-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IbgyrwB7Kj5oh55IYVSdb38VzwRzrfQ+3NXvQn5Xbl9DvtsjXAj7UJIXZLmYplmI YtpNoZl8/P/2dFx9kKHoDA== 0000912057-00-011236.txt : 20000314 0000912057-00-011236.hdr.sgml : 20000314 ACCESSION NUMBER: 0000912057-00-011236 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARRAHS ENTERTAINMENT INC CENTRAL INDEX KEY: 0000858339 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 621411755 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10410 FILM NUMBER: 567998 BUSINESS ADDRESS: STREET 1: 1023 CHERRY ROAD CITY: MEMPHIS STATE: TN ZIP: 38117 BUSINESS PHONE: 9017628600 MAIL ADDRESS: STREET 1: 1023 CHERRY ROAD CITY: MEMPHIS STATE: TN ZIP: 38117 FORMER COMPANY: FORMER CONFORMED NAME: PROMUS COMPANIES INC DATE OF NAME CHANGE: 19920703 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-10410 ------------------------ HARRAH'S ENTERTAINMENT, INC. (Exact name of registrant as specified in its charter) DELAWARE I.R.S. NO. 62-1411755 (State of Incorporation) (I.R.S. Employer Identification No.)
5100 WEST SAHARA AVENUE, SUITE 200 LAS VEGAS, NEVADA 89146 (Address of principal executive offices) (zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (702) 579-2300 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------- -------------------------------------------------------- Common Capital Stock, Par Value $0.10 per share* NEW YORK STOCK EXCHANGE CHICAGO STOCK EXCHANGE PACIFIC EXCHANGE PHILADELPHIA STOCK EXCHANGE 7 7/8% Senior Subordinated Notes Due 2005 of Harrah's NEW YORK STOCK EXCHANGE Operating Company, Inc.** 7 1/2% Senior Notes Due 2009 of Harrah's Operating NEW YORK STOCK EXCHANGE Company, Inc.**
- ------------------------------ * Common Capital Stock also has special stock purchase rights listed on each of the same exchanges ** Securities guaranteed by Registrant SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of January 31, 2000, based upon the closing price of $19 15/16 for the Common Stock on the New York Stock Exchange on that date, was $2,436,362,400. As of January 31, 2000, the Registrant had 123,423,321 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the 2000 Annual Meeting of Stockholders, which will be filed within 120 days after the end of the fiscal year, are incorporated by reference into Part III hereof and portions of the Company's Annual Report to Stockholders for the year ended December 31, 1999 (the "Annual Report") are incorporated by reference into Parts I and II hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES. Harrah's Entertainment, Inc., a Delaware corporation, is the leading consumer marketing company in the gaming industry, and operates casinos in more markets than any other casino company. (In this discussion, the words "Harrah's Entertainment," "Company," "we," "our," and "us" refer to Harrah's Entertainment, Inc., together with its subsidiaries where appropriate.) Formerly named The Promus Companies Incorporated ("Promus"), we were incorporated on November 2, 1989 and on June 30, 1995, changed our name to Harrah's Entertainment, Inc., after the spin-off of our hotel business into a separate public company. We conduct our business through a wholly-owned subsidiary, Harrah's Operating Company, Inc. ("HOC") (formerly named Embassy Suites, Inc. ("Embassy")), and through HOC's subsidiaries. Our principal asset is the stock of HOC, which holds, directly or indirectly through subsidiaries, substantially all of the assets of our businesses. Our principal executive offices are located at 5100 West Sahara Avenue, Suite 200, Las Vegas, Nevada 89146, telephone (702) 579-2300. On January 1, 1999, we completed our merger with Rio Hotel & Casino, Inc. ("Rio"). Rio owns and operates the Rio Hotel & Casino, an all-suite hotel and casino located in Las Vegas, Nevada, as well as the Rio Secco Golf Club in nearby Seven Hills, Nevada. In connection with the merger, we issued approximately 25 million shares of our common stock and assumed Rio's outstanding debt of $435 million face amount. During second quarter 1999, we redeemed all $225 million face amount of Rio's 10 5/8% Senior Subordinated Notes due 2005 and 9 1/2% Senior Subordinated Notes due 2007, and we retired Rio's revolving credit facility scheduled to mature in 2003 (collectively, the "Rio Debt"). In January 1999, we issued $500 million of 7 1/2% Senior Notes due 2009 and used the net proceeds to reduce amounts outstanding under our revolving credit facility scheduled to mature in 2000 (the "Previous Facility"). In April 1999, we consummated new revolving credit and letter of credit facilities (the "Bank Facility") in the amount of $1.6 billion. See "Management's Discussion and Analysis--Debt and Liquidity" on page 29 of the Annual Report. This page is incorporated into this document by reference. Proceeds from the Bank Facility were used to retire the Previous Facility and the Rio Debt. In February 1999, we consummated an agreement with our partners owning the other 45% interest in Showboat Marina Casino Partnership ("SMCP"), which owns our East Chicago casino property, to increase our ownership interest in SMCP to 99.55%. Partnership agreements were amended to give us greater flexibility in operating this property, and in March 1999 it was rebranded from a "Showboat" to a "Harrah's" casino. Also in March 1999, we redeemed all $150 million of SMCP's 13 1/2% First Mortgage Notes due 2009. In April 1999, we announced plans to sell our interests in the Star City casino in Sydney, Australia to TABCORP Holdings Limited ("TABCORP"), an Australia-based company, in connection with that company's intention to offer to acquire the issued and outstanding shares of Star City Holdings Ltd ("SCHL"). In fourth quarter 1999, we engaged in a series of transactions in which we divested our outstanding shares and options of SCHL, and the disposition of our management contract for the Star City casino was completed in January 2000. In July 1999, we announced that we had reached an agreement to sell the Showboat Las Vegas casino. We expect the sale to close by the end of first quarter 2000, subject to certain conditions, including regulatory approval. This property was determined to be a non-strategic asset at the time of the Showboat acquisition. In August 1999, we relocated our corporate headquarters and moved our senior corporate executives and their support staffs to Las Vegas, Nevada. Our national service headquarters remains in Memphis, Tennessee. We believe that the relocation of our corporate headquarters to the epicenter of 1 the casino industry will improve our business by expanding our knowledge base of the gaming market, enhancing our product and service innovation, fueling our corporate development and increasing our visibility and accessibility to important industry, political and customer constituencies. We further believe that expanding our presence in the world's largest casino marketplace will benefit our entire national distribution network and will enhance our ability to attract and retain the highest quality gaming industry executives. In August 1999, we announced the signing of a definitive agreement to acquire Players International, Inc. ("Players"). Under the terms of the agreement, Players' shareholders will receive $8.50 in cash for each share outstanding and we will assume approximately $150 million of Players' debt. We expect to fund the acquisition through our Bank Facility. Players stockholders approved the proposed merger at a special stockholders meeting held October 28, 1999, however, the transaction is subject to various conditions, including regulatory approvals. In January 2000 we successfully completed a consent solicitation to an amendment to the Indenture governing Players' 10 7/8% Senior Notes due 2005, conditioned upon closing of the Players acquisition, which will allow the merger to take place without creating a default under the Indenture. Players operates a dockside riverboat casino on the Ohio River in Metropolis, Illinois, two cruising riverboat casinos in Lake Charles, Louisiana, two dockside riverboat casinos in Maryland Heights, Missouri, and a horse racetrack in Paducah, Kentucky. Since March 1997, Players and Harrah's have jointly operated a landside hotel and entertainment facility at our St. Louis-Riverport property in Maryland Heights. Prior to entering into the agreement with us, Players terminated a previously announced merger agreement with another gaming company. As a result of the termination of that agreement, Players paid a $13.5 million break-up fee pursuant to that agreement's terms. In connection with our agreement with Players, we agreed to provide the funds necessary to make this payment. Players must reimburse us for this advance, plus pay an additional termination fee should certain events occur resulting in the termination of our agreement with Players. The funds we have advanced are a component of the total purchase price we will pay for Players. We expect our acquisition of Players to close by the end of March 2000. In September 1999, we announced that we had signed a contract with the Ak Chin Indian Community to continue management of the Harrah's Ak Chin Casino near Phoenix, Arizona for another five years after the expiration of our original management agreement at the end of 1999. The new agreement is subject to various regulatory approvals, and contemplates an extension of the Community's compact with the state of Arizona, which expires in 2003. The existing management agreement has been temporarily extended through July 1, 2000 (on the new financial terms) while regulatory approvals are obtained. In addition, the Tribe announced a planned expansion of the facility to include a new 150-room hotel, an additional restaurant, meeting and banquet room facilities, a resort pool and a landscaped courtyard. In October 1999, the new Harrah's New Orleans Casino, the exclusive land-based casino entertainment facility in New Orleans, Louisiana opened. One of our subsidiaries owns approximately 43% of the equity in JCC Holding Company, a publicly-traded company which owns the casino, and another of our subsidiaries manages the casino pursuant to a management agreement. JCC Holding is the successor to the operations of Harrah's Jazz Company pursuant to a plan of reorganization under Chapter 11 of the Bankruptcy Code. In November 1995, Harrah's Jazz Company and its wholly-owned subsidiary, Harrah's Jazz Finance Corp., filed petitions for relief under Chapter 11. In April 1996, Harrah's Jazz Company filed a plan of reorganization and later filed several subsequent amendments to the plan (the "Plan"). The Bankruptcy Court confirmed the Plan as modified on October 13, 1998, and the Plan was consummated on October 30, 1998. See "Casino Entertainment--Land-Based Casinos--New Orleans" on pages 6 through 8 for recent developments concerning the New Orleans casino. 2 In November 1999, we announced an agreement with the Eastern Band of Cherokee Indians to extend our management contract for the Harrah's Cherokee Smoky Mountains casino for another two years after its expiration in November 2002. Operating data for the three most recent fiscal years is set forth on page 23 of the Annual Report. This page of the Annual Report is incorporated into this document by reference. For information on operating results and a discussion of those results, see "Management's Discussion and Analysis--Operating Results and Development Plans" on pages 23 through 28 of the Annual Report. These pages are incorporated into this document by reference. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward looking statements. Certain information included in this Annual Report on Form 10-K and other materials filed or to be filed by the Company with the Securities and Exchange Commission ("SEC") (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are forward looking. These include statements relating to the following activities, among others: (A) operations and expansions of existing properties, including future performance, anticipated scope and opening dates of expansions; (B) planned construction or development of casinos and hotels that would be owned or managed by the Company and the pursuit of strategic acquisitions; (C) planned capital expenditures for 2000 and beyond; (D) the impact of the WINet and Total Gold Programs; and (E) any future impact of the Showboat acquisition, the Rio merger or the planned acquisition of Players. These activities involve important factors that could cause actual results to differ materially from those expressed in any forward looking statements made by or on behalf of the Company. These include, but are not limited to, the following factors as well as other factors described from time to time in the Company's reports filed with the SEC: construction factors, including zoning issues, environmental restrictions, soil and water conditions, weather and other hazards, site access matters and building permit issues; access to available and feasible financing; regulatory, licensing and other governmental approvals, third party consents and approvals, and relations with partners, owners and other third parties; conditions of credit markets and other business and economic conditions, including international and national economic problems; litigation, judicial actions and political uncertainties, including gaming legislative action, referenda and taxation; and effects of competition, including locations of competitors and operating and marketing competition. Any forward looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. 3 CASINO ENTERTAINMENT GENERAL Our casino business commenced operations in 1937 and is unique among casino entertainment companies in its broad geographic diversification. At year end, we operated casino hotels in the five traditional U.S. gaming markets of Reno, Lake Tahoe, Las Vegas and Laughlin, Nevada and Atlantic City, New Jersey. We also operated a riverboat casino in East Chicago, Indiana; dockside casinos in Joliet, Illinois, Vicksburg and Tunica, Mississippi, Shreveport, Louisiana, and St. Louis and North Kansas City, Missouri; and casinos on three Indian reservations, one near Phoenix, Arizona, one near Topeka, Kansas and one in Cherokee, North Carolina. We also operated the Rio Hotel & Casino in Las Vegas, Nevada and Showboat casinos in Las Vegas, Nevada (which we have reached agreement to sell) and Atlantic City, New Jersey. In November 1999, we completed the sale of our equity interests in the Star City casino in Sydney, Australia to a third party, and in January 2000 we sold our management contract for the casino. As of December 31, 1999, we operated a total of approximately 1,180,000 square feet of casino space, 33,794 slot machines, 1,044 table games, 11,760 hotel rooms or suites, approximately 281,286 square feet of convention space, 86 restaurants, 34 snack bars, ten showrooms and five cabarets. We continued in 1999 to implement our Total Gold program, a fully integrated national player recognition and rewards program that connects player activity and provides rewards across all Harrah's properties. During 1999, we embarked on the next stage of our strategy with the launch of the tiered customer loyalty card program--Total Diamond, Total Platinum and Total Gold--to reward customers for choosing our casinos. We have obtained four U.S. patents covering the technology associated with the Total Gold program. Underpinning Harrah's Total Gold program is a database management system exclusive to the Company, The Winners Information Network system, or WINet (U.S. Patent Pending), which enhances the advantages of our geographic distribution and links all of our domestic Harrah's brand locations. The Company's marketing strategy is currently designed to appeal primarily to those customers who are avid, experienced players, especially those who play in more than one market. Our strategic direction is focused on establishing well-defined brand identities that communicate and deliver a consistent message of high quality and excellent service. LAND-BASED CASINOS ATLANTIC CITY The Harrah's Atlantic City casino hotel is situated on 35.8 acres in the Marina area of Atlantic City and at year end had approximately 86,100 square feet of casino space with 2,826 slot machines and 83 table games. It consists of three 16-story hotel towers with 278 suites and 896 rooms and adjoining low rise buildings which house the casino space and the 26,100 square foot convention center. The facilities include seven restaurants, an 800-seat showroom, a health club with swimming pool, customer parking for 3,085 cars, including a substantial portion in a parking garage, and a 1,600-space employee/ valet parking lot. The property also has a 63-slip marina. We also own 174 acres of wetlands in the Brigantine area and parcels totaling 6.2 acres in Atlantic City outside the Marina area. The Mardi Gras-themed Atlantic City Showboat is located on 21 acres of land on the Boardwalk next to the Trump Taj Mahal and currently has approximately 102,000 square feet of casino gaming space containing 3,744 slot machines and 75 table games. The hotel and casino also has seven restaurants, two lounges and snack bars, a shopping center, a 60-lane bowling center, a 346-seat showroom and a total of 800 hotel rooms (including 69 suites). There are 3,046 parking spaces available. 4 Most of Harrah's Atlantic City's and Atlantic City Showboat's customers arrive by car or bus from within a 150-mile radius which includes Philadelphia, New York and northern New Jersey, the casinos' primary feeder markets. LAS VEGAS Harrah's Las Vegas is located on approximately 17.7 acres on the Las Vegas Strip and consists of a 15-floor hotel tower, a 23-floor hotel tower, two 35-floor hotel towers, and adjacent low-rise buildings which house a 25,000 square foot convention center and the casino. The hotel has 2,467 regular rooms and 146 suites. The Harrah's Las Vegas complex has approximately 86,700 square feet of casino space, with 1,819 slot machines and 75 table games. Also included are six restaurants, four snack bars, the 525-seat Commander's Theatre, a 367-seat cabaret, an arcade, a health club and a heated pool. There are 2,720 parking spaces available, including a substantial portion in a self-park garage. The Rio Hotel & Casino is situated adjacent to Interstate 15 near the heart of the Las Vegas Strip and has approximately 110,000 square feet of casino gaming space containing 2,368 slot machines, 106 table games including a premium gaming area, poker, keno and race and sports book. The carnival and Mardi Gras-themed hotel and casino also has 2,548 hotel suites, including approximately 1,500 suites contained in the three interconnected 21-story "Ipanema Towers," approximately 1,000 suites in the 41-story "Masquerade Tower" and nine luxury Palazzo Suites in a complex adjoining the casino. In addition, the facility contains 13 restaurants, four coffee bars, a 737-seat entertainment complex, a 32,000 square-foot shopping area, and a 108,000 square foot outdoor entertainment area featuring a landscaped sand beach and three swimming pools. There are 6,293 parking spaces available, including self-parking and valet. Rio also owns the Rio Secco Golf Club in nearby Seven Hills, Nevada. In October 1997, Rio, having acquired or contracted to acquire 43 acres of land adjacent to the Rio, announced the New Rio Master Plan. Most of the first phase of the New Rio Master Plan is completed, including a state-of-the-art convention and entertainment center, a complex of nine luxury Palazzo Suites, a restaurant serving authentic Chinese food, a valet parking structure, an expanded outdoor area with an additional swimming pool; additional exhibition space in the Masquerade Village; an expansion of the Shutters premium gaming lounge; the creation of a concierge suite level in the Ipanema and Masquerade Towers; an expansion of the Rio's spa; and additional parking. Subsequent phases of the New Rio Master Plan are in the conceptual stage. The timetable, theme and cost of the subsequent phases have not yet been established and there can be no assurance that the balance of the New Rio Master Plan will be implemented. In first quarter 1999, Rio began construction of a showroom complex as an addition to its existing entertainment venues. The showroom will include a 1,500 seat, state-of-the-art theater with a balcony, a three-level lobby with hospitality center, and a theater promenade with approximately 10,000 square feet of retail space. Completion is scheduled for second quarter 2000. Rio also is constructing a road across some of its recently acquired properties that will provide an additional east/west conduit for Las Vegas residents and tourists. Rio has agreed with Clark County, Nevada to deed the roadway acreage to Clark County upon its completion in exchange for other Clark County acreage and reimbursement of a portion of the construction costs. The primary feeder markets for Harrah's Las Vegas are the Midwest, California and Canada. For Rio, the primary feeder markets are Southern California, the Southwest and Asia. We have entered into an agreement to sell the Showboat Las Vegas casino, which was determined to be a non-strategic asset at the time of the Showboat acquisition. We expect the sale to close by the end of first quarter 2000, subject to certain conditions, including regulatory approval. 5 LAKE TAHOE Harrah's Lake Tahoe is situated on 23 acres near Lake Tahoe and consists of an 18-story tower and adjoining low-rise building which house approximately 66,500 square feet of casino space, with 1,668 slot machines and 84 table games, and an 18,000 square foot convention center. The casino hotel, with 78 suites and 453 luxury rooms, has seven restaurants, two snack bars, the 688-seat South Shore Showroom, a 50-seat cabaret, a health club, retail shops, a heated pool and an arcade. The facility has customer parking for 854 cars in a garage and 1,098 additional spaces in an adjoining lot. We also operate Bill's Lake Tahoe Casino, which is located on a 2.1 acre site adjacent to Harrah's Lake Tahoe. The casino includes approximately 18,000 square feet of casino space, with 579 slot machines and 18 table games, and one restaurant. The primary feeder market for both casinos is California. RENO Harrah's Reno, situated on approximately five acres, consists of a casino hotel complex with a 24-story structure, an approximate 15,450 square foot convention center and 57,000 square feet of casino space, with 1,536 slot machines and 70 table games. The facilities include two hotel towers, with 934 rooms and 24 suites, the 420-seat Sammy's Showroom, a pool, a health club and an arcade. The property has six restaurants, including a Planet Hollywood restaurant and lounge owned and operated by a non-affiliated restaurant company. The complex can accommodate guest parking for 1,661 cars, including a valet parking garage, a self-park garage and off-site valet parking. In June 1999, we purchased properties adjacent to Harrah's Reno and are demolishing the existing buildings on the site, where we plan to develop a plaza area. Other long-term plans for the site are being considered. The primary feeder markets for Harrah's Reno are northern California, the Pacific Northwest and Canada. LAUGHLIN Harrah's Laughlin is located in Laughlin, Nevada on a 44.9 acre site in a natural cove on the Colorado River and features a hotel with 1,480 standard rooms and 99 suites, a 378-seat showroom, a 3,164-seat outdoor amphitheater, five restaurants and two snack bars, including a McDonald's and a Baskin Robbins which are operated by non-affiliated companies. Harrah's Laughlin has approximately 47,000 square feet of casino space, with 1,170 slot machines and 41 table games, and approximately 5,000 square feet of convention center space. The facility has customer parking for 2,604 cars, including a covered parking garage, and a park for recreational vehicles. Other amenities include a health club, swimming pools, an arcade and retail shops. It is the only property in Laughlin with a developed beachfront on the River. The casino's primary feeder markets are the Los Angeles and Phoenix metropolitan areas. NEW ORLEANS On October 28, 1999, the new Harrah's New Orleans Casino opened. A subsidiary of the Company owns approximately 43% of the equity in JCC Holding Company, a publicly-traded company which owns the casino, and another subsidiary manages the casino pursuant to a management agreement. The casino includes 100,000 square feet of gaming space with approximately 2,900 slot machines and 120 table games including live poker, a 250-seat buffet, two parking garages, and approximately 10,000 square feet of multi-function, special event, food service and meeting-room space on the first floor of the premises. The casino contains five themed areas intended to evoke the atmosphere of New Orleans. Parking for approximately 300 cars and approximately 145,000 square feet of back-of-house and support areas are provided underneath the main gaming floor. Two parking facilities which contain 6 approximately 1,550 parking spaces are located across Poydras Street and are connected to the casino by an underground tunnel. The second floor of the casino premises contains approximately 150,000 square feet of unfinished multipurpose non-gaming entertainment space. A subsidiary of the Company owned an approximate 47% interest in Harrah's Jazz Company ("Harrah's Jazz"), a partnership formed for purposes of developing, owning and operating the exclusive land-based casino entertainment facility in New Orleans, Louisiana, on the site of the former Rivergate Convention Center. In November 1995, Harrah's Jazz and its wholly-owned subsidiary, Harrah's Jazz Finance Corp., filed petitions for relief under Chapter 11 of the Bankruptcy Code. Harrah's Jazz filed a plan of reorganization with the Bankruptcy Court in April 1996 and filed several subsequent amendments to the plan (the "Plan"). The Bankruptcy Court confirmed the Plan as modified on October 13, 1998 and the Plan was consummated on October 30, 1998. In accordance with the terms of the plan, a newly formed limited liability company, Jazz Casino Company, L.L.C. ("JCC"), was responsible for completing construction of the Harrah's New Orleans Casino. In exchange for an equity investment of $75 million (including $60 million in debtor-in possession loans to Harrah's Jazz which were converted to equity upon consummation of the Plan), one of our subsidiaries acquired, at the time of Plan consummation, approximately 44% of the equity in JCC Holding Company. This ownership interest has been reduced to approximately 43% due to the exercise by an unrelated party of an option to acquire a portion of the subsidiary's interest, and the ownership interest may be reduced in the future to approximately 40% in the event other unrelated parties exercise additional options to acquire portions of the interest. We also own a warrant which entitles us to acquire additional shares in JCC Holding Company sufficient to increase our ownership in JCC Holding Company to 50% for a predetermined price. Another subsidiary of the Company (the "Manager") manages the Casino pursuant to a management agreement under which it earns a base management fee of 3% of Casino revenues and 7% of Casino EBITDA in excess of $75 million. We are obligated to defer receipt of management fees under certain circumstances, and these fees are currently being deferred by JCC. We have also entered into settlements with former partners of Jazz whereby such partners (or their creditors) are entitled to future payments from us based on management fees actually received by the Manager. We (i) guaranteed JCC's initial $100 million twelve-month payment under the casino operating contract to the State of Louisiana gaming board (the "State Guarantee"), (ii) guaranteed $166.5 million of a $236.5 million JCC bank credit facility, including a $25 million working capital loan, (iii) guaranteed to the State of Louisiana gaming board, City of New Orleans, banks under the JCC bank credit facility and JCC bondholders, completion and opening of the Casino on or before October 30, 1999 (subject to force majeure) and (iv) made a $22.5 million subordinated loan to JCC to finance construction of the Casino in 1999. Since the Casino opened on October 28, 1999, our obligations under the completion guarantees have been performed except that we remain responsible to ensure that JCC has sufficient funds to pay any remaining unpaid completion bills. The amount of the funding necessary to pay these bills is not expected to be material to us. With respect to the State Guarantee, we guaranteed JCC's first $100 million twelve-month payment obligation commencing upon the opening of the Casino (October 28, 1999). Additionally, if certain cash flow tests and other conditions are satisfied each year, we are obligated to repost the guarantee beginning April 1, 2000, for each 12 month period ending March 31, up to the 12 month period ending March 31, 2004. There are no cash flow conditions for the first reposting period of April 1, 2000 to March 31, 2001, but reposting is subject to other conditions. If we repost the guarantee for the twelve-month period from April 1, 2000 to March 31, 2001, any unfunded portion of our initial guarantee for the period ending October 27, 2000 is extinguished. Our obligation under the guarantee for the first year of operations or any succeeding 12 month period is limited to a guarantee of the $100 million payment obligation of JCC for the 12 month period in which the guarantee is in effect 7 and is secured by a first priority lien on JCC's assets. JCC's payment obligation (and therefore the amount guaranteed by the Company) is $100 million at the commencement of each 12 month period under the casino operating contract and declines on a daily basis by 1/365 of $100 million to the extent payments are made each day by JCC to Louisiana's gaming board. On February 28, 2000 JCC notified us that it was suspending its daily minimum payments to the State of Louisiana gaming board until such time as JCC is able to generate sufficient cash flow to pay its operating expenses and make the daily payments. On February 29, 2000 the State made a demand on us under the State Guarantee. We began funding the daily payment to the State on February 29, 2000. The funding of the State Guarantee creates a demand obligation from JCC to us which is the most senior of the project debt, senior to the bank and bond financing, and secured by a first priority lien on all assets of the casino project. JCC's bank credit facility permits funding of up to $5 million under the State Guarantee without a default under the bank loan documents. JCC has obtained a waiver from its bank syndicate to permit funding of up to $40 million under the State Guarantee on certain conditions, including (1) reposting by the Company of the State Guarantee for the one-year period ending March 31, 2001, subject to certain conditions set forth in our agreement with JCC concerning the State Guarantee, and (2) forbearance until at the earliest March 31, 2001 by the Company of collection of up to $40 million principal on the demand obligation from JCC to us which arises when we fund under the State Guarantee, and also deferral until March 31, 2000 of any interest on such principal up to $40 million. On February 29, 2000, we notified JCC that if certain conditions are met, we will issue a new State Guarantee for the daily payments due from April 1, 2000 through March 31, 2001. We also agreed to forbear from collecting principal and interest on up to $40 million in loans under the State Guarantee until March 31, 2001. For providing the State Guarantee, we earn fees from JCC of $6 million for the first and second years of operations (or the prorated amounts thereof) and $5 million for each renewal year thereafter. We also earn fees for guaranteeing the JCC bank credit facility of approximately 2.75% of up to $156.5 million of guaranteed debt, payable for periods during which such debt is outstanding. Our credit support fees may be reduced in the event our borrowing costs under our Bank Facility increase after Plan consummation. We are obligated to defer receipt of State Guarantee fees and a portion of the credit support fees under certain circumstances, and the fees are currently being deferred by JCC. We have executed a forbearance agreement with JCC whereby we have agreed to forbear until August 1, 2000, or to such later date as we in our sole discretion may determine, from collecting from JCC slot machine rental, certain reimbursable items pursuant to the Management Agreement and certain service fees pursuant to an Administrative Services Agreement with JCC. AUSTRALIA We sold our interests in the Star City casino in Sydney, Australia during fourth quarter 1999 and first quarter 2000 by divesting our outstanding shares and options of Star City Holdings Ltd. and selling our management contract for the casino. In connection with the sale of our management contract, we entered into a three-year casino services agreement whereby we provide consulting and advisory services to the purchaser for a fee. 8 RIVERBOAT CASINOS JOLIET Harrah's Joliet is located in downtown Joliet, Illinois, on the Des Plaines River. The two riverboat casinos, the Harrah's Northern Star, a modern 210-foot mega-yacht, and the 210-foot Southern Star II, a re-creation of a Mississippi riverboat, offer a combined total of 37,160 square feet of casino space with 43 table games and 1,066 slot machines. Harrah's Joliet has operated as a dockside casino entertainment facility since the Illinois Riverboat Gambling Act was amended to allow dockside gaming in June 1999. The dockside facilities, which are situated on 6.8 acres, include a pavilion with three restaurants, two snack bars, a lounge, approximately 4,700 square feet of meeting space and a retail shop. Parking is available for 1,229 cars, including a portion in a 4-story parking garage. In 1999 Harrah's Joliet acquired 1.14 acres of additional land adjacent to the facility as a site for future development. On November 8, 1999, Harrah's Joliet opened a $29 million development project located in Joliet's City Center. The 11-story project includes a 204-room hotel (including four suites), 8,000 square feet of new and renovated office space and a fitness center. The hotel is located adjacent to Harrah's pavilion. We are now considering further modifications to the property to take advantage of the dockside operating environment. A partnership, in which an indirect subsidiary of the Company is the 80 percent general partner, owns the dockside facilities and underlying real property, the Harrah's Northern Star and the Southern Star II vessels, and the riverboat businesses. The businesses are operated by Harrah's, as general partner in the partnership. The partnership also holds long-term rights to the boat basin/berth. The Chicago metropolitan area is the primary feeder market for Harrah's Joliet, with Joliet being only 30 miles from downtown Chicago. EAST CHICAGO The Harrah's East Chicago Casino (formerly operated as Showboat Mardi Gras Casino) is a riverboat casino in East Chicago, Indiana, which contains 49,210 square feet of gaming space on four levels containing 66 table games and approximately 1,800 slot machines. The shoreside facilities include a 105,000 square foot pavilion located on approximately 27 acres of land. The property has three restaurants and two snack bars. There is a parking garage with the capacity to hold approximately 1,800 cars, and other surface parking available for approximately 800 cars. The Harrah's East Chicago Casino is owned by the Showboat Marina Casino Partnership ("SMCP"), an Indiana general partnership, in which the Company now has an almost 100% ownership interest. We acquired a 55% interest in SMCP in connection with our acquisition of Showboat in June 1998 and in February 1999 increased our ownership interest by buying out substantially all of the minority partners in SMCP. Some of the minority partners have retained the right to repurchase shares of SMCP at the original purchase price plus interest. If this occurs, it would reduce our interest to no less than 91%. On March 15, 1999, we converted the facility to the Harrah's brand name. In March 1999, we redeemed the $140 million of 13 1/2% First Mortgage Notes due 2009 issued by SMCP and its subsidiary. The casino's primary feeder market is the Chicago metropolitan area. TUNICA Harrah's Tunica is a riverboat casino complex located in Tunica, Mississippi, approximately 30 miles south of downtown Memphis, Tennessee. The facilities include a casino constructed on a floating 9 stationary barge with approximately 50,000 square feet of casino space, 1,437 slot machines and 23 table games. Shoreside facilities, which are situated on 88 acres of land, include a Harrah's hotel, which features 182 rooms, 18 suites, exercise facilities, four restaurants, a snack bar, a 250-seat showroom, a child care facility, an arcade, retail shop, approximately 13,500 square feet of convention area/meeting room space and customer parking for approximately 2,700 cars. The dockside casino facilities are owned by a partnership which is 100% owned by the Company. The underlying land is held under a long-term lease to the partnership. The partnership which owns Harrah's Tunica, along with two nearby competitors, owns a golf course and related facilities adjacent to Harrah's Tunica. The primary feeder market for Harrah's Tunica is the Memphis metropolitan area. We also operated another dockside casino in Tunica which closed in May 1997. In March 1999, this property was sold to another casino company. VICKSBURG Harrah's Vicksburg is the Company's dockside casino entertainment complex on approximately 10.3 acres in Vicksburg, Mississippi. The complex, which is located in downtown Vicksburg on the Yazoo Diversion Canal of the Mississippi River, includes a 297-foot stationary riverboat casino designed in the spirit of a traditional 1800's riverboat with approximately 21,000 square feet of casino space, 696 slot machines and 26 table games. The casino is docked next to the Company's shoreside complex which features three restaurants, child care facilities, an arcade, a retail outlet and an approximate 8,500 square foot meeting room/convention area. Adjacent to the riverboat is a Harrah's hotel, with 109 rooms and eight suites, which is operated by the Company. Two covered parking garages are across the street with combined parking for 996 cars and additional parking is available for 429 cars. The Company owns the riverboat and hotel and owns or holds long-term rights to all real property pertaining to the project. The casino's primary feeder markets are western and central Mississippi and eastern Louisiana. SHREVEPORT Harrah's Shreveport is the Company's dockside riverboat casino in downtown Shreveport, Louisiana, which includes a 254-foot 19th-century design paddlewheeler riverboat, the ShreveStar, with 22,550 square feet of gaming space with 1,153 slot machines and 32 table games. A pavilion, on 11.2 acres of land, adjoins the casino on the banks of the Red River and includes two restaurants and a 5,000 square foot area for private parties and group functions. Parking is available for 1,461 cars, including 1,365 spaces in a parking garage. We have begun construction to expand our Shreveport facilities to include a 514 room hotel as well as four restaurants (including a 156-seat steakhouse, a 198-seat coffee shop, a 446-seat buffet and a coffee/snack bar) as well as a new convention center, health spa and 437-space valet parking garage. We expect the expansion to be completed in fourth quarter 2000 at a cost of approximately $147 million. The casino and related facilities are owned by a partnership which is 100% owned by the Company. The underlying land is held by the partnership under a long-term lease from the City of Shreveport. The primary feeder markets for the casino are northwestern Louisiana and east Texas, including the Dallas/Fort Worth metropolitan area. 10 NORTH KANSAS CITY We own and operate dockside riverboat casino facilities in North Kansas City, Missouri, which include two riverboat casinos, the North Star, a 295-foot classic sternwheeler-designed stationary riverboat, and the other, the Mardi Gras, which is constructed on a floating stationary barge. The facilities offer a combined total of approximately 62,100 square feet of casino space, 2,239 slot machines and 65 table games. Shoreside facilities, which are situated on 55 acres of land that is under a long-term lease, include a Harrah's hotel which features 181 rooms and 17 suites, a pavilion that houses four restaurants and 10,000 square feet of meeting space. Additional property amenities include two snack bars, an arcade, swimming pool and exercise room. The property also has a three-story 1,048-car parking garage as well as surface parking. Total on-site parking, including valet parking, is available for 2,942 cars. The casino's primary feeder market is the Kansas City metropolitan area. ST. LOUIS-RIVERPORT Harrah's St. Louis-Riverport is part of a dockside riverboat casino complex owned and operated by the Company and Players in Maryland Heights, Missouri, in northwest St. Louis County, 16 miles from downtown St. Louis. The partnership formed by the Company and Players leases space both to us and to Players in which we each operate our separately branded casinos and specialty restaurants. Upon completion of our acquisition of Players, we will own 100% of the partnership and the operations at this property. Currently, each company operates two riverboat casinos. Harrah's two riverboats offer a combined total of approximately 60,000 square feet of gaming space, with a total of 1,664 slot machines and 48 table games. A shoreside pavilion includes five restaurants (one of which is owned and managed by Players), a snack bar, an arcade, an entertainment lounge and retail space. Additional amenities include a 10,000 square foot convention/special events center and child care facilities. Also included in the shoreside facilities is an 8-story Harrah's hotel with 277 rooms and 14 suites. Parking is available for 4,071 cars, including a portion in a parking garage. We manage the shoreside pavilion, hotel and parking areas for the partnership for a fee. The complex is located on a site comprised of approximately 74 acres which is owned by the Company and leased to the partnership, and approximately 140 acres of additional land which is included in the development and owned by the partnership. The primary feeder market for Harrah's St. Louis-Riverport is the St. Louis metropolitan area. INDIAN GAMING AK-CHIN Harrah's Phoenix Ak-Chin casino is owned by the Ak-Chin Indian Community and is located on approximately 20 acres of land on the Community's reservation, approximately 25 miles south of Phoenix, Arizona. The casino includes 38,000 square feet of casino space with 475 slot machines, 13 poker tables, bingo, keno, two restaurants, one snack bar, an entertainment lounge, 3,250 square feet of meeting room space and a retail shop. The complex has customer parking for approximately 1,100 cars and has valet parking available. We manage the casino for a fee under a management contract. The original contract expired in December 1999, and we have signed a contract with the Ak Chin Indian Community to continue management of the Casino for another five years after that date. The new agreement is subject to various regulatory approvals, and contemplates an extension of the Community's compact with the state of Arizona, which expires in 2003. The existing management 11 agreement has been temporarily extended through July 1, 2000 (on the new financial terms) while regulatory approvals are obtained. The primary feeder markets for the casino are Phoenix and Tucson. CHEROKEE We developed the Harrah's Cherokee Smoky Mountains Casino for the Eastern Band of Cherokee Indians on approximately 39 acres of land on their reservation in Cherokee, North Carolina. The casino includes 60,000 square feet of casino space, with 2,518 video gaming machines. Additional facilities consist of a multi-purpose entertainment room with approximately 1,500 theater-style seats, three restaurants, a gift shop and child care facilities. Parking is available for approximately 1,985 cars. We manage the casino for a fee under a management contract expiring in November 2002. In November 1999, we announced an agreement with the Tribe to extend our management contract for the casino for another two years after its expiration in November 2002. The Company has guaranteed the Tribe's repayment of an $82 million bank loan, the proceeds of which were used to construct the Cherokee facility. At year end 1999, $65.6 million of the loan was outstanding. In connection with the extension of the management contract, we have agreed to guarantee up to an additional $60 million in project financing to expand the facility. The casino's primary feeder markets are eastern Tennessee, western North Carolina, as well as northern Georgia and South Carolina. PRAIRIE BAND Harrah's Prairie Band Casino-Topeka, located approximately 17 miles north of Topeka, Kansas, was developed by the Company for the Prairie Band of Potawatomi Indians ("Prairie Band") on approximately 80 acres of land owned by the tribe. The casino facilities include 25,478 square feet of casino space with 702 slot machines and 31 table games. The complex also includes a 100-room hotel, a restaurant, two snack bars, an entertainment lounge, a gift shop and parking for approximately 820 vehicles. The facilities are managed by the Company for a fee under a management contract expiring in January 2003. Renewal of the contract would require mutual agreement between us and the Prairie Band and approval by the NIGC. We have guaranteed the Tribe's repayment of a $37 million bank loan, the proceeds of which were used to construct the Prairie facility. At year end 1999, $14.8 million of the loan was outstanding. Topeka and Wichita are the primary feeder markets for the casino. OTHER NATIONAL AIRLINES, INC. We own approximately 47.8% of the stock of National Airlines, Inc., a new airline based in Las Vegas and presently offering nonstop flights between Las Vegas and New York, Chicago, Philadelphia, Miami, Dallas, Los Angeles and San Francisco. Up to six additional routes are expected to be added during 2000. We originally invested $15 million in National Airlines, and prior to our acquisition of Rio, Rio also invested $15 million. The consummation of the merger with Rio increased our equity interest to approximately 47.8%; however, our voting power is limited to 25% Our investment in the airline allows us to offer additional valued services and conveniences to customers. We have entered into marketing agreements with National Airlines to support joint promotions involving the airline, Harrah's Las Vegas and the Rio Hotel & Casino, and, we have provided two letters of credit totaling $15 million as collateral for financial accommodations extended to National Airlines by two lenders, for 12 which we receive fees and warrants to purchase additional stock in the airline. Rio's interest in the airline is reported as an asset-held-for-sale in our financial statements. OTHER In September 1999, we sold our interest in Sodak Gaming, Inc. ("Sodak") to a gaming equipment manufacturing company which acquired all of Sodak's outstanding shares. Sodak is a leading distributor of electronic gaming machines and gaming-related products and systems. We own a minority interest in Interactive Entertainment Limited ("IEL"), a publicly-owned corporation. IEL pioneered the development of sophisticated remote control gaming entertainment software for use in the international long-haul airline industry, called "Sky Games." However, due to an inability to obtain sufficient financing for the project, IEL has ceased all operations related to its Sky Games business and is making efforts to conduct an orderly disposition of all the assets related to the Sky Games inflight gaming product line. In the fourth quarter of 1998, we wrote off our investment in IEL. We own a one-third interest in Turfway Park LLC, which is the owner of the Turfway Park race course located on 197 acres in Boone County, Kentucky. We also own 47 acres of undeveloped land in the vicinity of the race track, which are currently listed for sale. In addition to the above, we are actively pursuing a variety of casino entertainment opportunities in various jurisdictions both domestically and abroad, including land-based, riverboat and dockside casino and Indian gaming projects in the United States. A number of these projects, if they go forward, could require significant capital investments. PATENTS AND TRADEMARKS We own the following trademarks used in this document: Harrah's-Registered Trademark-; Rio-Registered Trademark-; Showboat-Registered Trademark-; Bill's-Registered Trademark-; Total Gold-Registered Trademark-; WINet-Registered Trademark-; Harrah's Northern Star(sm); North Star(sm); Harrah's Southern Star II(sm); ShreveStar(sm); Mardi Gras(sm); Masquerade Village(sm); Palazzo Suites(sm); Sammy's Showroom(sm); South Shore Showroom(sm) and Rio Secco Golf Club(sm). We consider all of these marks, and the associated name recognition, to be valuable to our business. We hold four U.S. patents covering the technology associated with our Total Gold program--U.S. Patent No. 5,613,912 issued March 25, 1997 (which is the subject of a license agreement with Mikohn Gaming Corporation), U.S. Patent No. 5,761,647 issued June 2, 1998, U.S. patent No. 5,809,482 issued September 15, 1998, and U.S. patent No. 6,003,013 issued December 14, 1999. We consider these patents to be valuable to our business. 13 COMPETITION We operate land-based, dockside, riverboat and Indian casino facilities in all of the traditional, and most of the new, U.S. casino entertainment jurisdictions. We compete with numerous casinos and casino hotels of varying quality and size in the market areas where our properties are located. We also compete with other non-gaming resorts and vacation areas, and with various other casino and other entertainment businesses. The casino entertainment business is characterized by competitors which vary considerably by their size, quality of facilities, number of operations, brand identities, marketing and growth strategies, financial strength and capabilities, level of amenities, management talent and geographic diversity. In certain areas such as Las Vegas, we compete with a wide range of casinos, some of which are significantly larger and offer substantially more non-gaming activities to attract customers. In most markets, we compete directly with other casino facilities operating in the immediate and surrounding market areas. In major casino destinations, such as Las Vegas and Atlantic City, we face competition from other markets in addition to direct competition in our market areas. In recent years, with fewer new markets open for development, competition in existing markets has intensified. Many casino operators, including Harrah's Entertainment, have invested in expanding existing facilities, in the development of new facilities in existing markets, such as Las Vegas, and in the acquisition of established facilities in existing markets, such as our acquisition of the casinos owned by Rio and Showboat and our planned acquisition of Players. This expansion of existing casino entertainment properties, the increase in the number of properties and the aggressive marketing strategies of many of our competitors has increased competition in many markets in which we compete, and this intense competition can be expected to continue. These competitive pressures have adversely affected our financial performance in certain markets and, we believe, have also adversely affected the financial performance of certain competitors operating in these markets. We believe we are well positioned to take advantage of any further legalization of casino gaming, the continued positive consumer acceptance of casino gaming as an entertainment activity, and increased visitation to casino facilities. However, the expansion of casino entertainment into new markets also presents competitive issues for us. For example, in September 1999, the State of California and approximately 60 Indian Tribes executed Class III Gaming compacts, which other California tribes can join. The Compacts, which allow each tribe to operate, on tribal trust lands, two casinos with up to 2,000 slot machines per tribe and unlimited house-banked card games, were the subject of an amendment to the state's constitution approved in a statewide referendum on March 7, 2000. At this time, the ultimate impact that the compacts and the California referendum may have on the industry or on our Company are uncertain. Moreover, the casino entertainment industry is subject to political and regulatory uncertainty. In 1996, the U.S. government formed the National Gambling Impact Study Commission to study gambling in the United States, including the casino gaming industry. The commission issued its report in June 1999. At this time, we are not sure of the ultimate impact of the commission's report on the casino industry or on the Company. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations--Effects of Current Economic and Political Conditions" on pages 31 and 32 and portions of "Management's Discussion and Analysis--Operating Results and Development Plans" on pages 25 and 26 of the Annual Report. These pages are incorporated into this document by reference. 14 GOVERNMENTAL REGULATION GAMING--NEW JERSEY As a holding company of Marina Associates ("Marina"), which holds a license to operate Harrah's Atlantic City, and of Atlantic City Showboat, Inc. ("Showboat"), which holds a license to operate Showboat Casino Hotel, Harrah's Entertainment is subject to the provisions of the New Jersey Casino Control Act (the "New Jersey Act"). The ownership and operation of casino hotel facilities in Atlantic City, New Jersey are the subject of pervasive state regulation under the New Jersey Act and the regulations adopted thereunder by the New Jersey Casino Control Commission (the "New Jersey Commission"). The New Jersey Commission is empowered to regulate a wide spectrum of gaming and non-gaming related activities and to approve the form of ownership and financial structure of not only the casino licensees, Marina and Showboat, but also their intermediary and ultimate holding companies, including Harrah's Entertainment and HOC. In addition to taxes imposed by the State of New Jersey on all businesses, the New Jersey Act imposes certain fees and taxes on casino licensees, including an 8% gross gaming revenue tax, an investment alternative obligation of 1.25% (or an investment alternative tax of 2.5%) of gross gaming revenue (generally defined as gross receipts less payments to customers as winnings) and various license fees. No casino hotel facility may operate unless the appropriate licenses and approvals are obtained from the New Jersey Commission, which has broad discretion with regard to the issuance, renewal and revocation or suspension of the non-transferable casino licenses (which licenses are issued initially for a one-year period and renewable for one-year periods for the first two renewals and four-year periods thereafter), including the power to impose conditions which are necessary to effectuate the purposes of the New Jersey Act. Each applicant for a casino license must demonstrate, among other things, its financial stability (including establishing ability to maintain adequate casino bankroll, meet ongoing operating expenses, pay all local, state and federal taxes, make necessary capital improvements and pay, exchange, refinance, or extend all long and short term debt due and payable during the license term), its financial integrity and responsibility, its reputation for good character, honesty and integrity, the suitability of the casino and related facilities and that it has sufficient business ability and casino experience to establish the likelihood of creation or maintenance of a successful, efficient casino operation. With the exception of licensed lending institutions and certain "institutional investors" waived from the qualification requirements under the New Jersey Act, each applicant is also required to establish the reputation of its financial sources including, but not limited to, its financial backers, investors, mortgagees and bond holders. The New Jersey Act requires that all officers, directors and principal employees of the casino licensees be licensed. In addition, each person who directly or indirectly holds any beneficial interest or ownership of the casino licensees and any person who in the opinion of the New Jersey Commission has the ability to control the casino licensees must obtain qualification approval. Each holding and intermediary company having an interest in the casino licensees must also obtain qualification approval by meeting essentially the same standards as that required of the casino licensees. All directors, officers and persons who directly or indirectly hold any beneficial interest, ownership or control in any of the intermediary or ultimate holding companies of the casino licensees may have to seek qualification from the New Jersey Commission. Lenders, underwriters, agents, employees and security holders of both equity and debt of the intermediary and holding companies of the casino licensees and any other person whom the New Jersey Commission deems appropriate may also have to seek qualification from the New Jersey Commission. Since Harrah's Entertainment and HOC are publicly-traded holding companies (as defined by the New Jersey Act), however, the persons described in the two previous sentences may be waived from compliance with the qualification process if the New Jersey Commission, with the concurrence of the Director of the New Jersey Division of Gaming Enforcement, determines that they are not significantly involved in the activities of Marina and/or Showboat and, in the case of security holders, that they do not have the ability to control Harrah's Entertainment (or its subsidiaries) 15 or elect one or more of its directors. Any person holding 5% or more of a security in an intermediary or ultimate holding company, or having the ability to elect one or more of the directors of a company, is presumed to have the ability to control the company and thus may be required to seek qualification unless the presumption is rebutted. Notwithstanding this presumption of control, the New Jersey Act permits the waiver of the qualification requirements for passive "institutional investors" (as defined by the New Jersey Act), when such institutional holdings are for investment purposes only and where such securities represent less than 10% of the equity securities of a casino licensee's holding or intermediary companies or debt securities of a casino licensee's holding or intermediary companies not exceeding 20% of a company's total outstanding debt or 50% of an individual debt issue. The waiver, which is subject to certain specified conditions including, upon request, the filing of a certified statement that the investor has no intention of influencing the affairs of the issuer, may be granted to an "institutional investor" holding a higher percentage of such securities upon a showing of good cause. If an "institutional investor" is granted a waiver of the qualification requirements and subsequently changes its investment intent, the New Jersey Act provides that no action other than divestiture may be taken by the investor without compliance with the Interim Casino Authorization Act (the "Interim Act") described below. In the event a security holder of either equity or debt is required to qualify under the New Jersey Act, the provisions of the Interim Act may be triggered requiring, among other things, either: (i) the filing of a completed application for qualification within 30 days after being ordered to do so, which application must include an approved Trust Agreement pursuant to which all securities of Harrah's Entertainment (or its respective subsidiaries) held by the security holder must be placed in trust with a trustee who has been approved by the New Jersey Commission; or (ii) the divestiture of all securities of Harrah's Entertainment (or its respective subsidiaries) within 120 days after the New Jersey Commission determines that qualification is required or declines to waive qualification, provided the security holder files a notice of intent to divest within 30 days after the determination of qualification. If a security holder files an application under the Interim Act, during the period the Trust Agreement remains in place, such holder may, through the approved trustee, continue to exercise all rights incident to the ownership of the securities with the exception that: (i) the security holder may only receive a return on its investment in an amount not to exceed the actual cost of the investment (as defined by the New Jersey Act) until the New Jersey Commission finds such holder qualified; and (ii) in the event the New Jersey Commission finds there is reasonable cause to believe that the security holder may be found unqualified, the Trust Agreement will become fully operative vesting the trustee with all rights incident to ownership of the securities pending a determination on such holder's qualifications; provided, however, that during the period the securities remain in trust, the security holder may petition the New Jersey Commission to: (a) direct the trustee to dispose of the trust property; and (b) direct the trustee to distribute proceeds thereof to the security holder in an amount not to exceed the lower of the actual cost of the investment or the value of the securities on the date the Trust became operative. If the security holder is ultimately not found to be qualified, the trustee is required to sell the securities and to distribute the proceeds of the sale to the applicant in an amount not exceeding the lower of the actual cost of the investment or the value of the securities on the date the Trust became operative (if not already sold and distributed at the direction of the security holder) and to distribute the remaining proceeds to the Casino Revenue Fund. If the security holder is found qualified, the Trust Agreement will be terminated. The New Jersey Commission can find that any holder of the equity or debt securities issued by Harrah's Entertainment or its subsidiaries is not qualified to own such securities. If a security holder of Harrah's Entertainment or its subsidiaries is found disqualified, the New Jersey Act provides that it is unlawful for the security holder to: (i) receive any dividends or interest payment on such securities; (ii) exercise, directly or indirectly, any rights conferred by the securities; or (iii) receive any remuneration from the company in which the security holder holds an interest. To implement these provisions, the New Jersey Act requires, among other things, casino licensees and their holding companies to adopt 16 provisions in their certificate of incorporation providing for certain remedial action in the event that a holder of any security of such company is found disqualified. The required certificate of incorporation provisions vary depending on whether such company is a publicly or privately traded company as defined by the New Jersey Act. The Certificates of Incorporation of Harrah's Entertainment and HOC (both "publicly-traded companies" as defined by the New Jersey Act) contain provisions which provide Harrah's Entertainment and HOC, respectively, with the right to redeem the securities of disqualified holders, if necessary, to avoid any regulatory sanctions, to prevent the loss or to secure the reinstatement of any license or franchise held by Harrah's Entertainment or HOC or their affiliates, or if such holder is determined by any gaming regulatory agency to be unsuitable, has an application for a license or permit rejected, or has a previously issued license or permit rescinded, suspended, revoked or not renewed. The Certificates of Incorporation of Harrah's Entertainment and HOC also contain provisions defining the redemption price and the rights of a disqualified security holder. In the event a security holder is disqualified, the New Jersey Commission is empowered to propose any necessary action to protect the public interest, including the suspension or revocation of the casino license of Marina and/or Showboat. The New Jersey Act provides, however, that the New Jersey Commission shall not take action against a casino licensee or its parent companies with respect to the continued ownership of the security interest by the disqualified holder, if the New Jersey Commission finds that: (i) such company has a certificate of incorporation provision providing for the disposition of such securities as discussed above; (ii) such company has made a good faith effort to comply with any order requiring the divestiture of the security interest held by the disqualified holder; and (iii) the disqualified holder does not have the ability to control the casino licensee or its parent companies or to elect one or more members to the board of directors of such company. The Certificate of Incorporation of HOC further provides that debt securities issued by HOC are held subject to the condition that if a holder is found unsuitable by any governmental agency the corporation shall have the right to redeem the securities. If, at any time, it is determined that Marina, Showboat or their holding companies have violated the New Jersey Act or regulations promulgated thereunder or that such companies cannot meet the qualification requirements of the New Jersey Act, Marina and/or Showboat could be subject to fines, or their licenses could be suspended or revoked. If Marina's or Showboat's license is suspended or revoked, the New Jersey Commission could appoint a Conservator to operate and dispose of the casino hotel facilities of Marina and/or Showboat. A Conservator would be vested with title to the assets of Marina and/or Showboat, subject to valid liens, claims and encumbrances. The Conservator would be required to act under the general supervision of the New Jersey Commission and would be charged with the duty of conserving, preserving and, if permitted, continuing the operation of the casino hotel. During the period of any such conservatorship, the Conservator may not make any distributions of net earnings without the prior approval of the New Jersey Commission. The New Jersey Commission may direct that all or part of such net earnings be paid to the Casino Revenue Fund, provided, however, that a suspended or former licensee is entitled to a fair rate of return. The New Jersey Commission granted Marina a plenary casino license in connection with Harrah's Atlantic City in November 1981, and granted Showboat a plenary casino license in connection with Showboat Casino Hotel in March 1987. Each of Marina's and Showboat's licenses has been renewed since then. In April 1996, the New Jersey Commission renewed Marina's license for a four-year period and also found Harrah's Entertainment and HOC to be qualified as holding companies of Marina. The New Jersey Commission has begun the renewal process for Marina's license, which we expect to result in the granting of an additional four-year license for Marina in April 2000. In January 1997, the New Jersey Commission renewed Showboat's license for a four-year period and, in April 1998, found Harrah's Entertainment and HOC to be qualified as holding companies of Showboat following the acquisition of Showboat, Inc. by Harrah's. 17 GAMING--NEVADA The ownership and operation of casino gaming facilities in Nevada are subject to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, "Nevada Act"); and (ii) various local ordinances and regulations. The Company's gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State Gaming Control Board ("Nevada Board"), the City of Las Vegas, the Clark County Liquor and Gaming Licensing Board ("CCLGLB"), the City of Reno, and the Douglas County Sheriff's Department ("Douglas County"). The Nevada Commission, the Nevada Board, the City of Las Vegas, the CCLGLB, the City of Reno, and Douglas County are collectively referred to as the "Nevada Gaming Authorities." The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) providing a source of state and local revenues through taxation and licensing fees. Changes in such laws, regulations and procedures could have an adverse effect on the Company's Nevada gaming operations. Harrah's Entertainment is registered by the Nevada Commission as a publicly traded corporation (a "Registered Corporation") and has been found suitable to own the stock of HOC which is also a Registered Corporation by virtue of its outstanding debt securities. HOC has been found suitable to own the stock of (I) Rio Hotel & Casino, Inc. ("Rio"), (ii) Showboat, Inc. ("Showboat"), (iii) Harrah's Las Vegas, Inc. ("HLVI") and (iv) Harrah's Laughlin, Inc. ("HLI"). Rio has been registered as an intermediary company and found suitable to own the stock of Rio Properties, Inc. ("RPI") and Rio Leasing, Inc. ("RLI"). Showboat also has been registered as an intermediary company and has been found suitable to own the stock of Showboat Operating Company ("SBOC"). HOC, Rio, Showboat, HLVI, HLI, RPI, SBOC and RLI (collectively, the "Gaming Subsidiaries") are required to be registered or licensed by the Nevada Gaming Authorities to enable Harrah's Entertainment to conduct gaming operations at Harrah's Lake Tahoe, Bill's Lake Tahoe Casino, Harrah's Reno, Harrah's Las Vegas, Harrah's Laughlin, Rio Suite Hotel & Casino and Las Vegas Showboat and to engage in manufacturing and distribution of gaming devices. The gaming licenses held by the Gaming Subsidiaries require the periodic payment of fees and taxes and are not transferable. HOC is also licensed as a manufacturer and distributor of gaming devices. SBOC and RLI are each licensed as a distributor of gaming devices. Such manufacturer's and distributor's licenses also require the annual payment of fees and are not transferable. As Registered Corporations, Harrah's Entertainment and HOC are required periodically to submit detailed financial and operating reports and furnish any other information which the Nevada Commission may require. No person may become a stockholder of, or receive any percentage of profits from, the Gaming Subsidiaries without first obtaining licenses and approvals from the Nevada Gaming Authorities and Harrah's Entertainment may not sell or transfer beneficial ownership of any of HOC's equity securities without the prior approval of the Nevada Commission. Harrah's Entertainment and the Gaming Subsidiaries have obtained from the Nevada Gaming Authorities the various registrations, findings of suitability, approvals, permits and licenses required in order to engage in gaming, manufacturing and distribution activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, Harrah's Entertainment or the Gaming Subsidiaries in order to 18 determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of the Gaming Subsidiaries must file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of Harrah's Entertainment, HOC, Rio or Showboat who are actively and directly involved in gaming activities of the Gaming Subsidiaries may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with Harrah's Entertainment or the Gaming Subsidiaries, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require Harrah's Entertainment or the Gaming Subsidiaries to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. Harrah's Entertainment and the Gaming Subsidiaries are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by the Gaming Subsidiaries must be reported to, or approved by, the Nevada Commission. If it were determined that the Nevada Act was violated by the Gaming Subsidiaries, the gaming licenses they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Gaming Subsidiaries, Harrah's Entertainment and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate Harrah's Entertainment's gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the gaming properties) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect Harrah's Entertainment's gaming operations. Any beneficial holder of Harrah's Entertainment voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of Harrah's Entertainment voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the state of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires beneficial ownership of more than 5% of Harrah's Entertainment voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of Harrah's Entertainment voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of Harrah's Entertainment voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting 19 securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of Harrah's Entertainment, any change in the Company's corporate charter, bylaws, management, policies or operations of Harrah's Entertainment, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding Harrah's Entertainment voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the voting securities of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. Harrah's Entertainment is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with Harrah's Entertainment or the Gaming Subsidiaries, it: (i) pays that person any dividend or interest upon voting securities of Harrah's Entertainment; (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person; (iii) pays remuneration in any form to that person for services rendered or otherwise; or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities including, if necessary, the immediate purchase of said voting securities for cash at fair market value. Additionally, the CCLGLB has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming licensee. The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. Harrah's Entertainment is required to maintain a current stock ledger at its corporate headquarters in Las Vegas, Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. Harrah's Entertainment also is required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require Harrah's Entertainment's stock certificates to bear a legend indicating that the securities are subject to the Nevada Act. However, to date, the Nevada Commission has not imposed such a requirement on Harrah's Entertainment. 20 Harrah's Entertainment and HOC may not make a public offering of their securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. On November 19, 1998, the Nevada Commission granted Harrah's Entertainment and HOC prior approval to make public offerings for a period of two years, subject to certain conditions ("Shelf Approval"). On November 18, 1999 the Nevada Commission amended the Shelf Approval. The Shelf Approval also applies to any affiliated company wholly owned by Harrah's Entertainment (an "Affiliate") which is a publicly traded corporation or would thereby become a publicly traded corporation pursuant to a public offering. The Shelf Approval also includes approval for the Gaming Subsidiaries to guarantee any security issued by, or to hypothecate their assets to secure the payment or performance of any obligations evidenced by a security issued by, Harrah's Entertainment or an Affiliate in a public offering under the Shelf Approval. The Shelf Approval, however, may be rescinded for good cause without prior notice upon the issuance of an interlocutory stop order by the Chairman of the Nevada Board. The Shelf Approval does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful. Changes in control of Harrah's Entertainment through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Registered Corporation can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Registered Corporation's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation. License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Gaming Subsidiaries' respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either: (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling or serving of food or refreshments or the selling of merchandise. Nevada licensees that hold a license as an operator of a slot route, or a manufacturer's or distributor's license, also pay certain fees and taxes to the State of Nevada. 21 Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees") and who proposes to become involved in a gaming venture outside of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities or enter into associations that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ, contract with or associate with a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of unsuitability. GAMING--INDIANA In 1993, the State of Indiana passed a Riverboat Gambling Act which created the Indiana Gaming Commission ("Indiana Commission"). The Indiana Commission is given extensive powers and duties for the purposes of administering, regulating and enforcing the system of riverboat gaming. It is authorized to award no more than 11 gaming licenses (five to counties contiguous to Lake Michigan, five to counties contiguous to the Ohio River and one to a county contiguous to Patoka Lake). The Indiana Commission has jurisdiction and supervision over all riverboat gaming operations in Indiana and all persons on riverboats where gaming operations are conducted. These powers and duties include authority to: (1) investigate all applicants for riverboat gaming licenses; (2) select among competing applicants those that promote the most economic development in a home dock area and that best serve the interest of the citizens of Indiana; (3) establish fees for licenses; and (4) prescribe all forms used by applicants. The Indiana Commission shall adopt rules pursuant to statute for administering the gaming statute and the conditions under which riverboat gaming in Indiana may be conducted. The Indiana Commission has promulgated certain final rules and has proposed additional rules governing the application procedure and all other aspects of riverboat gaming in Indiana. The Indiana Commission may suspend or revoke the license of a licensee or a certificate of suitability or impose civil penalties, in some cases without notice or hearing for any act in violation of the Riverboat Gambling Act or for any other fraudulent act or if the licensee or holder of such certificate of suitability has not begun regular riverboat excursions prior to the end of the twelve month period following the Indiana Commission's approval of the application for an owner's license. In addition, the Indiana Commission may revoke an owner's license if it is determined by the Indiana Commission that revocation is in the best interests of the state of Indiana. The Indiana Commission will: (1) authorize the route of the riverboat and stops that the riverboat may make; (2) establish minimum amounts of insurance; and (3) after consulting with the Corps of Engineers, determine which waterways are navigable waterways for purposes of the Riverboat Gambling Act and determine which navigable waterways are suitable for the operation of riverboats. The Riverboat Gambling Act requires an extensive disclosure of records and other information concerning an applicant, including disclosure of all directors, officers and persons holding one percent (1%) or more direct or indirect beneficial interest. In determining whether to grant an owner's license to an applicant, the Indiana Commission shall consider: (1) the character, reputation, experience and financial integrity of the applicant and any person who (a) directly or indirectly controls the applicant, or (b) is directly or indirectly controlled by either the applicant or a person who directly or indirectly controls the applicant; (2) the facilities or proposed facilities for the conduct of riverboat gaming; (3) the highest total prospective revenue to be collected by the state from the conduct of riverboat gaming; (4) the good faith affirmative action plan 22 to recruit, train and upgrade minorities in all employment classifications; (5) the financial ability of the applicant to purchase and maintain adequate liability and casualty insurance; (6) whether the applicant has adequate capitalization to provide and maintain the riverboat for the duration of the license; and (7) the extent to which the applicant meets or exceeds other standards adopted by the Indiana Commission. The Indiana Commission may also give favorable consideration to applicants for economically depressed areas and applicants who provide for significant development of a large geographic area. Each applicant must pay an application fee of $50,000 and additional fees may be assessed for the background investigation. If the applicant is selected, the applicant must pay an initial license fee of $25,000 and post a bond, and thereafter, pay an annual license renewal fee of $5,000. The Indiana Commission has issued nine of these eleven licenses--four in Lake County Indiana; one in LaPorte County; one in Vanderburgh County; one in Ohio County; one in Dearborn County; and one in Harrison County. The Indiana Commission has selected Switzerland County, on the Ohio River, for the tenth license. Additionally, the Indiana Commission has not considered applicants for the eleventh license since the Patoka Lake site has been determined by the U.S. Army Corp. of Engineers as an unsuitable site for development of a casino vessel project. A person holding an owner's gaming license issued by the Indiana Commission may not own more than a 10% interest in another such license. An owner's license expires five years after the effective date of the license; however, after three years the holder of an owner's license will undergo a reinvestigation to ensure continued suitability for licensure. Unless the license has been terminated, expired or revoked, the gaming license may be renewed if the Indiana Commission determines that the licensee has satisfied all statutory and regulatory requirements. In connection with the issuance of the license to Showboat Marina Casino Partnership ("SMCP"), Showboat Marina Partnership, an Indiana general partnership ("SMP"), Waterfront Entertainment and Development, Inc. ("Waterfront") and Showboat, Inc. and its affiliates declared to the Indiana Commission that if SMCP received a riverboat owner's license, they shall not commence more than one other casino gaming operation within a fifty-mile radius of East Chicago Showboat for a period of five years beginning on the date of issuance of an owner's license by the Indiana Commission to SMCP. Harrah's Joliet is within said fifty-mile radius. Adherence to the non-competition declaration is a condition of the owner's license. A gaming license is a revocable privilege and is not a property right. Minimum and maximum wagers on games are not established by regulation but are left to the discretion of the licensee. Wagering may not be conducted with money or other negotiable currency. Riverboat gaming excursions shall be at least two hours, but not more than four hours in duration unless expressly approved by the Indiana Commission. No gaming may be conducted while the boat is docked except: (1) for 30-minute time periods at the beginning and end of a cruise while the passengers are embarking and disembarking; (2) if the master of the riverboat reasonably determines that specific weather or water conditions present a danger to the riverboat; (3) if either the vessel or the docking facility is undergoing mechanical or structural repair; (4) if water traffic conditions present a danger to (A) the riverboat, riverboat passengers, and crew, or (B) other vessels on the water; or (5) if the master has been notified that a condition exists that would cause a violation of federal law if the riverboat were to cruise. The Indiana Commission has adopted rules governing cruising on Lake Michigan by a riverboat casino. The period of time during which passengers embark and disembark constitutes a portion of the gambling excursion if gambling is allowed. At the conclusion of the thirty-minute embarkation period, the gangway or its equivalent must be closed. However, a riverboat licensee must allow patrons to disembark at anytime the riverboat remains at the dock and gambling continues. A standard excursion schedule for a casino vessel on Lake Michigan must include at least one full excursion (a cruise into the open water on Lake Michigan, not more than three statute miles from the dock site July through September and not more than one statute mile October through June) and one intermediate excursion during which the vessel cruises in protected navigable water on or accessible to Lake Michigan. An intermediate excursion is to be conducted if the statutory conditions that permit dockside gaming are not present and if sea conditions or weather conditions, or both, do 23 not permit a full excursion. If a casino vessel remains dockside because of statutory conditions, the embarkation and disembarkation rules still apply. An admission tax of $3.00 for each person admitted to the gaming excursion is imposed upon the license owner. The admissions tax is paid by the riverboat licensee for each excursion or part of an excursion the patron remains on board. An additional 20% tax is imposed on the adjusted gross receipts received from gaming operations, which is defined as the total of all cash and property (including checks received by the licensee whether collected or not) received, less the total of all cash paid out as winnings to patrons and uncollectible gaming receivables (not to exceed 2%). The gaming license owner shall remit the admission and wagering taxes before the close of business on the day following the day on which the taxes were incurred. Riverboats are assessed for property tax purposes as real property and are taxed at rates to be determined by local taxing authorities of the jurisdiction in which a riverboat operates. The Riverboat Gambling Act requires a riverboat owner licensee to directly reimburse the Indiana Commission for the costs of inspectors and agents required to be present during the conduct of gaming operations. Pursuant to agreements with the City, and as reflected in the owner's license, SMCP has agreed to: (1) provide certain fixed incentives of approximately $16.4 million to the City of East Chicago and its agencies for transportation, job training, home buyer assistance and discrete economic development initiatives; (2) pay 3% of adjusted gross receipts divided equally among the City and two not-for-profit foundations for infrastructure improvements, education and community development; and (3) pay 0.75% of adjusted gross receipts for community development projects to East Chicago Second Century, Inc. ("Second Century"), a for-profit corporation owned by former owners of Waterfront but, in terms of expenditures, controlled by the City. Funding for the projects will be derived from contributions to Second Century from SMCP as well as funds from other third-party sources. The Indiana Commission is authorized to license suppliers and certain occupations related to riverboat gaming. Gaming equipment and supplies customarily used in conducting riverboat gaming may be purchased or leased only from licensed suppliers. The Indiana Commission has adopted a rule requiring employees working on the riverboat to have a valid merchant marine document issued by the United States Coast Guard. The Indiana Riverboat Gambling Act places special emphasis upon minority and women's business enterprise participation in the riverboat industry. Any person issued a riverboat owner's license must establish goals of expending at least 10% of the total dollar value of the licensee's contracts for goods and services with minority business enterprises and 5% of the total dollar value of the licensee's contracts for goods and services with women's business enterprises. The Indiana Commission may suspend, limit or revoke the gaming owner's license or impose a fine for failure to comply with statutory requirements. An institutional investor which acquires 5% or more of any class of voting securities of a holding company of a licensee is required to notify the Indiana Commission and to provide additional information, and may be subject to a finding of suitability. A person who acquires 5% or more of any class of voting securities of a holding company of a licensee is required to apply to the Indiana Commission for a finding of suitability. Harrah's Entertainment filed the necessary application for a transfer of 100% of Showboat's and 99% of Waterfront's beneficial interests in SMCP, including an investigatory fee of $50,000. The Indiana Commission completed its investigation of the key persons and substantial owners of Harrah's Entertainment, and Harrah's Entertainment was found to meet the criteria for licensing and suitability of riverboat owner licensees at the Indiana Commission's meeting on February 26, 1999. A riverboat owner licensee may not enter into or perform any contract or transaction in which it transfers or receives consideration which is not commercially reasonable or which does not reflect the fair market value of the goods or services rendered or received. All contracts are subject to disapproval by the Indiana Commission. 24 A riverboat owner licensee or an affiliate may not enter into a debt transaction of $1 million or more without the prior approval of the Indiana Commission. A riverboat owner licensee or any other person may not lease, hypothecate, borrow money against or loan money against a riverboat owner's license. The Indiana Commission has a rule requiring the reporting of certain currency transactions which is similar to that required by federal authorities. The Riverboat Gambling Act prohibits contributions to a candidate for a state, legislative, or local office, or to a candidate's committee or to a regular party committee by the holder of a riverboat owner's license or a supplier's license, by an officer of a licensee, by an officer of a person holding at least a 1% interest in the licensee. The Indiana Commission has promulgated a rule requiring quarterly reporting by the holder of a riverboat owner's license or a supplier's license of officers of the licensee, officers of persons that hold at least a 1% interest in the licensee, and of persons who directly or indirectly own a 1% interest in the licensee. The Indiana Commission adopted a rule that prohibits a distribution by a riverboat licensee to its partners, shareholders, itself, or any affiliated entity, if the distribution would impair the financial viability of the riverboat gambling operation. The Indiana Commission has proposed another rule, which would, if adopted, require riverboat licensees to maintain on a quarterly basis a cash reserve in the amount of the actual payout for three days, and the cash reserve would include cash in the casino cage, cash in a bank account in Indiana, or cash equivalents not committed or obligated. The Governor of Indiana has appointed a Gaming Impact Study Commission chaired by the Attorney General to review the impact of all forms of gaming in Indiana, which issued its final report on December 31, 1999. The effect of the report on gaming in Indiana, if any, cannot be determined at this time. A lawsuit was filed on October 25, 1996, in Harrison County, Indiana by three individuals residing in counties abutting the Ohio River, which challenges the constitutionality of the Riverboat Gambling Act on grounds that: (i) it creates an unequal privilege because under the Act supporters of riverboat casino gambling, having lost a county-wide vote, are allowed to resubmit a proposal to county voters for approval of riverboat casino gambling while opponents of riverboat casino gambling, having lost a county-wide vote, do not have a converse opportunity; and (ii) it was enacted as a provision attached to a state budget bill allegedly in violation of an Indiana constitutional provision requiring legislative acts to be confined to one subject and matters properly connected with the subject. The Indiana Supreme Court previously has upheld the constitutionality of the Riverboat Gambling Act, although the prior challenge was on different grounds than those contained in the current lawsuit. The Attorney General of the State of Indiana, on behalf of the Indiana Commission, filed a motion for summary judgment, which was granted, upholding the constitutionality of the Riverboat Gambling Act. The plaintiffs have filed an appeal, which is pending. If the Riverboat Gambling Act ultimately was held unconstitutional it would, absent timely corrective legislation, have a material adverse effect on SMCP's operations. GAMING--LOUISIANA (NEW ORLEANS) On October 30, 1998, the plan of reorganization of Harrah's Jazz Company, a partnership formed for the purposes of developing, owning and operating the exclusive land-based casino in New Orleans, was consummated (the "Plan"). Pursuant to the Plan, a newly formed entity, Jazz Casino Company, L.L.C. ("JCC"), assumed responsibility for, among other things, operating the casino (the "New Orleans Casino") in accordance with a casino operating contract (the "Casino Contract") with the Louisiana Gaming Control Bord ("LGCB"). In exchange for an equity investment, a subsidiary of the Company acquired, at the time of consummation of the Plan, approximately a 43% equity interest in the parent of JCC (which is subject to certain options). A subsidiary of the Company, Harrah's New Orleans Management Company ("HNOMC") manages the New Orleans Casino pursuant to a management agreement with JCC. 25 The ownership, management and operation of the New Orleans Casino are subject to pervasive governmental regulation, including regulation by the Louisiana Gaming Control Board ("LGCB") in accordance with the terms of the Louisiana Economic Development and Gaming Act (the "Gaming Act"), the rules and regulations promulgated thereunder from time to time ("the Rules and Regulations"), and the Casino Contract. The LGCB is empowered to regulate a wide spectrum of gaming and nongaming related activities. The Gaming Act and the Rules and Regulations, all of which are subject to amendment or revision from time to time, establish significant regulatory requirements with respect to gaming activities, JCC, HNOMC and affiliated entities, including, without limitation, suitability standards for direct and indirect investors, requirements with respect to minimum accounting and financial practices, standards for gaming devices and surveillance, licensure requirements for vendors and employees, and permissible food services. Failure to comply with the Gaming Act and the Rules and Regulations could result in disciplinary action, including fines and suspension or revocation of a license or suitability. Certain regulatory violations could also constitute an event of default under the Amended and Renegotiated Casino Operating Contract. The license to own and operate the casino derives from the Casino Contract. Subject to the terms and conditions of the Casino Contract, the term of the authorization for gaming runs to July 2014, with a ten-year renewal period. The Gaming Act and the Rules and Regulations require suitability findings for, among others, HNOMC and the Company, anyone with a direct ownership interest (regardless of percentage interest) or the ability to control JCC, HNOMC and the Company as well as certain officers and directors of such companies, certain employees and certain specified debt holders and lenders loaning funds related to the Casino project. Suitability of an applicant requires that the applicant demonstrate by clear and convincing evidence that, among other things, (i) the applicant is a person of good character, honesty and integrity; (ii) the applicant's prior activities, criminal record, if any, reputation, habits and associations do not pose a threat to the public interest of the State or the regulation and control of casino gaming or create or enhance the dangers of unsuitable, unfair or illegal prctices, methods and activities in the conduct of gaming or the carrying on of the business and financial arrangements incidental thereto; and (iii) the applicant is capable of and is likely to conduct the activities for which a license or contract is sought. In addition, to be found suitable for purposes of the Casino Contract, JCC must demonstrate by clear and convincing evidence that: (i) it has or guarantees acquisition of adequate business competence and experience in the operation of casino gaming operations; (ii) the proposed financing is adequate for the proposed operation and is from suitable sources; and (iii) it has or is capable of and guarantees the obtaining of a bond or satisfactory financial guarantee of a sufficient amount, as determined by the LGCB, to guarantee successful completion of and compliance with the Casino Contract or such other projects that are regulated by the LGCB. Under the Gaming Act and Rules and Regulations, any person holding or controlling a direct or beneficial 5% or more equity interest (either alone or in combination with others) in a direct or indirect holding company of JCC or HNOMC is presumed to have the ability to control JCC or HNOMC (or their holdings companies, as the case may be), requiring a finding of suitability, unless, among other things: (i) the presumption is rebutted by clear and convincing evidence; or (ii) the holder is one of several specified passive institutional investors and, upon request, such institution files necessary documentation demonstrating that it does not have the ability to control such entity and that it does not intend to influence the affairs of JCC or HNOMC. To the extent any holder of such securities fails to satisfy such requirement, such holder may be required to obtain certain qualifications or approvals (including a finding of suitability) from the LGCB to continue to hold such securities. Any failure to obtain such qualifications or approvals may subject such security holders to certain requirements, limitations or prohibitions, including a requirement that such security holders liquidate their securities at a time or at a cost that is otherwise unfavorable to such security holders. 26 Under the Gaming Act and Rules and Regulations, the LGCB has the authority to deny, revoke, suspend, limit, condition, or restrict any finding of suitability. Under the Rules and Regulations, the LGCB also has the authority to take further action against JCC or HNOMC on the grounds that a person found suitable as required by the Gaming Act is associated with, or controls, or is controlled by, or is under common control with, an unsuitable or disqualified person. Under the Rules and Regulations and the Casino Contract, if at any time the LGCB finds that any person required to be and remain suitable has failed to demonstrate suitability, the LGCB may, consistent with the Gaming Act and the Casino Contract, take any action that the LGCB deems necessary to protect the public interest. Under the Rules and Regulations, however, if a person associated with JCC, HNOMC or their affiliate, intermediary or holding companies, as the case may be, has failed to be found or remain suitable, the LGCB wil not declare such companies unsuitable as a result if such companies comply with the conditional licensing provisions, take immediate good faith action and comply with any order of the LGCB to cause such person to dispose of its interest, and, before such dispostion, ensure that the disqualified person does not receive any ownership benefits. The above safe harbor protections do not apply if JCC, HNOMC or their affiliate, intermediary, or holding companies, as the case may be: (i) fail to remain suitable, (ii) had actual or constructive knowledge of the facts that are the basis of the LGCB regulatory action and failed to take appropriate action, or (iii) are so tainted by such person that it affects the suitability of such entity under the standards of the Gaming Act. Under the Gaming Act, the LGCB and the its investigatory arm, the State Police, are also required to issue licenses or permits to certain persons associated with gaming operations, including: (i) certain employees of JCC and HNOMC; (ii) certain manufacturers, distributors and suppliers of gaming devices; (iii) certain suppliers of non-gaming goods or services; (iv) any person who furnishes services or property to JCC under an arrangement pursuant to which the person receives payments based on earnings, profits or receipts from gaming operations; and (v) any other persons deemed necessary by the LGCB. The securing of the requisite licenses and permits under the Gaming Act are a prerequisite for conducting, operating or performing any activity regulated by the LGCB or the Gaming Act. The Gaming Act provides that the LGCB has full and absolute power to deny an application, or to limit, condition, restrict, revoke or suspend any license, permit or approval, or to find unsuitable any person licensed, permitted or approved for any cause specified in the Gaming Act or rules promulgated by the LGCB. The Rules and Regulations provide that the LGCB may take any of the foregoing actions with respect to any person licensed, permitted, or approved, or any person registered, found suitable, or holding a contract, for any cause deemed reasonable. The Gaming Act provides that it is the express intent, desire and policy of the legislature that no holder of the Casino Contract, applicant for a license, permit, contract or other thing existing, issued or let as a result of the Gaming Act shall have any right or action to obtain any license, permit, contract or the granting of the approval sought except as provided for and authorized by the Gaming Act. Any license, permit, contract, approval or thing obtained or issued pursuant to the provisions of the Gaming Act has been expressly declared by the legislature to be a pure and absolute revocable privilege and not a right, property or otherwise, under the constitutions of the United States or of the State. The Gaming Act also provides that no holder acquires any vested right therein or thereunder. Under the Gaming Act, the gaming activities that may be conducted at the official gaming establishment, subject to the rule-making authority of the LGCB, include any banking or percentage game that is played with cards, dice or any electronic, electrical or mechanical device or machine for money, property or any thing of value, but exclude lottery, bingo, charitable games, raffles, electronic video bingo, pull tabs, cable television bingo, wagering on dog or horse races, sports betting or wagering on any type of sports contest or event. Under the Casino Contract, for each fiscal year of the Casino's operation, JCC is required to pay to LGCB the greater of (i) $100 million; and (ii) the sum of a sliding scale of gross gaming revenue that begins with a percentage of 18.5% of such revenues up to $600 million and escalates in differing 27 percentages to a high of 25% for such revenues in excess of $900 million. JCC is required to make such payments in daily increments, with an end of year settlement for gross gaming revenues in excess of $100 million. At least one day prior to the beginning of each fiscal year (no later than March 31(st) of each year), JCC is required to post with LGCB an unconditional guaranty of the minimum $100 million payments to LGCB in a form acceptable to LGCB and issued by a lender or third party with resources suitable to cover this payment (as determined by LGCB). The failure to post such a guaranty will result in the automatic termination of the Casino Contract with no cure period. The Casino Contract also imposes certain financial stability requirements on JCC relating to its ability to meet ongoing operating expenses, casino bankroll requirements, project debt payments and capital maintenance requirements. If JCC fails to clearly and convincingly demonstrate compliance with such requirements, LGCB may impose certain regulatory conditions, including, without limitation, placing restrictions on certain distributions by JCC to affiliates or entities in a control relationship with any of them and appointing a fiscal agent. The failure to cure a financial stability default within the specified period of time is an Event of Default under the Casino Contract that could lead to the closure of the Casino, the termination of the Casino Contract, and/or the appointment of a conservator. The sale, transfer, assignment, or alienation of a casino operating contract, or an interest therein, in violation of the Gaming Act is prohibited. The LGCB may approve the sale, transfer, assignment, or may grant the approval subject to conditions imposed by the LGCB. Further, under the Gaming Act, the sale, transfer, assignment, pledge, alienation, disposition, public offering, or acquisition of securities that results in one person's owning 5% or more of the total outstanding shares issued by JCC is void as to such person without prior approval of the LGCB. Failure to obtain prior approval by the of LGCB of a person acquiring 5% or more of the total outstanding shares of a licensee or 5% or more economic interest in JCC is grounds for cancellation of the Casino Contract or license suspension or revocation. The Gaming Act obligates JCC to give preference and priority to Louisiana residents, laborers, vendors and suppliers, except when not reasonably possible to do so without added expense, substantial inconvenience or sacrifice in operational efficiency. The Gaming Act further obligates JCC to give preference and priority to Louisiana residents in considering applicants for employment and requires that no less than 80% of the persons employed by JCC be Louisiana residents for at least one year immediately prior to employment. The Gaming Act provides that if any contract or other agreement to which the casino operator is a party contains a provision or clause establishing a different percentage or requiring more than 50% of the persons employed to be residents of any one parish, any such provision or clause shall be null and void and unenforceable as against public policy. The Gaming Act requires that JCC adopt written policies, procedures, and regulations to allow the participation of businesses owned by minorities in all design, engineering, and construction contracts and/or projects to the maximum extent practicable. The Rules and Regulations provide that JCC and HNOMC must take the foregoing actions with respect to all design, engineering, construction, banking and maintenance contracts and any other projects initiated by JCC and HNOMC. The Gaming Act further requires JCC, as nearly as practicable, to employ minorities consistent with the population of the State. The Rules and Regulations extend this obligation to HNOMC as well. The Gaming Act provides that JCC shall not: (i) offer seated restaurant facilities with table food service for patrons, but may offer limited cafeteria style food services for employees and patrons as provided by rule of the LGCB, provided, however, that no food may be given away or subsidized within the New Orleans Casino by JCC or any licensee, and no facility for food service shall exceed seating for 250 persons (by rule and regulation, LGCB is empowered to allow JCC to contract with local food preparers to provide certain limited food offerings at the New Orleans Casino); (ii) offer lodging in the Casino, nor engage in any practice or enter into any business relationships to give any hotel, whether or not affiliated with JCC, any advantage or preference not available to all similarly situated hotels; (iii) engage in such activities as are prohibited by the Casino Contract; (iv) engage in the sale of 28 products that are not directly related to gaming; or (v) cash or accept in exchange for the purchase of tokens, chips or electronic cards an identifiable employee payroll check. Any contract between JCC and any hotel or lodging facilities must be submitted to the LGCB for approval prior to entering into the contract. The Gaming Act provides that the LGCB shall annually enter into a casino support services contract with the City of New Orleans in order to compensate it for the cost to it for providing support services resulting from the operation of the official gaming establishment and the activities therein. The amount of the contract is to be determined by negotiation and agreement on an annual basis between the LGCB and the City of New Orleans, subject to approval by the State legislature. The Gaming Act, the Casino Contract and the Rules and Regulations have extensive prior approval requirements relating to certain borrowings and security interests related to the casino project. The Gaming Act authorizes the LGCB to provide for the protection of the rights of holders of security interests in both immovable property and movable property used in or related to casino gaming operations ("Gaming Collateral") and to provide for the continued operation of the New Orleans Casino during the period of time that a lender, as a holder of a security interest, seeks to enforce its security interest in such property. In connection therewith, the Gaming Act provides that the holder of a security interest in Gaming Collateral may receive payments from the owner or lessee of such property out of the proceeds of casino gaming operations received by the owner or lessee, and, the holder of the security interest may be exempt from the licensing requirements of the Gaming Act with respect to such payments if the transaction(s) giving rise to such payments have been approved in advance by the LGCB and complies with all rules and regulations of the LGCB and the LGCB determines the holder to be suitable. Under the Gaming Act, a holder of a security interest in a gaming device who asserts the right to ownership or possession of the encumbered property may be granted a one-time, nonrenewable, provisional contract for a maximum of 90 days for the sole purpose of acquiring ownership or possession for resale to a licensed or approved person, all in accordance with rules and regulations to be promulgated by the LGCB. The Rules and Regulations do not yet include a rule and regulation on this provision. If the holder of a security interest in immovable property comprising the New Orleans Casino wished to continue the operation during and after the filing of a suit to enforce the security interest, the Gaming Act provides that the holder of the security interest must name the LGCB as a nominal defendant in such suit and request the appointment of a receiver from among the persons on a list maintained by the LGCB. Upon proof of the debtor's default under the security instrument and the holder's right to enforce the security interest, the court shall appoint a person from the LGCB's list as a receiver of the official gaming establishment. Upon appointment of the receiver, the Gaming Act requires the receiver to furnish a fidelity bond in favor of the security interest holder, the owner or lessee of the official gaming establishment and the LGCB in an amount to be set by the court after consultation with the LGCB and all parties. The Gaming Act requires the LGCB to issue to the receiver a one-time, nonrenewable, provisional contact to continue gaming operations until the receivership is terminated. The receiver is considered to have all the rights and obligations of the casino operator under the casino operating contract. The holder of the security interest provoking the appointment of a receiver under the Gaming Act is required to pay the cost of the receiver's bond and the cost of operating the official gaming establishment or gaming operator during the term of the receivership to the extent that such costs exceed available revenues, in accordance with the rules and regulations of the LGCB. The Gaming Act further provides that the fees of the receiver and the authority for expenditures of the receiver are to be established by rules and regulations of the LGCB. The Gaming Act provides that a receivership must terminate upon: (i) the sale of the property subject to receivership to a duly approved or authorized person; (ii) the payment in full of all 29 obligations due to the holder of the security interest in the property subject to the receivership; (iii) an agreement for termination of the receivership signed by the holder of the security interest and the debtor, and approved by the LGCB and the court; or (iv) the lapse of five years from the date of the initial appointment of the receiver. Under the Gaming Act, a receivership may also be terminated by notice from the holder of the security interest who provoked the receivership addressed to the court and the LGCB of its intention to withdraw its financial support of the receivership at a specified time not less than 90 days from the date of the notice. In the event of such notice, the Gaming Act provides that the holder of the security interest giving the notice will not be responsible for any costs or expenses of the receivership after the date specified in the notice; except for reasonable costs and fees of the receiver in concluding the receivership, and the costs of a final accounting. The Gaming Act purports to provide that LGCB, the Governor by Executive Order, subject to legislative approval or the State legislature by act or resolution, may set aside or renegotiate the provisions of Casino operating contract when the casino operator is either voluntarily or involuntarily placed in bankruptcy, receivership or similar status. The Gaming Act provides that no rule or regulation and no provision in a contract executed by the LGCB pursuant to its authority to protect the holders of security interests in Gaming Collateral shall be the basis for any cause of action in contract or in tort against the State or the LGCB, its board of directors or its agents, attorneys or employees. Because legalized gaming is a relatively new industry in the State, there has been significant attention by the Louisiana legislature over the past few years to gaming related bills dealing with a wide range of subjects that could impact the New Orleans Casino project. At various times, bills have been introduced to, among other things, constitutionally and/or legislatively repeal all forms of gaming (including the land-based casino), increase taxes on casinos, limit credit that may be extended by casinos, limit days and hours of operation and alter the regulatory oversight structure. There can be no assurances that legislation having a material detrimental impact on the New Orleans Casino will not be enacted. GAMING--ILLINOIS The ownership and operation of a gaming riverboat in Illinois is subject to extensive regulation under the Illinois Riverboat Gambling Act and the rules and regulations promulgated thereunder. A five-member Illinois Gaming Board is charged with such regulatory authority, including the issuance of riverboat gaming licenses not to exceed 10 in number. The granting of an owner's license involves a preliminary approval procedure in which the Illinois Gaming Board issues a finding of preliminary suitability to a license applicant and effectively reserves a gaming license for such applicant. The Board has issued all 10 licenses. Des Plaines Development Limited Partnership, of which 80% is owned by Harrah's Illinois Corporation, an indirect subsidiary of Harrah's, received an owner's license in 1993. To obtain an owner's license (and a finding of preliminary suitability), applicants must submit comprehensive application forms, be fingerprinted and undergo an extensive background investigation by the Illinois Gaming Board. Each license granted entitles a licensee to own and operate up to two riverboats (with a combined maximum of 1,200 gaming positions) and equipment thereon from a specific location. An applicant is ineligible to receive an owner's license if the applicant, any of its officers, directors or managerial employees or any person who participates in the management or operation of gaming operations: (i) has been convicted of a felony; (ii) has been convicted of any violation under Article 28 of the Illinois Criminal Code or any similar statutes in any other jurisdiction; (iii) has submitted an application which contains false information; or (iv) is a member of the Illinois Gaming Board. In addition, an applicant is ineligible to receive an owners' license if a license of the applicant issued 30 under the Illinois legislation or a license to own or operate gaming facilities in any other jurisdiction has been revoked. In determining whether to grant a license, the Illinois Gaming Board considers: (i) the character, reputation, experience and financial integrity of the applicants; (ii) the type of facilities (including riverboat and docking facilities) proposed by the applicant; (iii) the highest prospective total revenue to be derived by the state from the conduct of riverboat gaming; (iv) affirmative action plans of the applicant, including minority training and employment; and (v) the financial ability of the applicant to purchase and maintain adequate liability and casualty insurance. Municipal (or county, if an operation is located outside of a municipality) approval of a proposed applicant is required, and all documents, resolutions, and letters of support must be submitted with the initial application. A holder of a license is subject to the imposition of fines, suspension or revocation of its license for any act that is injurious to the public health, safety, morals, good order, and general welfare of the people of the state of Illinois, or that would discredit or tend to discredit the Illinois gaming industry or the state of Illinois, including without limitation: (i) failing to comply with or make provision for compliance with the legislation, the rules promulgated thereunder or any federal, state or local law or regulation; (ii) failing to comply with any rule, order or ruling of the Illinois Gaming Board or its agents pertaining to gaming; (iii) receiving goods or services from a person or business entity who does not hold a supplier's license but who is required to hold such license by the rules; (iv) being suspended or ruled ineligible or having a license revoked or suspended in any state or gaming jurisdiction; (v) associating with, either socially or in business affairs, or employing persons of, notorious or unsavory reputation or who have extensive police records, or who have failed to cooperate with any official constituted investigatory or administrative body and would adversely affect public confidence and trust in gaming; and (vi) employing in any Illinois riverboat's gaming operation any person known to have been found guilty of cheating or using any improper device in connection with any game. Fines may be made of up to $5,000 against individuals and up to the greater of $10,000 or an amount equal to the daily gross receipts against licensees for each violation. An ownership interest in a license or in a business entity, other than a publicly held business entity which holds an owner's license, may not be transferred without approval of the Illinois Gaming Board. In addition, an ownership interest in a license or in a business entity, other than a publicly held business entity, which holds either directly or indirectly an owner's license, may not be pledged as collateral without approval of the Illinois Gaming Board. A person employed at a riverboat gaming operation must hold an occupational license which permits the holder to perform only activities included within such holder's level of occupation license or any lower level of occupation license. In addition, the Illinois Gaming Board issues suppliers licenses which authorize the supplier licensee to sell or lease gaming equipment and supplies to any licensee involved in the ownership and management of gaming operations. Minimum and maximum wagers on games are set by the licensee and wagering may be conducted only with a cashless wagering system, whereby money is converted to tokens, electronic cards or chips which can only be used for wagering. No person under the age of 21 is permitted to wager, and wagers may only be taken from a person present on a licensed riverboat. With respect to electronic gaming devices, the payout percentage may not be less than 80% nor more than 100%. The legislation, as amended, imposes an annual graduated wagering tax on adjusted receipts (generally defined as gross receipts less payments to customers as winnings) from gambling games, effective January 1, 1998. The graduated tax rate is as follows: up to $25 million--15%; $25 to $50 million--20%; $50 to $75 million--25%; $75 to $100 million--30%; in excess of $100 million--35%. The tax imposed is to be paid by the licensed owner to the Illinois Gaming Board on the day after the day when the wagers were made. Of the proceeds of that tax, 25% goes to the local government where 31 the home dock is located, a small portion goes to the Illinois Gaming Board for administration and enforcement expenses, and the remainder goes to the state education assistance fund. The legislation also requires that licensees pay a $2.00 admission tax for each person admitted to a gaming cruise. Of this admission tax, the host municipality or county receives $1.00. The licensed owner is required to maintain public books and records clearly showing amounts received from admission fees, the total amount of gross receipts and the total amount of adjusted gross receipts. All use, occupancy and excise taxes which apply to food and beverages and all taxes imposed on the sale or use of tangible property apply to sales aboard riverboats. In 1999, the Riverboat Gambling Act was amended, INTER ALIA, to allow dockside gaming, the ownership of multiple casino licenses, and the movement of a riverboat gaming license from one location to another. Subsequently, a lawsuit was filed challenging the constitutionality of certain aspects of the amendment. If the lawsuit is successful, it may result in a finding that the entire amendment is unconstitutional. Such a finding could have a material adverse effect on the Company's ownership of multiple casino licenses and the operating results of the Company's riverboats. GAMING--MISSISSIPPI The ownership and operation of a gaming business in the State of Mississippi is subject to extensive laws and regulations, including the Mississippi Gaming Control Act (the "Mississippi Act") and the regulations (the "Mississippi Regulations") promulgated thereunder by the Mississippi Gaming Commission (the "Mississippi Commission"), which is empowered to oversee and enforce the Mississippi Act. Gaming in Mississippi can be legally conducted only on vessels of a certain minimum size in navigable waters within any county bordering the Mississippi River or in waters of the State of Mississippi which lie adjacent and to the south (principally in the Gulf of Mexico) of the Counties of Hancock, Harrison and Jackson, provided that the county in question has not voted by referendum not to permit gaming in that county. The underlying policy of the Mississippi Act is to ensure that gaming operations in Mississippi are conducted: (i) honestly and competitively; (ii) free of criminal and corruptive influences; and (iii) in a manner which protects the rights of the creditors of gaming operations. The Mississippi Act requires that a person (including any corporation or other entity) be licensed to conduct gaming activities in the State of Mississippi. A license will be issued only for a specified location which has been approved in advance as a gaming site by the Mississippi Commission. Harrah's Vicksburg Corporation, an indirect subsidiary of Harrah's, is licensed to operate a riverboat casino in Vicksburg, Mississippi. Harrah's Tunica Corporation, another indirect subsidiary, is the general partner of Tunica Partners L.P. and Tunica Partners II L.P., each of which is the licensed operator of a riverboat casino in Tunica, Mississippi. (Harrah's Vicksburg Corporation is the limited partner of both partnerships.) As stated above, the casino operated by Tunica Partners L.P. closed in May 1997, and on March 1, 1999, that casino was sold to a subsidiary of Casino America, Inc. In addition, a parent company of a company holding a license must register under the Mississippi Act. Harrah's Entertainment and HOC are registered with the Mississippi Commission. The Mississippi Act also requires that each officer or director of a gaming licensee, or other person who exercises a material degree of control over the licensee, either directly or indirectly, be found suitable by the Mississippi Commission. In addition, any employee of a licensee who is directly involved in gaming must obtain a work permit from the Mississippi Commission. The Mississippi Commission will not issue a license or make a finding of suitability unless it is satisfied, after an investigation paid for by the applicant, that the persons associated with the gaming licensee or applicant for a license are of good character, honesty and integrity, with no relevant or material criminal record. In addition, the Mississippi Commission will not issue a license unless it is satisfied that the licensee is adequately financed or has a reasonable plan to finance its proposed operations 32 from acceptable sources, and that persons associated with the applicant have sufficient business probity, competence and experience to engage in the proposed gaming enterprise. The Mississippi Commission may refuse to issue a work permit to a gaming employee: (i) if the employee has committed larceny, embezzlement or any crime of moral turpitude, or has knowingly violated the Mississippi Act or Mississippi Regulations; or (ii) for any other reasonable cause. There can be no assurance that such persons will be found suitable by the Mississippi Commission. An application for licensing, finding of suitability or registration may be denied for any cause deemed reasonable by the issuing agency. Changes in licensed positions must be reported to the issuing agency. In addition to its authority to deny an application for a license, finding of suitability or registration, the Mississippi Commission has jurisdiction to disapprove a change in corporate position. If the Mississippi Commission were to find a director, officer or key employee unsuitable for licensing or unsuitable to continue having a relationship with the licensee, such entity would be required to suspend, dismiss and sever all relationships with such person. The licensee would have similar obligations with regard to any person who refuses to file appropriate applications. Each gaming employee must obtain a work permit which may be revoked upon the occurrence of certain specified events. Any individual who is found to have a material relationship to, or material involvement with, Harrah's Entertainment may be required to submit to an investigation in order to be found suitable or be licensed as a business associate of any subsidiary holding a gaming license. Key employees, controlling persons or others who exercise significant influence upon the management or affairs of Harrah's Entertainment may be deemed to have such a relationship or involvement. The Mississippi Commission has the power to deny, limit, condition, revoke and suspend any license, finding of suitability or registration, or to fine any person, as it deems reasonable and in the public interest, subject to an opportunity for a hearing. The Mississippi Commission may fine any licensee or person who was found suitable up to $100,000 for each violation of the Mississippi Act or the Mississippi Regulations which is the subject of an initial complaint, and up to $250,000 for each such violation which is the subject of any subsequent complaint. The Mississippi Act provides for judicial review of any final decision of the Mississippi Commission by petition to a Mississippi Circuit Court, but the filing of such petition does not necessarily stay any action taken by the Mississippi Commission pending a decision by the Circuit Court. Each gaming licensee must pay a license fee to the State of Mississippi based upon "gaming receipts" (generally defined as gross receipts less payouts to customers as winnings). The license fee equals four percent of gaming receipts of $50,000 or less per month, six percent of gaming receipts over $50,000 and up to $134,000 per month, and eight percent of gaming receipts over $134,000. The foregoing license fees are allowed as a credit against Mississippi state income tax liability for the year paid. An additional license fee, based upon the number of games conducted or planned to be conducted on the gaming premises, is payable to the State of Mississippi annually in advance. Also, up to a four percent additional tax on gaming revenues may be imposed at the local level of government. The Company also is subject to certain audit and record-keeping requirements, primarily intended to ensure compliance with the Mississippi Act, including compliance with the provisions relating to the payment of license fees. Under the Mississippi Regulations, a person is prohibited from acquiring control of Harrah's Entertainment without prior approval of the Mississippi Commission. Harrah's Entertainment also is prohibited from consummating a plan of recapitalization proposed by management in opposition to an attempted acquisition of control of Harrah's Entertainment and which involves the issuance of a significant dividend to Common Stock holders, where such dividend is financed by borrowings from financial institutions or the issuance of debt securities. In addition, Harrah's Entertainment is prohibited from repurchasing any of its voting securities under circumstances (subject to certain exemptions) where the repurchase involves more than one percent of Harrah's Entertainment 33 outstanding Common Stock at a price in excess of 110 percent of the then-current market value of Harrah's Entertainment Common Stock from a person who owns and has for less than one year owned more than three percent of Harrah's Entertainment outstanding Common Stock, unless the repurchase has been approved by a majority of Harrah's Entertainment shareholders voting on the issue (excluding the person from whom the repurchase is being made) or the offer is made to all other shareholders of Harrah's. Under the Mississippi Regulations, a gaming license may not be held by a publicly held corporation, although an affiliated corporation, such as Harrah's, may be publicly held so long as Harrah's Entertainment registers with and gets the approval of the Mississippi Commission. Harrah's Entertainment must obtain prior approval from the Mississippi Commission for any subsequent public offering of the securities of Harrah's Entertainment if any part of the proceeds from that offering are intended to be used to pay for or reduce debt used to pay for the construction, acquisition or operation of any gaming facility in Mississippi. In addition, in order to register with the Mississippi Commission as a publicly held holding corporation, Harrah's Entertainment must provide further documentation which is satisfactory to the Mississippi Commission, which includes all documents filed with the Securities and Exchange Commission. Any person who, directly or indirectly, or in association with others, acquires beneficial ownership of more than five percent of the Common Stock of Harrah's Entertainment must notify the Mississippi Commission of this acquisition. Regardless of the amount of securities owned, any person who has any beneficial ownership in the Common Stock of Harrah's Entertainment may be required to be found suitable if the Mississippi Commission has reason to believe that such ownership would be inconsistent with the declared policies of the State of Mississippi. Any person who is required to be found suitable must apply for a finding of suitability from the Mississippi Commission within 30 days after being requested to do so, and must deposit a sum of money which is adequate to pay the anticipated investigatory costs associated with such finding. Any person who is found not to be suitable by the Mississippi Commission shall not be permitted to have any direct or indirect ownership in Harrah's Entertainment Common Stock. Any person who is required to apply for a finding of suitability and fails to do so, or who fails to dispose of his or her interest in Harrah's Entertainment Common Stock if found unsuitable, is guilty of a misdemeanor. If a finding of suitability with respect to any person is not applied for where required, or if it is denied or revoked by the Mississippi Commission, Harrah's Entertainment is not permitted to pay such person for services rendered, or to employ or enter into any contract with such person. Harrah's Entertainment is required to maintain current stock ledgers in the State of Mississippi which may be examined by a representative of the Mississippi Commission at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Mississippi Commission. A failure to make such disclosure may be grounds for finding the record holder unsuitable. Harrah's Entertainment also is required to render maximum assistance in determining the identity of the beneficial owner. Because Harrah's Entertainment is licensed to conduct gaming in the State of Mississippi, neither Harrah's Entertainment nor any subsidiary may engage in gaming activities in Mississippi while also conducting gaming operations outside of Mississippi without approval of the Mississippi Commission. The Mississippi Commission has approved the conduct of gaming in all jurisdictions in which Harrah's Entertainment has ongoing operations or approved projects. There can be no assurance that any future approvals will be obtained. The failure to obtain such approvals could have a materially adverse effect on Harrah's. 34 GAMING--LOUISIANA (RIVERBOAT) The ownership and operation of a gaming riverboat in Louisiana is subject to extensive regulation under Louisiana Riverboat Economic Development and Gaming Control Act and the rules and regulations promulgated thereunder. A seven-member Louisiana Gaming Control Board ("LGCB") and the Riverboat Gaming Enforcement Division ("Division"), a part of the Louisiana State Police, are charged with such regulatory authority, including the issuance of riverboat gaming licenses. The number of licenses to conduct gaming on a riverboat is limited by statute to 15. No more than six licenses may be granted for the operation of gaming activities on riverboats in any one parish (county). In general, riverboat gaming in Louisiana can be conducted legally only on approved riverboats that cruise with certain exceptions including exceptions for certain portions of the Red River where riverboats can be continuously docked. Harrah's Shreveport Investment Company, Inc. an indirect subsidiary of Harrah's, is the general partner of, and owns 99% of, Red River Entertainment of Shreveport Partnership in Commendam ("Red River"), a Louisiana partnership which was granted a gaming license in April 1994, to operate a continuously docked gaming riverboat. Harrah's Shreveport Management Company, Inc., another subsidiary, owns the remaining one percent of the Partnership and manages the riverboat, pursuant to an agreement with the Partnership. To obtain a gaming license, applicants must obtain certain Certificates of Approval from the LGCB and submit comprehensive application forms, be fingerprinted and undergo an extensive background investigation by the Division. An applicant is ineligible to receive a gaming license if the applicant has not established good character, honesty and integrity. Each license granted entitles a licensee to operate a riverboat and equipment thereon from a specific location. The duration of the license initially runs for five years. Red River received a one-year renewal in July, 1999. Subsequent renewals will be for two-year terms. In determining whether to grant a license, the Division considers: (i) the good character, honesty and integrity of the applicant; (ii) the applicant's ability to conduct gaming operations; (iii) the adequacy and source of the applicant's financing; (iv) the adequacy of the design documents submitted; (v) the docking facilities to be used; (vi) applicant's plan to recruit, train, and upgrade minorities in employment and to provide for minority-owned business participation. A holder of a license is subject to the imposition of penalties, suspension or revocation of its license for any act that is injurious to the public health, safety, morals, good order, and general welfare of the people of the state of Louisiana, or that violates the gaming laws and regulations. The transfer of a license or an interest in a license is prohibited. In addition, an ownership interest of five percent or more in a business entity which holds a gaming license may not be sold, assigned, transferred or pledged without the Division's approval. No person may be employed as a gaming employee unless such person holds a gaming employee permit issued by the Division. In addition, the Division issues suppliers licenses which authorize the supplier licensee to sell or lease gaming equipment and supplies to any licensee. Minimum and maximum wagers on games are set by the licensee and wagering may be conducted only with a cashless wagering system, whereby all money is converted to tokens, electronic cards, or chips used only for wagering in the gaming establishment. No person under the age of 21 is permitted to wager, and wagers may only be taken from a person present on a licensed riverboat. The legislation imposes a franchise fee for the right to operate on Louisiana waterways of 15% of net gaming proceeds and a license fee of $50,000 (first year) and $100,000 (subsequent years) plus three and one-half percent of net gaming proceeds. All fees are paid to the Division. In addition, the legislation authorizes local governing authorities the power to levy an admission fee for each person boarding the riverboat. Currently that amount is paid by the license holder. The Company's operation is currently making a payment in lieu of such admission fee of 4.75% of net gaming proceeds. 35 GAMING--MISSOURI The ownership and operation of a gaming riverboat in Missouri is subject to extensive regulation under the Missouri Riverboat Gambling Act and the rules and regulations promulgated thereunder. A five-member Missouri Gaming Commission ("Commission") is charged with such regulatory authority, including the issuance of riverboat gaming licenses. Harrah's-North Kansas City Corporation, an indirect subsidiary of Harrah's, has been issued two licenses by the Commission to conduct riverboat gaming at its North Kansas City location. Harrah's Maryland Heights LLC, also an indirect subsidiary of the Company, has been issued two licenses by the Commission to conduct riverboat gaming at its Maryland Heights location. Gaming in Missouri can be conducted legally only on either excursion gambling boats or floating facilities approved by the Commission on the Mississippi and Missouri Rivers. Unless permitted to be continuously docked by the Commission for certain stated reasons, including safety, excursion gambling boats must cruise. The Commission has approved dockside gaming for the Company's riverboats in North Kansas City and Maryland Heights. To obtain a gaming license, applicants must submit comprehensive application forms, be fingerprinted and undergo an extensive background investigation by the Commission. An applicant is ineligible to receive an owner's license if the applicant has not established good reputation and moral character or if the applicant, any of its officers, directors or managerial employees or any person who participates in the management or operation of gaming operations has been convicted of a felony. There are separate licenses for owners and operators of riverboat gambling operations, which can be applied for and held concurrently. Each license granted entitles a licensee to own and/or operate an excursion gambling boat and equipment thereon from a specific location. The duration of the license initially runs for two one-year terms followed by two-year terms. The Commission also licenses the serving of alcoholic beverages on riverboats and adjacent facilities. All local income, earnings, use, property and sales taxes are applicable to licensees. In determining whether to grant a license, the Commission considers: (i) the integrity of the applicants; (ii) the types and variety of games to be offered; (iii) the quality of the physical facility, together with improvements and equipment, and how soon the project will be completed; (iv) the financial ability of the applicant to develop and operate the facility successfully; (v) the status of governmental actions required for the facility; (vi) management ability of the applicant; (vii) compliance with applicable laws, rules, charters, and ordinances; (viii) the economic, ecological and social impact of the facility as well as the cost of public improvements; (ix) the extent of public support or opposition; (x) the plan adopted by the home dock city or county; and (xi) effects on competition. A holder of a license is subject to the imposition of penalties, suspension or revocation of its license for any act that is injurious to the public health, safety, morals, good order, and general welfare of the people of the state of Missouri, or that would discredit or tend to discredit the Missouri gaming industry or the state of Missouri, including without limitation: (i) failing to comply with or make provision for compliance with the legislation, the rules promulgated thereunder or any federal, state or local law or regulation; (ii) failing to comply with any rules, order or ruling of the Commission or its agents pertaining to gaming; (iii) receiving goods or services from a person or business entity who does not hold a supplier's license but who is required to hold such license by the legislation or the rules; (iv) being suspended or ruled ineligible or having a license revoked or suspended in any state or gaming jurisdiction; (v) associating with, either socially or in business affairs, or employing persons of notorious or unsavory reputation or who have extensive police records, or who have failed to cooperate with any official constituted investigatory or administrative body and would adversely affect public confidence and trust in gaming; (vi) employing in any Missouri gaming operation any person known to have been found guilty of cheating or using any improper device in connection with any game; (vii) use of fraud, deception, misrepresentation or bribery in securing any license or permit issued pursuant to the legislation; (viii) obtaining any fee, charge, or other compensation by fraud, deception or 36 misrepresentation; and (ix) incompetence, misconduct, gross negligence, fraud, misrepresentation or dishonesty in the performance of the functions or duties regulated by the legislation. An ownership interest in a license or in a business entity, other than a publicly held business entity which holds a license, may not be transferred without the approval of the Commission. In addition, an ownership interest in a license or in a business entity, other than a publicly held business entity, which holds either directly or indirectly a license, may not be pledged as collateral to other than a regulated bank or saving and loan association without the Commission's approval. Every employee participating in a riverboat gaming operation must hold an occupational license which permits the holder to perform only activities included within such holder's level of occupation license or any lower level of occupation license. In addition, the Commission will issue suppliers licenses which authorize the supplier licensee to sell or lease gaming equipment and supplies to any licensee involved in the ownership and management of gaming operations. Even if continuously docked, licensed riverboats must establish and abide by a cruise schedule. Riverboat cruises are required to be a minimum of two hours and a maximum of four hours. For the Company's riverboats in North Kansas City and Maryland Heights, which are continuously docked, passengers may board the riverboats for a 45-minute period at the beginning of a cruise. They may disembark at any time. There is a maximum loss per person per cruise of $500. Minimum and maximum wagers on games are set by the licensee and wagering may be conducted only with a cashless wagering system, whereby money is converted to tokens, electronic cards or chips which can only be used for wagering. No person under the age of 21 is permitted to wager, and wagers may only be taken from a person present on a licensed excursion gambling boat. The legislation imposes a 20% wagering tax on adjusted gross receipts (generally defined as gross receipts less payments to customers as winnings) from gambling games. The tax imposed is to be paid by the licensed owner to the Commission on the day after the day when the wagers were made. Of the proceeds of that tax, 10% goes to the local government where the home dock is located, and the remainder goes to the state education assistance fund. The legislation also requires that licensees pay a $2.00 admission tax for each person admitted to a gaming cruise. The licensed owner is required to maintain public books and records clearly showing amounts received from admission fees, the total amount of gross receipts and the total amount of adjusted gross receipts. INDIAN GAMING The terms and conditions of management contracts and the operation of casinos and all gaming on Indian land in the United States are subject to the Indian Gaming Regulatory Act of 1988 ("IGRA"), which is administered by the NIGC and the gaming regulatory agencies of tribal governments. IGRA is subject to interpretation by the NIGC and may be subject to judicial and legislative clarification or amendment. IGRA requires NIGC approval of management contracts for Class II and Class III gaming as well as the review of all agreements collateral to the management contracts. The management contracts relating to the Harrah's managed casinos for the Ak-Chin Indian Community, the Eastern Band of Cherokee Indians and the Prairie Band of Potawatomi Nation were approved by the NIGC. The NIGC will not approve a management contract if a director or a 10% shareholder of the management company: (i) is an elected member of the Indian tribal government which owns the facility purchasing or leasing the games; (ii) has been or is convicted of a felony gaming offense; (iii) has knowingly and willfully provided materially false information to the NIGC or the tribe; (iv) has refused to respond to questions from the NIGC; or (v) is a person whose prior history, reputation and associations pose a threat to the public interest or to effective gaming regulation and control, or create or enhance the 37 chance of unsuitable activities in gaming or the business and financial arrangements incidental thereto. In addition, the NIGC will not approve a management contract if the management company or any of its agents have attempted to unduly influence any decision or process of tribal government relating to gaming, or if the management company has materially breached the terms of the management contract or the tribe's gaming ordinance, or a trustee, exercising due diligence, would not approve such management contract. A management contract can be approved only after NIGC determines that the contract provides, among other things, for: (i) adequate accounting procedures and verifiable financial reports, which must be furnished to the tribe; (ii) tribal access to the daily operations of the gaming enterprise, including the right to verify daily gross revenues and income; (iii) minimum guaranteed payments to the tribe, which must have priority over the retirement of development and construction costs; (iv) a ceiling on the repayment of such development and construction costs and (v) a contract term not exceeding five years and a management fee not exceeding 30% of net revenues (as determined by the NIGC); provided that the NIGC may approve up to a seven year term and a management fee not to exceed 40% of net revenues if NIGC is satisfied that the capital investment required, and the income projections for the particular gaming activity require the larger fee and longer term. There is no periodic or ongoing review of approved contracts by the NIGC. The only post-approval action which could result in possible modification or cancellation of a contract would be as the result of an enforcement action taken by the NIGC based on a violation of the law or an issue affecting suitability. IGRA established three separate classes of tribal gaming--Class I, Class II and Class III. Class I includes all traditional or social games solely for prizes of minimal value played by a tribe in connection with celebrations or ceremonies. Class II gaming includes games such as bingo, pulltabs, punchboards, instant bingo and non-banked card games (those that are not played against the house), such as poker. Class III gaming is casino-style gaming and includes banked table games such as blackjack, craps and roulette, and gaming machines such as slots, video poker, lotteries and pari-mutuel wagering. Harrah's Phoenix Ak-Chin provides Class II gaming and, as limited by the tribal-state compact, Class III gaming. The Cherokee and Prairie Band casinos provide only Class III gaming. IGRA prohibits all forms of Class III gaming unless the tribe has entered into a written agreement with the state that specifically authorizes the types of Class III gaming the tribe may offer (a "tribal-state compact"). These compacts provide among other things the manner and extent to which each state will conduct background investigations and certify the suitability of the manager, its officers, directors, and key employees to conduct gaming on tribal lands. The Company has received its permanent certification from the Arizona Department of Gaming as management contractor for the Ak-Chin Indian Community's casino and has been licensed by the relevant tribal gaming authorities to manage the Prairie Band of Potawatomi Indians' casino and the Eastern Band of Cherokee Indians' casino, respectively. Title 25, Section 81 of the United States Code states that "no agreement shall be made by any person with any tribe of Indians, or individual Indians not citizens of the United States, for the payment or delivery of any money or other thing of value . . . in consideration of services for said Indians relative to their lands . . . unless such contract or agreement be executed and approved" by the Secretary or his or her designee. An agreement or contract for services relative to Indian lands which fails to conform with the requirements of Section 81 is void and unenforceable. All money or other thing of value paid to any person by any Indian or tribe for or on his or their behalf, on account of such services, in excess of any amount approved by the Secretary or his or her authorized representative will be subject to forfeiture. We believe that we have complied with the requirements of section 81 with respect to our management contracts for Harrah's Phoenix Ak-Chin, Harrah's Cherokee and Harrah's Prairie Band and intend to comply with Section 81 with respect to any other contract to manage casinos located on Indian land in the United States. 38 Indian tribes are sovereign with their own governmental systems, which have primary regulatory authority over gaming on land within the tribes' jurisdiction. Therefore, persons engaged in gaming activities, including Harrah's Entertainment, are subject to the provisions of tribal ordinances and regulations on gaming. These ordinances are subject to review by the NIGC under certain standards established by IGRA. The NIGC may determine that some or all of the ordinances require amendment, and that additional requirements, including additional licensing requirements, may be imposed on us. We have received no such notification regarding the Ak-Chin, Cherokee and/or Prairie Band casinos. The possession of valid licenses from the Ak-Chin Indian Community, the Eastern Band of Cherokee Indians and the Prairie Band of Potawatomi Nation are ongoing conditions of our agreements with these tribes. OTHER REGULATIONS Our businesses are subject to various federal, state and local laws and regulations in addition to gaming laws. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, environmental matters, employees, currency transactions, taxation, zoning and building codes, and marketing and advertising. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted. Material changes, new laws or regulations, or material differences in interpretations by courts or governmental authorities could adversely affect our operating results. FUEL SHORTAGES AND COSTS; WEATHER Although gasoline supplies are now in relative abundance, gasoline shortages and price increases may have adverse effects on our casino business. Access to several of our casino entertainment facilities, including the Lake Tahoe and Reno areas of northern Nevada and Atlantic City, New Jersey, may be restricted from time to time during the winter months by bad weather which can cause road closures. Such closures have at times adversely affected operating results at Harrah's Lake Tahoe, Harrah's Reno, Bill's Lake Tahoe Casino, Harrah's Atlantic City, Atlantic City Showboat, Harrah's Joliet and Harrah's East Chicago. EMPLOYEE RELATIONS Harrah's Entertainment, through its subsidiaries, has approximately 36,100 employees. Labor relations with employees are good. Our subsidiaries have collective bargaining agreements covering approximately 5,400 employees. These agreements relate to certain casino, hotel and restaurant employees at Harrah's Atlantic City, Harrah's Las Vegas, Harrah's East Chicago and both Showboat facilities. ITEM 3. LEGAL PROCEEDINGS. The Company is party to routine litigation incidental to our business. We do not expect the outcome of any pending litigation to have a material adverse effect on our consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable. 39 EXECUTIVE OFFICERS OF THE REGISTRANT
POSITIONS AND OFFICES HELD AND PRINCIPAL NAME AND AGE OCCUPATIONS OR EMPLOYMENT DURING PAST 5 YEARS - ------------ ------------------------------------------------------------ Philip G. Satre (50).......... Director since 1989, member of the three-executive Office of the President since May, 1999, Chairman of the Board since January 1997, and Chief Executive Officer since April 1994 of Harrah's Entertainment. President (1991-1999), Chief Operating Officer of Harrah's Entertainment (1991-1994). President (1984-1995) of Harrah's Gaming Group. He was a member of the Executive Committee of Harrah's Jazz Company and was a director and President of Harrah's Jazz Finance Corp., both of which filed petitions under Chapter 11 of the United States Bankruptcy Code in November 1995. On October 30, 1998, the Plan of Reorganization for both Companies was consummated. He is also a director of TABCORP Holdings Limited, an Australia public company, JDN Realty Corporation and JCC Holding Company. Colin V. Reed (52)............ Director since 1998, member of the three-executive Office of the President since May 1999, Executive Vice President of Harrah's Entertainment from September 1995 to May 1999. Chief Financial Officer of Harrah's Entertainment since April 1997. Senior Vice President, Corporate Development of Harrah's Entertainment from May 1992 to September 1995. He was a member of the Executive Committee of Harrah's Jazz Company and was a director, Senior Vice President and Secretary of Harrah's Jazz Finance Corp., both of which filed petitions under Chapter 11 of the United States Bankruptcy Code in November 1995. On October 30, 1998, the Plan of Reorganization for both companies was consummated. He is also a director of National Airlines, Inc., as well as Chairman of the Board of JCC Holding Company. Gary W. Loveman (39).......... Director since 2000; Chief Operating Officer since May 1998; member of the three-executive Office of the President since May 1999; Executive Vice President of Harrah's Entertainment from May 1998 to May 1999. Mr. Loveman was Associate Professor of Business Administration, Harvard University Graduate School of Business Administration from 1994 to 1998, where his responsibilities included teaching MBA and executive education students, research and publishing in the field of service management, and consulting and advising large service companies. He is also a director of National Airlines, Inc. John M. Boushy (44)........... Senior Vice President, Brand Operations and Information Technology since February 1999; Senior Vice President, Information Technology and Marketing Services of Harrah's Entertainment from 1993 to 1999. He is a director of Interactive Entertainment Limited.
40
POSITIONS AND OFFICES HELD AND PRINCIPAL NAME AND AGE OCCUPATIONS OR EMPLOYMENT DURING PAST 5 YEARS - ------------ ------------------------------------------------------------ Stephen H. Brammell (42)...... Senior Vice President and General Counsel since July 1999; Vice President and Associate General Counsel from 1997 to 1999; Associate General Counsel from 1993 to 1997 of Harrah's Entertainment. Janis L. Jones (50)........... Senior Vice President of Communications/Government Relations of Harrah's Entertainment since October 1999; Mayor of Las Vegas from 1991 to 1999. She is also a director of the Community Bank of Nevada and HEALTHSOUTH Corporation. Marilyn G. Winn (47).......... Senior Vice President, Human Resources of Harrah's Entertainment since May 1999; Senior Vice President and General Manager of Harrah's Shreveport from 1997 to 1999; Director of Slot Operations of Harrah's Las Vegas from 1995 to 1997.
41 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. Our Common Stock is listed on the New York Stock Exchange and traded under the ticker symbol "HET". The stock is also listed on the Chicago Stock Exchange, the Pacific Exchange and the Philadelphia Stock Exchange. The following table sets forth the high and low price per share of our Common Stock for the last two years:
1999 HIGH LOW - ---- ----------- ---------- First Quarter............................................... 20 1/4 14 3/8 Second Quarter.............................................. 24 9/16 18 7/16 Third Quarter............................................... 27 3/4 19 5/8 Fourth Quarter.............................................. 30 3/4 23 3/8
1998 HIGH LOW - ---- ----------- ---------- First Quarter............................................... 25 1/8 18 1/8 Second Quarter.............................................. 26 3/16 21 5/8 Third Quarter............................................... 23 1/2 13 5/16 Fourth Quarter.............................................. 17 1/4 11 1/16
The approximate number of holders of record of our Common Stock as of January 31, 2000, is as follows:
APPROXIMATE NUMBER OF TITLE OF CLASS HOLDERS OF RECORD - -------------- ----------------- Common Stock, Par Value $0.10 per share..................... 11,063
We do not presently intend to declare cash dividends. Our Board of Directors may reevaluate this dividend policy in the future in light of our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board. ITEM 6. SELECTED FINANCIAL DATA. See the information for the years 1995 through 1999 set forth under "Financial and Statistical Highlights" on pages 20 and 21 of the Annual Report, which pages are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. See the information set forth on pages 23 through 33 of the Annual Report, which pages are incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. We are exposed to market risk, primarily changes in interest rates. We have entered into derivative transactions to hedge our exposure to interest rate changes. We do not hold or issue derivative financial instruments for trading purposes and do not enter into derivative transactions that would be considered speculative positions. The table below provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and 42 debt obligations. For debt obligations, the table presents notional amounts and weighted average interest rates by contractual maturity dates.
MATURITY DATE ----------------------------------------------------------------- FAIR 2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE(1) ---- ---- ---- ---- ---- ---------- ----- -------- (DOLLARS IN MILLIONS) LIABILITIES Long-term debt Fixed rate.......................... $ 2.9 $ 2.7 $ 1.4 $ 1.3 $ 1.3 $1,402.5 $1,412.1 $1,353.8 Average interest rate............. 11.4% 10.5% 7.3% 7.1% 7.1% 7.7% 7.7% Variable rate....................... $ - $ - $ - $ - $1,131.0 $ - $1,131.0 $1,131.0 Average interest rate(2).......... -% -% -% -% 7.4% -% 7.4% INTEREST RATE SWAPS Variable to Fixed................... $300.0 $ - $ - $ - $ - $ - $ 300.0 $ 0.5 Average pay rate.................. 6.5% -% -% -% -% -% 6.5% Average receive rate.............. 6.1% -% -% -% -% -% 6.1%
- ------------------------------ (1) The fair values are based on the borrowing rates currently available for debt instruments with similar terms and maturities and market quotes of the Company's publicly traded debt. (2) The average interest rates were based on December 31, 1999, variable rates. Actual rates in future periods could vary. The interest rate swap agreements contain a credit risk to the Company that the counterparties may be unable to meet the terms of the agreements. We minimize this risk by evaluating the creditworthiness of our counterparties, which are limited to major banks and financial institutions. Foreign currency translation gains and losses were not material to our results of operations for the year ended December 31, 1999. We sold our equity interest in a casino in a foreign country during fourth quarter 1999 and sold our management contract for that casino in January 2000. As a result of these transactions, we no longer have any interests in businesses in foreign countries and, therefore, are not subject to foreign currency exchange rate risk. Accordingly, we are not currently subject to material foreign currency exchange rate risk from the effects that exchange rate movements of foreign currencies would have on our future operating results or cash flows. We also hold investments in various available-for-sale equity securities. Our exposure to price risk arising from the ownership of these investments is not material to our consolidated financial position, results of operations or cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See the information set forth on pages 34 through 51 of the Annual Report, which pages are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS. DIRECTORS See the information regarding the names, ages, positions and prior business experience of our directors set forth in the section entitled "Board of Directors" of the Proxy Statement, which information is incorporated herein by reference. 43 EXECUTIVE OFFICERS See "Executive Officers of the Registrant" on page 40 in Part I hereof. ITEM 11. EXECUTIVE COMPENSATION. See the information set forth in the sections of the Proxy Statement entitled "Compensation of Directors," "Summary Compensation Table," "Option Grants in the Last Fiscal Year," "Aggregated Option Exercises in 1999 and December 31, 1999 Option Values" and "Certain Employment Arrangements", which sections are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. See the information set forth in the sections of the Proxy Statement entitled "Ownership of Harrah's Entertainment Securities" and "Certain Stockholders," which sections are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. See the information set forth in the section of the Proxy Statement entitled "Certain Transactions," which section is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial statements (including related notes to consolidated financial statements)* filed as part of this report are listed below: Report of Independent Public Accountants. Consolidated Balance Sheets as of December 31, 1999 and 1998. Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997. Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997. 2. Schedules for the years ended December 31, 1999, 1998 and 1997, are as follows:
NO. --- I -- Condensed financial information of registrant II.. -- Consolidated valuation and qualifying accounts Schedules III, IV, and V are not applicable and have therefore been omitted.
- ------------------------ * Incorporated by reference from pages 34 through 51 of the Annual Report. 3. Exhibits (footnotes appear on pages 51 through 53)
NO. --- 1 Underwriting Agreement, dated as of January 12, 1999, between Harrah's Entertainment, Inc., Harrah's Operating Company, Inc. and the Underwriters named therein. (26)
44
NO. --- 2(1) Agreement and Plan of Merger, dated August 9, 1998, and amended September 4, 1998, by and among Harrah's Entertainment, Inc., HEI Acquisition Corp. III, and Rio Hotel & Casino, Inc. (8) 2(2) Agreement and Plan of Merger, dated as of August 19, 1999, by and among Harrah's Entertainment, Inc., HEI Acquisition Corp. II and Players International, Inc. (including form of Stockholder Support Agreement entered into by stockholders of Players as of the same date). (27) 3(1) Certificate of Incorporation of The Promus Companies Incorporated; Certificate of Amendment of Certificate of Incorporation of The Promus Companies Incorporated dated April 29, 1994; Certificate of Amendment of Certificate of Incorporation of The Promus Companies Incorporated dated May 26, 1995; and Certificate of Amendment of Certificate of Incorporation of The Promus Companies Incorporated dated June 30, 1995, changing its name to Harrah's Entertainment, Inc. (19) 3(2) Bylaws of Harrah's Entertainment, Inc., as amended May 7, 1999. (28) 4(1) Rights Agreement dated as of October 5, 1996, between Harrah's Entertainment, Inc. and The Bank of New York, which includes the form of Certificate of Designations of Series A Special Stock of Harrah's Entertainment, Inc. as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Special Shares as Exhibit C. (3) 4(2) First Amendment, dated as of February 21, 1997, to Rights Agreement between Harrah's Entertainment, Inc. and The Bank of New York. (21) 4(3) Second Amendment, dated as of April 25, 1997, to Rights Agreement, dated as of October 25, 1996, between Harrah's Entertainment, Inc. and The Bank of New York. (4) 4(4) Letter to Stockholders dated July 23, 1997 regarding Summary of Rights To Purchase Special Shares As Amended Through April 25, 1997. (14) 4(5) Certificate of Elimination of Series B Special Stock of Harrah's Entertainment, Inc., dated February 21, 1997. (21) 4(6) Certificate of Designations of Series A Special Stock of Harrah's Entertainment, Inc., dated February 21, 1997. (21) 4(7) Interest Swap Agreement between Bank of America National Trust and Savings Association and Harrah's Operating Company, Inc. dated December 22, 1995. (19) 4(8) Interest Swap Agreement between Bank of America and Harrah's Entertainment, Inc. dated December 22, 1995. (19) 4(9) Interest Swap Agreement between Bankers Trust Company and Embassy Suites, Inc. dated May 10, 1995. (7) 4(10) Interest Swap Agreement between The Sumitomo Bank, Limited and Embassy Suites, Inc. dated June 6, 1995. (7) 4(11) Interest Swap Agreement between Bankers Trust Company and Embassy Suites, Inc. dated June 6, 1995. (7)
45
NO. --- 4(12) First Amendment, dated as of September 16, 1998, to the Credit Agreement dated as of July 22, 1993, amended and restated as of June 9, 1995 and further amended and restated as of April 1, 1998 (the "5-Year Credit Agreement") and to the Credit Agreement dated as of June 9, 1995, amended and restated as of April 1, 1998 (the "364-Day Credit Agreement"), among Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., Marina Associates, the lenders party to these credit agreements, Canadian Imperial Bank of Commerce and Societe Generale, as Co-Syndication Agents, Bank of America National Trust and Savings Association, as Documentation Agent, and Bankers Trust Company, as Administrative Agent. (29) 4(13) Second Amendment, dated as of November 30, 1998, to the 5-Year Credit Agreement and to the 364-Day Credit Agreement, among Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., Marina Associates, the lenders party to these credit agreements, Canadian Imperial Bank of Commerce and Societe Generale, as Co-Syndication Agents, Bank of America National Trust and Savings Association, as Documentation Agent, and Bankers Trust Company, as Administrative Agent. (29) 4(14) Third Amendment, dated as of January 19, 1999, to the 5-Year Credit Agreement and to the 364-Day Credit Agreement among Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., Marina Associates, the lenders party to these credit agreements, Canadian Imperial Bank of Commerce and Societe Generale, as Co-Syndication Agents, Bank of America National Trust and Savings Association, as Documentation Agent, and Bankers Trust Company, as Administrative Agent. (30) 4(15) Five Year Loan Agreement dated as of April 30, 1999 among Harrah's Entertainment, Inc., as Guarantor, Harrah's Operating Company, Inc. and Marina Associates, as Borrowers, The Lenders, Syndication Agent, Document Agents and Co-Documentation Agents and Bank of America National Trust and Savings Association, as Administrative Agent. (28) 4(16) 364-Day Loan Agreement dated as of April 30, 1999 among Harrah's Entertainment, Inc., as Guarantor, Harrah's Operating Company, Inc. and Marina Associates, as Borrowers, The Lenders, Syndication Agent, Document Agents and Co-Documentation Agents and Bank of America National Trust and Savings Association, as Administrative Agent. (28) 4(17) Indenture, dated as of December 9, 1998, among Harrah's Operating Company, Inc. as Issuer, Harrah's Entertainment, Inc., as Guarantor and IBJ Schroder Bank & Trust Company, as Trustee relating to the 7 7/8% Senior Subordinated Notes Due 2005. (29) 4(18) Indenture, dated as of December 18, 1998, among Harrah's Operating Company, Inc. as obligor, Harrah's Entertainment, Inc., as Guarantor, and IBJ Schroder Bank & Trust Company, as Trustee relating to the 7 1/2% Senior Notes Due 2009. (29) 4(19) Press Release dated January 13, 1999--Harrah's to Issue Senior Notes. (26) 4(20) Press Release dated February 11, 1999--Harrah's Reports Record Year in 1998 (32) 4(21) Press Release dated April 21, 1999--Harrah's Reports First Quarter 1999 Results. (33) 4(22) Press Release dated August 19, 1999--Harrah's Signs Definitive Agreement to Acquire Players International. (27)
46
NO. --- 4(23) Agreement of Purchase and Sale by and between Sun International and Showboat Land LLC, dated January 29, 1998; Assignment and Assumption of Lease by and between Sun International and Showboat Land LLC, dated January 27, 1998; Landlord Estoppel Certificate by Sun International to Atlantic City Showboat, Inc. dated January 27, 1998; Tenant Estoppel Certificate by Atlantic City Showboat, Inc. to Sun International dated January 27, 1998. (25) 4(24) Mortgage and Security Agreement by and between Column Financial, Inc. and Showboat Land LLC, dated January 29, 1998; Promissory Note in the principal amount of $100,000,000 in favor of Column Financial Inc. by Showboat Land LLC, dated January 29, 1998; Cash Management Agreement by and between Column Financial, Inc. and Showboat Land LLC dated January 28, 1998; Guaranty of Lease by and between Showboat, Inc. and Column Financial, Inc. dated January 29, 1998; Environmental Indemnity Agreement by and between Column Financial, Inc., Showboat Land LLC and Atlantic City Showboat, Inc. dated January 29, 1998; Assignment of Leases and Rents by and between Column Financial Inc. and Showboat Land LLC, dated January 29, 1998; Tenant Estoppel Certificate by Atlantic City Showboat, Inc. to Column Financial, Inc. and Showboat Land LLC, dated January 29, 1998; Promissory Note Clarification Agreement dated January 29, 1998 between Column Financial, Inc. and Showboat Land LLC; and Lease Clarification Agreement dated February 13, 1998 among Showboat Land LLC and Atlantic City Showboat, Inc. (25) **4(25) Purchase and Sale Agreement by and between Harrah's Operating Company, Inc. and RBM Venture Company dated September 15, 1999. **4(26) Agreement of Lease by and between RBM Cherry Road Partners and Harrah's Operating Company, Inc. dated October 25, 1999 (Building 1); Agreement of Lease by and between RBM Cherry Road Partners and Harrah's Operating Company, Inc. dated October 25, 1999 (Building 2). 10(1) Tax Sharing Agreement, dated June 30, 1995, between The Promus Companies Incorporated and Promus Hotel Corporation. (7) +10(2) Form of Indemnification Agreement entered into by The Promus Companies Incorporated and each of its directors and executive officers. (1) +10(3) Financial Counseling Plan of Harrah's Entertainment, Inc. as amended January 1996. (19) +10(4) The Promus Companies Incorporated 1996 Non-Management Director's Stock Incentive Plan dated April 5, 1995. (6) +10(5) Amendment dated February 20, 1997 to 1996 Non-Management Director's Stock Incentive Plan. (4) +10(6) Trust Agreement dated November 7, 1997 between Harrah's Entertainment, Inc. and NationsBank concerning the Non-Management Director's Stock Incentive Plan. (23) +10(7) The Promus Companies Incorporated Key Executive Officer Annual Incentive Plan dated February 24, 1995. (7) +10(8) Summary Plan Description of Executive Term Life Insurance Plan. (21) +10(9) Form of Harrah's Entertainment, Inc.'s Annual Management Bonus Plan, as amended 1995. (19) +10(10) Amendment dated as of December 12, 1997 to Harrah's Entertainment, Inc.'s Annual Management Bonus Plan. (23)
47
NO. --- +10(11) Amendment dated December 10, 1998 to Harrah's Entertainment, Inc.'s Annual Management Bonus Plan. (29) **+10(12) Description of Amendment to Harrah's Entertainment, Inc.'s Annual Management Bonus Plan on November 11, 1999. +10(13) Amended and Restated Severance Agreement dated as of October 31, 1997 entered into with Philip G. Satre. (23) +10(14) Form of Amended and Restated Severance Agreement dated as of October 31, 1997 entered into with John M. Boushy and Colin V. Reed. (23) +10(15) Severance Agreement dated October 29, 1998 entered into with Gary W. Loveman. (29) +10(16) Severance Agreement dated October 29, 1998 entered into with Philip G. Satre. (29) +10(17) Form of Severance Agreement dated October 29, 1998 entered into with John M. Boushy, Colin V. Reed and Judy T. Wormser. (29) +10(18) Form of Employment Agreement dated April 1, 1998 entered into with John M. Boushy and Colin V. Reed. (29) +10(19) Addendum dated April 1, 1998, to Employment Agreement between Harrah's Entertainment, Inc. and John M. Boushy. (29) +10(20) Employment Agreement and Addendum dated May 4, 1998, between Harrah's Entertainment, Inc. and Gary W. Loveman. (29) +10(21) Employment Agreement between Harrah's Entertainment, Inc. and J. Kell Houssels, III, dated June 1, 1998. (13) +10(22) Memorandum Agreement Concerning Termination of Employment and Commencement of Consulting Agreement dated November 25, 1998, among Harrah's Entertainment, Inc. and J. Kell Houssels, III. (29) **+10(23) Employment Agreement dated as of January 1, 1999, between Harrah's Entertainment, Inc. and Philip G. Satre +10(24) Employment Agreement dated May 7, 1999, between Harrah's Entertainment, Inc. and Marilyn G. Winn. (28) +10(25) Severance Agreement dated May 7, 1999, between Harrah's Entertainment, Inc. and Marilyn G. Winn. (28) +10(26) Employment Agreement dated July 30, 1999, between Harrah's Entertainment, Inc. and Stephen H. Brammell. (34) +10(27) Severance Agreement dated July 30, 1999, between Harrah's Entertainment, Inc. and Stephen H. Brammell. (34) **+10(28) Employment Agreement dated November 1, 1999, between Harrah's Operating Company, Inc. and Janis L. Jones. **+10(29) Severance Agreement dated November 1, 1999, between Harrah's Entertainment, Inc. and Janis L. Jones. +10(30) The Promus Companies Incorporated 1990 Stock Option Plan. (9) +10(31) The Promus Companies Incorporated 1990 Stock Option Plan (as amended as of April 30, 1993). (15)
48
NO. --- +10(32) The Promus Companies Incorporated 1990 Stock Option Plan, as amended April 29, 1994. (5) +10(33) The Promus Companies Incorporated 1990 Stock Option Plan, as amended July 29, 1994. (16) +10(34) Amendment, dated April 5, 1995, to The Promus Companies Incorporated 1990 Stock Option Plan as adjusted on December 12, 1996. (21) +10(35) Amendment, dated February 26, 1998, to the Harrah's Entertainment, Inc. 1990 Stock Option Plan. (10) +10(36) Amendment, dated April 30, 1998, to the Harrah's Entertainment, Inc. 1990 Stock Option Plan. (13) +10(37) Amendment, dated October 29, 1998, to the Harrah's Entertainment, Inc. 1990 Stock Option Plan. (29) +10(38) Revised Form of Stock Option (1990 Stock Option Plan). (19) +10(39) Revised Form of Stock Option with attachments (1990 Stock Option Plan). (21) +10(40) Form of memorandum agreement dated July 2, 1991, eliminating stock appreciation rights under stock options held by Philip G. Satre. (11) +10(41) The Promus Companies Incorporated 1990 Restricted Stock Plan. (9) +10(42) Amendment, dated April 5, 1995, to The Promus Companies Incorporated 1990 Restricted Stock Plan. (6) +10(43) Amendment, dated February 26, 1998, to the Harrah's Entertainment, Inc. 1990 Restricted Stock Plan. (10) +10(44) Amendment, dated April 30, 1998, to the Harrah's Entertainment, Inc. 1990 Restricted Stock Plan. (13) +10(45) Amendment, dated October 29, 1998, to the Harrah's Entertainment, Inc. 1990 Restricted Stock Plan. (29) **+10(46) Amendment, dated November 11, 1999, to the Harrah's Entertainment, Inc. 1990 Restricted Stock Plan. +10(47) Revised Forms of Restricted Stock Award (1990 Restricted Stock Plan). (19) +10(48) Revised Form of Restricted Stock Award (1990 Restricted Stock Plan). (21) +10(49) Administrative Regulations, Long Term Compensation Plan (Restricted Stock Plan and Stock Option Plan) dated October 27, 1995. (19) +10(50) Amendment to Administrative Regulations, Long Term Compensation Plan (Restricted Stock Plan and Stock Option Plan) dated December 12, 1996. (21) +10(51) Description of Terms of Stock Option and TARSAP grants for Gary W. Loveman on April 30, 1998. (13) **+10(52) Description of Terms of Amendment to TARSAP grants for Gary W. Loveman on November 11, 1999. +10(53) Deferred Compensation Plan dated October 16, 1991. (12)
49
NO. --- +10(54) Amendment, dated May 26, 1995, to The Promus Companies Incorporated Deferred Compensation Plan. (2) +10(55) Forms of Deferred Compensation Agreement. (19) +10(56) Amended and Restated Executive Deferred Compensation Plan dated as of October 27, 1995. (19) +10(57) Amendment dated April 24, 1997 to Harrah's Entertainment, Inc.'s Executive Deferred Compensation Plan. (14) +10(58) Amendment dated April 30, 1998 to the Harrah's Entertainment, Inc. Executive Deferred Compensation Plan. (13) +10(59) Amendment dated October 29, 1998 to the Harrah's Entertainment, Inc. Executive Deferred Compensation Plan. (29) +10(60) Description of Amendments to Executive Deferred Compensation Plan. (17) +10(61) Restated Amendment, dated July 18, 1996, to Harrah's Entertainment, Inc. Executive Deferred Compensation Plan. (21) +10(62) Forms of Executive Deferred Compensation Agreement. (19) +10(63) Amendment dated April 24, 1997, to Harrah's Entertainment, Inc.'s Deferred Compensation Plan. (14) +10(64) Escrow Agreement dated February 6, 1990 between The Promus Companies Incorporated, certain subsidiaries thereof, and Sovran Bank, as escrow agent. (9) +10(65) First Amendment to Escrow Agreement dated January 31, 1990 among Holiday Corporation, certain subsidiaries thereof and Sovran Bank, as escrow agent. (9) +10(66) Amendment to Escrow Agreement dated as of October 29, 1993 among The Promus Companies Incorporated, certain subsidiaries thereof, and NationsBank, formerly Sovran Bank. (18) +10(67) Amendment, dated as of June 7, 1995, to Escrow Agreement among The Promus Companies Incorporated, certain subsidiaries thereof and NationsBank. (2) +10(68) Amendment, dated as of July 18, 1996, to Escrow Agreement between Harrah's Entertainment, Inc. and NationsBank. (20) +10(69) Time Accelerated Restricted Stock Award Plan ("TARSAP") program dated December 12, 1996. (21) +10(70) Form of TARSAP Award. (21) +10(71) Form of Agreement, dated October 30, 1996, regarding cancellation and reissue of stock options, entered into with Philip G. Satre, Colin V. Reed, and John M. Boushy; and Form of Reissued Stock Option. (21) +10(72) Amendment, dated as of October 30, 1997, to Escrow Agreement between Harrah's Entertainment, Inc., Harrah's Operating Company, Inc. and NationsBank. (23)
50
NO. --- 10(73) Intercreditor Agreement among Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., Bankers Trust Company, as Administrative Agent, and Norwest Bank Minnesota, National Association, as Trustee, and The Bank of New York, as Collateral Agent, acknowledged and agreed to by JCC Holding Company, Jazz Casino Company, L.L.C., CP Development, L.L.C., CP Development, L.L.C., and JCC Development Company, L.L.C., dated as of October 29, 1998. (24) 10(74) Second Amended and Restated Management Agreement between Harrah's New Orleans Management Company and Jazz Casino Company, L.L.C., acknowledged and consented to by Rivergate Development Corporation, as Landlord, dated as of October 29, 1998. (24) 10(75) HET/JCC Agreement between Harrah's Entertainment, Inc., Harrah's Operating Company, Inc. and Jazz Casino Company, L.L.C., dated October 30, 1998. (24) 10(76) Guaranty and Loan Purchase Agreement by Harrah's Entertainment, Inc. and Harrah's Operating Company, Inc., acknowledged and agreed to by Bankers Trust Company as Administrative Agent, dated as of October 29, 1998. (24) 10(77) Master Agreement dated April 15, 1999 between TABCORP Holdings Limited and Harrah's Entertainment, Inc., with attachments. (28) 10(78) Amendment to Harrah's Entertainment, Inc. 1990 Stock Option Plan. (28) 10(79) Amendment to Harrah's Entertainment, Inc.'s Annual Management Bonus Plan. (28) 10(80) TARSAP Deferral Plan dated July 28, 1999. (34) 10(81) TARSAP Deferral Plan--Deferral Agreement dated August 30, 1999, between Harrah's Entertainment, Inc. and Philip G. Satre. (34) 10(82) TARSAP Deferral Plan--Deferral Agreement dated August 16, 1999, between Harrah's Entertainment, Inc. and Colin V. Reed. (34) **11 Computations of per share earnings. **12 Computations of ratios. **13 Portions of Annual Report to Stockholders for the year ended December 31, 1999. (22) **21 List of subsidiaries of Harrah's Entertainment, Inc. **27 Financial Data Schedule. 99 Press Release dated January 1, 1999--Harrah's and Rio Hotel Casino Complete Merger. (31)
- ------------------------ ** Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K. FOOTNOTES (1) Incorporated by reference from the Company's Registration Statement on Form 10, File No. 1-10410, filed on December 13, 1989. (2) Incorporated by reference from the Company's Current Report on Form 8-K, filed June 15, 1995, File No. 1-10410. 51 (3) Incorporated by reference from the Company's Current Report on Form 8-K, filed August 9, 1996, File No. 1-10410. (4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, filed May 13, 1997, File No. 1-10410. (5) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, filed May 12, 1994, File No. 1-10410. (6) Incorporated by reference from the Company's Proxy Statement for the May 26, 1995 Annual Meeting of Stockholders, filed April 25, 1995. (7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, filed August 14, 1995, File No. 1-10410. (8) Incorporated by reference from the Company's Current Report on Form 8-K, filed August 14, 1998, and amended on September 4, 1998, File No. 1-10410. (9) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 1989, filed March 28, 1990, File No. 1-10410. (10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998, filed May 14, 1998, File No. 1-10410. (11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 1991, filed November 8, 1991, File No. 1-10410. (12) Incorporated by reference from Amendment No. 2 to the Company's and Embassy's Registration Statement on Form S-1, File No. 33-43748, filed March 18, 1992. (13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, filed August 7, 1998, File No. 1-10410. (14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, filed August 13, 1997, File No. 1-10410. (15) Incorporated by reference from Post-Effective Amendment No. 1 to the Company's Form S-8 Registration Statement, File No. 33-32864-01, filed July 22, 1993. (16) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, filed August 11, 1994, File No. 1-10410. (17) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, filed November 13, 1997, File No. 1-10410. (18) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, filed March 28, 1994, File No. 1-10410. (19) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, filed March 6, 1996, File No. 1-10410. (20) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, filed November 12, 1996, File No. 1-10410. (21) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, filed March 11, 1997, File No. 1-10410. (22) Filed herewith to the extent portions of such report are specifically included herein by reference. (23) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, filed March 10, 1998, File No. 1-10410. 52 (24) Incorporated by reference from JCC Holding Company's Registration Statement on Form 10/A, filed November 20, 1998. (25) Incorporated by reference from Showboat, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-7123. (26) Incorporated by reference from the Company's Current Report on Form 8-K filed January 13, 1999, File No. 1-10410. (27) Incorporated by reference from the Company's Current Report on Form 8-K filed August 23, 1999, File No. 1-10410. (28) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, filed August 12, 1999, File No. 1-10410. (29) Incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed March 19, 1999, File No. 1-10410. (30) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, filed May 13, 1999, File No. 1-10410.) (31) Incorporated by reference from the Company's Current Report on Form 8-K, filed January 7, 1999, File No. 1-10410. (32) Incorporated by reference from the Company's Current Report on Form 8-K filed February 12, 1999, File No. 1-10410. (33) Incorporated by reference from the Company's Current Report on Form 8-K filed April 23, 1999, File No. 1-10410. (34) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, filed November 12, 1999, File No. 1-10410. (b) No reports on Form 8-K were filed by the Company during the fourth quarter of 1999 and thereafter through March 13, 2000. 53 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HARRAH'S ENTERTAINMENT, INC. By: /s/ PHILIP G. SATRE ----------------------------------------- Philip G. Satre CHAIRMAN, CHIEF EXECUTIVE OFFICER, OFFICE OF THE PRESIDENT
Dated: March 13, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ SUSAN CLARK-JOHNSON ------------------------------------------- Director March 13, 2000 Susan Clark-Johnson /s/ JAMES B. FARLEY ------------------------------------------- Director March 13, 2000 James B. Farley /s/ JOE M. HENSON ------------------------------------------- Director March 13, 2000 Joe M. Henson /s/ RALPH HORN ------------------------------------------- Director March 13, 2000 Ralph Horn /s/ J. KELL HOUSSELS, III ------------------------------------------- Director March 13, 2000 J. Kell Houssels, III /s/ GARY W. LOVEMAN Director, ------------------------------------------- Chief Operating Officer March 13, 2000 Gary W. Loveman Office of the President /s/ R. BRAD MARTIN ------------------------------------------- Director March 13, 2000 R. Brad Martin
54
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT G. MILLER ------------------------------------------- Director March 13, 2000 Robert G. Miller /s/ COLIN V. REED Director, ------------------------------------------- Chief Financial Officer March 13, 2000 Colin V. Reed Office of the President /s/ WALTER J. SALMON ------------------------------------------- Director March 13, 2000 Walter J. Salmon /s/ PHILIP G. SATRE Director, Chairman and ------------------------------------------- Chief Executive Officer March 13, 2000 Philip G. Satre Office of the President /s/ BOAKE A. SELLS ------------------------------------------- Director March 13, 2000 Boake A. Sells /s/ EDDIE N. WILLIAMS ------------------------------------------- Director March 13, 2000 Eddie N. Williams /s/ JUDY T. WORMSER ------------------------------------------- Controller and Principal March 13, 2000 Judy T. Wormser Accounting Officer
55 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Harrah's Entertainment, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the financial statements included in the Harrah's Entertainment, Inc. 1999 annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report hereon dated February 8, 2000 (except with respect to the matter discussed in note 18, as to which the date is February 29, 2000). Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed under Item 14(a)2 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements, and in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Memphis, Tennessee February 8, 2000 SCHEDULE I HARRAH'S ENTERTAINMENT, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------------ 1999 1998 ---------- -------- ASSETS Cash........................................................ $ -- $ -- Investments in and advances to subsidiaries (eliminated in consolidation)............................................ 1,486,277 851,407 ---------- -------- $1,486,277 $851,407 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Commitments and contingencies (Notes 2, 3, 6 through 9) Stockholders' equity (Note 4) Common stock, $0.10 par value, authorized--360,000,000 shares outstanding--124,379,760 and 102,188,018 shares (net of 9,286,772 and 3,036,562 held in treasury)....... $ 12,438 $ 10,219 Capital surplus........................................... 987,322 407,691 Retained earnings......................................... 512,539 451,410 Accumulated other comprehensive income.................... (493) 6,567 Deferred compensation related to restricted stock......... (25,529) (24,480) ---------- -------- $1,486,277 $851,407 ========== ========
The accompanying Notes to Financial Statements are an integral part of these balance sheets. S-1 SCHEDULE I (CONTINUED) HARRAH'S ENTERTAINMENT, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Revenues.................................................... $ -- $ -- $ -- Costs and expenses.......................................... 150 165 144 -------- -------- -------- Loss before income taxes and equity in subsidiaries' earnings.................................................. (150) (165) (144) Income tax benefit.......................................... 53 58 50 -------- -------- -------- Loss before equity in subsidiaries' earnings................ (97) (107) (94) Equity in subsidiairies' earnings........................... 219,600 121,824 107,616 -------- -------- -------- Income before extraordinary loss............................ 219,503 121,717 107,522 Extraordinary loss, net of tax benefit of $5,990, $10,522 and $4,477 (Note 3)....................................... (11,033) (19,693) (8,134) -------- -------- -------- Net income.................................................. $208,470 $102,024 $ 99,388 ======== ======== ========
The accompanying Notes to Financial Statements are an integral part of these statements. S-2 SCHEDULE I (CONTINUED) HARRAH'S ENTERTAINMENT, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- Cash flows from operating activities Net income................................................ $ 208,470 $ 102,024 $ 99,388 Adjustment to reconcile net income to cash flows from operating activities Equity in undistributed continuing earnings of subsidiaries........................................ (219,600) (121,824) (107,616) Extraordinary loss.................................... 17,023 29,491 12,611 Other non-cash activity............................... (5,893) (9,691) (4,383) --------- --------- --------- Cash flows from operating activities................ -- -- -- --------- --------- --------- Cash flows from financing activities Distributions from subsidiary............................. 147,952 -- 41,022 Treasury stock purchases.................................. (147,952) -- (41,022) --------- --------- --------- Cash flows from financing activities................ -- -- -- --------- --------- --------- Net change in cash.......................................... -- -- -- Cash, beginning of period................................... -- -- -- --------- --------- --------- Cash, end of period......................................... $ -- $ -- $ -- ========= ========= =========
The accompanying Notes to Financial Statements are an integral part of these statements. S-3 SCHEDULE I (CONTINUED) HARRAH'S ENTERTAINMENT, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO FINANCIAL STATEMENTS NOTE 1--BASIS OF ORGANIZATION Harrah's Entertainment, Inc. ("HET" or the "Company,"), a Delaware corporation, is a holding company, the principal assets of which are the capital stock of two subsidiaries, Harrah's Operating Company, Inc. ("HOC") and Aster Insurance Ltd. ("Aster"). HOC holds, directly and through its subsidiaries, the principal assets of HET's businesses. References to HOC include its subsidiaries where the context requires. These condensed financial statements should be read in conjunction with the consolidated financial statements of HET and subsidiaries. NOTE 2--INVESTMENT IN ASTER The value of HET's investment in Aster has been reduced below zero. HET's negative investment in Aster at December 31, 1999 and 1998 was $7.3 million and $7.3 million, respectively, and is included in investments in and advances to subsidiaries on the balance sheet. In addition, HET has guaranteed the payment by Aster of certain insurance-related liabilities. NOTE 3--LONG-TERM DEBT HET has no long-term debt obligations. In addition to entering into new revolving credit and letter of credit facilities ("the Bank Facility"), HOC refinanced certain of its outstanding debts, in particular those debt obligations assumed in our acquisition transactions, to reduce effective interest rates and/or lengthen maturities. The extraordinary losses reported in HET's Statements of income for each period are primarily due to HOC's refinancing activities. During December 1998, HOC completed a public offering of $750.0 million principal amount of 7 7/8% Senior Subordinated Notes due 2005 (the "7 7/8% Notes"). In January 1999, HOC completed a public offering of $500.0 million principal amount $7 1/2% Senior Notes due 2009 (the "7 1/2% Notes"). HET has guaranteed HOC's Bank Facility, the 7 7/8% Notes and the 7 1/2% Notes. NOTE 4--STOCKHOLDERS' EQUITY In addition to its common stock, Harrah's has the following classes of stock authorized but unissued: Preferred stock, $100 par value, 150,000 shares authorized Special stock, $1.125 par value 5,000,000 shares authorized-- Series A Special Stock, 2,000,000 shares designated HET's Board of Directors has authorized that one special stock purchase right (a "Right") be attached to each outstanding share of common stock. These Rights are exercisable only if a person or group acquires 15% or more of the Company's common stock or announces a tender offer for 15% or more of the common stock. Each Right entitles stockholders to buy one two-hundredth of a share of Series A Special Stock of the Company at an initial price of $130 per Right. If a person acquires 15% or more of the Company's outstanding common stock, each Right entitles its holder to purchase common stock of the Company having a market value at that time of twice the Right's exercise price. S-4 HARRAH'S ENTERTAINMENT, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4--STOCKHOLDERS' EQUITY (CONTINUED) Under certain conditions, each Right entitles its holder to purchase stock of an acquiring company at a discount. Rights held by the 15% holder will become void. The Rights will expire on October 5, 2006, unless earlier redeemed by the Board at one cent per Right. In October 1996, the Company's Board of Directors approved a plan, which expired on December 31, 1997, under which the Company repurchased 2,993,700 shares of its common stock at an average price of $18.05 per share. In July 1999, the Company's Board of Directors authorized the repurchase in open market and other transactions of up to 10 million shares of the Company's common stock. HET expects to acquire our shares from time to time at prevailing market prices through the December 31, 2000, expiration of the approved plan. At December 31, 1999, we had repurchased 5.6 million shares under the provisions of this plan. These repurchases are in addition to 0.5 million shares repurchased earlier in 1999 in connection with the increase of our ownership interest in the East Chicago property. The shares repurchased under these programs are held in treasury and reflected in HET's balance sheet as if they were retired. NOTE 5--INCOME TAXES Harrah's files a consolidated tax return with its subsidiaries. NOTE 6--COMMITMENTS AND CONTINGENCIES NEW ORLEANS CASINO. HOC has an approximate 43% ownership interest in the parent of Jazz Casino Company, L.L.C. ("JCC"), the company which owns and operates the exclusive land-based casino (the "Casino") in New Orleans, Louisiana. HOC manages that Casino pursuant to a management agreement between JCC and an HOC subsidiary. HET has (i) guaranteed JCC's initial $100.0 million annual tax payment under the Casino operating contract to the State of Louisiana gaming board (the "State Guarantee"), (ii) guaranteed $166.5 million of a $236.5 million JCC bank credit facility, and (iii) made a $22.5 million subordinated loan to JCC to finance construction of the casino. With respect to the State Guarantee, HET and HOC are obligated to guarantee JCC's first $100 million annual payment obligation commencing upon the October 28, 1999, opening of the Casino, and, if certain cash flow tests (for the renewal periods beginning April 1, 2001) and other conditions are satisfied each year, to renew the guarantee beginning April 1, 2000, for each 12 month period ending March 31, 2004. The obligations under the guarantee for the first year of operations or any succeeding 12 month period is limited to a guarantee of the $100 million payment obligation of JCC for the 12 month period in which the guarantee is in effect and is secured by a first priority lien on JCC's assets. JCC's payment (and therefore the amount we have guaranteed) is $100 million at commencement of each 12 month period under the Casino operating contract and declines on a daily basis by 1/365 of $100 million to the extent payments are made each day by JCC to Louisiana's gaming board. (See Note 9.) S-5 HARRAH'S ENTERTAINMENT, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7--LITIGATION HET is involved in various inquiries, administrative proceedings and litigation relating to contracts, sales of property and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, management believes that the final outcome of these matters will not have a material adverse effect upon our consolidated financial position or our results of operations. NOTE 8--ACQUISITIONS On June 1, 1998, HOC completed the acquisition of Showboat, Inc. ("Showboat") for $520.0 million in cash and assumption of approximately $635 million of Showboat debt. On January 1, 1999, HET completed the merger with Rio Hotel & Casino, Inc. ("Rio"), issuing approximately 25 million shares of HET common stock to acquire all of Rio's outstanding shares in a one-for-one transaction and assuming Rio's outstanding debt of approximately $432 million. HET transferred the Rio stock to HOC upon completion of the merger. In August 1999, HET announced the signing of a definitive agreement to acquire Players International, Inc. ("Players"). Players shareholders will receive $8.50 in cash for each share outstanding, and HET will assume $150 million of Players' debt. Completion of the transaction is subject to various conditions, including regulatory approvals and other third party approvals. NOTE 9--SUBSEQUENT EVENT On February 28, 2000, HET and HOC were notified by JCC that is was suspending payment of the daily payments to the State of Louisiana until JCC is able to generate sufficient cash flow to pay its operating expenses and make the daily payments. On February 29, 2000, the State made a demand on the Company under the State Guarantee, and HOC began funding the daily payment to the State on that date. HOC has also agreed, subject to certain conditions, to renew the State Guarantee for the period April 1, 2000, until March 31, 2001. See Note 6 for further discussion of the State Guarantee. S-6 SCHEDULE II HARRAH'S ENTERTAINMENT, INC. CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------------------ ---------- -------------------- ---------- --------- ADDITIONS -------------------- CHARGED BALANCE AT TO COSTS CHARGED DEDUCTIONS BALANCE BEGINNING AND TO OTHER FROM AT CLOSE DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD - ------------------------------------------------------------ ---------- --------- -------- ---------- --------- YEAR ENDED DECEMBER 31, 1999 Allowance for doubtful accounts Current................................................... $14,356 $22,774 $25,935 $(18,979)(A) $44,086 ======= ======= ======= ======== ======= Long-term................................................. $12,693 $ -- $ 2,639 $ (7,327) $ 8,005 ======= ======= ======= ======== ======= Reserve against investments in and advances to nonconsolidated affiliates (B)............................ $13,000 $ -- $ -- $ -- $13,000 ======= ======= ======= ======== ======= Reserve for impairment of long-lived assets (C)............. $36,490 $ 3,367 $ 2,385 $(29,005) $13,237 ======= ======= ======= ======== ======= Reserve for contingent liability exposure................... $ 1,041 $ -- $ -- $ (163) $ 878 ======= ======= ======= ======== ======= Insurance allowances and reserves........................... $45,771 $68,654 $ 0 $(63,417) $51,008 ======= ======= ======= ======== ======= YEAR ENDED DECEMBER 31, 1998 Allowance for doubtful accounts Current................................................... $11,462 $ 9,905 $ -- $ (7,011)(A) $14,356 ======= ======= ======= ======== ======= Long-term................................................. $10,421 $ -- $ -- $ 2,272 $12,693 ======= ======= ======= ======== ======= Reserve against investments in and advances to nonconsolidated affiliates (B)............................ $13,000 $ -- $ -- $ -- $13,000 ======= ======= ======= ======== ======= Reserve for impairment of long-lived assets................. $33,369 $ 2,740 $ 381 $ -- $36,490 ======= ======= ======= ======== ======= Reserve for contingent liability exposure................... $ 4,806 $ -- $ -- $ (3,765) $ 1,041 ======= ======= ======= ======== ======= Insurance allowances and reserves........................... $46,870 $62,262 $ -- $(63,361) $45,771 ======= ======= ======= ======== ======= YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts Current................................................... $14,064 $ 5,332 $ 27 $ (7,961)(A) $11,462 ======= ======= ======= ======== ======= Long-term................................................. $ 4,628 $ 1,118 $ -- $ 4,675 $10,421 ======= ======= ======= ======== ======= Reserve for debtor-in-possession loans to nonconsolidated subsidiary................................................ $ -- $13,000 $ -- $ -- $13,000 ======= ======= ======= ======== ======= Reserve for impairment of long-lived assets................. $33,369 $ -- $ -- $ -- $33,369 ======= ======= ======= ======== ======= Reserve for contingent liability exposure................... $ 9,481 $ -- $ -- $ (4,675) $ 4,806 ======= ======= ======= ======== ======= Insurance allowances and reserves........................... $49,590 $54,198 $ -- $(56,918) $46,870 ======= ======= ======= ======== =======
- ------------------------------ (A) Uncollectible accounts written off, net of amounts recovered. (B) See Note 7 to our Consolidated Financial Statements. (C) Reduction of reserve due to disposition of property. S-7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated February 8, 2000 (except with respect to the matter discussed in note 18, as to which the date is February 29, 2000), included in this Form 10-K for the year ended December 31, 1999, into the Company's previously filed Registration Statements File Nos. 333-80899 and 333-77937. ARTHUR ANDERSEN LLP Memphis, Tennessee March 13, 2000 EX-4.25 2 EXHIBIT 4.25 Exhibit 4(25) PURCHASE AND SALE AGREEMENT BY AND BETWEEN HARRAH'S OPERATING COMPANY, INC., as Seller AND RBM VENTURE COMPANY, as Purchaser PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (this "Agreement") is made and entered into by and between HARRAH'S OPERATING COMPANY, INC., a Delaware corporation ("Seller"), and RBM VENTURE COMPANY, a Delaware corporation, or assigns ("Purchaser"). RECITALS: A. Seller is the owner of an office campus located in Memphis, Shelby County, Tennessee which Seller currently uses as Seller's corporate headquarters. B. Seller desires to sell the Property (as hereinafter defined) to Purchaser, and Purchaser desires to purchase the Property from Seller, on the terms and conditions hereinafter set forth. AGREEMENT: NOW, THEREFORE, for and in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: ARTICLE 1 The Contract For and in consideration of the mutual benefits enjoyed by one another under this Agreement, Seller agrees to sell and convey the Property to Purchaser and Purchaser agrees to purchase and accept conveyance of the Property pursuant to the terms and conditions set forth in this Agreement. ARTICLE 2 Property As used in this Agreement, the term "Property" shall mean and refer to the following: (a) approximately 25.5 acres of real property located at 1023 Cherry Road, Memphis, Tennessee 38117, together with all -2- rights and interests appurtenant thereto (collectively the "Land"); (b) a three story office building containing approximately 59,159 usable square feet ("Building 1") located on the Land; (c) a two-story office building containing approximately 54,397 usable square feet, together with all lower level parking spaces ("Building 2") located on the Land; (d) a former residence converted to use as an office building located on the Land (the "Mansion"); (e) a pool house/cafeteria building (the "Pool House"); (f) a facility/security building (the "Security Building"); (g) a two story parking structure (the "Parking Structure"); (h) surface parking spaces (the "Surface Parking"); (i) all tangible personal property and fixtures (collectively, the "FF&E") of any kind whatsoever attached to, or located upon and used in connection with the ownership, maintenance, use or operation of Building 1, Building 2, the Mansion, the Pool House, the Security Building, the Parking Structure, and the Surface Parking (Building 1, Building 2, the Mansion, the Pool House, the Security Building, the Parking Structure, and the Surface Parking are sometimes referenced to collectively hereinafter as the "Improvements") as of the date hereof (or acquired by Seller and so employed prior to Closing, as defined below), including, but not limited to, all furniture, fixtures, equipment, personal property; all cameras, sensors, alarms, and other security systems; key pad and entry systems; sprinklers and fire suppression systems; landscaping equipment; irrigation systems and equipment; pool equipment; all heating, lighting, plumbing, drainage, electrical, air conditioning, and other mechanical fixtures and equipment and systems; building and energy management systems and controls; power backup and generator systems; telephone switches and systems; satellite dishes; fiber optic networks; computer wiring and cables; utility and other meters; all keys, locks, combinations, codes; building systems computers and software; all elevators and related motors and electrical equipment and systems; all hot water heaters, -3- furnaces, heating controls, motors and boiler pressure systems and equipment, all shelving and partitions, all ventilating equipment, and all incinerating and disposal equipment; all carpet, drapes, blinds, window treatments, chandeliers, furniture, and other furnishings; all stoves, ovens, freezers, refrigerators, dishwashers, disposals, kitchen equipment and utensils, tables, chairs, plates and other dishes, glasses, silverware, serving pieces and other restaurant and bar equipment, apparatus and utensils; including all items as described on Exhibit A attached hereto, but excluding, however, those certain items as described on Exhibit A-1 attached hereto. Purchaser shall have the option to elect to purchase any of the items described on Exhibit A-1 at the price reflected on Exhibit A-1. Seller agrees that between the date hereof and the Closing Date (as hereinafter defined), Seller will not cause or permit FF&E which is to be sold to Purchaser to be removed from the Improvements except for the purpose of discarding worn and valueless items; (j) all supplies and other items used for the operation and maintenance of the Property, engineers' supplies, paint and painters' supplies, and pool and other cleaning and maintenance supplies (collectively, the "Supplies"); provided, however, that Supplies shall not be deemed to include business supplies consumed by Seller in the ordinary course of Seller's day-to-day business. Seller agrees that between the date hereof and the Closing Date, Seller will not cause or permit depletion of Supplies except in the ordinary course of business; (k) to the extent assignable, any and all of the following that relate to or affect in any way, the design, construction, ownership, use, occupancy, leasing, maintenance, service, or operation of the Land, Improvements, Supplies, or FF&E: (i) contracts or agreements, such as maintenance, supply, service or utility contracts, a list of which is attached hereto as Exhibit A-2 and which shall be reviewed during the Review Period and either assumed or rejected by Purchaser, but only to the extent assumed by Purchaser (collectively, the "Service Contracts"); (ii) warranties, guaranties, indemnities, and claims for the benefit of Seller, a list of which is attached hereto as Exhibit A-3, (collectively the "Warranties"); -4- (iii) licenses, permits, software, franchises, utility reservations, certificates of occupancy, and similar documents issued by any federal, state, or municipal authority or by any private party, a list of which is attached hereto as Exhibit A-4 (collectively the "Licenses"), excluding, however, any business permits or licenses pertaining to the conduct of Seller's business on the Property; (iv) all files and records related to the Property (including, without limitation, all maintenance and repair records, logs, tax assessment appeal records and files, planned development files and records, files and records related to neighborhood owners agreements, service manuals, and related correspondence) plans, drawings, specifications, surveys, soil reports, engineering reports, environmental reports, material safety data sheets and similar documentation, inspection reports, and other technical descriptions and reports to the extent in Seller's possession or control, a list of which is attached hereto as Exhibit A-5 (collectively, the "Plans and Specs"); (v) leases of any FF&E and other contracts permitting the use of any FF&E at the Property, a list of which is attached hereto as Exhibit A-6 and which shall be reviewed during the Review Period and either assumed or rejected by Purchaser, but only to the extent assumed by Purchaser (collectively, the "FF&E Leases"), excluding, however, any business leases pertaining to the conduct of Seller's business. (l) to the extent assignable, Seller's interest in the right to receive immediately on and after Closing and continuously consume thereafter water service, sanitary and storm sewer service, electrical service, gas service, and telephone service on and for the Land and Improvements in capacities that are adequate to operate the Improvements for the purposes for which they were intended, free and clear of all qualifications and encumbrances other than the obligation to pay the applicable utility company the published rate for utility consumption after Closing, and the foregoing right shall include, but not be limited to (i) the right to the present and future use of wastewater, drainage, water and other utility facilities to the -5- extent such use benefits the Land or Improvements, (ii) all reservations of or commitments covering any such use in the future, and (iii) all wastewater capacity reservations relating to the Land or Improvements (all of the foregoing are referred to in this Agreement collectively as the "Utility Reservations", and a list of which is attached hereto as Exhibit A-7); and (m) all rights, titles, and interests of Seller appurtenant to the Property (collectively, the "Appurtenances"), including, but not limited to, (i) all easements, rights of way, rights of ingress and egress, tenements, hereditaments, privileges, and appurtenances in any way belonging to the Land or Improvements, (ii) any land lying in the bed of any alley, highway, street, road or avenue, open or proposed, in front of or abutting or adjoining the Land, (iii) any strips or gores of real estate adjacent to the Land, (iv) all minerals, mineral rights, and air rights, and (v) the use of all alleys, easements and rights-of-way, if any, abutting, adjacent, contiguous to or adjoining the Land. The Property shall be conveyed, assigned, and transferred to Purchaser at Closing, free and clear of all mortgages, liens, encumbrances, licenses, franchises, concession agreements, security interests, prior assignments or conveyances, conditions, restrictions, rights-of-way, easements, encroachments, claims and other matters affecting title, except for those matters specifically approved of in writing by Purchaser or otherwise permitted by the express terms of this Agreement. At Purchaser's option and in Purchaser's sole discretion, the FF&E Leases, collectively, or on a case by case basis, either shall be assigned to Purchaser or Seller shall elect either (i) to retain same or (ii) pay off at Seller's expense. ARTICLE 3 Purchase Price 3.1. PURCHASE PRICE. The total price (the "Purchase Price") for which Seller agrees to sell and convey the Property to Purchaser, and which Purchaser agrees to pay or deliver to Seller, subject to the terms of this Agreement and adjustments as provided herein, shall be Fourteen Million Three Hundred Forty-Nine Thousand Four Hundred Fifty-Three and No/100 Dollars ($14,349,453), payable as follows: -6- (a) Two Hundred Fifty Thousand Dollars ($250,000.00) ("Earnest Money Deposit") shall be deposited into escrow with the Title Company as hereinafter defined within two business days of the full execution of this Agreement. (b) at Closing (as defined in Article 11 of this Agreement), the balance of the purchase price will be paid to Seller in cash, cashier's check or wired funds. Purchaser shall receive a credit of $10,220.00 for the Roof Repair as set forth on Exhibit H. (c) all interest accruing on Earnest Money deposited under this Agreement shall become a part of and be added to the Earnest Money so that it shall be subject to disbursement or application in the same manner as is the principal of the Earnest Money. The Title Company shall deposit the Earnest Money in an interest bearing account at a bank or savings institution reasonably acceptable to Seller and Purchaser, and all interest accrued thereon shall be reported under Purchaser's federal tax identification number. If the sale of the Property is not consummated in accordance with the terms hereof, the Earnest Money shall be returned to Purchaser, or delivered to Seller as liquidated damages as herein provided. If the sale of the Property is consummated in accordance with the terms hereof, the Earnest Money shall be applied to the Purchase Price. 3.2. ALLOCATIONS. Subject to adjustments in accordance with the terms of this Agreement, the Purchase Price shall be allocated by Seller and Purchaser at Closing as set forth on Exhibit B attached hereto, and neither party shall take any position contrary to such allocation. ARTICLE 4 Deliveries 4.1. DEED. On the Closing Date, Seller shall convey, transfer, and assign title to the Property to Purchaser. The Land, Improvements and Appurtenances shall be conveyed to Purchaser by Seller's general warranty deed in the form attached hereto as Exhibit C ("Seller's Deed") conveying good, indefeasible, and insurable fee simple title to the Land and Improvements, and except for the lease of certain of the Improvements by Purchaser pursuant to the Lease (as hereinafter defined) free and clear of all mortgages, liens, encumbrances, leases, licenses, franchises, concession agreements, security -7- interests, prior assignments or conveyances, conditions, restrictions, rights of way, easements, encroachments, claims, and other matters affecting title except only those title exceptions specifically approved of in writing by Purchaser or otherwise permitted under the express terms of this Agreement. 4.2. BILL OF SALE. Seller's interest in all FF&E, Supplies, Service Contracts, Warranties, Licenses, Plans and Specs, and other personal property shall be conveyed to Purchaser by one or more Assignment and Bill of Sale and, to the extent, if any, that Purchaser elects to assume the obligations related thereto, such Assignment and Assumption Agreements in the form attached hereto as Exhibit D. 4.3. TITLE COMMITMENT. Within 15 days after the execution of this Agreement, Seller shall obtain and deliver to Purchaser, at Seller's sole cost and expense, the following: (a) a Commitment for Title Insurance (the "Title Commitment") issued by First American Title Insurance Company (the "Title Company"), for the most recent form of ALTA owner's policy, covering the Land and Improvements, setting forth the current status of the title to the Land and Improvements, showing all liens, claims, encumbrances, easements, rights of way, encroachments, reservations, restrictions, and any other matters affecting the Land and Improvements, and pursuant to which the Title Company agrees to issue to Purchaser at Closing an owner's policy of title insurance (the "Title Policy") on the most recent form of ALTA owner's policy; and (b) true, complete, legible and, where applicable, recorded copy of all documents and instruments (the "Supporting Documents") referred to or identified in the Title Commitment, including, but not limited to, all deeds, lien instruments, leases, plats, surveys, reservations, restrictions, and easements. 4.4. UCC SEARCH. Within 15 days after the execution hereof, Seller shall obtain and deliver to Purchaser, at Seller's sole cost and expense, current written reports (the "UCC Searches") from the Office of the Secretary of State of Tennessee and the Shelby County Tennessee Register's Office reflecting the results of current searches of the uniform commercial code records maintained by such offices. -8- 4.5. SURVEY. Within 10 days after the execution hereof, Seller shall provide to Purchaser, at Seller's sole cost and expense, a current "as built" ALTA/ACSM survey (the "Survey") of the Land and Improvements made on the ground and certified by a professional land surveyor licensed in the State of Tennessee (the "Surveyor"). The Survey shall contain a certification by the Surveyor in form reasonably acceptable and addressed to Seller, Purchaser and the Title Company, indicating that the Survey was made on the ground and accurately shows all the matters required above. The legal description of the Land contained in the Survey shall be used as the legal description in Seller's Deed. 4.6. PHASE I ENVIRONMENTAL SURVEY. Within 10 days after the execution hereof, Seller shall provide to Purchaser any environmental surveys of the Property which Seller has in its records, a list of which is attached hereto as Exhibit E. ARTICLE 5 Property Documents, Inspection and Objections 5.1. INSPECTION OF PROPERTY. Seller shall give Purchaser and Purchaser's agents and representatives reasonable access to the Property during normal business hours prior to Closing. Seller shall give Purchaser and Purchaser's agents and representatives the right to physically inspect the Property and to conduct soil tests and other inspections (so long as such tests and inspections do not unreasonably interfere with the use and occupancy of the Property by Seller). The costs and expenses of Purchaser's investigation shall be borne by Purchaser. In the event that the transaction contemplated by this Agreement does not close for any reason, Purchaser shall have the obligation to repair any damage to the Property caused by such investigation, which obligation shall survive any termination of this -9- Agreement. All non-public information furnished by Seller to Purchaser in accordance with the provisions of this Agreement or obtained by Purchaser from third parties in the course of its investigations shall be treated as confidential information by Purchaser, except that Purchaser may disclose such information to prospective investors and lenders, as well as attorneys and other parties assisting or representing Purchaser in connection with the subject transaction. The foregoing obligation to treat such information as confidential shall survive any termination of this Agreement but shall not survive Closing. Purchaser covenants and agrees that the Property shall not be materially damaged or impaired in any way as the result of Purchaser's activities on the Property, and Purchaser hereby agrees to indemnify and hold Seller harmless from and against any claims, causes of action, mechanics' and/or materialmen's liens, damages, and expenses (including attorneys' fees) to the extent resulting from the presence in, on or about the Property of Purchaser, or Purchaser's agents or representatives, or out of any such test or inspection conducted by Purchaser on the Property. Such indemnity shall survive the Closing or any termination of this Agreement and not be merged therein. 5.2. PROPERTY DOCUMENTS. Within 15 days after the execution of this Agreement, Seller, at Seller's sole cost and expense, will deliver to Purchaser true, correct and complete copies (or where specifically indicated, original counterparts) of the following, together with all amendments, modifications, renewals or extensions thereof: (i) All Warranties relating to the Property or any part thereof which are still in effect; (ii) All Licenses and all files and other information related to the zoning, planned development, neighborhood homeowners, and other rights or limitations with respect to the use of the Property; (iii) Personal property tax statements and files with respect to the FF & E, FF & E Leases, and real estate property tax statements and files with respect to the Property and notices of appraised value for the Land and Improvements for the years 1996, 1997, and 1998; (iv) To the extent in Seller's possession or control, engineering and architectural plans, drawings and specifications relating to the Property, as well as copies of any environmental reports, topographical, boundary or "as built" surveys, engineering reports and subsurface studies affecting the Property. If the Property is purchased by Purchaser, all such documents and information shall thereupon be and become the property of Purchaser without payment of any additional consideration therefor; provided, however, in the extent that the Closing does not actually -10- occur, Purchaser shall return to Seller all such Plans and Specs; (v) All Service Contracts and all FF & E Leases; and (vi) To the extent in Seller's possession or control, all notices received from governmental authorities or from neighborhood homeowners in connection with the Property subsequent to January 1, 1996. 5.3. PROCEDURE FOR PURCHASER'S OBJECTIONS. Purchaser shall have until the later of: i) thirty (30) days after the date of this Agreement, ii) thirty (30) days after the approval of this Agreement by Seller's board of directors, or iii) fifteen (15) business days following the completion of all deliveries required by Seller to Purchaser under Articles 4 and 5 hereof (the "Review Period") to notify Seller in writing of any objections Purchaser may have to matters reflected in or concerning the Title Commitment, the Survey, the UCC Searches, the Environmental Report, any documents or items delivered by Seller to Purchaser, or the results of any other tests or inspections of the Property made by Purchaser. If Purchaser shall so notify Seller of any objections, Seller may elect to cure such objections within ten (10) business days from the date on which Seller receives Purchaser's objections (the "Cure Period") and shall provide written notice within such Cure Period of the nature and extent of Seller's cure of such objections. If Purchaser, in Purchaser's sole discretion, is not satisfied with the results of any cure efforts by Seller, or with any other matter relating to the Property for any reason whatsoever, Purchaser may terminate this Agreement by giving written notice of termination to Seller at any time within ten (10) business days after the end of the Cure Period. If Purchaser terminates this Agreement pursuant to this Section, Seller shall be entitled to retain and, to the extent it has not already done so, Purchaser shall deliver to Seller all reports and studies relating to the Property resulting from the inspection of the Property (or the portions thereof which are specific to the Property) and all documents delivered to Purchaser pursuant to Section 5.2 hereof. The Earnest Money shall be returned to Purchaser within five (5) business days after any such termination and neither party shall have any further rights or obligations one to the other, except for the indemnity set forth in Section 5.1. If Purchaser does not terminate this Agreement prior to the expiration of the Review -11- Period (or, if applicable, within ten (10) business days of the expiration of the Cure Period) as provided herein, Purchaser shall be deemed to have waived the right to terminate this Agreement under this Section and shall be deemed to have accepted and approved the condition of the Property, subject to the remaining terms of this Agreement. ARTICLE 6 Permitted Exceptions 6.1. PERMITTED EXCEPTIONS. Notwithstanding any other provision herein set forth, Purchaser shall not be entitled to make any objection or terminate this Agreement on the basis of any lien, encumbrance or security interest created by Purchaser at Closing in connection with Purchaser's acquisition of the Property. Any title exceptions to which the Purchaser does not object in accordance with Section 5.3 and any title exceptions to which Purchaser objects that are not cured and which Purchaser is deemed to have accepted and approved in accordance with Section 5.3 shall be hereinafter referred to as the "Permitted Exceptions." The Permitted Exceptions shall be described in an exhibit to Seller's Deed referred to in Section 4.1. ARTICLE 7 (Intentionally Deleted.) ARTICLE 8 Operation of Property 8.1. INTERIM OPERATION. Seller hereby covenants and agrees that between the date of this Agreement and the Closing Date Seller shall: (a) operate and maintain the Property consistent with Seller's prior practice; (b) not commit waste of any portion of the Property; (c) keep and maintain the Property in a good state of repair and condition, reasonable and ordinary wear and tear excepted; (d) keep, observe, and perform all its obligations under the Service Contracts, and all other applicable contractual arrangements relating to the Property; -12- (e) timely make all repairs, maintenance, and replacements to keep the Property and all FF&E in good operating condition; (f) keep Supplies adequately stocked, consistent with good business practice, as if the sale of the Property hereunder were not to occur; (g) advise Purchaser promptly of any litigation, arbitration, or administrative hearing before any court or governmental agency concerning or affecting the Property which is instituted or threatened after the date of this Agreement or if any representation or warranty contained in this Agreement shall become false; (h) not take, or omit to take, any action that would have the effect of violating any of the representations, warranties, covenants or agreements of Seller contained in this Agreement; (i) comply with all federal, state, and municipal laws, ordinances, regulations, zoning, planned development, neighborhood owners agreements, and judicial or administrative orders relating to the Property, including, without limitation, Seller's covenant to use the Property for executive office space use until December 31, 1999; (j) not sell or assign, or enter into any agreement to sell or assign, or create or permit to exist any lien or encumbrance (other than a Permitted Exception) on, the Property or any portion thereof; (k) not allow any permit, receipt, license, or right currently in existence with respect to the operation, use, occupancy or maintenance of the Property to expire, be canceled or otherwise terminated; and (l) pay or cause to be paid all taxes, assessments and other impositions levied or assessed on the Property or any part thereof prior to the date on which the payment thereof is due. 8.2. MECHANICS' AND MATERIALMEN'S LIENS. Seller hereby represents, warrants, and covenants that all work done prior to the Closing Date has been or will be performed and fully paid for by Seller prior to the Closing Date, and all mechanics' and -13- materialmen's liens arising from any labor or material furnished prior to the Closing Date will be discharged or bonded so as to be omitted from the Title Policy. 8.3. NOTICES OF VIOLATION. Seller hereby covenants and agrees that all notices of violation of federal, state or municipal laws, ordinances, orders, regulations or requirements ("Notices of Violation") issued by, or filed by, or served by, the neighborhood owners or any governmental agency having jurisdiction over the Property against or affecting the Property on or before the Closing Date of which Seller has actual knowledge shall be promptly disclosed to Purchaser and fully cured by Seller. At Purchaser's option, the existence of any such uncured Notices of Violation shall give Purchaser the right to elect to terminate this Agreement. 8.4. THIRD PARTY CONSENTS. Prior to the Closing Date, Seller shall, at Seller's expense, use Seller's best efforts and cooperate with Purchaser to obtain planned development or zoning amendments, amendments to agreements with neighborhood owners, and all third party consents and approvals, if any, required in order for Purchaser to purchase the Property, to lease a portion of the Property to Seller in accordance with the terms of the Lease, and to use the Property for general office use. At Purchaser's option, failure of Seller to obtain such planned development or zoning amendments, amendments to agreements with neighborhood owners, and other third party consents shall give Purchaser the right to elect to terminate this Agreement. ARTICLE 9 Representations and Covenants 9.1. REPRESENTATIONS BY PURCHASER. Purchaser hereby represents and warrants unto Seller that each and every one of the following statements is true, correct and complete in every material respect as of the date of this Agreement and will be true, correct and complete as of the Closing Date: (a) Purchaser is duly organized, validly existing and in good standing under the laws of the State of Delaware and has full right, power and authority to enter into this Agreement and to assume and perform all of its obligations under this -14- Agreement; and, the execution and delivery of this Agreement and the performance by Purchaser of its obligations under this Agreement require no further action or approval of Purchaser's shareholders, directors, members, managers or partners (as the case may be) or of any other individuals or entities in order to constitute this Agreement as a binding and enforceable obligation of Purchaser. (b) Purchaser is not a foreign entity, foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Internal Revenue Code and Income tax regulations). (c) neither the entry into nor the performance of, or compliance with, this Agreement by Purchaser has resulted, or will result, in any violation of, or default under, or result in the acceleration of, any obligation under any existing corporate charter, certificate of incorporation, bylaw, articles of organization, limited liability company agreement or regulations, partnership agreement, mortgage indenture, lien agreement, note, contract, permit, judgment, decree, order, restrictive covenant, statute, rule or regulation applicable to Purchaser. 9.2. REPRESENTATIONS BY SELLER. Seller hereby represents and warrants unto Purchaser that each and every one of the following statements is true, correct and complete in every material respect as of the date of this Agreement and will be true, correct and complete as of the Closing Date: (a) Seller is duly organized, validly existing and in good standing under the laws of the State of Delaware, and is qualified to transact business in the State of Tennessee, and has full right, power and authority to enter into this Agreement. (b) Seller is not a foreign entity, foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Internal Revenue Code and Income tax regulations). (c) neither the entry into nor the performance of, or compliance with, this Agreement or the Lease, as hereinafter defined in Section 11.2 (g), by Seller has resulted, or will result, in any violation of, or default under, or result in the acceleration of, any obligation under any existing corporate charter, certificate of incorporation, bylaw, articles of organization, limited liability company agreement or regulations, -15- partnership agreement, mortgage indenture, lien agreement, note, contract, permit, judgment, decree, order, restrictive covenant, zoning or planned development plan conditions for Harrah's Entertainment, Inc. Corporate Headquarters P.D. 93-322, statute, rule or regulation applicable to Seller or to the Property. (d) there are no leases, management agreements, leasing agent's agreements, equipment leases, building service agreements, maintenance contracts, suppliers contracts, warranty contracts, operating agreements, or other agreements (i) to which Seller is a party or an assignee, or (ii) binding upon the Property, relating to the ownership, occupancy, operation or maintenance of the Land, Improvements, FF&E or Supplies, except for those Service Contracts, Warranties and FF&E Leases to be delivered to Purchaser and described in the respective Exhibits A-2, A-3, and A-6, and except for Seller's agreement with CB Richard Ellis for the payment of a commission upon the consummation of the sale of the Property, and Purchaser's agreement with CB Richard Ellis for the payment of a commission upon the commencement of rents as provided in the Lease of the Property by Purchaser to Seller. (e) Seller has received no notice, and has no knowledge, that it lacks any permit, license, certificates or authority necessary for the present use and occupancy of the Improvements. (f) the present level of insurance, a schedule of which is provided in Exhibit F, with respect to the Property will be maintained in full force and effect until the Closing Date. (g) no party has any right or option to acquire the Property or any portion thereof, other than Purchaser. (h) there are no: (i) pending arbitration proceedings or unsatisfied arbitration awards, or judicial proceedings or orders respecting awards, which might become a lien on the Property; (ii) pending unfair labor practice charges or complaints, unsatisfied unfair labor practice orders or judicial proceedings or orders with respect thereto, which might become a lien on the Property; -16- (iii) pending charges or complaints with or by city, state or federal civil or human rights agencies, unremedied orders by such agencies or judicial proceedings or orders with respect to obligations under city, state or federal civil or human rights or antidiscrimination laws or executive orders, which might become a lien of the Property; or (iv) other pending, or threatened or actual litigation claims, charges, complaints, petitions or unsatisfied orders by or before any administrative agency or court which affects the Property or might become a lien on the Property (collectively, the "Pending Claims"). (i) Seller has received no Notice of Violations. (j) to the best of Seller's knowledge, information and belief, Seller and the Property are, and upon commencement of the Lease will be, in compliance in all material respects with all terms and conditions of all notices, permits, licenses, registrations, zoning or planned development plan conditions for Harrah's Entertainment, Inc. Corporate Headquarters P.D. 93-322, neighborhood owners agreements, certificates of occupancy, applications, consents, variances, notices of intent, and/or other authorizations which are required for the use or operation of the Property, and with all limitations, requirements, restrictions, conditions, standards, prohibitions, schedules and timetables contained in all applicable laws, rules, regulations, ordinances or orders promulgated by any federal, state or local executive, legislative, judicial, regulatory or administrative agency, board or authority, or any applicable judicial or administrative decision in connection therewith, that relate to the Property, including without limitation the Americans With Disabilities Act of 1990 and regulations or orders promulgated thereunder, and all such laws, rules and regulations that relate to the environment or the pollution, preservation, protection, clean-up or remediation thereof, or the treatment, storage, disposal or other management of "hazardous substances," as such term is currently defined in the Comprehensive Environmental Response, Compensation Liability Act of 1980, with respect to the Property. -17- (k) there is no condemnation proceeding pending or, to Seller' knowledge, threatened with regard to all or part of the Property. (l) to the best of Seller's knowledge, information, and belief, there is no material defect in the condition of the Property, or any portion thereof, which has not been corrected or which will materially impair the operation of the Property and the Property will be in materially good operating condition on the Closing Date. 9.3. SUBSEQUENT DEVELOPMENTS. After the date of this Agreement and until the Closing Date, Seller shall keep Purchaser fully informed of all subsequent developments ("Subsequent Developments") which would cause any of Seller's representations contained in this Agreement to be no longer accurate in any material respect. In the event any of Seller's representations contained in this Agreement are, as of the Closing Date, no longer accurate in any material respect, Purchaser shall have the right to elect to terminate this Agreement. 9.4. NEW CONTRACTS. Prior to Closing, Seller shall not amend, modify, renew or extend any of the FF&E Leases or Service Contracts or enter into any new contractual relationships with any party to provide services or goods to the Property other than in the ordinary course of business and other than those which Purchaser elects to be terminated. 9.5. SELLER'S INDEMNITY. Seller agrees to indemnify and hold Purchaser harmless of and from all liabilities, losses, damages, costs, expenses (including reasonable attorneys' fees) which the Purchaser may suffer or incur by reason of any act or cause of action occurring or accruing prior to the Closing Date and arising from any breach of Seller's representations and warranties or from the ownership or operation of the Property prior to the Closing Date, including but not limited to any claims by employees of Seller or third parties under insurance carried by Seller. 9.6. PURCHASER'S INDEMNITY. Purchaser agrees to indemnify and hold Seller harmless of and from all liabilities, losses, damages, costs, expenses (including reasonably attorneys' fees) which the Seller may suffer or incur by reason of any act or cause of action occurring or accruing on or after the Closing -18- Date and arising from the ownership or operation of the Property subsequent to the Closing Date, including but not limited to any claims by employees of Purchaser or third parties under insurance carried by Purchaser; provided, however, that the Lease shall govern certain post-closing matters with respect to the portions of the Property described in the Lease and provided further, however, Purchaser shall not be required to indemnify Seller with respect to activities conducted by Seller in connection with Seller's lease of certain of the Improvements pursuant to the Lease (as hereinafter defined). ARTICLE 10 Conditions Precedent to the Closing In addition to any other conditions set forth in this Agreement, the obligations of the parties to consummate the Closing are subject to the timely satisfaction of each and every one of the conditions and requirements set forth in this Article 10, all of which shall be conditions precedent to the parties' respective obligations under this Agreement. 10.1. SELLER'S OBLIGATIONS. Seller shall have performed all obligations of Seller hereunder which are to be performed prior to Closing. 10.2. PURCHASER"S REPRESENTATIONS AND WARRANTIES. Purchaser's representations and warranties set forth in Section 9.1 shall be true and correct in all material respects as if made again on the Closing Date. 10.3. SELLER'S REPRESENTATIONS AND WARRANTIES. Seller's representations and warranties set forth in Section 9.2 shall be true and correct in all material respects as if made again on the Closing Date. 10.4. BOARD APPROVAL. Seller's board of directors shall have approved this Agreement and the sale of the Property and shall have approved the Lease at a duly called meeting of such board of directors on or before July 30, 1999. 10.5 LEASE. The Lease shall have been executed by both Seller and Purchaser. -19- 10.6 ZONING AND USE AMENDMENTS. Seller shall have obtained final approved amendments of the planned development or zoning provisions, amendments to agreements with neighborhood owners, and all third party consents and approvals, if any, required in order for Purchaser to purchase the Property, to lease a portion of the Property to Seller in accordance with the terms of the Lease, and to use the Property for general office use. ARTICLE 11 Closing and Closing Documents 11.1. CLOSING. The consummation and closing (the "Closing") of the transaction contemplated under this Agreement shall take place at the offices of Seller's attorneys, Burch, Porter & Johnson, PLLC, 50 N. Front Street, Suite 800, Memphis, Tennessee, or such other place as is mutually agreeable to the parties not later than sixty (60) days after the date of this Agreement, (the "Closing Date"), or on such other date as may be mutually agreed to by the parties. The Closing Date shall be extended by such period, but in no event to a date subsequent to December 31, 1999, as may be necessary to obtain approval of the amendments to the planned development and neighborhood owners agreements as provided in Section 8.4. 11.2. SELLER'S DELIVERIES. At the Closing and at Seller's sole cost and expense, Seller shall deliver the following to Purchaser in addition to all other items required to be delivered to Purchaser by Seller: (a) SELLER'S DEED. Seller's Deed duly executed and acknowledged by Seller, granting and conveying to Purchaser good and indefeasible title in fee simple to the Land and Improvements, free and clear of all liens, encumbrances, covenants, conditions, restrictions, rights-of-way, easements, and other matters affecting the title to the same that are not included within the term Permitted Exceptions and all of Seller's right, title and interest in the Appurtenances; (b) ASSIGNMENT AND BILL OF SALE. An Assignment and Bill of Sale covering FF&E duly executed and acknowledged by Seller, and an Assignment and Bill of Sale covering all personal property located at the Property other than FF&E duly executed and acknowledged by Seller; -20- (c) ASSIGNMENT AND ASSUMPTION AGREEMENT (SERVICE CONTRACTS). An Assignment and Assumption Agreement (Service Contracts) covering service contracts for the Property; (d) FIRPTA AFFIDAVIT. An affidavit from Seller in form and substance acceptable to Purchaser, as required by Section 1445 of the Internal Revenue Code, specifying (i) that Seller is not a foreign entity, foreign corporation, foreign partnership, foreign trust or foreign estate (as those terms are defined in the Internal Revenue Code and Income tax regulations), (ii) Seller's taxpayer identification number or U.S. employer identification number, (iii) Seller's office address, and (iv) such other matters as Purchaser may reasonably require in order to satisfy itself that no withholding is required under Section 1445 of the Internal Revenue Code including an indemnity against any claim for taxes which should have been withheld; (e) AUTHORITY DOCUMENTS. Evidence satisfactory to Purchaser and the Title Company that the person or persons executing the closing documents on behalf of Seller have full right, power and authority to do so; (f) TITLE POLICY. The Title Policy insuring good and indefeasible fee simple title to the Land and Improvements, subject only to the Permitted Exceptions, in the amount of the Purchase Price; (g) LEASE. A lease of Building 1, Building 2, the Parking Structure, and certain portions of the surface parking substantially in the form attached hereto as Exhibit G together with such revisions as may be mutually satisfactory to Seller and Purchaser, duly executed by Seller (the "Lease"); (h) PLANS AND LICENSES. To the extent not previously delivered to and in the possession of Purchaser, all Plans and Specs and all Licenses; and (i) MISCELLANEOUS. Such other instruments as are customarily executed by a seller in Shelby County, Tennessee to effectuate the conveyance of property similar to the Property, with the effect that, after the Closing, Purchaser will have succeeded to all of the rights, titles, and interests of Seller related to the Property and Seller will no longer have any -21- rights, titles, or interests in and to the Property other than those rights afforded to Seller pursuant to the terms of the Lease. Such instruments shall include, if appropriate, any documents required to effectively transfer the Utility Reservations by Seller to Purchaser. On the Closing Date, Seller shall deliver to Purchaser possession of the Property free and clear of all tenancies of every kind and parties in possession, except for Seller's occupancy under the Lease, and with all parts of the Property (including, without limitation, the Improvements and FF&E) in substantially the same condition as the same were on the date of this Agreement, normal wear and tear excepted. 11.3. PURCHASER'S DELIVERIES. At the Closing and at Purchaser's sole cost and expense, Purchaser shall deliver the following to Seller: (a) PURCHASE PRICE. The Purchase Price pursuant to Section 3.1 above, plus or minus the adjustments to be made at the Closing in accordance with the terms of this Agreement; (b) ASSIGNMENT AND ASSUMPTION AGREEMENT (SERVICE CONTRACTS). An Assignment and Assumption Agreement (Service Contracts) covering service contracts for the Property; (c) AUTHORITY DOCUMENTS. Evidence satisfactory to Seller and the Title Company that the person or persons executing the closing documents on behalf of Purchaser have full right, power and authority to do so; (d) LEASE. The Lease duly executed by Purchaser; and (e) MISCELLANEOUS. Such other instruments as are customarily executed by a purchaser in Shelby County, Tennessee to effectuate the purchase of property similar to the Property. 11.4. PRORATIONS. At Closing, the following items of expense shall be prorated, adjusted, and appropriated as of 12:01 a.m. on the Closing Date: (a) PROPERTY TAXES. Real estate taxes, personal property or use taxes and sewer rents, on the basis of the best available estimates for such taxes and rents that will be due and payable -22- on the Property for the calendar year in which the Closing occurs, and Seller shall pay to Purchaser in cash at the Closing or credit against the Purchase Price, Seller's pro rata portion of such taxes. In the event that taxes for the year in which the Closing occurs are more or less than such estimated amount, Seller or Purchaser shall promptly pay the amount necessary to adjust for the correct proration as soon as the actual tax amount becomes available; (b) OPERATING COSTS. All costs and expenses (including, without limitation, all utilities) of operating the Property, and amounts paid or payable under the Service Contracts; and (c) SUPPLIES. At Closing, Purchaser shall purchase from Seller all of the usable Supplies at the Property. The cost of such goods shall be equal to the lower of i) fair market value, or ii) Seller's actual cost thereof. 11.5. DOCUMENT PREPARATION, CLOSING COSTS AND TRANSFER COSTS. Purchaser shall pay all transfer and recording fees and taxes, the cost of the Title Policy (including any extra hazard coverages desired by Purchaser), and the cost of preparing or obtaining documents to be delivered by Purchaser to Seller pursuant to this Agreement. Seller shall pay for the abstract or title search, UCC Searches, the cost of the Survey, transfer, assumption and/or assignment fees and charges imposed by any party having an interest in the Property, and the cost of preparing or obtaining documents to be delivered by Seller to Purchaser pursuant to this Agreement. Seller and Purchaser each shall pay one-half of the Title Company's escrow fee, and each shall pay its own attorney's fees. 11.6. RECONCILIATION AND FINAL PAYMENT. Seller and Purchaser shall reasonably cooperate after Closing to make a final determination of the prorations required hereunder. Upon the final reconciliation of the prorations under this Section and Section 11.4, the party which owes the other party any sums hereunder shall pay such party such sums within ten (10) days after the reconciliation of such sums. The obligations to calculate such prorations, make such reconciliations and pay any such sums shall survive the Closing. -23- ARTICLE 12 Casualty and Condemnation 12.1. RISK OF LOSS; NOTICE. Prior to Closing and the delivery of possession of the Property to Purchaser in accordance with this Agreement, all risk of loss to the Property (whether by casualty, condemnation or otherwise) shall be borne by Seller. In the event that (a) any loss or damage to the Property shall occur prior to the Closing Date as a result of fire or other casualty, or (b) Seller receives notice that a governmental authority has initiated or threatened to initiate a condemnation proceeding affecting the Property, Seller shall give Purchaser immediate written notice of such loss, damage or condemnation proceeding. 12.2. PURCHASER'S TERMINATION RIGHT. If, prior to Closing and the delivery of possession of the Property to Purchaser in accordance with this Agreement, (a) any condemnation proceeding shall be pending against a substantial portion of the Property or (b) there is any substantial loss or damage to the Property, Purchaser shall have the option to terminate this Agreement provided it delivers written notice to Seller of its election so to terminate this Agreement within thirty (30) days after the date Seller has delivered Purchaser written notice of any such loss, damage or condemnation, and in such event all Earnest Money shall be delivered to Purchaser and thereafter no party shall have any further obligation or liability to the other under this Agreement. "Substantial" condemnation or loss shall mean a condemnation or loss in excess of $100,000 in value. 12.3. PROCEDURE FOR CLOSING. If, after a substantial loss or damage or substantial condemnation, Purchaser shall not timely elect to terminate this Agreement, or if the loss or condemnation is not substantial, Seller agrees to pay to Purchaser at the Closing all insurance proceeds or condemnation awards which Seller has received as a result of the same plus an amount equal to the insurance deductible, if any, and assign to Purchaser all insurance proceeds and condemnation awards payable as a result of the same in which event the Closing shall occur without Seller replacing or repairing such damage. 12.4. SELLER'S OPTION TO REPAIR OR RESTORE THE PROPERTY. Notwithstanding the foregoing provisions of this Article 12, if -24- the condemnation, loss, or damage to the Property is capable of being repaired or restored within a period of not more than thirty (30) days, Seller may elect to make such repairs or restoration at Seller's sole cost, in which event Purchaser shall not have the right to terminate the Agreement as provided in this Article 12. ARTICLE 13 Default and Remedies 13.1. PURCHASER'S DEFAULT. If, at or prior to Closing, (i) Purchaser refuses or fails to consummate the purchase of the Property pursuant to this Agreement for any reason other than termination hereof pursuant to a right granted to Purchaser hereunder to do so or a default by Seller, or (ii) any representation or warranty made by or on behalf of Purchaser herein shall have been materially incorrect when made or shall become incorrect in any material respect, or (iii) Purchaser shall otherwise fail in any material respect to perform any of its material obligations as and when required hereunder, then Seller shall give Purchaser and the Title Company written notice specifying the nature of the default, and Purchaser shall have fifteen (15) days from receipt of Seller's notice within which to cure the specified default; provided, however, if at the end of said fifteen (15) day period Purchaser is diligently pursuing the cure of the default but the default has not been cured, Purchaser shall have an additional period not to exceed fifteen (15) days within which to complete the cure of the default. If at the end of the initial fifteen (15) or, if applicable, additional fifteen (15) day period, the default is not still cured, the Seller, as its sole and exclusive remedy, shall have the right to terminate this Agreement by giving Purchaser and the Title Company written notice thereof, in which event neither party shall have any further rights, duties or obligations hereunder (except to the extent this Agreement specifically provides for the survival of certain obligations of Purchaser) and Seller shall be entitled to receive, as liquidated damages (Seller and Purchaser hereby acknowledging that the amount of damages resulting from breach of this Agreement by Purchaser would be difficult or impossible to accurately ascertain), the Earnest Money, and the Title Company shall immediately deliver to Seller the Earnest Money. Notwithstanding the foregoing, in the event of any default by Purchaser under this Agreement due to a material breach after Closing or any termination hereof of any covenant or indemnity -25- which survives the Closing or any termination hereof, or if Seller shall discover after Closing that any warranty or representation made by Purchaser herein or in connection with the transaction contemplated herein was materially incorrect or breached when made, Seller shall have any and all rights and remedies available at law or in equity by reason of such default. If Purchaser terminates this Agreement pursuant to a right granted to Purchaser hereunder to do so, then neither party shall have any further rights, duties or obligations hereunder (except to the extent this Agreement specifically provides for the survival of certain obligations of Purchaser), and the Earnest Money together with all interest earned thereon shall be returned to Purchaser. 13.2. SELLER'S DEFAULT. If Seller (i) refuses or fails to consummate the transaction contemplated by this Agreement, or (ii) otherwise wrongfully fails to perform any of its obligations or agreements hereunder, either prior to or at Closing, for any reason other than termination hereof pursuant to a right granted to Seller hereunder to do so, then Purchaser shall give Seller and the Title Company written notice specifying the nature of the default, and Seller shall have fifteen (15) days from receipt of Purchaser's notice within which to cure the specified default; provided, however, if at the end of said fifteen (15) day period Seller is diligently pursuing the cure of the default but the default has not been cured, Seller shall have an additional period not to exceed fifteen (15) days within which to complete the cure of the default. If at the end of the initial fifteen (15) or, if applicable, additional fifteen (15) day period, the default is still not cured, the Purchaser, as its sole remedy, shall have the right to do any one or more of the following: (a) terminate this Agreement by written notice given to Seller and the Title Company within fifteen (15) days of the expiration of the initial fifteen (15) or additional fifteen (15) day cure period (whichever is applicable), in which event (i) the Earnest Money shall be returned to Purchaser by the Title Company promptly upon receipt of such notice, and (ii) Seller shall pay to Purchaser, within ten (10) days following written demand from Purchaser, the amount of reasonable out-of-pocket expenses incurred by Purchaser in connection with its inspection and investigation of the Property and the preparation, negotiation and execution of this Agreement; or -26- (b) seek specific performance of this Agreement. Notwithstanding the foregoing, in the event of any default by Seller under this Agreement due to a material breach after Closing or any termination hereof of any covenant or indemnity which survives the Closing or any termination hereof, or if Purchaser shall discover after Closing that any warranty or representation made by Seller herein or in connection with the transaction contemplated herein was materially incorrect or breached when made, Purchaser shall have any and all rights and remedies available at law or in equity by reason of such default. Neither Purchaser's nor Seller's attendance or appearance at Closing shall be deemed to nullify or void the provisions of this Section. ARTICLE 14 Brokers 14.1. IDENTITY OF BROKERS. The parties hereto represent to each other that other than CB Richard Ellis Memphis, LLC ("CB Richard Ellis") they dealt with no finder, broker or consultant in connection with this Agreement, the Lease, or the transactions contemplated hereby. 14.2. INDEMNIFICATION BY SELLER. Seller shall be responsible for paying any fee due to CB Richard Ellis on account of the sale of the Property. Seller agrees to, and hereby does, indemnify and save harmless Purchaser and its affiliates and their respective successors and assigns against and from any loss, liability or expense, including reasonable attorneys' fees, arising out of any claim or claims for commissions or other compensation for bringing about this Agreement or the transactions contemplated hereby made by any broker, finder, consultant or like agent if such claim or claims made by any such broker, finder, consultant or like agent are based in whole or in part on any agreements entered into with Seller or its representatives for a commission or other compensation. 14.3. INDEMNIFICATION BY PURCHASER. Purchaser shall be responsible for paying any fee due to CB Richard Ellis on account of the Lease. Purchaser agrees to, and hereby does, indemnify and save harmless Seller and its affiliates and their respective successors and assigns against and from any loss, liability or -27- expense, including reasonable attorneys' fees, arising out of any claim or claims for commissions or other compensation for bringing about this Agreement or the transactions contemplated hereby (including any fees payable to CB Richard Ellis in accordance with the terms of Purchaser's separate written agreement with CB Richard Ellis to pay a commission on account of the Lease, but excluding any claim by CB Richard Ellis on account of the sale of the Property) made by any broker, finder, consultant or like agent if such claim or claims made by any such broker, finder, consultant or like agent are based on any agreements entered into with Purchaser or its representatives for a commission or other compensation. ARTICLE 15 Miscellaneous 15.1. NOTICES. Any notice provided for by this Agreement and any other notice, demand or communication which any party may wish to send to another shall be in writing and either delivered in person (including by confirmed facsimile transmission) or sent by registered or certified mail or overnight courier, return receipt requested, in a sealed envelope, postage prepaid, and addressed to the party for which such notice, demand or communication is intended at such party's address as set forth in this Section. Seller's address for all purposes under this Agreement shall be the following: Harrah's Operating Company, Inc. 1023 Cherry Road Memphis, TN 38117 Attention: Corporate Secretary Fax No. 901/762-8735 with a copy to: William A. Carson, II, Esq. Burch, Porter & Johnson, PLLC 50 N. Front St., Suite 800 Memphis, TN 38103 Fax No. 901/ 524-5026 Purchaser's address for all purposes under this Agreement shall be the following: -28- Mr. Brad Martin RBM Venture Company 5810 Shelby Oaks Drive Memphis, TN 38134 Fax No. 901/ 386-4594 with a copy to: Boyd L. Rhodes, Jr., Esq. Baker, Donelson, Bearman & Caldwell 165 Madison Avenue Memphis, Tennessee 38103 Fax No. 901/577-2303 Any address or name specified above may be changed by a notice given by the addressee to the other party. Any notice, demand or other communication shall be deemed given and effective as of the date of delivery in person or receipt set forth on the return receipt. The inability to deliver because of changed address of which no notice was given, or rejection or other refusal to accept any notice, demand or other communication, shall be deemed to be receipt of the notice, demand or other communication as of the date of such attempt to deliver or rejection or refusal to accept. 15.2. ENTIRE AGREEMENT; MODIFICATIONS AND WAIVERS; CUMULATIVE REMEDIES. This Agreement supersedes any existing term sheet between the parties, constitutes the entire agreement between the parties hereto and may not be modified or amended except by instrument in writing signed by the parties hereto, and no provisions or conditions may be waived other than by a writing signed by the party waiving such provisions or conditions. No delay or omission in the exercise of any right or remedy accruing to Seller or Purchaser upon any breach under this Agreement shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by Seller or Purchaser of any breach of any term, covenant or condition herein stated shall not be deemed to be a waiver of any other breach, or of a subsequent breach of the same or any other term, covenant or condition herein contained. All rights, powers, options or remedies afforded to Seller or Purchaser either hereunder or by law shall be cumulative and not alternative, and the exercise of one right, power, option or -29- remedy shall not bar other rights, powers, options or remedies allowed herein or by law, unless expressly provided to the contrary herein. 15.3. EXHIBITS. All exhibits referred to in this Agreement and attached hereto are hereby incorporated in this Agreement by reference. 15.4. SUCCESSORS AND ASSIGNS. Purchaser may assign its rights under this Agreement to an affiliated entity for the purpose of purchasing the Property. This Agreement shall be binding upon, and inure to the benefit of, Seller and Purchaser and their respective legal representatives, successors, and permitted assigns. Whenever a reference is made in this Agreement to Purchaser, it shall include Purchaser's successors and permitted assigns under this Agreement. 15.5. ARTICLE HEADINGS. Article headings and article and section numbers are inserted herein only as a matter of convenience and in no way define, limit or prescribe the scope or intent of this Agreement or any part thereof and shall not be considered in interpreting or construing this Agreement. 15.6. GOVERNING LAW. This Agreement shall be construed and interpreted in accordance with the laws of the State of Tennessee without regard to the principles of conflicts of laws. 15.7. TIME PERIODS. If the final day of any time period or limitation set out in any provision of this Agreement falls on a Saturday, Sunday or legal holiday under the laws of the State of Tennessee, or the federal government, then and in such event the time of such period shall be extended to the next day which is not a Saturday, Sunday or legal holiday. 15.8. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by either party hereto on a separate counterpart, each of which when so executed and delivered shall be deemed an original and all of which taken together shall constitute but one and the same instrument. 15.9. SURVIVAL. All covenants and agreements contained in the Agreement which contemplate performance after the Closing Date shall survive the Closing. All representations, warranties and indemnities contained in this Agreement which are not by -30- their nature intended to survive Closing shall be merged into Seller's Deed. 15.10. FURTHER ACTS. In addition to the acts, deeds, instruments and agreements recited herein and contemplated to be performed, executed and delivered by Purchaser and Seller, Purchaser and Seller shall perform, execute and deliver or cause to be performed, executed and delivered at the Closing or after the Closing, any and all further acts, deeds, instruments and agreements and provide such further assurances as the other party or the Title Company may reasonably require to consummate the transaction contemplated hereunder. 15.11. SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 15.12. ATTORNEYS' FEES. Should either party employ an attorney or attorneys to enforce any of the provisions hereof or to protect its interest in any manner arising under this Agreement, or to recover damages for breach of this Agreement, the nonprevailing party in any action pursued in a court of competent jurisdiction (the finality of which is not legally contested) agrees to pay to the prevailing party all reasonable costs, damages, and expenses, including attorneys' fees, expended or incurred in connection therewith. 15.13. 1031 EXCHANGE TRANSACTION. Seller may elect to treat the proceeds for the purchase of the Property as a Section 1031 exchange for tax purposes. If Seller so elects, Purchaser agrees to cooperate with Seller in effecting such Section 1031 exchange. Likewise, Purchaser may elect to treat this transaction for the purchase of the Property as a Section 1031 exchange for tax purposes. If Purchaser so elects, Seller agrees to cooperate with Purchaser in effecting such Section 1031 exchange. 15.14. JOINT PREPARATION. Seller and Purchaser acknowledge that they and their legal counsel have participated -31- in the negotiation and preparation of this Agreement. Therefore, this Agreement and the other documents required or contemplated hereunder shall be construed without regard to any presumption or other rule requiring construction against the party causing the Agreement to be drafted. 15.15. FUTURE DEVELOPMENT OF THE PROPERTY. Seller acknowledges that Purchaser has informed Seller that Purchaser may at some future date decide to develop additional portions of the Property. Seller agrees to cooperate with Purchaser's attempts to rezone, subdivide, or obtain approval of a planned development for the Property (the "Redevelopment"), provided that the Redevelopment shall not interfere with Seller's use of the portions of the Property covered by the Lease, and that the Redevelopment shall be consistent with the character and quality of a Class A office space or residential atmosphere. 15.16. BEST OF KNOWLEDGE. Whenever any statement set forth herein with respect to the existence of absence of facts is qualified by "to (Purchaser's or Seller's) knowledge" or "to the best of (Purchaser's or Seller's) knowledge," such phrase indicates only that no information has come to the attention of the party making such statement that would give such party actual knowledge of the existence or absence of such facts. For the purpose of making the Seller's covenants, representations and warranties contained in Articles 8 and 9, Seller shall, as a minimum, consult with its attorneys and with the executives or other management personnel whose duties include responsibility for the matters included within the purpose and intent of those covenants, representations, and warranties. Except as otherwise expressly stated herein, such party shall not be deemed to have undertaken any independent investigation to determine the existence or absence of any such facts. 15.17 TRANSITION ASSISTANCE. In order to aid in the orderly transition of ownership and operation of the Property, Seller shall provide the services of Mr. Walt Phelan, Director of Administrative Services, to Purchaser twenty (20) hours per week for a period of four (4) weeks after the Closing Date. IN WITNESS WHEREOF, this Agreement has been entered into effective as of the 15th day of September, 1999. SELLER: -32- HARRAH's OPERATING COMPANY, INC., a Delaware corporation By: /s/ COLIN V. REED ------------------------------------- Its: Executive VP/Chief Financial Officer PURCHASER: RBM VENTURE COMPANY a Delaware corporation By: /s/ SCOTT IMORDE ------------------------------------- Its: Vice President -33- LIST OF EXHIBITS Exhibit A - All Personal Property on the Premises except items listed on Exhibit A-1. Exhibit A-1 - Personal Property which is not to be included in the sale, unless purchased by Purchaser for the prices shown on Exhibit A-1. Exhibit A-2 - Service Contracts Exhibit A-3 - Warranties Exhibit A-4 - Licenses Exhibit A-5 - Plans & Specs Exhibit A-6 - FF & E Leases Exhibit A-7 - Utility Reservations Exhibit B - Agreed allocation of purchase price between real estate and personal property Exhibit C - Seller's Deed Exhibit D - Bill of Sale Exhibit E - Environmental Surveys Exhibit F - Insurance Schedule Exhibit G - Form of Lease of a portion of the Improvements from Purchaser to Seller Exhibit H - Roof Repair Report
-34- EXHIBIT A All tangible personal property and fixtures of any kind whatsoever attached to, or located upon and used in connection with the ownership, maintenance, use or operation of Building 1, Building 2, the Mansion, the Pool House, the Security Building, the Parking Structure, and the Surface Parking as of the date hereof (or acquired by Seller and so employed prior to Closing), including, but not limited to, all furniture, fixtures, equipment, personal property; all cameras, sensors, alarms, and other security systems; key pad and entry systems; sprinklers and fire suppression systems; landscaping equipment; irrigation systems and equipment; pool equipment; all heating, lighting, plumbing, drainage, electrical, air conditioning, and other mechanical fixtures and equipment and systems; building and energy management systems and controls; power backup and generator systems; telephone switches and systems; satellite dishes; fiber optic networks; computer wiring and cables; utility and other meters; all keys, locks, combinations, codes; building systems computers and software; all elevators and related motors and electrical equipment and systems; all hot water heaters, furnaces, heating controls, motors and boiler pressure systems and equipment, all shelving and partitions, all ventilating equipment, and all incinerating and disposal equipment; all carpet, drapes, blinds, window treatments, chandeliers, furniture, and other furnishings; all stoves, ovens, freezers, refrigerators, dishwashers, disposals, kitchen equipment and utensils, tables, chairs, plates and other dishes, glasses, silverware, serving pieces and other restaurant and bar equipment, apparatus and utensils; but excluding, however, those certain items as described on Exhibit A-1 attached hereto. -35- EXHIBIT A-1 Personal Property which is not to be included in the sale, unless purchased by Purchaser for the prices shown on this Exhibit A-1. 1. All of Seller's personal property, furniture, furnishings, and office equipment presently located in Building 1 and Building 2. 2. The following items located in the Mansion:
Foyer Amount ----- ------ Reproduction small bachelor's chest 225.00 Reproduction arm chair - "Prince of Windsor" back 75.00 Tall case (grandfather) clock - Irish face 2,000.00 Two (2) odd lamps 100.00 English antique box 150.00 Reproduction small Queen Anne mirror 175.00 Upstairs Landing ---------------- Serpentine side table 475.00 Reproduction oval mirror 300.00 Two (2) china planters 125.00 Sitting Room (Philip Satre) -------------------------- Club Chair (upholstered) 300.00 Three-seat sofa (upholstered) 450.00 Pair Chippendale armchairs 500.00 Pair yew-wood side cabinets (antique) 1,500.00 Pair URN lamps (partially old) 500.00 Two (2) English wood boxes (antique) 400.00 English lap desk made into table 400.00 Pair brass floor lamps 150.00 Brass fire fender, tools, and andirons 250.00
-36-
EXHIBIT A-1 CONTINUED Back Hall (by Norma Eghert) Amount -------------------------- ------ Walnut reveneuvered chest & concave center 2,500.00 Pair Country French oak side chairs 400.00 Two (2) fish bowl planters and stands 300.00 Queen Anne style low boy table 375.00 Brass bouillarte lamp 125.00 Reproduction Chippendale style mirror 375.00 Cloisonne Box 75.00 Candy jar 10.00 Sun Room -------- Country French 3-door chest 1,250.00 Reproduction side board 450.00 Square inlaid sidetable 375.00 Reproduction arm chair 125.00 Reproduction conference table 2,500.00 Set (10) reproduction conference arm chairs 2,000.00 Three (3) fish bowl planters and stands 300.00 Bronze figure of a girl 150.00 Four (4) miscellaneous lamps - reproductions 800.00 Pair rattan arm chairs 300.00 Reproduction Chinese Chippendale mirror 375.00 Cut crystal inkwell - silver top - as is 75.00 Dining Room ----------- Reproduction banded dining room table 4,000.00 Set (12) Queen Anne style dining chairs in hand- carved (late 19th century early 20th century) 7,500.00 Chinese Chippendale display cabinet 2,500.00 Set (5) walnut Queen Anne dining room chairs (striped fabric) 1,500.00 Reproduction bow-front sideboard & inlay 2,500.00 Mahogany plant stand 150.00 Pair large Rose Medallion covered temple jars w/ chips 2,500.00 Reproduction (Baker) tea-table 275.00
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EXHIBIT A-1 CONTINUED Dining Room Amount ----------- ------ Mahogany Chippendale side table 750.00 Six (6) English Ironstone plates 300.00 Pair Japanese Kutami plates 300.00 Seven (7) piece silver-plated American tea set (Wilcox) 750.00 Three (3) silver-plated trays 300.00 Two (2) silver-plated (Wallace) cream pitchers 25.00 Silver-plated punch bowl 250.00 Reproduction Chippendale mirror 450.00 Pair silver-plated 3-branch candelabras 350.00 Three (3) crystal decanters 100.00 Porcelain fish bowl planters 125.00 China planter (on plant stand) 45.00 Pair Gorham silver-plated candlesticks 50.00 Pair brass/crystal wall sconces (electric) 750.00 Living Room ----------- Two drawer low boy 1,500.00 Chinese lamp - single figure 350.00 Plant stand - 3 legs 350.00 Black lacquer small table 1,000.00 Chinese Chippendale arm chair 1,250.00 Queen Anne pole screen 2,500.00 Pair French Sampson armorial baskets 450.00 Brass fire fender 1,250.00 Pair brass andirons 1,000.00 Stone beside fireplace 150.00 Pie-crust tilt-top table 1,850.00 Queen Anne armchair (rose upholstery) 750.00 Walnut veneered Chippendale chest 2,250.00 Reproduction bonnet-top secretary 2,250.00 20th century wheel-back side chair 375.00 Crystal & sterling inkwell (English) 225.00 Rectangular side-table & gallery top 1,100.00 Pair 19th century Rose Medallion lamps mounted in bronze as-is 1,750.00
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EXHIBIT A-1 CONTINUED Living Room Amount ----------- ------ Cobalt cut glass newel post (finial) 350.00 Carved Queen Anne armchair (upholstered) 1,250.00 Chippendale camel back sofa (down cushions) 1,250.00 Rectangular side table & pierced gallery 400.00 Chinese Chippendale Gainesborough chairs (stripe) 1,750.00 Four (4) fabric pillows 150.00 Miscellaneous reproduction china 1,000.00 Four (4) miscellaneous lamps 600.00 Kimball Grand Piano 4,200.00 Basement Office (D Ann Glen) --------------------------- Pair brass sconces 150.00 Pair Queen Anne wingback chairs 500.00 Two-seat sofa 250.00 Antique tilt-top round table 850.00 Pine trunk 300.00 Mahogany side table (games table) 400.00 Fruitwood country French side table (stripped) 450.00 Five (5) miscellaneous lamps 275.00 Metal planters 25.00 Chinese ceramic planters 100.00 Pair metal andirons and tools 175.00 Rugs: Amount ----- ------ Basement - 4.9 X 7.7 Turkish 1,000.00 11.10 X 17.50 Persian 3,500.00
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EXHIBIT A-1 CONTINUED First Floor: Amount ----------- ------ Foyer - 11.1 X 13.8 Persian 15,000.00 4.3 X 6.10 Persian 3,500.00 Between Living Room and Foyer 1,200.00 3.2 X 4.10 Antique Persian West side of Foyer - 2.7 X 16.7 Antique Persian 1,000.00 Dining Room - 12.3 X 20.11 Antique Persian 40,000.00 Living Room - 12 X 17.2 Antique Persian 20,000.00 Second Floor: ------------- Sitting Room - 3.11 X 7 Antique Persian 4,000.00 Upstairs Hall - 5 X 11.10 Antique Persian 800.00 Miscellaneous: ------------- Formal Place Settings - approximately 12 settings 5,325.00 includes Lenox, Wallace, silverware, Waterford Crystal Everyday Place Settings - approx. 36 settings includes Spode China, Onleda everyday ware assorted glassware 2,850.00
3. The following items located in the Pool House:
Item Inventory Count Amount - ---- --------------- ------ Conference Room Tables & Chairs 2 rooms 20,400.00 Television Sets & VCR's 5 TV's, 2 VCR's 1,650.00 Cash Registers 2 1,150.00 Dining Tables & Chairs 76 top tables 12,530.00 42 top tables 344 top tables 175 chairs Portable Food Prep Equipment 1 frozen yogurt machine 1,000.00 Piano 1 1,700.00
-40- EXHIBIT A-2 SERVICE CONTRACTS 1. HOUSEKEEPING - Contract is between Horizon of Memphis, Inc. and Harrah's Operating Company, Inc. Term began 1/1/99 and is a 1-year term. 2. LANDSCAPING/IRRIGATION - Contract is between Environmental Landscaping Service (Roberts Company, ltd. of TN) and Harrah's Operating Company, Inc. Term began 3/1/99 and ends 2/29/00. 3. HVAC - Contract is between Walker-J-Walker and Harrah's Operating Company, Inc. Term began 6/10/99 and is a 1-year term. 4. WATER TREATMENT (CHEMICAL MAINTENANCE TREATMENT) - Contract is between Walker-J-Walker and Harrah's Operating Company, Inc. Term began 3/1/99 and is a 1-year term. 5. METASYS (BUILDING MANAGEMENT SYSTEM) - Contract is between Johnson Controls, Inc. and Harrah's Operating Company, Inc. Term began 2/1/97 and is a 3-year term. 6. PEST CONTROL - Contract is between Kolter Exterminating Company, Inc. and Harrah's Entertainment, Inc. Term began 7/1/99 and is a 1-year term. 7. ELEVATORS - Contract is between Dover Elevator Company and Harrah's Operating Company, Inc. Term began 3/1/99 and is a 1-year term. 8. UPS/GENERATORS - Contract is between Computer Power and Signal. There are three (3) separate agreements. One (1) for each generator - term for Catepillar is 1/1/99 and is a 1-year term; term for Liebert is 1/1/99 and is a 1-year term; and the term for Controlled Power is 9/15/98 thru 9/30/99. 9. TRASH DISPOSAL - Contract is between Harrah's Entertainment, Inc. and BFI of TN, Inc. Term began 8/20/98 and is a 2-year term. 10. TERMITE - Contract is between Kolter Exterminating Company, Inc. and Harrah's Entertainment, Inc. Term begins 4/18/99 and is a 1-year term. -41- EXHIBIT A-3 WARRANTIES 1. None -42- EXHIBIT A-4 LICENSES 1. Use & Occupancy Permit 2. Elevator Permit 3. Certificate of Operation (C of O) Permit 4. Boiler Permit (Pressure Valve) 5. Backflow Prevention Permit -43- EXHIBIT A-5 PLANS & SPECS 1. Mechanical Details - HQ Building (Office Building #2) 2. Residence / Facility / Pool House Full Set (Mechanicals) 3. Site, Electrical, and Finish Schedules - HQ Building (Office Building #2) 4. Site Plan; Electrical and Mechanical 5. Full Set Office Building #1 (Mechanical, Electrical, CD's) -44- EXHIBIT A-6 FF & E 1. Dish Machine 2. Coffee Urns & Pots (Employee Center) 3. Coffee Makers (except Board Room, Komen Room, Riverboat Room) 4. Coffee Hot Pots (Employee center & elsewhere) 5. Coke Machine (Employee Center) 6. Coke Logo Refrigerator (Employee Center) 7. Linens (Employee center & elsewhere) -45- EXHIBIT A-7 UTILITY RESERVATIONS 1. None -46- EXHIBIT B Agreed allocation of purchase price between real estate and personal property: Real Estate $14,300,000.00. Personal Property $49,453.00. -47- EXHIBIT C Seller's Deed -48- WARRANTY DEED THIS INDENTURE, made and entered into this ----- day of ---, 1999, by and between HARRAH'S OPERATING COMPANY, INC., party of the first part, and RBM VENTURE COMPANY party of the second part. W I T N E S S E T H : That for and in consideration of Ten Dollars ($10.00), cash in hand paid, and other good and valuable considerations, the receipt of all of which is hereby acknowledged, the said party of the first part has bargained and sold and does hereby bargain, sell, convey, and confirm unto the said party of the second part the following described real estate, situated and being in Memphis, County of Shelby, State of Tennessee, to-wit: PROPERTY DESCRIBED ON ATTACHED EXHIBIT "A" The aforesaid property is conveyed subject to the Permitted Exceptions described on attached Exhibit "B". TO HAVE AND TO HOLD the aforesaid real estate, together with all the appurtenances and hereditaments thereunto appertaining unto the said party of the second part, its successors, and assigns in fee simple forever. The said party of the first part does hereby covenant with the said party of the second part that they are lawfully seized in fee of the aforedescribed real estate; that they have a good right to sell and convey the same; that the same is unencumbered, except as aforesaid; and that the title and quiet possession thereto they will warrant and defend against the lawful claims of all persons. The word "party" as used herein shall mean "parties" if more than one person or entity be referred to, and pronouns shall be construed according to their gender and number according to the context thereof. WITNESS the signature of the party of the first part the day and year first above written. HARRAH'S OPERATING COMPANY, INC. By: --------------------------------- Title: --------------------------------- -49- STATE OF TENNESSEE COUNTY OF SHELBY Before me, ---------------, a Notary Public in and for the State and County aforesaid, personally appeared --------------------, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged himself (or herself) to be the - --------------------- of HARRAH'S OPERATING COMPANY, INC., the within named bargainor, a corporation, and that -he as such officer, being duly authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by --- self as such officer. WITNESS my hand and seal at office, on this the ----- day of - ----------, 1999. --------------------------- Notary Public My Commission Expires: - ---------------------- * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * PROPERTY ADDRESS: Memphis, TN THIS INSTRUMENT PREPARED BY: Tax Parcel I.D. #: State Tax $ MAIL TAX BILLS TO: (Person or Register's fee 1.00 Agency responsible for payment Computer fee of taxes) Recording fee -------- Total $------- -50- I, or we, hereby swear or affirm that, to the best of affiant's knowledge, information and belief, the actual consideration for this transfer or value of the property transferred, whichever is greater, is $-------- - -----, which amount is equal to or greater than the amount which the property transferred would command at a fair voluntary sale. - ------------------------------ Affiant SUBSCRIBED AND SWORN TO BEFORE ME this ---- day of --- - ---------------, 1999. - -------------------- Notary Public My Commission Expires: - --------------------- -51- EXHIBIT "A" Property in Memphis, Shelby County, Tennessee more particularly described as follows: Being the same property conveyed to Grantor by Deed of record as Instrument No. - ---------------. -52- EXHIBIT "B" The aforesaid property is conveyed subject to the following: -53- EXHIBIT D Bill of Sale BILL OF SALE dated as of the ---- day of -------, 1999, by and between HARRAH'S OPERATING COMPANY, INC. ("Seller"), and RBM VENTURE COMPANY ("Buyer"). FOR AND IN CONSIDERATION of Ten Dollars ($10.00) cash in hand paid by the Buyer to the Seller, and for other good and valuable consideration, receipt of which is hereby acknowledged, Seller does hereby sell, assign, transfer, and deliver to Buyer all of Seller's right, title an interest in the Seller's property, more particularly described in Exhibit "A" attached hereto and incorporated herein by reference (the "Property"). Seller warrants that Seller has the good right to sell the aforesaid Property and that the Property is unencumbered. The aforesaid Property is conveyed and accepted AS IS WHERE IS without warranty of MERCAHNTABILTY or FITNESS FOR PARTICULAR PURPOSE. IN WITNESS WHEREOF, the Seller has executed this Bill of Sale on the day and year first above written. HARRAH'S OPERATING COMPANY, INC. By: ---------------------------- Title: ---------------------------- STATE OF TENNESSEE COUNTY OF SHELBY On this ---- day of -------, 1999, before me, a Notary Public in and for said State and County, duly commissioned and qualified, personally appeared - -------------, the --------- of HARRAH'S OPERATING COMPANY, INC., the within named corporation, who acknowledged that he/she executed the same as said officer of said corporation, being duly authorized so to do. WITNESS my hand and Notarial Seal at office, the day and year above written. ------------------------------ Notary Public My Commission Expires: - ---------------------- -54- EXHIBIT E Environmental Surveys 1. None -55- EXHIBIT F Insurance Schedule Harrah's Entertainment, Inc. Schedule of Insurance Coverages Cherry Road Facility Best's Rating: A-VII Policy Period: 3/31/99-3/31/2000 Company: United Capitol Ins. Co. Policy Number: ARIN000592 Coverage: All Risk Property (including Boiler & Machinery and Crime) Limit of Liability: Primary $10M Deductible: $100K Best's Rating: A+ IX Policy Period: 6/1/99-6/1/2000 Company: Old Republic Policy Number: MWZY 54917 Coverage: Fronted Primary General Liability Limit of Liability: $2M Deductible: $2M Best's Rating: A+ IX Policy Period: 6/1/99-6/1/2000 Company: Old Republic Policy Number: MWTB 17822 Coverage: Fronted Primary Auto Liability Limit of Liability: $1M Deductible: $1M Best's Rating: A IX Policy Period: 6/1/99-6/1/2000 Company: Westchester Policy Number: CUA 1043670 Coverage: Umbrella Liability (Incl. EPLI) (Layer One) Limit of Liability: $25M/$25M Agg x/s Primary Deductible: NIL
-56- Best's Rating: A XIV Policy Period: 6/1/99-6/1/2000 Company: Royal Policy Number: PHA 013328 Coverage: Umbrella Liability (Incl. EPLI) (Layer Two) Limit of Liability: $25MM XS Layer One Deductible: NIL Best's Rating: A XIII Policy Period: 6/1/99-6/1/2000 Company: Agricultural Policy Number: EXC 2626355 Coverage: Umbrella Liability (Incl. EPLI) (Layer Three) Limit of Liability: $50MM XS Layer Two Deductible: NIL Best's Rating: A XIII Policy Period: 6/1/99-6/1/2000 Company: Agricultural Policy Number: EXC 2626355 Coverage: Umbrella Liability (Layer Four) Limit of Liability: $200M X/S Layer Three Deductible: NIL Best's Rating: A XIII Policy Period: 6/1/99-6/1/2000 Company: American Nat'L Policy Number: EXX 9032775-02 Coverage: Limit of Liability: ($75M P/O $200M) Deductible: Best's Rating: A++ XV Policy Period: 6/1/99-6/1/2000 Company: Federal Policy Number: (00) 7941-22-06 Coverage: Limit of Liability: ($25M P/O $200M) Deductible:
-57- Best's Rating: A+ IX Policy Period: 6/1/99-6/1/2000 Company: Gulf Insur. Co. Policy Number: GA 0476211 Coverage: Limit of Liability: ($50M P/0 $200M) Deductible: Best's Rating: A- XII Policy Period: 6/1/99-6/1/2000 Company: Reliance Policy Number: ELOOP 034001094 Coverage: Limit of Liability: ($50M P/0 $200M) Deductible: Best's Rating: A+ IX Policy Period: 6/1/99-6/1/2000 Company: Old Republic Policy Number: MWXS 531 Coverage: Excess Workers Comp/Employers Liability SIR States (LA, MS, MO, NV, TN) Limit of Liability: WC: Statutory EL: $1.9M each occur. Deductible: $100K Best's Rating: A- VII Policy Period: 3/31/99-3/31/2000 Company: United Capitol Insurance Co. Policy Number: ARIN 000592 Coverage: Crime Credit Card Forgery Safe Deposit Box Limit of Liability: $10M Deductible: $100K
-58- EXHIBIT G Form of Lease of a portion of the Improvements from Purchaser to Seller. AGREEMENT OF LEASE between RBM CHERRY ROAD PARTNERS Landlord and HARRAH'S OPERATING COMPANY, INC. Tenant Dated: October 25, 1999 Premises: Office Building #1 1023 Cherry Road Memphis, Tennessee 38117 -59- TABLE OF CONTENTS
Page REFERENCE PAGE .......................................................... 1 ARTICLE I GLOSSARY................................................................. 2 ARTICLE II DEMISE, PREMISES, TERM, RENT............................................. 5 ARTICLE III ESCALATION............................................................... 7 ARTICLE IV USE AND OCCUPANCY....................................................... 11 ARTICLE V ALTERATIONS............................................................. 12 ARTICLE VI REPAIRS................................................................. 14 ARTICLE VII CONNECTING CORRIDORS.................................................... 15 ARTICLE VIII REQUIREMENTS OF LAW..................................................... 15 ARTICLE IX SUBORDINATION........................................................... 16 ARTICLE X RULES AND REGULATIONS................................................... 18 ARTICLE XI INSURANCE, PROPERTY LOSS OR DAMAGE, REIMBURSEMENT....................... 18 ARTICLE XII DESTRUCTION BY FIRE OR OTHER CAUSE...................................... 20 ARTICLE XIII EMINENT DOMAIN.......................................................... 21
-60- ARTICLE XIV ASSIGNMENT, SUBLETTING, MORTGAGE, ETC................................... 21 ARTICLE XV ACCESS TO PREMISES...................................................... 23 ARTICLE XVI CERTIFICATE OF OCCUPANCY................................................ 24 ARTICLE XVII DEFAULT................................................................. 24 ARTICLE XVIII REMEDIES AND DAMAGES.................................................... 26 ARTICLE XIX FEES AND EXPENSES....................................................... 27 ARTICLE XX NO REPRESENTATIONS BY LANDLORD.......................................... 27 ARTICLE XXI END OF TERM............................................................. 28 ARTICLE XXII POSSESSION.............................................................. 28 ARTICLE XXIII NO WAIVER............................................................... 28 ARTICLE XXIV WAIVER OF TRIAL BY JURY................................................. 29 ARTICLE XXV INABILITY TO PERFORM.................................................... 29 ARTICLE XXVI BILLS AND NOTICES....................................................... 29 ARTICLE XXVII SERVICES AND EQUIPMENT.................................................. 30 ARTICLE XXVIII [RESERVED].............................................................. 31 ARTICLE XXIX [RESERVED].............................................................. 31
-61- ARTICLE XXX SIGNS................................................................... 31 ARTICLE XXXI BROKER.................................................................. 31 ARTICLE XXXII INDEMNITY............................................................... 32 ARTICLE XXXIII [RESERVED].............................................................. 32 ARTICLE XXXIV [RESERVED].............................................................. 33 ARTICLE XXXV [RESERVED].............................................................. 33 ARTICLE XXXVI COVENANT OF QUIET ENJOYMENT............................................. 33 ARTICLE XXXVII MISCELLANEOUS........................................................... 33
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EXHIBITS: Exhibit A Legal Description........................................... A-1 Exhibit B Building and Building No. 2................................. B-1 Exhibit C Rules and Regulations....................................... C-1 Exhibit D Cleaning Specifications......................................D-1 Exhibit E Rating Level Multiplier..................................... E-1 Exhibit F [RESERVED].................................................. F-1 Exhibit G Tenant Design and Construction Standards.................... G-1 Exhibit H First American Subordination, Non-Disturbance and Attornment Agreement........................................ H-1 Exhibit I Memphis and Shelby County Land Use Control Board - Staff Report #16 Correspondence Item, Case No.: P.D. 93-322, L.U.C.B. Meeting October 14, 1999....................................... I-1
-63- AGREEMENT OF LEASE AGREEMENT OF LEASE, made as of the 25th day of October, 1999, between RBM CHERRY ROAD PARTNERS, a Tennessee general partnership, or its assigns, having an address at 5810 Shelby Oaks Drive, Memphis, Tennessee 38134, as Landlord, and HARRAH'S OPERATING COMPANY, INC., a Delaware corporation, having an address at 1023 Cherry Road, Memphis, Tennessee 38117, as Tenant. REFERENCE PAGE In addition to other terms elsewhere defined in this Lease, the following terms whenever used in this Lease shall have the meanings set forth in this Reference Page. (1) Premises: Floors one (1) through three (3) of the Building, shown hatched on the site plan attached hereto as Exhibit "B," excluding, however, any portions thereof which are defined as Common Area(s). (2) Commencement Date: October 25, 1999 (3) Fixed Expiration Date: April 30, 2017 (4) Fixed Rent: (a) $1,183,180.00 per annum ($98,598.33 per month) from the Commencement Date through October 31, 2004; (b) $1,307,413.90 per annum ($108,951.15 per month) from November 1, 2004 through October 31, 2009; and (c) $1,413,900.10 per annum ($117,825.00 per month) from November 1, 2009 through the Fixed Expiration Date, in each case, as adjusted pursuant to Section 2.6 of this Lease. -64- (5) Fixed Rent Adjustment Factor: $19,928.00. (6) Tenant's Share: Fifty-two and one-tenth percent (52.1%). (7) Base Tax Factor: The Taxes applicable to the Real Property equal to $221,848.00. (8) Base Operating Factor: The Operating Expenses applicable to the Real Property equal to $583,835.00. (9) Permitted Use: Executive and administrative offices and operational activities related to data processing and information technology, and for no other use or purpose. (10) Broker(s): CB Richard Ellis Memphis, LLC (11) Security Deposit: NONE (12) Landlord's Contribution: NONE W I T N E S S E T H: The parties hereto, for themselves, their legal representatives, successors and assigns, hereby agree as follows: ARTICLE I GLOSSARY The following terms shall have the meanings indicated below: "Additional Rent" shall have the meaning set forth in Section 2.2. "Adjacent Property" shall mean the real property south of and adjacent to the Land, consisting of approximately nineteen and ninety-two-thousandths (19.092) acres, being purchased by Landlord at or about the date of this Lease, together with the -65- improvements thereon. The Adjacent Property is described as Parcel I in the legal description attached hereto as Exhibit "A," and incorporated herein by reference. "Alterations" shall mean alterations, decorations, installations, repairs, improvements, additions, replacements or other physical changes in or about the Premises; provided, however, that the term "Alterations" shall exclude those made by Landlord, if any, in accordance with any provisions of this Lease in order to prepare the Premises for Tenant's initial occupancy. "Applicable Rate" shall mean the lesser of (x) three percentage points above the then current Base Rate, and (y) the maximum rate permitted by applicable law. "ASHRAE" shall mean the American Society of Heating, Refrigeration and Air-Conditioning Engineers. "Bankruptcy Code" shall mean 11 U.S.C. Section 101 ET SEQ., or any statute, federal or state, of similar nature and purpose. "Base Rate" shall mean the rate of interest publicly announced from time to time by Citibank, N.A., or its successor, as its "base rate" (or such other term as may be used by Citibank, N.A., from time to time, for the rate presently referred to as its "base rate"). "Building" shall mean that certain three (3) story office building located on the Land and having an address of 1023 Cherry Road, Memphis, Tennessee 38117, and all of the equipment and other improvements and appurtenances related thereto of every kind and description now located or hereafter erected, constructed or placed upon the Land and any and all alterations, renewals, and replacements thereof, additions thereto and substitutions therefor. The Building is located as shown on Exhibit "B" attached hereto. "Building No. 2" shall mean that certain two (2) story office building located on the Land and having an address of 1023 Cherry Road, Memphis, Tennessee 38117, and all of the equipment and other improvements and appurtenances related thereto of every kind and description now located or hereafter erected, constructed or placed upon the Land and any and all alterations, renewals, and replacements thereof, additions thereto and substitutions therefor. Building No. 2 is located as shown on Exhibit "B" attached hereto. -66- "Building Standard Condition" shall mean the condition of the Building as of the date of this Lease (reasonable wear and tear excepted), plus any Alterations approved by Landlord, except to the extent Landlord's approval is conditioned upon Tenant's removal of the approved Alteration prior to the Expiration Date. "Building Systems" shall mean the base building mechanical, electrical, sanitary, heating, air conditioning, ventilating, elevator, plumbing, life-safety and other service systems of the Building but shall not include the Security System or installations made by Tenant after the date of this Lease. For purposes of calculating Operating Expenses, the term "Building Systems" shall include the base building mechanical, electrical, sanitary, heating, air conditioning, ventilating, elevator, plumbing, life-safety and other service systems of Building No. 2, but shall not include the Security System or installations made by Tenant after the date of this Lease. "Business Days" shall mean all days, excluding Saturdays, Sundays and all days observed as holidays by the State of Tennessee or the federal government. "Common Area" shall mean any and all portions of the Land and the improvements thereon not part of the Building or Building No. 2. Common Area includes all landscaping, fountains and related water works, walkways, sidewalks, parking lots, parking garages, parking decks, loading platforms, driveways, trash removal facilities, mechanical, electrical and utility rooms and service areas on the Land, regardless of whether they are part of the Building or Building No. 2. "Control" shall have the meaning set forth in Section 14.2. "Deficiency" shall have the meaning set forth in Section 18.2. "Escalation Rent" shall mean payments required to be made by Tenant pursuant to Article 3. "Event of Default" shall have the meaning set forth in Section 17.1. "Expiration Date" shall mean the Fixed Expiration Date or such earlier or later date on which the Term sooner or later ends pursuant to any of the terms, conditions or covenants of this Lease (including, but not limited to, the terms and provisions of Section 2.7 hereof) or pursuant to law. -67- "Fixed Rent Adjustment Factor" shall have the meaning set out on the Reference Page. "Government Authority (Authorities)" shall mean the United States of America, the State of Tennessee, the County of Shelby, the City of Memphis, any political subdivision thereof and any agency, department, commission, board, bureau or instrumentality of any of the foregoing, now existing or hereafter created, having jurisdiction over the Real Property or any portion thereof. "HVAC" shall mean heat, ventilation and air conditioning. "HVAC System" shall mean the Building Systems providing HVAC. "Hazardous Materials" shall have the meaning set forth in Section 8.2. "HET" shall mean Harrah's Entertainment, Inc., a Delaware corporation, and any affiliated or related company or subsidiary whose financial information is required by GAAP to be reported on Harrah's Entertainment Company, Inc.'s consolidated financial statements. "Land" shall mean the land containing approximately six and four hundred five-thousandths (6.405) acres of real estate located in Shelby County, Tennessee, and more particularly described as Parcel II in Exhibit "A." "Landlord" on the date as of which this Lease is made, shall mean RBM Venture Company, but thereafter, "Landlord" shall mean only the fee owner of the Real Property. "Landlord Indemnitees" shall mean Landlord, its trustees, partners, shareholders, officers, directors, employees, agents and contractors and the Manager (and the partners, shareholders, officers, directors and employees of Landlord's agents and contractors and of the Manager). "Landlord's Operating Statement" shall mean a statement containing a computation of Escalation Rent due pursuant to the provisions of Section 3.3 furnished by Landlord to Tenant. "Landlord's Statement" shall mean either a Landlord's Operating Statement or a Landlord's Tax Statement. -68- "Landlord's Tax Statement" shall mean a statement containing a computation of Escalation Rent due pursuant to the provisions of Section 3.2 furnished by Landlord to Tenant. "Leveraged Transaction" shall mean any transaction entered into by HET whereby HET (a) uses debt or a financing source having characteristics of debt to complete the transaction, or (b) as a result of the transaction, HET assumes or becomes liable for debt or other obligations characteristic of debt which were originally the obligations of the other party(ies) to the transaction. "Manager" shall mean any person or entity with which Landlord from time to time contracts for the management of the Building and/or Building No. 2. "Mortgage(s)" shall mean any trust deed, trust indenture or mortgage which may now or hereafter affect the Real Property, the Building, and all renewals, extensions, supplements, amendments, modifications, consolidations and replacements thereof or thereto, substitutions therefor, and advances made thereunder. "Mortgagee(s)" shall mean any trustee under or mortgagee or holder of a Mortgage. "Notice(s)" shall have the meaning set forth in Section 26.1. "Office Use" shall mean those uses which are included in the computation of Office Square Footage as such term is used in the Restrictive Covenants. "Operating Expenses" shall have the meaning set forth in Section 3.1. "Operating Hours" shall mean 7:00 a.m. to 7:00 p.m. on Business Days. "Operating Year" shall mean each calendar year that includes any part of the Term. "Parties" shall have the meaning set forth in Section 37.2. "Person or Person(s)" shall mean any natural person or persons, a partnership, a corporation, a limited liability -69- company, a limited liability partnership and any other form of business or legal association or entity. "Persons Within Landlord's Control" shall mean and include Landlord, all of Landlord's respective principals, officers, agents, contractors, servants, employees, licensees and invitees. "Persons Within Tenant's Control" shall mean and include Tenant, all of Tenant's respective principals, officers, agents, contractors, servants, employees, licensees and invitees. "Rating Level Multiplier" shall have the meaning set out in Exhibit "E" hereto. "Real Property" shall mean the Building, Building No. 2 and the Land. "Rental" shall mean and be deemed to include Fixed Rent, Additional Rent and any other sums payable by Tenant hereunder. "Requirements" shall mean (i) all present and future laws, rules, ordinances, regulations, statutes, requirements, codes and executive orders, extraordinary as well as ordinary, retroactive and prospective, of all Governmental Authorities now existing or hereafter created, and of any applicable fire rating bureau, or other body exercising similar functions, affecting the Real Property, or any street, avenue or sidewalk comprising a part or in front thereof or any vault in or under the same, or requiring removal of any encroachment, or affecting the maintenance, use or occupation of the Real Property, (ii) all requirements, obligations and conditions of all instruments of record on the date of this Lease including, without limitation, the Restrictive Covenants, and (iii) all requirements, obligations and conditions imposed by the carrier of Landlord's hazard insurance policy for the Building. "Restrictive Covenants" shall mean Final Plat P.D. 93-322, Phase I Harrah's Corporate Headquarters P.D., recorded at Plat Book 155, Page 8, in the Register's Office of Shelby County, Tennessee, as amended in accordance with the decision of the Memphis and Shelby County Land Use Control Board on October 14, 1999, pursuant to Staff Report #16 Correspondence Item, a copy of which is attached hereto as Exhibit "I"; and Agreement dated January 26, 1984 between Audubon Park Community Association and Holiday Inns, Inc. recorded at Instrument No. U9-9849, as amended at Instrument Nos. V8-8105 and BE 1706, in said Register's Office, for so long as said Agreement remains in effect. -70- "Rules and Regulations" shall mean the rules and regulations annexed hereto as Exhibit "C," and such other and further reasonable rules and regulations as Landlord and Landlord's agents may from time to time adopt, on notice to Tenant to be given in accordance with the terms of this Lease. "Security System" shall mean the keypad security system in use in the Building and Building No. 2 and located at various locations on the Real Property at the date of this Lease as modified from time to time. "Sublease Additional Rent" shall have the meaning set forth in Section 14.4. "Taxes" shall have the meaning set forth in Section 3.1. "Tax Year" shall mean each period of twelve (12) months, commencing on the first day of January of each year, that includes any part of the Term, or such other period of twelve (12) months as may be duly adopted as the fiscal year for real estate tax purposes by the City of Memphis, and Shelby County. "Tenant," on the date as of which this Lease is made, shall mean the Tenant named in this Lease, but thereafter "Tenant" shall mean only the tenant under this Lease at the time in question; provided, however, that the Tenant named in this Lease and any successor tenant hereunder shall not be released from liability hereunder in the event of any assignment of this Lease. "Tenant Indemnitees" shall mean Tenant, its trustees, partners, shareholders, officers, directors, employees, agents and contractors. "Tenant's Operating Payment" shall have the meaning set forth in Section 3.3. "Tenant's Projected Operating Share" shall have the meaning set forth in Section 3.3. "Tenant's Property" shall mean Tenant's movable fixtures and movable partitions, and other equipment, furniture, furnishings and other movable items of personal property, but excluding all FF&E acquired by Landlord under that certain Purchase and Sale Agreement by and between Tenant, as seller, and Landlord, as purchaser, dated September 15, 1999 (the term "FF&E" as used in -71- this Lease shall have the meaning ascribed thereto in the aforedescribed Purchase Agreement). "Tenant's Tax Payment" shall have the meaning set forth in Section 3.2. "Term" shall mean the period from the Commencement Date through the Expiration Date. "Unavoidable Delays" shall have the meaning set forth in Article 25. ARTICLE II DEMISE, PREMISES, TERM, RENT Section 2.1. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises for the Term to commence on the Commencement Date and to end on the Fixed Expiration Date, unless earlier terminated or extended as provided herein. Section 2.2. Commencing upon the Commencement Date, Tenant shall pay to Landlord, in lawful money of the United States of America, without notice or demand, by good and sufficient check drawn to Landlord's order on a bank or trust company with an office in the United States of America, at the office of Landlord or at such other place as Landlord may designate from time to time, the following: (a) the Fixed Rent, at the annual fixed rental rate set forth in the Reference Page, which shall be payable in equal monthly installments of Fixed Rent in advance on the first day of each and every calendar month during the Term, except that the first monthly installment of Fixed Rent shall be payable by Tenant upon execution and delivery of this Lease; and (b) additional rent ("Additional Rent") consisting of all other sums of money (including, without limitation, Escalation Rent) as shall become due from and be payable by Tenant hereunder (for default in the payment of which Landlord shall have the same remedies as for a default in the payment of Fixed Rent). Section 2.3. If the Commencement Date is other than the first day of a calendar month, or the Expiration Date is other -72- than the last Day of a calendar month, Rental for such month shall be prorated on a per diem basis. Section 2.4. [RESERVED] Section 2.5. Tenant shall pay the Fixed Rent and Additional Rent when due without abatement, deduction, counterclaim, setoff or defense for any reason whatsoever, except said abatement as may be occasioned by the occurrence of any event permitting an abatement of Fixed Rent and Escalation Rent as specifically set forth in this Lease. Section 2.6 Notwithstanding anything to the contrary set forth in this Lease, in the event that HET's corporate credit rating issued by Standard & Poor's falls below "BBB" [ignoring for purposes hereof pluses (+) and minuses (-) included in such ratings] as a result of one or more Leveraged Transactions, then for such period of time as such rating remains below "BBB," Fixed Rent per annum shall be increased by an amount equal to the product of the Fixed Rent Adjustment Factor multiplied by the Rating Level Multiplier (and Fixed Rent per month shall be adjusted commensurately). Changes in the Fixed Rent resulting from increases or decreases in HET's Corporate Credit Rating shall become effective as of the official change date of the Standard & Poor's rating, and the adjustments in Fixed Rent shall be prorated to take into account the number of days in the month during which such rating was at each level. In no event shall the Fixed Rent be adjusted to an amount less than that set out in the Reference Page of this Lease. Section 2.7. Provided Tenant is not in default under this Lease at the time the option may be exercised, Landlord grants Tenant the option to renew this Lease with respect to all of the Premises for two (2) additional terms of five (5) years each. Each option shall be exercised by Tenant delivering written notice to Landlord at least six (6) months prior to the Fixed Expiration Date, as extended by any previously exercised option. (a) The renewal rental rates for each option period shall be the Market Rental Rate (as hereinafter defined)(such rate being hereinafter referred to as the "Renewal Rental Rate"). The Market Rental Rate is the rental rate then being charged by landlords (including Landlord) in the Memphis area on new leases to tenants of a similar credit quality to Tenant for space of similar quality and size as the Premises, taking into account, all relevant factors, including without limitation, age, extent and quality of tenant improvements, leasing commissions, length -73- of term, amenities of the Building and the Real Property and the location and/or floor height and definition of usable area, reasonable projections of Fixed Rent, Additional Rent, Escalation Rent and allowances or concessions that have been granted such as abatements, lease assumptions and leasehold improvement and moving allowances. (b) Within ten (10) days after Tenant's exercise of each of the options to renew, Landlord shall notify Tenant in writing of the Renewal Rental Rate for that renewal period as determined by the above formula. Tenant shall have ten (10) days from the receipt of Landlord's notice to either accept or dispute Landlord's determination of the Renewal Rental Rate. In the event that Tenant disputes Landlord's determination, Tenant shall so notify Landlord and advise Landlord of Tenant's determination of the Renewal Rental Rate for the option period as determined by the above formula. If Landlord and Tenant cannot agree upon the Renewal Rental Rate within thirty (30) days of Tenant's original notice of its intent to exercise its renewal option, the following "Dispute Resolution Mechanisms" shall be utilized: (c) The parties, within ten (10) days thereafter, shall each select an MAI-certified commercial real estate appraiser with a minimum of ten (10) years experience in the Memphis market (each party to pay the cost of the appraiser selected by it). Each appraiser, within thirty (30) days after selection, shall present to the other their determination of the Market Rental Rate. If the Market Rental Rates determined by each appraiser are within ten percent (10%) of each other, then the Renewal Rental Rate for the option period shall be the average of the two (2) Market Rental Rates as determined by the parties' appraisers. If the appraisers' determinations are greater than ten percent (10%) apart, then the appraisers shall jointly select, within ten (10) days thereafter, a third MAI-certified commercial real estate appraiser with a minimum of ten (10) years experience in the Memphis market, with the cost of the third appraiser to be divided equally between Landlord and Tenant. Within thirty (30) days after appointment, the third appraiser shall announce his/her determination of the Market Rental Rate. The Renewal Rental Rate shall be equal to the average of the Market Rental Rate determined by the two appraisers whose determinations are numerically closest to each other (disregarding the determination of the appraiser whose determination is further apart from either of the others). Notwithstanding the foregoing, in the event that the third appraiser's determination is exactly in the middle of the first two appraisers' determinations, then the third appraiser's determination shall be the Renewal Rental Rate. -74- (d) Landlord and Tenant shall execute an amendment to this Lease within sixty (60) days after the determination of the Renewal Rental Rate, which amendment shall set forth the extended Term and all other terms and conditions applicable to the renewal period, and shall establish the Renewal Rental Rate as the annual Fixed Rent for the renewal period. (e) Except for the Renewal Rental Rate as set forth above, this Lease, and all of the terms and conditions hereof, shall remain in full force and effect throughout the entire renewal term. ARTICLE III ESCALATION Section 3.1. For the purposes of this Article 3, the following terms shall have the meanings set forth below: (a) "Operating Expenses" shall mean the aggregate of all costs, expenses and disbursements (and taxes thereon, if any), of every kind and nature, paid or incurred by Landlord or on behalf of Landlord with respect to the ownership, operation, cleaning, repair, safety, replacement, management, security and maintenance of the Real Property, including the Building Systems and Common Areas, and with respect to the services provided to tenants, including, without limitation: (i) salaries, wages and bonuses paid to, and the cost of any hospitalization, medical, surgical, union and general welfare benefits (including group life insurance), any pension, retirement or life insurance plans and other benefits or similar expenses relating to employees of Landlord and/or of Manager (on and off-site) engaged in the operation, cleaning, repair, safety, replacement, management, security or maintenance of the Real Property and the Building Systems or in providing services to tenants; (ii) social security, unemployment and other payroll taxes, the cost of providing disability and worker's compensation coverage imposed by any Requirement, union contract or otherwise with respect to said employees; (iii) the cost of gas, oil, steam, water, sewer rental, HVAC, water treatment, and other utilities furnished to the Building and Building No. 2 and utility taxes; (iv) the expenses incurred for casualty, rent, liability, fidelity, plate glass and any other insurance; (v) the cost of repairs, maintenance and painting, including the cost of acquiring or renting all -75- supplies, tools, materials and equipment used in operating or repairing the Building and Building No. 2 including, without limitation, their roofs; (vi) expenditures, whether by purchase or lease, for capital improvements and capital equipment (except for roof replacement and repairs to structural components of the Building or Building No. 2 which were not necessitated by the acts or omissions of Tenant) to the extent (but only to the extent) that such capital expenditures reduce or result in savings in Operating Expenses, the amortized cost of such capital expenditures (or portion thereof resulting in reduction or savings in Operating Expenses) to be included in Operating Expenses for the Operating Year in which such costs are incurred and every subsequent Operating Year, amortized on a straight-line basis over the accounting life of the capital improvement, with interest calculated at a per annum rate equal to eight percent (8%); (vii) operation, repair and replacement of building management systems; (viii) the cost or rental of all supplies, tools, materials and equipment; (ix) the cost of uniforms, work clothes and dry cleaning; (x) the cost of window cleaning, repair, resealing and replacement, janitorial, pest control, concierge, guard, watchman or other security personnel, service or system, fire extinguishers and sprinklers, power generators, fences and electronic/motorized gates, if any; (xi) management fees and expenses; (xii) charges of independent contractors performing work included within this definition of Operating Expenses; (xiii) telephone and stationery costs; (xiv) legal, accounting and other professional fees and disbursements incurred in connection with the operation and management of the Real Property; (xv) association fees and dues; (xvi) the cost of seasonal decorations; (xvii) depreciation of hand tools and other movable equipment used in the operation, cleaning, repair, safety, management, security or maintenance of the Building and Building No. 2; (xviii) exterior and interior landscaping, irrigation and tree care; (xix) all electrical costs incurred in the operation of the Real Property; (xx) striping, re-striping, sweeping and repairing parking areas and garages; and (xxi) waste removal. Provided, however, that the foregoing costs and expenses shall exclude or have deducted from them, as the case may be: -76- (1) amounts received by Landlord through proceeds of insurance to the extent they are compensation for sums previously included in Operating Expenses; (2) cost of repairs or replacements incurred by reason of fire or other casualty or condemnation to the extent Landlord is compensated therefor; (3) Taxes; and (4) leasing commissions, rental concessions and lease buy-outs. If Landlord leases any item of capital equipment that would otherwise be included in Operating Expenses, then the rentals and other costs paid with respect to such leasing shall be included in Operating Expenses for the Operating Years in which such rentals and costs are incurred. Notwithstanding anything to the contrary set forth herein, if the Building and Building No. 2 are not fully occupied during any calendar year of the Term, Operating Expenses shall be determined as if the Building and Building No. 2 had been fully occupied during such year, by adding to actual Operating Expenses an amount equal to those costs which would have been incurred if the Building and Building No. 2 had been fully occupied. For the purposes of this Lease, "fully occupied" shall mean occupancy of ninety-five percent (95%) of the usable square feet in the Building and Building No. 2 with Landlord providing all services. Notwithstanding anything to the contrary set forth herein, in the event that (a) utilities serving the Real Property are not separately metered or (b) any maintenance of the Real Property is covered by a contract which also covers the Adjacent Property or any portion thereof, then the Landlord shall make a fair and equitable allocation of the costs between the Real Property and the Adjacent Property receiving utility service and/or being covered by the maintenance contracts, and such fair and equitable amount shall be included in Operating Expenses under this Lease. (b) "Taxes" shall mean the aggregate amount of real estate taxes and any general or special assessments (exclusive of penalties and interest thereon) imposed upon the Real Property (including, without limitation, (i) assessments made upon or with respect to any "air" and "development" rights now or hereafter appurtenant to or affecting the Real Property, (ii) any fee, tax or charge -77- imposed by any Government Authority for any vaults, vault space or other space within or outside the boundaries of the Real Property, (iii) any assessments levied after the date of this Lease for public benefits to the Real Property or the Building or Building No. 2); and (iv) franchise taxes; provided that if, because of any change in the taxation of real estate, any other tax or assessment, however denominated (including, without limitation, any profit, sales, use, occupancy, gross receipts or rental tax) is imposed upon Landlord or the owner of the Real Property or the Building or Building No. 2, or the occupancy, rents or income therefrom, in substitution for any of the foregoing Taxes or for an increase in any of the foregoing Taxes, such other tax or assessment shall be deemed part of Taxes computed as if Landlord's sole asset were the Real Property. With respect to any Tax Year, all expenses, including attorneys' fees and disbursements and experts' and other witnesses' fees, incurred in contesting the validity or amount of any Taxes or in obtaining a refund of Taxes shall be considered as part of the Taxes for such Tax Year. Anything contained herein to the contrary notwithstanding, Taxes shall not be deemed to include (a) any federal taxes on Landlord's income, (b) estate or inheritance taxes, or (c) any similar taxes imposed on Landlord, unless such taxes are levied, assessed or imposed as a substitute for the whole or any part of, or as a substitute for an increase in, the taxes, assessments, levies, fees, charges and impositions that now constitute Taxes. In the event that the Real Property and the Adjacent Property are assessed together for ad valorem taxes, then for so long as there are no additions or expansions which result in increase in size of the exterior walls of the buildings on the Real Property or Adjacent Property, no additional buildings constructed on the Real Property or Adjacent Property, and no additional parking facilities or structures constructed on the Real Property or Adjacent Property (collectively, the "Additional Taxable Improvements"), the parties stipulate and agree that eighty-nine percent (89%) of the ad valorem real estate taxes imposed on the Real Property and Adjacent Property shall be "Taxes" within the meaning of this Lease, attributable to the Real Property. Upon the construction of Additional Taxable Improvements on the Real Property or Adjacent Property (provided that they are assessed together), the parties shall make an equitable adjustment to the foregoing stipulated percentage to account for any increase in assessment resulting from such Additional Taxable Improvements. -78- Section 3.2. (a) Tenant shall pay as Escalation Rent for each Tax Year, an amount ("Tenant's Tax Payment") equal to Tenant's Share of the amount by which the Taxes for such Tax Year are greater than the Base Tax Factor. Tenant's Tax Payment shall be payable by Tenant to Landlord in twelve (12) equal monthly installments (subject to the further provisions of this Section 3.2), the first of which shall be due within ten (10) days after receipt of a Landlord's Tax Statement, regardless of whether such Landlord's Tax Statement is received prior to, on or after the first day of such Tax Year and the remaining installments shall be due on the first day of each month thereafter. If there is any increase in Taxes for any Tax Year, whether during or after such Tax Year, or if there is any decrease in the Taxes for any Tax Year during such Tax Year, Landlord shall furnish a revised Landlord's Tax Statement for any Tax Year affected, and Tenant's Tax Payment for such Tax Year shall be adjusted and, (a) within ten (10) days after Tenant's receipt of such revised Landlord's Tax Statement, Tenant shall (with respect to any increase in Taxes for such Tax Year) pay the appropriate increase in Tenant's Tax Payment to Landlord, or (b) (with respect to any decrease in Taxes for such Tax Year) Landlord shall promptly, at its election, either credit such decrease in Tenant's Tax Payment against the next installment of Rental payable by Tenant or refund the amount of such decrease by check to the order of Tenant or, if at the end of the Term, there shall not be any further installments of Rental remaining against which Landlord can credit any decrease in Taxes due Tenant, Landlord shall deliver to Tenant Landlord's check in the amount of the refund due Tenant within thirty (30) days after Landlord's receipt of any refund. If, during the Term, Taxes are required to be paid (either to the appropriate taxing authorities or as tax escrow payments to the Lessor or the Mortgagee), in full or in quarterly or other installments on any other date or dates than as presently required, then Tenant's Tax Payments shall be correspondingly accelerated or revised so that Tenant's Tax Payments are due at least thirty (30) days prior to the date payments are due to the taxing authorities, the Lessor or the Mortgagee. The benefit of any discount for any early payment or prepayment of Taxes shall accrue solely to the benefit of Landlord and Taxes shall be computed without subtracting such discount. (b) (i) Except as provided in Section 3.2(b)(ii) below, only Landlord shall be eligible to institute tax reduction or other proceedings to reduce Taxes. If, after a Landlord's Tax Statement has been sent to Tenant, a refund -79- of Taxes is actually received by or on behalf of Landlord, then, promptly after receipt of such refund, Landlord shall send Tenant a Landlord's Tax Statement adjusting the Taxes for such Tax Year (taking into account Landlord's expenses therefor) and setting forth Tenant's Share of such refund, and Tenant shall be entitled to receive such amount by way of a credit against the Escalation Rent; provided, however, that Tenant's Share of such refund shall be limited to the amount of Tenant's Tax Payment, if any, which Tenant had theretofore paid to Landlord attributable to increases in Taxes for the Tax Year to which the refund is applicable. (ii) In the event Landlord does not contest any increase in ad valorem Taxes applicable to the Real Property, Tenant, at its sole cost and expense, shall have the right to contest any such increase and shall keep Landlord informed of the steps being taken. Landlord agrees to fully cooperate with Tenant in prosecuting any appeal taken by Tenant as a result of such increase, at no cost or expense to Landlord. During the pendency of any such contest, Tenant shall take all actions required to prevent the execution/enforcement by the taxing authorities of any rights against Landlord and/or the Real Property. All Escalation Rent charged by Landlord shall be paid by Tenant during the pendency of any such action. If, after a Landlord's Tax Statement has been sent to Tenant, a refund of Taxes is actually received as a result of a contest made by Tenant, then, promptly after receipt of such refund, Landlord shall send Tenant a Landlord's Tax Statement adjusting the Taxes for such Tax Year and setting forth Tenant's Share of such refund, and Tenant shall be entitled to receive such amount by way of a credit against the Escalation Rent; provided, however, that Tenant's Share of such refund shall be limited to the amount of Tenant's Tax Payment, if any, which Tenant had theretofore paid to Landlord attributable to increases in Taxes for the Tax Year to which the refund is applicable. (c) Tenant's Tax Payment and any credits with respect thereto as provided in this Section 3.2 shall be made as provided in this Section 3.2 regardless of the fact that Tenant may be exempt, in whole or in part, from the payment of any taxes by reason of Tenant's tax exempt status or for any other reason whatsoever. (d) Tenant shall pay to Landlord within thirty (30) days after demand as Additional Rent any occupancy tax or rent tax now -80- in effect or hereafter enacted, if payable by Landlord in the first instance or hereafter required to be paid by Landlord. (e) Each Landlord's Tax Statement furnished by Landlord with respect to Tenant's Tax Payment shall be accompanied by a copy of the real estate tax bill or bills for the Tax Year referred to therein, but Landlord shall have no obligation to deliver more than one such copy of the real estate tax bill or bills in respect of any Tax Year, and Landlord's failure to deliver such copy shall not affect Tenant's obligations as to amount or due date(s) thereof. (f) If the Base Tax Factor subsequently shall be adjusted, corrected or reduced whether as the result of protest, by means of agreement or as the result of legal proceedings, the Base Tax Factor for the purpose of computing any Additional Rent Payable pursuant to this Article shall be the Base Tax Factor as so adjusted, corrected or reduced. Until the Base Tax is so adjusted, corrected or reduced, if ever, Tenant shall pay Additional Rent hereunder based upon the unadjusted, uncorrected or unreduced Base Tax Factor and upon such adjustment, correction or reduction occurring, any Additional Rent payable by Tenant prior to the date of such occurrence shall be recomputed and Tenant shall pay to Landlord any Escalation Rent found due by such recomputation within thirty (30) days after being billed therefor (which bill shall set forth in reasonable detail the pertinent data causing and comprising such recomputation). (g) If the Commencement Date or the Expiration Date occurs on a date other than January 1 or December 31, respectively, any Tenant's Tax Payment under this Article 3 for the Tax Year in which such Commencement Date or Expiration Date occurs shall be apportioned in that percentage which the number of days in the period from the Commencement Date to December 31 or from January 1 to the Expiration Date, as the case may be, both inclusive, bears to the total number of days in such Tax Year. If the Commencement Date or the Expiration Date occurs on a date other than January 1 or December 31, respectively, any Tenant's Operating Payment under this Article 3 for the Operating Year in which such Commencement Date or Expiration Date occurs shall be apportioned in that percentage which the number of days in the period from the Commencement Date to December 31 or from January 1 to the Expiration Date, as the case may be, both inclusive, bears to the total number of days in such Operating Year. In the event of a termination of this Lease, any Escalation Rent under this Article 3 shall be paid or adjusted within thirty (30) days after submission of a Landlord's Statement. The rights and -81- obligations of Landlord and Tenant under the provisions of Article 3 with respect to any Escalation Rent shall survive for a period of six (6) months after the end of the calendar year in which the Expiration Date falls. Section 3.3. (a) Tenant shall pay as Escalation Rent for each Operating Year an amount ("Tenant's Operating Payment") equal to Tenant's Share of the amount by which Operating Expenses for such Operating Year are greater than the Base Operating Factor. (b) Landlord shall furnish to Tenant, with respect to each Operating Year, a Landlord's Operating Statement setting forth Landlord's estimate of Tenant's Operating Payment for such Operating Year ("Tenant's Projected Operating Share"). Tenant shall pay to Landlord on the first day of each month during such Operating Year, as Escalation Rent, an amount equal to one-twelfth (1/12) of Tenant's Projected Operating Share for such Operating Year. If, however, Landlord furnishes any such Landlord's Operating Statement for an Operating Year subsequent to the commencement of such Operating Year, then (a) until the first day of the month following the month in which such Landlord's Operating Statement is furnished to Tenant, Tenant shall pay to Landlord on the first day of each month an amount equal to the monthly sum payable by Tenant to Landlord under this Section 3.3 in respect of the last month of the preceding Operating Year; (b) after such Landlord's Operating Statement is furnished to Tenant or together therewith, Landlord shall give notice to Tenant stating whether the installments of Tenant's Projected Operating Share previously made for such Operating Year were greater or less than the installments of Tenant's Projected Operating Share to be made for such Operating Year in accordance with such estimate, and (i) if there is a deficiency, Tenant shall pay the amount thereof within thirty (30) days after demand therefor, or (ii) if there was an overpayment, Landlord shall credit the amount thereof against subsequent payments of Rental or, if at the end of the Term there shall not be any further installments of Rental remaining against which Landlord can credit any such overpayment due Tenant, Landlord shall deliver to Tenant Landlord's check in the amount of the refund due Tenant within thirty (30) days after Tenant shall first be entitled to a credit for the overpayment of Operating Expenses; and (c) on the first day of the month following the month in which such Landlord's Operating Statement is furnished to Tenant, and monthly thereafter throughout the remainder of such Operating Year, Tenant shall pay to Landlord an amount equal to one-twelfth (1/12) of Tenant's Projected Operating Share shown in such -82- Landlord's Operating Statement. Landlord shall furnish to Tenant a revised Landlord's Operating Statement with a new estimate of Tenant's Projected Operating Share for such Operating Year and, in such case, Tenant's Projected Operating Share for such Operating Year shall be adjusted and paid or credited, as the case may be, substantially in the same manner as provided in the preceding sentence. (c) After the end of each Operating Year, Landlord shall furnish to Tenant a Landlord's Operating Statement for such Operating Year. Each such year-end Landlord's Operating Statement shall be accompanied by a computation of Operating Expenses prepared by the Manager or a certified public accountant designated by Landlord from which Landlord shall make the computation of Escalation Rent due in respect of Operating Expenses hereunder. In making computations of Operating Expenses, the certified public accountant or the Manager may rely on Landlord's reasonable estimates and allocations whenever said estimates and allocations are needed for this Article 3. If the Landlord's Operating Statement shows that the sums paid by Tenant under Section 3.3(B) exceeded Tenant's Operating Payments required to be paid by Tenant for such Operating Year, Landlord shall credit the amount of such excess against subsequent payments of Rental or, if at the end of the Term there shall not be any further installments of Rental remaining against which Landlord can credit any such overpayments due Tenant, Landlord shall promptly deliver to Tenant Landlord's check in the amount of the refund due Tenant within thirty (30) days after Tenant shall first be entitled to a credit for the overpayment of Operating Expenses; and if the Landlord's Operating Statement for such Operating Year shows that the sums so paid by Tenant were less than Tenant's Operating Payment due for such Operating Year, Tenant shall pay the amount of such deficiency within thirty (30) days after demand therefor. (d) In addition, Tenant shall pay to the appropriate taxing authority, as and when due, any and all taxes due with respect to Tenant's personal property and/or leasehold interest in the Premises. Section 3.4. Landlord's failure to render any Landlord's Statement with respect to any Tax Year or Operating Year shall not prejudice Landlord's right thereafter to render a Landlord's Statement with respect thereto or with respect to any subsequent Tax Year or Operating Year, as the case may be, nor shall the rendering of a Landlord's Statement prejudice Landlord's right -83- thereafter to render a corrected Landlord's Statement for that Tax Year or Operating Year. Section 3.5. Any Landlord's Statement sent to Tenant shall be conclusively binding upon Tenant unless, within thirty (30) days after such Landlord's Statement is sent, Tenant shall send a written notice to Landlord objecting to such Landlord's Statement and specifying, to the extent reasonably practicable, the respects in which such Landlord's Statement is disputed. If Tenant shall send such notice with respect to a Landlord's Statement, Tenant may select and pay an independent certified public accountant or a member of an independent firm which is engaged in the business of auditing lease escalation clauses (an "Approved Examiner") provided that such Approved Examiner is not and has not during the Term been affiliated with, a shareholder in, an officer, director, partner, or employee of, any Manager during the Term or the Manager named in this Lease, and such Approved Examiner may examine Landlord's books and records relating solely to disputed aspects of the Operating Expenses to determine the accuracy of Landlord's Operating Statement. Tenant recognizes the confidential nature of Landlord's books and records, and agrees that any information obtained by an Approved Examiner during any examination shall be maintained in strict confidence by such Approved Examiner, without revealing same to any Person except Tenant. If, after such examination, such Approved Examiner shall dispute such Landlord's Operating Statement, either party may refer the decision of the issues raised to a reputable independent firm of certified public accountants, selected by Landlord and approved by Tenant, which approval shall not be unreasonably withheld or delayed, and the decision of such accountants shall be conclusively binding upon the parties. The fees and expenses involved in resolving such dispute shall be borne by Tenant, unless the final determination is that Landlord's Statement overstated Operating Expenses by more than five percent (5%), in which case Landlord shall pay the reasonable fees and expenses involved in resolving the dispute. Notwithstanding the giving of such notice by Tenant, and pending the resolution of any such dispute, Tenant shall pay to Landlord when due the amount shown on any such Landlord's Statement, as provided in this Article 3. Tenant shall pay the amount of any underpayment to Landlord and Landlord shall refund the amount of any overpayment to Tenant, within thirty (30) days after resolution of such dispute (and if Landlord fails to refund such overpayment to Tenant, Tenant shall be entitled to offset the same against future payments of Additional Rent). -84- ARTICLE IV USE AND OCCUPANCY Section 4.1. Tenant shall use and occupy the Premises for the Permitted Use and for no other purpose. Tenant and Tenant's use of the Premises shall comply in all respects with the Restrictive Covenants; and Tenant shall indemnify Landlord against any loss, cost or damage (including costs of defense and reasonable attorney fees) arising as a result of the failure of the Tenant or Tenant's use of the Premises to so comply. Tenant covenants and agrees that in no event and under no circumstances shall the Office Use within the Building exceed forty-six thousand seven hundred sixty-three (46,763) square feet unless Landlord and Tenant otherwise agree in a writing signed by them; and if the Office Use within the Building shall ever exceed said square footage, Tenant shall diligently take steps to remove area within the Building from Office Use in order that Tenant shall be in compliance with the foregoing provisions. Section 4.2. Tenant shall not use the Premises or any part thereof, or permit the Premises or any part thereof to be used, (1) for the business of photographic, multilith or multigraph reproductions or offset printing (other than those which are ancillary to an otherwise Permitted Use), (2) for an off-the-street retail commercial banking, thrift institution, loan company, trust company, depository or safe deposit business accepting deposits from the general public, (3) for the off-the-street retail sale of travelers checks, money orders, drafts, foreign exchange or letters of credit or for the receipt of money for transmission, (4) by the United States government, the state or local government, or any agency or department of any of the foregoing having or asserting sovereign immunity, (5) for the preparation, dispensing or consumption of food or beverages in any manner whatsoever, except for the preparation, dispensing and consumption of food by Tenant's employees who work in the Premises and not for the sale of food to any Persons other than such employees, (6) as an employment agency, daycare facility (other than as a self-operated facility for use only by Tenant's employees), labor union, school, or vocational training center (except for the training of employees of Tenant intended to be employed at the Premises), (7) as a barber shop, beauty salon or manicure shop, (8) for product display activities (such as those of a manufacturer's representative), (9) as offices of any public utility company, (10) for health care activities, (11) for clerical support services or offices of public stenographers or typists (other than those which are ancillary to an otherwise -85- Permitted Use), (12) as reservation or call centers, (13) for retail or manufacturing use, (14) as studios for radio, television or other media, or (15) any use which extends the hours of use or operations in the Premises (other than infrequently or sporadically) beyond the Operating Hours. Furthermore, the Premises shall not be used for any purpose that would, in Landlord's reasonable judgment, tend to lower the first-class character of the Building, create unreasonable or excessive elevator or floor loads, violate the certificate of occupancy of the Building, materially impair or interfere with any of the Building operations or the proper and economic heating, air-conditioning, cleaning or any other services of the Building, materially interfere with the use of the other areas of the Building by any other tenants, or materially impair the appearance of the Building. ARTICLE V ALTERATIONS Section 5.1. (a) Except as otherwise set out in Section 5.1(f), Tenant shall not make or permit to be made any Alterations without Landlord's prior written consent. Reference is made to Exhibit "G" hereto, which contains the Tenant Design and Construction Standards applicable to the Building, which is incorporated by reference in this Lease. Landlord reserves the right to make reasonable changes and additions thereto. (b) (1) Prior to making any such Alterations, Tenant shall (i) submit to Landlord two (2) sets of detailed plans and specifications (including layout, architectural, electrical, mechanical and structural drawings) that comply with all Requirements for each proposed Alteration, and Tenant shall not commence any such Alteration without first obtaining Landlord's approval of such plans and specifications, which approval shall not be unreasonably withheld or delayed, (ii) at Tenant's expense, obtain all permits, approvals and certificates required by any Governmental Authorities, and (iii) furnish to Landlord duplicate original policies or certificates thereof of worker's compensation insurance (covering all persons to be employed by Tenant, and Tenant's contractors and subcontractors, in connection with such Alteration) and commercial general liability insurance (including premises operation, bodily injury, personal injury, death, independent contractors, products and completed operations, broad form contractual liability and broad form property damage coverages) in such form, with such companies, for such periods and in such amounts as -86- Landlord may reasonably approve, naming Landlord and its agents, any Lessor and any Mortgagee, as additional insureds. Upon completion of such Alteration, Tenant, at Tenant's expense, shall obtain certificates of final approval of such Alterations required by any Governmental Authority and shall furnish Landlord with copies thereof, together with the "as built" plans and specifications for such Alterations. All Alterations shall be made and performed in accordance with the plans and specifications therefor as approved by Landlord, all Requirements, Restrictive Covenants, and the Rules and Regulations. All materials and equipment to be incorporated in the Premises as a result of any Alterations shall be first quality and no such materials or equipment shall be subject to any lien, encumbrance, chattel mortgage, title retention or security agreement. In addition, any such Alteration for which the cost of labor and materials (as estimated by Landlord's architect, engineer or contractor) is in excess of Seventy-Five Thousand Dollars ($75,000.00), either individually or in the aggregate with any other Alteration constructed in any twelve (12) month period, shall be performed only under the supervision of a licensed architect satisfactory to Landlord. (2) Landlord reserves the right to disapprove any plans and specifications in whole or in part, to reserve approval of items shown thereon pending its review and approval of other plans and specifications, and to condition its approval upon Tenant making revisions to the plans and specifications or supplying additional information; provided, however, that Landlord shall be reasonable in its exercise of these rights. Additionally, Landlord shall be deemed to have approved Tenant's plans and specifications if Landlord fails to respond to Tenant's plans and specifications within fifteen (15) days of Landlord's receipt thereof. Tenant agrees that any review or approval by Landlord of any plans and/or specifications with respect to any Alteration is solely for Landlord's benefit, and without any representation or warranty whatsoever to Tenant or any other Person with respect to the adequacy, correctness or sufficiency thereof or with respect to Requirements, Restrictive Covenants or otherwise. (c) Alterations shall be performed at Tenant's expense and at such times and in such manner as Landlord may from time to time reasonably designate, unless, at the time of the Alterations, Tenant is the only occupant of the Building and -87- Building No. 2, in which event, Tenant may control the times and manner (but always in accordance with all Requirements) to perform the Alterations. All Alterations shall become a part of the Building and shall be Landlord's property from and after the installation thereof and may not be removed or changed without Landlord's consent. Notwithstanding the foregoing, however, Landlord, upon notice given at least sixty (60) days prior to the Expiration Date or upon such shorter notice as is reasonable under the circumstances upon the earlier expiration of the Term, may require Tenant to remove any specified Alterations (other than those comprising part of Building Standard Condition) and to repair and restore in a good and workmanlike manner to Building Standard Condition (reasonable wear and tear excepted) any damage to the Premises or the Building caused by such removal. All Tenant's Property shall remain the property of Tenant and, unless Landlord and Tenant shall agree otherwise, on or before the Expiration Date shall, at Tenant's cost, be removed from the Premises by Tenant, and Tenant shall repair and restore in a good and workmanlike manner to Building Standard Condition (reasonable wear and tear excepted) any damage to the Premises or the Building caused by such removal. The provisions of this Section 5.1(c) shall survive the expiration or earlier termination of this Lease. (d) (1) All Alterations shall be performed, at Tenant's sole cost and expense, by contractors, subcontractors or mechanics approved by Landlord in Landlord's reasonable discretion. (2) Notwithstanding the foregoing, with respect to any Alteration affecting any Building Systems, (i) Tenant, if required by Landlord, shall employ Landlord's or the Manager's designated contractor, and (ii) the Alteration shall, if required by Landlord, at Tenant's expense, be designed by either Landlord's or the Manager's engineer. (e) (1) Any mechanic's lien filed against the Premises or the Real Property for work claimed to have been done for, or materials claimed to have been furnished to, Tenant shall be canceled or discharged by Tenant, at Tenant's expense, within twenty (20) days after such lien shall be filed, by payment or filing of the bond required by law, and Tenant shall indemnify and hold Landlord harmless from and against any and all costs, expenses, claims, losses or damages resulting therefrom by reason thereof. -88- (2) If Tenant shall fail to discharge such mechanic's lien within the aforesaid period, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to, discharge the same either by paying the amount claimed to be due or by procuring the discharge of such lien by deposit in court or bonding, and in any such event, Landlord shall be entitled, if Landlord so elects, to compel the prosecution of an action for the foreclosure of such mechanic's lien by the lienor and to pay the amount of the judgment, if any, in favor of the lienor, with interest, costs and allowances. (3) Any amount paid by Landlord for any of the aforesaid charges and for all expenses of Landlord (including, but not limited to, attorneys' fees and disbursements) incurred in defending any such action, discharging said lien or in procuring the discharge of said lien, with interest on all such amounts at the maximum legal rate of interest then chargeable to Tenant from the date of payment, shall be repaid by Tenant within ten (10) days after written demand therefor, and all amounts so repayable, together with such interest, shall be considered Additional Rent. (f) Notwithstanding anything to the contrary set forth in this Article V, Tenant, without Landlord's consent, is permitted to make Alterations to the Premises which relate only to the cosmetic appearance, nonstructural components, and/or non-load-bearing portions of the Premises (and which do not affect the structural and/or load-bearing elements of the Building or the Building Systems), provided such Alterations do not cost, in the aggregate, more than Seventy-Five Thousand Dollars ($75,000.00) during any twelve (12) month period during the Term. Section 5.2. Tenant shall reimburse Landlord, within five (5) Business Days after demand therefor, for any reasonable out-of-pocket expense incurred by Landlord for reviewing the plans and specifications for any Alterations or inspecting the progress of completion of the same. Section 5.3. Landlord, at Tenant's expense, and upon the request of Tenant, shall join in any applications for any permits, approvals or certificates required to be obtained by Tenant in connection with any permitted Alteration (provided that the provisions of the applicable Requirements shall require that Landlord join in such application) and shall otherwise cooperate with Tenant in connection therewith, provided that Landlord shall -89- not be obligated to incur any cost or expense or liability in connection therewith. Section 5.4. Tenant shall furnish to Landlord copies of records of all Alterations and of the cost thereof within fifteen (15) days after the completion of such Alterations. Section 5.5. TENANT HEREBY ACCEPTS THE PREMISES "AS IS, WHERE IS," AND WITHOUT ANY WARRANTY, EXPRESS OR IMPLIED, EXCEPT AS OTHERWISE SET FORTH IN THIS LEASE. Section 5.6. Tenant shall not, at any time prior to or during the Term, directly or indirectly employ, or permit the employment of, any contractor, mechanic or laborer in the Premises, whether in connection with any Alteration or otherwise, if such employment would unreasonably interfere or cause any unreasonable conflict with other contractors, mechanics or laborers engaged in the construction, maintenance or operation of the Building by Landlord, Tenant or others, or of any other property owned by Landlord. In the event of any such unreasonable interference or conflict, Tenant, upon demand of Landlord, shall cause all contractors, mechanics or laborers causing such interference or conflict to leave the Building immediately. Section 5.7. During the course of any Alteration and any construction by Landlord, whether on the Land or on any real property adjacent to the Land, Landlord and Tenant shall cooperate with each other, and shall cause their contractors and subcontractors to cooperate, so as to minimize interruption and interference with each other's construction activities. ARTICLE VI REPAIRS Section 6.1. Tenant covenants to use due care in its use and occupancy of the Premises and not to commit waste. Except as otherwise provided in this Section 6.1, Tenant shall not be obligated to repair any Building Systems. Tenant shall, however, at its own cost and expense, maintain and repair and, to the extent deemed appropriate by Tenant, monitor the Security System. Notwithstanding any provision contained in this Lease to the contrary, all damage or injury to the Premises, and all damage or injury to any other part of the Building, or to its fixtures, equipment and appurtenances (including Building Systems), whether requiring structural or nonstructural repairs, caused by the -90- moving of Tenant's Property or caused by or resulting from any act or omission of, or Alterations made by, Tenant or Persons Within Tenant's Control, shall be repaired by Tenant, at Tenant's sole cost and expense, to the reasonable satisfaction of Landlord (if the required repairs are non-structural in nature and do not affect any Building Systems), or by Landlord at Tenant's sole cost and expense (if the required repairs are structural in nature or affect any Building Systems). All of the aforesaid repairs shall be performed in a manner and with materials and design of first class and quality consistent with first-class office buildings in Memphis and shall be made in accordance with the provisions of Article 5. If Tenant shall fail, after five (5) days notice (or such shorter period as may be required because of an emergency), to proceed with due diligence to make repairs required to be made by Tenant, the same may be made by Landlord, at the expense of Tenant, and the expenses thereof incurred by Landlord, with interest thereon at the Applicable Rate, shall be paid to Landlord, as Additional Rent, within ten (10) days after rendition of a bill or statement therefor. Tenant shall give Landlord prompt notice of any defective condition in any Building Systems located in, servicing or passing through the Premises. Section 6.2. Tenant shall not place a load upon any floor of the Premises which exceeds seventy-five (75) pounds per square foot "live load." Tenant shall not locate or move any safe, heavy machinery, heavy equipment, business machines, freight, bulky matter or fixtures into or out of the Building without Landlord's prior consent, which consent shall not be unreasonably withheld, and Tenant shall make payment to Landlord of Landlord's costs in connection therewith (if such move is not part of an Alteration). If such safe, machinery, equipment, freight, bulky matter or fixture requires special handling (as determined by Landlord), Tenant shall employ only persons holding a Master Rigger's license to do said work. All work in connection therewith shall comply with the Requirements, and shall be done during such hours as Landlord may designate. Business machines and mechanical equipment shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Landlord's reasonable judgment, to absorb and prevent vibration, noise and annoyance. Section 6.3. Landlord shall operate, maintain and make all necessary repairs (both structural and non-structural) to the Building Systems and the public portions of the Building, both exterior and interior, in conformance with standards applicable to first-class office buildings in Memphis, except for those -91- repairs for which Tenant is responsible pursuant to any other provision of this Lease. Landlord shall use reasonable efforts to minimize interference with Tenant's use and occupancy of the Premises in making any repairs, alterations, additions or improvements; provided, however, that Landlord shall have no obligation to employ contractors or labor at so-called overtime or other premium pay rates or to incur any other overtime costs in connection with such repairs, alterations, additions or improvements. Notwithstanding the foregoing, if Tenant shall so request, Landlord shall employ contractors or labor at so-called overtime or other premium pay rates or incur other overtime costs in making such repairs, alterations, additions or improvements, provided Tenant shall pay to Landlord, as Additional Rent, within ten (10) days after demand therefor, an amount equal to the excess costs incurred by Landlord by reason of compliance with Tenant's request. Except as expressly provided in this Lease, there shall be no allowance to Tenant for a diminution of rental value and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from Landlord, Tenant or others making, or failing to make, any repairs, alterations, additions or improvements in or to any portion of the Building or the Premises, or its fixtures, appurtenances or equipment. Section 6.4. Without abatement or diminution in rent, Landlord reserves and shall have the following additional rights: 1 To erect, use and maintain pipes and conduits in and through the Premises; provided that all such conduits and pipes shall be located behind then-existing walls, under floors or above suspended ceilings and shall not interfere with the use and operation of the Premises, or any equipment or facilities located therein. 2 To take any and all measures, including inspections, repairs, alterations, additions and improvements to the Premises or to the Building, as may be necessary or desirable for the safety, protection or preservation of the Premises or the Building or Landlord's interests, or as may be necessary or desirable in the operation of the Building. ARTICLE VII CONNECTING CORRIDORS -92- Section 7.1 Within sixty (60) days after the Commencement Date, Tenant shall, at its own expense, install a doorway or wall in the enclosed corridor which leads to the building on the Adjacent Property, the design and location of the doorway or wall to be approved by Landlord. Section 7.2 In the event that the Expiration Date of this Lease shall be earlier or later than the expiration date of Tenant's lease of Building No. 2, then at such time as Tenant no longer occupies both of such buildings, Tenant shall, at its own expense, construct a door or doors in the corridor which connects the Building and Building No. 2, in such manner as Landlord and Tenant shall mutually agree, to prevent access between the Building and Building No. 2. ARTICLE VIII REQUIREMENTS OF LAW Section 8.1. Tenant shall not do, and shall not permit Persons Within Tenant's Control to do, any act or thing in or upon the Premises or the Building which will invalidate or be in conflict with the certificate of occupancy for the Premises or the Building or violate any Requirements or Restrictive Covenants. Tenant shall, at Tenant's sole cost and expense, take all action, including making any required Alterations necessary to comply with all Requirements (including, but not limited to, applicable terms of the Americans With Disabilities Act of 1990 (the "ADA"), as modified and supplemented from time to time) which shall impose any violation, order or duty upon Landlord or Tenant arising from, or in connection with, the Premises, Tenant's occupancy, use or manner of use of the Premises (including, without limitation, any occupancy, use or manner of use that constitutes a "place of public accommodation" under the ADA), or any installations by Tenant in the Premises, or required by reason of a breach of any of Tenant's covenants or agreements under this Lease, whether or not such Requirements shall now be in effect or hereafter enacted or issued, and whether or not any work required shall be ordinary or extraordinary or foreseen or unforeseen at the date hereof; provided, however, that Landlord shall be responsible for complying with such Requirement or Restrictive Covenant and for the cost of such compliance if and to the extent that non-compliance arose because of the acts of Landlord. Section 8.2. Tenant covenants and agrees that Tenant shall, at Tenant's sole cost and expense, comply at all times -93- with all Requirements governing the use, generation, storage, treatment and/or disposal of any Hazardous Materials (as defined below), the presence of which results from or in connection with the act or omission of Tenant or Persons Within Tenant's Control or the breach of this Lease by Tenant or Persons Within Tenant's Control. The term "Hazardous Materials" shall mean any biologically or chemically active or other toxic or hazardous wastes, pollutants or substances, including, without limitation, asbestos, PCBs, petroleum products and by-products, substances defined or listed as "hazardous substances" or "toxic substances" or similarly identified in or pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 ET SEQ., and as hazardous wastes under the Resource Conservation and Recovery Act, 42 U.S.C. 6010, ET SEQ., any chemical substance or mixture regulated under the Toxic Substance Control Act of 1976, as amended 15 U.S.C. 2601, ET SEQ., any "toxic pollutant" under the Clean Water Act, 33 U.S.C. 466 ET SEQ., as amended, any hazardous air pollutant under the Clean Air Act, 42 U.S.C. 7401 ET SEQ., hazardous materials identified in or pursuant to the Hazardous Materials Transportation Act, 49 U.S.C. 1802, ET SEQ., and any hazardous or toxic substances or pollutant regulated under any other Requirements. Tenant shall agree to execute, from time to time, at Landlord's request, affidavits, representations and the like concerning Tenant's best knowledge and belief regarding the presence of Hazardous Materials in, on, under or about the Premises, the Building or the Land. Tenant shall indemnify and hold harmless all Indemnitees from and against any loss, cost, damage, liability or expense (including attorneys' fees and disbursements) arising by reason of any clean up, removal, remediation, detoxification action or any other activity required or recommended of any Indemnitees by any Governmental Authority by reason of the presence in or about the Building or the Premises of any Hazardous Materials, as a result of or in connection with the act or omission of Tenant or Persons Within Tenant's Control or the breach of this Lease by Tenant or Persons Within Tenant's Control. The foregoing covenants and indemnity shall survive the expiration or any termination of this Lease. Section 8.3. If Tenant shall receive notice of any violation of, or defaults under, any Requirements, liens or other encumbrances applicable to the Premises, Tenant shall give prompt notice thereof to Landlord. Section 8.4. If any governmental license or permit shall be required for the proper and lawful conduct of Tenant's business and if the failure to secure such license or permit -94- would, in any way, affect Landlord or the Building, then Tenant, at Tenant's expense, shall promptly procure and thereafter maintain, submit for inspection by Landlord, and at all times comply with the terms and conditions of, each such license or permit. Section 8.5. Tenant, at Tenant's sole cost and expense and after notice to Landlord, may contest, by appropriate proceedings prosecuted diligently and in good faith, the legality or applicability of any Requirement affecting the Premises provided that: (a) neither Landlord nor any Indemnitees shall be subject to criminal penalties, nor shall the Real Property or any part thereof be subject to being condemned or vacated, nor shall the certificate of occupancy for the Premises or the Building be suspended or threatened to be suspended, by reason of non-compliance or by reason of such contest; (b) before the commencement of such contest, if Landlord or any Indemnitees may be subject to any civil fines or penalties or if Landlord may be liable to any independent third party as a result of such non-compliance, then Tenant shall furnish to Landlord either (i) a bond of a surety company satisfactory to Landlord, in form and substance reasonably satisfactory to Landlord, and in an amount at least equal to Landlord's estimate of the sum of (A) the cost of such compliance, (B) the penalties or fines that may accrue by reason of such non-compliance (as reasonably estimated by Landlord) and (C) the amount of such liability to independent third parties, and shall indemnify Landlord (and any Indemnitees) against the cost of such compliance and liability resulting from or incurred in connection with such contest or non-compliance; or (ii) other security satisfactory in all respects to Landlord; (c) such non-compliance or contest shall not constitute or result in a violation (either with the giving of notice or the passage of time or both) of the terms of any Mortgage, or if such Mortgage conditions such non-compliance or contest upon the taking of action or furnishing of security by Landlord, such action shall be taken or such security shall be furnished at the expense of Tenant; and (d) Tenant shall keep Landlord regularly advised as to the status of such proceedings. ARTICLE IX SUBORDINATION Section 9.1. This Lease shall be subject and subordinate to each Mortgage, whether made prior to or after the execution of this Lease, and to all renewals, extensions, supplements, amendments, modifications, consolidations and replacements -95- thereof or thereto, substitutions therefor, and advances made thereunder. This clause shall be self-operative and no further agreement of subordination shall be required to make the interest of any Lessor or Mortgagee superior to the interest of Tenant hereunder. In confirmation of such subordination, however, Tenant shall promptly execute and deliver, at its own cost and expense, any document, in recordable form if requested, that Landlord, any Lessor or any Mortgagee may request to evidence such subordination. Tenant shall not do anything that would constitute a default under any Mortgage, or omit to do anything that Tenant is obligated to do under the terms of this Lease so as to cause Landlord to be in default thereunder. If, in connection with the financing of the Real Property or the Building, any lending institution or Lessor, as the case may be, requests reasonable modifications of this Lease that do not increase rent or change the Term of this Lease, or materially and adversely affect the rights or obligations of Tenant under this Lease, Tenant shall make such modifications. Section 9.2. If, at any time prior to the expiration of the Term, any Mortgagee comes into possession of the Real Property or the Building by receiver or otherwise, Tenant agrees, at the election and upon demand of any owner of the Real Property or the Building, or of any Mortgagee in possession of the Real Property or the Building, to attorn, from time to time, to any such owner or Mortgagee or any person acquiring the interest of Landlord as a result of any such termination, or as a result of a foreclosure of the Mortgage or the granting of a deed in lieu of foreclosure, upon the then executory terms and conditions of this Lease (except as provided below), for the remainder of the Term, provided that such owner or Mortgagee, as the case may be, or receiver caused to be appointed by any of the foregoing, is then entitled to possession of the Premises. Any such attornment shall be made upon the condition that no such owner or Mortgagee shall be: 1. liable for any act or omission of any prior landlord (including, without limitation, the then defaulting landlord); or 2. subject to any defense or offsets (except as expressly set forth in this Lease) which Tenant may have against any prior landlord (including, without limitation, the then defaulting landlord); or 3. bound by any payment of Rental which Tenant might have paid for more than the current month to any prior -96- landlord (including, without limitation, the then defaulting landlord); or 4. bound by any obligation to make any payment to Tenant which was required to be made prior to the time such owner or Mortgagee succeeded to any prior landlord's interest; or 5. bound by any obligation to perform any work or to make improvements to the Premises except for (i) repairs and maintenance pursuant to the provisions of Article 6, (ii) repairs to the Premises or any part thereof as a result of damage by fire or other casualty pursuant to Article 12, but only to the extent that such repairs can be reasonably made from the net proceeds of any insurance actually made available to such owner or Mortgagee and (iii) repairs to the Premises as a result of a partial condemnation pursuant to Article 13, but only to the extent that such repairs can be reasonably made from the net proceeds of any award made available to such owner or Mortgagee. The provisions of this Section 9.2 shall inure to the benefit of any such owner or Mortgagee, shall apply notwithstanding that, as a matter of law, this Lease may terminate, and shall be self-operative upon any such demand, and no further agreement shall be required to give effect to said provisions. Tenant, however, upon demand of any such owner or Mortgagee, shall execute, from time to time, agreements in confirmation of the foregoing provisions of this Section 9.2, satisfactory to any such owner, Lessor or Mortgagee, and acknowledging such attornment and setting forth the terms and conditions of its tenancy. Nothing contained in this Section 9.2 shall be construed to impair any right otherwise exercisable by any such owner or Mortgagee. Section 9.3. If requested by any Mortgagee or Landlord, Tenant shall promptly execute and deliver, at Tenant's own cost and expense, any document in accordance with the terms of this Article 9, in recordable form, to evidence such subordination. Section 9.4. At any time and from time to time upon not less than twenty (20) days' prior notice to Tenant or Landlord given by the other, or to Tenant given by a Mortgagee, Tenant or Landlord, as the case may be, shall, without charge, execute, acknowledge and deliver a statement in writing addressed to such party as Tenant, Landlord or Mortgagee, as the case may be, may designate, in form satisfactory to Tenant, Landlord or Mortgagee, -97- as the case may be, certifying all or any of the following: (i) that this Lease is unmodified and in full force and effect (or if there have been modifications, that this Lease is in full force and effect as modified and stating the modifications); (ii) whether the Term has commenced and Fixed Rent and Additional Rent have become payable hereunder and, if so, the dates to which they have been paid; (iii) whether or not, to the best knowledge of the signer of such certificate, Landlord is in default in performance of any of the terms of this Lease and, if so, specifying each such event of default of which the signer may have knowledge; (iv) whether Tenant has accepted possession of the Premises; (v) whether Tenant has made any claim against Landlord under this Lease and, if so, the nature thereof and the dollar amount, if any, of such claim; (vi) either that Tenant does not know of any default in the performance of any provision of this Lease or specifying the details of any default of which Tenant may have knowledge and stating what action Tenant is taking or proposes to take with respect thereto; (vii) that, to the knowledge of Tenant, there are no proceedings pending or threatened against Tenant before or by any court or administrative agency which, if adversely decided, would materially and adversely affect the financial condition or operations of Tenant or, if any such proceedings are pending or threatened to the knowledge of Tenant, specifying and describing the same; and (viii) such further information with respect to the Lease or the Premises as Landlord may reasonably request or Mortgagee may require; it being intended that any such statement delivered pursuant hereto may be relied upon by any prospective purchaser of the Real Property or any part thereof or of the interest of Landlord in any part thereof, by any Mortgagee or prospective Mortgagee, by any tenant or prospective tenant of the Real Property or any part thereof, or by any prospective assignee of any Mortgage or by any assignee of Tenant. The failure of either Tenant or Landlord to execute, acknowledge and deliver to the other a statement in accordance with the provisions of this Section 9.4 within said twenty (20) day period shall constitute an acknowledgment by Tenant or Landlord, as the case may be, which may be relied on by any person who would be entitled to rely upon any such statement, that such statement as submitted by Landlord or Tenant, as the case may be, is true and correct. Section 9.5. As long as any Mortgage exists, Tenant shall not seek to terminate this Lease by reason of any act or omission of Landlord until Tenant has given written notice of such act or omission to all Mortgagees at such addresses as may have been -98- furnished to Tenant by such Mortgagees and, if any such Mortgagee notifies Tenant within thirty (30) days following receipt of such notice that it intends to remedy such act or omission, Mortgagee shall have a reasonable period of time to remedy such act or omission. ARTICLE X RULES AND REGULATIONS Section 10.1. Tenant and Persons Within Tenant's Control shall comply with Exhibit "C," "Rules and Regulations." Nothing contained in this Lease shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations or the terms, covenants or conditions in any other lease against any other tenant, and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its employees, agents, visitors or licensees. Landlord shall not discriminate against Tenant in enforcing the Rules and Regulations. In case of any conflict or inconsistency between the provisions of this Lease and of any of the Rules and Regulations as originally or as hereinafter adopted, the provisions of this Lease shall control. ARTICLE XI INSURANCE, PROPERTY LOSS OR DAMAGE, REIMBURSEMENT Section 11.1. (a) Tenant shall not entrust any property to any Building employee. Any Building employee to whom any property is entrusted by or on behalf of Tenant in violation of the foregoing prohibition shall be deemed to be acting as Tenant's agent with respect to such property and neither Landlord nor its agents shall be liable for any damage to property of Tenant or of others entrusted to employees of the Building, nor for the loss of or damage to any property of Tenant by theft or otherwise. Landlord and Landlord's agents shall not be liable for any damage to any of Tenant's Property or for interruption of Tenant's business, however caused, including but not limited to damage caused by other tenants or persons in the Building. Landlord shall not be liable for any latent defect in the Premises or in the Building. (b) Tenant shall give notice to Landlord promptly after Tenant learns of any accident, emergency or occurrence for which Landlord might be liable, fire or other casualty and all damages to or defects in the Premises or the Building for the repair of -99- which Landlord might be responsible or which constitutes Landlord's property. Such notice shall be given by telecopy or personal delivery to the address(es) of Landlord in effect for notice. Section 11.2. Tenant shall not do or permit to be done any act or thing in or upon the Premises which will invalidate or be in conflict with the terms of the State of Tennessee standard policies of fire insurance and liability (hereinafter referred to as "Building Insurance"); and Tenant, at Tenant's own expense, shall comply with all rules, orders, regulations and requirements of all insurance boards, and shall not do or permit anything to be done in or upon the Premises or bring or keep anything therein or use the Premises in a manner which increases the rate of premium for any of the Building Insurance over the rate in effect at the commencement of the Term of this Lease. Section 11.3. If by reason of any failure of Tenant to comply with the provisions of this Lease, the rate of premium for Building Insurance or other insurance on the property and equipment of Landlord shall increase, Tenant shall reimburse Landlord for that part of the insurance premiums thereafter paid by Landlord which shall have been charged because of such failure by Tenant. Tenant shall make said reimbursement on the first day of the month following such payment by Landlord. Section 11.4. (a) At Tenant's own cost and expense, Tenant shall obtain, maintain and keep in full force and effect during the Term commercial general liability insurance (without deductible) in a form approved in the State of Tennessee (including broad form property damage coverages). The limits of liability shall be not less than Five Million Dollars ($5,000,000.00) per occurrence, which amount may be satisfied with a primary commercial general liability policy of not less than Two Million Dollars ($2,000,000.00) and an excess (or "Umbrella") liability policy affording coverage, at least as broad as that afforded by the primary commercial general liability policy, in an amount not less than Three Million Dollars ($3,000,000.00). Landlord, the Manager, any Lessors and any Mortgagees shall be included as additional insureds in said policies and shall be protected against all liability arising in connection with this Lease. All said policies of insurance shall be written as "occurrence" policies. Whenever, in Landlord's reasonable judgment, good business practice and changing conditions indicate a need for additional amounts or different types of insurance coverage, Tenant shall, within ten (10) days -100- after Landlord's request, obtain such insurance coverage, at Tenant's expense. (b) Tenant, at Tenant's sole cost and expense, shall maintain all-risk insurance, with deductibles in an amount reasonably satisfactory to Landlord, protecting and indemnifying Tenant against any and all damage to or loss of any Alterations and leasehold improvements, including any made by Landlord to prepare the Premises for Tenant's occupancy, and Tenant's Property. All said policies shall cover the full replacement value of all Alterations, leasehold improvements and Tenant's Property. (c) All policies of insurance shall be: (i) written as primary policy coverage and not contributing with or in excess of any coverage which Landlord or any Lessor may carry; and (ii) issued by reputable and independent insurance companies rated in Best's Insurance Guide or any successor thereto (or, if there is none, an organization having a national reputation), as having a general policyholder rating of "A" and a financial rating of at least "VII," and which are licensed to do business in the State of Tennessee. Tenant shall, not later than ten (10) Business Days prior to the Commencement Date, deliver to Landlord either (a) the policies of insurance or (b) certificates thereof with a copy of the declaration page, and shall thereafter furnish to Landlord, at least thirty (30) days prior to the expiration of any such policies and any renewal thereof, a new policy or certificate (with copy of the declaration page) in lieu thereof. Each of said policies shall also contain a provision whereby the insurer agrees not to cancel, fail to renew, diminish or materially modify said insurance policy(ies) without having given Landlord, the Manager and any Lessors and Mortgagees at least thirty (30) days prior written notice thereof. Tenant shall promptly send to Landlord a copy of all notices sent to Tenant by Tenant's insurer. (d) Tenant shall pay all premiums and charges for all of said policies, and, if Tenant shall fail to make any payment when due or carry any such policy, then after notice to Tenant, Landlord may, but shall not be obligated to, make such payment or carry such policy, and the amount paid by Landlord, with interest thereon (at the Applicable Rate), shall be repaid to Landlord by Tenant on demand, and all such amounts so repayable, together with such interest, shall be deemed to constitute Additional Rent hereunder. Payment by Landlord of any such premium, or the carrying by Landlord of any such policy, shall not be deemed to waive or release the default of Tenant with respect thereto. -101- Section 11.5. (a) Landlord shall cause each policy carried by Landlord insuring the Building against loss, damage or destruction by fire or other casualty, and Tenant shall cause each insurance policy carried by Tenant and insuring the Premises and Tenant's Alterations, leasehold improvements and Tenant's Property against loss, damage or destruction by fire or other casualty, to be written in a manner so as to provide that the insurance company waives all rights of recovery by way of subrogation against Landlord, Tenant and any tenant of space in the Building in connection with any loss or damage covered by any such policy. Neither party shall be liable to the other for the amount of such loss or damage which is in excess of the applicable deductible, if any, caused by fire or any of the risks enumerated in its policies. (b) The waiver of subrogation referred to in Section 11.5(a) above shall extend to the agents and employees of each party (including, as to Landlord, the Manager). Nothing contained in this Section 11.5 shall be deemed to relieve either party from any duty imposed elsewhere in this Lease to repair, restore and rebuild. (c) During the Term, Landlord agrees to maintain: (i) "all risk" full replacement cost property insurance on the Building in an amount sufficient to prevent Landlord from being deemed a coinsurer of the risks insured under the policy, which shall include customary rent loss insurance covering loss of rents from Tenant under this Lease and other tenants under other leases and which shall include, as and to the extent customarily included by prudent owners of comparable first class office buildings in Memphis, Tennessee, boiler and machinery and electrical apparatus coverage; (ii) commercial general liability insurance (which may be a combination of primary and umbrella coverages) in an amount which Landlord deems appropriate; and (iii) Landlord shall furnish to Tenant certificates or other evidence of insurance from the insurer, or, if not available from the insurer, then from the insurance agent, evidencing such coverage at the time this Lease is executed and, at Tenant's request, within thirty (30) days after any policy is renewed, replaced or changed. -102- ARTICLE XII DESTRUCTION BY FIRE OR OTHER CAUSE Section 12.1. If the Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord. Landlord shall, subject to the provisions of Sections 12.2 and 12.3 below, proceed with reasonable diligence within 120 days of the casualty to repair or cause to be repaired such damage at its expense; and, if the Premises, or any part thereof, shall be rendered untenantable by reason of such damage and such damage shall not be due to the fault of Tenant or Persons Within Tenant's Control, then the Fixed Rent and the Escalation Rent hereunder, or an amount thereof apportioned on a pro rata basis according to the area of the Premises so rendered untenantable (if less than the entire Premises shall be so rendered untenantable), shall be abated for the period from the date of such damage to the date when the repair of such damage shall have been substantially completed. Tenant covenants and agrees to cooperate with Landlord and any Lessor or any Mortgagee in their efforts to collect insurance proceeds (including rent insurance proceeds) payable to such parties. Landlord shall not be liable for any delay which may arise by reason of adjustment of insurance on the part of Landlord and/or Tenant, or any cause beyond the control of Landlord or contractors employed by Landlord. Section 12.2. Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from damage from fire or other casualty or the repair thereof. Tenant understands that Landlord, in reliance upon Section 12.4, will not carry insurance of any kind on Tenant's Property, Tenant's Alterations and on leasehold improvements, and that Landlord shall not be obligated to repair any damage thereto or replace the same. (a) Notwithstanding anything to the contrary contained in Sections 12.1 and 12.2 above, in the event that: (i) at least twenty-five thousand (25,000) rentable square feet of the Building shall be damaged by a fire or other casualty so that substantial alteration or reconstruction of the Building shall, in Landlord's sole opinion, be required (whether or not the Premises shall have been damaged by such fire or other casualty and without regard to the structural integrity of the Building); or -103- (ii) the Premises shall be totally or substantially damaged or shall be rendered wholly or substantially untenantable; or (iii) there shall be any damage to the Premises within the last two (2) years of the Term wherein the cost of repair exceeds an amount equal to three (3) monthly installments of Fixed Rent, then either Landlord or Tenant may terminate this Lease and the term and estate hereby granted, by notifying the other party in writing of such termination prior to commencement of work to repair the damage to the Premises or within one hundred twenty (120) days after the date of such damage, whichever first occurs. In the event that such a notice of termination shall be given, then this Lease and the Term and estate hereby granted shall expire as of the date of termination stated in said notice with the same effect as if that were the Fixed Expiration Date, and the Fixed Rent and Escalation Rent hereunder shall be apportioned as of such date. (b) Notwithstanding anything to the contrary contained in this Section 12.2, upon written request which is made by Tenant prior to commencement of work to repair the damage to the Premises, Landlord shall deliver to Tenant an estimate prepared by a reputable contractor selected by Landlord setting forth such contractor's estimate as to the time reasonably required to repair such damage. If the period to repair set forth in any such estimate exceeds nine (9) months, Tenant may elect to terminate this Lease by notice to Landlord given not later than thirty (30) days following Tenant's receipt of such estimate. If Tenant exercises such election, this Lease and the term and estate hereby granted shall expire as of the sixtieth (60th) day after notice of such election given by Tenant with the same effect as if that were the Fixed Expiration Date, and the Fixed Rent and Escalation Rent hereunder shall be apportioned as of such date. Section 12.3. Except as may be provided in Section 11.5, nothing herein contained shall relieve Tenant from any liability to Landlord or to Landlord's insurers in connection with any damage to the Premises or the Building by fire or other casualty if Tenant shall be legally liable in such respect. -104- Section 12.4. This Lease shall be considered an express agreement governing any case of damage to or destruction of the Building or any part thereof by fire or other casualty. ARTICLE XIII EMINENT DOMAIN Section 13.1. If the whole of the Real Property, the Building or the Premises is acquired or condemned for any public or quasi-public use or purpose, this Lease and the Term shall end as of the date of the vesting of title with the same effect as if said date were the Fixed Expiration Date. If only a part of the Real Property and not the entire Premises is so acquired or condemned then, (a) except as hereinafter provided in this Section 13.1, this Lease and the Term shall continue in effect but, if a part of the Premises is included in the part of the Real Property so acquired or condemned, from and after the date of the vesting of title, the Fixed Rent and Tenant's Share shall be reduced in the proportion which the area of the part of the Premises so acquired or condemned bears to the total area of the Premises immediately prior to such acquisition or condemnation; (b) whether or not the Premises are affected thereby, Landlord, at Landlord's option, may give to Tenant, within sixty (60) days next following the date upon which Landlord receives notice of vesting of title, a thirty (30) day notice of termination of this Lease; and (c) if the part of the Real Property so acquired or condemned contains more than thirty percent (30%) of the total area of the Premises immediately prior to such acquisition or condemnation, or if, by reason of such acquisition or condemnation, Tenant no longer has access to the Premises, Tenant, at Tenant's option, may give to Landlord, within sixty (60) days next following the date upon which Tenant receives notice of vesting of title, a thirty (30) day notice of termination of this Lease. If any such thirty (30) day notice of termination is given, by Landlord or Tenant, this Lease and the Term shall come to an end and expire upon the expiration of said thirty (30) days with the same effect as if the date of expiration of said thirty (30) days were the Fixed Expiration Date. If a part of the Premises is so acquired or condemned and this Lease and the Term are not terminated pursuant to the foregoing provisions of this Section 13.1, Landlord, at Landlord's cost and expense, shall restore that part of the Premises not so acquired or condemned to a self-contained rental unit, exclusive of Tenant's Alterations and Tenant's Property. In the event of any termination of this Lease and the Term pursuant to the provisions of this Section 13.1, the Fixed Rent -105- shall be apportioned as of the date of the termination and any prepaid portion of the Fixed Rent or Escalation Rent for any period after such date shall be refunded by Landlord to Tenant. Section 13.2. In the event of any such acquisition or condemnation of all or any part of the Real Property, Landlord shall be entitled to receive the entire award for any such acquisition or condemnation. Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired portion of the Term and Tenant hereby expressly assigns to Landlord all of its right in and to any such award. Nothing contained in this Section 13.2 shall be deemed to prevent Tenant from making a separate claim in any condemnation proceedings for the value of any Tenant's Property included in such taking, and for any moving expenses, so long as Landlord's award is not reduced thereby. ARTICLE XIV ASSIGNMENT, SUBLETTING, MORTGAGE, ETC. Section 14.1 Except as otherwise provided in this Article 14, Tenant shall not (a) assign this Lease (whether by operation of law, transfers of interests in Tenant or otherwise); or (b) mortgage or encumber Tenant's interest in this Lease, in whole or in part; or (c) sublet, or permit the subletting of, the Premises or any part thereof. Tenant shall not advertise or authorize a broker to advertise for a subtenant or assignee, without in each instance, obtaining the prior written consent of Landlord, which shall not be unreasonably withheld or delayed. Section 14.2 If Tenant's interest in this Lease shall be assigned in violation of the provisions of this Article 14, such assignment shall be invalid and of no force and effect against Landlord; provided, however, that Landlord may collect an amount equal to the then Fixed Rent plus any other item of Rental from the assignee as a fee for its use and occupancy. If the Premises or any part thereof are sublet to, or occupied by, or used by, any person other than Tenant, whether or not in violation of this Article 14, Landlord, after default by Tenant under this Lease, may collect any item of Rental or other sums paid by the subtenant, user or occupant as a fee for its use and occupancy, and shall apply the net amount collected to the Fixed Rent and the items of Rental reserved in this Lease. No such assignment, subletting, occupancy, or use, whether with or without Landlord's prior consent, nor any such collection or application of Rental or fee for use and occupancy, shall be deemed a waiver by -106- Landlord of any term, covenant or condition of this Lease or the acceptance by Landlord of such assignee, subtenant, occupant or user as Tenant hereunder, nor shall the same, in any circumstances, relieve Tenant of any of its obligations under this Lease. The consent by Landlord to any assignment, subletting, occupancy or use shall not relieve Tenant from its obligation to obtain the express prior consent of Landlord to any further assignment, subletting, occupancy or use. Any person to which this Lease is assigned with Landlord's consent shall be deemed without more to have assumed all of the obligations arising under this Lease from and after the date of such assignment and shall execute and deliver to Landlord, upon demand, an instrument confirming such assumption. Notwithstanding and subsequent to any assignment, Tenant's primary liability hereunder shall continue notwithstanding (a) any subsequent amendment hereof, or (b) Landlord's forbearance in enforcing against Tenant any obligation or liability, without notice to Tenant, to each of which Tenant hereby consents in advance. If any such amendment operates to increase the obligations of Tenant under this Lease, the liability under this Section 14.2 of the assigning Tenant shall continue to be no greater than if such amendment had not been made (unless such party shall have expressly consented in writing to such amendment). (a) For purposes of this Article 14, (i) the transfer of a majority of the issued and outstanding capital stock of any corporate tenant, or of a corporate subtenant, or the transfer of a majority of the total interest in any partnership tenant or subtenant, or the transfer of control in any limited partnership tenant or subtenant, or the transfer of control in any limited liability company tenant or subtenant or the transfer of control in any limited liability partnership tenant or subtenant, however accomplished, whether in a single transaction or in a series of related or unrelated transactions, shall be deemed an assignment of this Lease, or of such sublease, as the case may be, except that the transfer of the outstanding capital stock of any corporate tenant, or subtenant, shall be deemed not to include the sale of such stock by persons or parties, other than those deemed "affiliates" of Tenant within the meaning of Rule 144 promulgated under the Securities Act of 1933, as amended, through the "over-the-counter market" or through any recognized stock exchange, (ii) any increase in the amount of issued and/or outstanding capital stock of any corporate tenant, or of a corporate subtenant, and/or the creation of one or more additional classes of capital stock of any corporate tenant or any corporate subtenant, in a single transaction or a series of -107- related or unrelated transactions, resulting in a change in the legal or beneficial ownership of such tenant or subtenant so that the shareholders of such tenant or subtenant existing immediately prior to such transaction or series of transactions shall no longer own a majority of the issued and outstanding capital stock of such tenant or subtenant, shall be deemed an assignments of this Lease, (iii) an agreement by any other person or entity, directly or indirectly, to assume Tenant's obligations under this Lease shall be deemed an assignment, (iv) any person or legal representative of Tenant, to whom Tenant's interest under this lease passes by operation of law, or otherwise, shall be bound by the provisions of this Article 14, and (v) a modification, amendment or extension of a sublease shall be deemed a sublease. Tenant agrees to furnish to Landlord on request at any time such information and assurances as Landlord may reasonably request that neither Tenant, nor any previously permitted subtenant, has violated the provisions of this Article 14. (b) The provisions of clauses (a), (c) and (d) of Section 14.1 shall not apply to transactions with a corporation into or with which Tenant is merged or consolidated or with a Person to which substantially all of Tenant's assets are transferred (provided such merger or transfer of assets is for a good business purpose and not principally for the purpose of transferring the leasehold estate created by this Lease, and provided further, that the assignee has a net worth at least equal to or in excess of the net worth of Tenant as of the date of this Lease and as of the date immediately prior to such merger or transfer, whichever is greater) or, if Tenant is a partnership, with a successor partnership, nor shall the provisions of clause (a), (c) and (d) of Section 14.1 apply to transactions with an entity that controls or is controlled by Tenant or is under common control with Tenant. Tenant shall notify Landlord before any such transaction is consummated. (c) The term "control" as used in this Lease (i) in the case of a corporation shall mean ownership of more than fifty percent (50%) of the outstanding capital stock of that corporation, (ii) in the case of a general partnership, shall mean more than fifty percent (50%) of the general partnership interest of the partnership, (iii) in the case of a limited partnership, shall mean more than fifty percent (50%) of the general and limited partnership interests of such limited partnership; (iv) in the case of a limited liability company, shall mean more than fifty percent (50%) of the membership interests of such limited liability company, and (v) in the case of a limited liability partnership, shall mean more than fifty -108- percent (50%) of the partnership interest of such limited liability partnership. Section 14.3. [RESERVED] Section 14.4. (a) If Tenant sublets any portion of the Premises to a Person in a transaction for which Landlord's consent is required, Landlord shall be entitled to and Tenant shall pay to Landlord, as Additional Rent (the "Sublease Additional Rent"), a sum equal to fifty percent (50%) of any rents, additional charges and other consideration payable under the sublease to Tenant by the subtenant in excess of the Fixed Rent and Escalation Rent accruing during the term of the sublease in respect of the subleased space (at the rate per square foot payable by Tenant under this Lease) pursuant to the terms of this Lease (including, but not limited to, sums paid for the sale or rental of Tenant's Property and Alterations less the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's federal income tax or federal information returns), net of any reasonable brokerage commissions incurred in connection therewith; provided, however, that no reduction shall be allowed if brokerage commissions are paid to any Person under Tenant's control. Such Sublease Additional Rent shall be payable as and when received by Tenant. (b) Landlord may, by notice to Tenant, elect to waive the benefits of this Section 14.4, for any month or months, prospectively or retroactively. Any retroactive waiver shall be accompanied by a return to Tenant of all Sublease Additional Rent theretofore paid to and retroactively waived by Landlord for the months in question. Section 14.5. (a) If Tenant shall assign this Lease to a Person in a transaction for which Landlord's consent is required, Landlord shall be entitled to and Tenant shall pay to Landlord, as Additional Rent, an amount equal to all sums and other consideration paid to Tenant by the assignee for or by reason of such assignment (including, but not limited to, sums paid for the sale or rental of Tenant's Property and Alterations less the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's federal income tax or federal information returns). Such Additional Rent shall be payable as and when received by Tenant from the assignee. (b) Landlord may, by notice to Tenant, elect to waive the benefits of this Section 14.5, prospectively or retrospectively. Any retroactive waiver shall be accompanied by a return to -109- Tenant of all amounts theretofore paid to and retroactively waived by Landlord. Section 14.6. Landlord shall have no liability for brokerage commissions incurred with respect to any assignment of this Lease or any subletting of all or any part of the Premises by or on behalf of Tenant. Tenant shall pay, and shall indemnify and hold Landlord harmless from and against, any and all cost, expense (including reasonable attorneys' fees and disbursements) and liability in connection with any compensation, commissions or charges claimed by any broker or agent with respect to any such assignment or subletting. ARTICLE XV ACCESS TO PREMISES Section 15.1. (a) Tenant shall permit Landlord, Landlord's agents and independent contractors and public utilities servicing the Building to have reasonable access for the purpose of maintaining existing concealed ducts, pipes and conduits in and through and to access all Common Areas within the Building and all Common Areas comprising a portion of the Land. Landlord or Landlord's agents shall have the right to enter the Premises at all reasonable times upon (except in case of emergency) reasonable prior notice, which notice may be oral, to examine the same, to show the same to prospective purchasers, Mortgagees or lessees of the Building or space therein, and to make such repairs, alterations, improvements or additions (i) as Landlord may deem necessary or desirable to the Premises or to any other portion of the Building, or (ii) which Landlord may elect to perform at least ten (10) days after notice (except in an emergency when no notice shall be required) following Tenant's failure to make repairs or perform any work which Tenant is obligated to make or perform under this Lease, or (iii) for the purpose of complying with Requirements, and Landlord shall be allowed to take all material into and upon the Premises that may be required therefor without the same constituting an eviction or constructive eviction of Tenant in whole or in part and the Fixed Rent (and any other item of Rental) shall in no respect abate or be reduced by reason of said repairs, alterations, improvements or additions, wherever located, or while the same are being made, by reason of loss or interruption of business of Tenant, or otherwise. Landlord shall promptly repair any damage caused to the Premises by such work, alterations, improvements or additions. Tenant shall, at Tenant's cost, take such action as may be reasonably necessary to grant to Landlord, its agents and -110- independent contractors clearance and access by means of the Security System for the purposes herein set out. (b) Any work performed or installations made pursuant to this Article 15 shall be made with reasonable diligence and otherwise pursuant to Section 6.3. (c) Any pipes, ducts, or conduits installed in or through the Premises pursuant to this Article 15 shall, if reasonably practicable, either be concealed behind, beneath or within partitioning, columns, ceilings or floors located or to be located in the Premises, or completely furred at points immediately adjacent to partitioning, columns or ceilings located or to be located in the Premises. Section 15.2. If Tenant is not present when for any reason entry into the Premises may be necessary or permissible, Landlord or Landlord's agents may enter the same without rendering Landlord or such agents liable therefor (if during such entry Landlord or Landlord's agents accord reasonable care to Tenant's Property), and without in any manner affecting this Lease. Section 15.3. All parts (except surfaces facing the interior of the Premises) of all walls, windows and doors bounding the Premises (including exterior Building walls, exterior core corridor walls, exterior doors and entrances), all balconies, terraces and roofs adjacent to the Premises, all space in or adjacent to the Premises used for shafts, stacks, stairways, chutes, pipes, conduits, ducts, fan rooms, heating, air cooling, plumbing and other mechanical facilities, service closets and other Building facilities are not part of the Premises, and Landlord shall have the use thereof, as well as access thereto through the Premises for the purposes of operation, maintenance, alteration and repair. ARTICLE XVI CERTIFICATE OF OCCUPANCY Section 16.1. Tenant shall not at any time use or occupy the Premises in violation of the certificate of occupancy at such time issued for the Premises or for the Building and in the event that any Governmental Authority hereafter contends or declares by notice, violation, order or in any other manner whatsoever that the Premises are used by Tenant for a purpose that is a violation of such certificate of occupancy, Tenant shall, upon three (3) Business Days' written notice from Landlord or any Government -111- Authority, immediately discontinue such use of the Premises; provided, however, that nothing herein shall prevent Tenant from contesting such violation pursuant to and in accordance with the provisions of Section 8.5. ARTICLE XVII DEFAULT Section 17.1. Each of the following events shall be an "Event of Default" under this Lease: (a) if Tenant shall on any occasion default in the payment when due of any installment of Fixed Rent or in the payment when due of any other item of Rental and the same shall not be cured within five (5) days after written notice of default by Landlord to Tenant; or (b) if Tenant shall fail on three (3) or more occasions in any period of eighteen (18) consecutive months to make a payment when due of any Rental, and Landlord shall have given Tenant written notice of such default after two (2) such occurrences; or (c) if Tenant shall default in the observance or performance of any term, covenant or condition on Tenant's part to be observed or performed under that certain Agreement of Lease of even date herewith between Landlord and Tenant with respect to Building No. 2, or any renewal, modification or extension thereof, and such default shall continue beyond any grace period set forth in such other lease for the remedying of such default; or (d) if the Premises shall become vacant or abandoned; or (e) if Tenant's interest in this Lease shall devolve upon or pass to any person, whether by operation of law or otherwise, except as expressly permitted under Article 14 hereof; or (f) (1) if Tenant shall not, or shall be unable to, or shall admit in writing Tenant's inability to, as to any obligation, pay Tenant's debts as they become due; or -112- (2) if Tenant shall commence or institute any case, proceeding or other action (a) seeking relief on Tenant's behalf as debtor, or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to Tenant or Tenant's debts under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, or (b) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property; or (3) if Tenant shall make a general assignment for the benefit of creditors; or (4) if any case, proceeding or other action shall be commenced or instituted against Tenant (a) seeking to have an order for relief entered against Tenant as debtor or to adjudicate Tenant a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to Tenant or Tenant's debts under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, or (b) seeking appointment of a receiver, trustee, custodian or other similar official for Tenant or for all or any substantial part of Tenant's property, which either (i) results in any such entry of an order for relief, adjudication of bankruptcy or insolvency or such an appointment or the issuance or entry of any other order having a similar effect or (ii) remains undismissed for a period of sixty (60) days; or (5) if a trustee, receiver or other custodian shall be appointed for any substantial part of the assets of Tenant which appointment is not vacated or effectively stayed within sixty (60) days; or (g) if Tenant shall default in the observance or performance of any other term, covenant or condition of this Lease on Tenant's part to be observed or performed and Tenant shall fail to remedy such default within fifteen (15) days after notice by Landlord to Tenant of such default, or if such default is of such a nature that it cannot with due -113- diligence be completely remedied within said period of fifteen (15) days and the continuation of which for the period required for cure will not subject Landlord to the risk of criminal liability or foreclosure of any Mortgage, if Tenant shall not, (i) within said fifteen (15) day period advise Landlord of Tenant's intention duly to institute all steps necessary to remedy such situation, (ii) duly institute within said fifteen (15) day period, and thereafter diligently and continuously prosecute to completion all steps necessary to remedy the same and (iii) complete such remedy within such time after the date of the giving of said notice by Landlord as shall reasonably be necessary. Section 17.2. If an Event of Default shall occur, Landlord may, at any time thereafter, at Landlord's option, give written notice to Tenant stating that this Lease and the Term shall expire and terminate on the date specified in such notice, which date shall not be less than three (3) days after Tenant's receipt of such notice, or such longer term as specified in the notice, whereupon this Lease and the Term and all rights of Tenant under this Lease shall automatically expire and terminate as if the date specified in the notice given pursuant to this Section 17.2 were the Fixed Expiration Date and Tenant immediately shall quit and surrender the Premises, but Tenant shall remain liable for damages as provided herein or pursuant to law. Anything contained herein to the contrary notwithstanding, if such termination shall be stayed by order of any court having jurisdiction over any proceeding described in Section 17.1(f), or by federal or state statute, then, following the expiration of any such stay, or if the trustee appointed in any such proceeding, Tenant or Tenant as debtor-in-possession fails to assume Tenant's obligations under this Lease within the period prescribed therefor by law or within one hundred twenty (120) days after entry of the order for relief or as may be allowed by the court, or if said trustee, Tenant or Tenant as debtor-in-possession shall fail to provide adequate protection of Landlord's right, title and interest in and to the Premises or adequate assurance of the complete and continuous future performance of Tenant's obligations under this Lease, Landlord, to the extent permitted by law or by leave of the court having jurisdiction over such proceeding, shall have the right, at its election, to terminate this Lease on three (3) days' prior written notice to Tenant, Tenant as debtor-in possession or said trustee and upon the expiration of said three (3) day period this Lease shall cease and expire as aforesaid and Tenant, Tenant as -114- debtor-in-possession or said trustee shall immediately quit and surrender the Premises as aforesaid. Section 17.3. If, at any time, (i) Tenant shall consist of two (2) or more persons, or (ii) Tenant's obligations under this Lease shall have been guaranteed by any person other than Tenant, or (iii) Tenant's interest in this Lease has been assigned, the word "Tenant" as used in Section 17.1(f), shall be deemed to mean any one or more of the persons primarily or secondarily liable for Tenant's obligations under this Lease. Any monies received by Landlord from or on behalf of Tenant during the pendency of any proceeding of the types referred to in Section 17.1(f) shall be deemed paid as compensation for the use and occupancy of the Premises and the acceptance of any such compensation by Landlord shall not be deemed an acceptance of Rental or a waiver on the part of Landlord of any rights under Section 17.2. ARTICLE XVIII REMEDIES AND DAMAGES Section 18.1. (a) If any Event of Default shall occur, or this Lease and the Term shall expire and come to an end as provided in Article 17: 6. Tenant shall quit and peacefully surrender the Premises to Landlord, and Landlord and its agents may immediately, or at any time after such Event of Default or after the date upon which this Lease and the Term shall expire and come to an end, re-enter the Premises or any part thereof, without notice, either by summary proceedings, or by any other applicable action or proceeding or otherwise (without being liable to indictment, prosecution or damages therefor), but excluding by force, and may repossess the Premises and dispossess Tenant and any other persons from the Premises by summary proceedings or otherwise (excluding by force) and remove any and all of their property and effects from the Premises (and Tenant shall remain liable for damages as provided herein or pursuant to law); and 7. Landlord, at Landlord's option, may relet the whole or any part or parts of the Premises from time to time, either in the name of Landlord or otherwise, to such tenant or tenants, for such term or terms ending before, on or after the Fixed Expiration Date, at such rent or rentals and upon such other conditions, which may include concessions and free rent periods, as Landlord, in Landlord's sole discretion, may determine; provided, -115- however, that Landlord shall have no obligation to relet the Premises or any part thereof and shall in no event be liable for refusal or failure to relet the Premises or any part thereof, or, in the event of any such reletting, for refusal or failure to collect any rent due upon any such reletting, and no such refusal or failure shall operate to relieve Tenant of any liability under this Lease or otherwise affect any such liability, and Landlord, at Landlord's option, may make such Alterations, in and to the Premises as Landlord, in Landlord's sole discretion, shall consider advisable or necessary in connection with any such reletting or proposed reletting, without relieving Tenant of any liability under this Lease or otherwise affecting any such liability. (b) Tenant hereby waives the service of any notice of intention to re-enter that may otherwise be required to be given under any present or future law. Tenant, on its own behalf and on behalf of all persons claiming through or under Tenant, including all creditors, does further hereby waive any and all rights that Tenant and all such persons might otherwise have under any present or future law to redeem the Premises, or to re-enter or repossess the Premises, or to restore the operation of this Lease, after (1) Tenant shall have been dispossessed by a judgment or by warrant of any court or judge, or (2) any reentry by Landlord, or (3) any expiration or termination of this Lease and the Term, whether such dispossess, re-entry, expiration or termination is by operation of law or pursuant to the provisions of this Lease. The words "re-entry," "re-enter" and "re-entered" as used in this Lease shall not be deemed to be restricted to their technical legal meanings. In the event of a breach or threatened breach by Tenant, or any persons claiming through or under Tenant, of any term, covenant or condition of this Lease, Landlord shall have the right to enjoin such breach and the right to invoke any other remedy allowed by law or in equity as if reentry, summary proceedings and other special remedies were not provided in this Lease for such breach. The right to invoke the remedies hereinbefore set forth are cumulative and shall not preclude Landlord from invoking any other remedy allowed at law or in equity. Section 18.2. (a) If this Lease and the Term shall expire and come to an end as provided in Article 18, or by or under any summary proceeding or any other action or proceeding, or if Landlord shall re-enter the Premises as provided in Section 18.1, -116- or by or under any summary proceeding or any other action or proceeding, then, in any of said events: 1. Tenant shall pay to Landlord all Fixed Rent, Escalation Rent, other Additional Rent and other items of Rental payable under this Lease by Tenant to Landlord to the date upon which this Lease and the Term shall have expired and come to an end or to the date of re-entry upon the Premises by Landlord, as the case may be; 2. Tenant also shall be liable for and shall pay to Landlord, as damages, any deficiency ("Deficiency") between the Rental for the period which otherwise would have constituted the unexpired portion of the Term and the net amount, if any, of rents collected under any reletting effected pursuant to the provisions of Section 18.1(a)(2) for any part of such period (after first deducting from the rents collected under any such reletting all of Landlord's expenses in connection with the termination of this Lease, Landlord's reentry upon the Premises and such reletting including, but not limited to, all repossession costs, brokerage commissions, attorneys' fees and disbursements, alteration costs and other expenses of preparing the Premises for such reletting); any such Deficiency shall be paid in monthly installments by Tenant on the days specified in this Lease for payment of installments of Fixed Rent; Landlord shall be entitled to recover from Tenant each monthly Deficiency as the same shall arise, and no suit to collect the amount of the Deficiency for any month shall prejudice Landlord's right to collect the Deficiency for any subsequent month by a similar proceeding; and 3. whether or not Landlord shall have collected any monthly Deficiency as aforesaid, Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord, on demand, in lieu of any further Deficiency as and for liquidated and agreed final damages, a sum equal to the amount by which the unpaid Rental for the period which otherwise would have constituted the unexpired portion of the Term exceeds the then fair and reasonable rental value of the Premises for the same period, both discounted to present worth at the Base Rate; if, before presentation of proof of such liquidated damages to any court, commission or tribunal, the Premises, or any part thereof, are relet by Landlord for the period which otherwise would have constituted the unexpired portion of the Term, or any part thereof, the amount of rent reserved upon such reletting -117- shall be deemed, prima facie, to be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting. (b) Tenant shall in no event be entitled to any rents collected or payable under any reletting, whether or not such rents exceed the Fixed Rent reserved in this Lease. Solely for the purposes of this Article 18, the term "Escalation Rent" as used in Section 18.2(a) shall mean the Escalation Rent in effect immediately prior to the Expiration Date, or the date of re-entry upon the Premises by Landlord, as the case may be, adjusted to reflect any increase pursuant to the provisions of Article 3 hereof for the Operating Year immediately preceding such event. Nothing contained in Article 17 or this Article 18 shall be deemed to limit or preclude the recovery by Landlord from Tenant of the maximum amount allowed to be obtained as damages by any statute or rule of law, or of any sums or damages to which Landlord may be entitled in addition to the damages set forth in this Section 18.2. ARTICLE XIX FEES AND EXPENSES Section 19.1. If an Event of Default shall have occurred, Landlord may (a) perform the obligations of Tenant for the account of Tenant, or (b) make any expenditure or incur any obligation for the payment of money in connection with any obligation owed by Tenant to Landlord, including, but not limited to, reasonable attorneys' fees and disbursements in instituting, prosecuting or defending any action or proceeding arising out of such Event of Default, and in either case the cost thereof, with interest thereon at the Applicable Rate, shall be deemed to be Additional Rent hereunder and shall be paid by Tenant to Landlord within ten (10) days after rendition of any bill or statement to Tenant therefor. Section 19.2. If Tenant shall fail to pay any installment of Fixed Rent, Additional Rent or any other item of Rental for a period longer than five (5) days after the same shall have become due, Tenant shall pay to Landlord, in addition to such installment of Fixed Rent, Additional Rent or other item of Rental, as the case may be, as a late charge and as Additional Rent, a sum equal to interest at the Applicable Rate on the amount unpaid, computed from the date such payment was due, without regard to any such grace period, to and including the date of payment. -118- ARTICLE XX NO REPRESENTATIONS BY LANDLORD Section 20.1. Landlord and Landlord's agents have made no representations or promises with respect to the Building, the Real Property or the Premises except as herein expressly set forth, and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth herein. Tenant shall accept possession of the Premises in its "AS IS" condition on the Commencement Date, and Landlord shall have no obligation to perform any work or make any installations in order to prepare the Premises for Tenant's occupancy. The taking of occupancy of the whole or any part of the Premises by Tenant shall be conclusive evidence, as against Tenant, that Tenant accepts possession of the same and that the Premises and the Building were in good and satisfactory condition at the time such occupancy was so taken. All references in this Lease to the consent or approval of Landlord shall be deemed to mean the written consent or approval executed by Landlord and no other consent or approval of Landlord shall be effective for any purpose whatsoever. ARTICLE XXI END OF TERM Section 21.1. Upon the expiration or other termination of this Lease, Tenant shall quit and surrender to Landlord the Premises, vacant, broom clean, in good order and condition, ordinary wear and tear excepted, and Tenant shall remove all of Tenant's Alterations as may be required pursuant to Article 5. Tenant shall also remove all of Tenant's Property and all other personal property and personal effects of all persons claiming through or under Tenant, and shall pay the cost of repairing all damage to the Premises and the Real Property occasioned by such removal. Any Tenant's Property or other personal property that remains in the Premises after the termination of this Lease shall be deemed to have been abandoned and either may be retained by Landlord as its property or may be disposed of in such manner as Landlord may see fit. If such Tenant's Property or other personal property or any part thereof is sold, Landlord may receive and retain the proceeds of such sale as the property of Landlord. Any expense incurred by Landlord in removing or disposing of such Tenant's Property or other personal property or Alterations required to be removed as provided in Article 5, as -119- well as the cost of repairing all damage to the Building or the Premises caused by such removal, shall be reimbursed to Landlord by Tenant, as Additional Rent, on demand. Section 21.2. If the Expiration Date falls on a day which is not a Business Day, then Tenant's obligations under Section 21.1 shall be performed on or prior to the immediately preceding Business Day. Section 21.3. If the Premises are not surrendered upon the expiration or other termination of this Lease, Tenant hereby indemnifies Landlord against liability resulting from delay by Tenant in so surrendering the Premises, including any claims made by any succeeding tenant or prospective tenant founded upon such delay and agrees to be liable to Landlord for (i) any payment or rent concession which Landlord may be required to make to any tenant obtained by Landlord for all or any part of the Premises in order to induce such tenant not to terminate its lease by reason of the holding-over by Tenant and (ii) the loss of the benefit of the bargain if any such tenant shall terminate its lease by reason of the holding-over by Tenant. Section 21.4. Tenant's obligation under this Article shall survive the expiration or termination of this Lease for a period ending six (6) months after the end of the calendar year in which the Expiration Date falls. ARTICLE XXII POSSESSION Section 22.1. Tenant acknowledges that it is in possession of the Premises as of the Commencement Date (Tenant being the prior owner of the Real Property and Building) and that no further act on Landlord's part is required as a condition to commencement of the Term of this Lease. ARTICLE XXIII NO WAIVER Section 23.1 No act or thing done by Landlord or Landlord's agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid unless in writing signed by Landlord. Only an executive officer of Landlord shall have the power to -120- accept surrender of the Premises prior to the termination of this Lease. Section 23.2. The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease, or any of the Rules and Regulations, shall not prevent a subsequent act, which would have originally constituted a violation, from having all of the force and effect of an original violation. The receipt by Landlord of Fixed Rent, Additional Rent or any other item of Rental with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. The failure of Landlord to enforce any of the Rules and Regulations against Tenant or any other tenant of the Real Property or the Adjacent Property shall not be deemed a waiver of any such Rules and Regulations. No provision of this Lease shall be deemed to have been waived by Landlord, unless such waiver shall be in writing and shall be signed by Landlord. No payment by Tenant or receipt by Landlord of a lesser amount than the Rental then due and payable shall be deemed to be other than on account of the earliest item(s) of Rental, or as Landlord may elect to apply the same, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance due of the Rental or pursue any other remedy in this Lease provided. This Lease contains the entire agreement between the parties and all prior negotiations and agreements are merged herein. Any executory agreement hereafter made shall be ineffective to change, discharge or effect an abandonment of this Lease in whole or in part unless such executory agreement is in writing and signed by the party against whom enforcement of the change, discharge or abandonment is sought. ARTICLE XXIV WAIVER OF TRIAL BY JURY Section 24.1. LANDLORD AND TENANT SHALL AND THEY HEREBY DO WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THEM AGAINST THE OTHER ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, WHETHER DURING OR AFTER THE TERM, OR FOR THE ENFORCEMENT OF ANY REMEDY UNDER ANY STATUTE, EMERGENCY OR OTHERWISE. -121- ARTICLE XXV INABILITY TO PERFORM Section 25.1. This Lease and the obligation of Tenant to pay Rental hereunder and to perform all of the other covenants and agreements hereunder on the part of Tenant to be performed shall in no way be affected, impaired or excused because Landlord is unable to fulfill any of Landlord's obligations under this Lease, expressly or implicitly to be performed by Landlord, or because Landlord is unable to make or is delayed in making any repairs, additions, alterations, improvements or decorations, or is unable to supply or is delayed in supplying any services, equipment or fixtures, if Landlord is prevented from or delayed in so doing by reason of acts of God, casualty, strikes or labor troubles, accident, governmental preemption in connection with an emergency, Requirements, Restrictive Covenants, conditions of supply and demand which have been or are affected by war or other emergency, or any other cause whatsoever, whether similar or dissimilar to the foregoing, beyond Landlord's reasonable control ("Unavoidable Delays"). Section 25.2 Notwithstanding anything to the contrary set forth in this Lease, Landlord shall not be liable for any cessation and/or interruption of services to the Premises caused by failure of any Building Systems or other computerized functions affecting use or occupancy of the Premises to be able to perform properly datesensitive functions for dates leading up to or following January 1, 2000 (that is, to be Year 2000 compliant), nor shall any such failure constitute an eviction or constructive eviction or give rise to abatement of Rental. ARTICLE XXVI BILLS AND NOTICES Section 26.1. (a) Except as otherwise expressly provided in this Lease, any bills, statements, consents, notices, demands, requests or other communications given or required to be given under this Lease ("Notice(s)") shall be in writing and shall be deemed sufficiently given or rendered if delivered by hand, or if sent by a nationally-recognized overnight courier service, delivery cost prepaid, marked for next-day delivery, or if deposited in a postage prepaid envelope in a depository that is regularly maintained by the U.S. Postal Service, sent by registered or certified mail (return receipt requested) and in either case addressed: -122- (i) if to Tenant, to Harrah's Operating Company, Inc., 5100 West Sahara Boulevard, Suite 200, Las Vegas, Nevada 89146, Attention: Office of the President and with a copy to Harrah's Operating Company, Inc., 5100 West Sahara Boulevard, Suite 200, Las Vegas, Nevada 89146, Attention: General Counsel, or (ii) if to Landlord, at Landlord's address set forth in the first paragraph of this Lease, with a copy to Baker, Donelson, Bearman & Caldwell, 2000 First Tennessee Building, 165 Madison Avenue, Memphis, Tennessee 38103, Attn: Frank L. Watson, Jr., and with a copy to any Mortgagee who may have requested the same, by Notice given in accordance with the provisions of this Article 26, at the address designated by such Mortgagee, or to such other address(es) as either Landlord or Tenant may designate as its new address(es) for such purpose by notice given to the other in accordance with the provisions of this Article 26. (b) Notices shall be deemed to have been rendered or given (i) on the date delivered, if delivered by hand, or (ii) the day after shipment, if sent by overnight courier service, or (iii) three (3) days after mailing, if mailed as provided in Section 26.1(a). Notice given by counsel for either party on behalf of such party or by the Manager on behalf of Landlord shall be deemed valid notices if addressed and sent in accordance with the provisions of this Article. Section 26.2. Notwithstanding the provisions of Section 26.1, Notices requesting services for Overtime Periods pursuant to Article 27 may be given by delivery to the Building Manager or any other person in the Building designated by Landlord to receive such Notices, and bills may be rendered by delivering them to the Premises. ARTICLE XXVII SERVICES AND EQUIPMENT Section 27.1. Landlord shall, at Landlord's expense: -123- (a) Provide passenger elevator service to the Premises on Business Days during Operating Hours and, subject to Section 27.3, have one passenger elevator on call at all other times. (b) Furnish and distribute to the Premises, through the HVAC System, during Operating Hours, air-conditioning, and heat or ventilation, as needed; provided that Tenant shall, at all times, cooperate fully with Landlord and abide by all of the Rules and Regulations which Landlord may prescribe for the proper functioning of the HVAC System. Tenant hereby expressly waives any claims against Landlord arising out of the cessation of operation of the HVAC System, or the suitability of the Premises when the same is not in operation, whether due to normal scheduling or the reasons set forth in Section 27.3. Landlord will not be responsible for the failure of the HVAC System if such failure results from the occupancy of the Premises by more persons than the number of persons for which HVAC System is designed. If Tenant occupies the Premises at an occupancy rate of greater than that for which the HVAC System was designed, or if Tenant's partitions are arranged in such a way as to interfere with the normal operation of the HVAC System, Landlord may elect to make changes to the HVAC System or the ducts through which it operates required by reason thereof, and the cost thereof shall be reimbursed by Tenant to Landlord as Additional Rent within ten (10) days after presentation of a bill therefor. Landlord, throughout the Term, shall have free access to all mechanical installations of Landlord, including but not limited to air cooling, fan, ventilating and machine rooms and electrical closets, and Tenant shall not construct partitions or other obstructions that may interfere with Landlord's free access thereto, or interfere with the moving of Landlord's equipment to and from the enclosures containing said installations. Neither Tenant nor its agents, employees or contractors shall at any time enter the said enclosures or tamper with, adjust, touch or otherwise in any manner affect said mechanical installations. Landlord's obligations under this Section 27.1 and under Section 27.2 are subject to applicable Requirements that may limit the hours or the extent to which Landlord is permitted to supply HVAC. (c) Furnish hot and cold water for ordinary drinking, cleaning and lavatory purposes. (d) Provided Tenant shall keep the Premises in order, Landlord, at Landlord's expense, shall cause the Premises, excluding any portions thereof used as secured areas, to be cleaned on Business Days in accordance with the cleaning -124- specifications annexed to this Lease as Exhibit "D." If, however, any additional cleaning of the Premises is to be done by Tenant, it shall be done at Tenant's sole expense, in a manner reasonably satisfactory to Landlord and no one other than persons approved by Landlord shall be permitted to enter the Premises or the Building for such purpose. Tenant shall pay to Landlord the cost of removal of any of Tenant's refuse and rubbish from the Premises and the Building (i) to the extent that the same, in any one day, exceeds the average daily amount of refuse and rubbish usually attendant upon the use of such Premises as offices, as described and included in Landlord's cleaning contract for the Building or recommended by Landlord's cleaning contractor, and (ii) related to or deriving from the preparation or consumption of food or drink. Bills for the same shall be rendered by Landlord to Tenant at such time as Landlord may elect and shall be due and payable as Additional Rent within ten (10) days after the time rendered. Section 27.2. Landlord reserves the right to stop the furnishing of the Building services and to stop service of the Building Systems, when necessary, by reason of accident, or emergency, or for Alterations in the judgment of Landlord desirable or necessary to be made, until said Alterations shall have been completed; and Landlord shall have no responsibility or liability for failure to supply air-conditioning, ventilation, heat, elevator, plumbing, electric, or other services during said period or when prevented from so doing by strikes, lockouts, difficulty of obtaining materials, accidents or by any cause beyond Landlord's reasonable control, or by Requirements or failure of electricity, water, steam, coal, oil or other suitable fuel or power supply, or inability by exercise of reasonable diligence to obtain electricity, water, steam, coal, oil or other suitable fuel or power. No diminution or abatement of rent or other compensation shall or will be claimed by Tenant as a result therefrom, nor shall this Lease or any of the obligations of Tenant be affected or reduced by reason of such interruption, curtailment or suspension, nor shall the same constitute an actual or constructive eviction; provided, however, that if the cessation is caused by Landlord and continues for more than three (3) days, then Fixed Rent shall abate on a per diem basis from the fourth (4th) day until Landlord restores the Building services. Section 27.3. Tenant agrees to abide by all requirements which Landlord may prescribe for the proper protection and functioning of its Building Systems and the furnishing of the Building services. Tenant further agrees to cooperate with -125- Landlord in any conservation effort pursuant to a program or procedure promulgated or recommended by ASHRAE or any Requirements. ARTICLE XXVIII [RESERVED] ARTICLE XXIX [RESERVED] ARTICLE XXX SIGNS Section 30.1. Landlord may replace the signs at the main entrance which serves the Real Property and Adjacent Property with signs which identify the businesses on both such properties, and may install signage at the driveway intersections on the Real Property and Adjacent Property which direct traffic to the appropriate businesses and parking area, all at Tenant's reasonable cost and expense, except that Landlord shall pay for signs with respect to the Adjacent Property. The location, size, materials, quality, design, color and lettering of any signs desired by Tenant shall be subject to the prior approval of Landlord and shall be in compliance with the standards set forth in Tenant Design and Construction Standards. ARTICLE XXXI BROKER Section 31.1. Landlord represents and warrants to Tenant that Landlord has not dealt with any broker or other Person who might claim a leasing commission in connection with this Lease other than the Broker(s). Landlord acknowledges that it is solely responsible to pay the leasing commissions due to the Broker in connection with the execution of this Lease. Tenant represents and warrants to Landlord that Tenant has not dealt with any broker or other Person who might claim a leasing commission in connection with this Lease. The execution and delivery of this Lease by Tenant shall be conclusive evidence that Tenant acknowledges that Landlord has relied upon the foregoing representation and warranty. Tenant shall indemnify -126- and hold harmless Landlord from and against any and all claims for commission, fee or other compensation by any Person (other than Broker) who claims to have dealt with Tenant in connection with this Lease and for any and all costs incurred by Landlord in connection with such claims, including, without limitation, attorneys' fees and disbursements. The execution and delivery of this Lease by Landlord shall be conclusive evidence that Landlord acknowledges that Tenant has relied upon the foregoing representation and warranty. Landlord shall indemnify and hold harmless Tenant from and against any and all claims for commission, fee or other compensation by any Person (including Broker) who claims to have dealt with Landlord in connection with this Lease and for any and all costs incurred by Tenant in connection with such claims, including, without limitation, attorneys' fees and disbursements. This provision shall survive the expiration or earlier termination of this Lease. ARTICLE XXXII INDEMNITY Section 32.1. Tenant shall indemnify and save harmless the Landlord Indemnitees from and against (a) all claims of third parties of whatever nature against the Landlord Indemnitees arising from any act, omission or negligence of Tenant or Persons Within Tenant's Control, (b) all claims of third parties against the Landlord Indemnitees arising from any accident, injury or damage whatsoever caused to any such third party or such party's property and occurring in or about the Premises during the Term or during Tenant's occupancy of the Premises, unless and to the extent caused by the negligence or willful misconduct of Landlord or its principals, officers or employees, (c) all claims of third parties against the Landlord Indemnitees arising from any accident, injury or damage occurring outside of the Premises but anywhere within or about the Real Property, where such accident, injury or damage results or is claimed to have resulted from an act, omission or negligence of Tenant or Persons Within Tenant's Control, and (d) any breach, violation or non-performance of any covenant, condition or agreement contained in this Lease to be fulfilled, kept, observed and performed by Tenant except as otherwise provided in this Lease; provided, however, that the indemnity and save harmless provision set out in this Section 32.1 and 32.2 shall have no effect to the extent that the Landlord Indemnitees are protected by insurance maintained under the provisions of Article XI hereof. This indemnity and hold harmless agreement shall include indemnity from and against any and all liability, fines, suits, demands, costs and expenses of -127- any kind or nature (including, without limitation, attorneys' fees and disbursements) incurred in or in connection with any such claim or proceeding brought thereon, and the defense thereof. Section 32.2. If any claim, action or proceeding is made or brought against any Landlord Indemnitee, against which claim, action or proceeding Tenant is obligated to indemnify such Landlord Indemnitee pursuant to the terms of this Lease, then, upon demand by the Landlord Indemnitee, Tenant, at its sole cost and expense, shall resist or defend such claim, action or proceeding in the Landlord Indemnitee's name, if necessary, by such attorneys as the Landlord Indemnitee may select. The provisions of this Article 32 shall survive the expiration or earlier termination of this Lease. Section 32.3 Landlord shall indemnify and save harmless the Tenant Indemnitees from and against (a) all claims of third parties of whatever nature against the Tenant Indemnitees arising from any act, omission or negligence of Landlord or Persons Within Landlord's Control, (b) all claims of third parties against the Tenant Indemnitees arising from any accident, injury or damage whatsoever caused to any such third party or such party's property and occurring in or about the Premises during the Term or during Tenant's occupancy of the Premises where such accident, injury or damage results or is claimed to have resulted from an act or omission or negligence of Landlord or Persons Within Landlord's Control, (c) all claims of third parties against the Tenant Indemnitees arising from any accident, injury or damage occurring outside of the Premises but anywhere within or about the Real Property, unless and to the extent caused by the negligence or willful misconduct of Tenant or its principals, officers or employees, and (d) any breach, violation or non-performance of any covenant, condition or agreement in this Lease to be fulfilled, kept, observed and performed by Tenant, except as otherwise provided in this Lease; provided, however, that the indemnity and save harmless provision set out in this Section 32.3 and 32.4 shall have no effect to the extent that Tenant Indemnitees are protected by insurance maintained under the provisions of Article XI hereof. This indemnity and hold harmless agreement shall include indemnity from and against any and all liability, fines, suits, demands, costs and expenses of any kind or nature (including, without limitation, attorneys' fees and disbursements) incurred in or in connection with any such claim or proceeding brought thereon, and the defense thereof. -128- Section 32.4 If any claim, action or proceeding is made or brought against any Tenant Indemnitee, against which claim, action or proceeding Landlord is obligated to indemnify such Tenant Indemnitee pursuant to the terms of this Lease, then, upon demand by the Tenant Indemnitee, Landlord, at its sole cost and expense, shall resist or defend such claim, action or proceeding in the Tenant Indemnitee's name, if necessary, by such attorneys as the Tenant Indemnitee may select. The provisions of this Article 32 shall survive the expiration or earlier termination of this Lease. ARTICLE XXXIII [RESERVED] ARTICLE XXXIV [RESERVED] ARTICLE XXXV [RESERVED] ARTICLE XXXVI COVENANT OF QUIET ENJOYMENT Section 36.1. Landlord covenants that, upon Tenant paying the Fixed Rent and Additional Rent and observing and performing all the terms, agreements, covenants, provisions and conditions of this Lease on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the Premises, subject nevertheless to the terms and conditions of this Lease; provided, however, that no impairment or deprivation of Tenant's use of the Premises which results from a violation of Restrictive Covenants shall be construed as a breach of this covenant nor permit abatement of Rental due hereunder unless such violation results from acts or neglect of Landlord in which Tenant played no part; provided further that no eviction of Tenant by reason of the foreclosure of any Mortgage now or hereafter affecting the Premises, shall be construed as a breach of this covenant nor shall any action by reason thereof be brought against Landlord; -129- and provided further that this covenant shall bind and be enforceable against Landlord or any successor to Landlord's interest, subject to the terms hereof, only so long as Landlord or any successor to Landlord's interest, is in possession and is collecting rent from Tenant but not thereafter. ARTICLE XXXVII MISCELLANEOUS Section 37.1. Landlord retains all air rights over the Premises. Tenant may not place anything on or attach anything to the roof of the Premises without first obtaining Landlord's written consent, which consent may be granted or withheld in Landlord's reasonable discretion. Section 37.2. The obligations of Landlord under this Lease shall not be binding upon Landlord named herein after the sale, conveyance, assignment or transfer by such Landlord (or upon any subsequent landlord after the sale, conveyance, assignment or transfer by such subsequent landlord) of its interest in the Building or the Real Property, as the case may be, and in the event of any such sale, conveyance, assignment or transfer, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord under this Lease thereafter arising, and the transferee shall be deemed to have assumed, subject to the remaining provisions of this Section 37.2, all obligations of the Landlord under this Lease arising after the effective date of the transfer. No trustee, partner, shareholder, director or officer of Landlord, or of any partner or shareholder of Landlord (collectively, the "Parties") shall have any direct or personal liability for the performance of Landlord's obligations under this Lease, and Tenant shall look solely to Landlord's interest in the Building to enforce Landlord's obligations hereunder and shall not otherwise seek any damages against Landlord personally or any of the Parties whatsoever. Section 37.3. [RESERVED] Section 37.4. The parties shall prepare and sign a suitable memorandum of this Lease for recordation. This Lease shall not be recorded. Section 37.5. Except as otherwise expressly stated in this Lease, any consent or approval required to be obtained from Landlord may be granted by Landlord in its sole discretion. -130- Section 37.6. [RESERVED] Section 37.7. If Tenant shall remain in possession of the Premises after the Expiration Date, without the execution by both Tenant and Landlord of a new lease, Tenant, at the election of Landlord, shall be deemed to be occupying the Premises as a Tenant from month-to-month, at a monthly rental equal to one and one-half (1.5) times the Rental payable during the last month of the Term, subject to all the other conditions, provisions and obligations of this Lease insofar as the same are applicable to a month-to-month tenancy. Section 37.8. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. If any words or phrases in this Lease are stricken out or otherwise eliminated, whether or not any other words or phrases have been added, this Lease shall be construed as if the words or phrases stricken out or otherwise eliminated were never included in this Lease and no implication or inference shall be drawn from the fact that such words or phrases were stricken out or otherwise eliminated. Section 37.9. [RESERVED] Section 37.10. [RESERVED] Section 37.11. If any of the provisions of this Lease, or the application thereof to any person or circumstance, shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby and shall remain valid and enforceable, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. Section 37.12. Landlord shall have the right to erect any gate, chain or other obstruction or to close off any portion of the Real Property to the public at any time to the extent necessary to prevent a dedication thereof for public use. Section 37.13. Tenant agrees that in all disputes arising directly or indirectly out of this Lease Tenant shall be subject to service of process in, and the jurisdiction of the courts of, the State of Tennessee. The provisions of this Section 37.13 shall survive the expiration of this Lease. -131- Section 37.14. This Lease contains the entire agreement between the parties and all prior negotiations and agreements are merged into this Lease. Except as provided in Section 37.6, this Lease may not be changed, abandoned or discharged, in whole or in part, nor may any of its provisions be waived except by a written agreement that (a) expressly refers to this Lease, (b) is executed by the party against whom enforcement of the change, abandonment, discharge or waiver is sought, and (c) is permissible under the Mortgage(s). Section 37.15. Any apportionment or prorations of Rental to be made under this Lease shall be computed on the basis of a three hundred sixty (360) day year, with twelve (12) months of thirty (30) days each. Section 37.16. The laws of the State of Tennessee applicable to contracts made and to be performed wholly within the State of Tennessee shall govern and control the validity, interpretation, performance and enforcement of this Lease. Section 37.17. Tenant warrants and represents that it is duly incorporated under the laws of the State of Delaware and is duly qualified to do business in the State of Tennessee (a copy of evidence thereof to be supplied to Landlord upon request); and that each person executing this Lease on behalf of Tenant is an officer of Tenant and that he or she is duly authorized to execute, acknowledge and deliver this Lease to Landlord (a copy of a resolution to that effect to be supplied to Landlord upon request). Section 37.18. The captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this Lease nor the intent of any provision thereof. Section 37.19. The covenants, conditions and agreements contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and their respective legal representatives, successors, and, except as otherwise provided in this Lease, their assigns. Section 37.20. For the purposes of this Lease and all agreements supplemental to this Lease, unless the context otherwise requires: -132- (a) The words "herein", "hereof", "hereunder" and "hereby" and words of similar import shall be construed to refer to this Lease as a whole and not to any particular Article or Section unless expressly so stated. (b) Reference to "termination of this Lease" or "expiration of this Lease" and words of like import includes expiration or sooner termination of this Lease and the Term and the estate hereby granted or cancellation of this Lease pursuant to any of the provisions of this Lease or to law. Upon the termination of this Lease, the Term and estate granted by this Lease shall end at noon on the date of termination as if such date were the Fixed Expiration Date, and neither party shall have any further obligation or liability to the other after such termination except (i) as shall be expressly provided for in this Lease, and (ii) for such obligations as by their nature under the circumstances can only be, or by the provisions of this Lease, may be, performed after such termination, and, in any event, unless expressly otherwise provided in this Lease, any liability for a payment (which shall be apportioned as of such termination) which shall have accrued to or with respect to any period ending at the time of termination shall survive the termination of this Lease. (c) Words and phrases used in the singular shall be deemed to include the plural and vice versa, and nouns and pronouns used in any particular gender shall be deemed to include any other gender. Section 37.21. All exhibits attached to this Lease are incorporated herein and Tenant agrees to execute Exhibit "H" upon Landlord's request without unreasonable delay. -133- IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the day and year first above written. RBM CHERRY ROAD PARTNERS, a Tennessee general partnership BY: RBM Venture Company, a Delaware corporation, its managing general partner By: ------------------------------------ Its: Vice President ------------------------------------ LANDLORD HARRAH'S OPERATING COMPANY, INC. By: ------------------------------------ Its: Chief Financial Officer ------------------------------------ TENANT -134- Exhibit "A" Legal Description PROPERTY LOCATED IN SHELBY COUNTY, TENNESSEE: PARCEL I BEING A PART OF THE HARRAH'S ENTERTAINMENT, INC. CORPORATE HEADQUARTERS P.D. AS RECORDED IN PLAT BOOK 155, PAGE 8, ALSO BEING A PART OF THE HOLIDAY INNS, INC. PROPERTY AS RECORDED IN INSTRUMENT U7-2133 AT THE SHELBY COUNTY REGISTER'S OFFICE, LOCATED IN MEMPHIS, TENNESSEE AND BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT A POINT ON THE NORTH LINE OF HAVERHILL ROAD (50' R.O.W.), 25.15 FEET WEST OF THE WEST LINE OF CHERRY ROAD (R.O.W. VARIES); THENCE ALONG SAID NORTH LINE N89 38'59"W A DISTANCE OF 986.49 FEET TO A POINT OF CURVATURE; THENCE ALONG A CURVE TO THE RIGHT HAVING A RADIUS OF 257.02 FEET, AN ARC LENGTH OF 120.30 FEET, (CHORD N76 22'21"W - 119.20 FEET) TO A FOUND CROW'S MARK AT THE SOUTHEAST CORNER OF THE JOEL M. COX PROPERTY (INST. S9-0045); THENCE N37 29'55"E ALONG THE EAST LINE OF SAID COX PROPERTY A DISTANCE OF 163.78 FEET TO A POINT, SAID POINT BEING THE NORTHEAST CORNER OF SAID JOEL M. COX PROPERTY, ALSO BEING THE SOUTHEAST CORNER OF LOT 31, AUDUBON PARK SUBDIVISION (PB. 14, PG. 30); THENCE ALONG THE EAST LINE OF SAID AUDUBON PARK SUBDIVISION N0 13'10"W A DISTANCE OF 579.13 FEET TO A POINT, SAID POINT BEING ON THE EAST LINE OF LOT 26 OF AUDUBON PARK SUBDIVISION (PB. 14, PG. 30) AND 15.11 FEET SOUTH OF THE NORTH LINE OF SAID LOT 26; THENCE ALONG THE FOLLOWING COURSES AND DISTANCES: S59 52'06"E A DISTANCE OF 225.85 FEET TO A POINT; THENCE N30 15'47"E A DISTANCE OF 48.67 FEET TO A POINT; THENCE S86 44'15"E A DISTANCE OF 75.95 FEET TO A POINT; THENCE S3 15'45"W A DISTANCE OF 27.58 FEET TO A POINT; THENCE S86 44'15"E A DISTANCE OF 173.28 FEET TO A POINT; THENCE N27 16'38"E A DISTANCE OF 188.13 FEET TO A POINT; THENCE S89 37'17"E A DISTANCE OF 222.36 FEET TO A POINT; THENCE N0 00'14"W A DISTANCE OF 267.93 FEET TO A POINT ON THE SOUTH LINE OF THE DIXON GALLERY AND GARDENS PROPERTY (K8-7671); THENCE ALONG SAID SOUTH LINE S89 37'17"E A DISTANCE OF 264.26 FEET TO A FOUND AXLE ON THE WEST LINE OF SAID CHERRY ROAD, SAID POINT ALSO BEING THE SOUTHEAST CORNER OF SAID DIXON GALLERY AND GARDENS PROPERTY; THENCE ALONG SAID WEST LINE -135- S0 00'14"E A DISTANCE OF 905.25 FEET TO A POINT; THENCE N98 38'59"W A DISTANCE OF 10.00 FEET TO A POINT; THENCE S0 00'14E A DISTANCE OF 131.85 FEET TO A POINT OF CURVATURE; THENCE ALONG A CURVE TO THE RIGHT HAVING A RADIUS OF 25.00 FEET, AN ARC LENGTH OF 39.42 FEET (CHORD S45 10'23"W - 35.46 FEET) TO THE POINT OF BEGINNING. PARCEL II The property on which exists a three (3) story office building is situated in Memphis, Shelby County, Tennessee, and is described as follows: BEING A PART OF THE HARRAH'S ENTERTAINMENT, INC. CORPORATE HEADQUARTERS P.D. AS RECORDED IN PLAT BOOK 155, PAGE 8, ALSO BEING THE HOLIDAY INN'S INC. PROPERTY AS RECORDED IN INSTRUMENT U7-2133 AT THE SHELBY COUNTY REGISTER'S OFFICE, LOCATED IN MEMPHIS, TENNESSEE AND BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS: COMMENCING AT A POINT ON THE CENTERLINE OF CHERRY ROAD (R.O.W. VARIES), 1087.24 FEET NORTH OF THE INTERSECTION OF HAVERHILL ROAD (50' R.O.W.) AND SAID CHERRY ROAD; THENCE NO89 37'17"W A DISTANCE OF 30.00 FEET TO A FOUND AXLE ON THE WEST LINE OF SAID CHERRY ROAD; SAID POINT ALSO BEING THE SOUTHEAST CORNER OF THE DIXON GALLERY AND GARDENS PROPERTY (INST. K8-7671); THENCE N89 37'17"W A DISTANCE OF 264.26 FEET TO THE POINT OF BEGINNING, SAID POINT BEING ON THE SOUTH LINE OF SAID DIXON GALLERY AND GARDENS PROPERTY; THENCE ALONG THE FOLLOWING COURSES AND DISTANCES: S0 00'14"E A DISTANCE OF 267.93 FEET TO A POINT; THENCE N89 37'17"W A DISTANCE OF 222.36 FEET TO A POINT; THENCE S27 16'38"W A DISTANCE OF 188.13 FEET TO A POINT; THENCE N86 44'15"W A DISTANCE OF 173.28 FEET TO A POINT; THENCE N3 15'45"E A DISTANCE OF 27.58 FEET TO A POINT; THENCE N86 44'15"W A DISTANCE OF 75.95 FEET TO A POINT; THENCE S30 15'47"W A DISTANCE OF 48.67 FEET TO A POINT; THENCE N59 52'06"W A DISTANCE OF 225.85 FEET TO A POINT ON THE EAST LINE OF LOT 26 OF AUDUBON PARK SUBDIVISION (PB. 14, PG. 30), SAID POINT BEING 15.11 FEET SOUTH OF THE NORTH LINE OF SAID LOT 26; THENCE ALONG SAID EAST LINE AND THE EAST LINE OF THE RESUBDIVISION OF LOTS 21-25, AUDUBON PARK SUBDIVISION (PB. 15, PG. 4) N0 13'10"W A DISTANCE OF 325.74 FEET TO A FOUND AXLE, SAID AXLE ALSO BEING THE SOUTHWEST CORNER OF SAID DIXON GALLERY AND GARDENS PROPERTY; THENCE ALONG THE SOUTH LINE OF SAID DIXON GALLERY AND GARDENS PROPERTY -136- S89 37'17"E A DISTANCE OF 776.93 FEET TO THE POINT OF BEGINNING. -137- Exhibit "B" Plat Showing Building and Building No. 2 -138- Exhibit "C" Rules and Regulations Definitions 1. Wherever in these Rules and Regulations the word "Tenant" is used, it shall be taken to apply to and include the Tenant and his agents, employees, invitees, licensees, visitors, subtenants and contractors, and shall be deemed of such number and gender as the circumstances require. The word "Landlord" shall be taken to include the employees and agents of Landlord. Obstructions 2. The streets, sidewalks, entrances, driveways, halls, passages, elevators, stairways and Common Areas provided by Landlord shall not be obstructed by Tenant. Washrooms 3. Toilet rooms, water-closets and other water apparatus shall not be used for any purposes other than those for which constructed. Fire Prevention 4. Tenant shall not do anything in the Premises or bring or keep anything therein, which shall in any way increase or tend to increase the risk of fire or the rate of fire insurance, or which shall conflict with the regulations of the Fire Department or the fire laws, or with the rules and regulations of the City of Memphis, or equivalent bodies, or with any insurance policy on the Building or any part thereof, or with any law, ordinance, rule or regulation affecting the occupancy and use the Premises, now existing or hereafter enacted or promulgated by any public authority or by the City of Memphis or any equivalent body. Tenant's Equipment 5. It is Tenant's responsibility to properly operate all business equipment and coffee machines and to service such equipment and machines. -139- General 6. In order to insure proper use and Prohibitions care of the Premises, Tenant shall not, without the consent of Landlord or unless otherwise permitted in the Lease: a. Keep or permit animals or birds in the Building except as required for handicapped persons. b. Use the Premises as sleeping apartments. c. Allow any sign, advertisement or notice to be fixed to the Building, inside or outside, without Landlord's written consent. d. Make improper noise or disturbances of any kind, or otherwise do anything to disturb other tenants or tend to injure the reputation of the Building. e. Mark or defile elevators, water closets, toilet rooms, walls, windows, doors or any other parts of the Building. f. Place anything on the outside of the Building, including roof setbacks, window ledges and other projections; or drop anything from the windows, stairways or parapets; or place trash or other matter in the halls, stairways, elevators or light wells of the Building. g. Cover, block or obstruct any window, skylight, door or transom or any other surface that admits light, except building standard blinds. h. Interfere with the heating or cooling apparatus. i. Allow anyone but Landlord's employees to clean Premises. j. Leave open doors to the Premises at any time except as otherwise approved by Landlord, and same shall be locked at all times when Premises are not occupied. k. Install any shades, blinds or awnings without consent of the Landlord, except building standard blinds. -140- l. Use any electric heating device, such as a space heater, without consent of the Landlord. m. Install call boxes, or any kind of wire in or on the Building without Landlord's permission and direction. n. Manufacture any commodity, or prepare or dispense any foods, beverages, or alcoholic beverages, tobacco, drugs, flowers, or other commodities or articles without the written consent of Landlord. All food and beverage vending machines will be provided by the Landlord Approved Contractor. o. Secure duplicate keys for Premises or toilets, except from Landlord, or change the locks of any doors to or in the Premises. p. Give employees or other persons permission to go upon or erect or place any antennae, tower or other structure or equipment on the roof of the Building without the written consent of the Landlord. q. Place door mats in public corridors (i.e., within the Common Area) without consent of Landlord. r. Schedule, receive or accept freight other than Monday through Friday, excluding holidays, between the hours of 7:00 a.m. to 7:00 p.m. s. Leave the Land and enter the Adjacent Property, except via the designated entrance driveway between the Land and Cherry Road, but then only during the course of arriving and leaving for work during Operating Hours. Business 7. Business machines and mechanical Machines equipment which cause vibration, noise, cold or heat that may be transmitted to Building structure or to any leased space outside Premises shall be placed and maintained by Tenant, at its sole cost and expense, in settings of cork, rubber, -141- or spring type vibration eliminators sufficient to absorb and prevent such vibration, noise, cold or heat. No business machines or mechanical equipment which require above normal business machine level or high amounts of electricity shall be used or installed in the Premises without Landlord's written consent and if installed, all electricity used shall be metered and paid by Tenant as Additional Rent. Movement of 8. Landlord reserves the right to Equipment designate the time when and the method whereby freight, small office equipment, furniture, safes and other like articles may be brought into, moved, or removed from the Building or Premises, and to designate the location for temporary disposition of such items. Tenant Moves 9. Landlord's tenant move in/move out policy is as follows: a. All moves will be done at such times as shall not unduly interfere with other tenants or occupants of the Real Property or Adjacent Property. b. Landlord shall approve the moving contractor and such contractor shall coordinate all aspects of the move with Landlord. c. Tenant's contractor shall provide a certificate of insurance evidencing liability, property damage and workmen's compensation insurance of not less than $1,000,000, naming Landlord as additional insured. d. Tenant's contractor shall use appropriate padding and masonite floor covering to protect all surfaces including door jambs, subject to Landlord's inspection and approval. e. Tenant will reimburse Landlord for all security provided. f. Tenant will be responsible for any damages during the move. -142- Rights Reserved 10. Without abatement or diminution in to Landlord rent, Landlord reserves and shall have the following additional rights: a. To install and maintain a sign or signs on the exterior of the Building. b. To designate all sources furnishing sign painting and lettering, ice, drinking water, towels and toilet supplies and other like services used on the Premises. c. At any time or times Landlord either voluntarily or pursuant to governmental requirement, may, at Landlord's own expense, make repairs, alterations or improvements in or to the Building or any part thereof and during alterations, any close entrances, doors, windows, corridors, elevators or other facilities, provided that such acts shall not unreasonably interfere with Tenant's use and occupancy of the Premises as a whole. d. During the last six (6) months of the term or any part thereof, if during or prior to that time the Tenant vacates the Premises, to decorate, remodel, repair, alter or otherwise prepare the Premises for re-occupancy. e. To constantly have pass keys and Security System clearance to the Premises. f. Landlord may reasonably enter upon the Premises and may exercise any or all of the foregoing rights hereby reserved without being deemed guilty of an eviction or disturbance of Tenant's use or possession and without being liable in any manner to the Tenant. g. To access the Dixon Gallery and Gardens via the Common Area. Regulation 11. Landlord shall have the right to Change make such other and further reasonable rules and regulations as in the judgment of Landlord, may from time to time be needful for the safety, appearance, care and cleanliness of the Building and Building No. 2 and for the preservation -143- of order therein, Landlord shall not be responsible to Tenant for any violation of rules and regulations by other tenants or occupants of the Real Property or Adjacent Property. Smoking Areas 12. Landlord shall have the right, from time to time, to designate and thereafter to change, alter or redesignate, smoking and non-smoking area(s) outside the Building and shall further be permitted to prohibit or limit such activity in order to fully comply with any applicable governmental ordinance, law or regulation. Tenant shall not permit any of its employees, agents or invitees to smoke except in the designated smoking area(s) and, in any event, never inside the Building. Plumbing 13. Plumbing fixtures and appliances shall be used only for purposes for which constructed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed therein. Damage resulting to any such fixtures or appliances from misuse by Tenant shall be repaired and replaced at Tenant's sole cost and expense, and Landlord shall not in any case be responsible therefor. Parking 14. Tenant shall use best efforts to cause Tenant's employees to park their motor vehicles in those portions of the parking area designated by Landlord ("Tenant's Parking Area"). -144- Access 15. Tenant shall access Tenant's Parking Area and/or the Building via the driveway designated on Exhibit "C-1" which is attached hereto and supplements these Rules and Regulations. -145- Exhibit "D" Cleaning Specifications Landlord agrees that, at its expense, it will do the following standard janitorial work for the Premises. I. General Space Cleaning - five (5) nights per week Monday thru Friday A. Nightly 1. Empty and dust wipe all receptacles. 2. Replace plastic liners in waste receptacles as required. 3. Remove waste to a compactor, hamper, or place waste in bags and leave in a designated area. 4. Empty and damp-wipe ashtrays. 5. Clean entrance glass. 6. Clean glass in directories. 7. Spot clean all interior glass, including the glass railing on the plaza and third floor. 8. Damp-wipe all glass top desks and tables. 9. Spot clean walls, doors, door frames and around light switches. 10. Clean the elevators including walls, floors, doors, lights, tracks and indicator panels. 11. Clean and polish stainless steel in the main lobby, elevator lobbies, elevators, etc. 12. Damp-wipe spillages on furniture in lounge and lunchroom areas. (Tenant shall be responsible for -146- cleaning of dishes, refrigerators and other kitchen appliances.) 13. Sanitize and polish all drinking fountains. 14. Vacuum all carpeted areas with particular attention being paid to under desks, moveable furniture, corners and edges, etc. 15. Spot clean carpet as needed. 16. Sweep all granite pavers and composition tile flooring with a specially treated mop and buff. 17. Damp mop trackage and spillage as required. 18. Sweep cement stairways. Damp-mop as required. 19. Dust or damp-wipe handrails and metalwork as required. 20. Sweep with specially treated mop, and wash floors in service areas. 21. Upon the completion of cleaning, the cleaning equipment will be stored neatly in a designated location. B. Monthly 1. Clean and polish desk tops. 2. Perform high dusting not reached in normal cleaning. 3. Dust Venetian blinds. 4. Spray buff vinyl tile flooring in tenant and service areas. C. Quarterly 1. Strip and wax all vinyl tile flooring in tenant and service areas. 2. Vacuum upholstered chairs. -147- II. Lavatories A. Nightly 1. Empty waste and sanitary napkin disposal receptacles. 2. Replace plastic liners as required. 3. Clean commodes and urinals with a disinfectant. 4. Clean washbowls with a scouring powder. 5. Polish mirrors. 6. Polish all brightwork. 7. Spot clean ceramic tile walls and metal partitions. 8. Floors to be swept, wet mopped and rinsed, using a disinfectant detergent. 9. Fill all towel, toilet issue, sanitary napkin and hand soap dispensers. B. Monthly 1. Wash and disinfect ceramic tile walls and metal partitions. 2. Wash interior of waste and sanitary napkin disposal containers. -148- Exhibit "E" Rating Level Multiplier For purposes of Section 2.6 of the Lease: If HET's Corporate . . . then the Credit Rating is . . . Rating Level Multiplier is: BBB 0 BB 1.0 B 2.0 CCC 3.0 CC or lower 4.0 -149- Exhibit "F" [RESERVED] -150- Exhibit "G" Tenant Design and Construction Standards Tenant agrees to furnish Landlord the following information in drawings, in accordance with the below-listed schedules. 1. PRELIMINARY DRAWINGS No later than four (4) weeks prior to the projected construction commencement date, Tenant shall furnish Landlord one (1) sepia and six (6) complete sets of prints of -" scale preliminary drawings showing at least the following information: a. Floor plan including furniture layout, partition layout, door layout, power and telephone outlet locations, items above standard finish, floor loading information beyond 70 psf, etc. b. Reflected ceiling plan including lighting layout, exit signs, registers, grilles, diffusers, exhaust fans, ceiling breaks, etc. c. Written scope sheet of special Tenant mechanical and electrical requirements and/or custom construction and finish requirements. d. Take-off sheet of building standard items shall be used. 2. ARCHITECTURAL WORKING DRAWINGS FOR CONSTRUCTION No later than two (2) weeks prior to the projected construction commencement date, Tenant shall furnish Landlord two (2) background mylars of the partition and ceiling plans and one (1) sepia and two (2) sets of prints of complete -" scale working drawings on or before showing at least the following information and marked "issued for engineering and Landlord review": a. Location and type of all partitions and doors (specify hardware and provide keying schedule), glass -151- partitions, windows and glass doors (indicate framing sections if not building standard). b. Indication of all critical dimensions necessary for construction. c. Location of telephone equipment room accompanied by an approval of the telephone company. d. Location of all building standard and above building standard electrical items including outlets, switches, telephone outlets and lighting. e. Location and type of equipment that require special electrical; requirements including manufacturer's specifications for use and operations. f. Location, weight per square foot and description of any exceptionally heavy equipment or filing system exceeding 75 psf live load including 20 psf for partitions. g. Requirements for special air conditioning or ventilation including occupancy information for each room and space. h. Type and color of floor covering, wall covering, and building standard and above-building standard paint or finishes. i. Requirements for special plumbing including all line sizes, fixtures and specifications. j. Location and type of kitchen equipment including specifications. k. Details showing: (1) Construction of all partition types; (2) Head, jamb and sill sections with elevations for all door types; (3) Shelving, cabinet work and architectural millwork with dimensions and dimensions of all equipment to be built in; -152- (4) Special corridor entrance with framing and support requirements; and (5) Bracing or support of special walls, glass partitions, drapery track, etc. 3. MECHANICAL/ELECTRICAL WORKING DRAWINGS FOR CONSTRUCTION No later than two (2) weeks prior to the projected construction commencement date, Tenant shall furnish two (2) sets of prints of --" scale mechanical/electrical working drawings which, among other things, shall identify requirements beyond the building standard scope. 4. Within ten (10) days after the furnishing of any such drawings by Tenant, Landlord shall approve, disapprove, or request further information concerning the drawings submitted, indicating the reason for any disapproval and specifying clearly the nature and scope of any request for further information. In all events, Landlord shall use good faith efforts to respond to such submissions by Tenant expeditiously so as to not delay unnecessarily Tenant's construction of Alterations. 5. Tenant shall be responsible for obtaining city review and approval of preliminary drawings (as referred to in paragraph 1 above). Tenant shall make application and obtain a city building permit. -153- Exhibit "H" First American SNDA SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT Building No. 1 THIS AGREEMENT, made as of the ----- day of October, 1999, by FIRST AMERICAN NATIONAL BANK, with a place of business at 6000 Poplar Avenue, Suite 300, Memphis, Tennessee 38119 ("Mortgagee") and Harrah's Operating Company, Inc., a Delaware corporation, having an office address at 5100 West Sahara Avenue, Suite 200, Las Vegas, NV 89146 ("Tenant"). WITNESSETH: WHEREAS, Mortgagee has entered into, or is about to enter into, a mortgage loan transaction with RBM Cherry Road Partners, a Tennessee general partnership, having an office address of 5810 Shelby Oaks Drive, Memphis, TN 38134 ("Landlord"); and WHEREAS, Mortgagee is, or is to become, the beneficiary of a Deed of Trust, Assignment of Rents and Security Agreement (said Deed of Trust, Assignment of Rents and Security Agreement being hereinafter referred to as the "Mortgage") covering that certain parcel of land owned by Landlord and described on Exhibit "A" annexed hereto and made a part hereof, together with the improvements erected thereon (said parcel of land and improvements thereon being commonly known as 1023 Cherry Road, Memphis, TN 38117, hereinafter called the "Improvements"); and WHEREAS, by a certain Lease entered into between Landlord and Tenant dated as of October 25, 1999 ("Lease"), Landlord leased to Tenant a portion of the Improvements, to wit, the premises designated as floors one (1) through three (3) of the three-story office building located at 1023 Cherry Road, Memphis, TN 38117, generally depicted on Exhibit "B" annexed hereto and made a part hereof (said premises being hereinafter called the "Demised Premises"); and WHEREAS, a copy of the Lease has been delivered to Mortgagee, the receipt of which is hereby acknowledged; and -154- WHEREAS, the parties hereto desire to effect the subordination of the Lease to the Mortgage and to provide for the non-disturbance of Tenant by the holder of the Mortgage. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, the parties hereto intending to be legally bound hereby agree as follows: 1. Mortgagee hereby consents to and approves the Lease and the term thereof, including any options to extend the term as set forth in the Lease, and covenants and agrees that the exercise by Tenant of any of the rights, remedies, and options therein contained shall not constitute a default under the Mortgage. 2. Tenant covenants and agrees with Mortgagee that the Lease is hereby made, and shall continue hereafter to be, subject and subordinate to the lien of the Mortgage, and to all modifications and extensions thereof, with the same force and effect as if the Mortgage had been executed and delivered prior to the execution and delivery of the Lease and without regard to the order of priority of recording the Mortgage, subject, however, to the provisions of this Agreement. Tenant shall take such steps and execute such documents from time to time hereafter as Mortgagee may reasonably request in order to carry into effect the provisions and intent of this Agreement and to confirm the subordination of the Lease to the lien of the Mortgage subject to the terms hereof. 3. Tenant certifies that the Lease is presently in full force and effect and unmodified and Tenant as of this date has no knowledge of any default, charge, lien or claim of offset under the Lease. 4. The Tenant shall deliver to Mortgagee, within thirty (30) days after receipt of a written request for same, further certifications that (i) the Lease is then in full force and effect; (ii) there have been no modifications to the Lease (except those specified therein); (iii) there is then no default, charge, lien or claim of offset under the Lease (or stating any of the same which may be claimed or known); (iv) not more than one month's installment of rent has been paid in advance of the due date (or stating any such other payments, if made); and (v) such other information as Mortgagee may reasonably request. For so long as Tenant is not in default under the terms of the Lease -155- and the Lease shall be in full force and effect, Mortgagee agrees that: (a) Except as may be procedurally required by law, Tenant shall not be named or joined as a party or otherwise in any suit, action or proceeding for the foreclosure of the Mortgage or to enforce any rights under the Mortgage or note or other obligation secured thereby. Nothing hereinabove shall prohibit or prevent the Mortgagee from suing the Tenant for any default (as defined in the Lease) by Tenant under the Lease. (b) The possession by Tenant of the Demised Premises and Tenant's rights thereto shall not be disturbed, affected or impaired by, nor will the Lease, Tenant's rights thereunder, or the term thereof be terminated or otherwise affected (i) by any suit, action or proceeding upon the Mortgage or note or other obligation secured thereby, or for the foreclosure of the Mortgage or the enforcement of any rights under the Mortgage or any other documents held by the holder of the Mortgage, or (ii) by any judicial sale or execution or other sale of the Demised Premises in connection with the Mortgage, or any deed given in lieu of foreclosure, or (iii) by any default under the Mortgage or note or other obligation secured thereby. (c) Neither the Mortgage nor any other security instrument executed in connection therewith shall cover or be construed as subjecting in any manner to the lien thereof, any trade fixtures, equipment, inventory or other personal property at any time furnished or installed by or for Tenant in the Demised Premises unless the same are permanently affixed to the real estate thereof. Tenant agrees that upon removal of any of its trade fixtures, equipment, inventory or other personal property at any time furnished or installed by or for Tenant in the Demised Premises, Tenant shall, at its expense, repair all damage to the Demised Premises caused by any such removal. 5. If Mortgagee or any future holder of the Mortgage shall become the owner of the Improvements by reason of foreclosure of the Mortgage or otherwise, or if the Improvements shall be sold as a result of any action or proceeding to foreclose the Mortgage, or transfer of ownership by deed given in lieu of foreclosure, the Lease shall continue in full force and effect, without necessity for executing any new lease, as a direct lease between Tenant and the then owner of the Improvements, as -156- "Landlord," upon all of the same terms, covenants, and provisions contained in the Lease, and in such event: (a) Tenant shall be bound to such new owner under all of the terms, covenants, and provisions of the Lease for the remainder of the term thereof (including also any extension periods, if Tenant elects or has elected to exercise its option to extend the term) and Tenant hereby agrees to attorn to such new owner and to recognize such new owner as "Landlord" under the Lease; and (b) Such new owner shall be bound to Tenant under all of the terms, covenants, and provisions of the Lease for the remainder of the term thereof (including also any extension periods, if Tenant elects or has elected to exercise its options to extend the term) which such new owner hereby agrees to assume and perform; and Tenant shall, from and after the date such new owner succeeds to the interest of "Landlord" under the Lease, have the same remedies against such new owner for any subsequently occurring breach of any covenant contained in the Lease as Tenant might have had under the Lease against Landlord if such new owner had not succeeded to the interest of Landlord, provided, however, that such new owner shall not (i) be bound by any rent or additional rent which Tenant might have paid for more than one month in advance to any prior landlord (including Landlord); or (ii) be bound by any amendment or modification of the Lease made without its consent. 6. Any notices or communications given under this Agreement shall be in writing and shall be given by certified mail, return receipt requested, postage prepaid, (a) if to Mortgagee, at the address for Mortgagee hereinabove set forth or at such other address as Mortgagee may designate by notice to Tenant, or (b) if to Tenant, at the address of Tenant as hereinabove set forth or at such address as Tenant may designate by notice to Mortgagee. 7. Tenant agrees, by notice given in the manner provided in the Lease, to give to Mortgagee at the address provided above a copy of any notice of default served upon the Landlord by Tenant. Tenant shall give such notice to Mortgagee simultaneously with the giving of any such notice of default to Landlord. Tenant further agrees that if Landlord shall have failed to cure any such default within such time as may be provided for in the -157- Lease, then Tenant shall give Mortgagee written notice of such failure and Mortgagee shall have an additional forty-five (45) days from receipt of such notice within which to cure such default, or if such default cannot be cured within that time, then within such additional time as may be necessary if within such forty-five (45) days Mortgagee has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure); and in such event the Lease shall not be terminated and Tenant shall not be excused or released from the timely performance and payment of all of Tenant's obligations under the Lease, without setoff or deduction, while such remedies are being so diligently pursued by Mortgagee. Mortgagee shall not be deemed, as a result of any such curing or attempted curing, to have assumed or become personally liable for Landlord's obligations under the Lease. 8. Upon notification by Mortgagee to the Tenant of the exercise of Mortgagee's rights under the Mortgage to receive direct payment of rents or other charges, Tenant shall pay rent and any other sums payable under the terms of the Lease directly to Mortgagee. Notwithstanding the Tenant's payment to Mortgagee of the rent and other sums payable under the terms of the Lease, Tenant hereby acknowledges and agrees that Mortgagee shall have no duties or obligations with respect to the Lease until Mortgagee has notified Tenant of Mortgagee's assumption of the Landlord's obligations under the Lease. 9. This Agreement shall bind and inure to the benefit of and be binding upon and enforceable by the parties hereto and their respective successors and assigns. 10. This Agreement contains the entire agreement between the parties and cannot be changed, modified, waived, or cancelled except by an agreement in writing executed by the parties against whom enforcement of such modification, change, waiver or cancellation is sought. 11. This Agreement and the covenants herein contained are intended to run with and bind all lands affected thereby. 12. Any notices sent to Mortgagee herein shall include a copy to: J. Philip Jones, Esq., Martin, Tate, Morrow & Marston, P.C., 6000 Poplar Avenue, Suite 340, Memphis, TN 38119-3971. -158- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. MORTGAGEE: FIRST AMERICAN NATIONAL BANK By:----------------------------- Title:-------------------------- TENANT: HARRAH'S OPERATING COMPANY, INC. By:----------------------------- Title:-------------------------- STATE OF TENNESSEE COUNTY OF SHELBY Before me, a Notary Public, of the State and County aforesaid, personally appeared --------------------, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged himself/herself to be the ---------------------- of First American National Bank, the within named bargainor, a national banking association, and that he/she as such officer, being authorized so to do, executed the foregoing instrument for the purpose therein contained, by signing the name of the association by himself/herself as such officer. WITNESS my hand and official seal this -----day of --------, 199--. ---------------------------- NOTARY PUBLIC My commission expires: - ---------------------- -159- STATE OF ---------------------- COUNTY OF --------------------- Before me, a Notary Public, of the State and County aforesaid, personally appeared --------------------, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence) and who, upon oath, acknowledged himself/herself to be the ------------------- of HARRAH'S OPERATING COMPANY, INC., the within named bargainor, a Delaware corporation, and that he/she as such officer, being authorized so to do, executed the foregoing instrument for the purpose therein contained by signing the name of the corporation by himself/herself as such officer. WITNESS my hand and seal at office this ---- day of --------, 199--. ---------------------------- NOTARY PUBLIC My commission expires: -160- Exhibit "I" Memphis and Shelby County Land Use Control Board - Staff Report #16 Correspondence Item, Case No.: P.D. 93-322 L.U.C.B. Meeting October 14, 1999 -161- EXHIBIT H DEFERRED ROOF REPAIR -162- EX-4.26(1) 3 EXHIBIT 4.26(1) Exhibit 4(26) AGREEMENT OF LEASE between RBM CHERRY ROAD PARTNERS Landlord and HARRAH'S OPERATING COMPANY, INC. Tenant Dated: October 25, 1999 Premises: Office Building #1 1023 Cherry Road Memphis, Tennessee 38117 TABLE OF CONTENTS
Page REFERENCE PAGE................................................................ 6 ARTICLE I GLOSSARY...................................................................... 7 ARTICLE II DEMISE, PREMISES, TERM, RENT.................................................. 14 ARTICLE III ESCALATION.................................................................... 17 ARTICLE IV USE AND OCCUPANCY............................................................. 27 ARTICLE V ALTERATIONS................................................................... 28 ARTICLE VI REPAIRS....................................................................... 32 ARTICLE VII CONNECTING CORRIDORS.......................................................... 34 ARTICLE VIII REQUIREMENTS OF LAW........................................................... 35 ARTICLE IX SUBORDINATION................................................................. 37 ARTICLE X RULES AND REGULATIONS......................................................... 41 ARTICLE XI INSURANCE, PROPERTY LOSS OR DAMAGE, REIMBURSEMENT............................. 41 ARTICLE XII DESTRUCTION BY FIRE OR OTHER CAUSE............................................ 45 ARTICLE XIII EMINENT DOMAIN................................................................ 47
-2- ARTICLE XIV ASSIGNMENT, SUBLETTING, MORTGAGE, ETC........................................ 48 ARTICLE XV ACCESS TO PREMISES........................................................... 52 ARTICLE XVI CERTIFICATE OF OCCUPANCY..................................................... 53 ARTICLE XVII DEFAULT...................................................................... 54 ARTICLE XVIII REMEDIES AND DAMAGES......................................................... 57 ARTICLE XIX FEES AND EXPENSES............................................................ 60 ARTICLE XX NO REPRESENTATIONS BY LANDLORD............................................... 61 ARTICLE XXI END OF TERM.................................................................. 61 ARTICLE XXII POSSESSION................................................................... 62 ARTICLE XXIII NO WAIVER.................................................................... 62 ARTICLE XXIV WAIVER OF TRIAL BY JURY...................................................... 63 ARTICLE XXV INABILITY TO PERFORM......................................................... 64 ARTICLE XXVI BILLS AND NOTICES............................................................ 64 ARTICLE XXVII SERVICES AND EQUIPMENT....................................................... 65 ARTICLE XXVIII [RESERVED]................................................................... 68 ARTICLE XXIX [RESERVED]................................................................... 68
-3- ARTICLE XXX SIGNS........................................................................ 68 ARTICLE XXXI BROKER....................................................................... 68 ARTICLE XXXII INDEMNITY.................................................................... 69 ARTICLE XXXIII [RESERVED]................................................................... 71 ARTICLE XXXIV [RESERVED]................................................................... 71 ARTICLE XXXV [RESERVED]................................................................... 71 ARTICLE XXXVI COVENANT OF QUIET ENJOYMENT.................................................. 71 ARTICLE XXXVII MISCELLANEOUS................................................................ 72
-4- EXHIBITS: Exhibit A Legal Description................................................A-1 Exhibit B Building and Building No. 2......................................B-1 Exhibit C Rules and Regulations............................................C-1 Exhibit D Cleaning Specifications..........................................D-1 Exhibit E Rating Level Multiplier..........................................E-1 Exhibit F [RESERVED].......................................................F-1 Exhibit G Tenant Design and Construction Standards.........................G-1 Exhibit H First American Subordination, Non-Disturbance and Attornment Agreement........................................H-1 Exhibit I Memphis and Shelby County Land Use Control Board - Staff Report #16 Correspondence Item, Case No.: P.D. 93-322, L.U.C.B. Meeting October 14, 1999...................I-1 -5- AGREEMENT OF LEASE AGREEMENT OF LEASE, made as of the 25th day of October, 1999, between RBM CHERRY ROAD PARTNERS, a Tennessee general partnership, or its assigns, having an address at 5810 Shelby Oaks Drive, Memphis, Tennessee 38134, as Landlord, and HARRAH'S OPERATING COMPANY, INC., a Delaware corporation, having an address at 1023 Cherry Road, Memphis, Tennessee 38117, as Tenant. REFERENCE PAGE In addition to other terms elsewhere defined in this Lease, the following terms whenever used in this Lease shall have the meanings set forth in this Reference Page. (1) Premises: Floors one (1) through three (3) of the Building, shown hatched on the site plan attached hereto as Exhibit "B," excluding, however, any portions thereof which are defined as Common Area(s). (2) Commencement Date: October 25, 1999 (3) Fixed Expiration Date: April 30, 2017 (4) Fixed Rent: (a) $1,183,180.00 per annum ($98,598.33 per month) from the Commencement Date through October 31, 2004; (b) $1,307,413.90 per annum ($108,951.15 per month) from November 1, 2004 through October 31, 2009; and (c) $1,413,900.10 per annum ($117,825.00 per month) from November 1, 2009 through the Fixed Expiration Date, in each case, as adjusted pursuant to Section 2.6 of this Lease. -6- (5) Fixed Rent Adjustment Factor: $19,928.00. (6) Tenant's Share: Fifty-two and one-tenth percent (52.1%). (7) Base Tax Factor: The Taxes applicable to the Real Property equal to $221,848.00. (8) Base Operating Factor: The Operating Expenses applicable to the Real Property equal to $583,835.00. (9) Permitted Use: Executive and administrative offices and operational activities related to data processing and information technology, and for no other use or purpose. (10) Broker(s): CB Richard Ellis Memphis, LLC (11) Security Deposit: NONE (12) Landlord's Contribution: NONE W I T N E S S E T H: The parties hereto, for themselves, their legal representatives, successors and assigns, hereby agree as follows: ARTICLE I GLOSSARY The following terms shall have the meanings indicated below: "Additional Rent" shall have the meaning set forth in Section 2.2. "Adjacent Property" shall mean the real property south of and adjacent to the Land, consisting of approximately nineteen and ninety-two-thousandths (19.092) acres, being purchased by Landlord at or about the date of this Lease, together with the -7- improvements thereon. The Adjacent Property is described as Parcel I in the legal description attached hereto as Exhibit "A," and incorporated herein by reference. "Alterations" shall mean alterations, decorations, installations, repairs, improvements, additions, replacements or other physical changes in or about the Premises; provided, however, that the term "Alterations" shall exclude those made by Landlord, if any, in accordance with any provisions of this Lease in order to prepare the Premises for Tenant's initial occupancy. "Applicable Rate" shall mean the lesser of (x) three percentage points above the then current Base Rate, and (y) the maximum rate permitted by applicable law. "ASHRAE" shall mean the American Society of Heating, Refrigeration and Air-Conditioning Engineers. "Bankruptcy Code" shall mean 11 U.S.C. Section 101 ET SEQ., or any statute, federal or state, of similar nature and purpose. "Base Rate" shall mean the rate of interest publicly announced from time to time by Citibank, N.A., or its successor, as its "base rate" (or such other term as may be used by Citibank, N.A., from time to time, for the rate presently referred to as its "base rate"). "Building" shall mean that certain three (3) story office building located on the Land and having an address of 1023 Cherry Road, Memphis, Tennessee 38117, and all of the equipment and other improvements and appurtenances related thereto of every kind and description now located or hereafter erected, constructed or placed upon the Land and any and all alterations, renewals, and replacements thereof, additions thereto and substitutions therefor. The Building is located as shown on Exhibit "B" attached hereto. "Building No. 2" shall mean that certain two (2) story office building located on the Land and having an address of 1023 Cherry Road, Memphis, Tennessee 38117, and all of the equipment and other improvements and appurtenances related thereto of every kind and description now located or hereafter erected, constructed or placed upon the Land and any and all alterations, renewals, and replacements thereof, additions thereto and substitutions therefor. Building No. 2 is located as shown on Exhibit "B" attached hereto. -8- "Building Standard Condition" shall mean the condition of the Building as of the date of this Lease (reasonable wear and tear excepted), plus any Alterations approved by Landlord, except to the extent Landlord's approval is conditioned upon Tenant's removal of the approved Alteration prior to the Expiration Date. "Building Systems" shall mean the base building mechanical, electrical, sanitary, heating, air conditioning, ventilating, elevator, plumbing, life-safety and other service systems of the Building but shall not include the Security System or installations made by Tenant after the date of this Lease. For purposes of calculating Operating Expenses, the term "Building Systems" shall include the base building mechanical, electrical, sanitary, heating, air conditioning, ventilating, elevator, plumbing, life-safety and other service systems of Building No. 2, but shall not include the Security System or installations made by Tenant after the date of this Lease. "Business Days" shall mean all days, excluding Saturdays, Sundays and all days observed as holidays by the State of Tennessee or the federal government. "Common Area" shall mean any and all portions of the Land and the improvements thereon not part of the Building or Building No. 2. Common Area includes all landscaping, fountains and related water works, walkways, sidewalks, parking lots, parking garages, parking decks, loading platforms, driveways, trash removal facilities, mechanical, electrical and utility rooms and service areas on the Land, regardless of whether they are part of the Building or Building No. 2. "Control" shall have the meaning set forth in Section 14.2. "Deficiency" shall have the meaning set forth in Section 18.2. "Escalation Rent" shall mean payments required to be made by Tenant pursuant to Article 3. "Event of Default" shall have the meaning set forth in Section 17.1. "Expiration Date" shall mean the Fixed Expiration Date or such earlier or later date on which the Term sooner or later ends pursuant to any of the terms, conditions or covenants of this Lease (including, but not limited to, the terms and provisions of Section 2.7 hereof) or pursuant to law. -9- "Fixed Rent Adjustment Factor" shall have the meaning set out on the Reference Page. "Government Authority (Authorities)" shall mean the United States of America, the State of Tennessee, the County of Shelby, the City of Memphis, any political subdivision thereof and any agency, department, commission, board, bureau or instrumentality of any of the foregoing, now existing or hereafter created, having jurisdiction over the Real Property or any portion thereof. "HVAC" shall mean heat, ventilation and air conditioning. "HVAC System" shall mean the Building Systems providing HVAC. "Hazardous Materials" shall have the meaning set forth in Section 8.2. "HET" shall mean Harrah's Entertainment, Inc., a Delaware corporation, and any affiliated or related company or subsidiary whose financial information is required by GAAP to be reported on Harrah's Entertainment Company, Inc.'s consolidated financial statements. "Land" shall mean the land containing approximately six and four hundred five-thousandths (6.405) acres of real estate located in Shelby County, Tennessee, and more particularly described as Parcel II in Exhibit "A." "Landlord" on the date as of which this Lease is made, shall mean RBM Venture Company, but thereafter, "Landlord" shall mean only the fee owner of the Real Property. "Landlord Indemnitees" shall mean Landlord, its trustees, partners, shareholders, officers, directors, employees, agents and contractors and the Manager (and the partners, shareholders, officers, directors and employees of Landlord's agents and contractors and of the Manager). "Landlord's Operating Statement" shall mean a statement containing a computation of Escalation Rent due pursuant to the provisions of Section 3.3 furnished by Landlord to Tenant. "Landlord's Statement" shall mean either a Landlord's Operating Statement or a Landlord's Tax Statement. -10- "Landlord's Tax Statement" shall mean a statement containing a computation of Escalation Rent due pursuant to the provisions of Section 3.2 furnished by Landlord to Tenant. "Leveraged Transaction" shall mean any transaction entered into by HET whereby HET (a) uses debt or a financing source having characteristics of debt to complete the transaction, or (b) as a result of the transaction, HET assumes or becomes liable for debt or other obligations characteristic of debt which were originally the obligations of the other party(ies) to the transaction. "Manager" shall mean any person or entity with which Landlord from time to time contracts for the management of the Building and/or Building No. 2. "Mortgage(s)" shall mean any trust deed, trust indenture or mortgage which may now or hereafter affect the Real Property, the Building, and all renewals, extensions, supplements, amendments, modifications, consolidations and replacements thereof or thereto, substitutions therefor, and advances made thereunder. "Mortgagee(s)" shall mean any trustee under or mortgagee or holder of a Mortgage. "Notice(s)" shall have the meaning set forth in Section 26.1. "Office Use" shall mean those uses which are included in the computation of Office Square Footage as such term is used in the Restrictive Covenants. "Operating Expenses" shall have the meaning set forth in Section 3.1. "Operating Hours" shall mean 7:00 a.m. to 7:00 p.m. on Business Days. "Operating Year" shall mean each calendar year that includes any part of the Term. "Parties" shall have the meaning set forth in Section 37.2. "Person or Person(s)" shall mean any natural person or persons, a partnership, a corporation, a limited liability -11- company, a limited liability partnership and any other form of business or legal association or entity. "Persons Within Landlord's Control" shall mean and include Landlord, all of Landlord's respective principals, officers, agents, contractors, servants, employees, licensees and invitees. "Persons Within Tenant's Control" shall mean and include Tenant, all of Tenant's respective principals, officers, agents, contractors, servants, employees, licensees and invitees. "Rating Level Multiplier" shall have the meaning set out in Exhibit "E" hereto. "Real Property" shall mean the Building, Building No. 2 and the Land. "Rental" shall mean and be deemed to include Fixed Rent, Additional Rent and any other sums payable by Tenant hereunder. "Requirements" shall mean (i) all present and future laws, rules, ordinances, regulations, statutes, requirements, codes and executive orders, extraordinary as well as ordinary, retroactive and prospective, of all Governmental Authorities now existing or hereafter created, and of any applicable fire rating bureau, or other body exercising similar functions, affecting the Real Property, or any street, avenue or sidewalk comprising a part or in front thereof or any vault in or under the same, or requiring removal of any encroachment, or affecting the maintenance, use or occupation of the Real Property, (ii) all requirements, obligations and conditions of all instruments of record on the date of this Lease including, without limitation, the Restrictive Covenants, and (iii) all requirements, obligations and conditions imposed by the carrier of Landlord's hazard insurance policy for the Building. "Restrictive Covenants" shall mean Final Plat P.D. 93-322, Phase I Harrah's Corporate Headquarters P.D., recorded at Plat Book 155, Page 8, in the Register's Office of Shelby County, Tennessee, as amended in accordance with the decision of the Memphis and Shelby County Land Use Control Board on October 14, 1999, pursuant to Staff Report #16 Correspondence Item, a copy of which is attached hereto as Exhibit "I"; and Agreement dated January 26, 1984 between Audubon Park Community Association and Holiday Inns, Inc. recorded at Instrument No. U9-9849, as amended at Instrument Nos. V8-8105 and BE 1706, in said Register's Office, for so long as said Agreement remains in effect. -12- "Rules and Regulations" shall mean the rules and regulations annexed hereto as Exhibit "C," and such other and further reasonable rules and regulations as Landlord and Landlord's agents may from time to time adopt, on notice to Tenant to be given in accordance with the terms of this Lease. "Security System" shall mean the keypad security system in use in the Building and Building No. 2 and located at various locations on the Real Property at the date of this Lease as modified from time to time. "Sublease Additional Rent" shall have the meaning set forth in Section 14.4. "Taxes" shall have the meaning set forth in Section 3.1. "Tax Year" shall mean each period of twelve (12) months, commencing on the first day of January of each year, that includes any part of the Term, or such other period of twelve (12) months as may be duly adopted as the fiscal year for real estate tax purposes by the City of Memphis, and Shelby County. "Tenant," on the date as of which this Lease is made, shall mean the Tenant named in this Lease, but thereafter "Tenant" shall mean only the tenant under this Lease at the time in question; provided, however, that the Tenant named in this Lease and any successor tenant hereunder shall not be released from liability hereunder in the event of any assignment of this Lease. "Tenant Indemnitees" shall mean Tenant, its trustees, partners, shareholders, officers, directors, employees, agents and contractors. "Tenant's Operating Payment" shall have the meaning set forth in Section 3.3. "Tenant's Projected Operating Share" shall have the meaning set forth in Section 3.3. "Tenant's Property" shall mean Tenant's movable fixtures and movable partitions, and other equipment, furniture, furnishings and other movable items of personal property, but excluding all FF&E acquired by Landlord under that certain Purchase and Sale Agreement by and between Tenant, as seller, and Landlord, as purchaser, dated September 15, 1999 (the term "FF&E" as used in -13- this Lease shall have the meaning ascribed thereto in the aforedescribed Purchase Agreement). "Tenant's Tax Payment" shall have the meaning set forth in Section 3.2. "Term" shall mean the period from the Commencement Date through the Expiration Date. "Unavoidable Delays" shall have the meaning set forth in Article 25. ARTICLE II DEMISE, PREMISES, TERM, RENT Section 2.1. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises for the Term to commence on the Commencement Date and to end on the Fixed Expiration Date, unless earlier terminated or extended as provided herein. Section 2.2. Commencing upon the Commencement Date, Tenant shall pay to Landlord, in lawful money of the United States of America, without notice or demand, by good and sufficient check drawn to Landlord's order on a bank or trust company with an office in the United States of America, at the office of Landlord or at such other place as Landlord may designate from time to time, the following: (a) the Fixed Rent, at the annual fixed rental rate set forth in the Reference Page, which shall be payable in equal monthly installments of Fixed Rent in advance on the first day of each and every calendar month during the Term, except that the first monthly installment of Fixed Rent shall be payable by Tenant upon execution and delivery of this Lease; and (b) additional rent ("Additional Rent") consisting of all other sums of money (including, without limitation, Escalation Rent) as shall become due from and be payable by Tenant hereunder (for default in the payment of which Landlord shall have the same remedies as for a default in the payment of Fixed Rent). Section 2.3. If the Commencement Date is other than the first day of a calendar month, or the Expiration Date is other -14- than the last Day of a calendar month, Rental for such month shall be prorated on a per diem basis. Section 2.4. [RESERVED] Section 2.5. Tenant shall pay the Fixed Rent and Additional Rent when due without abatement, deduction, counterclaim, setoff or defense for any reason whatsoever, except said abatement as may be occasioned by the occurrence of any event permitting an abatement of Fixed Rent and Escalation Rent as specifically set forth in this Lease. Section 2.6 Notwithstanding anything to the contrary set forth in this Lease, in the event that HET's corporate credit rating issued by Standard & Poor's falls below "BBB" [ignoring for purposes hereof pluses (+) and minuses (-) included in such ratings] as a result of one or more Leveraged Transactions, then for such period of time as such rating remains below "BBB," Fixed Rent per annum shall be increased by an amount equal to the product of the Fixed Rent Adjustment Factor multiplied by the Rating Level Multiplier (and Fixed Rent per month shall be adjusted commensurately). Changes in the Fixed Rent resulting from increases or decreases in HET's Corporate Credit Rating shall become effective as of the official change date of the Standard & Poor's rating, and the adjustments in Fixed Rent shall be prorated to take into account the number of days in the month during which such rating was at each level. In no event shall the Fixed Rent be adjusted to an amount less than that set out in the Reference Page of this Lease. Section 2.7. Provided Tenant is not in default under this Lease at the time the option may be exercised, Landlord grants Tenant the option to renew this Lease with respect to all of the Premises for two (2) additional terms of five (5) years each. Each option shall be exercised by Tenant delivering written notice to Landlord at least six (6) months prior to the Fixed Expiration Date, as extended by any previously exercised option. (a) The renewal rental rates for each option period shall be the Market Rental Rate (as hereinafter defined)(such rate being hereinafter referred to as the "Renewal Rental Rate"). The Market Rental Rate is the rental rate then being charged by landlords (including Landlord) in the Memphis area on new leases to tenants of a similar credit quality to Tenant for space of similar quality and size as the Premises, taking into account, all relevant factors, including without limitation, age, extent and quality of tenant improvements, leasing commissions, length -15- of term, amenities of the Building and the Real Property and the location and/or floor height and definition of usable area, reasonable projections of Fixed Rent, Additional Rent, Escalation Rent and allowances or concessions that have been granted such as abatements, lease assumptions and leasehold improvement and moving allowances. (b) Within ten (10) days after Tenant's exercise of each of the options to renew, Landlord shall notify Tenant in writing of the Renewal Rental Rate for that renewal period as determined by the above formula. Tenant shall have ten (10) days from the receipt of Landlord's notice to either accept or dispute Landlord's determination of the Renewal Rental Rate. In the event that Tenant disputes Landlord's determination, Tenant shall so notify Landlord and advise Landlord of Tenant's determination of the Renewal Rental Rate for the option period as determined by the above formula. If Landlord and Tenant cannot agree upon the Renewal Rental Rate within thirty (30) days of Tenant's original notice of its intent to exercise its renewal option, the following "Dispute Resolution Mechanisms" shall be utilized: (c) The parties, within ten (10) days thereafter, shall each select an MAI-certified commercial real estate appraiser with a minimum of ten (10) years experience in the Memphis market (each party to pay the cost of the appraiser selected by it). Each appraiser, within thirty (30) days after selection, shall present to the other their determination of the Market Rental Rate. If the Market Rental Rates determined by each appraiser are within ten percent (10%) of each other, then the Renewal Rental Rate for the option period shall be the average of the two (2) Market Rental Rates as determined by the parties' appraisers. If the appraisers' determinations are greater than ten percent (10%) apart, then the appraisers shall jointly select, within ten (10) days thereafter, a third MAI-certified commercial real estate appraiser with a minimum of ten (10) years experience in the Memphis market, with the cost of the third appraiser to be divided equally between Landlord and Tenant. Within thirty (30) days after appointment, the third appraiser shall announce his/her determination of the Market Rental Rate. The Renewal Rental Rate shall be equal to the average of the Market Rental Rate determined by the two appraisers whose determinations are numerically closest to each other (disregarding the determination of the appraiser whose determination is further apart from either of the others). Notwithstanding the foregoing, in the event that the third appraiser's determination is exactly in the middle of the first two appraisers' determinations, then the third appraiser's determination shall be the Renewal Rental Rate. -16- (d) Landlord and Tenant shall execute an amendment to this Lease within sixty (60) days after the determination of the Renewal Rental Rate, which amendment shall set forth the extended Term and all other terms and conditions applicable to the renewal period, and shall establish the Renewal Rental Rate as the annual Fixed Rent for the renewal period. (e) Except for the Renewal Rental Rate as set forth above, this Lease, and all of the terms and conditions hereof, shall remain in full force and effect throughout the entire renewal term. ARTICLE III ESCALATION Section 3.1. For the purposes of this Article 3, the following terms shall have the meanings set forth below: (a) "Operating Expenses" shall mean the aggregate of all costs, expenses and disbursements (and taxes thereon, if any), of every kind and nature, paid or incurred by Landlord or on behalf of Landlord with respect to the ownership, operation, cleaning, repair, safety, replacement, management, security and maintenance of the Real Property, including the Building Systems and Common Areas, and with respect to the services provided to tenants, including, without limitation: (i) salaries, wages and bonuses paid to, and the cost of any hospitalization, medical, surgical, union and general welfare benefits (including group life insurance), any pension, retirement or life insurance plans and other benefits or similar expenses relating to employees of Landlord and/or of Manager (on and off-site) engaged in the operation, cleaning, repair, safety, replacement, management, security or maintenance of the Real Property and the Building Systems or in providing services to tenants; (ii) social security, unemployment and other payroll taxes, the cost of providing disability and worker's compensation coverage imposed by any Requirement, union contract or otherwise with respect to said employees; (iii) the cost of gas, oil, steam, water, sewer rental, HVAC, water treatment, and other utilities furnished to the Building and Building No. 2 and utility taxes; (iv) the expenses incurred for casualty, rent, liability, fidelity, plate glass and any other insurance; (v) the cost of repairs, maintenance and painting, including the cost of acquiring or renting all -17- supplies, tools, materials and equipment used in operating or repairing the Building and Building No. 2 including, without limitation, their roofs; (vi) expenditures, whether by purchase or lease, for capital improvements and capital equipment (except for roof replacement and repairs to structural components of the Building or Building No. 2 which were not necessitated by the acts or omissions of Tenant) to the extent (but only to the extent) that such capital expenditures reduce or result in savings in Operating Expenses, the amortized cost of such capital expenditures (or portion thereof resulting in reduction or savings in Operating Expenses) to be included in Operating Expenses for the Operating Year in which such costs are incurred and every subsequent Operating Year, amortized on a straight-line basis over the accounting life of the capital improvement, with interest calculated at a per annum rate equal to eight percent (8%); (vii) operation, repair and replacement of building management systems; (viii) the cost or rental of all supplies, tools, materials and equipment; (ix) the cost of uniforms, work clothes and dry cleaning; (x) the cost of window cleaning, repair, resealing and replacement, janitorial, pest control, concierge, guard, watchman or other security personnel, service or system, fire extinguishers and sprinklers, power generators, fences and electronic/motorized gates, if any; (xi) management fees and expenses; (xii) charges of independent contractors performing work included within this definition of Operating Expenses; (xiii) telephone and stationery costs; (xiv) legal, accounting and other professional fees and disbursements incurred in connection with the operation and management of the Real Property; (xv) association fees and dues; (xvi) the cost of seasonal decorations; (xvii) depreciation of hand tools and other movable equipment used in the operation, cleaning, repair, safety, management, security or maintenance of the Building and Building No. 2; (xviii) exterior and interior landscaping, irrigation and tree care; (xix) all electrical costs incurred in the operation of the Real Property; (xx) striping, re-striping, sweeping and repairing parking areas and garages; and (xxi) waste removal. Provided, however, that the foregoing costs and expenses shall exclude or have deducted from them, as the case may be: -18- (1) amounts received by Landlord through proceeds of insurance to the extent they are compensation for sums previously included in Operating Expenses; (2) cost of repairs or replacements incurred by reason of fire or other casualty or condemnation to the extent Landlord is compensated therefor; (3) Taxes; and (4) leasing commissions, rental concessions and lease buy-outs. If Landlord leases any item of capital equipment that would otherwise be included in Operating Expenses, then the rentals and other costs paid with respect to such leasing shall be included in Operating Expenses for the Operating Years in which such rentals and costs are incurred. Notwithstanding anything to the contrary set forth herein, if the Building and Building No. 2 are not fully occupied during any calendar year of the Term, Operating Expenses shall be determined as if the Building and Building No. 2 had been fully occupied during such year, by adding to actual Operating Expenses an amount equal to those costs which would have been incurred if the Building and Building No. 2 had been fully occupied. For the purposes of this Lease, "fully occupied" shall mean occupancy of ninety-five percent (95%) of the usable square feet in the Building and Building No. 2 with Landlord providing all services. Notwithstanding anything to the contrary set forth herein, in the event that (a) utilities serving the Real Property are not separately metered or (b) any maintenance of the Real Property is covered by a contract which also covers the Adjacent Property or any portion thereof, then the Landlord shall make a fair and equitable allocation of the costs between the Real Property and the Adjacent Property receiving utility service and/or being covered by the maintenance contracts, and such fair and equitable amount shall be included in Operating Expenses under this Lease. (b) "Taxes" shall mean the aggregate amount of real estate taxes and any general or special assessments (exclusive of penalties and interest thereon) imposed upon the Real Property (including, without limitation, (i) assessments made upon or with respect to any "air" and "development" rights now or hereafter appurtenant to or affecting the Real Property, (ii) any fee, tax or charge -19- imposed by any Government Authority for any vaults, vault space or other space within or outside the boundaries of the Real Property, (iii) any assessments levied after the date of this Lease for public benefits to the Real Property or the Building or Building No. 2); and (iv) franchise taxes; provided that if, because of any change in the taxation of real estate, any other tax or assessment, however denominated (including, without limitation, any profit, sales, use, occupancy, gross receipts or rental tax) is imposed upon Landlord or the owner of the Real Property or the Building or Building No. 2, or the occupancy, rents or income therefrom, in substitution for any of the foregoing Taxes or for an increase in any of the foregoing Taxes, such other tax or assessment shall be deemed part of Taxes computed as if Landlord's sole asset were the Real Property. With respect to any Tax Year, all expenses, including attorneys' fees and disbursements and experts' and other witnesses' fees, incurred in contesting the validity or amount of any Taxes or in obtaining a refund of Taxes shall be considered as part of the Taxes for such Tax Year. Anything contained herein to the contrary notwithstanding, Taxes shall not be deemed to include (a) any federal taxes on Landlord's income, (b) estate or inheritance taxes, or (c) any similar taxes imposed on Landlord, unless such taxes are levied, assessed or imposed as a substitute for the whole or any part of, or as a substitute for an increase in, the taxes, assessments, levies, fees, charges and impositions that now constitute Taxes. In the event that the Real Property and the Adjacent Property are assessed together for ad valorem taxes, then for so long as there are no additions or expansions which result in increase in size of the exterior walls of the buildings on the Real Property or Adjacent Property, no additional buildings constructed on the Real Property or Adjacent Property, and no additional parking facilities or structures constructed on the Real Property or Adjacent Property (collectively, the "Additional Taxable Improvements"), the parties stipulate and agree that eighty-nine percent (89%) of the ad valorem real estate taxes imposed on the Real Property and Adjacent Property shall be "Taxes" within the meaning of this Lease, attributable to the Real Property. Upon the construction of Additional Taxable Improvements on the Real Property or Adjacent Property (provided that they are assessed together), the parties shall make an equitable adjustment to the foregoing stipulated percentage to account for any increase in assessment resulting from such Additional Taxable Improvements. -20- Section 3.2. (a) Tenant shall pay as Escalation Rent for each Tax Year, an amount ("Tenant's Tax Payment") equal to Tenant's Share of the amount by which the Taxes for such Tax Year are greater than the Base Tax Factor. Tenant's Tax Payment shall be payable by Tenant to Landlord in twelve (12) equal monthly installments (subject to the further provisions of this Section 3.2), the first of which shall be due within ten (10) days after receipt of a Landlord's Tax Statement, regardless of whether such Landlord's Tax Statement is received prior to, on or after the first day of such Tax Year and the remaining installments shall be due on the first day of each month thereafter. If there is any increase in Taxes for any Tax Year, whether during or after such Tax Year, or if there is any decrease in the Taxes for any Tax Year during such Tax Year, Landlord shall furnish a revised Landlord's Tax Statement for any Tax Year affected, and Tenant's Tax Payment for such Tax Year shall be adjusted and, (a) within ten (10) days after Tenant's receipt of such revised Landlord's Tax Statement, Tenant shall (with respect to any increase in Taxes for such Tax Year) pay the appropriate increase in Tenant's Tax Payment to Landlord, or (b) (with respect to any decrease in Taxes for such Tax Year) Landlord shall promptly, at its election, either credit such decrease in Tenant's Tax Payment against the next installment of Rental payable by Tenant or refund the amount of such decrease by check to the order of Tenant or, if at the end of the Term, there shall not be any further installments of Rental remaining against which Landlord can credit any decrease in Taxes due Tenant, Landlord shall deliver to Tenant Landlord's check in the amount of the refund due Tenant within thirty (30) days after Landlord's receipt of any refund. If, during the Term, Taxes are required to be paid (either to the appropriate taxing authorities or as tax escrow payments to the Lessor or the Mortgagee), in full or in quarterly or other installments on any other date or dates than as presently required, then Tenant's Tax Payments shall be correspondingly accelerated or revised so that Tenant's Tax Payments are due at least thirty (30) days prior to the date payments are due to the taxing authorities, the Lessor or the Mortgagee. The benefit of any discount for any early payment or prepayment of Taxes shall accrue solely to the benefit of Landlord and Taxes shall be computed without subtracting such discount. (b) (i) Except as provided in Section 3.2(b)(ii) below, only Landlord shall be eligible to institute tax reduction or other proceedings to reduce Taxes. If, after a Landlord's Tax Statement has been sent to Tenant, a refund -21- of Taxes is actually received by or on behalf of Landlord, then, promptly after receipt of such refund, Landlord shall send Tenant a Landlord's Tax Statement adjusting the Taxes for such Tax Year (taking into account Landlord's expenses therefor) and setting forth Tenant's Share of such refund, and Tenant shall be entitled to receive such amount by way of a credit against the Escalation Rent; provided, however, that Tenant's Share of such refund shall be limited to the amount of Tenant's Tax Payment, if any, which Tenant had theretofore paid to Landlord attributable to increases in Taxes for the Tax Year to which the refund is applicable. (ii) In the event Landlord does not contest any increase in ad valorem Taxes applicable to the Real Property, Tenant, at its sole cost and expense, shall have the right to contest any such increase and shall keep Landlord informed of the steps being taken. Landlord agrees to fully cooperate with Tenant in prosecuting any appeal taken by Tenant as a result of such increase, at no cost or expense to Landlord. During the pendency of any such contest, Tenant shall take all actions required to prevent the execution/enforcement by the taxing authorities of any rights against Landlord and/or the Real Property. All Escalation Rent charged by Landlord shall be paid by Tenant during the pendency of any such action. If, after a Landlord's Tax Statement has been sent to Tenant, a refund of Taxes is actually received as a result of a contest made by Tenant, then, promptly after receipt of such refund, Landlord shall send Tenant a Landlord's Tax Statement adjusting the Taxes for such Tax Year and setting forth Tenant's Share of such refund, and Tenant shall be entitled to receive such amount by way of a credit against the Escalation Rent; provided, however, that Tenant's Share of such refund shall be limited to the amount of Tenant's Tax Payment, if any, which Tenant had theretofore paid to Landlord attributable to increases in Taxes for the Tax Year to which the refund is applicable. (c) Tenant's Tax Payment and any credits with respect thereto as provided in this Section 3.2 shall be made as provided in this Section 3.2 regardless of the fact that Tenant may be exempt, in whole or in part, from the payment of any taxes by reason of Tenant's tax exempt status or for any other reason whatsoever. (d) Tenant shall pay to Landlord within thirty (30) days after demand as Additional Rent any occupancy tax or rent tax now -22- in effect or hereafter enacted, if payable by Landlord in the first instance or hereafter required to be paid by Landlord. (e) Each Landlord's Tax Statement furnished by Landlord with respect to Tenant's Tax Payment shall be accompanied by a copy of the real estate tax bill or bills for the Tax Year referred to therein, but Landlord shall have no obligation to deliver more than one such copy of the real estate tax bill or bills in respect of any Tax Year, and Landlord's failure to deliver such copy shall not affect Tenant's obligations as to amount or due date(s) thereof. (f) If the Base Tax Factor subsequently shall be adjusted, corrected or reduced whether as the result of protest, by means of agreement or as the result of legal proceedings, the Base Tax Factor for the purpose of computing any Additional Rent Payable pursuant to this Article shall be the Base Tax Factor as so adjusted, corrected or reduced. Until the Base Tax is so adjusted, corrected or reduced, if ever, Tenant shall pay Additional Rent hereunder based upon the unadjusted, uncorrected or unreduced Base Tax Factor and upon such adjustment, correction or reduction occurring, any Additional Rent payable by Tenant prior to the date of such occurrence shall be recomputed and Tenant shall pay to Landlord any Escalation Rent found due by such recomputation within thirty (30) days after being billed therefor (which bill shall set forth in reasonable detail the pertinent data causing and comprising such recomputation). (g) If the Commencement Date or the Expiration Date occurs on a date other than January 1 or December 31, respectively, any Tenant's Tax Payment under this Article 3 for the Tax Year in which such Commencement Date or Expiration Date occurs shall be apportioned in that percentage which the number of days in the period from the Commencement Date to December 31 or from January 1 to the Expiration Date, as the case may be, both inclusive, bears to the total number of days in such Tax Year. If the Commencement Date or the Expiration Date occurs on a date other than January 1 or December 31, respectively, any Tenant's Operating Payment under this Article 3 for the Operating Year in which such Commencement Date or Expiration Date occurs shall be apportioned in that percentage which the number of days in the period from the Commencement Date to December 31 or from January 1 to the Expiration Date, as the case may be, both inclusive, bears to the total number of days in such Operating Year. In the event of a termination of this Lease, any Escalation Rent under this Article 3 shall be paid or adjusted within thirty (30) days after submission of a Landlord's Statement. The rights and -23- obligations of Landlord and Tenant under the provisions of Article 3 with respect to any Escalation Rent shall survive for a period of six (6) months after the end of the calendar year in which the Expiration Date falls. Section 3.3. (a) Tenant shall pay as Escalation Rent for each Operating Year an amount ("Tenant's Operating Payment") equal to Tenant's Share of the amount by which Operating Expenses for such Operating Year are greater than the Base Operating Factor. (b) Landlord shall furnish to Tenant, with respect to each Operating Year, a Landlord's Operating Statement setting forth Landlord's estimate of Tenant's Operating Payment for such Operating Year ("Tenant's Projected Operating Share"). Tenant shall pay to Landlord on the first day of each month during such Operating Year, as Escalation Rent, an amount equal to one-twelfth (1/12) of Tenant's Projected Operating Share for such Operating Year. If, however, Landlord furnishes any such Landlord's Operating Statement for an Operating Year subsequent to the commencement of such Operating Year, then (a) until the first day of the month following the month in which such Landlord's Operating Statement is furnished to Tenant, Tenant shall pay to Landlord on the first day of each month an amount equal to the monthly sum payable by Tenant to Landlord under this Section 3.3 in respect of the last month of the preceding Operating Year; (b) after such Landlord's Operating Statement is furnished to Tenant or together therewith, Landlord shall give notice to Tenant stating whether the installments of Tenant's Projected Operating Share previously made for such Operating Year were greater or less than the installments of Tenant's Projected Operating Share to be made for such Operating Year in accordance with such estimate, and (i) if there is a deficiency, Tenant shall pay the amount thereof within thirty (30) days after demand therefor, or (ii) if there was an overpayment, Landlord shall credit the amount thereof against subsequent payments of Rental or, if at the end of the Term there shall not be any further installments of Rental remaining against which Landlord can credit any such overpayment due Tenant, Landlord shall deliver to Tenant Landlord's check in the amount of the refund due Tenant within thirty (30) days after Tenant shall first be entitled to a credit for the overpayment of Operating Expenses; and (c) on the first day of the month following the month in which such Landlord's Operating Statement is furnished to Tenant, and monthly thereafter throughout the remainder of such Operating Year, Tenant shall pay to Landlord an amount equal to one-twelfth (1/12) of Tenant's Projected Operating Share shown in such -24- Landlord's Operating Statement. Landlord shall furnish to Tenant a revised Landlord's Operating Statement with a new estimate of Tenant's Projected Operating Share for such Operating Year and, in such case, Tenant's Projected Operating Share for such Operating Year shall be adjusted and paid or credited, as the case may be, substantially in the same manner as provided in the preceding sentence. (c) After the end of each Operating Year, Landlord shall furnish to Tenant a Landlord's Operating Statement for such Operating Year. Each such year-end Landlord's Operating Statement shall be accompanied by a computation of Operating Expenses prepared by the Manager or a certified public accountant designated by Landlord from which Landlord shall make the computation of Escalation Rent due in respect of Operating Expenses hereunder. In making computations of Operating Expenses, the certified public accountant or the Manager may rely on Landlord's reasonable estimates and allocations whenever said estimates and allocations are needed for this Article 3. If the Landlord's Operating Statement shows that the sums paid by Tenant under Section 3.3(B) exceeded Tenant's Operating Payments required to be paid by Tenant for such Operating Year, Landlord shall credit the amount of such excess against subsequent payments of Rental or, if at the end of the Term there shall not be any further installments of Rental remaining against which Landlord can credit any such overpayments due Tenant, Landlord shall promptly deliver to Tenant Landlord's check in the amount of the refund due Tenant within thirty (30) days after Tenant shall first be entitled to a credit for the overpayment of Operating Expenses; and if the Landlord's Operating Statement for such Operating Year shows that the sums so paid by Tenant were less than Tenant's Operating Payment due for such Operating Year, Tenant shall pay the amount of such deficiency within thirty (30) days after demand therefor. (d) In addition, Tenant shall pay to the appropriate taxing authority, as and when due, any and all taxes due with respect to Tenant's personal property and/or leasehold interest in the Premises. Section 3.4. Landlord's failure to render any Landlord's Statement with respect to any Tax Year or Operating Year shall not prejudice Landlord's right thereafter to render a Landlord's Statement with respect thereto or with respect to any subsequent Tax Year or Operating Year, as the case may be, nor shall the rendering of a Landlord's Statement prejudice Landlord's right -25- thereafter to render a corrected Landlord's Statement for that Tax Year or Operating Year. Section 3.5. Any Landlord's Statement sent to Tenant shall be conclusively binding upon Tenant unless, within thirty (30) days after such Landlord's Statement is sent, Tenant shall send a written notice to Landlord objecting to such Landlord's Statement and specifying, to the extent reasonably practicable, the respects in which such Landlord's Statement is disputed. If Tenant shall send such notice with respect to a Landlord's Statement, Tenant may select and pay an independent certified public accountant or a member of an independent firm which is engaged in the business of auditing lease escalation clauses (an "Approved Examiner") provided that such Approved Examiner is not and has not during the Term been affiliated with, a shareholder in, an officer, director, partner, or employee of, any Manager during the Term or the Manager named in this Lease, and such Approved Examiner may examine Landlord's books and records relating solely to disputed aspects of the Operating Expenses to determine the accuracy of Landlord's Operating Statement. Tenant recognizes the confidential nature of Landlord's books and records, and agrees that any information obtained by an Approved Examiner during any examination shall be maintained in strict confidence by such Approved Examiner, without revealing same to any Person except Tenant. If, after such examination, such Approved Examiner shall dispute such Landlord's Operating Statement, either party may refer the decision of the issues raised to a reputable independent firm of certified public accountants, selected by Landlord and approved by Tenant, which approval shall not be unreasonably withheld or delayed, and the decision of such accountants shall be conclusively binding upon the parties. The fees and expenses involved in resolving such dispute shall be borne by Tenant, unless the final determination is that Landlord's Statement overstated Operating Expenses by more than five percent (5%), in which case Landlord shall pay the reasonable fees and expenses involved in resolving the dispute. Notwithstanding the giving of such notice by Tenant, and pending the resolution of any such dispute, Tenant shall pay to Landlord when due the amount shown on any such Landlord's Statement, as provided in this Article 3. Tenant shall pay the amount of any underpayment to Landlord and Landlord shall refund the amount of any overpayment to Tenant, within thirty (30) days after resolution of such dispute (and if Landlord fails to refund such overpayment to Tenant, Tenant shall be entitled to offset the same against future payments of Additional Rent). -26- ARTICLE IV USE AND OCCUPANCY Section 4.1. Tenant shall use and occupy the Premises for the Permitted Use and for no other purpose. Tenant and Tenant's use of the Premises shall comply in all respects with the Restrictive Covenants; and Tenant shall indemnify Landlord against any loss, cost or damage (including costs of defense and reasonable attorney fees) arising as a result of the failure of the Tenant or Tenant's use of the Premises to so comply. Tenant covenants and agrees that in no event and under no circumstances shall the Office Use within the Building exceed forty-six thousand seven hundred sixty-three (46,763) square feet unless Landlord and Tenant otherwise agree in a writing signed by them; and if the Office Use within the Building shall ever exceed said square footage, Tenant shall diligently take steps to remove area within the Building from Office Use in order that Tenant shall be in compliance with the foregoing provisions. Section 4.2. Tenant shall not use the Premises or any part thereof, or permit the Premises or any part thereof to be used, (1) for the business of photographic, multilith or multigraph reproductions or offset printing (other than those which are ancillary to an otherwise Permitted Use), (2) for an off-the-street retail commercial banking, thrift institution, loan company, trust company, depository or safe deposit business accepting deposits from the general public, (3) for the off-the-street retail sale of travelers checks, money orders, drafts, foreign exchange or letters of credit or for the receipt of money for transmission, (4) by the United States government, the state or local government, or any agency or department of any of the foregoing having or asserting sovereign immunity, (5) for the preparation, dispensing or consumption of food or beverages in any manner whatsoever, except for the preparation, dispensing and consumption of food by Tenant's employees who work in the Premises and not for the sale of food to any Persons other than such employees, (6) as an employment agency, daycare facility (other than as a self-operated facility for use only by Tenant's employees), labor union, school, or vocational training center (except for the training of employees of Tenant intended to be employed at the Premises), (7) as a barber shop, beauty salon or manicure shop, (8) for product display activities (such as those of a manufacturer's representative), (9) as offices of any public utility company, (10) for health care activities, (11) for clerical support services or offices of public stenographers or typists (other than those which are ancillary to an otherwise -27- Permitted Use), (12) as reservation or call centers, (13) for retail or manufacturing use, (14) as studios for radio, television or other media, or (15) any use which extends the hours of use or operations in the Premises (other than infrequently or sporadically) beyond the Operating Hours. Furthermore, the Premises shall not be used for any purpose that would, in Landlord's reasonable judgment, tend to lower the first-class character of the Building, create unreasonable or excessive elevator or floor loads, violate the certificate of occupancy of the Building, materially impair or interfere with any of the Building operations or the proper and economic heating, air-conditioning, cleaning or any other services of the Building, materially interfere with the use of the other areas of the Building by any other tenants, or materially impair the appearance of the Building. ARTICLE V ALTERATIONS Section 5.1. (a) Except as otherwise set out in Section 5.1(f), Tenant shall not make or permit to be made any Alterations without Landlord's prior written consent. Reference is made to Exhibit "G" hereto, which contains the Tenant Design and Construction Standards applicable to the Building, which is incorporated by reference in this Lease. Landlord reserves the right to make reasonable changes and additions thereto. (b) (1) Prior to making any such Alterations, Tenant shall (i) submit to Landlord two (2) sets of detailed plans and specifications (including layout, architectural, electrical, mechanical and structural drawings) that comply with all Requirements for each proposed Alteration, and Tenant shall not commence any such Alteration without first obtaining Landlord's approval of such plans and specifications, which approval shall not be unreasonably withheld or delayed, (ii) at Tenant's expense, obtain all permits, approvals and certificates required by any Governmental Authorities, and (iii) furnish to Landlord duplicate original policies or certificates thereof of worker's compensation insurance (covering all persons to be employed by Tenant, and Tenant's contractors and subcontractors, in connection with such Alteration) and commercial general liability insurance (including premises operation, bodily injury, personal injury, death, independent contractors, products and completed operations, broad form contractual liability and broad form property damage coverages) in such form, with such companies, for such periods and in such amounts as -28- Landlord may reasonably approve, naming Landlord and its agents, any Lessor and any Mortgagee, as additional insureds. Upon completion of such Alteration, Tenant, at Tenant's expense, shall obtain certificates of final approval of such Alterations required by any Governmental Authority and shall furnish Landlord with copies thereof, together with the "as built" plans and specifications for such Alterations. All Alterations shall be made and performed in accordance with the plans and specifications therefor as approved by Landlord, all Requirements, Restrictive Covenants, and the Rules and Regulations. All materials and equipment to be incorporated in the Premises as a result of any Alterations shall be first quality and no such materials or equipment shall be subject to any lien, encumbrance, chattel mortgage, title retention or security agreement. In addition, any such Alteration for which the cost of labor and materials (as estimated by Landlord's architect, engineer or contractor) is in excess of Seventy-Five Thousand Dollars ($75,000.00), either individually or in the aggregate with any other Alteration constructed in any twelve (12) month period, shall be performed only under the supervision of a licensed architect satisfactory to Landlord. (2) Landlord reserves the right to disapprove any plans and specifications in whole or in part, to reserve approval of items shown thereon pending its review and approval of other plans and specifications, and to condition its approval upon Tenant making revisions to the plans and specifications or supplying additional information; provided, however, that Landlord shall be reasonable in its exercise of these rights. Additionally, Landlord shall be deemed to have approved Tenant's plans and specifications if Landlord fails to respond to Tenant's plans and specifications within fifteen (15) days of Landlord's receipt thereof. Tenant agrees that any review or approval by Landlord of any plans and/or specifications with respect to any Alteration is solely for Landlord's benefit, and without any representation or warranty whatsoever to Tenant or any other Person with respect to the adequacy, correctness or sufficiency thereof or with respect to Requirements, Restrictive Covenants or otherwise. (c) Alterations shall be performed at Tenant's expense and at such times and in such manner as Landlord may from time to time reasonably designate, unless, at the time of the Alterations, Tenant is the only occupant of the Building and -29- Building No. 2, in which event, Tenant may control the times and manner (but always in accordance with all Requirements) to perform the Alterations. All Alterations shall become a part of the Building and shall be Landlord's property from and after the installation thereof and may not be removed or changed without Landlord's consent. Notwithstanding the foregoing, however, Landlord, upon notice given at least sixty (60) days prior to the Expiration Date or upon such shorter notice as is reasonable under the circumstances upon the earlier expiration of the Term, may require Tenant to remove any specified Alterations (other than those comprising part of Building Standard Condition) and to repair and restore in a good and workmanlike manner to Building Standard Condition (reasonable wear and tear excepted) any damage to the Premises or the Building caused by such removal. All Tenant's Property shall remain the property of Tenant and, unless Landlord and Tenant shall agree otherwise, on or before the Expiration Date shall, at Tenant's cost, be removed from the Premises by Tenant, and Tenant shall repair and restore in a good and workmanlike manner to Building Standard Condition (reasonable wear and tear excepted) any damage to the Premises or the Building caused by such removal. The provisions of this Section 5.1(c) shall survive the expiration or earlier termination of this Lease. (d) (1) All Alterations shall be performed, at Tenant's sole cost and expense, by contractors, subcontractors or mechanics approved by Landlord in Landlord's reasonable discretion. (2) Notwithstanding the foregoing, with respect to any Alteration affecting any Building Systems, (i) Tenant, if required by Landlord, shall employ Landlord's or the Manager's designated contractor, and (ii) the Alteration shall, if required by Landlord, at Tenant's expense, be designed by either Landlord's or the Manager's engineer. (e) (1) Any mechanic's lien filed against the Premises or the Real Property for work claimed to have been done for, or materials claimed to have been furnished to, Tenant shall be canceled or discharged by Tenant, at Tenant's expense, within twenty (20) days after such lien shall be filed, by payment or filing of the bond required by law, and Tenant shall indemnify and hold Landlord harmless from and against any and all costs, expenses, claims, losses or damages resulting therefrom by reason thereof. -30- (2) If Tenant shall fail to discharge such mechanic's lien within the aforesaid period, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to, discharge the same either by paying the amount claimed to be due or by procuring the discharge of such lien by deposit in court or bonding, and in any such event, Landlord shall be entitled, if Landlord so elects, to compel the prosecution of an action for the foreclosure of such mechanic's lien by the lienor and to pay the amount of the judgment, if any, in favor of the lienor, with interest, costs and allowances. (3) Any amount paid by Landlord for any of the aforesaid charges and for all expenses of Landlord (including, but not limited to, attorneys' fees and disbursements) incurred in defending any such action, discharging said lien or in procuring the discharge of said lien, with interest on all such amounts at the maximum legal rate of interest then chargeable to Tenant from the date of payment, shall be repaid by Tenant within ten (10) days after written demand therefor, and all amounts so repayable, together with such interest, shall be considered Additional Rent. (f) Notwithstanding anything to the contrary set forth in this Article V, Tenant, without Landlord's consent, is permitted to make Alterations to the Premises which relate only to the cosmetic appearance, nonstructural components, and/or non-load-bearing portions of the Premises (and which do not affect the structural and/or load-bearing elements of the Building or the Building Systems), provided such Alterations do not cost, in the aggregate, more than Seventy-Five Thousand Dollars ($75,000.00) during any twelve (12) month period during the Term. Section 5.2. Tenant shall reimburse Landlord, within five (5) Business Days after demand therefor, for any reasonable out-of-pocket expense incurred by Landlord for reviewing the plans and specifications for any Alterations or inspecting the progress of completion of the same. Section 5.3. Landlord, at Tenant's expense, and upon the request of Tenant, shall join in any applications for any permits, approvals or certificates required to be obtained by Tenant in connection with any permitted Alteration (provided that the provisions of the applicable Requirements shall require that Landlord join in such application) and shall otherwise cooperate with Tenant in connection therewith, provided that Landlord shall -31- not be obligated to incur any cost or expense or liability in connection therewith. Section 5.4. Tenant shall furnish to Landlord copies of records of all Alterations and of the cost thereof within fifteen (15) days after the completion of such Alterations. Section 5.5. TENANT HEREBY ACCEPTS THE PREMISES "AS IS, WHERE IS," AND WITHOUT ANY WARRANTY, EXPRESS OR IMPLIED, EXCEPT AS OTHERWISE SET FORTH IN THIS LEASE. Section 5.6. Tenant shall not, at any time prior to or during the Term, directly or indirectly employ, or permit the employment of, any contractor, mechanic or laborer in the Premises, whether in connection with any Alteration or otherwise, if such employment would unreasonably interfere or cause any unreasonable conflict with other contractors, mechanics or laborers engaged in the construction, maintenance or operation of the Building by Landlord, Tenant or others, or of any other property owned by Landlord. In the event of any such unreasonable interference or conflict, Tenant, upon demand of Landlord, shall cause all contractors, mechanics or laborers causing such interference or conflict to leave the Building immediately. Section 5.7. During the course of any Alteration and any construction by Landlord, whether on the Land or on any real property adjacent to the Land, Landlord and Tenant shall cooperate with each other, and shall cause their contractors and subcontractors to cooperate, so as to minimize interruption and interference with each other's construction activities. ARTICLE VI REPAIRS Section 6.1. Tenant covenants to use due care in its use and occupancy of the Premises and not to commit waste. Except as otherwise provided in this Section 6.1, Tenant shall not be obligated to repair any Building Systems. Tenant shall, however, at its own cost and expense, maintain and repair and, to the extent deemed appropriate by Tenant, monitor the Security System. Notwithstanding any provision contained in this Lease to the contrary, all damage or injury to the Premises, and all damage or injury to any other part of the Building, or to its fixtures, equipment and appurtenances (including Building Systems), whether requiring structural or nonstructural repairs, caused by the -32- moving of Tenant's Property or caused by or resulting from any act or omission of, or Alterations made by, Tenant or Persons Within Tenant's Control, shall be repaired by Tenant, at Tenant's sole cost and expense, to the reasonable satisfaction of Landlord (if the required repairs are non-structural in nature and do not affect any Building Systems), or by Landlord at Tenant's sole cost and expense (if the required repairs are structural in nature or affect any Building Systems). All of the aforesaid repairs shall be performed in a manner and with materials and design of first class and quality consistent with first-class office buildings in Memphis and shall be made in accordance with the provisions of Article 5. If Tenant shall fail, after five (5) days notice (or such shorter period as may be required because of an emergency), to proceed with due diligence to make repairs required to be made by Tenant, the same may be made by Landlord, at the expense of Tenant, and the expenses thereof incurred by Landlord, with interest thereon at the Applicable Rate, shall be paid to Landlord, as Additional Rent, within ten (10) days after rendition of a bill or statement therefor. Tenant shall give Landlord prompt notice of any defective condition in any Building Systems located in, servicing or passing through the Premises. Section 6.2. Tenant shall not place a load upon any floor of the Premises which exceeds seventy-five (75) pounds per square foot "live load." Tenant shall not locate or move any safe, heavy machinery, heavy equipment, business machines, freight, bulky matter or fixtures into or out of the Building without Landlord's prior consent, which consent shall not be unreasonably withheld, and Tenant shall make payment to Landlord of Landlord's costs in connection therewith (if such move is not part of an Alteration). If such safe, machinery, equipment, freight, bulky matter or fixture requires special handling (as determined by Landlord), Tenant shall employ only persons holding a Master Rigger's license to do said work. All work in connection therewith shall comply with the Requirements, and shall be done during such hours as Landlord may designate. Business machines and mechanical equipment shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Landlord's reasonable judgment, to absorb and prevent vibration, noise and annoyance. Section 6.3. Landlord shall operate, maintain and make all necessary repairs (both structural and non-structural) to the Building Systems and the public portions of the Building, both exterior and interior, in conformance with standards applicable to first-class office buildings in Memphis, except for those -33- repairs for which Tenant is responsible pursuant to any other provision of this Lease. Landlord shall use reasonable efforts to minimize interference with Tenant's use and occupancy of the Premises in making any repairs, alterations, additions or improvements; provided, however, that Landlord shall have no obligation to employ contractors or labor at so-called overtime or other premium pay rates or to incur any other overtime costs in connection with such repairs, alterations, additions or improvements. Notwithstanding the foregoing, if Tenant shall so request, Landlord shall employ contractors or labor at so-called overtime or other premium pay rates or incur other overtime costs in making such repairs, alterations, additions or improvements, provided Tenant shall pay to Landlord, as Additional Rent, within ten (10) days after demand therefor, an amount equal to the excess costs incurred by Landlord by reason of compliance with Tenant's request. Except as expressly provided in this Lease, there shall be no allowance to Tenant for a diminution of rental value and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from Landlord, Tenant or others making, or failing to make, any repairs, alterations, additions or improvements in or to any portion of the Building or the Premises, or its fixtures, appurtenances or equipment. Section 6.4. Without abatement or diminution in rent, Landlord reserves and shall have the following additional rights: 1. To erect, use and maintain pipes and conduits in and through the Premises; provided that all such conduits and pipes shall be located behind then-existing walls, under floors or above suspended ceilings and shall not interfere with the use and operation of the Premises, or any equipment or facilities located therein. 2. To take any and all measures, including inspections, repairs, alterations, additions and improvements to the Premises or to the Building, as may be necessary or desirable for the safety, protection or preservation of the Premises or the Building or Landlord's interests, or as may be necessary or desirable in the operation of the Building. ARTICLE VII CONNECTING CORRIDORS -34- Section 7.1 Within sixty (60) days after the Commencement Date, Tenant shall, at its own expense, install a doorway or wall in the enclosed corridor which leads to the building on the Adjacent Property, the design and location of the doorway or wall to be approved by Landlord. Section 7.2 In the event that the Expiration Date of this Lease shall be earlier or later than the expiration date of Tenant's lease of Building No. 2, then at such time as Tenant no longer occupies both of such buildings, Tenant shall, at its own expense, construct a door or doors in the corridor which connects the Building and Building No. 2, in such manner as Landlord and Tenant shall mutually agree, to prevent access between the Building and Building No. 2. ARTICLE VIII REQUIREMENTS OF LAW Section 8.1. Tenant shall not do, and shall not permit Persons Within Tenant's Control to do, any act or thing in or upon the Premises or the Building which will invalidate or be in conflict with the certificate of occupancy for the Premises or the Building or violate any Requirements or Restrictive Covenants. Tenant shall, at Tenant's sole cost and expense, take all action, including making any required Alterations necessary to comply with all Requirements (including, but not limited to, applicable terms of the Americans With Disabilities Act of 1990 (the "ADA"), as modified and supplemented from time to time) which shall impose any violation, order or duty upon Landlord or Tenant arising from, or in connection with, the Premises, Tenant's occupancy, use or manner of use of the Premises (including, without limitation, any occupancy, use or manner of use that constitutes a "place of public accommodation" under the ADA), or any installations by Tenant in the Premises, or required by reason of a breach of any of Tenant's covenants or agreements under this Lease, whether or not such Requirements shall now be in effect or hereafter enacted or issued, and whether or not any work required shall be ordinary or extraordinary or foreseen or unforeseen at the date hereof; provided, however, that Landlord shall be responsible for complying with such Requirement or Restrictive Covenant and for the cost of such compliance if and to the extent that non-compliance arose because of the acts of Landlord. Section 8.2. Tenant covenants and agrees that Tenant shall, at Tenant's sole cost and expense, comply at all times -35- with all Requirements governing the use, generation, storage, treatment and/or disposal of any Hazardous Materials (as defined below), the presence of which results from or in connection with the act or omission of Tenant or Persons Within Tenant's Control or the breach of this Lease by Tenant or Persons Within Tenant's Control. The term "Hazardous Materials" shall mean any biologically or chemically active or other toxic or hazardous wastes, pollutants or substances, including, without limitation, asbestos, PCBs, petroleum products and by-products, substances defined or listed as "hazardous substances" or "toxic substances" or similarly identified in or pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 ET SEQ., and as hazardous wastes under the Resource Conservation and Recovery Act, 42 U.S.C. 6010, ET SEQ., any chemical substance or mixture regulated under the Toxic Substance Control Act of 1976, as amended 15 U.S.C. 2601, ET SEQ., any "toxic pollutant" under the Clean Water Act, 33 U.S.C. 466 ET SEQ., as amended, any hazardous air pollutant under the Clean Air Act, 42 U.S.C. 7401 ET SEQ., hazardous materials identified in or pursuant to the Hazardous Materials Transportation Act, 49 U.S.C. 1802, ET SEQ., and any hazardous or toxic substances or pollutant regulated under any other Requirements. Tenant shall agree to execute, from time to time, at Landlord's request, affidavits, representations and the like concerning Tenant's best knowledge and belief regarding the presence of Hazardous Materials in, on, under or about the Premises, the Building or the Land. Tenant shall indemnify and hold harmless all Indemnitees from and against any loss, cost, damage, liability or expense (including attorneys' fees and disbursements) arising by reason of any clean up, removal, remediation, detoxification action or any other activity required or recommended of any Indemnitees by any Governmental Authority by reason of the presence in or about the Building or the Premises of any Hazardous Materials, as a result of or in connection with the act or omission of Tenant or Persons Within Tenant's Control or the breach of this Lease by Tenant or Persons Within Tenant's Control. The foregoing covenants and indemnity shall survive the expiration or any termination of this Lease. Section 8.3. If Tenant shall receive notice of any violation of, or defaults under, any Requirements, liens or other encumbrances applicable to the Premises, Tenant shall give prompt notice thereof to Landlord. Section 8.4. If any governmental license or permit shall be required for the proper and lawful conduct of Tenant's business and if the failure to secure such license or permit -36- would, in any way, affect Landlord or the Building, then Tenant, at Tenant's expense, shall promptly procure and thereafter maintain, submit for inspection by Landlord, and at all times comply with the terms and conditions of, each such license or permit. Section 8.5. Tenant, at Tenant's sole cost and expense and after notice to Landlord, may contest, by appropriate proceedings prosecuted diligently and in good faith, the legality or applicability of any Requirement affecting the Premises provided that: (a) neither Landlord nor any Indemnitees shall be subject to criminal penalties, nor shall the Real Property or any part thereof be subject to being condemned or vacated, nor shall the certificate of occupancy for the Premises or the Building be suspended or threatened to be suspended, by reason of non-compliance or by reason of such contest; (b) before the commencement of such contest, if Landlord or any Indemnitees may be subject to any civil fines or penalties or if Landlord may be liable to any independent third party as a result of such non-compliance, then Tenant shall furnish to Landlord either (i) a bond of a surety company satisfactory to Landlord, in form and substance reasonably satisfactory to Landlord, and in an amount at least equal to Landlord's estimate of the sum of (A) the cost of such compliance, (B) the penalties or fines that may accrue by reason of such non-compliance (as reasonably estimated by Landlord) and (C) the amount of such liability to independent third parties, and shall indemnify Landlord (and any Indemnitees) against the cost of such compliance and liability resulting from or incurred in connection with such contest or non-compliance; or (ii) other security satisfactory in all respects to Landlord; (c) such non-compliance or contest shall not constitute or result in a violation (either with the giving of notice or the passage of time or both) of the terms of any Mortgage, or if such Mortgage conditions such non-compliance or contest upon the taking of action or furnishing of security by Landlord, such action shall be taken or such security shall be furnished at the expense of Tenant; and (d) Tenant shall keep Landlord regularly advised as to the status of such proceedings. ARTICLE IX SUBORDINATION Section 9.1. This Lease shall be subject and subordinate to each Mortgage, whether made prior to or after the execution of this Lease, and to all renewals, extensions, supplements, amendments, modifications, consolidations and replacements -37- thereof or thereto, substitutions therefor, and advances made thereunder. This clause shall be self-operative and no further agreement of subordination shall be required to make the interest of any Lessor or Mortgagee superior to the interest of Tenant hereunder. In confirmation of such subordination, however, Tenant shall promptly execute and deliver, at its own cost and expense, any document, in recordable form if requested, that Landlord, any Lessor or any Mortgagee may request to evidence such subordination. Tenant shall not do anything that would constitute a default under any Mortgage, or omit to do anything that Tenant is obligated to do under the terms of this Lease so as to cause Landlord to be in default thereunder. If, in connection with the financing of the Real Property or the Building, any lending institution or Lessor, as the case may be, requests reasonable modifications of this Lease that do not increase rent or change the Term of this Lease, or materially and adversely affect the rights or obligations of Tenant under this Lease, Tenant shall make such modifications. Section 9.2. If, at any time prior to the expiration of the Term, any Mortgagee comes into possession of the Real Property or the Building by receiver or otherwise, Tenant agrees, at the election and upon demand of any owner of the Real Property or the Building, or of any Mortgagee in possession of the Real Property or the Building, to attorn, from time to time, to any such owner or Mortgagee or any person acquiring the interest of Landlord as a result of any such termination, or as a result of a foreclosure of the Mortgage or the granting of a deed in lieu of foreclosure, upon the then executory terms and conditions of this Lease (except as provided below), for the remainder of the Term, provided that such owner or Mortgagee, as the case may be, or receiver caused to be appointed by any of the foregoing, is then entitled to possession of the Premises. Any such attornment shall be made upon the condition that no such owner or Mortgagee shall be: 1. liable for any act or omission of any prior landlord (including, without limitation, the then defaulting landlord); or 2. subject to any defense or offsets (except as expressly set forth in this Lease) which Tenant may have against any prior landlord (including, without limitation, the then defaulting landlord); or 3. bound by any payment of Rental which Tenant might have paid for more than the current month to any prior -38- landlord (including, without limitation, the then defaulting landlord); or 4. bound by any obligation to make any payment to Tenant which was required to be made prior to the time such owner or Mortgagee succeeded to any prior landlord's interest; or 5. bound by any obligation to perform any work or to make improvements to the Premises except for (i) repairs and maintenance pursuant to the provisions of Article 6, (ii) repairs to the Premises or any part thereof as a result of damage by fire or other casualty pursuant to Article 12, but only to the extent that such repairs can be reasonably made from the net proceeds of any insurance actually made available to such owner or Mortgagee and (iii) repairs to the Premises as a result of a partial condemnation pursuant to Article 13, but only to the extent that such repairs can be reasonably made from the net proceeds of any award made available to such owner or Mortgagee. The provisions of this Section 9.2 shall inure to the benefit of any such owner or Mortgagee, shall apply notwithstanding that, as a matter of law, this Lease may terminate, and shall be self-operative upon any such demand, and no further agreement shall be required to give effect to said provisions. Tenant, however, upon demand of any such owner or Mortgagee, shall execute, from time to time, agreements in confirmation of the foregoing provisions of this Section 9.2, satisfactory to any such owner, Lessor or Mortgagee, and acknowledging such attornment and setting forth the terms and conditions of its tenancy. Nothing contained in this Section 9.2 shall be construed to impair any right otherwise exercisable by any such owner or Mortgagee. Section 9.3. If requested by any Mortgagee or Landlord, Tenant shall promptly execute and deliver, at Tenant's own cost and expense, any document in accordance with the terms of this Article 9, in recordable form, to evidence such subordination. Section 9.4. At any time and from time to time upon not less than twenty (20) days' prior notice to Tenant or Landlord given by the other, or to Tenant given by a Mortgagee, Tenant or Landlord, as the case may be, shall, without charge, execute, acknowledge and deliver a statement in writing addressed to such party as Tenant, Landlord or Mortgagee, -39- as the case may be, may designate, in form satisfactory to Tenant, Landlord or Mortgagee, as the case may be, certifying all or any of the following: (i) that this Lease is unmodified and in full force and effect (or if there have been modifications, that this Lease is in full force and effect as modified and stating the modifications); (ii) whether the Term has commenced and Fixed Rent and Additional Rent have become payable hereunder and, if so, the dates to which they have been paid; (iii) whether or not, to the best knowledge of the signer of such certificate, Landlord is in default in performance of any of the terms of this Lease and, if so, specifying each such event of default of which the signer may have knowledge; (iv) whether Tenant has accepted possession of the Premises; (v) whether Tenant has made any claim against Landlord under this Lease and, if so, the nature thereof and the dollar amount, if any, of such claim; (vi) either that Tenant does not know of any default in the performance of any provision of this Lease or specifying the details of any default of which Tenant may have knowledge and stating what action Tenant is taking or proposes to take with respect thereto; (vii) that, to the knowledge of Tenant, there are no proceedings pending or threatened against Tenant before or by any court or administrative agency which, if adversely decided, would materially and adversely affect the financial condition or operations of Tenant or, if any such proceedings are pending or threatened to the knowledge of Tenant, specifying and describing the same; and (viii) such further information with respect to the Lease or the Premises as Landlord may reasonably request or Mortgagee may require; it being intended that any such statement delivered pursuant hereto may be relied upon by any prospective purchaser of the Real Property or any part thereof or of the interest of Landlord in any part thereof, by any Mortgagee or prospective Mortgagee, by any tenant or prospective tenant of the Real Property or any part thereof, or by any prospective assignee of any Mortgage or by any assignee of Tenant. The failure of either Tenant or Landlord to execute, acknowledge and deliver to the other a statement in accordance with the provisions of this Section 9.4 within said twenty (20) day period shall constitute an acknowledgment by Tenant or Landlord, as the case may be, which may be relied on by any person who would be entitled to rely upon any such statement, that such statement as submitted by Landlord or Tenant, as the case may be, is true and correct. Section 9.5. As long as any Mortgage exists, Tenant shall not seek to terminate this Lease by reason of any act or omission of Landlord until Tenant has given written notice of such act or omission to all Mortgagees at such addresses as may have been -40- furnished to Tenant by such Mortgagees and, if any such Mortgagee notifies Tenant within thirty (30) days following receipt of such notice that it intends to remedy such act or omission, Mortgagee shall have a reasonable period of time to remedy such act or omission. ARTICLE X RULES AND REGULATIONS Section 10.1. Tenant and Persons Within Tenant's Control shall comply with Exhibit "C," "Rules and Regulations." Nothing contained in this Lease shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations or the terms, covenants or conditions in any other lease against any other tenant, and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its employees, agents, visitors or licensees. Landlord shall not discriminate against Tenant in enforcing the Rules and Regulations. In case of any conflict or inconsistency between the provisions of this Lease and of any of the Rules and Regulations as originally or as hereinafter adopted, the provisions of this Lease shall control. ARTICLE XI INSURANCE, PROPERTY LOSS OR DAMAGE, REIMBURSEMENT Section 11.1. (a) Tenant shall not entrust any property to any Building employee. Any Building employee to whom any property is entrusted by or on behalf of Tenant in violation of the foregoing prohibition shall be deemed to be acting as Tenant's agent with respect to such property and neither Landlord nor its agents shall be liable for any damage to property of Tenant or of others entrusted to employees of the Building, nor for the loss of or damage to any property of Tenant by theft or otherwise. Landlord and Landlord's agents shall not be liable for any damage to any of Tenant's Property or for interruption of Tenant's business, however caused, including but not limited to damage caused by other tenants or persons in the Building. Landlord shall not be liable for any latent defect in the Premises or in the Building. (b) Tenant shall give notice to Landlord promptly after Tenant learns of any accident, emergency or occurrence for which Landlord might be liable, fire or other casualty and all damages to or defects in the Premises or the Building for the repair of -41- which Landlord might be responsible or which constitutes Landlord's property. Such notice shall be given by telecopy or personal delivery to the address(es) of Landlord in effect for notice. Section 11.2. Tenant shall not do or permit to be done any act or thing in or upon the Premises which will invalidate or be in conflict with the terms of the State of Tennessee standard policies of fire insurance and liability (hereinafter referred to as "Building Insurance"); and Tenant, at Tenant's own expense, shall comply with all rules, orders, regulations and requirements of all insurance boards, and shall not do or permit anything to be done in or upon the Premises or bring or keep anything therein or use the Premises in a manner which increases the rate of premium for any of the Building Insurance over the rate in effect at the commencement of the Term of this Lease. Section 11.3. If by reason of any failure of Tenant to comply with the provisions of this Lease, the rate of premium for Building Insurance or other insurance on the property and equipment of Landlord shall increase, Tenant shall reimburse Landlord for that part of the insurance premiums thereafter paid by Landlord which shall have been charged because of such failure by Tenant. Tenant shall make said reimbursement on the first day of the month following such payment by Landlord. Section 11.4. (a) At Tenant's own cost and expense, Tenant shall obtain, maintain and keep in full force and effect during the Term commercial general liability insurance (without deductible) in a form approved in the State of Tennessee (including broad form property damage coverages). The limits of liability shall be not less than Five Million Dollars ($5,000,000.00) per occurrence, which amount may be satisfied with a primary commercial general liability policy of not less than Two Million Dollars ($2,000,000.00) and an excess (or "Umbrella") liability policy affording coverage, at least as broad as that afforded by the primary commercial general liability policy, in an amount not less than Three Million Dollars ($3,000,000.00). Landlord, the Manager, any Lessors and any Mortgagees shall be included as additional insureds in said policies and shall be protected against all liability arising in connection with this Lease. All said policies of insurance shall be written as "occurrence" policies. Whenever, in Landlord's reasonable judgment, good business practice and changing conditions indicate a need for additional amounts or different types of insurance coverage, Tenant shall, within ten (10) days -42- after Landlord's request, obtain such insurance coverage, at Tenant's expense. (b) Tenant, at Tenant's sole cost and expense, shall maintain all-risk insurance, with deductibles in an amount reasonably satisfactory to Landlord, protecting and indemnifying Tenant against any and all damage to or loss of any Alterations and leasehold improvements, including any made by Landlord to prepare the Premises for Tenant's occupancy, and Tenant's Property. All said policies shall cover the full replacement value of all Alterations, leasehold improvements and Tenant's Property. (c) All policies of insurance shall be: (i) written as primary policy coverage and not contributing with or in excess of any coverage which Landlord or any Lessor may carry; and (ii) issued by reputable and independent insurance companies rated in Best's Insurance Guide or any successor thereto (or, if there is none, an organization having a national reputation), as having a general policyholder rating of "A" and a financial rating of at least "VII," and which are licensed to do business in the State of Tennessee. Tenant shall, not later than ten (10) Business Days prior to the Commencement Date, deliver to Landlord either (a) the policies of insurance or (b) certificates thereof with a copy of the declaration page, and shall thereafter furnish to Landlord, at least thirty (30) days prior to the expiration of any such policies and any renewal thereof, a new policy or certificate (with copy of the declaration page) in lieu thereof. Each of said policies shall also contain a provision whereby the insurer agrees not to cancel, fail to renew, diminish or materially modify said insurance policy(ies) without having given Landlord, the Manager and any Lessors and Mortgagees at least thirty (30) days prior written notice thereof. Tenant shall promptly send to Landlord a copy of all notices sent to Tenant by Tenant's insurer. (d) Tenant shall pay all premiums and charges for all of said policies, and, if Tenant shall fail to make any payment when due or carry any such policy, then after notice to Tenant, Landlord may, but shall not be obligated to, make such payment or carry such policy, and the amount paid by Landlord, with interest thereon (at the Applicable Rate), shall be repaid to Landlord by Tenant on demand, and all such amounts so repayable, together with such interest, shall be deemed to constitute Additional Rent hereunder. Payment by Landlord of any such premium, or the carrying by Landlord of any such policy, shall not be deemed to waive or release the default of Tenant with respect thereto. -43- Section 11.5. (a) Landlord shall cause each policy carried by Landlord insuring the Building against loss, damage or destruction by fire or other casualty, and Tenant shall cause each insurance policy carried by Tenant and insuring the Premises and Tenant's Alterations, leasehold improvements and Tenant's Property against loss, damage or destruction by fire or other casualty, to be written in a manner so as to provide that the insurance company waives all rights of recovery by way of subrogation against Landlord, Tenant and any tenant of space in the Building in connection with any loss or damage covered by any such policy. Neither party shall be liable to the other for the amount of such loss or damage which is in excess of the applicable deductible, if any, caused by fire or any of the risks enumerated in its policies. (b) The waiver of subrogation referred to in Section 11.5(a) above shall extend to the agents and employees of each party (including, as to Landlord, the Manager). Nothing contained in this Section 11.5 shall be deemed to relieve either party from any duty imposed elsewhere in this Lease to repair, restore and rebuild. (c) During the Term, Landlord agrees to maintain: (i) "all risk" full replacement cost property insurance on the Building in an amount sufficient to prevent Landlord from being deemed a coinsurer of the risks insured under the policy, which shall include customary rent loss insurance covering loss of rents from Tenant under this Lease and other tenants under other leases and which shall include, as and to the extent customarily included by prudent owners of comparable first class office buildings in Memphis, Tennessee, boiler and machinery and electrical apparatus coverage; (ii) commercial general liability insurance (which may be a combination of primary and umbrella coverages) in an amount which Landlord deems appropriate; and (iii) Landlord shall furnish to Tenant certificates or other evidence of insurance from the insurer, or, if not available from the insurer, then from the insurance agent, evidencing such coverage at the time this Lease is executed and, at Tenant's request, within thirty (30) days after any policy is renewed, replaced or changed. -44- ARTICLE XII DESTRUCTION BY FIRE OR OTHER CAUSE Section 12.1. If the Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord. Landlord shall, subject to the provisions of Sections 12.2 and 12.3 below, proceed with reasonable diligence within 120 days of the casualty to repair or cause to be repaired such damage at its expense; and, if the Premises, or any part thereof, shall be rendered untenantable by reason of such damage and such damage shall not be due to the fault of Tenant or Persons Within Tenant's Control, then the Fixed Rent and the Escalation Rent hereunder, or an amount thereof apportioned on a pro rata basis according to the area of the Premises so rendered untenantable (if less than the entire Premises shall be so rendered untenantable), shall be abated for the period from the date of such damage to the date when the repair of such damage shall have been substantially completed. Tenant covenants and agrees to cooperate with Landlord and any Lessor or any Mortgagee in their efforts to collect insurance proceeds (including rent insurance proceeds) payable to such parties. Landlord shall not be liable for any delay which may arise by reason of adjustment of insurance on the part of Landlord and/or Tenant, or any cause beyond the control of Landlord or contractors employed by Landlord. Section 12.2. Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from damage from fire or other casualty or the repair thereof. Tenant understands that Landlord, in reliance upon Section 12.4, will not carry insurance of any kind on Tenant's Property, Tenant's Alterations and on leasehold improvements, and that Landlord shall not be obligated to repair any damage thereto or replace the same. (a) Notwithstanding anything to the contrary contained in Sections 12.1 and 12.2 above, in the event that: (i) at least twenty-five thousand (25,000) rentable square feet of the Building shall be damaged by a fire or other casualty so that substantial alteration or reconstruction of the Building shall, in Landlord's sole opinion, be required (whether or not the Premises shall have been damaged by such fire or other casualty and without regard to the structural integrity of the Building); or -45- (ii) the Premises shall be totally or substantially damaged or shall be rendered wholly or substantially untenantable; or (iii) there shall be any damage to the Premises within the last two (2) years of the Term wherein the cost of repair exceeds an amount equal to three (3) monthly installments of Fixed Rent, then either Landlord or Tenant may terminate this Lease and the term and estate hereby granted, by notifying the other party in writing of such termination prior to commencement of work to repair the damage to the Premises or within one hundred twenty (120) days after the date of such damage, whichever first occurs. In the event that such a notice of termination shall be given, then this Lease and the Term and estate hereby granted shall expire as of the date of termination stated in said notice with the same effect as if that were the Fixed Expiration Date, and the Fixed Rent and Escalation Rent hereunder shall be apportioned as of such date. (b) Notwithstanding anything to the contrary contained in this Section 12.2, upon written request which is made by Tenant prior to commencement of work to repair the damage to the Premises, Landlord shall deliver to Tenant an estimate prepared by a reputable contractor selected by Landlord setting forth such contractor's estimate as to the time reasonably required to repair such damage. If the period to repair set forth in any such estimate exceeds nine (9) months, Tenant may elect to terminate this Lease by notice to Landlord given not later than thirty (30) days following Tenant's receipt of such estimate. If Tenant exercises such election, this Lease and the term and estate hereby granted shall expire as of the sixtieth (60th) day after notice of such election given by Tenant with the same effect as if that were the Fixed Expiration Date, and the Fixed Rent and Escalation Rent hereunder shall be apportioned as of such date. Section 12.3. Except as may be provided in Section 11.5, nothing herein contained shall relieve Tenant from any liability to Landlord or to Landlord's insurers in connection with any damage to the Premises or the Building by fire or other casualty if Tenant shall be legally liable in such respect. -46- Section 12.4. This Lease shall be considered an express agreement governing any case of damage to or destruction of the Building or any part thereof by fire or other casualty. ARTICLE XIII EMINENT DOMAIN Section 13.1. If the whole of the Real Property, the Building or the Premises is acquired or condemned for any public or quasi-public use or purpose, this Lease and the Term shall end as of the date of the vesting of title with the same effect as if said date were the Fixed Expiration Date. If only a part of the Real Property and not the entire Premises is so acquired or condemned then, (a) except as hereinafter provided in this Section 13.1, this Lease and the Term shall continue in effect but, if a part of the Premises is included in the part of the Real Property so acquired or condemned, from and after the date of the vesting of title, the Fixed Rent and Tenant's Share shall be reduced in the proportion which the area of the part of the Premises so acquired or condemned bears to the total area of the Premises immediately prior to such acquisition or condemnation; (b) whether or not the Premises are affected thereby, Landlord, at Landlord's option, may give to Tenant, within sixty (60) days next following the date upon which Landlord receives notice of vesting of title, a thirty (30) day notice of termination of this Lease; and (c) if the part of the Real Property so acquired or condemned contains more than thirty percent (30%) of the total area of the Premises immediately prior to such acquisition or condemnation, or if, by reason of such acquisition or condemnation, Tenant no longer has access to the Premises, Tenant, at Tenant's option, may give to Landlord, within sixty (60) days next following the date upon which Tenant receives notice of vesting of title, a thirty (30) day notice of termination of this Lease. If any such thirty (30) day notice of termination is given, by Landlord or Tenant, this Lease and the Term shall come to an end and expire upon the expiration of said thirty (30) days with the same effect as if the date of expiration of said thirty (30) days were the Fixed Expiration Date. If a part of the Premises is so acquired or condemned and this Lease and the Term are not terminated pursuant to the foregoing provisions of this Section 13.1, Landlord, at Landlord's cost and expense, shall restore that part of the Premises not so acquired or condemned to a self-contained rental unit, exclusive of Tenant's Alterations and Tenant's Property. In the event of any termination of this Lease and the Term pursuant to the provisions of this Section 13.1, the Fixed Rent -47- shall be apportioned as of the date of the termination and any prepaid portion of the Fixed Rent or Escalation Rent for any period after such date shall be refunded by Landlord to Tenant. Section 13.2. In the event of any such acquisition or condemnation of all or any part of the Real Property, Landlord shall be entitled to receive the entire award for any such acquisition or condemnation. Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired portion of the Term and Tenant hereby expressly assigns to Landlord all of its right in and to any such award. Nothing contained in this Section 13.2 shall be deemed to prevent Tenant from making a separate claim in any condemnation proceedings for the value of any Tenant's Property included in such taking, and for any moving expenses, so long as Landlord's award is not reduced thereby. ARTICLE XIV ASSIGNMENT, SUBLETTING, MORTGAGE, ETC. Section 14.1 Except as otherwise provided in this Article 14, Tenant shall not (a) assign this Lease (whether by operation of law, transfers of interests in Tenant or otherwise); or (b) mortgage or encumber Tenant's interest in this Lease, in whole or in part; or (c) sublet, or permit the subletting of, the Premises or any part thereof. Tenant shall not advertise or authorize a broker to advertise for a subtenant or assignee, without in each instance, obtaining the prior written consent of Landlord, which shall not be unreasonably withheld or delayed. Section 14.2 If Tenant's interest in this Lease shall be assigned in violation of the provisions of this Article 14, such assignment shall be invalid and of no force and effect against Landlord; provided, however, that Landlord may collect an amount equal to the then Fixed Rent plus any other item of Rental from the assignee as a fee for its use and occupancy. If the Premises or any part thereof are sublet to, or occupied by, or used by, any person other than Tenant, whether or not in violation of this Article 14, Landlord, after default by Tenant under this Lease, may collect any item of Rental or other sums paid by the subtenant, user or occupant as a fee for its use and occupancy, and shall apply the net amount collected to the Fixed Rent and the items of Rental reserved in this Lease. No such assignment, subletting, occupancy, or use, whether with or without Landlord's prior consent, nor any such collection or application of Rental or fee for use and occupancy, shall be deemed a waiver by -48- Landlord of any term, covenant or condition of this Lease or the acceptance by Landlord of such assignee, subtenant, occupant or user as Tenant hereunder, nor shall the same, in any circumstances, relieve Tenant of any of its obligations under this Lease. The consent by Landlord to any assignment, subletting, occupancy or use shall not relieve Tenant from its obligation to obtain the express prior consent of Landlord to any further assignment, subletting, occupancy or use. Any person to which this Lease is assigned with Landlord's consent shall be deemed without more to have assumed all of the obligations arising under this Lease from and after the date of such assignment and shall execute and deliver to Landlord, upon demand, an instrument confirming such assumption. Notwithstanding and subsequent to any assignment, Tenant's primary liability hereunder shall continue notwithstanding (a) any subsequent amendment hereof, or (b) Landlord's forbearance in enforcing against Tenant any obligation or liability, without notice to Tenant, to each of which Tenant hereby consents in advance. If any such amendment operates to increase the obligations of Tenant under this Lease, the liability under this Section 14.2 of the assigning Tenant shall continue to be no greater than if such amendment had not been made (unless such party shall have expressly consented in writing to such amendment). (a) For purposes of this Article 14, (i) the transfer of a majority of the issued and outstanding capital stock of any corporate tenant, or of a corporate subtenant, or the transfer of a majority of the total interest in any partnership tenant or subtenant, or the transfer of control in any limited partnership tenant or subtenant, or the transfer of control in any limited liability company tenant or subtenant or the transfer of control in any limited liability partnership tenant or subtenant, however accomplished, whether in a single transaction or in a series of related or unrelated transactions, shall be deemed an assignment of this Lease, or of such sublease, as the case may be, except that the transfer of the outstanding capital stock of any corporate tenant, or subtenant, shall be deemed not to include the sale of such stock by persons or parties, other than those deemed "affiliates" of Tenant within the meaning of Rule 144 promulgated under the Securities Act of 1933, as amended, through the "over-the-counter market" or through any recognized stock exchange, (ii) any increase in the amount of issued and/or outstanding capital stock of any corporate tenant, or of a corporate subtenant, and/or the creation of one or more additional classes of capital stock of any corporate tenant or any corporate subtenant, in a single transaction or a series of -49- related or unrelated transactions, resulting in a change in the legal or beneficial ownership of such tenant or subtenant so that the shareholders of such tenant or subtenant existing immediately prior to such transaction or series of transactions shall no longer own a majority of the issued and outstanding capital stock of such tenant or subtenant, shall be deemed an assignments of this Lease, (iii) an agreement by any other person or entity, directly or indirectly, to assume Tenant's obligations under this Lease shall be deemed an assignment, (iv) any person or legal representative of Tenant, to whom Tenant's interest under this lease passes by operation of law, or otherwise, shall be bound by the provisions of this Article 14, and (v) a modification, amendment or extension of a sublease shall be deemed a sublease. Tenant agrees to furnish to Landlord on request at any time such information and assurances as Landlord may reasonably request that neither Tenant, nor any previously permitted subtenant, has violated the provisions of this Article 14. (b) The provisions of clauses (a), (c) and (d) of Section 14.1 shall not apply to transactions with a corporation into or with which Tenant is merged or consolidated or with a Person to which substantially all of Tenant's assets are transferred (provided such merger or transfer of assets is for a good business purpose and not principally for the purpose of transferring the leasehold estate created by this Lease, and provided further, that the assignee has a net worth at least equal to or in excess of the net worth of Tenant as of the date of this Lease and as of the date immediately prior to such merger or transfer, whichever is greater) or, if Tenant is a partnership, with a successor partnership, nor shall the provisions of clause (a), (c) and (d) of Section 14.1 apply to transactions with an entity that controls or is controlled by Tenant or is under common control with Tenant. Tenant shall notify Landlord before any such transaction is consummated. (c) The term "control" as used in this Lease (i) in the case of a corporation shall mean ownership of more than fifty percent (50%) of the outstanding capital stock of that corporation, (ii) in the case of a general partnership, shall mean more than fifty percent (50%) of the general partnership interest of the partnership, (iii) in the case of a limited partnership, shall mean more than fifty percent (50%) of the general and limited partnership interests of such limited partnership; (iv) in the case of a limited liability company, shall mean more than fifty percent (50%) of the membership interests of such limited liability company, and (v) in the case of a limited liability partnership, shall mean more than fifty -50- percent (50%) of the partnership interest of such limited liability partnership. Section 14.3. [RESERVED] Section 14.4. (a) If Tenant sublets any portion of the Premises to a Person in a transaction for which Landlord's consent is required, Landlord shall be entitled to and Tenant shall pay to Landlord, as Additional Rent (the "Sublease Additional Rent"), a sum equal to fifty percent (50%) of any rents, additional charges and other consideration payable under the sublease to Tenant by the subtenant in excess of the Fixed Rent and Escalation Rent accruing during the term of the sublease in respect of the subleased space (at the rate per square foot payable by Tenant under this Lease) pursuant to the terms of this Lease (including, but not limited to, sums paid for the sale or rental of Tenant's Property and Alterations less the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's federal income tax or federal information returns), net of any reasonable brokerage commissions incurred in connection therewith; provided, however, that no reduction shall be allowed if brokerage commissions are paid to any Person under Tenant's control. Such Sublease Additional Rent shall be payable as and when received by Tenant. (b) Landlord may, by notice to Tenant, elect to waive the benefits of this Section 14.4, for any month or months, prospectively or retroactively. Any retroactive waiver shall be accompanied by a return to Tenant of all Sublease Additional Rent theretofore paid to and retroactively waived by Landlord for the months in question. Section 14.5. (a) If Tenant shall assign this Lease to a Person in a transaction for which Landlord's consent is required, Landlord shall be entitled to and Tenant shall pay to Landlord, as Additional Rent, an amount equal to all sums and other consideration paid to Tenant by the assignee for or by reason of such assignment (including, but not limited to, sums paid for the sale or rental of Tenant's Property and Alterations less the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's federal income tax or federal information returns). Such Additional Rent shall be payable as and when received by Tenant from the assignee. (b) Landlord may, by notice to Tenant, elect to waive the benefits of this Section 14.5, prospectively or retrospectively. Any retroactive waiver shall be accompanied by a return to -51- Tenant of all amounts theretofore paid to and retroactively waived by Landlord. Section 14.6. Landlord shall have no liability for brokerage commissions incurred with respect to any assignment of this Lease or any subletting of all or any part of the Premises by or on behalf of Tenant. Tenant shall pay, and shall indemnify and hold Landlord harmless from and against, any and all cost, expense (including reasonable attorneys' fees and disbursements) and liability in connection with any compensation, commissions or charges claimed by any broker or agent with respect to any such assignment or subletting. ARTICLE XV ACCESS TO PREMISES Section 15.1. (a) Tenant shall permit Landlord, Landlord's agents and independent contractors and public utilities servicing the Building to have reasonable access for the purpose of maintaining existing concealed ducts, pipes and conduits in and through and to access all Common Areas within the Building and all Common Areas comprising a portion of the Land. Landlord or Landlord's agents shall have the right to enter the Premises at all reasonable times upon (except in case of emergency) reasonable prior notice, which notice may be oral, to examine the same, to show the same to prospective purchasers, Mortgagees or lessees of the Building or space therein, and to make such repairs, alterations, improvements or additions (i) as Landlord may deem necessary or desirable to the Premises or to any other portion of the Building, or (ii) which Landlord may elect to perform at least ten (10) days after notice (except in an emergency when no notice shall be required) following Tenant's failure to make repairs or perform any work which Tenant is obligated to make or perform under this Lease, or (iii) for the purpose of complying with Requirements, and Landlord shall be allowed to take all material into and upon the Premises that may be required therefor without the same constituting an eviction or constructive eviction of Tenant in whole or in part and the Fixed Rent (and any other item of Rental) shall in no respect abate or be reduced by reason of said repairs, alterations, improvements or additions, wherever located, or while the same are being made, by reason of loss or interruption of business of Tenant, or otherwise. Landlord shall promptly repair any damage caused to the Premises by such work, alterations, improvements or additions. Tenant shall, at Tenant's cost, take such action as may be reasonably necessary to grant to Landlord, its agents and -52- independent contractors clearance and access by means of the Security System for the purposes herein set out. (b) Any work performed or installations made pursuant to this Article 15 shall be made with reasonable diligence and otherwise pursuant to Section 6.3. (c) Any pipes, ducts, or conduits installed in or through the Premises pursuant to this Article 15 shall, if reasonably practicable, either be concealed behind, beneath or within partitioning, columns, ceilings or floors located or to be located in the Premises, or completely furred at points immediately adjacent to partitioning, columns or ceilings located or to be located in the Premises. Section 15.2. If Tenant is not present when for any reason entry into the Premises may be necessary or permissible, Landlord or Landlord's agents may enter the same without rendering Landlord or such agents liable therefor (if during such entry Landlord or Landlord's agents accord reasonable care to Tenant's Property), and without in any manner affecting this Lease. Section 15.3. All parts (except surfaces facing the interior of the Premises) of all walls, windows and doors bounding the Premises (including exterior Building walls, exterior core corridor walls, exterior doors and entrances), all balconies, terraces and roofs adjacent to the Premises, all space in or adjacent to the Premises used for shafts, stacks, stairways, chutes, pipes, conduits, ducts, fan rooms, heating, air cooling, plumbing and other mechanical facilities, service closets and other Building facilities are not part of the Premises, and Landlord shall have the use thereof, as well as access thereto through the Premises for the purposes of operation, maintenance, alteration and repair. ARTICLE XVI CERTIFICATE OF OCCUPANCY Section 16.1. Tenant shall not at any time use or occupy the Premises in violation of the certificate of occupancy at such time issued for the Premises or for the Building and in the event that any Governmental Authority hereafter contends or declares by notice, violation, order or in any other manner whatsoever that the Premises are used by Tenant for a purpose that is a violation of such certificate of occupancy, Tenant shall, upon three (3) Business Days' written notice from Landlord or any Government -53- Authority, immediately discontinue such use of the Premises; provided, however, that nothing herein shall prevent Tenant from contesting such violation pursuant to and in accordance with the provisions of Section 8.5. ARTICLE XVII DEFAULT Section 17.1. Each of the following events shall be an "Event of Default" under this Lease: (a) if Tenant shall on any occasion default in the payment when due of any installment of Fixed Rent or in the payment when due of any other item of Rental and the same shall not be cured within five (5) days after written notice of default by Landlord to Tenant; or (b) if Tenant shall fail on three (3) or more occasions in any period of eighteen (18) consecutive months to make a payment when due of any Rental, and Landlord shall have given Tenant written notice of such default after two (2) such occurrences; or (c) if Tenant shall default in the observance or performance of any term, covenant or condition on Tenant's part to be observed or performed under that certain Agreement of Lease of even date herewith between Landlord and Tenant with respect to Building No. 2, or any renewal, modification or extension thereof, and such default shall continue beyond any grace period set forth in such other lease for the remedying of such default; or (d) if the Premises shall become vacant or abandoned; or (e) if Tenant's interest in this Lease shall devolve upon or pass to any person, whether by operation of law or otherwise, except as expressly permitted under Article 14 hereof; or (f) (1) if Tenant shall not, or shall be unable to, or shall admit in writing Tenant's inability to, as to any obligation, pay Tenant's debts as they become due; or -54- (2) if Tenant shall commence or institute any case, proceeding or other action (a) seeking relief on Tenant's behalf as debtor, or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to Tenant or Tenant's debts under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, or (b) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property; or (3) if Tenant shall make a general assignment for the benefit of creditors; or (4) if any case, proceeding or other action shall be commenced or instituted against Tenant (a) seeking to have an order for relief entered against Tenant as debtor or to adjudicate Tenant a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to Tenant or Tenant's debts under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, or (b) seeking appointment of a receiver, trustee, custodian or other similar official for Tenant or for all or any substantial part of Tenant's property, which either (i) results in any such entry of an order for relief, adjudication of bankruptcy or insolvency or such an appointment or the issuance or entry of any other order having a similar effect or (ii) remains undismissed for a period of sixty (60) days; or (5) if a trustee, receiver or other custodian shall be appointed for any substantial part of the assets of Tenant which appointment is not vacated or effectively stayed within sixty (60) days; or (g) if Tenant shall default in the observance or performance of any other term, covenant or condition of this Lease on Tenant's part to be observed or performed and Tenant shall fail to remedy such default within fifteen (15) days after notice by Landlord to Tenant of such default, or if such default is of such a nature that it cannot with due -55- diligence be completely remedied within said period of fifteen (15) days and the continuation of which for the period required for cure will not subject Landlord to the risk of criminal liability or foreclosure of any Mortgage, if Tenant shall not, (i) within said fifteen (15) day period advise Landlord of Tenant's intention duly to institute all steps necessary to remedy such situation, (ii) duly institute within said fifteen (15) day period, and thereafter diligently and continuously prosecute to completion all steps necessary to remedy the same and (iii) complete such remedy within such time after the date of the giving of said notice by Landlord as shall reasonably be necessary. Section 17.2. If an Event of Default shall occur, Landlord may, at any time thereafter, at Landlord's option, give written notice to Tenant stating that this Lease and the Term shall expire and terminate on the date specified in such notice, which date shall not be less than three (3) days after Tenant's receipt of such notice, or such longer term as specified in the notice, whereupon this Lease and the Term and all rights of Tenant under this Lease shall automatically expire and terminate as if the date specified in the notice given pursuant to this Section 17.2 were the Fixed Expiration Date and Tenant immediately shall quit and surrender the Premises, but Tenant shall remain liable for damages as provided herein or pursuant to law. Anything contained herein to the contrary notwithstanding, if such termination shall be stayed by order of any court having jurisdiction over any proceeding described in Section 17.1(f), or by federal or state statute, then, following the expiration of any such stay, or if the trustee appointed in any such proceeding, Tenant or Tenant as debtor-in-possession fails to assume Tenant's obligations under this Lease within the period prescribed therefor by law or within one hundred twenty (120) days after entry of the order for relief or as may be allowed by the court, or if said trustee, Tenant or Tenant as debtor-in-possession shall fail to provide adequate protection of Landlord's right, title and interest in and to the Premises or adequate assurance of the complete and continuous future performance of Tenant's obligations under this Lease, Landlord, to the extent permitted by law or by leave of the court having jurisdiction over such proceeding, shall have the right, at its election, to terminate this Lease on three (3) days' prior written notice to Tenant, Tenant as debtor-in possession or said trustee and upon the expiration of said three (3) day period this Lease shall cease and expire as aforesaid and Tenant, Tenant as -56- debtor-in-possession or said trustee shall immediately quit and surrender the Premises as aforesaid. Section 17.3. If, at any time, (i) Tenant shall consist of two (2) or more persons, or (ii) Tenant's obligations under this Lease shall have been guaranteed by any person other than Tenant, or (iii) Tenant's interest in this Lease has been assigned, the word "Tenant" as used in Section 17.1(f), shall be deemed to mean any one or more of the persons primarily or secondarily liable for Tenant's obligations under this Lease. Any monies received by Landlord from or on behalf of Tenant during the pendency of any proceeding of the types referred to in Section 17.1(f) shall be deemed paid as compensation for the use and occupancy of the Premises and the acceptance of any such compensation by Landlord shall not be deemed an acceptance of Rental or a waiver on the part of Landlord of any rights under Section 17.2. ARTICLE XVIII REMEDIES AND DAMAGES Section 18.1. (a) If any Event of Default shall occur, or this Lease and the Term shall expire and come to an end as provided in Article 17: 6. Tenant shall quit and peacefully surrender the Premises to Landlord, and Landlord and its agents may immediately, or at any time after such Event of Default or after the date upon which this Lease and the Term shall expire and come to an end, re-enter the Premises or any part thereof, without notice, either by summary proceedings, or by any other applicable action or proceeding or otherwise (without being liable to indictment, prosecution or damages therefor), but excluding by force, and may repossess the Premises and dispossess Tenant and any other persons from the Premises by summary proceedings or otherwise (excluding by force) and remove any and all of their property and effects from the Premises (and Tenant shall remain liable for damages as provided herein or pursuant to law); and 7. Landlord, at Landlord's option, may relet the whole or any part or parts of the Premises from time to time, either in the name of Landlord or otherwise, to such tenant or tenants, for such term or terms ending before, on or after the Fixed Expiration Date, at such rent or rentals and upon such other conditions, which may include concessions and free rent periods, as Landlord, in Landlord's sole discretion, may determine; provided, -57- however, that Landlord shall have no obligation to relet the Premises or any part thereof and shall in no event be liable for refusal or failure to relet the Premises or any part thereof, or, in the event of any such reletting, for refusal or failure to collect any rent due upon any such reletting, and no such refusal or failure shall operate to relieve Tenant of any liability under this Lease or otherwise affect any such liability, and Landlord, at Landlord's option, may make such Alterations, in and to the Premises as Landlord, in Landlord's sole discretion, shall consider advisable or necessary in connection with any such reletting or proposed reletting, without relieving Tenant of any liability under this Lease or otherwise affecting any such liability. (b) Tenant hereby waives the service of any notice of intention to re-enter that may otherwise be required to be given under any present or future law. Tenant, on its own behalf and on behalf of all persons claiming through or under Tenant, including all creditors, does further hereby waive any and all rights that Tenant and all such persons might otherwise have under any present or future law to redeem the Premises, or to re-enter or repossess the Premises, or to restore the operation of this Lease, after (1) Tenant shall have been dispossessed by a judgment or by warrant of any court or judge, or (2) any reentry by Landlord, or (3) any expiration or termination of this Lease and the Term, whether such dispossess, re-entry, expiration or termination is by operation of law or pursuant to the provisions of this Lease. The words "re-entry," "re-enter" and "re-entered" as used in this Lease shall not be deemed to be restricted to their technical legal meanings. In the event of a breach or threatened breach by Tenant, or any persons claiming through or under Tenant, of any term, covenant or condition of this Lease, Landlord shall have the right to enjoin such breach and the right to invoke any other remedy allowed by law or in equity as if reentry, summary proceedings and other special remedies were not provided in this Lease for such breach. The right to invoke the remedies hereinbefore set forth are cumulative and shall not preclude Landlord from invoking any other remedy allowed at law or in equity. Section 18.2. (a) If this Lease and the Term shall expire and come to an end as provided in Article 18, or by or under any summary proceeding or any other action or proceeding, or if Landlord shall re-enter the Premises as provided in Section 18.1, -58- or by or under any summary proceeding or any other action or proceeding, then, in any of said events: 1. Tenant shall pay to Landlord all Fixed Rent, Escalation Rent, other Additional Rent and other items of Rental payable under this Lease by Tenant to Landlord to the date upon which this Lease and the Term shall have expired and come to an end or to the date of re-entry upon the Premises by Landlord, as the case may be; 2. Tenant also shall be liable for and shall pay to Landlord, as damages, any deficiency ("Deficiency") between the Rental for the period which otherwise would have constituted the unexpired portion of the Term and the net amount, if any, of rents collected under any reletting effected pursuant to the provisions of Section 18.1(a)(2) for any part of such period (after first deducting from the rents collected under any such reletting all of Landlord's expenses in connection with the termination of this Lease, Landlord's reentry upon the Premises and such reletting including, but not limited to, all repossession costs, brokerage commissions, attorneys' fees and disbursements, alteration costs and other expenses of preparing the Premises for such reletting); any such Deficiency shall be paid in monthly installments by Tenant on the days specified in this Lease for payment of installments of Fixed Rent; Landlord shall be entitled to recover from Tenant each monthly Deficiency as the same shall arise, and no suit to collect the amount of the Deficiency for any month shall prejudice Landlord's right to collect the Deficiency for any subsequent month by a similar proceeding; and 3. whether or not Landlord shall have collected any monthly Deficiency as aforesaid, Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord, on demand, in lieu of any further Deficiency as and for liquidated and agreed final damages, a sum equal to the amount by which the unpaid Rental for the period which otherwise would have constituted the unexpired portion of the Term exceeds the then fair and reasonable rental value of the Premises for the same period, both discounted to present worth at the Base Rate; if, before presentation of proof of such liquidated damages to any court, commission or tribunal, the Premises, or any part thereof, are relet by Landlord for the period which otherwise would have constituted the unexpired portion of the Term, or any part thereof, the amount of rent reserved upon such reletting -59- shall be deemed, prima facie, to be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting. (b) Tenant shall in no event be entitled to any rents collected or payable under any reletting, whether or not such rents exceed the Fixed Rent reserved in this Lease. Solely for the purposes of this Article 18, the term "Escalation Rent" as used in Section 18.2(a) shall mean the Escalation Rent in effect immediately prior to the Expiration Date, or the date of re-entry upon the Premises by Landlord, as the case may be, adjusted to reflect any increase pursuant to the provisions of Article 3 hereof for the Operating Year immediately preceding such event. Nothing contained in Article 17 or this Article 18 shall be deemed to limit or preclude the recovery by Landlord from Tenant of the maximum amount allowed to be obtained as damages by any statute or rule of law, or of any sums or damages to which Landlord may be entitled in addition to the damages set forth in this Section 18.2. ARTICLE XIX FEES AND EXPENSES Section 19.1. If an Event of Default shall have occurred, Landlord may (a) perform the obligations of Tenant for the account of Tenant, or (b) make any expenditure or incur any obligation for the payment of money in connection with any obligation owed by Tenant to Landlord, including, but not limited to, reasonable attorneys' fees and disbursements in instituting, prosecuting or defending any action or proceeding arising out of such Event of Default, and in either case the cost thereof, with interest thereon at the Applicable Rate, shall be deemed to be Additional Rent hereunder and shall be paid by Tenant to Landlord within ten (10) days after rendition of any bill or statement to Tenant therefor. Section 19.2. If Tenant shall fail to pay any installment of Fixed Rent, Additional Rent or any other item of Rental for a period longer than five (5) days after the same shall have become due, Tenant shall pay to Landlord, in addition to such installment of Fixed Rent, Additional Rent or other item of Rental, as the case may be, as a late charge and as Additional Rent, a sum equal to interest at the Applicable Rate on the amount unpaid, computed from the date such payment was due, without regard to any such grace period, to and including the date of payment. -60- ARTICLE XX NO REPRESENTATIONS BY LANDLORD Section 20.1. Landlord and Landlord's agents have made no representations or promises with respect to the Building, the Real Property or the Premises except as herein expressly set forth, and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth herein. Tenant shall accept possession of the Premises in its "AS IS" condition on the Commencement Date, and Landlord shall have no obligation to perform any work or make any installations in order to prepare the Premises for Tenant's occupancy. The taking of occupancy of the whole or any part of the Premises by Tenant shall be conclusive evidence, as against Tenant, that Tenant accepts possession of the same and that the Premises and the Building were in good and satisfactory condition at the time such occupancy was so taken. All references in this Lease to the consent or approval of Landlord shall be deemed to mean the written consent or approval executed by Landlord and no other consent or approval of Landlord shall be effective for any purpose whatsoever. ARTICLE XXI END OF TERM Section 21.1. Upon the expiration or other termination of this Lease, Tenant shall quit and surrender to Landlord the Premises, vacant, broom clean, in good order and condition, ordinary wear and tear excepted, and Tenant shall remove all of Tenant's Alterations as may be required pursuant to Article 5. Tenant shall also remove all of Tenant's Property and all other personal property and personal effects of all persons claiming through or under Tenant, and shall pay the cost of repairing all damage to the Premises and the Real Property occasioned by such removal. Any Tenant's Property or other personal property that remains in the Premises after the termination of this Lease shall be deemed to have been abandoned and either may be retained by Landlord as its property or may be disposed of in such manner as Landlord may see fit. If such Tenant's Property or other personal property or any part thereof is sold, Landlord may receive and retain the proceeds of such sale as the property of Landlord. Any expense incurred by Landlord in removing or disposing of such Tenant's Property or other personal property or Alterations required to be removed as provided in Article 5, as -61- well as the cost of repairing all damage to the Building or the Premises caused by such removal, shall be reimbursed to Landlord by Tenant, as Additional Rent, on demand. Section 21.2. If the Expiration Date falls on a day which is not a Business Day, then Tenant's obligations under Section 21.1 shall be performed on or prior to the immediately preceding Business Day. Section 21.3. If the Premises are not surrendered upon the expiration or other termination of this Lease, Tenant hereby indemnifies Landlord against liability resulting from delay by Tenant in so surrendering the Premises, including any claims made by any succeeding tenant or prospective tenant founded upon such delay and agrees to be liable to Landlord for (i) any payment or rent concession which Landlord may be required to make to any tenant obtained by Landlord for all or any part of the Premises in order to induce such tenant not to terminate its lease by reason of the holding-over by Tenant and (ii) the loss of the benefit of the bargain if any such tenant shall terminate its lease by reason of the holding-over by Tenant. Section 21.4. Tenant's obligation under this Article shall survive the expiration or termination of this Lease for a period ending six (6) months after the end of the calendar year in which the Expiration Date falls. ARTICLE XXII POSSESSION Section 22.1. Tenant acknowledges that it is in possession of the Premises as of the Commencement Date (Tenant being the prior owner of the Real Property and Building) and that no further act on Landlord's part is required as a condition to commencement of the Term of this Lease. ARTICLE XXIII NO WAIVER Section 23.1 No act or thing done by Landlord or Landlord's agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid unless in writing signed by Landlord. Only an executive officer of Landlord shall have the power to -62- accept surrender of the Premises prior to the termination of this Lease. Section 23.2. The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease, or any of the Rules and Regulations, shall not prevent a subsequent act, which would have originally constituted a violation, from having all of the force and effect of an original violation. The receipt by Landlord of Fixed Rent, Additional Rent or any other item of Rental with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. The failure of Landlord to enforce any of the Rules and Regulations against Tenant or any other tenant of the Real Property or the Adjacent Property shall not be deemed a waiver of any such Rules and Regulations. No provision of this Lease shall be deemed to have been waived by Landlord, unless such waiver shall be in writing and shall be signed by Landlord. No payment by Tenant or receipt by Landlord of a lesser amount than the Rental then due and payable shall be deemed to be other than on account of the earliest item(s) of Rental, or as Landlord may elect to apply the same, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance due of the Rental or pursue any other remedy in this Lease provided. This Lease contains the entire agreement between the parties and all prior negotiations and agreements are merged herein. Any executory agreement hereafter made shall be ineffective to change, discharge or effect an abandonment of this Lease in whole or in part unless such executory agreement is in writing and signed by the party against whom enforcement of the change, discharge or abandonment is sought. ARTICLE XXIV WAIVER OF TRIAL BY JURY Section 24.1. LANDLORD AND TENANT SHALL AND THEY HEREBY DO WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THEM AGAINST THE OTHER ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, WHETHER DURING OR AFTER THE TERM, OR FOR THE ENFORCEMENT OF ANY REMEDY UNDER ANY STATUTE, EMERGENCY OR OTHERWISE. -63- ARTICLE XXV INABILITY TO PERFORM Section 25.1. This Lease and the obligation of Tenant to pay Rental hereunder and to perform all of the other covenants and agreements hereunder on the part of Tenant to be performed shall in no way be affected, impaired or excused because Landlord is unable to fulfill any of Landlord's obligations under this Lease, expressly or implicitly to be performed by Landlord, or because Landlord is unable to make or is delayed in making any repairs, additions, alterations, improvements or decorations, or is unable to supply or is delayed in supplying any services, equipment or fixtures, if Landlord is prevented from or delayed in so doing by reason of acts of God, casualty, strikes or labor troubles, accident, governmental preemption in connection with an emergency, Requirements, Restrictive Covenants, conditions of supply and demand which have been or are affected by war or other emergency, or any other cause whatsoever, whether similar or dissimilar to the foregoing, beyond Landlord's reasonable control ("Unavoidable Delays"). Section 25.2 Notwithstanding anything to the contrary set forth in this Lease, Landlord shall not be liable for any cessation and/or interruption of services to the Premises caused by failure of any Building Systems or other computerized functions affecting use or occupancy of the Premises to be able to perform properly datesensitive functions for dates leading up to or following January 1, 2000 (that is, to be Year 2000 compliant), nor shall any such failure constitute an eviction or constructive eviction or give rise to abatement of Rental. ARTICLE XXVI BILLS AND NOTICES Section 26.1. (a) Except as otherwise expressly provided in this Lease, any bills, statements, consents, notices, demands, requests or other communications given or required to be given under this Lease ("Notice(s)") shall be in writing and shall be deemed sufficiently given or rendered if delivered by hand, or if sent by a nationally-recognized overnight courier service, delivery cost prepaid, marked for next-day delivery, or if deposited in a postage prepaid envelope in a depository that is regularly maintained by the U.S. Postal Service, sent by registered or certified mail (return receipt requested) and in either case addressed: -64- (i) if to Tenant, to Harrah's Operating Company, Inc., 5100 West Sahara Boulevard, Suite 200, Las Vegas, Nevada 89146, Attention: Office of the President and with a copy to Harrah's Operating Company, Inc., 5100 West Sahara Boulevard, Suite 200, Las Vegas, Nevada 89146, Attention: General Counsel, or (ii) if to Landlord, at Landlord's address set forth in the first paragraph of this Lease, with a copy to Baker, Donelson, Bearman & Caldwell, 2000 First Tennessee Building, 165 Madison Avenue, Memphis, Tennessee 38103, Attn: Frank L. Watson, Jr., and with a copy to any Mortgagee who may have requested the same, by Notice given in accordance with the provisions of this Article 26, at the address designated by such Mortgagee, or to such other address(es) as either Landlord or Tenant may designate as its new address(es) for such purpose by notice given to the other in accordance with the provisions of this Article 26. (b) Notices shall be deemed to have been rendered or given (i) on the date delivered, if delivered by hand, or (ii) the day after shipment, if sent by overnight courier service, or (iii) three (3) days after mailing, if mailed as provided in Section 26.1(a). Notice given by counsel for either party on behalf of such party or by the Manager on behalf of Landlord shall be deemed valid notices if addressed and sent in accordance with the provisions of this Article. Section 26.2. Notwithstanding the provisions of Section 26.1, Notices requesting services for Overtime Periods pursuant to Article 27 may be given by delivery to the Building Manager or any other person in the Building designated by Landlord to receive such Notices, and bills may be rendered by delivering them to the Premises. ARTICLE XXVII SERVICES AND EQUIPMENT Section 27.1. Landlord shall, at Landlord's expense: (a) Provide passenger elevator service to the Premises on Business Days during Operating Hours and, subject to Section 27.3, have one passenger elevator on call at all other times. -65- (b) Furnish and distribute to the Premises, through the HVAC System, during Operating Hours, air-conditioning, and heat or ventilation, as needed; provided that Tenant shall, at all times, cooperate fully with Landlord and abide by all of the Rules and Regulations which Landlord may prescribe for the proper functioning of the HVAC System. Tenant hereby expressly waives any claims against Landlord arising out of the cessation of operation of the HVAC System, or the suitability of the Premises when the same is not in operation, whether due to normal scheduling or the reasons set forth in Section 27.3. Landlord will not be responsible for the failure of the HVAC System if such failure results from the occupancy of the Premises by more persons than the number of persons for which HVAC System is designed. If Tenant occupies the Premises at an occupancy rate of greater than that for which the HVAC System was designed, or if Tenant's partitions are arranged in such a way as to interfere with the normal operation of the HVAC System, Landlord may elect to make changes to the HVAC System or the ducts through which it operates required by reason thereof, and the cost thereof shall be reimbursed by Tenant to Landlord as Additional Rent within ten (10) days after presentation of a bill therefor. Landlord, throughout the Term, shall have free access to all mechanical installations of Landlord, including but not limited to air cooling, fan, ventilating and machine rooms and electrical closets, and Tenant shall not construct partitions or other obstructions that may interfere with Landlord's free access thereto, or interfere with the moving of Landlord's equipment to and from the enclosures containing said installations. Neither Tenant nor its agents, employees or contractors shall at any time enter the said enclosures or tamper with, adjust, touch or otherwise in any manner affect said mechanical installations. Landlord's obligations under this Section 27.1 and under Section 27.2 are subject to applicable Requirements that may limit the hours or the extent to which Landlord is permitted to supply HVAC. (c) Furnish hot and cold water for ordinary drinking, cleaning and lavatory purposes. (d) Provided Tenant shall keep the Premises in order, Landlord, at Landlord's expense, shall cause the Premises, excluding any portions thereof used as secured areas, to be cleaned on Business Days in accordance with the cleaning specifications annexed to this Lease as Exhibit "D." If, however, any additional cleaning of the Premises is to be done by Tenant, it shall be done at Tenant's sole expense, in a manner reasonably satisfactory to Landlord and no one other than persons -66- approved by Landlord shall be permitted to enter the Premises or the Building for such purpose. Tenant shall pay to Landlord the cost of removal of any of Tenant's refuse and rubbish from the Premises and the Building (i) to the extent that the same, in any one day, exceeds the average daily amount of refuse and rubbish usually attendant upon the use of such Premises as offices, as described and included in Landlord's cleaning contract for the Building or recommended by Landlord's cleaning contractor, and (ii) related to or deriving from the preparation or consumption of food or drink. Bills for the same shall be rendered by Landlord to Tenant at such time as Landlord may elect and shall be due and payable as Additional Rent within ten (10) days after the time rendered. Section 27.2. Landlord reserves the right to stop the furnishing of the Building services and to stop service of the Building Systems, when necessary, by reason of accident, or emergency, or for Alterations in the judgment of Landlord desirable or necessary to be made, until said Alterations shall have been completed; and Landlord shall have no responsibility or liability for failure to supply air-conditioning, ventilation, heat, elevator, plumbing, electric, or other services during said period or when prevented from so doing by strikes, lockouts, difficulty of obtaining materials, accidents or by any cause beyond Landlord's reasonable control, or by Requirements or failure of electricity, water, steam, coal, oil or other suitable fuel or power supply, or inability by exercise of reasonable diligence to obtain electricity, water, steam, coal, oil or other suitable fuel or power. No diminution or abatement of rent or other compensation shall or will be claimed by Tenant as a result therefrom, nor shall this Lease or any of the obligations of Tenant be affected or reduced by reason of such interruption, curtailment or suspension, nor shall the same constitute an actual or constructive eviction; provided, however, that if the cessation is caused by Landlord and continues for more than three (3) days, then Fixed Rent shall abate on a per diem basis from the fourth (4th) day until Landlord restores the Building services. Section 27.3. Tenant agrees to abide by all requirements which Landlord may prescribe for the proper protection and functioning of its Building Systems and the furnishing of the Building services. Tenant further agrees to cooperate with Landlord in any conservation effort pursuant to a program or procedure promulgated or recommended by ASHRAE or any Requirements. -67- ARTICLE XXVIII [RESERVED] ARTICLE XXIX [RESERVED] ARTICLE XXX SIGNS Section 30.1. Landlord may replace the signs at the main entrance which serves the Real Property and Adjacent Property with signs which identify the businesses on both such properties, and may install signage at the driveway intersections on the Real Property and Adjacent Property which direct traffic to the appropriate businesses and parking area, all at Tenant's reasonable cost and expense, except that Landlord shall pay for signs with respect to the Adjacent Property. The location, size, materials, quality, design, color and lettering of any signs desired by Tenant shall be subject to the prior approval of Landlord and shall be in compliance with the standards set forth in Tenant Design and Construction Standards. ARTICLE XXXI BROKER Section 31.1. Landlord represents and warrants to Tenant that Landlord has not dealt with any broker or other Person who might claim a leasing commission in connection with this Lease other than the Broker(s). Landlord acknowledges that it is solely responsible to pay the leasing commissions due to the Broker in connection with the execution of this Lease. Tenant represents and warrants to Landlord that Tenant has not dealt with any broker or other Person who might claim a leasing commission in connection with this Lease. The execution and delivery of this Lease by Tenant shall be conclusive evidence that Tenant acknowledges that Landlord has relied upon the foregoing representation and warranty. Tenant shall indemnify and hold harmless Landlord from and against any and all claims for commission, fee or other compensation by any Person (other than Broker) who claims to have dealt with Tenant in connection with this Lease and for any and all costs incurred by Landlord in -68- connection with such claims, including, without limitation, attorneys' fees and disbursements. The execution and delivery of this Lease by Landlord shall be conclusive evidence that Landlord acknowledges that Tenant has relied upon the foregoing representation and warranty. Landlord shall indemnify and hold harmless Tenant from and against any and all claims for commission, fee or other compensation by any Person (including Broker) who claims to have dealt with Landlord in connection with this Lease and for any and all costs incurred by Tenant in connection with such claims, including, without limitation, attorneys' fees and disbursements. This provision shall survive the expiration or earlier termination of this Lease. ARTICLE XXXII INDEMNITY Section 32.1. Tenant shall indemnify and save harmless the Landlord Indemnitees from and against (a) all claims of third parties of whatever nature against the Landlord Indemnitees arising from any act, omission or negligence of Tenant or Persons Within Tenant's Control, (b) all claims of third parties against the Landlord Indemnitees arising from any accident, injury or damage whatsoever caused to any such third party or such party's property and occurring in or about the Premises during the Term or during Tenant's occupancy of the Premises, unless and to the extent caused by the negligence or willful misconduct of Landlord or its principals, officers or employees, (c) all claims of third parties against the Landlord Indemnitees arising from any accident, injury or damage occurring outside of the Premises but anywhere within or about the Real Property, where such accident, injury or damage results or is claimed to have resulted from an act, omission or negligence of Tenant or Persons Within Tenant's Control, and (d) any breach, violation or non-performance of any covenant, condition or agreement contained in this Lease to be fulfilled, kept, observed and performed by Tenant except as otherwise provided in this Lease; provided, however, that the indemnity and save harmless provision set out in this Section 32.1 and 32.2 shall have no effect to the extent that the Landlord Indemnitees are protected by insurance maintained under the provisions of Article XI hereof. This indemnity and hold harmless agreement shall include indemnity from and against any and all liability, fines, suits, demands, costs and expenses of any kind or nature (including, without limitation, attorneys' fees and disbursements) incurred in or in connection with any such claim or proceeding brought thereon, and the defense thereof. -69- Section 32.2. If any claim, action or proceeding is made or brought against any Landlord Indemnitee, against which claim, action or proceeding Tenant is obligated to indemnify such Landlord Indemnitee pursuant to the terms of this Lease, then, upon demand by the Landlord Indemnitee, Tenant, at its sole cost and expense, shall resist or defend such claim, action or proceeding in the Landlord Indemnitee's name, if necessary, by such attorneys as the Landlord Indemnitee may select. The provisions of this Article 32 shall survive the expiration or earlier termination of this Lease. Section 32.3 Landlord shall indemnify and save harmless the Tenant Indemnitees from and against (a) all claims of third parties of whatever nature against the Tenant Indemnitees arising from any act, omission or negligence of Landlord or Persons Within Landlord's Control, (b) all claims of third parties against the Tenant Indemnitees arising from any accident, injury or damage whatsoever caused to any such third party or such party's property and occurring in or about the Premises during the Term or during Tenant's occupancy of the Premises where such accident, injury or damage results or is claimed to have resulted from an act or omission or negligence of Landlord or Persons Within Landlord's Control, (c) all claims of third parties against the Tenant Indemnitees arising from any accident, injury or damage occurring outside of the Premises but anywhere within or about the Real Property, unless and to the extent caused by the negligence or willful misconduct of Tenant or its principals, officers or employees, and (d) any breach, violation or non-performance of any covenant, condition or agreement in this Lease to be fulfilled, kept, observed and performed by Tenant, except as otherwise provided in this Lease; provided, however, that the indemnity and save harmless provision set out in this Section 32.3 and 32.4 shall have no effect to the extent that Tenant Indemnitees are protected by insurance maintained under the provisions of Article XI hereof. This indemnity and hold harmless agreement shall include indemnity from and against any and all liability, fines, suits, demands, costs and expenses of any kind or nature (including, without limitation, attorneys' fees and disbursements) incurred in or in connection with any such claim or proceeding brought thereon, and the defense thereof. Section 32.4 If any claim, action or proceeding is made or brought against any Tenant Indemnitee, against which claim, action or proceeding Landlord is obligated to indemnify such Tenant Indemnitee pursuant to the terms of this Lease, then, upon -70- demand by the Tenant Indemnitee, Landlord, at its sole cost and expense, shall resist or defend such claim, action or proceeding in the Tenant Indemnitee's name, if necessary, by such attorneys as the Tenant Indemnitee may select. The provisions of this Article 32 shall survive the expiration or earlier termination of this Lease. ARTICLE XXXIII [RESERVED] ARTICLE XXXIV [RESERVED] ARTICLE XXXV [RESERVED] ARTICLE XXXVI COVENANT OF QUIET ENJOYMENT Section 36.1. Landlord covenants that, upon Tenant paying the Fixed Rent and Additional Rent and observing and performing all the terms, agreements, covenants, provisions and conditions of this Lease on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the Premises, subject nevertheless to the terms and conditions of this Lease; provided, however, that no impairment or deprivation of Tenant's use of the Premises which results from a violation of Restrictive Covenants shall be construed as a breach of this covenant nor permit abatement of Rental due hereunder unless such violation results from acts or neglect of Landlord in which Tenant played no part; provided further that no eviction of Tenant by reason of the foreclosure of any Mortgage now or hereafter affecting the Premises, shall be construed as a breach of this covenant nor shall any action by reason thereof be brought against Landlord; and provided further that this covenant shall bind and be enforceable against Landlord or any successor to Landlord's interest, subject to the terms hereof, only so long as Landlord or any successor to Landlord's interest, is in possession and is collecting rent from Tenant but not thereafter. -71- ARTICLE XXXVII MISCELLANEOUS Section 37.1. Landlord retains all air rights over the Premises. Tenant may not place anything on or attach anything to the roof of the Premises without first obtaining Landlord's written consent, which consent may be granted or withheld in Landlord's reasonable discretion. Section 37.2. The obligations of Landlord under this Lease shall not be binding upon Landlord named herein after the sale, conveyance, assignment or transfer by such Landlord (or upon any subsequent landlord after the sale, conveyance, assignment or transfer by such subsequent landlord) of its interest in the Building or the Real Property, as the case may be, and in the event of any such sale, conveyance, assignment or transfer, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord under this Lease thereafter arising, and the transferee shall be deemed to have assumed, subject to the remaining provisions of this Section 37.2, all obligations of the Landlord under this Lease arising after the effective date of the transfer. No trustee, partner, shareholder, director or officer of Landlord, or of any partner or shareholder of Landlord (collectively, the "Parties") shall have any direct or personal liability for the performance of Landlord's obligations under this Lease, and Tenant shall look solely to Landlord's interest in the Building to enforce Landlord's obligations hereunder and shall not otherwise seek any damages against Landlord personally or any of the Parties whatsoever. Section 37.3. [RESERVED] Section 37.4. The parties shall prepare and sign a suitable memorandum of this Lease for recordation. This Lease shall not be recorded. Section 37.5. Except as otherwise expressly stated in this Lease, any consent or approval required to be obtained from Landlord may be granted by Landlord in its sole discretion. Section 37.6. [RESERVED] Section 37.7. If Tenant shall remain in possession of the Premises after the Expiration Date, without the execution by both -72- Tenant and Landlord of a new lease, Tenant, at the election of Landlord, shall be deemed to be occupying the Premises as a Tenant from month-to-month, at a monthly rental equal to one and one-half (1.5) times the Rental payable during the last month of the Term, subject to all the other conditions, provisions and obligations of this Lease insofar as the same are applicable to a month-to-month tenancy. Section 37.8. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. If any words or phrases in this Lease are stricken out or otherwise eliminated, whether or not any other words or phrases have been added, this Lease shall be construed as if the words or phrases stricken out or otherwise eliminated were never included in this Lease and no implication or inference shall be drawn from the fact that such words or phrases were stricken out or otherwise eliminated. Section 37.9. [RESERVED] Section 37.10. [RESERVED] Section 37.11. If any of the provisions of this Lease, or the application thereof to any person or circumstance, shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby and shall remain valid and enforceable, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. Section 37.12. Landlord shall have the right to erect any gate, chain or other obstruction or to close off any portion of the Real Property to the public at any time to the extent necessary to prevent a dedication thereof for public use. Section 37.13. Tenant agrees that in all disputes arising directly or indirectly out of this Lease Tenant shall be subject to service of process in, and the jurisdiction of the courts of, the State of Tennessee. The provisions of this Section 37.13 shall survive the expiration of this Lease. Section 37.14. This Lease contains the entire agreement between the parties and all prior negotiations and agreements are merged into this Lease. Except as provided in Section 37.6, this Lease may not be changed, abandoned or discharged, in whole or in -73- part, nor may any of its provisions be waived except by a written agreement that (a) expressly refers to this Lease, (b) is executed by the party against whom enforcement of the change, abandonment, discharge or waiver is sought, and (c) is permissible under the Mortgage(s). Section 37.15. Any apportionment or prorations of Rental to be made under this Lease shall be computed on the basis of a three hundred sixty (360) day year, with twelve (12) months of thirty (30) days each. Section 37.16. The laws of the State of Tennessee applicable to contracts made and to be performed wholly within the State of Tennessee shall govern and control the validity, interpretation, performance and enforcement of this Lease. Section 37.17. Tenant warrants and represents that it is duly incorporated under the laws of the State of Delaware and is duly qualified to do business in the State of Tennessee (a copy of evidence thereof to be supplied to Landlord upon request); and that each person executing this Lease on behalf of Tenant is an officer of Tenant and that he or she is duly authorized to execute, acknowledge and deliver this Lease to Landlord (a copy of a resolution to that effect to be supplied to Landlord upon request). Section 37.18. The captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this Lease nor the intent of any provision thereof. Section 37.19. The covenants, conditions and agreements contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and their respective legal representatives, successors, and, except as otherwise provided in this Lease, their assigns. Section 37.20. For the purposes of this Lease and all agreements supplemental to this Lease, unless the context otherwise requires: (a) The words "herein", "hereof", "hereunder" and "hereby" and words of similar import shall be construed to refer to this Lease as a whole and not to any particular Article or Section unless expressly so stated. -74- (b) Reference to "termination of this Lease" or "expiration of this Lease" and words of like import includes expiration or sooner termination of this Lease and the Term and the estate hereby granted or cancellation of this Lease pursuant to any of the provisions of this Lease or to law. Upon the termination of this Lease, the Term and estate granted by this Lease shall end at noon on the date of termination as if such date were the Fixed Expiration Date, and neither party shall have any further obligation or liability to the other after such termination except (i) as shall be expressly provided for in this Lease, and (ii) for such obligations as by their nature under the circumstances can only be, or by the provisions of this Lease, may be, performed after such termination, and, in any event, unless expressly otherwise provided in this Lease, any liability for a payment (which shall be apportioned as of such termination) which shall have accrued to or with respect to any period ending at the time of termination shall survive the termination of this Lease. (c) Words and phrases used in the singular shall be deemed to include the plural and vice versa, and nouns and pronouns used in any particular gender shall be deemed to include any other gender. -75- Section 37.21. All exhibits attached to this Lease are incorporated herein and Tenant agrees to execute Exhibit "H" upon Landlord's request without unreasonable delay. IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the day and year first above written. RBM CHERRY ROAD PARTNERS, a Tennessee general partnership BY: RBM Venture Company, a Delaware corporation, its managing general partner By: /s/ SCOTT IMORDE --------------------------------------------- Its: Vice President --------------------------------------------- LANDLORD HARRAH'S OPERATING COMPANY, INC. By: /s/ COLIN V. REED --------------------------------------------- Its: Chief Financial Officer --------------------------------------------- TENANT -76- Exhibit "A" Legal Description PROPERTY LOCATED IN SHELBY COUNTY, TENNESSEE: PARCEL I BEING A PART OF THE HARRAH'S ENTERTAINMENT, INC. CORPORATE HEADQUARTERS P.D. AS RECORDED IN PLAT BOOK 155, PAGE 8, ALSO BEING A PART OF THE HOLIDAY INNS, INC. PROPERTY AS RECORDED IN INSTRUMENT U7-2133 AT THE SHELBY COUNTY REGISTER'S OFFICE, LOCATED IN MEMPHIS, TENNESSEE AND BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT A POINT ON THE NORTH LINE OF HAVERHILL ROAD (50' R.O.W.), 25.15 FEET WEST OF THE WEST LINE OF CHERRY ROAD (R.O.W. VARIES); THENCE ALONG SAID NORTH LINE N89 38'59"W A DISTANCE OF 986.49 FEET TO A POINT OF CURVATURE; THENCE ALONG A CURVE TO THE RIGHT HAVING A RADIUS OF 257.02 FEET, AN ARC LENGTH OF 120.30 FEET, (CHORD N76 22'21"W - 119.20 FEET) TO A FOUND CROW'S MARK AT THE SOUTHEAST CORNER OF THE JOEL M. COX PROPERTY (INST. S9-0045); THENCE N37 29'55"E ALONG THE EAST LINE OF SAID COX PROPERTY A DISTANCE OF 163.78 FEET TO A POINT, SAID POINT BEING THE NORTHEAST CORNER OF SAID JOEL M. COX PROPERTY, ALSO BEING THE SOUTHEAST CORNER OF LOT 31, AUDUBON PARK SUBDIVISION (PB. 14, PG. 30); THENCE ALONG THE EAST LINE OF SAID AUDUBON PARK SUBDIVISION N0 13'10"W A DISTANCE OF 579.13 FEET TO A POINT, SAID POINT BEING ON THE EAST LINE OF LOT 26 OF AUDUBON PARK SUBDIVISION (PB. 14, PG. 30) AND 15.11 FEET SOUTH OF THE NORTH LINE OF SAID LOT 26; THENCE ALONG THE FOLLOWING COURSES AND DISTANCES: S59 52'06"E A DISTANCE OF 225.85 FEET TO A POINT; THENCE N30 15'47"E A DISTANCE OF 48.67 FEET TO A POINT; THENCE S86 44'15"E A DISTANCE OF 75.95 FEET TO A POINT; THENCE S3 15'45"W A DISTANCE OF 27.58 FEET TO A POINT; THENCE S86 44'15"E A DISTANCE OF 173.28 FEET TO A POINT; THENCE N27 16'38"E A DISTANCE OF 188.13 FEET TO A POINT; THENCE S89 37'17"E A DISTANCE OF 222.36 FEET TO A POINT; THENCE N0 00'14"W A DISTANCE OF 267.93 FEET TO A POINT ON THE SOUTH LINE OF THE DIXON GALLERY AND GARDENS PROPERTY (K8-7671); THENCE ALONG SAID SOUTH LINE S89 37'17"E A DISTANCE OF 264.26 FEET TO A FOUND AXLE ON THE WEST LINE OF SAID CHERRY ROAD, SAID POINT ALSO BEING THE SOUTHEAST CORNER OF SAID DIXON GALLERY AND GARDENS PROPERTY; THENCE ALONG SAID WEST LINE S0 00'14"E A DISTANCE OF 905.25 FEET TO A POINT; THENCE N98 38'59"W A DISTANCE OF 10.00 FEET TO A POINT; THENCE S0 00'14E A DISTANCE OF 131.85 FEET TO A POINT OF CURVATURE; THENCE ALONG A CURVE TO THE RIGHT HAVING A RADIUS OF 25.00 FEET, AN ARC LENGTH OF 39.42 FEET (CHORD S45 10'23"W - 35.46 FEET) TO THE POINT OF BEGINNING. PARCEL II The property on which exists a three (3) story office building is situated in Memphis, Shelby County, Tennessee, and is described as follows: BEING A PART OF THE HARRAH'S ENTERTAINMENT, INC. CORPORATE HEADQUARTERS P.D. AS RECORDED IN PLAT BOOK 155, PAGE 8, ALSO BEING THE HOLIDAY INN'S INC. PROPERTY AS RECORDED IN INSTRUMENT U7-2133 AT THE SHELBY COUNTY REGISTER'S OFFICE, LOCATED IN MEMPHIS, TENNESSEE AND BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS: COMMENCING AT A POINT ON THE CENTERLINE OF CHERRY ROAD (R.O.W. VARIES), 1087.24 FEET NORTH OF THE INTERSECTION OF HAVERHILL ROAD (50' R.O.W.) AND SAID CHERRY ROAD; THENCE NO89 37'17"W A DISTANCE OF 30.00 FEET TO A FOUND AXLE ON THE WEST LINE OF SAID CHERRY ROAD; SAID POINT ALSO BEING THE SOUTHEAST CORNER OF THE DIXON GALLERY AND GARDENS PROPERTY (INST. K8-7671); THENCE N89 37'17"W A DISTANCE OF 264.26 FEET TO THE POINT OF BEGINNING, SAID POINT BEING ON THE SOUTH LINE OF SAID DIXON GALLERY AND GARDENS PROPERTY; THENCE ALONG THE FOLLOWING COURSES AND DISTANCES: S0 00'14"E A DISTANCE OF 267.93 FEET TO A POINT; THENCE N89 37'17"W A DISTANCE OF 222.36 FEET TO A POINT; THENCE S27 16'38"W A DISTANCE OF 188.13 FEET TO A POINT; THENCE N86 44'15"W A DISTANCE OF 173.28 FEET TO A POINT; THENCE N3 15'45"E A DISTANCE OF 27.58 FEET TO A POINT; THENCE N86 44'15"W A DISTANCE OF 75.95 FEET TO A POINT; THENCE S30 15'47"W A DISTANCE OF 48.67 FEET TO A POINT; THENCE N59 52'06"W A DISTANCE OF 225.85 FEET TO A POINT ON THE EAST LINE OF LOT 26 OF AUDUBON PARK SUBDIVISION (PB. 14, PG. 30), SAID POINT BEING 15.11 FEET SOUTH OF THE NORTH LINE OF SAID LOT 26; THENCE ALONG SAID EAST LINE AND THE EAST LINE OF THE RESUBDIVISION OF LOTS 21-25, AUDUBON PARK SUBDIVISION (PB. 15, PG. 4) N0 13'10"W A DISTANCE OF 325.74 FEET TO A FOUND AXLE, SAID AXLE ALSO BEING THE SOUTHWEST CORNER OF SAID DIXON GALLERY AND GARDENS PROPERTY; THENCE ALONG THE SOUTH LINE OF SAID DIXON GALLERY AND GARDENS PROPERTY S89 37'17"E A DISTANCE OF 776.93 FEET TO THE POINT OF BEGINNING. Exhibit "B" Plat Showing Building and Building No. 2 Exhibit "C" Rules and Regulations Definitions 1. Wherever in these Rules and Regulations the word "Tenant" is used, it shall be taken to apply to and include the Tenant and his agents, employees, invitees, licensees, visitors, subtenants and contractors, and shall be deemed of such number and gender as the circumstances require. The word "Landlord" shall be taken to include the employees and agents of Landlord. Obstructions 2. The streets, sidewalks, entrances, driveways, halls, passages, elevators, stairways and Common Areas provided by Landlord shall not be obstructed by Tenant. Washrooms 3. Toilet rooms, water-closets and other water apparatus shall not be used for any purposes other than those for which constructed. Fire Prevention 4. Tenant shall not do anything in the Premises or bring or keep anything therein, which shall in any way increase or tend to increase the risk of fire or the rate of fire insurance, or which shall conflict with the regulations of the Fire Department or the fire laws, or with the rules and regulations of the City of Memphis, or equivalent bodies, or with any insurance policy on the Building or any part thereof, or with any law, ordinance, rule or regulation affecting the occupancy and use the Premises, now existing or hereafter enacted or promulgated by any public authority or by the City of Memphis or any equivalent body. Tenant's Equipment 5. It is Tenant's responsibility to properly operate all business equipment and coffee machines and to service such equipment and machines. General 6. In order to insure proper use and Prohibitions care of the Premises, Tenant shall not, without the consent of Landlord or unless otherwise permitted in the Lease: a. Keep or permit animals or birds in the Building except as required for handicapped persons. b. Use the Premises as sleeping apartments. c. Allow any sign, advertisement or notice to be fixed to the Building, inside or outside, without Landlord's written consent. d. Make improper noise or disturbances of any kind, or otherwise do anything to disturb other tenants or tend to injure the reputation of the Building. e. Mark or defile elevators, water closets, toilet rooms, walls, windows, doors or any other parts of the Building. f. Place anything on the outside of the Building, including roof setbacks, window ledges and other projections; or drop anything from the windows, stairways or parapets; or place trash or other matter in the halls, stairways, elevators or light wells of the Building. g. Cover, block or obstruct any window, skylight, door or transom or any other surface that admits light, except building standard blinds. h. Interfere with the heating or cooling apparatus. i. Allow anyone but Landlord's employees to clean Premises. j. Leave open doors to the Premises at any time except as otherwise approved by Landlord, and same shall be locked at all times when Premises are not occupied. k. Install any shades, blinds or awnings without consent of the Landlord, except building standard blinds. l. Use any electric heating device, such as a space heater, without consent of the Landlord. m. Install call boxes, or any kind of wire in or on the Building without Landlord's permission and direction. n. Manufacture any commodity, or prepare or dispense any foods, beverages, or alcoholic beverages, tobacco, drugs, flowers, or other commodities or articles without the written consent of Landlord. All food and beverage vending machines will be provided by the Landlord Approved Contractor. o. Secure duplicate keys for Premises or toilets, except from Landlord, or change the locks of any doors to or in the Premises. p. Give employees or other persons permission to go upon or erect or place any antennae, tower or other structure or equipment on the roof of the Building without the written consent of the Landlord. q. Place door mats in public corridors (i.e., within the Common Area) without consent of Landlord. r. Schedule, receive or accept freight other than Monday through Friday, excluding holidays, between the hours of 7:00 a.m. to 7:00 p.m. s. Leave the Land and enter the Adjacent Property, except via the designated entrance driveway between the Land and Cherry Road, but then only during the course of arriving and leaving for work during Operating Hours. Business 7. Business machines and mechanical Machines equipment which cause vibration, noise, cold or heat that may be transmitted to Building structure or to any leased space outside Premises shall be placed and maintained by Tenant, at its sole cost and expense, in settings of cork, rubber, or spring type vibration eliminators sufficient to absorb and prevent such vibration, noise, cold or heat. No business machines or mechanical equipment which require above normal business machine level or high amounts of electricity shall be used or installed in the Premises without Landlord's written consent and if installed, all electricity used shall be metered and paid by Tenant as Additional Rent. Movement of 8. Landlord reserves the right to Equipment designate the time when and the method whereby freight, small office equipment, furniture, safes and other like articles may be brought into, moved, or removed from the Building or Premises, and to designate the location for temporary disposition of such items. Tenant Moves 9. Landlord's tenant move in/move out policy is as follows: a. All moves will be done at such times as shall not unduly interfere with other tenants or occupants of the Real Property or Adjacent Property. b. Landlord shall approve the moving contractor and such contractor shall coordinate all aspects of the move with Landlord. c. Tenant's contractor shall provide a certificate of insurance evidencing liability, property damage and workmen's compensation insurance of not less than $1,000,000, naming Landlord as additional insured. d. Tenant's contractor shall use appropriate padding and masonite floor covering to protect all surfaces including door jambs, subject to Landlord's inspection and approval. e. Tenant will reimburse Landlord for all security provided. f. Tenant will be responsible for any damages during the move. Rights Reserved 10. Without abatement or diminution in to Landlord rent, Landlord reserves and shall have the following additional rights: a. To install and maintain a sign or signs on the exterior of the Building. b. To designate all sources furnishing sign painting and lettering, ice, drinking water, towels and toilet supplies and other like services used on the Premises. c. At any time or times Landlord either voluntarily or pursuant to governmental requirement, may, at Landlord's own expense, make repairs, alterations or improvements in or to the Building or any part thereof and during alterations, any close entrances, doors, windows, corridors, elevators or other facilities, provided that such acts shall not unreasonably interfere with Tenant's use and occupancy of the Premises as a whole. d. During the last six (6) months of the term or any part thereof, if during or prior to that time the Tenant vacates the Premises, to decorate, remodel, repair, alter or otherwise prepare the Premises for re-occupancy. e. To constantly have pass keys and Security System clearance to the Premises. f. Landlord may reasonably enter upon the Premises and may exercise any or all of the foregoing rights hereby reserved without being deemed guilty of an eviction or disturbance of Tenant's use or possession and without being liable in any manner to the Tenant. g. To access the Dixon Gallery and Gardens via the Common Area. Regulation 11. Landlord shall have the right to Change make such other and further reasonable rules and regulations as in the judgment of Landlord, may from time to time be needful for the safety, appearance, care and cleanliness of the Building and Building No. 2 and for the preservation of order therein, Landlord shall not be responsible to Tenant for any violation of rules and regulations by other tenants or occupants of the Real Property or Adjacent Property. Smoking Areas 12. Landlord shall have the right, from time to time, to designate and thereafter to change, alter or redesignate, smoking and non-smoking area(s) outside the Building and shall further be permitted to prohibit or limit such activity in order to fully comply with any applicable governmental ordinance, law or regulation. Tenant shall not permit any of its employees, agents or invitees to smoke except in the designated smoking area(s) and, in any event, never inside the Building. Plumbing 13. Plumbing fixtures and appliances shall be used only for purposes for which constructed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed therein. Damage resulting to any such fixtures or appliances from misuse by Tenant shall be repaired and replaced at Tenant's sole cost and expense, and Landlord shall not in any case be responsible therefor. Parking 14. Tenant shall use best efforts to cause Tenant's employees to park their motor vehicles in those portions of the parking area designated by Landlord ("Tenant's Parking Area"). Access 15. Tenant shall access Tenant's Parking Area and/or the Building via the driveway designated on Exhibit "C-1" which is attached hereto and supplements these Rules and Regulations. Exhibit "D" Cleaning Specifications Landlord agrees that, at its expense, it will do the following standard janitorial work for the Premises. I. General Space Cleaning - five (5) nights per week Monday thru Friday A. Nightly 1. Empty and dust wipe all receptacles. 2. Replace plastic liners in waste receptacles as required. 3. Remove waste to a compactor, hamper, or place waste in bags and leave in a designated area. 4. Empty and damp-wipe ashtrays. 5. Clean entrance glass. 6. Clean glass in directories. 7. Spot clean all interior glass, including the glass railing on the plaza and third floor. 8. Damp-wipe all glass top desks and tables. 9. Spot clean walls, doors, door frames and around light switches. 10. Clean the elevators including walls, floors, doors, lights, tracks and indicator panels. 11. Clean and polish stainless steel in the main lobby, elevator lobbies, elevators, etc. 12. Damp-wipe spillages on furniture in lounge and lunchroom areas. (Tenant shall be responsible for cleaning of dishes, refrigerators and other kitchen appliances.) 13. Sanitize and polish all drinking fountains. 14. Vacuum all carpeted areas with particular attention being paid to under desks, moveable furniture, corners and edges, etc. 15. Spot clean carpet as needed. 16. Sweep all granite pavers and composition tile flooring with a specially treated mop and buff. 17. Damp mop trackage and spillage as required. 18. Sweep cement stairways. Damp-mop as required. 19. Dust or damp-wipe handrails and metalwork as required. 20. Sweep with specially treated mop, and wash floors in service areas. 21. Upon the completion of cleaning, the cleaning equipment will be stored neatly in a designated location. B. Monthly 1. Clean and polish desk tops. 2. Perform high dusting not reached in normal cleaning. 3. Dust Venetian blinds. 4. Spray buff vinyl tile flooring in tenant and service areas. C. Quarterly 1. Strip and wax all vinyl tile flooring in tenant and service areas. 2. Vacuum upholstered chairs. II. Lavatories A. Nightly 1. Empty waste and sanitary napkin disposal receptacles. 2. Replace plastic liners as required. 3. Clean commodes and urinals with a disinfectant. 4. Clean washbowls with a scouring powder. 5. Polish mirrors. 6. Polish all brightwork. 7. Spot clean ceramic tile walls and metal partitions. 8. Floors to be swept, wet mopped and rinsed, using a disinfectant detergent. 9. Fill all towel, toilet issue, sanitary napkin and hand soap dispensers. B. Monthly 1. Wash and disinfect ceramic tile walls and metal partitions. 2. Wash interior of waste and sanitary napkin disposal containers. Exhibit "E" Rating Level Multiplier For purposes of Section 2.6 of the Lease: If HET's Corporate . . . then the Credit Rating is . . . Rating Level Multiplier is: BBB 0 BB 1.0 B 2.0 CCC 3.0 CC or lower 4.0 Exhibit "F" [RESERVED] Exhibit "G" Tenant Design and Construction Standards Tenant agrees to furnish Landlord the following information in drawings, in accordance with the below-listed schedules. 1. PRELIMINARY DRAWINGS No later than four (4) weeks prior to the projected construction commencement date, Tenant shall furnish Landlord one (1) sepia and six (6) complete sets of prints of -" scale preliminary drawings showing at least the following information: a. Floor plan including furniture layout, partition layout, door layout, power and telephone outlet locations, items above standard finish, floor loading information beyond 70 psf, etc. b. Reflected ceiling plan including lighting layout, exit signs, registers, grilles, diffusers, exhaust fans, ceiling breaks, etc. c. Written scope sheet of special Tenant mechanical and electrical requirements and/or custom construction and finish requirements. d. Take-off sheet of building standard items shall be used. 2. ARCHITECTURAL WORKING DRAWINGS FOR CONSTRUCTION No later than two (2) weeks prior to the projected construction commencement date, Tenant shall furnish Landlord two (2) background mylars of the partition and ceiling plans and one (1) sepia and two (2) sets of prints of complete -" scale working drawings on or before showing at least the following information and marked "issued for engineering and Landlord review": a. Location and type of all partitions and doors (specify hardware and provide keying schedule), glass partitions, windows and glass doors (indicate framing sections if not building standard). b. Indication of all critical dimensions necessary for construction. c. Location of telephone equipment room accompanied by an approval of the telephone company. d. Location of all building standard and above building standard electrical items including outlets, switches, telephone outlets and lighting. e. Location and type of equipment that require special electrical; requirements including manufacturer's specifications for use and operations. f. Location, weight per square foot and description of any exceptionally heavy equipment or filing system exceeding 75 psf live load including 20 psf for partitions. g. Requirements for special air conditioning or ventilation including occupancy information for each room and space. h. Type and color of floor covering, wall covering, and building standard and above-building standard paint or finishes. i. Requirements for special plumbing including all line sizes, fixtures and specifications. j. Location and type of kitchen equipment including specifications. k. Details showing: (1) Construction of all partition types; (2) Head, jamb and sill sections with elevations for all door types; (3) Shelving, cabinet work and architectural millwork with dimensions and dimensions of all equipment to be built in; (4) Special corridor entrance with framing and support requirements; and (5) Bracing or support of special walls, glass partitions, drapery track, etc. 3. MECHANICAL/ELECTRICAL WORKING DRAWINGS FOR CONSTRUCTION No later than two (2) weeks prior to the projected construction commencement date, Tenant shall furnish two (2) sets of prints of -" scale mechanical/electrical working drawings which, among other things, shall identify requirements beyond the building standard scope. 4. Within ten (10) days after the furnishing of any such drawings by Tenant, Landlord shall approve, disapprove, or request further information concerning the drawings submitted, indicating the reason for any disapproval and specifying clearly the nature and scope of any request for further information. In all events, Landlord shall use good faith efforts to respond to such submissions by Tenant expeditiously so as to not delay unnecessarily Tenant's construction of Alterations. 5. Tenant shall be responsible for obtaining city review and approval of preliminary drawings (as referred to in paragraph 1 above). Tenant shall make application and obtain a city building permit. Exhibit "H" First American SNDA SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT Building No. 1 THIS AGREEMENT, made as of the ----- day of October, 1999, by FIRST AMERICAN NATIONAL BANK, with a place of business at 6000 Poplar Avenue, Suite 300, Memphis, Tennessee 38119 ("Mortgagee") and Harrah's Operating Company, Inc., a Delaware corporation, having an office address at 5100 West Sahara Avenue, Suite 200, Las Vegas, NV 89146 ("Tenant"). WITNESSETH: WHEREAS, Mortgagee has entered into, or is about to enter into, a mortgage loan transaction with RBM Cherry Road Partners, a Tennessee general partnership, having an office address of 5810 Shelby Oaks Drive, Memphis, TN 38134 ("Landlord"); and WHEREAS, Mortgagee is, or is to become, the beneficiary of a Deed of Trust, Assignment of Rents and Security Agreement (said Deed of Trust, Assignment of Rents and Security Agreement being hereinafter referred to as the "Mortgage") covering that certain parcel of land owned by Landlord and described on Exhibit "A" annexed hereto and made a part hereof, together with the improvements erected thereon (said parcel of land and improvements thereon being commonly known as 1023 Cherry Road, Memphis, TN 38117, hereinafter called the "Improvements"); and WHEREAS, by a certain Lease entered into between Landlord and Tenant dated as of October 25, 1999 ("Lease"), Landlord leased to Tenant a portion of the Improvements, to wit, the premises designated as floors one (1) through three (3) of the three-story office building located at 1023 Cherry Road, Memphis, TN 38117, generally depicted on Exhibit "B" annexed hereto and made a part hereof (said premises being hereinafter called the "Demised Premises"); and WHEREAS, a copy of the Lease has been delivered to Mortgagee, the receipt of which is hereby acknowledged; and WHEREAS, the parties hereto desire to effect the subordination of the Lease to the Mortgage and to provide for the non-disturbance of Tenant by the holder of the Mortgage. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, the parties hereto intending to be legally bound hereby agree as follows: 1. Mortgagee hereby consents to and approves the Lease and the term thereof, including any options to extend the term as set forth in the Lease, and covenants and agrees that the exercise by Tenant of any of the rights, remedies, and options therein contained shall not constitute a default under the Mortgage. 2. Tenant covenants and agrees with Mortgagee that the Lease is hereby made, and shall continue hereafter to be, subject and subordinate to the lien of the Mortgage, and to all modifications and extensions thereof, with the same force and effect as if the Mortgage had been executed and delivered prior to the execution and delivery of the Lease and without regard to the order of priority of recording the Mortgage, subject, however, to the provisions of this Agreement. Tenant shall take such steps and execute such documents from time to time hereafter as Mortgagee may reasonably request in order to carry into effect the provisions and intent of this Agreement and to confirm the subordination of the Lease to the lien of the Mortgage subject to the terms hereof. 3. Tenant certifies that the Lease is presently in full force and effect and unmodified and Tenant as of this date has no knowledge of any default, charge, lien or claim of offset under the Lease. 4. The Tenant shall deliver to Mortgagee, within thirty (30) days after receipt of a written request for same, further certifications that (i) the Lease is then in full force and effect; (ii) there have been no modifications to the Lease (except those specified therein); (iii) there is then no default, charge, lien or claim of offset under the Lease (or stating any of the same which may be claimed or known); (iv) not more than one month's installment of rent has been paid in advance of the due date (or stating any such other payments, if made); and (v) such other information as Mortgagee may reasonably request. For so long as Tenant is not in default under the terms of the Lease and the Lease shall be in full force and effect, Mortgagee agrees that: (a) Except as may be procedurally required by law, Tenant shall not be named or joined as a party or otherwise in any suit, action or proceeding for the foreclosure of the Mortgage or to enforce any rights under the Mortgage or note or other obligation secured thereby. Nothing hereinabove shall prohibit or prevent the Mortgagee from suing the Tenant for any default (as defined in the Lease) by Tenant under the Lease. (b) The possession by Tenant of the Demised Premises and Tenant's rights thereto shall not be disturbed, affected or impaired by, nor will the Lease, Tenant's rights thereunder, or the term thereof be terminated or otherwise affected (i) by any suit, action or proceeding upon the Mortgage or note or other obligation secured thereby, or for the foreclosure of the Mortgage or the enforcement of any rights under the Mortgage or any other documents held by the holder of the Mortgage, or (ii) by any judicial sale or execution or other sale of the Demised Premises in connection with the Mortgage, or any deed given in lieu of foreclosure, or (iii) by any default under the Mortgage or note or other obligation secured thereby. (c) Neither the Mortgage nor any other security instrument executed in connection therewith shall cover or be construed as subjecting in any manner to the lien thereof, any trade fixtures, equipment, inventory or other personal property at any time furnished or installed by or for Tenant in the Demised Premises unless the same are permanently affixed to the real estate thereof. Tenant agrees that upon removal of any of its trade fixtures, equipment, inventory or other personal property at any time furnished or installed by or for Tenant in the Demised Premises, Tenant shall, at its expense, repair all damage to the Demised Premises caused by any such removal. 5. If Mortgagee or any future holder of the Mortgage shall become the owner of the Improvements by reason of foreclosure of the Mortgage or otherwise, or if the Improvements shall be sold as a result of any action or proceeding to foreclose the Mortgage, or transfer of ownership by deed given in lieu of foreclosure, the Lease shall continue in full force and effect, without necessity for executing any new lease, as a direct lease between Tenant and the then owner of the Improvements, as "Landlord," upon all of the same terms, covenants, and provisions contained in the Lease, and in such event: (a) Tenant shall be bound to such new owner under all of the terms, covenants, and provisions of the Lease for the remainder of the term thereof (including also any extension periods, if Tenant elects or has elected to exercise its option to extend the term) and Tenant hereby agrees to attorn to such new owner and to recognize such new owner as "Landlord" under the Lease; and (b) Such new owner shall be bound to Tenant under all of the terms, covenants, and provisions of the Lease for the remainder of the term thereof (including also any extension periods, if Tenant elects or has elected to exercise its options to extend the term) which such new owner hereby agrees to assume and perform; and Tenant shall, from and after the date such new owner succeeds to the interest of "Landlord" under the Lease, have the same remedies against such new owner for any subsequently occurring breach of any covenant contained in the Lease as Tenant might have had under the Lease against Landlord if such new owner had not succeeded to the interest of Landlord, provided, however, that such new owner shall not (i) be bound by any rent or additional rent which Tenant might have paid for more than one month in advance to any prior landlord (including Landlord); or (ii) be bound by any amendment or modification of the Lease made without its consent. 6. Any notices or communications given under this Agreement shall be in writing and shall be given by certified mail, return receipt requested, postage prepaid, (a) if to Mortgagee, at the address for Mortgagee hereinabove set forth or at such other address as Mortgagee may designate by notice to Tenant, or (b) if to Tenant, at the address of Tenant as hereinabove set forth or at such address as Tenant may designate by notice to Mortgagee. 7. Tenant agrees, by notice given in the manner provided in the Lease, to give to Mortgagee at the address provided above a copy of any notice of default served upon the Landlord by Tenant. Tenant shall give such notice to Mortgagee simultaneously with the giving of any such notice of default to Landlord. Tenant further agrees that if Landlord shall have failed to cure any such default within such time as may be provided for in the Lease, then Tenant shall give Mortgagee written notice of such failure and Mortgagee shall have an additional forty-five (45) days from receipt of such notice within which to cure such default, or if such default cannot be cured within that time, then within such additional time as may be necessary if within such forty-five (45) days Mortgagee has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure); and in such event the Lease shall not be terminated and Tenant shall not be excused or released from the timely performance and payment of all of Tenant's obligations under the Lease, without setoff or deduction, while such remedies are being so diligently pursued by Mortgagee. Mortgagee shall not be deemed, as a result of any such curing or attempted curing, to have assumed or become personally liable for Landlord's obligations under the Lease. 8. Upon notification by Mortgagee to the Tenant of the exercise of Mortgagee's rights under the Mortgage to receive direct payment of rents or other charges, Tenant shall pay rent and any other sums payable under the terms of the Lease directly to Mortgagee. Notwithstanding the Tenant's payment to Mortgagee of the rent and other sums payable under the terms of the Lease, Tenant hereby acknowledges and agrees that Mortgagee shall have no duties or obligations with respect to the Lease until Mortgagee has notified Tenant of Mortgagee's assumption of the Landlord's obligations under the Lease. 9. This Agreement shall bind and inure to the benefit of and be binding upon and enforceable by the parties hereto and their respective successors and assigns. 10. This Agreement contains the entire agreement between the parties and cannot be changed, modified, waived, or cancelled except by an agreement in writing executed by the parties against whom enforcement of such modification, change, waiver or cancellation is sought. 11. This Agreement and the covenants herein contained are intended to run with and bind all lands affected thereby. 12. Any notices sent to Mortgagee herein shall include a copy to: J. Philip Jones, Esq., Martin, Tate, Morrow & Marston, P.C., 6000 Poplar Avenue, Suite 340, Memphis, TN 38119-3971. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. MORTGAGEE: FIRST AMERICAN NATIONAL BANK By:----------------------------- Title:-------------------------- TENANT: HARRAH'S OPERATING COMPANY, INC. By:----------------------------- Title:-------------------------- STATE OF TENNESSEE COUNTY OF SHELBY Before me, a Notary Public, of the State and County aforesaid, personally appeared --------------------, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged himself/herself to be the ---------------------- of First American National Bank, the within named bargainor, a national banking association, and that he/she as such officer, being authorized so to do, executed the foregoing instrument for the purpose therein contained, by signing the name of the association by himself/herself as such officer. WITNESS my hand and official seal this -----day of --------, 199--. ---------------------------- NOTARY PUBLIC My commission expires: - ---------------------- STATE OF ---------------------- COUNTY OF --------------------- Before me, a Notary Public, of the State and County aforesaid, personally appeared --------------------, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence) and who, upon oath, acknowledged himself/herself to be the ------------------- of HARRAH'S OPERATING COMPANY, INC., the within named bargainor, a Delaware corporation, and that he/she as such officer, being authorized so to do, executed the foregoing instrument for the purpose therein contained by signing the name of the corporation by himself/herself as such officer. WITNESS my hand and seal at office this ---- day of --------, 199--. ---------------------------- NOTARY PUBLIC My commission expires: Exhibit "I" Memphis and Shelby County Land Use Control Board - Staff Report #16 Correspondence Item, Case No.: P.D. 93-322 L.U.C.B. Meeting October 14, 1999 EX-4.26(2) 4 EXHIBIT 4.26(2) Exhibit 4(26) AGREEMENT OF LEASE between RBM CHERRY ROAD PARTNERS Landlord and HARRAH'S OPERATING COMPANY, INC. Tenant Dated: October 25, 1999 Premises: Office Building #2 1023 Cherry Road Memphis, Tennessee 38117 TABLE OF CONTENTS Page REFERENCE PAGE............................................................... 6 ARTICLE I GLOSSARY..................................................................... 7 ARTICLE II DEMISE, PREMISES, TERM, RENT................................................. 14 ARTICLE III ESCALATION................................................................... 17 ARTICLE IV USE AND OCCUPANCY............................................................ 26 ARTICLE V ALTERATIONS.................................................................. 28 ARTICLE VI REPAIRS...................................................................... 32 ARTICLE VII CONNECTING CORRIDORS......................................................... 34 ARTICLE VIII REQUIREMENTS OF LAW.......................................................... 35 ARTICLE IX SUBORDINATION................................................................ 37 ARTICLE X RULES AND REGULATIONS........................................................ 40 ARTICLE XI INSURANCE, PROPERTY LOSS OR DAMAGE, REIMBURSEMENT............................ 41 ARTICLE XII DESTRUCTION BY FIRE OR OTHER CAUSE........................................... 44 2 ARTICLE XIII EMINENT DOMAIN............................................................... 46 ARTICLE XIV ASSIGNMENT, SUBLETTING, MORTGAGE, ETC........................................ 48 ARTICLE XV ACCESS TO PREMISES........................................................... 52 ARTICLE XVI CERTIFICATE OF OCCUPANCY..................................................... 53 ARTICLE XVII DEFAULT...................................................................... 53 ARTICLE XVIII REMEDIES AND DAMAGES......................................................... 57 ARTICLE XIX FEES AND EXPENSES............................................................ 60 ARTICLE XX NO REPRESENTATIONS BY LANDLORD............................................... 60 ARTICLE XXI END OF TERM.................................................................. 61 ARTICLE XXII POSSESSION................................................................... 62 ARTICLE XXIII NO WAIVER.................................................................... 62 ARTICLE XXIV WAIVER OF TRIAL BY JURY...................................................... 63 ARTICLE XXV INABILITY TO PERFORM......................................................... 63 ARTICLE XXVI BILLS AND NOTICES............................................................ 64 ARTICLE XXVII SERVICES AND EQUIPMENT....................................................... 65 3 ARTICLE XXVIII [RESERVED]................................................................... 67 ARTICLE XXIX [RESERVED]................................................................... 68 ARTICLE XXX SIGNS........................................................................ 68 ARTICLE XXXI BROKER....................................................................... 68 ARTICLE XXXII INDEMNITY.................................................................... 69 ARTICLE XXXIII [RESERVED]................................................................... 71 ARTICLE XXXIV [RESERVED]................................................................... 71 ARTICLE XXXV [RESERVED]................................................................... 71 ARTICLE XXXVI COVENANT OF QUIET ENJOYMENT.................................................. 71 ARTICLE XXXVII MISCELLANEOUS................................................................ 71 4 EXHIBITS: Exhibit A Legal Description.................................................A-1 Exhibit B Building and Building No. 1.......................................B-1 Exhibit C Rules and Regulations.............................................C-1 Exhibit D Cleaning Specifications...........................................D-1 Exhibit E Rating Level Multiplier...........................................E-1 Exhibit F [RESERVED]........................................................F-1 Exhibit G Tenant Design and Construction Standards..........................G-1 Exhibit H First American Subordination, Non-Disturbance and Attornment Agreement........................................H-1 Exhibit I Memphis and Shelby County Land Use Control Board - Staff Report #16 Correspondence Item, Case No.: P.D. 93-322, L.U.C.B. Meeting October 14, 1999...................I-1 5 AGREEMENT OF LEASE AGREEMENT OF LEASE, made as of the 25th day of October, 1999, between RBM CHERRY ROAD PARTNERS, a Tennessee general partnership, or its assigns, having an address at 5810 Shelby Oaks Drive, Memphis, Tennessee 38134, as Landlord, and HARRAH'S OPERATING COMPANY, INC., a Delaware corporation, having an address at 1023 Cherry Road, Memphis, Tennessee 38117, as Tenant. REFERENCE PAGE In addition to other terms elsewhere defined in this Lease, the following terms whenever used in this Lease shall have the meanings set forth in this Reference Page. (1) Premises: Floors one (1) through two (2) of the Building, shown hatched on the site plan attached hereto as Exhibit "B," excluding, however, any portions thereof which are defined as Common Area(s). (2) Commencement Date: October 25, 1999 (3) Fixed Expiration Date: April 30, 2012 (4) Fixed Rent: (a) $1,087,940.00 per annum ($90,661.66 per month) from the Commencement Date through October 31, 2004; (b) $1,202,173.70 per annum ($100,181.14 per month) from November 1, 2004 through the Fixed Expiration Date, in each case, as adjusted pursuant to Section 2.6 of this Lease. (5) Fixed Rent Adjustment Factor: $18,321.52 (6) Tenant's Share: Forty-seven and nine-tenths percent (47.9%). (7) Base Tax Factor: The Taxes applicable to the 6 Real Property equal to $221,848.00. (8) Base Operating Factor: The Operating Expenses applicable to the Real Property equal to $583,835.00. (9) Permitted Use: Executive and administrative offices and operational activities related to data processing and information technology, and for no other use or purpose. (10) Broker(s): CB Richard Ellis Memphis, LLC (11) Security Deposit: NONE (12) Landlord's Contribution: NONE W I T N E S S E T H: The parties hereto, for themselves, their legal representatives, successors and assigns, hereby agree as follows: ARTICLE I GLOSSARY The following terms shall have the meanings indicated below: "Additional Rent" shall have the meaning set forth in Section 2.2. "Adjacent Property" shall mean the real property south of and adjacent to the Land, consisting of approximately nineteen and ninety-two-thousandths (19.092) acres, being purchased by Landlord at or about the date of this Lease, together with the improvements thereon. The Adjacent Property is described as Parcel I in the legal description attached hereto as Exhibit "A," and incorporated herein by reference. "Alterations" shall mean alterations, decorations, installations, repairs, improvements, additions, replacements or other physical changes in or about the Premises; provided, however, that the term "Alterations" shall exclude those made by 7 Landlord, if any, in accordance with any provisions of this Lease in order to prepare the Premises for Tenant's initial occupancy. "Applicable Rate" shall mean the lesser of (x) three percentage points above the then current Base Rate, and (y) the maximum rate permitted by applicable law. "ASHRAE" shall mean the American Society of Heating, Refrigeration and Air-Conditioning Engineers. "Bankruptcy Code" shall mean 11 U.S.C. Section 101 ET SEQ., or any statute, federal or state, of similar nature and purpose. "Base Rate" shall mean the rate of interest publicly announced from time to time by Citibank, N.A., or its successor, as its "base rate" (or such other term as may be used by Citibank, N.A., from time to time, for the rate presently referred to as its "base rate"). "Building" shall mean that certain two (2) story office building located on the Land and having an address of 1023 Cherry Road, Memphis, Tennessee 38117, and all of the equipment and other improvements and appurtenances related thereto of every kind and description now located or hereafter erected, constructed or placed upon the Land and any and all alterations, renewals, and replacements thereof, additions thereto and substitutions therefor. The Building is located as shown on Exhibit "B" attached hereto. "Building No. 1" shall mean that certain three (3) story office building located on the Land and having an address of 1023 Cherry Road, Memphis, Tennessee 38117, and all of the equipment and other improvements and appurtenances related thereto of every kind and description now located or hereafter erected, constructed or placed upon the Land and any and all alterations, renewals, and replacements thereof, additions thereto and substitutions therefor. Building No. 1 is located as shown on Exhibit "B" attached hereto. "Building Standard Condition" shall mean the condition of the Building as of the date of this Lease (reasonable wear and tear excepted), plus any Alterations approved by Landlord, except to the extent Landlord's approval is conditioned upon Tenant's removal of the approved Alteration prior to the Expiration Date. "Building Systems" shall mean the base building mechanical, electrical, sanitary, heating, air conditioning, ventilating, 8 elevator, plumbing, life-safety and other service systems of the Building but shall not include the Security System or installations made by Tenant after the date of this Lease. For purposes of calculating Operating Expenses, the term "Building Systems" shall include the base building mechanical, electrical, sanitary, heating, air conditioning, ventilating, elevator, plumbing, life-safety and other service systems of Building No. 1, but shall not include the Security System or installations made by Tenant after the date of this Lease. "Business Days" shall mean all days, excluding Saturdays, Sundays and all days observed as holidays by the State of Tennessee or the federal government. "Common Area" shall mean any and all portions of the Land and the improvements thereon not part of the Building or Building No. 1. Common Area includes all landscaping, fountains and related water works, walkways, sidewalks, parking lots, parking garages, parking decks, loading platforms, driveways, trash removal facilities, mechanical, electrical and utility rooms and service areas on the Land, regardless of whether they are part of the Building or Building No. 1. "Control" shall have the meaning set forth in Section 14.2. "Deficiency" shall have the meaning set forth in Section 18.2. "Escalation Rent" shall mean payments required to be made by Tenant pursuant to Article 3. "Event of Default" shall have the meaning set forth in Section 17.1. "Expiration Date" shall mean the Fixed Expiration Date or such earlier or later date on which the Term sooner or later ends pursuant to any of the terms, conditions or covenants of this Lease (including, but not limited to, the terms and provisions of Section 2.7 hereof) or pursuant to law. "Fixed Rent Adjustment Factor" shall have the meaning set out on the Reference Page. "Government Authority (Authorities)" shall mean the United States of America, the State of Tennessee, the County of Shelby, the City of Memphis, any political subdivision thereof and any agency, department, commission, board, bureau or instrumentality 9 of any of the foregoing, now existing or hereafter created, having jurisdiction over the Real Property or any portion thereof. "HVAC" shall mean heat, ventilation and air conditioning. "HVAC System" shall mean the Building Systems providing HVAC. "Hazardous Materials" shall have the meaning set forth in Section 8.2. "HET" shall mean Harrah's Entertainment, Inc., a Delaware corporation, and any affiliated or related company or subsidiary whose financial information is required by GAAP to be reported on Harrah's Entertainment Company, Inc.'s consolidated financial statements. "Land" shall mean the land containing approximately six and four hundred five-thousandths (6.405) acres of real estate located in Shelby County, Tennessee, and more particularly described as Parcel II in Exhibit "A." "Landlord" on the date as of which this Lease is made, shall mean RBM Venture Company, but thereafter, "Landlord" shall mean only the fee owner of the Real Property. "Landlord Indemnitees" shall mean Landlord, its trustees, partners, shareholders, officers, directors, employees, agents and contractors and the Manager (and the partners, shareholders, officers, directors and employees of Landlord's agents and contractors and of the Manager). "Landlord's Operating Statement" shall mean a statement containing a computation of Escalation Rent due pursuant to the provisions of Section 3.3 furnished by Landlord to Tenant. "Landlord's Statement" shall mean either a Landlord's Operating Statement or a Landlord's Tax Statement. "Landlord's Tax Statement" shall mean a statement containing a computation of Escalation Rent due pursuant to the provisions of Section 3.2 furnished by Landlord to Tenant. "Leveraged Transaction" shall mean any transaction entered into by HET whereby HET (a) uses debt or a financing source having characteristics of debt to complete the transaction, or 10 (b) as a result of the transaction, HET assumes or becomes liable for debt or other obligations characteristic of debt which were originally the obligations of the other party(ies) to the transaction. "Manager" shall mean any person or entity with which Landlord from time to time contracts for the management of the Building and/or Building No. 1. "Mortgage(s)" shall mean any trust deed, trust indenture or mortgage which may now or hereafter affect the Real Property, the Building, and all renewals, extensions, supplements, amendments, modifications, consolidations and replacements thereof or thereto, substitutions therefor, and advances made thereunder. "Mortgagee(s)" shall mean any trustee under or mortgagee or holder of a Mortgage. "Notice(s)" shall have the meaning set forth in Section 26.1. "Office Use" shall mean those uses which are included in the computation of Office Square Footage as such term is used in the Restrictive Covenants. "Operating Expenses" shall have the meaning set forth in Section 3.1. "Operating Hours" shall mean 7:00 a.m. to 7:00 p.m. on Business Days. "Operating Year" shall mean each calendar year that includes any part of the Term. "Parties" shall have the meaning set forth in Section 37.2. "Person or Person(s)" shall mean any natural person or persons, a partnership, a corporation, a limited liability company, a limited liability partnership and any other form of business or legal association or entity. "Persons Within Landlord's Control" shall mean and include Landlord, all of Landlord's respective principals, officers, agents, contractors, servants, employees, licensees and invitees. 11 "Persons Within Tenant's Control" shall mean and include Tenant, all of Tenant's respective principals, officers, agents, contractors, servants, employees, licensees and invitees. "Rating Level Multiplier" shall have the meaning set out in Exhibit "E" hereto. "Real Property" shall mean the Building, Building No. 1 and the Land. "Rental" shall mean and be deemed to include Fixed Rent, Additional Rent and any other sums payable by Tenant hereunder. "Requirements" shall mean (i) all present and future laws, rules, ordinances, regulations, statutes, requirements, codes and executive orders, extraordinary as well as ordinary, retroactive and prospective, of all Governmental Authorities now existing or hereafter created, and of any applicable fire rating bureau, or other body exercising similar functions, affecting the Real Property, or any street, avenue or sidewalk comprising a part or in front thereof or any vault in or under the same, or requiring removal of any encroachment, or affecting the maintenance, use or occupation of the Real Property, (ii) all requirements, obligations and conditions of all instruments of record on the date of this Lease including, without limitation, the Restrictive Covenants, and (iii) all requirements, obligations and conditions imposed by the carrier of Landlord's hazard insurance policy for the Building. "Restrictive Covenants" shall mean Final Plat P.D. 93-322, Phase I Harrah's Corporate Headquarters P.D., recorded at Plat Book 155, Page 8, in the Register's Office of Shelby County, Tennessee, as amended in accordance with the decision of the Memphis and Shelby County Land Use Control Board on October 14, 1999, pursuant to Staff Report #16 Correspondence Item, a copy of which is attached hereto as Exhibit "I"; and Agreement dated January 26, 1984 between Audubon Park Community Association and Holiday Inns, Inc. recorded at Instrument No. U9-9849, as amended at Instrument Nos. V8-8105 and BE 1706, in said Register's Office, for so long as said Agreement remains in effect. "Rules and Regulations" shall mean the rules and regulations annexed hereto as Exhibit "C," and such other and further reasonable rules and regulations as Landlord and Landlord's agents may from time to time adopt, on notice to Tenant to be given in accordance with the terms of this Lease. 12 "Security System" shall mean the keypad security system in use in the Building and Building No. 1 and located at various locations on the Real Property at the date of this Lease as modified from time to time. "Sublease Additional Rent" shall have the meaning set forth in Section 14.4. "Taxes" shall have the meaning set forth in Section 3.1. "Tax Year" shall mean each period of twelve (12) months, commencing on the first day of January of each year, that includes any part of the Term, or such other period of twelve (12) months as may be duly adopted as the fiscal year for real estate tax purposes by the City of Memphis, and Shelby County. "Tenant," on the date as of which this Lease is made, shall mean the Tenant named in this Lease, but thereafter "Tenant" shall mean only the tenant under this Lease at the time in question; provided, however, that the Tenant named in this Lease and any successor tenant hereunder shall not be released from liability hereunder in the event of any assignment of this Lease. "Tenant Indemnitees" shall mean Tenant, its trustees, partners, shareholders, officers, directors, employees, agents and contractors. "Tenant's Operating Payment" shall have the meaning set forth in Section 3.3. "Tenant's Projected Operating Share" shall have the meaning set forth in Section 3.3. "Tenant's Property" shall mean Tenant's movable fixtures and movable partitions, and other equipment, furniture, furnishings and other movable items of personal property, but excluding all FF&E acquired by Landlord under that certain Purchase and Sale Agreement by and between Tenant, as seller, and Landlord, as purchaser, dated September 15, 1999 (the term "FF&E" as used in this Lease shall have the meaning ascribed thereto in the aforedescribed Purchase Agreement). "Tenant's Tax Payment" shall have the meaning set forth in Section 3.2. "Term" shall mean the period from the Commencement Date through the Expiration Date. 13 "Unavoidable Delays" shall have the meaning set forth in Article 25. ARTICLE II DEMISE, PREMISES, TERM, RENT Section 2.1. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises for the Term to commence on the Commencement Date and to end on the Fixed Expiration Date, unless earlier terminated or extended as provided herein. Section 2.2. Commencing upon the Commencement Date, Tenant shall pay to Landlord, in lawful money of the United States of America, without notice or demand, by good and sufficient check drawn to Landlord's order on a bank or trust company with an office in the United States of America, at the office of Landlord or at such other place as Landlord may designate from time to time, the following: (a) the Fixed Rent, at the annual fixed rental rate set forth in the Reference Page, which shall be payable in equal monthly installments of Fixed Rent in advance on the first day of each and every calendar month during the Term, except that the first monthly installment of Fixed Rent shall be payable by Tenant upon execution and delivery of this Lease; and (b) additional rent ("Additional Rent") consisting of all other sums of money (including, without limitation, Escalation Rent) as shall become due from and be payable by Tenant hereunder (for default in the payment of which Landlord shall have the same remedies as for a default in the payment of Fixed Rent). Section 2.3. If the Commencement Date is other than the first day of a calendar month, or the Expiration Date is other than the last day of a calendar month, Rental for such month shall be prorated on a per diem basis. Section 2.4. [RESERVED] Section 2.5. Tenant shall pay the Fixed Rent and Additional Rent when due without abatement, deduction, counterclaim, setoff or defense for any reason whatsoever, except said abatement as may be occasioned by the occurrence of any 14 event permitting an abatement of Fixed Rent and Escalation Rent as specifically set forth in this Lease. Section 2.6 Notwithstanding anything to the contrary set forth in this Lease, in the event that HET's corporate credit rating issued by Standard & Poor's falls below "BBB" [ignoring for purposes hereof pluses (+) and minuses (-) included in such ratings] as a result of one or more Leveraged Transactions, then for such period of time as such rating remains below "BBB," Fixed Rent per annum shall be increased by an amount equal to the product of the Fixed Rent Adjustment Factor multiplied by the Rating Level Multiplier (and Fixed Rent per month shall be adjusted commensurately). Changes in the Fixed Rent resulting from increases or decreases in HET's Corporate Credit Rating shall become effective as of the official change date of the Standard & Poor's rating, and the adjustments in Fixed Rent shall be prorated to take into account the number of days in the month during which such rating was at each level. In no event shall the Fixed Rent be adjusted to an amount less than that set out in the Reference Page of this Lease. Section 2.7. Provided Tenant is not in default under this Lease at the time the option may be exercised, Landlord grants Tenant the option to renew this Lease with respect to all of the Premises for three (3) additional terms of five (5) years each. Each option shall be exercised by Tenant delivering written notice to Landlord at least six (6) months prior to the Fixed Expiration Date, as extended by any previously exercised option. (a) The renewal rental rates for each option period shall be the Market Rental Rate (as hereinafter defined)(such rate being hereinafter referred to as the "Renewal Rental Rate"). The Market Rental Rate is the rental rate then being charged by landlords (including Landlord) in the Memphis area on new leases to tenants of a similar credit quality to Tenant for space of similar quality and size as the Premises, taking into account, all relevant factors, including without limitation, age, extent and quality of tenant improvements, leasing commissions, length of term, amenities of the Building and the Real Property and the location and/or floor height and definition of usable area, reasonable projections of Fixed Rent, Additional Rent, Escalation Rent and allowances or concessions that have been granted such as abatements, lease assumptions and leasehold improvement and moving allowances. (b) Within ten (10) days after Tenant's exercise of each of the options to renew, Landlord shall notify Tenant in writing of 15 the Renewal Rental Rate for that renewal period as determined by the above formula. Tenant shall have ten (10) days from the receipt of Landlord's notice to either accept or dispute Landlord's determination of the Renewal Rental Rate. In the event that Tenant disputes Landlord's determination, Tenant shall so notify Landlord and advise Landlord of Tenant's determination of the Renewal Rental Rate for the option period as determined by the above formula. If Landlord and Tenant cannot agree upon the Renewal Rental Rate within thirty (30) days of Tenant's original notice of its intent to exercise its renewal option, the following "Dispute Resolution Mechanisms" shall be utilized: (c) The parties, within ten (10) days thereafter, shall each select an MAI-certified commercial real estate appraiser with a minimum of ten (10) years experience in the Memphis market (each party to pay the cost of the appraiser selected by it). Each appraiser, within thirty (30) days after selection, shall present to the other their determination of the Market Rental Rate. If the Market Rental Rates determined by each appraiser are within ten percent (10%) of each other, then the Renewal Rental Rate for the option period shall be the average of the two (2) Market Rental Rates as determined by the parties' appraisers. If the appraisers' determinations are greater than ten percent (10%) apart, then the appraisers shall jointly select, within ten (10) days thereafter, a third MAI-certified commercial real estate appraiser with a minimum of ten (10) years experience in the Memphis market, with the cost of the third appraiser to be divided equally between Landlord and Tenant. Within thirty (30) days after appointment, the third appraiser shall announce his/her determination of the Market Rental Rate. The Renewal Rental Rate shall be equal to the average of the Market Rental Rate determined by the two appraisers whose determinations are numerically closest to each other (disregarding the determination of the appraiser whose determination is further apart from either of the others). Notwithstanding the foregoing, in the event that the third appraiser's determination is exactly in the middle of the first two appraisers' determinations, then the third appraiser's determination shall be the Renewal Rental Rate. (d) Landlord and Tenant shall execute an amendment to this Lease within sixty (60) days after the determination of the Renewal Rental Rate, which amendment shall set forth the extended Term and all other terms and conditions applicable to the renewal period, and shall establish the Renewal Rental Rate as the annual Fixed Rent for the renewal period. 16 (e) Except for the Renewal Rental Rate as set forth above, this Lease, and all of the terms and conditions hereof, shall remain in full force and effect throughout the entire renewal term. ARTICLE III ESCALATION Section 3.1. For the purposes of this Article 3, the following terms shall have the meanings set forth below: (a) "Operating Expenses" shall mean the aggregate of all costs, expenses and disbursements (and taxes thereon, if any), of every kind and nature, paid or incurred by Landlord or on behalf of Landlord with respect to the ownership, operation, cleaning, repair, safety, replacement, management, security and maintenance of the Real Property, including the Building Systems and Common Areas, and with respect to the services provided to tenants, including, without limitation: (i) salaries, wages and bonuses paid to, and the cost of any hospitalization, medical, surgical, union and general welfare benefits (including group life insurance), any pension, retirement or life insurance plans and other benefits or similar expenses relating to employees of Landlord and/or of Manager (on- and off-site) engaged in the operation, cleaning, repair, safety, replacement, management, security or maintenance of the Real Property and the Building Systems or in providing services to tenants; (ii) social security, unemployment and other payroll taxes, the cost of providing disability and worker's compensation coverage imposed by any Requirement, union contract or otherwise with respect to said employees; (iii) the cost of gas, oil, steam, water, sewer rental, HVAC, water treatment, and other utilities furnished to the Building and Building No. 1 and utility taxes; (iv) the expenses incurred for casualty, rent, liability, fidelity, plate glass and any other insurance; (v) the cost of repairs, maintenance and painting, including the cost of acquiring or renting all supplies, tools, materials and equipment used in operating or repairing the Building and Building No. 1 including, without limitation, their roofs; (vi) expenditures, whether by purchase or lease, for capital improvements and capital equipment (except for roof replacement and repairs to structural components of the Building or Building No. 1 which were not necessitated by the acts or omissions of Tenant) to the extent (but only to the extent) that such 17 capital expenditures reduce or result in savings in Operating Expenses, the amortized cost of such capital expenditures (or portion thereof resulting in reduction or savings in Operating Expenses) to be included in Operating Expenses for the Operating Year in which such costs are incurred and every subsequent Operating Year, amortized on a straight-line basis over the accounting life of the capital improvement, with interest calculated at a per annum rate equal to eight percent (8%); (vii) operation, repair and replacement of building management systems; (viii) the cost or rental of all supplies, tools, materials and equipment; (ix) the cost of uniforms, work clothes and dry cleaning; (x) the cost of window cleaning, repair, resealing and replacement, janitorial, pest control, concierge, guard, watchman or other security personnel, service or system, fire extinguishers and sprinklers, power generators, fences and electronic/motorized gates, if any; (xi) management fees and expenses; (xii) charges of independent contractors performing work included within this definition of Operating Expenses; (xiii) telephone and stationery costs; (xiv) legal, accounting and other professional fees and disbursements incurred in connection with the operation and management of the Real Property; (xv) association fees and dues; (xvi) the cost of seasonal decorations; (xvii) depreciation of hand tools and other movable equipment used in the operation, cleaning, repair, safety, management, security or maintenance of the Building and Building No. 1; (xviii) exterior and interior landscaping, irrigation and tree care; (xix) all electrical costs incurred in the operation of the Real Property; (xx) striping, re-striping, sweeping and repairing parking areas and garages; and (xxi) waste removal. Provided, however, that the foregoing costs and expenses shall exclude or have deducted from them, as the case may be: (1) amounts received by Landlord through proceeds of insurance to the extent they are compensation for sums previously included in Operating Expenses; (2) cost of repairs or replacements incurred by reason of fire or other casualty or condemnation to the extent Landlord is compensated therefor; (3) Taxes; and 18 (4) leasing commissions, rental concessions and lease buy-outs. If Landlord leases any item of capital equipment that would otherwise be included in Operating Expenses, then the rentals and other costs paid with respect to such leasing shall be included in Operating Expenses for the Operating Years in which such rentals and costs are incurred. Notwithstanding anything to the contrary set forth herein, if the Building and Building No. 1 are not fully occupied during any calendar year of the Term, Operating Expenses shall be determined as if the Building and Building No. 1 had been fully occupied during such year, by adding to actual Operating Expenses an amount equal to those costs which would have been incurred if the Building and Building No. 1 had been fully occupied. For the purposes of this Lease, "fully occupied" shall mean occupancy of ninety-five percent (95%) of the usable square feet in the Building and Building No. 1 with Landlord providing all services. Notwithstanding anything to the contrary set forth herein, in the event that (a) utilities serving the Real Property are not separately metered or (b) any maintenance of the Real Property is covered by a contract which also covers the Adjacent Property or any portion thereof, then the Landlord shall make a fair and equitable allocation of the costs between the Real Property and the Adjacent Property receiving utility service and/or being covered by the maintenance contracts, and such fair and equitable amount shall be included in Operating Expenses under this Lease. (b) "Taxes" shall mean the aggregate amount of real estate taxes and any general or special assessments (exclusive of penalties and interest thereon) imposed upon the Real Property (including, without limitation, (i) assessments made upon or with respect to any "air" and "development" rights now or hereafter appurtenant to or affecting the Real Property, (ii) any fee, tax or charge imposed by any Government Authority for any vaults, vault space or other space within or outside the boundaries of the Real Property, (iii) any assessments levied after the date of this Lease for public benefits to the Real Property or the Building or Building No. 1); and (iv) franchise taxes; provided that if, because of any change in the taxation of real estate, any other tax or assessment, however denominated (including, without limitation, any profit, sales, use, occupancy, gross receipts or rental tax) is imposed upon Landlord or the owner of the Real Property or 19 the Building or Building No. 1, or the occupancy, rents or income therefrom, in substitution for any of the foregoing Taxes or for an increase in any of the foregoing Taxes, such other tax or assessment shall be deemed part of Taxes computed as if Landlord's sole asset were the Real Property. With respect to any Tax Year, all expenses, including attorneys' fees and disbursements and experts' and other witnesses' fees, incurred in contesting the validity or amount of any Taxes or in obtaining a refund of Taxes shall be considered as part of the Taxes for such Tax Year. Anything contained herein to the contrary notwithstanding, Taxes shall not be deemed to include (a) any federal taxes on Landlord's income, (b) estate or inheritance taxes, or (c) any similar taxes imposed on Landlord, unless such taxes are levied, assessed or imposed as a substitute for the whole or any part of, or as a substitute for an increase in, the taxes, assessments, levies, fees, charges and impositions that now constitute Taxes. In the event that the Real Property and the Adjacent Property are assessed together for ad valorem taxes, then for so long as there are no additions or expansions which result in increase in size of the exterior walls of the buildings on the Real Property or Adjacent Property, no additional buildings constructed on the Real Property or Adjacent Property, and no additional parking facilities or structures constructed on the Real Property or Adjacent Property (collectively, the "Additional Taxable Improvements"), the parties stipulate and agree that eighty-nine percent (89%) of the ad valorem real estate taxes imposed on the Real Property and Adjacent Property shall be "Taxes" within the meaning of this Lease, attributable to the Real Property. Upon the construction of Additional Taxable Improvements on the Real Property or Adjacent Property (provided that they are assessed together), the parties shall make an equitable adjustment to the foregoing stipulated percentage to account for any increase in assessment resulting from such Additional Taxable Improvements. Section 3.2. (a) Tenant shall pay as Escalation Rent for each Tax Year, an amount ("Tenant's Tax Payment") equal to Tenant's Share of the amount by which the Taxes for such Tax Year are greater than the Base Tax Factor. Tenant's Tax Payment shall be payable by Tenant to Landlord in twelve (12) equal monthly installments (subject to the further provisions of this Section 3.2), the first of which shall be due within ten (10) days after receipt of a Landlord's Tax Statement, regardless of whether such Landlord's Tax Statement is received prior to, on or after the 20 first day of such Tax Year and the remaining installments shall be due on the first day of each month thereafter. If there is any increase in Taxes for any Tax Year, whether during or after such Tax Year, or if there is any decrease in the Taxes for any Tax Year during such Tax Year, Landlord shall furnish a revised Landlord's Tax Statement for any Tax Year affected, and Tenant's Tax Payment for such Tax Year shall be adjusted and, (a) within ten (10) days after Tenant's receipt of such revised Landlord's Tax Statement, Tenant shall (with respect to any increase in Taxes for such Tax Year) pay the appropriate increase in Tenant's Tax Payment to Landlord, or (b) (with respect to any decrease in Taxes for such Tax Year) Landlord shall promptly, at its election, either credit such decrease in Tenant's Tax Payment against the next installment of Rental payable by Tenant or refund the amount of such decrease by check to the order of Tenant or, if at the end of the Term, there shall not be any further installments of Rental remaining against which Landlord can credit any decrease in Taxes due Tenant, Landlord shall deliver to Tenant Landlord's check in the amount of the refund due Tenant within thirty (30) days after Landlord's receipt of any refund. If, during the Term, Taxes are required to be paid (either to the appropriate taxing authorities or as tax escrow payments to the Lessor or the Mortgagee), in full or in quarterly or other installments on any other date or dates than as presently required, then Tenant's Tax Payments shall be correspondingly accelerated or revised so that Tenant's Tax Payments are due at least thirty (30) days prior to the date payments are due to the taxing authorities, the Lessor or the Mortgagee. The benefit of any discount for any early payment or prepayment of Taxes shall accrue solely to the benefit of Landlord and Taxes shall be computed without subtracting such discount. (b) (i) Except as provided in Section 3.2(b)(ii) below, only Landlord shall be eligible to institute tax reduction or other proceedings to reduce Taxes. If, after a Landlord's Tax Statement has been sent to Tenant, a refund of Taxes is actually received by or on behalf of Landlord, then, promptly after receipt of such refund, Landlord shall send Tenant a Landlord's Tax Statement adjusting the Taxes for such Tax Year (taking into account Landlord's expenses therefor) and setting forth Tenant's Share of such refund, and Tenant shall be entitled to receive such amount by way of a credit against the Escalation Rent; provided, however, that Tenant's Share of such refund shall be limited to the amount of Tenant's Tax Payment, if any, which Tenant had 21 theretofore paid to Landlord attributable to increases in Taxes for the Tax Year to which the refund is applicable. (ii) In the event Landlord does not contest any increase in ad valorem Taxes applicable to the Real Property, Tenant, at its sole cost and expense, shall have the right to contest any such increase and shall keep Landlord informed of the steps being taken. Landlord agrees to fully cooperate with Tenant in prosecuting any appeal taken by Tenant as a result of such increase, at no cost or expense to Landlord. During the pendency of any such contest, Tenant shall take all actions required to prevent the execution/enforcement by the taxing authorities of any rights against Landlord and/or the Real Property. All Escalation Rent charged by Landlord shall be paid by Tenant during the pendency of any such action. If, after a Landlord's Tax Statement has been sent to Tenant, a refund of Taxes is actually received as a result of a contest made by Tenant, then, promptly after receipt of such refund, Landlord shall send Tenant a Landlord's Tax Statement adjusting the Taxes for such Tax Year and setting forth Tenant's Share of such refund, and Tenant shall be entitled to receive such amount by way of a credit against the Escalation Rent; provided, however, that Tenant's Share of such refund shall be limited to the amount of Tenant's Tax Payment, if any, which Tenant had theretofore paid to Landlord attributable to increases in Taxes for the Tax Year to which the refund is applicable. (c) Tenant's Tax Payment and any credits with respect thereto as provided in this Section 3.2 shall be made as provided in this Section 3.2 regardless of the fact that Tenant may be exempt, in whole or in part, from the payment of any taxes by reason of Tenant's tax exempt status or for any other reason whatsoever. (d) Tenant shall pay to Landlord within thirty (30) days after demand as Additional Rent any occupancy tax or rent tax now in effect or hereafter enacted, if payable by Landlord in the first instance or hereafter required to be paid by Landlord. (e) Each Landlord's Tax Statement furnished by Landlord with respect to Tenant's Tax Payment shall be accompanied by a copy of the real estate tax bill or bills for the Tax Year referred to therein, but Landlord shall have no obligation to deliver more than one such copy of the real estate tax bill or bills in respect of any Tax Year, and Landlord's failure to 22 deliver such copy shall not affect Tenant's obligations as to amount or due date(s) thereof. (f) If the Base Tax Factor subsequently shall be adjusted, corrected or reduced whether as the result of protest, by means of agreement or as the result of legal proceedings, the Base Tax Factor for the purpose of computing any Additional Rent Payable pursuant to this Article shall be the Base Tax Factor as so adjusted, corrected or reduced. Until the Base Tax is so adjusted, corrected or reduced, if ever, Tenant shall pay Additional Rent hereunder based upon the unadjusted, uncorrected or unreduced Base Tax Factor and upon such adjustment, correction or reduction occurring, any Additional Rent payable by Tenant prior to the date of such occurrence shall be recomputed and Tenant shall pay to Landlord any Escalation Rent found due by such recomputation within thirty (30) days after being billed therefor (which bill shall set forth in reasonable detail the pertinent data causing and comprising such recomputation). (g) If the Commencement Date or the Expiration Date occurs on a date other than January 1 or December 31, respectively, any Tenant's Tax Payment under this Article 3 for the Tax Year in which such Commencement Date or Expiration Date occurs shall be apportioned in that percentage which the number of days in the period from the Commencement Date to December 31 or from January 1 to the Expiration Date, as the case may be, both inclusive, bears to the total number of days in such Tax Year. If the Commencement Date or the Expiration Date occurs on a date other than January 1 or December 31, respectively, any Tenant's Operating Payment under this Article 3 for the Operating Year in which such Commencement Date or Expiration Date occurs shall be apportioned in that percentage which the number of days in the period from the Commencement Date to December 31 or from January 1 to the Expiration Date, as the case may be, both inclusive, bears to the total number of days in such Operating Year. In the event of a termination of this Lease, any Escalation Rent under this Article 3 shall be paid or adjusted within thirty (30) days after submission of a Landlord's Statement. The rights and obligations of Landlord and Tenant under the provisions of Article 3 with respect to any Escalation Rent shall survive for a period of six (6) months after the end of the calendar year in which the Expiration Date falls. Section 3.3. (a) Tenant shall pay as Escalation Rent for each Operating Year an amount ("Tenant's Operating Payment") equal to Tenant's Share of the amount by which Operating Expenses 23 for such Operating Year are greater than the Base Operating Factor. (b) Landlord shall furnish to Tenant, with respect to each Operating Year, a Landlord's Operating Statement setting forth Landlord's estimate of Tenant's Operating Payment for such Operating Year ("Tenant's Projected Operating Share"). Tenant shall pay to Landlord on the first day of each month during such Operating Year, as Escalation Rent, an amount equal to one-twelfth (1/12) of Tenant's Projected Operating Share for such Operating Year. If, however, Landlord furnishes any such Landlord's Operating Statement for an Operating Year subsequent to the commencement of such Operating Year, then (a) until the first day of the month following the month in which such Landlord's Operating Statement is furnished to Tenant, Tenant shall pay to Landlord on the first day of each month an amount equal to the monthly sum payable by Tenant to Landlord under this Section 3.3 in respect of the last month of the preceding Operating Year; (b) after such Landlord's Operating Statement is furnished to Tenant or together therewith, Landlord shall give notice to Tenant stating whether the installments of Tenant's Projected Operating Share previously made for such Operating Year were greater or less than the installments of Tenant's Projected Operating Share to be made for such Operating Year in accordance with such estimate, and (i) if there is a deficiency, Tenant shall pay the amount thereof within thirty (30) days after demand therefor, or (ii) if there was an overpayment, Landlord shall credit the amount thereof against subsequent payments of Rental or, if at the end of the Term there shall not be any further installments of Rental remaining against which Landlord can credit any such overpayment due Tenant, Landlord shall deliver to Tenant Landlord's check in the amount of the refund due Tenant within thirty (30) days after Tenant shall first be entitled to a credit for the overpayment of Operating Expenses; and (c) on the first day of the month following the month in which such Landlord's Operating Statement is furnished to Tenant, and monthly thereafter throughout the remainder of such Operating Year, Tenant shall pay to Landlord an amount equal to one-twelfth (1/12) of Tenant's Projected Operating Share shown in such Landlord's Operating Statement. Landlord shall furnish to Tenant a revised Landlord's Operating Statement with a new estimate of Tenant's Projected Operating Share for such Operating Year and, in such case, Tenant's Projected Operating Share for such Operating Year shall be adjusted and paid or credited, as the case may be, substantially in the same manner as provided in the preceding sentence. 24 (c) After the end of each Operating Year, Landlord shall furnish to Tenant a Landlord's Operating Statement for such Operating Year. Each such year-end Landlord's Operating Statement shall be accompanied by a computation of Operating Expenses prepared by the Manager or a certified public accountant designated by Landlord from which Landlord shall make the computation of Escalation Rent due in respect of Operating Expenses hereunder. In making computations of Operating Expenses, the certified public accountant or the Manager may rely on Landlord's reasonable estimates and allocations whenever said estimates and allocations are needed for this Article 3. If the Landlord's Operating Statement shows that the sums paid by Tenant under Section 3.3(B) exceeded Tenant's Operating Payments required to be paid by Tenant for such Operating Year, Landlord shall credit the amount of such excess against subsequent payments of Rental or, if at the end of the Term there shall not be any further installments of Rental remaining against which Landlord can credit any such overpayments due Tenant, Landlord shall promptly deliver to Tenant Landlord's check in the amount of the refund due Tenant within thirty (30) days after Tenant shall first be entitled to a credit for the overpayment of Operating Expenses; and if the Landlord's Operating Statement for such Operating Year shows that the sums so paid by Tenant were less than Tenant's Operating Payment due for such Operating Year, Tenant shall pay the amount of such deficiency within thirty (30) days after demand therefor. (d) In addition, Tenant shall pay to the appropriate taxing authority, as and when due, any and all taxes due with respect to Tenant's personal property and/or leasehold interest in the Premises. Section 3.4. Landlord's failure to render any Landlord's Statement with respect to any Tax Year or Operating Year shall not prejudice Landlord's right thereafter to render a Landlord's Statement with respect thereto or with respect to any subsequent Tax Year or Operating Year, as the case may be, nor shall the rendering of a Landlord's Statement prejudice Landlord's right thereafter to render a corrected Landlord's Statement for that Tax Year or Operating Year. Section 3.5. Any Landlord's Statement sent to Tenant shall be conclusively binding upon Tenant unless, within thirty (30) days after such Landlord's Statement is sent, Tenant shall send a written notice to Landlord objecting to such Landlord's Statement and specifying, to the extent reasonably practicable, the respects in which such Landlord's Statement is disputed. If 25 Tenant shall send such notice with respect to a Landlord's Statement, Tenant may select and pay an independent certified public accountant or a member of an independent firm which is engaged in the business of auditing lease escalation clauses (an "Approved Examiner") provided that such Approved Examiner is not and has not during the Term been affiliated with, a shareholder in, an officer, director, partner, or employee of, any Manager during the Term or the Manager named in this Lease, and such Approved Examiner may examine Landlord's books and records relating solely to disputed aspects of the Operating Expenses to determine the accuracy of Landlord's Operating Statement. Tenant recognizes the confidential nature of Landlord's books and records, and agrees that any information obtained by an Approved Examiner during any examination shall be maintained in strict confidence by such Approved Examiner, without revealing same to any Person except Tenant. If, after such examination, such Approved Examiner shall dispute such Landlord's Operating Statement, either party may refer the decision of the issues raised to a reputable independent firm of certified public accountants, selected by Landlord and approved by Tenant, which approval shall not be unreasonably withheld or delayed, and the decision of such accountants shall be conclusively binding upon the parties. The fees and expenses involved in resolving such dispute shall be borne by Tenant, unless the final determination is that Landlord's Statement overstated Operating Expenses by more than five percent (5%), in which case Landlord shall pay the reasonable fees and expenses involved in resolving the dispute. Notwithstanding the giving of such notice by Tenant, and pending the resolution of any such dispute, Tenant shall pay to Landlord when due the amount shown on any such Landlord's Statement, as provided in this Article 3. Tenant shall pay the amount of any underpayment to Landlord and Landlord shall refund the amount of any overpayment to Tenant, within thirty (30) days after resolution of such dispute (and if Landlord fails to refund such overpayment to Tenant, Tenant shall be entitled to offset the same against future payments of Additional Rent). ARTICLE IV USE AND OCCUPANCY Section 4.1. Tenant shall use and occupy the Premises for the Permitted Use and for no other purpose. Tenant and Tenant's use of the Premises shall comply in all respects with the Restrictive Covenants; and Tenant shall indemnify Landlord against any loss, cost or damage (including costs of defense and reasonable attorney fees) arising as a result of the failure of 26 the Tenant or Tenant's use of the Premises to so comply. Tenant covenants and agrees that in no event and under no circumstances shall the Office Use within the Building exceed fifty-three thousand one hundred forty-nine (53,149) square feet unless Landlord and Tenant otherwise agree in a writing signed by them; and if the Office Use within the Building shall ever exceed said square footage, Tenant shall diligently take steps to remove area within the Building from Office Use in order that Tenant shall be in compliance with the foregoing provisions. Section 4.2. Tenant shall not use the Premises or any part thereof, or permit the Premises or any part thereof to be used, (1) for the business of photographic, multilith or multigraph reproductions or offset printing (other than those which are ancillary to an otherwise Permitted Use), (2) for an offthe-street retail commercial banking, thrift institution, loan company, trust company, depository or safe deposit business accepting deposits from the general public, (3) for the offthe-street retail sale of travelers checks, money orders, drafts, foreign exchange or letters of credit or for the receipt of money for transmission, (4) by the United States government, the state or local government, or any agency or department of any of the foregoing having or asserting sovereign immunity, (5) for the preparation, dispensing or consumption of food or beverages in any manner whatsoever, except for the preparation, dispensing and consumption of food by Tenant's employees who work in the Premises and not for the sale of food to any Persons other than such employees, (6) as an employment agency, day-care facility (other than as a self-operated facility for use only by Tenant's employees), labor union, school, or vocational training center (except for the training of employees of Tenant intended to be employed at the Premises), (7) as a barber shop, beauty salon or manicure shop, (8) for product display activities (such as those of a manufacturer's representative), (9) as offices of any public utility company, (10) for health care activities, (11) for clerical support services or offices of public stenographers or typists (other than those which are ancillary to an otherwise Permitted Use), (12) as reservation or call centers, (13) for retail or manufacturing use, (14) as studios for radio, television or other media, or (15) any use which extends the hours of use or operations in the Premises (other than infrequently or sporadically) beyond the Operating Hours. Furthermore, the Premises shall not be used for any purpose that would, in Landlord's reasonable judgment, tend to lower the first-class character of the Building, create unreasonable or excessive elevator or floor loads, violate the certificate of occupancy of the Building, materially impair or interfere with 27 any of the Building operations or the proper and economic heating, air-conditioning, cleaning or any other services of the Building, materially interfere with the use of the other areas of the Building by any other tenants, or materially impair the appearance of the Building. ARTICLE V ALTERATIONS Section 5.1. (a) Except as otherwise set out in Section 5.1(f), Tenant shall not make or permit to be made any Alterations without Landlord's prior written consent. Reference is made to Exhibit "G" hereto, which contains the Tenant Design and Construction Standards applicable to the Building, which is incorporated by reference in this Lease. Landlord reserves the right to make reasonable changes and additions thereto. (b) (1) Prior to making any such Alterations, Tenant shall (i) submit to Landlord two (2) sets of detailed plans and specifications (including layout, architectural, electrical, mechanical and structural drawings) that comply with all Requirements for each proposed Alteration, and Tenant shall not commence any such Alteration without first obtaining Landlord's approval of such plans and specifications, which approval shall not be unreasonably withheld or delayed, (ii) at Tenant's expense, obtain all permits, approvals and certificates required by any Governmental Authorities, and (iii) furnish to Landlord duplicate original policies or certificates thereof of worker's compensation insurance (covering all persons to be employed by Tenant, and Tenant's contractors and subcontractors, in connection with such Alteration) and commercial general liability insurance (including premises operation, bodily injury, personal injury, death, independent contractors, products and completed operations, broad form contractual liability and broad form property damage coverages) in such form, with such companies, for such periods and in such amounts as Landlord may reasonably approve, naming Landlord and its agents, any Lessor and any Mortgagee, as additional insureds. Upon completion of such Alteration, Tenant, at Tenant's expense, shall obtain certificates of final approval of such Alterations required by any Governmental Authority and shall furnish Landlord with copies thereof, together with the "as built" plans and specifications for such Alterations. All Alterations shall be made and performed in accordance with the plans and specifications 28 therefor as approved by Landlord, all Requirements, Restrictive Covenants, and the Rules and Regulations. All materials and equipment to be incorporated in the Premises as a result of any Alterations shall be first quality and no such materials or equipment shall be subject to any lien, encumbrance, chattel mortgage, title retention or security agreement. In addition, any such Alteration for which the cost of labor and materials (as estimated by Landlord's architect, engineer or contractor) is in excess of Seventy-Five Thousand Dollars ($75,000.00), either individually or in the aggregate with any other Alteration constructed in any twelve (12) month period, shall be performed only under the supervision of a licensed architect satisfactory to Landlord. (2) Landlord reserves the right to disapprove any plans and specifications in whole or in part, to reserve approval of items shown thereon pending its review and approval of other plans and specifications, and to condition its approval upon Tenant making revisions to the plans and specifications or supplying additional information; provided, however, that Landlord shall be reasonable in its exercise of these rights. Additionally, Landlord shall be deemed to have approved Tenant's plans and specifications if Landlord fails to respond to Tenant's plans and specifications within fifteen (15) days of Landlord's receipt thereof. Tenant agrees that any review or approval by Landlord of any plans and/or specifications with respect to any Alteration is solely for Landlord's benefit, and without any representation or warranty whatsoever to Tenant or any other Person with respect to the adequacy, correctness or sufficiency thereof or with respect to Requirements, Restrictive Covenants or otherwise. (c) Alterations shall be performed at Tenant's expense and at such times and in such manner as Landlord may from time to time reasonably designate, unless, at the time of the Alterations, Tenant is the only occupant of the Building and Building No. 1, in which event, Tenant may control the times and manner (but always in accordance with all Requirements) to perform the Alterations. All Alterations shall become a part of the Building and shall be Landlord's property from and after the installation thereof and may not be removed or changed without Landlord's consent. Notwithstanding the foregoing, however, Landlord, upon notice given at least sixty (60) days prior to the Expiration Date or upon such shorter notice as is reasonable under the circumstances upon the earlier expiration of the Term, 29 may require Tenant to remove any specified Alterations (other than those comprising part of Building Standard Condition) and to repair and restore in a good and workmanlike manner to Building Standard Condition (reasonable wear and tear excepted) any damage to the Premises or the Building caused by such removal. All Tenant's Property shall remain the property of Tenant and, unless Landlord and Tenant shall agree otherwise, on or before the Expiration Date shall, at Tenant's cost, be removed from the Premises by Tenant, and Tenant shall repair and restore in a good and workmanlike manner to Building Standard Condition (reasonable wear and tear excepted) any damage to the Premises or the Building caused by such removal. The provisions of this Section 5.1(c) shall survive the expiration or earlier termination of this Lease. (d) (1) All Alterations shall be performed, at Tenant's sole cost and expense, by contractors, subcontractors or mechanics approved by Landlord in Landlord's reasonable discretion. (2) Notwithstanding the foregoing, with respect to any Alteration affecting any Building Systems, (i) Tenant, if required by Landlord, shall employ Landlord's or the Manager's designated contractor, and (ii) the Alteration shall, if required by Landlord, at Tenant's expense, be designed by either Landlord's or the Manager's engineer. (e) (1) Any mechanic's lien filed against the Premises or the Real Property for work claimed to have been done for, or materials claimed to have been furnished to, Tenant shall be canceled or discharged by Tenant, at Tenant's expense, within twenty (20) days after such lien shall be filed, by payment or filing of the bond required by law, and Tenant shall indemnify and hold Landlord harmless from and against any and all costs, expenses, claims, losses or damages resulting therefrom by reason thereof. (2) If Tenant shall fail to discharge such mechanic's lien within the aforesaid period, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to, discharge the same either by paying the amount claimed to be due or by procuring the discharge of such lien by deposit in court or bonding, and in any such event, Landlord shall be entitled, if Landlord so elects, to compel the prosecution of an action for the foreclosure of such mechanic's lien by the lienor and to pay the amount of 30 the judgment, if any, in favor of the lienor, with interest, costs and allowances. (3) Any amount paid by Landlord for any of the aforesaid charges and for all expenses of Landlord (including, but not limited to, attorneys' fees and disbursements) incurred in defending any such action, discharging said lien or in procuring the discharge of said lien, with interest on all such amounts at the maximum legal rate of interest then chargeable to Tenant from the date of payment, shall be repaid by Tenant within ten (10) days after written demand therefor, and all amounts so repayable, together with such interest, shall be considered Additional Rent. (f) Notwithstanding anything to the contrary set forth in this Article V, Tenant, without Landlord's consent, is permitted to make Alterations to the Premises which relate only to the cosmetic appearance, nonstructural components, and/or non-load-bearing portions of the Premises (and which do not affect the structural and/or load-bearing elements of the Building or the Building Systems), provided such Alterations do not cost, in the aggregate, more than Seventy-Five Thousand Dollars ($75,000.00) during any twelve (12) month period during the Term. Section 5.2. Tenant shall reimburse Landlord, within five (5) Business Days after demand therefor, for any reasonable out-of-pocket expense incurred by Landlord for reviewing the plans and specifications for any Alterations or inspecting the progress of completion of the same. Section 5.3. Landlord, at Tenant's expense, and upon the request of Tenant, shall join in any applications for any permits, approvals or certificates required to be obtained by Tenant in connection with any permitted Alteration (provided that the provisions of the applicable Requirements shall require that Landlord join in such application) and shall otherwise cooperate with Tenant in connection therewith, provided that Landlord shall not be obligated to incur any cost or expense or liability in connection therewith. Section 5.4. Tenant shall furnish to Landlord copies of records of all Alterations and of the cost thereof within fifteen (15) days after the completion of such Alterations. 31 Section 5.5. TENANT HEREBY ACCEPTS THE PREMISES "AS IS, WHERE IS," AND WITHOUT ANY WARRANTY, EXPRESS OR IMPLIED, EXCEPT AS OTHERWISE SET FORTH IN THIS LEASE. Section 5.6. Tenant shall not, at any time prior to or during the Term, directly or indirectly employ, or permit the employment of, any contractor, mechanic or laborer in the Premises, whether in connection with any Alteration or otherwise, if such employment would unreasonably interfere or cause any unreasonable conflict with other contractors, mechanics or laborers engaged in the construction, maintenance or operation of the Building by Landlord, Tenant or others, or of any other property owned by Landlord. In the event of any such unreasonable interference or conflict, Tenant, upon demand of Landlord, shall cause all contractors, mechanics or laborers causing such interference or conflict to leave the Building immediately. Section 5.7. During the course of any Alteration and any construction by Landlord, whether on the Land or on any real property adjacent to the Land, Landlord and Tenant shall cooperate with each other, and shall cause their contractors and subcontractors to cooperate, so as to minimize interruption and interference with each other's construction activities. ARTICLE VI REPAIRS Section 6.1. Tenant covenants to use due care in its use and occupancy of the Premises and not to commit waste. Except as otherwise provided in this Section 6.1, Tenant shall not be obligated to repair any Building Systems. Tenant shall, however, at its own cost and expense, maintain and repair and, to the extent deemed appropriate by Tenant, monitor the Security System. Notwithstanding any provision contained in this Lease to the contrary, all damage or injury to the Premises, and all damage or injury to any other part of the Building, or to its fixtures, equipment and appurtenances (including Building Systems), whether requiring structural or nonstructural repairs, caused by the moving of Tenant's Property or caused by or resulting from any act or omission of, or Alterations made by, Tenant or Persons Within Tenant's Control, shall be repaired by Tenant, at Tenant's sole cost and expense, to the reasonable satisfaction of Landlord (if the required repairs are non-structural in nature and do not affect any Building Systems), or by Landlord at Tenant's sole cost and expense (if the required repairs are structural in 32 nature or affect any Building Systems). All of the aforesaid repairs shall be performed in a manner and with materials and design of first class and quality consistent with first-class office buildings in Memphis and shall be made in accordance with the provisions of Article 5. If Tenant shall fail, after five (5) days notice (or such shorter period as may be required because of an emergency), to proceed with due diligence to make repairs required to be made by Tenant, the same may be made by Landlord, at the expense of Tenant, and the expenses thereof incurred by Landlord, with interest thereon at the Applicable Rate, shall be paid to Landlord, as Additional Rent, within ten (10) days after rendition of a bill or statement therefor. Tenant shall give Landlord prompt notice of any defective condition in any Building Systems located in, servicing or passing through the Premises. Section 6.2. Tenant shall not place a load upon any floor of the Premises which exceeds seventy-five (75) pounds per square foot "live load." Tenant shall not locate or move any safe, heavy machinery, heavy equipment, business machines, freight, bulky matter or fixtures into or out of the Building without Landlord's prior consent, which consent shall not be unreasonably withheld, and Tenant shall make payment to Landlord of Landlord's costs in connection therewith (if such move is not part of an Alteration). If such safe, machinery, equipment, freight, bulky matter or fixture requires special handling (as determined by Landlord), Tenant shall employ only persons holding a Master Rigger's license to do said work. All work in connection therewith shall comply with the Requirements, and shall be done during such hours as Landlord may designate. Business machines and mechanical equipment shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Landlord's reasonable judgment, to absorb and prevent vibration, noise and annoyance. Section 6.3. Landlord shall operate, maintain and make all necessary repairs (both structural and non-structural) to the Building Systems and the public portions of the Building, both exterior and interior, in conformance with standards applicable to first-class office buildings in Memphis, except for those repairs for which Tenant is responsible pursuant to any other provision of this Lease. Landlord shall use reasonable efforts to minimize interference with Tenant's use and occupancy of the Premises in making any repairs, alterations, additions or improvements; provided, however, that Landlord shall have no obligation to employ contractors or labor at so-called overtime or other premium pay rates or to incur any other overtime costs 33 in connection with such repairs, alterations, additions or improvements. Notwithstanding the foregoing, if Tenant shall so request, Landlord shall employ contractors or labor at so-called overtime or other premium pay rates or incur other overtime costs in making such repairs, alterations, additions or improvements, provided Tenant shall pay to Landlord, as Additional Rent, within ten (10) days after demand therefor, an amount equal to the excess costs incurred by Landlord by reason of compliance with Tenant's request. Except as expressly provided in this Lease, there shall be no allowance to Tenant for a diminution of rental value and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from Landlord, Tenant or others making, or failing to make, any repairs, alterations, additions or improvements in or to any portion of the Building or the Premises, or its fixtures, appurtenances or equipment. Section 6.4. Without abatement or diminution in rent, Landlord reserves and shall have the following additional rights: 1. To erect, use and maintain pipes and conduits in and through the Premises; provided that all such conduits and pipes shall be located behind then-existing walls, under floors or above suspended ceilings and shall not interfere with the use and operation of the Premises, or any equipment or facilities located therein. 2. To take any and all measures, including inspections, repairs, alterations, additions and improvements to the Premises or to the Building, as may be necessary or desirable for the safety, protection or preservation of the Premises or the Building or Landlord's interests, or as may be necessary or desirable in the operation of the Building. ARTICLE VII CONNECTING CORRIDORS Section 7.1 [Reserved] Section 7.2 In the event that the Expiration Date of this Lease shall be earlier or later than the expiration date of Tenant's lease of Building No. 1, then at such time as Tenant no longer occupies both of such buildings, Tenant shall, at its own expense, construct a door or doors in the corridor which connects 34 the Building and Building No. 1, in such manner as Landlord and Tenant shall mutually agree, to prevent access between the Building and Building No. 1. ARTICLE VIII REQUIREMENTS OF LAW Section 8.1. Tenant shall not do, and shall not permit Persons Within Tenant's Control to do, any act or thing in or upon the Premises or the Building which will invalidate or be in conflict with the certificate of occupancy for the Premises or the Building or violate any Requirements or Restrictive Covenants. Tenant shall, at Tenant's sole cost and expense, take all action, including making any required Alterations necessary to comply with all Requirements (including, but not limited to, applicable terms of the Americans With Disabilities Act of 1990 (the "ADA"), as modified and supplemented from time to time) which shall impose any violation, order or duty upon Landlord or Tenant arising from, or in connection with, the Premises, Tenant's occupancy, use or manner of use of the Premises (including, without limitation, any occupancy, use or manner of use that constitutes a "place of public accommodation" under the ADA), or any installations by Tenant in the Premises, or required by reason of a breach of any of Tenant's covenants or agreements under this Lease, whether or not such Requirements shall now be in effect or hereafter enacted or issued, and whether or not any work required shall be ordinary or extraordinary or foreseen or unforeseen at the date hereof; provided, however, that Landlord shall be responsible for complying with such Requirement or Restrictive Covenant and for the cost of such compliance if and to the extent that non-compliance arose because of the acts of Landlord. Section 8.2. Tenant covenants and agrees that Tenant shall, at Tenant's sole cost and expense, comply at all times with all Requirements governing the use, generation, storage, treatment and/or disposal of any Hazardous Materials (as defined below), the presence of which results from or in connection with the act or omission of Tenant or Persons Within Tenant's Control or the breach of this Lease by Tenant or Persons Within Tenant's Control. The term "Hazardous Materials" shall mean any biologically or chemically active or other toxic or hazardous wastes, pollutants or substances, including, without limitation, asbestos, PCBs, petroleum products and by-products, substances defined or listed as "hazardous substances" or "toxic substances" 35 or similarly identified in or pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 ET SEQ., and as hazardous wastes under the Resource Conservation and Recovery Act, 42 U.S.C. 6010, ET SEQ., any chemical substance or mixture regulated under the Toxic Substance Control Act of 1976, as amended 15 U.S.C. 2601, ET SEQ., any "toxic pollutant" under the Clean Water Act, 33 U.S.C. 466 ET SEQ., as amended, any hazardous air pollutant under the Clean Air Act, 42 U.S.C. 7401 ET SEQ., hazardous materials identified in or pursuant to the Hazardous Materials Transportation Act, 49 U.S.C. 1802, ET SEQ., and any hazardous or toxic substances or pollutant regulated under any other Requirements. Tenant shall agree to execute, from time to time, at Landlord's request, affidavits, representations and the like concerning Tenant's best knowledge and belief regarding the presence of Hazardous Materials in, on, under or about the Premises, the Building or the Land. Tenant shall indemnify and hold harmless all Indemnitees from and against any loss, cost, damage, liability or expense (including attorneys' fees and disbursements) arising by reason of any clean up, removal, remediation, detoxification action or any other activity required or recommended of any Indemnitees by any Governmental Authority by reason of the presence in or about the Building or the Premises of any Hazardous Materials, as a result of or in connection with the act or omission of Tenant or Persons Within Tenant's Control or the breach of this Lease by Tenant or Persons Within Tenant's Control. The foregoing covenants and indemnity shall survive the expiration or any termination of this Lease. Section 8.3. If Tenant shall receive notice of any violation of, or defaults under, any Requirements, liens or other encumbrances applicable to the Premises, Tenant shall give prompt notice thereof to Landlord. Section 8.4. If any governmental license or permit shall be required for the proper and lawful conduct of Tenant's business and if the failure to secure such license or permit would, in any way, affect Landlord or the Building, then Tenant, at Tenant's expense, shall promptly procure and thereafter maintain, submit for inspection by Landlord, and at all times comply with the terms and conditions of, each such license or permit. Section 8.5. Tenant, at Tenant's sole cost and expense and after notice to Landlord, may contest, by appropriate proceedings prosecuted diligently and in good faith, the legality or applicability of any Requirement affecting the Premises provided that: (a) neither Landlord nor any Indemnitees shall be subject 36 to criminal penalties, nor shall the Real Property or any part thereof be subject to being condemned or vacated, nor shall the certificate of occupancy for the Premises or the Building be suspended or threatened to be suspended, by reason of non-compliance or by reason of such contest; (b) before the commencement of such contest, if Landlord or any Indemnitees may be subject to any civil fines or penalties or if Landlord may be liable to any independent third party as a result of such non-compliance, then Tenant shall furnish to Landlord either (i) a bond of a surety company satisfactory to Landlord, in form and substance reasonably satisfactory to Landlord, and in an amount at least equal to Landlord's estimate of the sum of (A) the cost of such compliance, (B) the penalties or fines that may accrue by reason of such non-compliance (as reasonably estimated by Landlord) and (C) the amount of such liability to independent third parties, and shall indemnify Landlord (and any Indemnitees) against the cost of such compliance and liability resulting from or incurred in connection with such contest or non-compliance; or (ii) other security satisfactory in all respects to Landlord; (c) such non-compliance or contest shall not constitute or result in a violation (either with the giving of notice or the passage of time or both) of the terms of any Mortgage, or if such Mortgage conditions such non-compliance or contest upon the taking of action or furnishing of security by Landlord, such action shall be taken or such security shall be furnished at the expense of Tenant; and (d) Tenant shall keep Landlord regularly advised as to the status of such proceedings. ARTICLE IX SUBORDINATION Section 9.1. This Lease shall be subject and subordinate to each Mortgage, whether made prior to or after the execution of this Lease, and to all renewals, extensions, supplements, amendments, modifications, consolidations and replacements thereof or thereto, substitutions therefor, and advances made thereunder. This clause shall be selfoperative and no further agreement of subordination shall be required to make the interest of any Lessor or Mortgagee superior to the interest of Tenant hereunder. In confirmation of such subordination, however, Tenant shall promptly execute and deliver, at its own cost and expense, any document, in recordable form if requested, that Landlord, any Lessor or any Mortgagee may request to evidence such subordination. Tenant shall not do anything that would constitute a default under any Mortgage, or omit to do anything that Tenant is obligated to do under the terms of this Lease so 37 as to cause Landlord to be in default thereunder. If, in connection with the financing of the Real Property or the Building, any lending institution or Lessor, as the case may be, requests reasonable modifications of this Lease that do not increase rent or change the Term of this Lease, or materially and adversely affect the rights or obligations of Tenant under this Lease, Tenant shall make such modifications. Section 9.2. If, at any time prior to the expiration of the Term, any Mortgagee comes into possession of the Real Property or the Building by receiver or otherwise, Tenant agrees, at the election and upon demand of any owner of the Real Property or the Building, or of any Mortgagee in possession of the Real Property or the Building, to attorn, from time to time, to any such owner or Mortgagee or any person acquiring the interest of Landlord as a result of any such termination, or as a result of a foreclosure of the Mortgage or the granting of a deed in lieu of foreclosure, upon the then executory terms and conditions of this Lease (except as provided below), for the remainder of the Term, provided that such owner or Mortgagee, as the case may be, or receiver caused to be appointed by any of the foregoing, is then entitled to possession of the Premises. Any such attornment shall be made upon the condition that no such owner or Mortgagee shall be: 1. liable for any act or omission of any prior landlord (including, without limitation, the then defaulting landlord); or 2. subject to any defense or offsets (except as expressly set forth in this Lease) which Tenant may have against any prior landlord (including, without limitation, the then defaulting landlord); or 3. bound by any payment of Rental which Tenant might have paid for more than the current month to any prior landlord (including, without limitation, the then defaulting landlord); or 4. bound by any obligation to make any payment to Tenant which was required to be made prior to the time such owner or Mortgagee succeeded to any prior landlord's interest; or 5. bound by any obligation to perform any work or to make improvements to the Premises except for (i) repairs and maintenance pursuant to the provisions of 38 Article 6, (ii) repairs to the Premises or any part thereof as a result of damage by fire or other casualty pursuant to Article 12, but only to the extent that such repairs can be reasonably made from the net proceeds of any insurance actually made available to such owner or Mortgagee and (iii) repairs to the Premises as a result of a partial condemnation pursuant to Article 13, but only to the extent that such repairs can be reasonably made from the net proceeds of any award made available to such owner or Mortgagee. The provisions of this Section 9.2 shall inure to the benefit of any such owner or Mortgagee, shall apply notwithstanding that, as a matter of law, this Lease may terminate, and shall be self-operative upon any such demand, and no further agreement shall be required to give effect to said provisions. Tenant, however, upon demand of any such owner or Mortgagee, shall execute, from time to time, agreements in confirmation of the foregoing provisions of this Section 9.2, satisfactory to any such owner, Lessor or Mortgagee, and acknowledging such attornment and setting forth the terms and conditions of its tenancy. Nothing contained in this Section 9.2 shall be construed to impair any right otherwise exercisable by any such owner or Mortgagee. Section 9.3. If requested by any Mortgagee or Landlord, Tenant shall promptly execute and deliver, at Tenant's own cost and expense, any document in accordance with the terms of this Article 9, in recordable form, to evidence such subordination. Section 9.4. At any time and from time to time upon not less than twenty (20) days' prior notice to Tenant or Landlord given by the other, or to Tenant given by a Mortgagee, Tenant or Landlord, as the case may be, shall, without charge, execute, acknowledge and deliver a statement in writing addressed to such party as Tenant, Landlord or Mortgagee, as the case may be, may designate, in form satisfactory to Tenant, Landlord or Mortgagee, as the case may be, certifying all or any of the following: (i) that this Lease is unmodified and in full force and effect (or if there have been modifications, that this Lease is in full force and effect as modified and stating the modifications); (ii) whether the Term has commenced and Fixed Rent and Additional Rent have become payable hereunder and, if so, the dates to which they have been paid; (iii) whether or not, to the best knowledge of the signer of such certificate, Landlord is in default in performance of any of the terms of this Lease and, if so, specifying each such event of default of which the signer may have knowledge; (iv) whether Tenant has accepted possession of 39 the Premises; (v) whether Tenant has made any claim against Landlord under this Lease and, if so, the nature thereof and the dollar amount, if any, of such claim; (vi) either that Tenant does not know of any default in the performance of any provision of this Lease or specifying the details of any default of which Tenant may have knowledge and stating what action Tenant is taking or proposes to take with respect thereto; (vii) that, to the knowledge of Tenant, there are no proceedings pending or threatened against Tenant before or by any court or administrative agency which, if adversely decided, would materially and adversely affect the financial condition or operations of Tenant or, if any such proceedings are pending or threatened to the knowledge of Tenant, specifying and describing the same; and (viii) such further information with respect to the Lease or the Premises as Landlord may reasonably request or Mortgagee may require; it being intended that any such statement delivered pursuant hereto may be relied upon by any prospective purchaser of the Real Property or any part thereof or of the interest of Landlord in any part thereof, by any Mortgagee or prospective Mortgagee, by any tenant or prospective tenant of the Real Property or any part thereof, or by any prospective assignee of any Mortgage or by any assignee of Tenant. The failure of either Tenant or Landlord to execute, acknowledge and deliver to the other a statement in accordance with the provisions of this Section 9.4 within said twenty (20) day period shall constitute an acknowledgment by Tenant or Landlord, as the case may be, which may be relied on by any person who would be entitled to rely upon any such statement, that such statement as submitted by Landlord or Tenant, as the case may be, is true and correct. Section 9.5. As long as any Mortgage exists, Tenant shall not seek to terminate this Lease by reason of any act or omission of Landlord until Tenant has given written notice of such act or omission to all Mortgagees at such addresses as may have been furnished to Tenant by such Mortgagees and, if any such Mortgagee notifies Tenant within thirty (30) days following receipt of such notice that it intends to remedy such act or omission, Mortgagee shall have a reasonable period of time to remedy such act or omission. ARTICLE X RULES AND REGULATIONS 40 Section 10.1. Tenant and Persons Within Tenant's Control shall comply with Exhibit "C," "Rules and Regulations." Nothing contained in this Lease shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations or the terms, covenants or conditions in any other lease against any other tenant, and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its employees, agents, visitors or licensees. Landlord shall not discriminate against Tenant in enforcing the Rules and Regulations. In case of any conflict or inconsistency between the provisions of this Lease and of any of the Rules and Regulations as originally or as hereinafter adopted, the provisions of this Lease shall control. ARTICLE XI INSURANCE, PROPERTY LOSS OR DAMAGE, REIMBURSEMENT Section 11.1. (a) Tenant shall not entrust any property to any Building employee. Any Building employee to whom any property is entrusted by or on behalf of Tenant in violation of the foregoing prohibition shall be deemed to be acting as Tenant's agent with respect to such property and neither Landlord nor its agents shall be liable for any damage to property of Tenant or of others entrusted to employees of the Building, nor for the loss of or damage to any property of Tenant by theft or otherwise. Landlord and Landlord's agents shall not be liable for any damage to any of Tenant's Property or for interruption of Tenant's business, however caused, including but not limited to damage caused by other tenants or persons in the Building. Landlord shall not be liable for any latent defect in the Premises or in the Building. (b) Tenant shall give notice to Landlord promptly after Tenant learns of any accident, emergency or occurrence for which Landlord might be liable, fire or other casualty and all damages to or defects in the Premises or the Building for the repair of which Landlord might be responsible or which constitutes Landlord's property. Such notice shall be given by telecopy or personal delivery to the address(es) of Landlord in effect for notice. Section 11.2. Tenant shall not do or permit to be done any act or thing in or upon the Premises which will invalidate or be in conflict with the terms of the State of Tennessee standard policies of fire insurance and liability (hereinafter referred to as "Building Insurance"); and Tenant, at Tenant's own expense, 41 shall comply with all rules, orders, regulations and requirements of all insurance boards, and shall not do or permit anything to be done in or upon the Premises or bring or keep anything therein or use the Premises in a manner which increases the rate of premium for any of the Building Insurance over the rate in effect at the commencement of the Term of this Lease. Section 11.3. If by reason of any failure of Tenant to comply with the provisions of this Lease, the rate of premium for Building Insurance or other insurance on the property and equipment of Landlord shall increase, Tenant shall reimburse Landlord for that part of the insurance premiums thereafter paid by Landlord which shall have been charged because of such failure by Tenant. Tenant shall make said reimbursement on the first day of the month following such payment by Landlord. Section 11.4. (a) At Tenant's own cost and expense, Tenant shall obtain, maintain and keep in full force and effect during the Term commercial general liability insurance (without deductible) in a form approved in the State of Tennessee (including broad form property damage coverages). The limits of liability shall be not less than Five Million Dollars ($5,000,000.00) per occurrence, which amount may be satisfied with a primary commercial general liability policy of not less than Two Million Dollars ($2,000,000.00) and an excess (or "Umbrella") liability policy affording coverage, at least as broad as that afforded by the primary commercial general liability policy, in an amount not less than Three Million Dollars ($3,000,000.00). Landlord, the Manager, any Lessors and any Mortgagees shall be included as additional insureds in said policies and shall be protected against all liability arising in connection with this Lease. All said policies of insurance shall be written as "occurrence" policies. Whenever, in Landlord's reasonable judgment, good business practice and changing conditions indicate a need for additional amounts or different types of insurance coverage, Tenant shall, within ten (10) days after Landlord's request, obtain such insurance coverage, at Tenant's expense. (b) Tenant, at Tenant's sole cost and expense, shall maintain all-risk insurance, with deductibles in an amount reasonably satisfactory to Landlord, protecting and indemnifying Tenant against any and all damage to or loss of any Alterations and leasehold improvements, including any made by Landlord to prepare the Premises for Tenant's occupancy, and Tenant's Property. All said policies shall cover the full replacement 42 value of all Alterations, leasehold improvements and Tenant's Property. (c) All policies of insurance shall be: (i) written as primary policy coverage and not contributing with or in excess of any coverage which Landlord or any Lessor may carry; and (ii) issued by reputable and independent insurance companies rated in Best's Insurance Guide or any successor thereto (or, if there is none, an organization having a national reputation), as having a general policyholder rating of "A" and a financial rating of at least "VII," and which are licensed to do business in the State of Tennessee. Tenant shall, not later than ten (10) Business Days prior to the Commencement Date, deliver to Landlord either (a) the policies of insurance or (b) certificates thereof with a copy of the declaration page, and shall thereafter furnish to Landlord, at least thirty (30) days prior to the expiration of any such policies and any renewal thereof, a new policy or certificate (with copy of the declaration page) in lieu thereof. Each of said policies shall also contain a provision whereby the insurer agrees not to cancel, fail to renew, diminish or materially modify said insurance policy(ies) without having given Landlord, the Manager and any Lessors and Mortgagees at least thirty (30) days prior written notice thereof. Tenant shall promptly send to Landlord a copy of all notices sent to Tenant by Tenant's insurer. (d) Tenant shall pay all premiums and charges for all of said policies, and, if Tenant shall fail to make any payment when due or carry any such policy, then after notice to Tenant, Landlord may, but shall not be obligated to, make such payment or carry such policy, and the amount paid by Landlord, with interest thereon (at the Applicable Rate), shall be repaid to Landlord by Tenant on demand, and all such amounts so repayable, together with such interest, shall be deemed to constitute Additional Rent hereunder. Payment by Landlord of any such premium, or the carrying by Landlord of any such policy, shall not be deemed to waive or release the default of Tenant with respect thereto. Section 11.5. (a) Landlord shall cause each policy carried by Landlord insuring the Building against loss, damage or destruction by fire or other casualty, and Tenant shall cause each insurance policy carried by Tenant and insuring the Premises and Tenant's Alterations, leasehold improvements and Tenant's Property against loss, damage or destruction by fire or other casualty, to be written in a manner so as to provide that the insurance company waives all rights of recovery by way of subrogation against Landlord, Tenant and any tenant of space in 43 the Building in connection with any loss or damage covered by any such policy. Neither party shall be liable to the other for the amount of such loss or damage which is in excess of the applicable deductible, if any, caused by fire or any of the risks enumerated in its policies. (b) The waiver of subrogation referred to in Section 11.5(a) above shall extend to the agents and employees of each party (including, as to Landlord, the Manager). Nothing contained in this Section 11.5 shall be deemed to relieve either party from any duty imposed elsewhere in this Lease to repair, restore and rebuild. (c) During the Term, Landlord agrees to maintain: (i) "all risk" full replacement cost property insurance on the Building in an amount sufficient to prevent Landlord from being deemed a co-insurer of the risks insured under the policy, which shall include customary rent loss insurance covering loss of rents from Tenant under this Lease and other tenants under other leases and which shall include, as and to the extent customarily included by prudent owners of comparable first class office buildings in Memphis, Tennessee, boiler and machinery and electrical apparatus coverage; (ii) commercial general liability insurance (which may be a combination of primary and umbrella coverages) in an amount which Landlord deems appropriate; and (iii) Landlord shall furnish to Tenant certificates or other evidence of insurance from the insurer, or, if not available from the insurer, then from the insurance agent, evidencing such coverage at the time this Lease is executed and, at Tenant's request, within thirty (30) days after any policy is renewed, replaced or changed. ARTICLE XII DESTRUCTION BY FIRE OR OTHER CAUSE Section 12.1. If the Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord. Landlord shall, subject to the provisions of Sections 12.2 and 12.3 below, proceed with reasonable diligence within 120 days of the casualty to repair or cause to be repaired such damage at its expense; and, if the 44 Premises, or any part thereof, shall be rendered untenantable by reason of such damage and such damage shall not be due to the fault of Tenant or Persons Within Tenant's Control, then the Fixed Rent and the Escalation Rent hereunder, or an amount thereof apportioned on a pro rata basis according to the area of the Premises so rendered untenantable (if less than the entire Premises shall be so rendered untenantable), shall be abated for the period from the date of such damage to the date when the repair of such damage shall have been substantially completed. Tenant covenants and agrees to cooperate with Landlord and any Lessor or any Mortgagee in their efforts to collect insurance proceeds (including rent insurance proceeds) payable to such parties. Landlord shall not be liable for any delay which may arise by reason of adjustment of insurance on the part of Landlord and/or Tenant, or any cause beyond the control of Landlord or contractors employed by Landlord. Section 12.2. Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from damage from fire or other casualty or the repair thereof. Tenant understands that Landlord, in reliance upon Section 12.4, will not carry insurance of any kind on Tenant's Property, Tenant's Alterations and on leasehold improvements, and that Landlord shall not be obligated to repair any damage thereto or replace the same. (a) Notwithstanding anything to the contrary contained in Sections 12.1 and 12.2 above, in the event that: (i) at least twenty thousand (20,000) rentable square feet of the Building shall be damaged by a fire or other casualty so that substantial alteration or reconstruction of the Building shall, in Landlord's sole opinion, be required (whether or not the Premises shall have been damaged by such fire or other casualty and without regard to the structural integrity of the Building); or (ii) the Premises shall be totally or substantially damaged or shall be rendered wholly or substantially untenantable; or (iii) there shall be any damage to the Premises within the last two (2) years of the Term wherein the cost of repair exceeds an amount equal to three (3) monthly installments of Fixed Rent, then either Landlord or Tenant may terminate this Lease and 45 the term and estate hereby granted, by notifying the other party in writing of such termination prior to commencement of work to repair the damage to the Premises or within one hundred twenty (120) days after the date of such damage, whichever first occurs. In the event that such a notice of termination shall be given, then this Lease and the Term and estate hereby granted shall expire as of the date of termination stated in said notice with the same effect as if that were the Fixed Expiration Date, and the Fixed Rent and Escalation Rent hereunder shall be apportioned as of such date. (b) Notwithstanding anything to the contrary contained in this Section 12.2, upon written request which is made by Tenant prior to commencement of work to repair the damage to the Premises, Landlord shall deliver to Tenant an estimate prepared by a reputable contractor selected by Landlord setting forth such contractor's estimate as to the time reasonably required to repair such damage. If the period to repair set forth in any such estimate exceeds nine (9) months, Tenant may elect to terminate this Lease by notice to Landlord given not later than thirty (30) days following Tenant's receipt of such estimate. If Tenant exercises such election, this Lease and the term and estate hereby granted shall expire as of the sixtieth (60th) day after notice of such election given by Tenant with the same effect as if that were the Fixed Expiration Date, and the Fixed Rent and Escalation Rent hereunder shall be apportioned as of such date. Section 12.3. Except as may be provided in Section 11.5, nothing herein contained shall relieve Tenant from any liability to Landlord or to Landlord's insurers in connection with any damage to the Premises or the Building by fire or other casualty if Tenant shall be legally liable in such respect. Section 12.4. This Lease shall be considered an express agreement governing any case of damage to or destruction of the Building or any part thereof by fire or other casualty. ARTICLE XIII EMINENT DOMAIN Section 13.1. If the whole of the Real Property, the Building or the Premises is acquired or condemned for any public or quasi-public use or purpose, this Lease and the Term shall end 46 as of the date of the vesting of title with the same effect as if said date were the Fixed Expiration Date. If only a part of the Real Property and not the entire Premises is so acquired or condemned then, (a) except as hereinafter provided in this Section 13.1, this Lease and the Term shall continue in effect but, if a part of the Premises is included in the part of the Real Property so acquired or condemned, from and after the date of the vesting of title, the Fixed Rent and Tenant's Share shall be reduced in the proportion which the area of the part of the Premises so acquired or condemned bears to the total area of the Premises immediately prior to such acquisition or condemnation; (b) whether or not the Premises are affected thereby, Landlord, at Landlord's option, may give to Tenant, within sixty (60) days next following the date upon which Landlord receives notice of vesting of title, a thirty (30) day notice of termination of this Lease; and (c) if the part of the Real Property so acquired or condemned contains more than thirty percent (30%) of the total area of the Premises immediately prior to such acquisition or condemnation, or if, by reason of such acquisition or condemnation, Tenant no longer has access to the Premises, Tenant, at Tenant's option, may give to Landlord, within sixty (60) days next following the date upon which Tenant receives notice of vesting of title, a thirty (30) day notice of termination of this Lease. If any such thirty (30) day notice of termination is given, by Landlord or Tenant, this Lease and the Term shall come to an end and expire upon the expiration of said thirty (30) days with the same effect as if the date of expiration of said thirty (30) days were the Fixed Expiration Date. If a part of the Premises is so acquired or condemned and this Lease and the Term are not terminated pursuant to the foregoing provisions of this Section 13.1, Landlord, at Landlord's cost and expense, shall restore that part of the Premises not so acquired or condemned to a self-contained rental unit, exclusive of Tenant's Alterations and Tenant's Property. In the event of any termination of this Lease and the Term pursuant to the provisions of this Section 13.1, the Fixed Rent shall be apportioned as of the date of the termination and any prepaid portion of the Fixed Rent or Escalation Rent for any period after such date shall be refunded by Landlord to Tenant. Section 13.2. In the event of any such acquisition or condemnation of all or any part of the Real Property, Landlord shall be entitled to receive the entire award for any such acquisition or condemnation. Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired portion of the Term and Tenant hereby expressly assigns to Landlord all of its right in and to any such award. Nothing 47 contained in this Section 13.2 shall be deemed to prevent Tenant from making a separate claim in any condemnation proceedings for the value of any Tenant's Property included in such taking, and for any moving expenses, so long as Landlord's award is not reduced thereby. ARTICLE XIV ASSIGNMENT, SUBLETTING, MORTGAGE, ETC Section 14.1 Except as otherwise provided in this Article 14, Tenant shall not (a) assign this Lease (whether by operation of law, transfers of interests in Tenant or otherwise); or (b) mortgage or encumber Tenant's interest in this Lease, in whole or in part; or (c) sublet, or permit the subletting of, the Premises or any part thereof. Tenant shall not advertise or authorize a broker to advertise for a subtenant or assignee, without in each instance, obtaining the prior written consent of Landlord, which shall not be unreasonably withheld or delayed. Section 14.2 If Tenant's interest in this Lease shall be assigned in violation of the provisions of this Article 14, such assignment shall be invalid and of no force and effect against Landlord; provided, however, that Landlord may collect an amount equal to the then Fixed Rent plus any other item of Rental from the assignee as a fee for its use and occupancy. If the Premises or any part thereof are sublet to, or occupied by, or used by, any person other than Tenant, whether or not in violation of this Article 14, Landlord, after default by Tenant under this Lease, may collect any item of Rental or other sums paid by the subtenant, user or occupant as a fee for its use and occupancy, and shall apply the net amount collected to the Fixed Rent and the items of Rental reserved in this Lease. No such assignment, subletting, occupancy, or use, whether with or without Landlord's prior consent, nor any such collection or application of Rental or fee for use and occupancy, shall be deemed a waiver by Landlord of any term, covenant or condition of this Lease or the acceptance by Landlord of such assignee, subtenant, occupant or user as Tenant hereunder, nor shall the same, in any circumstances, relieve Tenant of any of its obligations under this Lease. The consent by Landlord to any assignment, subletting, occupancy or use shall not relieve Tenant from its obligation to obtain the express prior consent of Landlord to any further assignment, subletting, occupancy or use. Any person to which this Lease is assigned with Landlord's consent shall be deemed without more to have assumed all of the obligations arising under this Lease from and after the date of such 48 assignment and shall execute and deliver to Landlord, upon demand, an instrument confirming such assumption. Notwithstanding and subsequent to any assignment, Tenant's primary liability hereunder shall continue notwithstanding (a) any subsequent amendment hereof, or (b) Landlord's forbearance in enforcing against Tenant any obligation or liability, without notice to Tenant, to each of which Tenant hereby consents in advance. If any such amendment operates to increase the obligations of Tenant under this Lease, the liability under this Section 14.2 of the assigning Tenant shall continue to be no greater than if such amendment had not been made (unless such party shall have expressly consented in writing to such amendment). (a) For purposes of this Article 14, (i) the transfer of a majority of the issued and outstanding capital stock of any corporate tenant, or of a corporate subtenant, or the transfer of a majority of the total interest in any partnership tenant or subtenant, or the transfer of control in any limited partnership tenant or subtenant, or the transfer of control in any limited liability company tenant or subtenant or the transfer of control in any limited liability partnership tenant or subtenant, however accomplished, whether in a single transaction or in a series of related or unrelated transactions, shall be deemed an assignment of this Lease, or of such sublease, as the case may be, except that the transfer of the outstanding capital stock of any corporate tenant, or subtenant, shall be deemed not to include the sale of such stock by persons or parties, other than those deemed "affiliates" of Tenant within the meaning of Rule 144 promulgated under the Securities Act of 1933, as amended, through the "over-the-counter market" or through any recognized stock exchange, (ii) any increase in the amount of issued and/or outstanding capital stock of any corporate tenant, or of a corporate subtenant, and/or the creation of one or more additional classes of capital stock of any corporate tenant or any corporate subtenant, in a single transaction or a series of related or unrelated transactions, resulting in a change in the legal or beneficial ownership of such tenant or subtenant so that the shareholders of such tenant or subtenant existing immediately prior to such transaction or series of transactions shall no longer own a majority of the issued and outstanding capital stock of such tenant or subtenant, shall be deemed an assignments of this Lease, (iii) an agreement by any other person or entity, directly or indirectly, to assume Tenant's obligations under this Lease shall be deemed an assignment, (iv) any person or legal representative of Tenant, to whom Tenant's interest under this lease passes by operation of law, or otherwise, shall be bound by 49 the provisions of this Article 14, and (v) a modification, amendment or extension of a sublease shall be deemed a sublease. Tenant agrees to furnish to Landlord on request at any time such information and assurances as Landlord may reasonably request that neither Tenant, nor any previously permitted subtenant, has violated the provisions of this Article 14. (b) The provisions of clauses (a), (c) and (d) of Section 14.1 shall not apply to transactions with a corporation into or with which Tenant is merged or consolidated or with a Person to which substantially all of Tenant's assets are transferred (provided such merger or transfer of assets is for a good business purpose and not principally for the purpose of transferring the leasehold estate created by this Lease, and provided further, that the assignee has a net worth at least equal to or in excess of the net worth of Tenant as of the date of this Lease and as of the date immediately prior to such merger or transfer, whichever is greater) or, if Tenant is a partnership, with a successor partnership, nor shall the provisions of clause (a), (c) and (d) of Section 14.1 apply to transactions with an entity that controls or is controlled by Tenant or is under common control with Tenant. Tenant shall notify Landlord before any such transaction is consummated. (c) The term "control" as used in this Lease (i) in the case of a corporation shall mean ownership of more than fifty percent (50%) of the outstanding capital stock of that corporation, (ii) in the case of a general partnership, shall mean more than fifty percent (50%) of the general partnership interest of the partnership, (iii) in the case of a limited partnership, shall mean more than fifty percent (50%) of the general and limited partnership interests of such limited partnership; (iv) in the case of a limited liability company, shall mean more than fifty percent (50%) of the membership interests of such limited liability company, and (v) in the case of a limited liability partnership, shall mean more than fifty percent (50%) of the partnership interest of such limited liability partnership. Section 14.3. [RESERVED] Section 14.4. (a) If Tenant sublets any portion of the Premises to a Person in a transaction for which Landlord's consent is required, Landlord shall be entitled to and Tenant shall pay to Landlord, as Additional Rent (the "Sublease Additional Rent"), a sum equal to fifty percent (50%) of any rents, additional charges and other consideration payable under 50 the sublease to Tenant by the subtenant in excess of the Fixed Rent and Escalation Rent accruing during the term of the sublease in respect of the subleased space (at the rate per square foot payable by Tenant under this Lease) pursuant to the terms of this Lease (including, but not limited to, sums paid for the sale or rental of Tenant's Property and Alterations less the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's federal income tax or federal information returns), net of any reasonable brokerage commissions incurred in connection therewith; provided, however, that no reduction shall be allowed if brokerage commissions are paid to any Person under Tenant's control. Such Sublease Additional Rent shall be payable as and when received by Tenant. (b) Landlord may, by notice to Tenant, elect to waive the benefits of this Section 14.4, for any month or months, prospectively or retroactively. Any retroactive waiver shall be accompanied by a return to Tenant of all Sublease Additional Rent theretofore paid to and retroactively waived by Landlord for the months in question. Section 14.5. (a) If Tenant shall assign this Lease to a Person in a transaction for which Landlord's consent is required, Landlord shall be entitled to and Tenant shall pay to Landlord, as Additional Rent, an amount equal to all sums and other consideration paid to Tenant by the assignee for or by reason of such assignment (including, but not limited to, sums paid for the sale or rental of Tenant's Property and Alterations less the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's federal income tax or federal information returns). Such Additional Rent shall be payable as and when received by Tenant from the assignee. (b) Landlord may, by notice to Tenant, elect to waive the benefits of this Section 14.5, prospectively or retrospectively. Any retroactive waiver shall be accompanied by a return to Tenant of all amounts theretofore paid to and retroactively waived by Landlord. Section 14.6. Landlord shall have no liability for brokerage commissions incurred with respect to any assignment of this Lease or any subletting of all or any part of the Premises by or on behalf of Tenant. Tenant shall pay, and shall indemnify and hold Landlord harmless from and against, any and all cost, expense (including reasonable attorneys' fees and disbursements) and liability in connection with any compensation, commissions or 51 charges claimed by any broker or agent with respect to any such assignment or subletting. ARTICLE XV ACCESS TO PREMISES Section 15.1. (a) Tenant shall permit Landlord, Landlord's agents and independent contractors and public utilities servicing the Building to have reasonable access for the purpose of maintaining existing concealed ducts, pipes and conduits in and through and to access all Common Areas within the Building and all Common Areas comprising a portion of the Land. Landlord or Landlord's agents shall have the right to enter the Premises at all reasonable times upon (except in case of emergency) reasonable prior notice, which notice may be oral, to examine the same, to show the same to prospective purchasers, Mortgagees or lessees of the Building or space therein, and to make such repairs, alterations, improvements or additions (i) as Landlord may deem necessary or desirable to the Premises or to any other portion of the Building, or (ii) which Landlord may elect to perform at least ten (10) days after notice (except in an emergency when no notice shall be required) following Tenant's failure to make repairs or perform any work which Tenant is obligated to make or perform under this Lease, or (iii) for the purpose of complying with Requirements, and Landlord shall be allowed to take all material into and upon the Premises that may be required therefor without the same constituting an eviction or constructive eviction of Tenant in whole or in part and the Fixed Rent (and any other item of Rental) shall in no respect abate or be reduced by reason of said repairs, alterations, improvements or additions, wherever located, or while the same are being made, by reason of loss or interruption of business of Tenant, or otherwise. Landlord shall promptly repair any damage caused to the Premises by such work, alterations, improvements or additions. Tenant shall, at Tenant's cost, take such action as may be reasonably necessary to grant to Landlord, its agents and independent contractors clearance and access by means of the Security System for the purposes herein set out. (b) Any work performed or installations made pursuant to this Article 15 shall be made with reasonable diligence and otherwise pursuant to Section 6.3. (c) Any pipes, ducts, or conduits installed in or through the Premises pursuant to this Article 15 shall, if reasonably practicable, either be concealed behind, beneath or within 52 partitioning, columns, ceilings or floors located or to be located in the Premises, or completely furred at points immediately adjacent to partitioning, columns or ceilings located or to be located in the Premises. Section 15.2. If Tenant is not present when for any reason entry into the Premises may be necessary or permissible, Landlord or Landlord's agents may enter the same without rendering Landlord or such agents liable therefor (if during such entry Landlord or Landlord's agents accord reasonable care to Tenant's Property), and without in any manner affecting this Lease. Section 15.3. All parts (except surfaces facing the interior of the Premises) of all walls, windows and doors bounding the Premises (including exterior Building walls, exterior core corridor walls, exterior doors and entrances), all balconies, terraces and roofs adjacent to the Premises, all space in or adjacent to the Premises used for shafts, stacks, stairways, chutes, pipes, conduits, ducts, fan rooms, heating, air cooling, plumbing and other mechanical facilities, service closets and other Building facilities are not part of the Premises, and Landlord shall have the use thereof, as well as access thereto through the Premises for the purposes of operation, maintenance, alteration and repair. ARTICLE XVI CERTIFICATE OF OCCUPANCY Section 16.1. Tenant shall not at any time use or occupy the Premises in violation of the certificate of occupancy at such time issued for the Premises or for the Building and in the event that any Governmental Authority hereafter contends or declares by notice, violation, order or in any other manner whatsoever that the Premises are used by Tenant for a purpose that is a violation of such certificate of occupancy, Tenant shall, upon three (3) Business Days' written notice from Landlord or any Government Authority, immediately discontinue such use of the Premises; provided, however, that nothing herein shall prevent Tenant from contesting such violation pursuant to and in accordance with the provisions of Section 8.5. ARTICLE XVII DEFAULT 53 Section 17.1. Each of the following events shall be an "Event of Default" under this Lease: (a) if Tenant shall on any occasion default in the payment when due of any installment of Fixed Rent or in the payment when due of any other item of Rental and the same shall not be cured within five (5) days after written notice of default by Landlord to Tenant; or (b) if Tenant shall fail on three (3) or more occasions in any period of eighteen (18) consecutive months to make a payment when due of any Rental, and Landlord shall have given Tenant written notice of such default after two (2) such occurrences; or (c) if Tenant shall default in the observance or performance of any term, covenant or condition on Tenant's part to be observed or performed under that certain Agreement of Lease of even date herewith between Landlord and Tenant with respect to Building No. 1, or any renewal, modification or extension thereof, and such default shall continue beyond any grace period set forth in such other lease for the remedying of such default; or (d) if the Premises shall become vacant or abandoned; or (e) if Tenant's interest in this Lease shall devolve upon or pass to any person, whether by operation of law or otherwise, except as expressly permitted under Article 14 hereof; or (f) (1) if Tenant shall not, or shall be unable to, or shall admit in writing Tenant's inability to, as to any obligation, pay Tenant's debts as they become due; or (2) if Tenant shall commence or institute any case, proceeding or other action (a) seeking relief on Tenant's behalf as debtor, or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to Tenant or Tenant's debts under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, or (b) seeking appointment of a 54 receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property; or (3) if Tenant shall make a general assignment for the benefit of creditors; or (4) if any case, proceeding or other action shall be commenced or instituted against Tenant (a) seeking to have an order for relief entered against Tenant as debtor or to adjudicate Tenant a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to Tenant or Tenant's debts under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, or (b) seeking appointment of a receiver, trustee, custodian or other similar official for Tenant or for all or any substantial part of Tenant's property, which either (i) results in any such entry of an order for relief, adjudication of bankruptcy or insolvency or such an appointment or the issuance or entry of any other order having a similar effect or (ii) remains undismissed for a period of sixty (60) days; or (5) if a trustee, receiver or other custodian shall be appointed for any substantial part of the assets of Tenant which appointment is not vacated or effectively stayed within sixty (60) days; or (g) if Tenant shall default in the observance or performance of any other term, covenant or condition of this Lease on Tenant's part to be observed or performed and Tenant shall fail to remedy such default within fifteen (15) days after notice by Landlord to Tenant of such default, or if such default is of such a nature that it cannot with due diligence be completely remedied within said period of fifteen (15) days and the continuation of which for the period required for cure will not subject Landlord to the risk of criminal liability or foreclosure of any Mortgage, if Tenant shall not, (i) within said fifteen (15) day period advise Landlord of Tenant's intention duly to institute all steps necessary to remedy such situation, (ii) duly institute within said fifteen (15) day period, and thereafter diligently and continuously prosecute to 55 completion all steps necessary to remedy the same and (iii) complete such remedy within such time after the date of the giving of said notice by Landlord as shall reasonably be necessary. Section 17.2. If an Event of Default shall occur, Landlord may, at any time thereafter, at Landlord's option, give written notice to Tenant stating that this Lease and the Term shall expire and terminate on the date specified in such notice, which date shall not be less than three (3) days after Tenant's receipt of such notice, or such longer term as specified in the notice, whereupon this Lease and the Term and all rights of Tenant under this Lease shall automatically expire and terminate as if the date specified in the notice given pursuant to this Section 17.2 were the Fixed Expiration Date and Tenant immediately shall quit and surrender the Premises, but Tenant shall remain liable for damages as provided herein or pursuant to law. Anything contained herein to the contrary notwithstanding, if such termination shall be stayed by order of any court having jurisdiction over any proceeding described in Section 17.1(f), or by federal or state statute, then, following the expiration of any such stay, or if the trustee appointed in any such proceeding, Tenant or Tenant as debtor-in-possession fails to assume Tenant's obligations under this Lease within the period prescribed therefor by law or within one hundred twenty (120) days after entry of the order for relief or as may be allowed by the court, or if said trustee, Tenant or Tenant as debtor-in-possession shall fail to provide adequate protection of Landlord's right, title and interest in and to the Premises or adequate assurance of the complete and continuous future performance of Tenant's obligations under this Lease, Landlord, to the extent permitted by law or by leave of the court having jurisdiction over such proceeding, shall have the right, at its election, to terminate this Lease on three (3) days' prior written notice to Tenant, Tenant as debtor-in possession or said trustee and upon the expiration of said three (3) day period this Lease shall cease and expire as aforesaid and Tenant, Tenant as debtor-in-possession or said trustee shall immediately quit and surrender the Premises as aforesaid. Section 17.3. If, at any time, (i) Tenant shall consist of two (2) or more persons, or (ii) Tenant's obligations under this Lease shall have been guaranteed by any person other than Tenant, or (iii) Tenant's interest in this Lease has been assigned, the word "Tenant" as used in Section 17.1(f), shall be deemed to mean any one or more of the persons primarily or secondarily liable for Tenant's obligations under this Lease. Any monies received 56 by Landlord from or on behalf of Tenant during the pendency of any proceeding of the types referred to in Section 17.1(f) shall be deemed paid as compensation for the use and occupancy of the Premises and the acceptance of any such compensation by Landlord shall not be deemed an acceptance of Rental or a waiver on the part of Landlord of any rights under Section 17.2. ARTICLE XVIII REMEDIES AND DAMAGES Section 18.1. (a) If any Event of Default shall occur, or this Lease and the Term shall expire and come to an end as provided in Article 17: 6. Tenant shall quit and peacefully surrender the Premises to Landlord, and Landlord and its agents may immediately, or at any time after such Event of Default or after the date upon which this Lease and the Term shall expire and come to an end, re-enter the Premises or any part thereof, without notice, either by summary proceedings, or by any other applicable action or proceeding or otherwise (without being liable to indictment, prosecution or damages therefor), but excluding by force, and may repossess the Premises and dispossess Tenant and any other persons from the Premises by summary proceedings or otherwise (excluding by force) and remove any and all of their property and effects from the Premises (and Tenant shall remain liable for damages as provided herein or pursuant to law); and 7. Landlord, at Landlord's option, may relet the whole or any part or parts of the Premises from time to time, either in the name of Landlord or otherwise, to such tenant or tenants, for such term or terms ending before, on or after the Fixed Expiration Date, at such rent or rentals and upon such other conditions, which may include concessions and free rent periods, as Landlord, in Landlord's sole discretion, may determine; provided, however, that Landlord shall have no obligation to relet the Premises or any part thereof and shall in no event be liable for refusal or failure to relet the Premises or any part thereof, or, in the event of any such reletting, for refusal or failure to collect any rent due upon any such reletting, and no such refusal or failure shall operate to relieve Tenant of any liability under this Lease or otherwise affect any such liability, and Landlord, at Landlord's option, may make such Alterations, in and to the Premises as Landlord, 57 in Landlord's sole discretion, shall consider advisable or necessary in connection with any such reletting or proposed reletting, without relieving Tenant of any liability under this Lease or otherwise affecting any such liability. (b) Tenant hereby waives the service of any notice of intention to re-enter that may otherwise be required to be given under any present or future law. Tenant, on its own behalf and on behalf of all persons claiming through or under Tenant, including all creditors, does further hereby waive any and all rights that Tenant and all such persons might otherwise have under any present or future law to redeem the Premises, or to re-enter or repossess the Premises, or to restore the operation of this Lease, after (1) Tenant shall have been dispossessed by a judgment or by warrant of any court or judge, or (2) any reentry by Landlord, or (3) any expiration or termination of this Lease and the Term, whether such dispossess, re-entry, expiration or termination is by operation of law or pursuant to the provisions of this Lease. The words "re-entry," "re-enter" and "re-entered" as used in this Lease shall not be deemed to be restricted to their technical legal meanings. In the event of a breach or threatened breach by Tenant, or any persons claiming through or under Tenant, of any term, covenant or condition of this Lease, Landlord shall have the right to enjoin such breach and the right to invoke any other remedy allowed by law or in equity as if reentry, summary proceedings and other special remedies were not provided in this Lease for such breach. The right to invoke the remedies hereinbefore set forth are cumulative and shall not preclude Landlord from invoking any other remedy allowed at law or in equity. Section 18.2. (a) If this Lease and the Term shall expire and come to an end as provided in Article 18, or by or under any summary proceeding or any other action or proceeding, or if Landlord shall re-enter the Premises as provided in Section 18.1, or by or under any summary proceeding or any other action or proceeding, then, in any of said events: 1. Tenant shall pay to Landlord all Fixed Rent, Escalation Rent, other Additional Rent and other items of Rental payable under this Lease by Tenant to Landlord to the date upon which this Lease and the Term shall have expired and come to an end or to the date of re-entry upon the Premises by Landlord, as the case may be; 58 2. Tenant also shall be liable for and shall pay to Landlord, as damages, any deficiency ("Deficiency") between the Rental for the period which otherwise would have constituted the unexpired portion of the Term and the net amount, if any, of rents collected under any reletting effected pursuant to the provisions of Section 18.1(a)(2) for any part of such period (after first deducting from the rents collected under any such reletting all of Landlord's expenses in connection with the termination of this Lease, Landlord's reentry upon the Premises and such reletting including, but not limited to, all repossession costs, brokerage commissions, attorneys' fees and disbursements, alteration costs and other expenses of preparing the Premises for such reletting); any such Deficiency shall be paid in monthly installments by Tenant on the days specified in this Lease for payment of installments of Fixed Rent; Landlord shall be entitled to recover from Tenant each monthly Deficiency as the same shall arise, and no suit to collect the amount of the Deficiency for any month shall prejudice Landlord's right to collect the Deficiency for any subsequent month by a similar proceeding; and 3. whether or not Landlord shall have collected any monthly Deficiency as aforesaid, Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord, on demand, in lieu of any further Deficiency as and for liquidated and agreed final damages, a sum equal to the amount by which the unpaid Rental for the period which otherwise would have constituted the unexpired portion of the Term exceeds the then fair and reasonable rental value of the Premises for the same period, both discounted to present worth at the Base Rate; if, before presentation of proof of such liquidated damages to any court, commission or tribunal, the Premises, or any part thereof, are relet by Landlord for the period which otherwise would have constituted the unexpired portion of the Term, or any part thereof, the amount of rent reserved upon such reletting shall be deemed, prima facie, to be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting. (b) Tenant shall in no event be entitled to any rents collected or payable under any reletting, whether or not such rents exceed the Fixed Rent reserved in this Lease. Solely for the purposes of this Article 18, the term "Escalation Rent" as used in Section 18.2(a) shall mean the Escalation Rent in effect immediately prior to the Expiration Date, or the date of re-entry 59 upon the Premises by Landlord, as the case may be, adjusted to reflect any increase pursuant to the provisions of Article 3 hereof for the Operating Year immediately preceding such event. Nothing contained in Article 17 or this Article 18 shall be deemed to limit or preclude the recovery by Landlord from Tenant of the maximum amount allowed to be obtained as damages by any statute or rule of law, or of any sums or damages to which Landlord may be entitled in addition to the damages set forth in this Section 18.2. ARTICLE XIX FEES AND EXPENSES Section 19.1. If an Event of Default shall have occurred, Landlord may (a) perform the obligations of Tenant for the account of Tenant, or (b) make any expenditure or incur any obligation for the payment of money in connection with any obligation owed by Tenant to Landlord, including, but not limited to, reasonable attorneys' fees and disbursements in instituting, prosecuting or defending any action or proceeding arising out of such Event of Default, and in either case the cost thereof, with interest thereon at the Applicable Rate, shall be deemed to be Additional Rent hereunder and shall be paid by Tenant to Landlord within ten (10) days after rendition of any bill or statement to Tenant therefor. Section 19.2. If Tenant shall fail to pay any installment of Fixed Rent, Additional Rent or any other item of Rental for a period longer than five (5) days after the same shall have become due, Tenant shall pay to Landlord, in addition to such installment of Fixed Rent, Additional Rent or other item of Rental, as the case may be, as a late charge and as Additional Rent, a sum equal to interest at the Applicable Rate on the amount unpaid, computed from the date such payment was due, without regard to any such grace period, to and including the date of payment. ARTICLE XX NO REPRESENTATIONS BY LANDLORD Section 20.1. Landlord and Landlord's agents have made no representations or promises with respect to the Building, the Real Property or the Premises except as herein expressly set forth, and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth 60 herein. Tenant shall accept possession of the Premises in its "AS IS" condition on the Commencement Date, and Landlord shall have no obligation to perform any work or make any installations in order to prepare the Premises for Tenant's occupancy. The taking of occupancy of the whole or any part of the Premises by Tenant shall be conclusive evidence, as against Tenant, that Tenant accepts possession of the same and that the Premises and the Building were in good and satisfactory condition at the time such occupancy was so taken. All references in this Lease to the consent or approval of Landlord shall be deemed to mean the written consent or approval executed by Landlord and no other consent or approval of Landlord shall be effective for any purpose whatsoever. ARTICLE XXI END OF TERM Section 21.1. Upon the expiration or other termination of this Lease, Tenant shall quit and surrender to Landlord the Premises, vacant, broom clean, in good order and condition, ordinary wear and tear excepted, and Tenant shall remove all of Tenant's Alterations as may be required pursuant to Article 5. Tenant shall also remove all of Tenant's Property and all other personal property and personal effects of all persons claiming through or under Tenant, and shall pay the cost of repairing all damage to the Premises and the Real Property occasioned by such removal. Any Tenant's Property or other personal property that remains in the Premises after the termination of this Lease shall be deemed to have been abandoned and either may be retained by Landlord as its property or may be disposed of in such manner as Landlord may see fit. If such Tenant's Property or other personal property or any part thereof is sold, Landlord may receive and retain the proceeds of such sale as the property of Landlord. Any expense incurred by Landlord in removing or disposing of such Tenant's Property or other personal property or Alterations required to be removed as provided in Article 5, as well as the cost of repairing all damage to the Building or the Premises caused by such removal, shall be reimbursed to Landlord by Tenant, as Additional Rent, on demand. Section 21.2. If the Expiration Date falls on a day which is not a Business Day, then Tenant's obligations under Section 21.1 shall be performed on or prior to the immediately preceding Business Day. 61 Section 21.3. If the Premises are not surrendered upon the expiration or other termination of this Lease, Tenant hereby indemnifies Landlord against liability resulting from delay by Tenant in so surrendering the Premises, including any claims made by any succeeding tenant or prospective tenant founded upon such delay and agrees to be liable to Landlord for (i) any payment or rent concession which Landlord may be required to make to any tenant obtained by Landlord for all or any part of the Premises in order to induce such tenant not to terminate its lease by reason of the holding-over by Tenant and (ii) the loss of the benefit of the bargain if any such tenant shall terminate its lease by reason of the holding-over by Tenant. Section 21.4. Tenant's obligation under this Article shall survive the expiration or termination of this Lease for a period ending six (6) months after the end of the calendar year in which the Expiration Date falls. ARTICLE XXII POSSESSION Section 22.1. Tenant acknowledges that it is in possession of the Premises as of the Commencement Date (Tenant being the prior owner of the Real Property and Building) and that no further act on Landlord's part is required as a condition to commencement of the Term of this Lease. ARTICLE XXIII NO WAIVER Section 23.1 No act or thing done by Landlord or Landlord's agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid unless in writing signed by Landlord. Only an executive officer of Landlord shall have the power to accept surrender of the Premises prior to the termination of this Lease. Section 23.2. The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease, or any of the Rules and Regulations, shall not prevent a subsequent act, which would have originally constituted a violation, from having all of the force and effect of an original violation. The receipt by Landlord of Fixed Rent, Additional Rent or any other item of Rental with 62 knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. The failure of Landlord to enforce any of the Rules and Regulations against Tenant or any other tenant of the Real Property or the Adjacent Property shall not be deemed a waiver of any such Rules and Regulations. No provision of this Lease shall be deemed to have been waived by Landlord, unless such waiver shall be in writing and shall be signed by Landlord. No payment by Tenant or receipt by Landlord of a lesser amount than the Rental then due and payable shall be deemed to be other than on account of the earliest item(s) of Rental, or as Landlord may elect to apply the same, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance due of the Rental or pursue any other remedy in this Lease provided. This Lease contains the entire agreement between the parties and all prior negotiations and agreements are merged herein. Any executory agreement hereafter made shall be ineffective to change, discharge or effect an abandonment of this Lease in whole or in part unless such executory agreement is in writing and signed by the party against whom enforcement of the change, discharge or abandonment is sought. ARTICLE XXIV WAIVER OF TRIAL BY JURY Section 24.1. LANDLORD AND TENANT SHALL AND THEY HEREBY DO WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THEM AGAINST THE OTHER ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, WHETHER DURING OR AFTER THE TERM, OR FOR THE ENFORCEMENT OF ANY REMEDY UNDER ANY STATUTE, EMERGENCY OR OTHERWISE. ARTICLE XXV INABILITY TO PERFORM Section 25.1. This Lease and the obligation of Tenant to pay Rental hereunder and to perform all of the other covenants and agreements hereunder on the part of Tenant to be performed shall in no way be affected, impaired or excused because Landlord is unable to fulfill any of Landlord's obligations under this Lease, expressly or implicitly to be performed by Landlord, or 63 because Landlord is unable to make or is delayed in making any repairs, additions, alterations, improvements or decorations, or is unable to supply or is delayed in supplying any services, equipment or fixtures, if Landlord is prevented from or delayed in so doing by reason of acts of God, casualty, strikes or labor troubles, accident, governmental preemption in connection with an emergency, Requirements, Restrictive Covenants, conditions of supply and demand which have been or are affected by war or other emergency, or any other cause whatsoever, whether similar or dissimilar to the foregoing, beyond Landlord's reasonable control ("Unavoidable Delays"). Section 25.2 Notwithstanding anything to the contrary set forth in this Lease, Landlord shall not be liable for any cessation and/or interruption of services to the Premises caused by failure of any Building Systems or other computerized functions affecting use or occupancy of the Premises to be able to perform properly date-sensitive functions for dates leading up to or following January 1, 2000 (that is, to be Year 2000 compliant), nor shall any such failure constitute an eviction or constructive eviction or give rise to abatement of Rental. ARTICLE XXVI BILLS AND NOTICES Section 26.1. (a) Except as otherwise expressly provided in this Lease, any bills, statements, consents, notices, demands, requests or other communications given or required to be given under this Lease ("Notice(s)") shall be in writing and shall be deemed sufficiently given or rendered if delivered by hand, or if sent by a nationally-recognized overnight courier service, delivery cost prepaid, marked for next-day delivery, or if deposited in a postage prepaid envelope in a depository that is regularly maintained by the U.S. Postal Service, sent by registered or certified mail (return receipt requested) and in either case addressed: (i) if to Tenant, to Harrah's Operating Company, Inc., 5100 West Sahara Boulevard, Suite 200, Las Vegas, Nevada 89146, Attention: Office of the President and with a copy to Harrah's Operating Company, Inc., 5100 West Sahara Boulevard, Suite 200, Las Vegas, Nevada 89146, Attention: General Counsel, or 64 (ii) if to Landlord, at Landlord's address set forth in the first paragraph of this Lease, with a copy to Baker, Donelson, Bearman & Caldwell, 2000 First Tennessee Building, 165 Madison Avenue, Memphis, Tennessee 38103, Attn: Frank L. Watson, Jr., and with a copy to any Mortgagee who may have requested the same, by Notice given in accordance with the provisions of this Article 26, at the address designated by such Mortgagee, or to such other address(es) as either Landlord or Tenant may designate as its new address(es) for such purpose by notice given to the other in accordance with the provisions of this Article 26. (b) Notices shall be deemed to have been rendered or given (i) on the date delivered, if delivered by hand, or (ii) the day after shipment, if sent by overnight courier service, or (iii) three (3) days after mailing, if mailed as provided in Section 26.1(a). Notice given by counsel for either party on behalf of such party or by the Manager on behalf of Landlord shall be deemed valid notices if addressed and sent in accordance with the provisions of this Article. Section 26.2. Notwithstanding the provisions of Section 26.1, Notices requesting services for Overtime Periods pursuant to Article 27 may be given by delivery to the Building Manager or any other person in the Building designated by Landlord to receive such Notices, and bills may be rendered by delivering them to the Premises. ARTICLE XXVII SERVICES AND EQUIPMENT Section 27.1. Landlord shall, at Landlord's expense: (a) Provide passenger elevator service to the Premises on Business Days during Operating Hours and, subject to Section 27.3, have one passenger elevator on call at all other times. (b) Furnish and distribute to the Premises, through the HVAC System, during Operating Hours, air-conditioning, and heat or ventilation, as needed; provided that Tenant shall, at all times, cooperate fully with Landlord and abide by all of the Rules and Regulations which Landlord may prescribe for the proper functioning of the HVAC System. Tenant hereby expressly waives any claims against Landlord arising out of the cessation of 65 operation of the HVAC System, or the suitability of the Premises when the same is not in operation, whether due to normal scheduling or the reasons set forth in Section 27.3. Landlord will not be responsible for the failure of the HVAC System if such failure results from the occupancy of the Premises by more persons than the number of persons for which HVAC System is designed. If Tenant occupies the Premises at an occupancy rate of greater than that for which the HVAC System was designed, or if Tenant's partitions are arranged in such a way as to interfere with the normal operation of the HVAC System, Landlord may elect to make changes to the HVAC System or the ducts through which it operates required by reason thereof, and the cost thereof shall be reimbursed by Tenant to Landlord as Additional Rent within ten (10) days after presentation of a bill therefor. Landlord, throughout the Term, shall have free access to all mechanical installations of Landlord, including but not limited to air cooling, fan, ventilating and machine rooms and electrical closets, and Tenant shall not construct partitions or other obstructions that may interfere with Landlord's free access thereto, or interfere with the moving of Landlord's equipment to and from the enclosures containing said installations. Neither Tenant nor its agents, employees or contractors shall at any time enter the said enclosures or tamper with, adjust, touch or otherwise in any manner affect said mechanical installations. Landlord's obligations under this Section 27.1 and under Section 27.2 are subject to applicable Requirements that may limit the hours or the extent to which Landlord is permitted to supply HVAC. (c) Furnish hot and cold water for ordinary drinking, cleaning and lavatory purposes. (d) Provided Tenant shall keep the Premises in order, Landlord, at Landlord's expense, shall cause the Premises, excluding any portions thereof used as secured areas, to be cleaned on Business Days in accordance with the cleaning specifications annexed to this Lease as Exhibit "D." If, however, any additional cleaning of the Premises is to be done by Tenant, it shall be done at Tenant's sole expense, in a manner reasonably satisfactory to Landlord and no one other than persons approved by Landlord shall be permitted to enter the Premises or the Building for such purpose. Tenant shall pay to Landlord the cost of removal of any of Tenant's refuse and rubbish from the Premises and the Building (i) to the extent that the same, in any one day, exceeds the average daily amount of refuse and rubbish usually attendant upon the use of such Premises as offices, as described and included in Landlord's cleaning contract for the 66 Building or recommended by Landlord's cleaning contractor, and (ii) related to or deriving from the preparation or consumption of food or drink. Bills for the same shall be rendered by Landlord to Tenant at such time as Landlord may elect and shall be due and payable as Additional Rent within ten (10) days after the time rendered. Section 27.2. Landlord reserves the right to stop the furnishing of the Building services and to stop service of the Building Systems, when necessary, by reason of accident, or emergency, or for Alterations in the judgment of Landlord desirable or necessary to be made, until said Alterations shall have been completed; and Landlord shall have no responsibility or liability for failure to supply air-conditioning, ventilation, heat, elevator, plumbing, electric, or other services during said period or when prevented from so doing by strikes, lockouts, difficulty of obtaining materials, accidents or by any cause beyond Landlord's reasonable control, or by Requirements or failure of electricity, water, steam, coal, oil or other suitable fuel or power supply, or inability by exercise of reasonable diligence to obtain electricity, water, steam, coal, oil or other suitable fuel or power. No diminution or abatement of rent or other compensation shall or will be claimed by Tenant as a result therefrom, nor shall this Lease or any of the obligations of Tenant be affected or reduced by reason of such interruption, curtailment or suspension, nor shall the same constitute an actual or constructive eviction; provided, however, that if the cessation is caused by Landlord and continues for more than three (3) days, then Fixed Rent shall abate on a per diem basis from the fourth (4th) day until Landlord restores the Building services. Section 27.3. Tenant agrees to abide by all requirements which Landlord may prescribe for the proper protection and functioning of its Building Systems and the furnishing of the Building services. Tenant further agrees to cooperate with Landlord in any conservation effort pursuant to a program or procedure promulgated or recommended by ASHRAE or any Requirements. ARTICLE XXVIII [RESERVED] 67 ARTICLE XXIX [RESERVED] ARTICLE XXX SIGNS Section 30.1. Landlord may replace the signs at the main entrance which serves the Real Property and Adjacent Property with signs which identify the businesses on both such properties, and may install signage at the driveway intersections on the Real Property and Adjacent Property which direct traffic to the appropriate businesses and parking area, all at Tenant's reasonable cost and expense, except that Landlord shall pay for signs with respect to the Adjacent Property. The location, size, materials, quality, design, color and lettering of any signs desired by Tenant shall be subject to the prior approval of Landlord and shall be in compliance with the standards set forth in Tenant Design and Construction Standards. ARTICLE XXXI BROKER Section 31.1. Landlord represents and warrants to Tenant that Landlord has not dealt with any broker or other Person who might claim a leasing commission in connection with this Lease other than the Broker(s). Landlord acknowledges that it is solely responsible to pay the leasing commissions due to the Broker in connection with the execution of this Lease. Tenant represents and warrants to Landlord that Tenant has not dealt with any broker or other Person who might claim a leasing commission in connection with this Lease. The execution and delivery of this Lease by Tenant shall be conclusive evidence that Tenant acknowledges that Landlord has relied upon the foregoing representation and warranty. Tenant shall indemnify and hold harmless Landlord from and against any and all claims for commission, fee or other compensation by any Person (other than Broker) who claims to have dealt with Tenant in connection with this Lease and for any and all costs incurred by Landlord in connection with such claims, including, without limitation, attorneys' fees and disbursements. The execution and delivery of this Lease by Landlord shall be conclusive evidence that Landlord acknowledges that Tenant has relied upon the foregoing representation and warranty. Landlord shall indemnify and hold harmless Tenant from and against any and all claims for 68 commission, fee or other compensation by any Person (including Broker) who claims to have dealt with Landlord in connection with this Lease and for any and all costs incurred by Tenant in connection with such claims, including, without limitation, attorneys' fees and disbursements. This provision shall survive the expiration or earlier termination of this Lease. ARTICLE XXXII INDEMNITY Section 32.1. Tenant shall indemnify and save harmless the Landlord Indemnitees from and against (a) all claims of third parties of whatever nature against the Landlord Indemnitees arising from any act, omission or negligence of Tenant or Persons Within Tenant's Control, (b) all claims of third parties against the Landlord Indemnitees arising from any accident, injury or damage whatsoever caused to any such third party or such party's property and occurring in or about the Premises during the Term or during Tenant's occupancy of the Premises, unless and to the extent caused by the negligence or willful misconduct of Landlord or its principals, officers or employees, (c) all claims of third parties against the Landlord Indemnitees arising from any accident, injury or damage occurring outside of the Premises but anywhere within or about the Real Property, where such accident, injury or damage results or is claimed to have resulted from an act, omission or negligence of Tenant or Persons Within Tenant's Control, and (d) any breach, violation or non-performance of any covenant, condition or agreement contained in this Lease to be fulfilled, kept, observed and performed by Tenant except as otherwise provided in this Lease; provided, however, that the indemnity and save harmless provision set out in this Section 32.1 and 32.2 shall have no effect to the extent that the Landlord Indemnitees are protected by insurance maintained under the provisions of Article XI hereof. This indemnity and hold harmless agreement shall include indemnity from and against any and all liability, fines, suits, demands, costs and expenses of any kind or nature (including, without limitation, attorneys' fees and disbursements) incurred in or in connection with any such claim or proceeding brought thereon, and the defense thereof. Section 32.2. If any claim, action or proceeding is made or brought against any Landlord Indemnitee, against which claim, action or proceeding Tenant is obligated to indemnify such Landlord Indemnitee pursuant to the terms of this Lease, then, upon demand by the Landlord Indemnitee, Tenant, at its sole cost 69 and expense, shall resist or defend such claim, action or proceeding in the Landlord Indemnitee's name, if necessary, by such attorneys as the Landlord Indemnitee may select. The provisions of this Article 32 shall survive the expiration or earlier termination of this Lease. Section 32.3 Landlord shall indemnify and save harmless the Tenant Indemnitees from and against (a) all claims of third parties of whatever nature against the Tenant Indemnitees arising from any act, omission or negligence of Landlord or Persons Within Landlord's Control, (b) all claims of third parties against the Tenant Indemnitees arising from any accident, injury or damage whatsoever caused to any such third party or such party's property and occurring in or about the Premises during the Term or during Tenant's occupancy of the Premises where such accident, injury or damage results or is claimed to have resulted from an act or omission or negligence of Landlord or Persons Within Landlord's Control, (c) all claims of third parties against the Tenant Indemnitees arising from any accident, injury or damage occurring outside of the Premises but anywhere within or about the Real Property, unless and to the extent caused by the negligence or willful misconduct of Tenant or its principals, officers or employees, and (d) any breach, violation or non-performance of any covenant, condition or agreement in this Lease to be fulfilled, kept, observed and performed by Tenant, except as otherwise provided in this Lease; provided, however, that the indemnity and save harmless provision set out in this Section 32.3 and 32.4 shall have no effect to the extent that Tenant Indemnitees are protected by insurance maintained under the provisions of Article XI hereof. This indemnity and hold harmless agreement shall include indemnity from and against any and all liability, fines, suits, demands, costs and expenses of any kind or nature (including, without limitation, attorneys' fees and disbursements) incurred in or in connection with any such claim or proceeding brought thereon, and the defense thereof. Section 32.4 If any claim, action or proceeding is made or brought against any Tenant Indemnitee, against which claim, action or proceeding Landlord is obligated to indemnify such Tenant Indemnitee pursuant to the terms of this Lease, then, upon demand by the Tenant Indemnitee, Landlord, at its sole cost and expense, shall resist or defend such claim, action or proceeding in the Tenant Indemnitee's name, if necessary, by such attorneys as the Tenant Indemnitee may select. The provisions of this Article 32 shall survive the expiration or earlier termination of this Lease. 70 ARTICLE XXXIII [RESERVED] ARTICLE XXXIV [RESERVED] ARTICLE XXXV [RESERVED] ARTICLE XXXVI COVENANT OF QUIET ENJOYMENT Section 36.1. Landlord covenants that, upon Tenant paying the Fixed Rent and Additional Rent and observing and performing all the terms, agreements, covenants, provisions and conditions of this Lease on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the Premises, subject nevertheless to the terms and conditions of this Lease; provided, however, that no impairment or deprivation of Tenant's use of the Premises which results from a violation of Restrictive Covenants shall be construed as a breach of this covenant nor permit abatement of Rental due hereunder unless such violation results from acts or neglect of Landlord in which Tenant played no part; provided further that no eviction of Tenant by reason of the foreclosure of any Mortgage now or hereafter affecting the Premises, shall be construed as a breach of this covenant nor shall any action by reason thereof be brought against Landlord; and provided further that this covenant shall bind and be enforceable against Landlord or any successor to Landlord's interest, subject to the terms hereof, only so long as Landlord or any successor to Landlord's interest, is in possession and is collecting rent from Tenant but not thereafter. ARTICLE XXXVII MISCELLANEOUS 71 Section 37.1. Landlord retains all air rights over the Premises. Tenant may not place anything on or attach anything to the roof of the Premises without first obtaining Landlord's written consent, which consent may be granted or withheld in Landlord's reasonable discretion. Section 37.2. The obligations of Landlord under this Lease shall not be binding upon Landlord named herein after the sale, conveyance, assignment or transfer by such Landlord (or upon any subsequent landlord after the sale, conveyance, assignment or transfer by such subsequent landlord) of its interest in the Building or the Real Property, as the case may be, and in the event of any such sale, conveyance, assignment or transfer, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord under this Lease thereafter arising, and the transferee shall be deemed to have assumed, subject to the remaining provisions of this Section 37.2, all obligations of the Landlord under this Lease arising after the effective date of the transfer. No trustee, partner, shareholder, director or officer of Landlord, or of any partner or shareholder of Landlord (collectively, the "Parties") shall have any direct or personal liability for the performance of Landlord's obligations under this Lease, and Tenant shall look solely to Landlord's interest in the Building to enforce Landlord's obligations hereunder and shall not otherwise seek any damages against Landlord personally or any of the Parties whatsoever. Section 37.3. [RESERVED] Section 37.4. The parties shall prepare and sign a suitable memorandum of this Lease for recordation. This Lease shall not be recorded. Section 37.5. Except as otherwise expressly stated in this Lease, any consent or approval required to be obtained from Landlord may be granted by Landlord in its sole discretion. Section 37.6. [RESERVED] Section 37.7. If Tenant shall remain in possession of the Premises after the Expiration Date, without the execution by both Tenant and Landlord of a new lease, Tenant, at the election of Landlord, shall be deemed to be occupying the Premises as a Tenant from month-to-month, at a monthly rental equal to one and one-half (1.5) times the Rental payable during the last month of the Term, subject to all the other conditions, provisions and 72 obligations of this Lease insofar as the same are applicable to a month-to-month tenancy. Section 37.8. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. If any words or phrases in this Lease are stricken out or otherwise eliminated, whether or not any other words or phrases have been added, this Lease shall be construed as if the words or phrases stricken out or otherwise eliminated were never included in this Lease and no implication or inference shall be drawn from the fact that such words or phrases were stricken out or otherwise eliminated. Section 37.9. [RESERVED] Section 37.10. [RESERVED] Section 37.11. If any of the provisions of this Lease, or the application thereof to any person or circumstance, shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby and shall remain valid and enforceable, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. Section 37.12. Landlord shall have the right to erect any gate, chain or other obstruction or to close off any portion of the Real Property to the public at any time to the extent necessary to prevent a dedication thereof for public use. Section 37.13. Tenant agrees that in all disputes arising directly or indirectly out of this Lease Tenant shall be subject to service of process in, and the jurisdiction of the courts of, the State of Tennessee. The provisions of this Section 37.13 shall survive the expiration of this Lease. Section 37.14. This Lease contains the entire agreement between the parties and all prior negotiations and agreements are merged into this Lease. Except as provided in Section 37.6, this Lease may not be changed, abandoned or discharged, in whole or in part, nor may any of its provisions be waived except by a written agreement that (a) expressly refers to this Lease, (b) is executed by the party against whom enforcement of the change, abandonment, discharge or waiver is sought, and (c) is permissible under the Mortgage(s). 73 Section 37.15. Any apportionment or prorations of Rental to be made under this Lease shall be computed on the basis of a three hundred sixty (360) day year, with twelve (12) months of thirty (30) days each. Section 37.16. The laws of the State of Tennessee applicable to contracts made and to be performed wholly within the State of Tennessee shall govern and control the validity, interpretation, performance and enforcement of this Lease. Section 37.17. Tenant warrants and represents that it is duly incorporated under the laws of the State of Delaware and is duly qualified to do business in the State of Tennessee (a copy of evidence thereof to be supplied to Landlord upon request); and that each person executing this Lease on behalf of Tenant is an officer of Tenant and that he or she is duly authorized to execute, acknowledge and deliver this Lease to Landlord (a copy of a resolution to that effect to be supplied to Landlord upon request). Section 37.18. The captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this Lease nor the intent of any provision thereof. Section 37.19. The covenants, conditions and agreements contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and their respective legal representatives, successors, and, except as otherwise provided in this Lease, their assigns. Section 37.20. For the purposes of this Lease and all agreements supplemental to this Lease, unless the context otherwise requires: (a) The words "herein", "hereof", "hereunder" and "hereby" and words of similar import shall be construed to refer to this Lease as a whole and not to any particular Article or Section unless expressly so stated. (b) Reference to "termination of this Lease" or "expiration of this Lease" and words of like import includes expiration or sooner termination of this Lease and the Term and the estate hereby granted or cancellation of this Lease pursuant to any of the provisions of this Lease or to law. Upon the termination of this Lease, the Term and estate 74 granted by this Lease shall end at noon on the date of termination as if such date were the Fixed Expiration Date, and neither party shall have any further obligation or liability to the other after such termination except (i) as shall be expressly provided for in this Lease, and (ii) for such obligations as by their nature under the circumstances can only be, or by the provisions of this Lease, may be, performed after such termination, and, in any event, unless expressly otherwise provided in this Lease, any liability for a payment (which shall be apportioned as of such termination) which shall have accrued to or with respect to any period ending at the time of termination shall survive the termination of this Lease. (c) Words and phrases used in the singular shall be deemed to include the plural and vice versa, and nouns and pronouns used in any particular gender shall be deemed to include any other gender. 75 Section 37.21. All exhibits attached to this Lease are incorporated herein and Tenant agrees to execute Exhibit "H" upon Landlord's request without unreasonable delay. IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the day and year first above written. RBM CHERRY ROAD PARTNERS, a Tennessee general partnership BY: RBM Venture Company, a Delaware corporation, its managing general partner By: /s/ SCOTT IMORDE --------------------------------------------- Its: Vice President --------------------------------------------- LANDLORD HARRAH'S OPERATING COMPANY, INC. By: /s/ COLIN V. REED --------------------------------------------- Its: Chief Financial Officer --------------------------------------------- TENANT 76 Exhibit "A" Legal Description PROPERTY LOCATED IN SHELBY COUNTY, TENNESSEE: PARCEL I BEING A PART OF THE HARRAH'S ENTERTAINMENT, INC. CORPORATE HEADQUARTERS P.D. AS RECORDED IN PLAT BOOK 155, PAGE 8, ALSO BEING A PART OF THE HOLIDAY INNS, INC. PROPERTY AS RECORDED IN INSTRUMENT U7-2133 AT THE SHELBY COUNTY REGISTER'S OFFICE, LOCATED IN MEMPHIS, TENNESSEE AND BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT A POINT ON THE NORTH LINE OF HAVERHILL ROAD (50' R.O.W.), 25.15 FEET WEST OF THE WEST LINE OF CHERRY ROAD (R.O.W. VARIES); THENCE ALONG SAID NORTH LINE N89 38'59"W A DISTANCE OF 986.49 FEET TO A POINT OF CURVATURE; THENCE ALONG A CURVE TO THE RIGHT HAVING A RADIUS OF 257.02 FEET, AN ARC LENGTH OF 120.30 FEET, (CHORD N76 22'21"W - 119.20 FEET) TO A FOUND CROW'S MARK AT THE SOUTHEAST CORNER OF THE JOEL M. COX PROPERTY (INST. S9-0045); THENCE N37 29'55"E ALONG THE EAST LINE OF SAID COX PROPERTY A DISTANCE OF 163.78 FEET TO A POINT, SAID POINT BEING THE NORTHEAST CORNER OF SAID JOEL M. COX PROPERTY, ALSO BEING THE SOUTHEAST CORNER OF LOT 31, AUDUBON PARK SUBDIVISION (PB. 14, PG. 30); THENCE ALONG THE EAST LINE OF SAID AUDUBON PARK SUBDIVISION N0 13'10"W A DISTANCE OF 579.13 FEET TO A POINT, SAID POINT BEING ON THE EAST LINE OF LOT 26 OF AUDUBON PARK SUBDIVISION (PB. 14, PG. 30) AND 15.11 FEET SOUTH OF THE NORTH LINE OF SAID LOT 26; THENCE ALONG THE FOLLOWING COURSES AND DISTANCES: S59 52'06"E A DISTANCE OF 225.85 FEET TO A POINT; THENCE N30 15'47"E A DISTANCE OF 48.67 FEET TO A POINT; THENCE S86 44'15"E A DISTANCE OF 75.95 FEET TO A POINT; THENCE S3 15'45"W A DISTANCE OF 27.58 FEET TO A POINT; THENCE S86 44'15"E A DISTANCE OF 173.28 FEET TO A POINT; THENCE N27 16'38"E A DISTANCE OF 188.13 FEET TO A POINT; THENCE S89 37'17"E A DISTANCE OF 222.36 FEET TO A POINT; THENCE N0 00'14"W A DISTANCE OF 267.93 FEET TO A POINT ON THE SOUTH LINE OF THE DIXON GALLERY AND GARDENS PROPERTY (K8-7671); THENCE ALONG SAID SOUTH LINE S89 37'17"E A DISTANCE OF 264.26 FEET TO A FOUND AXLE ON THE WEST LINE OF SAID CHERRY ROAD, SAID POINT 77 ALSO BEING THE SOUTHEAST CORNER OF SAID DIXON GALLERY AND GARDENS PROPERTY; THENCE ALONG SAID WEST LINE S0 00'14"E A DISTANCE OF 905.25 FEET TO A POINT; THENCE N98 38'59"W A DISTANCE OF 10.00 FEET TO A POINT; THENCE S0 00'14E A DISTANCE OF 131.85 FEET TO A POINT OF CURVATURE; THENCE ALONG A CURVE TO THE RIGHT HAVING A RADIUS OF 25.00 FEET, AN ARC LENGTH OF 39.42 FEET (CHORD S45 10'23"W - 35.46 FEET) TO THE POINT OF BEGINNING. PARCEL II The property on which exists a two (2) story office building is situated in Memphis, Shelby County, Tennessee, and is described as follows: BEING A PART OF THE HARRAH'S ENTERTAINMENT, INC. CORPORATE HEADQUARTERS P.D. AS RECORDED IN PLAT BOOK 155, PAGE 8, ALSO BEING THE HOLIDAY INN'S INC. PROPERTY AS RECORDED IN INSTRUMENT U7-2133 AT THE SHELBY COUNTY REGISTER'S OFFICE, LOCATED IN MEMPHIS, TENNESSEE AND BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS: COMMENCING AT A POINT ON THE CENTERLINE OF CHERRY ROAD (R.O.W. VARIES), 1087.24 FEET NORTH OF THE INTERSECTION OF HAVERHILL ROAD (50' R.O.W.) AND SAID CHERRY ROAD; THENCE NO89 37'17"W A DISTANCE OF 30.00 FEET TO A FOUND AXLE ON THE WEST LINE OF SAID CHERRY ROAD; SAID POINT ALSO BEING THE SOUTHEAST CORNER OF THE DIXON GALLERY AND GARDENS PROPERTY (INST. K8-7671); THENCE N89 37'17"W A DISTANCE OF 264.26 FEET TO THE POINT OF BEGINNING, SAID POINT BEING ON THE SOUTH LINE OF SAID DIXON GALLERY AND GARDENS PROPERTY; THENCE ALONG THE FOLLOWING COURSES AND DISTANCES: S0 00'14"E A DISTANCE OF 267.93 FEET TO A POINT; THENCE N89 37'17"W A DISTANCE OF 222.36 FEET TO A POINT; THENCE S27 16'38"W A DISTANCE OF 188.13 FEET TO A POINT; THENCE N86 44'15"W A DISTANCE OF 173.28 FEET TO A POINT; THENCE N3 15'45"E A DISTANCE OF 27.58 FEET TO A POINT; THENCE N86 44'15"W A DISTANCE OF 75.95 FEET TO A POINT; THENCE S30 15'47"W A DISTANCE OF 48.67 FEET TO A POINT; THENCE N59 52'06"W A DISTANCE OF 225.85 FEET TO A POINT ON THE EAST LINE OF LOT 26 OF AUDUBON PARK SUBDIVISION (PB. 14, PG. 30), SAID POINT BEING 15.11 FEET SOUTH OF THE NORTH LINE OF SAID LOT 26; THENCE ALONG SAID EAST LINE AND THE EAST LINE OF THE RESUBDIVISION OF LOTS 21-25, AUDUBON PARK SUBDIVISION (PB. 15, PG. 4) 78 N0 13'10"W A DISTANCE OF 325.74 FEET TO A FOUND AXLE, SAID AXLE ALSO BEING THE SOUTHWEST CORNER OF SAID DIXON GALLERY AND GARDENS PROPERTY; THENCE ALONG THE SOUTH LINE OF SAID DIXON GALLERY AND GARDENS PROPERTY S89 37'17"E A DISTANCE OF 776.93 FEET TO THE POINT OF BEGINNING. 79 Exhibit "B" Plat Showing Building and Building No. 1 80 Exhibit "C" Rules and Regulations Definitions 1. Wherever in these Rules and Regulations the word "Tenant" is used, it shall be taken to apply to and include the Tenant and his agents, employees, invitees, licensees, visitors, subtenants and contractors, and shall be deemed of such number and gender as the circumstances require. The word "Landlord" shall be taken to include the employees and agents of Landlord. Obstructions 2. The streets, sidewalks, entrances, driveways, halls, passages, elevators, stairways and Common Areas provided by Landlord shall not be obstructed by Tenant. Washrooms 3. Toilet rooms, water-closets and other water apparatus shall not be used for any purposes other than those for which constructed. Fire Prevention 4. Tenant shall not do anything in the Premises or bring or keep anything therein, which shall in any way increase or tend to increase the risk of fire or the rate of fire insurance, or which shall conflict with the regulations of the Fire Department or the fire laws, or with the rules and regulations of the City of Memphis, or equivalent bodies, or with any insurance policy on the Building or any part thereof, or with any law, ordinance, rule or regulation affecting the occupancy and use the Premises, now existing or hereafter enacted or promulgated by any public authority or by the City of Memphis or any equivalent body. Tenant's Equipment 5. It is Tenant's responsibility to properly operate all business equipment and coffee machines and to service such equipment and machines. 81 General 6. In order to insure proper use and Prohibitions care of the Premises, Tenant shall not, without the consent of Landlord or unless otherwise permitted in the Lease: a. Keep or permit animals or birds in the Building except as required for handicapped persons. b. Use the Premises as sleeping apartments. c. Allow any sign, advertisement or notice to be fixed to the Building, inside or outside, without Landlord's written consent. d. Make improper noise or disturbances of any kind, or otherwise do anything to disturb other tenants or tend to injure the reputation of the Building. e. Mark or defile elevators, water closets, toilet rooms, walls, windows, doors or any other parts of the Building. f. Place anything on the outside of the Building, including roof setbacks, window ledges and other projections; or drop anything from the windows, stairways or parapets; or place trash or other matter in the halls, stairways, elevators or light wells of the Building. g. Cover, block or obstruct any window, skylight, door or transom or any other surface that admits light, except building standard blinds. h. Interfere with the heating or cooling apparatus. i. Allow anyone but Landlord's employees to clean Premises. j. Leave open doors to the Premises at any time except as otherwise approved by Landlord, and same shall be locked at all times when Premises are not occupied. k. Install any shades, blinds or awnings without consent of the Landlord, except building standard blinds. l. Use any electric heating device, such as 82 a space heater, without consent of the Landlord. m. Install call boxes, or any kind of wire in or on the Building without Landlord's permission and direction. n. Manufacture any commodity, or prepare or dispense any foods, beverages, or alcoholic beverages, tobacco, drugs, flowers, or other commodities or articles without the written consent of Landlord. All food and beverage vending machines will be provided by the Landlord Approved Contractor. o. Secure duplicate keys for Premises or toilets, except from Landlord, or change the locks of any doors to or in the Premises. p. Give employees or other persons permission to go upon or erect or place any antennae, tower or other structure or equipment on the roof of the Building without the written consent of the Landlord. q. Place door mats in public corridors (i.e., within the Common Area) without consent of Landlord. r. Schedule, receive or accept freight other than Monday through Friday, excluding holidays, between the hours of 7:00 a.m. to 7:00 p.m. s. Leave the Land and enter the Adjacent Property, except via the designated entrance driveway between the Land and Cherry Road, but then only during the course of arriving and leaving for work during Operating Hours. Business 7. Business machines and mechanical Machines equipment which cause vibration, noise, cold or heat that may be transmitted to Building structure or to any leased space outside Premises shall be placed and maintained by Tenant, at its sole cost and expense, in settings of cork, rubber, or spring type vibration eliminators 83 sufficient to absorb and prevent such vibration, noise, cold or heat. No business machines or mechanical equipment which require above normal business machine level or high amounts of electricity shall be used or installed in the Premises without Landlord's written consent and if installed, all electricity used shall be metered and paid by Tenant as Additional Rent. Movement of 8. Landlord reserves the right to Equipment designate the time when and the method whereby freight, small office equipment, furniture, safes and other like articles may be brought into, moved, or removed from the Building or Premises, and to designate the location for temporary disposition of such items. Tenant Moves 9. Landlord's tenant move in/move out policy is as follows: a. All moves will be done at such times as shall not unduly interfere with other tenants or occupants of the Real Property or Adjacent Property. b. Landlord shall approve the moving contractor and such contractor shall coordinate all aspects of the move with Landlord. c. Tenant's contractor shall provide a certificate of insurance evidencing liability, property damage and workmen's compensation insurance of not less than $1,000,000, naming Landlord as additional insured. d. Tenant's contractor shall use appropriate padding and masonite floor covering to protect all surfaces including door jambs, subject to Landlord's inspection and approval. e. Tenant will reimburse Landlord for all security provided. f. Tenant will be responsible for any damages during the move. 84 Rights Reserved 10. Without abatement or diminution in to Landlord rent, Landlord reserves and shall have the following additional rights: a. To install and maintain a sign or signs on the exterior of the Building. b. To designate all sources furnishing sign painting and lettering, ice, drinking water, towels and toilet supplies and other like services used on the Premises. c. At any time or times Landlord either voluntarily or pursuant to governmental requirement, may, at Landlord's own expense, make repairs, alterations or improvements in or to the Building or any part thereof and during alterations, any close entrances, doors, windows, corridors, elevators or other facilities, provided that such acts shall not unreasonably interfere with Tenant's use and occupancy of the Premises as a whole. d. During the last six (6) months of the term or any part thereof, if during or prior to that time the Tenant vacates the Premises, to decorate, remodel, repair, alter or otherwise prepare the Premises for re-occupancy. e. To constantly have pass keys and Security System clearance to the Premises. f. Landlord may reasonably enter upon the Premises and may exercise any or all of the foregoing rights hereby reserved without being deemed guilty of an eviction or disturbance of Tenant's use or possession and without being liable in any manner to the Tenant. g. To access the Dixon Gallery and Gardens via the Common Area. Regulation 11. Landlord shall have the right to Change make such other and further reasonable rules and regulations as in the judgment of Landlord, may from time to time be needful for the safety, appearance, care and cleanliness of the Building and Building No. 2 and for the preservation 85 of order therein, Landlord shall not be responsible to Tenant for any violation of rules and regulations by other tenants or occupants of the Real Property or Adjacent Property. Smoking Areas 12. Landlord shall have the right, from time to time, to designate and thereafter to change, alter or redesignate, smoking and non-smoking area(s) outside the Building and shall further be permitted to prohibit or limit such activity in order to fully comply with any applicable governmental ordinance, law or regulation. Tenant shall not permit any of its employees, agents or invitees to smoke except in the designated smoking area(s) and, in any event, never inside the Building. Plumbing 13. Plumbing fixtures and appliances shall be used only for purposes for which constructed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed therein. Damage resulting to any such fixtures or appliances from misuse by Tenant shall be repaired and replaced at Tenant's sole cost and expense, and Landlord shall not in any case be responsible therefor. Parking 14. Tenant shall use best efforts to cause Tenant's employees to park their motor vehicles in those portions of the parking area designated by Landlord ("Tenant's Parking Area"). Access 15. Tenant shall access Tenant's Parking Area and/or the Building via the driveway designated on Exhibit "C-1" which is attached hereto and supplements these Rules and Regulations. 86 Exhibit "D" Cleaning Specifications Landlord agrees that, at its expense, it will do the following standard janitorial work for the Premises. I. General Space Cleaning - five (5) nights per week Monday thru Friday A. Nightly 1. Empty and dust wipe all receptacles. 2. Replace plastic liners in waste receptacles as required. 3. Remove waste to a compactor, hamper, or place waste in bags and leave in a designated area. 4. Empty and damp-wipe ashtrays. 5. Clean entrance glass. 6. Clean glass in directories. 7. Spot clean all interior glass, including the glass railing on the plaza and third floor. 8. Damp-wipe all glass top desks and tables. 9. Spot clean walls, doors, door frames and around light switches. 10. Clean the elevators including walls, floors, doors, lights, tracks and indicator panels. 11. Clean and polish stainless steel in the main lobby, elevator lobbies, elevators, etc. 12. Damp-wipe spillages on furniture in lounge and lunchroom areas. (Tenant shall be responsible for cleaning of dishes, refrigerators and other kitchen appliances.) 87 13. Sanitize and polish all drinking fountains. 14. Vacuum all carpeted areas with particular attention being paid to under desks, moveable furniture, corners and edges, etc. 15. Spot clean carpet as needed. 16. Sweep all granite pavers and composition tile flooring with a specially treated mop and buff. 17. Damp mop trackage and spillage as required. 18. Sweep cement stairways. Damp-mop as required. 19. Dust or damp-wipe handrails and metalwork as required. 20. Sweep with specially treated mop, and wash floors in service areas. 21. Upon the completion of cleaning, the cleaning equipment will be stored neatly in a designated location. B. Monthly 1. Clean and polish desk tops. 2. Perform high dusting not reached in normal cleaning. 3. Dust Venetian blinds. 4. Spray buff vinyl tile flooring in tenant and service areas. C. Quarterly 1. Strip and wax all vinyl tile flooring in tenant and service areas. 2. Vacuum upholstered chairs. II. Lavatories 88 A. Nightly 1. Empty waste and sanitary napkin disposal receptacles. 2. Replace plastic liners as required. 3. Clean commodes and urinals with a disinfectant. 4. Clean washbowls with a scouring powder. 5. Polish mirrors. 6. Polish all brightwork. 7. Spot clean ceramic tile walls and metal partitions. 8. Floors to be swept, wet mopped and rinsed, using a disinfectant detergent. 9. Fill all towel, toilet issue, sanitary napkin and hand soap dispensers. B. Monthly 1. Wash and disinfect ceramic tile walls and metal partitions. 2. Wash interior of waste and sanitary napkin disposal containers. 89 Exhibit "E" Rating Level Multiplier For purposes of Section 2.6 of the Lease: If HET's Corporate . . . then the Credit Rating is . . . Rating Level Multiplier is: BBB 0 BB 1.0 B 2.0 CCC 3.0 CC or lower 4.0 90 Exhibit "F" [RESERVED] 91 Exhibit "G" Tenant Design and Construction Standards Tenant agrees to furnish Landlord the following information in drawings, in accordance with the below-listed schedules. 1. PRELIMINARY DRAWINGS No later than four (4) weeks prior to the projected construction commencement date, Tenant shall furnish Landlord one (1) sepia and six (6) complete sets of prints of -" scale preliminary drawings showing at least the following information: a. Floor plan including furniture layout, partition layout, door layout, power and telephone outlet locations, items above standard finish, floor loading information beyond 70 psf, etc. b. Reflected ceiling plan including lighting layout, exit signs, registers, grilles, diffusers, exhaust fans, ceiling breaks, etc. c. Written scope sheet of special Tenant mechanical and electrical requirements and/or custom construction and finish requirements. d. Take-off sheet of building standard items shall be used. 2. ARCHITECTURAL WORKING DRAWINGS FOR CONSTRUCTION No later than two (2) weeks prior to the projected construction commencement date, Tenant shall furnish Landlord two (2) background mylars of the partition and ceiling plans and one (1) sepia and two (2) sets of prints of complete -" scale working drawings on or before showing at least the following information and marked "issued for engineering and Landlord review": a. Location and type of all partitions and doors (specify hardware and provide keying schedule), glass partitions, windows and glass doors (indicate framing sections if not building standard). 92 b. Indication of all critical dimensions necessary for construction. c. Location of telephone equipment room accompanied by an approval of the telephone company. d. Location of all building standard and above building standard electrical items including outlets, switches, telephone outlets and lighting. e. Location and type of equipment that require special electrical; requirements including manufacturer's specifications for use and operations. f. Location, weight per square foot and description of any exceptionally heavy equipment or filing system exceeding 75 psf live load including 20 psf for partitions. g. Requirements for special air conditioning or ventilation including occupancy information for each room and space. h. Type and color of floor covering, wall covering, and building standard and above-building standard paint or finishes. i. Requirements for special plumbing including all line sizes, fixtures and specifications. j. Location and type of kitchen equipment including specifications. k. Details showing: (1) Construction of all partition types; (2) Head, jamb and sill sections with elevations for all door types; (3) Shelving, cabinet work and architectural millwork with dimensions and dimensions of all equipment to be built in; (4) Special corridor entrance with framing and support requirements; and 93 (5) Bracing or support of special walls, glass partitions, drapery track, etc. 3. MECHANICAL/ELECTRICAL WORKING DRAWINGS FOR CONSTRUCTION No later than two (2) weeks prior to the projected construction commencement date, Tenant shall furnish two (2) sets of prints of -" scale mechanical/electrical working drawings which, among other things, shall identify requirements beyond the building standard scope. 4. Within ten (10) days after the furnishing of any such drawings by Tenant, Landlord shall approve, disapprove, or request further information concerning the drawings submitted, indicating the reason for any disapproval and specifying clearly the nature and scope of any request for further information. In all events, Landlord shall use good faith efforts to respond to such submissions by Tenant expeditiously so as to not delay unnecessarily Tenant's construction of Alterations. 5. Tenant shall be responsible for obtaining city review and approval of preliminary drawings (as referred to in paragraph 1 above). Tenant shall make application and obtain a city building permit. 94 Exhibit "H" First American SNDA SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT Building No. 2 THIS AGREEMENT, made as of the ----- day of October, 1999, by FIRST AMERICAN NATIONAL BANK, with a place of business at 6000 Poplar Avenue, Suite 300, Memphis, Tennessee 38119 ("Mortgagee") and Harrah's Operating Company, Inc., a Delaware corporation, having an office address at 5100 West Sahara Avenue, Suite 200, Las Vegas, NV 89146 ("Tenant"). WITNESSETH: WHEREAS, Mortgagee has entered into, or is about to enter into, a mortgage loan transaction with RBM Cherry Road Partners, a Tennessee general partnership, having an office address of 5810 Shelby Oaks Drive, Memphis, TN 38134 ("Landlord"); and WHEREAS, Mortgagee is, or is to become, the beneficiary of a Deed of Trust, Assignment of Rents and Security Agreement (said Deed of Trust, Assignment of Rents and Security Agreement being hereinafter referred to as the "Mortgage") covering that certain parcel of land owned by Landlord and described on Exhibit "A" annexed hereto and made a part hereof, together with the improvements erected thereon (said parcel of land and improvements thereon being commonly known as 1023 Cherry Road, Memphis, TN 38117, hereinafter called the "Improvements"); and WHEREAS, by a certain Lease entered into between Landlord and Tenant dated as of October 25, 1999 ("Lease"), Landlord leased to Tenant a portion of the Improvements, to wit, the premises designated as floors one (1) through two (2) of the three-story office building located at 1023 Cherry Road, Memphis, TN 38117, generally depicted on Exhibit "B" annexed hereto and made a part hereof (said premises being hereinafter called the "Demised Premises"); and WHEREAS, a copy of the Lease has been delivered to Mortgagee, the receipt of which is hereby acknowledged; and WHEREAS, the parties hereto desire to effect the subordination of the Lease to the Mortgage and to provide for the non-disturbance of Tenant by the holder of the Mortgage. 95 NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, the parties hereto intending to be legally bound hereby agree as follows: 1. Mortgagee hereby consents to and approves the Lease and the term thereof, including any options to extend the term as set forth in the Lease, and covenants and agrees that the exercise by Tenant of any of the rights, remedies, and options therein contained shall not constitute a default under the Mortgage. 2. Tenant covenants and agrees with Mortgagee that the Lease is hereby made, and shall continue hereafter to be, subject and subordinate to the lien of the Mortgage, and to all modifications and extensions thereof, with the same force and effect as if the Mortgage had been executed and delivered prior to the execution and delivery of the Lease and without regard to the order of priority of recording the Mortgage, subject, however, to the provisions of this Agreement. Tenant shall take such steps and execute such documents from time to time hereafter as Mortgagee may reasonably request in order to carry into effect the provisions and intent of this Agreement and to confirm the subordination of the Lease to the lien of the Mortgage subject to the terms hereof. 3. Tenant certifies that the Lease is presently in full force and effect and unmodified and Tenant as of this date has no knowledge of any default, charge, lien or claim of offset under the Lease. 4. The Tenant shall deliver to Mortgagee, within thirty (30) days after receipt of a written request for same, further certifications that (i) the Lease is then in full force and effect; (ii) there have been no modifications to the Lease (except those specified therein); (iii) there is then no default, charge, lien or claim of offset under the Lease (or stating any of the same which may be claimed or known); (iv) not more than one month's installment of rent has been paid in advance of the due date (or stating any such other payments, if made); and (v) such other information as Mortgagee may reasonably request. For so long as Tenant is not in default under the terms of the Lease and the Lease shall be in full force and effect, Mortgagee agrees that: (a) Except as may be procedurally required by law, Tenant shall not be named or joined as a party or otherwise in any suit, action or proceeding for the foreclosure of the Mortgage or to enforce any rights under the Mortgage or note or 96 other obligation secured thereby. Nothing hereinabove shall prohibit or prevent the Mortgagee from suing the Tenant for any default (as defined in the Lease) by Tenant under the Lease. (b) The possession by Tenant of the Demised Premises and Tenant's rights thereto shall not be disturbed, affected or impaired by, nor will the Lease, Tenant's rights thereunder, or the term thereof be terminated or otherwise affected (i) by any suit, action or proceeding upon the Mortgage or note or other obligation secured thereby, or for the foreclosure of the Mortgage or the enforcement of any rights under the Mortgage or any other documents held by the holder of the Mortgage, or (ii) by any judicial sale or execution or other sale of the Demised Premises in connection with the Mortgage, or any deed given in lieu of foreclosure, or (iii) by any default under the Mortgage or note or other obligation secured thereby. (c) Neither the Mortgage nor any other security instrument executed in connection therewith shall cover or be construed as subjecting in any manner to the lien thereof, any trade fixtures, equipment, inventory or other personal property at any time furnished or installed by or for Tenant in the Demised Premises unless the same are permanently affixed to the real estate thereof. Tenant agrees that upon removal of any of its trade fixtures, equipment, inventory or other personal property at any time furnished or installed by or for Tenant in the Demised Premises, Tenant shall, at its expense, repair all damage to the Demised Premises caused by any such removal. 5. If Mortgagee or any future holder of the Mortgage shall become the owner of the Improvements by reason of foreclosure of the Mortgage or otherwise, or if the Improvements shall be sold as a result of any action or proceeding to foreclose the Mortgage, or transfer of ownership by deed given in lieu of foreclosure, the Lease shall continue in full force and effect, without necessity for executing any new lease, as a direct lease between Tenant and the then owner of the Improvements, as "Landlord," upon all of the same terms, covenants, and provisions contained in the Lease, and in such event: (a) Tenant shall be bound to such new owner under all of the terms, covenants, and provisions of the Lease for the remainder of the term thereof (including also any extension periods, if Tenant elects or has elected to exercise its option to extend the term) and Tenant hereby agrees to attorn to such new owner and to recognize such new owner as "Landlord" under the Lease; and 97 (b) Such new owner shall be bound to Tenant under all of the terms, covenants, and provisions of the Lease for the remainder of the term thereof (including also any extension periods, if Tenant elects or has elected to exercise its options to extend the term) which such new owner hereby agrees to assume and perform; and Tenant shall, from and after the date such new owner succeeds to the interest of "Landlord" under the Lease, have the same remedies against such new owner for any subsequently occurring breach of any covenant contained in the Lease as Tenant might have had under the Lease against Landlord if such new owner had not succeeded to the interest of Landlord, provided, however, that such new owner shall not (i) be bound by any rent or additional rent which Tenant might have paid for more than one month in advance to any prior landlord (including Landlord); or (ii) be bound by any amendment or modification of the Lease made without its consent. 6. Any notices or communications given under this Agreement shall be in writing and shall be given by certified mail, return receipt requested, postage prepaid, (a) if to Mortgagee, at the address for Mortgagee hereinabove set forth or at such other address as Mortgagee may designate by notice to Tenant, or (b) if to Tenant, at the address of Tenant as hereinabove set forth or at such address as Tenant may designate by notice to Mortgagee. 7. Tenant agrees, by notice given in the manner provided in the Lease, to give to Mortgagee at the address provided above a copy of any notice of default served upon the Landlord by Tenant. Tenant shall give such notice to Mortgagee simultaneously with the giving of any such notice of default to Landlord. Tenant further agrees that if Landlord shall have failed to cure any such default within such time as may be provided for in the Lease, then Tenant shall give Mortgagee written notice of such failure and Mortgagee shall have an additional forty-five (45) days from receipt of such notice within which to cure such default, or if such default cannot be cured within that time, then within such additional time as may be necessary if within such forty-five (45) days Mortgagee has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure); and in such event the Lease shall not be terminated and Tenant shall not be excused or released from the timely performance and payment of all of Tenant's obligations under the Lease, without setoff or deduction, while such remedies are being so diligently pursued by 98 Mortgagee. Mortgagee shall not be deemed, as a result of any such curing or attempted curing, to have assumed or become personally liable for Landlord's obligations under the Lease. 8. Upon notification by Mortgagee to the Tenant of the exercise of Mortgagee's rights under the Mortgage to receive direct payment of rents or other charges, Tenant shall pay rent and any other sums payable under the terms of the Lease directly to Mortgagee. Notwithstanding the Tenant's payment to Mortgagee of the rent and other sums payable under the terms of the Lease, Tenant hereby acknowledges and agrees that Mortgagee shall have no duties or obligations with respect to the Lease until Mortgagee has notified Tenant of Mortgagee's assumption of the Landlord's obligations under the Lease. 9. This Agreement shall bind and inure to the benefit of and be binding upon and enforceable by the parties hereto and their respective successors and assigns. 10. This Agreement contains the entire agreement between the parties and cannot be changed, modified, waived, or cancelled except by an agreement in writing executed by the parties against whom enforcement of such modification, change, waiver or cancellation is sought. 11. This Agreement and the covenants herein contained are intended to run with and bind all lands affected thereby. 12. Any notices sent to Mortgagee herein shall include a copy to: J. Philip Jones, Esq., Martin, Tate, Morrow & Marston, P.C., 6000 Poplar Avenue, Suite 340, Memphis, TN 38119-3971. 99 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. MORTGAGEE: FIRST AMERICAN NATIONAL BANK By:----------------------------- Title:-------------------------- TENANT: HARRAH'S OPERATING COMPANY, INC. By:----------------------------- Title:-------------------------- 100 STATE OF TENNESSEE COUNTY OF SHELBY Before me, a Notary Public, of the State and County aforesaid, personally appeared --------------------, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who, upon oath, acknowledged himself/herself to be the ---------------------- of First American National Bank, the within named bargainor, a national banking association, and that he/she as such officer, being authorized so to do, executed the foregoing instrument for the purpose therein contained, by signing the name of the association by himself/herself as such officer. WITNESS my hand and official seal this -----day of --------, 199--. ---------------------------- NOTARY PUBLIC My commission expires: - ---------------------- STATE OF ---------------------- COUNTY OF --------------------- Before me, a Notary Public, of the State and County aforesaid, personally appeared --------------------, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence) and who, upon oath, acknowledged himself/herself to be the ------------------- of HARRAH'S OPERATING COMPANY, INC., the within named bargainor, a Delaware corporation, and that he/she as such officer, being authorized so to do, executed the foregoing instrument for the purpose therein contained by signing the name of the corporation by himself/herself as such officer. WITNESS my hand and seal at office this ---- day of --------, 199--. ---------------------------- NOTARY PUBLIC My commission expires: - --------------------- 101 Exhibit "I" Memphis and Shelby County Land Use Control Board - Staff Report #16 Correspondence Item, Case No.: P.D. 93-322 L.U.C.B. Meeting October 14, 1999 102 EX-10.12 5 EXHIBIT 10(12) Exhibit 10(12) Description of Amendment to Harrah's Entertainment, Inc's Annual Management Bonus Plan In November, 1999, the Human Resources Committee of the Board of Directors approved an amendment to the bonus matrix for the Annual Management Bonus Plan. This amendment applies to employees in grades 30 and above which includes executive officers. The amendment eliminates a specified maximum amount of bonus which can be earned by reason of exceeding target performance. The target bonus of 50% to 60% of base salary, depending on the executive, remains the same and a minimum financial achievement is required to pay any bonus unless an exception is approved by the Committee. EX-10.23 6 EXHIBIT 10(23) Exhibit 10(23) EMPLOYMENT AGREEMENT THIS AGREEMENT, made as of the 1st day of January, 1999, between Harrah's Entertainment, Inc., a Delaware corporation with its executive offices at 1023 Cherry Road, Memphis, Tennessee (the "Company"), and Philip G. Satre (the "Executive"). The Company and the Executive agree as follows: 1. Introductory Statement ---------------------- The Company desires to secure the services of the Executive as Chairman of Company's Board of Directors, Chief Executive Officer and President, and the Executive is willing to execute this Agreement with respect to his employment. This Agreement is effective on January 1, 1999, and shall expire December 31, 2002, subject to the terms and conditions herein. 2. Agreement of Employment ----------------------- The Company agrees to, and hereby does, employ the Executive, and the Executive agrees to, and hereby does accept, employment by the Company, in a full-time capacity as Chairman of the Board, Chief Executive Officer, and President, pursuant to the provisions of this Agreement and of the bylaws of the Company, and subject to the control of the Board of Directors ("Board"). It is understood that the Executive's positions as Chairman of the Board, Chief Executive Officer, and President is subject to his yearly re-election to these positions by the Board. (See paragraph 6 herein for Executive's rights if such re-election does not occur during the term of this Agreement.) The Company acknowledges that although Executive shall be employed in the capacity of President, in addition to his positions as Chairman of the Board and Chief Executive Officer, the Board and Executive have created the Office of the President, which shall consist of Executive and other Company employees recommended by the Executive and approved by the Board. The 1 Company also acknowledges that a person in the Office of the President (other than Executive) may be appointed to the position of President during the term of this Agreement. Based upon the foregoing, the Company and the Executive agree that, notwithstanding anything in this Agreement to the contrary, Company's obligations to Executive pursuant to this Agreement are based upon Executive's employment as Chairman of the Board and Chief Executive Officer. The reduction of Executive's role as President or the appointment or election of another person to the position of President shall have no effect upon this Agreement. 3. Executive's Obligations ----------------------- During the period of his service under this Agreement, the Executive shall devote substantially all of his time and energies during business hours to the supervision and conduct, faithfully and to the best of his ability, of the business and affairs of the Company and to the furtherance of its interests, and to such other duties as directed by the Board. 4. Compensation ------------ The Company shall pay to Executive a salary at the rate of $900,000 per year, in equal bi-weekly installments, provided, however, that the Human Resources Committee of the Board (the "HRC") shall in good faith review the salary of the Executive, on an annual basis, with a view to consideration of appropriate merit increases in such salary. In addition, except as otherwise provided herein, during the term of this Agreement the Executive shall be entitled to participate in incentive compensation programs and to receive employee benefits and perquisites at least as favorable to the Executive as those presently provided to Executive by the Company, and as may be enhanced for all senior officers. Such benefits include, but are not limited to, the rabbi trust (provided pursuant to the Escrow Agreement dated February 6, 1990, as amended (the "Escrow Agreement"), and his Severance Agreement dated November 5, 1992, as amended by Amendments dated February 25, 1994, October 25, 1996 and April 2 25, 1997, attached hereto as Exhibit A (the "Severance Agreement"), each of which will continue in force subject to their respective terms and conditions, including the termination and amendment provisions thereof. There will be no diminution of the above compensation, perquisites, or benefits except as provided in this Agreement. The Company acknowledges that it will be relocating its headquarters to Las Vegas, Nevada, in August, 1999. The Company also acknowledges and approves the Executive's intention to relocate his primary residence under the Group Relocation Plan to Reno, Nevada, and to maintain a secondary residence (not covered under the Group Relocation Plan) in Las Vegas, Nevada. The Executive will use the Company's aircraft or charter aircraft for security purposes for himself and his family for business and personal travel (with standard charges for family members and for non-Company business usage), including travel between Reno and Las Vegas, Nevada. The Executive also will be entitled to be reimbursed for first class travel or charter aircraft travel expenses between Reno and Las Vegas, Nevada. The Company also will provide Executive with appropriate security arrangements at his residences. If the Executive dies or resigns pursuant to this Agreement or pursuant to any other Agreement between the Company and the Executive providing for such resignation during the period of this Agreement, service for any part of the month in which any such event occurs shall be considered service for the entire month. 5. Termination From Employment on December 31, 2002 ------------------------------------------------ 5.1 Except as otherwise provided in this Agreement, the date of Executive's termination from employment shall be December 31, 2002. 5.2 After the date of Executive's termination from employment at any time (including termination or resignation prior to December 31, 2002, if that should occur), he will be 3 entitled to participate for his lifetime in the Company's group health insurance plans applicable to corporate executives, including family coverage as applicable (medical, dental and vision coverage). His group health insurance benefits after any termination of employment will not be less than those offered to corporate officers of the Company, and he will be entitled to any later enhancements in such benefits. His benefits will be the same as normally provided to other retired management directors pursuant to the policy adopted by the HRC on October 23, 1990 (except to the extent he voluntarily elects not to participate in any plan). 5.3 After the date of Executive's termination from employment, the Executive will become vested at the retirement rate under the Executive Deferred Compensation Plan ("EDCP"), and his EDCP account and any other deferred compensation balances will continue to be protected by the Escrow Agreement if it is then in force, subject to the terms and conditions of that Agreement, including its termination and amendment provisions. 6. Termination Without Cause or Resignation for Good Reason -------------------------------------------------------- 6.1 The Board reserves the right to terminate Executive from his then current position without cause at any time upon at least three months prior written notice. The failure of the Board to elect Executive as Chairman of the Board and Chief Executive Officer during the annual election of officers shall also be deemed termination without cause for purposes of this Agreement unless, before the election, the Board has sent the written notice initiating termination for Cause as provided in paragraph 11.1, and Executive is thereafter terminated for Cause. Executive reserves the right to resign his position for Good Reason (as defined in paragraph 11.2 herein) by giving the Company 30 days written notice which states the reason for his resignation. For purposes of this Agreement, Good Reason does not include changes that are expressly permitted by this Agreement. 4 6.2 Upon Executive's termination without cause or resignation from his position for Good Reason as described in paragraph 6.1 above: (a) Executive will continue in employee status as a consultant-employee for two years beginning on the date of such termination without cause or resignation for Good Reason (the "Transition Period"). His stock options and any restricted stock will continue in force for vesting purposes during the Transition Period. Any unvested stock options and unvested shares of restricted stock that do not vest before the expiration of the Transition Period will be forfeited. If a Change in Control as defined in the Executive's Severance Agreement occurs during the Transition Period, all unvested stock options and TARSAP will vest. Executive also shall be entitled: (i) to the bonus Executive has earned but for which he has not been paid for the year prior to the year in which he is terminated without cause or in which he resigns his position for Good Reason; and (ii) to a prorated bonus for the year in which he is terminated without cause or in which he resigns for Good Reason. (b) Executive will become vested at the retirement rate under the EDCP on the date of such termination without cause or resignation for Good Reason. (c) Executive will continue to receive his then-current salary rate and the right to participate in the Company's benefit plans during the Transition Period, but, except as otherwise provided in subsection (a) above, he no longer will be eligible for bonus, stock option or restricted stock grants or any other long-term incentive awards then in effect. (d) After the expiration of the Transition period, Executive will be entitled to the lifetime group insurance benefits described in paragraph 5.2. 7. Termination For Cause or Resignation Without Good Reason -------------------------------------------------------- 5 7.1 The Board will have the right to terminate Executive at any time from his then-current positions for Cause (as defined in paragraph 11.1 herein). 7.2 If Executive is terminated for Cause, or if he resigns his position without Good Reason, then: (a) all his rights and benefits under this Agreement shall thereupon terminate and his employment shall be deemed terminated on the date of such termination or resignation; (b) he shall be entitled to all accrued rights, bonuses, payments and benefits vested or paid on or before such date under the Company's plans and programs, but unvested stock options and unvested shares of restricted stock, if any, will be forfeited; (c) his right to exercise vested stock options will expire at 12:00 p.m. midnight on the date of such termination or resignation, and all stock options not so exercised will be forfeited; (d) his Indemnification Agreement will continue in force; (e) the Escrow Agreement, if then in force, will continue in force, unless such agreement is thereafter amended or terminated pursuant to its terms; (f) he will be entitled to the lifetime group insurance benefits described in paragraph 5.2 above, except that any future amendments to such benefits shall apply to him in the same manner as such amendments apply to other employees; and, (g) his Severance Agreement and all rights thereunder will terminate as of such termination or resignation date, unless a Change in Control or Potential Change in Control (as such terms are defined in the Severance Agreement) has occurred prior to such termination or resignation or resignation date. If Executive's Severance Agreement is in force upon a Change in Control (as defined in the Severance Agreement), the provisions of this paragraph 7.2 will not be applicable if he resigns (for or without Good Reason) within two (2) years after the Change Control. In the event of such resignation after a Change in Control, he will be entitled to the payments, rights and benefits as provided in paragraph 10 below. 8. Death ----- 6 In the event of Executive's death prior to December 31, 2002, during his employment under this Agreement, his salary and all rights and benefits under this Agreement will terminate, and his estate and beneficiary(ies) will receive the benefits they are entitled to under the terms of the Company's benefit plans and programs by reason of a participant's death during active employment, including the death benefits provided by the EDCP and applicable rights and benefits under the Company's stock plans, including any accrued but unpaid bonus. The Escrow Agreement, if then in force, will continue in force (subject to its amendment or termination in accordance with its terms) for the benefit of Executive's beneficiaries until his deferred compensation accounts are paid in full, and Executive's Indemnification Agreement will continue in force for the benefit of his estate. If the Executive dies during the Transition Period, all of the provisions of the previous sentences apply, except that the remaining salary will be paid in a lump sum to his estate. 9. Disability --------- In the event of Executive's disability prior to December 31, 2002, during his employment, he will be entitled to apply at his option for the Company's long-term disability benefits. If he is accepted for such benefits, then the terms and provisions of the Company's benefit plans and programs (including EDCP, Stock Option, Restricted Stock and TARSAP Plans) that are applicable in the event of such disability of an employee shall apply in lieu of the salary and benefits under this Agreement, except that: (a) the Escrow Agreement (if then in force) and his Indemnification Agreement will continue in force (subject to amendment or termination in accordance with their terms); and (b) he will be entitled to the lifetime group insurance benefits described in paragraph 5.2. If Executive is disabled so that he cannot perform his duties (as determined by the HRC), and if he does not apply for long-term disability benefits or is not accepted for such benefits, then the Board may terminate his duties under this Agreement. In such event, he will receive two years salary 7 continuation together with all other benefits, and during such period of salary continuation, any stock options and restricted stock grants then in existence will continue in force for vesting purposes. However, during such period of salary continuation for disability, Executive will not be eligible to participate in the annual bonus plan, nor will he be eligible to receive stock option or restricted stock grants or any other long-term incentive awards except to the extent approved by the HRC. 10. Change in Control ----------------- Except as provided in paragraph 6.2, if a Change in Control as defined in Executive's Severance Agreement occurs prior to Executive's termination of employment, and if the Severance Agreement is in force when the Change in Control occurs, then, upon his termination or voluntary or involuntary resignation within two years after the Change in Control (including termination on December 31, 2002, due to expiration of this Agreement), except if his termination of employment is for "Cause," "Disability" or "Retirement" as set forth in the Severance Agreement, he will be entitled to all the rights, payments and benefits provided under his Severance Agreement, including the benefits that the Severance Agreement provides with respect to the benefit plans and programs of the Company resulting from his termination or voluntary resignation, in lieu of the rights and benefits that would otherwise apply under this Agreement by virtue of his termination or resignation; provided that: (a) the Escrow Agreement (if then in force and subject to amendment or termination in accordance with its terms) and his Indemnification Agreement will continue in force; and (b) he will be entitled to the lifetime group insurance benefits described in paragraph 5.2. 11. Definitions of Cause and Good Reason ------------------------------------ 11.1 Cause. Termination by Company of this Agreement for "Cause" shall mean termination upon the Executive's engaging in willful and continued misconduct, or the Executive's willful and 8 continued failure to substantially perform his duties with the Company (other than due to physical or mental illness), if such failure or misconduct is materially damaging or materially detrimental to the business and operations of the Company; provided that Executive shall have received written notice of such failure or misconduct and shall have continued to engage in such failure or misconduct after 30 days following receipt of such notice from the Board, which notice specifically identifies the manner in which the Board believes that Executive has engaged in such failure or misconduct. For purposes of this paragraph 11.1, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purposes (after reasonable notice to the Executive and an opportunity for him, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Executive was guilty of failure to substantially perform his duties or of misconduct in accordance with the first sentence of this paragraph, and of continuing such failure to substantially perform his duties or misconduct as aforesaid after notice from the Board, and specifying the particular thereof in detail. 11.2 Good Reason. "Good Reason" shall mean, without Executive's express written consent, the occurrence of any of the following circumstances unless, in the case of paragraphs (a), (e), (f) or (g), such circumstances are fully corrected prior to the date of termination specified in the written notice given by Executive notifying the Company of his resignation for Good Reason: 9 (a) The assignment to Executive of any duties inconsistent with his status as Chairman of the Board, Chief Executive Officer of the Company or a substantial adverse alteration in the nature or status of his responsibilities; (b) A reduction by the Company in his annual base salary of $900,000 or as the same may be increased from time to time pursuant to paragraph 4 hereof; (c) The relocation of the Company's principal executive offices from Las Vegas, Nevada, to a location more than 50 miles from such offices, or the Company's requiring Executive either: (i) to be based anywhere other than the location of the Company's principal offices in Las Vegas (except for required travel on the Company's business to an extent substantially consistent with Executive's present business travel obligations); or (ii) to relocate his primary residence from Reno to Las Vegas; (d) The failure by the Company, without Executive's consent, to pay him any portion of his current compensation, except pursuant to a compensation deferral elected by the Executive, or to pay to Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company within thirty days of the date such compensation is due; (e) Except as permitted by this Agreement, the failure by the Company to continue in effect any compensation plan in which Executive is participating on the date of this Agreement which is material to Executive's total compensation, including, but not limited to, the Company's annual bonus plan, the EDCP, the Restricted Stock Plan, the TARSAP Plan, or the Stock Option Plan or any substitute plans, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue Executive's participation therein (or in such substitute or alternative plan) on a basis not materially 10 less favorable, both in terms of the amount of benefits provided and the level of Executive's participation relative to other participants at Executive's grade level; (f) The failure by the Company to continue to provide Executive with benefits substantially similar to those enjoyed by him under the S&RP and the life insurance, medical, health and accident, and disability plans in which Executive is participating on the date of this Agreement, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive Executive of any material fringe benefit enjoyed by Executive on the date of this Agreement, except as permitted by this Agreement, or the failure by the Company to provide Executive with the number of paid vacation days to which Executive is entitled; or (g) The failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in paragraph 14 hereof. Executive's right to terminate his employment pursuant to this Agreement for Good Reason shall not be affected by Executive's incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. Notwithstanding any provision in this Agreement to the contrary, in the event the Executive's active employment as an executive officer with the Company, or its direct or indirect subsidiaries, terminates for any reason, any TARSAP shares granted to Executive which are unvested on the date of such termination of active employment will be forfeited as of 12:00 p.m. on such date; provided that it is understood that the HRC could approve an exception, in its discretion, based on its review of the circumstances at that time. 12. Non-Competition Agreement ------------------------- 11 12.1 For a period of two years after Executive's full-time, active employment (which, for purposes of this paragraph 12.1, shall not include employee status as a consultant-employee under paragraph 6.2 (a)) with the Company or a direct or indirect subsidiary ends, he will not, directly or indirectly, solicit or recruit any employee of the Company or of any of its direct or indirect subsidiaries, and he will not engage (as employee, consultant, director, investor, contractor, or otherwise) directly or indirectly in any business, including the development of such business, in the United States, Canada or Mexico that is competitive with any business that the Company or its direct or indirect subsidiaries are engaged (as owner, manager, consultant, licensor, partner, or otherwise) in at the time such employment ends, except with the prior specific approval of the Board. 12.2 If the Executive breaches any of the covenants in paragraph 12.1, then the Board may terminate any of his rights under this Agreement upon thirty days written notice, whereupon all of the Company's obligations under this Agreement shall terminate (including, without limitation, the right to lifetime group insurance) without further obligation to him except for obligations that have been paid, accrued or are vested as of or prior to such termination date. In addition the Company shall be entitled to enforce any such convenants, including obtaining monetary damages, specific performance and injunctive relief. 13. Binding Arbitration ------------------- Any and all claims, disputes or controversies arising out of or related to this Agreement or the breach thereof shall be resolved by arbitration in accordance with the rules of the American Arbitration Association (the "AAA") then in existence, subject to this paragraph 13. Such arbitration shall be conducted by a panel of three arbitrators. The Executive and the Company each shall appoint one arbitrator, and the third shall be appointed by the two arbitrators appointed by the parties. The third arbitrator shall serve as chairman of the panel. The parties shall appoint their arbitrators within 30 days after the 12 demand for arbitration is served. If either party fails to do so, the AAA promptly shall appoint a defaulting party's arbitrator. The two arbitrators selected by the parties and/or the AAA shall select the third arbitrator within 15 days after their appointment, and if they cannot agree or fail so to appoint, then the AAA promptly shall appoint the third arbitrator. The arbitrators shall render their decision in writing within 60 days after the close of evidence or other termination of the proceedings by the panel. The determination or award rendered in such arbitration shall be binding and conclusive upon the parties and shall not be appealable. Judgment may be entered thereon in accordance with applicable law in any court of competent jurisdiction. Any arbitration hearings shall be held in Las Vegas, Nevada, and shall be private and not open to the public. Each party shall bear the fees and expenses of its arbitrator, counsel and witnesses, and the fees and expenses of the third arbitrator shall be shared equally by the parties. Other costs of the arbitration, including the fees of AAA, shall be shared equally by the parties. 14. Assumption of Agreement on Merger, Consolidation or Sale of Assets ------------------------------------------------------------------ The Company agrees that until the termination of this Agreement as above provided, it will not (i) enter into any merger or consolidation with another company in which the Company is not the surviving company, or (ii) sell or dispose of all or substantially all of its assets, unless the company which is to survive such merger or consolidation or to purchase such assets first makes a written agreement with the Executive to either: (1) assume the Company's financial obligations to the Executive under this Agreement; or (2) make such other provision for the Executive as is satisfactory to the Executive and approved by him in writing in lieu of assuming the Company's financial obligations to him under this Agreement. 15. Assurances on Liquidation -------------------------- 13 The Company agrees that until the termination of this Agreement as above provided, it will not voluntarily liquidate or dissolve without first making a full settlement or, at the discretion of the Executive, a written agreement with the Executive satisfactory to and approved by him in writing, in fulfillment of or in lieu of its obligations to him under this Agreement. 16. Amendments ---------- This Agreement may not be amended or modified orally, and no provision hereof may be waived, except in a writing signed by the parties hereto. 17. Assignment ---------- 17.1 Except as otherwise provided in paragraph 17.2, this Agreement cannot be assigned by either party hereto, except with the written consent of the other. Any assignment of this Agreement by either party shall not relieve such party of its or his obligations hereunder. 17.2 The Company may elect to perform any or all of its obligations under this Agreement through its wholly-owned subsidiary, Harrah's Operating Company, Inc., or another subsidiary, and if the Company so elects, Executive will be an employee of Harrah's Operating Company, Inc., or such other subsidiary. Notwithstanding any such election, the Company's obligations to the Executive under this Agreement will continue in full force and effect as obligations of the Company, and the Company shall retain primary liability for their performance. 18. Binding Effect -------------- This Agreement shall be binding upon and inure to the benefit of the personal representatives and successors in interest of the Company. 19. Choice of Law ------------- This Agreement shall be governed by the law of the Sate of Nevada as to all matters, including but not limited to matters of validity, construction, effect and performance. 14 20. Severability of Provisions -------------------------- In case any one or more of the provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby, and this Agreement shall be interpreted as if such invalid, illegal or unenforceable provision were not contained herein. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused this Agreement to be executed in its name and on its behalf and its corporate seal to be hereunto affixed and attested by its corporate officers thereunto duly authorized. /s/ PHILIP G. SATRE ---------------------------- Philip G. Satre (Corporate Seal) HARRAH'S ENTERTAINMENT, INC. By: /s/ E. O. ROBINSON, JR. ------------------------- Its: Senior Vice President ATTEST: /s/ REBECCA W. BALLOU ---------------------------- Secretary 15 EX-10.28 7 EXHIBIT 10(28) Exhibit 10(28) EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of November 1, 1999, by and between Harrah's Operating Company, Inc. ("Company") and Janis L. Jones ("Executive"). The Company and the Executive agree as follows: 1. EMPLOYMENT. The Company hereby employs the Executive as Senior Vice President of Communications or in such other capacity as the Company reasonably shall designate. The Executive may be an employee of the Company or one of its subsidiaries. 2. DUTIES. During the term of this Agreement ("Active Employment"), the Executive shall devote substantially all of her working time, energies, and skills to the benefit of the Company's business. The Executive agrees to serve the Company diligently and to the best of her ability, and to follow the policies and directions of the Company. 3. COMPENSATION. The Executive's compensation and benefits during her Active Employment shall be as follows: (a) BASE SALARY. The Company shall pay the Executive a base salary ("Base Salary") of $250,000 per year, which will be reviewed annually by the Company during the term of this Agreement in accordance with its compensation practices regarding senior executives. The Executive's Base Salary shall be paid biweekly in accordance with the Company's normal payroll schedule. All payments shall be subject to the Executive's chosen benefit deductions and the deduction of payroll taxes and similar assessments as required by law. (b) BONUS. In addition to the Base Salary, the Executive shall be eligible for an annual bonus in accordance with the Company's bonus plan. 4. INSURANCE AND BENEFITS. The Executive will be eligible to participate in each employee benefit plan and receive each executive benefit that the Company provides for its senior executives, in accordance with the applicable plan rules. 5. TERM. The term of this Agreement shall be for four (4) years, beginning November 1, 1999, and ending October 31, 2003. 6. NO CAUSE TERMINATION/NON-RENEWAL OF AGREEMENT. The Company may terminate the Executive's Active Employment at any time without cause upon thirty (30) days' prior written notice ("no cause termination"). The Company also, in its sole discretion, may elect not to renew this Agreement upon its expiration ("non-renewal of Agreement"). In the event of such no cause termination or non-renewal of Agreement, the Executive shall remain an employee of the Company during the subsequent Salary Continuation Period and shall be entitled only to the salary and benefits set forth below, unless otherwise specified in this Agreement.
Termination Date of Compensation or Benefit Compensation or Benefit - ----------------------- ----------------------- Base Salary (rate as of Separation Date) 18 months (78 weeks) ("Salary Continuation Period") from last day of Active Employment ("Separation Date"). PTO and Service Credit Separation Date (accrued PTO will be paid within 30 days of Separation Date). Use of Credit Cards Separation Date. Bonus--Payment and Eligibility (i) Eligible for prior year bonus if Separation Date occurs during payment year but prior to payment; (ii) eligible for prorated bonus
2 for the then current year if in job for more than 6 months and Separation Date occurs after June 30; (iii) not eligible for bonus for year following Separation Date. Group Health and Life Insurance End of Salary Continuation Period. 18-month COBRA rights period for health insurance will commence on Separation Date. (See also Paragraph 10.) Retaining Existing Stock Options for Stock options are retained for Vesting and Other Rights exercise and vesting through end of Salary Continuation Period. Exercise of vested options after Salary Continuation Period per plan rules. Accelerated vesting of all options if Change of Control occurs during Salary Continuation Period. Retaining Existing Restricted Stock for All restricted stock that is Vesting and Other Rights unvested as of the Separation Date will be forfeited on that date. Forfeited restricted stock will not vest upon a Change in Control during Salary Continuation. Eligibility for New Restricted Stock or New Separation Date. Stock Options TARSAP Next potential vesting, based on Performance targets, after
3 Separation Date, at CEO's and HRC's discretion. Accelerated vesting of all shares if Change of Control occurs during Salary Continuation. Unvested TARSAP shares at the end of Salary Continuation are forfeited. Use of Financial Counseling per Plan End of Salary Continuation Period. Provisions The maximum remaining benefit shall be the annual benefit remaining as of Separation Date. Savings and Retirement Plan Deductions End of year of Separation Date. (Active Participation) Employment termination date will be termination date under S&RP. Executive Deferred Compensation End of year of Separation Date. Plan/Deferred Compensation Plan (Active Distribution will commence after Participation) Salary Continuation Period, in accordance with previously made elections, and at the termination rate unless the Executive qualifies for the retirement rate. (See also Paragraph 11.) 3X death benefit provision waived for death after Separation Date. EDCP and other deferred compensation balances will continue to be protected by then existing Escrow Agreement subject to all terms and conditions thereof including its termination provisions.
4 7. DEATH OF EXECUTIVE. Upon the death of the Executive during her Active Employment, her salary and all rights and benefits hereunder will terminate, and her estate and beneficiary(ies) will receive the benefits to which they are entitled under the terms of the Company's benefit plans and programs by reason of a participant's death during employment, including the 3X death benefit provided by the EDCP (3X death benefit applies only if death occurs during Active Employment) and the applicable rights and benefits under the Company's stock plans. If the Executive dies during the Salary Continuation Period, all of the provisions of the previous sentence apply except that the remaining salary continuation will be paid in a lump sum to the Executive's estate. 8. TERMINATION BY COMPANY FOR CAUSE. The Company shall have the right to terminate the Executive's Active Employment for cause. Employment status and all salary and benefits shall thereupon cease, except COBRA rights and as otherwise provided in applicable benefit plans. Termination for cause shall be effective immediately upon notice sent or given to the Executive and this effective date will be both her Separation Date and date of termination of employment. For purposes of this Agreement, the term "cause" shall mean and be strictly limited to: (i) conviction of any crime that materially discredits the Company or is materially detrimental to the reputation or goodwill of the Company; (ii) commission of any material act of fraud or dishonesty against the Company, or commission of an immoral or unethical act that materially reflects negatively on the Company, or engaging in willful misconduct; provided that the Executive shall first be provided with written notice of the claim against her under this provision (ii) and with an opportunity to contest said claim before the Board of Directors; or (iii) material breach of the Executive's obligations under Paragraph 2. of this Agreement, as so determined by the Board of Directors. 9. VOLUNTARY TERMINATION/NOTICE PERIOD. The Executive may terminate this Agreement voluntarily at any time and for any or no reason during its term upon thirty (30) days' prior written notice to the Company, except as specified in 5 this paragraph. If the Executive is going to work or act in competition with the Company as described in Paragraph 14. of this Agreement, the Executive must give the Company six (6) months' prior written notice of her intention to do so. The written notice provided by the Executive shall specify the last day to be worked by the Executive ("Separation Date"), which Separation Date under this Paragraph 9. shall also be her termination of employment date and must be at least thirty (30) days or six (6) months (as appropriate) after the date the notice is received by the Company. Unless otherwise specified herein, or in a writing executed by both parties, the Executive shall not receive any of the benefits provided in this Agreement after the Separation Date set forth in her written notice except for applicable rights and benefits that apply to employees generally upon termination of employment. 10. CERTAIN HEALTH INSURANCE BENEFITS. If (i) the Executive reaches the age of 50 and, when added to her number of years of continuous service with the Company including any period of salary continuation, the sum of her age and years of service equals or exceeds 65, and at any time after the occurrence of both such events the Executive's employment is terminated pursuant to Paragraph 6., above; or (ii) the Executive reaches the age of 55 and has attained 10 years of continuous service with the Company including any period of salary continuation, and at any time after the occurrence of both such events the Executive's employment terminates for any reason other than by the Company for "cause" as described in paragraph 8., above, the Executive and her then-eligible dependents shall be entitled to participate in the Company's group health insurance plan, as amended from time to time by the Company, after the Executive's Separation Date or the end of the Salary Continuation Period, as applicable, for the remainder of the Executive's life ("Life Coverage Period"). During the Life Coverage Period, the Executive shall pay 20% of the current premium (revised annually) on an after-tax basis each quarter, and the Company shall pay 80% of said premium on an after-tax basis, which contribution will be imputed income to the Executive. As soon after the Separation Date as the Executive becomes eligible for Medicare coverage, the 6 Company's group health insurance plan shall become secondary to Medicare. If the Executive engages in any of the activities described in Paragraph 14.(a), below during the Life Coverage Period, the entitlement of the Executive and her then-eligible dependents to participate in the Company's group health insurance plan shall terminate automatically, without any further action or notice by either party, subject to applicable COBRA rights, which shall commence on the Separation Date. If the Executive engages in any of the activities described in said Paragraph 14.(a)(i) in a business which does not compete with the Company or any of its subsidiaries during the Life Coverage Period, the Company's group health insurance plan shall become secondary to any primary health insurance plan or coverage made available to the Executive by that business. The Executive shall also receive the benefits and be bound by the provisions of this Paragraph 10 if a Change in Control, as defined in the Executive's Severance Agreement, occurs following the effective date of this Agreement. 11. EDCP RETIREMENT RATE. If the Executive reaches the age of 50 and, when added to her number of years of continuous service with the Company, the sum of her age and years of service equals or exceeds 65, and at any time after the occurrence of both such events the Executive's employment is terminated pursuant to Paragraph 6., above, the Executive shall be entitled to receive her distributions from EDCP at the retirement rate. For EDCP retirement rate purposes, the Executive will receive service credit for the Salary Continuation Period. 12. CHANGE IN CONTROL. If a Change in Control, as defined in the Executive's Severance Agreement, occurs during the Executive's Active Employment, and if the Severance Agreement is in force when the Change in Control occurs, then the Severance Agreement supersedes and replaces this Agreement except as provided in Paragraph 10. If, prior to a Change in Control (as defined above), the Executive's Active Employment has been terminated for any 7 reason by either party or this Agreement is not renewed by the Company, then the Executive's Severance Agreement terminates automatically. 13. DISABILITY. If the Executive becomes disabled prior to the termination of her Active Employment or the non-renewal of this Agreement, she will be entitled to apply at her option for the Company's long-term disability benefits. If she is accepted for such benefits, then the terms and provisions of the Company's benefit plans and the programs (including the EDCP and the Company's Stock Option and Restricted Stock Plans) that are applicable in the event of such disability of an employee shall apply in lieu of the salary and benefits under this Agreement, except that (i) the Escrow Agreement (if then in force) and her indemnification agreement will continue in force (the Escrow Agreement will be subject to amendment or termination in accordance with its terms), and (ii) she will be entitled to the lifetime group insurance benefits as described in Paragraph 10 if the terms and conditions of Paragraph 10 are satisfied. If the Executive is disabled so that she cannot perform her duties (as determined by the Human Resources Committee (HRC)), and if she does not apply for long-term disability benefits or is not accepted for such benefits, then the Company may terminate her duties under this Agreement. In such event, she will receive eighteen months Salary Continuation, together with all other benefits associated with salary continuation as described in Paragraph 6. However, during such period of salary continuation for disability, Executive will not be eligible to participate in the annual bonus plan, nor will she be eligible to receive stock option or restricted stock grants or any other long-term incentive awards except to the extent approved by the HRC. If the Executive becomes disabled during the Salary Continuation Period, she will be entitled only to the salary and benefits described in Paragraphs 6. and 10., above, for the periods set forth in those respective paragraphs and subject to the provisions and requirements therein. 8 14. NON-COMPETITION. (a) NON-COMPETITION. During the Executive's Active Employment, and during the Salary Continuation Period described in Paragraph 6., above, the Executive: (i) shall not engage in any activity, including development activity, whether as employer, proprietor, partner, stockholder (other than the holder of less than 5% of the stock of a corporation the securities of which are traded on a national securities exchange or in the over-the-counter market), director, officer, employee, consultant or otherwise, in competition with (x) the casino, casino/hotel and/or casino/resort businesses conducted at the date hereof by the Company, or any subsidiary or affiliate ("Company" for purposes of this paragraph 14) or (y) any casino, casino/hotel and/or casino/resort business in which the Company is substantially engaged at any time during the Active Employment period; (ii) shall not solicit, in competition with the Company, any person who is a customer of the businesses conducted by the Company at the date hereof or of any business in which the Company is substantially engaged at any time during the term of this Agreement. (b) SCOPE OF COVENANTS; REMEDIES. The following provisions shall apply to the covenants of the Executive contained in this Paragraph 14: (i) the covenants contained in paragraphs (i) and (ii) of Paragraph 14.(a) shall apply within the United States, Canada and Mexico, plus any territories in which Company is actively engaged in the conduct of business while the Executive is employed under this Agreement, including, without limitation, the territories in which customers are then being solicited; (ii) without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Paragraph 14., it is expressly agreed by the Executive 9 and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief to prevent any such violation or any continuing violation thereof; (iii) each party intends and agrees that if, in any action before any court or agency legally empowered to enforce the covenants contained in this Paragraph 14., any term, restriction, covenant or promise contained therein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency; and 15. Any confidentiality/non-solicitation agreement that Executive has signed with the Company shall remain in full force and effect according to its terms. 16. POST ACTIVE-EMPLOYMENT COOPERATION. Upon the termination of her Active Employment, the Executive will cooperate with, and provide information to, the Company in assuring an orderly transition of all matters being handled by her. Upon the Company providing reasonable notice to her, she will also appear as a witness at the Company's request and/or assist the Company in any litigation, bankruptcy or similar matter in which the Company or any affiliate thereof is a party; provided that the Company will defray any approved out-of-pocket expenses incurred by her in connection with any such appearance and that, if the Executive is no longer receiving salary compensation from the Company, the Company will compensate her for all time spent, at either her then current compensation rate or her salary rate as of the Separation Date, whichever is higher. The Company agrees further to indemnify her as prescribed in her Indemnification Agreement and Article TENTH of the Certificate of Incorporation of Harrah's Entertainment, Inc., as amended, filed on November 2, 1989, in the Office of the Secretary of State of the State of Delaware and recorded in Book 935, Page 780, et seq. 17. RELEASE. Upon the termination of the Executive's Active Employment, and in consideration of the receipt of 10 the salary and benefits described in this Agreement, except for claims arising from the covenants, agreements, and undertakings of the Company as set forth herein and except as prohibited by statutory language, the Executive forever and unconditionally waives, and releases Harrah's Entertainment, Inc., Harrah's Operating Company, Inc., their subsidiaries and affiliates, and their officers, directors, agents, benefit plan trustees, and employees ("Released Parties") from any and all claims, whether known or unknown, and regardless of type, cause or nature, including but not limited to claims arising under all salary, vacation, insurance, bonus, stock, and all other benefit plans, and all state and federal anti-discrimination, civil rights and human rights laws, ordinances and statutes, including Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act, concerning her employment with Harrah's Operating Company, Inc., its subsidiaries and affiliates, and the cessation of that employment. 18. GENERAL PROVISIONS. (a) NOTICES. Any notice to be given hereunder by either party to the other may be effected by personal delivery, in writing, or by mail, registered or certified, postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses set forth below, but each party may change her or its address by written notice in accordance with this Paragraph 18.(a). Notices shall be deemed communicated as of the actual receipt or refusal of receipt. If to Executive: Janis L. Jones 9833 Glenrock Las Vegas, NV 89134 If to Company: Harrah's Operating Company, Inc. 5100 W. Sahara Blvd., Ste. 200 Las Vegas, NV 89146 Attn: General Counsel 11 (b) PARTIAL INVALIDITY. If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall, nevertheless, continue in full force and without being impaired or invalidated in any way. (c) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada, without regard to its conflict of laws provisions. (d) NO CONFLICTING AGREEMENT. By signing this Agreement, Executive warrants that she is not a party to any restrictive covenant, agreement or contract which limits the performance of her duties and responsibilities under this Agreement or under which such performance would constitute a breach. (e) HEADINGS. The Section, paragraph, and subparagraph headings are for convenience or reference only and shall not define or limit the provisions hereof. (f) AMENDMENTS. Any amendments to this Agreement must be in writing and signed by both parties. (g) BINDING AGREEMENT. This Agreement is binding on the parties and their heirs, successors and assigns. (h) SURVIVAL OF PROVISIONS. The provisions of this Agreement shall survive any termination thereof if so provided herein and if necessary or desirable fully to accomplish the purposes of such provisions, including without limitation the rights and obligations of the Executive under Paragraphs 6, 14, 15, 16 and 17 hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. 12 Harrah's Operating Company, Inc. By: /s/ PHILIP G. SATRE ------------------------------ Philip G. Satre Chairman of the Board and Chief Executive Officer /s/ JANIS L. JONES ------------------------------ Janis L. Jones Executive 13 EX-10.29 8 EXHIBIT 10(29) Exhibit 10(29) HARRAH'S ENTERTAINMENT, INC November 1, 1999 Ms. Janis L. Jones c/o Harrah's Entertainment, Inc. 5100 W. Sahara Blvd. Suite 200 Las Vegas, NV 89146 Re: Amended and Restated Severance Agreement Dear Jan: Harrah's Entertainment, Inc. (the "Company") considers it essential to the best interest of its stockholders to foster the continuous employment of key management personnel. In this connection, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company, although no such change is now contemplated. In order to induce you to remain in the employ of the Company or its subsidiaries and in consideration of your agreements set forth in Subsection 2(b) hereof, the Company agrees that you shall receive the severance benefits set forth in Janis L. Jones November 1, 1999 Page 2 this letter agreement ("this Agreement") in the event your employment with the Company or its subsidiaries terminates subsequent to a "Change in Control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. TERM OF AGREEMENT. This Agreement shall commence on November 1, 1999, and shall continue in effect through December 31, 1999; provided, however, that commencing on January 1, 2000 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than January 1 of the preceding year, the Company with the approval of the Board of Directors shall have given you written notice that it does not wish to extend this Agreement; provided, further, if a Change in Control of the Company shall have occurred during the original or extended term of this Agreement, this Agreement shall automatically continue in effect for a period of twenty-four months beyond the month in which such Change in Control occurred. 2. CHANGE IN CONTROL. (a) No benefit shall be payable to you hereunder unless there shall have been a Change in Control of the Company, as set forth below. For purposes of this Agreement, a "Change in Control of the Company" shall be deemed to have occurred, subject to subparagraph (iv) hereof, if any of the events in subparagraphs (i), (ii) or (iii) occur: (i) Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than an employee benefit plan of the Company, or a trustee or other fiduciary holding securities under an employee benefit plan of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 25% or more of the Company's then outstanding voting securities carrying the right to vote in elections of persons to the Board, regardless of comparative voting power of such voting securities, and regardless of whether or not Janis L. Jones November 1, 1999 Page 3 the Board shall have approved the acquisition of such securities by the acquiring person; or (ii) During any period of two consecutive years, individuals who, at the beginning of such period, constitute the Board together with any new director(s) (other than a director designated by a person who shall have entered into an agreement with the Company to effect a transaction described in clauses (i) or (iii) of this Subsection) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two year period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (iii) The holders of securities of the Company entitled to vote thereon approve the following: (A) A merger or consolidation of the Company with any other corporation regardless of which entity is the surviving company, other than a merger or consolidation which would result in the voting securities of the Company carrying the right to vote in elections of persons to the Board outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of (a) the Company's then outstanding voting securities carrying the right to vote in elections of persons to the Board, or (b) the voting securities of such surviving entity outstanding immediately after such merger or consolidation, or (B) A plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. Janis L. Jones November 1, 1999 Page 4 (iv) Notwithstanding the definition of a "Change in Control" of the Company as set forth in this Section 2(a), the Human Resources Committee of the Board (the "Committee") shall have full and final authority, which shall be exercised in its discretion, to determine conclusively whether a Change in Control of the Company has occurred, and the date of the occurrence of such Change in Control and any incidental matters relating thereto, with respect to a transaction or series of transactions which have resulted or will result in a substantial portion of the assets or business of the Company (as determined, prior to the transaction or series of transactions, by the Committee in its sole discretion which determination as to whether a substantial portion is involved shall be final and conclusive) being held by a corporation at least 80% of whose voting securities are held, immediately following such transaction or series of transactions, by holders of the voting securities of the Company (as determined by the Committee in its sole discretion prior to such transaction or series of transactions which determination as to whether the 80% amount will be satisfied shall be final and conclusive). The Committee may exercise any such discretionary authority without regard to whether one or more of the transactions in such series of transactions would otherwise constitute a Change in Control of the Company under the definition set forth in this Section 2(a). (b) For purposes of this Agreement, a "Potential Change in Control of the Company" shall be deemed to have occurred if the following occur: (i) The Company enters into a written agreement or letter of intent, the consummation of which would result in the occurrence of a Change in Control of the Company; (ii) Any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control of the Company; Janis L. Jones November 1, 1999 Page 5 (iii) Any person (other than an employee benefit plan of the Company, or a trustee or other fiduciary holding securities under an employee benefit plan of the Company) who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 9.5% or more of the Company's then outstanding voting securities carrying the right to vote in elections of persons to the Board increases such beneficial ownership of such securities by an additional five percentage points or more thereby beneficially owning 14.5% or more of such securities; or (iv) The Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control of the Company has occurred. You agree that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control of the Company, you will remain in the employ of the Company (or the subsidiary thereof by which you are employed at the date such Potential Change in Control occurs) until the earliest of (x) a date which is six months from the occurrence of such Potential Change in Control of the Company, (y) the termination by you of your employment by reasons of Disability or Retirement (at your normal retirement age), as defined in Subsection 3(a), or (z) the occurrence of a Change in Control of the Company. (c) GOOD REASON. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, the occurrence after a Change in Control of the Company, of any of the following circumstances unless, in the case of paragraphs (i), (v), (vi), (vii) or (viii), such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination, as such terms are defined in Subsections 3(e) and 3(d), respectively, given in respect thereof: (i) The assignment to you of any duties inconsistent with your status as an executive officer of the Company (or your status in the position held by you immediately prior to the Change in Control) or a substantial adverse alteration in the nature or status of your responsibilities from those Janis L. Jones November 1, 1999 Page 6 in effect immediately prior to the Change in Control of the Company; (ii) A reduction by the Company in your annual base salary as in effect on the date hereof or as the same may be increased from time to time except for an across-the-board salary reduction of a specific percentage applied to all individuals at grade levels 26 and above and all individuals in similar grade levels of any person in control of the Company; (iii) The relocation of the Company's principal executive offices where you are working immediately prior to the Change in Control of the Company to a location more than 50 miles from the location of such offices immediately prior to the Change in Control of the Company or the Company's requiring you to be based anywhere other than the location of the Company's principal executive offices where you were working immediately prior to the Change in Control of the Company except for required travel on the Company's business to an extent substantially consistent with your business travel obligations during the year prior to the Change in Control; (iv) The failure by the Company, without your consent, to pay to you any portion of your current compensation except pursuant to an across-the-board compensation deferral of a specific percentage applied to all individuals in grade levels 26 or above and all individuals in similar grades of any person in control of the Company, or to pay to you any portion of an installment of deferred compensation under any deferred compensation program of the Company, within thirty days of the date such compensation is due; (v) The failure by the Company to continue in effect any compensation plan in which you are participating immediately prior to the Change in Control of the Company which is material to your total compensation, including but not limited to, the Company's Bonus Plan, Executive Deferred Compensation Plan, Deferred Compensation Plan, Restricted Janis L. Jones November 1, 1999 Page 7 Stock Plan, Stock Option Plan, or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue your participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed immediately prior to the Change in Control of the Company; (vi) The failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's pension, savings and retirement plan, life insurance, medical, health and accident, or disability plans in which you were participating at the time of the Change in Control of the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the Change in Control of the Company, or the failure by the Company to provide you with the number of paid vacation or PTO days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy and/or PTO policy in effect at the time of the Change in Control of the Company; (vii) The failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 5 hereof; or (viii) Any purported termination of your employment by the Company which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection 3(d) hereof and the requirements of Subsection 3(b) below; for purposes of this Agreement, no such purported termination shall be effective. Janis L. Jones November 1, 1999 Page 8 Your right to terminate your employment pursuant to this Agreement for Good Reason shall not be affected by your incapacity due to physical or mental illness. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. 3. TERMINATION FOLLOWING CHANGE IN CONTROL (OR PRIOR TO A CHANGE IN CONTROL IN SPECIFIC CIRCUMSTANCES). If any of the events described in Subsection 2(a) hereof constituting a Change in Control of the Company shall have occurred, then following such Change in Control, you shall be entitled to the benefits provided in Subsection 4(c) hereof: (1) if your employment was terminated within six months prior to the Change of Control under the circumstances described in Section 4.(2) below, or (2) if your employment is terminated during the term of this Agreement after such Change in Control if such termination is (y) by the Company, other than for Cause or (z) by you for Good Reason as provided in Subsection 3(c)(i) hereof or by your Voluntary Termination as provided in Subsection 3(c)(ii) hereof. (a) DISABILITY; RETIREMENT. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for six consecutive months, and within thirty days after written notice of termination is given you shall not have returned to the full-time performance of your duties, your employment may be terminated for "Disability". Termination by the Company or you of your employment based on "Retirement" shall mean termination at age 65 (or later) with ten years of service or retirement in accordance with any retirement contract between the Company and you. (b) CAUSE. Termination by the Company of your employment for "Cause" shall mean termination upon your engaging in willful and continued misconduct, or your willful and continued failure to substantially perform your duties with the Company (other than due to physical or mental illness), if such failure or misconduct is materially damaging or materially detrimental to the business and operations of the Company, provided that you shall have Janis L. Jones November 1, 1999 Page 9 received written notice of such failure or misconduct and shall have continued to engage in such failure or misconduct after 30 days following receipt of such notice from the Board, which notice specifically identifies the manner in which the Board believes that you have engaged in such failure or misconduct. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without your reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of failure to substantially perform your duties or of misconduct in accordance with the first sentence of this Subsection, and of continuing such failure to substantially perform your duties or misconduct as aforesaid after notice from the Board, and specifying the particulars thereof in detail. (c) VOLUNTARY RESIGNATION. After a Change in Control of the Company and for purposes of receiving the benefits provided in Subsection 4(c) hereof, you shall be entitled to terminate your employment by voluntary resignation given at any time during the two years following the occurrence of a Change in Control of the Company hereunder, provided such resignation is (i) by you for Good Reason or (ii) by you voluntarily without the necessity of asserting or establishing Good Reason and regardless of your age or any disability and regardless of any grounds that may exist for the termination of your employment if such voluntary termination occurs by written notice given by you to the Company during the thirty days immediately following the one year anniversary of the Change in Control (your "Voluntary Termination"), provided, however, for purposes of this Subsection 3(c)(ii) only, the language "25% or more" in Subsection 2(a)(i) hereof is changed to "a majority". Such resignation shall not be Janis L. Jones November 1, 1999 Page 10 deemed a breach of any employment contract between you and the Company. (d) NOTICE OF TERMINATION. Any purported termination of your employment by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (e) DATE OF TERMINATION, ETC. "Date of Termination" shall mean: (i) If your employment is terminated for Disability, thirty days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty day period), and (ii) If your employment is terminated pursuant to Subsection (b) or (c) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to Subsection (b) above shall not be less than thirty days, and in the case of a termination pursuant to Subsection (c) above shall not be less than fifteen nor more than sixty days (thirty days in case of your Voluntary Termination), respectively, from the date such Notice of Termination is given); provided that if within fifteen days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this provision), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been Janis L. Jones November 1, 1999 Page 11 perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation, bonus, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. Amounts paid under this Subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 4. COMPENSATION UPON TERMINATION FOLLOWING A CHANGE OF CONTROL (OR IF TERMINATION OCCURS PRIOR TO A CHANGE IN CONTROL IN SPECIFIC CIRCUMSTANCES). Following a Change in Control of the Company as defined in Subsection 2(a), then: (1) upon termination of your employment after such Change in Control, or (2) notwithstanding anything in this Agreement to the contrary, if termination of your employment occurred within six months prior to the Change in Control if such termination was by the Company without Cause by reason of the request of the person or persons (or their representatives) who subsequently acquire control of the Company in the Change of Control transaction, you shall be entitled to the following benefits: (a) Deleted. (b) If your employment shall be terminated by the Company for Cause, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus the Company shall pay all other amounts and honor all rights to which you are entitled under any compensation plan of the Company at the time such payments are due, and the Company shall have no other obligations to you under this Agreement. Janis L. Jones November 1, 1999 Page 12 (c) If your employment shall be terminated (y) after a Change of Control, by the Company other than for Cause or (z) after a Change of Control, by you for Good Reason or by your Voluntary Termination as provided in Subsection 3(c)(ii), or (yy) within six months prior to a Change of Control, by the Company under the circumstances described in Section 4.(2) above, then you shall be entitled to the benefits provided below: (i) The Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation or benefit plan of the Company, at the time such payments are due; (ii) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as severance pay to you a lump sum severance payment (the "Severance Payment") equal to 3.0 times the average of the Annual Compensation (as defined below) payable to you by the Company or any corporation affiliated with the Company within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"). Annual Compensation is defined to consist of two components: (a) Your annual salary in effect immediately prior to the Change in Control or in effect as of the Date of Termination, whichever annual salary is higher. Your annual salary for this purpose will be determined without any reduction for deferrals of such salary under any deferred compensation plan (qualified or unqualified) and without any reduction for any salary reductions used for making contributions to any group insurance plan of the Company or its affiliates and also without reduction for any other deductions from salary for any reason; plus (b) The average of your annual bonuses under the Company's Annual Management Bonus Plan, or any substitute or successor plan including the Key Executive Officer Annual Incentive Plan, for the three highest calendar years, in terms of annual bonus paid to you in such years, during the five calendar years preceding the calendar year in which the Change in Control occurred. Your annual bonuses for this purpose will be Janis L. Jones November 1, 1999 Page 13 determined without any reduction for deferrals under any deferred compensation plan (qualified or unqualified) and without any reduction for salary reductions used for making contributions to any group insurance plan of the Company or its affiliates and also without reduction for any other deductions from bonus for any reason. If you were not employed by the Company or its affiliates for a sufficient period of time to receive annual bonuses during each of the five calendar years before the Change in Control occurred, then the average bonus will be measured using the three highest calendar years, in terms of annual bonus paid to you, in all the consecutive calendar years immediately preceding the date the Change in Control occurred. If you were not eligible for three years of bonuses paid during the calendar years immediately preceding the date the Change in Control occurred, then the average bonus will be the average of the annual bonuses that were paid to you during such time under such Plan. If you were not eligible for any bonus during such time because of not being employed by the Company for a sufficient period of time to qualify for a previous bonus payment, then Annual Compensation will only consist of the salary component as provided above and will not include a bonus component. (iii) The Company shall also pay to you a pro rata amount of your target bonus (the bonus amount for your grade level assuming 100 bonus points are earned) as shown on the matrix for the Annual Management Bonus Plan (or any substitute or successor plan) attributable to the bonus plan year which contains your Date of Termination, regardless of whether or not any bonus is determined to be actually earned for such year, provided that the target bonus for calculating this pro rata payment will not be less than the target bonus under such Plan for the Plan year that contains the day immediately prior to the Change in Control (which target bonus will be the one that applies to your grade level at that time) regardless of whether or not any bonus was payable for such year. The pro-rata amount will be based on the percentage of days of your employment in the calendar year of the Date of Termination. For example, if Janis L. Jones November 1, 1999 Page 14 the Date of Termination is October 1 in a year with 365 days, with October 1 counted as the last day of employment for a total of 274 days of employment that year, then the pro-rata amount will be 75.06849% of target bonus (274 days divided by 365 days). In addition, the Company shall pay to you the amounts of any compensation or awards payable to you or due to you under any incentive compensation plan of the Company including, without limitation, the Company's Restricted Stock Plan, Stock Option Plan (the "Option Plan") and Annual Management Bonus Plan (or any substitute or successor plan including the Key Executive Officer Annual Incentive Plan) and under any agreements with you in connection therewith, and shall make any other payments and take any other actions and honor such rights you may have accrued under such plans and agreements including any rights you may have to payments after the Date of Termination, which will include the payment to you of any bonus earned during the bonus year fully completed prior to the Date of Termination if such Date of Termination occurs prior to the payment date for such bonus, it being understood, however, that the pro-rata payment provided for in the first sentence of this paragraph 4(c)(iii) is in lieu of any bonus earned for the bonus plan year during which occurred the Date of Termination. (iv) In lieu of shares of common stock of the Company or any securities of a successor company which shall have replaced such common stock ("Company Shares") issuable upon exercise of outstanding and unexercised options (whether or not they are fully exerciseable or "vested"), if any, granted to you under the Option Plan including options granted under the plan of any successor company that replaced or assumed the options under said Option Plan ("Options") (which Options shall be cancelled upon the making of the payment referred to below), you shall receive an amount in cash equal to the product of (y) the excess of the higher of the closing price of Company Shares as reported on the New York Stock Exchange on or nearest the Date of Termination (or, if not listed on such exchange, on a nationally recognized exchange or quotation system on which trading volume in Company Shares is highest) or the Janis L. Jones November 1, 1999 Page 15 highest per share price (including cash, securities and any other consideration) for Company Shares actually paid in connection with any change in control of the Company, over the per share exercise price of each Option held by you (whether or not then fully exercisable or "vested"), times (z) the number of Company Shares covered by each such option. (v) The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder). (vi) In the event that you become entitled to the payments (the "Severance Payments") provided under paragraphs (ii), (iii), and (iv), above (and Subsections (d) and (e), below), and if any of the Severance Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code, the Company shall pay to you at the time specified in paragraph (vii), below, an additional amount (the "Gross-Up Payment") such that the net amount retained by you (such net amount to be the amount remaining after deducting any Excise Tax on the Severance Payments and any federal, state and local income tax and Excise Tax payable on the payment provided for by this paragraph), shall be equal to the amount of the Severance Payments after deducting normal and ordinary taxes but not deducting (a) the Excise Tax and (b) any federal, state and local income tax and Excise tax payable on the payment provided for by this paragraph. For example, if the Severance Payments are $1,000,000 and if you are subject to the Excise Tax, then the Gross-Up Payment will be such that you will retain an amount of $1,000,000 less only any normal and ordinary taxes on such amount. (The Excise Tax and federal, state and local taxes and any Excise Tax on the payment provided by Janis L. Jones November 1, 1999 Page 16 this paragraph will not be deemed normal and ordinary taxes). For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, the following will apply: (A) Any other payments or benefits received or to be received by you in connection with a Change in Control of the Company or your termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control of the Company or any person affiliated with the Company or such person) shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and acceptable to you such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax; (B) The amount of the Severance Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (y) the total amount of the Severance Payments or (z) the amount of excess parachute payments within the meaning of Section 280G(b)(1) (after applying clause (A), above); and (C) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with proposed, temporary or final regulations under Sections 280G(d)(3) and (4) of the Code or, in the absence of Janis L. Jones November 1, 1999 Page 17 such regulations, in accordance with the principles of Section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay Federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of your residence on the Date of Termination, net of the maximum reduction in Federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the amount of Excise Tax attributable to Severance Payments is subsequently determined to be less than the amount taken into account hereunder at the time of termination of your employment, you shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and Federal (and state and local) income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax and/or a Federal (and state and local) income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax attributable to Severance Payments is determined to exceed the amount taken into account hereunder at the time of the termination of your employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional gross-up payment to you in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. (vii) The payments provided for in paragraphs (ii), (iii), (iv) and (vi) above, shall be made not later than the fifth day following the Date of Termination (or following Janis L. Jones November 1, 1999 Page 18 the date of the Change in Control if your employment is terminated under the circumstances described in Section 4.(2) above), provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth day after the Date of Termination (or following the date of the Change in Control if your employment is terminated under the circumstances described in Section 4.(2) above). In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (d) If your employment shall be terminated (y) by the Company other than for Cause, or (z) by you voluntarily for Good Reason or by your Voluntary Termination, or by the Company within six months prior to a Change in Control under the circumstances described in Section 4.(2) hereof, then for a twenty-four month period after such termination, the Company shall arrange to provide you with life, disability, accident and health insurance benefits substantially similar to those which you are receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by you pursuant to this Subsection 4(d) shall be reduced to the extent comparable benefits are actually received by you during the twenty-four month period following your termination, and any such benefits actually received by you shall be reported to the Company. (e) In the event a Change in Control of the Company occurs while you are employed with the Company or its affiliates but after you and the Company have executed an agreement that expressly provides for your subsequent retirement including an agreement that expressly provides for your early retirement, then Janis L. Jones November 1, 1999 Page 19 the present value, computed using a discount rate of 8% per annum, of (i) the total amount of all unpaid deferred payments as payable to you in accordance with the payment schedule that you elected when the deferral was agreed to and using the plan interest rate applicable to your situation, including, without limitation, any unpaid deferred payments to be paid to you under the Company's Executive Deferred Compensation Plan and the Company's other deferred compensation plans, and (ii) the total amount of all other payments payable or to become payable to you or your estate or beneficiary under such retirement agreement (other than payments payable pursuant to a plan qualified under Section 401(a) of the Internal Revenue Code) shall be accelerated and paid to you (or your estate or beneficiary if applicable) in a lump sum cash payment within five business days after the occurrence of the Change in Control of the Company. In addition, if you and the Company or its affiliates have executed such a retirement agreement and if the Change in Control of the Company occurs before the effective date of your retirement, then you shall receive the Severance Payment payable under Subsection 4(c)(ii) herein in addition to the lump sum cash payment of the present value of your total unpaid deferred payments and other payments under the retirement agreement as aforesaid. All benefits (other than the payments accelerated and paid out to you in a lump sum as provided above) to which you or your estate or any beneficiary are entitled under such retirement agreement shall continue in effect notwithstanding the Change in Control of the Company. This Subsection 4(e) shall survive your retirement. (f) Notwithstanding that a Change in Control shall not have yet occurred, if you so elect, by written notice to the Company given at any time after the date hereof and prior to the time such amounts are otherwise payable to you: (i) The Company shall deposit with an escrow agent, pursuant to an escrow agreement between the Company and such escrow agent, a sum of money, or other property permitted by such escrow agreement, which are substantially sufficient in the opinion of the Company's management to fund payment of the following amounts to you, as such amounts become payable (provided such deposit will not be necessary to the extent Janis L. Jones November 1, 1999 Page 20 the escrow already contains funds or other assets which are substantially sufficient in the opinion of the Company's management to fund such payments): (A) Amounts payable, or to become payable, to you or to your beneficiaries or your estate under the Company's Executive Deferred Compensation Plan and under any agreements related thereto in existence at the time of your election to make the deposit into escrow. (B) Amounts payable, or to become payable, to you or to your beneficiaries or your estate by reason of your deferral of payments payable to you prior to the date of your election to make the deposit into escrow under any other deferred compensation agreements between you and the Company in existence at the time of your election to make the deposit into escrow, including but not limited to deferred compensation agreements relating to the deferral of salary or bonuses. (C) Amounts payable, or to become payable, to you or to your beneficiaries or your estate under any executed agreement that expressly provides for your retirement from the Company (including payments described under Subsection 4(e) above) which agreement is in existence at the time of your election to make the deposit into escrow, other than amounts payable by a plan qualified under Section 401(a) of the Code. (D) Subject to the approval of the Committee, amounts then due and payable to you, but not yet paid, under any other benefit plan or incentive compensation plan of the Company (whether such amounts are stock or cash) other than amounts payable to you under a plan qualified under Section 401(a) of the Code. (ii) Within 5 days after the occurrence of a Potential Change of Control, the Company shall deposit with an escrow Janis L. Jones November 1, 1999 Page 21 agent (which shall be the same escrow agent, if one exists, acting pursuant to clause (i) of this Subsection 4(f)), pursuant to an escrow agreement between the Company and such escrow agent, a sum of money, or other property permitted by such escrow agreement, substantially sufficient in the opinion of Company management to fund the payment to you of the amounts specified in Subsection 4(c) of this Agreement. (iii) It is intended that any amounts deposited in escrow pursuant to the provisions of clause (i) or (ii) of this Subsection 4(f), shall be subject to the claims of the Company's creditors, as set forth in the form of such escrow agreement. (g) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by you to the Company, or otherwise (except as specifically provided in this Section 4). (h) In addition to all other amounts payable to you under this Section 4, you shall be entitled to receive all benefits payable to you under any benefit plan of the Company in which you participate to the extent such benefits are not paid under this Agreement. 5. SUCCESSORS; BINDING AGREEMENT. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation Janis L. Jones November 1, 1999 Page 22 from the Company in the same amount and on the same terms as you would be entitled to hereunder if you terminate your employment voluntarily for Good Reason following a Change in Control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devises and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 6. NOTICES. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, by FAX if available, or by overnight courier service, addressed as follows: To the Company: Secretary Harrah's Entertainment, Inc. 1023 Cherry Road Memphis, TN 38117 FAX: 901-762-8735 To you: Addressed to your name at your office address (or FAX number) with the Company or its affiliates (or any successor thereto) at the time the notice is Janis L. Jones November 1, 1999 Page 23 sent and your home address at that time; and if you are not employed by the Company at the time of the notice, your home address as shown on the records of the Company or its affiliates (or any successor thereto) on the date of the notice. To such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 7. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Section 4 shall survive the expiration of the term of this Agreement. 8. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but Janis L. Jones November 1, 1999 Page 24 all of which together will constitute one and the same instrument. 10. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Memphis, Tennessee in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 11. SIMILAR PROVISIONS IN OTHER AGREEMENT. The Severance Payment under this Agreement supersedes and replaces any previous severance agreement and any other severance payment to which you may be entitled under any previous agreement between you and the Company or its affiliates. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our binding agreement on this subject. Very truly yours, HARRAH'S ENTERTAINMENT, INC. By: /s/STEPHEN H. BRAMMELL --------------------------- Stephen H. Brammell Senior Vice President Agreed: /s/ JANIS L. JONES - ------------------------- Janis L. Jones EX-10.(46) 9 EXHIBIT 10(46) Exhibit 10(46) Amendment to Harrah's Entertainment, Inc. 1990 Restricted Stock Plan Harrah's Entertainment, Inc. (the "Company") hereby adopts this Amendment to the 1990 Restricted Stock Plan (the "Plan"), effective November 11, 1999. Section 4(b)(1) of the Company's 1990 Restricted Stock Plan, as amended, is amended by adding the following sentence at the end thereof: "If a member of the Board continues in service after the last such installment vests for that member, then such member will automatically receive a new award of 1,000 restricted shares (effective the April 2 immediately following the last April 1 vesting date except that for the last vesting on April 1, 1999, the effective date of this award will be November 12, 1999); these shares will be subject to the same terms and conditions as the original award of 1,000 restricted shares and will vest in 100 share installments on each subsequent April 1 following the last vesting of the original 1,000 share award provided such person is a member of the Board on the vesting date." This Amendment was duly adopted by the Human Resources Committee of the Board of Directors of the Company on November 11, 1999. /s/ REBECCA W. BALLOU ---------------------- Rebecca W. Ballou Secretary of Harrah's Entertainment, Inc. EX-10.(52) 10 EXHIBIT 10(52) Exhibit 10(52) Description of TARSAP Vesting Adjustment Gary W. Loveman Date: November 11, 1999 The Human Resources Committee of the Board of Directors modified the TARSAP vesting schedule of Gary W. Loveman as follows:
Current Performance Performance Vesting Vesting As Modified Plan Year (cumulative) (cumulative) Vest Date - --------- -------------------- ------------------------ --------- 1999 43.4% 50% 50.0% (target) 60% (target) 3/1/00 56.8% 70% 2000 73.4% 80% 80.0% (target) 90% (target) 3/1/00 86.8 % 100%
EX-11 11 EXHIBIT 11 EXHIBIT 11 HARRAH'S ENTERTAINMENT, INC. COMPUTATIONS OF PER SHARE EARNINGS
YEAR ENDED DECEMBER 31, ------------------------------------------ 1999 1998 1997 ------------ ------------ ------------ Income before extraordinary losses................. $219,503,000 $121,717,000 $107,522,000 Extraordinary losses, net.......................... (11,033,000) (19,693,000) (8,134,000) ------------ ------------ ------------ Net income................................. $208,470,000 $102,024,000 $ 99,388,000 ============ ============ ============ BASIC EARNINGS PER SHARE Weighted average number of common shares outstanding...................................... 126,071,980 100,231,327 100,618,139 ============ ============ ============ BASIC EARNINGS PER COMMON SHARE Income before extraordinary losses................. $ 1.74 $ 1.21 $ 1.07 Extraordinary losses, net.......................... (0.09) (0.19) (0.08) ------------ ------------ ------------ Net income................................. $ 1.65 $ 1.02 $ 0.99 ============ ============ ============ DILUTED EARNINGS PER SHARE Weighted average number of common shares outstanding...................................... 126,071,980 100,231,327 100,618,139 Additional shares based on average market price for period applicable to: Restricted stock............................. 789,690 215,513 86,827 Stock options................................ 1,886,469 1,072,833 549,101 ------------ ------------ ------------ Average number of common and common equivalent shares outstanding............................... 128,748,139 101,519,673 101,254,067 ============ ============ ============ DILUTED EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Income before extraordinary losses................. $ 1.71 $ 1.19 $ 1.06 Extraordinary losses, net.......................... (.09) (0.19) (0.08) ------------ ------------ ------------ Net income................................. $ 1.62 $ 1.00 $ 0.98 ============ ============ ============
EX-12 12 EXHIBIT 12 EXHIBIT 12 HARRAH'S ENTERTAINMENT, INC. COMPUTATION OF RATIOS (IN THOUSANDS, EXCEPT RATIO AMOUNTS)
1999 (a) 1998 (b) 1997 (c) 1996 (d) 1995 (e) --------- --------- --------- --------- --------- RETURN ON REVENUES-CONTINUING Income from continuing operations..................... $ 219,503 $ 121,717 $ 107,522 $ 98,897 $ 78,810 Revenues.............................................. 3,024,428 2,004,015 1,619,210 1,586,020 1,578,795 Return.............................................. 7.3% 6.1% 6.6% 6.2% 5.0% RETURN ON AVERAGE INVESTED CAPITAL Income from continuing operations..................... $ 219,503 $ 121,717 $ 107,522 $ 98,897 $ 78,810 Add: Interest expense after tax....................... 121,846 72,707 48,233 43,187 56,650 --------- --------- --------- --------- --------- $ 341,349 $ 194,424 $ 155,755 $ 142,084 $ 135,460 ========= ========= ========= ========= ========= Average invested capital.............................. $4,231,789 $2,426,028 $1,815,869 $1,619,880 $1,377,354 ========= ========= ========= ========= ========= Return.............................................. 8.1% 8.0% 8.6% 8.8% 9.8% ========= ========= ========= ========= ========= RETURN ON AVERAGE EQUITY (f) Income before extraordinary items..................... $ 219,503 $ 121,717 $ 107,522 $ 98,897 $ 78,846 Average equity........................................ 1,416,591 793,492 722,298 682,489 618,778 Return.............................................. 15.5% 15.3% 14.9% 14.5% 12.7% RATIO OF EARNINGS TO FIXED CHARGES (g) Income from continuing operations..................... $ 219,503 $ 121,717 $ 107,522 $ 98,897 $ 78,810 Add: Provision for income taxes.......................... 128,914 74,600 68,746 67,316 60,677 Interest expense.................................... 193,407 117,270 79,071 69,968 73,890 Interest included in rental expense................. 10,801 9,718 7,692 7,663 6,738 Amortization of capitalized interest................ 1,359 1,444 606 763 580 (Income) or loss from equity investments............ 33,042 4,709 (473) (473) -- Adjustment to include 100% of nonconsolidated, majority-owned affiliate (h)...................... -- 12,254 -- -- (34,775) --------- --------- --------- --------- --------- Earnings as defined................................... $ 587,026 $ 341,712 $ 263,164 $ 244,134 $ 185,920 ========= ========= ========= ========= ========= Fixed charges: Interest expense.................................... $ 193,407 $ 117,270 $ 79,071 $ 69,968 $ 73,890 Capitalized interest................................ 13,118 2,526 6,860 11,025 3,636 Interest included in rental expense................. 10,801 9,718 7,692 7,663 6,738 Adjustment to include 100% of nonconsolidated, majority-owned affiliate (h).................... -- 12,071 -- -- 56,652 --------- --------- --------- --------- --------- Total fixed charges................................... $ 217,326 $ 141,585 $ 93,623 $ 88,656 $ 140,916 ========= ========= ========= ========= ========= Ratio of earnings to fixed charges.................. 2.7 2.4 2.8 2.8 1.3 ========= ========= ========= ========= ========= COMPUTATION OF EBITDA AND ADJUSTED EBITDA Income from continuing operations..................... $ 219,503 $ 121,717 $ 107,522 $ 98,897 $ 78,810 Add/(less): Income tax provision................................ 128,914 74,600 68,746 67,316 60,677 Interest expense.................................... 193,407 117,270 79,071 69,968 73,890 Depreciation and amortization....................... 218,299 159,183 122,396 102,338 95,388 Amortization of deferred finance charge............. (4,459) (4,866) (3,021) (3,151) (3,626) Amortization of debt discounts and premiums......... 543 74 (12) (21) (53) --------- --------- --------- --------- --------- Earnings before interest, taxes, depreciation and amortization (EBITDA)(i)............................ 756,207 467,978 374,702 335,347 305,086 Add/(less): Write-downs and reserves............................ 2,235 7,474 13,806 52,188 93,348 Project opening costs............................... 19,961 11,066 19,518 5,907 450 Venture restructuring costs......................... (322) 6,013 6,944 14,601 -- Gains on sales of ownership interests in nonconsolidated affiliates........................ (59,824) (13,155) (37,388) -- (11,773) Gain on sale of land................................ -- (6,607) -- -- -- Cancellation of management contract................. -- (10,254) -- -- -- Costs in connection with Missouri initiative........ 56 4,994 -- -- -- --------- --------- --------- --------- --------- Adjusted EBITDA (i)................................... $ 718,313 $ 467,509 $ 377,582 $ 408,043 $ 387,111 ========= ========= ========= ========= =========
- ------------------------------ (a) 1999 includes $2.2 million in pretax charges for write-downs and reserves and $59.8 million gains on the sales of equity interests in nonconsolidated subsidiaries. 1999 also includes the financial results of Rio Hotel & Casino, Inc., from its January 1, 1999, date of acquistion. HARRAH'S ENTERTAINMENT, INC. COMPUTATION OF RATIOS (IN THOUSANDS, EXCEPT RATIO AMOUNTS) (b) 1998 includes $7.5 million in pretax charges for write-downs and reserves and a $13.2 million gain on the sale of equity interests in a nonconsolidated subsidiary. 1998 also includes the financial results of Showboat, Inc., from its June 1, 1998, date of acquisition. (c) 1997 includes $13.8 million in pretax charges for write-downs and reserves and a $37.4 million gain on the sale of equity in a New Zealand subsidiary. (d) 1996 includes $52.2 million in pretax charges for write-downs and reserves, primarily related to write-downs of impaired long-lived assets and reserves for contingent liability exposure. (e) 1995 includes $93.3 million in pretax charges for write-downs, primarily related to our New Orleans casino development project. (f) Amounts for the period prior to the June 30, 1995, dividend of Promus Hotel Corporation common stock to the Company's stockholders reflect the impact of the financial position and results of operations for the discontinued hotel business in that period. (g) As discussed in Note 12 to the Consolidated Financial Statements in the 1999 Harrah's Entertainment Annual Report, the Company has guaranteed certain third party loans in connection with its casino development activities. The above ratio computation excludes estimated fixed charges associated with these guarantees as follows: 1999, $6.2 million; 1998, $7.9 million; 1997, $7.8 million; 1996, $5.2 million; and 1995, $6.8 million. (h) For purposes of computing this ratio, "earnings" consist of income before income taxes plus fixed charges (excluding capitalized interest) and minority interests (relating to subsidiaries whose fixed charges are included in the computation), excluding equity in undistributed earnings of less than 50% owned investments. "Fixed charges" include interest whether expensed or capitalized, amortization of debt expense, discount or premium related to indebtedness and such portion of rental expense that we deem to be representative of interest. As required by the rules which govern the computation of this ratio, both earnings and fixed charges are adjusted where appropriate to include the financial results for the Company's nonconsolidated majority-owned subsidiaries. Accordingly, 1994 and 1995 have been adjusted to include the financial results and fixed charges for Harrah's Jazz Company. For 1998, the computation of the ratio has been adjusted to include the financial results and fixed charges of the East Chicago partnership from its June 1, 1998, date of acquisition. (i) Adjusted EBITDA consists of EBITDA (earnings before interest, taxes, depreciation and amortization) before write-downs, reserves and recoveries, project opening costs, venture restructuring costs, gains on sales of equity interests and nonoperating assets and provisions for settlement of litigation and related costs. EBITDA and adjusted EBITDA are supplemental financial measures used by management, as well as by industry analysts, to evaluate Harrah's operations. However, EBITDA and adjusted EBITDA should not be construed as an alternative to Income from operations (as an indicator of Harrah's operating performance) or to Cash flows from operating activities (as a measure of liquidity) as determined in accordance with generally accepted accounting principles and presented in the Company's Consolidated Financial Statements. All companies do not calculate EBITDA in the same manner. As a result, EBITDA as presented by our Company, may not be comparable to similarly titled measures presented by other companies. EX-13 13 EXHIBIT 13 Exhibit 13 FINANCIAL AND STATISTICAL HIGHLIGHTS (in millions, except common stock data and financial percentages and ratios) (See Notes 1 and 2 to the Consolidated Financial Statements)
Compound Growth 1999(a) 1998(b) 1997(c) 1996(d) 1995(e) Rate --------- --------- --------- --------- --------- --------- OPERATING DATA Revenues $ 3,024.4 $ 2,004.0 $ 1,619.2 $ 1,586.0 $ 1,578.8 17.7% Income from operations 481.0 287.8 213.5 236.9 209.4 23.1% Income before income taxes and minority interest 359.6 203.3 183.6 172.1 151.6 24.1% Income from continuing operations 219.5 121.7 107.5 98.9 78.8 29.2% Net income(f) 208.5 102.0 99.4 98.9 78.8 27.5% COMMON STOCK DATA Earnings per share-diluted Continuing operations 1.71 1.19 1.06 0.95 0.76 22.4% Net income(f) 1.62 1.00 0.98 0.95 0.76 20.7% FINANCIAL POSITION Total assets 4,766.8 3,286.3 2,005.5 1,974.1 1,636.7 30.6% Long-term debt 2,540.3 1,999.4 924.4 889.5 753.7 35.5% Stockholders' equity 1,486.3 851.4 735.5 719.7 585.5 26.2%
(a) 1999 includes $2.2 million in pretax charges for write-downs, reserves and recoveries (see Note 7) and $59.8 million of gains from sales of our equity interests in nonconsolidated affiliates. 1999 also includes the financial results of Rio Hotel & Casino, Inc., from its January 1, 1999, date of acquisition. (b) 1998 includes $7.5 million in pretax charges for write-downs and reserves (see Note 7) and a $13.2 million gain on the sale of our equity interest in a nonconsolidated restaurant subsidiary. 1998 also includes the financial results of Showboat, Inc., from its June 1, 1998, date of acquisition. (c) 1997 includes $13.8 million in pretax charges for write-downs and reserves (see Note 7) and a $37.4 million gain on the sale of our equity interest in a New Zealand subsidiary. (d) 1996 includes $52.2 million in pretax charges for write-downs and reserves, primarily related to write-downs of impaired long-lived assets and reserves for contingent liability exposure. (e) 1995 includes $93.3 million in pretax charges for write-downs, primarily related to our New Orleans casino development project. (f) Amounts for the period prior to the June 30, 1995, dividend of Promus Hotel Corporation common stock to our stockholders reflect the impact of the financial position and results of operations for the discontinued hotel business in that period. CASH FLOWS Provided by operating activities 514.4 300.4 255.1 285.7 213.7 24.6% EBITDA(g) 756.2 468.0 374.7 335.3 305.1 25.5% Adjusted EBITDA(g) 718.3 467.5 377.6 408.0 387.1 16.7% Capital expenditures 430.1 245.2 290.5 390.0 231.8 16.7% FINANCIAL PERCENTAGES AND RATIOS Return on revenues-continuing 7.3% 6.1% 6.6% 6.2% 5.0% Return on average invested capital(h) 8.1% 8.0% 8.6% 8.8% 9.8% Return on average equity(h) 15.5% 15.3% 14.9% 14.5% 12.7% Ratio of earnings to fixed charges 2.7 2.4 2.8 2.8 1.3
(g) EBITDA consists of earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA consists of EBITDA before write-downs, reserves and recoveries, project opening costs, venture restructuring costs, gains on sales of subsidiary equity interests and nonoperating assets and costs related to a successful ballot initiative in Missouri. See Exhibit 12 to our 1999 Form 10-K for the computations of EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are supplemental financial measures used by management, as well as industry analysts, to evaluate our operations. However, EBITDA and Adjusted EBITDA should not be construed as an alternative to Income from operations (as an indicator of our operating performance) or to Cash Flows from operating activities (as a measure of liquidity) as determined in accordance with generally accepted accounting principles and presented in the accompanying Consolidated Financial Statements. All companies do not calculate EBITDA in the same manner. As a result, EBITDA may not be comparable to similarly titled measures presented by other companies. (h) Ratio computed based on Income from continuing operations. See Exhibit 12 to our 1999 Form 10-K computations of these ratios. Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Harrah's Entertainment, Inc. is the leading consumer marketing company in the gaming industry. Operating casinos in more markets than any other casino company, we seek to differentiate ourselves through a unique strategy aimed at building loyalty to our brands from our guests. To accomplish this objective, we have focused on continued investment and emphasis on marketing, technology and database management, industry-leading customer reward and incentive programs, a commitment to service and a broadened national appeal. We are building our Harrah's, Rio and Showboat brands with a focus on those customers who are avid, experienced players, especially those who play in more than one market, and, as we will review with you in this discussion, our 1999 results reflect the success of our strategy. In this discussion, the words "Harrah's Entertainment," "Company," "we," "our," and "us" refer to Harrah's Entertainment, Inc., together with its subsidiaries where appropriate. OPERATING RESULTS AND DEVELOPMENT PLANS Overall - -------
Percentage Increase/(Decrease) (In millions, except --------------------- earnings per share) 1999 1998 1997 99 vs 98 98 vs 97 - -------------------------------------- -------- -------- -------- -------- -------- Revenues ............................. $3,024.4 $2,004.0 $1,619.2 50.9% 23.8% Operating profit ..................... 594.8 354.2 260.5 67.9% 36.0% Income from operations ............... 481.0 287.8 213.5 67.1% 34.8% Income before extraordinary items .... 219.5 121.7 107.5 80.4% 13.2% Net income ........................... 208.5 102.0 99.4 104.4% 2.6% Earnings per share-diluted Before extraordinary items ......... 1.71 1.19 1.06 43.7% 12.3% Net income ......................... 1.62 1.00 0.98 62.0% 2.0% Operating margin ..................... 15.9% 14.4% 13.2% 1.5pts 1.2pts
As reflected in the table above, we experienced significant growth in our financial results in 1999 as compared to 1998, setting new records for almost every measurement of financial performance, including revenues, income from operations and diluted earnings per share. This continues the trends we reported for 1998 as compared to 1997. Significant contributors to our growth over the three years presented above were the strategic acquisitions of Rio Hotel & Casino, Inc. ("Rio") and Showboat, Inc. ("Showboat"). However, even without the impact of these acquisitions, we would have achieved record results in 1999. The following table reflects the combined operating results for the 11 company-owned casinos open throughout the three-year period and Harrah's St. Louis, which opened in March 1997.
Percentage Increase/(Decrease) ---------------------- (In millions) 1999 1998 1997 99 vs 98 98 vs 97 - -------------------------------------- -------- -------- -------- -------- --------- Casino revenues ...................... $1,626.5 $1,458.9 $1,328.0 11.5% 9.9% Total revenues ....................... 1,896.4 1,720.5 1,571.3 10.2% 9.5% Operating profit ..................... 384.1 306.7 287.2 25.2% 6.8% Operating margin ..................... 20.3% 17.8% 18.3% 2.5pts (0.5)pts
Strategic Acquisitions - ---------------------- An important facet of our growth has been the pursuit of strategic acquisitions to further enhance our distribution, strengthen our access to target customers and leverage our technological and centralized services infrastructure. The following provides a brief review of our acquisition activities. SHOWBOAT, INC. We acquired Showboat on June 1, 1998, for approximately $520.0 million in cash and assumption of $635.0 million of Showboat's outstanding debt. Our acquisition of Showboat gives us a stronger presence in the two key growth and feeder markets of Atlantic City and Chicago. In Atlantic City, Showboat provides us with a very strong additional brand in a strategic Boardwalk location that complements our Harrah's location in the Marina district. In the Chicago market, the combination of Showboat's riverboat casino complex southeast of Chicago in neighboring Indiana, which has been re-branded as a "Harrah's" property, and Harrah's in Joliet, Illinois, southwest of Chicago, makes it possible for us to seek the loyalty of a broader share of visitors from the Chicago area. Our acquisition of Showboat was accounted for as a purchase. RIO HOTEL & CASINO, INC. We completed our merger with Rio on January 1, 1999, issuing approximately 25 million shares of our common stock to acquire all of Rio's outstanding shares in a one-for-one transaction and assuming Rio's outstanding debt. The addition of the Rio to the family of Harrah's Entertainment properties provides our customers who frequent Las Vegas a choice between two distinct, high-quality experiences, a high quality Las Vegas strip destination and a high quality resort experience. In addition to the Rio property, our acquisition also Management's Discussion and Analysis of Financial Condition and Results of Operations, continued - -------------------------------------------------------------------------------- included Rio Secco, an 18-hole, championship golf course, and approximately 35 acres adjacent to the Rio, which is available for further development. We accounted for our merger with Rio as a purchase. PLAYERS INTERNATIONAL, INC. In August 1999, we announced the signing of a definitive agreement to acquire Players International, Inc. ("Players"). Players operates a dockside riverboat casino on the Ohio River in Metropolis, Illinois; two cruising riverboat casinos in Lake Charles, Louisiana; two dockside riverboat casinos in Maryland Heights, Missouri; and a horse racetrack in Paducah, Kentucky. Players and Harrah's jointly operate a landside hotel and entertainment facility at the Maryland Heights property, a suburb of St. Louis. Players' shareholders will receive $8.50 in cash for each share outstanding and we will assume approximately $150 million of Players' debt. The acquisition will be funded through our Bank Facility (see Debt and Liquidity section) and will be accounted for as a purchase. The purchase price will be allocated to the underlying assets and liabilities based upon their estimated fair values at the date of the acquisition. Completion of the transaction is subject to various conditions, including regulatory approvals. Prior to entering into the agreement with us, Players terminated a previously announced merger agreement with another gaming company. As a result of the termination of that agreement, Players paid a $13.5 million break-up fee pursuant to that agreement's terms. We provided the funds necessary to make this payment. The funds advanced are a component of the total purchase price we will pay for Players and, at December 31, 1999, were included in Deferred costs, trademarks and other assets in the Consolidated Balance Sheets. During fourth quarter 1999, we acquired approximately 1.0 million shares of Players common stock in a negotiated transaction at a cost of $8.37 per share. Western Region - --------------
Percentage Increase/(Decrease) ---------------------- (In millions) 1999 1998 1997 99 vs 98 98 vs 97 - ------------------------------------- --------- ------ ------ -------- --------- Casino revenues ..................... $ 730.1 $457.6 $408.3 59.5% 12.1% Total revenues ...................... 1,147.9 642.6 576.0 78.6% 11.6% Operating profit .................... 182.4 94.3 88.3 93.4% 6.8% Operating margin .................... 15.9% 14.7% 15.3% 1.2pts (0.6)pts
SOUTHERN NEVADA. The acquisition of Rio in 1999 contributed $463.7 million in revenues in the Western region. However, even without the addition of Rio, Southern Nevada posted record revenues for 1999, an increase of 6.8% over 1998 revenues. Harrah's Las Vegas set record revenues for the second consecutive year, and Harrah's Laughlin exceeded their previous revenue record by 4.5%. Operating profit for Southern Nevada, excluding the impact of Rio, increased 30.5% over 1998. Revenue and operating profit increases in Southern Nevada for 1998 versus 1997 were due to improved results reported by Harrah's Las Vegas. That property's 1997 results were impacted by construction disruptions associated with a $200 million expansion and renovation project completed in fourth quarter 1997. Rio is expected to complete construction of a showroom complex during second quarter 2000. The showroom will include a 1,500 seat, state-of-the-art theater with balcony; a three-level lobby with hospitality center; and a theater promenade with approximately 10,000 square feet of retail space. The showroom complex is located adjacent to the Pavilion, Rio's new 110,000 square foot entertainment/convention complex which opened in March 1999. The showroom complex is expected to cost approximately $35 million, of which $24.6 million had been spent through December 31, 1999. At the time of the Showboat acquisition, the Showboat Las Vegas property was determined to be a nonstrategic asset for us and is reported as an asset-held-for-sale in our financial statements. The sale of this property is expected to be completed in March 2000, and no gain or loss is expected to result from the sale. NORTHERN NEVADA. For 1999, Northern Nevada revenues increased 6.1% over 1998, and operating profit was 14.6% higher than the prior year. This comparison continues the trend reflected in the 1998 versus 1997 comparison in which revenues increased 3.0% and operating profit increased 4.5%. Central Region - --------------
Percentage Increase/(Decrease) --------------------- (In millions) 1999 1998 1997 99 vs 98 98 vs 97 - ------------------------------------- -------- ------ ------ -------- -------- Casino revenues ..................... $ 970.9 $661.9 $614.8 46.7% 7.7 % Total revenues ...................... 1,020.1 702.7 656.2 45.2% 7.1 % Operating profit .................... 201.8 121.0 124.2 66.8% (2.6)% Operating margin .................... 19.8% 17.2% 18.9% 2.6pts (1.7)pts
The revenue and operating profit increases reported by the Central Region for 1999 versus 1998 are primarily due to the consolidation in 1999 of the East Chicago property, the conversion of Harrah's Joliet from a cruising to a dockside operation and continued improvements at our St. Louis property. Excluding the impact of the consolidation of the East Chicago property, Central Region revenues increased 14.7% over 1998 and operating profit increased 36.7% for the same period. These improvements follow a decline in overall operating profits and margins from 1997 to 1998 due to new and increased competition in all riverboat markets, higher gaming taxes paid by Harrah's Joliet, and costs related to a successful ballot initiative in Missouri. CHICAGOLAND. In the Chicagoland market, our operating results benefited from both the consolidation and re-branding in first quarter 1999 of the East Chicago property and rule changes governing the operations of Harrah's Joliet. After our acquisition of Showboat, we owned a 55% noncontrolling interest in the partnership that owned the East Chicago Showboat property. During 1998, our share of income from the East Chicago casino was included in Equity in losses of nonconsolidated affiliates in the Consolidated Statements of Income. In first quarter 1999, we consummated an agreement with our partners owning the other 45% interest in the East Chicago Showboat property to increase our ownership interest to 99.55%, and partnership agreements were amended to give us greater flexibility in operating this property. Consequently, we began consolidating this partnership with the financial results of our other businesses in first quarter 1999. Revenues increased 32.9% at Harrah's Joliet in Illinois in 1999 compared to the prior year, and operating profit increased 61.0%. In late June 1999, cruise scheduling and ticketing were eliminated at Harrah's Joliet, and business levels have increased significantly since going "dockside". Operating profit at the Joliet property declined in 1998 from 1997 levels due primarily to the impact of higher Illinois gaming taxes. During fourth quarter 1999, we completed construction of a 204-suite hotel at Harrah's Joliet. This follows the completion in first quarter 1998 of a climate-controlled walkway, joining Harrah's Joliet's self-parking garage to its pavilion, and a new VIP lounge. We are now considering further modifications to the property to take advantage of the dockside operating environment. LOUISIANA. Harrah's Shreveport's 1999 revenues declined 3.8% and operating profit declined 11.0% compared to 1998 due to substantial new additional hotel and entertainment amenities added by our competitors in 1998. This performance follows a 3.0% decline in revenues in 1998 compared to 1997 and a 10.6% decline in operating profit for the same period. Construction began in second quarter 1999 at Harrah's Shreveport on a 514-room hotel with almost 18,000 sq. ft. of convention center space. The new hotel and amenity expansion is expected to cost $146.6 million, of which $28.7 million has been spent through December 31, 1999. The expansion is scheduled to open in fourth quarter 2000. MISSISSIPPI. Combined revenues from our Mississippi operations increased 6.1% in 1999 from 1998 levels. 1998 revenues were down 6.6% from 1997 levels, due to the closing of our original Tunica property in second quarter 1997. Our Mississippi properties' combined operating profit in 1999 was $5.2 million, compared to a combined loss for 1998 due to disrupted operations at Harrah's Tunica for much of the year in connection with our testing of service initiatives at that property. In March 1999, we consummated the sale of our original Tunica property to another casino company. Our gain from this disposition is reported in Writedowns, reserves and recoveries in the Consolidated Statements of Income. MISSOURI. Revenues at Harrah's North Kansas City increased 8.8% in 1999 over the prior year and operating profit increased 9.3% for the same period. 1998 revenues were up 3.1% from 1997 and operating profit was up 10.7% for the same period. Harrah's St. Louis Riverport reported record revenues and operating income for 1999, up 31.5% and 86.6%, respectively, over 1998 levels. 1998 operating income was $15.8 million compared to a loss of approximately $1.4 million for 1997. Revenues were $44.1 million higher in 1998 than they were for the approximate ten-month period in which the property was open in 1997. Our pro rata share of the operating losses of the shoreside facilities was $10.4 million for 1999, $10.8 million for 1998 and $11.5 million for 1997. These operating losses are included in Equity in losses of nonconsolidated subsidiaries in the Consolidated Statements of Income (see Other Factors Affecting Net Income). The shoreside facilities are a joint venture with Players. Upon completion of our acquisition of Players, we will own 100% of the joint venture operations. During 1998, we incurred $5.0 million of nonrecurring costs in connection with a successful campaign for a referendum in Missouri seeking approval of games of chance on riverboats in artificial basins. In November 1998, the people of Missouri voted to amend that State's Constitution to deem all floating casino facilities in compliance with state law. In third quarter 1998, we acquired the assets of a riverboat casino in Kansas City formerly operated by a third party, including a 28,000 square foot casino riverboat, shoreside facilities, parking garage, certain land, all gaming equipment and computerized customer databases. Our plans for the acquired riverboat, land and shoreside facilities have not been finalized. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued - -------------------------------------------------------------------------------- Eastern Region - --------------
Percentage Increase/(Decrease) --------------------- (In millions) 1999 1998 1997 99 vs 98 98 vs 97 - ---------------------------------------- ------ ------ ------ -------- -------- Casino revenues ........................ $723.3 $540.8 $314.9 33.7% 71.7% Total revenues ......................... 775.6 590.8 349.5 31.3% 69.0% Operating profit ....................... 173.8 129.2 73.3 34.5% 76.3% Operating margin ....................... 22.4% 21.9% 21.0% 0.5pts 0.9pts
Our Eastern Region is comprised of the operating results of Harrah's Atlantic City and the Atlantic City Showboat property. Harrah's Atlantic City achieved record revenues for the third consecutive year in 1999, and operating profit increased 18.9% in 1999 compared to 1998. The Eastern Region's 1999 results include a full year of operations from the Atlantic City Showboat, while 1998 results include only seven months. We continue to monitor the progress of the development of new casino projects in Atlantic City by other casino companies as we consider possible expansions of our properties to maintain our competitive position. No decisions concerning any such expansions have been made. Managed Casinos and Other - -------------------------
Percentage Increase/(Decrease) ---------------------- (In millions) 1999 1998 1997 99 vs 98 98 vs 97 - ---------------------------------------- ----- ----- ----- --------- -------- Revenues ............................... $77.9 $65.6 $33.2 18.8% 97.6% Operating profit ....................... 43.3 25.3 2.9 71.1% N/M
N/M = Not meaningful Our Managed Casinos and Other results for 1999 were led by increased management fees from the tribal-owned casinos we manage. The increase in our operating results for 1998 versus 1997 was primarily due to the addition of management fees from the casinos managed for the Eastern Band of Cherokee, which opened in November 1997, and the Prairie Band of Potawatomi, which opened in January 1998. Although not a significant contributor to our 1999 Managed Casinos and Other results, we also manage for a fee the Harrah's New Orleans casino, which opened during fourth quarter 1999. (See Other Factors Affecting Net Income.) Upon completion of the Showboat acquisition on June 1, 1998, we assumed management of the Star City casino in Sydney, Australia. We ceased management of that facility in January 2000 upon the completion of the buy-out of our management contract by another company. Their acquisition of the management contract followed their buy-out of our equity ownership in the casino in fourth quarter 1999. (See Other Factors Affecting Net Income.) In January 2000, we announced the signing of a letter of intent with the Rincon San Luiseno Band of Mission Indians ("Rincon") to develop and operate a $110 million casino and hotel project on Rincon tribal land in Southern California. The Rincon tribal land is located near Valley Center, a 30 minute drive north of San Diego, California, and has convenient access to metropolitan San Diego, La Jolla, Del Mar, Escondido and Orange County, California. The project is subject to various approvals, including the National Indian Gaming Commission ("NIGC"). In fourth quarter 1999, we announced an agreement with the Eastern Band of Cherokee Indians for a two-year extension of the management contract for Harrah's Cherokee Smoky Mountains Casino. Our agreement will now expire in November 2004. In third quarter 1999, we signed a contract with the Ak-Chin Indian Community to continue management of its casino for another five years. The five-year agreement contemplates an extension of the Tribe's compact with the State of Arizona, which currently expires in 2003, and is subject to final approval by the NIGC, which, in the interim, has approved a temporary extension (on new financial terms) of the original agreement. In addition, the Tribe announced a planned expansion of the casino to include a new 150-room hotel, an additional restaurant, meeting and banquet room facilities, a resort pool and a landscaped courtyard. See Debt and Liquidity section for further discussion of our guarantees of debt related to Indian projects. In fourth quarter 1998, Interactive Entertainment Limited ("IEL") announced plans to discontinue all operations of its Sky Games business and to write off assets related to that business. In conjunction with that announcement, we wrote off our remaining investment in IEL of $0.8 million. During 1997, we recognized $2.3 million of non-cash nonrecurring income from IEL in consid- eration for the termination of our management contract with that entity. The termination of the management contract occurred in conjunction with IEL's reorganization and transformation into a publicly-traded company. In November 1998, we ceased management of the casino owned by the Upper Skagit Tribe, located on Indian lands near Seattle, Washington. We had guaranteed the Skagit Tribe's development financing, and during second quarter 1999 we performed under our guarantee and purchased the Tribe's outstanding development debt from the lender for $11.4 million. Under the terms of our agreement with the Tribe, they have agreed to fund the retirement of this debt. The Tribe is attempting to secure new financing. However, there is no assurance that their efforts will be successful and that the receivable will be collected. On June 30, 1998, we ceased management of the Sky City casino complex in Auckland, New Zealand. Our management contract was bought out by the owner, Sky City Limited, and a $10.3 million termination fee was received. During third quarter 1997, we sold our remaining 12.5% equity interest in Sky City Limited (see Other Factors Affecting Net Income). Also included in Managed Casinos and Other are our brand marketing costs. In 1998, we launched the first national brand advertising campaign by a casino company. A portion of the 1998 cost of the brand advertising campaign was funded by the displacement of advertising and marketing dollars spent in the past by the individual properties. The cost for the campaign in excess of the amounts contributed to this effort by the properties totaled approximately $9.3 million in 1998. In 1999, the cost of the brand advertising campaign was fully funded by contributions from the properties. Other Factors Affecting Net Income - ----------------------------------
Percentage Increase/(Decrease) (Income)/Expense ---------------------- (In millions) 1999 1998 1997 99 vs 98 98 vs 97 - -------------------------------------- ------ ------ ------ -------- ---------- Development costs .................... $ 6.5 $ 9.0 $ 10.5 (27.8)% (14.3)% Write-downs, reserves and recoveries .................... 2.2 7.5 13.8 (70.7)% (45.7)% Project opening costs ................ 2.3 8.1 17.6 (71.6)% (54.0)% Corporate expense .................... 42.7 37.9 27.2 12.7 % 39.3 % Headquarters relocation and reorganization costs .......... 10.3 -- -- N/M N/M Equity in losses of nonconsolidated affiliates ........ 43.5 15.0 11.1 N/M 35.1 % Venture restructuring costs .......... (0.3) 6.0 6.9 N/M (13.0)% Amortization of goodwill and trademarks .................... 17.6 7.5 1.8 N/M N/M Interest expense, net ................ 193.4 117.3 79.1 64.9 % 48.3 % Gains on sales of equity interests in nonconsolidated affiliates ..... (59.8) (13.2) (37.4) N/M N/M Other income ......................... (12.1) (19.6) (11.8) (38.3)% 66.1 % Effective tax rate ................... 35.9% 36.7% 37.4% (0.8)pts (0.7)pts Minority interests ................... $11.2 $ 7.0 $ 7.4 60.0 % (5.4)% Extraordinary losses, net of income taxes ............... 11.0 19.7 8.1 N/M N/M
N/M = Not meaningful Development costs have decreased over the years presented due to the decrease in new casino development opportunities. Write-downs, reserves and recoveries for 1999 included a further write-down to estimated realizable value of an idle riverboat, write-offs of obsolete assets, Year 2000 costs and recoveries of costs previously written-off. In 1998, Write-downs and reserves included write-offs of obsolete assets, the write-down to estimated realizable value of an idle riverboat, a reserve for termination of a development agreement with an Indian tribe and certain Year 2000 costs. Write-downs and reserves for 1997 were primarily related to a $13 million reserve against debtor-in-possession financing provided to the original New Orleans casino project. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued - -------------------------------------------------------------------------------- Project opening costs for 1999 included a fee paid in connection with the renewal of a management contract and costs related to expansions at various properties. In 1998, Project opening costs were incurred in connection with an initiative to develop and implement strategies and employee training programs designed to better focus our employees on serving our targeted customers. Project opening costs for 1997 included costs incurred in connection with the first quarter 1997 opening of Harrah's St. Louis Riverport casino property, costs related to expansions at Harrah's Las Vegas and Harrah's Tunica and costs incurred in connection with the customer service initiative. Corporate expense increased 12.7% in 1999 over 1998 but represented only 1.4% of revenues in 1999, down from 1.9% in 1998 and 1.7% in 1997. During 1999, we relocated our corporate headquarters and moved our senior corporate executives and their support staffs to Las Vegas, Nevada. The Company's national services headquarters remains in Memphis, Tennessee. $10.3 million of costs related to the relocation of the Company's headquarters were expensed in 1999. The final phase of the relocation will be completed in 2000, and the expense of that activity will be reported as relocation costs as incurred. Equity in losses of nonconsolidated affiliates for 1999 increased over the previous two years primarily as a result of losses from our investments in two companies which commenced operations in 1999, Jazz Casino Company, L.L.C. ("JCC") and National Airlines, Inc. ("NAI"). We have an approximate 43% ownership interest in the parent of JCC, the company that owns and operates the exclusive land-based casino in New Orleans, Louisiana (the "Casino"), which opened in fourth quarter 1999. Our share of 1999 losses from JCC was $23.2 million, including $14.9 million of project opening costs. Our share of NAI's 1999 losses was $8.8 million, including $2.7 million of their project opening costs. With the acquisition of Rio, our ownership interest in NAI, an airline company in Las Vegas which opened for business in May 1999, increased from 23.9% to 47.8%. During 1999, we accounted for Rio's investment in the airline as an asset-held-for-sale. Although the Rio ownership interest is still for sale, our equity pick-up percentage will increase in 2000 to reflect our full ownership interest. Losses from the joint venture portion of the St. Louis development were 4.2% less than our share of 1998 losses and 9.5% less than our share of 1997 losses, which included our $1.9 million share of the joint venture's preopening costs (see Central Region - Missouri). Venture restructuring costs represent our costs, including legal fees, associated with the successful development of a reorganization plan for the New Orleans casino. Amortization of goodwill and trademarks increased in 1998 with the acquisition of Showboat and again in 1999 with the acquisition of Rio. Interest expense increased in 1999 over 1998 due to debt assumed and incurred in connection with the Rio merger and Showboat acquisition. The increase in Interest expense in 1998 over 1997 was also due to debt assumed and incurred in connection with the acquisition of Showboat (see Debt and Liquidity section). In 1999, we sold our shares of Star City casino and recorded a pretax gain of $43.5 million. We also sold our interest in Sodak Gaming, Inc. to a gaming equipment manufacturing company and recorded a pretax gain of $16.3 million. In 1998, we sold our interest in a restaurant affiliate and recorded a pretax gain of $13.2 million. During 1997, we sold our remaining equity interest in Sky City Limited, and recorded a pretax gain of $37.4 million. We sold our ownership interest in Station Square, an entertainment, business and retail center in Pittsburgh, Pennsylvania, to our partner for cash during fourth quarter 1997. Under the terms of the sale agreement, we retain the right to pursue development of a casino entertainment facility at the Station Square site if casino gaming is legalized in this jurisdiction. No gain or loss was recognized as a result of this transaction. The increase in Other income in 1998 as compared to the other two years was primarily due to the sale of land in the Atlantic City area. The effective tax rate for each year is higher than the federal statutory rate primarily due to state income taxes and that portion of our goodwill amortization which is not deductible for tax purposes. Minority interests reflect joint venture partners' shares of income at joint venture riverboat casinos. Extraordinary losses reported in all three years are due primarily to early extinguishments of debt and include the premium paid to holders of the debt retired and the write-off of related unamortized deferred finance charges. (See Debt and Liquidity - Early Extinguishments of Debt.) - -------------------------------------------------------------------------------- CAPITAL SPENDING AND DEVELOPMENT Year 2000 - --------- Throughout 1999, we continued our efforts to address the potential impact of the Year 2000 ("Y2K") on the technology systems and equipment that are essential to our operations. All of our business systems and equipment were tested and evaluated and then replaced or renovated as required to become Y2K compliant. The total cost of system replacements and upgrades to address potential Y2K problems, as well as enhancing business and operational functionality in some areas, was approximately $10.5 million, including approximately $9 million of costs which were capitalized. Approximately 80% of the total cost was related to the cost to repair, replace and improve software and related hardware and equipment and approximately 20% related to the cost to repair, replace and improve embedded technology. Our systems and equipment were deemed Y2K compliant by the end of 1999, and we have experienced no significant problems related to the turn of the century. Total Capital Spending and Development - -------------------------------------- In addition to the specific development and expansion projects discussed in the Operating Results and Development Plans section, we perform on-going refurbishment and maintenance at our casino entertainment facilities in order to maintain our quality standards. We also continue to pursue development and acquisition opportunities for additional casino entertainment facilities that meet our strategic and return on investment criteria. Prior to the receipt of necessary regulatory approvals, the costs of pursuing development projects are expensed as incurred. Construction-related costs incurred after the receipt of necessary approvals are capitalized and depreciated over the estimated useful life of the resulting asset. Project opening costs are expensed as incurred. Our planned development projects, if they go forward, will require, individually and in the aggregate, significant capital commitments and, if completed, may result in significant additional revenues. The commitment of capital, the timing of completion and the commencement of operations of casino entertainment development projects are contingent upon, among other things, negotiation of final agreements and receipt of approvals from the appropriate political and regulatory bodies. Cash needed to finance projects currently under development as well as additional projects being pursued is expected to be made available from operating cash flows, the Bank Facility (see Debt and Liquidity section), joint venture partners, specific project financing, guarantees of third party debt and, if necessary, additional debt and/or equity offerings. Our capital spending for 1999 totaled approximately $430.1 million, excluding the costs of our merger with Rio and our acquisition of the additional ownership interest in the East Chicago partnership. Estimated total capital expenditures for 2000 are expected to be between $370 million and $470 million, excluding the acquisition of Players and the possible further expansion of our Atlantic City properties. DEBT AND LIQUIDITY Bank Facility - ------------- On April 30, 1999, we consummated new revolving credit and letter of credit facilities (the "Bank Facility") in the amount of $1.6 billion. This Bank Facility consists of a five-year $1.3 billion revolving credit and letter of credit facility maturing in 2004 and a separate $300 million revolving credit facility, which is renewable annually at the borrower's and lenders' options. Currently, the Bank Facility bears interest based upon 80 basis points over LIBOR for current borrowings under the five-year facility and 85 basis points over LIBOR for the 364-day facility. In addition, there is a facility fee for borrowed and unborrowed amounts which is currently 20 basis points on the five-year facility and 15 basis points on the 364-day facility. The interest rate and facility fee are based on our current debt ratings and leverage ratio and may change as our debt ratings and leverage ratio change. Borrowings under the Bank Facility were used to retire our previous revolving credit facility, scheduled to mature in 2000, (the "Previous Facility") and Rio's revolving credit facility scheduled to mature in 2003, 10 5/8% Senior Subordinated Notes due 2005 and 9 1/2% Senior Subordinated Notes due 2007. As of December 31, 1999, $1.1 billion in borrowings were outstanding under the Bank Facility, with an additional $37.5 million committed to back letters of credit. After consideration of these borrowings, $452.5 million of additional borrowing capacity was available to the Company as of December 31, 1999. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued - -------------------------------------------------------------------------------- Issuance of Senior Notes - ------------------------ In connection with obtaining consent from our bank lenders for the Rio merger, we agreed to refinance a significant portion of our short-term, floating-rate debt with long-term, fixed-rate debt. In December 1998, we issued $750 million of 7 7/8% Senior Subordinated Notes due 2005 and used the net proceeds to reduce the amount outstanding under our Previous Facility. In January 1999, we issued $500 million of 7 1/2% Senior Notes due 2009 and used the net proceeds to further reduce amounts outstanding under our Previous Facility. Extinguishments of Debt - ----------------------- During first quarter 1999, we redeemed all $140 million face amount of Showboat Marina Casino Partnership's ("SMCP") 13 1/2% First Mortgage Notes due 2003 (the "SMCP Notes"). We retired the SMCP Notes using proceeds from our Previous Facility. We recorded liabilities assumed in the Showboat acquisition, including the SMCP Notes, at their fair value as of the consummation date of the transaction. The difference between the consideration of $159.8 million paid the holders of the SMCP notes pursuant to this tender offer and the carrying value of the SMCP Notes on the consummation date was recorded as an extraordinary loss of $2.0 million, net of tax. During second quarter 1999, we redeemed all $100 million face amount of Rio's 10 5/8% Senior Subordinated Notes due 2005 and all $125 million of Rio's 9 1/2% Senior Subordinated Notes due 2007. We recorded liabilities assumed in the Rio merger, including these notes, at their fair value as of the date of consummation of the merger. The difference between the consideration of $251.8 million paid to the holders of the Rio notes pursuant to the tender offer and the carrying value of the notes on the date of the redemption was recorded as an extraordinary loss of $4.5 million, net of tax. During third quarter 1999, we retired SMCP's capital lease obligations. Approximately $9.2 million of debt was retired, and an extraordinary loss of $0.4 million, net of tax, was recorded. In 1998, we redeemed all $200 million of our 8 3/4% Senior Subordinated Notes due 2002. We also redeemed approximately $218.6 million face amount of Showboat's 9 1/4% First Mortgage Bonds due 2008 and approximately $117.9 million face amount of Showboat's 13% Senior Notes due 2009 (collectively, the "Showboat Notes"). Extraordinary losses, net of tax, in the amounts of $3.3 million and $13.3 million, respectively, were recorded in conjunction with these early debt extinguishments. The remaining balance of the Showboat Notes were defeased in 1998 by purchasing treasury securities which were deposited with trustees to pay the scheduled interest payments to the first call date and the premium and principal on the securities outstanding on such date. These treasury securities are included in Deferred costs, trademarks and other assets and the remaining balance of the Showboat Notes is reported in Long-term debt in the Consolidated Balance Sheets. In 1997, we redeemed our $200 million 10 7/8% Senior Subordinated Notes due 2002 and recorded an extraordinary loss, net of tax, of $8.1 million. Interest Rate Agreements - ------------------------ To manage the relative mix of our debt between fixed and variable rate instruments, we entered into interest rate swap agreements to modify the interest characteristics of our outstanding debt without an exchange of the underlying principal amount. The differences to be paid or received under the terms of our interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense for the related debt. Changes in the variable interest rates to be paid or received pursuant to the terms of our interest rate swap agreements will have a corresponding effect on our future cash flows. These agreements contain a credit risk that the counterparties may be unable to meet the terms of the agreements. We minimize that risk by evaluating the creditworthiness of our counterparties, which are limited to major banks and financial institutions, and do not anticipate nonperformance by the counterparties. As of December 31, 1999, we were a party to six interest rate swaps for a total notional amount of $300 million. All of these swaps will expire in 2000, and we do not expect to enter into new swap agreements. For more information regarding our interest rate swap agreements as of December 31, 1999, see Note 5 to the accompanying Consolidated Financial Statements. Guarantees of Third Party Debt and Other Commitments - ---------------------------------------------------- In addition to our ownership interest in JCC's parent, we manage the Harrah's New Orleans property pursuant to a management agreement between JCC and a subsidiary of our Company. We have (i) guaranteed JCC's initial $100.0 million annual payment under the Casino operating contract to the State of Louisiana gaming board (the "State Guarantee"), (ii) guaranteed $166.5 million of a $236.5 million JCC bank credit facility, and (iii) made a $22.5 million subordinated loan to JCC to finance construction of the casino. With respect to the State Guarantee, we are obligated to guarantee JCC's first $100 million annual payment obligation commencing from the October 28, 1999, opening of the Casino, and, if certain cash flow tests (for the renewal periods beginning April 1, 2001) and other conditions are satisfied each year, to renew the guarantee beginning April 1, 2000, for each 12 month period ending March 31, 2004. Our obligations under the guarantee for the first year of operations or any succeeding 12 month period is limited to a guarantee of the $100 million payment obligation of JCC for the 12 month period in which the guarantee is in effect and is secured by a first priority lien on JCC's assets. JCC's payment (and therefore the amount we have guaranteed) is $100 million at commencement of each 12 month period under the Casino operating contract and declines on a daily basis by 1/365 of $100 million to the extent payments are made each day by JCC to Louisiana's gaming board. On February 28, 2000, we were notified by JCC that it was suspending payment of the daily payments to the State of Louisiana until JCC is able to generate sufficient cash flow to pay its operating expenses and make the daily payments. On February 29, 2000, the State made a demand on the Company under the State Guarantee, and we began funding the daily payment to the State on that date. JCC's bank credit facility permits funding of up to $5 million under the State Guarantee without a default under the bank loan documents. JCC has obtained a waiver to permit funding of up to $40 million under the State Guarantee on certain conditions, including (i) our renewal of the State Guarantee for the one-year period ending March 31, 2001, and (ii) our forbearance until at the earliest March 31, 2001, of the collection of the principal or interest on the demand obligation which arises when we fund under the State Guarantee. Separately, we have also agreed to forbear collection until August 1, 2000, of certain fees and reimbursable costs arising from our existing agreements with JCC. We have also agreed, subject to certain conditions, to renew the State Guarantee for the period April 1, 2000, until March 31, 2001. The agreements under which we manage casinos on Indian lands contain provisions required by law which provide that a minimum monthly payment be made to the tribe. That obligation has priority over scheduled repayments of borrowings for development costs. In the event that insufficient cash flow is generated by the operations to fund this payment, we must pay the shortfall to the tribe. Such advances, if any, would be repaid to us in future periods in which operations generate cash flow in excess of the required minimum payment. These commitments will terminate upon the occurrence of certain defined events, including termination of the management contract. Our aggregate monthly commitment pursuant to the contracts for the three Indian-owned facilities now open, which extend for periods of up to 60 months from December 31, 1999, is $1.1 million. We may guarantee all or part of the debt incurred by Indian tribes with which we have entered a management contract to fund development of casinos on the Indian lands. For all existing guarantees of Indian debt, we have obtained a first lien on certain personal property (tangible and intangible) of the casino enterprise. There can be no assurance, however, the value of such property would satisfy our obligations in the event these guarantees were enforced. Additionally, we have received limited waivers from the Indian tribes of their sovereign immunity to allow us to pursue our rights under the contracts between the parties and to enforce collection efforts as to any assets in which a security interest is taken. The aggregate outstanding balance of such debt as of December 31, 1999, was $80.4 million. During second quarter 1999, we performed under our guarantee of the Upper Skagit Tribe's development financing and purchased the outstanding development debt from the lender for $11.4 million. Under the terms of our agreement with the Tribe, they have agreed to fund the retirement of this debt. The Tribe is attempting to secure new financing; however, there is no assurance that their efforts will be successful and that the receivable will be collected. EFFECTS OF CURRENT ECONOMIC AND POLITICAL CONDITIONS Competitive Pressures - --------------------- Due to the limited number of new markets opening for development, the focus of many casino operators has shifted to investing in existing markets in an effort to attract new customers, thereby increasing competition in those markets. Our properties in the long-established gaming markets of Nevada and New Jersey have generally been less affected by the changing competitive conditions. With the exception of the additional supply being added in Las Vegas, the amount of supply change within these markets has represented a smaller percentage change than that experienced in some riverboat markets. In riverboat markets, the additions to Management's Discussion and Analysis of Financial Condition and Results of Operations, continued - -------------------------------------------------------------------------------- supply had a more noticeable impact, due to the fact that competition was limited in the early stages of many of these markets. As companies have completed expansion projects, supply has typically grown at a faster pace than demand in some markets and competition has increased significantly. Furthermore, several operators, including Harrah's Entertainment, have announced plans for additional developments or expansions in some markets. In the Las Vegas market four new "mega" facilities have opened since October 1998, and others are planned and under development. The impact that the additional supply will have on our operations cannot be determined at this time. Although the short-term effect of these competitive developments on our Company has been negative, we are not able to determine the long-term impact, whether favorable or unfavorable, that these trends and events will have on current or future markets. We believe that the geographic diversity of our operations; our focus on multi-market customer relationships; our service training, measurements and rewards programs; and our continuing efforts to establish our brands as premier brands upon which we have built strong customer loyalty have well-positioned us to face the challenges present within our industry. We have introduced WINet, a sophisticated nationwide customer database, and our Total Gold Card, a nationwide reward and recognition card, both of which we believe provide competitive advantages, particularly with players who visit more than one market. During 1999, we embarked on the next stage of our strategy with the launch of the tiered customer loyalty card program - Total Diamond, Total Platinum and Total Gold - to reward customers for choosing Harrah's Entertainment casinos. Industry Consolidation - ---------------------- As evidenced by the number of recent public announcements by casino entertainment companies of plans to acquire or be acquired by other companies, including our acquisition of Showboat, merger with Rio and planned acquisition of Players, consolidation in the gaming industry is now underway. We believe we are well-positioned to, and may from time to time, pursue additional strategic acquisitions. Political Uncertainties - ----------------------- The casino entertainment industry is subject to political and regulatory uncertainty. In 1996, the U.S. government formed a federal commission to study gambling in the United States, including the casino gaming industry. The commission issued its report in June 1999. In September 1999, the State of California and approximately 60 Indian tribes executed Class III Gaming Compacts, which other California tribes can join. The Compacts allow each tribe to operate, on tribal trust lands, two casinos with up to 2,000 slot machines per tribe and unlimited house-banked card games. At this time, the ultimate impacts that the National Gaming Impact Study Commission report and the California Compacts may have on the industry or on our Company are uncertain. From time to time, individual jurisdictions have also considered legislation or referendums which could adversely impact our operations, and the likelihood or outcome of similar legislation and referendums in the future is difficult to predict. The casino entertainment industry represents a significant source of tax revenues to the various jurisdictions in which casinos operate. From time to time, various state and federal legislators and officials have proposed changes in tax laws, or in the administration of such laws, which would affect the industry. It is not possible to determine with certainty the scope or likelihood of possible future changes in tax laws or in the administration of such laws. If adopted, such changes could have a material adverse effect on our financial results. EFFECTS OF INFLATION Inflation has had little effect on our historical operations. Generally, we have not experienced any significant negative impact on gaming volume or on wagering propensity of our customers as a result of inflationary pressures. Further, we have been successful in increasing the amount of wagers and playing time of our casino customers through effective marketing programs. We have also, from time to time, adjusted our required minimum bets at table games and changed the relative mix of slot machines in favor of machines with higher denominations. These strategies, supplemented by effective cost management programs, have offset the impact of inflation on our operations. Inflation tends to increase the value of our casino entertainment properties. - -------------------------------------------------------------------------------- INTERCOMPANY DIVIDEND RESTRICTION Certain of our debt guarantees require us to abide by covenants which, among other things, limit the ability of our principal operating subsidiary, Harrah's Operating Company, Inc. ("HOC"), to pay dividends and make other restricted payments, as defined, to Harrah's Entertainment. The amount of HOC's restricted net assets, as defined, computed in accordance with the most restrictive of these covenants regarding restricted payments was approximately $1.5 billion at December 31, 1999. Harrah's Entertainment's principal asset is the stock of HOC, a wholly-owned subsidiary which holds, directly and through subsidiaries, the principal assets of our businesses. Given this ownership structure, these restrictions should not impair our ability to conduct our business through our subsidiaries or to pursue our development plans. RECENTLY ISSUED ACCOUNTING STANDARDS We implemented the provisions of Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-up Activities," effective January 1, 1999. SOP 98-5, issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants, requires that the costs of all start-up activities, as defined in the SOP, be expensed as incurred. The adoption of the provisions of this SOP did not materially impact our results of operations or financial position. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative financial instruments. The provisions of SFAS No. 133 require that a company recognizes all derivatives as either assets or liabilities on its balance sheet and that the instruments be valued at their fair value. The Statement also defines the criteria and conditions which govern the recognition of subsequent changes in the fair value of the instrument as being either balance sheet or income statement events. During 1999, the effective date for implementation of the provisions of SFAS No. 133 was delayed until years beginning after June 15, 2000. We do not expect the adoption of SFAS No. 133 to materially impact our results of operations or financial position. PRIVATE SECURITIES LITIGATION REFORM ACT The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in our Annual Report on Form 10-K and other materials filed or to be filed by the Company with the Securities and Exchange Commission ("SEC") (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are forward looking. These include statements relating to the following activities, among others: (A) operations and expansions of existing properties, including future performance, anticipated scope and opening dates of expansions; (B) planned development of casinos and hotels that would be owned or managed by the Company and the pursuit of strategic acquisitions; (C) planned capital expenditures for 2000 and beyond; (D) the impact of the WINet and Total Gold Card Programs; and (E) any future impact of the Showboat acquisition, the Rio merger or the planned acquisition of Players. These activities involve important factors that could cause actual results to differ materially from those expressed in any forward looking statements made by or on behalf of the Company. These include, but are not limited to, the following factors as well as other factors described from time to time in the Company's reports filed with the SEC: construction factors, including zoning issues, environmental restrictions, soil conditions, weather and other hazards, site access matters and building permit issues; access to available and feasible financing; regulatory, licensing and other government approvals, third party consents and approvals, and relations with partners, owners and other third parties; conditions of credit markets and other business and economic conditions, including international and national economic problems; litigation, judicial actions and political uncertainties, including gaming legislative action, referenda, and taxation; and the effects of competition including locations of competitors and operating and marketing competition. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. HARRAH'S ENTERTAINMENT, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31, --------------------------------- 1999 1998 ----------- ------------ ASSETS Current assets Cash and cash equivalents ............................................................. $ 233,581 $ 158,995 Receivables, less allowance for doubtful accounts of $44,086 and $14,356 .............. 121,186 55,043 Deferred income taxes (Note 9) ........................................................ 33,208 22,478 Prepayments and other ................................................................. 68,028 27,521 Inventories ........................................................................... 30,666 15,306 ----------- ----------- Total current assets ............................................................. 486,669 279,343 ----------- ----------- Land, buildings, riverboats and equipment Land and land improvements ............................................................ 653,101 323,692 Buildings, riverboats and improvements ................................................ 2,510,070 1,624,346 Furniture, fixtures and equipment ..................................................... 820,583 711,966 ----------- ----------- 3,983,754 2,660,004 Less: accumulated depreciation ........................................................ (922,524) (789,847) ------------ ----------- 3,061,230 1,870,157 Goodwill, net of amortization of $54,346 and $40,051 (Note 2) ............................ 505,217 383,450 Investments in and advances to nonconsolidated affiliates (Note 15) ...................... 168,511 273,508 Deferred costs, trademarks and other (Note 4) ............................................ 545,220 479,874 ----------- ----------- $ 4,766,847 $ 3,286,332 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable ...................................................................... $ 81,200 $ 58,493 Accrued expenses (Note 4) ............................................................. 287,494 172,021 Current portion of long-term debt (Note 5) ............................................ 2,877 2,332 ----------- ----------- Total current liabilities ........................................................ 371,571 232,846 Long-term debt (Note 5) .................................................................. 2,540,268 1,999,354 Deferred credits and other ............................................................... 120,827 112,362 Deferred income taxes (Note 9) ........................................................... 228,955 75,457 ----------- ----------- 3,261,621 2,420,019 ----------- ----------- Minority interests ....................................................................... 18,949 14,906 ----------- ----------- Commitments and contingencies (Notes 6, 12 through 15 and 17) Stockholders' equity (Notes 3, 14 and 15) Common stock, $0.10 par value, authorized - 360,000,000 shares, outstanding - 124,379,760 and 102,188,018 shares (net of 9,286,772 and 3,036,562 shares held in treasury) ............................ 12,438 10,219 Capital surplus ....................................................................... 987,322 407,691 Retained earnings ..................................................................... 512,539 451,410 Accumulated other comprehensive income ................................................ (493) 6,567 Deferred compensation related to restricted stock ..................................... (25,529) (24,480) ------------ ----------- 1,486,277 851,407 ----------- ----------- $ 4,766,847 $ 3,286,332 =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated balance sheets. HARRAH'S ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, ---------------------------------------------- 1999 1998 1997 ---------- ---------- ------------- Revenues Casino ....................................................................... $2,424,237 $1,660,313 $1,338,003 Food and beverage ............................................................ 425,808 231,568 196,765 Rooms ........................................................................ 253,629 153,538 128,354 Management fees .............................................................. 75,890 64,753 24,566 Other ........................................................................ 131,403 78,320 78,954 Less: casino promotional allowances .......................................... (286,539) (184,477) (147,432) ---------- ----------- ----------- Total revenues ........................................................... 3,024,428 2,004,015 1,619,210 ---------- ----------- ----------- Operating expenses Direct Casino ..................................................................... 1,254,557 868,622 685,942 Food and beverage .......................................................... 218,580 116,641 103,604 Rooms ...................................................................... 66,818 41,871 39,719 Depreciation of buildings, riverboats and equipment .......................... 188,199 130,128 103,670 Development costs ............................................................ 6,538 8,989 10,524 Write-downs, reserves and recoveries (Note 7) ................................ 2,235 7,474 13,806 Project opening costs ........................................................ 2,276 8,103 17,631 Other ........................................................................ 690,404 467,999 383,791 ---------- ----------- ---------- Total operating expenses ................................................. 2,429,607 1,649,827 1,358,687 ---------- ----------- ---------- Operating profit ........................................................ 594,821 354,188 260,523 Corporate expense ............................................................ (42,748) (37,890) (27,155) Headquarters relocation and reorganization costs (Note 8) .................... (10,274) -- -- Equity in losses of nonconsolidated affiliates (Note 15) ..................... (43,467) (14,989) (11,053) Venture restructuring costs .................................................. 322 (6,013) (6,944) Amortization of goodwill and trademarks ...................................... (17,617) (7,450) (1,839) ---------- ----------- ---------- Income from operations .......................................................... 481,037 287,846 213,532 Interest expense, net of interest capitalized (Note 1) .......................... (193,407) (117,270) (79,071) Gains on sales of equity interests in nonconsolidated affiliates (Note 15) ...... 59,824 13,155 37,388 Other income, including interest income ......................................... 12,129 19,575 11,799 ---------- ----------- ------ Income before income taxes and minority interests ............................... 359,583 203,306 183,648 Provision for income taxes (Note 9) ............................................. (128,914) (74,600) (68,746) Minority interests .............................................................. (11,166) (6,989) (7,380) ---------- ----------- ---------- Income before extraordinary losses .............................................. 219,503 121,717 107,522 Extraordinary losses, net of tax benefit of $5,990, $10,522 and $4,477 (Note 10) ................................................. (11,033) (19,693) (8,134) ---------- ----------- ---------- Net income ...................................................................... $ 208,470 $ 102,024 $ 99,388 ========== =========== ========== Earnings (loss) per share - basic Before extraordinary losses .................................................. $ 1.74 $ 1.21 1.07 Extraordinary losses, net .................................................... (0.09) 0.19) (0.08) --------------------------------------------- Net income ................................................................. $ 1.65 $ 1.02 $ 0.99 ============================================= Earnings (loss) per share - diluted Before extraordinary losses .................................................. $ 1.71 $ 1.19 $ 1.06 Extraordinary losses, net .................................................... (0.09) (0.19) (0.08) --------------------------------------------- Net income ................................................................. $ 1.62 $ 1.00 $ 0.98 ============================================= Weighted average common shares outstanding ...................................... 126,072 100,231 100,618 Diluted effect of stock compensation programs ................................... 2,676 1,289 636 --------------------------------------------- Weighted average common and common equivalent shares outstanding ................ 128,748 101,520 101,254 =============================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. HARRAH'S ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (NOTES 3, 14 AND 15) (IN THOUSANDS)
Deferred Common Stock Compensation --------------------- Other Related to Compre- Shares Capital Retained Comprehensive Restricted hensive Outstanding Amount Surplus Earnings Income Stock Total Income ----------- ------ -------- -------- ------------- ----------- --------- -------- Balance - December 31, 1996 ........... 102,970 $10,297 $385,941 $290,797 $51,394 $(18,683) $719,746 Net income ......................... 99,388 99,388 $ 99,388 Realization of gain due to sale of equity interest in New Zealand subsidiary, net of deferred taxes of $14,653 ....................... (22,735) (22,735) (22,735) Decline in market value of other available-for-sale securities, less deferred tax benefit of $16,362 ....................... (25,775) (25,775) (25,775) Treasury stock purchases ........... (2,234) (223) (40,799) (41,022) Net shares issued under incentive compensation plans, including income tax benefit of $702 ....... 300 30 2,984 2,887 5,901 -------- 1997 Comprehensive Income ..... $ 50,878 ------- ------ -------- -------- ------- -------- ------- ======== Balance - December 31, 1997 ........... 101,036 10,104 388,925 349,386 2,884 (15,796) 735,503 Net income ......................... 102,024 102,024 $102,024 Unrealized gain on available- for-sale securities, less deferred tax provision of $2,110 .......... 3,567 3,567 3,567 Foreign currency adjustment ........ 116 116 116 Net shares issued under incentive compensation plans, including income tax benefit of $787 ....... 1,152 115 18,766 (8,684) 10,197 -------- 1998 Comprehensive Income ..... $105,707 ------- ------ -------- -------- ------- ------- ------- ======== Balance - December 31, 1998 ........... 102,188 10,219 407,691 451,410 6,567 (24,480) 851,407 Net income ......................... 208,470 208,470 208,470 Unrealized gain on available- for-sale securities, less deferred tax provision of $2,118 .......... 3,606 3,606 3,606 Realization of gain due to sale of equity interest in nonconsolidated affiliate, net of tax provision of $6,031 ... (10,269) (10,269) (10,269) Foreign currency adjustment ........ (397) (397) (397) Treasury stock purchases ........... (6,108) (611) (147,341) (147,952) Net shares issued in acquisition of Rio and minority interest in subsidiary .. 25,392 2,539 529,492 532,031 Net shares issued under incentive compensation plans, including income tax benefit of $2,625 ..... 2,908 291 50,139 (1,049) 49,381 ------- 1999 Comprehensive Income ..... 201,410 ------- ------- -------- -------- ------- -------- ---------- ======= Balance - December 31, 1999 ........... 124,380 $12,438 $987,322 $512,539 $ (493) $(25,529) $1,486,277 ======= ======= ======== ======== ======= ======== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. HARRAH'S ENTERTAINMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 11) (IN THOUSANDS)
Year Ended December 31, ----------------------------------------- 1999 1998 1997 --------- -------- ---------- Cash flows from operating activities Net income ................................................................ $208,470 $102,024 $ 99,388 Adjustments to reconcile net income to cash flows from operating activities Extraordinary losses, before income taxes ............................ 17,023 29,491 12,611 Depreciation and amortization ........................................ 218,299 159,183 122,396 Write-downs, reserves and recoveries ................................. 1,570 6,535 13,806 Other noncash items .................................................. 86,976 28,835 27,712 Minority interests' share of net income .............................. 11,166 6,989 7,380 Equity in losses of nonconsolidated affiliates ....................... 43,467 14,989 11,053 Realized gains from sales of equity interests in nonconsolidated affiliates ......................................... (59,824) (13,155) (37,388) Net losses (gains) from asset sales .................................. 878 (6,536) (4,117) Net change in long-term accounts ..................................... 56,542 17,260 (1,452) Net change in working capital accounts ............................... (70,161) (45,244) 3,713 ---------- -------- --------- Cash flows provided by operating activities ........................ 514,406 300,371 255,102 ---------- -------- --------- Cash flows from investing activities Land, buildings, riverboats and equipment additions ....................... (340,468) (140,386) (229,529) Increase (decrease) in construction payables .............................. 1,871 (6,557) (10,789) Investments in and advances to nonconsolidated affiliates ................. (70,181) (76,052) (54,477) Purchase of minority interest in subsidiary ............................... (26,000) -- -- Proceeds from sales of equity interests in subsidiaries ................... 172,576 17,000 53,755 Proceeds from other asset sales ........................................... 26,359 12,728 26,570 Cash acquired in acquisitions ............................................. 50,226 -- -- Payment for purchase of Showboat, Inc., net of cash acquired .............. -- (475,334) -- Purchase of marketable equity securities for defeasance of debt ........... -- (65,898) -- Other ..................................................................... 1,253 (28,739) (6,483) ---------- -------- --------- Cash flows used in investing activities ............................ (184,364) (763,238) (220,953) ---------- -------- --------- Cash flows from financing activities Net borrowings under Bank Facility, net of financing costs of $4,556 ...... 1,105,444 -- -- Net (repayments) borrowings under Retired Facility, net of financing costs of $9,332 in 1998 ................................ (1,086,000) 362,262 239,500 Proceeds from issuance of senior notes, net of discount and issue costs of $5,980 ............................... 494,020 -- -- Proceeds from issuance of senior subordinated notes, net of issue costs of $12,552 ........................................... -- 737,448 -- Other debt proceeds ....................................................... 21,000 -- -- Debt retirements .......................................................... (625,568) (563,522) (202,115) Purchases of treasury stock ............................................... (147,952) -- (41,022) Minority interests' distributions, net of contributions ................... (7,122) (6,200) (9,952) Premiums paid on early extinguishments of debt ............................ (9,278) (24,569) (9,666) Other ..................................................................... -- -- (45) ---------- -------- --------- Cash flows (used in) provided by financing activities .............. (255,456) 505,419 (23,300) ---------- -------- --------- Net increase in cash and cash equivalents .................................... 74,586 42,552 10,849 Cash and cash equivalents, beginning of year ................................. 158,995 116,443 105,594 ---------- -------- --------- Cash and cash equivalents, end of year ....................................... $233,581 $158,995 $ 116,443 ========== ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. Notes to Consolidated Financial Statements (Dollars in thousands, unless otherwise stated) - -------------------------------------------------------------------------------- In these footnotes, the words "Company," "Harrah's Entertainment," "we," "our" and "us" refer to Harrah's Entertainment, Inc., a Delaware corporation, and its wholly-owned subsidiaries, unless otherwise stated or the context requires otherwise. 1. Summary of Significant Accounting Policies BASIS OF PRESENTATION AND ORGANIZATION. We are one of the leading casino entertainment companies in the United States, operating in more markets than any other casino company. As of December 31, 1999, our U.S. operations included ten land-based casinos, seven riverboat or dockside casinos, and three casinos on Indian reservations. PRINCIPLES OF CONSOLIDATION. Our Consolidated Financial Statements include the accounts of Harrah's Entertainment and its subsidiaries after elimination of all significant intercompany accounts and transactions. We follow the equity method of accounting for our investments in 20% to 50% owned companies and joint ventures (see Note 15). CASH AND CASH EQUIVALENTS. Cash includes the minimum cash balances required to be maintained by a state gaming commission, which totaled approximately $16.6 million and $14.0 million at December 31, 1999 and 1998, respectively. Cash equivalents are highly liquid investments with a maturity of less than three months and are stated at the lower of cost or market value. INVENTORIES. Inventories, which consist primarily of food, beverage and operating supplies, are stated at average cost. LAND, BUILDINGS, RIVERBOATS AND EQUIPMENT. Land, buildings, riverboats and equipment are stated at cost. Land includes land held for future development or disposition which totaled $116.0 million and $21.7 million at December 31, 1999 and 1998, respectively. We capitalize the costs of improvements and extraordinary repairs that extend the life of the asset. We expense maintenance and repairs costs as incurred. Interest expense is capitalized on internally constructed assets at our overall weighted average borrowing rate of interest. Capitalized interest amounted to $13.1 million, $2.5 million and $6.9 million in 1999, 1998 and 1997, respectively. We depreciate our buildings, riverboats and equipment using the straight-line method over the shorter of the estimated useful life of the asset or the related lease term, as follows: Buildings and improvements ...................................... 10 to 40 years Riverboats ...................................................... 30 years Furniture, fixtures and equipment ............................... 2 to 15 years TREASURY STOCK. The shares of Harrah's Entertainment common stock we hold in treasury are reflected in our Consolidated Balance Sheets and our Consolidated Statements of Stockholders' Equity and Comprehensive Income as if those shares were retired. REVENUE RECOGNITION. Casino revenues consist of net gaming wins. Food and beverage and rooms revenues include the aggregate amounts generated by those departments at all consolidated casinos and casino hotels. Casino promotional allowances consist principally of the retail value of complimentary food and beverages, accommodations, admissions and entertainment provided to casino patrons. The estimated costs of providing such complimentary services, which we classify as casino expenses through interdepartmental allocations, were as follows: 1999 1998 1997 -------- --------- -------- Food and beverage $144,841 $ 97,934 $ 83,491 Rooms 43,773 28,473 19,290 Other 14,450 6,138 3,768 -------- --------- -------- $203,064 $132,545 $106,549 ======== ========= ======== AMORTIZATION. We amortize goodwill and other intangibles, including trademarks, on a straight-line basis over periods up to 40 years. We use the interest method to amortize deferred financing charges over the term of the related debt agreement. EARNINGS PER SHARE. In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," we compute our basic earnings per share by dividing Net income by the number of weighted average common shares outstanding during the year. Our Diluted earnings per share is computed by dividing Net income by the number of weighted average common shares and common stock equivalents outstanding during the year. For each of the three years ended December 31, 1999, common stock equivalents consisted solely of net restricted shares and stock options outstanding under our employee stock benefit plans. (See Note 14.) RECLASSIFICATIONS. We have reclassified certain amounts for prior years to conform with our presentation for 1999. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting period. Our actual results could differ from those estimates. 2. Completed Acquisitions We are accounting for each of the transactions described below as a purchase. Accordingly, the purchase price is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We determine the estimated fair values based on independent appraisals, discounted cash flows, quoted market prices and estimates made by management. For each transaction, the allocation of the purchase price was completed within one year from the date of the acquisition. To the extent that the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired, such excess is allocated to goodwill and amortized for periods of up to 40 years. For periods prior to the completion of the purchase price allocation, our financial statements included estimated goodwill amortization expense. SHOWBOAT, INC. On June 1, 1998, we completed our acquisition of Showboat, Inc. ("Showboat") for $30.75 per share in an all-cash transaction, and assumed approximately $635 million of Showboat debt. The operating results for Showboat are included in the Consolidated Financial Statements from the date of acquisition. As a result of this transaction, we now own and operate the Showboat casinos in Atlantic City, New Jersey, and Las Vegas, Nevada. The Las Vegas Showboat property is a non-strategic asset and is reported by the Company as an asset-held-for-sale. As such, this property has been valued at its estimated net realizable value, net of estimated selling expenses, carrying, and interest costs through the expected date of sale. Also acquired in this transaction was a 55% noncontrolling interest in Showboat Marina Casino Partnership ("SMCP"), which owned and operated the Showboat East Chicago casino. In first quarter 1999 we increased our ownership interest of SMCP to 99.55% and began consolidating this partnership with the financial results of our other businesses. The East Chicago property was re-branded as a "Harrah's" property during first quarter 1999. Also included in the Showboat acquisition was a 24.6% equity ownership interest in the Star City Casino in Sydney, Australia, and an agreement to manage that casino. In fourth quarter 1999 we sold our ownership interest in the Star City Casino and in first quarter 2000 we completed the sale of our management interests in that property. (See Note 15.) Subsequent to the closing of the Showboat acquisition, all debt assumed in the acquisition, including the debt of the partnership owning the East Chicago property, was retired using proceeds from the Previous Facility. (See Note 5.) RIO HOTEL & CASINO, INC. We completed our merger with Rio Hotel & Casino, Inc. ("Rio"), on January 1, 1999, issuing approximately 25 million shares of common stock to acquire all of Rio's outstanding shares in a one-for-one transaction and assuming Rio's outstanding debt of approximately $432 million. In addition to the Rio property, our acquisition also included Rio Secco, an 18-hole championship golf course, and approximately 35 acres adjacent to the Rio, which is available for further development. In second quarter 1999 we retired Rio's revolving credit facility scheduled to mature in 2003 and Rio's 10 5/8% Senior Subordinated Notes due 2005 and 9 1/2% Senior Subordinated Notes due 2007 using proceeds from our Bank Facility. (See Note 5.) The following unaudited pro forma consolidated financial information for the Company has been prepared assuming that the Showboat acquisition, the Rio merger and the debt extinguishments discussed above had occurred on the first day of the period: Year Ended (In millions, except December 31, per share amounts) 1998 ------------ Revenues..................................................... $2,764.7 ======== Income from operations....................................... $ 380.5 ======== Income before extraordinary losses........................... $ 126.1 ======== Net income................................................... $ 106.4 ======== Earnings per share-diluted Income before extraordinary losses........................ $ 1.00 ======== Net income................................................ $ 0.84 ======== These unaudited pro forma results are presented for comparative purposes only. The pro forma results are not necessarily indicative of what our actual results would have been had the Showboat acquisition, Rio merger and the debt extinguishments been completed as of the beginning of the period, or of future results. Notes to Consolidated Financial Statements, continued (Dollars in thousands, unless otherwise stated) - -------------------------------------------------------------------------------- 3. Stockholders' Equity In addition to its common stock, Harrah's Entertainment has the following classes of stock authorized but unissued: Preferred stock, $100 par value, 150,000 shares authorized Special stock, $1.125 par value, 5,000,000 shares authorized- Series A Special Stock, 2,000,000 shares designated Harrah's Entertainment's Board of Directors has authorized that one special stock purchase right (a "Right") be attached to each outstanding share of common stock. These Rights are exercisable only if a person or group acquires 15% or more of Harrah's Entertainment common stock or announces a tender offer for 15% or more of the common stock. Each Right entitles stockholders to buy one two-hundredth of a share of Series A Special Stock of the Company at an initial price of $130 per Right. If a person acquires 15% or more of the Company's outstanding common stock, each Right entitles its holder to purchase common stock of the Company having a market value at that time of twice the Right's exercise price. Under certain conditions, each Right entitles its holder to purchase stock of an acquiring company at a discount. Rights held by the 15% holder will become void. The Rights will expire on October 5, 2006, unless earlier redeemed by the Board at one cent per Right. In October 1996, our Board of Directors approved a plan, which expired on December 31, 1997, under which we repurchased 2,993,700 shares of Harrah's Entertainment common stock at an average price of $18.05 per share. The repurchased shares are held in treasury. In July 1999, our Board of Directors authorized the repurchase in open market and other transactions of up to 10 million shares of the Company's common stock. We expect to acquire our shares from time to time at prevailing market prices through the December 31, 2000, expiration of the approved plan. At December 31, 1999, we had repurchased 5.6 million shares under the provisions of this plan. These repurchases are in addition to 0.5 million shares repurchased earlier in 1999 in connection with the increase of our ownership interest in the East Chicago property. Under the terms of our employee stock benefit programs, we have reserved shares of Harrah's Entertainment common stock for issuance under the Restricted Stock and Stock Option Plans. (See Note 14 for a description of the plans.) The following table summarizes the total number of shares authorized for issuance under each of these plans and the remaining unissued shares as of December 31, 1999: Restricted Stock Stock Plan Option Plan ---------- ----------- Total shares authorized for issuance under the plans ........................... 8,400,000 19,792,955 Shares issued and options granted, net of cancellations ...................... (6,522,087) (18,111,670) --------- ----------- Shares held in reserve for issuance or grant under the plans as of December 31, 1999 ................... 1,877,913 1,681,285 ========= ========== 4. Detail of Certain Balance Sheet Accounts Deferred costs, trademarks and other consisted of the following: 1999 1998 --------- ---------- Star City management contract, net of amortization of $5,364 and $1,976 ............. $130,136 $133,524 Trademarks, net of amortization of $4,061 and $981 ............................... 119,139 66,319 Cash surrender value of life insurance (Note 14) ........................... 63,303 52,904 Treasury securities .............................. 62,555 64,510 Deferred finance charges, net of amortization of $3,379 and $16,453 ............ 21,507 21,913 Other ............................................ 148,580 140,704 --------- ---------- $545,220 $479,874 ========= ========== Accrued expenses consisted of the following: 1999 1998 -------- -------- Insurance claims and reserves ................ $ 50,985 $ 45,770 Payroll and other compensation ............... 83,975 48,521 Accrued interest payable ..................... 24,147 18,465 Other accruals ............................... 128,387 59,265 -------- -------- $287,494 $172,021 ======== ======== - -------------------------------------------------------------------------------- 5. Long-Term Debt Long-term debt consisted of the following:
1999 1998 ---------- ---------- Revolving Credit Facilities 7.0%-7.9% at December 31, 1999, maturities to 2004 ....................... $1,110,000 $1,086,000 Secured Debt 7.1%, maturity 2028 ...................... 98,278 99,232 9 1/4%, maturity 2008 .................... 58,137 58,269 13%, maturity 2009 ....................... 2,377 2,393 Unsecured Senior Notes 7 1/2%, maturity 2009 .................... 498,072 -- Unsecured Senior Subordinated Notes 7 7/8%, maturity 2005 .................... 750,000 750,000 Other Unsecured Borrowings 5.5%-15.2%, maturities to 2001 ........... 23,409 3,605 Capitalized lease obligations 4.9%-8.9%, maturities to 2002 ............ 2,872 2,187 ---------- ---------- 2,543,145 2,001,686 Current portion of long-term debt .......... (2,877) (2,332) ---------- ---------- $2,540,268 $1,999,354 ========== ==========
As of December 31, 1999, aggregate annual principal maturities for the four years subsequent to 2000 were: 2001, $2.7 million; 2002, $1.4 million; 2003, $1.3 million; and 2004, $1.1 billion. REVOLVING CREDIT FACILITIES. On April 30, 1999, we consummated new revolving credit and letter of credit facilities (the "Bank Facility") in the amount of $1.6 billion. This Bank Facility consists of a five-year $1.3 billion revolving credit and letter of credit facility maturing in 2004 and a separate $300 million revolving credit facility, which is renewable annually at the borrower's and lenders' options. Currently, the Bank Facility bears interest based upon 80 basis points over LIBOR for current borrowings under the five-year facility and 85 basis points over LIBOR for the 364-day facility. In addition, there is a facility fee for borrowed and unborrowed amounts which is currently 20 basis points on the five-year facility and 15 basis points on the 364-day facility. The interest rate and facility fee are based on our current debt ratings and leverage ratio and may change as our debt ratings and leverage ratio change. Proceeds from the Bank Facility were used to retire our previous revolving credit facility scheduled to mature in 2000 (the "Previous Facility"), Rio's revolving credit facility scheduled to mature in 2003 and Rio's 10 5/8% Senior Subordinated Notes due 2005 and 9 1/2% Senior Subordinated Notes due 2007. As of December 31, 1999, $1.1 billion in borrowings were outstanding under the Bank Facility, with an additional $37.5 million committed to back letters of credit. After consideration of these borrowings, $452.5 million of additional borrowing capacity was available to the Company as of December 31, 1999. ISSUANCE OF NOTES. During December 1998, Harrah's Operating Company, Inc., ("HOC"), a wholly-owned subsidiary of the Company, completed a public offering of $750.0 million principal amount of 7 7/8% Senior Subordinated Notes due 2005 (the "7 7/8% Notes"). The 7 7/8% Notes are unsecured and contain certain financial covenants. In January 1999, HOC completed a public offering of $500.0 million principal amount 7 1/2% Senior Notes due 2009 (the "7 1/2% Notes"). The 7 1/2% Notes, which are unsecured, were issued with essentially the same financial covenants as our 7 7/8% Notes. The net proceeds from both debt offerings were used to reduce our outstanding borrowings under the Previous Facility. Harrah's Entertainment has unconditionally guaranteed HOC's obligations under both the 7 7/8% Notes and the 7 1/2% Notes. EARLY EXTINGUISHMENTS OF DEBT. In addition to entering into the new Bank Facility, we have refinanced certain of our outstanding debts, in particular those debt obligations assumed in our acquisition transactions, to reduce our effective interest rate and /or lengthen maturities. We financed these activities using the proceeds from our bank facilities. The following table summarizes the debt obligations that we have refinanced over the last three years: - ------------------------------------------------------------------------------- Date Face Value Issuer Retired Debt Extinguished Retired - ------------------------------------------------------------------------------- SMCP March 1999 13 1/2% First Mortgage Notes due 2003 ...................... $140,000 Rio May 1999 10 5/8% Senior Subordinated Notes due 2005 ...................... 100,000 Rio May 1999 9 1/2% Senior Subordinated Notes due 2007 ...................... 125,000 SMCP July 1999 Capital lease obligations ............. 9,210 Showboat June 1998 9 1/4% First Mortgage Bonds due 2008 ...................... 218,555 Showboat June 1998 13% Senior Subordinated Notes due 2009 ...................... 117,900 HOC May 1998 8 3/4% Senior Subordinated Notes due 2000 ...................... 200,000 HOC May 1997 10 7/8% Senior Subordinated Notes due 2002 ...................... 200,000 The premiums paid to the holders of the debts retired and the write-off of the related unamortized deferred finance charges are reported on the Consolidated Statements of Income as Notes to Consolidated Financial Statements, continued (Dollars in thousands, unless otherwise stated) - -------------------------------------------------------------------------------- Extraordinary losses (see Note 10). We recorded the liabilities assumed in acquisition transactions at their fair value at the date of consummation of the acquisition. The premium charged to Extraordinary losses as a result of the retirement of these assumed debts equaled the difference between the consideration paid to the holders of the notes and the carrying value we assigned to the notes at the time of purchase. In addition to these debt extinguishments, in August 1998 we defeased the remaining balance of Showboat's 9 1/4% First Mortgage Bonds due 2008 and 13% Senior Subordinated Notes due 2009. Treasury securities were purchased and deposited with trustees to fund both the payment of the scheduled interest payments until the first call date and the payment of the premium and principal of the securities outstanding on the call date. The treasury securities are reported as Deferred costs, trademarks and other assets and the remaining balance of the defeased debt is reported in Long-term debt in the Consolidated Balance Sheets. INTEREST RATE AGREEMENTS. To manage the relative mix of our debt between fixed and variable rate instruments, we entered into interest rate swap agreements to modify the interest characteristics of our outstanding debt without an exchange of the underlying principal amount. At December 31, 1999, we were a party to six interest rate swap agreements to effectively convert a total of $300 million in variable rate debt to a fixed rate. Pursuant to the terms of these swaps, we receive variable payments tied to LIBOR in exchange for our payments at a fixed interest rate. The fixed rates we pay and the variable rates we receive are summarized in the following table: Rate Swap Rate Received Paid (Variable) at Notional Amount (Fixed) Dec. 31, 1999 Swap Maturity - --------------- ---------- -------------- ------------- $50 million 6.985% 6.140% March 2000 $50 million 6.951% 6.163% March 2000 $50 million 6.945% 6.163% March 2000 $50 million 6.651% 6.066% May 2000 $50 million 5.788% 6.121% June 2000 $50 million 5.785% 6.121% June 2000 The differences to be paid or received under the terms of the interest rate swap agreements are accrued as interest rates change and recognized as an adjustment to interest expense for the related debt. Changes in the variable interest rates to be paid or received by us pursuant to the terms of our interest rate agreements will have a corresponding effect on our future cash flows. These agreements contain a credit risk that the counterparties may be unable to meet the terms of the agreements. We minimize that risk by evaluating the creditworthiness of our counterparties, which are limited to major banks and financial institutions, and do not anticipate nonperformance by the counterparties. FAIR MARKET VALUE. Based on the borrowing rates currently available for debt with similar terms and maturities and market quotes of our publicly traded debt, the fair value of our long-term debt, including the interest rate swap agreements, at December 31, 1999 and 1998, was as follows: December 31, ------------ 1999 1998 ---------- ---------- ------------ ---------- Carrying Market Carrying Market (In millions) Value Value Value Value - --------------------------- ---------- ---------- ----------- ---------- Outstanding debt ........... $(2,543.1) $(2,484.6) $(2,001.7) $(2,019.0) Interest rate swap agreements (used for hedging purposes) ... (0.1) (0.5) (0.2) (6.2) The amounts reflected as the "Carrying Value" of the interest rate swap agreements represent the accrual balance as of the date reported. The "Market Value" of the interest rate swap agreements represents the estimated amount, considering the prevailing interest rates, that we would pay to terminate the agreements as of the date reported. 6. Leases We lease both real estate and equipment used in our operations and classify those leases as either operating or capital leases following the provisions of SFAS No. 13, "Accounting for Leases." At December 31, 1999, the remaining lives of our real estate operating leases ranged from one to 17 years, with various automatic extensions totaling up to 45 years. The average remaining term for other operating leases, which generally contain renewal options, extends approximately five years. Rental expense associated with operating leases is charged to expense in the year incurred and was included in the Consolidated Statements of Income as follows: 1999 1998 1997 ---- ---- ---- Noncancelable Minimum ..................... $16,385 $15,409 $16,455 Contingent .................. 4,666 4,029 2,929 Sublease .................... (385) (258) (294) Other .......................... 6,859 4,168 3,584 ------- ------- ------- $27,525 $23,348 $22,674 ======= ======= ======= - -------------------------------------------------------------------------------- Our future minimum rental commitments as of December 31, 1999, were as follows: Noncancelable Operating Leases ------------- 2000 ............................................................. $ 14,799 2001 ............................................................. 15,819 2002 ............................................................. 14,463 2003 ............................................................. 13,988 2004 ............................................................. 13,940 Thereafter ....................................................... 178,604 -------- Total minimum lease payments .................................. $251,613 ======== In addition to these minimum rental commitments, certain of these operating leases provide for contingent rentals based on a percentage of revenues in excess of specified amounts. 7. Write-downs, Reserves and Recoveries Our operating results include various pretax charges to record asset impairments, contingent liability reserves, project write-offs and recoveries at time of sale of previously recorded reserves for asset impairment. The components of our write-downs, reserves and recoveries were as follows: 1999 1998 1997 ---- ---- ---- Impairment of long-lived assets .............................. $ 3,367 $2,740 $ 806 Write-off of abandoned assets and other costs .............. 569 4,734 -- Reserve for debtor-in- possession loans to Harrah's Jazz Company ........................ -- -- 13,000 Recoveries from sale of impaired assets ..................... (1,701) -- -- -------- ------ ------- $ 2,235 $7,474 $13,806 ======= ====== ======= 8. Headquarters Relocation and Reorganization Costs During August 1999, we began the move of our corporate headquarters to Las Vegas, Nevada, from Memphis, Tennessee. The move, to be completed in 2000, is being accomplished in phases and the costs of the relocation are being expensed as incurred. Certain headquarters employees elected not to accept an offer to move, and the positions of other employees were eliminated as part of a staff reorganization conducted in advance of the move. The expenses for the severance payable to these employees were accrued when the employee became eligible for the severance payments. 9. Income Taxes Our federal and state income tax provision (benefit) allocable to identified income statement and balance sheet line items was as follows: 1999 1998 1997 -------- -------- -------- Income before income taxes and minority interests .................... $128,914 $ 74,600 $ 68,746 Extraordinary loss ....................... (5,990) (10,522) (4,477) Stockholders' equity Unrealized gain (loss) on marketable equity securities ................... 2,118 2,110 (16,362) Compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes ............................ (2,625) (787) (702) -------- -------- -------- $122,417 $ 65,401 $ 47,205 ======== ======== ======== Income tax expense attributable to Income before income taxes and minority interests consisted of the following: 1999 1998 1997 --------- ------- -------- United States Current Federal ....................... $ 69,567 $45,084 $ 78,306 State ......................... 7,429 6,531 5,407 Deferred ........................ 34,052 22,985 (14,967) Other countries Current ......................... 17,866 -- -- -------- ------- -------- $128,914 $74,600 $ 68,746 ======== ======= ======== Notes to Consolidated Financial Statements, continued (Dollars in thousands, unless otherwise stated) - -------------------------------------------------------------------------------- The differences between the statutory federal income tax rate and the effective tax rate expressed as a percentage of Income before income taxes and minority interests were as follows: 1999 1998 1997 ---- ---- ---- Statutory tax rate ............................. 35.0% 35.0% 35.0% Increases (decreases) in tax resulting from: State taxes, net of federal tax benefit ............................ 1.4 2.2 2.2 Goodwill amortization ..................... 1.3 1.1 -- Minority interests in partnership earnings ................... (1.1) (1.2) (1.4) Other ..................................... (0.7) (0.4) 1.6 ---- ---- ---- Effective tax rate ............................. 35.9% 36.7% 37.4% ==== ==== ==== The components of our net deferred tax balance included in the Consolidated Balance Sheets were as follows: 1999 1998 ----- ----- Deferred tax assets Compensation programs ........................ $ 41,670 $ 25,447 Bad debt reserve ............................. 12,951 4,735 Self-insurance reserves ...................... 7,910 5,302 Deferred income .............................. 1,278 1,137 Project opening expenses ..................... 1,274 2,573 Debt costs ................................... 768 1,592 Investments in nonconsolidated affiliates ................. -- 31,773 Other ........................................ 3,308 4,423 --------- --------- 69,159 76,982 --------- --------- Deferred tax liabilities Property ..................................... (173,963) (60,016) Management contract .......................... (45,547) (46,733) Trademarks ................................... (41,697) (23,212) Investment in nonconsolidated affiliates ................. (3,699) -- --------- --------- (264,906) (129,961) --------- --------- Net deferred tax liability ................... $(195,747) $ (52,979) ========= ========= 10. Extraordinary Items The components of our net extraordinary losses were as follows: 1999 1998 1997 ------ ------ ------ Losses on early extinguishments of debt ................. $(17,023) $(27,824) $(12,611) Harrah's Entertainment's share of nonconsolidated affiliate's extraordinary loss ...................... -- (2,391) -- -------- -------- -------- (17,023) (30,215) (12,611) Income tax benefit ......................... 5,990 10,522 4,477 -------- -------- -------- Extraordinary losses, net of income taxes ..................... $(11,033) $(19,693) $ (8,134) ======== ======== ======== The extraordinary losses on early extinguishments of debt are due to the premiums paid to the holders of the debt retired and the write-off of related unamortized deferred finance charges. See Note 5 for information regarding the specific debt issues retired in each period. Our 1998 results also include our share of an extraordinary loss incurred by a nonconsolidated affiliate as a result of that entity's reorganization and refinancing of its debt. 11. Supplemental Cash Flow Information The increase (decrease) in cash and cash equivalents due to the changes in long-term and working capital accounts was as follows: 1999 1998 1997 ------ ------ ------ Long-term accounts Deferred costs and other assets .................... $ 51,717 $ (6,457) $ (1,746) Deferred credits and other long-term liabilities ..... 4,825 23,717 294 -------- -------- -------- Net change in long-term accounts ......... $ 56,542 $ 17,260 $ (1,452) ======== ======== ======== Working capital accounts Receivables ....................... $(53,620) $(21,734) $(12,062) Inventories ....................... (307) (1,269) (565) Prepayments and other ............. 75,986 (2,134) (3,454) Other current assets .............. -- -- 27 Accounts payable .................. (1,849) 13,561 5,606 Accrued expenses .................. (90,371) (33,668) 14,161 -------- -------- -------- Net change in working capital accounts ........... $(70,161) $(45,244) $ 3,713 ======== ======== ======== - -------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR INTEREST AND TAXES. The following table reconciles our Interest expense, net of interest capitalized, per the Consolidated Statements of Income, to cash paid for interest: 1999 1998 1997 ----- ------ ----- Interest expense, net of amount capitalized ................ $193,407 $117,270 $79,071 Adjustments to reconcile to cash paid for interest Net change in accruals .......... (2,011) (16,917) (5,961) Amortization of deferred finance charges .............. (4,459) (4,982) (3,021) Net amortization of discounts and premiums ....... 543 74 (12) -------- --------- ---------- Cash paid for interest, net of amount capitalized ......... $187,480 $ 95,445 $70,077 ======== ========= ========= Cash payments for income taxes, net of refunds (Note 9) ........... $ 77,534 $ 51,785 $36,479 ======== ========= ========== 12. Commitments and Contingencies CONTRACTUAL COMMITMENTS. We continue to pursue additional casino development opportunities that may require, individually and in the aggregate, significant commitments of capital, up-front payments to third parties, guarantees by Harrah's Entertainment of third party debt and development completion guarantees. Excluding guarantees and commitments for New Orleans (see Notes 15 and 18), as of December 31, 1999, we had guaranteed third party loans and leases of $100.5 million, which are secured by certain assets, and had commitments of $238.8 million, primarily construction-related. During second quarter 1999, we performed under our guarantee of the Upper Skagit Tribe's development financing and purchased their receivable from the lender for $11.4 million. Under the terms of our agreement with the Tribe, they have agreed to fund the retirement of this debt. The Tribe is attempting to secure new financing; however, there is no assurance that their efforts will be successful and that the receivable will be collected. The agreements under which we manage casinos on Indian lands contain provisions required by law which provide that a minimum monthly payment be made to the tribe. That obligation has priority over scheduled payments of borrowings for development costs. In the event that insufficient cash flow is generated by the operations to fund this payment, we must pay the shortfall to the tribe. Such advances, if any, would be repaid to us in future periods in which operations generate cash flow in excess of the required minimum payment. These commitments will terminate upon the occurrence of certain defined events, including termination of the management contract. As of December 31, 1999, the aggregate monthly commitment pursuant to these contracts, which extend for periods of up to 60 months from December 31, 1999, was $1.1 million. SEVERANCE AGREEMENTS. As of December 31, 1999, the Company has severance agreements with 47 of its senior executives, which provide for payments to the executives in the event of their termination after a change in control, as defined. These agreements provide, among other things, for a compensation payment of 1.5 to 3.0 times the executive's average annual compensation, as defined, as well as for accelerated payment or accelerated vesting of any compensation or awards payable to the executive under any of Harrah's Entertainment's incentive plans. The estimated amount, computed as of December 31, 1999, that would be payable under the agreements to these executives based on earnings and stock options aggregated approximately $88 million. TAX SHARING AGREEMENTS. In connection with the 1995 spin-off of certain hotel operations (the "PHC Spin-off") to Promus Hotel Corporation ("PHC"), Harrah's Entertainment entered into a Tax Sharing Agreement with PHC wherein each company is obligated for those taxes associated with their respective businesses. Additionally, Harrah's Entertainment is obligated for all taxes for periods prior to the PHC Spin-off date which are not specifically related to PHC operations and/or PHC hotel locations. Our obligations under this agreement are not expected to have a material adverse effect on our consolidated financial position or results of operations. SELF-INSURANCE. We are self-insured for various levels of general liability, workers' compensation and employee medical coverage. Insurance claims and reserves include accruals of estimated settlements for known claims, as well as accruals of actuarial estimates of incurred but not reported claims. Notes to Consolidated Financial Statements, continued (Dollars in thousands, unless otherwise stated) - -------------------------------------------------------------------------------- 13. Litigation We are involved in various inquiries, administrative proceedings and litigation relating to contracts, sales of property and other matters arising in the normal course of business. While any proceeding or litigation has an element of uncertainty, management believes that the final outcome of these matters will not have a material adverse effect upon our consolidated financial position or our results of operations. 14. Employee Benefit Plans We have established a number of employee benefit programs for purposes of attracting, retaining and motivating our employees. The following is a description of the basic components of these programs. STOCK OPTION PLAN. Our employees may be granted options to purchase shares of common stock under the Harrah's Entertainment Stock Option Plan ("SOP"). An SOP grant typically vests in equal installments over a four-year period and allows the option holder to purchase stock over specified periods of time, generally ten years from the date of grant, at a fixed price equal to the market value at the date of grant. No options may be granted under the SOP after February 2008. All outstanding stock options under Rio's stock option plans at the date of our merger were fully vested and converted, at the same terms and conditions as originally granted, into options for Harrah's Entertainment common stock. No options for additional shares may be granted under the Rio plans, and any options cancelled under the Rio plans may not be re-issued. A summary of SOP activity for 1997, 1998 and 1999 is as follows:
Number of Common Shares Weighted Avg. -------------------------------- Exercise Price Options Available (Per Share) Outstanding For Grant -------------- ----------- --------- Balance - December 31, 1996 ............................................... $16.95 5,972,518 2,868,672 Granted ................................................................ 18.93 2,495,903 (2,495,903) Exercised .............................................................. 7.70 (196,905) -- Canceled ............................................................... 19.29 (946,944) 946,944 ---------- --------- Balance - December 31, 1997 ............................................... 17.57 7,324,572 1,319,713 Additional shares authorized ........................................... N/A -- 3,500,000 Granted ................................................................ 15.94 3,891,119 (3,891,119) Exercised .............................................................. 10.29 (241,409) -- Canceled ............................................................... 19.71 (661,128) 661,128 ---------- --------- Balance - December 31, 1998 ............................................... 16.99 10,313,154 1,589,722 Additional shares authorized ........................................... N/A -- 2,500,000 Rio acquisition ........................................................ 14.74 3,442,955 -- Granted ................................................................ 23.20 3,133,783 (3,133,783) Exercised .............................................................. 14.95 (2,444,747) -- Canceled ............................................................... 18.17 (725,346) 725,346 Rio plans cancellations ................................................ 18.24 (14,500) -- ---------- --------- Balance - December 31, 1999 ............................................... 18.14 13,705,299 1,681,285 ========== =========
1999 1998 1997 ------ ------ ------ Options exercisable at December 31 ................. 4,727,341 2,257,662 1,536,964 Weighted average fair value per share of options granted during year ......... $11.74 $7.39 $9.98 The following table summarizes additional information regarding the options outstanding at December 31, 1999: Options Outstanding Options Exercisable ------------------------------------- ----------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contract Exercise Number Exercise Prices Outstanding Life Price Exercisable Price - ------------- ----------- --------- -------- ----------- -------- $ 3.00-$15.50 5,362,334 7.1 years $13.57 2,370,735 $12.60 15.63- 21.47 5,685,993 7.7 years 18.55 1,864,345 18.90 22.55- 35.59 2,656,972 9.0 years 26.51 492,261 24.44 ---------- --------- 13,705,299 4,727,341 ========== ========= As allowed under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," we apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations to account for the SOP and, accordingly, do not recognize compensation expense. Had compensation expense for the SOP been - -------------------------------------------------------------------------------- determined in accordance with SFAS No. 123, our Net income and Earnings per share would have been reduced to the pro forma amounts indicated in the following table:
1999 1998 1997 ---------------------- ---------------------- --------------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma -------- ----- -------- ----- -------- ----- Net income ............ $208,470 $193,631 $102,024 $93,628 $99,388 $89,570 Earnings per share Basic ............ 1.65 1.54 1.02 0.93 0.99 0.89 Diluted .......... 1.62 1.50 1.00 0.92 0.98 0.88
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1999 1998 1997 ------ ------ ----- Expected dividend yield ....................... 0.0% 0.0% 0.0% Expected stock price volatility ............... 40.0% 47.0% 41.0% Risk-free interest rate ....................... 5.9% 4.3% 5.8% Expected average life of options (years) ...... 6 5 7 RESTRICTED STOCK PLAN. Employees may be granted shares of common stock under the Harrah's Entertainment Restricted Stock Plan ("RSP"). Shares granted under the RSP are restricted as to transfer and subject to forfeiture during a specified period or periods prior to vesting. The shares generally vest in equal installments over a period of four years. No awards of RSP shares may be made under the current plan after February 2008. The compensation arising from an RSP grant is based upon the market price at the grant date. Such expense is deferred and amortized to expense over the vesting period. The Company has issued time accelerated restricted stock ("TARSAP") awards to certain key executives which will fully vest on January 1, 2002, if the executive continues in active employment until that date. However, the vesting of some or all of these shares can be accelerated into the years 2000 and 2001 on the basis of our financial performance. The expense arising from the TARSAP awards is being amortized to expense over the periods in which the restrictions lapse. The number and weighted-average grant-date fair value of RSP shares granted, and the amortization expense recognized, during 1999, 1998 and 1997, including the TARSAP awards, were as follows: 1999 1998 1997 ------ ------ ------ Number of shares granted .............. 560,085 990,893 309,833 Weighted-average grant price per share .................... $23.62 $17.26 $19.46 Amortization expense (In millions) ...................... 9.7 6.9 4.5 SAVINGS AND RETIREMENT PLAN. We maintain a defined contribution savings and retirement plan, which, among other things, allows pretax and after-tax contributions to be made by employees to the plan. Under the plan, participating employees may elect to contribute up to 16 percent of their eligible earnings, the first six percent of which is fully matched. Amounts contributed to the plan are invested, at the participant's direction, in a Harrah's company stock fund, a diversified stock fund, an aggressive stock fund, a long-term bond fund, an income fund and/or a treasury fund. Participants become vested in the matching contribution over five years of credited service. Our contribution expense for this plan was $22.2 million, $18.1 million and $14.6 million in 1999, 1998 and 1997, respectively. DEFERRED COMPENSATION PLANS. Harrah's maintains deferred compensation plans under which certain employees may defer a portion of their compensation. Amounts deposited into these plans are unsecured liabilities of the Company and earn interest at rates approved by the Human Resources Committee of the Board of Directors. The total liability included in Deferred credits and other liabilities for these plans at December 31, 1999 and 1998 was $59.3 million and $49.6 million, respectively. In connection with the administration of one of these plans, we have purchased company-owned life insurance policies insuring the lives of certain directors, officers and key employees. MULTI-EMPLOYER PENSION PLAN. Approximately 4,900 of our employees are covered by union sponsored, collectively bargained multi-employer pension plans. We contributed and charged to expense $4.2 million, $4.4 million and $2.4 million in 1999, 1998 and 1997, respectively, for such plans. The plans' administrators do not provide sufficient information to enable us to determine our share, if any, of unfunded vested benefits. Notes to Consolidated Financial Statements, continued (Dollars in thousands, unless otherwise stated) - -------------------------------------------------------------------------------- 15. Nonconsolidated Affiliates NEW ORLEANS CASINO. We have an approximate 43% ownership interest in the parent of Jazz Casino Company, L.L.C. ("JCC"), the company which owns and operates the exclusive land-based casino (the "Casino") in New Orleans, Louisiana. We manage that Casino pursuant to a management agreement between JCC and a subsidiary of our Company. We have (i) guaranteed JCC's initial $100.0 million annual payment under the Casino operating contract to the State of Louisiana gaming board (the "State Guarantee"), (ii) guaranteed $166.5 million of a $236.5 million JCC bank credit facility, and (iii) made a $22.5 million subordinated loan to JCC to finance construction of the Casino. With respect to the State Guarantee, we are obligated to guarantee JCC's first $100 million annual payment obligation commencing upon the October 28, 1999, opening of the Casino, and, if certain cash flow tests (for the renewal periods beginning April 1, 2001) and other conditions are satisfied each year, to renew the guarantee beginning April 1, 2000, for each 12 month period ending March 31, 2004. Our obligations under the guarantee for the first year of operations or any succeeding 12 month period is limited to a guarantee of the $100 million payment obligation of JCC for the 12 month period in which the guarantee is in effect and is secured by a first priority lien on JCC's assets. JCC's payment (and therefore the amount we have guaranteed) is $100 million at commencement of each 12 month period under the Casino operating contract and declines on a daily basis by 1/365 of $100 million to the extent payments are made each day by JCC to Louisiana's gaming board. (See Note 18.) DISPOSITIONS OF EQUITY INTERESTS. In 1999 we sold our shares of Star City casino and recorded a pretax gain of $43.5 million. We also sold our interest in Sodak Gaming, Inc. to a gaming equipment manufacturing company and recorded a pretax gain of $16.3 million. During 1998, we sold our remaining equity interest in a restaurant affiliate and recognized a gain on the sale of $13.1 million. During 1997, we sold our remaining 12.5% ownership interest in Sky City Limited ("Sky City"), a New Zealand publicly-traded company which owns a casino entertainment facility in Auckland, New Zealand, and recorded a pretax gain of $37.4 million. COMBINED FINANCIAL INFORMATION. Summarized balance sheet and income statement information of nonconsolidated affiliates, which we accounted for using the equity method, as of December 31, 1999 and 1998, and for the three fiscal years ended December 31, 1999, is included in the following tables. 1999 1998 1997 ------ ------ ------ Combined Summarized Balance Sheet Information Current assets ............ $ 73,560 $ 111,218 Land, buildings and equipment, net ......... 570,204 1,094,195 Other assets .............. 130,889 355,505 ----------- ----------- Total assets ......... 774,653 1,560,918 ----------- ----------- Current liabilities ....... 100,336 96,095 Long-term debt ............ 437,756 808,334 ----------- ----------- Total liabilities .... 538,092 904,429 ----------- ----------- Net assets ......... $ 236,561 $ 656,489 =========== =========== Combined Summarized Statements of Operations Revenues .................. $ 116,236 $ 299,292 $ 23,464 =========== =========== =========== Operating loss ............ $ (77,595) $ (2,774) $ (44,115) =========== =========== =========== Net loss .................. $ (108,082) $ (33,245) $ (39,290) =========== =========== =========== Our Investments in and advances to nonconsolidated affiliates are reflected in the accompanying Consolidated Balance Sheets as follows: 1999 1998 -------- -------- Investments in and advances to nonconsolidated affiliates Accounted for under the equity method ................................... $167,828 $231,366 Accounted for at historical cost ............ -- 15,087 Available for sale and recorded at market value .......................... 683 27,055 -------- -------- $168,511 $273,508 ======== ======== In accordance with the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," we adjust the carrying value of our available for sale - -------------------------------------------------------------------------------- equity investments to include unrealized gains or losses. A corresponding adjustment is recorded in the combination of our stockholders' equity and deferred income tax accounts. 16. Summarized Financial Information HOC is a wholly-owned subsidiary and the principal asset of Harrah's Entertainment and the issuer of certain debt securities which have been guaranteed by Harrah's Entertainment. Due to the comparability of HOC's consolidated financial information with that of Harrah's Entertainment, complete separate financial statements and other disclosures regarding HOC have not been presented. Management has determined that such information is not material to holders of HOC's debt securities. Summarized financial information of HOC as of December 31, 1999 and 1998, and for each of the three years ended December 31, 1999, prepared on the same basis as Harrah's Entertainment was as follows: 1999 1998 1997 ------ ------ ----- Current assets ....................... $ 481,437 $ 271,247 Land, buildings, riverboats and equipment, net .................... 3,061,230 1,870,157 Other assets ......................... 1,218,866 1,136,750 ---------- ---------- 4,761,533 3,278,154 ---------- ---------- Current liabilities .................. 353,534 209,651 Long-term debt ....................... 2,540,268 1,999,354 Other liabilities .................... 349,782 187,247 Minority interests ................... 18,949 14,906 ---------- ---------- 3,262,533 2,411,158 ---------- ---------- Net assets ...................... $1,499,000 $ 866,996 ========== ========== Revenues ............................. $3,024,027 $2,003,861 $1,618,998 ========== ========== ========== Income from operations ............... $ 481,183 $ 286,703 $ 213,942 ========== ========== ========== Income before extraordinary losses ............................ $ 219,598 $ 120,632 $ 105,343 ========== ========== ========== Net income ........................... $ 208,565 $ 100,939 $ 97,209 ========== ========== ========== Certain of our debt guarantees contain certain covenants which, among other things, place limitations on HOC's ability to pay dividends and make other restricted payments, as defined, to Harrah's Entertainment. The amount of HOC's restricted net assets, as defined, computed in accordance with the most restrictive of these covenants regarding restricted payments was approximately $1.5 billion at December 31, 1999. 17. Players International, Inc. In August 1999, we signed a definitive agreement to acquire Players International, Inc. ("Players"). Players operates a dockside riverboat casino on the Ohio River in Metropolis, Illinois; two cruising riverboat casinos in Lake Charles, Louisiana; two dockside riverboat casinos in Maryland Heights, Missouri, and a horse racetrack in Paducah, Kentucky. Players and Harrah's jointly operate a landside hotel and entertainment facility at the Maryland Heights property, a suburb of St. Louis. Players' shareholders will receive $8.50 in cash for each share outstanding and we will assume approximately $150 million of Players' debt. The acquisition will be funded through our Bank Facility and will be accounted for as a purchase. Completion of the transaction is subject to various conditions, including regulatory approvals. 18. Subsequent Event On February 28, 2000, we were notified by JCC that it was suspending payment of the daily payments to the State of Louisiana until JCC is able to generate sufficient cash flow to pay its operating expenses and make the daily payments. On February 29, 2000, the State made a demand on the Company under the State Guarantee, and we began funding the daily payment to the State on that date. We have also agreed, subject to certain conditions, to renew the State Guarantee for the period April 1, 2000, until March 31, 2001. See Note 15 for further discussion of the State Guarantee. Management's Report on Financial Statements - -------------------------------------------------------------------------------- Harrah's Entertainment is responsible for preparing the financial statements and related information appearing in this report. Management believes that the financial statements present fairly its financial position, its results of operations and its cash flows in conformity with generally accepted accounting principles. In preparing its financial statements, Harrah's Entertainment is required to include amounts based on estimates and judgments which it believes are reasonable under the circumstances. Harrah's Entertainment maintains accounting and other control systems designed to provide reasonable assurance that financial records are reliable for purposes of preparing financial statements and that assets are properly accounted for and safeguarded. Compliance with these systems and controls is reviewed through a program of audits by an internal auditing staff. Limitations exist in any internal control system, recognizing that the system's cost should not exceed the benefits derived. The Board of Directors pursues its responsibility for Harrah's Entertainment's financial statements through its Audit Committee, which is composed solely of directors who are not Harrah's Entertainment officers or employees. The Audit Committee meets from time to time with the independent public accountants, management and the internal auditors. Harrah's Entertainment's internal auditors report directly to the Audit Committee pursuant to gaming regulations. The independent public accountants have direct access to the Audit Committee, with and without the presence of management representatives. /s/ Philip G. Satre Philip G. Satre Chairman of the Board and Chief Executive Officer /s/ Judy T. Wormser Judy T. Wormser Vice President, Controller and Chief Accounting Officer Report of Independent Public Accountants - -------------------------------------------------------------------------------- To the Stockholders and Board of Directors of Harrah's Entertainment, Inc.: We have audited the accompanying consolidated balance sheets of Harrah's Entertainment, Inc. (a Delaware corporation) and subsidiaries ("Harrah's Entertainment") as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows for each of the three years ended December 31, 1999. These financial statements are the responsibility of Harrah's Entertainment's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Harrah's Entertainment as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Anderson LLP Las Vegas, Nevada, February 8, 2000 (except with respect to the matter discussed in Note 18, as to which the date is February 29, 2000). HARRAH'S ENTERTAINMENT, INC. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
First Second Third Fourth Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ---- 1999(1) Revenues .............................. $ 711,668 $ 751,137 $ 814,054 $ 747,569 $3,024,428 Income from operations ................ 112,483 123,504 155,921 89,129 481,037 Net income ............................ 34,097 40,548 74,634 59,191 208,470 Earnings per share(3) Basic ............................... 0.27 0.32 0.59 0.47 1.65 Diluted ............................. 0.27 0.31 0.58 0.45 1.62 1998(2) Revenues .............................. $ 414,447 $ 478,634 $ 586,242 $ 524,692 $2,004,015 Income from operations ................ 58,066 71,855 109,202 48,723 287,846 Net income ............................ 23,236 20,406 44,202 14,180 102,024 Earnings per share(3) Basic ............................... 0.23 0.20 0.44 0.14 1.02 Diluted ............................. 0.23 0.20 0.44 0.14 1.00
(1) 1999 includes $16.3 million recognized in third quarter and $43.5 million recognized in fourth quarter in pretax gains from the sales of our equity interests in nonconsolidated affiliates. 1999 also includes the financial results of Rio Hotel & Casino, Inc., from its January 1, 1999, date of acquisition. (2) 1998 includes $13.2 million in pretax income from the second quarter sale of our interest in a restaurant subsidiary. 1998 also includes the operating results for Showboat, Inc., for periods after its June 1, 1998, acquisition. (3) The sum of the quarterly per share amounts may not equal the annual amount reported, as per share amounts are computed independently for each quarter and for the full year. EX-21 14 EXHIBIT 21 Exhibit 21 HARRAH'S ENTERTAINMENT, INC. SUBSIDIARIES
Jurisdiction Percentage Date of of of Incorpor- FEIN Name Incorporation Ownership ation Number ---- ------------- ---------- --------- ------ Aster Insurance Ltd. Bermuda 100% 02/06/90 62-1428220 HEI Acquisition Corp. II Nevada 100% 07/22/98 88-0407469 Harrah's Operating Company, Inc. Delaware 100% 08/08/83 75-1941623 Dusty Corporation Nevada 100% 07/02/98 88-0398744 Harrah South Shore Corporation California 100% 10/02/59 88-0074793 Harrah's - Holiday Inns of New Jersey, Inc. New Jersey 100% 09/19/79 62-1071040 Harrah's Alabama Corporation Nevada 100% 09/09/93 88-0308027 Harrah's Arizona Corporation Nevada 100% 01/26/93 62-1523519 Harrah's Asia Development Company Nevada 100% 09/20/96 88-0368569 Harrah's Asia Investment Company Nevada 100% 09/20/96 88-0368568 Harrah's Asia Management Company Nevada 100% 09/20/96 88-0368567 Harrah's Atlantic City, Inc. New Jersey 100% 02/13/79 93-0737757 Harrah's Aviation, Inc. Tennessee 100% 03/11/63 62-0694622 HCAL Corporation Nevada 100% 02/02/94 88-0313169 Harrah's Crescent City Investment Company Nevada 100% 03/28/97 86-0863877 Harrah's Illinois Corporation Nevada 100% 12/18/91 88-0284653 Van Buren Leasing Corporation(1) Nevada 100% 08/30/96 93-1218215 Harrah's Indiana Casino Corporation Nevada 100% 09/09/93 88-0308079 Harrah's Indiana Management Corporation Nevada 100% 09/09/93 88-0308082 Harrah's Interactive Entertainment Company Nevada 100% 09/21/94 88-0326037 Harrah's Interactive Investment Company Nevada 100% 09/21/94 88-0326036
- ---------------------- (1) 100% owned by Des Plaines Development Limited Partnership of which Harrah's Illinois Corporation is 80% partner. 1 Exhibit 21 HARRAH'S ENTERTAINMENT, INC. SUBSIDIARIES
Jurisdiction Percentage Date of of of Incorpor- FEIN Name Incorporation Ownership ation Number ---- ------------- ---------- --------- ------ Harrah's Kansas Casino Corporation Nevada 100% 11/12/93 88-0313173 HPB Corporation Kansas 100% 11/13/97 74-2859636 Harrah's Las Vegas, Inc. Nevada 100% 03/21/68 88-0116377 Harrah's Laughlin, Inc. Nevada 100% 07/10/87 88-0230282 Harrah's Louisiana Investment Company Nevada 100% 10/22/98 88-0407915 Harrah's Management Company Nevada 100% 04/07/83 88-0187173 Harrah's Marketing Services Corporation Nevada 100% 08/21/97 86-0889202 Harrah's Maryland Heights Corporation Nevada 100% 07/30/93 88-0306276 Harrah's Maryland Heights LLC(2) Delaware 99% 10/16/95 43-1725857 Harrah's Maryland Heights Operating Company Nevada 100% 06/20/95 88-0343024 Harrah's Michigan Corporation Nevada 100% 06/15/93 88-0307990 Harrah's Minnesota Corporation Nevada 100% 10/20/92 88-0292681 Harrah's NC Casino Company, LLC(3) North Carolina 99% 04/21/95 56-1936298 Harrah's New Jersey, Inc. New Jersey 100% 09/13/78 22-2219370 Harrah's New Orleans Management Company Nevada 100% 05/21/93 62-1534758 Harrah's New Zealand Inc. Nevada 100% 02/18/92 88-0292682 Harrah's North Kansas City LLC(4) Missouri 100% 12/15/99 62-1802713 Harrah's of Jamaica, Ltd. Jamaica 100% 07/12/85 N/A Harrah's Operating Company Memphis, Inc. Delaware 100% 12/15/99 62-1802711 Harrah's Pennsylvania Development Co. Nevada 100% 05/18/94 88-0320301
- ---------------------- (2) 99% Harrah's Operating Company, Inc., 1% Harrah's Maryland Heights Operating Company (3) 99% Harrah's Operating Company, nc., 1% Harrah's Management Company (4) Successor by merger with Harrah's-North Kansas City Corporation; 100% Harrah's Operating Company, Inc. 2 Exhibit 21 HARRAH'S ENTERTAINMENT, INC. SUBSIDIARIES
Jurisdiction Percentage Date of of of Incorpor- FEIN Name Incorporation Ownership ation Number ---- ------------- ---------- --------- ------ Harrah's Pittsburgh Management Company Nevada 100% 06/08/94 88-0320269 Harrah's Red River Corporation Nevada 100% 08/05/96 88-0365487 Harrah's Reno Holding Company, Inc. Nevada 100% 02/23/88 62-1440237 Harrah's Shreveport Investment Company, Inc. Nevada 100% 04/23/92 88-0292677 Harrah's Shreveport Management Company, Inc. Nevada 100% 04/23/92 88-0292678 Harrah's Skagit Valley Agency Corporation Nevada 100% 11/08/95 88-0348745 Harrah's Southeast Washington Casino Corporation Nevada 100% 11/21/95 88-0352305 Harrah's Southwest Michigan Casino Nevada 100% 04/06/95 88-0337476 Corporation Harrah's Travel, Inc. Nevada 100% 07/30/98 88-0400542 Harrah's Tunica Corporation Nevada 100% 08/10/92 88-0292680 Harrah's Vicksburg Corporation Nevada 100% 07/13/92 88-0292320 Harrah's Washington Corporation Nevada 100% 02/03/94 88-0313171 Harrah's Wheeling Corporation Nevada 100% 04/29/94 88-0317848 Rio Hotel & Casino, Inc. Nevada 100% 06/14/88 88-0288115 Rio Resort Properties, Inc. Nevada 100% 09/04/87 88-0229914 Rio Properties, Inc. Nevada 100% 02/24/92 95-3671082 Cinderlane, Inc. Nevada 100% 12/29/94 88-3331880 Twain Avenue, Inc. Nevada 100% 08/08/97 88-0438885 McKellar Industrial Park Owner's Nevada 100% 12/03/84 Association, Inc. (Non-Profit) HLG, Inc. Nevada 100% 10/28/96 88-0371040 Rio Leasing, Inc. Nevada 100% 09/10/96 88-0369074 Rio Development Company, Inc. Nevada 100% 08/28/96 88-0220505
3 Exhibit 21 HARRAH'S ENTERTAINMENT, INC. SUBSIDIARIES
Jurisdiction Percentage Date of of of Incorpor- FEIN Name Incorporation Ownership ation Number ---- ------------- ---------- --------- ------ Rio Vegas Hotel Casino, Inc. Nevada 100% 09/28/88 N/A Showboat, Inc. Nevada 100% 02/16/60 88-0090766 Showboat Australia PTY Limited(5) Australia 50% 08/11/93 N/A Ocean Showboat, Inc. New Jersey 100% 09/12/83 22-2500790 Atlantic City Showboat, Inc. New Jersey 100% 01/10/84 22-2500794 Ocean Showboat Finance Corporation New Jersey 100% 12/22/86 22-2773679 Showboat Development Company Nevada 100% 06/09/83 88-0227522 Lake Pontchartrain Showboat, Inc. Nevada 100% 03/18/93 88-0297741 Showboat Canada, Inc. Canada 100% 06/28/93 N/A Dion Showboat, Inc. Canada 100% 06/28/93 N/A Showboat Grande, Inc. Nevada 100% 06/08/93 88-0302251 Showboat Indiana, Inc. Nevada 100% 09/13/93 88-0308090 Showboat LMI, Inc. Nevada 100% 07/26/94 None Showboat Louisiana, Inc. Nevada 100% 05/18/93 88-0302250 Showboat Missouri, Inc. Nevada 100% 07/26/94 88-0344271 Showboat Mohawk, Inc. Nevada 100% 07/07/93 88-0308091 Showboat New Hampshire, Inc. Nevada 100% 07/26/94 None Showboat Rockingham Company, LLC(6) New Hampshire 50% 09/09/97 Showboat One, Inc. Nevada 100% 07/26/94 None Showboat Six, Inc. Nevada 100% 07/26/94 None Showboat Seven, Inc. Nevada 100% 07/26/94 None Showboat Eight, Inc. Nevada 100% 07/26/94 None Showboat Nine, Inc. Nevada 100% 07/27/94 None Showboat Ten, Inc. Nevada 100% 07/27/94 None Showboat Eleven, Inc. Nevada 100% 07/27/94 None Showboat Twelve, Inc. Nevada 100% 07/27/94 None Showboat Thirteen, Inc. Nevada 100% 07/27/94 None Showboat Fourteen, Inc. Nevada 100% 07/27/94 None
- ---------------------- (5) 50% Showboat, Inc., 50% Showboat Development Company (6) 50% Showboat New Hampshire, Inc., 50% Rockingham Venture, Inc. 4 Exhibit 21 HARRAH'S ENTERTAINMENT, INC. SUBSIDIARIES
Jurisdiction Percentage Date of of of Incorpor- FEIN Name Incorporation Ownership ation Number ---- ------------- ---------- --------- ------ Showboat Fifteen, Inc. Nevada 100% 07/27/94 88-0335287 Showboat Finance Corporation Nevada 100% 05/10/94 None Showboat Intellectual Property, Inc. Nevada 100% 01/25/94 88-0314414 Showboat Land Company Nevada 100% 11/12/97 88-0378914 Showboat Operating Company Nevada 100% 04/10/73 88-0121120 Showboat Land LLC(7) Nevada 1% 11/04/97 88-0382943 Trigger Real Estate Corporation Nevada 100% 07/02/98 88-0398745 Waterfront Entertainment and Development, Inc. Indiana 100% 07/19/93
- ---------------------- (7) 1% Showboat Operating Company, 99% Showboat Land Holding Limited Partnership 5 EX-27 15 EXHIBIT 27 (FINANCIAL DATA SCHEDULE)
5 1,000 12-MOS DEC-31-1999 DEC-31-1999 233,581 0 165,272 44,086 30,666 486,669 3,983,754 922,524 4,766,847 371,571 2,540,268 0 0 12,438 1,473,839 4,766,847 0 3,024,428 0 2,429,607 0 0 193,407 359,583 128,914 219,503 0 11,033 0 208,470 1.65 1.62
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