** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

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** **

**FORM10-K**

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| **(Mark One)**                                                                                         |
|--------------------------------------------------------------------------------------------------------|
| **ý**  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE  ACT OF 1934  |
|                                                                                                   |
| **For the fiscal year ended December 31, 2003**                                                        |
|                                                                                                   |
| **OR**                                                                                                 |
|                                                                                                   |
| **o**   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934 |

 

| **For the transition period  from              to              ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                          |
| **Commission File Number 333-88679**                                                                                                                                                                          |
|                                                                                                                                                                                                          |
| **Hollywood  Casino Shreveport  Shreveport Capital Corporation**                                                                                                                                              |
| **(Exact  name of registrant as specified in its charter)**                                                                                                                                                   |
|                                                                                                                                                                                                          |
|                                                                                                                                                                                                          | **Louisiana****Louisiana** |   | **72-1225563  75-2830167** |   |
|                                                                                                                                                                                                          |  (State or other jurisdiction  of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |   |
|                                                                                                                                                                                                          |   |   |   |   |
|                                                                                                                                                                                                          | **5601 Bridge St., Suite 300****Fort Worth, Texas** |   |   |   |
|                                                                                                                                                                                                          | **76112-2355** |   | **76112** |   |
|                                                                                                                                                                                                          | (Address of principal executive offices) |   | (Zip Code) |   |
|                                                                                                                                                                                                          |   |   |   |   |
|                                                                                                                                                                                                          | Registrant’s telephone number, including area code: ** (817)  492-7065** |   |
|                                                                                                                                                                                                          |   |   |   |   |
|                                                                                                                                                                                                          | Securities registered pursuant to Section 12(b) of the Act: |   |
|                                                                                                                                                                                                          |   |   |   |   |
|                                                                                                                                                                                                          | **$150,000,000 of 13% First Mortgage Notes  with Contingent Interest due August 1, 2006** |   |
|                                                                                                                                                                                                          | **$39,000,000 of 13% Senior Secured Notes  with Contingent Interest due August 1, 2006** |   |
|                                                                                                                                                                                                          |   |   |   |   |
|                                                                                                                                                                                                          | Securities  registered pursuant to Section 12(g) of the Act: |   |
|                                                                                                                                                                                                          | **None** |   |
|                                                                                                                                                                                                          |   |   |
|                                                                                                                                                                                                          | (Title  of Class) |   |
|                                                                                                                                                                                                               |  |  |  |  |

 

Indicate bycheck mark whether the registrant (1) has filed all reports to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days. Yes   ý.   No   o.

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  ý

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Act). Yes  No ý

 

As of March 1,2004, HCS I, Inc. holds an effective 99% partnership interest and HCS II, Inc.holds an effective 1% partnership interest in Hollywood Casino Shreveport. Asof March 1, 2004, 1,000 shares of common stock of Shreveport CapitalCorporation, $1.00 par value, are outstanding, all of which are owned byHollywood Casino Shreveport.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions ofthe following documents are incorporated by reference into the indicated partshereof:  None.

 

 

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**TABLEOF CONTENTS**

** **
|      | **PART I**                                                                                        |   |
|-----------|---------------------------------------------------------------------------------------------------|--------|
|      |                                                                                              |   |
| ITEM  1.  | BUSINESS                                                                                          |   |
| ITEM  2.  | PROPERTY                                                                                          |   |
| ITEM  3.  | LEGAL  PROCEEDINGS                                                                                |   |
| ITEM  4.  | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                              |   |
|      |                                                                                              |   |
|      | **PART II**                                                                                       |   |
|      |                                                                                              |   |
| ITEM  5.  | MARKET  FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                   |   |
| ITEM  6.  | SELECTED  CONSOLIDATED FINANCIAL DATA                                                             |   |
| ITEM  7.  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS       |   |
| ITEM  7A. | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                       |   |
| ITEM  8.  | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                      |   |
| ITEM  9.  | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE             |   |
| ITEM  9A  | CONTROLS  & PROCEDURES                                                                        |   |
|      |                                                                                              |   |
|      | **PART III**                                                                                      |   |
|      |                                                                                              |   |
| ITEM  10. | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                               |   |
| ITEM 11.  | EXECUTIVE COMPENSATION                                                                            |   |
| ITEM  12. | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED  STOCKHOLDERS MATTERS |   |
| ITEM  13. | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                                   |   |
| ITEM  14. | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                           |   |
|      |                                                                                              |   |
|      | **PART IV**                                                                                       |   |
|      |                                                                                              |   |
| ITEM  15. | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                                 |   |

 

This documentincludes “forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct, as amended. These statements are included throughout the document,including the section entitled “Risk Factors,” and relate to our businessstrategy, our prospects and our financial position. These statements can beidentified by the use of forward-looking terminology such as “believes,”“estimates,” “expects,” “intends,” “may,” “will,” “should” or “anticipates” orthe negative or other variation of these or similar words, or by discussions ofstrategy or risks and uncertainties. Specifically, forward-looking statements mayinclude, among others, statements concerning:

 

•      our expectations of futureresults of operations or financial condition;

 

•      our expectations concerningthe potential sale or disposition of the property;

 

•      the timing, cost andexpected impact on our market share and results of operations of our plannedcapital expenditures;

 

•      the outcome and financialimpact of the litigation in which we are involved;

 

•      the effect of legislative,regulatory, executive or judicial decisions at the federal, state or locallevel with regard to our business and the impact of any such decisions;

 

•      the expected effect ofregulatory changes that we are pursuing or monitoring; and

 

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•      our expectations regardingthe availability of capital resources.

 

Although webelieve that the expectations reflected in such forward-looking statements arereasonable, they are inherently subject to risks, uncertainties and assumptionsabout us, and accordingly, our forward-looking statements are qualified intheir entirety by reference to the factors described. Important factors thatcould cause actual results to differ materially from the forward-lookingstatements include, without limitation, risks related to the following:

 

•      the outcome and financialimpact of the events of default under our indentures governing the 13% seniorsecured notes due 2006 and 13% first mortgage notes due 2006;

 

•      the ramifications of apotential sale or other disposition and the possibility that such a sale or dispositionmay be effected through a bankruptcy proceeding;

 

•      successful completion ofcapital projects at our facility;

 

•      the activities of ourcompetitors;

 

•      the passage of legislationthat would expand, restrict, further tax or prevent gaming operations;

 

•      our ability to maintainregulatory approvals for our business;

 

•      our dependence on keypersonnel;

 

•      the availability and cost offinancing;

 

•      the impact of economicconditions; and

 

•      the impact of terrorism orother international hostilities.

 

All subsequentwritten and oral forward-looking statements attributable to us or personsacting on our behalf are expressly qualified in their entirety by thecautionary statements included in this document. We undertake no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise, except as required by law. Inlight of these risks, uncertainties and assumptions, the forward-looking eventsdiscussed in this document may not occur.

 

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**PART I**

# ** **

## **ITEM 1.**  BUSINESS

 

**Overview**

 

HollywoodCasino Shreveport is located in Shreveport, Louisiana, which is 190 miles eastof Dallas, Texas.  Our principal targetmarkets are the Dallas-Ft. Worth Metroplex and communities in East Texas.

 

The HollywoodCasino Shreveport resort consists of a 403-room, all-suite, art deco-stylehotel, and a three-level riverboat dockside casino. The casino containsapproximately 59,000 square feet of space with approximately 1,423 slotmachines and 71 table games.

 

Thecenterpiece of the resort is a 170,000 square foot land-based pavilion housingnumerous restaurants and entertainment amenities.  An 85-foot wide seamless entrance connects the casino to theland-based pavilion on all three levels resulting in the feel of a land-basedcasino. Amenities include the Fairbanks® gourmet steakhouse, the Hollywood EpicBuffet®, the Hollywood Diner, the Hollywood Director’s Club and the HollywoodCelebrity Lounge, a spa and the Hollywood Casino Studio Store®, which featuresthemed and logo merchandise.  HollywoodCasino Shreveport also features the Hollywood Casino Corporation’s uniqueHollywood theme throughout its gaming, dining and entertainment facilities thathas been successfully applied at its other properties.

 

HollywoodCasino Shreveport is owned by the Hollywood Casino Shreveport generalpartnership which, through HCS I, Inc. and HCS II, Inc., is in turnowned by HWCC-Louisiana, Inc., a Louisiana corporation which is wholly-owned byHollywood Casino Corporation.  The HollywoodCasino Shreveport general partnership operates Hollywood CasinoShreveport under a management agreement with HWCC-Shreveport, Inc., a wholly-owned subsidiary of Hollywood CasinoCorporation.  The managementagreement provides that the HollywoodCasino Shreveport general partnership pays a management fee of 2% of netrevenues plus an increasing percentage (5-10%) of Hollywood Casino Shreveport’sannual earnings before interest, taxes, depreciation and amortization above$25.0 million with payment subject to certain restrictions provided in theindentures and related documents governing the Shreveport Notes.  No management fees have been paid since theopening of the facility.

 

The HollywoodCasino Shreveport general partnership and Shreveport Capital Corporation areco-issuers of $150 million aggregate principal amount of 13% firstmortgage notes due 2006, or the First Mortgage Notes, and $39 millionaggregate principal amount of 13% senior secured notes due 2006, or the SeniorSecured Notes, which we refer collectively to in this document as theShreveport Notes.  Shreveport CapitalCorporation is a wholly owned subsidiary of Hollywood Casino Shreveport formedsolely for the purpose of being a co-issuer of the Shreveport Notes.  The Shreveport Notes are secured bysubstantially all of the assets of Hollywood Casino Shreveport and the FirstMortgage Notes are further secured by the guarantee of HWCC-Louisiana, Inc., HCS I,Inc., and HCS II, Inc., the pledge by HCS I, Inc. and HCS II,Inc. of their partnership interests in the Hollywood Casino Shreveport generalpartnership and the pledge by HWCC-Louisiana, Inc. of its stock in HCS I,Inc. and HCS II, Inc.

 

**Acquisition of Hollywood Casino Shreveport**

 

Effective withthe close of business on February 28, 2003, we were indirectly acquired byPenn National Gaming, Inc., or Penn National, as part of its acquisition ofHollywood Casino Corporation and its subsidiaries.  As a result of the acquisition, we were required to adjust ourassets and liabilities to reflect fair values as of the date ofacquisition.  The purchase priceadjustments reflected in our financial statements include the fair values ofproperty and equipment based on independent appraisals obtained by PennNational and a bond valuation allowance that reduces the value of theShreveport Notes to their estimated fair value. No goodwill was recorded inconnection with the acquisition.

 

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**Shreveport Notes**

 

The indenturesgoverning the Shreveport Notes require the issuers to make an offer to purchasethe Shreveport Notes at 101% of the principal amount thereof within ten days ofthe occurrence of a “Change of Control” as defined in the indentures. A “Changeof Control” was deemed to have occurred under the indentures on March 3, 2003as a result of the consummation of the merger of a wholly-owned subsidiary ofPenn National with and into Hollywood Casino Corporation. We determined that wedid not have the liquidity to repurchase the Shreveport Notes at 101% of theirprincipal amount and, accordingly, could not make an offer to purchase theShreveport Notes as required under the indentures. A valuation allowance in theamount of $70.3 million was established to reduce the carrying amount tomanagement’s estimate of the fair value of the Shreveport Notes, which wasbased on the fair value of the underlying collateral.

 

On March 14,2003, we were notified by an ad hoc committee of holders of the ShreveportNotes that we had 60 days from receipt of the notice to cure the failure tooffer to purchase the Shreveport Notes or an event of default would occur underthe indentures.  Neither the HollywoodCasino Shreveport general partnership nor Shreveport Capital Corporation made aChange of Control offer to purchase the Shreveport Notes within the 60 daysand, accordingly, the ad hoc committee notified us in May 2003 that a defaulthad occurred under the indentures.  Inaddition, we did not make the August 1, 2003 and February 1, 2004 interestpayments of approximately $12.3 million each, which were due on theShreveport Notes.  During theintervening period, we entered into negotiations with an ad hoc committee ofholders of the Shreveport Notes regarding the possible restructure of theoutstanding indebtedness.  In November2003, we retained Libra Securities, LLC as our exclusive financial advisor inconnection with a possible sale or debt restructuring transaction. The holdersof the Shreveport Notes might pursue all rights and remedies that they may haveunder the indentures as a result of the event of default.  Any such action on the part of the noteholders may prompt us to seek the protection of the bankruptcy laws or other similarremedies.

 

**Recent Developments**

 

On February 3,2004, HCS I, Inc., our managing general partner, announced that its Board ofDirectors had authorized the initiation of a process that it hopes will resultin the sale or other disposition of Hollywood Casino Shreveport.  The Board further authorized our financialadvisor, Libra Securities LLC, to begin contacting potential acquirers.  In addition, the Board authorized thecreation of an independent committee of the Board, currently consisting of thedirector not employed directly by Penn National, to oversee this process.  The Board created an independent committeein the event that Penn National elects to participate as a bidder in theprocess.  The Board took action afterconsultation with the ad hoc committee of holders of the Shreveport Notes.  Although no formal agreement has beenreached with the ad hoc committee regarding the sale process, the independentcommittee anticipates that it will consult with the ad hoc committee throughoutthe process.  There can be no assurancethat the process will result in the sale or other disposition of the riverboatcasino/hotel complex or that, if it does, the sale proceeds will be adequate topay the Shreveport Notes in full.  Wecurrently anticipate that any transaction will be effected through a bankruptcyproceeding.  If our efforts to achieve asale or other restructuring transaction are unsuccessful, the holders of theShreveport Notes might pursue all rights and remedies they may have under theindentures.  Any such action on the partof the note holders may prompt us to seek the protection of the bankruptcy lawsor other similar remedies.

 

**Liquidity**

 

Cash flow fromoperations for 2003 was not sufficient to fund interest accrued on theShreveport Notes, and we did not make the August 1, 2003 and February 1,2004 payments of approximately $12.3 million each which were due on suchnotes.  As previously described, afterconsultation with the ad hoc committee of holders of the Shreveport Notes, wehave commenced a process to solicit bids from potential acquirers of HollywoodCasino Shreveport.  The uncertaintiesregarding the ultimate success of the sales process, our existing defaults onthe Shreveport Notes and our inability to cure such defaults other than througha successful sale or other restructuring transaction raises substantial doubtabout our ability to continue as a going concern.

 

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**Trademarks**

 

We haveentered into a trademark license agreement with Hollywood Casino Corporation,pursuant to which Hollywood Casino Corporation has granted us the right to usethe service mark “Hollywood Casino” which is registered with the U.S. Patentand Trademark Office. Pursuant to the license agreement, we may also use othertrademarks owned or applied for by Hollywood Casino Corporation.  The use of the Hollywood Casino trademark isof substantial value to us.  Upontermination of the management services agreement between a subsidiary ofHollywood Casino Corporation and us for the management of Hollywood CasinoShreveport, the trademark license agreement will terminate and we shall only beentitled to the use of the Hollywood Casino trademarks for six months followingsuch termination.

 

**Competition**

 

The gamingindustry is highly fragmented and characterized by a high degree of competitionamong a large number of participants, many of which have financial and otherresources that are greater than our resources. Competitive gaming activitiesinclude casinos, video lottery terminals and other forms of legalized gaming inthe U.S. and other jurisdictions.

 

Legalizedgaming is currently permitted in various forms throughout the U.S. and inseveral Canadian provinces and on various lands taken into trust for thebenefit of certain Native Americans in the U.S. and Canada.  Other jurisdictions may legalize gaming inthe near future.  In addition,established gaming jurisdictions could award additional gaming licenses orpermit the expansion of existing gaming operations.  New or expanded operations by other persons will increasecompetition for our gaming operations and could have a material adverse impacton us.

 

TheShreveport/Bossier City gaming market is characterized by intense competitionand the market has not grown since we opened. We compete directly with four casinos, all of which have operated in theShreveport/Bossier City market for several years and have established customerbases. In May 2003, an existing race track, which had been acquired by one ofthe existing casinos in the market, opened a temporary gaming facility withapproximately 900 slot machines.  Thatrace track currently has a new permanent facility under construction which willaccommodate 1,400 slot machines and is expected to open during the second quarterof 2004. Casino gaming is currently prohibited in several jurisdictions fromwhich the Shreveport/Bossier City market draws customers, primarily Texas.  Although casino gaming is currently notpermitted in Texas, the Texas legislature has from time to time consideredproposals to authorize casino gaming in the past.  In July 2003, the Chickasaw Nation announced the opening ofWinStar Casinos, a Las Vegas-style, 110,000-square-foot gaming facility locatedin Oklahoma approximately 60 miles north of the Dallas/Fort Worth area.  Although gaming in Oklahoma is limited bylaw to Class II-type games, which games have previously been technologicallyincapable of offering a similar entertainment experience to our Class III-typegames, recent innovations have allowed the Class II-type product to compete muchmore effectively than in the past. Since we draw a significant amount of our customers from the Dallas/FortWorth area but are located approximately 190 miles from that area, we believewe will face increased competition from the WinStar Casinos and similar typesof facilities.

 

**Regulations**

 

*General*

 

We are subjectto federal, state, and local regulations, related to our current casinooperations. The following description of the regulatory environment in which weoperate is only a summary and not a complete recitation of all applicableregulatory laws. Moreover, our current and proposed operations could besubjected at any time to additional or more restrictive regulations, or bannedentirely.

 

*Louisiana Regulation*

 

We and ourLouisiana affiliates that are involved in the ownership and operation of theHollywood Casino Shreveport, referred to as the “Louisiana Licensees,” aresubject to regulation by the State of Louisiana.

 

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In July 1991,the Louisiana legislature adopted legislation permitting certain types ofgaming activity on certain rivers and waterways in Louisiana.  Since May 1, 1999, the Louisiana GamingControl Board, or the Louisiana Board, has regulated such gaming activities.

 

The LouisianaRiverboat Economic Development and Gaming Control Act authorized the issuanceof up to fifteen licenses to conduct gaming activities on a riverboat of newconstruction in accordance with applicable law.  However, no more than six licenses may be granted to riverboatsoperating from any one parish.  Of thefifteen available licenses, fourteen are currently in operation.  The final license has been awarded to asubsidiary of Pinnacle Entertainment for Lake Charles, Louisiana.

 

Riverboatgaming licenses in Louisiana are issued for an initial five-year term with fiveyear renewals thereafter. In issuing or renewing a license, the Louisiana Boardmust find that the applicant is a person of good character, honesty andintegrity and that the applicant is a person whose prior activities, criminalrecord, if any, reputation, habits and associations do not pose a threat to thepublic interest of the State of Louisiana or to the effective regulation andcontrol of gaming, or create or enhance the dangers of unsuitable, unfair orillegal practices, methods and activities in the conduct of gaming or thecarrying on of business and financial arrangements in connectiontherewith.  The Louisiana Board willgrant or renew a license if it finds that: (i) the applicant can demonstrate the capability, either throughtraining, education, business experience, or a combination of the above, tooperate a gaming casino; (ii) the proposed financing of the riverboat and thegaming operation is adequate for the nature of the proposed operation and froma source suitable and acceptable to the Louisiana Board; (iii) the applicantdemonstrates a proven ability to operate a vessel of comparable size, capacityand complexity to a riverboat so as to ensure the safety of its passengers,with relevant employees being appropriately United States Coast Guardcertified; (iv) the applicant submits a detailed plan of design of theriverboat in its application for a license; (v) the applicant designates thedocking facilities to be used by the riverboat; (vi) the applicant showsadequate financial ability to construct and maintain a riverboat; and (vii) theapplicant has a good faith plan to recruit, train and upgrade minorities in allemployment classifications.

 

On September21, 1999, the Louisiana Board renewed the license of Hollywood CasinoShreveport through October 14, 2004, subject to several conditions. Theconditions imposed by the Louisiana Board have either already been compliedwith or are voluntary and standard compliance, procurement, and employmentconditions routinely imposed on licensees in the state of Louisiana.

 

Otherregulations imposed by the Louisiana Act or rules adopted pursuant theretoinclude, but are not limited to, the following:  (i) we must periodically submit financial and operatingreports to the Louisiana Board for ourselves and our subsidiaries;(ii) owners holding greater than a 5% interest or who are officers ordirectors of us or subsidiaries related to the Louisiana Licensees must befound suitable by the Louisiana Board; (iii) any individual who is foundto have a material relationship to, or involvement with the Louisiana Licenseesmay be required to be investigated for suitability; (iv) if a director,officer, or key employee were found to be unsuitable, we and our subsidiarieswould have to sever all relationships with that person; (v) the transferof a license or permit or an interest in a license or permit is prohibitedwithout prior approval; (vi) the Louisiana Licensees must notify theLouisiana Board of any withdrawals of capital, loans, advances, ordistributions in excess of 5% of retained earnings upon completion of suchtransaction; and (vii) each of the Louisiana Licensees must give priornotification to the Louisiana Board if it applies or receives, accepts ormodifies the terms of any loan or other financing transaction or a parent ofthe Louisiana licensees receives, accepts or modifies the terms of a loan orother financing transaction on behalf of or for the benefit of any of theLouisiana Licensees. In some cases, the Louisiana Board will be required toinvestigate the reported transaction and to either approve or disapprove thetransaction.

 

The LouisianaAct or rules adopted pursuant thereto contain certain restrictions andconditions relating to the operation of riverboat gaming, including thefollowing:  (i) agents of the LouisianaBoard are permitted on board at any time during gaming operations; (ii) gamingdevices, equipment and supplies may only be purchased or leased from permittedsuppliers; (iii) gaming may only take place in the designated gaming area whilethe riverboat is upon a designated river or waterway; (iv) gaming equipment maynot be possessed, maintained or exhibited by any person on a riverboat exceptin the specifically designated gaming area, or a secure area used forinspection, repair or storage of such equipment; (v) wagers may be receivedonly from a person present on a licensed riverboat; (vi) persons under 21 arenot permitted on gaming vessels; (vii) except for slot machine play, wagers maybe made only with tokens, chips or electronic cards purchased from the licenseeaboard a riverboat; (viii) licensees may only use

 

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docking facilities for which they arelicensed and may only board and discharge passengers at the riverboat’slicensed berth; (ix) licensees must have adequate protection and indemnityinsurance; (x) licensees must have all necessary federal and state licenses,certificates and other regulatory approvals prior to operating a riverboat; and(xi) gaming may only be conducted in accordance with the terms of the license,the Louisiana Act and the rules and regulations adopted by the Louisiana Board.

 

Fees forconducting gaming activities on a riverboat pursuant to the Louisiana Actinclude (i) $50,000 per riverboat for the first year of operation and $100,000per year per riverboat thereafter plus (ii) a percentage of net gaming proceeds(gross revenue). In March 2001, Louisiana passed Act 3 of the 1st ExtraordinaryLegislative Session, which allows riverboat gaming licensees to operatedockside. In consideration of this change, the tax on our gaming revenues wasincreased one percent per annum beginning in April 2001 and continuing untilApril 2003 to a total of 21.5%.

 

The LouisianaAct also authorizes the City of Shreveport to assess a boarding fee, up to$3.00.  In lieu of the boarding fee, wehave negotiated a payment in an amount equal to 3.225% of the net gamingproceeds (gross revenues) of the Hollywood Casino Shreveport riverboat to bepaid to the City of Shreveport and .5375% of the net gaming proceeds (grossrevenues) of the Hollywood Casino Shreveport riverboat to be paid to theBossier Parish School Board.  We are currentlyinvolved in litigation regarding these payments.  See Item 3, Legal Proceedings.

 

Proposals toamend or supplement the Louisiana Act are frequently introduced in theLouisiana State legislature. In addition, the state legislature from time totime considers proposals to repeal the Louisiana Act, which would effectivelyprohibit riverboat gaming in the State of Louisiana. Although we do not believethat a prohibition of riverboat gaming in Louisiana is likely, no assurance canbe given that changes in the Louisiana gaming law will not occur or that suchchanges will not have a material adverse effect on the business of theLouisiana Licensees.

 

*Taxation*

 

Gamingcompanies are typically subject to significant taxes and fees in addition tonormal federal, state and local income taxes, and such taxes and fees aresubject to increase at any time. We pay substantial taxes and fees with respectto our operations. From time to time, federal, state, local and provinciallegislators and officials have proposed changes in tax laws, or in the administrationof such laws, affecting the gaming industry. It is not possible to determinewith certainty the likelihood of changes in tax laws or in the administrationof such laws.

 

*IRS Regulations, Currency Transaction Reporting and Suspicious ActivityReporting*

 

The InternalRevenue Service, or IRS, requires operators of casinos located in the U.S. tofile information returns for U.S. citizens, including names and addresses ofwinners, for all winnings in excess of stipulated amounts. The IRS alsorequires operators to withhold taxes on certain winnings.

 

Regulationsadopted by the Financial Crimes Enforcement Network of the Treasury Departmentand the gaming regulatory authorities in certain domestic jurisdictions inwhich we operate casinos require the reporting of currency transactions inexcess of $10,000 occurring within a gaming day, including identification ofthe patron by name and social security number. This reporting obligationcommenced in May 1985 and may have resulted in the loss of casino revenues tojurisdictions outside the U.S. that are exempt from the ambit of suchregulations.

 

Regulationsadopted by the Financial Crimes Enforcement Network of the Treasury Departmentrequire the filing of suspicious activity reports by casinos on all transactionsof at least $5,000 that the casino knows, suspects, or has reason to suspectfall into specific categories that are deemed to be suspicious. This reportingobligation commenced on March 25, 2003 and may result in the loss of casinorevenues to jurisdictions outside the U.S. that are exempt from the ambit ofsuch regulations.

 

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*Compliance with Other Laws*

 

Our operationsare also subject to a variety of other rules and regulations, including zoning,environmental, construction and land-use laws and regulations governing theserving of alcoholic beverages.

 

**Employees and Labor Relations**

 

As of March 1, 2004 wehad approximately 1,646 employees, of which 1,474 are full-time, none of whomare represented under collective bargaining agreements.

 

**Risks Related to Our Business**

 

*We are in default on our notes.*

 

We are in default under the indenturesgoverning the Shreveport Notes and have not made interest payments on theShreveport Notes since February 2003. After consultation with an ad hoc committee of holders of the ShreveportNotes, we have begun a process which we hope will result in the sale or otherdisposition of the riverboat casino/hotel complex.  There can be no assurance, however, that the process will resultin the sale or other disposition of the riverboat casino/hotel complex or that,if it does, the sale proceeds will be adequate to repay the Shreveport Notes infull.  We currently anticipate that anysuch sale or other disposition would be effected through a bankruptcyproceeding.

 

If a sale or otherdisposition does not occur, the holders of the Shreveport Notes might pursueall rights and remedies that they may have as a result of the default. Inaddition, whether or not the note holders pursue remedies against us or inother circumstances, we may seek the protection of the bankruptcy laws. Wecannot assure you that a bankruptcy filing, for any reason, will not have anadverse effect on our business, including adversely impacting the credit terms wereceive from vendors and service providers and negatively affecting ourcustomers’ perceptions of us.

 

*We have a history of losses.*

 

We reported a loss fromoperations in 2001 of $20.3 million, and income from operations in 2002 of$1.4 million and $.3 million for the period from January 1, 2003 throughFebruary 28, 2003 and $1.9 million for the period from March 1, 2003 throughDecember 31, 2003, respectively.  Inaddition, we reported net losses of $45 million and $25.5 million in 2001and 2002, respectively, and $4.2 million for the period from January 1, 2003through February 28, 2003, and $21.3 million for the period from March 1, 2003through December 31, 2003.  There can beno assurance that we will not experience operating losses in the future.  Because of our current capital structure andcurrent levels of operations and revenue, we anticipate that we will continueto experience net losses.

 

*Our substantial indebtedness could adversely affect our operations andfinancial health.*

 

We continue tohave a significant amount of indebtedness. Our substantial indebtedness could have important consequences to ouroperations and financial health.  Forexample, it could:

 

•      increase our vulnerabilityto general adverse economic and industry conditions;

 

•      limit our flexibility inplanning for, or reacting to, changes in our business and the industry in whichwe operate; and

 

•      place us at a competitivedisadvantage compared to our competitors that have a more favorable capitalstructure.

 

Any of theabove-listed factors could have a material adverse effect on our business,financial condition and results of operations.

 

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*We face risks related to the maintenance of our property.*

 

We expect touse a portion of our limited cash for capital expenditures. These enhancementscould involve risks, including cost overruns, delays and failure to obtainapplicable permits and authorizations. In addition, due to our operatinglosses, substantial maintenance capital expenditures have been deferred.

 

*We face significant competition from other gaming operations.*

 

The gamingindustry is highly fragmented and characterized by a high degree of competitionamong a large number of participants, many of which have financial and otherresources that are greater than our resources. Competitive gaming activitiesinclude casinos, video lottery terminals and other forms of legalized gaming inLouisiana, Oklahoma and other jurisdictions.

 

Legalizedgaming is currently permitted in various forms throughout the U.S. and inseveral Canadian provinces and on various lands taken into trust for thebenefit of certain Native Americans in the U.S. and Canada.  Other jurisdictions may legalize gaming inthe near future. In addition, established gaming jurisdictions could awardadditional gaming licenses or permit the expansion of existing gamingoperations.  New or expanded operationsby other persons will increase competition for our gaming operations and couldhave a material adverse impact on us.

 

TheShreveport/Bossier City gaming market is characterized by intense competitionand the market has not grown since we opened. We compete directly with four casinos, all of which have operated in theShreveport/Bossier City market for several years and have established customerbases.  In May 2003, an existing racetrack, which had been acquired by one of the existing casinos in the market,opened a temporary gaming facility with approximately 900 slot machines.  That race track currently has a new permanentfacility under construction which will accommodate 1,400 slot machines and isexpected to open during the second quarter of 2004.  Casino gaming is currently prohibited in several jurisdictionsfrom which the Shreveport/Bossier City market draws customers, primarilyTexas.  Although casino gaming iscurrently not permitted in Texas, the Texas legislature has consideredproposals to authorize casino gaming from time to time in the past.  In July 2003, the Chickasaw Nation announcedthe opening of WinStar Casinos, a Las Vegas-style, 110,000-square-foot gamingfacility located in Oklahoma approximately 60 miles north of the Dallas/FortWorth area.  Although gaming in Oklahomais limited by law to Class II-type games, which games have previously beentechnologically incapable of offering a similar entertainment experience to ourClass III-type games, recent innovations have allowed the Class II-type productto compete much more effectively than in the past.  Since we draw a significant amount of our customers from theDallas/Fort Worth area but are located approximately 190 miles from that area,we believe that we shall face increased competition from the WinStar Casinosand similar types of facilities.

 

*We are or may become involved in legal proceedings that, if adverselyadjudicated or settled, could impact our financial condition.*

 

We aredefendants in various lawsuits relating to matters incidental to our business.The nature of our business subjects us to the risk of lawsuits filed bycustomers, past and present employees, competitors and others in the ordinarycourse. As with all litigation, no assurance can be provided as to the outcomeof these matters and in general, litigation can be expensive and timeconsuming. We believe that we have defenses to these lawsuits and arecontesting them vigorously; however, we cannot be sure that we will besuccessful in defending these claims. If we are not, these lawsuits couldresult in settlements or liability for damages that could significantly impactour business, financial condition and results of operations.

 

*We face extensive regulation from gaming and other regulatoryauthorities.*

 

*Licensing Requirements.*As owners andoperators of a gaming facility, we are subject to extensive state and localregulation. State and local authorities require us to demonstrate suitabilityto obtain and retain various licenses and require that we have registrations,permits and approvals to conduct gaming operations.  Various regulatory authorities may, for any reason set forth inthe applicable legislation, rules and regulations, limit, condition, suspend orrevoke a license or registration to conduct gaming operations.  Like all gaming operators in thejurisdictions in which we operate, we must periodically apply to renew our gaminglicenses or registrations and

 

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have the suitability of certain of ourdirectors, officers and employees approved. We cannot assure you that we will be able to obtain such renewals orapprovals.  Regulatory authorities mayalso levy substantial fines against or seize our assets or the assets of oursubsidiaries or the people involved in violating gaming laws orregulations.  Any of these events couldhave a material adverse effect on our business, financial condition and resultsof operations.

 

We havedemonstrated suitability to obtain and have obtained all governmental licenses,registrations, permits and approvals necessary for us to operate our existinggaming facility.  We cannot assure youthat we will be able to retain them or demonstrate suitability to obtain anynew licenses, registrations, permits or approvals. The approval process can betime-consuming and costly and we cannot be sure that we will be successful.

 

Gamingauthorities in Louisiana generally can require that any beneficial owner orholder of our equity or debt securities file an application for a finding ofsuitability.  If a gaming authorityrequires a record or beneficial owner or holder of our securities to file asuitability application, the owner or holder must apply for a finding ofsuitability within 30 days or at an earlier time prescribed by the gamingauthority.  The gaming authority has thepower to investigate an owner’s or holder’s suitability and the owner or holdermust pay all costs of the investigation. If the owner or holder is found unsuitable, then the owner may berequired by law to dispose of our securities.

 

*Potential changes in regulatory environment.*  From time to time, legislators and specialinterest groups have proposed legislation that would expand, restrict orprevent gaming operations or which may otherwise adversely impact ouroperations in the jurisdiction in which we operate. Any expansion of gaming orrestriction on or prohibition of our gaming operations could have a materialadverse effect on our operating results.

 

*Taxation.*We believe that the prospect ofsignificant revenue is one of the primary reasons that jurisdictions permitlegalized gaming. As a result, gaming companies are typically subject tosignificant taxes and fees in addition to normal federal and local incometaxes, and such taxes and fees are subject to increase at any time. We paysubstantial taxes and fees with respect to our operations. From time to time,federal, state and local legislators and officials have proposed changes in taxlaws, or in the administration of such laws, affecting the gaming industry. Inaddition, worsening economic conditions could intensify the efforts of stateand local governments to raise revenues through increases in gaming taxes. Itis not possible to determine with certainty the likelihood of changes in taxlaws or in the administration of such laws. Such changes, if adopted, couldhave a material adverse effect on our business, financial condition and resultsof operations

 

*Compliance with other laws.*We are alsosubject to a variety of other rules and regulations, including zoning,environmental, construction and land-use laws and regulations governing theserving of alcoholic beverages. If we are not in compliance with these laws, itcould have a material adverse effect on our business, financial condition andresults of operations.

 

*We depend on our key personnel.*

 

We are highlydependent on the services of our General Manager, Melvyn Thomas, and our seniormanagement team. Our ability to retain key personnel is affected by thecompetitiveness of our compensation packages and other terms and conditions ofemployment. Our inability to retain our senior management team could adverselyeffect our business, financial condition and results of operations.

 

*Inclement weather and other conditions could seriously disrupt ouroperations.*

 

The operationsof our facilities are subject to disruptions or reduced patronage as a resultof severe weather conditions. Our facility is subject to risks including lossof service due to casualty, mechanical failure, extended or extraordinarymaintenance, flood, hurricane or other severe weather conditions. Reducedpatronage or the loss of service to our casino for any period of time due tosevere weather could adversely affect our business, financial condition andresults of operations.

 

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*We are subject to environmental laws and potential exposure toenvironmental liabilities.*

 

We are subjectto various federal, state and local environmental laws and regulations thatgovern our operations, including emissions and discharges into the environment,and the handling and disposal of hazardous and non-hazardous substances andwaste. Failure to comply with such laws and regulations could result in costsfor corrective action, penalties or the imposition of other liabilities orrestrictions. From time to time, we have incurred and are incurring costs andobligations for correcting environmental noncompliance matters. To date, noneof these matters have had a material adverse effect on our business, financialcondition or results of operations; however, there can be no assurance thatsuch matters will not have such an effect in the future.

 

*Energy and fuel price increases may adversely affect our costs ofoperations and our revenues.*

 

Our casinoproperty uses significant amounts of electricity, natural gas and other formsof energy. While no shortages of energy have been experienced, the recentsubstantial increases in the cost of electricity in the United States maynegatively affect our results of operations. The extent of the impact issubject to the magnitude and duration of the energy and fuel price increases.Dramatic increases in fuel prices may also affect customer visits.

 

**Available Information**

 

For moreinformation about us, visit our web site at www.hollywoodcasinoshreveport.com.Our electronic filings with the Securities and Exchange Commission (includingall Forms 10-K, 10-Q, and 8-K, and any amendments to these reports) areavailable free of charge at the Securities and Exchange Commission websitewww.sec.gov.

 

## **ITEM 2.**                  PROPERTY

 

The followingdescribes our principal real estate property:

 

We leaseapproximately nine acres of land in Shreveport, Louisiana, which contains adockside casino with approximately 59,000 square feet along with a hotel andland-based pavilion that includes various entertainment amenities.

 

## **ITEM 3.**                  LEGALPROCEEDINGS

 

We are subjectto various legal and administrative proceedings relating to personal injuries,employment matters, commercial transactions and other matters arising in thenormal course of business. We do not believe that the final outcome of thesematters will have a material adverse effect on our consolidated financialposition or results of operations. In addition, we maintain what we believe isadequate insurance coverage to further mitigate the risks of such proceedings.However, such proceedings can be costly, time consuming and unpredictable and,therefore, no assurance can be given that the final outcome of such proceedingsmay not materially impact our consolidated financial condition or results ofoperations. Further, no assurance can be given that the amount or scope ofexisting insurance coverage will be sufficient to cover losses arising fromsuch matters.

 

The followingproceedings could result in costs, settlements or damages that materiallyimpact our consolidated financial condition or operating results. In eachinstance, we believe that we have meritorious defenses and/or counter-claimsand intend to vigorously defend ourselves.

 

On April 23, 2000, the construction site for our facility sufferedtornado damage that contributed to the delay in its opening. We filed damageclaims and received reimbursements from our insurance carriers during 2000 inthe amount of approximately $1.5 million to cover substantially all of the costof repairing the damage incurred. We also filed a lawsuit in the U.S. DistrictCourt for the Western District of Louisiana against our insurance carriersseeking to recover lost profits and related claims under our businessinterruption insurance coverage. On June 16, 2003, a judgment was entered inthat court awarding us approximately $3.9 million (including interest butexcluding attorney fees). Subsequently, an order staying enforcement ofjudgment was entered by the court to allow the defendant insurance companiestime to file certain post-trial motions. Following the disposition of suchmotions, we

 

9

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and the defendants entered into asettlement of this lawsuit in December 2003, whereby we received$4.0 million in settlement of the June 16, 2003 judgment and the defendantinsurance companies paid $.8 million to our outside legal counsel in fullsatisfaction of our attorneys’ fees relating to the claims in the lawsuit.  The $4.0 million settlement was consideredin management’s assessment of the purchase price adjustments required inaccordance with SFAS 141.

 

In a set of related matters, we are also seeking to recover damagesfrom the general contractor, the architect and certain other parties involvedin the construction of our casino. For this and other reasons, we have withheldpayment of certain retainage amounts that the general contractor is currentlyseeking. The general contractor has also submitted additional change ordersthat we are disputing. We have recorded a liability in the amount ofapproximately $3.6 million in accounts payable in connection with theconstruction project. These matters were the subject of various state andfederal court proceedings as well as arbitrations. In May 2003, we, the generalcontractor, and the architect entered into an agreement to arbitrate thevarious claims. Such proceedings are currently ongoing and no assurance can begiven as to the ultimate outcome.

 

In October 2003, the Bossier Parish Police Jury filed an action againstus and the City of Shreveport in the 26th Judicial District Court ofBossier Parish, Louisiana seeking to overturn the agreement between us and theCity of Shreveport, which provides for an annual fee in lieu of the $3.00/headadmission fee, in order to collect boarding fees for itself. In late February2004, we and the City of Shreveport filed Exceptions of No Right and No Causeof Action seeking dismissal of the suit. A hearing has been set on theExceptions for April 8, 2004. We have vigorously contested all the allegationsset forth in the suit and will continue to do so.

 

Over the past several months, a number of individual employees havebrought similar gender related employment claims against us under Title VII inFederal Court in Louisiana. We are vigorously contesting all the allegations.The claims are in various stages of discovery and administrative proceedings.

 

We are or may become a party in various legal proceedings with respectto the conduct of casino and hotel operations. Although a possible range ofloss cannot be estimated, in the opinion of management, based upon the advise ofcounsel, settlement or resolution of these proceedings should not have amaterial adverse impact on our consolidated financial position or results ofour operations.

 

## **ITEM 4.**                  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

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**PARTII**

 

## **ITEM 5.**                 MARKETFOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

As of March 1, 2003, HCS I, Inc. holds an effective 99%partnership interest and HCS II, Inc. holds an effective 1% partnership interestin the Hollywood Casino Shreveport general partnership.

 

As of March 1, 2003, 1,000 shares of common stock of ShreveportCapital Corporation, $1.00 par value, are outstanding, all of which are ownedby the Hollywood Casino Shreveport general partnership.

 

## **ITEM 6.**                 SELECTEDCONSOLIDATED FINANCIAL DATA

## ** **

The followingselected consolidated financial and operating data for the years ended December31, 1999, 2000, 2001, 2002, and for the period from January 1, 2003 throughFebruary 28, 2003 are derived from our consolidated financial statements thathave been audited by Deloitte & Touche LLP, our former independentcertified public accountants, and for the period from March 1, 2003 throughDecember 31, 2003 by BDO Seidman, LLP, our current independent publicaccountants.  The selected consolidatedfinancial and operating data should be read in conjunction with ourconsolidated financial statements and Notes thereto, “Management’s Discussionand Analysis of Financial Condition and Results of Operations” and the otherfinancial information included herein.

 

As a result ofthe acquisition of Hollywood Casino Corporation and its subsidiaries, includingus, by Penn National, we adopted a new basis of accounting which included,among other items, adjusting the carrying value of certain assets, includingproperty and equipment and certain liabilities, including long-term debt.  The differences in financial presentationfrom the Predecessor Basis to the Successor Basis includes the reclassificationof cash awards from promotional allowances to a reduction of casino revenue anda reclassification of marketing giveaways and coupons from promotionalallowances to marketing expense.  Thishad the effect for the year 2002 of decreasing casino revenue by $4.5 million,decreasing promotional allowance by $11.5 million and increasing operatingexpenses by $7.0 million.  The effectfor the predecessor period from January 1, 2003 to February 28, 2003 was adecrease in casino revenue by $.7 million, a decrease in promotional allowancesby $1.6 million and an increase in operating expenses by $.9 million.

 

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|                                                                      |   | **Predecessor  Basis**             |       | **Successor  Basis**               |   |
|---------------------------------------------------------------------------|--------|------------------------------------|------------|------------------------------------|--------|
|                                                                      |   | **Year Ended  December 31,  1999** |       | **Year Ended  December 31,  2000** |   | **Year  Ended  December  31, 2001** |   | **Year  Ended  December  31, 2002** |   | **Period  from  January 1,  2003  Through  February  28, 2003** |   | **Period  from  March 1,  2003  Through  December 31,  2003** |   |
|                                                                      |   | **(In thousands )**                | ** ** |
| **Hollywood Casino Shreveport  and Subsidiaries**                         |   |                               |       |
| **Income statement data:**                                                |   |                               |       |                               |   |   |   |   |   |   |   |   |   |
| Net Revenues                                                              |   | $                                  | —     |                               | $      | 7,754 |   | $ | 143,868 |   | $ | 146,356 |   | $ | 22,981 |   | $ | 113,924 |   |
| Total operating expenses                                                  |   | 993                                |       | 21,458                             |   | 164,181 |   | 144,989 |   | 22,705 |   | 112,056 |   |
| Income (loss) from operations                                             |   | (993                               | )          | (13,704                            | )      | (20,313 | ) | 1,367 |   | 276 |   | 1,868 |   |
| Other non-operating income (expenses), net                                |   | (3,302                             | )          | (4,196                             | )      | (24,698 | ) | (26,857 | ) | (4,439 | ) | (23,177 | ) |
| Net (loss)                                                                |   | $                                  | (4,295     | )                                  | $      | (17,900 | ) | $ | (45,011 | ) | $ | (25,490 | ) | $ | (4,163 | ) | $ | (21,309 | ) |
|                                                                      |   |                               |       |                               |   |   |   |   |   |   |   |   |   |
| **Other data:**                                                           |   |                               |       |                               |   |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) operating  activities                      |   | $                                  | 7,839      |                               | $      | (6,967 | ) | $ | (28,200 | ) | $ | (3,990 | ) | $ | (9,688 | ) | $ | 13,989 |   |
| Net cash provided by (used in) investing  activities                      |   | (182,338                           | )          | 21,615                             |   | 4,272 |   | (1,465 | ) | (224 | ) | (369 | ) |
| Net cash provided by (used in) financing  activities                      |   | 189,779                            |       | 3,690                              |   | 13,039 |   | 617 |   | 561 |   | (1,084 | ) |
| Depreciation and amortization                                             |   | 2                                  |       | 506                                |   | 15,866 |   | 16,157 |   | 2,715 |   | 8,104 |   |
| Interest expense                                                          |   | 6,946                              |       | 9,991                              |   | 25,350 |   | 26,744 |   | 4,456 |   | 20,870 |   |
| Capital expenditures                                                      |   | 35,028                             |       | 116,117                            |   | 4,993 |   | 1,497 |   | 224 |   | 369 |   |
| **Balance sheet data:**                                                   |   |                               |       |                               |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                 |   | $                                  | 19,014     |                               | $      | 37,352 |   | $ | 26,463 |   | $ | 21,625 |   | $ | 12,274 |   | $ | 24,810 |   |
| Total assets                                                              |   | 209,480                            |       | 242,384                            |   | 212,034 |   | 191,868 |   | 179,449 |   | 141,711 |   |
| Total debt*                                                               |   | 151,759                            |       | 181,946                            |   | 190,105 |   | 189,911 |   | 189,877 |   | 119,345 |   |
| Partners’ capital (deficiency)                                       |   | 38,171                             |       | 29,174                             |   | (8,699 | ) | (33,572 | ) | (37,165 | ) | (22,386 | ) |
|                                                                      |   |                               |       |                               |   |   |   |   |   |   |   |   |   |
| **HWCC-Louisiana, Inc. and Subsidiaries**                                 |   |                               |       |                               |   |   |   |   |   |   |   |   |   |
| **Income statement data:**                                                |   |                               |       |                               |   |   |   |   |   |   |   |   |   |
| Net Revenues                                                              |   | $                                  | —     |                               | $      | 7,754 |   | $ | 143,868 |   | $ | 146,356 |   | $ | 22,981 |   | $ | 113,924 |   |
| Total operating expenses                                                  |   | 1,036                              |       | 21,724                             |   | 163,533 |   | 144,989 |   | 22,705 |   | 112,056 |   |
| Income (loss) from operations                                             |   | (1,036                             | )          | (13,970                            | )      | (19,665 | ) | 1,367 |   | 276 |   | 1,868 |   |
| Other non-operating income (expenses), net  and minority interest expense |   | (3,233                             | )          | (4,062                             | )      | (26,851 | ) | (28,272 | ) | (4,663 | ) | (24,228 | ) |
| Net (loss)                                                                |   | $                                  | (4,269     | )                                  | $      | (18,032 | ) | $ | (46,516 | ) | $ | (26,905 | ) | $ | (4,387 | ) | $ | (22,360 | ) |
|                                                                      |   |                               |       |                               |   |   |   |   |   |   |   |   |   |
| **Other data:**                                                           |   |                               |       |                               |   |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) operating activities                       |   | $                                  | 11,826     |                               | $      | (7,217 | ) | $ | (28,258 | ) | $ | (3,941 | ) | $ | (9,685 | ) | $ | 13,998 |   |
| Net cash provided by (used in) investing  activities                      |   | (184,993                           | )          | 21,615                             |   | 4,272 |   | (1,465 | ) | (224 | ) | (369 | ) |
| Net cash provided by (used in) financing  activities                      |   | 194,679                            |       | 3,978                              |   | 10,639 |   | 617 |   | 561 |   | (1,084 | ) |
| Depreciation and amortization                                             |   | 2                                  |       | 506                                |   | 15,866 |   | 16,157 |   | 2,715 |   | 8,104 |   |
| Interest expense                                                          |   | 6,946                              |       | 9,991                              |   | 25,350 |   | 26,744 |   | 4,456 |   | 20,870 |   |
| Capital expenditures                                                      |   | 38,157                             |       | 116,117                            |   | 4,993 |   | 1,497 |   | 224 |   | 369 |   |
| **Balance sheet data:**                                                   |   |                               |       |                               |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                 |   | $                                  | 21,580     |                               | $      | 39,956 |   | $ | 26,609 |   | $ | 21,820 |   | $ | 12,472 |   | $ | 25,017 |   |
| Total assets                                                              |   | 219,428                            |       | 252,017                            |   | 219,802 |   | 199,787 |   | 187,363 |   | 142,842 |   |
| Total debt*                                                               |   | 151,759                            |       | 184,445                            |   | 190,105 |   | 189,911 |   | 189,877 |   | 119,345 |   |
| Shareholders’ equity (deficiency)                                    |   | 46,000                             |       | 34,293                             |   | (3,548 | ) | (28,372 | ) | (31,959 | ) | 21,158 |   |

 

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* For the period from March 1,2003 through December 31, 2003, total debt is net of valuation allowance of$70,348.

 

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## **ITEM 7.**                 MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

**OurOperations**

 

We are ahighly themed hotel and casino destination resort in Shreveport,Louisiana.  We enjoy high visibility andconvenient access from Interstate 20, the major highway that connects theShreveport/Bossier City market with its feeder markets of Dallas/Ft. Worth andEast Texas.  Our casino was built nextto an existing riverboat gaming and hotel facility operated by Harrah’sEntertainment.  There are currently fivecasinos and a racino operating in the Shreveport/Bossier City market, which isthe largest gaming market****inLouisiana.  The Shreveport/Bossier Citygaming market permits continuous dockside gaming without cruising requirementsor simulated cruising schedules, allowing us to operate 24 hours a day withuninterrupted access.

 

Our marketingstrategy is designed to take advantage of our proximity to the large populationbase of the greater Dallas/Ft. Worth metropolitan area and other major marketsby targeting the local day-trip market and by utilizing our hotel rooms toexpand our patron mix to include overnight visitors. We have also coordinatedour restaurant and entertainment promotions to encourage overnight stays. Byutilizing the data in our casino information systems, we are able to identifyour premium patrons, encourage their participation in our casino player’s cardprogram and design promotions and special events to this target market.

 

Keyperformance indicators related to revenues are:

 

•                Gaming revenueindicators – slot handle, table game drop (volume indicators) and “win” or“hold” percentages, which are not fully controllable by us. Our normal slot winpercentage is in the range of 6% to 7% of slot handle and our normal tablegames win percentage is in the range of 15% to 21% of table game drop; and

 

•                Hotel revenueindicators – hotel occupancy (volume indicator); average daily rate (“ADR,”price indicator); revenue per available room (“REVPAR”), a summary measure ofhotel results, combining ADR and occupancy rate.

 

Our propertygenerates significant operating cash flow since most of our revenue iscash-based through customers wagering with cash on slot machines and tablegames. Non-gaming services are generally paid for with cash or credit cards.Our business is capital intensive and we rely on our cash to generatesufficient cash to repay debt, fund maintenance capital expenditures and fundnew capital projects.

 

**Overall Outlook**

 

We reported aloss from operations in 2001 of $20.3 million, and income from operations in2002 of $1.4 million and $.3 million for the period from January 1, 2003through February 28, 2003 and $1.9 million for the period from March 1, 2003through December 31, 2003, respectively. In addition, we reported net losses of $45 million,$25.5 million and $25.5 million in 2001, 2002 and 2003,respectively.  We have a deficiency inour partners’ capital account. Accordingly, our existing cash and cash flowfrom operations have not been sufficient to fund our capital needs and debtservice under our current capital structure and we do not believe that it willbe sufficient for the foreseeable future.

 

We are in default under the indenturesgoverning the Shreveport Notes and have not made interest payments on theShreveport Notes since February 2003. After consultation with an ad hoccommittee of holders of the Shreveport Notes, we have begun a process which wehope will result in the sale or other disposition of the riverboat casino/hotelcomplex. There can be no assurance, however, that the process will result inthe sale or other disposition of the riverboat casino/hotel complex or that, ifit does, the sale proceeds will be adequate to repay the Shreveport Notes infull. We currently anticipate that any such sale or other disposition would beeffected through a bankruptcy proceeding.

 

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If a sale or other disposition does notoccur, the holders of the Shreveport Notes might pursue all rights and remediesthat they may have as a result of the default. In addition, whether or not thenote holders pursue remedies against us or in other circumstances, we may seekthe protection of the bankruptcy laws. We cannot assure you that a bankruptcyfiling, for any reason, will not have an adverse effect on our business,including adversely impacting the credit terms we receive from vendors andservice providers and negatively affecting our customers’ perceptions ofus.  All of these matters continue to raisesubstantial doubt about our ability to continue as a going concern.

 

We are apartnership and accordingly are not subject to federal income taxes. Such taxesare the responsibility of our partners. HWCC-Louisiana, Inc. and its subsidiaries are included in PennNational’s consolidated federal income tax return for periods subsequent to theacquisition and were included in Hollywood Casino Corporation’s consolidatedfederal income tax return for periods prior to the acquisition. Prior to ouracquisition by Penn National benefit for income taxes was based on the amountof tax that would be provided if a separate federal income tax return werefiled.  As a result of the uncertaintiesdiscussed in Notes 1 and 10 of the HWCC-Louisiana, Inc. and subsidiaries financialstatements, no consolidated tax benefit was allocated to HWCC-Louisiana, Inc.and its subsidiaries based upon its contribution to consolidated federaltaxable income.  Statement of FinancialAccounting Standards No. 109, “Accounting for Income Taxes,” requires thatthe tax benefit of net operating loss carry forwards (“NOL’s”) and creditcarryforwards, together with the tax benefit of deferred tax assets resultingfrom temporary differences, be recorded as an asset and, to the extent thatmanagement cannot assess that the utilization of all or a portion of suchdeferred tax assets is more likely than not, a valuation allowance should berecorded. Based on the losses incurred to date and the lack of historicaloperating activity upon which to estimate future taxable income, management hasprovided valuation allowances to fully reserve the net deferred tax assets forthe predecesor periods presented.

 

As a result ofthe acquisition of Hollywood Casino Corporation and its subsidiaries by PennNational, a “change of control,” as defined in Section 382 of the InternalRevenue Code of 1986, as amended, occurred. Accordingly, the amount ofHWCC-Louisiana, Inc.’s loss carryforwards, which at the date of acquisition was$97 million, that is available for use in any one year by Penn National isapproximately $15.3 million. Future treasury regulations, administrativerulings or court decisions may also affect Penn National’s future utilizationof HWCC-Louisiana, Inc.’s loss carryforwards.

 

The InternalRevenue Service recently opened an examination of Hollywood CasinoCorporation’s consolidated federal income tax returns for the years 1999through 2001 in which HWCC-Louisiana, Inc. was included.

 

The Shreveport/Bossier Citygaming market is characterized by intense competition and the market has notgrown since we opened.  We competedirectly with four casinos, all of which have operated in theShreveport/Bossier City market for several years and have established customer bases.  In May 2003, an existing race track, whichhad been acquired by one of the existing casinos in the market, opened atemporary gaming facility with approximately 900 slot machines.  That race track currently has a newpermanent facility under construction which will accommodate 1,400 slot machinesand is expected to open during the second quarter of 2004. Casino gaming iscurrently prohibited in several jurisdictions from which the Shreveport/BossierCity market draws customers, primarily Texas. Although casino gaming is currently not permitted in Texas, the Texaslegislature has from time to time considered proposals to authorize casinogaming in the past. In July 2003, the Chickasaw Nation announced the opening ofWinStar Casinos, a Las Vegas-style, 110,000-square-foot gaming facility locatedin Oklahoma approximately 60 miles north of the Dallas/Fort Worth area.Although gaming in Oklahoma is limited by law to Class II-type games, whichgames have previously been technologically incapable of offering a similarentertainment experience to our Class III-type games, recent innovations haveallowed the Class II-type product to compete much more effectively than in thepast.  Since we draw a significantamount of our customers from the Dallas/Fort Worth area but are locatedapproximately 190 miles from that area, we believe we will face increasedcompetition from the WinStar Casinos and similar types of facilities.

 

The mostimportant factors and trends contributing to our operating performance havebeen:

 

## **•**              Intense competition in the Shreveport/Bossier Citymarket.

 

## **•**              The general economic conditions in our principalmarket areas.

 

## **•**              The lack of significant revenue growth in theShreveport/Bossier City gaming market since 2001.

 

## **•**              The introduction of slot machines at Louisiana Downsand the opening of WinStar Casinos in Southern Oklahoma in 2003.

 

**Year Ended December 31, 2003 Compared to Year Ended December 31, 2002**

 

As a result ofthe acquisition of Hollywood Casino Corporation and its subsidiaries, includingus, by Penn National, we adopted a new basis of accounting which included,among other items, adjusting the carrying value of certain assets, includingproperty and equipment and certain liabilities, including long-term debt.  We have also made certain accountingreclassifications to the accompanying condensed consolidated Successor Basisstatement of operations to present it on a consistent basis with those of otherPenn National properties. Accordingly, comparisons with the Predecessor Basisstatements of operations are not meaningful.

 

14

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The results ofoperations for the year ended December 31, 2002, the period from January 1,2003 through February 28, 2003 and the period from March 1, 2003 throughDecember 31, 2003 are summarized below (in thousands):

 
|                                |   | **Predecessor Basis**                  |    | **Successor Basis**                                               |   |
|-------------------------------------|--------|----------------------------------------|---------|-------------------------------------------------------------------|--------|
|                                |   | **Year ended  December 31, 2002** |    | **Period from  January 1, 2003  through  February 28, 2003** |   | **Period from  March 1, 2003 to  December 1, 2003** |   |
| Revenue:                            |   |                                   |    |                                                              |   |   |   |
| Casino                              |   | $                                      | 146,070 |                                                              | $      | 22,730 |   | $ | 105,330 |   |
| Rooms                               |   | 9,279                                  |    | 1,353                                                             |   | 7,341 |   |
| Food and beverage                   |   | 24,441                                 |    | 3,784                                                             |   | 17,890 |   |
| Other                               |   | 2,473                                  |    | 376                                                               |   | 1,890 |   |
| Less:   Promotional allowances |   | (35,907                                | )       | (5,262                                                            | )      | (18,527 | ) |
| Net Revenues                        |   | 146,356                                |    | 22,981                                                            |   | 113,924 |   |
| Operating expenses:                 |   |                                   |    |                                                              |   |   |   |
| Casinos                             |   | 106,391                                |    | 16,700                                                            |   | 57,225 |   |
| Rooms                               |   | 2,229                                  |    | 344                                                               |   | 3,148 |   |
| Food and beverage                   |   | 6,784                                  |    | 983                                                               |   | 15,287 |   |
| Other                               |   | 2,916                                  |    | 516                                                               |   | 7,833 |   |
| General and administrative          |   | 10,333                                 |    | 1,447                                                             |   | 20,459 |   |
| Depreciation and amortization       |   | 16,157                                 |    | 2,715                                                             |   | 8,104 |   |
| Impairment Loss                     |   | 179                                    |    | —                                                            |   | — |   |
| Total operating expenses            |   | 144,989                                |    | 22,705                                                            |   | 112,056 |   |
| Income from operations              |   | $                                      | 1,367   |                                                              | $      | 276 |   | $ | 1,868 |   |

 

*Revenues*

* *

Revenues in2003 were negatively impacted as a result of the opening of Louisiana Downsslots in May 2003 and the opening of the WinStar Casinos in July 2003.  Our revenues were also negatively impactedby the continuing economic stagnation in our primary market area.  Consequently our operating expensesdecreased as a result of our declining revenues and our planned reductions inoperating expenses in response to the decline in revenues.

 

15

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*Depreciation and Amortization*

* *

Depreciationand amortization expense decreased significantly as a result of the revaluationof our fixed assets to their estimated fair market values at the date ofpurchase by Penn National.

 

*Interest Expense*

* *

Interestexpense decreased primarily due to the decrease in contingent interest incurredon the Shreveport Notes and the elimination of the deferred finance feesamortization that resulted from the acquisition.

 

*Other Expenses*

* *

Other expensesin 2003 consist of reorganization costs incurred by legal and financialadvisors in connection with debt restructuring negotiations and planning. Theseexpenses totaled $2.4 million.

 

16

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**Year Ended December 31, 2002 Compared to Year Ended December 31, 2001**

 

The results ofoperations for the years ended December 31, 2001 and 2002 are summarized below(in thousands):

 
|                                 |   | **2001** |    | **2002** |   |
|--------------------------------------|--------|----------|---------|----------|--------|
| Revenue:                             |   |     |    |     |   |
| Casino                               |   | $        | 144,334 |     | $      | 146,070 |   |
| Rooms                                |   | 8,754    |    | 9,279    |   |
| Food and beverage                    |   | 25,521   |    | 24,441   |   |
| Other                                |   | 3,412    |    | 2,473    |   |
| Promotional allowance                |   | (38,153  | )       | (35,907  | )      |
| Net Revenues                         |   | 143,868  |    | 146,356  |   |
| Departmental expenses:               |   |     |    |     |   |
| Casinos                              |   | 118,685  |    | 106,391  |   |
| Rooms                                |   | 2,452    |    | 2,229    |   |
| Food and beverage                    |   | 9,396    |    | 6,784    |   |
| Other                                |   | 3,433    |    | 2,916    |   |
| General and administrative           |   | 13,506   |    | 10,333   |   |
| Depreciation and amortization        |   | 15,866   |    | 16,157   |   |
| Impairment loss                      |   | —   |    | 179      |   |
| Loss on early extinquishment of debt |   | 843      |    | —   |   |
| Total expense                        |   | 164,181  |    | 144,989  |   |
| Income (loss) from operations        |   | $        | (20,313 | )        | $      | 1,367 |   |

 

*General*

 

We commencedoperations in December 2000 and experienced typical operating inefficienciesassociated with the opening of a new, major resort.  As a result, management concentrated its efforts in January andearly February 2001 on fully implementing operating and training programs toensure that customers were provided with a high level of service. With theseprograms completed, we launched major marketing programs in late February andMarch.  Delays in commencing ourmarketing efforts, together with inclement weather and increased competitivepressures in the Shreveport/Bossier City market, resulted in lower gamingactivity in January and February 2001 than originally anticipated bymanagement. With the implementation of the marketing programs, we experienced afavorable trend in our gaming revenues with significant increases in Februaryand March compared to the prior month periods. Revenues continued to show improvement in April and May; however, theseincreases remained below management’s expectations, primarily due to theeconomic slowdown. Management responded by fine-tuning the marketing efforts tomaximize the effectiveness of its marketing programs while minimizing theircosts. To this end, we terminated

 

17

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certain marketing programs that targeted lessprofitable market segments which resulted in a reduction of our gaming revenuesin June. Commencing in the second quarter of 2001, we also instituted a seriesof measures to significantly reduce our operating costs.

 

Entertainment-relatedcompanies, already suffering from the general economic downturn, experienced anadditional setback from the tragic events of September 11, 2001.  While difficult to measure with any degreeof precision, management believed the operating results for the third andfourth quarters were negatively impacted by the difficult operating environmenttriggered by the tragic September events. Management analyzed the operating revenues and gaming activity for thefacility relative to its internal budget for the period from September 1through September 10 and for the period from September 11 through the end ofthe month.  By comparing the operatingtrends for these two periods, management estimated that the revenues for themonth of September were reduced by approximately $1.7 million, or 14.8%, as aresult of the terrorist attacks.  Fourthquarter revenues continued to under perform budgeted amounts.

 

Despite therevenue downturn in the second half of 2001, as a result of the elimination ofmarketing programs and other significant cost cutting efforts, we managed togenerate positive earnings before interest taxes, depreciation, amortizationand non-recurring items in every month commencing with June 2001.  Throughout 2002 we continued our efforts toaggressively manage our marketing programs to increase our customer base whilemaximizing near and long-term profitability by decreasing the operating coststructure of the property.

 

The opening ofthe casino increased gaming capacity in the Shreveport/Bossier City market byapproximately 32%.  However, the marketdid not grow sufficiently to fully absorb the increase in capacity, as totalcasino win for the years 2002 and 2001 only grew by 2.2% and 18.7%,respectively.  The 2.2% overall growthin the Shreveport/Bossier City market during 2002 reflected an increase of 3.4%during the first half of the year, but only a 1% increase during the secondhalf of the year, in each case compared to the same period in 2001. Managementbelieved this erosion in market growth reflected the deteriorating economicconditions in the principal feeder markets to the Shreveport/Bossier Citygaming market, including the Dallas/Ft. Worth metropolitan area.

 

*Revenues*

 

Casino revenueconsists of the portion of gross wagering retained by the casino and, as apercentage of gross wagering, is referred to as the “hold percentage”.  Casino revenues totaled $146.1 million and$144.3 million during 2002 and 2001, respectively.  Casino revenues increased slightly during 2002 compared to 2001as decreases in the slot machine hold percentage were offset by increases inslot machine gross wagering. As a result, slot machine revenues increased by1.5% during 2002 compared to 2001.  The2002 decline in table games gross wagering was partially offset by an increasein the table games hold percentage to 18.9% from 17.9% resulting in an overalltable game revenue decrease of 5.1% in 2002 compared to 2001.  Slot machine revenues accounted for 73.4%and 73.2% during 2002 and 2001, respectively, of total casino revenues andtable game revenues accounted for 25.1% and 26.8% during 2002 and 2001,respectively, of total casino revenues. Poker accounted for the additional 1.5%of revenues in 2002 following the June opening of six poker stations.

 

Room revenuesincreased 6% during 2002 compared to 2001. Hotel occupancy rates increased to93.4% in 2002 from 86.6% during 2001 due to more aggressive marketing programs.However, the average daily room rate decreased to $68 during 2002 from $70during 2001. Room rates in 2002 were lowered to meet competitive pressures inthe Shreveport/Bossier City marketplace; however, such reductions were morethan offset by the improvement in hotel occupancy.

 

Food andbeverage revenues amounted to $24.4 million and $25.5 million during 2002 and2001, respectively. Food and beverage revenues decreased 4.2% in 2002 comparedto the prior year primarily as a result of decreases in promotional activities.Other revenues amounted to $2.5 million and $3.4 million during 2002 and 2001,respectively. Other revenues decreased 27.5% during 2002 compared to 2001. Thedecrease was primarily due to reductions in theater revenues and retail storesales and was partially offset by rental income of $.2 million earned withrespect to restaurant and entertainment facilities operating in leased space.

 

Promotionalallowances represent the estimated value of goods and services provided free ofcharge to casino customers under various marketing programs, the cost ofcertain cash incentive programs and the estimated

 

18

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cost of the “cash back” award feature of thecasino’s customer loyalty programs. Overall, promotional allowances decreasedby 5.9% during 2002 compared to 2001. Goods and services provided to patrons without charge increased slightlyas a percentage of the associated room, food and beverage and other revenues to67.4% during 2002 from 66.3% during 2001. These percentages were consistent with the historical experience ofother gaming operations owned by Hollywood Casino Corporation.  The cost of other cash incentive andcustomer loyalty programs decreased during 2002 compared to 2001 as marketingand direct mail programs were refined and marginal programs were eliminated.

 

*Departmental Expenses*

* *

We weredesigned to be a major destination resort. Accordingly, our initial coststructure was based on the facility generating a significant level of gamingrevenues. As noted previously, management concentrated its efforts in Januaryand early February 2001 on fully implementing operating and training programsto ensure that customers were provided with a superior level of service.  Because we were in a longer start up phase,departmental expense ratios during the first half of 2001 were higher thanthose experienced by other Hollywood Casino Corporation operated gamingfacilities during their initial periods. During the summer of 2001, managementinitiated a new business plan in response to the difficult operating conditionsexperienced by the property. Due to the economic recession and the impact ofthe events of September 11th, the Shreveport/Bossier City market grew much moreslowly in 2001 than anticipated and experienced a significant increase inmarketing and promotional activity. Over the second half of 2001 and throughout2002, management made significant progress in achieving the principal elementsof its new business plan. Specifically, departmental expenditures weresignificantly reduced while maintaining our level of service. Managementreduced the property’s operating costs during 2002 by approximately $15.6million, or 11.7%, compared to 2001, while maintaining revenue levels.

 

In March 2001,the Louisiana legislature approved an increase in the gaming tax on riverboatcasinos to 21.5% of net gaming proceeds from 18.5%. The tax increase was phasedin over a 25-month period for all riverboats in the Shreveport/Bossier Cityarea; accordingly, the gaming tax imposed on us increased to 19.5% effectiveApril 1, 2001, to 20.5% effective April 1, 2002, and to 21.5% effective April1, 2003. Had the entire 3% gaming tax increase been in effect during 2002 and2001, our operating expenses would have increased by approximately $1.9 millionand $3.3 million, respectively.

 

Casinoexpenses decreased 10.4% during 2002 compared to 2001 due to management’s costsavings initiatives discussed above. Expenditures were reduced in the areas ofpayroll, cage operations, and advertising, as well as in the allocations ofpromotional related costs from other operating departments to the casinodepartment.

 

Rooms expensedecreased 9.1% during 2002 compared to 2001 reflecting management’s costsavings initiatives discussed above partially offset by increased occupancycosts.

 

During 2002,food and beverage expenses decreased by 27.8% compared to the prior year due toreductions in the cost of goods sold, consistent with the reductions inrevenues, as well as to reductions in payroll costs and increases in operatingefficiency.

 

Other expensesdecreased $.5 million, or 15.1% during 2002 compared to 2001 reflectingreductions in the cost of goods sold, consistent with the reductions inrevenues, reductions in payroll costs and a reduction in the costs incurred inconnection with “headliner” entertainment shows. These decreases were partiallyoffset by increased insurance costs.

 

*General and Administrative*

 

General andadministrative expenses amounted to $10.3 million and $13.5 million during 2002and 2001, respectively.  General andadministrative expenses included a management fees payable to a subsidiary ofHollywood Casino Corporation which amounted to $2.9 million in both 2002 and2001. The 2002 decrease in general and administrative expenses reflected costsavings initiatives by management. Significant savings in executive and humanresources departmental costs were partially offset by increases in legal feesand utility costs.

 

19

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*Depreciation and Amortization*

 

Depreciationand amortization expense increased slightly to $16.2 million during 2002 from$15.9 million in 2001.  The 2001increase resulted primarily from substantially all of our fixed assets beingplaced in service in December 2000.

 

*Impairment Loss*

* *

We incurred animpairment loss during 2002 with respect to the valuation of our motion picturememorabilia. No impairment loss was required with respect to any of our otherlong-lived assets.

 

*Loss on Early Extinguishment of Debt*

* *

During June2001, we retired our outstanding lease financing with a portion of the proceedsfrom the Senior Secured Notes. The loss from early extinguishment of debtconsisted of the write off of unamortized deferred finance costs associatedwith the lease financing.

 

*Interest Income*

* *

Interestincome decreased 69.3% during 2002 compared to the prior year reflecting lesscash available for investment purposes and reduced interest rates.  HWCC-Louisiana, Inc. earned additionalinterest income of $49,000 and $.1 million during 2002 and 2001, respectively.HWCC-Louisiana, Inc. had cash available for investment purposes prior to itspayment of $2.5 million to Sodak Gaming, Inc. during June 2001 in connectionwith HWCC-Louisiana, Inc.’s acquisition in 1999 of Sodak’s partnership interestin us.

 

*Interest Expense*

* *

Interestexpense increased by $1.4 million during 2002 compared to 2001. The 2002increase was due primarily to the increase in our long-term indebtedness and tocontingent interest incurred on the Shreveport Notes. In June 2001, we retiredthe $27.5 million outstanding balance of certain lease financings with aportion of the proceeds from the issuance of $39 million of Senior Secured Notes,which also provided additional working capital for us.  The increase in overall borrowings coupledwith a higher interest rate (an effective rate of 12.21% on the Senior SecuredNotes versus a floating rate on the lease financing of 8.9% at the time of theirretirement) contributed to the increase in interest expense.

 

Interestexpense also included the amortization of deferred financing costs incurred inconnection with the Shreveport Notes and, for periods prior to June 15, 2001,the lease financing. Such amortization amounted to $1.3 million and $1.4million during 2002 and 2001, respectively. Contingent interest incurred with respect to the Shreveport Notesamounted to $1.1 million and $.4 million during 2002 and 2001, respectively.

 

*Write Off Investment in Unconsolidated Affiliate*

* *

We enteredinto an agreement with a third party during 2000 providing for the jointconstruction and ownership of a golf course. Our contributions to the limitedliability corporation formed to develop and operate the golf course frominception amounted to $.3 million. No contributions were made during 2002.Given the difficult market conditions, the partners in the golf course providednotice in April 2002 that they were terminating the lease for the land on whichthe golf course would have been constructed. Accordingly, we provided a reserveof $.3 million during April 2002 to write down our investment in the limitedliability corporation to a zero value. The partners terminated the golf coursejoint venture effective as of September 30, 2002.

 

*Minority Interest in Hollywood Casino Shreveport*

* *

In accordancewith the terms of our joint venture agreement and related amended and restatedassignment of joint venture interest, the joint venture partner ofHWCC-Louisiana, Inc.’s subsidiaries, HCS I, Inc. and HCS II, Inc. is toreceive, among other things, an amount equal to 1% of “complex net revenues”,as defined, earned by us.  The

 

20

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allocation of this interest is reflected byHWCC-Louisiana, Inc. as a minority interest in us.  Such interest, which commenced upon the opening of the casino,amounted to $1.5 million and $1.4 million during 2002 and 2001, respectively,and is reflected as a reduction in arriving at net loss on the accompanyingconsolidated statements of operations of HWCC-Louisiana, Inc.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

*Outlook*

* *

We haveexperienced net losses since our opening on December 20, 2000, are in defaultunder the terms of the indentures governing our Shreveport Notes and have adeficiency in our partners’ capital account. Accordingly, our existing cash andcash flow from operations will not be sufficient to fund our capital needs anddebt service under our current capital structure for the foreseeable future.Penn National has no obligation to and does not currently anticipate providingany additional financial support to us. All of these matters continue to raisesubstantial doubt about our ability to continue as a going concern.

 

*Cash flow*

* *

Historically,our primary sources of liquidity and capital resources have been cash flow fromoperations and proceeds from the issuance of debt securities.

 

Net cash usedin provided by operating activities was $9.7 million and $14 million forthe period from January 1, 2003 through February 28, 2003 and for the periodfrom March 1, 2003 through December 31, 2003, respectively. This consisted of anet loss of, $4.2 million and $21.3 million for the period from January 1, 2003through February 28, 2003 and for the period from March 1, 2003 throughDecember 31, 2003, respectively; non-cash reconciling items of $3.0 million and$8.1 million for the period from January 1, 2003 through February 28, 2003 andfor the period from March 1, 2003 through December 31, 2003, respectively; andnet increases in current liability accounts along with a net decrease incurrent asset accounts of $8.5 million for the period from January 1, 2003through February 28, 2003, and a net increase in current asset accounts of$27.2 million for the period from March 1, 2003 through December 31, 2003.If we had made the interest payment on the Shreveport Notes on August 1, 2003in the amount of approximately $12.3 million, operating activities would havehad a negative cash flow of $1.7 million for the period from March 1, 2003through December 31, 2003.

 

Cash flowsused in investing activities totaled $.2 million and $.4 million for theperiod from January 1, 2003 through February 28, 2003 and for the period fromMarch 1, 2003 through December 31, 2003, respectively. This amount was spent onmaintenance capital expenditures at the property.

 

Cash flowsprovided by used in financing activities were $.6 million and $1.1 million forthe period from January 1, 2003 through February 28, 2003 and for the period fromMarch 1, 2003 through December 31, 2003, respectively. Financing activitiesincluded a capital contribution from the parent company prior to being acquiredby Penn National net of distributions to partners.

 

*Capital Expenditures*

* *

During theyear we spent approximately $.6 million on maintenance capital expenditures atthe property. In 2004, we are planning to spend approximately $1.5 million onmaintenance capital expenditures.

 

*$150 Million 13% First Mortgage Notes*

* *

In August1999, the Hollywood Casino Shreveport general partnership and ShreveportCapital issued $150 million of the First Mortgage Notes. Fixed interest on theFirst Mortgage Notes at the annual rate of 13% is payable on eachFebruary 1 and August 1. In addition, contingent interest accrues andis payable on each interest payment date subsequent to the opening of thecasino. The amount of contingent interest is equal to 5% of the consolidatedcash flow of Hollywood Casino Shreveport for the applicable period subject to amaximum contingent interest of $5 million for any four consecutive fiscalquarters. Contingent interest amounted to $.6 million for the year endedDecember 31, 2003. Accrued contingent interest amounted to $1.2 millionand $1.8  million at December 31, 2002 and 2003, respectively.Contingent interest may not be paid to the extent that payment would result incertain financial coverage ratios not being met. Consequently, no contingentinterest has been paid since the opening of the casino.

 

The FirstMortgage Notes are secured by, among other things, (1) a first prioritysecurity interest in substantially all of the assets that comprise HollywoodCasino Shreveport other than certain assets that secure the Senior SecuredNotes and up to $6 million in assets that may be acquired with futureequipment financing; (2) a

 

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collateral assignment of the Hollywood CasinoShreveport’s interest in the principal agreements under which it wasconstructed and is currently operated and managed; and (3) a collateralassignment of certain licenses and permits with respect to the operation andmanagement of the casino. In addition, the First Mortgage Notes are guaranteedon a senior secured basis by HWCC-Louisiana, Inc., HCS I, Inc. andHCS II, Inc. (collectively, the “Guarantors”).

 

Suchguarantees are secured by a first priority secured interest in substantiallyall of the Guarantors’ assets, including a pledge of the capital stock ofHCS I, Inc. and HCS II, Inc. and their partnership interests inHollywood Casino Shreveport.

 

The FirstMortgage Notes may be redeemed at any time on or after August 1, 2003 at106.5% of the then outstanding principal amount, decreasing to 103.25% and 100%on August 1, 2004 and 2005, respectively. (See Event of Default, below, regarding required repurchase offer at101%).

 

The indenturegoverning the First Mortgage Notes contains various provisions limiting ourability to borrow money, pay distributions on our equity interests or prepaydebt, make investments, create liens, sell assets or enter into mergers orconsolidations. In addition, the indenture restricts the ability of theGuarantors and Shreveport Capital Corporation to acquire additional assets,become liable for additional obligations or engage in any significant businessactivities.

 

*$39 Million 13% Senior Secured Notes*

* *

InJune 2001, Hollywood Casino Shreveport and Shreveport Capital Corporationissued $39 million of the Senior Secured Notes. The Senior Secured Notes wereissued at an initial premium of $1.2 million to yield interest at an effectiverate of 12.21% per annum. Fixed interest on the Senior Secured Notes at theannual rate of 13% is payable on each February 1 and August 1. Inaddition, contingent interest accrues and is payable on each interest paymentdate. The amount of contingent interest is equal to 1.3% of the consolidatedcash flow of Hollywood Casino Shreveport for the applicable period subject to amaximum contingent interest of $1.3 million for any four consecutivefiscal quarters. Contingent interest amounted to $.2 million for the yearended December 31, 2003. Accrued contingent interest amounted to $.5 millionand $.3 million at December 31, 2003 and 2002, respectively. Contingentinterest may not be paid to the extent that payment would result in certainfinancial coverage ratios not being met. Consequently, no contingent interesthas been paid since the opening of the casino. Proceeds from the Senior SecuredNotes were used, in part, to retire our then outstanding capital lease obligationwith the remainder available for working capital purposes.

 

Under theterms of certain intercreditor collateral agreements, the Senior Secured Notesare secured by, among other things, (1) a security interest in certainfurniture, fixtures and equipment acquired prior to the opening of the casinofor $30 million and (2) a security interest on an equal basis in upto $10 million of the collateral which secures the First Mortgage Notes. Thefurniture, fixtures and equipment in (1) above were obtained with theproceeds from the capital lease obligation retired with a portion of theproceeds from the Senior Secured Notes.

 

The SeniorSecured Notes may be redeemed on the same terms and conditions as the FirstMortgage Notes. The indenture governing the Senior Secured Notes also carriessubstantially the same limitations, covenants and restrictions as thoseincluded in the indenture governing the First Mortgage Notes.

 

*Event of Default*

* *

The indenturesgoverning the Shreveport Notes require the issuers to make an offer to purchasethe Shreveport Notes at 101% of the principal amount thereof within ten days ofthe occurrence of a “Change of Control” as defined in the indentures. A “Changeof Control” was deemed to have occurred under the indentures on March 3, 2003as a result of the consummation of the merger of a wholly-owned subsidiary ofPenn National with and into Hollywood Casino Corporation. We determined that wedid not have the liquidity to repurchase the Shreveport Notes at 101% of theirprincipal amount and, accordingly, could not make an offer to purchase theShreveport Notes as required under the indentures. A valuation allowance in theamount of $70.3 million was established to reduce the carrying amount tomanagement’s estimate of the fair value of the Shreveport Notes, which wasbased on the fair value of the underlying collateral.

 

22

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On March 14,2003, we were notified by an ad hoc committee of holders of the ShreveportNotes that we had 60 days from receipt of the notice to cure the failure tooffer to purchase the Shreveport Notes or an event of default would occur underthe indentures. Neither the Hollywood Casino Shreveport general partnership norShreveport Capital Corporation made a Change of Control offer to purchase theShreveport Notes within the 60 days and, accordingly, the ad hoc committeenotified us in May 2003 that an event of default had occurred under theindentures.  In addition, we did notmake the August 1, 2003 and February 1, 2004 interest payments of approximately$12.3 million each, which were due on the Shreveport Notes.  During the intervening period, we enteredinto negotiations with an ad hoc committee of holders of the Shreveport Notesregarding the possible restructure of the outstanding indebtedness. In November2003, we retained Libra Securities, LLC as our exclusive financial advisor inconnection with a possible sale or debt restructuring transaction. The holdersof the Shreveport Notes might pursue all rights and remedies that they may haveunder the indentures as a result of the event of default. Any such action onthe part of the note holders may prompt us to seek the protection of thebankruptcy laws or other similar remedies.

 

*Recent Developments*

* *

On February 3,2004, HCS, I, Inc., our managing general partner, announced that its Board ofDirectors had authorized the initiation of a process that it hopes will resultin the sale or other disposition of Hollywood Casino Shreveport. The Boardfurther authorized our financial advisor, Libra Securities LLC, to begincontacting potential acquirers.  Inaddition, the Board authorized the creation of an independent committee of theBoard, currently consisting of the director not employed directly by PennNational, to oversee this process.  TheBoard created an independent committee in the event that Penn National electsto participate as a bidder in the process. The Board took action afterconsultation with the ad hoc committee of holders of the Shreveport Notes.Although no formal agreement has been reached with the ad hoc committeeregarding the sale process, the independent committee anticipates that it willconsult with the ad hoc committee throughout the process. There can be noassurance that the process will result in the sale or other disposition of theriverboat casino/hotel complex or that, if it does, the sale proceeds will beadequate to pay the Shreveport Notes in full. We currently anticipate that any transaction will be effected through abankruptcy proceeding.  If our effortsto achieve a sale or other restructuring transaction are unsuccessful, theholders of the Shreveport Notes might pursue all rights and remedies they mayhave under the indentures.  Any suchaction on the part of the note holders may prompt us to seek the protection ofthe bankruptcy laws or other similar remedies.

 

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**Commitmentsand contingencies**

 

Contractual Cash Obligations

 

The following table presentsour contractual cash obligations as of December 31, 2003 (in thousands):

 
|                                 |   | **Payments  Due By Period** |    |
|--------------------------------------|--------|-----------------------------|---------|
|                                 |   | **Total**                   |    | **2004** |   | **2005– 2006** |   | **2007 -  2008** |   | **2009 and  After** |   |
|                                 |   |                        |    |   |   |   |   |   |   |   |   |
| 13% First Mortgage Notes due 2006(1) |   |                        |    |   |   |   |   |   |   |   |   |
| Principal                            |   | $                           | 150,000 |   | $ | 150,000 |   | $ | — |   | $ | — |   | $ | — |   |
| Interest                             |   | 19,500                      |    | 19, 500 |   | — |   | — |   | — |   |
| 13% Senior Secured Notes due 2006(2) |   |                        |    |   |   |   |   |   |   |   |   |
| Principal                            |   | 39,000                      |    | 39,000 |   | — |   | — |   | — |   |
| Interest                             |   | 5,070                       |    | 5,070 |   | — |   | — |   | — |   |
| Purchase obligations                 |   | 1,718                       |    | 1,089 |   | 462 |   | 167 |   | — |   |
| Construction commitments             |   | —                      |    | — |   | — |   | — |   | — |   |
| Operating Leases                     |   | 2,508                       |    | 603 |   | 658 |   | 280 |   | 967 |   |
| Total                                |   | $                           | 217,796 |   | $ | 215,262 |   | $ | 1,120 |   | $ | 447 |   | $ | 967 |   |

 

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(1)                                  The$150 million aggregate principal amount of 13% First Mortgage Notes are indefault.  Interest payments ofapproximately $19.6 million are past due and payable.

(2)                                  The$39 million aggregate principal amount of 13% Senior Secured Notes are indefault.  Interest payments ofapproximately $5 million are past due and payable.

 

*– OtherCommercial Commitments*

* *

None

 

*ManagementContract for Hollywood Casino Shreveport*

* *

HWCC-Shreveport, Inc., a wholly ownedsubsidiary of Hollywood Casino Corporation, manages our operations under theterms of a management agreement. Under the terms of the management agreement,HWCC-Shreveport, Inc. earns basic and incentive management fees for itsservices. The basic fee equals approximately 2% of our net revenues and theincentive fee equals the sum of (1) 5% of our earnings before interest,taxes, depreciation and amortization as defined in the agreement (“EBITDA”)between $25 million and $35 million, (2) 7% of our EBITDAbetween $35 million and $40 million, and (3) 10% of our EBITDAover $40 million.  In addition, wereimburse HWCC-Shreveport, Inc. for expenses incurred in connection withservices provided under the management agreement.

 

Such fees amounted to $2.2 million for thefiscal year 2003, the payment of which was deferred. Under the indenture andrelated documents governing the Shreveport Notes, management fees aresubordinated to all payments under the Shreveport Notes and may not be paid tothe extent that their payment would result in certain financial coverage ratiosnot being met. Consequently, no management fees have been paid since theopening of the casino.

 

*ShreveportPaddlewheels, L.L.C. Residual Interest Payments and Marine Services Agreement*

* *

HCS I, Inc. and HCS II, Inc. have assumed HWCC-Louisiana,Inc.’s obligation to cause us to pay Shreveport Paddlewheels, L.L.C., orPaddlewheels, a Louisiana limited liability company, an amount equal toapproximately 1% of the casino’s net revenues in exchange for the assignment byPaddlewheels of its joint venture interest in us to HWCC-Louisiana, Inc. andSodak Louisiana, L.L.C. in September 1998. For financial accountingpurposes, such allocations are treated as distributions to HCS I, Inc. andHCS II, Inc.  We are also obligatedto pay Paddlewheels a $30,000 monthly fee for marine services and toreimburse Paddlewheels for its direct expenses, if any, incurred with respectto those services. The payments to Paddlewheels are to be made for so long asit remains our joint venture partner. We paid or accrued distributions totaling $1.5 million and incurredmarine services fees of $.3 million under these agreements during thefiscal year 2003.  Since July 10,2003, we suspended payments to Paddlewheels due to the event of default on theShreveport Notes.

 

24

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*City ofShreveport Ground Lease*

* *

We entered into a ground lease with the City of Shreveport for the landon which the casino was built. The lease has an initial term endingDecember 20, 2010 with subsequent renewals for up to an additional40 years. Base rental payments under the lease began when constructioncommenced and were $10,000 per month during the construction period. The baserental amount increased to $.5 million per year upon opening and continues atthat amount for the remainder of the initial ten-year lease term. During thefirst five-year renewal term, the base annual rental will be $.4 million. Theannual base rental payment will be $.5 million for the second five-yearrenewal term, $.5 million for the third five-year renewal term,$.6 million for the fourth five-year renewal term and $.7 million forthe fifth five year renewal term with no further increases.

 

The base rental portion of the ground leaseis being amortized on a straight-line basis. In addition to the base rent, we pay a monthly percentage rent equal tothe greater of (1) $.5 million per year or (2) the sum of 1% ofour adjusted gross revenues and the amount by which 50% of the net income fromour parking facilities exceeds a specified parking income credit.  Ground lease rentals amounted toapproximately $1.9 million for the year ended December 31, 2003,including percentage rentals amounting to $1.3 million.  In addition, the ground lease agreementcalls for payments in lieu of admission fees to the City of Shreveport andpayments to the Bossier Parish School Board amounting to 3.225% and .5375% ofNet Gaming Proceeds (as defined in the agreement), respectively.  These additional charges amounted to$5 million for the year ending December 31, 2003.

 

**CriticalAccounting Estimates**

** **

Financial Reporting Release No. 60 requiresall companies to include a discussion of critical accounting policies ormethods and estimates used in the preparation of financial statements. Criticalaccounting estimates and assumptions are made in order to prepare ourconsolidated financial statements in accordance with generally acceptedaccounting principles and affect the amounts reported in the consolidatedfinancial statements. We regularly evaluate these estimates and assumptions,particularity in areas where changes in these estimates and assumptions couldhave a material affect on our results of operations, financial position andcash flows. The critical accounting estimates that we believe are the mostcritical to aid in fully understanding our reported financial results includethe following:

 

*Valuation oflong-lived tangible and intangible assets, including goodwill*

* *

Effective with the close of business onFebruary 28, 2003, we were acquired by Penn National as part of its acquisitionof Hollywood Casino Corporation and its subsidiaries. As a result of theacquisition, we were required to adjust our assets and liabilities to reflectfair values as of the date of acquisition. The purchase price adjustments reflectedon our financial statements includes the fair values based on independentappraisals obtained by Penn National and a bond valuation allowance thatreduces the value of the Shreveport Notes to their estimated fair value. Nogoodwill was recorded in connection with the acquisition.

 

The purchase price allocation processrequires management’s estimates and judgments as to the remaining useful livesof the assets purchased and the fair value of other assets, liabilities anddebt. If growth rates, operating margins, fair value of debt or useful lives,among other assumptions, differ from the estimates and judgments used in thepurchase price allocation, the amounts recorded in the financial statementscould result in a possible impairment of the assets and a further adjustment tothe bond valuation allowance.

 

At December 31, 2003, we had a netproperty and equipment balance of $110.7 million, representing 78.1% oftotal assets. We depreciate property and equipment on a straight-line basisover their estimated useful lives. The estimated useful lives are based on thenature of the assets as well as our current operating strategy. Future eventssuch as property expansions, new competition and new regulations, could resultin a change in the manner in which we are using certain assets requiringchanges in the estimated useful lives of such assets. In assessing therecoverability of the carrying value of property and equipment, we must makeassumptions regarding future cash flows and other factors. If these estimatesor the related assumptions change in the future, we may be required to recordimpairment loss for these assets. Such an impairment loss would be recognizedas a non-cash component of operating income.

 

25

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*Litigation,Claims and Assessments*

* *

We utilize estimates for litigation, claimsand assessments. These estimates are based on our knowledge and experienceregarding current and past events, as well as assumptions about future events.If our assessment of such a matter should change, we may have to change theestimate, which may have an adverse effect on our results of operations. Actualresults could differ from these estimates.

 

**AccountingPronouncements Adopted in 2003**

** **

In January 2003, FASB issued InterpretationNo. 46, “Consolidation of Variable Interest Entities” (“InterpretationNo. 46”), clarifies the application of Accounting Research BulletinNo. 51, “Consolidated Financial Statements,” to certain entities in whichequity investors do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. Interpretation No. 46 is applicable immediately for variableinterest entities created after January 31, 2003. For variable interestentities created prior to January 31, 2003, the provisions ofInterpretation No. 46 are applicable no later than July 1, 2003. Wedo not expect this Interpretation to have an effect on the consolidatedfinancial statements.

 

**RecentAccounting Pronouncements**

** **

There are no accounting standards issuedbefore December 31, 2003 but effective after December 31, 2003 that areexpected to have a material impact on our financial reporting.

 

## **ITEM 7A.**               QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

## ** **

Both the First Mortgage Notes issued tofinance construction of the Hollywood Casino Shreveport and the Senior SecuredNotes issued to retire lease financing and provide working capital includeinterest at the rate of 13% payable semiannually as well as contingent interesteffective with the casino’s opening. Contingent interest under the indenturesgoverning the First Mortgage Notes and the Senior Secured Notes is equal to 5%and 1.3%, respectively, of consolidated cash flow for the applicable periodsubject to a maximum contingent interest of $5 million and$1.3 million, respectively, for any four consecutive fiscal quarters.Accordingly, the maximum potential interest with respect to the First MortgageNotes for a fiscal year could be $24.5 million, resulting in an effectiveannual interest rate of 16.33% and the maximum potential interest with respectto the Senior Secured Notes for a fiscal year could be $6.4 million,resulting in an effective annual interest rate of 15.5%. These maximums wouldassume that the annual consolidated cash flow of the casino was at least$100 million. The contingent component of interest under the FirstMortgage Notes and the Senior Secured Notes was negotiated with the lenders aspart of determining the fixed rate component of interest. Management believesthat because the contingent interest component is determined by our cash flowsand can only be paid if certain coverage ratios are met, our liquidity andcapital resources will not be compromised by the payment, if any, of contingentinterest.

 

26

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**ITEM8****.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**Report ofIndependent Certified Public Accountants**

** **

To the Partners of Hollywood CasinoShreveport:

 

We have audited the accompanying consolidatedbalance sheet of Hollywood Casino Shreveport and subsidiaries (a Louisianageneral partnership) as of December 31, 2003 and the related consolidatedstatements of operations, change in partners’ deficiency and cash flows for theperiod from March 1, 2003 through December 31, 2003.  These consolidated financial statements are the responsibility ofthe Partnership’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audit. 

 

We conducted our audit in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a testbasis,evidence supporting the amounts and disclosures in the consolidated financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Hollywood Casino Shreveport and subsidiaries at December31, 2003, and the results of their operations and their cash flows for theperiod from March 1, 2003 through December 31, 2003 in conformity withaccounting principles generally accepted in the United States of America. 

 

The accompanying financial statements havebeen prepared assuming that the Partnership will continue as a goingconcern.  As discussed in Note 1 to theconsolidated financial statements, the Partnership has suffered net losses overseveral years, has a significant deficiency in its partners’ capital, and is indefault under certain of its debt agreements. These factors raise substantial doubt about the Partnership’s ability tocontinue as a going concern. Management’s plans about these matters are more fully described in Note9, including its anticipation of bankruptcy proceedings.  The consolidated financial statements do notinclude any adjustments that might result from the outcome of theseuncertainties.

 

BDO Seidman, LLP

Philadelphia, Pennsylvania

January30, 2004, except for Note 9,which is as of February 3, 2004

 

27

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**Independent Auditors’ Report**

 

To the Partners of HollywoodCasino Shreveport:

 

We have audited theaccompanying consolidated balance sheets of Hollywood Casino Shreveport (aLouisiana general partnership and formerly known as QNOV) and subsidiaries asof December 31, 2002 and the related consolidated statements of operations,changes in partners’ deficiency and cash flows for the period from January 1,2003 through February 28, 2003 and for the years ended December 31, 2002 and 2001.  Thesefinancial statements are the responsibility of the Partnership’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards required thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements present fairly, in all material respects, thefinancial position of Hollywood Casino Shreveport and subsidiaries as ofDecember 31, 2002, and the results of their operations and their cash flows forthe period from January 1, 2003 through February 28, 2003, and the years endedDecember 31, 2002 and 2001, in conformity with the accounting principlesgenerally accepted in the United States of America.

 

The accompanying financialstatements have been prepared assuming that the Partnership will continue as agoing concern.  As discussed in the *PredecessorNote* to the financial statements under the caption *“LiquidityIssues,”* Hollywood Casino Shreveport may not be able to meet itsfinancial obligations.  In addition, asdiscussed in the *Predecessor Note,* the Partnership has experienced continuingnet losses and has a significant deficiency in its partners’ capital.  Both of these matters raise substantialdoubt about the Partnership’s ability to continue as a going concern.  Management’s plans concerning these mattersare also described in the *Predecessor Note*under the caption *“LiquidityIssues.”*  The financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

 

Deloitte & Touche LLP

Dallas, Texas

April 11, 2003

 

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**HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands)**

 
| **December 31,**                                                                                       |   | **(Predecessor  Basis)****2002** |    | **(Successor  Basis)****2003** |   |
|--------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|--------------------------------|--------|
| **Assets**                                                                                             |   |                             |    |                           |   |
| Current assets:                                                                                        |   |                             |    |                           |   |
| Cash and cash equivalents                                                                              |   | $                                | 21,625  |                           | $      | 24,810 |   |
| Accounts receivable, net allowance of $729  and $881, respectively                                     |   | 2,301                            |    | 1,698                          |   |
| Inventories                                                                                            |   | 1,950                            |    | 1,974                          |   |
| Prepaid expenses and other current assets                                                              |   | 1,086                            |    | 2,113                          |   |
| Total current assets                                                                                   |   | 26,962                           |    | 30,595                         |   |
|                                                                                                   |   |                             |    |                           |   |
| Property and equipment:                                                                                |   |                             |    |                           |   |
| Land improvements                                                                                      |   | 1,665                            |    | 10,000                         |   |
| Building and improvements                                                                              |   | 97,465                           |    | 75,056                         |   |
| Riverboat                                                                                              |   | 45,042                           |    | 15,379                         |   |
| Furniture and equipment                                                                                |   | 48,098                           |    | 18,408                         |   |
|                                                                                                   |   | 192,270                          |    | 118,843                        |   |
| Less-accumulated depreciation                                                                          |   | (32,507                          | )       | (8,100                         | )      |
|                                                                                                   |   | 159,763                          |    | 110,743                        |   |
| Other assets                                                                                           |   |                             |    |                           |   |
| Deferred Financing costs, net                                                                          |   | 4,770                            |    | —                         |   |
| Other                                                                                                  |   | 373                              |    | 373                            |   |
| Total other assets                                                                                     |   | 5,143                            |    | 373                            |   |
|                                                                                                   |   | $                                | 191,868 |                           | $      | 141,711 |   |
| **Liabilities and Partners’ Deficiency**                                                          |   |                             |    |                           |   |
| Current liabilities:                                                                                   |   |                             |    |                           |   |
| Current maturities of long–term debt, net  of valuation allowance of $70,348 at December 31, 2003 |   | $                                | 6       |                           | $      | 119,345 |   |
| Accounts payable                                                                                       |   | 7,074                            |    | 5,723                          |   |
| Accrued liabilities                                                                                    |   |                             |    |                           |   |
| Salaries and wages                                                                                     |   | 2,911                            |    | 2,212                          |   |
| Interest                                                                                               |   | 11,757                           |    | 24,780                         |   |
| Gaming and other taxes                                                                                 |   | 1,113                            |    | 1,446                          |   |
| Insurance                                                                                              |   | 1,591                            |    | 2,091                          |   |
| Other                                                                                                  |   | 3,238                            |    | 3,300                          |   |
| Due to affiliates , net of valuation  allowance of $6,420 at December 31, 2003                         |   | 6,187                            |    | 3,269                          |   |
| Other current liabilities                                                                              |   | 1,370                            |    | 1,528                          |   |
| Total current liabilities                                                                              |   | 35,247                           |    | 163,694                        |   |
|                                                                                                   |   |                             |    |                           |   |
| Long–term  debt                                                                                   |   | 189,905                          |    | —                         |   |
|                                                                                                   |   |                             |    |                           |   |
| Other noncurrent liabilities                                                                           |   | 288                              |    | 403                            |   |
|                                                                                                   |   |                             |    |                           |   |
| Commitments and contingencies                                                                          |   |                             |    |                           |   |
| Partners’ deficiency                                                                              |   | (33,572                          | )       | (22,386                        | )      |
|                                                                                                   |   | $                                | 191,868 |                           | $      | 141,711 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands)**

 
|                                               |   | **Predecessor  Basis**             |    | **Successor  Basis**               |   |
|----------------------------------------------------|--------|------------------------------------|---------|------------------------------------|--------|
|                                               |   | **Year Ended  December 31,  2001** |    | **Year Ended  December 31,  2002** |   | **Period  from  January 1, 2003  Through  February 28,  2003** |   | **Period  from  March 1, 2003  Through  December 31,  2003** |   |
| Revenues:                                          |   |                               |    |                               |   |   |   |   |   |
|                                               |   |                               |    |                               |   |   |   |   |   |
| Casino                                             |   | $                                  | 144,334 |                               | $      | 146,070 |   | $ | 22,730 |   | $ | 105,330 |   |
| Rooms                                              |   | 8,754                              |    | 9,279                              |   | 1,353 |   | 7,341 |   |
| Foods and beverages                                |   | 25,521                             |    | 24,441                             |   | 3,784 |   | 17,890 |   |
| Other                                              |   | 3,412                              |    | 2,473                              |   | 376 |   | 1,890 |   |
|                                               |   | 182,021                            |    | 182,263                            |   | 28,243 |   | 132,451 |   |
| Less promotional allowances                        |   | (38,153                            | )       | (35,907                            | )      | (5,262 | ) | (18,527 | ) |
| Net revenue                                        |   | 143,868                            |    | 146,356                            |   | 22,981 |   | 113,924 |   |
|                                               |   |                               |    |                               |   |   |   |   |   |
| Expenses:                                          |   |                               |    |                               |   |   |   |   |   |
| Casino                                             |   | 118,685                            |    | 106,391                            |   | 16,700 |   | 57,225 |   |
| Rooms                                              |   | 2,452                              |    | 2,229                              |   | 344 |   | 3,148 |   |
| Food and beverage                                  |   | 9,396                              |    | 6,784                              |   | 983 |   | 15,287 |   |
| Other                                              |   | 3,433                              |    | 2,916                              |   | 516 |   | 7,833 |   |
| General and administrative                         |   | 13,506                             |    | 10,333                             |   | 1,447 |   | 20,459 |   |
| Depreciation and amortization                      |   | 15,866                             |    | 16,157                             |   | 2,715 |   | 8,104 |   |
| Loss of early extinguishment of debt               |   | 843                                |    | —                             |   | — |   | — |   |
| Impairment Loss                                    |   | —                             |    | 179                                |   | — |   | — |   |
| Total expenses                                     |   | 164,181                            |    | 144,989                            |   | 22,705 |   | 112,056 |   |
|                                               |   |                               |    |                               |   |   |   |   |   |
| Income (loss) from operations                      |   | (20,313                            | )       | 1,367                              |   | 276 |   | 1,868 |   |
|                                               |   |                               |    |                               |   |   |   |   |   |
| Non–operating income (expenses):              |   |                               |    |                               |   |   |   |   |   |
| Interest income                                    |   | 652                                |    | 200                                |   | 17 |   | 77 |   |
| Interest expense                                   |   | (25,350                            | )       | (26,744                            | )      | (4,456 | ) | (20,870 | ) |
| Equity in gain (loss) of unconsolidated  affiliate |   | —                             |    | (313                               | )      | — |   | — |   |
| Reorganization costs                               |   | —                             |    | —                             |   | — |   | (2,384 | ) |
| Total non-operating (expenses), net                |   | (24,698                            | )       | (26,857                            | )      | (4,439 | ) | (23,177 | ) |
|                                               |   |                               |    |                               |   |   |   |   |   |
| Net (loss)                                         |   | $                                  | (45,011 | )                                  | $      | (25,490 | ) | $ | (4,163 | ) | $ | (21,309 | ) |

 

See accompanying notes to consolidated financial statements.

 

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**HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARIESCONSOLIDATED STATEMENT OF CHANGESIN PARTNERS’ DEFICIENCY(In thousands)**

 

**For the Years Ended December 31, 2001 and2002 and****For the Periods from January 1, 2003 Through February 28, 2003(Predecessor Basis)and From March 1, 2003 Through December 31, 2003 (Successor Basis)**

 
|                                                                    |   | **Former  Partners** |   | **HCS I, Inc** |   | **HCS II,  Inc.** |   | **Shreveport  Paddlewheels  L.L.C.** |   | **Totals** |   |
|-------------------------------------------------------------------------|--------|----------------------|--------|----------------|--------|-------------------|--------|--------------------------------------|--------|------------|--------|
| **Predecessor Basis**                                                   |   |                 |   |           |   |              |   |                                 |   |       |   |
|                                                                    |   |                 |   |           |   |              |   |                                 |   |       |   |
| **Balances, January 1, 2001**                                           |   | $                    | (5,000 | )              | $      | 31,851            |   | $                                    | 323    |       | $      | 2,000 |   | $ | 29,174 |   |
| Capital contributions                                                   |   | —               |   | 8,588          |   | 87                |   | —                               |   | 8,675      |   |
| Partnership distributions                                               |   | —               |   | (1,522         | )      | (15               | )      | —                               |   | (1,537     | )      |
| Net (loss)                                                              |   | —               |   | (44,561        | )      | (450              | )      | —                               |   | (45,011    | )      |
|                                                                    |   |                 |   |           |   |              |   |                                 |   |       |   |
| **Balances, December 31, 2001**                                         |   | (5,000               | )      | (5,644         | )      | (55               | )      | 2,000                                |   | (8,699     | )      |
| Capital contributions                                                   |   | —               |   | 2,060          |   | 21                |   | —                               |   | 2,081      |   |
| Partnership distributions                                               |   | —               |   | (1,449         | )      | (15               | )      | —                               |   | (1,464     | )      |
| Net (loss)                                                              |   | —               |   | (25,235        | )      | (255              | )      | —                               |   | (25,490    | )      |
|                                                                    |   |                 |   |           |   |              |   |                                 |   |       |   |
| **Balances, December 31, 2002**                                         |   | (5,000               | )      | (30,268        | )      | (304              | )      | 2,000                                |   | (33,572    | )      |
| Capital Contributions                                                   |   | —               |   | 792            |   | 8                 |   | —                               |   | 800        |   |
| Partnership distributions                                               |   | —               |   | (228           | )      | (2                | )      | —                               |   | (230       | )      |
| Net (loss) for the period of  January 1, 2003 through February 28, 2003 |   | —               |   | (4,121         | )      | (42               | )      | —                               |   | (4,163     | )      |
| Acquisition adjustment                                                  |   | 5,000                |   | 33,825         |   | 340               |   | (2,000                               | )      | 37,165     |   |
|                                                                    |   |                 |   |           |   |              |   |                                 |   |       |   |
| **Successor Basis**                                                     |   |                 |   |           |   |              |   |                                 |   |       |   |
| **Balances, March 1, 2003**                                             |   | —               |   | —         |   | —            |   | —                               |   | —     |   |
| Partnership distributions                                               |   | —               |   | (1,066         | )      | (11               | )      | —                               |   | (1,077     | )      |
| Net (loss) for the period of  March 1, 2003 through December 31, 2003   |   | —               |   | (21,096        | )      | (213              | )      | —                               |   | (21,309    | )      |
|                                                                    |   |                 |   |           |   |              |   |                                 |   |       |   |
| **Balances, December 31, 2003**                                         |   | $                    | — |           | $      | (22,162           | )      | $                                    | (224   | )          | $      | — |   | $ | (22,386 | ) |

 

See accompanying notes to consolidated financial statements.

 

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**HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

 
|                                                                                       |   | **Predecessor  Basis**             |    | **Successor  Basis**               |   |
|--------------------------------------------------------------------------------------------|--------|------------------------------------|---------|------------------------------------|--------|
|                                                                                       |   | **Year ended  December 31,  2001** |    | **Year ended  December 31,  2002** |   | **Period from  January 1 to  February 28,  2003** |   | **Period from  March 1 to  December 31,  2003** |   |
| **OPERATING ACTIVITIES:**                                                                  |   |                               |    |                               |   |   |   |   |   |
| Net (loss)                                                                                 |   | $                                  | (45,011 | )                                  | $      | (25,490 | ) | $ | (4,163 | ) | $ | (21,309 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |   |                               |    |                               |   |   |   |   |   |
| Depreciation and amortization, including  amortization of premium                          |   | 17,223                             |    | 17,274                             |   | 2,902 |   | 7,667 |   |
| Impairment loss                                                                            |   | —                             |    | 179                                |   |   |   |   |   |
| Loss on early extinguishment of debt                                                       |   | 843                                |    | —                             |   |   |   |   |   |
| Gain on disposal of assets                                                                 |   | 26                                 |    | (16                                | )      | — |   | — |   |
| Write off investment in unconsolidated  affiliate                                          |   | —                             |    | 313                                |   | — |   | — |   |
| (Benefit) provision for doubtful accounts                                                  |   | 1,021                              |    | 444                                |   | 55 |   | 452 |   |
| Decrease (increase) in accounts receivable                                                 |   | (2,280                             | )       | (635                               | )      | 185 |   | 3,918 |   |
| Increase (decrease) in accounts payable and  accrued liabilities                           |   | (4,229                             | )       | 1,643                              |   | (9,124 | ) | 20,988 |   |
| Net change in affiliate balances                                                           |   | 2,876                              |    | 2,316                              |   | 577 |   | 2,934 |   |
| Net change in other current assets and  liabilities                                        |   | 1,205                              |    | (151                               | )      | (140 | ) | (756 | ) |
| Net change in other noncurrent assets and  liabilities                                     |   | 126                                |    | 133                                |   | 20 |   | 95 |   |
|                                                                                       |   |                               |    |                               |   |   |   |   |   |
| Net cash provided by (used in) operating  activities                                       |   | (28,200                            | )       | (3,990                             | )      | (9,688 | ) | 13,989 |   |
|                                                                                       |   |                               |    |                               |   |   |   |   |   |
| **INVESTING ACTIVITIES:**                                                                  |   |                               |    |                               |   |   |   |   |   |
| Purchases of property and equipment                                                        |   | (4,993                             | )       | (1,497                             | )      | (224 | ) | (369 | ) |
| Proceeds from the disposal of assets                                                       |   | —                             |    | 32                                 |   | — |   | — |   |
| Investment in unconsolidated affiliate                                                     |   | (265                               | )       | —                             |   | — |   | — |   |
| Net change in cash restricted for  construction project                                    |   | 9,530                              |    | —                             |   | — |   | — |   |
| Net cash provided by (used in) investing  activities                                       |   | 4,272                              |    | (1,465                             | )      | (224 | ) | (369 | ) |
|                                                                                       |   |                               |    |                               |   |   |   |   |   |
| **FINANCING ACTIVITIES:**                                                                  |   |                               |    |                               |   |   |   |   |   |
| Proceeds from issuance of long–term debt                                              |   | 40,170                             |    | —                             |   | — |   | — |   |
| Repayment of long–term debt                                                           |   | (2,006                             | )       | (7                                 | )      | (1 | ) | (7 | ) |
| Deferred financing costs                                                                   |   | (2,296                             | )       | (5                                 | )      | — |   | — |   |
| Capital contributions                                                                      |   | 8,675                              |    | 2,081                              |   | 800 |   | — |   |
| Payments on capital lease obligations                                                      |   | (30,000                            | )       | —                             |   | — |   | — |   |
| Partner distributions                                                                      |   | (1,504                             | )       | (1,452                             | )      | (238 | ) | (1,077 | ) |
| Net cash provided by (used in) financing  activities                                       |   | 13,039                             |    | 617                                |   | 561 |   | (1,084 | ) |
| Net increase (decrease) in cash and cash  equivalents                                      |   | (10,889                            | )       | (4,838                             | )      | (9,351 | ) | 12,536 |   |
| Cash and cash equivalents at beginning of  period                                          |   | 37,352                             |    | 26,463                             |   | 21,625 |   | 12,274 |   |
| Cash and cash equivalents at end of period                                                 |   | $                                  | 26,463  |                               | $      | 21,625 |   | $ | 12,274 |   | $ | 24,810 |   |

 

See accompanying notes to consolidated financial statements.

 

32

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**HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

### **1.             Successor’s Note**

### ** **

**Acquisition ofHollywood Casino Shreveport**

** **

Effective with the close of business onFebruary 28, 2003, Penn National Gaming, Inc. (“Penn National”) completedthe acquisition of Hollywood Casino Corporation (“HCC”) and its subsidiaries,including the Hollywood Casino Shreveport general partnership (“HCS”).  Penn National “pushed down” its basis in HCSin accordance with Staff Accounting Bulletin No. 54, “Push Down Basis ofAccounting Required in Certain Limited Circumstances.”  The accompanying consolidated financialstatements for the period following the acquisition (“Successor Period”) includesmanagement’s assessment of the purchase price adjustments required inaccordance with Statement of Financial Accounting Standards No. 141,“Business Combinations” (“SFAS 141”). SFAS 141 requires that assetsand liabilities of the acquired entity be reflected at their fair values. Theaccompanying consolidated financial statements for periods prior to theacquisition (“Predecessor Period”) reflect the historical cost basis of HCS’sassets and liabilities.  (See Note 10for Predecessor Note).

 

The differences in financial presentationfrom the Predecessor Basis to the Successor Basis includes the reclassificationof cash awards from promotional allowances to a reduction of casino revenue anda reclassification of marketing giveaways and coupons from promotionalallowances to marketing expense.  Thishad the effect for the year 2002 of decreasing casino revenue by $4.5 million,decreasing promotional allowance by $11.5 million and increasing operatingexpenses by $7.0 million.  The effectfor the predecessor period from January 1, 2003 to February 28, 2003 was adecrease in casino revenue by $.7 million, a decrease in promotional allowancesby $1.6 million and an increase in operating expenses by $.9 million.

 

The purchase price adjustments reflected onthe accompanying Successor Basis consolidated financial statements includerevaluing on the acquisition date HCS’s property and equipment to theirestimated fair values based on an independent appraisal obtained by PennNational. Such appraisal resulted in a reduction of the recorded net book valueof property and equipment as of the date of the acquisition in the amount of$38.8 million. Deficiencies in HCS’s partners’ capital accounts (includingthe carryover deficiency of the former partners) were adjusted by$37.2 million to a zero basis as of the acquisition date. No goodwill wasrecorded in connection with the acquisition.

 

A valuation allowance in the amount of$70.3 million was established with respect to the $150 million 13%First Mortgage Notes with contingent interest due 2006 (the “First Mortgage Notes”)and the $39 million 13% Senior Secured Notes with contingent interest due2006 (the “Senior Secured Notes,” and collectively, the “Shreveport Notes”) toreduce their carrying amount to management’s estimate of their fair value.Management’s estimate was based on the fair values of the assets andliabilities assumed. In addition, a valuation allowance in the amount of$6.4 million was established at the acquisition date to fully reserve themanagement fee payable to a subsidiary of HCC. Such management fee is subordinated in payment to the Shreveport Notes.

 

As described in Note 3, HCS failed to make arequired repurchase offer for the Shreveport Notes and has failed to makesemi-annual interest payments on the Shreveport Notes aggregating approximately$24.6 million.

 

In addition, HCS has experienced net lossessince inception and has a significant deficiency in its partners’ capital.  Accordingly, management believes that HCS’sexisting cash and cash flow from operations will not be sufficient to fund itsoperating and capital needs for the next 24 months.  All of these matters raise substantial doubt about HCS’s abilityto continue as a going concern. Management is currently in the process of developing its plans withregard to these matters.

 

As described in Note 9, HCS I, Inc., themanaging general partner of HCS, has initiated a process that it hopes willresult in the sale or other disposition of the riverboat casino/hotelcomplex.  There can be no assurance thatthe process will result in the sale or other disposition of the riverboatcasino/hotel complex or that, if it does, the sale proceeds will be adequate topay the Shreveport Notes in full. Further, the holders of the Shreveport Notes might pursue all rights andremedies that they may have under the indentures as a result of the event ofdefault. Any such action on the part of the note holders may prompt HCS to seekthe protection of the bankruptcy laws or other similar remedies.

 

33

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### **2.             Summary of Significant AccountingPolicies**

### ** **

***Principles ofConsolidation***

* *

The consolidated financial statements includethe accounts of HCS and its wholly owned subsidiary, Shreveport CapitalCorporation (collectively, the “Company”). All significant intercompanyaccounts and transactions have been eliminated in consolidation.

 

**Use ofEstimates**

** **

The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenue and expenses forthe reporting periods. Actual results could differ from those estimates.

 

**Cash and CashEquivalents**

** **

The Company considers all cash balances andhighly liquid investments with original maturities of three months or less tobe cash equivalents.

 

**Concentrationof Credit Risk**

** **

Financial instruments that potentially subjectthe Company to credit risk consist of cash equivalents and accounts receivable.

 

The Company’s policy is to review the amountof credit exposure to any one financial institution and place investments withfinancial institutions evaluated as being creditworthy. In the ordinary courseof business, the Company has bank deposits and overnight repurchase agreementsthat may exceed federally insured limits.

 

Concentration of credit risk, with respect tocasino receivables, is limited through the Company’s credit evaluation process.The Company issues markers to approved casino customers following backgroundchecks and investigations of creditworthiness.

 

**Allowance forDoubtful Accounts**

** **

Accounts are written off when managementdetermines that an account is uncollectible. Recoveries of accounts previouslywritten off are recorded when received. An estimated allowance for doubtfulaccounts is determined to reduce the Company’s receivables to their carryingvalue, which approximates fair value. The allowance is estimated based onhistorical collection experience, specific review of individual customeraccounts, and current economic and business conditions. Historically, theCompany has not incurred any significant credit-related losses.

 

**Fair Value ofFinancial Instruments**

** **

The following methods and assumptions areused to estimate the fair value of each class of financial instruments forwhich it is practical to estimate:

 

Cash and Cash Equivalents:  Thecarrying amount approximates the fair value due to the short maturity of thecash equivalents.

 

Long-term Debt:  In theSuccessor Period, long-term debt is based on the fair value of the underlyingcollateral.

 

34

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**Property andEquipment**

** **

Property and equipment are stated at cost.Maintenance and repairs that do not add materially to the value of the assetnor appreciably prolong its useful life are charged to expense as incurred.Gains or losses on the disposal of property and equipment are included in thedetermination of income.

 

Depreciation of property and equipment and amortization of leaseholdimprovements are provided using the straight-line method over the followingestimated useful lives:

 
| Land improvements                  |   | 5 to 15 years  |   |
|------------------------------------|--------|----------------|--------|
| Building and improvements          |   | 25 to 40 years |   |
| Furniture, fixtures, and equipment |   | 3 to 7 years   |   |
| Transportation equipment           |   | 5 years        |   |
| Leasehold Improvements             |   | 10 to 20 years |   |

 

The Company reviews the carrying values ofits long-lived assets for possible impairment whenever events or changes incircumstances indicate that the carrying amount of the assets may not berecoverable based on undiscounted estimated future operating cash flows. As ofDecember 31, 2003, the Company has determined that no impairment hasoccurred.

 

**Inventory**

 

Inventories are stated at the lower of cost(on a first-in, first-out basis) or market.

 

**DeferredFinancing Costs**

** **

During the Predecessor Period, deferredfinancing costs that were incurred by the Company in connection with theissuance of debt were deferred and amortized to interest expense over the lifeof the underlying indebtness using the interest method adjusted to reflect anyearly repayments.  There were nodeferred financing costs during the Successor Period.

 

**Income Taxes**

** **

The Company is a partnership and its taxattributes, including income and expense items are passed through itspartners.  Accordingly, the accompanyingconsolidated financial statements do not reflect state or federal income taxes.

 

35

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**RevenueRecognition**

** **

In accordance with gaming industry practice,the Company recognizes casino revenues as the net of gaming wins less losses.Net revenues exclude the retail value of complimentary rooms, food and beveragefurnished gratuitously to customers. These amounts that are included inpromotional allowances were as follows (in thousands):

 
|                         |   | **Precedessor Basis**               |   | **Successor Basis**                 |   |
|------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|
|                         |   | **Year ended  December   31, 2001** |   | **Year  Ended  December  31, 2002** |   | **Period  from  January 1,  2003  Through  February  28, 2003** |   | **Period from  March 1, 2003  Through  December 31,  2003** |   |
|                         |   |                                |   |                                |   |   |   |   |   |
| Rooms                        |   | $                                   | 4,586  |                                | $      | 5,305 |   | $ | 720 |   | $ | 4,382 |   |
| Food and beverage            |   | 19,026                              |   | 18,419                              |   | 2,858 |   | 13,645 |   |
| Other                        |   | 1,375                               |   | 681                                 |   | 81 |   | 500 |   |
| Customer loyalty programs    |   | 13,166                              |   | 11,502                              |   | 1,603 |   | — |   |
| Total promotional allowances |   | $                                   | 38,153 |                                | $      | 35,907 |   | $ | 5,262 |   | $ | 18,527 |   |

 

The estimated cost of providing suchcomplimentary services that is included in operating expenses was as follows(in thousands):

 
|                                 |   | **Precedessor Basis**              |   | **Successor Basis**                 |   |
|--------------------------------------|--------|------------------------------------|--------|-------------------------------------|--------|
|                                 |   | **Year ended  December  31, 2001** |   | **Year  Ended  December  31, 2002** |   | **Period  from  January 1,  2003  Through  February  28, 2003** |   | **Period from  March 1, 2003  Through  December 31,  2003** |   |
| Rooms                                |   | $                                  | 2,631  |                                | $      | 2,628 |   | $ | 388 |   | $ | 1,889 |   |
| Food and beverage                    |   | 22,217                             |   | 19,271                              |   | 3,030 |   | 11,663 |   |
| Other                                |   | 3,227                              |   | 1,028                               |   | 142 |   | 2,031 |   |
| Total cost of complimentary services |   | $                                  | 28,075 |                                | $      | 22,927 |   | $ | 3,560 |   | $ | 15,583 |   |

 

**Certain Risksand Uncertainties**

 

The Company’s operations are dependent on itscontinued licensing by the Louisiana Gaming Control Board. The loss of alicense in the jurisdiction in which the Company operates, could have amaterial, adverse effect on future results of operations.

 

The Company is dependent on the local market,the Dallas-Fort Worth Metroplex and East Texas for a significant number of itspatrons and revenues. If economic conditions in this area deteriorate oradditional gaming licenses are awarded which compete for these markets, theCompany’s results of operations could be adversely affected.

 

The Company is also dependantupon a stable gaming and admission tax structure in the local jurisdictions inwhich it operates and in the State of Louisiana. Any change in the taxstructure could have a material adverse effect on future results of operations.

 

36

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**AccountingPronouncements Adopted in 2003**

** **

In January 2003, FASB issued InterpretationNo. 46, “Consolidation of Variable Interest Entities” (“InterpretationNo. 46”), clarifies the application of Accounting Research BulletinNo. 51, “Consolidated Financial Statements,” to certain entities in whichequity investors do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. Interpretation No. 46 is applicable immediately for variableinterest entities created after January 31, 2003. For variable interestentities created prior to January 31, 2003, the provisions of InterpretationNo. 46 are applicable no later than July 1, 2003. This Interpretationdid not have an effect on the consolidated financial statements.

 

**RecentAccounting Pronouncements**

** **

There are no accounting standards issuedbefore December 31, 2003 but effective after December 31, 2003 thatare expected to have a material impact on our financial reporting.

 

### **3.             Long-term Debt**

### ** **

HCS and Shreveport Capital Corporation areco-issuers of $150 million aggregate principal amount of 13% first mortgagenotes due 2006 and $39 million aggregate principal amount of 13% senior securednotes due 2006 (collectively, the “Shreveport Notes”). HCS is a generalpartnership that owns the casino operations. Shreveport Capital Corporation isa wholly owned subsidiary of HCS formed solely for the purpose of being aco-issuer of the Shreveport Notes.

 

The Shreveport Notes are non-recourse to PennNational and its subsidiaries (other than Hollywood Casino Shreveport,Shreveport Capital Corporation, HCS I, Inc., HCS II, Inc. and HWCC-Louisiana,Inc. (collectively the “Shreveport Entities”) and are secured by substantiallyall of the assets of the casino, and, in the case of the 13% first mortgagenotes due 2006, the partnership interests held by HCS I, Inc. and HCS II, Inc.and the stock held by HWCC-Louisiana, Inc.

 

The indentures governing the Shreveport Notesrequire the issuers to make an offer to purchase the Shreveport Notes at 101%of the principal amount thereof within 10 days of the occurrence of a “Changeof Control” as defined in the indentures. A “Change of Control” was deemed tohave occurred under the indentures on March 3, 2003 as a result of theconsummation of the merger of a wholly owned subsidiary of Penn National Gamingwith and into HCC.  HCS determined thatit did not have the liquidity to repurchase the Shreveport Notes at 101% oftheir principal amount and, accordingly, could not make an offer to purchasethe Shreveport Notes as required under the indentures.

 

On March 14, 2003, HCS and ShreveportCapital Corporation were notified by an ad hoc committee of holders of theShreveport Notes that they had 60 days from receipt of the notice to cure thefailure to offer to purchase the Shreveport Notes or an event of default wouldoccur under the indentures. Neither HCS nor Shreveport Capital Corporation madea Change of Control offer to purchase the Shreveport Notes within the60 days and, accordingly, the ad hoc committee notified HCS in May2003 that an event of default had occurred under the indentures. In addition, theydid not make the August 1, 2003 and February 1, 2004 interestpayments of

 

37

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approximately $12.3 million each, whichwere due on the Shreveport Notes. During the period subsequent to May 2003, HCSentered into negotiations with the ad hoc committee of holders of theShreveport Notes, regarding the possible restructure of the outstandingindebtedness. In November 2003, HCS retained Libra Securities, LLC as itsexclusive financial advisor in connection with a possible sale or debtrestructuring transaction.  The holdersof the Shreveport Notes might pursue all rights and remedies that they may haveunder the indentures as a result of the event of default. Any such action onthe part of the note holders may prompt HCS to seek the protection of thebankruptcy laws or other similar remedies. (See Note 9 for subsequentevents).

 

Long-term debt is as follows (in thousands):

 
| **December 31,**                                                                                                     |   | **2002** |    | **2003** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| 13% First Mortgage Notes, with contingent  interest, due 2006                                                        |   | $        | 150,000 |     | $      | 150,000 |   |
| 13% Senior Secured Notes, with contingent  interest, due 2006, including bond premium of $891 and $686, respectively |   | 39,891   |    | 39,686   |   |
| Less:   Bond valuation allowance                                                                                |   | —   |    | (70,348  | )      |
| Other notes payable                                                                                                  |   | 20       |    | 7        |   |
|                                                                                                                 |   | 189,911  |    | 119,345  |   |
| Less current maturities                                                                                              |   | 6        |    | 119,345  |   |
|                                                                                                                 |   | $        | 189,905 |     | $      | — |   |

** **

**ContingentInterest**

** **

Under the terms of the indentures for theShreveport Notes, contingent interest is due and payable on each interestpayment date. The amount of contingent interest payable is based on a percentof the consolidated cash flow of HCS. Contingent interest may not be paid tothe extent that payment will result in certain financial coverage ratios notbeing met. Consequently, no contingent interest has been paid by HCS since itsopening.

 
|                             |   | **Precedessor Basis**              |   | **Successor  Basis**               |   |
|----------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
| **Contingent  Interest Expense** |   | **Year ended  December  31, 2001** |   | **Year Ended  December  31, 2002** |   | **Period from  January 1,  2003  Through  February  28, 2003** |   | **Period from  March 1, 2003  Through  December 31,  2003** |   |
|                             |   | **(in thousands)**                 |   |
| First Mortgage Notes             |   | $                                  | 309    |                               | $      | 836 |   | $ | 139 |   | $ | 447 |   |
| Senior Secured Notes             |   | 78                                 |   | 219                                |   | 36 |   | 116 |   |
|                             |   |                               |   |                               |   |   |   |   |   |
|                             |   | $                                  | 387    |                               | $      | 1,055 |   | $ | 175 |   | $ | 563 |   |

 
| **Accrued  Contingent Interest  Payable, December 31,** |   | **(In thousands)** | ** ** |
|--------------------------------------------------------------|--------|--------------------|------------|
| **2002**                                                     |   | **2003**           |
|                                                         |   |               |       |   |   |
| First Mortgage Notes                                         |   | $                  | 1,222      |   | $ | 1,808 |   |
| Senior Secured Notes                                         |   | 297                |       | 449 |   |
|                                                         |   | $                  | 1,519      |   | $ | 2,257 |   |

 

### **4.             Commitments and Contingencies**

 

For so long as it remains a joint venturepartner in HCS, Shreveport Paddlewheels, L.L.C. (“Paddlewheels”), a Louisianalimited liability company, receives, among other things, an amount equal to 1%of “complex net revenues,” as defined, of the casino, which approximates netrevenues, in exchange for the previous

 

38

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assignment by Paddlewheels and its affiliatesof their joint venture interest in HCS. Allocations to Paddlewheels of suchamounts are reflected as partnership distributions to HCS I, Inc. andHCS II, Inc. Such interest amounted to $1.4 million,$1.5 million and $1.3 million for the years ended December 301 2001,2002 and 2003 respectively. Unpaid distributions of $.1 million,$.1 million and $.9 million, respectively, are included in due toaffiliates on the accompanying consolidated balance sheets at December 31,2001, 2002 and 2003, respectively. Effective July 10, 2003, HCS hassuspended payments under the agreement to Paddlewheels due to the event ofdefault on the Shreveport Notes.

 

HCS is subject to various legal andadministrative proceedings relating to personal injuries, employment matters,commercial transactions and other matters arising in the normal course ofbusiness. HCS does not believe that the final outcome of these matters willhave a material adverse effect on its consolidated financial position orresults of operations. In addition, HCS maintains what it believes is adequateinsurance coverage to further mitigate the risks of such proceedings. However,such proceedings can be costly, time consuming and unpredictable and,therefore, no assurance can be given that the final outcome of such proceedingsmay not materially impact its consolidated financial condition or results ofoperations. Further, no assurance can be given that the amount or scope ofexisting insurance coverage will be sufficient to cover losses arising fromsuch matters.

 

The following proceedings could result incosts, settlements or damages that materially impact HCS’s consolidatedfinancial condition or operating results. In each instance, HCS believes thatit has meritorious defenses and/or counter-claims and intends to vigorouslydefend itself.

 

On April 23, 2000, theconstruction site for the facility suffered tornado damage that contributed tothe delay in its opening. HCS filed damage claims and received reimbursementsfrom its insurance carriers during 2000 in the amount of approximately $1.5million to cover substantially all of the cost of repairing the damageincurred. HCS also filed a lawsuit in the U.S. District Court for the WesternDistrict of Louisiana against its insurance carriers seeking to recover lostprofits and related claims under its business interruption insurance coverage.On June 16, 2003, a judgment was entered in that court awarding HCSapproximately $3.9 million (including interest but excluding attorney fees).Subsequently, an order staying enforcement of judgment was entered by the courtto allow the defendant insurance companies time to file certain post-trialmotions. Following the disposition of such motions, HCS and the defendantsentered into a settlement of this lawsuit in December 2003, whereby HCSreceived $4.0 million in settlement of the June 16, 2003 judgment and thedefendant insurance companies paid $.8 million to HCS’s outside legalcounsel in full satisfaction of its attorneys’ fees relating to the claims inthe lawsuit.  The 4.0 million settlementwas considered in management's assessment of the purchase price adjustmentsrequired in accordance with SFAS 141.

 

In a set of related matters, HCSis also seeking to recover damages from the general contractor, the architectand certain other parties involved in the construction of the casino. For thisand other reasons, HCS has withheld payment of certain retainage amounts thatthe general contractor is currently seeking. The general contractor has also submitted additional change orders thatHCS is disputing.  HCS has recorded aliability in the amount of approximately $3.6 million in accounts payable inconnection with the construction project. These matters were the subject ofvarious state and federal court proceedings as well as arbitrations. In May2003, HCS, the general contractor, and the architect entered into an agreementto arbitrate the various claims. Such proceedings are currently ongoing and noassurance can be given as to the ultimate outcome.  The $4.0 million settlement was considered in managementsassessment of the purchase price adjustments required in accordance with SFAS141.

 

In October 2003, the BossierParish Police Jury filed an action against HCS and the City of Shreveport inthe 26th Judicial District Court of Bossier Parish, Louisianaseeking to overturn the agreement between HCS and the City of Shreveport, whichprovides for an annual fee in lieu of the $3.00/head admission fee, in order tocollect boarding fees for itself. In late February 2004, HCS and the City ofShreveport filed Exceptions of No Right and No Cause of Action seekingdismissal of the suit. A hearing has been set on the Exceptions for April 8,2004. HCS has vigorously contested all the allegations set forth in the suitand will continue to do so.

 

Over the past several months, anumber of individual employees have brought similar gender related employmentclaims against HCS under Title VII in Federal Court in Louisiana.  HCS is vigorously contesting all theallegations. The claims are in various stages of discovery and administrativeproceedings.

 

 

39

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**EmployeeBenefit Plans**

** **

HCS participated in a retirement savings plan under Section 401(k) ofthe Internal Revenue Code of 1986, as amended, that covered all eligibleemployees and was sponsored by Hollywood Casino Corporation.  The plan allowed employees to contribute upto 15% of their salary on a pre-tax basis (subject to statutory limitations)and invest such monies in a choice of mutual funds on a tax-deferredbasis.  Employer contributions to theplan were set at 50% of the employees’ elective salary deferrals up to amaximum of 5% of employee compensation. For the years ended December 31, 2001 and 2002 and for the two monthsended February 28, 2003, HCS expensed $30,000, $.1 million and $12,000,respectively, as company contributions to the plan.

 

On August 1, 2003, the plan was merged into Penn National Gaming,Inc.’s retirement savings plan that also qualifies under the provisions ofSection 401(k) of the Internal Revenue Code of 1986, as amended.  Employer contributions to the plan are setat 50% of the employee’s elective salary deferrals up to a maximum of 6% ofemployee compensation.  For the periodfrom March 1, 2003 to December 3, 2003, HCS expensed $.2 million as companycontributions to the plan.

 

**OperatingLeases**

** **

HCS is party to a ground lease with the City of Shreveport for the landon which the casino was built. The terms of the ground lease require thepayment by HCS of base rent to the City of Shreveport, percentage rent based onadjusted gross receipts to the City of Shreveport and payments in lieu ofadmission fees to the City of Shreveport and the Bossier Parish School Board.

 

Payments made under the terms of the ground lease are as follows (inthousands):

 
|                               |   | **Precedessor Basis**              |   | **Successor Basis**                 |   |
|------------------------------------|--------|------------------------------------|--------|-------------------------------------|--------|
|                               |   | **Year ended  December  31, 2001** |   | **Year  Ended  December  31, 2002** |   | **Period from  January 1,  2003  Through  February  28, 2003** |   | **Period from  March 1, 2003  Through  December 31,  2003** |   |
| Ground lease:                      |   |                               |   |                                |   |   |   |   |   |
| Base rent                          |   | $                                  | 573    |                                | $      | 573 |   | $ | 95 |   | $ | 478 |   |
| Percentage rent                    |   | 1,438                              |   | 1,464                               |   | 230 |   | 1,078 |   |
|                               |   | $                                  | 2,011  |                                | $      | 2,037 |   | $ | 325 |   | $ | 1,556 |   |
|                               |   |                               |   |                                |   |   |   |   |   |
| Payment in lieu of admissions fees |   | $                                  | 5,603  |                                | $      | 5,637 |   | $ | 864 |   | $ | 4,159 |   |

 

Future minimum lease payments as of December31, 2003 under operating lease obligations (other than the ground lease) havingan initial or remaining noncancelable term in excess of one year are as follows(in thousands):

 
| **Year Ended  December 31,** |   |   |   |
|------------------------------|--------|--------|--------|
| 2004                         |   | $      | 603    |   |
| 2005                         |   | 445    |   |
| 2006                         |   | 213    |   |
| 2007                         |   | 140    |   |
| 2008                         |   | 140    |   |
| Thereafter                   |   | 967    |   |
|                         |   | $      | 2,508  |   |

 

40

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### **5.             Summarized Quarterly Data(Unaudited)**

### ** **

Following is a summary of the quarterly resultsof operations for the years ended December 31, 2002 and 2003 (in thousands):

 
|                          |   | **Fiscal  Quarter** |   |
|-------------------------------|--------|---------------------|--------|
| **2002**                      |   | **First**           |   | **Second** |   | **Third** |   | **Fourth** |   |
| Net revenue                   |   | $                   | 38,217 |   | $ | 36,302 |   | $ | 38,780 |   | $ | 33,057 |   |
| Income (loss) from operations |   | 2,679               |   | 555 |   | (767 | ) | (1,100 | ) |
| Net (loss)                    |   | (4,118              | )      | (6,450 | ) | (7,267 | ) | (7,655 | ) |
|                               |        |                     |        |  |  |  |  |  |  |  |  |  |  |

 

 
|                          |   | **Fiscal  Quarter**           |   |
|-------------------------------|--------|-------------------------------|--------|
| **2003**                      |   | **January 1 to  February 28** |   | **March 1 to  March 31** |   | **Second** |   | **Third** |   | **Fourth** |   |
| Net revenue                   |   | $                             | 22,981 |   | $ | 12,710 |   | $ | 33,759 |   | $ | 35,411 |   | $ | 32,044 |   |
| Income (loss) from operations |   | 276                           |   | 1,742 |   | 749 |   | (209 | ) | (414 | ) |
| Net (loss)                    |   | (4,163                        | )      | (545 | ) | (6,513 | ) | (7,531 | ) | (6,720 | ) |
|                               |        |                               |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

### **6.             Related Party Transactions**

### ** **

The operations of the casino are managed byHWCC-Shreveport, Inc. (“Shreveport Management”), a wholly owned subsidiary ofHCC, under the terms of a management agreement. HCS also reimburses ShreveportManagement for expenses incurred in connection with services provided under themanagement agreement. Total management fees incurred amounted to$2.9 million for each of the years ended December 31, 2001 and 2002,$.5 million for the period from January 1, 2003 through February 28, 2003 and$1.5 million for the period from March 1, 2003 through December 31, 2003 andare included in general and administrative expenses on the accompanyingcondensed consolidated statements of operations. Management fees payable atDecember 31, 2002 and 2003 amounted to $6 million and$2.2 million, respectively. Such fees, reduced by a valuation allowance of$6.4 million at December 31, 2003, are included in due to affiliateson the accompanying consolidated balance sheets. Under the indentures andrelated documents governing the Shreveport Notes, management fees aresubordinated to all payments under the Shreveport Notes and may not be paid tothe extent that their payment would result in certain financial coverage ratiosnot being met. Consequently, no management fees have been paid since theopening of the facility.

 

HCS has also entered into a Marine ServicesAgreement with Paddlewheels to provide certain marine services for so long asPaddlewheels remains a joint venture partner in HCS. The Marine ServicesAgreement became effective on September 22, 1998 and, in addition to thereimbursement to Paddlewheels for its direct expenses incurred, if any, HCSpays a monthly fee of $30,000. HCS expensed $.4 million per year for eachof the years ended December 31, 2001 and 2002, respectively, and $ .1million for the period from January 1, 2003 through February 28, 2003 and $ .4million for the period from March 1, 2003 through December 31, 2003 under theagreement. Unpaid charges of $30,000 and $.2 million are included in dueto affiliates on the accompanying consolidated balance sheets atDecember 31, 2002 and 2003, respectively. Effective July 10, 2003, HCSsuspended payments under the agreement to Paddlewheels due to the event ofdefault on the Shreveport Notes.

 

### **7.             Supplemental Cash Flow Information**

 

HCS paidinterest totaling $21.5 million and $24.6 million during the years endedDecember 31, 2001 and 2002, respectively and $12.3 million for the period fromJanuary 1, 2003 through February 28, 2003. HCS paid no income taxes during the years ended December 31, 2001, 2002or 2003.

 

### **8.             StockOption Plan**

 

Certain employees of HCS were granted stockoptions to acquire common stock of HCC under the Hollywood Casino Corporation1996 Long Term Incentive Plan.  On March3, 2003, due to the change of control provisions in the plan, all of the stockoptions granted under the plan became exercisable and were exercised.  In October 2003 Penn National issued to aHCS employee options to acquire 15,000 shares of Penn National common stockunder the Penn National Gaming, Inc. 2003 Long Term Incentive CompensationPlan.

 

### **9.             Subsequent Events**

### ** **

On February 3, 2004, HCS I, Inc.,the managing general partner of HCS, announced that its Board of Directors (the“Board”) had authorized the initiation of a process that it hopes will resultin the sale or other disposition of the riverboat casino/hotel complex. TheBoard further authorized HCS’s financial advisor, Libra Securities LLC, tobegin contacting potential acquirers. The Board also authorized the creation ofan independent committee, currently consisting of the director not employeddirectly by Penn National, to oversee the process. The Board

 

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created the independent committee in theevent that Penn National elects to participate as a bidder in the process. TheBoard took action after consultation with an ad hoc committee of holdersof the Shreveport Notes. Although no formal agreement has been reached with thead hoc committee regarding the sale process, the independent committeeanticipates that it will consult with the ad hoc committee throughout theprocess. There can be no assurance that the process will result in the sale orother disposition of the riverboat casino/hotel complex or that, if it does,the sale proceeds will be adequate to pay the Shreveport Notes in full. HCScurrently anticipates that any transaction will be effected through abankruptcy proceeding. The Board also determined not to authorize theFebruary 1, 2004 interest payments, aggregating approximately$12.3 million, due on the Shreveport Notes. As previously reported by HCS,the Shreveport Notes have been in default under the terms of their respectivenote indentures since March 2003.

 

**10.          Predecessor Note**

** **

*Organization, History, Business and Basis ofPresentation* - Hollywood Casino Shreveport (“HCS”) isa general partnership registered in the state of Louisiana. The originalpartnership agreement was amended on September 22, 1998 to include as partnersin what is now referred to as HCS the following companies: HWCC—Louisiana, Inc.(“HCL”), a Louisiana corporation which is ultimately wholly owned by HollywoodCasino Corporation (“HCC”); Sodak Louisiana, L.L.C. (“Sodak”), a Louisianalimited liability company; and Shreveport Paddlewheels, L.L.C.(“Paddlewheels”), a Louisiana limited liability company. The generalpartnership was originally formed in May 1992 for the purpose of developing andoperating a riverboat casino in New Orleans, Louisiana. Originally named Queenof New Orleans at the Hilton Joint Venture (“QNOV”), the partnership was50%-owned by Hilton New Orleans Corporation (“Hilton”) and 50%-owned by NewOrleans Paddlewheels, Inc. (“NOP”). Hilton and NOP are collectively referred toherein as the “former partners.” QNOV’s riverboat operations in New Orleanscommenced in February 1994 and were discontinued in October 1997.

 

During October 1996, QNOV received approvalfrom state gaming authorities to relocate its license to operate to the City ofShreveport, Louisiana, approximately 190 miles east of Dallas, Texas.Subsequent to receiving approval to relocate, QNOV made the decision in 1997not to conduct gaming operations in Shreveport. The former partners sought totransfer the license to operate in Shreveport to another interested party.Under Louisiana gaming regulations, the license to operate a riverboat gamingoperation is not transferable; however, the ownership of an entity licensed tooperate is transferable, subject to the approval of the Louisiana GamingControl Board (the “LGCB”). Accordingly, the transfer of the license to HCL,Sodak and Paddlewheels to operate in Shreveport was structured as the acquisitionof the interests of the former partners of QNOV. The former partners disposedof QNOV’s assets other than its license to operate and satisfied all but one ofits obligations so that when the former partners withdrew on September 22,1998, QNOV’s only asset was its license to operate in Shreveport (which had norecorded value) and its only liability was a $5 million obligation to theCity of New Orleans. The $5 million obligation was paid by HCS in August1999 upon the issuance of $150 million of 13% First Mortgage Notes withcontingent interest due 2006 (the “First Mortgage Notes”).

 

Upon admission of the new partners, HCSproceeded with entirely new plans to develop, own and operate a riverboatgaming complex to be constructed in Shreveport (the “Shreveport Casino”). TheShreveport Casino was completed and opened on December 20, 2000. Prior toopening, HCS had no operating activities other than development, financing andconstruction activities with respect to the Shreveport Casino. The ShreveportCasino consists of a three-level riverboat dockside casino with approximately1,423 slot machines, 61 table games and six poker stations and a 403-room, allsuite, art deco style hotel. The project also includes approximately 45,000square feet of available restaurant and entertainment space developed by athird party lessee.

 

Riverboat gaming operations in Louisiana aresubject to regulatory control by the LGCB. HCS’s current license to operate theShreveport Casino expires on October 14, 2004.

 

It was originally anticipated that HCS woulddevelop the Shreveport Casino with each of HCL and Sodak having a 50% interestin the development and subsequent operations. Once operations commenced,Paddlewheels was to have a residual interest in the event that the project wasever sold amounting to 10% plus any capital contributions made by Paddlewheelsto HCS or otherwise credited to their account. On March 31, 1999, HCL enteredinto a definitive agreement with Sodak’s parent to acquire Sodak for the$2.5 million Sodak had contributed to HCS, with $1,000 paid at closing andthe remainder paid by HCL in June 2001. The revised structure of the

 

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partnership was approved by the LGCB on April20, 1999. As a result of the acquisition, HCL obtained an effective 100%ownership interest in HCS with Paddlewheels retaining its 10% residualinterest. During July 1999, Sodak was merged into HCL.

 

Also during July 1999, HCL formed two new,wholly owned subsidiaries, HCS I, Inc. and HCS II, Inc., both Louisianacorporations. HCL contributed $1,000 of capital to each entity, along with 99%of its interest in HCS to HCS I, Inc. and the remaining 1% to HCS II, Inc. Inaddition, the HCS joint venture agreement was amended and restated on July 21,1999, to reflect, among other things, the admission of HCS I, Inc. and HCS II,Inc. as partners of HCS and the withdrawal of HCL as managing partner of HCS.As a result, HCS I, Inc. now has an effective 99% interest in HCS and hasbecome its managing general partner. HCS II, Inc. now has an effective 1%interest in HCS. Paddlewheels retained its 10% residual interest in HCS. Therevised partnership structure was approved by the LGCB on July 20, 1999. HCLcontributed an additional $300,000 to HCS through HCS I, Inc. and HCS II, Inc.in July 1999. Once HCS secured financing for the Shreveport Casino, HCLcontributed an additional $43.7 million to HCS through HCS I, Inc. and HCSII, Inc. HCL also loaned $1 million to Paddlewheels which Paddlewheelscontributed to HCS. HCL made additional capital contributions to HCS throughHCS I, Inc. and HCS II, Inc. of $8.7 million in May 2001 and$5.9 million in December 2000. Capital contributions from HCC, HCL’s parent,were used by HCL to make the capital contributions to its subsidiaries and theloan to Paddlewheels.

 

Additionally, in July 1999, HCS formed a new,wholly owned subsidiary, Shreveport Capital Corporation (“Shreveport Capital”),a Louisiana corporation. HCS contributed $1,000 of capital to Shreveport Capital.Shreveport Capital was formed for the sole purpose of being a co-issuer withrespect to the First Mortgage Notes and subsequently became a co-issuer withrespect to the $39 million of 13% Senior Secured Notes with contingent interestdue 2006 (the “Senior Secured Notes”) issued in June 2001. Shreveport Capitalhas not and is not expected to have any operating activities, acquire anyassets or incur any other liabilities. Accordingly, separate financialstatements of Shreveport Capital are not included herein because management hasdetermined that such information is not material to investors.

 

In November 2002, HCL issued additionalshares of its common stock to HWCC-Holdings, Inc. (“Holdings”), a wholly ownedsubsidiary of HCC which was not subject to certain restrictions on makinginvestments under HCC’s then-existing loan agreements. The initial stockpurchase in the amount of $.3 million, together with subsequent capitalcontributions of $1.8 million in December 2002, were contributed byHoldings through HCS I, Inc. and HCS II, Inc. to HCS for working capital needs.Subsequent to December 31, 2002, an additional $.8 million was contributedby Holdings through HCS I, Inc. and HCS II, Inc. to HCS.

 

The accompanying consolidated financialstatements include the accounts of HCS and its wholly owned subsidiaries,Shreveport Capital and HCS—Golf Course, LLC (“Golf”). All significantintercompany balances have been eliminated in consolidation. Golf, a Delawarelimited liability company, was formed in 2000 to own an eventual 50% interestin Shreveport Golf Company, a joint venture formed to develop and operate agolf course to be used by patrons of the Shreveport Casino. Golf’s ownershipinterest in Shreveport Golf Company was accounted for under the equity method.Given the difficult market conditions, the partners in the golf course providednotice in April 2002 that they were terminating the lease for the land on whichthe golf course would have been constructed. Accordingly, HCS provided areserve of $.3 million during April 2002 to write down its investment inthe limited liability company to a zero value. The partners terminated thejoint venture effective as of September 30, 2002. As of December 31, 2001,capital contributions amounting to $.3 million had been made to ShreveportGolf Company and are included in other noncurrent assets on the accompanyingconsolidated balance sheet.

 

HCS estimates that a significant amount ofthe Shreveport Casino’s revenues are derived from patrons living in theDallas/Ft. Worth and east Texas areas. The Shreveport Casino faces intensecompetition from other riverboat gaming operations in Shreveport and BossierCity, Louisiana and management believes that this competition will continue inthe future.

 

HCC (the then-ultimate parent of HCS, HCL andShreveport Capital), Penn National Gaming, Inc., a Pennsylvania corporation(“Penn National”), and P Acquisition Corp., a Delaware corporation and awholly-owned subsidiary of Penn National, entered into an Agreement and Plan ofMerger (the “Merger Agreement”), dated as of August 7, 2002, pursuant to which,and subject to the conditions thereof, HCC became a wholly owned subsidiary ofPenn National through the merger of P Acquisition Corp. with and into HCC onMarch 3, 2003.

 

43

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*Liquidity Issues -*The terms of the merger agreement entered into by HCC and Penn National onAugust 7, 2002 restricted HCC, or any of its subsidiaries, from making anyadditional capital contributions to HCS. Subsequent to entering into the mergeragreement, HCC received approval from Penn National to contribute to HCS anyfunds necessary to make the February 1, 2003 interest payments due with respectto the First Mortgage Notes and Senior Secured Notes (collectively, theShreveport Notes”) With Penn National’s approval, Holdings contributed anaggregate of $800,000 subsequent to December 31, 2002 to assist HCS in makingits interest payments.

 

The terms of the indentures for theShreveport Notes provide that, upon consummation of the merger, HCS must offerto purchase any and all of such notes at a price of 101% of their face amountplus accrued interest (the “Repurchase Offer”). Penn National announced onFebruary 24, 2003 that it had commenced the solicitation of consents fromholders of record of the notes on February 21, 2003 to waive theRepurchase Offer and related provisions. Penn National concurrently announcedthat it did not intend to, or to permit any of its subsidiaries to, providefinancing or credit support to enable any of them or HCS to make the RepurchaseOffer. On March 3, 2003, Penn National announced that the requisite numberof consents from holders of the Shreveport Notes were not obtained in thesolicitation.

 

On March 14, 2003, HCS received noticefrom an ad hoc committee of the holders of the Shreveport Notes that HCS hadfailed to make the Repurchase Offer within ten days of the merger as requiredunder the respective governing indentures. Pursuant to these indentures, HCShad sixty days from receipt of such notice to cure such failure or an Event ofDefault, as defined under each of the indentures, would occur.

 

Even in the event that HCS’s failure tolaunch the required Repurchase Offer was either waived by the note holders orotherwise cured, HCS has experienced net losses and has a significantdeficiency in its partners’ capital. Accordingly, management believes thatHCS’s existing cash and cash flow from operations may not be sufficient to fundits operating and capital needs for the next 24 months. In such event, HCSwould require additional capital contributions or other financial support fromPenn National. Penn National has not publicly stated its plans or intentionsfor HCS after the merger; accordingly, management of HCS can make no assurancesthat Penn National will provide additional liquidity to HCS. All of thesematters raise substantial doubt about HCS’s ability to continue as a goingconcern. Management is currently in the process of developing its plans withregard to these matters. The holders of the Shreveport Notes might pursue allrights and remedies that they may have under the indentures as a result of theevent of default.  Any such action onthe part of the note holders may prompt HCS to seek the protection of the bankruptcylaws or other similar remedies.  (SeeNote 9 for subsequent events).

 

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**Report ofIndependent Certified Public Accountants**

** **

** **

To the Shareholders of HWCC – Louisiana:

 

We have audited the accompanying consolidatedbalance sheet of HWCC – Louisiana, Inc. and subsidiaries as of December 31,2003 and the related consolidated statements of operations, change inshareholders’ deficiency and cash flows for the period from March 1, 2003through December 31, 2003.  Theseconsolidated financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudit. 

 

We conducted our audit in accordance withauditing standards generally accepted in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a testbasis,evidence supporting the amounts and disclosures in the consolidated financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of HWCC – Louisiana, Inc. and subsidiaries at December 31,2003, and the results of their operations and their cash flows for the periodfrom March 1, 2003 through December 31, 2003 in conformity with accountingprinciples generally accepted in the United States of America. 

 

The accompanying consolidated financialstatements have been prepared assuming that the Company will continue as agoing concern.  As discussed in Note 1to the consolidated financial statements, the Company has suffered net lossesover several years, has a net capital deficiency, and is in default undercertain of its debt agreements.  Thesefactors raise substantial doubt about the Company’s ability to continue as agoing concern.  Management’s plans aboutthese matters are more fully described in Note 10, including its anticipationof bankruptcy proceedings.  Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of these uncertainties.

 

 

BDO Seidman, LLP

Philadelphia, Pennsylvania

January30, 2004, except for Note 10,which is as of February 3, 2004

 

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**IndependentAuditors’ Report**

** **

To the Shareholders’ of HWCC – Louisiana:

 

We have audited the accompanying consolidatedbalance sheets of HWCC – Louisiana, Inc. and subsidiaries as of December 31,2002, and the related consolidated statements of operations, changes inshareholders’ (deficit) and cash flows for the period from January 1, 2003through February 28, 2003 and for the years ended December 31, 2002 and2001.  These financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America.  Those standards required that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements present fairly, in all material respects, the financial position ofHWCC-Louisiana, Inc. and subsidiaries as of December 31, 2002, and the resultsof their operations and their cash flows for the period from January 1, 2003through February 28, 2003 and the years ended December 31, 2002 and 2001, inconformity with the accounting principles generally accepted in the UnitedStates of America.

 

The accompanying financial statements havebeen prepared assuming that the Company will continue as a going concern.  As discussed in the *Predecessor Note* to thefinancial statements under the caption *“Liquidity Issues,”* HWCC-Louisiana may notbe able to meet its financial obligations, which raises substantial doubt aboutits ability to continue as a going concern. Management’s plans concerning these matters are also described in the *PredecessorNote* under the caption *“Liquidity Issues.”*  The financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

 

Deloitte & Touche LLP

Dallas, Texas

April 11, 2002

 

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**HWCC-LOUISIANA, INC.AND SUBSIDIARIES**CONSOLIDATED BALANCE SHEETS(In thousands, except per share data)
|                                                                                                    |   | **Predecessor Basis** |    | **Successor Basis** |   |
|---------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|---------------------|--------|
|                                                                                                    |   | **2002**              |    | **2003**            |   |
| **Assets**                                                                                              |   |                  |    |                |   |
| Current assets:                                                                                         |   |                  |    |                |   |
| Cash and cash equivalents                                                                               |   | $                     | 21,820  |                | $      | 25,017 |   |
| Accounts receivable, net  allowance of $729 and $881, respectively                                      |   | 2,301                 |    | 1,723               |   |
| Inventories                                                                                             |   | 1,950                 |    | 1,974               |   |
| Prepaid expenses and other  current assets                                                              |   | 1,091                 |    | 2,114               |   |
| Deferred income taxes                                                                                   |   | 719                   |    | —              |   |
| Total current  assets                                                                                   |   | 27,881                |    | 30,828              |   |
|                                                                                                    |   |                  |    |                |   |
| Property and equipment:                                                                                 |   |                  |    |                |   |
| Land improvements                                                                                       |   | 1,665                 |    | 10,000              |   |
| Building and improvements                                                                               |   | 103,465               |    | 75,056              |   |
| Riverboat                                                                                               |   | 45,042                |    | 15,379              |   |
| Furniture and equipment                                                                                 |   | 48,098                |    | 18,408              |   |
|                                                                                                    |   | 198,270               |    | 118,843             |   |
| Less-accumulated depreciation                                                                           |   | (32,507               | )       | (8,100              | )      |
|                                                                                                    |   | 165,763               |    | 110,743             |   |
| **Other assets:**                                                                                       |   |                  |    |                |   |
| Note receivable – affiliate                                                                        |   | 1,000                 |    | 1,000               |   |
| Other                                                                                                   |   | 5,143                 |    | 271                 |   |
|                                                                                                    |   | $                     | 199,787 |                | $      | 142,842 |   |
| **Liabilities and Shareholders’ Deficiency**                                                       |   |                  |    |                |   |
| Current liabilities:                                                                                    |   |                  |    |                |   |
| Current maturities of long–term  debt, net of valuation allowance of $70,348 at December 31, 2003  |   | $                     | 6       |                | $      | 119,345 |   |
| Accounts payable                                                                                        |   | 7,074                 |    | 5,723               |   |
| Accrued liabilities                                                                                     |   |                  |    |                |   |
| Salaries and wages                                                                                      |   | 2,911                 |    | 2,212               |   |
| Interest                                                                                                |   | 11,757                |    | 24,780              |   |
| Gaming and other taxes                                                                                  |   | 1,113                 |    | 1,446               |   |
| Insurance                                                                                               |   | 1,591                 |    | 2,091               |   |
| Other                                                                                                   |   | 3,238                 |    | 3,306               |   |
| Due to affiliates, net of  valuation allowance of $6,420 at December 31, 2003                           |   | 6,064                 |    | 3,167               |   |
| Other current liabilities                                                                               |   | 1,370                 |    | 1,527               |   |
| Total current liabilities                                                                               |   | 35,124                |    | 163,597             |   |
|                                                                                                    |   |                  |    |                |   |
| Long-term debt                                                                                          |   | 189,905               |    | —              |   |
| Deferred income taxes                                                                                   |   | 719                   |    | —              |   |
| Other noncurrent liabilities                                                                            |   | 288                   |    | 403                 |   |
| Minority interest                                                                                       |   | 2,123                 |    | —              |   |
|                                                                                                    |   |                  |    |                |   |
| Commitments and Contingencies                                                                           |   |                  |    |                |   |
|                                                                                                    |   |                  |    |                |   |
| Shareholders’ Deficiency:                                                                          |   |                  |    |                |   |
| Common stock, $1 par value per  share, 1,000,000 shares authorized, 1,010 shares issued and outstanding |   | 1                     |    | 1                   |   |
| Additional paid–in capital                                                                         |   | 68,481                |    | 1,201               |   |
| Accumulated deficit                                                                                     |   | (96,854               | )       | (22,360             | )      |
| Total shareholders’ deficiency                                                                     |   | (28,372               | )       | (21,158             | )      |
|                                                                                                    |   | $                     | 199,787 |                | $      | 142,842 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**HWCC-LOUISIANA, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands)**

 
|                                              |   | **Predecessor Basis**             |    | **Successor Basis**                |   |
|---------------------------------------------------|--------|-----------------------------------|---------|------------------------------------|--------|
|                                              |   | **Year Ended  December 31, 2001** |    | **Year Ended  December 31,  2002** |   | **Period from  January 1, 2003  Through  February 28,  2003** |   | **Period from  March 1, 2003  Through  December 31,  2003** |   |
| Revenues:                                         |   |                              |    |                               |   |   |   |   |   |
| Casino                                            |   | $                                 | 144,334 |                               | $      | 146,070 |   | $ | 22,730 |   | $ | 105,330 |   |
| Rooms                                             |   | 8,754                             |    | 9,279                              |   | 1,353 |   | 7,341 |   |
| Foods and beverage                                |   | 25,521                            |    | 24,441                             |   | 3,784 |   | 17,890 |   |
| Other                                             |   | 3,412                             |    | 2,473                              |   | 376 |   | 1,890 |   |
|                                              |   | 182,021                           |    | 182,263                            |   | 28,243 |   | 132,451 |   |
| Less promotional allowances                       |   | (38,153                           | )       | (35,907                            | )      | (5,262 | ) | (18,527 | ) |
| Net revenue                                       |   | 143,868                           |    | 146,356                            |   | 22,981 |   | 113,924 |   |
|                                              |   |                              |    |                               |   |   |   |   |   |
| Expenses:                                         |   |                              |    |                               |   |   |   |   |   |
| Casino                                            |   | 118,685                           |    | 106,391                            |   | 16,700 |   | 57,225 |   |
| Rooms                                             |   | 2,452                             |    | 2,229                              |   | 344 |   | 3,148 |   |
| Food and beverage                                 |   | 9,396                             |    | 6,784                              |   | 983 |   | 15,287 |   |
| Other                                             |   | 3,433                             |    | 2,916                              |   | 516 |   | 7,833 |   |
| General and administrative                        |   | 13,701                            |    | 10,333                             |   | 1,447 |   | 20,459 |   |
| Depreciation and  amortization                    |   | 15,866                            |    | 16,157                             |   | 2,715 |   | 8,104 |   |
| Impairment Loss                                   |   | —                            |    | 179                                |   | — |   | — |   |
| Total expenses                                    |   | 163,533                           |    | 144,989                            |   | 22,705 |   | 112,056 |   |
|                                              |   |                              |    |                               |   |   |   |   |   |
| Income (loss) from operations                     |   | (19,665                           | )       | 1,367                              |   | 276 |   | 1,868 |   |
|                                              |   |                              |    |                               |   |   |   |   |   |
| Non–operating income (expenses):             |   |                              |    |                               |   |   |   |   |   |
| Interest income                                   |   | 780                               |    | 249                                |   | 23 |   | 115 |   |
| Interest expense                                  |   | (25,350                           | )       | (26,744                            | )      | (4,456 | ) | (20,870 | ) |
| Loss on early extinguishment of debt              |   | (843                              | )       | —                             |   | — |   | — |   |
| Equity in  loss of unconsolidated affiliate       |   | —                            |    | (313                               | )      | — |   | — |   |
| Reorganization costs                              |   | —                            |    | —                             |   | — |   | (2,396 | ) |
| Total non–operating (expenses), net          |   | (25,413                           | )       | (26,808                            | )      | (4,433 | ) | (23,151 | ) |
| Net (loss)                                        |   | (45,078                           | )       | (25,441                            | )      | (4,157 | ) | (21,283 | ) |
| Minority interest in Hollywood Casino  Shreveport |   | (1,438                            | )       | (1,464                             | )      | (230 | ) | (1,077 | ) |
|                                              |   |                              |    |                               |   |   |   |   |   |
| Net (loss)                                        |   | $                                 | (46,516 | )                                  | $      | (26,905 | ) | $ | (4,387 | ) | $ | (22,360 | ) |

 

See accompanying notes toconsolidated financial statements.

 

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**HWCC-LOUISIANA, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)(In thousands, except per share data)**

** **

**For the TwoYears Ended December 31, 2002 and 2003 and**For thePeriods from January 1, 2003 Through February 28, 2003 (PredecessorBasis)and From March 1, 2003 Through December 31, 2003 (Successor Basis)

** **
|                                                                    |   | **Shares** |   | **Amount** |   | **Additional  Paid–in  Capital** |   | **Accumulated  Deficit** |   |
|-------------------------------------------------------------------------|--------|------------|--------|------------|--------|---------------------------------------|--------|--------------------------|--------|
| **Predecessor Basis**                                                   |   |       |   |       |   |                                  |   |                     |   |
| **Balances, January 1, 2001**                                           |   |       | 1,000  |       | $      | 1                                     |   | $                        | 57,725 |   | $ | (23,433 | ) |
| Capital contributions                                                   |   | —     |   | —     |   | 8,675                                 |   | —                   |   |
| Net (loss)                                                              |   | —     |   | —     |   | —                                |   | (46,516                  | )      |
|                                                                    |   |       |   |       |   |                                  |   |                     |   |
| **Balances, December 31, 2001**                                         |   | 1,000      |   | 1          |   | 66,400                                |   | (69,949                  | )      |
| Issuance of common stock                                                |   | 10         |   | —     |   | 250                                   |   | —                   |   |
| Capital contributions                                                   |   | —     |   | —     |   | 1,831                                 |   | —                   |   |
| Net (loss)                                                              |   | —     |   | —     |   | —                                |   | (26,905                  | )      |
|                                                                    |   |       |   |       |   |                                  |   |                     |   |
| **Balances, December 31, 2002**                                         |   | 1,010      |   | 1          |   | 68,481                                |   | (96,854                  | )      |
| Capital Contributions                                                   |   | —     |   | —     |   | 800                                   |   | —                   |   |
| Net (loss) for the period of  January 1, 2003 through February 28, 2003 |   | —     |   | —     |   | —                                |   | (4,387                   | )      |
| Acquisition adjustment                                                  |   | —     |   | —     |   | (68,080                               | )      | 101,241                  |   |
|                                                                    |   |       |   |       |   |                                  |   |                     |   |
| **Successor Basis**                                                     |   |       |   |       |   |                                  |   |                     |   |
| **Balances, March 1, 2003**                                             |   | 1,010      |   | 1          |   | 1,201                                 |   | —                   |   |
| Net (loss) for the period of  March 1, 2003 through December 31, 2003   |   | —     |   | —     |   | —                                |   | (22,360                  | )      |
|                                                                    |   |       |   |       |   |                                  |   |                     |   |
| **Balances, December 31, 2003**                                         |   |       | 1,010  |       | $      | 1                                     |   | $                        | 1,201  |   | $ | (22,360 | ) |

 

See accompanying notes toconsolidated financial statements.

 

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**HWCC – LOUISIANA, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
|                                                                                       |   | **Predecessor  Basis**             |    | **Successor  Basis**               |   |
|--------------------------------------------------------------------------------------------|--------|------------------------------------|---------|------------------------------------|--------|
|                                                                                       |   | **Year ended  December 31,  2001** |    | **Year ended  December 31,  2002** |   | **Period from  January 1 to  February 28,  2003** |   | **Period from  March 1 to  December 31,  2003** |   |
| **OPERATING  ACTIVITIES:**                                                                 |   |                               |    |                               |   |   |   |   |   |
| Net Loss                                                                                   |   | $                                  | (46,516 | )                                  | $      | (26,905 | ) | $ | (4,387 | ) | $ | (22,360 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |   |                               |    |                               |   |   |   |   |   |
| Depreciation and amortization, including  amortization of premium                          |   | 17,224                             |    | 17,274                             |   | 2,902 |   | 7,667 |   |
| Impairment loss                                                                            |   | —                             |    | 179                                |   | — |   | — |   |
| Gain on disposal of assets                                                                 |   | 26                                 |    | (16                                | )      | — |   | — |   |
| Write off investment in unconsolidated  affiliate                                          |   | —                             |    | 313                                |   | — |   | — |   |
| Loss on early extinguishment of debt                                                       |   | 843                                |    | —                             |   |   |   |   |   |
| (Benefit) provision for doubtful accounts                                                  |   | 1,021                              |    | 444                                |   | 55 |   | 452 |   |
| Decrease (increase) in accounts receivable                                                 |   | (2,255                             | )       | (635                               | )      | 185 |   | 3,901 |   |
| Minority interest in Hollywood Casino  Shreveport                                          |   | 1,438                              |    | 1,464                              |   | 230 |   | 1,077 |   |
| Increase (decrease) in accounts payable and  accrued liabilities                           |   | (4,244                             | )       | 1,643                              |   | (9,124 | ) | 20,988 |   |
| Net change in affiliate balances                                                           |   | 2,876                              |    | 2,316                              |   | 576 |   | 2,934 |   |
| Net change in other current assets and  liabilities                                        |   | 1,203                              |    | (151                               | )      | (142 | ) | (756 | ) |
| Net change in other noncurrent assets and  liabilities                                     |   | 126                                |    | 133                                |   | 12 |   | 95 |   |
| Net cash provided by (used in) operating  activities                                       |   | (28,258                            | )       | (3,941                             | )      | (9,693 | ) | 13,998 |   |
|                                                                                       |   |                               |    |                               |   |   |   |   |   |
| **INVESTING  ACTIVITIES:**                                                                 |   |                               |    |                               |   |   |   |   |   |
| Purchases of property and equipment                                                        |   | (4,993                             | )       | (1,497                             | )      | (224 | ) | (369 | ) |
| Proceeds from the disposal of assets                                                       |   | —                             |    | 32                                 |   | — |   | — |   |
| Investment in unconsolidated affiliate                                                     |   | (265                               | )       | —                             |   | — |   | — |   |
| Net change in cash restricted for  construction project                                    |   | 9,530                              |    | —                             |   | — |   | — |   |
| Net cash provided by (used in) investing  activities                                       |   | 4,272                              |    | (1,465                             | )      | (224 | ) | (369 | ) |
|                                                                                       |   |                               |    |                               |   |   |   |   |   |
| **FINANCING  ACTIVITIES:**                                                                 |   |                               |    |                               |   |   |   |   |   |
| Proceeds from issuance of long-term debt                                                   |   | 40,170                             |    | —                             |   | — |   | — |   |
| Proceeds from issuance of common stock                                                     |   | —                             |    | 250                                |   | — |   | — |   |
| Repayment of long-term debt                                                                |   | (2,006                             | )       | (7                                 | )      | (1 | ) | (7 | ) |
| Deferred financing costs                                                                   |   | (2,296                             | )       | (5                                 | )      | — |   | — |   |
| Capital contributions                                                                      |   | 8,675                              |    | 1,831                              |   | 800 |   | — |   |
| Payments on capital lease obligations                                                      |   | (30,000                            | )       | —                             |   | — |   | — |   |
| Payments to Sodak Gaming, Inc.                                                             |   | (2,499                             | )       | —                             |   | — |   | — |   |
| Partner distributions                                                                      |   | (1,405                             | )       | (1,452                             | )      | (230 | ) | (1,077 | ) |
| Net cash provided by (used in) financing  activities                                       |   | 10,639                             |    | 617                                |   | 569 |   | (1,084 | ) |
| Net increase (decrease) in cash and cash  equivalents                                      |   | (13,347                            | )       | (4,789                             | )      | (9,348 | ) | 12,545 |   |
| Cash and cash equivalents at beginning of  period                                          |   | 39,956                             |    | 26,609                             |   | 21,820 |   | 12,472 |   |
| Cash and cash equivalents at end of period                                                 |   | $                                  | 26,609  |                               | $      | 21,820 |   | $ | 12,472 |   | $ | 25,017 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**HWCC –LOUISIANA, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

### **1.**             Successor’s Note

 

**Acquisition of HWCC-Louisiana, Inc.**

 

Effective with the close of business on February 28, 2003, PennNational Gaming, Inc. (“Penn National”) completed the acquisition of HollywoodCasino Corporation (“HCC”) and its subsidiaries, including HWCC-Louisiana, Inc.(“HCL”). Penn National “pushed down” its basis in the Company in accordancewith Staff Accounting Bulletin No. 54, “Push Down Basis of AccountingRequired in Certain Limited Circumstances.” The accompanying consolidatedfinancial statements for the period following the acquisition (“SuccessorPeriod”) includes management’s best estimate of the purchase price adjustmentsrequired in accordance with Statement of Financial Accounting StandardsNo. 141, “Business Combinations” (“SFAS 141”). SFAS 141 requiresthat assets and liabilities of the acquired entity be reflected at their fairvalues. The accompanying consolidated financial statements for periods prior tothe acquisition (“Predecessor Period”) reflect the historical cost basis of theCompany’s assets and liabilities (See Note 11 for Predecessor Note).

 

The purchase price adjustments reflected on the accompanying SuccessorBasis consolidated financial statements include revaluing Hollywood CasinoShreveport’s (“HCS”) property and equipment to their estimated fair valuesbased on an independent appraisal obtained by Penn National. Such appraisalresulted in a reduction of the recorded net book value of property andequipment as of the date of the acquisition in the amount of $38.8 million.Deficiencies in HCS’s partners’ capital accounts (including the carryoverdeficiency of the former partners) were adjusted by $37.2 million to a zerobasis as of the acquisition date. No goodwill was recorded in connection withthe acquisition.

 

A valuation allowance in the amount of $70.3 million was establishedwith respect to the $150 million 13% First Mortgage Notes with contingentinterest due 2006 (the “First Mortgage Notes”) and the $39 million 13% SeniorSecured Notes with contingent interest due 2006 (the “Senior Secured Notes” andcollectively, the “Shreveport Notes”) to reduce their carrying amount tomanagement’s estimate of their fair value. Management’s estimate was based onthe fair values of the assets and liabilities assumed. In addition, a valuationallowance in the amount of $6.4 million was established at the acquisition dateto fully reserve the management fee payable to a subsidiary of HCC. Suchmanagement fee is subordinated in payment to the Shreveport Notes.

 

The accompanying Successor Basis consolidated statement of operationsalso includes certain reclassifications made by Penn National to conform thepost-acquisition statement of operations to the same presentation used by otherproperties owned and operated by Penn National. The accompanying PredecessorBasis consolidated statements of operations do not include suchreclassifications. In addition, depreciation of property and equipment for theperiod from March 1, 2003 through December 31, 2003 has been adjusted toreflect the revised estimates of fair value established as a result of theaforementioned appraisal.

 

As described in Note 3, HCS failed to make a required repurchase offerfor the Shreveport Notes and has failed to make semi-annual interest paymentson the Shreveport Notes aggregating approximately $24.6 million.

 

In addition, HCS has experienced net losses since inception and has asignificant deficiency in its partners’ capital.  Accordingly, management believes that HCS’s existing cash andcash flow from operations will not be sufficient to fund its operating andcapital needs for the next 24 months. All of these matters raise substantial doubt about HCS’s ability tocontinue as a going concern.  Managementis currently in the process of developing its plans with regard to thesematters.

 

As described in Note 10, HCS I, Inc., the managing general partner ofHCS, has initiated a process that it hopes will result in the sale or otherdisposition of the riverboat casino/hotel complex.  There can be no assurance that the process will result in thesale or other disposition of the riverboat casino/hotel complex or that, if itdoes, the sale proceeds will be adequate to pay the Shreveport Notes infull.  Further, the holders of theShreveport Notes might pursue all rights

 

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and remedies that they may have under the indentures as a result of theevent of default. Any such action on the part of the note holders may prompt HCSto seek the protection of the bankruptcy laws or other similar remedies.

 

### **2.**             Summary of Significant AccountingPolicies

 

**Principles of Consolidation**

 

The consolidated financial statements include the accounts ofHWCC-Louisiana, Inc. (“HCL”) and its wholly owned subsidiaries, HCS I, Inc.(“HCS I”) and HCS II, Inc. (“HCS II”) (collectively, the “Company”). HCS I andHCS II together own 100% of the partnership interest of Hollywood CasinoShreveport (“HCS”). All significant intercompany accounts and transactions havebeen eliminated in consolidation.

 

**Use of Estimates**

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenue and expenses for the reportingperiods. Actual results could differ from those estimates.

 

**Cash and Cash Equivale***n*ts

 

The Company considers all cash balances and highly liquid investmentswith original maturities of three months or less to be cash equivalents.

 

**Concentration of Credit Risk**

 

Financial instruments that potentially subject the Company to credit riskconsist of cash equivalents and accounts receivable.

 

The Company’s policy is to limit the amount of credit exposure to anyone financial institution and place investments with financial institutionsevaluated as being creditworthy, or in short-term money market and tax-freebond funds which are exposed to minimal interest rate and credit risk. Attimes, the Company has bank deposits and overnight repurchase agreements thatexceed federally insured limits.

 

Concentration of credit risk, with respect to casino receivables, islimited through the Company’s credit evaluation process. The Company issuesmarkers to approved casino customers following background checks andinvestigations of creditworthiness.

 

**Allowance for Doubtful Accounts**

 

Accounts are written off when management determines that an account isuncollectible. Recoveries of accounts previously written off are recorded whenreceived. An estimated allowance for doubtful accounts is determined to reducethe Company’s receivables to their carrying value, which approximates fairvalue. The allowance is estimated based on historical collection experience,specific review of individual customer accounts, and current economic andbusiness conditions. Historically, the Company has not incurred any significantcredit-related losses.

 

**Fair Value of Financial Instruments**

 

The following methods and assumptions are used to estimate the fairvalue of each class of financial instruments for which it is practical toestimate:

 

Cash and Cash Equivalents:  The carrying amount approximates the fairvalue due to the short maturity of the cash equivalents.

 

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Long-term Debt:  In the Successor Period, long-term debt is based on the fairvalue of the underlying collateral.

 

**Property and Equipment**

 

Property and equipment are stated at cost. Maintenance and repairs thatdo not add materially to the value of the asset nor appreciably prolong itsuseful life are charged to expense as incurred. Gains or losses on the disposalof property and equipment are included in the determination of income.

 

Depreciationof property and equipment and amortization of leasehold improvements areprovided using the straight-line method over the following estimated usefullives:

 

| Land improvements                  |   | 5 to 15 years  |   |
|------------------------------------|--------|----------------|--------|
| Building and improvements          |   | 25 to 40 years |   |
| Furniture, fixtures, and equipment |   | 3 to 7 years   |   |
| Transportation equipment           |   | 5 years        |   |
| Leasehold Improvements             |   | 10 to 20 years |   |

 

The Company reviews the carrying values of its long-lived assets forpossible impairment whenever events or changes in circumstances indicate thatthe carrying amount of the assets may not be recoverable based on undiscountedestimated future operating cash flows. As of December 31, 2003, the Company has determined that noimpairment has occurred.

 

**Inventory**

 

Inventories are stated at the lower of cost (on a first-in, first-outbasis) or market.

 

**Deferred Financing Costs**

 

During the Predecessor Period, deferred financing costs that wereincurred by the Company in connection with the issuance of debt are deferredand amortized to interest expense over the life of the underlying indebtednessusing the interest method adjusted to reflect any early repayments.  During the Successor Period, there were nodeferred financing costs.

 

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**Income Taxes**

 

The Companywill be included in the consolidated federal income tax return, for the periodMarch 1, 2003 to December 31, 2003, filed for Penn National.  As a result of the uncertainties as discussed in Notes 1 and 10,no consolidated tax benefit was allocated to HCL.

 

Prior to theacquisition by Penn National, HCL was included in the consolidated federalincome tax return of HCC. Pursuant to agreements between HCL and HCC, HCL’sprovision for taxes is based on the amount of tax that would be provided if aseparate federal income tax return were to be filed.

 

**Revenue Recognition**

 

In accordance with gaming industry practice, the Company recognizescasino revenues as the net of gaming wins less losses. Net revenues exclude theretail value of complimentary rooms, food and beverage furnished gratuitouslyto customers. These amounts that are included in promotional allowances were asfollows (in thousands):

 

|                         |   | **Precedessor  Basis**             |   | **Successor  Basis**                |   |
|------------------------------|--------|------------------------------------|--------|-------------------------------------|--------|
|                         |   | **Year ended  December  31, 2001** |   | **Year  Ended  December  31, 2002** |   | **Period  from  January 1,  2003  Through  February  28, 2003** |   | **Period  from  March 1, 2003  Through  December 31,  2003** |   |
|                         |   |                               |   |                                |   |   |   |   |   |
| Rooms                        |   | $                                  | 4,586  |                                | $      | 5,305 |   | $ | 720 |   | $ | 4,382 |   |
| Food and beverage            |   | 19,026                             |   | 18,419                              |   | 2,858 |   | 13,645 |   |
| Other                        |   | 1,375                              |   | 681                                 |   | 81 |   | 500 |   |
| Customer loyalty programs    |   | 13,166                             |   | 11,502                              |   | 1,603 |   | — |   |
| Total promotional allowances |   | $                                  | 38,153 |                                | $      | 35,907 |   | $ | 5,262 |   | $ | 18,527 |   |

 

The estimated cost of providing such complimentary services that isincluded in operating expenses was as follows (in thousands):

 

|                                 |   | **Precedessor  Basis**             |   | **Successor  Basis**                |   |
|--------------------------------------|--------|------------------------------------|--------|-------------------------------------|--------|
|                                 |   | **Year ended  December  31, 2001** |   | **Year  Ended  December  31, 2002** |   | **Period  from  January 1,  2003  Through  February  28, 2003** |   | **Period  from  March 1, 2003  Through  December 31,  2003** |   |
|                                 |   |                               |   |                                |   |   |   |   |   |
| Rooms                                |   | $                                  | 2,631  |                                | $      | 2,628 |   | $ | 386 |   | $ | 1,889 |   |
| Food and beverage                    |   | 22,217                             |   | 19,271                              |   | 3,030 |   | 11,663 |   |
| Other                                |   | 3,227                              |   | 1,028                               |   | 142 |   | 2,031 |   |
| Total cost of complimentary services |   | $                                  | 28,075 |                                | $      | 22,927 |   | $ | 3,558 |   | $ | 15,583 |   |

 

**Certain Risks and Uncertainties**

 

The Company’s operations are dependent on its continued licensing bystate gaming commissions. The loss of a license in the jurisdiction in whichthe Company operates, could have a material, adverse effect on future resultsof operations.

 

The Company is dependent on the local market for a significant numberof its patrons and revenues. If economic conditions in this area deteriorate oradditional gaming licenses are awarded in these markets, the Company’s resultsof operations could be adversely affected.

 

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The Company is also dependant upon a stablegaming and admission tax structure in the local jurisdictions in which itoperates and in the state Louisiana. Any change in the tax structure could have a material adverse effect onfuture results of operations.

 

**Accounting Pronouncements Adopted in 2003**

 

In January 2003, FASB issued Interpretation No. 46, “Consolidationof Variable Interest Entities” (“Interpretation No. 46”), clarifies theapplication of Accounting Research Bulletin No. 51, “ConsolidatedFinancial Statements,” to certain entities in which equity investors do nothave the characteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. Interpretation No. 46is applicable immediately for variable interest entities created afterJanuary 31, 2003. For variable interest entities created prior toJanuary 31, 2003, the provisions of Interpretation No. 46 areapplicable no later than July 1, 2003. We do not expect thisInterpretation to have an effect on the consolidated financial statements.

 

**Recent Accounting Pronouncements**

 

There are no accounting standards issued before December 31, 2003 buteffective after December 31, 2003 that are expected to have a material impacton our financial reporting.

 

### **3.**             Long-termDebt

 

The Hollywood Casino Shreveport general partnership and ShreveportCapital Corporation are co-issuers of $150 million aggregate principal amountof 13% senior secured notes due 2006 and $39 million aggregate principal amountof 13% first mortgage notes due 2006 (the “Shreveport Notes”). Hollywood CasinoShreveport is a general partnership that owns the casino operations. ShreveportCapital Corporation is a wholly owned subsidiary of Hollywood Casino Shreveportformed solely for the purpose of being a co-issuer of the Shreveport Notes.

 

The Shreveport Notes are non-recourse to Penn National and itssubsidiaries (other than Hollywood Casino Shreveport, Shreveport CapitalCorporation, HCS I, Inc., HCS II, Inc. and HCL. (collectively the “ShreveportEntities”) and are secured by substantially all of the assets of the casino,and the partnership interests held by HCS I, Inc. and HCS II, Inc. and thestock held by HCL.

 

The indentures governing the Shreveport Notes require the issuers tomake an offer to purchase the Shreveport Notes at 101% of the principal amountthereof within 10 days of the occurrence of a “Change of Control” as defined inthe indentures. A “Change of Control” was deemed to have occurred under theindentures on March 3, 2003 as a result of the consummation of the merger ofour wholly owned subsidiary with and into HCC. HCS determined that it does nothave the liquidity to repurchase the Shreveport Notes at 101% of theirprincipal amount and, accordingly, could not make an offer to purchase theShreveport Notes as required under the indentures.

 

On March 14, 2003, HCS and Shreveport Capital Corporation werenotified by an ad hoc committee of holders of the Shreveport Notes thatthey had 60 days from receipt of the notice to cure the failure to offer topurchase the Shreveport Notes or an event of default would occur under theindentures. Neither HCS nor

 

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Shreveport Capital Corporation made a Change of Control offer topurchase the Shreveport Notes within the 60 days and, accordingly, thead hoc committee notified HCS in May 2003 that an event of default hadoccurred under the indentures. In addition, we did not make the August 1,2003 and February 1, 2004 interest payments of approximately$12.3 million each, which were due on the Shreveport Notes. During theperiod subsequent to May 2003, HCS entered into negotiations with thead hoc committee of holders of the Shreveport Notes, regarding thepossible restructure of the outstanding indebtedness. In November 2003, HCSretained Libra Securities, LLC as its exclusive financial advisor in connectionwith a possible sale or debt restructuring transaction. The holders of theShreveport Notes might pursue all rights and remedies that they may have underthe indentures as a result of the event of default.  Any such action on the part of the note holders may prompt HCS toseek the protection of the bankruptcy laws or other similar remedies. (SeeNote 10 for subsequent events).

 

Long-term debt is as follows (in thousands):

 
| **December 31,**                                                                                                     |   | **2002** |    | **2003** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| 13% First Mortgage Notes, with contingent  interest, due 2006                                                        |   | $        | 150,000 |     | $      | 150,000 |   |
| 13% Senior Secured Notes, with contingent  interest, due 2006, including bond premium of $891 and $686, respectively |   | 39,891   |    | 39,686   |   |
| Less:   Bond valuation allowance                                                                                |   | —   |    | (70,348  | )      |
| Other notes payable                                                                                                  |   | 20       |    | 7        |   |
|                                                                                                                 |   | 189,911  |    | 119,345  |   |
| Less current maturities                                                                                              |   | 6        |    | 119,345  |   |
|                                                                                                                 |   | $        | 189,905 |     | $      | — |   |

 

**Contingent Interest**

 

Under the terms of the indentures for the Shreveport Notes, contingentinterest is due and payable on each interest payment date. The amount ofcontingent interest payable is based on a percent of the consolidated cash flowof HCS. Contingent interest may not be paid to the extent that payment wouldresult in certain financial coverage ratios not being met. Consequently, nocontingent interest has been paid by HCS.

 
|                            |   | **Precedessor  Basis**             |   | **Successor  Basis**                |   |
|---------------------------------|--------|------------------------------------|--------|-------------------------------------|--------|
| **Contingent Interest Expense** |   | **Year ended  December  31, 2001** |   | **Year  Ended  December  31, 2002** |   | **Period  from  January 1,  2003  Through  February  28, 2003** |   | **Period from  March 1, 2003  Through  December 31,  2003** |   |
|                            |   | **(in thousands)**                 |   |
| First Mortgage Notes            |   | $                                  | 309    |                                | $      | 836 |   | $ | 139 |   | $ | 447 |   |
| Senior Secured Notes            |   | 78                                 |   | 219                                 |   | 36 |   | 116 |   |
|                            |   | $                                  | 387    |                                | $      | 1,055 |   | $ | 175 |   | $ | 563 |   |

 
| **Accrued  Contingent Interest Payable  December 31,** |   | **(In thousands)** |   |
|--------------------------------------------------------|--------|--------------------|--------|
| **2002**                                               |   | **2003**           |
|                                                   |   |               |   |   |   |
| First Mortgage Notes                                   |   | $                  | 1,222  |   | $ | 1,808 |   |
| Senior Secured  Notes                                  |   | 297                |   | 449 |   |
|                                                   |   | $                  | 1,519  |   | $ | 2,257 |   |

 

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### **4.**             Commitmentsand Contingencies

 

For so long as it remains a joint venture partner in HCS, ShreveportPaddlewheels, L.L.C. (“Paddlewheels”), a Louisiana limited liability company,receives, among other things, an amount equal to 1% of “complex net revenues,”as defined, of the casino, which approximates net revenues, in exchange for theprevious assignment by Paddlewheels and its affiliates of their joint ventureinterest in HCS. Allocations to Paddlewheels of such amounts are reflected aspartnership distributions to HCS I, Inc. and HCS II, Inc. Suchinterest amounted to $1.4 million and $1.5 million for the years ended December30, 2001 and, 2002, respectively, and $.2 million for the period from January1, 2003 through February 28, 2003 and $1.1 million for the period from March 1,2003 through December 31, 2003. Unpaid distributions of $.1 million and $.9million, respectively, are included in due to affiliates on the accompanyingconsolidated balance sheets at December 31, 2002 and 2003, respectively.Effective July 10, 2003, HCS suspended payments under the agreement to Paddlewheelsdue to the event of default on the Shreveport Notes.

 

HCS is subject to various legal and administrative proceedings relatingto personal injuries, employment matters, commercial transactions and othermatters arising in the normal course of business. HCS does not believe that thefinal outcome of these matters will have a material adverse effect on itsconsolidated financial position or results of operations. In addition, HCSmaintains what it believes is adequate insurance coverage to further mitigatethe risks of such proceedings. However, such proceedings can be costly, timeconsuming and unpredictable and, therefore, no assurance can be given that thefinal outcome of such proceedings may not materially impact its consolidatedfinancial condition or results of operations. Further, no assurance can begiven that the amount or scope of existing insurance coverage will besufficient to cover losses arising from such matters.

 

The following proceedings could result in costs, settlements or damagesthat materially impact HCS’s consolidated financial condition or operatingresults. In each instance, HCS believes that it has meritorious defenses and/orcounter-claims and intends to vigorously defend itself.

 

On April 23, 2000, the construction site forthe facility suffered tornado damage that contributed to the delay in itsopening. HCS filed damage claims and received reimbursements from its insurancecarriers during 2000 in the amount of approximately $1.5 million to coversubstantially all of the cost of repairing the damage incurred. HCS also fileda lawsuit in the U.S. District Court for the Western District of Louisianaagainst its insurance carriers seeking to recover lost profits and relatedclaims under its business interruption insurance coverage. On June 16, 2003, ajudgment was entered in that court awarding HCS approximately $3.9 million(including interest but excluding attorney fees). Subsequently, an orderstaying enforcement of judgment was entered by the court to allow the defendantinsurance companies time to file certain post-trial motions. Following thedisposition of such motions, HCS and the defendants entered into a settlementof this lawsuit in December 2003, whereby HCS received $4.0 million insettlement of the June 16, 2003 judgment and the defendant insurance companiespaid $.8 million to HCS’s outside legal counsel in full satisfaction ofits attorneys’ fees relating to the claims in the lawsuit.

 

In a set of related matters, HCS is alsoseeking to recover damages from the general contractor, the architect andcertain other parties involved in the construction of the casino. For this andother reasons, HCS has withheld payment of certain retainage amounts that thegeneral contractor is currently seeking. The general contractor has also submitted additional change orders thatHCS is disputing.  HCS has recorded aliability in the amount of approximately $3.6 million in accounts payable inconnection with the construction project. These matters were the subject ofvarious state and federal court proceedings as well as arbitrations. In May2003, HCS, the general contractor, and the architect entered into an agreementto arbitrate the various claims. Such proceedings are currently ongoing and noassurance can be given as to the ultimate outcome.

 

In October 2003, the Bossier Parish PoliceJury filed an action against HCS and the City of Shreveport in the 26thJudicial District Court of Bossier Parish, Louisiana seeking to overturn theagreement between HCS and the City of Shreveport, which provides for an annualfee in lieu of the $3.00/head admission fee, in order to collect boarding feesfor itself. In late February 2004, HCS and the City of Shreveport filedExceptions of No Right and No Cause of Action seeking dismissal of the suit. Ahearing has been set on the Exceptions for April 8, 2004. HCS has vigorouslycontested all the allegations set forth in the suit and will continue to do so.

 

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Over the past several months, a number of individualemployees have brought similar gender related employment claims against HCSunder Title VII in Federal Court in Louisiana. HCS is vigorously contesting all the allegations. The claims are invarious stages of discovery and administrative proceedings.

 

**Employee Benefit Plans**

 

HCSparticipated in a retirement savings plan under Section 401(k) of the InternalRevenue Code of 1986, as amended, that covered all eligible employees and wassponsored by Hollywood Casino Corporation. The plan allowed employees to contribute up to 15% of their salary on apre-tax basis (subject to statutory limitations) and invest such monies in achoice of mutual funds on a tax-deferred basis.  Employer contributions to the plan were set at 50% of theemployees’ elective salary deferrals up to a maximum of 5% of employeecompensation.  For the years endedDecember 31, 2001 and 2002 and for the two months ended February 28, 2003, HCSexpensed $30,000, $.1 million and $12,000, respectively, as companycontributions to the plan.

 

OnAugust 1, 2003, the plan was merged into Penn National Gaming, Inc.’sretirement savings plan that also qualifies under the provisions of Section401(k) of the Internal Revenue Code of 1986, as amended.  Employer contributions to the plan are set at50% of the employee’s elective salary deferrals up to a maximum of 6% ofemployee compensation.  For the periodfrom March 1, 2003 to December 3, 2003, HCS expensed $.2 million as companycontributions to the plan.

 

**Operating Leases**

 

HCS is party to a ground lease with the City of Shreveport for the landon which the casino was built. The terms of the ground lease require thepayment by HCS base rent, percentage rent based on adjusted gross receipts,payments in lieu of admission fees to the City of Shreveport and payments inlieu of school taxes to the local school board.

 

Payments made under the terms of the ground lease are as follows (inthousands):

 
|                               |   | **Precedessor  Basis**             |   | **Successor  Basis**                |   |
|------------------------------------|--------|------------------------------------|--------|-------------------------------------|--------|
|                               |   | **Year ended  December  31, 2001** |   | **Year  Ended  December  31, 2002** |   | **Period  from  January 1,  2003  Through  February  28, 2003** |   | **Period  from  March 1, 2003  Through  December 31,  2003** |   |
| Ground lease:                      |   |                               |   |                                |   |   |   |   |   |
| Base rent                          |   | $                                  | 573    |                                | $      | 573 |   | $ | 95 |   | $ | 478 |   |
| Percentage rent                    |   | 1,438                              |   | 1,464                               |   | 230 |   | 1,078 |   |
|                               |   |                               |   |                                |   |   |   |   |   |
|                               |   | $                                  | 2,011  |                                | $      | 2,037 |   | $ | 325 |   | $ | 1,556 |   |
|                               |   |                               |   |                                |   |   |   |   |   |
| Payment in lieu of admissions fees |   | $                                  | 5,603  |                                | $      | 5,637 |   | $ | 864 |   | $ | 4,159 |   |

 

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Future minimum lease payments as of December 31, 2003 under operatinglease obligations (other than the ground lease) having an initial or remainingnoncancelable term in excess of one year are as follows (In thousands):

 

| **Year Ended December 31,** |   |   |   |
|-----------------------------|--------|--------|--------|
| 2004                        |   | $      | 603    |   |
| 2005                        |   | 445    |   |
| 2006                        |   | 213    |   |
| 2007                        |   | 140    |   |
| 2008                        |   | 140    |   |
| Thereafter                  |   | 967    |   |
|                        |   | $      | 2,508  |   |

 

### **5.**             SummarizedQuarterly Data (Unaudited)

 

Following is a summary of the quarterly results of operations for theyears ended December 31, 2002 and 2003 (in thousands):

 
|                          |   | **Fiscal  Quarter** |   |
|-------------------------------|--------|---------------------|--------|
| **2002**                      |   | **First**           |   | **Second** |   | **Third** |   | **Fourth** |   |
| Net revenue                   |   | $                   | 38,217 |   | $ | 36,302 |   | $ | 36,780 |   | $ | 35,057 |   |
| Income (loss) from operations |   | 2,627               |   | 607 |   | (768 | ) | (1,099 | ) |
| Net (loss)                    |   | (4,541              | )      | (6,748 | ) | (7,623 | ) | (7,993 | ) |
|                               |        |                     |        |  |  |  |  |  |  |  |  |  |  |

 
|                          |   | **Fiscal  Quarter**           |   |
|-------------------------------|--------|-------------------------------|--------|
| **2003**                      |   | **January 1 to  February 28** |   | **March 1 to  March 31** |   | **Second  (Restated)** |   | **Third  (Restated)** |   | **Fourth** |   |
| Net revenue                   |   | $                             | 22,981 |   | $ | 12,710 |   | $ | 33,759 |   | $ | 35,411 |   | $ | 32,044 |   |
| Income (loss) from operations |   | 276                           |   | 1,742 |   | 744 |   | (209 | ) | (409 | ) |
| Net (loss)*                   |   | (4,387                        | )      | (663 | ) | (6,948 | ) | (7,850 | ) | (6,899 | ) |
|                               |        |                               |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*  The second and third quarters for the yearended December 31, 2003 reflect adjustments of ($2.7 million) and ($2.5million), respectively, to net (loss) from previously issued financialstatements related to the elimination of an income tax benefit.

 

### **6.**             RelatedParty Transactions

 

The operations of the Shreveport Casino are managed byHWCC-Shreveport, Inc. (“Shreveport Management”), a wholly owned subsidiaryof HCC, under the terms of a management agreement. HCS also reimbursesShreveport Management for expenses incurred in connection with services providedunder the management agreement. Total management fees incurred amounted to  $2.9 million for each of the years endedDecember 31, 2001 and 2002, respectively, and $.5 million for the period fromJanuary 1, 2003 through February 28, 2003 and $1.5 million for the period fromMarch 1, 2003 through December 31, 2003 and are included in general andadministrative expenses on the accompanying condensed consolidated statementsof operations. Management fees payable at December 31, 2002 and 2003amounted to $6 million and $2.2 million, respectively. Such fees, reduced by avaluation allowance of $6.4 million at December 31, 2003, are included indue to affiliates on the accompanying consolidated balance sheets. Under theindentures and related documents governing the Shreveport Notes, managementfees are subordinated to all payments under the Shreveport Notes and may not bepaid to the extent that their payment would result in certain financialcoverage ratios not being met. Consequently, no management fees have been paidsince the opening of the facility.

 

HCS has also entered into a Marine Services Agreement with Paddlewheelsto provide certain marine services for so long as Paddlewheels remains a jointventure partner in HCS. The Marine Services Agreement became effective onSeptember 22, 1998 and, in addition to the reimbursement to Paddlewheelsfor its direct expenses incurred, if any, HCS pays a monthly fee of $30,000.HCS expensed $.4 million per year for each of the years ended December 31, 2002and 2002, respectively, and $ .1 million for the period from January 1, 2003through February 28, 2003 and $.4 million for the period from March 1, 2003through December 31, 2003 under the agreement. Unpaid charges of $30,000 and$.2 million are included in due to affiliates on the accompanying consolidatedbalance sheets at December 31, 2002

 

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and 2003, respectively. Effective July 10, 2003, HCS has suspendedpayments under the agreement to Paddlewheels due to the event of default on theFirst Mortgage Notes and the Senior Secured Notes.

### ** **

### **7.**             SupplementalCash Flow Information

 

HCSpaid interest totaling $21.5 million and $24.5 million during the years endedDecember 31, 2001 and 2002, respectively, and $ 12.3 million during the periodfrom January 1, 2003 through February 28, 2003.  HCS paid no income taxes during the years ended December 31,2001, 2002 or 2003.

 

**8.             IncomeTaxes**

 

As previouslydiscussed in Note 2, the Company will be included in the consolidated federalincome tax return, for the period March 1, 2003 to December 31, 2003, filed forPenn National.  As a result, an incometax benefit of $7.8 million for the period from March 1, 2003 through December31, 2003 may be realized by Penn National. None of thetax benefit will be allocated to HCL as a result of the uncertainties as discussed in Notes 1 and 10.

 

Prior to March1, 2003, the Company recognized deferred tax assets and liabilities for theexpected future tax consequences of events that have been recognized in theCompany’s financial statements or tax returns. Under this method, deferred taxassets and liabilities are determined based on the difference between thefinancial statement carrying amounts and tax bases of assets and liabilitiesusing enacted tax rates in effect in the years in which the differences areexpected to reverse.

 

Deferred taxassets and liabilities are comprised of the following (in thousands):

 
| **December 31,**                           |   | **Predecessor  Basis  2002** |   |
|--------------------------------------------|--------|------------------------------|--------|
| Deferred tax assets:                       |   |                         |   |
| Net operating loss carryforwards           |   | $                            | 41,390 |   |
| Preopening expenses                        |   | 3,356                        |   |
| Allowance for doubtful  accounts           |   | 354                          |   |
| Other liabilities and accruals             |   | 2,601                        |   |
| Impairment loss                            |   | 72                           |   |
| Other                                      |   | 134                          |   |
| Total Deferred tax assets                  |   | 47,907                       |   |
|                                       |   |                         |   |
| Deferred tax liabilities:                  |   |                         |   |
| Depreciation and amortization              |   | (9,845                       | )      |
| Net deferred asset (liability)             |   | 38,062                       |   |
| Valuation allowance                        |   | (38,062                      | )      |
|                                       |   | $                            | — |   |
|                                       |   |                         |   |
| Reflected on consolidated  balance sheets: |   |                         |   |
| Current deferred tax asset,  net           |   | —                       |   |
| Noncurrent deferred tax  liabilities, net  |   | —                       |   |
| Net deferred taxes                         |   | $                            | — |   |

 

The valuationallowance represented the income tax effect of net operating loss carryforwards of the Company, which were presently expected to be utilized.

 

The provisionfor income taxes charged to operations was as follows (in thousands):

 
|                           |   | **Precedessor  Basis**             |   |
|--------------------------------|--------|------------------------------------|--------|
|                           |   | **Year ended  December  31, 2001** |   | **Year Ended  December  31, 2002** |   | **Period  from  January 1,  2003 Through  February 28,  2003** |   |
| Current tax (expense) benefit  |   |                               |   |   |   |   |   |
| Federal                        |   | $                                  | — |   | $ | — |   | $ | — |   |
| State                          |   | —                             |   | — |   | — |   |
| Total current                  |   | —                             |   | — |   | — |   |
|                           |   |                               |   |   |   |   |   |
| Deferred tax expense           |   |                               |   |   |   |   |   |
| Federal                        |   | 13,986                             |   | 9,237 |   | 1,409 |   |
| State                          |   | 3,561                              |   | 2,121 |   | 347 |   |
| Current in valuation allowance |   | (17,547                            | )      | (11,358 | ) | (1,756 | ) |
| Total deferred                 |   | —                             |   | — |   | — |   |
| Total provision (benefit)      |   | $                                  | — |   | $ | — |   | $ | — |   |

 

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Statement ofFinancial Accounting Standards No. 109, “Accounting for Income Taxes”, requiresthat the tax benefit of such NOL’s and credit carryforwards, together with thetax benefit of deferred tax assets resulting from temporary differences, berecorded as an asset and, to the extent that management can not assess that theutilization of all or a portion of such deferred tax assets is more likely thannot, a valuation allowance should be recorded. Based on the losses incurred todate and the near-term expectation of taxable losses, management has providedvaluation allowances to fully reserve the net deferred tax assets for allperiods presented.

 

The followingis a reconciliation of the statutory federal income tax rate to the actualeffective income tax rate for the following periods:

 
|                                                      |   | **Precedessor  Basis**             |   |
|-----------------------------------------------------------|--------|------------------------------------|--------|
|                                                      |   | **Year ended  December  31, 2001** |   | **Year Ended  December  31, 2002** |   | **Period  from  January 1,  2003 Through  February 28,  2003** |   |
| Federal tax rate                                          |   | 35.0                               | %      | 35.0 | % | 35.0 | % |
| State and local income taxes, net of  federal tax benefit |   | 5.1                                | %      | 5.1 | % | 5.2 | % |
| Valuation allowance charge                                |   | (40.1                              | )%     | (40.1 | )% | (40.2 | )% |
|                                                      |   | —                             |   | — |   | — |   |

 

Deferredincome taxes result primarily from the use of the allowance method rather thanthe direct write-off method for doubtful accounts, the use of acceleratedmethods of depreciation for federal income tax purposes and differences in thetiming of deductions taken between tax and financial reporting purposes for theamortization of preopening costs, the capitalization of interest, impairmentlosses and other accruals.

 

At December31, 2003, HCL has net operating loss carry forwards (“NOL’s”) for federalincome tax purposes totaling approximately $97 million that do not begin toexpire until the year 2019.  The sale ofHCC  as discussed in Note 1,caused a “change of control”, as defined in Section 382 of the Internal RevenueCode of 1986, as amended, which limits the ability of Penn National to utilizethese loss carryforwards in later tax periods.

 

The InternalRevenue Service recently opened an examination of the consolidated federalincome tax returns of HCC for the years 1999 through 2001 in which HCL wasincluded.

 

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**9.             StockOption Plan**

 

Certain employeesof HCS were granted stock options to acquire common stock of HCC under theHollywood Casino Corporation 1996 Long Term Incentive Plan.  On March 3, 2003, due to the change ofcontrol provisions in the plan, all of the stock options granted under the planbecame exercisable and were exercised. In October 2003 Penn National issued to a HCS employee options toacquire 15,000 shares of Penn National common stock under the Penn NationalGaming, Inc. 2003 Long Term Incentive Compensation Plan.

 

### **10.**          SubsequentEvents

 

On February 3, 2004, the Company’s indirect subsidiary,HCS I, Inc., the managing general partner of HCS, announced that its Boardof Directors (the “Board”) had authorized initiation of a process that it hopeswill result in the sale or other disposition of the riverboat casino/hotelcomplex. The Board further authorized HCS’s financial advisor, Libra SecuritiesLLC, to begin contacting potential acquirers. The Board also authorized thecreation of an independent committee, currently consisting of the director whois not employed directly by Penn National Gaming, to oversee the process. TheBoard created the independent committee in the event that Penn National electsto participate as a bidder in the sale process. The Board took action afterconsultation with an ad hoc committee of holders of the Shreveport Notes.Although no formal agreement has been reached with the ad hoc committeeregarding the sale process, HCS anticipates that it will consult with the adhoc committee throughout the process. There can be no assurance that theprocess will result in the sale or other disposition of the riverboatcasino/hotel complex or that, if it does, the sale proceeds will be adequate topay the Shreveport Notes in full. HCS currently anticipates that anytransaction will be effected through a bankruptcy proceeding. The Board alsodetermined not to authorize HCS to make the February 1, 2004 interest payments,aggregating  approximately $12.3million, due on the Shreveport Notes. As previously reported by HCS, theShreveport Notes have been in default under the terms of their respective noteindentures since March 2003.

 

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**11.          PredecessorNote**

* *

*Organization,History, Business and Basis of Presentation —*HWCC—Louisiana, Inc. (“HCL”) is a Louisianacorporation approximately 99%-owned by Hollywood Casino Corporation (“HCC”) and1%-owned by HWCC-Holdings, Inc. (“Holdings”), which is a wholly ownedsubsidiary of HCC. HCL was formed in April 1993 for the purpose of obtaining alicense to develop and own a riverboat casino in Louisiana. HCL’s initialefforts to obtain sites in Lake Charles and Bossier City, Louisiana provedunsuccessful. In September 1998, HCL, Sodak Louisiana, L.L.C. (“Sodak”) andShreveport Paddlewheels, L.L.C. (“Paddlewheels”) acquired the interests ofQueen of New Orleans at the Hilton Joint Venture (“QNOV”). QNOV was a generalpartnership which owned and operated a riverboat gaming facility in NewOrleans, Louisiana. QNOV ceased operating the riverboat casino in October 1997having requested and obtained approval from the Louisiana Gaming Control Board(the “LGCB”) to move their licensed site to the City of Shreveport,approximately 190 miles east of Dallas, Texas. Subsequent to receiving approvalto relocate the license, QNOV made the decision not to conduct gamingoperations in Shreveport. The partners of QNOV sought to transfer the licenseto operate in Shreveport to another interested party. Under Louisiana gamingregulations, the license to operate a riverboat gaming operation is nottransferable; however, the ownership of an entity licensed to operate istransferable, subject to the approval of the LGCB. Accordingly, the acquisitionby HCL, Sodak and Paddlewheels of the license to operate in Shreveport wasstructured as an acquisition of the interests of QNOV’s partners. The formerpartners disposed of QNOV’s assets other than its license to operate

 

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*and satisfied all but one of its obligations so that when the formerpartners withdrew on September 22, 1998 transferring their interests to HCL,Sodak and Paddlewheels, QNOV’s only asset was its license to operate inShreveport (which had no recorded value) and its only liability was a $5 millionobligation to the City of New Orleans (see below). HCL, Sodak and Paddlewheelsobtained the necessary approvals from the LGCB to proceed with the project inShreveport. In June 1999, HCL obtained approval to change the name of thepartnership to Hollywood Casino Shreveport (“HCS”).*

 

Upon admission of the new partners, HCS proceeded with entirely newplans to develop, own and operate a riverboat gaming complex to be constructedin Shreveport (the “Shreveport Casino”). The Shreveport Casino was completedand opened on December 20, 2000. Prior to opening, HCS had no operatingactivities other than development, financing and construction activities withrespect to the Shreveport Casino. The Shreveport Casino consists of athree-level riverboat dockside casino with approximately 1,423 slot machines,61 table games and six poker stations and a 403-room, all suite, art deco stylehotel. The project also includes approximately 45,000 square feet of availablerestaurant and entertainment space developed by a third party lessee.

 

Riverboat gaming operations in Louisiana are subject to regulatorycontrol by the LGCB. HCS’s current license to operate the Shreveport Casinoexpires on October 14, 2004.

 

When the former partners of QNOV proposed moving to Shreveport, theynegotiated a settlement with the City of New Orleans to pay $10 millionwith respect to claims asserted by the city in connection with the relocation.During September 1998, HCS, the former partners of QNOV and the City of NewOrleans entered into a Compromise Agreement under which one of QNOV’s formerpartners agreed to pay $5 million to the city and QNOV was released fromany further relocation claims. The remaining $5 million obligationcontinued to be reflected as a liability by HCS until it was paid in August1999 upon the issuance of $150 million of 13% First Mortgage Notes withcontingent interest due 2006 (the “First Mortgage Notes”).  HCL has treated this $5 million as partof the cost of acquiring their interest in HCS and has included the cost inproperty and equipment on the accompanying consolidated balance sheets.

 

It was originally anticipated that HCS would develop the ShreveportCasino with each of HCL and Sodak having a 50% interest in the development andsubsequent operations.  Once operationscommenced, Paddlewheels was to have a residual interest in the event that theproject was ever sold amounting to 10% plus any capital contributions made byPaddlewheels to HCS or otherwise credited to their account.  On March 31, 1999, HCL entered into adefinitive agreement with Sodak’s parent to acquire Sodak for the$2.5 million Sodak had contributed to HCS, with $1,000 paid at closing andthe remainder paid by HCL in June 2001. The revised structure of the partnership was approved by the LGCB onApril 20, 1999.  As a result, HCLobtained an effective 100% ownership interest in HCS with Paddlewheelsretaining its 10% residual interest. During July 1999, Sodak was merged intoHCL.

 

In July 1999, HCL formed two new, wholly owned subsidiaries, HCS I,Inc. and HCS II, Inc., both Louisiana corporations. HCL contributed $1,000 ofcapital to each entity along with 99% of its interest in HCS to HCS I, Inc. andthe remaining 1% of its interest to HCS II, Inc. In addition, the HCS jointventure agreement was amended and restated on July 21, 1999, to reflect, amongother things, the admission of HCS I, Inc. and HCS II, Inc. as partners of HCSand the withdrawal of HCL as managing partner of HCS. As a result, HCS I, Inc.now has an effective 99% interest in HCS, and has become its managing generalpartner. HCS II, Inc. now has an effective 1% interest in HCS. HCS I, Inc. andHCS II, Inc. currently have no other operating activities or assets other thantheir ownership interests in HCS. Paddlewheels retained its 10% residualinterest in HCS. The revised partnership structure was approved by the LGCB onJuly 20, 1999.

 

Additionally, in July 1999, HCS formed a new, wholly owned subsidiary,Shreveport Capital Corporation (“Shreveport Capital”), a Louisiana corporation.HCS contributed $1,000 of capital to Shreveport Capital. Shreveport Capital wasformed for the sole purpose of being a co-issuer with respect to the FirstMortgage Notes and subsequently became a co-issuer with respect to the $39million of 13% Senior Secured Notes with contingent interest due 2006 (the“Senior Secured Notes”) issued in June 2001. Shreveport Capital has not and isnot expected to have any operating activities, acquire any assets or incur anyother liabilities. Accordingly, separate financial statements of ShreveportCapital are not included herein because management has determined that suchinformation is not material to investors.

 

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In November 2002, HCL issued additional shares of its common stock toHoldings, a wholly owned subsidiary of HCC which was not subject to certainrestrictions on making investments under HCC’s then-existing loan agreements.The initial stock purchase in the amount of $.3 million, together withsubsequent capital contributions of $1.8 million in December 2002, werecontributed by Holdings through HCS I, Inc. and HCS II, Inc. to HCS for workingcapital needs. Subsequent to year end, an additional $.8 million wascontributed by Holdings through HCS I, Inc. and HCS II, Inc. to HCS.

 

The accompanying consolidated financial statements include the accountsof HCS—Golf Course, LLC (“Golf”), a wholly owned subsidiary of HCS. Golf, aDelaware limited liability company, was formed in 2000 to own an eventual 50%interest in Shreveport Golf Company, a joint venture formed to develop andoperate a golf course to be used by patrons of the Shreveport Casino. Golf’sownership interest in Shreveport Golf Company was accounted for under theequity method. Given the difficult market conditions, the partners in the golfcourse provided notice in April 2002 that they were terminating the lease forthe land on which the golf course would have been constructed. Accordingly, HCSprovided a reserve of $.3 million during April 2002 to write down itsinvestment in the limited liability company to a zero value. The partnersterminated the joint venture effective as of September 30, 2002. As of December31, 2001, capital contributions amounting to $.3 million had been made toShreveport Golf Company and are included in other noncurrent assets on theaccompanying consolidated balance sheet. HCL estimates that a significantamount of the Shreveport Casino’s revenues are derived from patrons living inthe Dallas/Ft. Worth and east Texas areas. The Shreveport Casino faces intensecompetition from other riverboat gaming operations in Shreveport and BossierCity, Louisiana and management believes that this competition will continue inthe future.

 

HCC (the then-ultimate parent of HCS, HCL and Shreveport Capital), PennNational Gaming, Inc., a Pennsylvania corporation (“Penn National”), and PAcquisition Corp., a Delaware corporation and a wholly-owned subsidiary of PennNational, entered into an Agreement and Plan of Merger (the “MergerAgreement”), dated as of August 7, 2002, pursuant to which HCC became a whollyowned subsidiary of Penn National through the merger of P Acquisition Corp.with and into HCC on March 3, 2003.

* *

*LiquidityIssues–*The terms ofthe merger agreement entered into by HCC and Penn National on August 7, 2002restricted HCC, or any of its subsidiaries, from making any additional capitalcontributions to HCS. Subsequent to entering into the merger agreement, HCCreceived approval from Penn National to contribute to HCS any funds necessaryto make the February 1, 2003 interest payments due with respect to the FirstMortgage Notes and Senior Secured Notes (collectively, the “Shreveport Notes”).With Penn National’s approval, Holdings contributed an aggregate of$.8 million subsequent to December 31, 2002 to assist HCS in making itsinterest payments.

 

The terms of the indentures for the Shreveport Notes provide that, uponconsummation of the merger, HCS must offer to purchase any and all of suchnotes at a price of 101% of their face amount plus accrued interest (the“Repurchase Offer”). Penn National announced on February 24, 2003 that ithad commenced the solicitation of consents from holders of record of the noteson February 21, 2003 to waive the Repurchase Offer and related provisions.Penn National concurrently announced that it did not intend to, or to permitany of its subsidiaries to, provide financing or credit support to enable anyof them or HCS to make the Repurchase Offer. On March 3, 2003, PennNational announced that the requisite number of consents from holders of theShreveport Notes were not obtained in the solicitation.

 

On March 14, 2003, HCS received notice from an ad hoc committeethe holders of the Shreveport Notes that HCS had failed to make the RepurchaseOffer within ten days of the merger as required under the respective governingindentures. Pursuant to these indentures, HCS had sixty days from receipt ofsuch notice to cure such failure or an Event of Default, as defined under eachof the indentures, would occur.

 

Even in the event that HCS’s failure to launch the required RepurchaseOffer was either waived by the note holders or otherwise cured, HCS hasexperienced net losses and has a significant deficiency in its partners’capital. Accordingly, management believes that HCS’s existing cash and cashflow from operations may not be sufficient to fund its operating and capitalneeds for the next 24 months. In such event, HCS would require additionalcapital contributions or other financial support from Penn National. PennNational has not publicly stated its plans or intentions for HCS after themerger; accordingly, management of HCS can make no assurances that PennNational

 

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will provide additional liquidity to HCS. All of these matters raisesubstantial doubt about HCS’s ability to continue as a going concern.Management is currently in the process of developing its plans with regard tothese matters. The holders of the Shreveport Notes might pursue all rights andremedies that they may have under the indentures as a result of the event ofdefault.  Any such action on the part ofthe note holders may prompt HCS to seek the protection of the bankruptcy lawsor other similar remedies.  (See Note 10for subsequent events).

 

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**Reportof Independent Certified Public Accountants**

 

 

To the Partners of HollywoodCasino Shreveport:

 

The audit referred to in ourreport dated January 30, 2004, except for Note 9, which is as of February 3,2004, relating to the consolidated financial statements of Hollywood CasinoShreveport and subsidiaries as of December 31, 2003 and for the period fromMarch 1, 2003 through December 31, 2003, which is contained in Item 8 of thisForm 10-K, included the audit of the financial statement schedule listed in theaccompanying index for the same period. This financial statement schedule isthe responsibility of the Partnership’s management. Our responsibility is toexpress an opinion on this financial statement schedule based upon our audit.

 

In our opinion such financialstatement schedule presents fairly, in all material respects, the informationset forth therein.

 

 

BDO Seidman, LLP

Philadelphia, Pennsylvania

January 30, 2004

 

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**Independent Auditors’ Report**

 

To the Partners of HollywoodCasino Shreveport:

 

We have audited theconsolidated financial statements of Hollywood Casino Shreveport andsubsidiaries as of, and for each of the two years in the period ended December31, 2002, and for the two months ended February 28, 2003, and have issued ourreport thereon dated April 11, 2003; such report is included elsewhere in thisForm 10-K.  Our audits also include thefinancial statement schedule of Hollywood Casino Shreveport listed in Item 15for such periods.  This financialstatement schedule is the responsibility of the Partnership’s management.  Our responsibility is to express an opinionbased on our audits.  In our opinion,such financial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

 

 

Deloitte & Touche LLP

Dallas, Texas

April 11, 2003

 

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SCHEDULE II

 

**HOLLYWOOD CASINO SHREVEPORTValuation and Qualifying Accounts(In Thousands)**

 
|                                         |   | **Balance at  Beginning  of Period** |   | **Amounts  Charged to  Costs and  Expenses** |   | **Deductions** |   | **Balance  at End  of Period** |   |
|----------------------------------------------|--------|--------------------------------------|--------|----------------------------------------------|--------|----------------|--------|--------------------------------|--------|
| **Ten  Months Ended December 31, 2003** |   |                                 |   |                                         |   |           |   |                           |   |   |   |   |   |
| Allowance  for doubtful accounts receivable  |   | $                                    | 863    |                                         | $      | 451            |   | $                              | (584   | ) | $ | 730 |   |
| **Two  Months Ended February 28, 2003** |   |                                 |   |                                         |   |           |   |                           |   |   |   |   |   |
| Allowance  for doubtful accounts receivable  |   | $                                    | 881    |                                         | $      | 55             |   | $                              | (73    | ) | $ | 863 |   |
| **Year Ended December 31, 2002**             |   |                                 |   |                                         |   |           |   |                           |   |   |   |   |   |
| Allowance  for doubtful accounts receivable  |   | $                                    | 534    |                                         | $      | 444            |   | $                              | (97    | ) | $ | 881 |   |
| **Year Ended December 31, 2001**             |   |                                 |   |                                         |   |           |   |                           |   |   |   |   |   |
| Allowance  for doubtful accounts receivable  |   | $                                    | 90     |                                         | $      | 1,021          |   | $                              | (577   | ) | $ | 534 |   |

 

The accompanying notes toconsolidated financial statements are an integral part of this schedule.

 

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**Reportof Independent Certified Public Accountants**

 

To the Board of Directors andShareholders of HWCC-Louisiana, Inc.:

 

The audit referred to in ourreport dated January 30, 2004, except for Note 10, which is as of February 3,2004, relating to the consolidated financial statements of HWCC-Louisiana, Inc.and subsidiaries as of December 31, 2003 and for the period from March 1, 2003through December 31, 2003, which is contained in Item 8 of this Form 10-K,included the audit of the financial statement schedule listed in theaccompanying index for the same period. This financial statement schedule isthe responsibility of the Company’s management. Our responsibility is toexpress an opinion on this financial statement schedule based upon our audit.

 

In our opinion such financialstatement schedule presents fairly, in all material respects, the informationset forth therein.

 

BDO Seidman, LLP

Philadelphia, Pennsylvania

January 30, 2004

 

70

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**Independent Auditors’ Report**

 

To the Board of Directors and Shareholders of

HWCC —Louisiana, Inc.:

 

We have audited the consolidated financialstatements of HWCC-Louisiana, Inc. and subsidiaries as of, and for each of thetwo years in the period ended December 31, 2002, and for the two months endedFebruary 28, 2003, and have issued our report thereon dated April 11, 2003;such report is included elsewhere in this Form 10-K.  Our audits also include the financial statement schedule ofHWCC-Louisiana, Inc. listed in Item 15 for such periods.  This financial statement schedule is theresponsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.  In our opinion, such financial statementschedule, when considered in relation to the basic financial statements takenas a whole, presents fairly in all material respects the information set forththerein.

 

 

Deloitte & Touche LLP

Dallas, Texas

April 11, 2003

 

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SCHEDULE II

 

**HWCC-LOUISIANA, INC. AND SUBSIDIARIESValuation and Qualifying Accounts(In Thousands)**

** **
|                                         |   | **Balance at  Beginning  of Period** |   | **Amounts  Charged to  Costs and  Expenses** |   | **Deductions** |   | **Balance  at End  of Period** |   |
|----------------------------------------------|--------|--------------------------------------|--------|----------------------------------------------|--------|----------------|--------|--------------------------------|--------|
| **Ten  Months Ended December 31, 2003** |   |                                 |   |                                         |   |           |   |                           |   |   |   |   |   |
| Allowance  for doubtful accounts receivable  |   | $                                    | 863    |                                         | $      | 451            |   | $                              | (584   | ) | $ | 730 |   |
| **Two  Months Ended February 28, 2003** |   |                                 |   |                                         |   |           |   |                           |   |   |   |   |   |
| Allowance  for doubtful accounts receivable  |   | $                                    | 881    |                                         | $      | 55             |   | $                              | (73    | ) | $ | 863 |   |
| **Year Ended December 31, 2002**             |   |                                 |   |                                         |   |           |   |                           |   |   |   |   |   |
| Allowance  for doubtful accounts receivable  |   | $                                    | 534    |                                         | $      | 444            |   | $                              | (97    | ) | $ | 881 |   |
| **Year Ended December 31, 2001**             |   |                                 |   |                                         |   |           |   |                           |   |   |   |   |   |
| Allowance  for doubtful accounts receivable  |   | $                                    | 90     |                                         | $      | 1,021          |   | $                              | (577   | ) | $ | 534 |   |

 

The accompanying notes to consolidatedfinancial statements are an integral part of this schedule.

 

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## **ITEM 9.**                                                     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE

 

None.

 

**ITEM 9A**.                                            CONTROLSAND PROCEDURES

 

Our management, under the supervision and with the participation of theprincipal executive officer and principal financial officer, have evaluated theeffectiveness of our controls and procedures related to our reporting anddisclosure obligations as of December 31, 2003, which is the end of theperiod covered by this Annual Report on Form 10-K. Based on that evaluation,the principal executive officer and principal financial officer have concludedthat our disclosure controls and procedures are sufficient to provide that (a)material information relating to us, including our consolidated subsidiaries,is made known to these officers by our and our consolidated subsidiaries otheremployees, particularly material information related to the period for whichthis periodic report is being prepared; and (b) this information is recorded,processed, summarized, evaluated and reported, as applicable, within the timeperiods specified in the rules and forms promulgated by the Securities andExchange Commission.

 

There were no changes that occurred during the fiscal quarter endedDecember 31, 2003 that have materially affected, or are reasonable likelyto materially affect, our internal controls over financial reporting.

 

# **PART III**

 

## **ITEM 10.**               DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The Hollywood Casino Shreveport general partnership and ShreveportCapital Corporation are co-issuers of the Shreveport Notes.  Shreveport Capital Corporation is awholly-owned subsidiary of Hollywood Casino Shreveport.  HCS I, Inc. is the managing partner ofHollywood Casino Shreveport.  Each ofthese entities is a subsidiary of HWCC—Louisiana, Inc.  Set forth below are the directors andexecutive officers, as applicable, of each of these entities:

 

**HCS I, Inc., Managing Partner of HollywoodCasino Shreveport**

 
| **Name**           |   | **Age** |   | **Position**                                                                     |
|--------------------|--------|---------|--------|----------------------------------------------------------------------------------|
| Kevin DeSanctis    |   | 52      |   | Chairman of the Board, Chief Executive Officer, and Director                     |
| John C. Hull       |   | 65      |   | President, Chief Financial Officer, Treasurer, Assistant Secretary and  Director |
| Robert S. Ippolito |   | 52      |   | Vice President, Secretary and Director                                           |
| Tonya Tarrant      |   | 33      |   | Vice President and Assistant Treasurer                                           |
| Jordan B. Savitch  |   | 38      |   | Vice President and General Counsel                                               |
| Melvyn Thomas      |   | 55      |   | Vice President and General Manager                                               |

 

**Shreveport Capital Corporation**

 
| **Name**           |   | **Age** |   | **Position**                                                                     |
|--------------------|--------|---------|--------|----------------------------------------------------------------------------------|
| Kevin DeSanctis    |   | 52      |   | Chairman of the Board, Chief Executive Officer, and Director                     |
| John C. Hull       |   | 65      |   | President, Chief Financial Officer, Treasurer, Assistant Secretary  and Director |
| Robert S. Ippolito |   | 52      |   | Vice President, Secretary and Director                                           |
| Tonya Tarrant      |   | 33      |   | Vice President and Assistant Treasurer                                           |

 

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**HWCC-Louisiana, Inc.**

 
| **Name**           |   | **Age** |   | **Position**                                                                     |
|--------------------|--------|---------|--------|----------------------------------------------------------------------------------|
| Kevin DeSanctis    |   | 52      |   | Chairman of the Board, Chief Executive Officer, and Director                     |
| John C. Hull       |   | 65      |   | President, Chief Financial Officer, Treasurer, Assistant Secretary  and Director |
| Robert S. Ippolito |   | 52      |   | Vice President, Secretary and Director                                           |
| Tonya Tarrant      |   | 33      |   | Vice President and Assistant Treasurer                                           |
| Jordan B. Savitch  |   | 38      |   | Vice President and General Counsel                                               |

 

**Kevin DeSanctis.**  Mr. DeSanctis has served as Chairman of theBoard, Chief Executive Officer and a Director of each of the companies sinceMay 2003.  Since February 2001 he hasbeen President and Chief Operating Officer of Penn National Gaming, Inc.  From 1995 to 2000, Mr. DeSanctis served asChief Operating Officer, North America, for Sun International Hotels Limitedwhere he was responsible for complete oversight of day-to-day operations of thecompany’s gaming properties in North America and the Bahamas.  Prior to joining Sun International, Mr.DeSanctis’ experience included management and pre-opening responsibilities forgaming operations in Las Vegas, Atlantic City, New Orleans and Colorado.

** **

**John C. Hull.** Mr. Hull has served as Director,President, Chief Financial Officer, Treasurer and Assistant Secretary of HCS I,Inc. (which is the managing general partner of Hollywood Casino Shreveport),HCS II, Inc., HWCC-Louisiana, Inc. and Shreveport Capital Corporation since May2003 (and previously served as Chairman of the Board, Chief Executive Officerand Treasurer of HCS I, Inc., HCS II, Inc., HWCC-Louisiana, Inc. and ShreveportCapital Corporation from March 2003 through April 2003).  Prior to such service, Mr. Hull served as afinancial executive with Hollywood Casino Corporation from August 2002 throughFebruary 2003, as Chairman of the Board and Chief Executive Officer of GreateBay Casino Corporation from January 1998 through July 2002, and as Corporate Controllerand Principal Accounting Officer of Hollywood Casino Corporation from November1994 through December 1997.  Greate BayCasino Corporation filed a petition for relief under Chapter 11 of the UnitedStates Bankruptcy Code in December 2001.

** **

**Robert S. Ippolito.** Mr. Ippolito has served as Vice President,Secretary and a Director of each of the Companies since May 2003.  In July 2001, Mr. Ippolito became a VicePresident of Penn National Gaming, Inc. Mr. Ippolito has served as Penn National Gaming, Inc.’s Secretary andTreasurer since April 1994 and was Chief Financial Officer from April 1994until July 2001.  Mr. Ippolito bringsmore than 21 years of gaming and racing experience to the management team bothas a manager at a major accounting firm and as an officer of companies in theracing business.

** **

**Tonya Tarrant.**  Ms.Tarrant has served as Vice President of Finance and Chief Financial Officer ofHollywood Casino Shreveport since February 2001.  In addition, she has served as Vice President and AssistantTreasurer of HCS I, Inc, HCS II, Inc., HWCC-Louisiana, Inc. and ShreveportCapital Corporation since May 2003 (and also previously served as VicePresident, Secretary and Assistant Treasurer of HCS I, HCS II, HWCC-Louisianaand Shreveport Capital from March 2003 through April 2003).  Prior to February 2001 Ms. Tarrant served asSenior Director of Finance of the Isle of Capri Casino & Hotel in BossierCity, Louisiana from December 1998 to February 2001 and in various othercapacities with the Isle of Capri from May 1996 to December 1998.

** **

**Jordan B. Savitch.**  Mr. Savitch has served as Vice President of each of HCS I, Inc. andHWCC-Louisiana, Inc. since May 2003. Since September 2002 Mr. Savitch has been Senior Vice President andGeneral Counsel of Penn National Gaming, Inc. From June 1999 to April 2002, Mr. Savitch served as a director andsenior executive at iMedium, Inc., a venture-backed software company offeringinnovative software solutions for increasing sales effectiveness.  From 1995 to 1999, Mr. Savitch served assenior corporate counsel at Safeguard Scientifics, Inc., a NYSE-listed companyspecializing in identifying, developing and operating emerging technologycompanies.  Mr. Savitch also spent fouryears in private practice as an associate at Willkie Farr & Gallagher, LLPin New York, New York.

** **

**Melvyn Thomas.**  Mr. Thomas has served as Vice President andGeneral Manager of Hollywood Casino Shreveport and HCS I, Inc. since October2003.  Prior to October 2003, Mr. Thomasserved as an independent consultant to the gaming industry from August 2000through May 2001 and from March 2002 to October 2003.  He

 

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was General Manager of the Black Hawk Casino by Hyatt in Colorado fromJune 2001 to March 2002. Mr. Thomas held various positions with Caesars World,Inc. (including executive Vice President and General Manager of Caesars Tahoe)from February 1994 through July 2000.

 

The full board of directors effectively functions as the auditcommittee.  Robert S. Ippolito serves asthe board’s financial expert.

 

Each of our officers and directors is subject to the Code of BusinessConduct adopted by Penn National.

## ** **

## **ITEM 11.**               EXECUTIVECOMPENSATION

 

We are indirectly wholly-owned by Penn National.  Except as set forth below, our officers(including the Chief Executive Officer) and directors are employees of PennNational and are compensated as such by Penn National and receive no additionalcompensation for their services to us. The following table sets forth a summary of all compensation paid oraccrued by us for services rendered for the last three fiscal years by ourChief Executive Officer and the four most highly compensated officers.

** **

**Summary Compensation Table**

** **

|                             |   |     |   | **Annual  Compensation** |    | **Long Term  Compensation Awards** |   |
|----------------------------------|--------|----------|--------|--------------------------|---------|------------------------------------|--------|
| **Name and  Principal Position** |   | **Year** |   | **Salary**               |    | **Bonus**                          |   | **Securities  Underlying  Options Granted** |   |
| Kevin DeSanctis                  |   | 2003     |   | —                   |    | —                             |   | — |   |
| *Chief Executive  Officer*       |   | 2002     |   | —                   |    | —                             |   | — |   |
|                             |   | 2001     |   | —                   |    | —                             |   | — |   |
|                             |   |     |   |                     |    |                               |   |   |   |
| John C. Hull(1)                  |   | 2003     |   | $                        | 231,528 |                               | $      | 66,667 |   | — |   |
| *President*                      |   | 2002     |   | —                   |    | —                             |   | — |   |
|                             |   | 2001     |   | —                   |    | —                             |   | — |   |
|                             |   |     |   |                     |    |                               |   |   |   |
| Gary Gregg                       |   | 2003     |   | $                        | 246,136 |                               | $      | 112,500 |   | — |   |
| *General Manager*(2)             |   | 2002     |   | 234,351                  |    | —                             |   | — |   |
|                             |   | 2001     |   | 51,923                   |    | —                             |   | 25,000 | (4) |
|                             |   |     |   |                     |    |                               |   |   |   |
| Melvyn Thomas                    |   | 2003     |   | $                        | 50,724  |                               | $      | — |   | 15,000 | (5) |
| *General Manager(3)*             |   | 2002     |   | —                   |    | —                             |   | — |   |
|                             |   | 2001     |   | —                   |    | —                             |   | — |   |
|                             |   |     |   |                     |    |                               |   |   |   |
| Tonya Tarrant                    |   | 2003     |   | $                        | 156,256 |                               | $      | 25,000 |   | — |   |
| *Vice President of Finance*      |   | 2002     |   | 150,808                  |    | —                             |   | — |   |
| *and Chief Financial Officer*    |   | 2001     |   | 124,615                  |    | 50,000                             |   | — |   |

 

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(1)                                  Priorto March 2003, Mr. Hull’s salary was paid by Hollywood Casino Corporation.

(2)                                  Mr.Gregg resigned as General Manager effective October 13, 2003.

(3)                                  Mr.Thomas joined Hollywood Casino Shreveport on October 1, 2003.

(4)                                  Optionsto purchase shares of Hollywood Casino Corporation common stock.

(5)                                  Optionsto purchase shares of Penn National Gaming, Inc. common stock.

 

**Option Grantsin Last Fiscal Year**

 

The following table sets forthcertain information regarding stock options granted during 2003 to theexecutive officers named in the Summary Compensation Table.

 
|            |   | **Individual  Grants**                                  |   |                                                                          |   |                           |   | **Potential  Realizable  Value at Assumed  Annual Rates of Stock  Price Appreciation for  Option Term** |       |
|-----------------|--------|---------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|--------------------------------|--------|---------------------------------------------------------------------------------------------------------|------------|
|            |   | **Number of  Securities  Underlying  Options  Granted** |   | **Percentage  of Total  Options  Granted to  Employees in  Fiscal Year 2003** |   | **Exercise  Price Per  Share** |   | **Expiration  Date**                                                                                    |       |   |
| **NAME**        |   |                                                    |   |                                                                          |   | **5%**                         |   | **10%**                                                                                                 |       |
| Kevin DeSanctis |   | —                                                  |   | —                                                                        |   | —                         |   | —                                                                                                  |       | — |   | — |   |
| John C. Hull    |   | —                                                  |   | —                                                                        |   | —                         |   | —                                                                                                  |       | — |   | — |   |
| Gary Gregg      |   | —                                                  |   | —                                                                        |   | —                         |   | —                                                                                                  |       | — |   | — |   |
| Melvyn Thomas   |   | 15,000                                                  | (1)    | .14                                                                           | %(2)   | $                              | 21.32  | (3)                                                                                                     | 10/01/2010 |   | $ | 130,191 | (4) | $ | 303,400 | (4) |
| Tonya Tarrant   |   | —                                                  |   | —                                                                        |   | —                         |   | —                                                                                                  |       | — |   | — |   |
|                 |        |                                                         |        |                                                                               |        |                                |        |                                                                                                         |            |  |  |  |  |  |  |  |

 

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(1)                                  Optionsto purchase shares of Penn National Gaming, Inc. common stock.

(2)                                  Basedon a total number of options granted to employees of 1,105,000.

(3)                                  Theexercise price is equal to the closing price of Penn National’s common stock onthe date of grant.

(4)                                  Potentialrealizable value is based on an assumption that the market price of PennNational’s common stock appreciates at the stated rates compounded annually,from the date of grant until the end of the respective option term.  These values are calculated based onrequirements promulgated by the Securities and Exchange Commission and do notreflect the Company’s estimate of future stock price appreciation.

 

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**AggregatedOption Exercises in Last Fiscal Yearand Fiscal Year-End Option Values**

 

The followingtable provides information with respect to the executive officers shown in theSummary Compensation Table concerning stock options exercised during 2003 andthe value of vested and unvested unexercised options held as of December 31,2003.  There are no outstanding stockappreciation rights.

 
|            |   | **Shares  Acquired  on Exercise** |   | **Value  Realized** |    | **Number of  Securities  Underlying Unexercised  Options at  December 31, 2003** |   | **Value of  Unexercised  In-the-Money Options  at December 31, 2003** |   |
|-----------------|--------|-----------------------------------|--------|---------------------|---------|----------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|
| **Name**        |   |                              |   | **Exercisable**     |    | **Unexercisable**                                                                |   | **Exercisable**                                                       |   | **Unexercisable** |   |
| Kevin DeSanctis |   | —                            |   | —              |    | —                                                                           |   | —                                                                |   | — |   | — |   |
| John C. Hull    |   | —                            |   | —              |    | —                                                                           |   | —                                                                |   | — |   | — |   |
| Gary Gregg      |   | 25,000                            | (1)    | $                   | 100,000 |                                                                             | — |                                                                  | — |   | — |   | — |   |
| Melvyn Thomas   |   | —                            |   | —              |    | —                                                                           |   | 15,000                                                                | (2)    | — |   | $ | 27,000 |   |
| Tonya Tarrant   |   | —                            |   | —              |    | —                                                                           |   | —                                                                |   | — |   | — |   |
|                 |        |                                   |        |                     |         |                                                                                  |        |                                                                       |        |  |  |  |  |  |  |

 

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(1)  Shares of common stock of Hollywood Casino Corporation.

(2)  Shares of common stock of Penn National Gaming, Inc.

 

On January 30, 2004, but effective as of March 1, 2003, HCS I, Inc.entered into an employment agreement with John Hull, its President.  The agreement expires on the earlier of June30, 2004 or a restructuring of our bond debt. HCS I, Inc., at its option, may extend the term of the agreement by anadditional six-month term.  HCS I, Inc.may terminate the agreement if Mr. Hull becomes disabled, is convicted of afelony or commits acts of gross neglect or willful misconduct that materiallyharms the company, loses certain regulatory licensure, or commits a materialbreach of the agreement.  Mr. Hull’scompensation consists of an initial base salary of $215,000, and an annualbonus of $80,000.  Mr. Hull isprohibited from disclosing confidential information, is subject to anon-competition clause during the term of his employment and non-solicitationclauses for one year following termination of his employment.  Following the termination of his employmentwith HCS I, Inc. for any reason, Mr. Hull shall receive any earned, but unpaidbase salary, his annual bonus, pro-rated through the date of termination, thecash equivalent of any accrued, but unused vacation, any accrued employeebenefits, subject to the terms of the applicable employee benefit plans, and anamount equal to six months of his base salary.

 

On October 1, 2003, we entered into an employment agreement with MelvynThomas to serve as General Manager of the facility.  The agreement is for a two-year term, after which Mr. Thomasshall be an “at-will” employee unless the agreement is renewed.  We may terminate the agreement if Mr. Thomasbecomes disabled, is convicted of certain crimes or commits acts of dishonestyas determined in good faith by the Board of our managing general partner, losescertain regulatory licensure, or commits a material breach of the agreement notcured within 15 days of written notice of breach.  Mr. Thomas’s initial base salary is $225,000 and he is eligiblefor an annual cash bonus of up to 100% of his base salary.  Mr. Thomas also received equity compensationof options to purchase 15,000 shares of Penn National Gaming, Inc. commonstock, which vest at a rate of 25% per year over four years. 

 

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Upon termination, before or after the term of this agreement, otherthan for cause, Mr. Thomas shall receive six months of full salary andbenefits.  In the event of Mr. Thomas’sdeath or total disability, he shall be entitled to up to 175% of his basemonthly salary for up to six months. Mr. Thomas is prohibited from disclosing confidential information and issubject to a non-competition clause for the term of the agreement, includingany renewals.

 

On July 1, 2002, we entered into an employment agreement with TonyaTarrant to serve as our Vice President of Finance and Chief FinancialOfficer.  The agreement is for atwo-year term.  We may terminate theagreement if Ms. Tarrant becomes disabled, is convicted of a felony or commitsacts of dishonesty, disloyalty or infidelity against the company, loses certainregulatory licensure, or commits a material breach of the agreement or ourpolicies.  Ms. Tarrant’s initial basesalary is $150,000, plus an annual bonus of at least $25,000.  She is prohibited from disclosingconfidential information, is subject to a non-competition clause during theterm of her employment or for as long as she receives employment benefits fromus.

 

We do not have any long-term incentive plans or any defined benefit oractuarial plans for the benefit of our executives.

 

## **ITEM 12.**               SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDERS MATTERS

 

The Hollywood Casino Shreveport general partnership and ShreveportCapital Corporation are co-issuers of the Shreveport Notes.  Shreveport Capital Corporation is awholly-owned subsidiary of Hollywood Casino Shreveport.  HCS I, Inc. is the managing partner ofHollywood Casino Shreveport.  Each ofthese entities is a subsidiary of HWCC-Louisiana, Inc., which is an indirectlyowned subsidiary of Penn National.

 

The following table sets forth certain information with respect tobeneficial ownership of Penn National’s common stock as of March 26, 2004, byeach director, the chief executive officer and each of our four other mosthighly compensated executive officers and all of our executive officers anddirectors as a group.

 
| **Name and Address(1)**                                         |   | **Number of  Shares  Beneficially Owned** |   | **Percentage  of  Class(2)** |   |
|-----------------------------------------------------------------|--------|-------------------------------------------|--------|------------------------------|--------|
| Kevin DeSanctis(3)                                              |   | 225,000                                   |   |                         | *      |
| John C. Hull                                                    |   | —                                    |   |                         | *      |
| Melvyn Thomas                                                   |   | —                                    |   |                         | *      |
| Tonya Tarrant                                                   |   | —                                    |   |                         | *      |
| Robert S. Ippolito(3)                                           |   | 41,200                                    |   |                         | *      |
| All executive officers and directors as a  group (6 persons)(3) |   | 316,512                                   |   |                         | *      |

 

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*              Lessthan 1%

(1)  Thepersons named in the above table have sole voting and investment power withrespect to all shares of common stock shown as beneficially owned by themexcept as otherwise shown in the succeeding footnotes, and the address ofMessrs.  DeSanctis and Ippolito is c/o Penn National Gaming, Inc.,825 Berkshire Boulevard, Suite 200, Wyomissing, Pennsylvania  19610 and the address for Messrs. Hull andThomas and Ms. Tarrant is 451 Clyde Fant Parkway, Shreveport, Louisiana 71101.

(2)  Thepercentage for each beneficial owner is calculated based on (i) the aggregatenumber of shares reported to be owned by such group or individual and (ii) theaggregate number of shares of Common Stock outstanding as of March 26, 2004(39,976,200 shares).

(3)  Includesshares that may be acquired upon the exercise of outstanding options that areexercisable within 60 days of March 26, 2004, as follows: Kevin DeSanctis,225,000 shares; Robert S. Ippolito, 37,500 shares; and all executive officersand directors as a group, 312,812 shares.

 

## **ITEM 13.**               CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Our operations are managed by HWCC-Shreveport, Inc., or ShreveportManagement, a wholly owned subsidiary of Hollywood Casino Corporation under theterms of a management agreement. We also reimburse Shreveport Management forexpenses incurred in connection with services provided under the management

 

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agreement.  Total managementfees incurred amounted to $2.9 million for each of the years endedDecember 31, 2001 and 2002, respectively, and $ .5 million for the periodfrom January 1, 2003 through February 28, 2003 and $ 1.5 million for the periodfrom March 1, 2003 through December 31, 2003 and are included in general andadministrative expenses on the accompanying condensed consolidated statementsof operations. Management fees payable at December 31, 2002 and 2003amounted to $6 million and $2.2 million, respectively. Such fees,reduced by a valuation allowance of $6.4 million at December 31,2003, are included in due to affiliates on the accompanying consolidatedbalance sheets. Under the indentures and related documents governing theShreveport Notes, management fees are subordinated to all payments under theShreveport Notes and may not be paid to the extent that their payment wouldresult in certain financial coverage ratios not being met. Consequently, nomanagement fees have been paid since the opening of the casino.

 

We also entered into a Marine Services Agreement with Paddlewheels toprovide certain marine services for so long as Paddlewheels remains our jointventure partner. The Marine Services Agreement became effective onSeptember 22, 1998 and, in addition to the reimbursement to Paddlewheelsfor its direct expenses incurred, if any, we pay a monthly fee of $30,000. Weexpensed $.4 million per year for each of the years ended December 31,2001 and 2002, $.1 million for the period from January 1, 2003 through February28, 2003 and $ .4 million for the period from March 1, 2003 through December31, 2003, under the agreement. Unpaid charges of $30,000 and $.2 millionare included in due to affiliates on the accompanying consolidated balancesheets at December 31, 2002 and 2003, respectively. Effective July 10,2003, we suspended payments under the agreement to Paddlewheels due to theevent of default on the Shreveport Notes.

 

Each of Kevin DeSanctis, our Chief Executive Officer and Director,Robert Ippolito, our Vice President, Secretary and Director, and JordanSavitch, our Vice President and General Counsel, are employees of PennNational.  Messrs.  DeSanctis, Ippolito and Savitch arecompensated by Penn National for their services as employees of Penn Nationaland receive no other compensation from us for their services.

 

## **ITEM 14.**               PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

A summary of the audit and non-audit fees paid is as follows:  

 
|                  |   | **Fiscal  2003** |    | **Fiscal  2002** |   |
|-----------------------|--------|------------------|---------|------------------|--------|
|                  |   |             |    |             |   |
| Audit Fees            |   | $                | 141,400 |             | $      | 62,000 |   |
| Audit-Related Fees(1) |   | 89,428           |    | 43,000           |   |
| Tax Fees              |   | —           |    | —           |   |
| All Other Fees(2)     |   | 236,571          |    | —           |   |
|                       |        |                  |         |                  |        |  |  |

 

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(1)         Audit-related fees are for quarterlygaming revenue audits.

(2)         All other fees are in connection withdebt restructuring negotiations and planning.

 

**PARTIV**

 

## **ITEM 15.**               EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

 

(a)  1 and 2.            Financial Statementsand Financial Statement Schedules. The following is a list of the consolidatedfinancial statements of the Company and its subsidiaries and supplementary datafiled as part of Item 8 hereof:

 

1.             Financial Statements

 

Hollywood Casino Shreveport and Subsidiaries:

 

Report of Independent Certified Public Accountants — BDO Seidman, LLP

 

IndependentAuditors' Report — Deliotte & Touche LLP

 

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Consolidated Balance Sheets as of December31, 2002 and 2003

 

Consolidated Statements of Operations for theyears ended December 31, 2001 and 2002, the period from January 1, 2003 throughFebruary 28, 2003 and the period March 1, 2003 through December 31, 2003

 

Consolidated Statements of Changes inPartners’ Deficiency for the years ended December 31, 2001 and 2002, the periodfrom January 1, 2003 through February 28, 2003 and the period March 1, 2003through December 31, 2003

 

Consolidated Statements of Cash Flows for theyears ended December 31, 2001 and 2002, the period from January 1, 2003 throughFebruary 28, 2003 and the period March 1, 2003 through December 31, 2003

 

HWCC-Louisiana and Subsidiaries:

 

Report of Independent Certified PublicAccountants — BDO Seidman, LLP

 

IndependentAuditors' Report — Deliotte & Touche LLP

 

Consolidated Balance Sheets as of December 31, 2002 and 2003

 

Consolidated Statements of Operations for theyears ended December 31, 2001 and 2002, the period from January 1, 2003 throughFebruary 28, 2003 and the period March 1, 2003 through December 31, 2003

 

Consolidated Statements of Changes inShareholders’ Equity (Deficit) for the years ended December 31, 2001 and 2002,the period from January 1, 2003 through February 28, 2003 and the period March1, 2003 through December 31, 2003

 

Consolidated Statements of Cash Flows for theyears ended December 31, 2001 and 2002, the period from January 1, 2003 throughFebruary 28, 2003 and the period March 1, 2003 through December 31, 2003

 

**2.             Financial StatementSchedules**

 

**Hollywood Casino Shreveport and Subsidiaries**

 

Report ofIndependent Certified Public Accountants — BDO Seidman, LLP

 

IndependentAuditors’ Report — Deloitte & Touche LLP

 

**HWCC-Louisiana, Inc. and Subsidiaries**

 

Report ofIndependent Certified Public Accountants — BDO Seidman, LLP

 

IndependentAuditors’ Report — Deloitte & Touche LLP

 

All other schedules are omitted because they are not applicable, or notrequired, or because the required information is included in the consolidatedfinancial statements or notes thereto.

 

3.             Exhibits,Including Those Incorporated by Reference.

 

The exhibits to this Report are listed on the accompanying index toexhibits and are incorporated herein by reference or are filed as part of thisannual report on Form 10-K.

 

### **(a)**           Exhibits

 
| **Exhibit**  |   | **Exhibit Index  Description of Exhibit**                                                                                                                                                                 |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                      |
| ##2.1—  |   | Membership  Interest Purchase Agreement dated as of March 31, 1999 by and among  HWCC-Louisiana, Inc., Sodak Gaming, Inc. and Sodak Louisiana, L.L.C. (Exhibit  10.32)                                    |
|         |   |                                                                                                                                                                                                      |
| ###3.1— |   | Amended and  Restated Joint Venture Agreement by and among Shreveport Paddlewheels,  L.L.C., Sodak Louisiana, L.L.C. and HWCC-Louisiana, Inc. dated July 31, 1998.  (Exhibit 10.1)                        |
|         |   |                                                                                                                                                                                                      |
| ###3.2— |   | September  1998 Amendment to the July Amended and Restated Joint Venture Agreement.  (Exhibit 10.2)                                                                                                       |
|         |   |                                                                                                                                                                                                      |
| +++3.3— |   | Third  Amended and Restated Joint Venture Agreement of Hollywood Casino Shreveport  by and among Shreveport Paddlewheels, L.L.C., HCS I, Inc. and HCS II, Inc.,  dated as of July 21, 1999. (Exhibit 3.1) |

 

79

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| **Exhibit**   |   | **Exhibit Index  Description of Exhibit**                                                                                                                                                                                                                                                                    |
|---------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |   |                                                                                                                                                                                                                                                                                                         |
| +++3.4—  |   | August 1999  Amendment to Third Amended and Restated Joint Venture Agreement among  Shreveport Paddlewheels, L.L.C., HCS I, Inc. and HCS II, Inc. (Exhibit 3.2)                                                                                                                                              |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +++3.5—  |   | Articles of  incorporation of Shreveport Capital Corporation. (Exhibit 3.3)                                                                                                                                                                                                                                  |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +++3.6—  |   | Bylaws of  Shreveport Capital Corporation. (Exhibit 3.4)                                                                                                                                                                                                                                                     |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +++3.7—  |   | Articles of  incorporation of HWCC-Louisiana, Inc. (Exhibit 3.5)                                                                                                                                                                                                                                             |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +++3.8—  |   | Bylaws of  Hollywood Casino—Lake Charles, Inc. (now known as HWCC-Louisiana, Inc.)  (Exhibit 3.6)                                                                                                                                                                                                       |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +++3.9—  |   | Articles of  incorporation of HCS I, Inc. (Exhibit 3.7)                                                                                                                                                                                                                                                      |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +++3.10— |   | Bylaws of  HCS I, Inc. (Exhibit 3.8)                                                                                                                                                                                                                                                                         |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +++3.11— |   | Articles of  incorporation of HCS II, Inc. (Exhibit 3.9)                                                                                                                                                                                                                                                     |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +++3.12— |   | Bylaws of  HCS II, Inc. (Exhibit 3.10)                                                                                                                                                                                                                                                                       |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +4.1—    |   | Indenture  among Hollywood Casino Shreveport and Shreveport Capital Corporation (“SCC”)  as Co-Issuers, and HWCC-Louisiana, Inc. (“HCL”), HCS I, Inc. and HCS II,  Inc., as Guarantors, and State Street Bank and Trust Company, as Trustee,  dated as of August 10, 1999. (Exhibit 4.1) |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +4.2—    |   | Registration  Rights Agreement, dated as of August 10, 1999, by and among Hollywood Casino  Shreveport, SCC, the Guarantors named therein and the Initial Purchasers.  (Exhibit 4.2)                                                                                                                         |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +4.3—    |   | Collateral  Assignment of Contracts and Documents dated August 10, 1999 between Hollywood  Casino Shreveport and State Street Bank and Trust Company, as Trustee.  (Exhibit 4.3)                                                                                                                             |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +4.4—    |   | Security  Agreement dated August 10, 1999 between Hollywood Casino Shreveport and State  Street Bank and Trust Company, as Trustee. (Exhibit 4.4)                                                                                                                                                            |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +4.5—    |   | Partnership  Interest Pledge Agreement dated August 10, 1999 made by HCS I, Inc. in favor  of State Street Bank and Trust Company, as Trustee and Secured Party.  (Exhibit 4.5)                                                                                                                              |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +4.6—    |   | Cash  Collateral and Disbursement Agreement dated August 10, 1999 among Hollywood  Casino Shreveport, SCC, First American Title Insurance Company, as  Disbursement Agent and State Street Bank and Trust Company, as Trustee.  (Exhibit 4.6)                                                                |
|          |   |                                                                                                                                                                                                                                                                                                         |
| #4.7—    |   | First  Amendment to Cash Collateral and Disbursement Agreement dated January 1, 2000  between Hollywood Casino Shreveport, SCC, First American Title Insurance  Company and State Street Bank and Trust Company. (Exhibit 4.24)                                                                              |
|          |   |                                                                                                                                                                                                                                                                                                         |
| +4.8—    |   | Stock Pledge  Agreement dated August 10, 1999 made by HCL in favor of State Street Bank and  Trust Company, as Trustee. (Exhibit 4.7)                                                                                                                                                                        |

 

80

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| **Exhibit**    |   | **Exhibit Index  Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                             |
|----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| +4.9—     |   | Security  Agreement dated August 10, 1999 made by SCC, HCL, HCS I, Inc. and HCS II,  Inc. to State Street Bank and Trust Company, as Trustee and Secured Party.  (Exhibit 4.8)                                                                                                                                                                                                                        |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| +4.10—    |   | Security  Agreement-Vessel Construction dated August 10, 1999 between Hollywood Casino  Shreveport and State Street Bank and Trust Company, as Trustee. (Exhibit 4.9)                                                                                                                                                                                                                                 |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| +4.11—    |   | Mortgage,  Leasehold Mortgage and Assignment of Leases and Rents made by Hollywood  Casino Shreveport in favor of State Street Bank and Trust Company, as  Mortgagee, dated August 10, 1999. (Exhibit 4.10)                                                                                                                                                                                           |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| +4.12—    |   | Partnership  Interest Pledge Agreement dated August 10, 1999 made by HCS II, Inc. in favor  of State Street Bank and Trust Company, as Trustee and Secured Party.  (Exhibit 4.11)                                                                                                                                                                                                                     |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| +4.13—    |   | First  Amendment to Security Agreement dated August 10, 1999 between  HWCC-Shreveport, Inc. and State Street Bank and Trust Company, as Trustee.  (Exhibit 4.12)                                                                                                                                                                                                                                      |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| ++++4.14— |   | Indenture  dated as of June 15, 2001 among Hollywood Casino Shreveport and Shreveport  Capital Corporation (“SCC”) as Issuers and State Street Bank and Trust  Company, as Trustee. (Exhibit 4.1)                                                                                                                                                                                           |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| ++++4.15— |   | Registration  Rights Agreement, dated as of June 15, 2001, by and among Hollywood Casino  Shreveport and SCC and the Initial Purchasers. (Exhibit 4.2)                                                                                                                                                                                                                                                |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| ++++4.16— |   | Collateral  Assignment of Contracts and Documents dated June 15, 2001 between Hollywood  Casino Shreveport and State Street Bank and Trust Company, as Trustee.  (Exhibit 4.3)                                                                                                                                                                                                                        |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| ++++4.17— |   | Security  Agreement dated June 15, 2001 between Hollywood Casino Shreveport and State  Street Bank and Trust Company, as Trustee. (Exhibit 4.4)                                                                                                                                                                                                                                                       |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| ++++4.18— |   | Security  Agreement dated June 15, 2001 made by SCC to State Street Bank and Trust  Company, as Trustee. (Exhibit 4.5)                                                                                                                                                                                                                                                                                |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| ++++4.19— |   | Preferred  Ship Mortgage made by Hollywood Casino Shreveport in favor of State Street  Bank and Trust Company, as Trustee, on Hollywood Dreams Official No. 1099497  dated as of June 15, 2001. (Exhibit 4.6)                                                                                                                                                                                         |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| ++++4.20— |   | Mortgage,  Leasehold Mortgage and Assignments of Leases and Rents made by Hollywood  Casino Shreveport in favor of State Street Bank and Trust Company, as  Trustee, dated as of June 15, 2001. (Exhibit 4.7)                                                                                                                                                                                         |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| +10.1—    |   | Amended and  Restated Federal Income Tax Sharing Agreement dated August 10, 1999 by and  among HCC, HWCC Development Corporation, Hollywood Management, Inc.,  HWCC-Tunica, Inc., Golf, Hollywood Casino Aurora, Inc., HWCC-Shreveport,  Inc., HWCC-Argentina, Inc., HCL, HWCC Holdings, Inc., HWCC-Aurora Management,  Inc., HWCC-Transportation, Inc., HCS I, Inc. and HCS II, Inc. (Exhibit 10.16) |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                  |
| ++10.2—   |   | Manager  Subordination Agreement, dated as of August 10, 1999, by and among State  Street Bank and Trust Company, as Trustee, HWCC-Shreveport, Inc. and  Hollywood Casino Shreveport. (Exhibit 10.3)                                                                                                                                                                                                  |

 

81

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| **Exhibit**     |   | **Exhibit Index  Description of Exhibit**                                                                                                                                                                                    |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                         |
| +10.3—     |   | Technical  Services Agreement, dated as of September 22, 1998, by and between QNOV and  HWCC-Shreveport, Inc. (Exhibit 10.4)                                                                                                 |
|            |   |                                                                                                                                                                                                                         |
| +10.4—     |   | Compromise  Agreement, dated September 15, 1998, by and among Hilton New Orleans  Corporation, New Orleans Paddlewheels, Inc., Queen of New Orleans at the  Hilton Joint Venture and the City of New Orleans. (Exhibit 10.7) |
|            |   |                                                                                                                                                                                                                         |
| +10.5—     |   | Loan and  Settlement Agreement, dated January 16, 1998, by and among New Orleans  Paddlewheels, Inc., Shreveport Paddlewheels, L.L.C., HCL, Sodak Louisiana  L.L.C. and Hilton New Orleans Corporation. (Exhibit 10.11)      |
|            |   |                                                                                                                                                                                                                         |
| +10.6—     |   | Retail Space  Lease, executed as of June 3, 1999 by and between QNOV and Red River  Entertainment Company, L.L.C. (Exhibit 10.12)                                                                                            |
|            |   |                                                                                                                                                                                                                         |
| +10.7—     |   | Ground  Lease, dated May 19, 1999, by and between the City of Shreveport, Louisiana  and QNOV. (Exhibit 10.13)                                                                                                               |
|            |   |                                                                                                                                                                                                                         |
| +10.8—     |   | Marine  Services Agreement dated September 22, 1998 between QNOV and Shreveport  Paddlewheels, L.L.C. (Exhibit 10.17)                                                                                                        |
|            |   |                                                                                                                                                                                                                         |
| +10.9—     |   | Side  Agreement dated January 16, 1998 between Queen of New Orleans at the Hilton  Joint Venture, HCL, and Sodak, L.L.C. (Exhibit 10.18)                                                                                     |
|            |   |                                                                                                                                                                                                                         |
| +10.10—    |   | Loan  Agreement dated August 10, 1999 between Shreveport Paddlewheels, L.L.C. and  HCL. (Exhibit 10.19)                                                                                                                      |
|            |   |                                                                                                                                                                                                                         |
| +10.11—    |   | Promissory  note in the original principal amount of $1,000,000 dated August 10, 1999  made by Shreveport Paddlewheels, L.L.C., as Borrower, to HCL, as Lender.  (Exhibit 10.20)                                             |
|            |   |                                                                                                                                                                                                                         |
| +10.12—    |   | Security  Agreement dated August 10, 1999, by Shreveport Paddlewheels, Inc., as Debtor,  in favor of HCL, as Secured Party. (Exhibit 10.21)                                                                                  |
|            |   |                                                                                                                                                                                                                         |
| +10.13—    |   | Guaranty  Agreement dated August 10, 1999, by New Orleans Paddlewheels, Inc. in favor  of HCL. (Exhibit 10.22)                                                                                                               |
|            |   |                                                                                                                                                                                                                         |
| +10.14—    |   | Contribution  and Assumption Agreement dated July 21, 1999 among HCL, HCS I, Inc., HCS II,  Inc. and Shreveport Paddlewheels, L.L.C. (Exhibit 10.24)                                                                         |
|            |   |                                                                                                                                                                                                                         |
| ++++10.15— |   | Manager  Subordination Agreement, dated as of June 15, 2001, by and among State Street  Bank and Trust Company, as Trustee, HWCC-Shreveport, Inc. and Hollywood Casino  Shreveport. (Exhibit 10.1)                           |
|            |   |                                                                                                                                                                                                                         |
| @10.16—    |   | Management  Services Agreement dated September 22, 1998 by and between QNOV and  HWCC-Shreveport, Inc. (Exhibit 10.1)                                                                                                        |
|            |   |                                                                                                                                                                                                                         |
| @10.17—    |   | Amendment to  Management Services Agreement dated August 2, 1999 by and between Hollywood  Casino Shreveport (formerly QNOV) and HWCC-Shreveport, Inc. (Exhibit 10.2)                                                        |
|            |   |                                                                                                                                                                                                                         |
| @@10.18—   |   | Employment  Agreement by and between Hollywood Casino Shreveport and Gary A. Gregg.  (Exhibit 10.20)                                                                                                                         |

 

82

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| **Exhibit**     |   | **Exhibit Index  Description of Exhibit**                                                                                                                                                                                |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                     |
| @@@10.19—  |   | Joint Motion  for Entry of Decree in Notice of Violation and Hearing (incident #RGS  000375), dated October 29, 2002. (Exhibit 10.1)                                                                                     |
|            |   |                                                                                                                                                                                                                     |
| @@@@10.20— |   | Employment  Agreement dated as of October 1, 2003 by and between Hollywood Casino  Shreveport and Melvyn Thomas. (Exhibit 10.3)                                                                                          |
|            |   |                                                                                                                                                                                                                     |
| @@@@10.21— |   | Acknowledgement  and Waiver for Employment Agreement dated October 1, 2003 by and between  Hollywood Casino Shreveport and Melvyn Thomas. (Exhibit 10.4)                                                            |
|            |   |                                                                                                                                                                                                                     |
| *10.22—    |   | Employment  Agreement dated July 1, 2002 by and between Hollywood Casino Shreveport and  Tonya Tarrant.                                                                                                                  |
|            |   |                                                                                                                                                                                                                     |
| *10.23—    |   | Employment  Agreement entered into January 30, 2004, but effective as of March 1, 2003,  by and between HCS I, Inc. and John C. Hull.                                                                                    |
|            |   |                                                                                                                                                                                                                     |
| *14.1—     |   | Code of  Business Conduct                                                                                                                                                                                                |
|            |   |                                                                                                                                                                                                                     |
| *31.1–     |   | CEO  Certification pursuant to rule 13a-14(a) and 15d-14(a) of the Securities  Exchange Act of 1934.                                                                                                                     |
|            |   |                                                                                                                                                                                                                     |
| *31.2—     |   | CFO  Certification pursuant to rule 13a-14(a) and 15d-14(a) of the Securities  Exchange Act of 1934.                                                                                                                     |
|            |   |                                                                                                                                                                                                                     |
| *32.1—     |   | CEO  Certification pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of The Sarbanes-Oxley Act of 2002.                                                                                            |
|            |   |                                                                                                                                                                                                                     |
| *32.2—     |   | CFO  Certification pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to  Section 906 of The Sarbanes-Oxley Act of 2002.                                                                                            |
|            |   |                                                                                                                                                                                                                     |
| #               |   | Incorporated  by reference from the exhibit shown in parenthesis filed in HCS’s Annual  Report on Form 10-K for the fiscal year ended December 31, 1999.                                                            |
|            |   |                                                                                                                                                                                                                     |
| ##              |   | Incorporated  by reference from the exhibit shown in parenthesis filed in HCC’s Annual  Report on Form 10-K for the fiscal year ended December 31 1998.                                                             |
|            |   |                                                                                                                                                                                                                     |
| ###             |   | Incorporated  by reference to the exhibit shown in parenthesis filed in HCC’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 1998 as filed with the  SEC on November 13, 1998.                  |
|            |   |                                                                                                                                                                                                                     |
| +               |   | Incorporated  by reference to the exhibit shown in parenthesis included in Form S-4  Registration Statement of Hollywood Casino Shreveport and Shreveport Capital  Corporation as filed with the SEC on October 8, 1999. |
|            |   |                                                                                                                                                                                                                     |
| ++              |   | Incorporated  by reference to the exhibit shown in parenthesis included in Form S-4  Registration Statement of Hollywood Casino Corporation as filed with the SEC  on August 13, 1999.                                   |
|            |   |                                                                                                                                                                                                                     |
| +++             |   | Incorporated  by reference to the exhibit shown in parenthesis included in Form S-4  Registration Statement of Hollywood Casino Corporation as filed with the SEC  on July 16, 1999.                                     |

 

83

----

 
| **Exhibit** |   | **Exhibit Index  Description of Exhibit**                                                                                                                                                                                          |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                               |
| ++++        |   | Incorporated  by reference to the exhibit shown in parenthesis included in HCS’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2001 as filed with the SEC  on August 10, 2001.                                |
|        |   |                                                                                                                                                                                                                               |
| @           |   | Incorporated  by reference to the exhibit shown in parenthesis filed in HCC’s Quarterly Report  on Form 10-Q for the quarter ended June 30, 1999 as filed with the SEC on  August 16, 1999.                                   |
|        |   |                                                                                                                                                                                                                               |
| @@          |   | Incorporated  by reference from the exhibit shown in parenthesis filed in Amendment No. 1  to Form S-4 Registration Statement No. 333-68380 of Hollywood Casino  Shreveport and Shreveport Capital Corporation on October 1, 2001. |
|        |   |                                                                                                                                                                                                                               |
| @@@         |   | Incorporated  by reference to the exhibit shown in parenthesis included in the Report on  Form 8-K filed by HCS on October 29, 2002.                                                                                               |
|        |   |                                                                                                                                                                                                                               |
| @@@@        |   | Incorporated  by reference to the exhibit shown in parenthesis filed in HCS’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2003 as filed with  the SEC on November 14, 2003.                            |
|        |   |                                                                                                                                                                                                                               |
| *           |   | Filed  herewith.                                                                                                                                                                                                                   |

 

**(b)**           **Reports on Form 8-K**

** **

| **Report** |   | **Item(s) No.** |   | **Date of Report** |   | **Date Filed or Furnished** |
|------------|--------|-----------------|--------|--------------------|--------|-----------------------------|
| Form 8-K   |   | 5 and 7         |   | February 3, 2004   |   | Filed February 6, 2004      |

 

84

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

 
|   | HOLLYWOOD CASINO SHREVEPORT                  |
|--------|----------------------------------------------|
|   | By:  HCS I, Inc., its Managing  Partner |
|   |                                         |   |
|   | By:                                          | /s/ | Kevin DeSanctis |
|   |                                         |   | Kevin DeSanctis |
|   |                                         |   | Chairman of the Board and Chief Executive  Officer |
|        |                                              |  |  |  |

 

Dated:  April 6, 2004

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the following persons on behalf of the registrant and in the capacities and onthe dates indicated have signed this report below.

 

Each person whose signature appears below in so signing also makes,constitutes and appoints Robert S. Ippolito his true and lawfulattorney-in-fact, in his name, place and stead to execute and cause to be filedwith the Securities and Exchange Commission any or all amendments to thisreport.

 
| **Signature**          |   | **Title**                                                                    |   | **Date**      |
|------------------------|--------|------------------------------------------------------------------------------|--------|---------------|
|                   |   |                                                                         |   |          |
| /s/ Kevin DeSanctis    |   | Chairman of the Board, Chief                                                 |   | April 6, 2004 |
| Kevin DeSanctis        |   | Executive Officer, and Director  (Principal Executive Officer)               |   |          |
|                   |   |                                                                         |   |          |
| /s/ John C. Hull       |   | President , Chief Financial Officer,                                         |   | April 6, 2004 |
| John C. Hull           |   | Treasurer, Assistant Secretary, and  Director (Principal Financial  Officer) |   |          |
|                   |   |                                                                         |   |          |
| /s/Tonya Tarrant       |   | Vice President and Assistant                                                 |   | April 6, 2004 |
| Tonya Tarrant          |   | Treasurer (Principal Accounting  Officer)                                    |   |          |
|                   |   |                                                                         |   |          |
| /s/ Robert S. Ippolito |   | Director                                                                     |   | April 6, 2004 |
| Robert S. Ippolito     |   |                                                                         |   |          |

 

85

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

 
|   | SHREVEPORT CAPITAL CORPORATION |
|--------|--------------------------------|
|   |                           |
|   |                           |
|   | By:                            | /s/ | Kevin DeSanctis |
|   |                           |   | Kevin DeSanctis |
|   |                           |   | Chairman of the Board and Chief Executive  Officer |

 

Dated:  April 6, 2004

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the following persons on behalf of the registrant and in the capacities and onthe dates indicated have signed this report below.

 

Each person whose signature appears below in so signing also makes,constitutes and appoints Robert S. Ippolito his true and lawfulattorney-in-fact, in his name, place and stead to execute and cause to be filedwith the Securities and Exchange Commission any or all amendments to thisreport.

 
| **Signature**          |   | **Title**                                                                   |   | **Date**       |
|------------------------|--------|-----------------------------------------------------------------------------|--------|----------------|
|                   |   |                                                                        |   |           |
| /s/ Kevin DeSanctis    |   | Chairman of the Board, Chief                                                |   | April 6,  2004 |
| Kevin DeSanctis        |   | Executive Officer, and Director  (Principal Executive Officer)              |   |           |
|                   |   |                                                                        |   |           |
| /s/ John C. Hull       |   | President , Chief Financial Officer,                                        |   | April 6,  2004 |
| John C. Hull           |   | Treasurer, Assistant Secretary and  Director (Principal Financial  Officer) |   |           |
|                   |   |                                                                        |   |           |
| /s/Tonya Tarrant       |   | Vice President and Assistant                                                |   | April 6,  2004 |
| Tonya Tarrant          |   | Treasurer (Principal Accounting  Officer)                                   |   |           |
|                   |   |                                                                        |   |           |
| /s/ Robert S. Ippolito |   | Director                                                                    |   | April 6,  2004 |
| Robert S. Ippolito     |   |                                                                        |   |           |

 

86

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

 
|   | HWCC-LOUISIANA, INC. |
|--------|----------------------|
|   |                 |   |   |
|   |                 |   |   |
|   | By:                  | /s/ | Kevin DeSanctis |
|   |                 |   | Kevin DeSanctis |
|   |                 |   | Chairman of the Board and Chief Executive  Officer |

 

Dated:  April 6, 2004

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the following persons on behalf of the registrant and in the capacities and onthe dates indicated have signed this report below.

 

Each person whose signature appears below in so signing also makes,constitutes and appoints Robert S. Ippolito his true and lawfulattorney-in-fact, in his name, place and stead to execute and cause to be filedwith the Securities and Exchange Commission any or all amendments to thisreport.

 
| **Signature**          |   | **Title**                                                                   |   | **Date**      |
|------------------------|--------|-----------------------------------------------------------------------------|--------|---------------|
|                   |   |                                                                        |   |          |
| /s/ Kevin DeSanctis    |   | Chairman of the Board, Chief                                                |   | April 6, 2004 |
| Kevin DeSanctis        |   | Executive Officer, and Director  (Principal Executive Officer)              |   |          |
|                   |   |                                                                        |   |          |
| /s/ John C. Hull       |   | President , Chief Financial Officer,                                        |   | April 6, 2004 |
| John C. Hull           |   | Treasurer, Assistant Secretary and  Director (Principal Financial  Officer) |   |          |
|                   |   |                                                                        |   |          |
| /s/Tonya Tarrant       |   | Vice President and Assistant                                                |   | April 6, 2004 |
| Tonya Tarrant          |   | Treasurer (Principal Accounting  Officer)                                   |   |          |
|                   |   |                                                                        |   |          |
| /s/ Robert S. Ippolito |   | Director                                                                    |   | April 6, 2004 |
| Robert S. Ippolito     |   |                                                                        |   |          |

 

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