**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM10-K**

 

**(Mark One)**
| **ý** | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE** |
|------------|------------|-----------------------------------------------------------|
| ** ** | ** ** | **SECURITIES  EXCHANGE ACT OF 1934**                      |

 

**For the fiscal year ended December 31, 2004**

 

**OR**

 
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE** |
|------------|------------|---------------------------------------------------------------|
| ** ** | ** ** | **SECURITIES  EXCHANGE ACT OF 1934**                          |

 

**For the transition periodfrom              to              **

** **

**Commission File Number 333-88679**

** **

**HollywoodCasino ShreveportShreveport 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**                        |
| (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 withContingent Interest due August 1, 2006**

**$39,000,000 of 13% Senior Secured Notes with ContingentInterest due August 1, 2006**

 

Securities registered pursuant to Section 12(g) of the Act:  **None**

(Title of Class)

 

Indicateby check 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.

 

Indicateby check 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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act). Yes   o  No  ý

 

Asof March 28, 2005, HCS I, Inc. holds an effective 99% partnership interest andHCS II, Inc. holds an effective 1% partnership interest in Hollywood CasinoShreveport. As of March 28, 2005, 1,000 shares of common stock of ShreveportCapital Corporation, $1.00 par value, are outstanding, all of which are ownedby Hollywood Casino Shreveport.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portionsof the following documents are incorporated by reference into the indicatedparts hereof:  None.

 

 

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**TABLE OF 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, RELATED STOCKHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES |       |
| 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                                                         |       |
| ITEM 13.   | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                                                         |       |
| ITEM 14.   | PRINCIPAL  ACCOUNTANING FEES AND SERVICES                                                                               |       |
|       |                                                                                                                    |       |
| ** ** | **PART IV**                                                                                                             | ** ** |
| ** ** | ** **                                                                                                              | ** ** |
| ITEM 15.   | EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES                                                                             |       |

 

Thisdocument includes “forward-looking statements” within the meaning of Section27A of the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act, as amended. These statements are included throughout thedocument, including the section entitled “Risk Factors,” and relate to ourbusiness strategy, our prospects and our financial position. These statementscan be identified 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 statementsmay include, among others, statements concerning:

 

•                  ourexpectations of future results of operations or financial condition;

 

•                  ourexpectations concerning the bankruptcy proceedings and the potential sale ordisposition of the property;

 

•                  thetiming, cost and expected impact on our market share and results of operationsof our planned capital expenditures;

 

•                  theoutcome and financial impact of the litigation in which we are involved;

 

•                  theeffect of legislative, regulatory, executive or judicial decisions at thefederal, state or local level with regard to our business and the impact of anysuch decisions; and 

 

•                  ourexpectations regarding the availability of capital resources.

 

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Althoughwe believe that the expectations reflected in such forward-looking statementsare reasonable, they are inherently subject to risks, uncertainties andassumptions about us, and accordingly, our forward-looking statements are qualifiedin their 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:

 

•                  theoutcome and financial impact of the Chapter 11 bankruptcy proceedings resultingfrom events of default under our indentures governing the 13% senior securednotes due 2006 and 13% first mortgage notes due 2006;

 

•                  theramifications of a potential sale or other disposition and the possibility thatsuch a sale or disposition may be effected through a bankruptcy proceeding;

 

•                  successfulcompletion of capital projects at our facility;

 

•                  theactivities of our competitors;

 

•                  thepassage of legislation that would expand, restrict, further tax or preventgaming operations;

 

•                  ourability to maintain regulatory approvals for our business;

 

•                  ourdependence on key personnel;

 

•                  theavailability and cost of financing;

 

•                  theimpact of economic conditions; and

 

•                  theimpact of terrorism or other international hostilities.

 

Allsubsequent written and oral forward-looking statements attributable to us orpersons acting 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**

# ** **

## **ITEM1.**                  BUSINESS

 

**Overview**

 

HollywoodCasino Shreveport is located in Shreveport, Louisiana, which is 190 miles eastof Dallas, Texas.  Our principal target markets are the Dallas-Ft. WorthMetroplex and communities in East Texas.

 

TheHollywood Casino Shreveport resort consists of a 403-room, all-suite, artdeco-style hotel, and a three-level riverboat dockside casino. The casinocontains approximately 59,000 square feet of space with approximately 1,400 slotmachines, 61 table games and ten poker tables.

 

Thecenterpiece of the resort is a 170,000 square foot land-based pavilion housingnumerous restaurants and entertainment amenities.  An 85-foot wideseamless entrance connects the casino to the land-based pavilion on all threelevels resulting in the feel of a land-based casino. Amenities include theFairbanks® gourmet steakhouse, the Hollywood Epic Buffet®, the Hollywood Diner,the Hollywood Director’s Club and the Hollywood Celebrity Lounge, a spa and theHollywood Casino Studio Store®, which features themed and logomerchandise.  Hollywood Casino Shreveport also features the HollywoodCasino Corporation’s unique Hollywood theme throughout its gaming, dining andentertainment facilities that has been successfully applied at its otherproperties.

 

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 organized in April 1993,which is wholly-owned by Hollywood Casino Corporation. The Hollywood CasinoShreveport general partnership was originally formed in May 1992 and operatesHollywood Casino Shreveport under a management agreement with HWCC-Shreveport,Inc., a wholly-owned subsidiary of Hollywood Casino Corporation.  Themanagement agreement provides that the Hollywood Casino Shreveport generalpartnership pay a management fee of 2% of net revenues plus an increasingpercentage (5-10%) of Hollywood Casino Shreveport’s annual earnings beforeinterest, taxes, depreciation and amortization above $25.0 million withpayment subject to certain restrictions provided in the indentures and relateddocuments governing the Shreveport Notes.  No management fees have beenpaid since the opening of the facility.

 

TheHollywood Casino Shreveport general partnership and Shreveport CapitalCorporation are co-issuers of $150 million aggregate principal amount of13% first mortgage notes due 2006, or the First Mortgage Notes, and$39 million aggregate principal amount of 13% senior secured notes due2006, or the Senior Secured Notes, which we refer to collectively in thisdocument as the Shreveport Notes.  Shreveport Capital Corporation is a wholly-ownedsubsidiary of Hollywood Casino Shreveport formed in July 1999 solely for thepurpose of being a co-issuer of the Shreveport Notes.  The ShreveportNotes are secured by substantially all of the assets of Hollywood CasinoShreveport and the First Mortgage Notes are further secured by the guaranteesof HWCC-Louisiana, Inc., HCS I, Inc. and HCS II, Inc.; the pledge byHCS I, Inc. and HCS II, Inc. of their partnership interests in theHollywood Casino Shreveport general partnership; and the pledge byHWCC-Louisiana, Inc. of its stock in HCS I, Inc. and HCS II, Inc.

 

**Acquisition of Hollywood Casino Shreveport**

 

Effectivewith the close of business on February 28, 2003, we were indirectlyacquired by Penn National Gaming, Inc., or Penn National, as part of itsacquisition of Hollywood Casino Corporation and its subsidiaries.  As aresult of certain accounting requirements, we adjusted our assets andliabilities to reflect fair values as of the date of acquisition.  The purchaseprice adjustments reflected in our consolidated financial statements includethe fair values of property and equipment based on independent appraisalsobtained by Penn National and a bond valuation allowance that reduces the valueof the Shreveport Notes to their estimated fair value. No goodwill was recordedin connection with the acquisition.

 

**Shreveport Notes**

 

Theindentures governing the Shreveport Notes require the issuers to make an offerto purchase the Shreveport Notes at 101% of the principal amount thereof withinten days of the occurrence of a “Change of Control” as defined in theindentures. A “Change of Control” was deemed to have occurred under theindentures on March 3, 2003 as a result of the consummation of the merger of awholly-owned subsidiary of Penn National with and into Hollywood CasinoCorporation. We determined that we did not have the liquidity to repurchase theShreveport Notes at 101% of their principal amount and, accordingly, could notmake an offer to purchase the Shreveport Notes as required under theindentures. A valuation allowance in the amount of $70.3 million wasestablished to reduce the carrying amount to management’s estimate of the fairvalue of the Shreveport Notes, which was based on the fair value of the underlyingcollateral.

 

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OnMarch 14, 2003, we were notified by an ad hoc committee of holders of theShreveport Notes that we 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 the Hollywood Casino Shreveportgeneral partnership nor Shreveport Capital Corporation made a Change of Controloffer to purchase the Shreveport Notes within the 60 days and, accordingly, thead hoc committee notified us in May 2003 that a default had occurred under theindentures.  In addition, we did not make the August 1, 2003, February 1,2004, August 1, 2004 and February 1, 2005 interest payments of approximately $12.3 millioneach, which were due on the Shreveport Notes.  During the periodsubsequent to May 2003, we entered into negotiations with an ad hoc committeeof holders of the Shreveport Notes regarding the possible restructure of theoutstanding indebtedness.  In November 2003, we retained Libra Securities,LLC as our exclusive financial advisor in connection with a possible sale ordebt restructuring transaction. 

 

OnFebruary 3, 2004, HCS I, Inc., our managing general partner, announced that itsBoard of Directors had authorized the initiation of a process that it hoped wouldresult in the sale or other disposition of Hollywood Casino Shreveport. The Board further authorized our financial advisor, Libra Securities LLC, tobegin contacting potential acquirers.  In addition, the Board authorizedthe creation of an independent committee of the Board, consisting of twodirectors not employed directly by Penn National, to oversee thisprocess.  The independent committee was established in the event that PennNational elected to participate as a bidder in the process.  Penn Nationaldecided not to participate in the bid process. The Board took action after consultation with the ad hoc committee ofholders of the Shreveport Notes.  

 

**BankruptcyFilings**

 

OnAugust 27, 2004, acting by and through our managing general partner, HCS I,Inc., we entered into an agreement with Eldorado Resorts, LLC (“Eldorado”)providing for our acquisition by certain affiliates of Eldorado.  OnOctober 18, 2004, acting by and through HCS I, Inc., we entered into adefinitive Investment Agreement with Eldorado, Eldorado Shreveport #1, LLC andEldorado Shreveport #2, LLC (together with Eldorado Shreveport #1, LLC, the“Investors”) providing for the acquisition of the reorganized Hollywood Casino Shreveportby the Investors.  The Agreementcontemplates a financial restructuring of Hollywood Casino Shreveport that willsignificantly reduce our outstanding secured debt obligations and annual cashinterest payments.  Under the proposedrestructuring, holders of our existing secured notes are to receive (1) $140million of new first mortgage notes, (2) interest in a corporation that willhold a $20 million preferred equity interest and a 25% non-voting equityinterest in the reorganized Hollywood Casino Shreveport and (3) cash in anamount to be determined, in exchange for existing secured notes in theprincipal face amount of $189 million plus accrued interest.  TheInvestors would acquire a 75% voting equity interest in the reorganized HollywoodCasino Shreveport.  We had intended toeffectuate the sale and related financial restructuring transaction through aprepackaged Chapter 11 bankruptcy reorganization, but as described below, aninvoluntary bankruptcy petition interrupted the process.  On October 28, 2004, we filed a joint planand disclosure statement that incorporated the Eldorado transaction.  The Agreement, which has been extended byamendment to June 30, 2005, remains subject to subsequent noteholdersolicitation and acceptance, approval by the Bankruptcy Court of the Agreement,approval by the Louisiana Gaming Control Board and certain other conditions. 

 

OnSeptember 10, 2004, certain of our creditors filed an involuntary petitionagainst us for relief under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court, Western District of Louisiana, located in Shreveport,Louisiana.  The petition was filed by Black Diamond Capital Management,LLC (“Black Diamond”), a holder of our notes, who had previously participatedin meetings with the ad hoc committee and who had later submitted an unsuccessfulbid to acquire us, and by two of our construction contractors, who have been inlitigation with us over amounts owing on our 1999 construction contract (see Item3, Legal Proceedings).  A hearing on thepetition was held on October 29 and 30, 2004. A Consensual Order for Relief was issued on October 30, 2004, and webecame a “debtor-in-possession”.  We willcontinue to manage our assets and business subject to the powers and supervisionof the Bankruptcy Court.  On November 19,2004, the Bankruptcy Court entered an order appointing David S. Rubin asmediator for the limited purposes of reviewing the pre-petition bid process todetermine whether it was performed in a proper and competent fashion and thatthe scope of solicitations for bids was sufficient and performed in a timelyfashion; reviewing the bids submitted and the process for evaluating the bids;determining the value of the bids submitted and recommending to the Court whetheradditional bid processes should be undertaken. The United States Trustee has appointed a Non-Bondholder UnsecuredCreditors Committee and a Bondholder Committee.

 

OnOctober 30, 2004, HCS I, Inc. and HCS II, Inc., the general partners of theHollywood Casino Shreveport partnership, HWCC-Louisiana, Inc. and ShreveportCapital Corporation commenced voluntary cases under Chapter 11 in theBankruptcy Court, which cases are pending.

 

On February 14, 2005, the court-appointed mediator, David S. Rubin,filed his report in our Chapter 11 case, which remains confidential.  The report concluded, among other things,that:

 

•                  The pre-petition bid process conducted by HCSand the Ad Hoc Committee of Noteholders of HCS was performed in a proper andcompetent fashion.

 

•                  The scope of the solicitations for bids wassufficient and adequate.

 

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•                  Bids submitted during the period of the formalprocess were appropriately ranked based on both quantitative and qualitativefacts existing at the time the bids were made and evaluated.

 

•                  The decision to select the bid submitted byEldorado to pursue closure was appropriate.

 

•                  As of August 27, 2004, the Eldorado bidoffered the highest economic return to creditors.

 

•                  Although a subsequent bid made by BlackDiamond on October 25, 2004, on a purely quantitative economic basis, washigher and offered more total value than the amount of the already acceptedEldorado proposal, the economic difference between the face amounts of the Eldoradooffer and the October 25, 2004 Black Diamond offer, based on all of thecircumstances existing as of October 25, 2004, was not demonstrably material interms of the scope of the proposed transaction.

 

•                  The attendant delay of a re-offering or otherauction process to again expose the assets to the market (including possiblelitigation in and out of the Court) may diminish interest in and offers for theHCS assets, may drive value down, and may have an effect on the Eldorado offer.

 

•                  A new formal auction process is not in thebest interest of HCS and its creditors.

 

Wesubsequently filed a revised reorganization Plan and Disclosure Statement withthe Bankruptcy Court on March 3, 2005. The Plan continues to provide for the acquisition of our hotel and casinoby Eldorado under the agreement announced last year.  The Bondholder Committee in the Chapter 11cases has joined us as a proponent of the Plan. The Bankruptcy Court has set a hearing on the approval of the DisclosureStatement for April 11, 2005.  BlackDiamond and KOAR International continue to express an interest in jointlyacquiring the hotel and casino and have asked the Bankruptcy Court forpermission to file their own competing plan. We intend to oppose that request. The Bankruptcy Court has set a hearing for April 4, 2005 on BlackDiamond’s motion to terminate our period of exclusivity for filing areorganization plan.

 

Althoughthe sale and restructuring process, including the Chapter 11 cases, has had anegative impact on our day-to-day operations, we believe that our significantcash on hand and cash from operations will continue to be sufficient to timelyfulfill ordinary course obligations to employees, customers and trade vendorsin full as they come due, pending completion of the transaction.  TheAgreement contemplates payment of such obligations in the ordinary course bothduring and after the restructuring process. Because the sale process has been unduly prolonged, management believesthat it has had and may continue to have an adverse effect on employee moraleand turnover and on our competitive position with our customers.

 

Therecan be no assurance that the process will result in the sale or otherdisposition of the riverboat casino/hotel complex.  If it does, the sale proceeds will not likelybe adequate to pay the Shreveport Notes in full. We currently anticipate thatany transaction will be effected through the pending Chapter 11 cases.  Ifthe efforts to achieve a sale or other restructuring transaction areunsuccessful and the Chapter 11 cases are dismissed or relief from theautomatic stay is granted, the holders of the Shreveport Notes might pursue allrights and remedies they may have under the indentures.  We did not makethe August 1, 2003, February 1, 2004, August 1, 2004 and February 1, 2005 interestpayments of approximately $12.3 million each due on the Shreveport Notes. Aspreviously noted, the Shreveport Notes have been in default under the terms oftheir respective note indentures since March 2003.

 

**Liquidity**

 

Aspreviously described, after consultation with the ad hoc committee of holdersof the Shreveport Notes, we commenced a process to solicit bids from potentialacquirers of Hollywood Casino Shreveport and entered into the Agreement withEldorado.  The uncertainties regarding the ultimate success of the salesprocess, our existing defaults on the Shreveport Notes and our inability tocure such defaults other than through a successful sale or other restructuringtransaction raises substantial doubt about our ability to continue as a goingconcern.

 

UnderChapter 11, actions to collect certain claims against us in existence prior tothe filing of the petitions for relief are stayed while we continue businessoperations as debtor-in-possession. These claims are reflected in the December 31, 2004 consolidated balancesheet as “liabilities subject to compromise”. Additional claims may arise subsequent to the filing date resulting fromthe rejection of executory contracts such as leases and from the determinationby the Bankruptcy Court of allowed claims for contingencies and other disputedamounts.  We received approval from theBankruptcy Court to pay certain of our pre-petition obligations, includingemployee wages and customer obligations. We have determined that there is insufficient collateral to cover the amountsowing on the Shreveport Notes and have discontinued accruing interest on theseobligations effective with the close of business on September 10, 2004.  Cash flows from operations continue to beinsufficient to fund interest accrued on the Shreveport Notes and we did notmake the August 1, 2003, February 1, 2004, August 1, 2004 andFebruary 1, 2005 payments of approximately $12.3 million each due on suchnotes. 

 

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**Trademarks**

 

Wehave entered into a trademark license agreement with Hollywood CasinoCorporation, pursuant to which Hollywood Casino Corporation has granted us theright to use the service mark “Hollywood Casino” which is registered with theU.S. Patent and Trademark Office. Pursuant to the license agreement, we mayalso use other trademarks owned or applied for by Hollywood CasinoCorporation.  The use of the Hollywood Casino trademark is of substantialvalue to us.  Upon termination of the management services agreementbetween a subsidiary of Hollywood Casino Corporation and us for the managementof Hollywood Casino Shreveport, the trademark license agreement will terminateand we shall only be entitled to the use of the Hollywood Casino trademarks forsix months following such termination.

 

**Competition**

 

Thegaming industry is highly fragmented and characterized by a high degree ofcompetition among a large number of participants, many of which have financialand other resources that are greater than our resources.  Competitive gaming activities includecasinos, video lottery terminals and other forms of legalized gaming in theUnited States and other jurisdictions.

 

Legalizedgaming is currently permitted in various forms throughout the United States andin several Canadian provinces and on various lands taken into trust for thebenefit of certain Native Americans in the United States and Canada. Other jurisdictions may legalize gaming in the near future.  In addition,established gaming jurisdictions could award additional gaming licenses orpermit the expansion of existing gaming operations.  New or expandedoperations by other persons will increase competition for our gaming operationsand could have 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 withfour casinos, three of which have operated in the Shreveport/Bossier Citymarket for several years and have established customer bases. In May 2003, anexisting race track, which had been acquired by one of the existing casinos inthe market, opened a temporary gaming facility with approximately 900 slotmachines.  That race track completed construction and opened a newpermanent facility accommodating 1,400 slot machines in April 2004. Casinogaming is currently prohibited in several jurisdictions from which theShreveport/Bossier City market draws customers, primarily Texas.  Althoughcasino gaming is currently not permitted in Texas, the Texas legislature hasfrom time to time considered proposals to authorize casino gaming.  InJuly 2003, the Chickasaw Nation announced the opening of WinStar Casinos, a LasVegas-style, 110,000-square-foot gaming facility located in Oklahomaapproximately 60 miles north of the Dallas/Fort Worth area.  Althoughgaming in Oklahoma is limited by law to Class II-type games, which games havepreviously been technologically incapable of offering a similar entertainmentexperience to our Class III-type games, recent innovations have allowed theClass II-type product to compete much more effectively than in the past. In November 2004, voters in Oklahoma approved several ballot initiatives which,when fully implemented, will (1) allow Class II-type games at three Oklahomaracetracks, the closest of which is approximately 200 miles from theDallas/Fort Worth area; (2) allow several new electronic gaming devices,including video poker, that are defined as “games of skill” at native-American casinos;and (3) allow certain “player-pooled” table games such as poker and blackjack atnative-American casinos.  Since we draw asignificant amount of our customers from the Dallas/Fort Worth area, but arelocated approximately 190 miles from that area, we believe we will faceincreased competition from the WinStar Casinos, racetracks and similar types offacilities.

** **

**Regulations**

 

*General*

 

Weare subject to federal, state, and local regulations, related to our currentcasino operations. The following description of the regulatory environment inwhich we operate is only a summary and not a complete recitation of allapplicable regulatory laws. Moreover, our current and proposed operations couldbe subjected at any time to additional or more restrictive regulations, orbanned entirely.

 

*Louisiana Regulation*

 

Weand our Louisiana affiliates that are involved in the ownership and operationof the Hollywood Casino Shreveport, referred to as the “Louisiana Licensees,”are subject to regulation by the State of Louisiana.

 

InJuly 1991, the Louisiana legislature adopted legislation permitting certaintypes of gaming activity on certain rivers and waterways in Louisiana. Since May 1, 1999, the Louisiana Gaming Control Board, or the LouisianaBoard, has regulated such gaming activities.

 

TheLouisiana Riverboat Economic Development and Gaming Control Act (the “LouisianaAct”) authorized the issuance of up to fifteen licenses to conduct gamingactivities on a riverboat of new construction in accordance with applicablelaw.  However, no more than six licenses may be granted to riverboatsoperating from any one parish.  Of the fifteen available licenses,fourteen are currently in operation.  The final license has been awardedto a subsidiary of Pinnacle Entertainment for a facility to be located in LakeCharles, Louisiana and expected to commence operations in the spring of 2005.

 

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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 will grant or renew a license if it findsthat:  (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.

 

OnSeptember 14, 2004, the Louisiana Board conditionally renewed the license ofHollywood Casino Shreveport, subject to (1) the full execution by us andEldorado of a definitive agreement governing Eldorado’s proposed acquisition ofus not later than October 19, 2004; (2) our submission to the Louisiana Boardof a Petition to Approve Transfer of Interest, together with such definitiveagreement, not later than October 19, 2004; and (3) upon the submission of suchPetition to Approve Transfer of Interest, the making by all appropriate personsand entities of the proper applications for findings of suitability and thesubmission by such persons or entities to such background and suitabilityinvestigations as may be required by Louisiana gaming law and may be conductedby the Louisiana State Police, Casino Section and Audit Section.  These requirements for the conditionalrenewal of our Louisiana gaming license were timely satisfied on or beforeOctober 19, 2004 and the investigation of the suitability of Eldorado wascommenced thereafter. 

 

Otherregulations imposed by the Louisiana Act or rules adopted pursuant theretoinclude, but are not limited to, the following:  (i) we mustperiodically submit financial and operating reports to the Louisiana Board forourselves and our subsidiaries; (ii) owners holding greater than a 5%interest or who are officers or directors of us or subsidiaries related to theLouisiana Licensees must be found suitable by the Louisiana Board;(iii) any individual who is found to have a material relationship to, orinvolvement with the Louisiana Licensees may be required to be investigated forsuitability; (iv) if a director, officer, or key employee were found to beunsuitable, we and our subsidiaries would have to sever all relationships withthat person; (v) the transfer of a license or permit or an interest in alicense or permit is prohibited without prior approval; (vi) the LouisianaLicensees must notify the Louisiana Board of any withdrawals of capital, loans,advances, or distributions in excess of 5% of retained earnings upon completionof such transaction; and (vii) each of the Louisiana Licensees must giveprior notification 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.

 

TheLouisiana Act or rules adopted pursuant thereto contain certain restrictionsand conditions relating to the operation of riverboat gaming, including thefollowing:  (i) agents of the Louisiana Board are permitted on board atany time during gaming operations; (ii) gaming devices, equipment and suppliesmay only be purchased or leased from permitted suppliers; (iii) gaming may onlytake place in the designated gaming area while the riverboat is upon adesignated river or waterway; (iv) gaming equipment may not be possessed,maintained or exhibited by any person on a riverboat except in the specificallydesignated gaming area, or a secure area used for inspection, repair or storageof such equipment; (v) wagers may be received only from a person present on alicensed riverboat; (vi) persons under 21 are not permitted on gaming vessels;(vii) except for slot machine play, wagers may be made only with tokens, chipsor electronic cards purchased from the licensee aboard a riverboat; (viii)licensees may only use docking facilities for which they are licensed and mayonly board and discharge passengers at the riverboat’s licensed berth; (ix)licensees must have adequate protection and indemnity insurance; (x) licenseesmust have all necessary federal and state licenses, certificates and otherregulatory approvals prior to operating a riverboat; and (xi) gaming may onlybe conducted in accordance with the terms of the license, the Louisiana Act andthe rules and regulations adopted by the Louisiana Board.

 

Feesfor conducting 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%.

 

TheLouisiana Act also authorizes the City of Shreveport to assess a boarding fee,up to $3.00.  In lieu of the boarding fee, we have negotiated a payment inan amount equal to 3.225% of the net gaming proceeds (gross revenues) of theHollywood Casino Shreveport riverboat to be paid to the City of Shreveport and..5375% of the net gaming proceeds (gross revenues) of the Hollywood CasinoShreveport riverboat to be paid to the Bossier Parish School Board.  Weare currently involved in litigation regarding these payments.  See Item3, Legal Proceedings.

 

5

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Proposalsto amend 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 theadministration of such laws, affecting the gaming industry. It is not possibleto determine with certainty the likelihood of changes in tax laws or in theadministration of such laws.

 

*IRS Regulations, Currency Transaction Reporting andSuspicious Activity Reporting*

 

TheInternal Revenue Service, or IRS, requires operators of casinos located in theUnited States to file information returns for United States citizens, includingnames and addresses of winners, for all winnings in excess of stipulatedamounts. The IRS also requires operators to withhold taxes on certain winnings.

 

Regulationsadopted by the Financial Crimes Enforcement Network of the Treasury Departmentand the gaming regulatory authorities require the reporting of currencytransactions in excess of $10,000 occurring within a gaming day, includingidentification of the patron by name and social security number. This reportingobligation commenced in May 1985 and may have resulted in the loss of casinorevenues to jurisdictions outside the United States that are exempt from theambit of such regulations.

 

Regulationsadopted by the Financial Crimes Enforcement Network of the Treasury Departmentrequire the filing of suspicious activity reports by casinos on alltransactions of at least $5,000 that the casino knows, suspects, or has reasonto suspect fall into specific categories that are deemed to be suspicious. Thisreporting obligation commenced on March 25, 2003 and may have resulted in theloss of casino revenues to jurisdictions outside the United States that areexempt from the ambit of such regulations.

* *

*Compliance with Other Laws*

 

Ouroperations are also subject to a variety of other rules and regulations,including zoning, environmental, construction and land-use laws and regulationsgoverning the serving of alcoholic beverages.

** **

**Employees and Labor Relations**

 

Asof March 15, 2005 we had 1,623 employees, of which 1,336 are full-time, noneof whom are represented under collective bargaining agreements.

** **

**Risks Related to Our Business**

 

*We are currently under the supervision of the Bankruptcy Court.*

 

OnAugust 27, 2004, we entered into an agreement with Eldorado providing for ouracquisition by certain affiliates of Eldorado.  On October 18, 2004, weentered into a definitive Investment Agreement with Eldorado providing for the acquisitionof the reorganized Hollywood Casino Shreveport by Eldorado’s affiliates.  The Agreement contemplates a financialrestructuring of Hollywood Casino Shreveport that will significantly reduce ouroutstanding secured debt obligations and annual cash interest payments.  Under the proposed restructuring, holders ofour existing secured notes are to receive (1) $140 million of new firstmortgage notes, (2) interest in a corporation that will hold a $20 millionpreferred equity interest and a 25% non-voting equity interest in thereorganized Hollywood Casino Shreveport and (3) cash in an amount to bedetermined, in exchange for existing secured notes in the principal face amountof $189 million plus accrued interest.  Eldorado’s affiliates wouldacquire a 75% voting equity interest in the reorganized Hollywood CasinoShreveport.  We had intended toeffectuate the sale and related financial restructuring transaction through aprepackaged Chapter 11 bankruptcy reorganization, but as described below, aninvoluntary bankruptcy petition interrupted the process.  On October 28, 2004, we filed a joint planand disclosure statement that incorporated the Eldorado transaction.  The Agreement, which has been extended byamendment to June 30, 2005, remains subject to subsequent noteholdersolicitation and acceptance, approval by the Bankruptcy Court of the Agreement,approval by the Louisiana Gaming Control Board and certain other conditions.

 

6

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OnSeptember 10, 2004, certain of our creditors filed an involuntary petitionagainst us for relief under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court, Western District of Louisiana, located in Shreveport,Louisiana.  The petition was filed by Black Diamond, a holder of ournotes, who had previously participated in meetings with the ad hoc committeeand who had later submitted an unsuccessful bid to acquire us, and by two ofour construction contractors, who have been in litigation with us over amountsowing on our 1999 construction contract (see Item 3, Legal Proceedings).  A hearing on the petition was held on October29 and 30, 2004.  A Consensual Order forRelief was issued on October 30, 2004, and we became a“debtor-in-possession”.  We will continueto manage our assets and business subject to the powers and supervision of theBankruptcy Court.  On November 19, 2004,the Bankruptcy Court entered an order appointing David S. Rubin as mediator forthe limited purposes of reviewing the pre-petition bid process to determinewhether it was performed in a proper and competent fashion and that the scopeof solicitations for bids was sufficient and performed in a timely fashion;reviewing the bids submitted and the process for evaluating the bids;determining the value of the bids submitted and recommending to the Courtwhether additional bid processes should be undertaken.  The United States Trustee has appointed aNon-Bondholder Unsecured Creditors Committee and a Bondholder Committee.

 

OnOctober 30, 2004, HCS I, Inc. and HCS II, Inc., the general partners of theHollywood Casino Shreveport partnership, HWCC-Louisiana, Inc. and ShreveportCapital Corporation commenced voluntary cases under Chapter 11 in theBankruptcy Court, which cases are pending.

 

On February 14, 2005, the court-appointed mediator, David S. Rubin,filed his report in our Chapter 11 case, which remains confidential.  The report concluded, among other things,that:

 

•                  The pre-petition bid process conducted by HCSand the Ad Hoc Committee of Noteholders of HCS was performed in a proper andcompetent fashion.

 

•                  The scope of the solicitations for bids was sufficientand adequate.

 

•                  Bids submitted during the period of the formalprocess were appropriately ranked based on both quantitative and qualitativefacts existing at the time the bids were made and evaluated.

 

•                  The decision to select the bid submitted byEldorado to pursue closure was appropriate.

 

•                  As of August 27, 2004, the Eldorado bidoffered the highest economic return to creditors.

 

•                  Although a subsequent bid made by BlackDiamond on October 25, 2004, on a purely quantitative economic basis, washigher and offered more total value than the amount of the already acceptedEldorado proposal, the economic difference between the face amounts of theEldorado offer and the October 25, 2004 Black Diamond offer, based on all ofthe circumstances existing as of October 25, 2004, was not demonstrablymaterial in terms of the scope of the proposed transaction.

 

•                  The attendant delay of a re-offering or otherauction process to again expose the assets to the market (including possiblelitigation in and out of the Court) may diminish interest in and offers for theHCS assets, may drive value down, and may have an effect on the Eldorado offer.

 

•                  A new formal auction process is not in thebest interest of HCS and its creditors.

 

Wesubsequently filed a revised reorganization Plan and Disclosure Statement withthe Bankruptcy Court on March 3, 2005. The Plan continues to provide for the acquisition of our hotel andcasino by Eldorado under the agreement announced last year.  The Bondholder Committee in the Chapter 11cases has joined us as a proponent of the Plan. The Bankruptcy Court has set a hearing on the approval of the DisclosureStatement for April 11, 2005.  BlackDiamond and KOAR International continue to express an interest in jointlyacquiring the hotel and casino and have asked the Bankruptcy Court forpermission to file their own competing plan. We intend to oppose that request. The Bankruptcy Court has set a hearing for April 4, 2005 on BlackDiamond’s motion to terminate our period of exclusivity for filing areorganization plan.

 

Althoughthe sale and restructuring process, including the Chapter 11 cases, has had anegative impact on our day-to-day operations, we believe that our significantcash on hand and cash from operations will continue to be sufficient to timelyfulfill ordinary course obligations to employees, customers and trade vendorsin full as they come due, pending completion of the transaction.  TheAgreement contemplates payment of such obligations in the ordinary course both duringand after the restructuring process.  Becausethe sale process has been unduly prolonged, management believes that it has hadand may continue to have an adverse effect on employee morale and turnover andon our competitive position with our customers.

 

7

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Other risk factors associatedwith the Chapter 11 proceedings include, among other things:

 

•                  our ability to obtain Court approval withrespect to motions in the Chapter 11 proceedings from time to time, 

 

•                  risks associated with third parties seekingand obtaining Court approval to terminate or shorten the exclusivity periodthat we have to propose and confirm one or more plans of reorganization, forthe appointment of a Chapter 11 trustee or to convert the cases to Chapter 7cases,

 

•                  our ability to offset the negative effectsthat the filing for reorganization under Chapter 11 has had on our business,including the loss in customer traffic, the impairment of vendor relations andthe constraints placed on available capital,

 

•                  our ability to maintain contracts, includingleases, that are critical to our operations, and

 

•                  the potential adverse impact of the Chapter 11cases and the resulting delays on our liquidity or results of operations.

* *

*We are in default on our notes.*

 

Weare in default under the indentures governing the Shreveport Notes and have notmade interest payments on the Shreveport Notes since February 2003.  Afterconsultation with an ad hoc committee of holders of the Shreveport Notes, wehave begun a process which we hope will result in the sale or other dispositionof the riverboat casino/hotel complex.  There can be no assurance,however, that the process will result in the sale or other disposition of theriverboat casino/hotel complex.  If itdoes, the sale proceeds will not likely be adequate to repay the ShreveportNotes in full.  We currently anticipatethat any such sale or other disposition would be effected through the pendingChapter 11 cases.

 

 *We have a history of losses.*

 

Wehave experienced net losses since our opening on December 20, 2000 andoperating losses in five out of the last six quarters.  There can be no assurance that we will notexperience operating losses in the future.  Because of our current capitalstructure and current levels of operations and revenue, we anticipate that wewill continue to experience net losses.

* *

*Our substantial indebtedness could adversely affect ouroperations and financial health.*

 

Wecontinue to have a significant amount of indebtedness.  Our substantialindebtedness could have important consequences to our operations and financialhealth.  For example, it could:

 

•                  increaseour vulnerability to general adverse economic and industry conditions;

 

•                  limitour flexibility in planning for, or reacting to, changes in our business andthe industry in which we operate; and

 

•                  placeus at a competitive disadvantage compared to our competitors that have a morefavorable capital structure.

 

Anyof the above-listed factors could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

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

 

Weexpect to use a portion of our limited cash for capital expenditures. Thesecapital expenditures could involve risks, including cost overruns, delays andfailure to obtain applicable permits and authorizations. In addition, due toour operating losses, substantial maintenance capital expenditures have beendeferred.

* *

*We face significant competition from other gaming operations.*

 

Thegaming industry is highly fragmented and characterized by a high degree ofcompetition among a large number of participants, many of which have financialand other resources that are greater than our resources. Competitive gamingactivities include casinos, video lottery terminals and other forms oflegalized gaming in Louisiana, Oklahoma and other jurisdictions.

 

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Legalizedgaming is currently permitted in various forms throughout the United States andin several Canadian provinces and on various lands taken into trust for thebenefit of certain Native Americans in the United States and Canada. Other jurisdictions may legalize gaming in the near future. In addition,established gaming jurisdictions could award additional gaming licenses orpermit the expansion of existing gaming operations.  New or expandedoperations by other persons will increase competition for our gaming operationsand could have 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 fourcasinos, three of which have operated in the Shreveport/Bossier City market forseveral years and have established customer bases.  In May 2003, anexisting race track, which had been acquired by one of the existing casinos inthe market, opened a temporary gaming facility with approximately 900 slotmachines.  That race track completed construction and opened a newpermanent facility accommodating 1,400 slot machines in April 2004.  Casino gaming is currently prohibited inseveral jurisdictions from which the Shreveport/Bossier City market drawscustomers, primarily Texas.  Although casino gaming is currently notpermitted in Texas, the Texas legislature has from time to time consideredproposals to authorize casino gaming.  In July 2003, the Chickasaw Nationannounced the opening of WinStar Casinos, a Las Vegas-style,110,000-square-foot gaming facility located in Oklahoma approximately 60 milesnorth of the Dallas/Fort Worth area.  Although gaming in Oklahoma islimited 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.  In November 2004,voters in Oklahoma approved several ballot initiatives which, when fullyimplemented, will (1) allow Class II-type games at three Oklahoma racetracks,the closest of which is approximately 200 miles from the Dallas/Fort Wortharea; (2) allow several new electronic gaming devices, including video poker,that are defined as “games of skill” at native-American casinos; and (3) allowcertain “player-pooled” table games such as poker and blackjack atnative-American casinos.  Since we draw asignificant amount of our customers from the Dallas/Fort Worth area, but arelocated approximately 190 miles from that area, we believe we will faceincreased competition from the WinStar Casinos, racetracks and similar types offacilities.

* *

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

 

Weare defendants in various lawsuits relating to matters incidental to ourbusiness. The nature of our business subjects us to the risk of lawsuits filedby customers, past and present employees, competitors and others in theordinary course.  Litigation, in general,can be expensive and time consuming and, as with all litigation, we cannotprovide any assurance as to the outcome. We believe that we have defenses tothese lawsuits and are contesting them vigorously; however, we cannot be surethat we will be successful in defending these claims. If we are not successful,these lawsuits could result in settlements or liability for damages that couldsignificantly impact our business, financial condition and results ofoperations.

* *

*We face extensive regulation from gaming and otherregulatory authorities.*

 

*Licensing Requirements.*As owners and operators of a gaming facility,we are subject to extensive state and local regulation. State and localauthorities require us to demonstrate suitability to obtain and retain variouslicenses and require that we have registrations, permits and approvals toconduct gaming operations.  Various regulatory authorities may, for anyreason set forth in the applicable legislation, rules and regulations, limit,condition, suspend or revoke a license or registration to conduct gamingoperations.  Like all gaming operators in the jurisdiction in which weoperate, we must periodically apply to renew our gaming licenses orregistrations and have the suitability of certain of our directors, officersand employees approved.  We cannot assure you that we will be able toobtain such renewals or approvals.  Regulatory authorities may also levysubstantial fines against us or seize our assets or the assets of oursubsidiaries or the people involved in violating gaming laws orregulations.  Any of these events could have a material adverse effect onour business, financial condition and results of operations.

 

Wehave demonstrated suitability to obtain and have obtained all governmentallicenses, registrations, permits and approvals necessary for us to operate ourexisting gaming facility.  We cannot assure you that we will be able toretain them or demonstrate suitability to obtain any new licenses,registrations, permits or approvals. The approval process can be time consumingand 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 of suitability. If a gaming authority requires a record or beneficial owner or holder of oursecurities to file a suitability application, the owner or holder must applyfor a finding of suitability within 30 days or at an earlier time prescribed bythe gaming authority.  The gaming authority has the power to investigatean owner’s or holder’s suitability and the owner or holder must pay all costsof the investigation.  If the owner or holder is found unsuitable, thenthe owner may be required by law to dispose of our securities.

* *

*Potential changes in regulatory environment.*  From time to time, legislators andspecial interest groups have proposed legislation that would expand, restrictor prevent gaming operations or which may otherwise adversely impact our operationsin the jurisdiction in which we operate. Any expansion of gaming or restrictionon or prohibition of our gaming operations could have a material adverse effecton our operating results.

 

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*Taxation.*We believethat the prospect of significant revenue is one of the primary reasons thatjurisdictions permit legalized gaming. As a result, gaming companies aretypically subject to significant taxes and fees in addition to normal federal,state and local income taxes, and such taxes and fees are subject to increaseat any time. We pay substantial taxes and fees with respect to our operations.From time to time, federal, state and local legislators and officials haveproposed changes in tax laws, or in the administration of such laws, affectingthe gaming industry. 

 

In addition, worseningeconomic conditions could intensify the efforts of state and local governmentsto raise revenues through increases in gaming taxes. It is not possible todetermine with certainty the likelihood of changes in tax laws or in theadministration of such laws. Such changes, if adopted, could have a materialadverse effect on our business, financial condition and results of operations

 

*Compliancewith other laws.*We are also subject to a variety of otherrules and regulations, including zoning, environmental, construction andland-use laws and regulations governing the serving of alcoholic beverages. Ifwe are not in compliance with these laws, it could have a material adverse effecton our business, financial condition and results of operations.

 

*Compliance with changing regulation of corporate governance and publicdisclosure may result in additional expenses and compliance risks**.***New or changing laws and regulations relating to corporate governanceand public disclosure, including the Sarbanes-Oxley Act of 2002 and new SECregulations, are creating uncertainty and higher compliance costs forcompanies.  If our gaming authorities,the SEC or our independent auditors were to conclude that our compliance withthe regulations was unsatisfactory, it might lead to a negative publicperception of us, subject us to increased regulatory scrutiny and penalties orotherwise adversely affect us.

 

*We depend on our key personnel.*

 

We are highly dependent onthe services of our General Manager, Melvyn Thomas, and our senior managementteam. Our ability to retain key personnel is affected by the competitiveness ofour compensation packages and other terms and conditions of employment. Our inabilityto retain our senior management team could adversely affect our business,financial condition and results of operations. Because the sale process has been unduly prolonged, management believesthat it has had and may continue to have an adverse effect on employee moraleand turnover.

 

*Inclement weather and other conditions could seriouslydisrupt our operations.*

 

The operation of our facilityis subject to disruptions or reduced patronage as a result of severe weatherconditions. Our facility is subject to risks including loss of service due tocasualty, mechanical failure, extended or extraordinary maintenance, flood,hurricane or other severe weather conditions. Reduced patronage or the loss ofservice at our casino for any period of time due to severe weather couldadversely affect our business, financial condition and results of operations.

 

*We are subject to environmental laws and potentialexposure to environmental liabilities.*

 

We are subject to variousfederal, state and local environmental laws and regulations that govern ouroperations, including emissions and discharges into the environment, and thehandling and disposal of hazardous and non-hazardous substances and waste.Failure to comply with such laws and regulations could result in costs forcorrective 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, we can make no assurances thatsuch matters will not have such an effect in the future.

 

*Energy and fuel price increases may adversely affectour costs of operations and our revenues.*

 

Our casino property usessignificant amounts of electricity, natural gas and other forms of energy.While no shortages of energy have been experienced, recent substantialincreases in the cost of electricity in the United States may negatively affectour results of operations. The extent of the impact is subject to the magnitudeand duration of the energy and fuel price increases. Dramatic increases in fuelprices may also affect customer visits.

** **

**Available Information**

 

For more information aboutus, visit our web site at www.hollywoodcasinoshreveport.com. Our electronicfilings with the Securities and Exchange Commission (including all Forms 10-K,10-Q, 8-K and any amendments to these reports) are available free of charge atthe Securities and Exchange Commission website www.sec.gov.

 

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**ITEM 2.****                  PROPERTY**

 

Thefollowing describes our principal real estate property:

 

Welease approximately nine acres of land in Shreveport, Louisiana, which containsa dockside casino with approximately 59,000 square feet along with a hotel andland-based pavilion with approximately 170,000 square feet that includesvarious entertainment amenities.

## ** **

## **ITEM 3.**                  LEGALPROCEEDINGS

 

Weare subject to various legal and administrative proceedings relating topersonal injuries, employment matters, commercial transactions and othermatters arising in the normal course of business. We do not believe that thefinal outcome of these matters will have a material adverse effect on ourconsolidated financial position or results of operations. In addition, wemaintain what we believe is adequate insurance coverage to further mitigate therisks of such proceedings. However, such proceedings can be costly, time consumingand unpredictable and, therefore, we can give no assurance that the finaloutcome of such proceedings may not materially impact our consolidatedfinancial condition or results of operations. Further, we can give no assurancethat the amount or scope of existing insurance coverage will be sufficient tocover losses arising from such matters.

 

Thefollowing proceedings could result in costs, settlements or damages thatmaterially impact our consolidated financial condition or operating results. Ineach instance, we believe that we have meritorious defenses and/orcounter-claims and intend to vigorously defend ourselves.

 

OnApril 23, 2000, the construction site for our facility suffered tornado damagethat contributed to the delay in our opening. We filed damage claims andreceived reimbursements from our insurance carriers during 2000 in the amountof approximately $1.5 million to cover substantially all of the cost ofrepairing 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 June16, 2003, a judgment was entered in that court awarding us approximately $3.9million (including interest but excluding attorney fees). Subsequently, anorder staying enforcement of judgment was entered by the court to allow thedefendant insurance companies time to file certain post-trial motions.Following the disposition of such motions, we and the defendants entered into asettlement of this lawsuit in December 2003, whereby we received $4.0 millionin settlement of the June 16, 2003 judgment and the defendant insurancecompanies paid $.8 million to our outside legal counsel in full satisfaction ofour attorneys’ fees relating to the claims in the lawsuit.  

 

Ina set of related matters, we are also seeking to recover damages from thegeneral contractor, the architect and certain other parties involved in theconstruction of the casino. For this and other reasons, we withheld payment ofcertain retainage amounts that the general contractor is currentlyseeking.  The general contractor has also submitted additional changeorders that we are disputing.  We previously recorded a liability in theamount of approximately $3.6 million in connection with the constructionproject. These matters were the subject of various state and federal courtproceedings as well as arbitrations. In May 2003, we entered into an agreementto arbitrate the various claims with the general contractor and thearchitect.  An initial arbitration hearing was conducted during June 2004on our claims for liquidated damages, on our offset claims for delay damagesand costs to repair defective work, and on the general contractor’s paymentclaims for unpaid contract balance, retainage, unapproved change orders, andincreased general conditions and extended overhead.  On July 27, 2004, thearbitration panel issued an Interim Award on the parties’ respective claims. The arbitration panel found that the general contractor was entitled to anaward of $6.1 million with interest offset by an award to us of $1.2 millionwith interest.  The award provides that interest is to accrue at thecontractual rate of 12% from different periods and will be calculated in thefinal award.  The general contractor also claims it is entitled to anadditional $.6 million plus interest for unapproved change orders.  Werecorded an additional $3.1 million liability during the third quarter of 2004with respect to the Interim Award issued by the arbitration panel.  We intend to vigorously contest the generalcontractor’s claims and to seek to modify the Interim Award.  Anarbitration hearing on our claims against the architect had tentatively beenscheduled during January 2005, but as a result of certain proceedings in theChapter 11 case, has been postponed until June 2005.  

 

InOctober 2003, the Bossier Parish Police Jury filed an action against us and theCity of Shreveport in the 26th Judicial District Court of Bossier Parish,Louisiana seeking to overturn the agreement between us and the City ofShreveport, 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 filed Exceptions of No Right and No

 

Causeof Action seeking dismissal of the suit together with the City ofShreveport.  A hearing was set on theExceptions for April 8, 2004, but was postponed and has not yet beenrescheduled.  We have vigorously contested all the allegations set forthin the suit and will continue to do so.  During the session of theLouisiana Legislature which ended on June 21, 2004, at least two bills wereproposed seeking to impose prospectively a boarding fee assessment to be leviedby the Bossier Parish Police Jury as a percentage of our monthly net gamingproceeds, but such bills were not enacted into law. Additionally, on April21, 2004, the Bossier Parish Police Jury notified us that it will conduct asales and use tax audit covering the period August 2000 forward directedprincipally at the tax that is alleged to be due on complimentary 

 

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services provided by us toour customers.  We have vigorously contested the claims set forth in theaudit request and will continue to do so.  We are currently innegotiations with the Bossier Parish Police Jury in an effort to settle thepending lawsuit, the effect of any potential future legislation and the salesand use tax audit.

 

Anumber of individual employees have brought similar gender-based employmentclaims against us under Title VII in Federal Court in Louisiana.  We arevigorously contesting all the allegations. The claims are in various stages ofdiscovery.

 

Aspreviously discussed in Item 1, on September 10, 2004, certain of our creditorsfiled an involuntary petition against us for relief under Chapter 11 of theU.S. Bankruptcy Code.  In addition, onOctober 30, 2004, HCS I, Inc., HCS II, Inc., HWCC-Louisiana, Inc. and ShreveportCapital Corporation commenced voluntary cases under Chapter 11, which cases arepending.

 

Allof the proceedings in which we are a defendant have been automatically stayedas a result of the involuntary petition for relief under Chapter 11 filed onSeptember 10, 2004.  We are or may becomea party in various legal proceedings with respect to the conduct of casino andhotel operations. Although a possible range of loss cannot be estimated, in theopinion of management, based upon the advice of counsel, settlement orresolution of these proceedings should not have a material adverse impact onour consolidated financial position or results of our operations.

## ** **

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

 

None.

** **

**PART II**

 

## **ITEM5.**                  MARKET FOR THE REGISTRANT’SCOMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES

 

Asof March 28, 2005, HCS I, Inc. holds an effective 99% partnership interestand HCS II, Inc. holds an effective 1% partnership interest in the Hollywood CasinoShreveport general partnership.

 

Asof March 28, 2005, 1,000 shares of common stock of Shreveport CapitalCorporation, $1.00 par value, are outstanding, all of which are owned by theHollywood Casino Shreveport general partnership.

 

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

## ** **

Thefollowing selected consolidated financial and operating data are derived fromour consolidated financial statements that have been audited by Deloitte &Touche LLP, our former independent registered public accounting firm, for theyears ended December 31, 2000, 2001 and 2002, and for the period from January1, 2003 through February 28, 2003 and by BDO Seidman, LLP, our currentindependent registered public accounting firm, for the period from March 1,2003 through December 31, 2003 and for the year ended December 31, 2004. The selected consolidated financial and operating data should be read inconjunction with our consolidated financial statements and Notes thereto,“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and the other financial information included herein.

 

Asa result of the acquisition of Hollywood Casino Corporation and itssubsidiaries, including us, by Penn National, we adopted a new basis ofaccounting which included, among other items, adjusting the carrying value ofcertain assets, including property and equipment, and certain liabilities,including long-term debt.  The differences in financial presentation fromthe Predecessor Basis to the Successor Basis includes the reclassification ofcash awards from promotional allowances to a reduction of casino revenue and areclassification of marketing giveaways and coupons from promotional allowancesto marketing expense.  These reclassifications had the effect for the year2002 of decreasing casino revenues by $4.5 million, decreasing promotionalallowances by $11.5 million and increasing operating expenses by $7.0million.  The effect for the predecessor period from January 1, 2003 toFebruary 28, 2003 was a decrease in casino revenues of $.7 million, a decreasein promotional allowances of $1.6 million and an increase in operating expensesof $.9 million.

 

12

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| ** **                                                  | ** ** | **Predecessor Basis**              | ** ** | **Successor Basis**                | ** ** |
|-------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                                  | ** ** | **Year Ended  December 31,  2000** | ** ** | **Year Ended  December 31,  2001** | ** ** | **Year Ended  December 31,  2002** | ** ** | **Period from  Jan. 1, 2003  Through  Feb. 28, 2003** | ** ** | **Period from  March 1, 2003  Through  Dec. 31, 2003** | ** ** | **Year Ended  December 31,  2004** | ** ** |
| ** **                                                  | ** ** | **(In thousands)**                 | ** ** |
| **Hollywood Casino Shreveport and  Subsidiaries**           |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| **Income statement data:**                                  |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Net revenues                                                |       | $                                  | 7,754      |                               | $          | 143,868 |   | $ | 146,356 |   | $ | 22,981 |   | $ | 113,924 |   | $ | 134,150 |   |
| Total operating expenses                                    |       | 21,458                             |       | 164,181                            |       | 144,989 |   | 22,705 |   | 112,056 |   | 136,643 |   |
| (Loss) income from operations                               |       | (13,704                            | )          | (20,313                            | )          | 1,367 |   | 276 |   | 1,868 |   | (2,493 | ) |
| Other non-operating income (expenses), net                  |       | (4,196                             | )          | (24,698                            | )          | (26,857 | ) | (4,439 | ) | (23,177 | ) | (26,903 | ) |
| Net loss                                                    |       | $                                  | (17,900    | )                                  | $          | (45,011 | ) | $ | (25,490 | ) | $ | (4,163 | ) | $ | (21,309 | ) | $ | (29,396 | ) |
|                                                        |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| **Other data:**                                             |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Net cash (used in) provided by operating  activities        |       | $                                  | (6,967     | )                                  | $          | (28,200 | ) | $ | (3,990 | ) | $ | (9,688 | ) | $ | 13,250 |   | $ | 3,157 |   |
| Net cash provided by (used in) investing  activities        |       | 21,615                             |       | 4,272                              |       | (1,465 | ) | (224 | ) | (369 | ) | (1,488 | ) |
| Net cash provided by (used in) financing  activities        |       | 3,690                              |       | 13,039                             |       | 617 |   | 561 |   | (345 | ) | (7 | ) |
| Depreciation and amortization                               |       | 506                                |       | 15,866                             |       | 16,157 |   | 2,715 |   | 8,104 |   | 9,660 |   |
| Interest expense (contractual interest of  $24,715 in 2004) |       | 9,991                              |       | 25,350                             |       | 26,744 |   | 4,456 |   | 20,870 |   | 17,237 |   |
| Capital expenditures                                        |       | 116,117                            |       | 4,993                              |       | 1,497 |   | 224 |   | 369 |   | 1,488 |   |
|                                                        |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| **Balance sheet data:**                                     |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                   |       | $                                  | 37,352     |                               | $          | 26,463 |   | $ | 21,625 |   | $ | 12,274 |   | $ | 24,810 |   | $ | 26,472 |   |
| Total assets                                                |       | 242,384                            |       | 212,034                            |       | 191,868 |   | 179,449 |   | 141,711 |   | 135,444 |   |
| Total debt*                                                 |       | 181,946                            |       | 190,105                            |       | 189,911 |   | 189,877 |   | 119,345 |   | 119,176 |   |
| Partners’ capital (deficiency)                         |       | 29,174                             |       | (8,699                             | )          | (33,572 | ) | (37,165 | ) | (22,386 | ) | (53,053 | ) |

 

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* For periods subsequent toMarch 1, 2003, total debt is net of a valuation allowance of $70,348.

 

13

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| ** **                                                        | ** ** | **Predecessor Basis**              | ** ** | **Successor Basis**                | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                                        | ** ** | **Year Ended  December 31,  2000** | ** ** | **Year Ended  December 31,  2001** | ** ** | **Year Ended  December 31,  2002** | ** ** | **Period from  Jan. 1, 2003  Through  Feb. 28, 2003** | ** ** | **Period from  March 1, 2003  Through  Dec. 31, 2003** | ** ** | **Year Ended  December 31,  2004** | ** ** |
| ** **                                                        | ** ** | **(In thousands)**                 | ** ** |
| **HWCC-Louisiana, Inc. and Subsidiaries**                         |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| **Income statement data:**                                        |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Net revenues                                                      |       | $                                  | 7,754      |                               | $          | 143,868 |   | $ | 146,356 |   | $ | 22,981 |   | $ | 113,924 |   | $ | 134,150 |   |
| Total operating expenses                                          |       | 21,724                             |       | 163,533                            |       | 144,989 |   | 22,705 |   | 112,056 |   | 136,674 |   |
| (Loss) income from operations                                     |       | (13,970                            | )          | (19,665                            | )          | 1,367 |   | 276 |   | 1,868 |   | (2,524 | ) |
| Other non-operating income (expenses), net  and minority interest |       | (4,062                             | )          | (26,851                            | )          | (28,272 | ) | (4,663 | ) | (24,228 | ) | (28,131 | ) |
| Net loss                                                          |       | $                                  | (18,032    | )                                  | $          | (46,516 | ) | $ | (26,905 | ) | $ | (4,387 | ) | $ | (22,360 | ) | $ | (30,655 | ) |
|                                                              |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| **Other data:**                                                   |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Net cash (used in) provided by operating  activities              |       | $                                  | (7,217     | )                                  | $          | (28,258 | ) | $ | (3,941 | ) | $ | (9,693 | ) | $ | 13,259 |   | $ | 3,122 |   |
| Net cash provided by (used in) investing  activities              |       | 21,615                             |       | 4,272                              |       | (1,465 | ) | (224 | ) | (369 | ) | (1,488 | ) |
| Net cash provided by (used in) financing  activities              |       | 3,978                              |       | 10,639                             |       | 617 |   | 569 |   | (345 | ) | (7 | ) |
| Depreciation and amortization                                     |       | 506                                |       | 15,866                             |       | 16,157 |   | 2,715 |   | 8,104 |   | 9,660 |   |
| Interest expense (contractual interest of  $24,715 in 2004)       |       | 9,991                              |       | 25,350                             |       | 26,744 |   | 4,456 |   | 20,870 |   | 17,237 |   |
| Capital expenditures                                              |       | 116,117                            |       | 4,993                              |       | 1,497 |   | 224 |   | 369 |   | 1,488 |   |
|                                                              |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| **Balance sheet data:**                                           |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                         |       | $                                  | 39,956     |                               | $          | 26,609 |   | $ | 21,820 |   | $ | 12,472 |   | $ | 25,017 |   | $ | 26,644 |   |
| Total assets                                                      |       | 252,017                            |       | 219,802                            |       | 199,787 |   | 187,363 |   | 142,842 |   | 136,679 |   |
| Total debt*                                                       |       | 184,445                            |       | 190,105                            |       | 189,911 |   | 189,877 |   | 119,345 |   | 119,176 |   |
| Shareholders’ equity (deficiency)                            |       | 34,293                             |       | (3,548                             | )          | (28,372 | ) | (31,959 | ) | 21,158 |   | (51,813 | ) |

 

----

* For periods subsequent toMarch 1, 2003, total debt is net of a valuation allowance of $70,348.

 

14

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

 

**Our Operations**

 

Weare a highly themed hotel and casino destination resort in Shreveport,Louisiana.  We enjoy high visibility and convenient access from Interstate20, the major highway that connects the Shreveport/Bossier City market with itsfeeder markets of Dallas/Ft. Worth and East Texas.  Our casino was builtnext to an existing riverboat gaming and hotel facility formerly operated byHarrah’s Entertainment and now operated by Sam’s Town.  There arecurrently five casinos and a racino operating in the Shreveport/Bossier Citymarket, which is the largest gaming market****inLouisiana.  The Shreveport/Bossier City gaming market permits continuousdockside gaming without cruising requirements or simulated cruising schedules,allowing us to operate 24 hours a day with uninterrupted access.

 

Ourmarketing strategy is designed to take advantage of our proximity to the largepopulation base of the greater Dallas/Ft. Worth metropolitan area and othermajor markets by targeting the local day-trip market and by utilizing our hotelrooms to expand our patron mix to include overnight visitors. We have alsocoordinated our restaurant and entertainment promotions to encourage overnightstays. By utilizing the data in our casino information systems, we are able toidentify our premium patrons, encourage their participation in our casinoplayer’s card program and design promotions and special events to this targetmarket.

 

Keyperformance indicators related to revenues are:

 

•                                          Gaming revenue indicators – slot handle, tablegame drop (volume indicators) and “win” or “hold” percentages, which are notfully controllable by us. Our normal slot win percentage is in the range of 6%to 7% of slot handle and our normal table games win percentage is in the rangeof 15% to 21% of table game drop; and

 

•                                          Hotel revenue indicators – hotel occupancy(volume indicator); average daily rate (“ADR,” price indicator); revenue peravailable room (“REVPAR”), a summary measure of hotel results, combining ADRand occupancy rate.

 

Ourproperty generates 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 operations to generatesufficient cash to repay debt, fund maintenance capital expenditures and fundnew capital projects.

 

TheShreveport/Bossier City gaming market is characterized by intense competitionand the market has not grown since we opened.  We compete directly withfour casinos, all of which have operated in the Shreveport/Bossier City marketfor several years and have established customer bases.  In May 2003, anexisting race track, which had been acquired by one of the existing casinos inthe market, opened a temporary gaming facility with approximately 900 slotmachines.  That race track completed construction and opened a newpermanent facility accommodating 1,400 slot machines in April 2004.  Casino gaming is currently prohibited inseveral jurisdictions from which the Shreveport/Bossier City market drawscustomers, primarily Texas.  Although casino gaming is currently notpermitted in Texas, the Texas legislature has from time to time consideredproposals to authorize casino gaming.  In July 2003, the Chickasaw Nationannounced the opening of WinStar Casinos, a Las Vegas-style,110,000-square-foot gaming facility located in Oklahoma approximately 60 milesnorth of the Dallas/Fort Worth area.  Although gaming in Oklahoma islimited 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 asignificant amount of our customers from the Dallas/Fort Worth area, but arelocated approximately 190 miles from that area, we believe we will faceincreased competition from the WinStar Casinos and similar types of facilities.

 

Themost important factors and trends contributing to our operating performancehave been:

 

## **•**                                          Thenegative aspects of the Chapter 11 proceedings on our operations.

 

## **•**                                          Intensecompetition in the Shreveport/Bossier City market.

 

## **•**                                          Thegeneral economic conditions in our principal market areas.

 

## **•**                                          Thelack of significant revenue growth in the Shreveport/Bossier City gaming marketsince 2001.

 

## **•**                                          Theintroduction of slot machines at Louisiana Downs, the opening of WinStarCasinos in Southern Oklahoma in 2003 and the recent expansion of the slotmachine facility at Louisiana Downs in 2004.

 

15

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**Overall Outlook**

 

Wehave experienced net losses since our opening on December 20, 2000 andoperating losses in five out of the last six quarters.  There can be no assurance that we will notexperience operating losses in the future.  Because of our current capitalstructure and current levels of operations and revenue, we anticipate that we willcontinue to experience net losses.  We are also in default under theterms of the indentures governing our Shreveport Notes and 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. Penn National has no obligation or current plans to provide anyadditional financial support to us. All of these matters continue to raisesubstantial doubt about our ability to continue as a going concern.

 

Weare in default under the indentures governing the Shreveport Notes and have notmade interest payments on the Shreveport Notes since February 2003. Afterconsultation with an ad hoc committee of holders of the Shreveport Notes, webegan a process which we hoped would result in the sale or other disposition ofthe riverboat casino/hotel complex. There can be no assurance, however, thatthe process will result in the sale or other disposition of the riverboatcasino/hotel complex.  If it does, thesale proceeds will not likely be adequate to repay the Shreveport Notes infull.  We currently anticipate that anysuch sale or other disposition would be effected through the pending Chapter 11cases.

 

 OnAugust 27, 2004, acting by and through our managing general partner, HCS I,Inc., we entered into an agreement with Eldorado providing for our acquisitionby certain affiliates of Eldorado.  On October 18, 2004, acting by andthrough HCS I, Inc., we entered into a definitive Investment Agreement withEldorado and certain of its affiliates providing for the acquisition of thereorganized Hollywood Casino Shreveport by Eldorado’s affiliates.  The Agreement contemplates a financial restructuringof Hollywood Casino Shreveport that will significantly reduce our outstandingsecured debt obligations and annual cash interest payments.  Under the proposed restructuring, holders ofour existing secured notes are to receive (1) $140 million of new firstmortgage notes, (2) interest in a corporation that will hold a $20 millionpreferred equity interest and a 25% non-voting equity interest in thereorganized Hollywood Casino Shreveport and (3) cash in an amount to bedetermined, in exchange for existing secured notes in the principal face amountof $189 million plus accrued interest.  Eldorado’s affiliates wouldacquire a 75% voting equity interest in the reorganized Hollywood CasinoShreveport.  We had intended toeffectuate the sale and related financial restructuring transaction through aprepackaged Chapter 11 bankruptcy reorganization, but as described below, aninvoluntary petition interrupted the process. On October 28, 2004, we filed a joint plan and disclosure statement thatincorporated the Eldorado transaction. The Agreement, which has been extended by amendment to June 30, 2005, remainssubject to subsequent noteholder solicitation and acceptance, approval by theBankruptcy Court of the Agreement, approval by the Louisiana Gaming ControlBoard and certain other conditions.

 

OnSeptember 10, 2004, certain of our creditors filed an involuntary petitionagainst us for relief under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court, Western District of Louisiana, located in Shreveport,Louisiana.  The petition was filed by Black Diamond, a holder of ournotes, who had previously participated in meetings with the ad hoc committeeand who had later submitted an unsuccessful bid to acquire us, and by two ofour construction contractors, who have been in litigation with us over amountsowing on our 1999 construction contract (see Item 3, Legal Proceedings).  A hearing on the petition was held on October29 and 30, 2004.  A Consensual Order forRelief was issued on October 30, 2004, and we became a “debtor-in-possession”.  We will continue to manage our assets andbusiness subject to the powers and supervision of the Bankruptcy Court.  On November 19, 2004, the Bankruptcy Courtentered an order appointing David S. Rubin as mediator for the limited purposesof reviewing the pre-petition bid process to determine whether it was performedin a proper and competent fashion and that the scope of solicitations for bidswas sufficient and performed in a timely fashion; reviewing the bids submittedand the process for evaluating the bids; determining the value of the bidssubmitted and recommending to the Court whether additional bid processes shouldbe undertaken.  The United States Trusteehas appointed a Non-Bondholder Unsecured Creditors Committee and a BondholderCommittee. 

 

OnOctober 30, 2004, HCS I, Inc. and HCS II, Inc., the general partners of theHollywood Casino Shreveport partnership, HWCC-Louisiana, Inc. and ShreveportCapital Corporation commenced voluntary cases under Chapter 11 in theBankruptcy Court, which cases are pending.

 

On February 14, 2005, the court-appointed mediator, David S. Rubin,filed his report in our Chapter 11 case, which remains confidential.  The report concluded, among other things,that:

 

•                  The pre-petition bid process conducted by HCSand the Ad Hoc Committee of Noteholders of HCS was performed in a proper andcompetent fashion.

 

•                  The scope of the solicitations for bids wassufficient and adequate.

 

16

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•                  Bids submitted during the period of the formalprocess were appropriately ranked based on both quantitative and qualitativefacts existing at the time the bids were made and evaluated. 

 

•                  The decision to select the bid submitted byEldorado to pursue closure was appropriate.

 

•                  As of August 27, 2004, the Eldorado bidoffered the highest economic return to creditors.

 

•                  Although a subsequent bid made by BlackDiamond on October 25, 2004, on a purely quantitative economic basis, washigher and offered more total value than the amount of the already acceptedEldorado proposal, the economic difference between the face amounts of theEldorado offer and the October 25, 2004 Black Diamond offer, based on all ofthe circumstances existing as of October 25, 2004, was not demonstrablymaterial in terms of the scope of the proposed transaction.

 

•                  The attendant delay of a re-offering or otherauction process to again expose the assets to the market (including possiblelitigation in and out of the Court) may diminish interest in and offers for theHCS assets, may drive value down, and may have an effect on the Eldorado offer.

 

•                  A new formal auction process is not in thebest interest of HCS and its creditors.

 

Wesubsequently filed a revised reorganization Plan and Disclosure Statement withthe Bankruptcy Court on March 3, 2005. The Plan continues to provide for the acquisition of our hotel andcasino by Eldorado under the agreement announced last year.  The Bondholder Committee in the Chapter 11cases has joined us as a proponent of the Plan. The Bankruptcy Court has set a hearing on the approval of the DisclosureStatement for April 11, 2005.  BlackDiamond and KOAR International continue to express an interest in jointlyacquiring the hotel and casino and have asked the Bankruptcy Court forpermission to file their own competing plan. We intend to oppose that request. The Bankruptcy Court has set a hearing for April 4, 2005 on Black Diamond’smotion to terminate our period of exclusivity for filing a reorganization plan.

 

Althoughthe sale and restructuring process, including the Chapter 11 cases, has had anegative impact on our day-to-day operations, we believe that our significantcash on hand and cash from operations will continue to be sufficient to timelyfulfill ordinary course obligations to employees, customers and trade vendorsin full as they come due, pending completion of the transaction.  TheAgreement contemplates payment of such obligations in the ordinary course bothduring and after the restructuring process. Because the sale process has been unduly prolonged, management believesthat it has had and may continue to have an adverse effect on employee moraleand turnover and on our competitive position with our customers.

 

Therecan be no assurance that the process will result in the sale or otherdisposition of the riverboat casino/hotel complex.  If it does, the sale proceeds will not likelybe adequate to pay the Shreveport Notes in full. HCS currently anticipates thatany transaction will be effected through the pending Chapter 11 cases.  Ifthe efforts to achieve a sale or other restructuring transaction areunsuccessful and the Chapter 11 cases are dismissed or relief from theautomatic stay is granted, the holders of the Shreveport Notes might pursue allrights and remedies they may have under the indentures.  

 

Cashflow from operations continues to be insufficient to fund interest accrued onthe Shreveport Notes, and we have not made the semiannual interest payments ofapproximately $12.3 million each due on such notes since February2003.  As previously described, after consultation with the ad hoccommittee of holders of the Shreveport Notes, we commenced a process to solicitbids from potential acquirers of Hollywood Casino Shreveport and entered intothe Agreement with Eldorado.  The uncertainties regarding the ultimatesuccess of the sales process, our existing defaults on the Shreveport Notes andour inability to cure such defaults other than through a successful sale orother restructuring transaction raises substantial doubt about our ability tocontinue as a going concern.

 

**FederalIncome Taxes**

 

Weare a partnership and accordingly are not subject to federal income taxes. Suchtaxes are the responsibility of our partners.  HWCC-Louisiana, Inc. andits subsidiaries are included in Penn National’s consolidated federal incometax return for periods subsequent to the acquisition and were included inHollywood Casino Corporation’s consolidated federal income tax return forperiods prior to the acquisition. Prior to our acquisition by Penn National, thebenefit for income taxes was based on the amount of tax that would be providedif a separate federal income tax return were filed.  As a result of theuncertainties discussed in Note 1 of HWCC-Louisiana, Inc. and subsidiaries’ consolidatedfinancial statements, no consolidated tax benefit was allocated toHWCC-Louisiana, Inc. and its subsidiaries based upon its contribution toconsolidated federal taxable income.  Statement of Financial AccountingStandards No. 109, “Accounting for Income Taxes,” 

 

17

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requires that the tax benefitof net operating loss carry forwards (“NOL’s”) and credit carryforwards,together with the tax benefit of deferred tax assets resulting from temporarydifferences, be recorded as an asset and, to the extent that management cannotassess that the utilization of all or a portion of such deferred tax assets ismore likely than not, a valuation allowance should be recorded.

 

Asa result of the acquisition of Hollywood Casino Corporation and itssubsidiaries by Penn National, a “change of control,” as defined inSection 382 of the Internal Revenue Code of 1986, as amended, occurred.Accordingly, the amount of HWCC-Louisiana, Inc.’s loss carryforwards, which atthe date of acquisition were $97 million, available for use in any one year byPenn National are approximately $15.3 million. Future treasury regulations,administrative rulings or court decisions may also affect Penn National’sfuture utilization of HWCC-Louisiana, Inc.’s loss carryforwards.

 

TheInternal Revenue Service is conducting an examination of Hollywood CasinoCorporation’s consolidated federal income tax returns for the years 1999through 2001 in which HWCC-Louisiana, Inc. was included.

 

**Year Ended December 31, 2004 Compared to Year Ended December31, 2003**

 

As a result of theacquisition of Hollywood Casino Corporation and its subsidiaries, including us,by Penn National, we adopted a new basis of accounting which included, amongother items, adjusting the carrying value of certain assets, including propertyand equipment and certain liabilities, including long-term debt.  We havealso made certain accounting reclassifications to the accompanying condensed consolidatedSuccessor Basis statements of operations to present them on a consistent basiswith those of other Penn National properties. Accordingly, comparisons with thePredecessor Basis statement of operations are not meaningful.

 

The results of the operationsof Hollywood Casino Shreveport for the period from January 1, 2003 throughFebruary 28, 2003, the period from March 1, 2003 through December 31, 2003 andfor the year ended December 31, 2004 are summarized below (in thousands).  The percentage of each component to netrevenues is presented for the comparable Successor Basis periods:

 
| ** **                          | ** ** | **Predecessor Basis**                                             | ** ** | ** ****Successor Basis**                            | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                          | ** ** | **Period from  January 1, 2003  through  February 28, 2003** | ** ** | **Period from  March 1, 2003 to  December 1, 2003** | ** ** | **Year Ended  December 31, 2004** | ** ** |
| Revenues:                           |       |                                                              |       |                                                     |       |   |   |   |   |   |   |
| Casino                              |       | $                                                                 | 22,730     |                                                     | $          | 105,330 |   | 92.46 | % | $ | 123,570 |   | 92.11 | % |
| Rooms                               |       | 1,353                                                             |       | 7,341                                                    |       | 6.44 | % | 8,521 |   | 6.35 | % |
| Food and beverage                   |       | 3,784                                                             |       | 17,890                                                   |       | 15.7 | % | 21,890 |   | 16.32 | % |
| Other                               |       | 376                                                               |       | 1,890                                                    |       | 1.66 | % | 2,441 |   | 1.82 | % |
| Less:  Promotional  allowances |       | (5,262                                                            | )          | (18,527                                                  | )          | -16.26 | % | (22,272 | ) | -16.60 | % |
| Net revenues                        |       | 22,981                                                            |       | 113,924                                                  |       | 100.00 | % | 134,150 |   | 100.00 | % |
| Operating expenses:                 |       |                                                              |       |                                                     |       |   |   |   |   |   |   |
| Casinos                             |       | 16,700                                                            |       | 57,225                                                   |       | 50.23 | % | 69,494 |   | 51.80 | % |
| Rooms                               |       | 344                                                               |       | 3,148                                                    |       | 2.76 | % | 3,559 |   | 2.65 | % |
| Food and beverage                   |       | 983                                                               |       | 15,287                                                   |       | 13.42 | % | 19,907 |   | 14.84 | % |
| Other                               |       | 516                                                               |       | 7,833                                                    |       | 6.88 | % | 10,125 |   | 7.55 | % |
| General and administrative          |       | 1,447                                                             |       | 20,459                                                   |       | 17.96 | % | 23,898 |   | 17.81 | % |
| Depreciation and  amortization      |       | 2,715                                                             |       | 8,104                                                    |       | 7.11 | % | 9,660 |   | 7.20 | % |
| Total operating expenses            |       | 22,705                                                            |       | 112,056                                                  |       | 98.36 | % | 136,643 |   | 101.86 | % |
| Income (loss) from  operations      |       | $                                                                 | 276        |                                                     | $          | 1,868 |   | 1.64 | % | $ | (2,493 | ) | -1.86 | % |

 

*Revenues*

* *

Ourcasino revenues continue to be impacted by the additional competition thatresulted from the opening of Louisiana Downs slots in May 2003, the opening ofthe WinStar Casinos in July 2003, the expansion of Louisiana Downs slots in May2004 and the weak economic conditions of the market area.  In order tomaintain our total revenue levels, we have made****changes in our marketing program to increase our players’club enrollment, increase trip frequency and promote more frequent play. Our hotel occupancy has been impacted by the marketing program changes asplayers are rewarded with additional play credits or cash instead of hotelrooms and a focus on the local market rather than the Dallas-Ft. Worthmarket.  Food and beverage revenues have increased over prior periods aschanges have been made to the buffet in terms of food item selection and foodquality.  Over the past year we have also replaced some of our slotmachines with new participation games in order to enhance our slot product.

 

18

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*Operating Expenses*

 

Casinoexpenses decreased as a result of our declining casino revenues and our plannedreductions in such expenses in response to the decline in casino revenues.  Other operating expenses have increased as aresult of our efforts to maintain our revenue levels.  Marketing expenseshave increased in the areas of media advertising for property awareness,players’ club promotion to enroll new players and direct mail campaigns toincrease trip frequency and play.  The new participation games haveresulted in additional fees being paid to the manufacturer.  Food andbeverage costs have increased as a result of rising food costs and the changesin the buffet menu.  We have continued to monitor staffing to properlymatch service to revenue levels and maintain tight controls on other generalexpenses.

* *

*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*

* *

Wehave determined that there is insufficient collateral to cover the interestportion of scheduled payments on the Shreveport Notes and have discontinuedaccruing interest on these obligations effective with the close of business onSeptember 10, 2004.  Contractual intereston these obligations is disclosed on the accompanying consolidated statement ofoperations for the year ended December 31, 2004.  Interest expense decreased primarily due tothe discontinuation of such accruals on the Shreveport Notes and theelimination of amortization of deferred finance fees as a result of the PennNational acquisition.

* *

*Other Expenses*

* *

Otherexpenses in 2004 include $6.7 million of reorganization costs incurred by legaland financial advisors in connection with debt restructuring negotiations andplanning.  These expenses have beenreduced by $.1 million, representing the estimated interest income earned oncash which has accumulated as a result of our not paying our debt obligationscurrently.****

** **

AnInterim Award was issued in July 2004 following an arbitration hearingregarding disputed claims with the general contractor and architect involved inthe initial construction of the Shreveport resort.  As a result, we recorded an additional $3.1million during the third quarter of 2004. We intend to vigorously contest the general contractor’s claims and toseek to modify the Interim Award.  An arbitration hearing on our claimsagainst the architect had tentatively been scheduled during January 2005, butas a result of certain proceedings in the Chapter 11 case, has been postponeduntil June 2005.  

 

**Year Ended December 31, 2003 Compared to Year Ended December31, 2002**

 

Asa result of the acquisition of Hollywood Casino Corporation and itssubsidiaries, including us, by Penn National, we adopted a new basis ofaccounting which included, among other items, adjusting the carrying value ofcertain assets, including property 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. 

 

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The results of the operations of Hollywood CasinoShreveport 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** | ** ** |
| Revenues:                           |       |                                   |       |                                                              |       |   |   |
| 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 in 2003 were negatively impacted as a resultof the opening of the temporary slot facility at Louisiana Downs in May 2003and the opening of the WinStar Casinos in July 2003.  Our revenues werealso negatively impacted by the continuing economic stagnation in our primarymarket area.  Consequently our operating expenses decreased as a result ofour declining revenues and our planned reductions in operating expenses inresponse to the decline in revenues.

 

*Depreciation and Amortization*

 

Depreciation and amortization expense decreasedsignificantly as a result of the revaluation of our fixed assets to theirestimated fair market values at the date of purchase by Penn National.

 

 *Interest Expense*

 

Interest expense decreased primarily due to thedecrease in contingent interest incurred on the Shreveport Notes and theelimination of amortization of deferred finance fees as a resulted of the PennNational acquisition.

 

*Other Expenses*

 

Other expenses in 2003 consist of reorganizationcosts incurred by legal and financial advisors in connection with debtrestructuring negotiations and planning. These expenses totaled $2.4 million.

 

20

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**LIQUIDITY AND CAPITAL RESOURCES**

 

*Outlook*

 

We have experienced net losses since our opening onDecember 20, 2000 and operating losses in five out of the last sixquarters.  There can be no assurance thatwe will not experience operating losses in the future.  Because of ourcurrent capital structure and current levels of operations and revenue, weanticipate that we will continue to experience net losses.   We arealso in default under the terms of the indentures governing our ShreveportNotes and have a deficiency in our partners’ capital account. Accordingly, ourexisting cash and cash flow from operations have not been sufficient to fundour capital needs and debt service under our current capital structure and wedo not believe that it will be sufficient for the foreseeable future.  Penn National has no obligation and does not planto provide any additional financial support to us. All of these matterscontinue to raise substantial doubt about our ability to continue as a goingconcern.

 

Under Chapter 11, actions to collect certain claimsagainst us in existence prior to the filing of the petitions for relief arestayed while we continue business operations as debtor-in-possession.  These claims are reflected in the December31, 2004 consolidated balance sheet as “liabilities subject to compromise”.  Additional claims may arise subsequent to thefiling date resulting from the rejection of executory contracts such as leasesand from the determination by the Bankruptcy Court of allowed claims forcontingencies and other disputed amounts. We received approval from the Bankruptcy Court to pay certain of its pre-petitionobligations, including employee wages and customer obligations.  We have determined that there is insufficientcollateral to cover the amounts owing on the Shreveport Notes and have discontinuedaccruing interest on these obligations effective with the close of business on September10, 2004.

 

*Cash flows*

 

Historically, our primary sources of liquidity andcapital resources have been cash flow from operations and proceeds from theissuance of debt securities.

 

Net cash provided by operating activities was $3.2 millionfor the year ended December 31, 2004. This consisted primarily of a net loss of$29.4 million; non-cash reconciling items of $10.0 million and a net increasein current liability accounts (partly offset by a net increase in current assetaccounts) of $22.4 million. If we had made the interest payments on the ShreveportNotes on February 1 and August 1, 2004 totaling approximately $24.6 million,operating activities would have had a negative cash flow of $21.4 millionfor the year ended December 31, 2004. Operating cash flows resulting from our reorganization consisted ofinterest received on cash accumulated amounting to $.1 million and professionalfees paid for services rendered amounting to $6.1 million.

 

Cash flows used in investing activities totaled $1.5 millionfor the year ended December 31, 2004. This amount was spent on maintenancecapital expenditures at the property.

 

Cash flows used in financing activities were notsignificant during the year ended December 31, 2004.

 

*Capital Expenditures*

 

During the year we spent approximately $1.5 millionon maintenance capital expenditures at the property.  In 2005, we are planning to spendapproximately $5.4 million on maintenance capital expenditures to include thepurchase of 254 new slot machines and the conversion and upgrade of anadditional 308 slot machines to “ticket in/ticket out” capability.

 

*$150 Million 13% First Mortgage Notes*

 

In August 1999, the Hollywood Casino Shreveportgeneral partnership and Shreveport Capital issued $150 million of the FirstMortgage Notes. Fixed interest on the First Mortgage Notes at the annual rateof 13% is payable on each February 1 and August 1. In addition,contingent interest accrues and is payable on each interest payment datesubsequent to the opening of the casino. The amount of contingent interest isequal to 5% of the consolidated cash flow of Hollywood Casino Shreveport forthe applicable period subject to a maximum contingent interest of$5 million for any four consecutive fiscal quarters. Contingent interestamounted to $.6 million and $.3 million for the years endedDecember 31, 2003 and 2004, respectively. Accrued contingent interestamounted to $1.8 million and $2.4 million at December 31, 2003 and2004, respectively. Contingent interest may not be paid to the extent thatpayment would result in certain financial coverage ratios not being met.Consequently, no contingent interest has been paid since the opening of thecasino.

 

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The First Mortgage Notes are secured by, among otherthings, (1) a first priority security interest in substantially all of theassets that comprise Hollywood Casino Shreveport other than certain assets thatsecure the Senior Secured Notes and up to $6 million in assets that may beacquired with future equipment financing; (2) a collateral assignment ofthe Hollywood Casino Shreveport’s interest in the principal agreements underwhich it was constructed and is currently operated and managed; and (3) acollateral assignment of certain licenses and permits with respect to theoperation and management of the casino. In addition, the First Mortgage Notesare guaranteed on a senior secured basis by HWCC-Louisiana, Inc., HCS I,Inc. and HCS II, Inc. (collectively, the “Guarantors”).

 

Such guarantees are secured by a first prioritysecured interest in substantially all of the Guarantors’ assets, including apledge of the capital stock of HCS I, Inc. and HCS II, Inc. and theirpartnership interests in Hollywood Casino Shreveport.

 

The First Mortgage Notes may be redeemed at any timeon or after August 1, 2004 at 103.25% of the then outstanding principalamount, decreasing to 100% on August 1, 2005.  (See Event of Defaultand Bankruptcy Filings, below, regarding required repurchase offer at 101%).

 

The indenture governing the First Mortgage Notes containsvarious provisions limiting our ability to borrow money, pay distributions onour equity interests or prepay debt, make investments, create liens, sellassets or enter into mergers or consolidations. In addition, the indenturerestricts the ability of the Guarantors and Shreveport Capital Corporation toacquire additional assets, become liable for additional obligations or engagein any significant business activities.

* *

*$39 Million 13% Senior Secured Notes*

 

In June 2001, Hollywood Casino Shreveport andShreveport Capital Corporation issued $39 million of the Senior Secured Notes.The Senior Secured Notes were issued at an initial premium of $1.2 million toyield interest at an effective rate of 12.21% per annum. Fixed interest on theSenior Secured 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. The amount of contingent interest isequal to 1.3% of the consolidated cash flow of Hollywood Casino Shreveport forthe applicable period subject to a maximum contingent interest of$1.3 million for any four consecutive fiscal quarters. Contingent interestamounted to $.2 million and $.1 million for the years ended December 31,2003 and 2004, respectively.  Accruedcontingent interest amounted to $.4 million and $.5 million at December 31,2003 and 2004, respectively. Contingent interest may not be paid to the extentthat payment would result in certain financial coverage ratios not being met.Consequently, no contingent interest has been paid since the opening of thecasino. Proceeds from the Senior Secured Notes were used, in part, to retireour then outstanding capital lease obligation with the remainder available forworking capital purposes.

 

Under the terms of certain intercreditor collateralagreements, the Senior Secured Notes are secured by, among other things,(1) a security interest in certain furniture, fixtures and equipmentacquired prior to the opening of the casino for $30 million and (2) asecurity interest on an equal basis in up to $10 million of the collateralwhich secures the First Mortgage Notes. The furniture, fixtures and equipmentin (1) above were obtained with the proceeds from the capital leaseobligation retired with a portion of the proceeds from the Senior SecuredNotes.

 

The Senior Secured Notes may be redeemed on the sameterms and conditions as the First Mortgage Notes. The indenture governing theSenior Secured Notes also carries substantially the same limitations, covenantsand restrictions as those included in the indenture governing the FirstMortgage Notes.

* *

*Event of default and bankruptcy filings*

 

We are in default under the indentures governing theShreveport Notes and have not made interest payments on the Shreveport Notessince February 2003. After consultation with an ad hoc committee of holders ofthe Shreveport Notes, we began a process which we hoped would result in thesale or other disposition of the riverboat casino/hotel complex. There can beno assurance, however, that the process will result in the sale or otherdisposition of the riverboat casino/hotel complex.  If it does, the sale proceeds will not likelybe adequate to repay the Shreveport Notes in full. We currently anticipate thatany such sale or other disposition would be effected through the pendingChapter 11 cases.

 

OnAugust 27, 2004, acting by and through our managing general partner, HCS I,Inc., we entered into an agreement with Eldorado providing for our acquisitionby certain affiliates of Eldorado.  On October 18, 2004, acting by andthrough HCS I, Inc., we entered into a definitive Investment Agreement withEldorado and certain of its affiliates providing for the acquisition of thereorganized Hollywood Casino Shreveport by Eldorado’s affiliates.   The Agreement contemplates a financialrestructuring of Hollywood Casino Shreveport that will significantly reduce ouroutstanding secured debt obligations and annual cash interest payments.  Under the proposed restructuring, holders of ourexisting secured notes are to receive (1) $140 million of new first mortgagenotes, (2) interest in a corporation that will hold a $20 million preferredequity interest and a 25% non-voting equity interest in the reorganizedHollywood Casino Shreveport and (3) cash in an amount to be determined, inexchange for existing secured notes in the principal face amount of $189million plus accrued interest.  Eldorado’s affiliates would acquire a 75%voting equity interest in the reorganized Hollywood Casino Shreveport.  We had intended toeffectuate the sale and related

 

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financialrestructuring transaction through a prepackaged Chapter 11 bankruptcyreorganization, but as described below, an involuntary bankruptcy petitioninterrupted the process.  On October 28,2004, we filed a joint plan and disclosure statement that incorporated theEldorado transaction.  The Agreement,which has been extended by amendment to June 30, 2005, remains subject tosubsequent noteholder solicitation and acceptance, approval by the BankruptcyCourt of the Agreement, approval by the Louisiana Gaming Control Board andcertain other conditions.

 

On September 10, 2004, certain of our creditors filedan involuntary petition against us for relief under Chapter 11 of the U.S.Bankruptcy Code with the U. S. Bankruptcy Court, Western District of Louisiana,located in Shreveport, Louisiana.  The petition was filed by BlackDiamond, a holder of our notes, who had previously participated in meetings withthe ad hoc committee and who had later submitted an unsuccessful bid to acquireus, and by two of our construction contractors, who have been in litigationwith us over amounts owing on our 1999 construction contract (see Item 3, LegalProceedings).  A hearing on the petitionwas held on October 29 and 30, 2004.  AConsensual Order for Relief was issued on October 30, 2004, and we became a “debtor-in-possession”.  We will continue to manage our assets andbusiness subject to the powers and supervision of the Bankruptcy Court.  On November 19, 2004, the Bankruptcy Courtentered an order appointing David S. Rubin as mediator for the limited purposesof reviewing the pre-petition bid process to determine whether it was performedin a proper and competent fashion and that the scope of solicitations for bidswas sufficient and performed in a timely fashion; reviewing the bids submittedand the process for evaluating the bids; determining the value of the bidssubmitted and recommending to the Court whether additional bid processes shouldbe undertaken.  The United States Trusteehas appointed a Non-Bondholder Unsecured Creditors Committee and a BondholderCommittee.

 

On October 30, 2004, HCS I, Inc. and HCS II, Inc.,the general partners of the Hollywood Casino Shreveport partnership,HWCC-Louisiana, Inc. and Shreveport Capital Corporation commenced voluntarycases under Chapter 11 in the Bankruptcy Court, which cases are pending.

 

On February 14, 2005, thecourt-appointed mediator, David S. Rubin, filed his report in our Chapter 11case, which remains confidential.  Thereport concluded, among other things, that:

 

•                  The pre-petition bid process conducted by HCSand the Ad Hoc Committee of Noteholders of HCS was performed in a proper andcompetent fashion.

 

•                  The scope of the solicitations for bids wassufficient and adequate.

 

•                  Bids submitted during the period of the formalprocess were appropriately ranked based on both quantitative and qualitativefacts existing at the time the bids were made and evaluated.

 

•                  The decision to select the bid submitted byEldorado to pursue closure was appropriate.

 

•                  As of August 27, 2004, the Eldorado bidoffered the highest economic return to creditors.

 

•                  Although a subsequent bid made by BlackDiamond on October 25, 2004, on a purely quantitative economic basis, washigher and offered more total value than the amount of the already acceptedEldorado proposal, the economic difference between the face amounts of theEldorado offer and the October 25, 2004 Black Diamond offer, based on all ofthe circumstances existing as of October 25, 2004, was not demonstrablymaterial in terms of the scope of the proposed transaction.

 

•                  The attendant delay of a re-offering or otherauction process to again expose the assets to the market (including possiblelitigation in and out of the Court) may diminish interest in and offers for theHCS assets, may drive value down, and may have an effect on the Eldorado offer.

 

•                  A new formal auction process is not in thebest interest of HCS and its creditors.

 

We subsequently filed a revised reorganization Planand Disclosure Statement with the Bankruptcy Court on March 3, 2005.  The Plan continues to provide for theacquisition of our hotel and casino by Eldorado under the agreement announcedlast year.  The Bondholder Committee inthe Chapter 11 cases has joined us as a proponent of the Plan.  The Bankruptcy Court has set a hearing on theapproval of the Disclosure Statement for April 11, 2005.  Black Diamond and KOAR International continueto express an interest in jointly acquiring the hotel and casino and have askedthe Bankruptcy Court for permission to file their own competing plan.  We intend to oppose that request.  The Bankruptcy Court has set a hearing forApril 4, 2005 on Black Diamond’s motion to terminate our period of exclusivityfor filing a reorganization plan.

 

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Although the sale and restructuring process,including the Chapter 11 cases, has had a negative impact on our day-to-dayoperations, we believe our significant cash on hand and cash from operationswill continue to be sufficient to timely fulfill ordinary course obligations toemployees, customers and trade vendors in full as they come due, pendingcompletion of the transaction.  The Agreement contemplates payment of suchobligations in the ordinary course both during and after the restructuringprocess.  Because the sale process hasbeen unduly prolonged  managementbelieves that it has had and may continue to have an adverse effect on employeemorale and turnover and on our competitive position with our customers.

 

There can be no assurance that the process willresult in the sale or other disposition of the riverboat casino/hotelcomplex.  If it does, the sale proceedswill not likely be adequate to pay the Shreveport Notes in full. We currentlyanticipate that any transaction will be effected through the pending Chapter 11cases.  If the efforts to achieve a sale or other restructuringtransaction are unsuccessful and the Chapter 11 cases are dismissed or relieffrom the automatic stay is granted, the holders of the Shreveport Notes mightpursue all rights and remedies they may have under the indentures.

 

**Commitments and contingencies**

 

*Contractual Cash Obligations*

 

The following table presents our contractual cashobligations as of December 31, 2004 (in thousands):

 

 
| ** **                            | ** ** | **Payments Due By Period** | ** ** |
|---------------------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **Total**                  | ** ** | **2005** | ** ** | **2006– 2007** | ** ** | **2008 - 2009** | ** ** | **2010 and After** | ** ** |
| 13%  First Mortgage Notes due 2006(1) |       |                       |       |   |   |   |   |   |   |   |   |
| Principal                             |       | $                          | 150,000    |   | $ | 150,000 |   | $ | — |   | $ | — |   | $ | — |   |
| Interest                              |       | 39,486                     |       | 39,486 |   | — |   | — |   | — |   |
| 13%  Senior Secured Notes due 2006(2) |       |                       |       |   |   |   |   |   |   |   |   |
| Principal                             |       | 39,000                     |       | 39,000 |   | — |   | — |   | — |   |
| Interest                              |       | 10,246                     |       | 10,246 |   | — |   | — |   | — |   |
| Purchase  obligations and commitments |       | 4,401                      |       | 4,160 |   | 241 |   | — |   | — |   |
| Operating  leases                     |       | 1,865                      |       | 372 |   | 386 |   | 280 |   | 827 |   |
| Other                                 |       | 6                          |       | 6 |   | — |   | — |   | — |   |
| Total                                 |       | $                          | 245,004    |   | $ | 243,270 |   | $ | 627 |   | $ | 280 |   | $ | 827 |   |

 

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(1)           The $150 million aggregate principal amount of13% First Mortgage Notes are in default.  The contractual cash obligationfor interest payments as of December 31, 2004 shown in the above table includesapproximately $6 million not reflected in the accompanying consolidatedfinancial statements which represents contractual interest for periodssubsequent to the close of business on September 10, 2004.

(2)           The $39 million aggregate principal amount of13% Senior Secured Notes are in default.  The contractual cash obligationfor interest payments as of December 31, 2004 shown in the above table includesapproximately $1.6 million not reflected in the accompanying consolidatedfinancial statements which represents contractual interest for periodssubsequent to the close of business on September 10, 2004.

 

Included in the foregoing amounts are significantpre-petition obligations.  Under theBankruptcy Code, actions to collect pre-petition indebtedness, as well as mostother pending litigation, are stayed and other contractual obligations againstus may not be enforced. In addition, we may assume or reject executorycontracts, including lease obligations. Therefore, the commitments shown in theabove table and discussed above may not reflect actual cash outlays in thefuture periods.

 

*Other Commercial Commitments*

 

None

 

*Management Contract for Hollywood Casino Shreveport*

 

HWCC-Shreveport, Inc., a wholly-owned subsidiary ofHollywood Casino Corporation, provides certain management services to us underthe terms of a management agreement. Under the terms of the managementagreement, HWCC-Shreveport, Inc. earns basic and incentive management fees forits services. The basic fee equals approximately 2% of our net revenues and theincentive fee equals the sum of (1) 5% of our earnings****beforeinterest, 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, we reimburse HWCC-Shreveport, Inc.for expenses incurred in connection with services provided under the managementagreement.

 

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Such fees amounted to $2.5 million for the fiscalyear 2004, the payment of which was deferred. Under the indenture and relateddocuments governing the Shreveport Notes, management fees are subordinated toall payments under the Shreveport Notes and may not be paid to the extent thattheir payment would result in certain financial coverage ratios not being met.Consequently, no management fees have been paid since the opening of thecasino.

 

*Shreveport Paddlewheels, L.L.C. Residual InterestPayments and Marine Services Agreement*

 

HCS I, Inc. and HCS II, Inc. have assumedHWCC-Louisiana, Inc.’s obligation to cause us to pay Shreveport Paddlewheels, L.L.C.,or Paddlewheels, 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 obligated to pay Paddlewheels a$30,000 monthly fee for marine services and to reimburse Paddlewheels forits direct expenses, if any, incurred with respect to those services. Thepayments to Paddlewheels were to be made for so long as it remained our jointventure partner.  We accrued distributions totaling $1.3 million andincurred marine services fees of $.4 million under these agreements duringfiscal year 2004.  Since July 10, 2003, we suspended payments toPaddlewheels due to the event of default on the Shreveport Notes.

 

*City of Shreveport Ground Lease*

 

We entered into a ground lease with the City of Shreveportfor the land on which the casino was built. The lease has an initial termending December 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 baserent, we pay a monthly percentage rent equal to the greater of(1) $.5 million per year or (2) the sum of 1% of our adjustedgross revenues and the amount by which 50% of the net income from our parkingfacilities exceeds a specified parking income credit.  Ground leaserentals amounted to approximately $1.8 million for the year ended December 31,2004, including percentage rentals amounting to $1.3 million.  Inaddition, the ground lease agreement calls for payments in lieu of admissionfees to the City of Shreveport and payments to the Bossier Parish School Boardamounting to 3.225% and .5375% of Net Gaming Proceeds (as defined in theagreement), respectively.  These additional charges amounted to $4.9 millionfor the year ending December 31, 2004.

 

**Critical Accounting Estimates**

 

Financial Reporting Release No. 60 requires allcompanies to include a discussion of critical accounting policies or methodsand 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 of long-lived tangible and intangibleassets, including goodwill*

 

Effective with the close of business on February 28,2003, we were acquired by Penn National as part of its acquisition of HollywoodCasino Corporation and its subsidiaries.  As a result of certain accounting requirements,we adjusted our assets and liabilities to reflect fair values as of the date ofacquisition.  The purchase price adjustments reflected in our consolidatedfinancial statements include the fair values of property and equipment based onindependent appraisals obtained by Penn National and a bond valuation allowancethat reduces the value of the Shreveport Notes to their estimated fair value.No goodwill was recorded in connection with the acquisition.

 

The purchase price allocation process required management’sestimates and judgments as to the remaining useful lives of the assetspurchased and the fair value of other assets, liabilities and debt. If growthrates, operating margins, fair value of debt or useful lives, among otherassumptions, differ from the estimates and judgments used in the purchase priceallocation, the amounts recorded in the consolidated financial statements couldresult in a possible impairment of the assets and a further adjustment to thebond valuation allowance.

 

AtDecember 31, 2004, we had a net property and equipment balance of $102.6 million,representing 75.7% of total assets. We depreciate property and equipment on astraight-line basis over their estimated useful lives. The estimated usefullives are based on the nature of the assets as well as our current operatingstrategy. Future events such as property expansions, new competition and newregulations, could result in a change in the manner in which we are usingcertain assets requiring changes in the estimated useful lives of such assets.In assessing

 

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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 losses for these assets. Such impairment losses would be recognizedas a non-cash component of operating income.

 

*Litigation, Claims and Assessments*

 

We utilize estimates for litigation, claims andassessments. 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 theestimates, which may have an adverse effect on our results of operations.Actual results could differ from these estimates.

 

*Recent Accounting Pronouncements*

 

##### ***In December 2004, the FinancialAccounting Standards Board (“FASB”) issued a revised Statement of FinancialAccounting Standards (“SFAS”) No. 123(R), “Share-Based Payment – an Amendmentof FASB Statements No. 123 and 95.”  SFAS No. 123(R) sets accountingrequirements for “share-based” compensation to employees and requires companiesto recognize in their income statements the grant-date fair value of stockoptions and other equity-based compensation and to recognize the cost over theperiod during which an employee is required to provide service in exchange forthe award.  We account for stock options granted by our parent company toour employees using the intrinsic-value method in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB25”) and related Interpretations.  Under the intrinsic-value method, becausethe exercise price of the employee stock options is greater than or equal tothe market price of the underlying stock on the date of grant, no compensationexpense is recognized.  SFAS No. 123(R)is effective for interim or annual periods beginning after June 15, 2005.  It is not currently anticipated thatadditional stock options will be issued to our employees; accordingly, theadoption of SFAS No. 123(R) is not expected to have a material impact on ourresults of operations or financial condition.***

##### *** ***

In December 2004, the FASB issued SFAS No. 153, “Exchangesof Nonmonetary Assets – An Amendment of APB Opinion No. 29,” which eliminatesthe exception for nonmonetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of nonmonetary assets thatdo not have commercial substance.  SFAS No. 153 is effective fornonmonetary asset exchanges occurring after June 15, 2005 and its adoption isnot expected to have a significant impact on our results of operations orfinancial condition.

 

In November 2004, the FASB issued SFAS No. 151, “InventoryCosts – An Amendment of ARB No. 43, Chapter 4,” which clarifies the accountingfor abnormal amounts of idle facility expense, freight, handling costs andwasted material (spoilage).  SFAS No. 151 is effective for inventory costsincurred in fiscal years beginning after June 15, 2005 and its adoption is notexpected to have a significant impact on our results of operations or financialcondition.

 

## **ITEM 7A**.               QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK

## ** **

Both the First Mortgage Notes issued to financeconstruction of the Hollywood Casino Shreveport and the Senior Secured Notesissued to retire lease financing and provide working capital include interestat 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.

 

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**ITEM 8****.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**Report of Independent Registered Public Accounting Firm**

 

Tothe Partners of Hollywood Casino Shreveport:

 

Wehave audited the accompanying consolidated balance sheets of Hollywood CasinoShreveport and subsidiaries (a Louisiana general partnership) as of December31, 2004 and 2003 and the related consolidated statements of operations, changein partners’ deficiency and cash flows for the year ended December 31, 2004 andthe period from March 1, 2003 through December 31, 2003.  Theseconsolidated financial statements are the responsibility of the Partnership’smanagement.  Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States) (PCAOB). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement. ThePartnership is not required to have, nor were we engaged to perform, an auditof its internal control over financial reporting.  Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Partnership’s internal control overfinancial reporting.  Accordingly, weexpress no such opinion.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall consolidated financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Hollywood CasinoShreveport and subsidiaries at December 31, 2004 and 2003, and the results oftheir operations and their cash flows for the year ended December 31, 2004 andthe period from March 1, 2003 through December 31, 2003 in conformity withaccounting principles generally accepted in the United States of America.

 

Theaccompanying financial statements have been prepared assuming that thePartnership will continue as a going concern.  As discussed in Note 1 tothe consolidated financial statements, the Partnership has suffered net lossesover several years, has a significant deficiency in its partners’ capital, andis in default under certain of its debt agreements.  These factors raisesubstantial doubt about the Partnership’s ability to continue as a goingconcern.  Management’s plans about these matters are more fully describedin Note 1, including its bankruptcy proceedings.  The consolidatedfinancial statements do not include any adjustments that might result from theoutcome of these uncertainties.

 

BDOSeidman, LLP

Philadelphia,Pennsylvania

January28, 2005

 

27

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**Report of Independent Registered Public Accounting Firm**

 

Tothe Partners of Hollywood Casino Shreveport:

 

Wehave audited the accompanying consolidated statements of operations, changes inpartners’ deficiency and cash flows for the period from January 1, 2003 throughFebruary 28, 2003 and for the year ended December 31, 2002 of Hollywood CasinoShreveport (a Louisiana general partnership and formerly known as QNOV) andsubsidiaries.  These financial statements are the responsibility of thePartnership’s management.  Our responsibility is to express an opinion onthese financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includesconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of thePartnership’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our audits provide a reasonable basis forour opinion.

 

Inour opinion, the consolidated financial statements present fairly, in allmaterial respects, the results of operations and cash flows of Hollywood CasinoShreveport and subsidiaries for the period from January 1, 2003 through February28, 2003, and the year ended December 31, 2002, in conformity with accountingprinciples generally accepted in the United States of America.

 

Theaccompanying financial statements have been prepared assuming that the Partnershipwill continue as a going concern.  As discussed in the *Predecessor Note* to the financialstatements under the caption *“LiquidityIssues,”* Hollywood Casino Shreveport may not be able to meet itsfinancial obligations.  In addition, as discussed in the *Predecessor Note,* the Partnership hasexperienced continuing net losses and has a significant deficiency in itspartners’ capital.  Both of these matters raise substantial doubt aboutthe Partnership’s ability to continue as a going concern.  Management’s plansconcerning these matters are also described in the *Predecessor Note*under the caption *“Liquidity Issues.”*  The financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

Deloitte& Touche LLP

Dallas,Texas

April11, 2003

 

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**HOLLYWOODCASINO SHREVEPORT AND SUBSIDIARIES**

**(Debtors-in-Possession)**

**CONSOLIDATEDBALANCE SHEETS(In thousands)**

 
| ** **                                                                           | ** ** | **Successor Basis** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                           | ** ** | **December 31.**    | ** ** |
| ** **                                                                           | ** ** | **2003**            | ** ** | **2004** | ** ** |
| **Assets**                                                                           |       |                |       |   |   |
| Current  assets:                                                                     |       |                |       |   |   |
| Cash  and cash equivalents                                                           |       | $                   | 24,810     |   | $ | 26,472 |   |
| Accounts  receivable, net of allowances of $730 and $802, respectively               |       | 1,698               |       | 2,234 |   |
| Inventories                                                                          |       | 1,974               |       | 1,512 |   |
| Prepaid  expenses and other current assets                                           |       | 2,113               |       | 2,320 |   |
| Total  current assets                                                                |       | 30,595              |       | 32,538 |   |
|                                                                                 |       |                |       |   |   |
| Property  and equipment:                                                             |       |                |       |   |   |
| Land  improvements                                                                   |       | 10,000              |       | 10,000 |   |
| Building  and improvements                                                           |       | 75,056              |       | 75,088 |   |
| Riverboat                                                                            |       | 15,379              |       | 15,392 |   |
| Furniture  and equipment                                                             |       | 18,408              |       | 19,839 |   |
|                                                                                 |       | 118,843             |       | 120,319 |   |
| Less-accumulated  depreciation                                                       |       | (8,100              | )          | (17,755 | ) |
|                                                                                 |       | 110,743             |       | 102,564 |   |
|                                                                                 |       |                |       |   |   |
| Other  assets                                                                        |       | 373                 |       | 342 |   |
|                                                                                 |       | $                   | 141,711    |   | $ | 135,444 |   |
| ** **                                                                           |       |                |       |   |   |
| **Liabilities and Partners’ Deficiency**                                        |       |                |       |   |   |
| Liabilities Not Subject to Compromise                                                |       |                |       |   |   |
| Current  liabilities:                                                                |       |                |       |   |   |
| Current  maturities of long-term debt, net of valuation allowance of $70,348 in 2003 |       | $                   | 119,345    |   | $ | — |   |
| Accounts  payable                                                                    |       | 5,723               |       | 1,967 |   |
| Accrued  liabilities                                                                 |       |                |       |   |   |
| Salaries  and wages                                                                  |       | 2,212               |       | 1,637 |   |
| Interest                                                                             |       | 24,780              |       | — |   |
| Gaming  and other taxes                                                              |       | 1,446               |       | 1,555 |   |
| Insurance                                                                            |       | 2,091               |       | 1,635 |   |
| Other                                                                                |       | 3,300               |       | 2,992 |   |
| Due  to affiliates, net of valuation allowance of $6,420 in 2003                     |       | 3,269               |       | 60 |   |
| Other  current liabilities                                                           |       | 1,528               |       | 1,276 |   |
| Total  current liabilities                                                           |       | 163,694             |       | 11,122 |   |
|                                                                                 |       |                |       |   |   |
| Liabilities  subject to compromise (Note 4)                                          |       | —              |       | 176,866 |   |
|                                                                                 |       |                |       |   |   |
| Other  noncurrent liabilities                                                        |       | 403                 |       | 509 |   |
|                                                                                 |       |                |       |   |   |
| Commitments  and contingencies                                                       |       |                |       |   |   |
|                                                                                 |       |                |       |   |   |
| Partners’  deficiency                                                           |       | (22,386             | )          | (53,053 | ) |
|                                                                                 |       | $                   | 141,711    |   | $ | 135,444 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**HOLLYWOODCASINO SHREVEPORT AND SUBSIDIARIES(Debtors-in-Possession)**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS(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  Through  December 31,  2003** | ** ** | **Year Ended  December 31,  2004** | ** ** |
|                                                          |       |                               |       |                                                          |       |   |   |   |   |
|  Revenues:                                               |       |                               |       |                                                          |       |   |   |   |   |
| Casino                                                        |       | $                                  | 146,070    |                                                          | $          | 22,730 |   | $ | 105,330 |   | $ | 123,570 |   |
| Rooms                                                         |       | 9,279                              |       | 1,353                                                         |       | 7,341 |   | 8,521 |   |
| Foods  and beverages                                          |       | 24,441                             |       | 3,784                                                         |       | 17,890 |   | 21,890 |   |
| Other                                                         |       | 2,473                              |       | 376                                                           |       | 1,890 |   | 2,441 |   |
|                                                          |       | 182,263                            |       | 28,243                                                        |       | 132,451 |   | 156,422 |   |
| Less  promotional allowances                                  |       | (35,907                            | )          | (5,262                                                        | )          | (18,527 | ) | (22,272 | ) |
| Net  revenues                                                 |       | 146,356                            |       | 22,981                                                        |       | 113,924 |   | 134,150 |   |
|                                                          |       |                               |       |                                                          |       |   |   |   |   |
| Expenses:                                                     |       |                               |       |                                                          |       |   |   |   |   |
| Casino                                                        |       | 106,391                            |       | 16,700                                                        |       | 57,225 |   | 69,494 |   |
| Rooms                                                         |       | 2,229                              |       | 344                                                           |       | 3,148 |   | 3,559 |   |
| Food  and beverage                                            |       | 6,784                              |       | 983                                                           |       | 15,287 |   | 19,907 |   |
| Other                                                         |       | 2,916                              |       | 516                                                           |       | 7,833 |   | 10,125 |   |
| General  and administrative                                   |       | 10,333                             |       | 1,447                                                         |       | 20,459 |   | 23,898 |   |
| Depreciation  and amortization                                |       | 16,157                             |       | 2,715                                                         |       | 8,104 |   | 9,660 |   |
| Impairment  loss                                              |       | 179                                |       | —                                                        |       | — |   | — |   |
|                                                          |       |                               |       |                                                          |       |   |   |   |   |
| Total  expenses                                               |       | 144,989                            |       | 22,705                                                        |       | 112,056 |   | 136,643 |   |
|                                                          |       |                               |       |                                                          |       |   |   |   |   |
| Income  (loss) from operations                                |       | 1,367                              |       | 276                                                           |       | 1,868 |   | (2,493 | ) |
|                                                          |       |                               |       |                                                          |       |   |   |   |   |
| Non-operating  income (expenses):                             |       |                               |       |                                                          |       |   |   |   |   |
| Interest  income                                              |       | 200                                |       | 17                                                            |       | 77 |   | 89 |   |
| Interest  expense (contractual interest of $24,715 in 2004)   |       | (26,744                            | )          | (4,456                                                        | )          | (20,870 | ) | (17,237 | ) |
| Equity  in loss of unconsolidated affiliate                   |       | (313                               | )          | —                                                        |       | — |   | — |   |
| Arbitration  settlement                                       |       | —                             |       | —                                                        |       | — |   | (3,120 | ) |
| Reorganization  costs, net of interest income of $105 in 2004 |       | —                             |       | —                                                        |       | (2,384 | ) | (6,635 | ) |
| Total  non-operating expenses, net                            |       | (26,857                            | )          | (4,439                                                        | )          | (23,177 | ) | (26,903 | ) |
|                                                          |       |                               |       |                                                          |       |   |   |   |   |
| Net  loss                                                     |       | $                                  | (25,490    | )                                                             | $          | (4,163 | ) | $ | (21,309 | ) | $ | (29,396 | ) |
|                                                               |            |                                    |            |                                                               |            |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes toconsolidated financial statements.

 

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**HOLLYWOODCASINO SHREVEPORT AND SUBSIDIARIES(Debtors-in-Possession)**

**CONSOLIDATEDSTATEMENT OF CHANGESIN PARTNERS’ DEFICIENCY (In thousands)**

 

**For the YearEnded December 31, 2002 and For the Period from January 1, 2003 Through February 28, 2003(Predecessor Basis)and For the Period From March 1, 2003 Through December 31, 2003 and**

**the YearEnded December 31, 2004 (Successor Basis)**

 
| ** **                                                                | ** ** | **Former  Partners** | ** ** | **HCS I, Inc** | ** ** | **HCS II,  Inc.** | ** ** | **Shreveport  Paddlewheels  L.L.C.** | ** ** | **Totals** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------|------------|----------------|------------|-------------------|------------|--------------------------------------|------------|------------|------------|
| **Predecessor Basis**                                                     |       |                 |       |           |       |              |       |                                 |       |       |       |
|                                                                      |       |                 |       |           |       |              |       |                                 |       |       |       |
| **Balances, January 1, 2002**                                             |       | $                    | (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  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  March 1, 2003  through December 31, 2003   |       | —               |       | (21,096        | )          | (213              | )          | —                               |       | (21,309    | )          |
|                                                                      |       |                 |       |           |       |              |       |                                 |       |       |       |
| **Balances, December 31, 2003**                                           |       | —               |       | (22,162        | )          | (224              | )          | —                               |       | (22,386    | )          |
| Partnership  distributions                                                |       | —               |       | (1,258         | )          | (13               | )          | —                               |       | (1,271     | )     |
| Net  loss                                                                 |       | —               |       | (29,102        | )          | (294              | )          | —                               |       | (29,396    | )          |
|                                                                      |       |                 |       |           |       |              |       |                                 |       |       |       |
| **Balances, December 31, 2004**                                           |       | $                    | —     |           | $          | (52,522           | )          | $                                    | (531       | )          | $          | — |   | $ | (53,053 | ) |

 

See accompanying notes toconsolidated financial statements.

 

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**HOLLYWOODCASINO SHREVEPORT AND SUBSIDIARIES (Debtors-in-Possession)**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (In thousands)**

 
| ** **                                                                                 | ** ** | **Predecessor Basis**              | ** ** | **Successor Basis**                               | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **Year ended  December 31,  2002** | ** ** | **Period from  January 1 to  February 28,  2003** | ** ** | **Period from  March 1 to  December 31,  2003** | ** ** | **Year Ended  December 31,  2004** | ** ** |
| **OPERATING ACTIVITIES:**                                                                  |       |                               |       |                                              |       |   |   |   |   |
| Net  loss                                                                                  |       | $                                  | (25,490    | )                                                 | $          | (4,163 | ) | $ | (21,309 | ) | $ | (29,396 | ) |
| Adjustments  to reconcile net loss to net cash (used in) provided by operating activities: |       |                               |       |                                              |       |   |   |   |   |
| Depreciation  and amortization, including amortization of premium                          |       | 17,274                             |       | 2,902                                             |       | 7,667 |   | 9,498 |   |
| Impairment  loss                                                                           |       | 179                                |       | —                                            |       | — |   | — |   |
| (Gain)  loss on disposal of assets                                                         |       | (16                                | )          | —                                            |       | — |   | 7 |   |
| Write  off investment in unconsolidated affiliate                                          |       | 313                                |       | —                                            |       | — |   | — |   |
| Provision  for doubtful accounts                                                           |       | 444                                |       | 55                                                |       | 451 |   | 463 |   |
| (Increase)  decrease in accounts receivable                                                |       | (635                               | )          | 185                                               |       | 3,919 |   | (999 | )  |
| Increase  (decrease) in accounts payable and accrued liabilities                           |       | 1,643                              |       | (9,124                                            | )     | 20,988 |   | 20,536 |   |
| Net  change in affiliate balances                                                          |       | 2,316                              |       | 577                                               |       | 2,195 |   | 2,908 |   |
| Net  change in other current assets and liabilities                                        |       | (151                               | )          | (140                                              | )          | (756 | )  | 3 |   |
| Net  change in other noncurrent assets and liabilities                                     |       | 133                                |       | 20                                                |       | 95 |   | 137 |   |
| Net  cash (used in) provided by operating activities                                       |       | (3,990                             | )          | (9,688                                            | )          | 13,250 |   | 3,157 |   |
|                                                                                       |       |                               |       |                                              |       |   |   |   |   |
| **INVESTING ACTIVITIES:**                                                                  |       |                               |       |                                              |       |   |   |   |   |
| Purchases  of property and equipment                                                       |       | (1,497                             | )          | (224                                              | )          | (369 | ) | (1,488 | ) |
| Proceeds  from the disposal of assets                                                      |       | 32                                 |       | —                                            |       | — |   | — |   |
| Net  cash used in investing activities                                                     |       | (1,465                             | )          | (224                                              | )          | (369 | ) | (1,488 | ) |
|                                                                                       |       |                               |       |                                              |       |   |   |   |   |
| **FINANCING ACTIVITIES:**                                                                  |       |                               |       |                                              |       |   |   |   |   |
| Repayment  of long-term debt                                                               |       | (7                                 | )          | (1                                                | )          | (7 | ) | (7 | ) |
| Deferred  financing costs                                                                  |       | (5                                 | )          | —                                            |       | — |   | — |   |
| Capital  contributions                                                                     |       | 2,081                              |       | 800                                               |       | — |   | — |   |
| Partner  distributions                                                                     |       | (1,452                             | )          | (238                                              | )          | (338 | ) | — |   |
| Net  cash provided by (used in) financing activities                                       |       | 617                                |       | 561                                               |       | (345 | ) | (7 | ) |
|                                                                                       |       |                               |       |                                              |       |   |   |   |   |
| Net  (decrease) increase in cash and cash equivalents                                      |       | (4,838                             | )          | (9,351                                            | )          | 12,536 |   | 1,662 |   |
| Cash  and cash equivalents at beginning of period                                          |       | 26,463                             |       | 21,625                                            |       | 12,274 |   | 24,810 |   |
| Cash  and cash equivalents at end of period                                                |       | $                                  | 21,625     |                                              | $          | 12,274 |   | $ | 24,810 |   | $ | 26,472 |   |
|                                                                                            |            |                                    |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes toconsolidated financial statements.

 

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**HOLLYWOODCASINO SHREVEPORT AND SUBSIDIARIES (Debtors-in-Possession)**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

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

### ** **

**Business**

 

The Hollywood Casino Shreveport resort consists of a403-room, all-suite, art deco-style hotel, and a three-level riverboat docksidecasino that opened on December 20, 2000. The casino contains approximately59,000 square feet of space with approximately 1,400 slot machines, 61 tablegames and ten poker tables.

 

The centerpiece of the resort is a 170,000 squarefoot land-based pavilion housing numerous restaurants and entertainmentamenities.  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.  Hollywood Casino Shreveport also featuresthe unique Hollywood theme throughout its gaming, dining and entertainmentfacilities that has been successfully applied at other properties owned by itsparent, Hollywood Casino Corporation.

 

The Hollywood Casino Shreveport resort is owned bythe Hollywood Casino Shreveport general partnership (“HCS”) which, through HCSI, Inc. and HCS II, Inc., is in turn owned by HWCC-Louisiana, Inc. (“HCL”), aLouisiana corporation.  HCL is wholly-owned by Hollywood CasinoCorporation (“HCC”).  HCS I, Inc. has an effective 99% interest in HCS andis its managing general partner, and HCS II, Inc. has an effective 1% interestin HCS.  Shreveport Paddlewheels, L.L.C. (“Paddlewheels”), a Louisianalimited liability company, has a residual interest in HCS.  HCS operatesHollywood Casino Shreveport under a management agreement with HWCC-Shreveport,Inc., a wholly-owned subsidiary of HCC.

 

**Acquisition of Hollywood Casino Shreveport**

 

Effective with the close of business on February 28,2003, Penn National Gaming, Inc. (“Penn National”) completed the acquisition ofHCC and its subsidiaries, including HCS.  Penn National “pushed down” itsbasis in HCS in accordance with Staff Accounting Bulletin No. 54, “Push DownBasis of Accounting Required in Certain Limited Circumstances.”  Theaccompanying consolidated financial statements for the period following theacquisition (“Successor Period”) include management’s assessment of thepurchase price adjustments required in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 141, “Business Combinations”.  SFAS No. 141 requires that assets andliabilities 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 10 for Predecessor Note).

 

The purchase price adjustments reflected on theaccompanying 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 (including thecarryover deficiency of the former partners) were adjusted by $37.2 million toa zero basis as of the acquisition date. No goodwill was recorded in connectionwith the acquisition.

 

A valuation allowance in the amount of $70.3 millionwas established with respect to the $150 million 13% First Mortgage Notes withcontingent interest due 2006 (the “First Mortgage Notes”) and the $39 million13% Senior Secured Notes with contingent interest due 2006 (the “Senior SecuredNotes” and, together with the First Mortgage Notes, 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 $6.4million was established at the acquisition date to fully reserve the managementfee payable to a subsidiary of HCC.  Such management fee is subordinatedin payment to the Shreveport Notes.

 

The differences in financial presentation from thePredecessor Basis to the Successor Basis include the reclassification of cashawards from promotional allowances to a reduction of casino revenues and areclassification of marketing giveaways and coupons from promotional allowancesto marketing expense.  The effect for the predecessor period from January1, 2003 to February 28, 2003 was a decrease in casino revenue of $.7 million, adecrease in promotional allowances of $1.6 million and an increase in operatingexpenses of $.9 million.  In addition,depreciation of property and equipment for periods subsequent to March 1,2003 have been adjusted to reflect the revised estimates of fair valueestablished as a result of the aforementioned appraisal.

 

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**Sale of Property and Bankruptcy Filings**

 

As described in Note 3, HCS failed to make a requiredrepurchase offer for the Shreveport Notes and has failed to make the August 1,2003, February 1, 2004 and August 1, 2004 interest payments on the ShreveportNotes aggregating approximately $36.9 million.

 

In addition, HCS has experienced net losses sinceinception and operating losses in five out of the last six quarters and has asignificant deficiency in its partners’ capital.  Accordingly, managementbelieves that HCS’s existing cash and cash flow from operations will not besufficient to fund its operating and capital needs for the next 12months.  All of these matters raise substantial doubt about HCS’s abilityto continue as a going concern.  Theaccompanying consolidated financial statements do not include any adjustmentsthat might result from the outcome of these uncertainties.

 

On February 3, 2004, HCS I, Inc., the managinggeneral partner of HCS, announced that its Board of Directors (the “Board”) hadauthorized the initiation of a process that it hoped would result in the saleor other disposition of the riverboat casino/hotel complex. The Board furtherauthorized HCS’s financial advisor, Libra Securities LLC, to begin contactingpotential acquirers. The Board also authorized the creation of an independentcommittee consisting of two directors not employed directly by Penn National tooversee the process. The Board created the independent committee in the eventthat Penn National elected to participate as a bidder in the process.  PennNational decided not to participate in the bid process.  The Board tookaction after consultation with an ad hoc committee of holders of the ShreveportNotes.

 

On August 27, 2004, HCS, acting by and through itsmanaging general partner, HCS I, Inc., entered into an agreement with EldoradoResorts, LLC (“Eldorado”) providing for the acquisition of HCS by certainaffiliates of Eldorado.  On October 18, 2004, HCS, acting by and throughits managing general partner, HCS I, Inc., entered into a definitive InvestmentAgreement (the “Agreement”) with Eldorado, Eldorado Shreveport #1, LLC andEldorado Shreveport #2, LLC (together with Eldorado Shreveport #1, LLC, the “Investors”)providing for the acquisition of the reorganized HCS by the Investors.  The Investors are each an affiliate ofEldorado.  The Agreement contemplates afinancial restructuring of HCS that will significantly reduce outstandingsecured debt obligations and annual cash interest payments.  Under the proposed restructuring, holders ofHCS’s existing secured notes are to receive (1) $140 million of new firstmortgage notes, (2) interest in a corporation that will hold a $20 millionpreferred equity interest and a 25% non-voting equity interest in thereorganized HCS and (3) cash in an amount to be determined, in exchange forexisting secured notes in the principal face amount of $189 million plusaccrued interest.  The Investors would acquire a 75% voting equityinterest in the reorganized HCS.  HCS hadintended to effectuate the sale and related financial restructuring transactionthrough a prepackaged Chapter 11 bankruptcy reorganization, but as describedbelow, an involuntary bankruptcy petition interrupted the process.  On October 28, 2004, HCS filed a joint planand disclosure statement that incorporated the Eldorado transaction.  The Agreement, which has been extended byamendment to June 30, 2005, remains subject to subsequent noteholdersolicitation and acceptance, approval by the Bankruptcy Court of the Agreement,Louisiana Gaming Control Board (“LGCB”) approval and certain other conditions.

 

On September 10, 2004, certain creditors of HCS filedan involuntary petition against HCS for relief under Chapter 11 of the U.S.Bankruptcy Code with the U. S. Bankruptcy Court, Western District of Louisiana,located in Shreveport, Louisiana.  The petition was filed by Black DiamondCapital Management, LLC (“Black Diamond”), a holder of HCS’s notes, who hadpreviously participated in meetings with the ad hoc committee and who had latersubmitted an unsuccessful bid to acquire HCS, and by two constructioncontractors who have been in litigation with HCS over amounts owing on HCS’s1999 construction contract (see Note 5). A hearing on the petition was held on October 29 and 30, 2004.  A Consensual Order for Relief was issued onOctober 30, 2004, and HCS became a “debtor-in-possession”.  HCS will continue to manage its assets andbusiness subject to the powers and supervision of the Bankruptcy Court.  On November 19, 2004 the Bankruptcy Courtentered an order appointing David S. Rubin as mediator for the limited purposesof reviewing the pre-petition bid process to determine whether it was performedin a proper and competent fashion and that the scope of solicitations for bidswas sufficient and performed in a timely fashion; reviewing the bids submittedand the process for evaluating the bids; determining the value of the bidssubmitted and recommending to the Court whether additional bid processes shouldbe undertaken.  The United States Trusteehas appointed a Non-Bondholder Unsecured Creditors Committee and a BondholderCommittee.

 

On October 30, 2004, HCS I, Inc. and HCS II, Inc.,the general partners of the Hollywood Casino Shreveport partnership, HCL andShreveport Capital commenced voluntary cases under Chapter 11 in the BankruptcyCourt, which cases are pending.

 

On February 14, 2005, the court-appointed mediator,David S. Rubin, filed his report in our Chapter 11 case, which remainsconfidential.  The report concluded,among other things, that (1) the pre-petition bid process conducted by HCS andthe Ad Hoc Committee of Noteholders of HCS was performed in a proper andcompetent fashion; (2) the scope of the solicitations for bids was sufficientand adequate; (3) bids submitted during the period of the formal process wereappropriately ranked based on both quantitative and qualitative facts existingat the time the bids were made and evaluated; (4) the decision to select thebid submitted by Eldorado to pursue closure was appropriate; (5) as of August27, 2004, the Eldorado bid offered the highest economic return to creditors;(6) although a subsequent bid made by Black Diamond on October 25, 2004,on a purely quantitative economic basis, was higher and offered more totalvalue than the amount of the already accepted Eldorado proposal, the economicdifference between the face amounts of the Eldorado offer and the October 25,2004 Black Diamond offer, based on all of the circumstances existing as ofOctober 25, 2004, was not demonstrably material in terms of the scope of theproposed

 

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transaction; (7) theattendant delay of a re-offering or other auction process to again expose theassets to the market (including possible litigation in and out of the Court)may diminish interest in and offers for the HCS assets, may drive value down,and may have an effect on the Eldorado offer; and (8) a new formal auctionprocess is not in the best interest of HCS and its creditors.

 

HCS subsequently filed a revised reorganization Planand Disclosure Statement with the Bankruptcy Court on March 3, 2005.  The Plan continues to provide for theacquisition of HCS’s hotel and casino by Eldorado under the agreement announcedlast year.  The Bondholder Committee inthe Chapter 11 cases has joined HCS as a proponent of the Plan.  The Bankruptcy Court has set a hearing on theapproval of the Disclosure Statement for April 11, 2005.  Black Diamond and KOAR International continueto express an interest in jointly acquiring the hotel and casino and have askedthe Bankruptcy Court for permission to file their own competing plan.  Management intends to oppose thatrequest.  The Bankruptcy Court has set ahearing for April 4, 2005 on Black Diamond’s motion to terminate HCS’s periodof exclusivity for filing a reorganization plan.

 

Although the sale and restructuring process,including the Chapter 11 cases, has had a negative impact on its day-to-dayoperations, management believes that HCS’s significant cash on hand and cashfrom operations will continue to be sufficient to timely fulfill ordinarycourse obligations to employees, customers and trade vendors in full as theycome due, pending completion of the transaction.  The Agreementcontemplates payment of such obligations in the ordinary course both during andafter the restructuring process.  Becausethe sale process has been unduly prolonged, management believes that it had hadand may continue to have an adverse effect on employee morale and turnover andon HCS’s competitive position with its customers.

 

There can be no assurance that the process willresult in the sale or other disposition of the riverboat casino/hotelcomplex.  If it does, the sale proceedswill not likely be adequate to pay the Shreveport Notes in full.  Management currently anticipates that anytransaction will be effected through the pending Chapter 11 cases.  If theefforts to achieve a sale or other restructuring transaction are unsuccessfuland the Chapter 11 cases are dismissed or relief from the automatic stay isgranted, the holders of the Shreveport Notes might pursue all rights andremedies they may have under the indentures.  HCS and Shreveport Capitaldid not make the August 1, 2003, February 1, 2004, August 1, 2004 and February1, 2005 interest payments of approximately $12.3 million each, which were dueon the Shreveport Notes. As previously noted, the Shreveport Notes have been indefault under the terms of their respective note indentures since March 2003.

 

As a result of the Chapter 11 cases, the accompanyingconsolidated financial statements of HCS and its subsidiaries have beenprepared in accordance with Statement of Position No. 90-7, “FinancialReporting by Entities in Reorganization Under the Bankruptcy Code.”   Under Chapter 11, actions to collect certainclaims against HCS in existence prior to the filing of the petitions for reliefare stayed while HCS continues business operations asdebtor-in-possession.  These claims arereflected in the December 31, 2004 consolidated balance sheet as “liabilitiessubject to compromise”.   Additionalclaims may arise subsequent to the filing date resulting from the rejection ofexecutory contracts such as leases and from the determination by the BankruptcyCourt of allowed claims for contingencies and other disputed amounts.  HCS received approval from the BankruptcyCourt to pay certain of its pre-petition obligations, including employee wagesand customer obligations.  HCS hasdetermined that there is insufficient collateral to cover the amounts owing onthe Shreveport Notes and has discontinued accruing interest on theseobligations effective with the close of business on September 10, 2004.  Contractual interest on these obligations isdisclosed on the accompanying consolidated statement of operations for the yearended December 31, 2004.

 

### **2.            Summary of Significant Accounting Policies**

### ** **

**Principles of Consolidation**

 

The consolidated financial statements include theaccounts of HCS and its wholly-owned subsidiary, Shreveport Capital Corporation(collectively, “HCS”). All significant intercompany accounts and transactionshave been eliminated in consolidation.

 

**Use of Estimates**

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to make estimatesand assumptions 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 Equivalents**

 

HCS considers all cash balances and highly liquidinvestments with original maturities of three months or less to be cashequivalents.

 

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**Concentration of Credit Risk**

 

Financial instruments that potentially subject HCS tocredit risk consist of cash equivalents and accounts receivable.

 

HCS’s policy is to review the amount of creditexposure to any one financial institution and place investments with financialinstitutions evaluated as being creditworthy. In the ordinary course ofbusiness, HCS has bank deposits and overnight repurchase agreements that mayexceed federally insured limits.

 

Concentration of credit risk, with respect to casinoreceivables, is limited through HCS’s credit evaluation process.  HCS issues markers to approved casinocustomers following background checks and investigations of creditworthiness.

 

**Allowance for Doubtful Accounts**

 

Accounts are written off when management determinesthat an account is uncollectible. Recoveries of accounts previously written off are recorded whenreceived.  An estimated allowance fordoubtful accounts is determined to reduce HCS’s receivables to their carryingvalue, which approximates fair value. The allowance is estimated based on historical collection experience,specific review of individual customer accounts, and current economic andbusiness conditions.  Historically, HCShas not incurred any significant credit-related losses.

 

**Fair Value of Financial Instruments**

 

The following methods and assumptions are used toestimate the fair value of each class of financial instruments for which it ispractical to estimate:

 

Cash and Cash Equivalents:  The carrying amountapproximates the fair value due to the short maturity of the cash equivalents.

 

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

 

**Property and Equipment**

 

Property and equipment are stated at cost.  Maintenance and repairs that do not addmaterially to the value of the asset nor appreciably prolong its useful lifeare charged to expense as incurred. Gains or losses on the disposal of property and equipment are includedin the determination of income.

 

Depreciation of property and equipment andamortization of leasehold improvements are provided using the straight-linemethod over the following estimated 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 |   |

 

HCS reviews the carrying values of its long-livedassets for possible impairment whenever events or changes in circumstancesindicate that the carrying amount of the assets may not be recoverable based onundiscounted estimated future operating cash flows.  As of December 31, 2004, HCS hasdetermined that no impairment has occurred.

 

**Inventory**

 

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

 

**Deferred Financing Costs**

 

During the Predecessor Period, deferred financingcosts that were incurred by HCS in connection with the issuance of debt weredeferred and amortized to interest expense over the life of the underlyingindebtedness using the interest method adjusted to reflect any earlyrepayments.  There were no deferred financing costs during the SuccessorPeriod.

 

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**Income Taxes**

 

HCS is a partnership and its tax attributes,including income and expense items are passed through to its partners. Accordingly, the accompanying consolidated financial statements do not reflectstate or federal income taxes.

 

**Reorganization Costs, net**

 

Reorganization costs are costs incurred by legal andfinancial advisors in connection with debt restructuring negotiations andplanning.  These expenses have beenreduced in 2004 by $.1 million, representing the estimated interest income earnedon cash which has accumulated as a result of our not paying our debtobligations currently.

 

**Revenue Recognition**

 

In accordance with gaming industry practice, HCSrecognizes casino revenues as the net of gaming wins less losses.  Net revenues exclude the retail value ofcomplimentary rooms, food and beverage furnished gratuitously tocustomers.  These amounts that areincluded in promotional allowances were as follows (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  Through  December 31,  2003** | ** ** | **Year Ended December 31,  2004** | ** ** |
|                          |       |                               |       |                                                            |       |   |   |   |   |
| Rooms                         |       | $                                  | 5,305      |                                                            | $          | 720 |   | $ | 4,382 |   | $ | 4,595 |   |
| Food  and beverage            |       | 18,419                             |       | 2,858                                                           |       | 13,645 |   | 17,029 |   |
| Other                         |       | 681                                |       | 81                                                              |       | 500 |   | 648 |   |
| Customer  loyalty programs    |       | 11,502                             |       | 1,603                                                           |       | — |   | — |   |
| Total  promotional allowances |       | $                                  | 35,907     |                                                            | $          | 5,262 |   | $ | 18,527 |   | $ | 22,272 |   |

 

The estimated cost of providing such complimentaryservices that is included in operating expenses was as follows (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  Through  December 31,  2003** | ** ** | **Year Ended  December 31,  2004** | ** ** |
| Rooms                                 |       | $                                  | 2,628      |                                                            | $          | 388 |   | $ | 1,889 |   | $ | 1,919 |   |
| Food  and beverage                    |       | 19,271                             |       | 3,030                                                           |       | 11,663 |   | 15,498 |   |
| Other                                 |       | 1,028                              |       | 142                                                             |       | 2,031 |   | 2,526 |   |
| Total  cost of complimentary services |       | $                                  | 22,927     |                                                            | $          | 3,560 |   | $ | 15,583 |   | $ | 19,943 |   |

 

**Certain Risks and Uncertainties**

 

The operations of HCS are dependent on the continuedlicensing of HCS by the LGCB.  On September 14, 2004, the LGCBconditionally renewed the Louisiana riverboat gaming license of HCS, subject to(1) the full execution by HCS and Eldorado of a definitive agreement governing Eldorado’sproposed acquisition of HCS not later than October 19, 2004 (see Note 1), (2)the submission by HCS to the LGCB of a Petition to Approve Transfer ofInterest, together with such definitive agreement, not later than October 19,2004 and (3) upon the submission of such Petition to Approve Transfer ofInterest, the making by all appropriate persons and entities of the properapplications for findings of suitability and the submission by such persons orentities to such background and suitability investigations as may be requiredby Louisiana gaming law and may be conducted by the Louisiana State Police,Casino Section and Audit Section.  Theserequirements for the

 

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conditionalrenewal of the Louisiana gaming license for HCS were timely satisfied on orbefore October 19, 2004 and the investigation of the suitability of Eldoradowas commenced thereafter.  The loss of alicense in the jurisdiction in which the Company operates could have a materialadverse effect on future results of operations.

 

HCS is dependent on the local market, the Dallas-FortWorth Metroplex and East Texas for a significant number of its patrons andrevenues.  If economic conditions in thisarea deteriorate or additional gaming licenses are awarded which compete forthese markets, HCS’s results of operations could be adversely affected.

 

HCS is also dependent upon stable gaming andadmission taxes in the local jurisdictions in which it operates and in theState of Louisiana.  Any change in suchtaxes could have a material adverse effect on future results of operations.

 

**Recent Accounting Pronouncements**

 

##### ***In December 2004, the FinancialAccounting Standards Board (“FASB”) issued a revised SFAS No. 123(R), “Share-BasedPayment – an Amendment of FASB Statements No. 123 and 95.”  SFAS No.123(R) sets accounting requirements for “share-based” compensation to employeesand requires companies to recognize in their income statements the grant-datefair value of stock options and other equity-based compensation and torecognize the cost over the period during which an employee is required toprovide service in exchange for the award.  HCS accounts for stock optionsgranted by its parent company to its employees using the intrinsic-value methodin accordance with Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” (“APB 25”) and related Interpretations.  Underthe intrinsic-value method, because the exercise price of the employee stockoptions is greater than or equal to the market price of the underlying stock onthe date of grant, no compensation expense is recognized.  SFAS No. 123(R) is effective for interim orannual periods beginning after June 15, 2005. It is not currently anticipated that additional stock options will beissued to HCS’s employees; accordingly, the adoption of SFAS No. 123(R) is notexpected to have a material impact on HCS’s results of operations or financialcondition.***

 

In December 2004, the FASB issued SFAS No. 153, “Exchangesof Nonmonetary Assets – An Amendment of APB Opinion No. 29,” which eliminatesthe exception for nonmonetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of nonmonetary assets thatdo not have commercial substance.  SFAS No. 153 is effective fornonmonetary asset exchanges occurring after June 15, 2005 and its adoption isnot expected to have a significant impact on HCS’s results of operations orfinancial condition.

 

In November 2004, the FASB issued SFAS No. 151, “InventoryCosts – An Amendment of ARB No. 43, Chapter 4,” which clarifies the accountingfor abnormal amounts of idle facility expense, freight, handling costs andwasted material (spoilage).  SFAS No. 151 is effective for inventory costsincurred in fiscal years beginning after June 15, 2005 and its adoption is notexpected to have a significant impact on HCS’s results of operations orfinancial condition.

 

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

### ** **

HCS and Shreveport Capital are co-issuers of theShreveport Notes.  HCS is a general partnership that owns the casinooperations. Shreveport Capital is a wholly-owned subsidiary of HCS formedsolely for the purpose of being a co-issuer of the Shreveport Notes.

 

The Shreveport Notes are non-recourse to PennNational and its subsidiaries (other than HCS, Shreveport Capital, HCS I, Inc.,HCS II, Inc. and HWCC-Louisiana, Inc.), and are secured by substantially all ofthe assets of the casino, and, in the case of the First Mortgage Notes, thepartnership interests held by HCS I, Inc. and HCS II, Inc. and the stock heldby HWCC-Louisiana, Inc.

 

The indentures governing the Shreveport Notes requirethe issuers to make an offer to purchase the Shreveport Notes at 101% of theprincipal amount thereof within 10 days of the occurrence of a “Change ofControl” as defined in the indentures. A “Change of Control” was deemed to haveoccurred under the indentures on March 3, 2003 as a result of the consummationof the merger of a wholly-owned subsidiary of Penn National with and intoHCC.  HCS determined that it did not have the liquidity to repurchase theShreveport Notes at 101% of their principal amount and, accordingly, could notmake an offer to purchase the Shreveport Notes as required under theindentures.

 

On March 14, 2003, HCS and Shreveport Capitalwere notified by an ad hoc committee of holders of the Shreveport Notesthat they had 60 days from receipt of the notice to cure the failure to offerto purchase the Shreveport Notes or an event of default would occur under theindentures.  Neither HCS nor ShreveportCapital made a Change of Control offer to purchase the Shreveport Notes withinthe 60 days and, accordingly, the ad hoc committee notified HCS inMay 2003 that an event of default had occurred under the indentures.  In addition, HCS did not make theAugust 1, 2003, February 1, 2004, August 1, 2004 and February 1, 2005interest payments of approximately $12.3 million each, which were due onthe Shreveport Notes.  As a result of theChapter 11 filings previously discussed in Note 1, the accrual of interest onthe Shreveport Notes for periods subsequent to the close of business onSeptember 10, 2004 has been suspended. During the period subsequent to May 2003, HCS entered into negotiationswith the ad hoc committee of holders of the Shreveport Notes regarding thepossible restructure of the outstanding

 

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indebtedness.In November 2003, HCS retained Libra Securities, LLC as its exclusive financialadvisor in connection with a possible sale or debt restructuringtransaction.  As a result of the Chapter 11 filings previously discussedin Note 1, the Shreveport Notes are included in liabilities subject tocompromise on the accompanying consolidated balance sheet at December 31, 2004(see Note 4).

 

Long-term debt at December 31, 2003 was as follows(in thousands):

 
| 13%  First Mortgage Notes, with contingent interest, due 2006                                  |   | $        | 150,000 |   |
|------------------------------------------------------------------------------------------------|--------|----------|---------|--------|
| 13%  Senior Secured Notes, with contingent interest, due 2006, including bond  premium of $680 |   | 39,680   |    |
| Less:   valuation allowance                                                               |   | (70,348  | )  |
| Other                                                                                          |   | 13       |    |
|                                                                                           |   | 119,345  |    |
| Less  current maturities                                                                       |   | (119,345 | )  |
|                                                                                           |   | $        | —  |   |

 

**Contingent Interest**

 

Under the terms of the indentures for the ShreveportNotes, contingent interest is due and payable on each interest paymentdate.  The amount of contingent interestpayable is based on a percent of the consolidated cash flow of HCS.  Contingent interest may not be paid to theextent that payment will result in certain financial coverage ratios not beingmet.  Consequently, no contingentinterest has been paid by HCS since its opening.  No contingent interest has been accrued onthe accompanying consolidated financial statements since the close of businesson September 10, 2004 as a result of the Chapter 11 filings.  On a contractual basis, contingent interestfor the period from the close of business on September 10 through December 31,2004 would have been $37,000 with respect to the First Mortgage Notes and$10,000 with respect to the Senior Secured Notes.

 
| ** **                      | ** ** | **Predecessor Basis**              | ** ** | **Successor Basis**                                            | ** ** |
|---------------------------------|------------|------------------------------------|------------|----------------------------------------------------------------|------------|
| **Contingent Interest Expense** | ** ** | **Year ended  December 31,  2002** | ** ** | **Period from  January 1,  2003  Through  February 28,  2003** | ** ** | **Period from  March 1, 2003  Through  December 31,  2003** | ** ** | **Year Ended  December 31,  2004** | ** ** |
|                            |       | **(in  thousands)**                |       |
| First  Mortgage Notes           |       | $                                  | 836        |                                                           | $          | 139 |   | $ | 447 |   | $ | 266 |   |
| Senior  Secured Notes           |       | 219                                |       | 36                                                             |       | 116 |   | 73 |   |
|                            |       | $                                  | 1,055      |                                                           | $          | 175 |   | $ | 563 |   | $ | 339 |   |

 

Accrued contingent interest of $1.8 million withrespect to the First Mortgage Notes and $.4 million with respect to the SeniorSecured Notes is included in accrued interest payable on the accompanyingconsolidated balance sheet at December 31, 2003.  Accrued contingent interest of $2.1 millionwith respect to the First Mortgage Notes and $.5 million with respect to theSenior Secured Notes is included in liabilities subject to compromise on theaccompanying consolidated balance sheet at December 31, 2004 (see Note 4).

 

### **4.             Liabilities Subject to Compromise**

### ** **

### **Liabilities subject tocompromise under the Chapter 11 filings consist of the following at December31, 2004:**

### ** **

| 13%  First Mortgage Notes, with contingent interest, due 2006                                  |   | $       | 150,000 |   |
|------------------------------------------------------------------------------------------------|--------|---------|---------|--------|
| 13%  Senior Secured Notes, with contingent interest, due 2006, including bond  premium of $518 |   | 39,518  |    |
| Valuation  allowance on Shreveport Notes                                                       |   | (70,348 | )  |
| Accrued  interest                                                                              |   | 42,179  |    |
| Accounts  payable and accrued liabilities                                                      |   | 3       |    |
| Due  to affiliates, net of valuation allowance of $6,420                                       |   | 7,389   |    |
| Construction  retainage                                                                        |   | 6,731   |    |
| Litigation  reserves (Note 5)                                                                  |   | 1,388   |    |
| Other                                                                                          |   | 6       |    |
|                                                                                           |   | $       | 176,866 |   |
|                                                                                                |        |         |         |        |  |

 

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### **5.             Commitmentsand Contingencies**

 

For so long as it remains a joint venture partner inHCS, Paddlewheels is entitled to receive, among other things, an amount equalto 1% of “complex net revenues,” as defined, of the casino, which approximatesnet revenues, in exchange for the previous assignment by Paddlewheels and itsaffiliates of their joint venture interest in HCS.  Allocations to Paddlewheels of such amountsare reflected as partnership distributions to HCS I, Inc. and HCS II, Inc.  Such allocations amounted to $1.5 million forthe year ended December 31, 2002, $.2 million for the period from January 1,2003 through February 28, 2003, $1.1 million for the period from March 1, 2003 throughDecember 31, 2003 and $1.3 million for the year ended December 31, 2004.  Unpaid distributions of $.8 million areincluded in due to affiliates on the accompanying consolidated balance sheet atDecember 31, 2003.  Unpaid distributionsof $2.1 million are included in liabilities subject to compromise on theaccompanying consolidated balance sheet at December 31, 2004.   Effective July 10, 2003, HCS suspendedpayments under the agreement to Paddlewheels due to the event of default on theShreveport Notes.

 

HCS is subject to various legal and administrativeproceedings relating to personal injuries, employment matters, commercialtransactions and other matters arising in the normal course of business.  HCS does not believe that the final outcomeof these matters will have a material adverse effect on its consolidatedfinancial position or results of operations. In addition, HCS maintains what it believes is adequate insurancecoverage to further mitigate the 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 be given that the amount or scope of existinginsurance coverage will be sufficient to cover losses arising from suchmatters.

 

The following proceedings could result in costs,settlements or damages that materially impact HCS’s consolidated financial conditionor operating results.  In each instance,HCS believes that it has meritorious defenses and/or counter-claims and intendsto vigorously defend itself.

 

On April 23, 2000, the construction site for thefacility suffered tornado damage that contributed to the delay in itsopening.   HCS filed damage claims andreceived reimbursements from its insurance carriers during 2000 in the amountof approximately $1.5 million to cover substantially all of the cost of repairingthe damage incurred.  HCS also filed alawsuit 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.

 

OnJune 16, 2003, a judgment was entered in that court awarding HCS approximately$3.9 million (including interest but excluding 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 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 legal counselin full satisfaction of its attorneys’ fees relating to the claims in thelawsuit.  The $4.0 million settlement was considered in management’sassessment of the purchase price adjustments required in accordance with SFASNo. 141.

 

In a set of related matters, HCS is also seeking torecover damages from the general contractor, the architect and certain otherparties involved in the construction of the casino.  For this and other reasons, HCS has withheldpayment of certain retainage amounts that the general contractor is currentlyseeking.  The general contractor has also submitted additional changeorders that HCS is disputing.  HCS recorded a liability in the amount ofapproximately $3.6 million in accounts payable in connection with theconstruction project.  These matters werethe subject of various state and federal court proceedings as well asarbitrations.  In May 2003, HCS, the generalcontractor, and the architect entered into an agreement to arbitrate the variousclaims.  An initial arbitration hearing was conducted during June 2004 onHCS’s claims for liquidated damages, on HCS’s offset claims for delay damagesand costs to repair defective work, and on the general contractor’s paymentclaims for unpaid contract balance, retainage, unapproved change orders, andincreased general conditions and extended overhead.  On July 27, 2004, thearbitration panel issued an Interim Award on the parties’ respectiveclaims.  The arbitration panel found that the general contractor wasentitled to an award of $6.1 million with interest offset by an award to HCS of$1.2 million with interest.  The award provides that interest is to accrueat the contractual rate of 12% from different periods and will be calculated inthe final award.  The general contractor also claims it is entitled to anadditional $.6 million plus interest for unapproved change orders.  HCSrecorded an additional $3.1 million liability during the third quarter of 2004with respect to the Interim Award issued by the arbitration panel.  The resulting liability is included inliabilities subject to compromise on the accompanying consolidated balancesheet at December 31, 2004 (see Note 4). HCS intends to vigorously contest the general contractor’s claims and toseek to modify the Interim Award.  An arbitration hearing on HCS’s claimsagainst the architect had tentatively been scheduled during January 2005, butas a result of certain proceedings in the Chapter 11 case, has been postponeduntil June 2005.

 

In October 2003, the Bossier Parish Police Jury filedan action against HCS and the City of Shreveport in the 26th Judicial DistrictCourt of Bossier Parish, Louisiana seeking to overturn the agreement betweenHCS and the City of Shreveport, which provides for an annual fee in lieu of the$3.00/head admission fee, in order to collect boarding fees for itself.  In late February 2004, HCS and the City ofShreveport filed Exceptions of No Right and No Cause of Action seeking dismissalof the suit.  A hearing was set on theExceptions for April 8, 2004, but was

 

40

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postponedand has not yet been rescheduled.  HCS has vigorously contested all theallegations set forth in the suit and will continue to do so.  During the sessionof the Louisiana Legislature which ended on June 21, 2004, at least two billswere proposed seeking to impose prospectively a boarding fee assessment to belevied by the Bossier Parish Police Jury as a percentage of HCS’ monthly netgaming proceeds, but such bills were not enacted into law.  Additionally,on April 21, 2004, the Bossier Parish Police Jury notified HCS that it willconduct a sales and use tax audit covering the period August 2000 forwarddirected principally at the tax that is alleged to be due on complimentaryservices provided by HCS to its customers.  HCS has vigorously contestedthe claims set forth in the audit request and will continue to do so.  HCSand the Bossier Parish Police Jury are currently in negotiations in an effortto settle the pending lawsuit, the effect of any potential future legislationand the sales and use tax audit.

 

A number of individual employees have brought similargender-based employment claims against HCS under Title VII in Federal Court inLouisiana.  HCS is vigorously contesting all the allegations. The claimsare in various stages of discovery..

 

As more fully discussed in Note 1, on September 10,2004, certain creditors of HCS filed an involuntary petition against HCS forrelief under Chapter 11 of the U.S. Bankruptcy Code.  In addition, on October 30, 2004, HCS I,Inc., HCS II, Inc., HCL and Shreveport Capital commenced voluntary cases underChapter 11, which cases are pending.

 

All of the proceedings in which HCS is a defendanthave been automatically stayed as a result of the involuntary petition forrelief under Chapter 11 filed on September 10, 2004.

 

**Employee Benefit Plans**

 

HCS participated in a retirement savings plan underSection 401(k) of the Internal Revenue Code of 1986, as amended, that coveredall eligible employees and was sponsored by Hollywood Casino Corporation. The plan allowed employees to contribute up to 15% of their salary on a pre-taxbasis (subject to statutory limitations) and invest such monies in a choice ofmutual funds on a tax-deferred basis.  Employer contributions to the planwere set at 50% of the employees’ elective salary deferrals up to a maximum of5% of employee compensation.  For the year ended December 31, 2002 and forthe two months ended February 28, 2003, HCS expensed $.1 million and $12,000,respectively, as contributions to the plan.

 

On August 1, 2003, the plan was merged into PennNational Gaming, Inc.’s retirement savings plan that also qualifies under theprovisions of Section 401(k) of the Internal Revenue Code of 1986, asamended.  Employer contributions to the plan are set at 50% of theemployee’s elective salary deferrals up to a maximum of 6% of employeecompensation.  For the period from March 1, 2003 to December 31 2003 andthe year ended December 31, 2004, HCS expensed $.2 million and $.3 million,respectively, as contributions to the plan.

 

**Operating Leases**

 

HCS is party to a ground lease with the City ofShreveport for the land on which the casino was built. The terms of the groundlease require the payment by HCS of base rent to the City of Shreveport,percentage rent based on adjusted gross receipts to the City of Shreveport andpayments in lieu of admission fees to the City of Shreveport and the BossierParish School Board.

 

Payments made under the terms of the ground lease areas follows (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  Through  December 31,  2003** | ** ** | **Year Ended  December 31,  2004** | ** ** |
| Ground  lease:                      |       |                               |       |                                                           |       |   |   |   |   |
| Base  rent                          |       | $                                  | 573        |                                                           | $          | 95 |   | $ | 478 |   | $ | 573 |   |
| Percentage  rent                    |       | 1,464                              |       | 230                                                            |       | 1,078 |   | 1,274 |   |
|                                |       | $                                  | 2,037      |                                                           | $          | 325 |   | $ | 1,556 |   | $ | 1,847 |   |
|                                |       |                               |       |                                                           |       |   |   |   |   |
| Payment  in lieu of admissions fees |       | $                                  | 5,637      |                                                           | $          | 864 |   | $ | 4,159 |   | $ | 4,924 |   |

 

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Expenses under operatingleases (exclusive of the ground lease) for the year ended December 31, 2004amounted to $506,000.  Future minimumlease payments as of December 31, 2004 under operating lease obligations(other than the ground lease) having an initial or remaining non-cancelableterm in excess of one year (subject to possible rejection under the Chapter 11proceedings) are as follows (in thousands):

 
| **Year Ended December 31,** | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
|                             |       |       |       |
| 2005                             |       | $          | 304        |   |
| 2006                             |       | 233        |       |
| 2007                             |       | 153        |       |
| 2008                             |       | 140        |       |
| 2009                             |       | 140        |       |
| Thereafter                       |       | 827        |       |
|                             |       |       |       |
|                             |       | $          | 1,797      |   |

 

**6.            SummarizedQuarterly Data (Unaudited)**

 

Following is a summary of thequarterly results of operations for the years ended December 31, 2003 and2004 (in thousands):

 
| ** **                    | ** ** | **Fiscal  Quarter**                      | ** ** |
|-------------------------------|------------|------------------------------------------|------------|
| ** **                    | ** ** | **Predecessor  Basis**                   | ** ** | **Successor  Basis** | ** ** |
| **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 | ) |
|                               |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                    | ** ** | **Fiscal  Quarter** | ** ** |
|-------------------------------|------------|---------------------|------------|
| **2004**                      | ** ** | **First**           | ** ** | **Second** | ** ** | **Third  (Restated)** | ** ** | **Fourth** | ** ** |
| Net revenue                   |       | $                   | 36,901     |   | $ | 34,152 |   | $ | 33,627 |   | $ | 29,470 |   |
| Income (loss) from operations |       | 1,053               |       | (1,222 | ) | (884 | ) | (1,440 | ) |
| Net loss (1)                  |       | (6,198              | )          | (8,365 | ) | (11,247 | ) | (3,586 | ) |
|                               |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

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### **(1)  Reflects a decrease in thepreviously reported net loss for the third quarter of 2004 in the amount of $1.4million.  In accordance with therequirements of Statement of Position 90-7 (see Note 1), as a result of HCShaving determined that there is insufficient collateral to cover the interestportion of scheduled payments on the Shreveport Notes, the accrual of intereston these obligations ceased effective with the close of business on September 10,2004.  The previously issued quarterlyfinancial statements included the accrual of interest through September 30,2004.**

### ** **

### **7.            RelatedParty Transactions**

### ** **

HWCC-Shreveport, Inc., a wholly-ownedsubsidiary of HCC, provides certain management services to the Shreveportcasino under the terms of a management agreement.  HCS also reimburses HWCC-Shreveport, Inc. forexpenses incurred in connection with services provided under the managementagreement. Total management fees incurred amounted to $2.9 million for the yearended December 31, 2002, $.5 million for the period from January 1,2003 through February 28, 2003, $2.1 million for the period from March 1,2003 through December 31, 2003 and $2.5 million for the year ended December 31,2004 and are included in general and administrative expenses on theaccompanying consolidated statements of operations.  Management fees payable at December 31,2003, net of a valuation allowance of $6.4 million, amounted to $2.2 millionand are included in due to affiliates on the accompanying consolidated balancesheet.  Management fees payable at December 31,2004, net of a valuation allowance of $6.4 million, amounted to $4.7 millionand are included in liabilities subject to compromise (see Note 4) on theaccompanying consolidated balance sheet. Under the indentures and related documents governing the ShreveportNotes, management fees are subordinated to all payments under the ShreveportNotes and may not be paid to the extent that their payment would result incertain financial coverage ratios not being met.  Consequently, no management fees have beenpaid since the opening of the facility.

 

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HCS has also entered into aMarine Services Agreement with Paddlewheels to provide certain marine servicesfor so long as Paddlewheels remains a joint venture partner in HCS.  The Marine Services Agreement became effectiveon September 22, 1998 and, in addition to the reimbursement toPaddlewheels for its direct expenses incurred, if any, provides for HCS to paya monthly fee of $30,000.  HCS expensed$.4 million for the year ended December 31, 2002, $.1 million for theperiod from January 1, 2003 through February 28, 2003,  $.3 million for the period from March 1,2003 through December 31, 2003 and $.4 million for the year ended December 31,2004 under the agreement.  Unpaid chargesof $.2 million are included in due to affiliates on the accompanyingconsolidated balance sheet at December 31, 2003.  Unpaid charges of $.6 million are included inliabilities subject to compromise on the accompanying consolidated balancesheet at December 31, 2004 (see Note 4). Effective July 10, 2003, HCS suspended payments under the agreementto Paddlewheels due to the event of default on the Shreveport Notes.  HCS believes that the payments may moreproperly be characterized as equity payments and intends to raise this issue inits Chapter 11 case.

 

### **8.            Supplemental Cash Flow Information**

### ** **

HCS paid interest totaling$24.6 million during the year ended December 31, 2002 and $12.3 millionfor the period from January 1, 2003 through February 28, 2003.  Nointerest has been paid subsequent to February 28, 2003.  HCS paid no income taxes during the yearsended December 31, 2002, 2003 or 2004.

 

Operating cash receipts anddisbursements resulting from the reorganization of HCS during the year ended December 31,2004 consisted of interest received on cash accumulated because of the Chapter11 proceeding amounting to $.1 million and professional fees paid for servicesrendered amounting to $6.1 million. There were no cash flows from investing or financing activities duringthe year ended December 31, 2004 resulting from the reorganization.

 

### ** 9.            Stock Option Plan**

### ** **

Certain employees of HCS weregranted stock options to acquire common stock of HCC under the Hollywood CasinoCorporation 1996 Long Term Incentive Plan.  On March 3, 2003, due tothe change of control provisions in the plan, all of the stock options grantedunder the plan became exercisable and were exercised.  In October 2003Penn National issued options to an HCS employee to acquire 15,000 shares ofPenn National common stock under the Penn National Gaming, Inc. 2003 Long TermIncentive Compensation Plan.

 

**10.         Predecessor Note**

 

Thedisclosures contained in this Note are as of the date of the PredecessorIndependent Registered Public Accounting Firm’s report (April 11, 2003)and should be read in conjunction with the other Notes to ConsolidatedFinancial Statements.

 

*Organization,History, Business and Basis of Presentation* - Hollywood Casino Shreveport (“HCS”) is ageneral partnership registered in the state of Louisiana. The originalpartnership agreement was amended on September 22, 1998 to include aspartners in what is now referred to as HCS the following companies: HWCC-Louisiana,Inc. (“HCL”), a Louisiana corporation which is ultimately wholly-owned byHollywood Casino Corporation (“HCC”); Sodak Louisiana, L.L.C. (“Sodak”), aLouisiana limited liability company; and Shreveport Paddlewheels, L.L.C. (“Paddlewheels”),a Louisiana limited liability company. The general partnership was originallyformed in May 1992 for the purpose of developing and operating a riverboatcasino in New Orleans, Louisiana.  Originallynamed Queen of New Orleans at the Hilton Joint Venture (“QNOV”), thepartnership was 50%-owned by Hilton New Orleans Corporation (“Hilton”) and50%-owned by New Orleans Paddlewheels, Inc. (“NOP”).  Hilton and NOP are collectively referred toherein as the “former partners.”  QNOV’sriverboat operations in New Orleans commenced in February 1994 and werediscontinued in October 1997.

 

During October 1996,QNOV received approval from state gaming authorities to relocate its license tooperate to the City of Shreveport, Louisiana, approximately 190 miles east ofDallas, Texas.  Subsequent to receivingapproval to relocate, QNOV made the decision in 1997 not to conduct gamingoperations in Shreveport.  The formerpartners sought to transfer the license to operate in Shreveport to anotherinterested 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 Louisiana Gaming Control Board(the “LGCB”).  Accordingly, the transferof the license to HCL, Sodak and Paddlewheels to operate in Shreveport wasstructured as the acquisition of the interests of the former partners of QNOV.  The former partners disposed of QNOV’s assetsother than its license to operate and satisfied all but one of its obligationsso that when the former partners withdrew on September 22, 1998, QNOV’sonly asset was its license to operate in Shreveport (which had no recordedvalue) and its only liability was a $5 million obligation to the City ofNew Orleans.  The $5 millionobligation was paid by HCS in August 1999 upon the issuance of$150 million of 13% First Mortgage Notes with contingent interest due 2006(the “First Mortgage Notes”).

 

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Upon admission of the newpartners, HCS proceeded with entirely new plans to develop, own and operate ariverboat gaming complex to be constructed in Shreveport (the “ShreveportCasino”).  The Shreveport Casino wascompleted and opened on December 20, 2000. Prior to opening, HCS had no operating activities other thandevelopment, financing and construction activities with respect to theShreveport Casino.  The Shreveport Casinoconsists of a three-level riverboat dockside casino with approximately 1,423slot machines, 61 table games and six poker stations and a 403-room, all suite,art deco style hotel.  The project alsoincludes approximately 45,000 square feet of available restaurant andentertainment space developed by a third party lessee.

 

Riverboat gaming operationsin Louisiana are subject to regulatory control by the LGCB.  HCS’s current license to operate theShreveport Casino expires on October 14, 2004 (the license wassubsequently renewed on a conditional basis—see Note 2).

 

It was originally anticipatedthat HCS would develop the Shreveport Casino with each of HCL and Sodak havinga 50% interest in the development and subsequent operations.  Once operations commenced, Paddlewheels was tohave a residual interest in the event that the project was ever sold amountingto 10% plus any capital contributions made by Paddlewheels to HCS or otherwisecredited to their account.   On March 31,1999, HCL entered into a definitive agreement with Sodak’s parent to acquireSodak for the $2.5 million Sodak had contributed to HCS, with $1,000 paidat closing and the remainder paid by HCL in June 2001.  The revised structure of the partnership wasapproved by the LGCB on April 20, 1999.  As a result of the acquisition, HCL obtainedan effective 100% ownership interest in HCS with Paddlewheels retaining its 10%residual interest.  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 Louisiana corporations.  HCLcontributed $1,000 of capital to each entity, along with 99% of its interest inHCS to HCS I, Inc. and the remaining 1% to HCS II, Inc.  In addition, the HCS joint venture agreementwas 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 thewithdrawal of HCL as managing partner of HCS.  As a result, HCS I, Inc. now has an effective99% interest in HCS and has become its managing general partner.  HCS II, Inc. now has an effective 1% interestin HCS.  Paddlewheels retained its 10%residual interest in HCS.  The revisedpartnership structure was approved by the LGCB on July 20, 1999.  HCL contributed an additional $300,000 to HCSthrough HCS I, Inc. and HCS II, Inc. in July 1999.  Once HCS secured financing for the ShreveportCasino, HCL contributed an additional $43.7 million to HCS through HCS I,Inc. and HCS II, Inc.  HCL also loaned$1 million to Paddlewheels which Paddlewheels contributed to HCS.  HCL made additional capital contributions toHCS through HCS I, Inc. and HCS II, Inc. of $8.7 million in May2001 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 (“ShreveportCapital”), a Louisiana corporation.  HCScontributed $1,000 of capital to Shreveport Capital.  Shreveport Capital was formed for the solepurpose of being a co-issuer with respect to the First Mortgage Notes andsubsequently became a co-issuer with respect to the $39 million of 13% SeniorSecured Notes with contingent interest due 2006 (the “Senior Secured Notes”)issued in June 2001.  ShreveportCapital has not and is not expected to have any operating activities, acquireany assets or incur any other liabilities.  Accordingly, separate financial statements ofShreveport Capital are not included herein because management has determinedthat such information is not material to investors.

 

In November 2002, HCLissued additional shares of its common stock to HWCC-Holdings, Inc. (“Holdings”),a wholly-owned subsidiary of HCC which was not subject to certain restrictionson making investments under HCC’s then-existing loan agreements.  The initial stock purchase in the amount of$.3 million, together with subsequent capital contributions of$1.8 million in December 2002, were contributed by Holdings throughHCS I, Inc. and HCS II, Inc. to HCS for working capital needs.  Subsequent to December 31, 2002, anadditional $.8 million was contributed by Holdings through HCS I, Inc. andHCS II, Inc. to HCS.

 

The accompanying consolidatedfinancial statements include the accounts of HCS and its wholly-ownedsubsidiaries, Shreveport Capital and HCS-Golf Course, LLC (“Golf”).  All significant intercompany balances havebeen eliminated in consolidation.  Golf,a Delaware 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’s ownership interest in Shreveport GolfCompany was accounted for under the equity method.  Given the difficult market conditions, thepartners in the golf course provided notice in April 2002 that they wereterminating the lease for the land on which the golf course would have beenconstructed.  Accordingly, HCS provided areserve of $.3 million during April 2002 to write down its investmentin the limited liability company to a zero value.  The partners terminated the joint ventureeffective as of September 30, 2002.

 

HCS estimates that asignificant amount of the Shreveport Casino’s revenues are derived from patronsliving in the 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.

 

44

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HCC (the then-ultimate parentof HCS, HCL and Shreveport Capital), Penn National Gaming, Inc., a Pennsylvaniacorporation (“Penn National”), and P Acquisition Corp., a Delaware corporationand a wholly-owned subsidiary of Penn National, entered into an Agreement andPlan of Merger (the “Merger Agreement”), dated as of August 7, 2002,pursuant to which, and subject to the conditions thereof, HCC became a wholly-ownedsubsidiary of Penn National through the merger of P Acquisition Corp. with andinto HCC on March 3, 2003.

 

*LiquidityIssues -* The terms ofthe merger agreement entered into by HCC and Penn National on August 7,2002 restricted HCC, or any of its subsidiaries, from making any additionalcapital contributions to HCS.  Subsequentto entering into the merger agreement, HCC received approval from Penn Nationalto contribute to HCS any funds necessary to make the February 1, 2003interest payments due with respect to the First Mortgage Notes and SeniorSecured Notes (collectively, the Shreveport Notes”).  With Penn National’s approval, Holdingscontributed an aggregate of $800,000 subsequent to December 31, 2002 toassist HCS in making its interest payments.

 

The terms of the indenturesfor the Shreveport Notes provide that, upon consummation of the merger, HCSmust offer to purchase any and all of such notes at a price of 101% of theirface amount plus accrued interest (the “Repurchase Offer”).  Penn National announced on February 24,2003 that it had commenced the solicitation of consents from holders of recordof the notes on February 21, 2003 to waive the Repurchase Offer andrelated provisions.  Penn Nationalconcurrently announced that it did not intend to, or to permit any of itssubsidiaries to, provide financing or credit support to enable any of them orHCS to make the Repurchase Offer.  On March 3,2003, Penn National announced that the requisite number of consents fromholders of the Shreveport Notes were not obtained in the solicitation.

 

On March 14, 2003, HCSreceived notice from an ad hoc committee of the holders of the Shreveport Notesthat HCS had failed to make the Repurchase Offer within ten days of the mergeras required under the respective governing indentures.  Pursuant to these indentures, HCS had sixtydays from receipt of such notice to cure such failure or an Event of Default,as defined under each of the indentures, would occur.

 

Even in the event that HCS’sfailure to launch the required Repurchase Offer was either waived by the noteholders or otherwise cured, HCS has experienced net losses and has asignificant deficiency in its partners’ capital.  Accordingly, management believes that HCS’sexisting cash and cash flow from operations may not be sufficient to fund itsoperating and capital needs for the next 24 months (as of April 11, 2003). In such event, HCS would requireadditional capital contributions or other financial support from Penn National.Penn National has not publicly stated its plans or intentions for HCS after themerger; accordingly, management of HCS can make no assurances that PennNational will provide additional liquidity to HCS.  All of these matters raise substantial doubtabout HCS’s ability to continue as a going concern.  Management is currently in the process ofdeveloping its plans with regard to these matters.  The holders of the Shreveport Notes mightpursue all rights and remedies that they may have under the indentures as aresult of the event of default.  Any such action on the part of the noteholders may prompt HCS to seek the protection of the bankruptcy laws or othersimilar remedies.  (The conclusions regarding the sufficiency of cash, theuncertainties regarding Penn National’s continued involvement, the developmentof Management’s eventual plans and the actions taken by the note holders havebeen subsequently updated as reflected in Note 1).

 

45

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**Report of Independent RegisteredPublic Accounting Firm**

 

To the Shareholders of HWCC – Louisiana:

 

We have audited the accompanying consolidated balancesheet of HWCC – Louisiana, Inc. and subsidiaries as of December 31, 2004and 2003 and the related consolidated statements of operations, change inshareholders’ deficiency and cash flows for the year ended December 31,2004 and the period from March 1, 2003 through December 31,2003.  These consolidated financial statements are the responsibility ofthe Company’s management.  Our responsibility is to express an opinion onthese consolidated financial statements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States)(PCAOB). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting. Our audits included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall consolidated financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of HWCC – Louisiana, Inc. and subsidiaries at December 31, 2004and 2003, and the results of their operations and their cash flows for the yearended December 31, 2004 and the period from March 1, 2003 through December 31,2003 in conformity with accounting principles generally accepted in the UnitedStates of America.

 

The accompanying consolidated financial statementshave been prepared assuming that the Company will continue as a goingconcern.  As discussed in Note 1 to the consolidated financial statements,the Company has suffered net losses over several years, has a net capitaldeficiency, and is in default under certain of its debt agreements.  Thesefactors raise substantial doubt about the Company’s ability to continue as agoing concern.  Management’s plans about these matters are more fullydescribed in Note 1, including its bankruptcy proceedings.  Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of these uncertainties.

 

 

BDO Seidman, LLP

Philadelphia, Pennsylvania

January 28, 2005

 

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**Report of Independent RegisteredPublic Accounting Firm**

 

To the Shareholders of HWCC – Louisiana:

 

We have audited the accompanying consolidatedstatements of operations, changes in shareholders’ (deficit) and cash flows forthe period from January 1, 2003 through February 28, 2003 and for theyear ended December 31, 2002 of HWCC – Louisiana, Inc. and subsidiaries. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits in accordance with the standardsof the Public Company Accounting Oversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting asa basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

 

In our opinion, the consolidated financial statementspresent fairly, in all material respects, the results of operations and cashflows of HWCC-Louisiana, Inc. and subsidiaries for the period from January 1,2003 through February 28, 2003 and the year ended December 31, 2002,in conformity with accounting principles generally accepted in the UnitedStates of America.

 

The accompanying financial statements have beenprepared assuming that the Company will continue as a going concern.  Asdiscussed in the *Predecessor Note*to the financial statements under the caption *“LiquidityIssues,”* HWCC-Louisiana may not be able to meet its financialobligations, which raises substantial doubt about its ability to continue as agoing concern.  Management’s plans concerning these matters are alsodescribed in the *Predecessor Note*under the caption *“Liquidity Issues.”* The financial statements do not include any adjustments that might result fromthe outcome of this uncertainty.

 

 

Deloitte & Touche LLP

Dallas, Texas

April 11, 2003

 

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**HWCC-LOUISIANA, INC.AND SUBSIDIARIES (Debtors-in-Possession)**

**CONSOLIDATEDBALANCE SHEETS (In thousands)**

 
| ** **                                                                                              | ** ** | **Successor  Basis** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                              | ** ** | **2003**             | ** ** | **2004** | ** ** |
| **Assets**                                                                                              |       |                 |       |   |   |
| Current assets:                                                                                         |       |                 |       |   |   |
| Cash and cash equivalents                                                                               |       | $                    | 25,017     |   | $ | 26,644 |   |
| Accounts receivable, net of allowances of $730 and  $802, respectively                                  |       | 1,723                |       | 2,234 |   |
| Inventories                                                                                             |       | 1,974                |       | 1,512 |   |
| Prepaid expenses and other current assets                                                               |       | 2,114                |       | 2,383 |   |
|                                                                                                    |       |                 |       |   |   |
| Total current assets                                                                                    |       | 30,828               |       | 32,773 |   |
|                                                                                                    |       |                 |       |   |   |
| Property and equipment:                                                                                 |       |                 |       |   |   |
| Land improvements                                                                                       |       | 10,000               |       | 10,000 |   |
| Building and improvements                                                                               |       | 75,056               |       | 75,088 |   |
| Riverboat                                                                                               |       | 15,379               |       | 15,392 |   |
| Furniture and equipment                                                                                 |       | 18,408               |       | 19,839 |   |
|                                                                                                    |       | 118,843              |       | 120,319 |   |
| Less-accumulated depreciation                                                                           |       | (8,100               | )          | (17,755 | ) |
|                                                                                                    |       | 110,743              |       | 102,564 |   |
| **Other assets:**                                                                                       |       |                 |       |   |   |
| Note receivable – affiliate                                                                        |       | 1,000                |       | 1,000 |   |
| Other                                                                                                   |       | 271                  |       | 342 |   |
|                                                                                                    |       | $                    | 142,842    |   | $ | 136,679 |   |
| **Liabilities and Shareholders’  Deficiency**                                                      |       |                 |       |   |   |
| Liabilities Not Subject  to Compromise                                                                  |       |                 |       |   |   |
| Current liabilities:                                                                                    |       |                 |       |   |   |
| Current maturities of long-term debt, net of  valuation allowance of $70,348 in 2003                    |       | $                    | 119,345    |   | $ | — |   |
| Accounts payable                                                                                        |       | 5,723                |       | 1,967 |   |
| Accrued liabilities                                                                                     |       |                 |       |   |   |
| Salaries and wages                                                                                      |       | 2,212                |       | 1,637 |   |
| Interest                                                                                                |       | 24,780               |       | — |   |
| Gaming and other taxes                                                                                  |       | 1,446                |       | 1,555 |   |
| Insurance                                                                                               |       | 2,091                |       | 1,635 |   |
| Other                                                                                                   |       | 3,306                |       | 2,992 |   |
| Due to affiliates, net of valuation allowance of  $6,420 in 2003                                        |       | 3,167                |       | 55 |   |
| Other current liabilities                                                                               |       | 1,527                |       | 1,276 |   |
| Total current liabilities                                                                               |       | 163,597              |       | 11,117 |   |
|                                                                                                    |       |                 |       |   |   |
| Liabilities subject to compromise (Note 4)                                                              |       | —               |       | 176,866 |   |
|                                                                                                    |       |                 |       |   |   |
| Other noncurrent liabilities                                                                            |       | 403                  |       | 509 |   |
|                                                                                                    |       |                 |       |   |   |
| 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                                                                              |       | 1,201                |       | 1,201 |   |
| Accumulated deficit                                                                                     |       | (22,360              | )          | (53,015 | ) |
| Total shareholders’ deficiency                                                                     |       | (21,158              | )          | (51,813 | ) |
|                                                                                                    |       | $                    | 142,842    |   | $ | 136,679 |   |

 

See accompanying notes toconsolidated financial statements.

 

48

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**HWCC-LOUISIANA, INC.AND SUBSIDIARIES**

**(Debtors-in-Possession)CONSOLIDATED STATEMENTS OF OPERATIONS (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  Through  December 31,  2003** | ** ** | **Year Ended  December 31,  2004** | ** ** |
| Revenues:                                                     |       |                                    |       |                                                                    |       |   |   |   |   |
| Casino                                                        |       | $                                       | 146,070    |                                                                    | $          | 22,730 |   | $ | 105,330 |   | $ | 123,570 |   |
| Rooms                                                         |       | 9,279                                   |       | 1,353                                                                   |       | 7,341 |   | 8,521 |   |
| Foods and beverage                                            |       | 24,441                                  |       | 3,784                                                                   |       | 17,890 |   | 21,890 |   |
| Other                                                         |       | 2,473                                   |       | 376                                                                     |       | 1,890 |   | 2,441 |   |
|                                                          |       | 182,263                                 |       | 28,243                                                                  |       | 132,451 |   | 156,422 |   |
| Less promotional allowances                                   |       | (35,907                                 | )          | (5,262                                                                  | )          | (18,527 | ) | (22,272 | ) |
| Net revenues                                                  |       | 146,356                                 |       | 22,981                                                                  |       | 113,924 |   | 134,150 |   |
|                                                          |       |                                    |       |                                                                    |       |   |   |   |   |
| Expenses:                                                     |       |                                    |       |                                                                    |       |   |   |   |   |
| Casino                                                        |       | 106,391                                 |       | 16,700                                                                  |       | 57,225 |   | 69,494 |   |
| Rooms                                                         |       | 2,229                                   |       | 344                                                                     |       | 3,148 |   | 3,559 |   |
| Food and beverage                                             |       | 6,784                                   |       | 983                                                                     |       | 15,287 |   | 19,907 |   |
| Other                                                         |       | 2,916                                   |       | 516                                                                     |       | 7,833 |   | 10,125 |   |
| General and administrative                                    |       | 10,333                                  |       | 1,447                                                                   |       | 20,459 |   | 23,929 |   |
| Depreciation and amortization                                 |       | 16,157                                  |       | 2,715                                                                   |       | 8,104 |   | 9,660 |   |
| Impairment loss                                               |       | 179                                     |       | —                                                                  |       | — |   | — |   |
| Total expenses                                                |       | 144,989                                 |       | 22,705                                                                  |       | 112,056 |   | 136,674 |   |
|                                                          |       |                                    |       |                                                                    |       |   |   |   |   |
| Income (loss) from operations                                 |       | 1,367                                   |       | 276                                                                     |       | 1,868 |   | (2,524 | )  |
|                                                          |       |                                    |       |                                                                    |       |   |   |   |   |
| Non-operating income (expenses):                              |       |                                    |       |                                                                    |       |   |   |   |   |
| Interest income                                               |       | 249                                     |       | 23                                                                      |       | 115 |   | 132 |   |
| Interest expense (contractual interest of $24,715  in 2004)   |       | (26,744                                 | )          | (4,456                                                                  | )          | (20,870 | ) | (17,237 | ) |
| Equity in loss of unconsolidated affiliate                    |       | (313                                    | )          | —                                                                  |       | — |   | — |   |
| Arbitration settlement                                        |       | —                                  |       | —                                                                  |       | — |   | (3,120 | ) |
| Reorganization costs, net of interest income of  $105 in 2004 |       | —                                  |       | —                                                                  |       | (2,396 | ) | (6,635 | ) |
| Total non-operating expenses, net                             |       | (26,808                                 | )          | (4,433                                                                  | )          | (23,151 | ) | (26,860 | ) |
| Net loss before minority interest                             |       | (25,441                                 | )          | (4,157                                                                  | )          | (21,283 | ) | (29,384 | ) |
| Minority interest in Hollywood Casino Shreveport              |       | (1,464                                  | )          | (230                                                                    | )          | (1,077 | ) | (1,271 | ) |
|                                                          |       |                                    |       |                                                                    |       |   |   |   |   |
| Net loss                                                      |       | $                                       | (26,905    | )                                                                  | $          | (4,387 | )  | $ | (22,360 | )  | $ | (30,655 | ) |
|                                                               |            |                                         |            |                                                                         |            |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes toconsolidated financial statements.

 

49

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**HWCC-LOUISIANA, INC.AND SUBSIDIARIES**

**(Debtors-inPossession)CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)(In thousands)**

 

**For the YearEnded December 31, 2002 and For the Period from January 1, 2003 Through February 28, 2003(Predecessor Basis)and For the Period From March 1, 2003 Through December 31, 2003 and**

**For the YearEnded December 31, 2004 (Successor Basis)**

 
| ** **                                                                   | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** |
|------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------------------------------|------------|--------------------------|------------|
| **Predecessor Basis**                                                        |       |       |       |       |       |                             |       |                     |       |
| **Balances, January 1, 2002**                                           |       | 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 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 March 1, 2003 through December 31,  2003   |       | —     |       | —     |       | —                           |       | (22,360                  | )          |
|                                                                         |       |       |       |       |       |                             |       |                     |       |
| **Balances, December 31, 2003**                                         |       | 1,010      |       | 1          |       | 1,201                            |       | (22,360                  | )          |
| Net loss                                                                     |       | —     |       | —     |       | —                           |       | (30,655                  | )          |
|                                                                         |       |       |       |       |       |                             |       |                     |       |
| **Balances, December 31, 2004**                                         |       | 1,010      |       | $          | 1          |                             | $          | 1,201                    |       | $ | (53,015 | ) |

 

See accompanying notes toconsolidated financial statements.

 

50

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**HWCC –LOUISIANA, INC. AND SUBSIDIARIES**

**(Debtors-in-Possession)CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inthousands)**

 
| ** **                                                                                 | ** ** | **Predecessor  Basis**                  | ** ** | **Successor  Basis**                                         | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **Year ended  December 31,  2002** | ** ** | **Period  from  January 1 to  February 28,  2003** | ** ** | **Period  from  March 1 to  December 31,  2003** | ** ** | **Year ended  December 31,  2004** | ** ** |
|                                                                                       |       |                                    |       |                                                         |       |   |   |   |   |
| **OPERATING ACTIVITIES:**                                                                  |       |                                    |       |                                                         |       |   |   |   |   |   |   |   |   |
| Net loss                                                                                   |       | $                                       | (26,905    | )                                                            | $          | (4,387 | ) | $ | (22,360 | ) | $ | (30,655 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities: |       |                                    |       |                                                         |       |   |   |   |   |
| Depreciation and amortization, including  amortization of premium                          |       | 17,274                                  |       | 2,902                                                        |       | 7,667 |   | 9,498 |   |
| Impairment loss                                                                            |       | 179                                     |       | —                                                       |       | — |   | — |   |
| (Gain) loss on disposal of assets                                                          |       | (16                                     | )          | —                                                       |       | — |   | 7 |   |
| Write off investment in unconsolidated affiliate                                           |       | 313                                     |       | —                                                       |       | — |   | — |   |
| Provision for doubtful accounts                                                            |       | 444                                     |       | 55                                                           |       | 451 |   | 463 |   |
| (Increase) decrease in accounts receivable                                                 |       | (635                                    | )          | 185                                                          |       | 3,902 |   | (974 | ) |
| Minority interest in Hollywood Casino Shreveport                                           |       | 1,464                                   |       | 230                                                          |       | 1,077 |   | 1,271 |   |
| Increase (decrease) in accounts payable and accrued  liabilities                           |       | 1,643                                   |       | (9,124                                                       | )          | 20,988 |   | 20,530 |   |
| Net change in affiliate balances                                                           |       | 2,316                                   |       | 576                                                          |       | 2,195 |   | 2,903 |   |
| Net change in other current assets and liabilities                                         |       | (151                                    | )          | (142                                                         | )          | (756 | ) | (58 | ) |
| Net change in other noncurrent assets and  liabilities                                     |       | 133                                     |       | 12                                                           |       | 95 |   | 137 |   |
| Net cash (used in) provided by operating activities                                        |       | (3,941                                  | )          | (9,693                                                       | )          | 13,259 |   | 3,122 |   |
|                                                                                       |       |                                    |       |                                                         |       |   |   |   |   |
| **INVESTING ACTIVITIES:**                                                                  |       |                                    |       |                                                         |       |   |   |   |   |
| Purchases of property and equipment                                                        |       | (1,497                                  | )          | (224                                                         | )          | (369 | ) | (1,488 | ) |
| Proceeds from the disposal of assets                                                       |       | 32                                      |       | —                                                       |       | — |   | — |   |
| Net cash (used in) investing activities                                                    |       | (1,465                                  | )          | (224                                                         | )          | (369 | ) | (1,488 | ) |
|                                                                                       |       |                                    |       |                                                         |       |   |   |   |   |
| **FINANCING ACTIVITIES:**                                                                  |       |                                    |       |                                                         |       |   |   |   |   |
| Proceeds from issuance of common stock                                                     |       | 250                                     |       | —                                                       |       | — |   | — |   |
| Repayment of long-term debt                                                                |       | (7                                      | )          | (1                                                           | )          | (7 | ) | (7 | ) |
| Deferred financing costs                                                                   |       | (5                                      | )          | —                                                       |       | — |   | — |   |
| Capital contributions                                                                      |       | 1,831                                   |       | 800                                                          |       | — |   | — |   |
| Partner distributions                                                                      |       | (1,452                                  | )          | (230                                                         | )          | (338 | ) | — |   |
| Net cash provided by (used in) financing activities                                        |       | 617                                     |       | 569                                                          |       | (345 | ) | (7 | ) |
|                                                                                       |       |                                    |       |                                                         |       |   |   |   |   |
| Net (decrease) increase in cash and cash  equivalents                                      |       | (4,789                                  | )          | (9,348                                                       | )          | 12,545 |   | 1,627 |   |
| Cash and cash equivalents at beginning of period                                           |       | 26,609                                  |       | 21,820                                                       |       | 12,472 |   | 25,017 |   |
| Cash and cash equivalents at end of period                                                 |       | $                                       | 21,820     |                                                         | $          | 12,472 |   | $ | 25,017 |   | $ | 26,644 |   |

 

See accompanying notes toconsolidated financial statements.

 

51

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**HWCC–LOUISIANA, INC. AND SUBSIDIARIES**

**(Debtors-in-Possession)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

### ** **

**Business**

 

The Hollywood CasinoShreveport resort consists of a 403-room, all-suite, art deco-style hotel, anda three-level riverboat dockside casino that opened on December 20, 2000.The casino contains approximately 59,000 square feet of space withapproximately 1,400 slot machines, 61 table games and ten poker tables.

 

The centerpiece of the resortis a 170,000 square foot land-based pavilion housing numerous restaurants andentertainment amenities.  An 85-foot wide seamless entrance connects thecasino to the land-based pavilion on all three levels resulting in the feel ofa land-based casino. Amenities include the Fairbanks® gourmet steakhouse, theHollywood Epic Buffet®, the Hollywood Diner, the Hollywood Director’s Club andthe Hollywood Celebrity Lounge, a spa and the Hollywood Casino Studio Store®,which features themed and logo merchandise.  Hollywood Casino Shreveportalso features the unique Hollywood theme throughout its gaming, dining andentertainment facilities that has been successfully applied at other propertiesowned by its parent, Hollywood Casino Corporation.

 

The Hollywood CasinoShreveport resort is owned by the Hollywood Casino Shreveport generalpartnership (“HCS”) which, through HCS I, Inc. and HCS II, Inc., is in turnowned by HWCC-Louisiana, Inc. (“HCL”), a Louisiana corporation.  HCL, HCSI, Inc. and HCS II, Inc. are collectively referred to as the “Company”.  HCL is wholly-owned by Hollywood CasinoCorporation (“HCC”).  HCS I, Inc. has an effective 99% interest in HCS andis its managing general partner, and HCS II, Inc. has an effective 1% interestin HCS.  Shreveport Paddlewheels, L.L.C. (“Paddlewheels”), a Louisianalimited liability company, has a residual interest in HCS.  HCS operatesHollywood Casino Shreveport under a management agreement with HWCC-Shreveport,Inc., a wholly-owned subsidiary of HCC.

 

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

 

Effective with the close ofbusiness on February 28, 2003, Penn National Gaming, Inc. (“Penn National”)completed the acquisition of HCC and its subsidiaries, including HCL.  Penn National “pushed down” its basis in theCompany in accordance with Staff Accounting Bulletin No. 54, “Push DownBasis of Accounting Required in Certain Limited Circumstances.”  The accompanying consolidated financialstatements for the period following the acquisition (“Successor Period”)includes management’s best estimate of the purchase price adjustments requiredin accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,“Business Combinations”.  SFAS No. 141requires that assets and liabilities of the acquired entity be reflected attheir fair values.  The accompanyingconsolidated financial statements for periods prior to the acquisition (“PredecessorPeriod”) reflect the historical cost basis of the Company’s assets andliabilities (See Note 11 for Predecessor Note).

 

The purchase price adjustmentsreflected on the accompanying Successor Basis consolidated financial statementsinclude revaluing 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’spartners’ capital accounts (including the carryover deficiency of the formerpartners) were adjusted by $37.2 million to a zero basis as of the acquisitiondate.  No goodwill was recorded inconnection with the acquisition.

 

A valuation allowance in theamount of $70.3 million was established with respect to the $150 million 13%First Mortgage Notes with contingent interest due 2006 (the “First MortgageNotes”) and the $39 million 13% Senior Secured Notes with contingent interestdue 2006 (the “Senior Secured Notes” and, together with the First MortgageNotes, the “Shreveport Notes”) to reduce their carrying amount to management’sestimate of their fair value.  Management’sestimate was based on the fair values of the assets and liabilities assumed.  In addition, a valuation allowance in theamount of $6.4 million was established at the acquisition date to fully reservethe management fee payable to a subsidiary of HCC.   Such management fee is subordinated in paymentto the Shreveport Notes.

 

The differences in financialpresentation from the Predecessor Basis to the Successor Basis include thereclassification of cash awards from promotional allowances to a reduction ofcasino revenues and a reclassification of marketing giveaways and coupons frompromotional allowances to marketing expense.  The effect for thepredecessor period from January 1, 2003 to February 28, 2003 was adecrease in casino revenues of $.7 million, a decrease in promotionalallowances of $1.6 million and an increase in operating expenses of $.9million.  In addition, depreciation ofproperty and equipment for periods subsequent to March 1, 2003 have beenadjusted to reflect the revised estimates of fair value established as a resultof the aforementioned appraisal.

 

52

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**Sale of Property and BankruptcyFilings**

 

As described in Note 3, HCSfailed to make a required repurchase offer for the Shreveport Notes and hasfailed to make the August 1, 2003, February 1, 2004 and August 1,2004 interest payments on the Shreveport Notes aggregating approximately $36.9million.

 

In addition, HCS hasexperienced net losses since inception and operating losses in five out of thelast six quarters and has a significant 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 12 months.  All of these matters raisesubstantial doubt about HCS’s ability to continue as a going concern.  The accompanying consolidated financialstatements do not include any adjustments that might result from the outcome ofthese uncertainties.

 

On February 3, 2004, HCSI, Inc., the managing general partner of HCS, announced that its Board ofDirectors (the “Board”) had authorized the initiation of a process that ithoped would result in the sale or other disposition of the riverboatcasino/hotel complex.  The Board furtherauthorized HCS’s financial advisor, Libra Securities LLC, to begin contactingpotential acquirers.  The Board alsoauthorized the creation of an independent committee consisting of two directorsnot employed directly by Penn National to oversee the process.  The Board created the independent committee inthe event that Penn National elected to participate as a bidder in theprocess.  Penn National decided not to participate in the bidprocess.  The Board took action after consultation with an ad hoccommittee of holders of the Shreveport Notes.

 

On August 27, 2004, HCS,acting by and through its managing general partner, HCS I, Inc., entered intoan agreement with Eldorado Resorts, LLC (“Eldorado”) providing for theacquisition of HCS by certain affiliates of Eldorado.  On October 18,2004, HCS, acting by and through its managing general partner, HCS I, Inc.,entered into a definitive Investment Agreement (the “Agreement”) with Eldorado,Eldorado Shreveport #1, LLC and Eldorado Shreveport #2, LLC (together withEldorado Shreveport #1, LLC, the “Investors”) providing for the acquisition ofthe reorganized HCS by the Investors. The Investors are each an affiliate of Eldorado.  The Agreement contemplates a financialrestructuring of HCS that will significantly reduce outstanding secured debtobligations and annual cash interest payments. Under the proposed restructuring, holders of HCS’s existing securednotes are to receive (1) $140 million of new first mortgage notes, (2) interestin a corporation that will hold a $20 million preferred equity interest and a25% non-voting equity interest in the reorganized HCS and (3) cash in an amountto be determined, in exchange for existing secured notes in the principal faceamount of $189 million plus accrued interest.  The Investors would acquirea 75% voting equity interest in the reorganized HCS.  HCS had intended toeffectuate the sale and related financial restructuring transaction through aprepackaged Chapter 11 bankruptcy reorganization, but as described below, aninvoluntary bankruptcy petition interrupted the process.  On October 28, 2004, the Company filed ajoint plan and disclosure statement that incorporated the Eldoradotransaction.  The Agreement, which hasbeen extended by amendment to June 30, 2005, remains subject to subsequentnoteholder solicitation and acceptance, approval by the Bankruptcy Court of theAgreement, Louisiana Gaming Control Board (“LGCB”) approval and certain otherconditions.

 

On September 10, 2004,certain creditors of HCS filed an involuntary petition against HCS for reliefunder Chapter 11 of the U.S. Bankruptcy Code with the U. S. Bankruptcy Court,Western District of Louisiana, located in Shreveport, Louisiana.  Thepetition was filed by Black Diamond Capital Management, LLC (“Black Diamond”), aholder of HCS’s notes, who had previously participated in meetings with the adhoc committee and who had later submitted an unsuccessful bid to acquire HCS,and by two construction contractors, who have been in litigation with HCS overamounts owing on HCS’s 1999 construction contract (see Note 5).  A hearing on the petition was held on October 29and 30, 2004.  A Consensual Order forRelief was issued on October 30, 2004, and HCS became a “debtor inpossession”.  HCS will continue to manageits assets and business subject to the powers and supervision of the BankruptcyCourt.  On November 19, 2004, theBankruptcy Court entered an order appointing David S. Rubin as mediator for thelimited purposes of reviewing the pre-petition bid process to determine whetherit was performed in a proper and competent fashion and that the scope ofsolicitations for bids was sufficient and performed in a timely fashion;reviewing the bids submitted and the process for evaluating the bids;determining the value of the bids submitted and recommending to the Courtwhether additional bid processes should be undertaken.  The United States Trustee has appointed aNon-Bondholder Unsecured Creditors Committee and a Bondholder Committee.

 

On October 30, 2004, HCSI, Inc. and HCS II, Inc., the general partners of the Hollywood CasinoShreveport partnership, HCL and Shreveport Capital commenced voluntary casesunder Chapter 11 in the Bankruptcy Court, which cases are pending.

 

On February 14, 2005,the court-appointed mediator, David S. Rubin, filed his report in our Chapter11 case, which remains confidential.  Thereport concluded, among other things, that (1) the pre-petition bid processconducted by HCS and the Ad Hoc Committee of Noteholders of HCS was performedin a proper and competent fashion; (2) the scope of the solicitations for bidswas sufficient and adequate; (3) bids submitted during the period of the formalprocess were appropriately ranked based on both quantitative and qualitativefacts existing at the time the bids were made and evaluated; (4) the decisionto select the bid submitted by Eldorado to pursue closure was appropriate; (5)as of August 27, 2004, the Eldorado bid offered the highest economicreturn to creditors; (6) although a subsequent bid made by Black Diamond on October 25,2004, on a purely quantitative economic basis, was higher and offered moretotal value than the amount of the already accepted Eldorado proposal, theeconomic difference between the face amounts of the Eldorado offer and the October 25,2004 Black Diamond offer, based on all of the circumstances existing as of October 25,2004, was not demonstrably material in terms of the scope of the proposed

 

53

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transaction;(7) the attendant delay of a re-offering or other auction process to againexpose the assets to the market (including possible litigation in and out ofthe Court) may diminish interest in and offers for the HCS assets, may drivevalue down, and may have an effect on the Eldorado offer; and (8) a new formalauction process is not in the best interest of HCS and its creditors.

 

HCS subsequently filed arevised reorganization Plan and Disclosure Statement with the Bankruptcy Courton March 3, 2005.  The Plancontinues to provide for the acquisition of HCS’s hotel and casino by Eldoradounder the agreement announced last year. The Bondholder Committee in the Chapter 11 cases has joined HCS as aproponent of the Plan.  The BankruptcyCourt has set a hearing on the approval of the Disclosure Statement for April 11,2005.  Black Diamond and KOARInternational continue to express an interest in jointly acquiring the hoteland casino and have asked the Bankruptcy Court for permission to file their owncompeting plan.  Management intends tooppose that request.  The BankruptcyCourt has set a hearing for April 4, 2005 on Black Diamond’s motion toterminate HCS’s period of exclusivity for filing a reorganization plan.

 

Although the sale andrestructuring process, including the Chapter 11 cases, has had a negativeimpact on its day-to-day operations, management believes that HCS’s significantcash on hand and cash from operations will continue to be sufficient to timelyfulfill ordinary course obligations to employees, customers and trade vendorsin full as they come due, pending completion of the transaction.  TheAgreement contemplates payment of such obligations in the ordinary course bothduring and after the restructuring process. Because the sale process has been unduly prolonged, management believes thatit has had and may continue to have an adverse effect on employee morale andturnover and on the Company’s competitive position with its customers.

 

There can be no assurancethat the process will result in the sale or other disposition of the riverboatcasino/hotel complex.  If it does, thesale proceeds will not likely be adequate to pay the Shreveport Notes in full. Managementcurrently anticipates that any transaction will be effected through the pendingChapter 11 cases.  If the efforts to achieve a sale or other restructuringtransaction are unsuccessful and the Chapter 11 cases are dismissed or relieffrom the automatic stay is granted, the holders of the Shreveport Notes mightpursue all rights and remedies they may have under the indentures.  HCSand Shreveport Capital did not make the August 1, 2003, February 1,2004, August 1, 2004 and February 1, 2005 interest payments of approximately$12.3 million each, which were due on the Shreveport Notes. As previouslynoted, the Shreveport Notes have been in default under the terms of theirrespective note indentures since March 2003.

 

As a result of the Chapter 11cases, the accompanying consolidated financial statements of HCL and itssubsidiaries have been prepared in accordance with Statement of Position No.90-7, “Financial Reporting by Entities in Reorganization Under the BankruptcyCode.”   Under Chapter 11, actions tocollect certain claims against HCS in existence prior to the filing of thepetitions for relief are stayed while HCS continues business operations asdebtor-in-possession.  These claims arereflected in the December 31, 2004 consolidated balance sheet as “liabilitiessubject to compromise”.   Additionalclaims may arise subsequent to the filing date resulting from the rejection ofexecutory contracts such as leases and from the determination by the BankruptcyCourt of allowed claims for contingencies and other disputed amounts.  HCS received approval from the BankruptcyCourt to pay certain of its pre-petition obligations, including employee wagesand customer obligations.  HCS hasdetermined that there is insufficient collateral to cover the amounts owing onthe Shreveport Notes and has discontinued accruing interest on theseobligations effective with the close of business on September 10,2004.  Contractual interest on theseobligations is disclosed on the accompanying consolidated statement ofoperations for the year ended December 31, 2004.

 

### **2.**            Summary of Significant Accounting Policies

### ** **

**Principles of Consolidation**

 

The consolidated financialstatements include the accounts of HCL and its wholly-owned subsidiaries, HCSI, Inc. and HCS II, Inc.   HCS I, Inc.and HCS II, Inc. together own 100% of the partnership interest of HCS.  All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

**Use of Estimates**

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements, and the reported amounts of revenueand expenses for the reporting periods.  Actualresults could differ from those estimates.

 

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

 

The Company considers allcash balances and highly liquid investments with original maturities of threemonths or less to be cash equivalents.

 

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**Concentration of Credit Risk**

 

Financial instruments thatpotentially subject the Company to credit risk consist of cash equivalents andaccounts receivable.

 

The Company’s policy is toreview the amount of credit exposure to any one financial institution and placeinvestments with financial institutions evaluated as being creditworthy.  In the ordinary course of business, theCompany has bank deposits and overnight repurchase agreements that may exceedfederally insured limits.

 

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

 

**Allowance for Doubtful Accounts**

 

Accounts are written off whenmanagement determines that an account is uncollectible.  Recoveries of accounts previously written offare recorded when received.  An estimatedallowance for doubtful accounts is determined to reduce the Company’sreceivables to their carrying value, which approximates fair value.  The allowance is estimated based onhistorical collection experience, specific review of individual customeraccounts, and current economic and business conditions.  Historically, the Company has not incurredany significant credit-related losses.

 

**Fair Value of Financial Instruments**

 

The following methods andassumptions are used to estimate the fair value of each class of financialinstruments for which it is practical to estimate:

 

Cashand Cash Equivalents:  The carrying amount approximates the fair value dueto the short maturity of the cash equivalents.

 

Long-termDebt:  In the Successor Period, long-term debt is based on the fair valueof the underlying collateral.

 

**Property and Equipment**

 

Property and equipment arestated at cost.  Maintenance and repairsthat do not add materially to the value of the asset nor appreciably prolongits useful life are charged to expense as incurred.  Gains or losses on the disposal of propertyand equipment are included in the determination of income.

 

Depreciation of property andequipment and amortization of leasehold improvements are provided using thestraight-line method over the following estimated 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 thecarrying values of its long-lived assets for possible impairment wheneverevents or changes in circumstances indicate that the carrying amount of theassets may not be recoverable based on undiscounted estimated future operatingcash flows.  As of December 31, 2004, the Company has determined thatno impairment has occurred.

 

**Inventory**

 

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

 

**Deferred Financing Costs**

 

During the PredecessorPeriod, deferred financing costs that were incurred by the Company inconnection with the issuance of debt were deferred and amortized to interestexpense over the life of the underlying indebtedness using the interest methodadjusted to reflect any early repayments.  During the Successor Period,there were no deferred financing costs.

 

55

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**Income Taxes**

 

The Company is included inthe consolidated federal income tax return for Penn National for periodssubsequent to March 1, 2003.  As a result of the uncertaintiesdiscussed in Notes 1, no consolidated tax benefit was allocated to HCL.

 

Prior to the acquisition byPenn National, HCL was included in the consolidated federal income tax returnof HCC.  Pursuant to agreements betweenHCL and HCC, HCL’s provision for taxes is based on the amount of tax that wouldbe provided if a separate federal income tax return were to be filed.

 

**Reorganization Costs, net**

 

Reorganization costs are costs incurred by legal andfinancial advisors in connection with debt restructuring negotiations andplanning.  These expenses have beenreduced in 2004 by $.1 million, representing the estimated interest incomeearned on cash which has accumulated as a result of our not paying our debtobligations currently.

 

**Revenue Recognition**

 

In accordance with gamingindustry practice, the Company recognizes casino revenues as the net of gamingwins less losses. Net revenues exclude the retail value of complimentary rooms,food and beverage furnished gratuitously to customers. These amounts that areincluded in promotional allowances were as follows (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  Through  December 31,  2003** | ** ** | **Year Ended  December 31,  2004** | ** ** |
|                         |       |                                    |       |                                                                      |       |   |   |   |   |
| Rooms                        |       | $                                       | 5,305      |                                                                      | $          | 720 |   | $ | 4,382 |   | $ | 4,595 |   |
| Food and beverage            |       | 18,419                                  |       | 2,858                                                                     |       | 13,645 |   | 17,029 |   |
| Other                        |       | 681                                     |       | 81                                                                        |       | 500 |   | 648 |   |
| Customer loyalty programs    |       | 11,502                                  |       | 1,603                                                                     |       | — |   | — |   |
| Total promotional allowances |       | $                                       | 35,907     |                                                                      | $          | 5,262 |   | $ | 18,527 |   | $ | 22,272 |   |

 

The estimated cost ofproviding such complimentary services that is included in operating expenseswas as follows (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  Through  December 31,  2003** | ** ** | **Year Ended  December 31,  2004** | ** ** |
| Rooms                                |       | $                                       | 2,628      |                                                                      | $          | 388 |   | $ | 1,889 |   | $ | 1,919 |   |
| Food and beverage                    |       | 19,271                                  |       | 3,030                                                                     |       | 11,663 |   | 15,498 |   |
| Other                                |       | 1,028                                   |       | 142                                                                       |       | 2,031 |   | 2,526 |   |
| Total cost of complimentary services |       | $                                       | 22,927     |                                                                      | $          | 3,560 |   | $ | 15,583 |   | $ | 19,943 |   |

 

**Certain Risks and Uncertainties**

 

The operations of the Companyare dependent on the continued licensing of HCS by the LGCB.  On September 14,2004, the LGCB conditionally renewed the Louisiana riverboat gaming license ofHCS, subject to (1) the full execution by HCS and Eldorado of a definitiveagreement governing Eldorado’s proposed acquisition of HCS not later than October 19,2004 (see Note 1), (2) the submission by HCS to the LGCB of a Petition toApprove Transfer of Interest, together with such definitive agreement, notlater than October 19, 2004 and (3) upon the submission of such Petitionto Approve Transfer of Interest, the making by all appropriate persons andentities of the proper applications for

 

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findings of suitability and the submission by suchpersons or entities to such background and suitability investigations as may berequired by  Louisiana gaming law and may be conducted by the LouisianaState Police, Casino Section and Audit Section.  These requirements for the conditionalrenewal of the Louisiana gaming license for HCS were timely satisfied on orbefore October 19, 2004 and the investigation of the suitability ofEldorado was commenced thereafter. The loss of a license in the jurisdiction inwhich the Company operates could have a material adverse effect on futureresults of operations.

 

The Company is dependent onthe local market, the Dallas-Fort Worth Metroplex and East Texas for asignificant number of its patrons and revenues. If economic conditions in thisarea deteriorate or additional gaming licenses are awarded which compete forthese markets, the Company’s results of operations could be adversely affected.

 

The Company is also dependentupon stable gaming and admission taxes in the local jurisdictions in which itoperates and in the State of Louisiana. Any change in such taxes could have amaterial adverse effect on future results of operations.

 

**Recent Accounting Pronouncements**

 

##### ***In December 2004, theFinancial Accounting Standards Board (“FASB”) issued a revised SFAS No. 123(R),“Share-Based Payment – an Amendment of FASB Statements No. 123 and 95.” SFAS No. 123(R) sets accounting requirements for “share-based” compensation toemployees and requires companies to recognize in their income statements thegrant-date fair value of stock options and other equity-based compensation andto recognize the cost over the period during which an employee is required toprovide service in exchange for the award.  The Company accounts for stockoptions granted by its parent company to its employees using theintrinsic-value method in accordance with Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and relatedInterpretations.  Under the intrinsic-value method, because the exerciseprice of the employee stock options is greater than or equal to the marketprice of the underlying stock on the date of grant, no compensation expense isrecognized.  SFAS No. 123(R) is effectivefor interim or annual periods beginning after June 15, 2005.  It is not currently anticipated thatadditional stock options will be issued to the Company’s employees;accordingly, the adoption of SFAS No. 123(R) is not expected to have a materialimpact on the Company’s results of operations or financial condition.***

##### *** ***

In December 2004, theFASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – An Amendment ofAPB Opinion No. 29,” which eliminates the exception for nonmonetary exchangesof similar productive assets and replaces it with a general exception forexchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring after June 15,2005 and its adoption is not expected to have a significant impact on theCompany’s results of operations or financial condition.

 

In November 2004, theFASB issued SFAS No. 151, “Inventory Costs – An Amendment of ARB No. 43,Chapter 4,” which clarifies the accounting for abnormal amounts of idlefacility expense, freight, handling costs and wasted material (spoilage). SFAS No. 151 is effective for inventory costs incurred in fiscal yearsbeginning after June 15, 2005 and its adoption is not expected to have asignificant impact on the Company’s results of operations or financialcondition.

 

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

### ** **

HCS and Shreveport Capitalare co-issuers of the Shreveport Notes.  HCS is a general partnership thatowns the casino operations. Shreveport Capital is a wholly-owned subsidiary ofHCS formed solely for the purpose of being a co-issuer of the Shreveport Notes.

 

The Shreveport Notes arenon-recourse to Penn National and its subsidiaries (other than HCS, ShreveportCapital, HCS I, Inc., HCS II, Inc. and HWCC-Louisiana, Inc.), and are securedby substantially all of the assets of the casino, and, in the case of the FirstMortgage Notes, the partnership interests held by HCS I, Inc. and HCS II, Inc.and the stock held by HWCC-Louisiana, Inc.

 

The indentures governing theShreveport Notes required the issuers to make an offer to purchase theShreveport Notes at 101% of the principal amount thereof within 10 days of theoccurrence of a “Change of Control” as defined in the indentures.  A “Change of Control” was deemed to haveoccurred under the indentures on March 3, 2003 as a result of theconsummation of the merger of a wholly-owned subsidiary of Penn National withand into HCC.  HCS determined that it did not have the liquidity torepurchase the Shreveport Notes at 101% of their principal amount and,accordingly, could not make an offer to purchase the Shreveport Notes asrequired under the indentures.

 

On March 14, 2003, HCSand Shreveport Capital were notified by an ad hoc committee of holders ofthe Shreveport Notes that they had 60 days from receipt of the notice to curethe failure to offer to purchase the Shreveport Notes or an event of defaultwould occur under the indentures.  NeitherHCS nor Shreveport Capital made a Change of Control offer to purchase theShreveport Notes within the 60 days and, accordingly, the ad hoccommittee notified HCS in May 2003 that an event of default had occurred underthe indentures.  In addition, the Companydid not make the August 1, 2003, February 1, 2004, August 1,2004 and February 1, 2005 interest payments of approximately$12.3 million each, which were due on the Shreveport Notes.  As a result of the Chapter 11 filingspreviously discussed in Note 1, the accrual of interest on the Shreveport Notesfor periods subsequent to the close of business on September 10, 2004 hasbeen suspended.  During the periodsubsequent to May 2003, HCS entered into negotiations with the ad hoccommittee of holders of the Shreveport Notes regarding the possible restructureof the

 

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outstanding indebtedness.  In November 2003, HCS retained LibraSecurities, LLC as its exclusive financial advisor in connection with apossible sale or debt restructuring transaction.  As a result of theChapter 11 filings previously discussed in Note 1, the Shreveport Notes areincluded in liabilities subject to compromise on the accompanying consolidatedbalance sheet at December 31, 2004 (see Note 4).

 

Long-term debt at December 31,2003 was as follows (in thousands):

 
| 13% First Mortgage Notes, with contingent interest,  due 2006                                 |   | $        | 150,000 |   |
|-----------------------------------------------------------------------------------------------|--------|----------|---------|--------|
| 13% Senior Secured Notes, with contingent interest,  due 2006, including bond premium of $680 |   | 39,680   |    |
| Less:  valuation allowance                                                               |   | (70,348  | )  |
| Other                                                                                         |   | 13       |    |
|                                                                                          |   | 119,345  |    |
| Less current maturities                                                                       |   | (119,345 | )  |
|                                                                                          |   | $        | —  |   |

 

**Contingent Interest**

 

Under the terms of theindentures for the Shreveport Notes, contingent interest is due and payable oneach interest payment date.  The amountof contingent interest payable is based on a percent of the consolidated cashflow of HCS.  Contingent interest may notbe paid to the extent that payment will result in certain financial coverageratios not being met.  Consequently, nocontingent interest has been paid by HCS since its opening.  No contingent interest has been accrued onthe accompanying consolidated financial statements since the close of businesson September 10, 2004 as a result of the Chapter 11 filings.  On a contractual basis, contingent interestfor the period from the close of business on September 10 through December 31,2004 would have been $37,000 with respect to the First Mortgage Notes and $10,000with respect to the Senior Secured Notes.

 
| ** **                      | ** ** | **Predecessor  Basis**                  | ** ** | **Successor  Basis**                                                      | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **Contingent Interest Expense** | ** ** | **Year ended  December 31,  2002** | ** ** | **Period  from  January 1,  2003  Through  February 28,  2003** | ** ** | **Period  from  March 1, 2003  Through  December 31,  2003** | ** ** | **Year Ended  December 31,  2004** | ** ** |
| ** **                      | ** ** | **(in  thousands)**                     | ** ** |
| First Mortgage Notes            |       | $                                       | 836        |                                                                      | $          | 139 |   | $ | 447 |   | $ | 266 |   |
| Senior Secured Notes            |       | 219                                     |       | 36                                                                        |       | 116 |   | 73 |   |
|                            |       | $                                       | 1,055      |                                                                      | $          | 175 |   | $ | 563 |   | $ | 339 |   |

 

Accrued contingent interestof $1.8 million with respect to the First Mortgage Notes and $.4 million withrespect to the Senior Secured Notes is included in accrued interest payable onthe accompanying consolidated balance sheet at December 31, 2003.  Accrued contingent interest of $2.1 millionwith respect to the First Mortgage Notes and $.5 million with respect to theSenior Secured Notes is included in liabilities subject to compromise on theaccompanying consolidated balance sheet at December 31, 2004 (see Note 4).

 

### **4.**              Liabilities Subject to Compromise

### ** **

### **Liabilities subject to compromise under the Chapter 11 filings consist ofthe following at December 31, 2004:**

 
| 13% First Mortgage Notes, with contingent interest,  due 2006                                 |   | $       | 150,000 |   |
|-----------------------------------------------------------------------------------------------|--------|---------|---------|--------|
| 13% Senior Secured Notes, with contingent interest,  due 2006, including bond premium of $518 |   | 39,518  |    |
| Valuation allowance on Shreveport Notes                                                       |   | (70,348 | )  |
| Accrued interest                                                                              |   | 42,179  |    |
| Accounts payable and accrued liabilities                                                      |   | 3       |    |
| Due to affiliates, net of valuation allowance of  $6,420                                      |   | 7,389   |    |
| Construction retainage                                                                        |   | 6,731   |    |
| Litigation reserves (Note 5)                                                                  |   | 1,388   |    |
| Other                                                                                         |   | 6       |    |
|                                                                                          |   | $       | 176,866 |   |

 

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### **5.**            Commitments and Contingencies

### ** **

For so long as it remains ajoint venture partner in HCS, Paddlewheels is entitled to receive, among otherthings, an amount equal to 1% of “complex net revenues,” as defined, of thecasino, which approximates net revenues, in exchange for the previousassignment by Paddlewheels and its affiliates of their joint venture interestin HCS.  Allocations to Paddlewheels ofsuch amounts are reflected as partnership distributions to HCS I, Inc. and HCSII, Inc.  Such allocations amounted to$1.5 million for the year ended December 31, 2002, $.2 million for theperiod from January 1, 2003 through February 28, 2003, $1.1 millionfor the period from March 1, 2003 through December 31, 2003 and $1.3million for the year ended December 31, 2004.  Unpaid distributions of $.8 million areincluded in due to affiliates on the accompanying consolidated balance sheet atDecember 31, 2003.   Unpaiddistributions of $2.1 million are included in liabilities subject to compromiseon the accompanying consolidated balance sheet at December 31, 2004.  Effective July 10, 2003, HCS suspendedpayments under the agreement to Paddlewheels due to the event of default on theShreveport Notes.

 

HCS is subject to variouslegal and administrative proceedings relating to personal injuries, employmentmatters, commercial transactions and other matters arising in the normal courseof business.  HCS does not believe thatthe final outcome of these matters will have a material adverse effect on itsconsolidated financial position or results of operations.  In addition, HCS maintains what it believes isadequate insurance coverage to further mitigate the 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 be given that theamount or scope of existing insurance coverage will be sufficient to coverlosses arising from such matters.

 

The following proceedingscould result in costs, settlements or damages that materially impact theCompany’s consolidated financial condition or operating results.  In each instance, the Company 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 fileddamage claims and received reimbursements from its insurance carriers during2000 in the amount of approximately $1.5 million to cover substantially all ofthe cost of repairing the damage incurred.  HCS also filed a lawsuit in the U.S. DistrictCourt for the Western District of Louisiana against its insurance carriersseeking to recover lost profits and related claims under its businessinterruption insurance coverage.  On June 16,2003, a judgment was entered in that court awarding HCS approximately $3.9million (including interest but excluding 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 such motions, HCSand the defendants entered into a settlement of this lawsuit in December 2003,whereby HCS received $4.0 million in settlement of the June 16, 2003judgment and the defendant insurance companies paid $.8 million to HCS’soutside legal counsel in full satisfaction of its attorneys’ fees relating tothe claims in the lawsuit.  The $4.0 million settlement was considered inmanagement’s assessment of the purchase price adjustments required inaccordance with SFAS No. 141.

 

In a set of related matters,HCS is also seeking to recover damages from the general contractor, thearchitect and certain other parties involved in the construction of the casino.  For this and other reasons, HCS has withheldpayment of certain retainage amounts that the general contractor is currentlyseeking.  The general contractor has also submitted additional changeorders that HCS is disputing.  HCS 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, HCS, the general contractor, andthe architect entered into an agreement to arbitrate the various claims. An initial arbitration hearing was conducted during June 2004 on HCS’sclaims for liquidated damages, on HCS’s offset claims for delay damages andcosts to repair defective work, and on the general contractor’s payment claimsfor unpaid contract balance, retainage, unapproved change orders, and increasedgeneral conditions and extended overhead.  On July 27, 2004, thearbitration panel issued an Interim Award on the parties’ respectiveclaims.  The arbitration panel found that the general contractor wasentitled to an award of $6.1 million with interest offset by an award to HCS of$1.2 million with interest.  The award provides that interest is to accrueat the contractual rate of 12% from different periods and will be calculated inthe final award.  The general contractor also claims it is entitled to anadditional $.6 million plus interest for unapproved change orders.  HCSrecorded an additional $3.1 million liability during the third quarter of 2004with respect to the Interim Award issued by the arbitration panel.  HCS intends to vigorously contest the generalcontractor’s claims and to seek to modify the Interim Award.  Anarbitration hearing on HCS’s claims against the architect had tentatively beenscheduled during January 2005, but as a result of certain proceedings inthe Chapter 11 case, has been postponed until June 2005.

 

In October 2003, theBossier Parish Police Jury filed an action against HCS and the City of Shreveportin the 26th Judicial District Court of Bossier Parish, Louisiana seeking tooverturn the agreement between HCS and the City of Shreveport, which providesfor an annual fee in lieu of the $3.00/head admission fee, in order to collectboarding fees for itself.  In late February 2004,HCS and the City of Shreveport filed Exceptions of No Right and No Cause ofAction seeking dismissal of the suit.  Ahearing was set on the Exceptions for April 8, 2004, but

 

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was postponed and has not yet been rescheduled. HCS has vigorously contested all the allegations set forth in the suit and willcontinue to do so.  During the session of the Louisiana Legislature whichended on June 21, 2004, at least two bills were proposed seeking to imposeprospectively a boarding fee assessment to be levied by the Bossier ParishPolice Jury as a percentage of HCS’ monthly net gaming proceeds, but such billswere not enacted into law.  Additionally, on April 21, 2004, theBossier Parish Police Jury notified HCS that it will conduct a sales and usetax audit covering the period August 2000 forward directed principally atthe tax that is alleged to be due on complimentary services provided by HCS toits customers.  HCS has vigorously contested the claims set forth in theaudit request and will continue to do so.  HCS and the Bossier ParishPolice Jury are currently in negotiations in an effort to settle the pendinglawsuit, the effect of any potential future legislation and the sales and usetax audit.

 

A number of individualemployees have brought similar gender-based employment claims against HCS underTitle VII in Federal Court in Louisiana.  HCS is vigorously contesting allthe allegations. The claims are in various stages of discovery.

 

As more fully discussed inNote 1, on September 10, 2004, certain creditors of HCS filed aninvoluntary petition against HCS for relief under Chapter 11 of the U.S.Bankruptcy Code.  In addition, on October 30,2004, HCS I, Inc., HCS II, Inc., HCL and Shreveport Capital commenced voluntarycases under Chapter 11, which cases are pending.

 

All of the proceedings inwhich HCS is a defendant have been automatically stayed as a result of theinvoluntary petition for relief under Chapter 11 filed on September 10,2004.

 

**Employee Benefit Plans**

 

HCS participated in aretirement savings plan under Section 401(k) of the Internal Revenue Codeof 1986, as amended, that covered all eligible employees and was sponsored byHollywood 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 the plan were set at 50% of the employees’elective salary deferrals up to a maximum of 5% of employee compensation. For the year ended December 31, 2002 and for the two months ended February 28,2003, HCS expensed $.1 million and $12,000, respectively, as companycontributions to the plan.

 

On August 1, 2003, theplan was merged into Penn National Gaming, Inc.’s retirement savings plan thatalso qualifies under the provisions of Section 401(k) of the InternalRevenue Code of 1986, as amended.  Employer contributions to the plan areset at 50% of the employee’s elective salary deferrals up to a maximum of 6% ofemployee compensation.  For the period from March 1, 2003 to December 312003 and the year ended December 31, 2004, HCS expensed $.2 million and$.3 million, respectively, as company contributions to the plan.

 

**Operating Leases**

 

HCS is party to a groundlease with the City of Shreveport for the land on which the casino was built.The terms of the ground lease require the payment by HCS of base rent to theCity of Shreveport, percentage rent based on adjusted gross receipts to theCity of Shreveport and payments in lieu of admission fees to the City ofShreveport and the Bossier Parish School Board.

 

Payments made under the termsof the ground lease are as follows (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  Through  December 31,  2003** | ** ** | **Year Ended  December 31,  2004** | ** ** |
| Ground lease:                      |       |                                    |       |                                                                      |       |   |   |   |   |
| Base rent                          |       | $                                       | 573        |                                                                      | $          | 95 |   | $ | 478 |   | $ | 573 |   |
| Percentage rent                    |       | 1,464                                   |       | 230                                                                       |       | 1,078 |   | 1,274 |   |
|                               |       | $                                       | 2,037      |                                                                      | $          | 325 |   | $ | 1,556 |   | $ | 1,847 |   |
|                               |       |                                    |       |                                                                      |       |   |   |   |   |
| Payment in lieu of admissions fees |       | $                                       | 5,637      |                                                                      | $          | 864 |   | $ | 4,159 |   | $ | 4,924 |   |

 

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Expenses under operatingleases (exclusive of the ground lease) for the year ended December 31, 2004amounted to $506,000.  Future minimumlease payments as of December 31, 2004 under operating lease obligations(other than the ground lease) having an initial or remaining non-cancelableterm in excess of one year (subject to possible rejection under the Chapter 11proceedings) are as follows (in thousands):

 
| **Year Ended December 31,** | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
|                             |       |       |       |
| 2005                             |       | $          | 304        |   |
| 2006                             |       | 233        |       |
| 2007                             |       | 153        |       |
| 2008                             |       | 140        |       |
| 2009                             |       | 140        |       |
| Thereafter                       |       | 827        |       |
|                             |       |       |       |
|                             |       | $          | 1,797      |   |

### ** **

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

### ** **

Following is a summary of thequarterly results of operations for the years ended December 31, 2003 and2004 (in thousands):

 
| **  **              | ** ** | **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 (1)                  |       | (4,387                                   | )          | (663 | ) | (6,948 | ) | (7,850 | ) | (6,899 | ) |
|                               |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                    | ** ** | **Fiscal  Quarter** | ** ** |
|-------------------------------|------------|---------------------|------------|
| **2004**                      | ** ** | **First**           | ** ** | **Second** | ** ** | **Third  (Restated)** | ** ** | **Fourth** | ** ** |
| Net revenue                   |       | $                   | 36,901     |   | $ | 34,152 |   | $ | 33,627 |   | $ | 29,470 |   |
| Income (loss) from operations |       | 1,053               |       | (1,232 | ) | (884 | ) | (1,461 | ) |
| Net loss (2)                  |       | (6,536              | )          | (8,683 | ) | (10,164 | ) | (5,272 | ) |
|                               |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1)  The secondand third quarters for the year ended December 31, 2003 reflectadjustments of ($2.7 million) and ($2.5 million), respectively,   to net loss from previously issued financialstatements related to the elimination of an income tax benefit.

 

### **(2)  Reflects a decrease in thepreviously reported net loss for the third quarter of 2004 in the amount of$1.4 million.  In accordance with therequirements of Statement of Position 90-7 (see Note 1), as a result of HCShaving determined that there is insufficient collateral to cover the interestportion of scheduled payments on the Shreveport Notes, the accrual of intereston these obligations ceased effective with the close of business on September 10,2004.  The previously issued quarterlyfinancial statements included the accrual of interest through September 30,2004.**

### ** **

### **7.**            Related Party Transactions

### ** **

HWCC-Shreveport, Inc., a wholly-ownedsubsidiary of HCC, provides certain management services to the Shreveportcasino under the terms of a management agreement.  HCS also reimburses HWCC-Shreveport, Inc. forexpenses incurred in connection with services provided under the managementagreement. Total management fees incurred amounted to $2.9 million for the yearended December 31, 2002, $.5 million for the period from January 1,2003 through February 28, 2003, $2.1 million for the period from March 1,2003 through December 31, 2003 and $2.5 million for the year ended December 31,2004 and are included in general and administrative expenses on theaccompanying consolidated statements of operations.  Management fees payable at December 31,2003, net of a valuation allowance of $6.4 million, amounted to $2.2 millionand are included in due to affiliates on the accompanying consolidated balancesheet.  Management fees payable at December 31,2004, net of a valuation allowance of $6.4 million, amounted to $4.7 millionand are included in liabilities subject to compromise on the accompanyingconsolidated balance sheet (see Note 4). Under the indentures and related documents governing the ShreveportNotes, management fees are subordinated to all payments under the ShreveportNotes and may not be paid to the extent that their payment would result incertain financial coverage ratios not being met.  Consequently, no management fees have beenpaid since the opening of the facility.

 

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HCS has also entered into aMarine Services Agreement with Paddlewheels to provide certain marine servicesfor so long as Paddlewheels remains a joint venture partner in HCS.  The Marine Services Agreement becameeffective on September 22, 1998 and, in addition to the reimbursement toPaddlewheels for its direct expenses incurred, if any, provides for HCS to paya monthly fee of $30,000.  HCS expensed$.4 million for the year ended December 31, 2002, $.1 million for theperiod from January 1, 2003 through February 28, 2003,****$.3 million for the period from March 1, 2003 through December 31,2003 and $.4 million for the year ended December 31, 2004 under theagreement.  Unpaid charges of $.2 millionare included in due to affiliates on the accompanying consolidated balancesheet at December 31, 2003.  Unpaidcharges of $.6 million are included in liabilities subject to compromise on theaccompanying consolidated balance sheet at December 31, 2004 (see Note4).  Effective July 10, 2003, HCSsuspended payments under the agreement to Paddlewheels due to the event ofdefault on the Shreveport Notes.  HCSbelieves that the payments may more properly be characterized as equitypayments and intends to raise this issue in its Chapter 11 case.

 

### **8.            Supplemental Cash Flow Information**

### ** **

HCL paid interest totaling$24.6 million during the year ended December 31, 2002 and $12.3 millionfor the period from January 1, 2003 through February 28, 2003.  Nointerest has been paid subsequent to February 28, 2003.  HCL paid no income taxes during the yearsended December 31, 2002, 2003 or 2004.

 

Operating cash receipts anddisbursements resulting from the reorganization of HCS during the year ended December 31,2004 consisted of interest received on cash accumulated because of the Chapter11 proceeding amounting to $.1 and professional fees paid for services renderedamounting to $6.1 million.  There were nocash flows from investing or financing activities during the year ended December 31,2004 resulting from the reorganization.

 

**9.            Income Taxes**

 

HCL and its subsidiaries areincluded in Penn National’s consolidated federal income tax return for periodssubsequent to the acquisition and were included in Hollywood Casino Corporation’sconsolidated federal income tax return for periods prior to theacquisition.  Prior to HCL’s acquisition byPenn National, the benefit for income taxes was based on the amount of tax thatwould be provided if a separate federal income tax return were filed.  Asa result of the uncertainties discussed in Note 1, no consolidated tax benefitwas allocated to HCL based upon its contribution to consolidated federaltaxable income.  Statement of Financial Accounting Standards No. 109,“Accounting for Income Taxes,” requires that the tax benefit of net operatingloss carry forwards (“NOL’s”) and credit carryforwards, together with the taxbenefit of deferred tax assets resulting from temporary differences, berecorded as an asset and, to the extent that management cannot assess that theutilization of all or a portion of such deferred tax assets is more likely thannot, a valuation allowance should be recorded.

 

As a result of theacquisition 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 acquisitionwere $97 million, available for use in any one year by Penn National areapproximately $15.3 million. Future treasury regulations, administrative rulingsor court decisions may also affect Penn National’s future utilization ofHWCC-Louisiana, Inc.’s loss carryforwards.

 

The following is areconciliation of the statutory federal income tax rate to the actual effectiveincome tax rate for the following periods:

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

 

Deferred income taxes resultprimarily from the use of the allowance method rather than the direct write-offmethod for doubtful accounts, the use of accelerated methods of depreciationfor federal income tax purposes and differences in the timing of deductionstaken between tax and financial reporting purposes for the amortization ofpreopening costs, the capitalization of interest, impairment losses and otheraccruals.

 

The Internal Revenue Servicerecently opened an examination of the consolidated federal income tax returnsof HCC for the years 1999 through 2001 in which HCL was included.

 

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**10.            Stock Option Plan**

 

Certain employees of HCS weregranted stock options to acquire common stock of HCC under the Hollywood CasinoCorporation 1996 Long Term Incentive Plan.  On March 3, 2003, due tothe change of control provisions in the plan, all of the stock options grantedunder the plan became exercisable and were exercised.  In October 2003Penn National issued options to an HCS employee to acquire 15,000 shares ofPenn National common stock under the Penn National Gaming, Inc. 2003 Long TermIncentive Compensation Plan.

 

**11.         Predecessor Note**

 

Thedisclosures contained in this Note are as of the date of the PredecessorIndependent Registered Public Accounting Firm’s report (April 11, 2003)and should be read in conjunction with the other Notes to ConsolidatedFinancial Statements.

 

*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 1993for the purpose of obtaining a license to develop and own a riverboat casino inLouisiana.  HCL’s initial efforts toobtain sites in Lake Charles and Bossier City, Louisiana proved unsuccessful.  In September 1998, HCL, Sodak Louisiana,L.L.C. (“Sodak”) and Shreveport Paddlewheels, L.L.C. (“Paddlewheels”) acquiredthe interests of Queen of New Orleans at the Hilton Joint Venture (“QNOV”).  QNOV was a general partnership which owned andoperated a riverboat gaming facility in New Orleans, Louisiana. QNOV ceasedoperating the riverboat casino in October 1997 having requested andobtained approval from the Louisiana Gaming Control Board (the “LGCB”) to movetheir licensed site to the City of Shreveport, approximately 190 miles east ofDallas, Texas.  Subsequent to receivingapproval to relocate the license, QNOV made the decision not to conduct gamingoperations in Shreveport.  The partnersof QNOV sought to transfer the license to operate in Shreveport to anotherinterested 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 acquisition by HCL, Sodak andPaddlewheels of the license to operate in Shreveport was structured as anacquisition of the interests of QNOV’s partners.  The former partners disposed of QNOV’s assetsother than its license to operate and satisfied all but one of its obligationsso that when the former partners withdrew on September 22, 1998transferring their interests to HCL, Sodak and Paddlewheels.  QNOV’s only asset was its license to operatein Shreveport (which had no recorded value) and its only liability was a$5 million obligation to the City of New Orleans (see below).  HCL, Sodak and Paddlewheels obtained thenecessary approvals from the LGCB to proceed with the project in Shreveport.  In June 1999, HCL obtained approval tochange the name of the partnership to Hollywood Casino Shreveport (“HCS”).

 

Upon admission of the newpartners, HCS proceeded with entirely new plans to develop, own and operate ariverboat gaming complex to be constructed in Shreveport (the “ShreveportCasino”).  The Shreveport Casino wascompleted and 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 1,4023 slot machines,61 table games and six poker stations and a 403-room, all suite, art deco stylehotel.  The project also includesapproximately 45,000 square feet of available restaurant and entertainmentspace developed by a third party lessee.

 

Riverboat gaming operationsin Louisiana are subject to regulatory control by the LGCB.  HCS’s current license to operate theShreveport Casino expires on October 14, 2004 (the license wassubsequently renewed on a conditional basis—see Note 2).

 

When the former partners ofQNOV proposed moving to Shreveport, they negotiated a settlement with the Cityof New Orleans to pay $10 million with respect to claims asserted by thecity in connection with the relocation.  DuringSeptember 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.  Theremaining $5 million obligation continued to be reflected as a liabilityby HCS until it was paid in August 1999 upon the issuance of$150 million of 13% First Mortgage Notes with contingent interest due 2006(the “First Mortgage Notes”).  HCL treated this $5 million as part ofthe cost of acquiring their interest in HCS and included the cost in propertyand equipment.

 

It was originally anticipatedthat HCS would develop the Shreveport Casino with each of HCL and Sodak havinga 50% interest in the development and subsequent operations.  Onceoperations commenced, Paddlewheels was to have a residual interest in the eventthat the project was ever sold amounting to 10% plus any capital contributionsmade by Paddlewheels to HCS or otherwise credited to their account.  On March 31,1999, HCL entered into a definitive agreement with Sodak’s parent to acquireSodak for the $2.5 million Sodak had contributed to HCS, with $1,000 paidat closing and the remainder paid by HCL in June 2001.  The revisedstructure of the partnership was approved by the LGCB on April 20,1999.  As a result, HCL obtained an effective 100% ownership interest inHCS with Paddlewheels retaining its 10% residual interest.  During July 1999, Sodak was merged intoHCL.

 

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In July 1999, HCL formedtwo new, wholly-owned subsidiaries, HCS I, Inc. and HCS II, Inc., bothLouisiana corporations.  HCL contributed$1,000 of capital to each entity along with 99% of its interest in HCS to HCSI, Inc. and the remaining 1% of its interest to HCS II, Inc.  In addition, the HCS joint venture agreementwas 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 thewithdrawal of HCL as managing partner of HCS. As a result, HCS I, Inc. now has an effective 99% interest in HCS, andhas become its managing general partner.  HCS II, Inc. now has an effective 1% interestin HCS.  HCS I, Inc. and HCS II, Inc.currently have no other operating activities or assets other than theirownership interests in HCS.  Paddlewheelsretained its 10% residual interest in HCS.  The revised partnership structure was approvedby the LGCB on July 20, 1999.

 

Additionally, in July 1999,HCS formed a new, wholly-owned subsidiary, Shreveport Capital Corporation (“ShreveportCapital”), a Louisiana corporation.  HCScontributed $1,000 of capital to Shreveport Capital.  Shreveport Capital was formed for the solepurpose of being a co-issuer with respect to the First Mortgage Notes and subsequentlybecame a co-issuer with respect to the $39 million of 13% Senior Secured Noteswith contingent interest due 2006 (the “Senior Secured Notes”) issued in June 2001. Shreveport Capital has not and is notexpected to have any operating activities, acquire any assets or incur anyother liabilities.  Accordingly, separatefinancial statements of Shreveport Capital are not included herein becausemanagement has determined that such information is not material to investors.

 

In November 2002, HCLissued additional shares of its common stock to Holdings, a wholly-ownedsubsidiary of HCC which was not subject to certain restrictions on makinginvestments under HCC’s then-existing loan agreements.  The initial stock purchase in the amount of$.3 million, together with subsequent capital contributions of$1.8 million in December 2002, were contributed by Holdings throughHCS I, Inc. and HCS II, Inc. to HCS for working capital needs.  Subsequent to year end, an additional$.8 million was contributed by Holdings through HCS I, Inc. and HCS II,Inc. to HCS.

 

The accompanying consolidatedfinancial statements include the accounts of HCS—Golf Course, LLC (“Golf”), a wholly-ownedsubsidiary of HCS.  All significantintercompany balances have been eliminated in consolidation.  Golf, a Delaware limited liability company,was formed in 2000 to own an eventual 50% interest in Shreveport Golf Company,a joint venture formed to develop and operate a golf course to be used bypatrons of the Shreveport Casino.  Golf’sownership interest in Shreveport Golf Company was accounted for under theequity method.  Given the difficultmarket conditions, the partners in the golf course provided notice in April 2002that they were terminating the lease for the land on which the golf coursewould have been constructed. Accordingly, HCS provided a reserve of$.3 million during April 2002 to write down its investment in thelimited liability company to a zero value.  The partners terminated the joint ventureeffective as of September 30, 2002.

 

HCL estimates that asignificant amount of the Shreveport Casino’s revenues are derived from patronsliving in the 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 parentof HCS, HCL and Shreveport Capital), Penn National Gaming, Inc., a Pennsylvaniacorporation (“Penn National”), and P Acquisition Corp., a Delaware corporationand a wholly-owned subsidiary of Penn National, entered into an Agreement andPlan of Merger (the “Merger Agreement”), dated as of August 7, 2002,pursuant to which HCC became a wholly-owned subsidiary of Penn National throughthe 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 7,2002 restricted HCC, or any of its subsidiaries, from making any additionalcapital contributions to HCS.  Subsequentto entering into the merger agreement, HCC received approval from Penn Nationalto contribute to HCS any funds necessary to make the February 1, 2003interest payments due with respect to the First Mortgage Notes and SeniorSecured Notes (collectively, the “Shreveport Notes”).  With Penn National’s approval, Holdingscontributed an aggregate of $.8 million subsequent to December 31,2002 to assist HCS in making its interest payments.

 

The terms of the indenturesfor the Shreveport Notes provide that, upon consummation of the merger, HCSmust offer to purchase any and all of such notes at a price of 101% of theirface amount plus accrued interest (the “Repurchase Offer”).  Penn National announced on February 24,2003 that it had commenced the solicitation of consents from holders of recordof the notes on February 21, 2003 to waive the Repurchase Offer andrelated provisions.  Penn Nationalconcurrently announced that it did not intend to, or to permit any of itssubsidiaries to, provide financing or credit support to enable any of them orHCS to make the Repurchase Offer.  On March 3,2003, Penn National announced that the requisite number of consents fromholders of the Shreveport Notes were not obtained in the solicitation.

 

On March 14, 2003, HCSreceived notice from an ad hoc committee the holders of the Shreveport Notesthat HCS had failed to make the Repurchase Offer within ten days of the mergeras required under the respective governing indentures.  Pursuant to these indentures, HCS had sixtydays from receipt of such notice to cure such failure or an Event of Default,as defined under each of the indentures, would occur.

 

64

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Even in the event that HCS’sfailure to launch the required Repurchase Offer was either waived by the noteholders or otherwise cured, HCS has experienced net losses and has asignificant deficiency in its partners’ capital.  Accordingly, management believes that HCS’sexisting cash and cash flow from operations may not be sufficient to fund itsoperating and capital needs for the next 24 months (as of April 11, 2003). In such event, HCS would requireadditional capital contributions or other financial support from Penn National. Penn National has not publicly statedits plans or intentions for HCS after the merger; accordingly, management ofHCS can make no assurances that Penn National will provide additional liquidityto HCS.  All of these matters raisesubstantial doubt about HCS’s ability to continue as a going concern.  Management is currently in the process ofdeveloping its plans with regard to these matters.  The holders of the Shreveport Notes mightpursue all rights and remedies that they may have under the indentures as a resultof the event of default.  Any such action on the part of the note holdersmay prompt HCS to seek the protection of the bankruptcy laws or other similarremedies.  (The conclusions regarding the sufficiency of cash, theuncertainties regarding Penn National’s continued involvement, the developmentof Management’s eventual plans and the actions taken by the note holders havebeen subsequently updated as reflected in Note 1).

 

65

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**Report of Independent RegisteredPublic Accounting Firm**

 

To the Partners of Hollywood Casino Shreveport:

 

The audits referred to in our report dated January 28,2005, relating to the consolidated financial statements of Hollywood CasinoShreveport and subsidiaries as of December 31, 2004 and 2003 and for theyear ended December 31, 2004 and 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 Partnership’s management. Our responsibility is toexpress an opinion on this financial statement schedule based upon ouraudits.

 

In our opinion such financial statement schedule presentsfairly, in all material respects, the information set forth therein.

 

 

BDO Seidman, LLP

Philadelphia, Pennsylvania

January 28, 2005

 

66

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**Report of IndependentRegistered Public Accounting Firm**

 

To the Partners of HollywoodCasino Shreveport:

 

We have audited theconsolidated financial statements of Hollywood Casino Shreveport andsubsidiaries for the year ended December 31, 2002 and for the two monthsended February 28, 2003, and have issued our report thereon dated April 11,2003; such report is included elsewhere in this Form 10-K.  Our auditsalso include the financial statement schedule of Hollywood CasinoShreveport listed in Item 15 for such periods.  This financial statement schedule isthe responsibility of the Partnership’s management.  Our responsibility isto express an opinion based on our audits.  In our opinion, such financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

 

Deloitte & Touche LLP

Dallas, Texas

April 11, 2003

 

67

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SCHEDULE II

 

**HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARIES(Debtors-in-Possession)**

**Valuation and Qualifying Accounts (In Thousands)**

 
| ** **                                   | ** ** | **Balance at  Beginning  of Period** | ** ** | **Amounts  Charged to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Balance  at End  of Period** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------|------------|----------------|------------|--------------------------------|------------|
| ** **                                   |       |                                 |       |                                         |       |           |       |                           |       |   |   |   |   |
| **Year Ended  December 31, 2004**       |       |                                 |       |                                         |       |           |       |                           |       |   |   |   |   |
| Allowance for doubtful  accounts receivable  |       | $                                    | 730        |                                         | $          | 463            |       | $                              | (391       | ) | $ | 802 |   |
| ** **                                   |       |                                 |       |                                         |       |           |       |                           |       |   |   |   |   |
| **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 |   |

 

Theaccompanying notes to consolidated financial statements are an integral part ofthis schedule.

 

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**Report ofIndependent Registered Public Accounting Firm**

 

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

 

The audits referred to in ourreport dated January 28, 2005 relating to the consolidated financialstatements of HWCC-Louisiana, Inc. and subsidiaries as of December 31, 2004and 2003 and for the year ended December 31, 2004 and the period from March 1,2003 through December 31, 2003, which is contained in Item 8 of this Form10-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 ouraudits.

 

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

 

BDO Seidman, LLP

Philadelphia, Pennsylvania

January 28, 2005

 

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**Report of IndependentRegistered Public Accounting Firm**

 

To the Board of Directors andShareholders of

HWCC — Louisiana, Inc.:

 

We have audited theconsolidated financial statements of HWCC-Louisiana, Inc. and subsidiaries for theyear ended December 31, 2002 and the two months ended February 28,2003, and have issued our report thereon dated April 11, 2003; such reportis included elsewhere in this Form 10-K.  Our audits also include thefinancial statement schedule of HWCC-Louisiana, Inc. listed in Item 15 forsuch periods.  This financial statement schedule is the responsibilityof the Company’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 basic financial statements taken as a whole,presents fairly in all material respects the information set forth therein.

 

Deloitte & Touche LLP

Dallas, Texas

April 11, 2003

 

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SCHEDULE II

 

**HWCC-LOUISIANA, INC. AND SUBSIDIARIES (Debtors-in-Possession)**

**Valuation and Qualifying Accounts (In Thousands)**

 
| ** **                                   | ** ** | **Balance at  Beginning  of Period** | ** ** | **Amounts  Charged to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Balance  at End  of Period** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|----------------------------------------------|------------|----------------|------------|--------------------------------|------------|
| **Year Ended  December 31, 2004**       |       |                                 |       |                                         |       |           |       |                           |       |   |   |   |   |
| Allowance for doubtful  accounts receivable  |       | $                                    | 730        |                                         | $          | 463            |       | $                              | (391       | ) | $ | 802 |   |
| ** **                                   |       |                                 |       |                                         |       |           |       |                           |       |   |   |   |   |
| **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 |   |

 

Theaccompanying notes to consolidated financial statements are an integral part ofthis schedule.

 

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**ITEM 9****.****                 ****C****HANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A****.****                                           ****CONTROLS AND PROCEDURES**

 

Our management, under thesupervision and with the participation of the principal executive officer andprincipal financial officer, have evaluated the effectiveness of our controlsand procedures related to our reporting and disclosure obligations as of December 31,2004, which is the end of the period covered by this Annual Report on Form10-K.  Based on that evaluation, theprincipal executive officer and principal financial officer have concluded thatour 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 thatoccurred during the fiscal quarter ended December 31, 2004 that havematerially affected, or are reasonable likely to materially affect, ourinternal controls over financial reporting.

 

**ITEM 9B****.**                                            **OTHER INFORMATION**

 

None.

 

# **PART III**

# ** **

## **ITEM 10.**                                              DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT

## ** **

The Hollywood CasinoShreveport general partnership and Shreveport Capital Corporation areco-issuers of the Shreveport Notes.  Shreveport Capital Corporation is awholly-owned subsidiary of Hollywood Casino Shreveport.  HCS I, Inc.is the managing partner of Hollywood Casino Shreveport.  Each of theseentities is a subsidiary of HWCC—Louisiana, Inc.  Set forth below are thedirectors and executive officers, as applicable, of each of these entities:

 

**HCS I, Inc.,Managing Partner of Hollywood Casino Shreveport**

 
| **Name**           | ** ** | **Age** | ** ** | **Position**                                                                |   |
|--------------------|------------|---------|------------|-----------------------------------------------------------------------------|--------|
| John C. Hull       |       | 66      |       | President, Treasurer,  Assistant Secretary and Director                     |   |
| Melvyn Thomas      |       | 56      |       | Vice President and General  Manager                                         |
| Tonya Tarrant      |       | 34      |       | Vice President, Chief  Financial Officer, Secretary and Assistant Treasurer |   |
| C. Daniel Clemente |       | 68      |       | Director                                                                    |

 

**ShreveportCapital Corporation**

 
| **Name**           | ** ** | **Age** | ** ** | **Position**                                                                |
|--------------------|------------|---------|------------|-----------------------------------------------------------------------------|
| John C. Hull       |       | 66      |       | President, Assistant  Secretary and Director                                |
| Tonya Tarrant      |       | 34      |       | Vice President, Chief  Financial Officer, Secretary and Assistant Treasurer |
| C. Daniel Clemente |       | 68      |       | Director                                                                    |
|                    |            |         |            |                                                                             |  |  |

 

**HWCC-Louisiana,Inc.**

 
| **Name**           | ** ** | **Age** | ** ** | **Position**                                                                |
|--------------------|------------|---------|------------|-----------------------------------------------------------------------------|
| John C. Hull       |       | 66      |       | President, Treasurer,  Assistant Secretary and Director                     |
| Tonya Tarrant      |       | 34      |       | Vice President, Chief  Financial Officer, Secretary and Assistant Treasurer |
| C. Daniel Clemente |       | 68      |       | Director                                                                    |

 

**John C. Hull.**  Mr. Hull has served as Director, President, Chief FinancialOfficer, Treasurer and Assistant Secretary of HCS I, Inc. (which is themanaging general partner of Hollywood Casino Shreveport), HCS II, Inc.,HWCC-Louisiana, Inc. and Shreveport Capital Corporation since May 2003 (andpreviously served as Chairman of the Board, Chief Executive Officer andTreasurer of HCS I, Inc., HCS II, Inc., HWCC-Louisiana, Inc. and ShreveportCapital Corporation from March 2003 through April 2003).  Priorto such service, Mr. Hull served as a financial executive with Hollywood CasinoCorporation from August 2002 through February 2003, as Chairman ofthe Board and Chief

 

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Executive Officer of GreateBay Casino Corporation from January 1998 through July 2002 and asCorporate Controller and Principal Accounting Officer of Hollywood CasinoCorporation from November 1994 through December 1997.  GreateBay Casino Corporation filed a petition for relief under Chapter 11 of theUnited States Bankruptcy Code in December 2001.

 

**Tonya Tarrant.**  Ms. Tarrant has served as Vice President of Finance and ChiefFinancial Officer of Hollywood Casino Shreveport since February 2001. In addition, she has served as Vice President and Assistant Treasurer of HCS I,Inc, HCS II, Inc., HWCC-Louisiana, Inc. and Shreveport Capital Corporationsince May 2003 (and also previously served as Vice President, Secretary andAssistant Treasurer of HCS I, Inc., HCS II, Inc., HWCC-Louisiana, Inc. andShreveport Capital Corporation from March 2003 through April 2003). Prior to February 2001 Ms. Tarrant served as Senior Director of Finance ofthe Isle of Capri Casino & Hotel in Bossier City, Louisiana from December 1998to February 2001 and in various other capacities with the Isle of Caprifrom May 1996 to December 1998.

 

**Melvyn Thomas.**  Mr. Thomas has served as Vice President and General Manager ofHollywood Casino Shreveport and HCS I, Inc. since October 2003. Prior to October 2003, Mr. Thomas served as an independent consultant tothe gaming industry from August 2000 through May 2001 and from March 2002to October 2003.  He was General Manager of the Black Hawk Casino byHyatt in Colorado from June 2001 to March 2002.  Mr. Thomas held various positions with CaesarsWorld, Inc. (including executive Vice President and General Manager of CaesarsTahoe) from February 1994 through July 2000.

 

**C. DanielClemente. **Mr. Clemente is a retired lawyer and is anactive business and financial consultant with extensive experience handlingcomplex corporate and real estate issues.  Mr. Clemente has extensiveexperience in corporate governance, corporate finance, and real estatedevelopment and asset management.  He has founded two commercial banks andhas served as director, chief executive officer and legal counsel offederally-regulated institutions.

 

The full board of directorseffectively functions as the audit committee.  John C. Hull serves as theboard’s financial expert.

 

**Code ofConduct**.  All of our employees, including our principalexecutive officer and principal financial and accounting officer, are subjectto the Code of Business Conduct adopted by Penn National.  The Code of Business Conduct is designed todeter wrongdoing and promote ethical conduct, full and accurate reporting inour filings with the Securities and Exchange Commission, compliance withapplicable law, as well as other matters. A copy of the Code of Business Conduct has been filed as exhibit 14.1 tothis Annual Report on Form 10-K.

 

## **ITEM 11**.               EXECUTIVE COMPENSATION

## ** **

The following table setsforth a summary of all compensation paid or accrued by us for services renderedfor the last three fiscal years by our Chief Executive Officer and our otherexecutive officers.

 

**SummaryCompensation Table**

 

| ** **                       | ** ** | ** ** | ** ** | **Annual  Compensation** | ** ** | **Long Term  Compensation  Awards** | ** ** |
|----------------------------------|------------|------------|------------|--------------------------|------------|-------------------------------------|------------|
| **Name and  Principal Position** | ** ** | **Year**   | ** ** | **Salary**               | ** ** | **Bonus**                           | ** ** | **Securities  Underlying  Options Granted** | ** ** |
| John C. Hull(1)                  |       | 2004       |       | $                        | 215,000    |                                | $          | 80,000 |   | — |   |
| *President*                      |       | 2003       |       | 231,528                  |       | 66,667                              |       | — |   |
|                             |       | 2002       |       | —                   |       | —                              |       | — |   |
|                             |       |       |       |                     |       |                                |       |   |   |
| Melvyn Thomas                    |       | 2004       |       | $                        | 235,157    |                                | $          | — |   | — |   |
| *General Manager(2)*             |       | 2003       |       | 50,724                   |       | —                              |       | 15,000 | (3)  |
|                             |       | 2002       |       | —                   |       | —                              |       | — |   |
|                             |       |       |       |                     |       |                                |       |   |   |
| Tonya Tarrant                    |       | 2004       |       | $                        | 161,854    |                                | $          | 25,000 |   | — |   |
| *Vice President of Finance*      |       | 2003       |       | 156,256                  |       | 25,000                              |       | — |   |
| *and Chief Financial Officer*    |       | 2002       |       | 150,808                  |       | —                              |       | — |   |

 

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(1)                                  Prior to March 2003, Mr. Hull’s salary waspaid by Hollywood Casino Corporation.

(2)                                  Mr. Thomas joined Hollywood Casino Shreveporton October 1, 2003.

(3)                                  Options to purchase shares of Penn NationalGaming, Inc. common stock.

 

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**OptionGrants in Last Fiscal Year**

 

No stock options were grantedduring 2004 to the executive officers named in the Summary Compensation Table.

 

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

 

The following table providesinformation with respect to the executive officers shown in the SummaryCompensation Table concerning stock options exercised during 2004 and the valueof vested and unvested unexercised options held as of December 31,2004.  There are no outstanding stock appreciation rights.

 
| ** **    | ** ** | **Shares  Acquired  on Exercise** | ** ** | **Value  Realized** | ** ** | **Number of  Securities  Underlying Unexercised  Options at  December 31, 2004 (1)** | ** ** | **Value of  Unexercised  In-the-Money Options  at December 31, 2004 (2)** | ** ** |
|---------------|------------|-----------------------------------|------------|---------------------|------------|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **Name**      | ** ** | ** **                        | ** ** | **Exercisable**     | ** ** | **Unexercisable**                                                                         | ** ** | **Exercisable**                                                                | ** ** | **Unexercisable** | ** ** |
| John C. Hull  |       | —                            |       | —              |       | —                                                                                    |       | —                                                                         |       | — |   | — |   |
| Melvyn Thomas |       | —                            |       | —              |       | 3,750                                                                                     |       | 11,250                                                                         |       | $ | 147,113 |   | $ | 441,337 |   |
| Tonya Tarrant |       | —                            |       | —              |       | —                                                                                    |       | —                                                                         |       | — |   | — |   |
|               |            |                                   |            |                     |            |                                                                                           |            |                                                                                |            |  |  |  |  |  |  |

 

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(1)  Shares ofcommon stock of Penn National Gaming, Inc.

(2)  Marketprice of shares at fiscal year end ($60.55) less exercise price.

 

On January 30, 2004, buteffective as of March 1, 2003, HCS I, Inc. entered into an employmentagreement with John Hull, its President.  The agreement expires upon therestructuring of our bond debt; however, HCS I, Inc., at its option, may extendthe term of the agreement by an additional six-months.  HCS I, Inc. mayterminate the agreement if Mr. Hull becomes disabled, is convicted of a felonyor commits acts of gross neglect or willful misconduct that materially harmsthe company, loses certain regulatory licensure, or commits a material breachof the agreement.  Mr. Hull’s compensation consists of an initial basesalary of $215,000, and an annual bonus of $80,000.  Mr. Hull is alsoentitled to receive a bonus of $100,000 payable on the effective date of a planof reorganization confirmed by the bankruptcy court.   Mr. Hull is prohibited from disclosingconfidential information, is subject to a non-competition clause during theterm of his employment and non-solicitation clauses for one year followingtermination of his employment.  Following the termination of hisemployment with HCS I, Inc. for any reason, Mr. Hull shall receive any earned,but unpaid base salary, his annual bonus, pro-rated through the date oftermination, the cash equivalent of any accrued, but unused vacation, anyaccrued employee benefits, subject to the terms of the applicable employeebenefit plans, and an amount equal to six months of his base salary.

 

On October 1, 2003, weentered into an employment agreement with Melvyn Thomas to serve as GeneralManager of the facility.  The agreement is for a two-year term, afterwhich Mr. Thomas shall be an “at-will” employee unless the agreement isrenewed.  We may terminate the agreement if Mr. Thomas becomes disabled,is convicted of certain crimes or commits acts of dishonesty as determined ingood faith by the Board of our managing general partner, loses certainregulatory licensure, or commits a material breach of the agreement not curedwithin 15 days of written notice of breach.  Mr. Thomas’s initial basesalary is $225,000 and he is eligible for an annual cash bonus of up to 100% ofhis base salary.  Mr. Thomas also received equity compensation of optionsto purchase 15,000 shares of Penn National Gaming, Inc. common stock, whichvest at a rate of 25% per year over four years. Upon termination, before or after the term of this agreement, other thanfor cause, Mr. Thomas shall receive six months of full salary andbenefits.  In the event of Mr. Thomas’s death or total disability, heshall be entitled to up to 175% of his base monthly salary for up to sixmonths.  Mr. Thomas is prohibited from disclosing confidential informationand is subject to a non-competition clause for the term of the agreement,including any renewals.

 

On July 1, 2002, weentered into an employment agreement with Tonya Tarrant to serve as our VicePresident of Finance and Chief Financial Officer.  The agreement wasoriginally for a two-year term, but was subsequently amended in April 2004to extend the term until July 1, 2005.  Ms. Tarrant’s initial basesalary is $150,000, plus an annual bonus of at least $25,000.  Ms. Tarrantis also entitled to receive a bonus of $30,000 payable 60 days following theconsummation of an agreement extinguishing or restructuring our indebtedness toour bondholders if she remains an employee at the time such bonus becomes dueand payable.  Upon termination, before orafter the term of this agreement, other than for cause, Ms. Tarrant shallreceive a cash payment equal to her base salary and benefits for the greater ofthe remainder of her employment term or six months.  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.  She is prohibited from disclosing confidential information, issubject to a non-competition clause during the term of her employment or for aslong as she receives employment benefits from us.

 

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We do not have any long-termincentive plans or any defined benefit or actuarial plans for the benefit ofour executives.

 

Mr. C. Daniel Clemente, ournon-employee director, received compensation of $50,000 during 2004 uponjoining the Board of Directors and is to receive an additional $10,000 upon thesuccessful completion of a plan of reorganization to be confirmed by thebankruptcy court.  Effective September 2004,Mr. Clemente began receiving additional compensation of $2,000 per month and$1,000 for each meeting of the Board of Directors or Committee thereof which heattends.

 

## **ITEM 12**.               SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

## ** **

The Hollywood CasinoShreveport general partnership and Shreveport Capital Corporation areco-issuers of the Shreveport Notes.  Shreveport Capital Corporation is awholly-owned subsidiary of Hollywood Casino Shreveport.  HCS I, Inc. isthe managing partner of Hollywood Casino Shreveport.  Each of theseentities is a subsidiary of HWCC-Louisiana, Inc., which is an indirectly ownedsubsidiary of Penn National.

 

The following table setsforth certain information with respect to beneficial ownership of Penn National’scommon stock as of March 11, 2005, by each director, the chief executiveofficer and each of our executive officers and all of our executive officersand directors as a group.

 
| **Name and Address(1)**                                          | ** ** | **Number of  Shares  Beneficially Owned** | ** ** | **Percentage  of  Class(2)** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------|------------|
| John C. Hull                                                     |       | —                                    |       |                         | *          |
| C. Daniel Clemente                                               |       | —                                    |       |                         | *          |
| Melvyn Thomas (3)                                                |       | 3,750                                     |       |                         | *          |
| Tonya Tarrant                                                    |       | —                                    |       |                         | *          |
| All executive officers and directors as a group (4  persons) (3) |       | 3,750                                     |       |                         | *          |

 

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*                                         Less than 1%

 

(1)           The persons named in the above table have sole voting and investmentpower with respect to all shares of common stock shown as beneficially owned bythem except as otherwise shown in the succeeding footnotes, and the address ofMessrs. Hull and Clemente is 5601 Bridge Street, Suite 300, Fort Worth,Texas 76112 and the address for Mr. Thomas and Ms. Tarrant is 451 Clyde FantParkway, Shreveport, Louisiana 71101.

(2)           The percentage for each beneficial owner is calculated based on (i) theaggregate number of shares reported to be owned by such group or individual and(ii) the aggregate number of shares of Common Stock outstanding as of March 11,2005 (82,815,086 shares).

(3)           Includes shares that may be acquired upon the exercise of outstandingoptions that are exercisable within 60 days of March 11, 2005, as follows:Melvyn Thomas, 3,750 shares and all executive officers and directors as agroup, 3,750 shares.

 

## **ITEM 13**.               CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

## ** **

For so long as it remains oneour joint venture partners, Paddlewheels is entitled to receive, among otherthings, an amount equal to 1% of our “complex net revenues,” as defined, whichapproximates net revenues, in exchange for the previous assignment by Paddlewheelsand its affiliates of their joint venture interest in us.  Allocations to Paddlewheels of such amountsare reflected as partnership distributions to HCS I, Inc. and HCS II, Inc. Suchallocations amounted to $1.5 million for the year ended December 31, 2002,$.2 million for the period from January 1, 2003 through February 28,2003, $1.1 million for the period from March 1, 2003 through December 31,2003 and $1.3 million for the year ended December 31, 2004.  Unpaid distributions of $.8 million and $2.1million were outstanding at December 31, 2003 and 2004, respectively.  Effective July 10, 2003, we suspendedpayments under the agreement to Paddlewheels due to the event of default on theShreveport Notes.

 

Our operations are managed byHWCC-Shreveport, Inc., a wholly-owned subsidiary of HCC, under the terms of amanagement agreement. We also reimburse HWCC-Shreveport, Inc. for expensesincurred in connection with services provided under the management agreement.Total management fees incurred amounted to $2.9 million for the year ended December 31,2002, $.5 million for the period from January 1, 2003 through February 28,2003, $2.1 million for the period from March 1, 2003 through December 31,2003 and $2.5 million for the year ended December 31, 2004.  Management fees payable at December 31,2003 and 2004, net of a valuation allowance of $6.4 million, amounted to $2.2million and  $4.7 million, respectively.  Under the indentures and related documentsgoverning the First Mortgage Notes and Senior Secured Notes, management feesare subordinated to all payments under the First Mortgage Notes and SeniorSecured Notes and may not be paid to the extent that their payment would resultin certain financial coverage ratios not being met.  Consequently, no management fees have beenpaid since the opening of the facility.

 

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We have also entered into aMarine Services Agreement with Paddlewheels to provide certain marine servicesfor so long as Paddlewheels remains a joint venture partner in us.  The Marine Services Agreement became effectiveon September 22, 1998 and, in addition to the reimbursement toPaddlewheels for its direct expenses incurred, if any, provides for us to pay amonthly fee of $30,000.  We expensed $.4million for the year ended December 31, 2002, $.1 million for the periodfrom January 1, 2003 through February 28, 2003, $.3 million for theperiod from March 1, 2003 through December 31, 2003 and $.4 millionfor the year ended December 31, 2004 under the agreement. Unpaid chargesof $.2 million and $.6 million were outstanding at December 31, 2003 and 2004,respectively.  Effective July 10,2003, we suspended payments under the agreement to Paddlewheels due to theevent of default on the First Mortgage Notes and Senior Secured Notes.  We believe that the payments may moreproperly be characterized as equity payments and intend to raise this issue in ourChapter 11 case.

 

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

## ** **

We are an indirect,wholly-owned subsidiary of Penn National. A summary of the audit and non-audit fees paid by us during fiscal 2004and 2003 is as follows:

 
| ** **            | ** ** | **Fiscal  2003** | ** ** | **Fiscal 2004** | ** ** |
|-----------------------|------------|------------------|------------|-----------------|------------|
|                  |       |             |       |            |       |
| Audit Fees            |       | $                | 141,400    |            | $          | 115,000 |   |
| Audit-Related Fees(1) |       | 89,428           |       | 35,000          |       |
| Tax Fees              |       | —           |       | —          |       |
| All Other Fees(2)     |       | 236,571          |       | —          |       |
|                       |            |                  |            |                 |            |  |  |

 

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

(2)        All other fees are in connection with debt restructuring negotiations andplanning.

 

**PART IV**

 

## **ITEM 15**.              EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

## ** **

(a)  1 and2.            FinancialStatements and Financial Statement Schedules. The following is a list of theconsolidated financial statements of the Company and its subsidiaries andsupplementary data filed as part of Item 8 hereof:

 

1.            Financial Statements

 

Hollywood Casino Shreveportand Subsidiaries:

 

Report of Independent RegisteredPublic Accounting Firm — BDO Seidman, LLP

 

Report of Independent RegisteredPublic Accounting Firm — Deloitte & Touche LLP

 

ConsolidatedBalance Sheets as of December 31, 2003 and 2004

 

ConsolidatedStatements of Operations for the year ended December 31, 2002, the periodfrom January 1, 2003 through February 28, 2003, the period from March 1,2003 through December 31, 2003 and the year ended December 31, 2004

 

ConsolidatedStatement of Changes in Partners’ Deficiency for the year ended December 31,2002, the period from January 1, 2003 through February 28, 2003, theperiod from March 1, 2003 through December 31, 2003 and the yearended December 31, 2004

 

ConsolidatedStatements of Cash Flows for the year ended December 31, 2002, the periodfrom January 1, 2003 through February 28, 2003, the period from March 1,2003 through December 31, 2003 and the year ended December 31, 2004

 

76

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HWCC-Louisiana and Subsidiaries:

 

Reportof Independent Registered Public Accounting Firm — BDO Seidman, LLP

 

Report of Independent RegisteredPublic Accounting Firm — Deloitte & Touche LLP

 

ConsolidatedBalance Sheets as of December 31, 2003 and 2004

 

ConsolidatedStatements of Operations for the year ended December 31, 2002, the periodfrom January 1, 2003 through February 28, 2003, the period from March 1,2003 through December 31, 2003 and the year ended December 31, 2004

 

ConsolidatedStatement of Changes in Shareholders’ Equity (Deficit) for the year ended December 31,2002, the period from January 1, 2003 through February 28, 2003, theperiod from March 1, 2003 through December 31, 2003 and the yearended December 31, 2004

 

ConsolidatedStatements of Cash Flows for the year ended December 31, 2002, the periodfrom January 1, 2003 through February 28, 2003, the period from March 1,2003 through December 31, 2003 and the year ended December 31, 2004

 

2.            Financial Statement Schedules

 

Hollywood Casino Shreveport and Subsidiaries

 

Reportof Independent Registered Public Accounting Firm — BDO Seidman, LLP

 

Reportof Independent Registered Public Accounting Firm — Deloitte & Touche LLP

 

Schedule II— Valuation and Qualifying Accounts

 

HWCC-Louisiana, Inc. and Subsidiaries

 

Reportof Independent Registered Public Accounting Firm — BDO Seidman, LLP

 

Reportof Independent Registered Public Accounting Firm — Deloitte & Touche LLP

 

Schedule II— Valuation and Qualifying Accounts

 

All other schedules areomitted because they are not applicable, or not required, or because therequired information is included in the consolidated financial statements ornotes thereto.

 

3.            Exhibits, Including Those Incorporated by Reference.

 

The exhibits to this Reportare listed on the accompanying index to exhibits and are incorporated herein byreference or are filed as part of this annual report on Form 10-K.

 
| **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)                           |
|                     |       |                                                                                                                                                                                                 |
| &2.2—           |       | Agreement, dated August 27, 2004, by and between  Hollywood Casino Shreveport and Eldorado Resorts, LLC. (Exhibit 2.1)                                                                          |
|                     |       |                                                                                                                                                                                                 |
| &&2.3—      |       | Amendment to Agreement dated September 28,  2004, by and between Hollywood Casino Shreveport and Eldorado Resorts, LLC.  (Exhibit 2.1)                                                          |
|                     |       |                                                                                                                                                                                                 |
| &&&2.4— |       | Investment Agreement dated as of October 18,  2004 by and among Hollywood Casino Shreveport, Eldorado Resorts, LLC.,  Eldorado Shreveport #1, LLC and Eldorado Shreveport #2, LLC (Exhibit 2.1) |

 

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| @@@2.5—  |   | Joint Plan of the Debtors, HCS-Golf Course, LLC and  the Bondholders Committee, Proposed March 3, 2005. (Exhibit 99.1)                                                                                                                                                                                       |
|---------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |   |                                                                                                                                                                                                                                                                                                              |
| @@@2.6        |   | Debtors’ Amended Disclosure Statement for Amended  Joint Plan Dated March 3, 2005. (Exhibit 99.2)                                                                                                                                                                                                       |
|          |   |                                                                                                                                                                                                                                                                                                              |
| @@@2.7—  |   | Black Diamond’s Motion to Terminate the Debtors’  Period of Exclusivity Pursuant to Section 1121(d) of the Bankruptcy  Code. (Exhibit 99.3)                                                                                                                                                        |
|          |   |                                                                                                                                                                                                                                                                                                              |
| *2.8—    |   | Amendment to Investment Agreement dated March 28,  2005, by and among Hollywood Casino Shreveport, Eldorado Resorts, LLC,  Eldorado Shreveport #1, LLC and Eldorado Shreveport #2, LLC.                                                                                                                      |
|          |   |                                                                                                                                                                                                                                                                                                              |
| ###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)                                                                                                     |
|          |   |                                                                                                                                                                                                                                                                                                              |
| +++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)                                                                                                                               |

 

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| +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)                                                                                                                                                                                                                                                                 |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                                       |
| +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)                                                                                                                                                                                                   |

 

79

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| +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 dated as of October 1,  2003 by and between Hollywood Casino Shreveport and Melvyn Thomas. (Exhibit  10.3)                                                                                              |
|            |   |                                                                                                                                                                                                                              |
| @@10.19—   |   | Acknowledgement and Waiver for Employment Agreement  dated October 1, 2003 by and between Hollywood Casino Shreveport and  Melvyn Thomas. (Exhibit 10.4)                                                                     |
|            |   |                                                                                                                                                                                                                              |
| ####10.20— |   | Employment Agreement dated July 1, 2002 by and  between Hollywood Casino Shreveport and Tonya Tarrant. (Exhibit 10.22)                                                                                                       |
|            |   |                                                                                                                                                                                                                              |
| ####10.21— |   | Employment Agreement entered into January 30,  2004, but effective as of March 1, 2003, by and between HCS I, Inc. and  John C. Hull. (Exhibit 10.23)                                                                   |

 

80

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| &&&&10.22— |   | First Amendment to Employment Agreement effective  as of April 21, 2004 by and between Hollywood Casino Shreveport and  Tonya Tarrant. (Exhibit 10.1)         |
|---------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                            |   |                                                                                                                                                               |
| *10.23—                    |   | First Amendment to 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. (Exhibit 14.1)                                                                                                                           |
|                            |   |                                                                                                                                                               |
| *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 from the exhibit shown in  parenthesis filed in HCC’s Annual Report on Form 10-K for the fiscal year  ended December 31, 2003.                                                            |
|   |   |                                                                                                                                                                                                                          |
| +      |   | 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.                                      |
|   |   |                                                                                                                                                                                                                          |
| ++++   |   | 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 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.              |
|   |   |                                                                                                                                                                                                                          |
| @@@    |   | Incorporated by reference to the exhibit shown in  parenthesis included in the Report on Form 8-K filed by HCS on March 9,  2005.                                                                                        |
|   |   |                                                                                                                                                                                                                          |
| &  |   | Incorporated by reference to the exhibit shown in  parenthesis included in the Report on Form 8-K filed by HCS on September 1,  2004.                                                                                    |

 

81

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| &&           |   | Incorporated by reference to the exhibit shown in  parenthesis included in the Report on Form 8-K filed by HCS on October 1,  2004.                                                                  |
|----------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                                                                                      |
| &&&      |   | Incorporated by reference to the exhibit shown in  parenthesis included in the Report on Form 8-K filed by HCS on October 22,  2004.                                                                 |
|                 |   |                                                                                                                                                                                                      |
| &&&& |   | Incorporated by reference to the exhibit shown in  parenthesis filed in HCS’s Quarterly Report on Form 10-Q for the quarter  ended June 30, 2004 as filed with the SEC on August 13, 2004. |
|                 |   |                                                                                                                                                                                                      |
| *                    |   | Filed herewith.                                                                                                                                                                                           |

 

82

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**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

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

 

Dated:  March 29, 2005

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the following persons on behalf of theregistrant and in the capacities and on the dates indicated have signed thisreport below.

 

Each person whose signatureappears below in so signing also makes, constitutes and appoints John C. Hullhis true and lawful attorney-in-fact, in his name, place and stead to executeand cause to be filed with the Securities and Exchange Commission any or allamendments to this report.

 
| **Signature**        | ** ** | **Title**                                                                  | ** ** | **Date**            |
|----------------------|------------|----------------------------------------------------------------------------|------------|---------------------|
|                 |       |                                                                       |       |                |
| /s/ John C. Hull     |       | Chairman of the Board, President, Chief Executive  Officer,                |       | March 29, 2005 |
| John C. Hull         |       | Treasurer, Assistant Secretary and Director  (Principal Executive Officer) |       |                |
|                 |       |                                                                       |       |                |
| /s/ Melvyn Thomas    |       | Vice President                                                             |       | March 29, 2005 |
| Melvin Thomas        |       |                                                                       |       |                |
|                 |       |                                                                       |       |                |
| /s/ Tonya Tarrant    |       | Vice President, Chief Financial Officer and  Assistant                     |       | March 29, 2005 |
| Tonya Tarrant        |       | Treasurer (Principal Financial and Accounting Officer)                     |       |                |
|                 |       |                                                                       |       |                |
|                 |       | Director                                                                   |       | March 29, 2005 |
| C. Daniel Clemente * |       |                                                                       |       |                |

 

----

*  C. DanielClemente was elected as a Director for the limited purpose of serving as anindependent director on the committee charged with overseeing the sale or otherdisposition of the property of the Registrant. As part of Mr. Clemente’s licensing suitability approval with Louisianagaming authorities, it was agreed that Mr. Clemente would not take an activepart in the oversight of the ongoing business activities of theRegistrant.  Accordingly, for the purposeof meeting the filing requirements with the Securities and Exchange Commission,John C. Hull is acting as the sole director.

 

83

----

 

**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|   | SHREVEPORT CAPITAL CORPORATION |
|--------|--------------------------------|
|   |                           |
|   |                           |
|   | By:                            | /s/ | John C. Hull |
|   |                           |   | John C. Hull |
|   |                           |   | Chairman of the Board and Chief Executive Officer |

 

Dated:  March 29, 2005

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the following persons on behalf of theregistrant and in the capacities and on the dates indicated have signed thisreport below.

 

Each person whose signatureappears below in so signing also makes, constitutes and appoints John C. Hull histrue and lawful attorney-in-fact, in his name, place and stead to execute andcause to be filed with the Securities and Exchange Commission any or allamendments to this report.

 
| **Signature**        | ** ** | **Title**                                                                  | ** ** | **Date**            |
|----------------------|------------|----------------------------------------------------------------------------|------------|---------------------|
|                 |       |                                                                       |       |                |
| /s/ John C. Hull     |       | Chairman of the Board, President, Chief Executive  Officer,                |       | March 29, 2005 |
| John C. Hull         |       | Treasurer, Assistant Secretary and Director  (Principal Executive Officer) |       |                |
|                 |       |                                                                       |       |                |
| /s/ Tonya Tarrant    |       | Vice President, Chief Financial Officer and  Assistant                     |       | March 29, 2005 |
| Tonya Tarrant        |       | Treasurer (Principal Financial and Accounting Officer)                     |       |                |
|                 |       |                                                                       |       |                |
|                 |       | Director                                                                   |       | March 29, 2005 |
| C. Daniel Clemente * |       |                                                                       |       |                |

 

----

*  C. DanielClemente was elected as a Director for the limited purpose of serving as anindependent director on the committee charged with overseeing the sale or otherdisposition of the property of the Registrant. As part of Mr. Clemente’s licensing suitability approval with Louisianagaming authorities, it was agreed that Mr. Clemente would not take an activepart in the oversight of the ongoing business activities of theRegistrant.  Accordingly, for the purposeof meeting the filing requirements with the Securities and Exchange Commission,John C. Hull is acting as the sole director.

 

84

----

 

**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|   | HWCC-LOUISIANA, INC. |
|--------|----------------------|
|   |                 |   |   |
|   |                 |   |   |
|   | By:                  | /s/ | John C. Hull |
|   |                 |   | John C. Hull |
|   |                 |   | Chairman of the Board and Chief Executive Officer |

 

Dated:  March 29, 2005

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the following persons on behalf of theregistrant and in the capacities and on the dates indicated have signed thisreport below.

 

Each person whose signatureappears below in so signing also makes, constitutes and appoints John C. Hull histrue and lawful attorney-in-fact, in his name, place and stead to execute andcause to be filed with the Securities and Exchange Commission any or allamendments to this report.

 
| **Signature**        | ** ** | **Title**                                                                  | ** ** | **Date**            |
|----------------------|------------|----------------------------------------------------------------------------|------------|---------------------|
|                 |       |                                                                       |       |                |
| /s/ John C. Hull     |       | Chairman of the Board, President, Chief Executive  Officer,                |       | March 29, 2005 |
| John C. Hull         |       | Treasurer, Assistant Secretary and Director  (Principal Executive Officer) |       |                |
|                 |       |                                                                       |       |                |
| /s/ Tonya Tarrant    |       | Vice President, Chief Financial Officer and  Assistant                     |       | March 29, 2005 |
| Tonya Tarrant        |       | Treasurer (Principal Financial and Accounting Officer)                     |       |                |
|                 |       |                                                                       |       |                |
|                 |       | Director                                                                   |       | March 29, 2005 |
| C. Daniel Clemente * |       |                                                                       |       |                |

 

 

----

*  C. DanielClemente was elected as a Director for the limited purpose of serving as anindependent director on the committee charged with overseeing the sale or otherdisposition of the property of the Registrant. As part of Mr. Clemente’s licensing suitability approval with Louisianagaming authorities, it was agreed that Mr. Clemente would not take an activepart in the oversight of the ongoing business activities of theRegistrant.  Accordingly, for the purposeof meeting the filing requirements with the Securities and Exchange Commission,John C. Hull is acting as the sole director.

 

85

----