum of Understanding for consideration of $3,700,000 from Mirage. In September 1996, the Company entered into a long term lease with Holiday Gifts, Inc. ("HGI") with respect to the gift shop within the hotel-casino covering approximately 1,000 square feet for an initial term of ten years, with a 5-year option, at a base monthly lease payment of the greater of $5.00 per square foot or 10% of the tenant's gross sales. Prior to September 1996, the Company leased to HGI a different and smaller store on its property as a gift shop at a monthly rental of $1,000. The investment banking firm of Roberts & Green was engaged by the Company as its financial advisor in regard to the merger agreement with Mirage. James Scibelli, a former director of the Company, is the president of Roberts & Green. All future transactions with affiliates will be on terms no less favorable than could be obtained form unaffiliated parties. Any loans to officers, affiliates and/or shareholders of the Company are subject to the approval by a majority of the disinterested directors of the Company. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. 3.1 Restated Articles of Incorporation of the Registrant.* 3.2 Certificate of Amendment of Articles of Incorporation of the Registrant.** 3.3 Certificate of Amendment of Articles of Incorporation of the Registrant. 3.4 Bylaws of the Registrant. * 4.1 Form of Warrant Agreement. * 4.2 Indenture between Boardwalk Casino, Inc., Issuer and Shawmut Bank, N.A., Trustee for $40,000,000 16.5% First Mortgage Notes Due March 31, 2005, Dated as of April 7, 1995. * 10.1 Outside Directors Stock Option Plan of Boardwalk Casino, Inc.** 10.2 1994 Stock Compensation Plan of Boardwalk Casino, Inc. ** 10.3 Employment Agreement between Boardwalk Casino, Inc. and Louis J.Sposato. ** 10.4 Employment Agreement between Boardwalk Casino, Inc. and Forrest J. Woodward, II. *** 10.5 Holiday Inns Franchising, Inc. License Agreement with the Company. * 10.6 Purchase Agreement dated as of September 24, 1996, by and among Diversified, Jansen and the Company. **** 10.7 Convertible Subordinated Note dated September 24, 1996, executed by the Company in favor of Diversified. **** 10.8 Option and Proxy Agreement dated as of September 24, 1996, by and among Diversified, Jansen and the Company. **** 10.9 Registration Agreement dated as of September 24, 1996, by and between Diversified and the Company. **** 10.10 Lease Agreement effective as of October 1, 1996, by and between Jansen and the Company. **** 10.11 Memorandum of Understanding by and among Diversified, Jansen and the Company - incorporated by reference to the Report on Form 8-K dated October 29, 1997, file number 1-12780. 10.12 Agreement and Plan of Merger dated December 22, 1997 among Mirage Resorts, Incorporated, Mirage Acquisition Sub, Inc. and Boardwalk Casino, Inc. 23.1 Consent of Coopers & Lybrand L.L.P., independent public accountants, to the incorporation by reference in the Registration Statements on Form S-8 (file numbers 333-05019 and 333-05021) of their report dated November 24, 1997, included in the Registrant's Report on Form 10-KSB for the fiscal year ended September 30, 1997. 27.1 Financial Data Schedule. - ----------------- * - incorporated by reference to the Exhibits to the Registration Statement on Form SB-2and Post Effective Amendments thereto, file number 33-71816-LA, declared effective February 11, 1994, June 29, 1995 and February 6, 1996. ** - incorporated by reference to the Report on Form 10-KSB for the fiscal year ended September 30, 1994, file number 1-12780. *** - incorporated by reference to the Report on Form 10-KSB for the fiscal year ended September 30, 1995, file number 1-12780. **** - incorporated by reference to the Report on Form 10-KSB for the fiscal year ended September 30, 1996, file number 1-12780. (b) REPORTS ON FORM 8-K. The Company did not file any reports on Form 8-K during the last quarter of the period covered by this report. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BOARDWALK CASINO, INC. ------------------------- Registrant Date: 1/13/98 By:/s/ FORREST J. WOODWARD -------- -------------------------------- Forrest J. Woodward, President and Chief Operating Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. NAME TITLE DATE /s/ AVIS P. JANSEN Chairman of the Board of Directors 1/13/98 - --------------------- -------- Avis P. Jansen /s/ LOUIS J. SPOSATO Chief Financial Officer, 1/13/98 - --------------------- Secretary, Treasurer and Director -------- Louis J. Sposato /s/ KEVEN J. PICARDO Director 1/13/98 - --------------------- -------- Keven J. Picardo /s/ JEFFREY P. JACOBS Director 1/13/98 - --------------------- -------- Jeffrey P. Jacobs EX-3.3 2 EXHIBIT 3.3 File No. 9007-93 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF BOARDWALK CASINO, INC. Forrest J. Woodward, II, and Louis J. Sposato certify that: A. They are the President and Secretary, respectively, of Boardwalk Casino, Inc., a Nevada corporation (the "Corporation"). B. Resolutions proposing and declaring advisable the following amendment to the Corporation's Articles of Incorporation were adopted by the Corporation's Board of Directors at a meeting held on October 3, 1996: 1. The Corporation's Articles of Incorporation be amended by amending Article III, Section 3.1 to read in its entirety as follows: "Section 3.1. AUTHORIZED SHARES. The aggregate number of shares which the corporation shall have authority to issue is 65,000,000 shares, consisting of: (a) 50,000,000 shares of a single series of common class, having a par value of $.001 per share, each of which is entitled to one vote in all matters on which the stockholders of the corporation are required or permitted to vote (the "Common Shares"); and (b) 15,000,000 shares of preferred class, having a par value of $.001 per share (the "Preferred Shares")." C. The foregoing amendment to the Corporation's Articles of Incorporation was approved on December 19, 1996 by the affirmative vote of stockholders owning 6,661,246 shares (92.7%) of the Corporation's 7,179,429 outstanding shares of capital stock entitled to vote. IN WITNESS WHEREOF, we do hereby execute this Certificate of Amendment of Articles of Incorporation of Boardwalk Casino, Inc. on December 30, 1996. /s/ Forrest J. Woodward, II --------------------------------------- Forrest J. Woodward, II, President /s/ Louis J. Sposato --------------------------------------- Louis J. Sposato, Secretary STATE OF NEVADA COUNTY OF CLARK This instrument was acknowledged before me on December 30, 1996 by Forrest J. Woodward, II and Louis J. Sposato as President and Secretary of Boardwalk Casino, Inc. /s/ Esther L. Gallagher --------------------------------------- Notary Public SEAL ESTHER L. GALLAGHER Notary Public - Nevada My appt. exp. Sep. 26, 2000 No. 92-3914-1 -2- EX-10.12 3 EXH 10.12 MERGER AGRMT AGREEMENT AND PLAN OF MERGER DATED DECEMBER 22, 1997 AMONG MIRAGE RESORTS, INCORPORATED MIRAGE ACQUISITION SUB, INC. AND BOARDWALK CASINO, INC. AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger (this "AGREEMENT") is entered into on December 22, 1997, by and among Mirage Resorts, Incorporated, a Nevada corporation, located at 3400 Las Vegas Boulevard South, Las Vegas, Nevada 89109 ("PARENT"), Mirage Acquisition Sub, Inc, a Nevada corporation and wholly-owned subsidiary of Parent, located at 3400 Las Vegas Boulevard South, Las Vegas, Nevada 89109 ("MERGER SUB"), and Boardwalk Casino, Inc., a Nevada corporation, located at 3750 Las Vegas Boulevard South, Las Vegas, Nevada 89109 (the "COMPANY"). RECITALS WHEREAS, Parent and the Board of Directors of Merger Sub have determined that it is advisable and in the best interests of Parent and Merger Sub to engage in a transaction whereby Parent will acquire the Company on the terms and subject to the conditions set forth herein; and WHEREAS, the Board of Directors of the Company has determined that it is advisable and in the best interests of the Company and its stockholders to engage in a transaction whereby Parent will acquire the Company on the terms and subject to the conditions set forth in this Agreement; and WHEREAS, as an inducement to Parent to acquire the Company, and as a condition to Parent's willingness to enter into this Agreement, concurrently with the execution and delivery of this Agreement, Jeffrey P. Jacobs and certain of his affiliates (collectively "JACOBS"), and Avis Jansen, on behalf of herself, the Estate of Norbert W. Jansen and the Jansen Family Trust (collectively, "JANSEN"), have each executed agreements with Parent, dated the date hereof (collectively, the "STOCKHOLDER AGREEMENTS") pursuant to which Jacobs and Jansen (individually, a "SELLING STOCKHOLDER"; and collectively, the "SELLING STOCKHOLDERS") have agreed, among other things, to sell to Parent or Merger Sub all of their shares of common stock, par value $.001 per share, of the Company (hereinafter referred to as either the "SHARES" or the "COMPANY COMMON STOCK") and the Company's 6% Non-Voting Cumulative Preferred Shares, Series A (the "PREFERRED SHARES"), and, pursuant to the Stockholder Agreements with Jansen, the parties have agreed to certain amendments to the lease agreement pursuant to which Jansen operates a gift shop upon the Company's premises and that Parent will purchase from Jansen, and Jansen will sell to Parent, certain real estate currently leased to the Company; and WHEREAS, Parent and the respective Boards of Directors of Merger Sub and the Company have approved the merger (the "MERGER") of Merger Sub into the Company, upon the terms and subject to the conditions set forth in this Agreement, whereby each issued and outstanding share of Company Common Stock not owned directly or indirectly by Parent or the Company, except shares of Company Common Stock held by persons who object to the Merger and comply with all the provisions of Nevada law concerning the rights, if any, of holders of Company Common Stock to dissent from the Merger and demand appraisal of their shares of Company Common Stock (each, a "DISSENTING STOCKHOLDER"), will be converted into the right to receive $5.00 per share in cash. NOW, THEREFORE, in consideration of the premises and the representations, warranties and agreements contained herein, the parties hereto agree as follows: ARTICLE I THE MERGER 1.1 THE MERGER. (a) Subject to the terms and conditions of this Agreement, and pursuant to Section 92A.250 of the Nevada Revised Statutes ("NRS"), at the Effective Time (as defined in Section 1.2) the Company and Merger Sub shall consummate the Merger pursuant to which (i) Merger Sub shall be merged with and into the Company and the separate corporate existence of Merger Sub shall thereupon cease, (ii) the Company shall be the successor or surviving corporation in the Merger (the "SURVIVING CORPORATION") and shall continue to be governed by the laws of the State of Nevada, and (iii) the separate corporate existence of the Company with all its rights, privileges, immunities, powers and franchises shall continue unaffected by the Merger. (b) Pursuant to the Merger, (i) the articles of incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the articles of incorporation of the Surviving Corporation until thereafter amended as provided by applicable law and such articles of incorporation, and (ii) the bylaws of the Company, as in effect immediately prior to the Effective Time, shall be the bylaws of the Surviving Corporation until thereafter amended as provided by law, the articles of incorporation and such bylaws. (c) The Merger shall have the effects set forth in the NRS (including without limitation Section 92A.250 thereof). Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the properties, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. As of the Effective Time, the Company shall become a wholly-owned subsidiary of Parent. 1.2 EFFECTIVE TIME. On the date of Closing (as defined in Section 1.3) as soon as practicable following the satisfaction or waiver of the conditions set forth in Article VIII (or on such other date as Parent and the Company may agree) the parties shall cause articles of merger or other appropriate documents (in any such case, the "ARTICLES OF MERGER") to be executed and filed with the Secretary of State of the State of Nevada in accordance with the provisions of Chapter 92A of the NRS, and make all other filings and recordings required by the NRS in connection with the Merger. The Merger shall become effective at the time and -2- on the date on which the Articles of Merger have been duly filed with the Secretary of State of the State of Nevada or such later time as is agreed upon by the parties and specified in the Articles of Merger, and such time is hereinafter referred to as the "EFFECTIVE TIME." 1.3 CLOSING. The Closing of the Merger (the "CLOSING") will take place at 9:00 a.m., Las Vegas time, on a date to be specified by the parties, which shall be no later than the second business day after satisfaction or waiver of all of the conditions set forth in Article VIII hereof (the "CLOSING DATE"), at the offices of Jones Vargas, at 3773 Howard Hughes Parkway, 3rd Floor, Las Vegas, Nevada, unless another date or place is agreed to in writing by the parties hereto. 1.4 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The directors and officers of Merger Sub at the Effective Time shall, from and after the Effective Time, be the directors and officers, respectively, of the Surviving Corporation until their successors shall have been duly elected or appointed or qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's articles of incorporation and bylaws. 1.5 STOCKHOLDERS' MEETING. (a) The Company, acting through its Board of Directors, shall, in accordance with applicable law: (i) take all action necessary, in accordance with applicable law and its articles of incorporation and bylaws, to duly call, give notice, convene and hold a special meeting of the holders of Company Common Stock (the "SPECIAL MEETING") as promptly as practicable for the purpose of considering and taking action upon this Agreement; (ii) prepare and file with the United States Securities and Exchange Commission (the "SEC") a preliminary proxy or information statement relating to the Merger and this Agreement and use its reasonable efforts (x) to obtain and furnish the information required to be included by the SEC in the Company Proxy Statement (as defined below) and, after consultation with Parent, to respond promptly to any comments made by the SEC with respect to the preliminary proxy or information statement and cause a definitive proxy or information statement (the "COMPANY PROXY STATEMENT") to be mailed to its stockholders and (y) to obtain the necessary approval of the Merger and approval and adoption of this Agreement by its stockholders; and (iii) include in the Company Proxy Statement the recommendation of the Board of Directors that stockholders of the Company vote in favor of the approval of the Merger and the approval and adoption of this Agreement. (b) Parent and Merger Sub agree that they shall, and shall cause any permitted assignee of each of them to, vote all Shares then owned by any of them which are -3- entitled to vote in favor of the approval of the Merger and the approval and adoption of this Agreement. ARTICLE II CONVERSION OF SHARES 2.1 CONVERSION OF CAPITAL STOCK. As of the Effective Time, by virtue of the Merger and without any action on the part of the holders of any share of Company Common Stock or common stock, no par value, of Merger Sub (the "MERGER SUB COMMON STOCK"): (a) MERGER SUB COMMON STOCK. Each issued and outstanding share of Merger Sub Common Stock shall be converted into and become 71,795 fully paid and nonassessable shares of common stock of the Surviving Corporation. (b) CANCELLATION OF TREASURY STOCK AND PARENT-OWNED STOCK. All shares of Company Common Stock that are owned by the Company as treasury stock and any shares of Company Common Stock owned by Parent, Merger Sub or any other direct or indirect wholly-owned subsidiary of Parent shall be canceled and retired and shall cease to exist and no consideration shall be delivered in exchange therefor. (c) CONVERSION OF SHARES. Each issued and outstanding share of Company Common Stock (other than shares to be canceled in accordance with Section 2.1(b) and, if applicable, Shares held by Dissenting Stockholders as described in Section 2.1(e)) shall be converted into the right to receive $5.00 in cash, payable to the holder thereof, without interest (the "MERGER CONSIDERATION"), upon surrender of the certificate formerly representing such share of Company Common Stock in the manner provided in Section 2.2. All such shares of Company Common Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a certificate representing any such Shares shall cease to have any rights with respect thereto, except the right to receive the Merger Consideration therefor upon the surrender of such certificate in accordance with Section 2.2, without interest. (d) COMPANY PREFERRED STOCK. All shares of preferred stock of the Company, including without limitation the Preferred Shares, which are outstanding at the Effective Time shall remain outstanding and shall not be affected by the Merger. (e) SHARES OF DISSENTING STOCKHOLDERS. Notwithstanding anything in this Agreement to the contrary, in the event that holders of Shares are determined to have rights pursuant to Section 92A.380 of the NRS, any issued and outstanding shares of Company Common Stock held by a Dissenting Stockholder shall not be converted as described in Section 2.1(c) but shall become the right to receive such consideration as may be determined to be due to such Dissenting Stockholder pursuant to the laws of the State of Nevada; PROVIDED, HOWEVER, that the shares of Company Common Stock outstanding immediately -4- prior to the Effective Time and held by a Dissenting Stockholder who shall, after the Effective Time, fail to perfect his right to appraisal, withdraw his demand for appraisal or lose his right of appraisal, in any case pursuant to Sections 92A.390 through 92A.440 of the NRS, shall be deemed to be converted as of the Effective Time into the right to receive the Merger Consideration. The Company shall give Parent (i) prompt notice of any written demands for appraisal of shares of Company Common Stock received by the Company and (ii) the opportunity to direct all negotiations and proceedings with respect to any such demands. Prior to the Effective Time, the Company shall not, without the prior written consent of Parent, voluntarily make any payment with respect to, or settle, offer to settle or otherwise negotiate, any such demands. 2.2 EXCHANGE OF CERTIFICATES. (a) PAYING AGENT. Parent shall designate a bank or trust company to act as agent for the holders of shares of Company Common Stock in connection with the Merger (the "PAYING AGENT") to receive the funds to which holders of shares of Company Common Stock shall become entitled pursuant to Section 2.1(c). Such funds shall be invested by the Paying Agent as directed by Parent or the Surviving Corporation. (b) EXCHANGE PROCEDURES. As soon as reasonably practicable after the Effective Time, the Paying Agent shall mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Company Common Stock (the "CERTIFICATES"), whose Shares were converted pursuant to Section 2.1 into the right to receive the Merger Consideration (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Paying Agent and shall be in such form and have such other provisions as Parent and the Company may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for payment of the Merger Consideration. Upon surrender of a Certificate for cancellation to the Paying Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration for each share of Company Common Stock formerly represented by such Certificate and the Certificate so surrendered shall forthwith be canceled. If payment of the Merger Consideration is to be made to a person other than the person in whose name the surrendered Certificate is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such payment shall have paid any transfer and other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the Certificate surrendered or shall have established to the satisfaction of the Surviving Corporation that such tax either has been paid or is not applicable. Until surrendered as contemplated by this Section 2.2, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive the Merger Consideration in cash as contemplated by this Section 2.2. -5- (c) TRANSFER BOOKS; NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. At the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of shares of Company Common Stock on the records of the Company. From and after the Effective Time, the holders of Certificates evidencing ownership of shares of Company Common Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares, except as otherwise provided for herein or by applicable law. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article II. (d) TERMINATION OF FUND; NO LIABILITY. At any time following six months after the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds (including any interest received with respect thereto) which had been made available to the Paying Agent and which have not been disbursed to holders of Certificates, and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat or other similar laws) only as general creditors thereof with respect to the Merger Consideration payable upon due surrender of their Certificates, without any interest thereon. Notwithstanding the foregoing, neither the Surviving Corporation nor the Paying Agent shall be liable to any holder of a Certificate for Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. ARTICLE III [INTENTIONALLY OMITTED] ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Merger Sub as follows: 4.1 ORGANIZATION AND QUALIFICATION. (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. (b) The Company is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, and to perform all of its obligations under any contract under which the Company (A) has or may -6- acquire any rights, (B) has or may become subject to any obligation or liability or (C) is or may, or any of the assets used or owned by it are or may, become bound, except where the failure to be so duly qualified or licensed and in good standing or to effect such performance would not, individually or in the aggregate, have a Company Material Adverse Effect. When used in this Agreement, the term "COMPANY MATERIAL ADVERSE EFFECT" means any change or effect that would (i) be materially adverse to the business, assets (tangible or intangible), results of operations, liabilities or financial condition of the Company, or (ii) impair the ability of the Company to perform its obligations under this Agreement or to consummate the transactions contemplated hereby. (c) The Company has heretofore furnished or made available to Parent complete and correct copies of the Company's articles of incorporation and bylaws, each as amended to the date hereof, and all of such articles of incorporation, bylaws and equivalent organizational documents are in full force and effect. The Company is not in violation of any of the provisions of the Company's articles of incorporation or bylaws. 4.2 CAPITALIZATION OF THE COMPANY. (a) The authorized capital stock of the Company consists of (i) 50,000,000 shares of Company Common Stock, of which 7,179,429 shares are currently issued and outstanding and (ii) 15,000,000 shares of preferred stock, $.001 par value, of which 3,250 Preferred Shares are currently issued and outstanding. All outstanding shares of capital stock of the Company have been validly issued, and are fully paid, nonassessable and free of preemptive rights. Set forth in SCHEDULE 4.2(A) are all outstanding options, warrants, or other rights to purchase capital stock of the Company from the Company. Except as set forth above or in SCHEDULE 4.2(A), there are outstanding (A) no shares of capital stock or other voting securities of the Company, (B) no securities of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company, (C) no options, subscriptions, warrants, convertible securities, calls or other rights to acquire from the Company, and no obligation of the Company to issue, deliver or sell, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company, and (D) no equity equivalents, performance shares, interests in the ownership or earnings of the Company or other similar rights issued by the Company (the items referred to in clauses (A)-(D) are referred to herein as "COMPANY SECURITIES"). Except as set forth on SCHEDULE 4.2(A) hereto, (i) there are no outstanding obligations of the Company to repurchase, redeem or otherwise acquire any Company Securities, (ii) no agreement or other document grants or imposes on any shares of the Company Common Stock any right, preference, privilege or restriction with respect to the transactions contemplated hereby (including without limitation any rights of first refusal), other than the right to dissent from the Merger as provided in Section 2.1(e) above and (iii) there are no bonds, debentures, notes or other indebtedness having general voting rights (or convertible into securities having such rights) of the Company issued and outstanding. (b) The Company has no subsidiaries. Except for portfolio securities with an aggregate fair market value not in excess of $50,000, the Company has not made, directly -7- or indirectly, any material investment or ownership interest in (including without limitation any ownership of capital stock or other equity securities), advance to or purchase or guaranty of any obligations of, any entity, nor is the Company subject to any obligation or requirement to provide funds for or make any investment (in the form of a loan, capital contribution or otherwise) in any entity. For purposes of this Agreement, "SUBSIDIARY" shall mean, with respect to any party, any corporation or other organization, whether incorporated or unincorporated, of which (x) at least a majority of the securities or other interests having by their terms voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such party or by any one or more of its subsidiaries, or by such party and one or more of its subsidiaries, or (y) such party or any other subsidiary of such party is a general partner (excluding such partnerships where such party or any subsidiary of such party do not have a majority of the voting interest in such partnership). (c) All issued and outstanding warrants, options and other rights to acquire Company Securities (other than the stock options outstanding under the Company's 1994 Stock Compensation Plan or the Company's Outside Directors Stock Option Plan (each, a "COMPENSATION OPTION")), will, as of or prior to the Effective Time, terminate or will thereafter constitute only the right to receive the excess, if any, of the per share Merger Consideration over the per share exercise price of such warrant, option or such other right, multiplied by the number of shares for which such warrant or option is exercisable immediately prior to the Effective Time (the "OPTION/WARRANT SPREAD"), without obligation of any other payment. The termination of all Compensation Options will be governed by the termination provisions contained in the Company's 1994 Stock Compensation Plan or the Company's Outside Directors Stock Option Plan attached to SCHEDULE 4.2(A), as applicable. 4.3 POWER AND AUTHORITY. (a) The Company has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Company's Board of Directors. This Agreement has been duly and validly executed and delivered by the Company and is a valid and binding agreement of the Company, enforceable against it in accordance with its terms, except (a) as such enforcement may be subject to bankruptcy, insolvency or similar laws now or hereafter in effect relating to creditors rights generally (collectively, the "BANKRUPTCY EXCEPTIONS"), and (b) as the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (b) Except for the action contemplated by Section 1.5 hereof, the Board of Directors of the Company has duly and validly approved and taken all corporate action -8- required to be taken by the Board of Directors for the consummation by the Company of the transactions to which it is a party contemplated by this Agreement, including the Merger and the acquisition of Shares pursuant to the Merger, the Stockholder Agreements and any Other Transactions. 4.4 BOARD RECOMMENDATIONS; ANTI-TAKEOVER PROVISIONS. (a) The Company's Board of Directors, at a meeting duly held on December 18, 1997 has (i) declared that as of such date it has not considered or acted on any proposed agreement, arrangement, or understanding with Parent or any other party with respect to the transactions contemplated by the Stockholder Agreements and this Agreement, (ii) duly and validly taken all action necessary to: (A) amend the Company's Bylaws in such a manner as is necessary to ensure that the provisions of Sections 78.378 through 78.3793, inclusive, of the NRS do not apply to the Company (and the provision of the Bylaws effecting the foregoing shall be referred to as the "CONTROL SHARE OPT-OUT BYLAW"); and (B) ensure that the prohibitions contained in Sections 78.411 through 78.444, inclusive, of the NRS applicable to "combinations" (as defined in Section 78.416) would not apply to substantially contemporaneous purchasing by Parent and/or its affiliates of (a) all of the outstanding voting shares of the Company from the Selling Stockholders and (b) all the remaining outstanding voting shares of the Company from the remaining stockholders, as contemplated by this Agreement; and (iii) has received a written legal opinion, dated the date hereof, of Jones Vargas, counsel to the Company, addressed to the Company, Parent and Merger Sub, satisfactory in form and substance to Parent and its counsel, to the effect described in clause (ii) above as to matters of Nevada law. (b) The Company's Board of Directors, at a meeting duly held on December 22, 1997 has duly and validly: (i) determined that each of the Merger and the transactions contemplated thereby is fair to and in the best interests of the Company's stockholders; (ii) approved and adopted this Agreement and the transactions contemplated hereby (including without limitation (x) the acquisition of the Company by Parent or any of its affiliates, and any purchase of Shares in connection therewith, by means of this Agreement, the Merger, the Stockholder Agreements and/or any other transactions conducted to effectuate the acquisition of the Company by Parent or its affiliates in accordance with this Agreement ("OTHER TRANSACTIONS") and (y) any other transactions contemplated hereby and by the foregoing clause (x)); (iii) resolved to recommend that the stockholders of the Company approve and adopt this Agreement and the Merger; (iii) resolved not to alter, amend, repeal, modify or otherwise restrict the effect of the Control Share Opt-Out Bylaw for a period of not less than fourteen (14) days following the date of such December 22, 1997 Board of Directors meeting; and (iv) has received an opinion from its financial advisor that the Merger Consideration is fair to the Company's stockholders from a financial point of view. 4.5 COMPLIANCE. -9- (a) Except as set forth in SCHEDULE 4.5(A), since January 1, 1994, the Company and its affiliates, officers, directors, agents and employees have been and are in compliance with (i) all applicable laws, rules, statutes, orders, ordinances and regulations of foreign, Federal, state and local governmental authorities applicable to the businesses conducted by the Company, and neither the Company nor any of its affiliates, is aware of any claim of violation, or of any actual violation, of any such laws, rules, statutes, orders, ordinances and regulations, by the Company, except where such failure or violation (whether actual or claimed) would not have a Company Material Adverse Effect and (ii) all applicable federal, state, local or foreign statutes, ordinances, rules, regulations, permits, consents, approvals, licenses, judgments, orders, decrees, injunctions or other authorizations governing or relating to the Company's current or contemplated casino, liquor related activities and gaming activities and operations, including, without limitation, the Nevada Gaming Control Act, as amended (the "NEVADA ACT"), and the rules and regulations promulgated thereunder, or applicable to the properties owned or leased and used by the Company (collectively, "GAMING LAWS"). None of the Company or any employee, officer, director or stockholder or any affiliate thereof, has received any written claim, demand, notice, complaint, court order or administrative order from any governmental authority since January 1, 1994, asserting that a license of the Company or of any such employee, officer, director or stockholder or affiliate thereof, as applicable, under any Gaming Laws should be revoked or suspended or that any such party is not in full compliance with such license (with respect to such employee, officer, director or stockholder or affiliate thereof, to the extent that such revocation or suspension or non-compliance might result in the revocation or suspension of the Company's license). (b) Except as set forth in SCHEDULE 4.5(B), since January 1, 1994, the Company has possessed and currently possesses, and is current on all fees with regard to, all franchises, certificates, licenses, permits and other authorizations from any governmental authorities and all patents, trademarks, service marks, trade names, copyrights, licenses and other rights that are necessary to the Company for the present ownership, maintenance and operation of its business, properties and assets (including without limitation all gaming and liquor licenses), except where the failure to possess such franchises, certificates, licenses, permits, and other authorizations, patents, trademarks, service marks, trade names, copyrights, licenses and other rights (other than those required to be obtained from the Nevada Gaming Commission (the "GAMING COMMISSION"), the Nevada State Gaming Control Board (the "CONTROL BOARD"), the Clark County Liquor and Gaming Licensing Board (the "CCB"), and the City of Las Vegas ("LAS VEGAS") (the Gaming Commission, the Control Board, the CCB, and Las Vegas are collectively referred to as the "GAMING AUTHORITIES"), including approvals under the Gaming Laws) would not have a Company Material Adverse Effect; and the Company is not in violation of any thereof, except where such violation would not have a Company Material Adverse Effect. (c) Except as set forth in SCHEDULE 4.5(C), since January 1, 1994, the Company has not violated (with or without notice or lapse of time) any applicable provisions of (i) any laws, rules, statutes, orders, ordinances or regulations, or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise, or other -10- instrument or obligations to which the Company is a party or by which the Company or any of its properties are bound or affected, except as will not have a Company Material Adverse Effect. (d) Except as set forth in SCHEDULE 4.5(D), since January 1, 1994: (i) the Company is, and has been, in full compliance with all of the terms and requirements of each award, decision, injunction, judgment, order, ruling, subpoena, or verdict (each, an "ORDER") entered, issued, made, or rendered by any court, administrative agency, or other governmental entity, officer or authority or by any arbitrator to which it, or any of the assets owned or used by it, is or has been subject, and (ii) no event has occurred or circumstance exists that may constitute or result in (with or without notice or lapse of time) a violation of or failure to comply with any term or requirement of any Order to which the Company, or any of the assets owned or used by the Company, is subject, except where such non-compliance, violation or failure to comply would not have a Company Material Adverse Effect. (e) Except as set forth in SCHEDULE 4.5(E), the Company has not received, at any time since January 1, 1994, any notice or other communication (whether oral or written) regarding any actual, alleged, possible, or potential violation of, or failure to comply with, any term or requirement of any Order to which the Company, or any of the assets owned or used by the Company, is or has been subject, except as would not have a Company Material Adverse Effect. (f) Except as set forth on SCHEDULE 4.5(F), no investigation or review by any government entity, officer or authority, including without limitation any investigation or review by Gaming Authorities or relating to compliance with Gaming Laws, with respect to the Company is pending or, to the knowledge of the Company, threatened, nor has any government entity, officer or authority indicated an intention to conduct the same. 4.6 CONSENTS AND APPROVALS; NO VIOLATION. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby and the performance by the Company of its obligations hereunder will not: (a) subject to the obtaining of any requisite approvals of the Company's stockholders as contemplated by Section 1.5 hereof, conflict with or violate any provision of the Company's articles of incorporation or bylaws; (b) require any consent, approval, order, authorization or permit of, or registration, filing or notification to, any governmental or regulatory authority or agency (a "GOVERNMENTAL ENTITY"), except for (i) the filing of a premerger notification and report form by the Company under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR ACT"), (ii) the filing with the SEC of (x) the Company Proxy Statement relating to the approval and adoption by the Company's stockholders of the Merger and this Agreement, if such approval and adoption is required by law, and (y) such reports under Sections 13 and 16 of the Securities Exchange Act of 1934, as amended ("EXCHANGE ACT"), -11- as may be required in connection with this Agreement, the Stockholder Agreements and the transactions contemplated hereby and thereby, (iii) obtaining all necessary approvals under applicable Gaming Laws, including those required by the Gaming Authorities, (iv) the filing of the Articles of Merger with the Secretary of State of the State of Nevada, and (v) such additional actions or filings which, if not taken or made, would not, individually or in the aggregate, have a Company Material Adverse Effect; (c) except as disclosed on SCHEDULE 4.6(c), result in any conflict with or violation of or the breach of or constitute a default (with notice or lapse of time or both) under, or give rise to any right of termination, cancellation or acceleration or guaranteed payments under or to a loss of a material benefit under, any of the terms, conditions or provisions of any note, bond, indenture, lease, mortgage, license, franchise, agreement or other instrument or obligation to which the Company is a party or by which the Company or any of its properties or assets may be bound, except for such conflicts, violations, breaches, defaults, or rights of termination, cancellation or acceleration, or losses as to which requisite waivers or consents have been obtained or will be obtained prior to the Effective Time or which, individually or in the aggregate, would not result in a Company Material Adverse Effect; (d) violate the provisions of any order, writ, injunction, judgment, decree, statute, rule or regulation applicable to the Company, in such a manner as to result in a Company Material Adverse Effect; or (e) result in the creation of any lien, charge or encumbrance upon any shares of capital stock, properties or assets of the Company under any agreement or instrument to which the Company is a party or by which the Company is bound. 4.7 ASSIGNMENT OF MOU. The Company has consented (and hereby reaffirms such consent) to the termination and release of any rights and obligations of the Company under that certain Memorandum of Understanding, dated October 29, 1997 between, among others, the Company and Jacobs, Jacobs Entertainment Nevada, Inc. and Diversified Opportunities Group Ltd. 4.8 SEC REPORTS; FINANCIAL STATEMENTS, ABSENCE OF UNDISCLOSED LIABILITIES. (a) The Company has filed all forms, reports and documents required to be filed with the SEC since February 11, 1994. The Company has made available to Parent, in the form filed with the SEC, the Company's (i) Annual Reports on Form 10-KSB for the fiscal years ended September 30, 1996, 1995 and 1994, (ii) all Quarterly Reports on Form 10-QSB filed by the Company with the SEC since February 11, 1994, (iii) all proxy statements relating to meetings of the Company's stockholders since February 11, 1994 and (iv) all Current Reports on Form 8-K and registration statements and other forms, reports and documents, filed by the Company with the SEC since February 11, 1994 (collectively and as amended, the "SEC REPORTS"). As of their respective dates, the SEC Reports complied in all material respects with all applicable requirements of the Securities Act of -12- 1933, as amended, and the rules and regulations promulgated thereunder, and the Exchange Act, as the case may be, each as in effect on the dates such SEC Reports were filed. As of their respective dates, none of the SEC Reports, including, without limitation, any financial statements or schedules included therein, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The audited consolidated financial statements and unaudited consolidated interim financial statements of the Company included in the SEC Reports fairly present, in all material respects, in conformity with GAAP (as defined below) applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of the Company as of the dates thereof and its consolidated results of operations and cash flows for the periods then ended (subject to normal year-end adjustments in the case of any unaudited interim financial statements). The Company has heretofore made available or promptly will make available to Parent a complete and correct copy of any amendments or modifications, which are required to be filed with the SEC but have not yet been filed with the SEC, to the SEC Reports. As used in this Agreement, "GAAP" means United States generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession in the United States as in effect on the date hereof. (b) Except as set forth in SCHEDULE 4.8(b) hereto, the Company has no liabilities of any nature (whether accrued, absolute, contingent or otherwise), except for (i) liabilities set forth in the balance sheet of the Company dated September 30, 1997 or on the notes thereto, contained in the Company's draft Annual Report on Form 10-KSB for the fiscal year ended September 30, 1997 attached to SCHEDULE 4.8(b) (the "DRAFT SEPTEMBER 30, 1997 FORM 10-KSB") (which balance sheet is subject to normal year end adjustments which individually or in the aggregate will not be material) (the "DRAFT SEPTEMBER 30, 1997 BALANCE SHEET"), (ii) liabilities incurred in the ordinary course of business consistent with past practice since September 30, 1997 and (iii) liabilities to financial advisors in connection with the transactions contemplated by this Agreement which, in the aggregate, do not and will not exceed $600,000. 4.9 ABSENCE OF CERTAIN CHANGES. Since October 1, 1996, except as set forth in SCHEDULE 4.9 hereto or as disclosed in the SEC Reports since that date or as disclosed in the Draft September 30, 1997 Form 10-KSB, the Company has conducted its business only in the ordinary course, and there has not been (i) any declaration, setting aside or payment of any dividend or other distribution with respect to its capital stock, (ii) any incurrence, assumption or guarantees by the Company of any indebtedness for borrowed money other than in the ordinary course of business, (iii) any making of any loan, advance or capital contributions to, or investments in, any other person, (iv) any split, combination or reclassification of any of its capital stock or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, (v) (x) any granting by the Company to any officer of the Company of any increase in -13- compensation, except in the ordinary course of business consistent with past practice or as was required under employment agreements in effect as of the date of the most recent audited financial statements included in the SEC Reports filed and publicly available prior to the date of this Agreement, (y) any granting by the Company to any such officer of any increase in severance or termination pay, except as part of a standard employment package to any person promoted or hired, or as was required under employment, severance or termination agreements in effect as of the date of the most recent audited financial statements included in the SEC Reports filed and publicly available prior to the date of this Agreement or (z) except termination arrangements in the ordinary course of business consistent with past practice with employees other than any executive officer of the Company, any entry by the Company into any employment, severance or termination agreement with any such officer, (vi) any damage, destruction or loss, whether or not covered by insurance, that would be expected to have a Company Material Adverse Effect, (vii) any transaction or commitment made, or any contract or agreement entered into, by the Company relating to its assets or business (including without limitation the acquisition or disposition of any assets), or any relinquishment by the Company of any contractual or other right, in either case, material to the Company, other than transactions and commitments in the ordinary course of business and those contemplated by this Agreement, (viii) any change in accounting methods, principles or practices by the Company materially affecting its assets, liabilities or business, except insofar as may have been required by a change in GAAP, (ix) any transaction, payment or commitment made, or any contract or agreement entered into, by the Company with or to any affiliate of the Company; (x) any transaction, payment or commitment made, or any contract or agreement entered into, by the Company relating to the Merger or the transactions contemplated by this Agreement or the negotiation thereof (including without limitation obligations to pay any agent, broker, investment banker, financial advisor or other firm or person any brokers' or finders' fee or any other commission or similar fee) other than the obligations to the Company's advisors described in Section 4.8(b)(iii) above, or (xi) any other event, development or change which is reasonably likely to have a Company Material Adverse Effect. 4.10 COMPANY PROXY STATEMENT. The Company Proxy Statement, including any amendments or supplements thereto, shall not, at the time filed with the SEC, as of the date mailed to the Company's stockholders or at the time of the Special Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information provided by Parent or Merger Sub specifically for use in the Company Proxy Statement. The Company Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act. 4.11 ABSENCE OF LITIGATION. Except as disclosed in SCHEDULE 4.11 hereto, since January 1, 1997, there has not been any action, suit, claim, investigation or proceeding pending against, or to the knowledge of the Company, threatened against, the Company or any of its directors or officers (in their capacities as such) or properties, before any court or -14- arbitrator or any administrative, regulatory or governmental body, or any agency or official which, individually or in the aggregate, if decided adversely, would have a Company Material Adverse Effect. Except as disclosed in SCHEDULE 4.11 hereto, since January 1, 1997, there has not been any action, suit, claim, investigation or proceeding pending against, or to the knowledge of the Company, threatened against, the Company or any of its directors or officers (in their capacities as such) or properties, before any court or arbitrator or any administrative, regulatory or governmental body, or any agency or official which (i) challenges or seeks to prevent, enjoin, alter or delay the Merger or any of the other transactions contemplated hereby or (ii) alleges any criminal action or inaction. Except as disclosed in SCHEDULE 4.11 hereto, since January 1, 1997, neither the Company nor any of its properties has been subject to any order, writ, judgment, injunction, decree, determination or award having, or which would have a Company Material Adverse Effect or which would prevent or delay the consummation of the transactions contemplated hereby. 4.12 TAXES. Except as set forth in SCHEDULE 4.12 hereto: (a) the Company has filed or sent, all material returns, material declarations and reports and information returns and statements required to be filed or sent by or relating to the Company relating to any Taxes (as defined herein) with respect to any material income, properties or operations of the Company (collectively, "RETURNS"); (b) as of the time of filing, the Returns correctly reflected in all material respects the facts regarding the income, business, assets, operations, activities and status of the Company and any other material information required to be shown therein; (c) the Company has timely paid or made provision for all material Taxes that have been shown as due and payable on the Returns that have been filed; (d) the Company has made or will make provision for all material Taxes payable for any periods that end before the Effective Time for which no Returns have yet been filed and for any periods that begin before the Effective Time and end after the Effective Time to the extent such Taxes are attributable to the portion of any such period ending at the Effective Time; (e) the charges, accruals and reserves for Taxes reflected on the books of the Company are adequate under GAAP to cover the Tax liabilities accruing or payable by the Company; (f) the Company is not delinquent in the payment of any material Taxes and has requested any extension of time within which to file or send any material Return (other than extensions granted to the Company for the filing of its Returns as set forth in SCHEDULE 4.12), which Return has not since been filed or sent; (g) no material deficiency for any Taxes has been proposed, asserted or assessed in writing against the Company other than those Taxes being contested in good faith by appropriate proceedings and set forth in SCHEDULE 4.12 (which shall set forth the nature of the proceeding, the type of return, the deficiencies proposed, asserted or assessed and the amount thereof, and the taxable year in question); (h) the Company has not granted any extension of the limitation period applicable to any material Tax claims other than those Taxes being contested in good faith by appropriate proceedings; and (i) the Company is not subject to liability for Taxes of any person (other than the Company). For purposes of this Agreement, "TAX" or "TAXES" means all Federal, state, local and foreign taxes, and other assessments of a similar nature (whether imposed directly or -15- through withholding), including any interest, additions to tax, or penalties applicable thereto, imposed by any Tax Authority. "TAX AUTHORITY" means the Internal Revenue Service and any other domestic or foreign governmental authority responsible for the administration of any Taxes. 4.13 EMPLOYEE BENEFITS. (a) EXISTENCE OF PLANS. For purposes of this Agreement, the term "PLANS" shall mean (i) all "EMPLOYEE BENEFIT PLANS" (as such term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), of which the Company or any member of the same controlled group of businesses as the Company within the meaning of Section 4001(a)(14) of ERISA (an "ERISA AFFILIATE") is or ever was a sponsor or participating employer or as to which the Company or any of its ERISA Affiliates makes contributions or is required to make contributions and (ii) any similar employment, severance or other arrangement or policy of the Company or of any of its ERISA Affiliates (whether written or oral) providing for insurance coverage (including self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits or retirement benefits, or for profit sharing, deferred compensation, bonuses, stock options, stock appreciation or other forms of incentive compensation or post-retirement insurance, compensation or benefits. Except as is disclosed on SCHEDULE 4.13, (i) neither the Company nor any of its ERISA Affiliates maintains or sponsors (or ever maintained or sponsored), or makes or is required to make contributions to, any Plans, (ii) none of the Plans is or was a "multi-employer plan", as defined in Section 3(37) of ERISA, (iii) none of the Plans is or was a "defined benefit pension plan" within the meaning of Section 3(35) of ERISA, (iv) none of the Plans provides or provided post-retirement medical or health benefits, (v) none of the Plans is or was a "welfare benefit fund," as defined in Section 419(e) of the Internal Revenue Code of 1986, as amended ("CODE"), or an organization described in Sections 501(c)(9) or 501(c)(20) of the Code, (vi) neither the Company nor any of its ERISA Affiliates is or was a party to any collective bargaining agreement, and (vii) neither the Company nor any of its ERISA Affiliates has announced or otherwise made any commitment to create or amend any Plan. Notwithstanding any statement or indication in this Agreement to the contrary, there are no Plans (a) as to which Parent or Merger Sub will be required to make any contributions or with respect to which Parent or Merger Sub shall have any obligation or liability whatsoever, whether on behalf of any of the current employees of the Company or on behalf of any other Person, after the Closing, or (b) which Parent or Merger Sub will not be able to terminate immediately after the Closing in accordance with their terms and ERISA. With respect to each of such Plans, at the Closing there will be no unrecorded liabilities with respect to the establishment, implementation, operation, administration or termination of any such Plan, or the termination of the participation in any such Plan by the Company or any of its ERISA Affiliates. The Company has delivered/will deliver within five business days of the date hereof to Parent true and complete copies of: (i) each of the Plans and any related funding agreements thereto (including insurance contracts) including all amendments, all of which are legally valid and binding and in full force and effect and there are no defaults thereunder, (ii) the currently effective Summary Plan Description pertaining to each of the Plans, (iii) the -16- three most recent annual reports for each of the Plans (including all relevant schedules), (iv) the most recently filed PBGC Form 1 (if applicable), (v) the most recent Internal Revenue Service determination letter for each Plan which is intended to constitute a qualified plan under Section 401 of the Code and each amendment to each of the foregoing documents, and (vi) for each funded Plan, financial statements consisting of (A) the consolidated statement of assets and liabilities of such Plan as of its most recent valuation date, and (B) the statement of changes in fund balance and in financial position or the statement of changes in net assets available for benefits under such Plan for the most recently-ended plan year, which such financial statements shall fairly present the financial condition and the results of operations of such Plan in accordance with GAAP as of such dates. (b) PRESENT VALUE OF BENEFITS. The present value of all accrued benefits under any Plans subject to Title IV of ERISA shall not, as of the Closing Date, exceed the value of the assets of such Plans allocated to such accrued benefits, based upon the applicable provisions of the Code and ERISA, and each such Plan shall be capable of being terminated as of the Closing Date in a "standard termination" under Section 4041(b) of ERISA. With respect to each Plan that is subject to Title IV of ERISA, (i) no amount is due or owing from the Company or any of its ERISA Affiliates to the Pension Benefit Guaranty Corporation or to any "multi-employer Plan" as defined in Section 3(37) of ERISA on account of any withdrawal therefrom and (ii) no such Plan has been terminated other than in accordance with ERISA or at a time when the plan was not sufficiently funded. The transactions contemplated hereunder, including without limitation the termination of the Plans at or prior to the Closing, shall not result in any material such withdrawal or other liability under any applicable Laws. (c) PENALTIES; REPORTABLE EVENTS. Neither the Company nor any of its ERISA Affiliates is subject to any material liability, tax or penalty whatsoever to any Person or agency whomsoever as a result of engaging in a prohibited transaction under ERISA or the Code, and neither the Company nor any of its ERISA Affiliates has any knowledge of any circumstances which reasonably might result in any material liability, tax or penalty, including, but not limited to, a penalty under Section 502 of ERISA, as a result of a breach of any duty under ERISA or under other Laws. Each Plan which is required to comply with the provisions of Section 4980B of the Code has complied in all material respects. No event has occurred which could subject any Plan to material tax liability under Section 511 of the Code. None of the Plans subject to Title IV of ERISA has, since September 2, 1974, been completely or partially terminated nor has there been any "reportable event", as such term is defined in Section 4043(b) of ERISA, with respect to any of the Plans since the effective date of ERISA nor has any notice of intent to terminate been filed or given with respect to any such Plan. There has been no (i) withdrawal by the Company or any of its ERISA Affiliates that is a substantial employer from a single-employer plan which is a Plan and which has two or more contributing sponsors at least two of whom are not under common control, as referred to in Section 4063(b) of ERISA, or (ii) cessation by the Company or any of its respective ERISA Affiliates of operations at a facility causing more than 20% of Plan participants to be separated from employment, as referred to in Section 4062(f) of ERISA. Neither the Company nor any of its ERISA Affiliates, nor any other organization of which -17- any of them are a successor or parent corporation as defined in Section 4069(b) of ERISA, have engaged in any transaction described in Section 4069(a) of ERISA. (d) DEFICIENCIES; QUALIFICATION. None of the Plans nor any trust created thereunder has incurred any "accumulated funding deficiency" as such term is defined in Section 412 of the Code, whether or not waived, since the effective date of such Section 412, and no condition has occurred or exists which by the passage of time could be expected to result in an accumulated funding deficiency as of the last day of the current plan year of any such Plan. Furthermore, neither the Company nor any of its respective ERISA Affiliates has any unfunded liability under ERISA in respect of any of the Plans. Each of the Plans which is intended to be a qualified plan under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service, and has been operated in accordance with its terms and with the provisions of the Code. All of the Plans have been administered and maintained in substantial compliance with ERISA, the Code and all other applicable Laws. All contributions required to be made to each of the Plans under the terms of that Plan, ERISA, the Code or any other applicable Laws have been timely made. Each Plan intended to meet the requirements for tax-favored treatment under Subchapter B of Chapter 1 of the Code meets such requirements. There are no liens against the property of the Company (including the Transferred Assets) or any of its ERISA Affiliates under Section 412(n) of the Code or Sections 302(f) or 4068 of ERISA. The Financial Statements properly reflect all material amounts required to be accrued as liabilities to date under each of the Plans. There is no contract, agreement or benefit arrangement covering any employee of the Company which, individually or collectively, could give rise to the payment of any amount which would constitute an "excess parachute payment" (as defined in Section 280G of the Code). The execution and performance of this Agreement will not (i) result in any obligation or liability (with respect to accrued benefits or otherwise) of Parent or Merger Sub or any subsidiary of Parent to the PBGC, any Plan, or any present or former employee of the Company, (ii) be a trigger event under any Plan that will result in any material payment (whether of severance pay or otherwise) becoming due to any present or former employee, officer, director, stockholder, contractor, or consultant, or any of their dependents, or (iii) accelerate the time of payment or vesting, or increase the amount, of compensation due to any employee, officer, director, stockholder, contractor, or consultant of the Company. With respect to any insurance policy which provides, or has provided, funding for benefits under any Plan, (A) there is and will be no material liability of the Company or Parent or Merger Sub in the nature of a retroactive or retrospective rate adjustment, loss sharing arrangement, or actual or contingent liability as of the Closing Date, nor would there be any such liability if such insurance policy were terminated as of the Closing Date, and (B) no insurance company issuing any such policy is in receivership, conservatorship, bankruptcy, liquidation, or similar proceeding, and, to the knowledge of the Company, no such proceedings with respect to any insurer are imminent. (e) LITIGATION. Other than routine claims for benefits under the Plans, there are no pending, or, to the best knowledge of the Company, threatened, investigations, proceedings, claims, lawsuits, disputes, actions, audits or controversies involving the Plans, or the fiduciaries, administrators, or trustees of any of the Plans or the Company or any of its -18- ERISA Affiliates as the employer or sponsor under any Plan, with any of the Internal Revenue Service, the Department of Labor, the Pension Benefit Guaranty Corporation, any participant in or beneficiary of any Plan or any other Person whomsoever. The Company knows of no reasonable basis for any such claim, lawsuit, audit, dispute, action or controversy. 4.14 INTELLECTUAL PROPERTY. Except as disclosed in the SEC Reports filed prior to the date of this Agreement or as set forth in SCHEDULE 4.14 hereto, the Company owns, or is licensed or has the right to use (in each case, free and clear of any security interests, liens, claims, pledges, charges, voting agreements or other encumbrances of any nature whatsoever (collectively, "LIENS"), all Intellectual Property (as defined below) used in or necessary for the conduct of its business substantially as currently conducted; to the knowledge of the Company, the use of any Intellectual Property by the Company does not infringe on or otherwise violate the rights of any person; and, to the knowledge of the Company, no person is challenging, infringing on or otherwise violating any right of the Company with respect to any Intellectual Property owned by and/or licensed to the Company, except in each case for such infringements or failures to own or be licensed as would not, individually or in the aggregate, have a Company Material Adverse Effect. For purposes of this Agreement, "INTELLECTUAL PROPERTY" means trademarks, service marks, brand names, certification marks, trade dress, assumed names, trade names and other indications of origin, the goodwill associated with the foregoing and any registration in any jurisdiction of, and applications in any jurisdiction to register, the foregoing, including any extension, modification or renewal of any such registration or application; inventions, discoveries and ideas, whether patentable or not in any jurisdiction; patents, applications for patents (including without limitation divisions, continuations, continuations in part and renewal applications), and any renewals, extensions or reissues thereof, in any jurisdiction; non-public information, trade secrets and confidential information and rights in any jurisdiction to limit the use or disclosure thereof by any person; writings and other works, whether copyrightable or not in any jurisdiction; registrations or applications for registration of copyrights in any jurisdiction, and any renewals or extensions thereof; and any similar intellectual property or proprietary rights. The Company has received no notice from Holiday Inns Franchising, Inc. ("HIFI"), alleging any current or uncured grounds for termination of the Company's License Agreement with HIFI, and the Company has no knowledge of any currently-existing or anticipated grounds for such termination other than HIFI's contractual right under the License Agreement to approve a change of control of the Company. 4.15 MATERIAL CONTRACTS. Except as set forth in SCHEDULE 4.15 hereto, there are no (i) agreements of the Company containing an unexpired covenant not to compete or similar restriction applying to the Company, (ii) interest rate, currency or commodity hedging, swap or similar derivative transactions to which the Company is a party or (iii) other contracts or amendments thereto that would be required to be filed and have not been filed as an exhibit to the Company's Annual Report on Form 10-KSB for the fiscal year ended September 30, 1996 (the "1996 FORM 10-KSB") and to the Company's SEC Reports filed subsequent thereto and prior to the date of this Agreement (collectively, along with agreements or contracts or amendments thereto filed as exhibits to the 1996 Form 10-KSB and to such -19- subsequently filed SEC Reports, the "MATERIAL CONTRACTS"). Assuming each Material Contract constitutes a valid and binding obligation of each other party thereto, each Material Contract is a valid and binding obligation of the Company. To the Company's knowledge, each Material Contract is a valid and binding obligation of each other party thereto, and each such Material Contract is in full force and effect and is enforceable by the Company in accordance with its terms, except as such enforcement may be limited by the Bankruptcy Exceptions and subject to the general principles of equity. There are no existing defaults (or circumstances or events that, with the giving of notice or lapse of time or both would become defaults) of the Company (or, to the knowledge of the Company, any other party thereto) under any of the Material Contracts except for defaults that would not, individually or in the aggregate, have a Company Material Adverse Effect. 4.16 INSURANCE. The Company has obtained and maintained in full force and effect insurance with responsible and reputable insurance companies or associations in such amounts, on such terms and covering such risks, including fire and other risks insured against by extended coverage, as is consistent with industry practice for companies (i) engaged in similar businesses and (ii) of at least similar size to that of the Company, and has maintained in full force and effect public liability insurance, insuring against claims for personal injury or death or property damage occurring in connection with any of the activities of the Company or any of the properties owned, occupied or controlled by the Company, in such amount as reasonably deemed necessary by the Company. SCHEDULE 4.16 hereto sets forth a complete and correct list of all material insurance policies (including a brief summary of the nature and terms thereof and any amounts paid or payable to the Company) providing coverage in favor of the Company or any of its properties. Each such policy is in full force and effect, no notice of termination, cancellation or reservation of rights has been received with respect to any such policy, there is no default with respect to any provision contained in any such policy, and there has not been any failure to give any notice or present any claim under any such policy in a timely fashion or in the manner or detail required by any such policy, except for any such failures to be in full force and effect, any such terminations, cancellations, reservations or defaults, or any such failures to give notice or present claims which would not, individually or in the aggregate, have a Company Material Adverse Effect. 4.17 LABOR MATTERS. (a) Except as set forth in SCHEDULE 4.17(a) hereto, the Company is not a party to any collective bargaining or other labor union contract applicable to persons employed by the Company, no collective bargaining agreement is being negotiated by the Company and the Company has no knowledge of any material activities or proceedings (i) involving any unorganized employees of the Company seeking to certify a collective bargaining unit or (ii) of any labor union to organize any of the employees of the Company. There is no labor dispute, strike or work stoppage against the Company pending or, to the Company's knowledge, threatened which may interfere with the business activities of the Company, except where such dispute, strike or work stoppage would not have a Company Material Adverse Effect. -20- (b) Except as set forth in SCHEDULE 4.17(b) hereto, the Company has paid in full, or fully accrued for in their financial statements, all wages, salaries, commissions, bonuses, severance payments, vacation payments, holiday pay, sick pay, pay in lieu of compensatory time and other compensation due or to become due to all current and former employees of the Company for all services performed by any of them on or prior to the date hereof. The Company is in compliance in all material respects with all applicable federal, state, local and foreign laws, rules and regulations relating to the employment of labor, including without limitation, laws, rules and regulations relating to payment of wages, employment and employment practices, terms and conditions of employment, hours, immigration, discrimination, child labor, occupational health and safety, collective bargaining and the payment and withholding of Taxes and other sums required by governmental authorities. 4.18 REAL PROPERTY. (a) SCHEDULE 4.18 identifies all real property owned by the Company (the "OWNED PROPERTY") and all real property leased or operated (or leased and subleased) by the Company (the "LEASED PROPERTY"). The Owned Property and the Leased Property shall be referred to collectively as the "REAL PROPERTY." (b) The Company has good and marketable fee simple absolute title to the Owned Property, and the right to use the Leased Property, free and clear of any and all liens, encumbrances, easements, restrictions, leases, subleases, concession agreements, options to purchase, options to lease, options to joint venture or jointly develop, conditions, covenants, assessments, defects, claims or exceptions, except for the exceptions described on SCHEDULE 4.18 or as shown on the policies of title insurance or preliminary title reports (if more recent) attached as part of such schedule. Except as set forth on SCHEDULE 4.18(b) hereto, all leases, subleases and licenses on the Owned Property or Leased Property, including renewal rights or other options, are terminable by the Company without penalty on not more than 30 days notice. (c) True and correct copies of the documents under which the Owned Property and Leased Property is leased, subleased (to or by the Company or otherwise) or operated (the "LEASE DOCUMENTS") have been delivered to Parent. The Lease Documents are unmodified and in full force and effect, and there are no other agreements, written or oral, between the Company and any third parties, or by and amongst any third parties, claiming an interest in the interest of the Company in the Owned Property, Leased Property or otherwise relating to the use and occupancy of the Owned Property or Leased Property. Without limiting the generality of the foregoing, except as set forth on SCHEDULE 4.18, no person or entity other than the Company has any right to occupancy, or right to acquire any occupancy right, to any portion of the Real Property (whether pursuant to a lease, sublease, license or otherwise) for any period of time beyond June 30, 1998. Neither the Company nor any other party is in material default under the Lease Documents, and no defaults (which have not been cured) by the Company nor any other party have been asserted thereunder. To the best knowledge of the Company, each landlord or other party (e.g., a subtenant or -21- concessionaire) named in any of the Lease Documents is not in material default thereunder, and no material defaults (whether or not subsequently cured) by such landlord or other parties have been alleged thereunder. (d) Except as disclosed in SCHEDULE 4.18, (i) the Real Property complies with, and is operated in accordance with, all applicable laws (including without limitation all Environmental Laws to the extent stated in SECTION 4.19) affecting the Real Property or the ownership, improvement, development, possession, use, occupancy or operation thereof, and with any and all liens, encumbrances, easements, agreements, covenants, conditions and restrictions (collectively, "RESTRICTIONS") affecting the Real Property, except where the failure to comply, individually or in the aggregate, would not result in a Company Material Adverse Effect; (ii) to the best knowledge of the Company, no land or property adjacent to the Real Property is in material violation of any applicable laws, regulations or Restrictions, except for such violations which, individually or in the aggregate, would not result in a Company Material Adverse Effect; (iii) there are no material defects in the physical condition of the Real Property or the improvements located on the Real Property, except for defects which, individually or in the aggregate, would not have a Company Material Adverse Effect; and (iv) the Company has not received any notice from any governmental body (a) requiring it to make any material repairs or changes to the Real Property or the improvements located on the Real Property or (b) giving notice of any material governmental actions pending, except for such repairs, changes or actions which, individually or in the aggregate, would not have a Company Material Adverse Effect. (e) Except as disclosed in SCHEDULE 4.18, there is no action, proceeding or litigation pending (or, to the best knowledge of the Company, contemplated or threatened): (i) to take all or any portion of the Real Property, or any interest therein, by eminent domain; (ii) to modify the zoning of, or other governmental rules or restrictions applicable to, the Real Property or the use or development thereof; (iii) for any street widening or changes in highway or traffic lanes or patterns in the immediate vicinity of the Real Property; or (iv) otherwise relating to the Real Property or the interests of the Company therein, or which otherwise would interfere with the use, ownership, improvement, development and/or operation of the Real Property. (f) Except as disclosed in SCHEDULE 4.18, no portion of the Real Property or the roads immediately adjacent to the Real Property: (i) is situated in a "Special Flood Hazard Area," as set forth on a Federal Emergency Management Agency Flood Insurance Rate Map or Flood Hazard Boundary Map; (ii) to the best knowledge of the Company, was the former site of any public or private landfill, dump site, retention basin or settling pond; (iii) to the best knowledge of the Company, was the former site of any oil or gas drilling operations; (iv) to the best knowledge of the Company, was the former site of any experimentation, processing, refining, reprocessing, recovery or manufacturing operation for any petrochemicals; or (v) has any defect or condition which would materially impair either (a) the current use of the Real Property or (b) the use of the Real Property for gaming or other currently contemplated activities, as applicable. -22- (g) The parcels constituting the Real Property are assessed separately from all other adjacent property for purposes of real property taxes. (h) Except as disclosed in SCHEDULE 4.18, (i) all improvements on the Real Property are in compliance with current building codes, to the extent applicable and (ii) the Company has not received any written notices of any material violations of any applicable building codes relating to the Real Property which have not been remedied. (i) The Real Property is connected to and serviced by adequate water, sewage disposal, gas and electricity facilities in accordance with all applicable laws, statutes, ordinances, rules and regulations of all public or quasi-public authorities having or claiming jurisdiction there over. All material systems (heating, air conditioning, electrical, plumbing and the like) for the basic operation of the Real Property are operable and in good condition (ordinary wear and tear excepted). (j) There are no material commitments to or agreements with any governmental authority or agency (federal, state or local) affecting the Real Property which are not listed in SCHEDULE 4.18 or described in the SEC Reports. (k) Except as disclosed in SCHEDULE 4.18 or as shown in the policies of title insurance or preliminary title reports (if more recent) delivered previously to Parent, there are no commitments, agreements, understandings or other Restrictions materially adversely affecting Company's ability to utilize the Real Property for its intended purposes or to improve or develop or effect expansion of the Company's business on the Real Property. (l) There are no contracts or other obligations outstanding for the sale, exchange or transfer of any of the Real Property or any interest therein, or any portion of it or the business operated thereon, except as disclosed on SCHEDULE 4.18. 4.19 ENVIRONMENTAL MATTERS. (a) "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "CERCLIS" means the Comprehensive Environmental Response Compensation Liability Information System List. "ENVIRONMENTAL CLAIM" means, with respect to any Person, any written notice, claim, demand or other communication (collectively, a "CLAIM") by any other Person alleging or asserting such Person's liability for investigatory costs, cleanup costs, Governmental Authority response costs, damages to natural resources or other property, personal injuries, fines or penalties arising out of, based on or resulting from (a) the presence, or release into the environment, of any Hazardous Material at any location, whether or not owned by such Person, or (b) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. The term "ENVIRONMENTAL -23- CLAIM" shall include, without limitation, any claim by any Governmental Authority for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and any claim by any third party (other than workers compensation claims arising from isolated incidents) seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from the presence of Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. "ENVIRONMENTAL LAW" means any law, regulation or order relating to the regulation or protection of human health, safety or the environment or to emissions, discharges, releases or threatened releases of Hazardous Materials into the environment (including without limitation ambient air, soil, surface water, ground water, wetlands, land or subsurface strata), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. "GOVERNMENTAL AUTHORITY" means any agency, authority, board, bureau, commission, department, office or instrumentality of any nature whatsoever of any governmental or quasi-governmental unit, whether federal, state, county, district, city or other political subdivision, foreign or otherwise and whether now or hereafter in existence, or any officer or official of any thereof. "HAZARDOUS MATERIALS" includes (a) any "hazardous substance", as defined by CERCLA or any other similar substance or waste regulated pursuant to any similar state or local law, regulation or ordinance; (b) any "waste" or "hazardous waste", as defined by the Resource Conservation and Recovery Act, as amended, or any other similar substance or waste regulated pursuant to any similar state or local law, regulation or ordinance; (c) any pollutant, contaminant, material, substance or waste regulated by the Clean Water Act, as amended, or any other similar substance or waste regulated pursuant to any similar state or local law, regulation or ordinance; (d) any pollutant, contaminant, material, substance or waste regulated by the Clean Air Act, as amended, or any other similar substance or waste regulated pursuant to any similar state or local law, regulation or ordinance; (e) any petroleum product; (f) any polychorinated biphenyls; or (g) any radioactive materials or substances. "RELEASE" means release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment or into or out of any real or personal property or any fixture, including the movement of Hazardous Materials through or in the air, soil, surface water or groundwater. (b) Except as set forth in SCHEDULE 4.19 (with paragraph references corresponding to those set forth below): (i) all facilities and property owned or leased by the Company at any time have been, and continue to be, operated by the Company in material compliance with all Environmental Laws; -24- (ii) there have been no past, and there are no pending or, to the best knowledge of the Company, threatened (x) claims, complaints, notices, requests for information or investigations with respect to any alleged material violation of any Environmental Law by the Company, or (y) complaints, notices or inquiries to or investigations of the Company regarding potential liability under any Environmental Law by the Company; (iii) there have not been, at any facilities or property presently or formerly owned or leased by the Company, any Releases of Hazardous Materials and there are no citations, notices or orders of noncompliance issued and outstanding to the Company under any Environmental Law, except as would not, individually or in the aggregate, be reasonably expected to have a Company Material Adverse Effect; (iv) the Company has been issued and is in material compliance with all permits, certificates, approvals, licenses and other governmental authorizations relating to environmental matters and necessary for their businesses, and no order has been issued, no Environmental Claim has been made, no penalty has been assessed and no investigation or review has occurred or is pending or, to the best knowledge of the Company, threatened, by any Person with respect to any alleged failure by the Company to have any license or permit required under applicable Environmental Laws in connection with the conduct of its business or operations or to comply with any Environmental Laws or with respect to any generation, treatment, storage, recycling, transportation, discharge, disposal or release of any Hazardous Material generated by the Company; (v) neither any property now or previously owned or leased by the Company nor any property to which wastes generated at any such property have been disposed of, is listed or proposed for listing on the National Priorities List pursuant to CERCLA, or on the CERCLIS or on any similar federal or state list of sites requiring investigation or clean-up; (vi) there are no underground storage tanks, active or abandoned, including petroleum storage tanks, under any property now owned or leased by the Company; and (vii) there are no facts upon which the Company may reasonably be expected to become liable under any Environmental Law in any material respect. 4.20 REPRESENTATIONS COMPLETE. None of the representations or warranties made by the Company herein or in any Schedule or Exhibit hereto contains or will contain at the Effective Time any untrue statement of a material fact, or omits or will omit at the Effective Time any material fact necessary in order to make the statements contained herein or therein, in light of the circumstances under which they are made, not misleading. 4.21 DISCLOSURE SCHEDULES. Disclosure of a matter on a Schedule called for under one Section or subsection of this Article IV shall be deemed to be disclosure for any other -25- Schedule under another Section or subsection of this Article IV provided that the statements in the Schedule relating to the matter can be clearly identified as relating to the Schedule to be delivered under such other Section or subsection. Notwithstanding the preceding sentence, the listing of a security interest on a title report does not constitute disclosure of the associated indebtedness or liability under a representation and warranty where disclosure of such indebtedness or liability was required. ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Parent and Merger Sub represent and warrant to the Company as follows: 5.1 ORGANIZATION. Each of Parent and Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of their jurisdiction of incorporation and has the requisite corporate power to carry on its business. Merger Sub has made available to the Company a complete and correct copy of its articles of incorporation and bylaws, each as amended to date and as in full force and effect. Merger Sub is not in default in any material respect in the performance, observation or fulfillment of any provision of its articles of incorporation or bylaws. 5.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Parent and Merger Sub has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby on the part of Parent and Merger Sub have been duly and validly authorized by the Boards of Directors of Parent and Merger Sub and by Parent as the sole stockholder of Merger Sub and no other corporate proceedings on the part of Parent and Merger Sub are necessary to authorize this Agreement or to consummate the transactions contemplated hereby, except as contemplated hereby. This Agreement has been duly and validly executed and delivered by Parent and Merger Sub and, assuming this Agreement constitutes a valid and binding obligation of the Company and the requisite approval of the Company's stockholders has been obtained, this Agreement constitutes a valid and binding agreement of Parent and Merger Sub, enforceable against each of them in accordance with its terms, except (a) as such enforcement may be subject to the Bankruptcy Exceptions, and (b) as the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 5.3 CONSENT AND APPROVALS; NO VIOLATION. Neither the execution and delivery of this Agreement by Parent and Merger Sub, nor the consummation of the transactions contemplated hereby, will: (a) conflict with any provision of the respective articles of incorporation or bylaws of Parent or Merger Sub; -26- (b) require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except (i) the filing of a premerger notification and report form under the HSR Act, (ii) the filing with the SEC of the Company Proxy Statement relating to the approval and adoption by the Company's stockholders of the Merger and this Agreement as contemplated by Section 1.5 of this Agreement, if such approval is required by law, and such reports under Sections 13 and 16 of the Exchange Act as may be required in connection with this Agreement, the Stockholder Agreements and the transactions contemplated hereby and thereby, (iii) obtaining all necessary approvals under the Gaming Laws, including those required by the Gaming Authorities, (iv) the filing of the Articles of Merger with the Secretary of State of the State of Nevada, and (v) where the failure to obtain such consents, approvals, authorizations or permits or the failure to make such filings or notifications would not have a material adverse effect on the ability of Parent and Merger Sub to consummate the transactions contemplated hereby; or (c) conflict with or violate the provisions of any order, writ, injunction, judgment, decree, statute, rule or regulation applicable to Parent or Merger Sub, or any contract or agreement to which Parent or Merger Sub is a party, in such a manner as to result in a material adverse effect on the ability of Parent and Merger Sub to consummate the transactions contemplated hereby. 5.4 INFORMATION SUPPLIED. None of the information supplied or to be supplied by Parent or Merger Sub expressly for inclusion in the Company Proxy Statement will, at the time filed with the SEC, as of the date mailed to the Company's stockholders or at the time of the Special Meeting, contain any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they are made, not misleading. 5.5 MERGER SUB'S OPERATIONS. Merger Sub was formed solely for the purpose of engaging in the transactions contemplated hereby and has not engaged in any business activities or conducted any operations other than in connection with the transactions contemplated hereby. 5.6 CAPITALIZATION. The authorized capital stock of Merger Sub consists of 1,000 shares of common stock. All of the issued and outstanding shares of Merger Sub's common stock have been duly and validly issued and are held of record and beneficially by Parent. 5.7 FINANCING. Parent has available to it funds necessary to purchase all of the Shares, to pay the Merger Consideration and to pay all of its fees and expenses related to the transactions contemplated by this Agreement. -27- ARTICLE VI CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO EFFECTIVE DATE The Company agrees, except (i) as expressly contemplated by this Agreement, or (ii) as agreed in writing by Parent, from the date hereof and prior to the Effective Time, as follows: 6.1 ORDINARY COURSE. The Company shall carry on its business in the usual, regular and ordinary course, in substantially the same manner as heretofore conducted, and use its reasonable efforts consistent with past practice and policies to preserve intact its present business organization, keep available the services of its present officers and employees and preserve its existing relationships with customers, suppliers, lessors, lessees, creditors and others having business dealings with it. The Company will continue to maintain a standard system of accounting established and administered in accordance with GAAP. 6.2 DIVIDENDS; CHANGES IN STOCK. The Company shall not (a) declare, set aside or pay any dividends on or make other distributions in respect of any shares of its capital stock, (b) split, combine or reclassify any shares of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any shares of its capital stock or (c) propose to do any of the foregoing. 6.3 ISSUANCE, REPURCHASE OR REPRICING OF SECURITIES. The Company shall not issue, pledge, deliver, sell or transfer or authorize or propose the issuance, pledge, delivery, sale or transfer of, or repurchase, redeem or otherwise acquire directly or indirectly, or propose the repurchase, redemption or other acquisition of, any shares of capital stock of any class of the Company, or any options, warrants or other rights exercisable for or securities convertible into or exchangeable for, any such shares (or enter into any agreements, arrangements, plans or understandings with respect to any of the foregoing), other than pursuant to the exercise of outstanding options or warrants pursuant to the terms thereof as of the date hereof or amend any of the terms of any of such securities. The Company shall take no action to reduce or alter the consideration to be paid to the Company upon the exercise of any outstanding options, warrants or other rights exercisable for, or securities convertible into or exchangeable for, any shares of the Company's capital stock, nor shall it enter into any agreements, arrangements, plans or understandings with respect to any such reduction or alteration. 6.4 GOVERNING DOCUMENTS; BOARD OF DIRECTORS. The Company shall not propose or adopt any amendment to its articles of incorporation or bylaws (or similar charter documents) or take any action to alter the size or composition of its Board of Directors. 6.5 NO DISPOSITIONS. The Company shall not transfer, sell, lease, license, mortgage or otherwise dispose of or encumber any material assets, or enter into any -28- commitment to do any of the foregoing, other than in the ordinary and usual course of business, consistent with past practice. 6.6 INDEBTEDNESS. (a) The Company shall not incur, become subject to, or agree to incur any debt for borrowed money or incur or become subject to any other obligation or liability (absolute or contingent), except current liabilities incurred, and obligations under contracts entered into, in the ordinary course of business consistent with prior practice. (b) The Company shall not pay or be liable for prepayment or other penalties in connection with the early retirement of any Company indebtedness for borrowed money. 6.7 EMPLOYEES AND AFFILIATES. The Company shall not make any change in the compensation payable or to become payable to any of its officers, directors, employees, agents, affiliates or consultants, enter into or amend any employment, severance, termination or other agreement or make any loans to any of its officers, directors, employees, agents, affiliates or consultants or make any change in its existing borrowing or lending arrangements for or on behalf of any of such persons, or otherwise enter into any transactions with or make any payment to or for any affiliate of the Company, in each case whether contingent on consummation of the Merger or otherwise, except for increases in the compensation payable to non-management salaried employees in the ordinary course of business and consistent with past practice. 6.8 BENEFIT PLANS. The Company shall not, except as required by law, (a) pay, agree to pay or make any accrual or arrangement for payment of any pension, retirement allowance or other employee benefit pursuant to any existing plan, agreement or arrangement to any officer, director or employee except in the ordinary course of business and consistent with past practice or as permitted by this Agreement; (b) pay or agree to pay or make any accrual or arrangement for payment to any employees of the Company of any amount relating to unused vacation days; (c) commit itself or themselves to adopt or pay, grant, issue, accelerate or accrue salary or other payments or benefits pursuant to any pension, profit-sharing, bonus, extra compensation, incentive, deferred compensation, stock purchase, stock option, stock appreciation right, group insurance, severance pay, retirement or other employee benefit plan, agreement or arrangement, or any employment or consulting agreement with or for the benefit of any director, officer, employee, agent or consultant, whether past or present; or (d) amend in any material respect any such existing plan, agreement or arrangement. 6.9 TAXES. The Company shall (i) properly prepare and file all material reports or Tax Returns required by the Company to be filed with any governmental or regulatory authorities with respect to its business, operations, or affairs, and (ii) pay in full and when due all Taxes indicated on such Tax Returns or otherwise levied or assessed upon the Company or any of its assets and properties unless such Taxes are being contested in good -29- faith by appropriate proceedings and reasonable reserves therefor have been established in accordance with GAAP. The preparation of any such Tax Returns filed by the Company shall be subject to the timely review and approval of Parent, which approval shall not be unreasonably withheld. 6.10 CONSULTATION AND COOPERATION. The Company shall (i) report on a regular basis, at reasonable times, to a representative designated by Parent regarding material operational matters and financial matters (including monthly unaudited financial information); (ii) promptly and regularly notify Parent of any change in the normal course of operation of its business or its properties and of any material development in the business or operations of the Company (including without limitation any Company Material Adverse Effect or any governmental or third party claims, complaints, investigations or hearings, or communications indicating that the same may be forthcoming or contemplated); and (iii) cooperate with Parent and its affiliates and representatives in arranging for an orderly transition in connection with the transfer of control of the Company. 6.11 ADDITIONAL MATTERS. The Company shall not: (a) enter into, amend or terminate any agreements, commitments or contracts which, individually or in the aggregate, are material to the financial condition, business, assets, properties or results of operations of the Company, or waive, release, assign or relinquish any material rights or claims thereunder, except in the ordinary course of business, consistent with past practice; (b) discharge or satisfy any lien or encumbrance or payment of any obligation or liability (absolute or contingent) other than current liabilities in the ordinary course of business; (c) cancel or agree to cancel any material debts or claims, except in each case in the ordinary course of business; (d) waive any rights of substantial value; (e) pay, discharge, satisfy or settle any litigation or other claims, liabilities or obligations (absolute, accrued, asserted, unasserted, contingent or otherwise) involving the payment by the Company of more than $50,000; (f) make any equity investments in third parties; (g) create any subsidiaries; (h) (i) incur, pay, or be subject to any material obligation to make any payment of, or in respect of, any Tax on or before the Effective Time, except in the ordinary course of business consistent with past practice, (ii) settle any material audit, make or change -30- any material Tax election or file any amended Tax Returns, or (iii) agree to extend or waive any statute of limitations on the assessment or collection of Tax; (i) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company (other than the Merger) or otherwise make any material change in the conduct of the business or operations of the Company; or (j) agree in writing or otherwise to take any of the foregoing actions or any other action which would constitute a Company Material Adverse Effect in any of the items and matters covered by the representations and warranties of the Company set forth in Article IV, or make any representation or warranty of the Company in this Agreement materially inaccurate in any respect. 6.12 CONSENT TO STOCKHOLDER AGREEMENTS AND RELEASE. (a) By the execution of this Agreement, the Company hereby consents to the entry into the Stockholder Agreements by Diversified Opportunites Group Ltd., Jacobs Entertainment, Inc., Jacobs, and Jansen (collectively the "MEMORANDUM PARTIES") and to the termination and release of all of the rights, title and interest of the Memorandum Parties under that certain Option and Proxy Agreement (the "OPTION AGREEMENT") dated September 24, 1996,and the Memorandum of Understanding (the "MEMORANDUM") dated as October 29, 1997. (b) Effective at the Closing (and contingent on the occurrence of the Closing), the Company terminates and releases any and all rights, title and interest which it may have under or pursuant to that certain Purchase Agreement dated as of September 24, 1996 ("PURCHASE AGREEMENT"), the Option Agreement, or the Memorandum, including any and all claims for breaches or violations of those agreements that may have occurred on or prior to the date of the Closing. The Company expressly agrees that, effective at the Closing, the Purchase Agreement, the Option Agreement, and the Memorandum shall be terminated and of no further force and effect. Effective at the Closing (and contingent on the occurrence of the Closing), the Company releases the Memorandum Parties from any and all obligations, charges or claims arising out of or in connection with the Purchase Agreement, the Option Agreement, or the Memorandum. The Memorandum Parties shall each be a third party beneficiary with respect to the consents, releases, and agreements contained in this Section 6.12. ARTICLE VII ADDITIONAL COVENANTS 7.1 NO SOLICITATION. (a) The Company and its affiliates will not, and the Company and its affiliates will use their reasonable efforts to ensure that their respective officers, directors, -31- employees, investment bankers, attorneys, accountants and other representatives and agents do not, directly or indirectly, initiate, solicit, encourage or participate in negotiations or discussions relating to, or provide any information to any Person (as defined below) concerning, or take any action to facilitate the making of, any offer or proposal which constitutes or is reasonably likely to lead to any Acquisition Proposal (as defined below) of the Company or any affiliate, or any inquiry with respect thereto, or agree to approve or recommend any Acquisition Proposal. The Company shall, and shall cause its affiliates, and their respective officers, directors, employees, investment bankers, attorneys, accountants and other agents to, immediately cease and cause to be terminated all existing activities, discussions and negotiations, if any, with any parties conducted heretofore with respect to any of the foregoing. Notwithstanding the foregoing, the Company may, directly or indirectly, provide access and furnish information concerning its business, properties or assets to any corporation, partnership, person or other entity or group pursuant to an appropriate confidentiality agreement, and may negotiate and participate in discussions and negotiations with such entity or group concerning an Acquisition Proposal if (x) such entity or group has submitted an unsolicited bona fide written proposal to the Board of Directors of the Company relating to an Acquisition Proposal which contemplates the acquisition of all of the stock, assets or business of the Company and (i) in which the offeror demonstrates proof of its financial capability and authority to consummate the transactions contemplated by such offer (including without limitation the payments required by Section 10.1(b) hereof); and (ii) which provides for (x) net aggregate cash proceeds to the Company or all of its stockholders in an amount greater than that provided for hereunder, at a per Share purchase price greater than the Merger Consideration (or, in the event the Merger Consideration has been increased by Parent, such greater amount), (y) the Company's financial advisers have advised the Board of Directors of the Company that such Acquisition Proposal is more favorable to the Company's stockholders, from a financial point of view, than the transactions contemplated hereby, and (z) in the opinion of the Board of Directors of the Company, after consultation with independent legal counsel to the Company, the failure to provide such information or access or to engage in such discussions or negotiations would result in a substantial risk of liability for a breach of fiduciary duties of the members of the Board of Directors. Except with Parent's consent, the Company shall not release any third party from, or waive any provisions of, any confidentiality or standstill agreement to which the Company is a party. (b) The Company shall immediately notify Parent of any such offers, proposals or Acquisition Proposals (including without limitation the terms and conditions thereof and the identity of the Person making it), and will keep Parent apprised of all developments with respect to any such Acquisition Proposal, including without limitation any modifications thereof. (c) Nothing contained in this Section 7.1 shall prohibit the Company or its Board of Directors from (i) taking and disclosing to the Company's stockholders a position with respect to a tender offer by a third party pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange Act, or (ii) making such disclosure to the Company's stockholders which, in the opinion of the Board of Directors of the Company, after -32- consultation with independent legal counsel to the Company, may be required under applicable law. (d) As used in this Agreement, "ACQUISITION PROPOSAL" shall mean any tender or exchange offer involving the Company or its securities, any proposal for a merger, consolidation or other business combination involving the Company, any proposal or offer to acquire in any manner a substantial equity interest in, or a substantial portion of the business or assets of, the Company, any proposal or offer with respect to any recapitalization or restructuring with respect to the Company or any proposal or offer with respect to any other transaction similar to any of the foregoing with respect to the Company; PROVIDED, HOWEVER, that, as used in this Agreement, the term "ACQUISITION PROPOSAL" shall not apply to (i) any transaction of the type described in this subsection (d) involving Parent, Merger Sub or their affiliates. (e) The Company shall continue to be obligated to hold the Special Meeting notwithstanding the existence of an Acquisition Proposal and shall take all further action in furtherance of the consummation of the transactions contemplated under this Agreement. 7.2 ACCESS TO INFORMATION; CONFIDENTIALITY. (a) Between the date of this Agreement and the Effective Time, upon reasonable notice the Company shall (i) give Parent, Merger Sub and their respective officers, employees, accountants, counsel, financing sources and other agents and representatives full access to all buildings, offices, and other facilities and to all contracts, internal reports, data processing files and records, Federal, state, local and foreign tax returns and records, commitments, books, records and affairs of the Company, whether located on the premises of the Company or at another location; (ii) furnish promptly to Parent a copy of each report, schedule, registration statement and other document filed or received by it during such period pursuant to the requirements of Federal securities laws or regulations; (iii) permit Parent and Merger Sub to make such inspections as they may require; (iv) cause its officers to furnish Parent and Merger Sub such financial, operating, technical and product data and other information with respect to the business and properties of the Company as Parent and Merger Sub from time to time may request, including without limitation financial statements and schedules; (v) allow Parent and Merger Sub the opportunity to interview such employees and other personnel and affiliates of the Company with the Company's prior written consent, which consent shall not be unreasonably withheld; and (vi) assist and cooperate with Parent and Merger Sub in the development of integration plans for implementation by Parent and the Surviving Corporation following the Effective Time; PROVIDED, HOWEVER, that no investigation pursuant to this Section 7.2 shall affect or be deemed to modify any representation or warranty made by the Company herein. Materials furnished to Parent pursuant to this Section 7.2 may be used by Parent for strategic and integration planning purposes relating to accomplishing the transactions contemplated hereby. -33- (b) Except as otherwise provided below, until Parent or Merger Sub acquires Shares pursuant to the Stockholder Agreements, Parent and Merger Sub shall, and shall cause their affiliates, agents and representatives to, keep secret and retain in confidence, and not use for the benefit of any such person or others (other than in connection with this Agreement and the transactions contemplated hereby), any confidential information of the Company which Parent or Merger Sub obtained from the Company pursuant to this Section 7.2. The restrictions on use and disclosure contained herein shall not apply if and to the extent any such information (i) is publicly available or becomes publicly available (through no action or fault of Parent or Merger Sub), (ii) was or is obtained by Parent or Merger Sub from a third party, PROVIDED that to the recipient's knowledge, such third party was not bound by a contractual, legal or fiduciary obligation of confidentiality to the Company or any other party with respect to such information or material, (iii) was already in the possession of Parent or Merger Sub or known to Parent or Merger Sub prior to being disclosed or provided to them by or on behalf of the Company, PROVIDED that, to the recipient's knowledge, the source of such information or material was not bound by a contractual, legal or fiduciary obligation of confidentiality to the Company or any other party with respect thereto, or (iv) is required to be disclosed in a legal proceeding or pursuant to applicable law, gaming regulations or the rules or regulations of any national securities exchange or over-the-counter market. In the event that Parent or Merger Sub is requested or required (by oral questions, interrogatories, request for information or documents in legal proceedings, subpoena, civil investigative demand or other similar process) to disclose any of the confidential information provided under this Section 7.2, such party shall provide the Company with prompt written notice of any such request or requirement so that the Company may seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Section 7.2. If, in the absence of a protective order or other remedy or the receipt of a waiver by the Company, Parent or Merger Sub is nonetheless, based on advice of its counsel, legally compelled to disclose the confidential information to any tribunal or else stand liable to contempt or suffer other censure or penalty, such party may, without liability hereunder, disclose to such tribunal only that portion of the confidential information which such counsel advises such party is legally required to be disclosed, provided that such party shall use its reasonable efforts to preserve the confidentiality of the confidential information, including without limitation by cooperating with the Company to obtain an appropriate protective order or other reliable assurance that confidential treatment will be afforded the confidential information by such tribunal. The restrictions on use and disclosure of confidential information under this Section 7.2 shall expire three years from the date hereof. 7.3 HSR ACT. The Company and Parent shall take all reasonable actions necessary to file as soon as practicable notifications under the HSR Act and to respond as promptly as practicable to any inquiries received from the Federal Trade Commission and the Antitrust Division of the Department of Justice for additional information or documentation and to respond as promptly as practicable to all inquiries and requests received from any state attorney general or other Governmental Entity in connection with antitrust matters. -34- 7.4 CONSENTS AND APPROVALS. (a) The parties hereto shall cooperate with each other and use reasonable best efforts (and, with respect to Gaming Laws, shall use reasonable best efforts to cause their respective directors, officers and (if required) stockholders to do so) to promptly prepare and file all necessary documentation, to effect all applications, notices, petitions and filings, to obtain as promptly as practicable all permits, consents, approvals and authorizations of all third parties and Governmental Entities which are necessary or advisable to consummate the transactions contemplated by this Agreement (including without limitation the Merger) ("GOVERNMENTAL APPROVALS"), and to comply (and, with respect to Gaming Laws, to cause their respective directors, officers and (if required) stockholders to so comply) with the terms and conditions of all such permits, consents, approvals and authorizations of all such Governmental Entities. Each of the parties hereto and their respective officers, directors and affiliates shall use their reasonable best efforts to file within 30 days after the date hereof, and in all events shall file within 60 days after the date hereof, all required initial applications and documents in connection with obtaining the Governmental Approvals (including without limitation under applicable Gaming Laws) and shall act reasonably and promptly thereafter in responding to additional requests in connection therewith; and each party will use its reasonable best efforts to secure such Governmental Approvals as expeditiously as practicable. Parent and the Company shall have the right to review in advance, and to the extent practicable each will consult the other on, in each case subject to applicable laws relating to the exchange of information, all the information relating to Parent or the Company, as the case may be, and any of their respective subsidiaries, directors, officers and stockholders which appear in any filing made with, or written materials submitted to, any third party or any Governmental Entity in connection with the transactions contemplated by this Agreement. Without limiting the foregoing, each of Parent and the Company (the "NOTIFYING PARTY") will notify the other promptly of the receipt of comments or requests from Governmental Entities relating to Governmental Approvals, and will supply the other party with copies of all correspondence between the Notifying Party or any of its representatives and Governmental Entities with respect to Governmental Approvals; PROVIDED, HOWEVER, that it shall not be required to supply the other party with copies of correspondence relating to the personal applications of individual applicants except for evidence of filing. (b) Parent and the Company shall promptly advise each other upon receiving any communication from any Governmental Entity whose consent or approval is required for consummation of the transactions contemplated by this Agreement which causes such party to believe that there is a reasonable likelihood that any Requisite Regulatory Approval (as defined below) will not be obtained or that the receipt of any such approval will be materially delayed. 7.5 CLOSING OF STOCKHOLDER AGREEMENTS; PARENT OBLIGATION TO EFFECT MERGER ONCE STOCKHOLDER AGREEMENTS FULLY CONSUMMATED. To the extent the Stockholder Agreements otherwise permit Parent to do so, Parent shall not waive the condition to its closing obligation in the Stockholder Agreement(s) with one Selling Stockholder that the -35- Stockholder Agreement(s) with the other Selling Stockholder shall have been consummated or consummated concurrently. In the event the transactions contemplated by the Stockholder Agreements are fully consummated, including without limitation the acquisition by Parent of the Shares owned by the Selling Stockholders and the purchase of Jansen's real estate contemplated thereunder, then all of the conditions to Parent's obligations to effect the Merger under Sections 8.1 and 8.2 shall be deemed satisfied or waived. 7.6 NOTIFICATION OF CERTAIN MATTERS. The Company will give prompt notice to Parent of (a) any notice of default received by it subsequent to the date of this Agreement and prior to the Effective Time under any material instrument or material agreement to which it is a party or by which it is bound, which default would, if not remedied, result in a Company Material Adverse Effect or which would render materially incomplete or untrue any representation or warranty made herein, (b) any suit, action or proceeding instituted or, to the knowledge of the Company, threatened against or affecting the Company subsequent to the date of this Agreement and prior to the Effective Time which, if adversely determined, would have a Company Material Adverse Effect or which would render materially incorrect any representation or warranty made herein and (c) any material breach of the Company's covenants hereunder or the occurrence of any event that is reasonably likely to cause any of its representations and warranties hereunder to become incomplete or untrue in any material respect. 7.7 ADDITIONAL ACTIONS. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations, or to remove any injunctions or other impediments or delays, to consummate and make effective the Merger and the other transactions contemplated by this Agreement, subject, however, to the appropriate vote of stockholders of the Company required so to vote as described in Section 1.5 hereof. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of either of Merger Sub or the Company, the proper officers and directors of each corporation which is a party to this Agreement shall take all such necessary action. 7.8 INTERFERENCE WITH TRANSACTIONS. The Company, prior to the Effective Date shall not (a) take any action which, in the reasonable judgment of Parent, would impede, interfere with or attempt to discourage the transactions contemplated by this Agreement or the Stockholder Agreements, (b) amend, revoke, withdraw or modify the approval of Parent's and Merger Sub's acquisition of the Company Common Stock, the Merger and the other transactions contemplated hereby so as to render the prohibitions contained in Sections 78.411 to 78.444 of the NRS applicable to the Merger or the other transactions contemplated hereby as a result of the failure to satisfy the requirements of Section 78.438 or 78.439 thereof, or (c) without limiting the generality of Section 6.4, amend, revoke, repeal, withdraw, restrict or modify the Control Share Opt-Out Bylaw for any reason whatsoever, or permit (whether by action of the Company's Board of Directors or stockholders or -36- otherwise) the Control Share Opt-Out Bylaw to be amended, revoked, repealed, withdrawn, restricted or modified for any reason whatsoever, or take any other action which might be expected to render the provisions of NRS Sections 78.378 through 78.3793 applicable to the Company or which would otherwise jeopardize the right of Parent and Merger Sub to exercise all voting and other rights with respect to Shares acquired by them. 7.9 PUBLICITY. So long as this Agreement is in effect and subject to Section 7.1 hereof, neither the Company nor any of its affiliates shall issue or cause the publication of any press release or other announcement with respect to the Merger, this Agreement or the other transactions contemplated hereby without prior consultation with Parent, except as may be required by law or by any listing agreement with a national securities exchange. 7.10 OPINION OF COMPANY COUNSEL. Prior to the Effective Time, the Company shall cause to be delivered to Parent an opinion, dated the Closing Date, of Jones Vargas, counsel for the Company, with respect to matters customarily covered in legal opinions in transactions of this type, in form and substance reasonably satisfactory to Parent and its counsel. 7.11 RESIGNATION OF DIRECTORS. Prior to the Effective Time, the Company shall deliver to Parent evidence satisfactory to Parent of the resignation of such directors of the Company as Parent shall specify, which resignations shall be effective at the Effective Time. 7.12 PARENT CONSENT TO MERGER. Parent, in its capacity as holder of all of the Company's 16.5% First Mortgage Notes Due March 31, 2005 (the "FIRST MORTGAGE NOTES") (and as holder of that certain Convertible Subordinated Note dated September 24, 1996, originally made by the Company in favor of Diversified Opportunities Group Ltd. when it acquires such Convertible Note pursuant to the Stockholder Agreement with Jacobs), hereby consents to the Merger and the other transactions contemplated hereby, all subject to the terms set forth herein. 7.13 PARENT CONSENT TO DEFERRAL OF MARCH INTEREST PAYMENT ON FIRST MORTGAGE NOTES. At the request of the Company, Parent, in its capacity as holder of all the First Mortgage Notes hereby agrees that the Company may, at its option, defer payment of all or any portion of the March 31, 1998 interest payment that will become due on the First Mortgage Notes (the "Deferred Interest"); provided, however that (i) the Deferred Interest will become due and payable on September 30, 1998 along with the regular September 30, 1998 interest payment and (ii) the Deferred Interest will accrue interest at the same rate that interest accrues on the principal amount of the First Mortgage Notes and such accrued interest on the Deferred Interest shall be due and payable on September 30, 1998. The Company may pay the Deferred Interest and any interest thereon at any time prior to September 30, 1998. -37- ARTICLE VIII CONDITIONS 8.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. The respective obligations of the parties to effect the Merger shall be subject to the satisfaction or waiver, on or prior to the Closing Date, of the following conditions: (a) REGULATORY APPROVALS. Other than the filing of the Articles of Merger in accordance with the NRS, all licenses, permits, registrations, authorizations, consents, waivers, orders or other approvals of Governmental Authorities required to be obtained, and all filings, notices or declarations required to be made by the parties and their subsidiaries, officers, directors and affiliates in order to consummate the Merger and the transactions contemplated by this Agreement, and in order to permit the Company to conduct its business in the jurisdictions regulated by the Gaming Authorities after the Effective Time in the same manner as conducted by the Company or its subsidiaries prior to the Effective Time (all such approvals and the expiration of all such waiting periods being referred to herein as the "REQUISITE REGULATORY APPROVALS") shall have been obtained or made, and no such approval shall contain any conditions, limitations or restrictions which Parent reasonably determines in good faith will have or reasonably be expected to have a Company Material Adverse Effect. (b) LEGAL ACTION. No temporary restraining order, preliminary injunction or permanent injunction or other order precluding, restraining, enjoining, preventing or prohibiting the consummation of the Merger shall have been issued by any Federal, state or foreign court or other governmental or regulatory authority and remain in effect. (c) STATUTES. No Federal, state, local or foreign statute, rule or regulation shall have been enacted which prohibits, restrains, enjoins or restricts the consummation of the Merger, would limit Surviving Corporation's conduct of its business or would make the consummation of the Merger illegal. (d) STOCKHOLDER APPROVAL. Subject to Section 1.6, this Agreement and the transactions contemplated hereby shall have been approved and adopted by the requisite affirmative vote of the holders of the Company Common Stock as described in Section 1.5, in accordance with applicable law. (e) HSR WAITING PERIOD. All waiting periods applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated. (f) PARENT TO FUND PAYING AGENT. On or prior to the Effective Time, Parent shall have deposited with the Paying Agent the funds to which holders of Company Common Stock shall become entitled pursuant to Section 2.1(c) hereof. 8.2 CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB TO EFFECT THE MERGER. The obligations of Parent and Merger Sub to effect the Merger shall be subject to -38- the fulfillment at or prior to the Effective Date of the additional following conditions, unless waived by Parent: (a) REPRESENTATIONS AND WARRANTIES ACCURATE. The representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects (i) as of the date hereof and (ii) as of the date of the Closing (provided that in the cases of clauses (i) and (ii) any such representation and warranty made as of a specific date shall be true and correct as of such specific date), and Parent and Merger Sub shall have received a certificate signed by the president and the chief financial officer of the Company to such effect. (b) NO MATERIAL BREACH. The Company shall have performed in all material respects all obligations and covenants required to be performed by it under this Agreement prior to or as of the date of the Closing, and Parent and Merger Sub shall have received a certificate signed by the president and the chief financial officer of the Company to such effect. (c) NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse change in the business, assets (tangible or intangible), results of operations, liabilities, prospects or financial condition of the Company after the date hereof through the Effective Date. (d) CONSENTS RECEIVED. Parent and the Company shall have received all third-party consents and approvals required to be obtained by the Company or Parent in connection with the transactions contemplated hereby, under any contract to which the Company or Parent (or any of their respective subsidiaries) may be a party, except for such third-party consents and approvals as to which the failure to obtain, either individually or in the aggregate, would not reasonably be expected to result in a Company Material Adverse Effect. (e) CONSENT UNDER HOLIDAY INN LICENSE AGREEMENT. Without limiting the generality of Section 8.2(d) hereof, within sixty (60) days of the date hereof Parent shall have received the written consent to the Merger and the transactions contemplated hereby (including without limitation Parent's acquisition of Shares pursuant to the Stockholder Agreements) of the licensor under that certain Holiday Inn Conversion License Agreement dated December 16, 1993, as amended, between HIFI and the Company, which consent shall be obtained without any payment required of, or penalty imposed on, Parent, Merger Sub or the Company. (f) TERMINATION OF OPTIONS AND WARRANTS. Parent shall be satisfied, in its sole discretion, that, without payment made in respect thereof, all warrants, options and other rights to purchase Company Securities either have been terminated or will terminate at the Effective Time or will constitute only the right to receive the Option/Warrant Spread, other than the Compensation Options which will continue in accordance with their terms. -39- (g) TITLE POLICY. Parent shall have obtained the unconditional commitment of Nevada Title Company to issue its ALTA form of owner's policy of title insurance with endorsements designated by Parent (the "TITLE POLICY") in favor of the Company and Parent insuring that the Company is the fee owner of the Company Owned Property in the amount of $101 million, subject to no exceptions or exclusions other than those (i) of the exceptions or exclusions shown on SCHEDULE 4.18 hereof which in the reasonable judgment of Parent do not materially adversely affect the use or value of the Owned Properties, or (ii) which are created subsequently to the date hereof with the consent of Parent, or (iii) which are reflected as indebtedness of the Company on the Draft September 30, 1997 Balance Sheet. (h) NO BREACH OF STOCKHOLDER AGREEMENTS. None of the other parties to either of the Stockholder Agreements shall have breached any representation, warranty or covenant set forth in such agreements. (i) MAXIMUM NUMBER OF DISSENTING SHARES. The number of shares of Company Common Stock as to which the holders thereof have purported to exercise dissenters' rights, if any, with respect to the Merger shall not exceed ten percent (10%) of the total number of shares of Company Common Stock outstanding as of the record date for the Special Meeting. ARTICLE IX TERMINATION 9.1 TERMINATION. Anything herein or elsewhere to the contrary notwithstanding, this Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after stockholder approval thereof: (a) BY MUTUAL CONSENT. By mutual consent of Parent and the Company. (b) BY ANY PARTY. By Parent or Merger Sub, or by the Board of Directors of the Company: (i) if the Merger shall not have been consummated on or prior to June 30, 1998; PROVIDED, HOWEVER, that the right to terminate this Agreement under this Section 9.1(b)(i) shall not be available to any party whose failure to fulfill any material obligation under this Agreement has been the cause of, or resulted in, the failure of the Merger to be consummated on or prior to such date; or (ii) if a court of competent jurisdiction or other governmental or regulatory authority shall have issued an order, decree or ruling or taken any other action (which order, decree, ruling or other action the parties hereto shall use their reasonable efforts to lift), in each case permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and non-appealable. -40- (c) BY PARENT OR MERGER SUB. By Parent or Merger Sub: (i) if neither Parent nor Merger Sub is in material breach of this Agreement and the Board of Directors of the Company shall have withdrawn, modified or changed in a manner adverse to Parent or Merger Sub its approval or recommendation of this Agreement or the Merger or shall have approved or recommended an Acquisition Proposal; or (ii) if any approval of the stockholders of the Company contemplated by this Agreement shall not have been obtained by reason of the failure to obtain the required vote at the Special Meeting or at any adjournment or postponement thereof; or (iii) if any person or group (other than Parent or any of its affiliates) acquires beneficial ownership (as such term is defined in Rule 13d-3 under the Exchange Act), or the right to acquire beneficial ownership, of 25% or more of the outstanding Company Common Stock or the voting power of the Company's equity securities, whether by purchase of outstanding shares from third parties or by exercise of currently-existing or newly-issued options or warrants; or (iv) if the Company breaches or fails in any material respect to perform or comply with any of its material covenants and agreements contained herein (including without limitation the covenants in Article VII), or breaches any of its representations or warranties contained herein, in any material respect; or (v) if the Control Share Opt-Out Bylaw is amended, revoked, repealed, withdrawn, restricted or modified in any respect; or (vi) if any of the other parties to either of the Stockholder Agreements commits any material breach of, or fails in any material respect to perform or comply with any of its material covenants and agreements contained in, such agreement, or breaches any of its representations or warranties contained therein in any material respect. (d) BY THE COMPANY. By the Company, if Parent or Merger Sub breaches or fails in any material respect to perform or comply with any of their respective material covenants and agreements contained herein, or breaches any of their respective representations or warranties contained herein, in any material respect, which breach shall not have been cured in the case of a representation or warranty, prior to the Closing or, in the case of a covenant or agreement, within ten (10) days following receipt by Parent of written notice specifying such breach from the Company. 9.2 EFFECT OF TERMINATION. In the event of termination of this Agreement as provided in Section 9.1 above, written notice thereof shall forthwith be given to the other party or parties specifying the provision hereof pursuant to which such termination is made, and this Agreement shall forthwith become null and void and there shall be no liability or obligation on the part of Parent and Merger Sub, or either of them, or the Company, or their -41- respective officers, directors or employees, except (a) for fraud or for willful material breach of this Agreement and (b) as set forth in this Section 9.2 and in Sections 7.2(b) and 10.1 hereof. ARTICLE X GENERAL PROVISIONS 10.1 FEES AND EXPENSES. (a) Except as contemplated by this Agreement, including Section 10.1(b) and (c) hereof, all costs and expenses incurred in connection with this Agreement and the consummation of the transactions contemplated hereby shall be paid by the party incurring such expenses. (b) If Parent or Merger Sub shall terminate this Agreement pursuant to Section 9.1(c)(iii) or 9.1(c)(iv) hereof, then (i) the Company shall pay or cause to be paid to Parent a fee in the amount equal to One Million Dollars ($1,000,000); PROVIDED, HOWEVER, that if Parent or Merger Sub terminate this Agreement pursuant to Section 9.1(c)(iv) by reason of a breach of the representation and warranty contained in Section 4.2(c) and there remain outstanding warrants, options (other than Compensation Options) and other rights to purchase not more than 500,000 shares of Company Common Stock which have not been terminated or otherwise constitute only the right to receive the Option/Warrant Spread, then Parent shall not be entitled to the payment described in this Section 10.1(b). (c) If Parent or Merger Sub shall terminate this Agreement: (x) pursuant to Section 9.1(c)(ii), 9.1(c)(iii) or 9.1(c)(iv) hereof and any of the following events (a "SUBSEQUENT TRANSACTION") occur prior to the date which is nine (9) months after the termination of this Agreement: any person or group (other than Parent) shall have entered into a definitive agreement or agreement in principle with the Company or any person holding at least ten percent (10%) of the Company's then outstanding voting securities with respect to an Acquisition Proposal or other business combination with the Company (including a transaction in which the then outstanding shares of the Company Common Stock would, after such business combination, represent less than a majority of the then outstanding common shares of the Company) or any person or group (other than Parent) shall have acquired beneficial ownership (as such terms is defined in Rule 13d-3 under the Exchange Act) of a majority of the voting power of the Company's equity securities, or (y) pursuant to Section 9.1(c)(i) or 9.1(c)(v) hereof, then (i) the Company shall pay or cause to be paid to Parent an amount equal to Two Million Dollars ($2,000,000) plus all costs and expenses of Parent and Merger Sub relating to this Agreement and the transactions contemplated hereby (including without limitation fees and expenses of Parent's counsel, accountants and financial advisors). In the event that Parent -42- shall have terminated this Agreement pursuant to Section 9.1(c)(iii) or 9.1(c)(iv) hereof and become entitled to receive the $1,000,000 payment described in Section 10.1(b) hereof, and a Subsequent Transaction occurs prior to the date which is nine (9) months after the termination of this Agreement, then Parent shall be entitled to the payment described in this Section 10.1(c), less any amounts received pursuant to Section 10.1(b) hereof. (d) Any payments to which Parent may become entitled pursuant to Section 10.1(b) hereof shall be payable in equal quarterly installments with the first installment being due three months following the relevant triggering event; PROVIDED, HOWEVER, that, in the event the Company issues shares of capital stock following the date hereof (whether through private placements, public offerings, the exercise of Company Securities or otherwise), the Company shall make additional payments of the fee described in Section 10.1(b) hereof equal to the net cash proceeds of such issuance to Parent within two business days after the later of such issuance or such triggering event and such payment shall be credited against the installment payments due hereunder in reverse order of maturity. Any payments to which Parent may become entitled pursuant to Section 10.1(c) hereof shall be payable by the Company within two business days after the relevant triggering event. 10.2 AMENDMENT AND MODIFICATION. Subject to applicable law, this Agreement may be amended, modified and supplemented in any and all respects, whether before or after any vote of the stockholders of the Company contemplated hereby, by written agreement of the parties hereto, by action taken by their respective Boards of Directors (which in the case of the Company shall include approvals as contemplated in Section 4.3 hereof), at any time prior to the Closing Date with respect to any of the terms contained herein; PROVIDED, HOWEVER, that after the approval of this Agreement by the stockholders of the Company, no such amendment, modification or supplement shall reduce or change the Merger Consideration. 10.3 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the representations and warranties in this Agreement shall survive the Effective Time. 10.4 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given upon personal delivery, facsimile transmission (which is confirmed), telex or delivery by an overnight express courier service (delivery, postage or freight charges prepaid), or on the fourth day following deposit in the United States mail (if sent by registered or certified mail, return receipt requested, delivery, postage or freight charges prepaid), addressed to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): -43- (a) if to Parent or Merger Sub, to: Mirage Resorts, Incorporated 3400 Las Vegas Boulevard South Las Vegas, Nevada 89109 Telecopy No.: (702) 792-7268 Attn: Daniel Lee and Bruce Levin, Esq. with a copy to: Irell & Manella LLP 1800 Avenue of the Stars, Suite 900 Los Angeles, California 90067 Telecopy No.: (310) 203-7199 Attention: C. Kevin McGeehan, Esq. and Bruce A. Leslie, Esq. Bernhard & Leslie, Chtd. 3980 Howard Hughes Parkway - Suite 550 Las Vegas, Nevada 89109 Telecopy No.: (702) 650-2995 (b) if to the Company, to: Boardwalk Casino, Inc. 3750 Las Vegas Boulevard South Las Vegas, Nevada 89109 Attention: Forrest J. Woodward Telecopy No: (702) 739-7918 with a copy to: Jones Vargas 3773 Howard Hughes Parkway, 3rd Floor South Las Vegas, Nevada 89109 Attention: Gary Goodheart, Esq. and Douglas G. Crosby, Esq. Telecopy No.: (702) 737-7705 10.5 DEFINITIONS; INTERPRETATION. As used in this Agreement, the term "AFFILIATE(S)" shall have the meaning set forth in Rule 12b-2 under the Exchange Act. When a reference is made in this Agreement to an Article, Section, Exhibit or Schedule, such reference shall be to an Article, Section, Exhibit or Schedule to this Agreement unless -44- otherwise indicated. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 10.6 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof (including without limitation Section 7.1(e) hereof) in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. 10.7 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. 10.8 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement (including the documents and the instruments referred to herein and therein) (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. 10.9 NO CONTROL OF THE COMPANY BY PARENT UNDER GAMING LAWS. Notwithstanding any provision contained in this Agreement, Parent shall not have the power, directly or indirectly, to direct or cause the direction of the management and policies of the Company until Parent receives all Requisite Regulatory Approvals under applicable Gaming Laws to acquire control of the Company pursuant to the terms of this Agreement. To the extent that any provision contained in this Agreement would purport to give Parent such power prior to the receipt of all such Requisite Regulatory Approvals, such provision shall be deemed amended to the extent necessary, but only to the extent necessary, so as not to give Parent such power. 10.10 SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void, unenforceable or against its regulatory policy, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 10.11 GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Nevada (without giving effect to the principles of conflicts of law thereof). -45- 10.12 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, except that Merger Sub may assign, in its sole discretion, any or all of its rights, interests and obligations hereunder to Parent or to any direct or indirect subsidiary of Parent. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by, the parties and their respective successors and assigns. 10.13 NO PRIOR AGREEMENTS. Each of the parties hereto acknowledges and agrees that, prior to the execution of this Agreement on the date hereof, there was no agreement, arrangement or understanding among the parties with respect to the acquisition, disposition, holding or voting of Company Common Stock. [SIGNATURE PAGE FOLLOWS] -46- IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. COMPANY: PARENT: Boardwalk Casino, Inc. Mirage Resorts, Incorporated /s/ Forrest J. Woodward, II /s/ Daniel Lee - ------------------------------ ----------------------------- Name: Forrest J. Woodward, II Name: Daniel Lee Title: President Title: Chief Financial Officer MERGER SUB: Mirage Acquisition Sub, Inc. /s/ Daniel Lee ---------------------------- Name: Daniel Lee Title: Chief Financial Officer -47- TABLE OF CONTENTS Page ---- ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . 2 1.1 The Merger . . . . . . . . . . . . . . . . . . . . 2 1.2 Effective Time . . . . . . . . . . . . . . . . . . 2 1.3 Closing. . . . . . . . . . . . . . . . . . . . . . 3 1.4 Directors and Officers of the Surviving Corporation. . . . . . . . . . . . . . . . . . . . 3 1.5 Stockholders' Meeting. . . . . . . . . . . . . . . 3 ARTICLE II CONVERSION OF SHARES. . . . . . . . . . . . . . . . 4 2.1 Conversion of Capital Stock. . . . . . . . . . . . 4 2.2 Exchange of Certificates . . . . . . . . . . . . . 5 ARTICLE III [Intentionally Omitted]. . . . . . . . . . . . . . 6 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . 6 4.1 Organization and Qualification . . . . . . . . . . 6 4.2 Capitalization of the Company. . . . . . . . . . . 7 4.3 Power and Authority. . . . . . . . . . . . . . . . 8 4.4 Board Recommendations; Anti-takeover Provisions. . 9 4.5 Compliance . . . . . . . . . . . . . . . . . . . . 10 4.6 Consents and Approvals; No Violation . . . . . . . 11 4.7 Assignment of MOU. . . . . . . . . . . . . . . . . 12 -i- Page ---- 4.8 SEC Reports; Financial Statements, Absence of Undisclosed Liabilities. . . . . . . . . . . . . . 13 4.9 Absence of Certain Changes . . . . . . . . . . . . 14 4.10 Company Proxy Statement. . . . . . . . . . . . . . 15 4.11 Absence of Litigation. . . . . . . . . . . . . . . 15 4.12 Taxes. . . . . . . . . . . . . . . . . . . . . . . 15 4.13 Employee Benefits. . . . . . . . . . . . . . . . . 16 4.14 Intellectual Property. . . . . . . . . . . . . . . 19 4.15 Material Contracts . . . . . . . . . . . . . . . . 20 4.16 Insurance. . . . . . . . . . . . . . . . . . . . . 20 4.17 Labor Matters. . . . . . . . . . . . . . . . . . . 21 4.18 Real Property. . . . . . . . . . . . . . . . . . . 21 4.19 Environmental Matters. . . . . . . . . . . . . . . 24 4.20 Representations Complete . . . . . . . . . . . . . 26 4.21 Disclosure Schedule. . . . . . . . . . . . . . . . 26 ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB . . . . . . . . . . . . . . . . . . 26 5.1 Organization . . . . . . . . . . . . . . . . . . . 26 5.2 Authority Relative to this Agreement . . . . . . . 27 5.3 Consent and Approvals; No Violation. . . . . . . . 27 5.4 Information Supplied . . . . . . . . . . . . . . . 28 5.5 Merger Sub's Operations. . . . . . . . . . . . . . 28 5.6 Capitalization . . . . . . . . . . . . . . . . . . 28 -ii- Page ---- 5.7 Financing. . . . . . . . . . . . . . . . . . . . . 28 ARTICLE VI CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO EFFECTIVE DATE . . . . . . . . . . . . . . . . . 28 6.1 Ordinary Course. . . . . . . . . . . . . . . . . . 28 6.2 Dividends; Changes in Stock. . . . . . . . . . . . 29 6.3 Issuance, Repurchase or Repricing of Securities. . 29 6.4 Governing Documents; Board of Directors. . . . . . 29 6.5 No Dispositions. . . . . . . . . . . . . . . . . . 29 6.6 Indebtedness . . . . . . . . . . . . . . . . . . . 29 6.7 Employees and Affiliates . . . . . . . . . . . . . 29 6.8 Benefit Plans. . . . . . . . . . . . . . . . . . . 30 6.9 Taxes. . . . . . . . . . . . . . . . . . . . . . . 30 6.10 Consultation and Cooperation . . . . . . . . . . . 30 6.11 Additional Matters . . . . . . . . . . . . . . . . 31 6.12 Consent to Stockholder Agreements and Release. . . 31 ARTICLE VII ADDITIONAL COVENANTS . . . . . . . . . . . . . . . 32 7.1 No Solicitation. . . . . . . . . . . . . . . . . . 32 7.2 Access to Information; Confidentiality . . . . . . 34 7.3 HSR Act. . . . . . . . . . . . . . . . . . . . . . 35 7.4 Consents and Approvals . . . . . . . . . . . . . . 35 7.5 Closing of Stockholder Agreements; Parent Obligation to Effect Merger Once Stockholder Agreements Fully Consummated . . . . . 36 -iii- Page ---- 7.6 Notification of Certain Matters. . . . . . . . . . 36 7.7 Additional Actions . . . . . . . . . . . . . . . . 37 7.8 Interference with Transactions . . . . . . . . . . 37 7.9 Publicity. . . . . . . . . . . . . . . . . . . . . 37 7.10 Opinion of Company Counsel . . . . . . . . . . . . 38 7.11 Resignation of Directors . . . . . . . . . . . . . 38 7.12 Parent Consent to Merger . . . . . . . . . . . . . 38 7.13 Parent Consent to Deferral of March Interest Payment on First Mortgage Notes . . . . . 38 ARTICLE VIII CONDITIONS. . . . . . . . . . . . . . . . . . . . 38 8.1 Conditions to each Party's Obligations to Effect the Merger. . . . . . . . . . . . . . . . . 38 8.2 Conditions to Obligations of Parent and Merger Sub to Effect the Merger . . . . . . . . . . . . . 39 ARTICLE IX TERMINATION . . . . . . . . . . . . . . . . . . . . 41 9.1 Termination. . . . . . . . . . . . . . . . . . . . 41 9.2 Effect of Termination. . . . . . . . . . . . . . . 42 ARTICLE X GENERAL PROVISIONS . . . . . . . . . . . . . . . . . 43 10.1 Fees and Expenses. . . . . . . . . . . . . . . . . 43 10.2 Amendment and Modification . . . . . . . . . . . . 44 10.3 Nonsurvival of Representations and Warranties. . . 44 10.4 Notices. . . . . . . . . . . . . . . . . . . . . . 44 10.5 Definitions; Interpretation. . . . . . . . . . . . 45 -iv- Page ---- 10.6 Specific Performance . . . . . . . . . . . . . . . 46 10.7 Counterparts . . . . . . . . . . . . . . . . . . . 46 10.8 Entire Agreement; No Third Party Beneficiaries . . 46 10.9 No Control of the Company by Parent Under Gaming Laws. . . . . . . . . . . . . . . . . . . . 46 10.10 Severability . . . . . . . . . . . . . . . . . . . 46 10.11 Governing Law. . . . . . . . . . . . . . . . . . . 46 10.12 Assignment . . . . . . . . . . . . . . . . . . . . 46 10.13 No Prior Agreements . . . . . . . . . . . . . . 47 -v- EX-23.1 4 EXHIBIT 23.1 CONSENT OF ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the previously filed registration statements of Boardwalk Casino, Inc. on Forms S-8 (file No.'s 333-05019 and 333-05021) of our report dated November 24, 1997, except for Note 2 as to which the date is January 5, 1998, on our audits of the financial statements of Boardwalk Casino, Inc. as of and for the years ended September 30, 1997 and 1996, included in the Company's Annual Report on Form 10-KSB for the fiscal year ended September 30, 1997. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Las Vegas, Nevada January 5, 1998 EX-27.1 5 EXHIBIT 27.1 FDS
5 YEAR SEP-30-1997 SEP-30-1997 2,236,018 0 1,266,446 (8,276) 130,436 4,371,589 66,190,849 (8,885,392) 63,368,161 53,274,936 1,833,477 0 0 7,179 8,252,569 63,368,161 5,248,147 41,700,045 2,938,962 37,720,376 0 0 7,546,878 (3,485,367) 0 (3,485,367) 0 0 0 (3,485,367) (.49) (.49) Net of interest capitalized of $507,286
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