<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM-10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 1996
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ----------------------
Commission file number 33-48887
--------------------
HOLLYWOOD CASINO CORPORATION
HWCC-TUNICA, INC.
- - --------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2352412
TEXAS 75-2513808
- - ------------------------------------------- ----------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
TWO GALLERIA TOWER, SUITE 2200
13455 NOEL ROAD, LB 48
DALLAS, TEXAS 75240
- - ------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) (214) 392-7777
--------------
(NOT APPLICABLE)
- - --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether each of the Registrants (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 each
of the Registrants was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES X NO
------ ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Registrant Class May 13, 1996
- - ---------------------------- ------------------------------ -----------------
HOLLYWOOD CASINO CORPORATION COMMON STOCK, $.0001 PAR VALUE 24,719,968 SHARES
HWCC-TUNICA, INC. COMMON STOCK, $.01 PAR VALUE 1,000 SHARES
1
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
- - ------------------------------
INTRODUCTORY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------
Hollywood Casino Corporation ("HCC" or the "Company") develops, owns
and operates riverboat and land-based casino entertainment facilities. Through
its subsidiaries, HCC currently owns and operates a riverboat gaming facility
located in Aurora, Illinois (the "Aurora Casino"); a casino and hotel complex in
Tunica County, Mississippi (the "Tunica Casino"); the Sands Hotel and Casino
(the "Sands") in Atlantic City, New Jersey; and other hotel properties in the
United States and Puerto Rico, and is actively pursuing potential gaming
opportunities in domestic and foreign jurisdictions where gaming is legalized or
is being actively considered. Approximately 47% of HCC's outstanding common
shares are listed and traded on the NASDAQ under the symbol HWCC. The remaining
outstanding HCC common shares are owned by certain general partnerships and
trusts controlled by Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt
and by other family members (collectively, the "Pratt Family").
HCC owns all of the outstanding common stock of both Hollywood Casino
- - - Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an Illinois
corporation organized by the Pratt Family during 1990 for the purpose of
developing and owning the Aurora Casino. HCT is a Texas corporation formed by
HCC during 1993 to acquire and complete the Tunica Casino. HCC also owns
approximately 80% of the common stock of Pratt Hotel Corporation ("PHC"), a
Delaware corporation, whose principal assets are the Sands and management and
consulting agreements on the Aurora Casino and the Tunica Casino, respectively.
The remaining PHC common stock is listed and traded on the American Stock
Exchange under the symbol PHC. The Sands is not affiliated with the Sands Hotel
and Casino in Las Vegas, Nevada.
As further discussed in the Notes to Consolidated Financial
Statements, HCC issued $210,000,000 of 12 3/4% Senior Secured Notes (the "Senior
Secured Notes") due November 1, 2003, discounted to yield 13 3/4% per annum,
through a public offering in October 1995. The Senior Secured Notes are
unconditionally guaranteed on a senior secured basis by HCT and by certain
future subsidiaries of HCC. The Senior Secured Notes are secured by, among
other things, (i) substantially all of the assets of HCT, (ii) a first mortgage
limited to approximately $39 million on substantially all of the assets of HCA
and (iii) a pledge of the capital stock of certain subsidiaries of HCC including
HCA and HCT. Accordingly, the financial statements of HCA and HCT are also
included herein.
The consolidated financial statements and the financial statements as
of March 31, 1996 and for the three month periods ended March 31, 1996 and 1995
have been prepared by HCC, HCA and HCT without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, these consolidated financial statements and financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the consolidated financial position of HCC and the
financial position of HCA and HCT as of March 31, 1996, and the results of their
operations and cash flows for the three month periods ended March 31, 1996 and
1995.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements should be
read in conjunction with the financial statements and notes thereto included in
HCC and HCT's 1995 Annual Report on Form 10-K.
A significant portion of HCC's assets relate to the Sands and the
Aurora Casino. Historically, the Sands' gaming operations have been highly
seasonal in nature, with the peak activity occurring from May to September.
Furthermore, the Aurora Casino has also experienced seasonality, but to a lesser
extent than the Sands, and management believes that seasonality may also cause
fluctuations in reported results at the Tunica Casino. Consequently, the
results of operations for the three month period ended March 31, 1996 are not
necessarily indicative of the operating results to be reported for the full
year.
2
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 59,860,000 $ 56,538,000
Accounts receivable, net of allowances of
$18,343,000 and $17,675,000, respectively 15,608,000 16,410,000
Inventories 5,540,000 5,815,000
Prepaid expenses 2,962,000 3,340,000
Deferred income taxes 10,285,000 10,585,000
Refundable deposits and other
current assets 1,617,000 1,307,000
------------- -------------
Total current assets 95,872,000 93,995,000
------------- -------------
Property and Equipment:
Land 61,569,000 61,643,000
Buildings and improvements 255,973,000 255,646,000
Riverboats and barges 39,494,000 39,491,000
Operating equipment 150,376,000 149,019,000
Construction in progress 15,920,000 7,432,000
------------- -------------
523,332,000 513,231,000
Less - accumulated depreciation
and amortization (188,647,000) (179,073,000)
------------- -------------
Net property and equipment 334,685,000 334,158,000
------------- -------------
Cash Restricted for Construction Projects 26,467,000 29,874,000
------------- -------------
Other Assets:
Obligatory investments 5,122,000 5,521,000
Deferred financing costs 15,694,000 16,136,000
Notes receivable 19,195,000 19,222,000
Land rights 7,878,000 7,962,000
Other assets 8,793,000 7,762,000
------------- -------------
Total other assets 56,682,000 56,603,000
------------- -------------
$ 513,706,000 $ 514,630,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
3
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
-------------- --------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 8,215,000 $ 9,325,000
Short-term credit facilities 2,000,000 -
Accounts payable 15,268,000 14,027,000
Accrued liabilities -
Salaries and wages 7,498,000 8,278,000
Interest 21,285,000 16,964,000
Insurance 4,707,000 4,319,000
Other 16,264,000 14,763,000
Other current liabilities 4,338,000 4,844,000
------------- -------------
Total current liabilities 79,575,000 72,520,000
------------- -------------
Long-Term Debt 476,099,000 476,829,000
------------- -------------
Capital Lease Obligations 10,211,000 10,693,000
------------- -------------
Other Noncurrent Liabilities 11,714,000 11,821,000
------------- -------------
Commitments and Contingencies
Shareholders' Deficit:
Common Stock:
Class A common stock, $.0001 par value
per share; 50,000,000 shares authorized;
24,720,000 shares issued and outstanding 2,000 2,000
Class B, non-voting, $.01 par value per
share; 10,000,000 shares authorized; no
shares issued - -
Additional paid-in capital 77,936,000 77,936,000
Accumulated deficit (141,831,000) (135,171,000)
------------- -------------
Total shareholders' deficit (63,893,000) (57,233,000)
------------- -------------
$ 513,706,000 $ 514,630,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1996 1995
------------- --------------
<S> <C> <C>
Revenues:
Casino $122,490,000 $119,573,000
Rooms 4,350,000 4,112,000
Food and beverage 15,225,000 12,763,000
Other 3,417,000 2,342,000
------------ ------------
145,482,000 138,790,000
Less - promotional allowances (12,502,000) (10,122,000)
------------ ------------
Net revenues 132,980,000 128,668,000
------------ ------------
Expenses:
Casino 92,922,000 81,253,000
Rooms 1,465,000 1,734,000
Food and beverage 5,245,000 4,829,000
Other 1,729,000 1,663,000
General and administrative 14,411,000 14,259,000
Depreciation and amortization 10,595,000 9,681,000
Development 197,000 1,228,000
------------ ------------
Total expenses 126,564,000 114,647,000
------------ ------------
Income from operations 6,416,000 14,021,000
------------ ------------
Non-operating income (expenses):
Interest income 1,019,000 816,000
Interest expense, net of capitalized interest
of $81,000 and $161,000, respectively (14,771,000) (13,451,000)
Loss on assets held for sale (16,000) (67,000)
------------ ------------
Total non-operating expenses, net (13,768,000) (12,702,000)
------------ ------------
(Loss) income before income taxes and
extraordinary item (7,352,000) 1,319,000
Income tax benefit (provision) 692,000 (4,000)
------------ ------------
(Loss) income before extraordinary item (6,660,000) 1,315,000
Extraordinary item - loss on early
extinguishment of debt - (72,000)
------------ ------------
Net (loss) income $ (6,660,000) $ 1,243,000
============ ============
Net (loss) income per common share:
(Loss) income before extraordinary item $(.27) $.05
Extraordinary item - -
------------ ------------
Net (loss) income $(.27) $.05
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (6,660,000) $ 1,243,000
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Extraordinary item - 72,000
Depreciation and amortization, including accretion of
debt discount 10,781,000 9,794,000
Provision for doubtful accounts 827,000 901,000
Deferred income tax benefit (67,000) (577,000)
Increase in accounts receivable (25,000) (429,000)
Net increase (decrease) in accounts payable and accrued
expenses 6,889,000 (6,211,000)
Net change in other current assets and liabilities (216,000) 1,039,000
Net change in other noncurrent assets and liabilities (179,000) (90,000)
------------ ------------
Net cash provided by operating activities 11,350,000 5,742,000
------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions (10,121,000) (12,352,000)
Collections on notes receivable 27,000 25,000
Obligatory investments (762,000) (652,000)
Investments in unconsolidated affiliates - (550,000)
Decrease in cash restricted for construction projects 3,407,000 -
------------ ------------
Net cash used in investing activities (7,449,000) (13,529,000)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 4,250,000
Borrowings on credit facilities 2,000,000 -
Deferred financing costs (71,000) (43,000)
Repayments of long-term debt (1,764,000) (7,703,000)
Payments on capital lease obligations (744,000) (558,000)
------------ ------------
Net cash used in financing activities (579,000) (4,054,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 3,322,000 (11,841,000)
Cash and cash equivalents at beginning of period 56,538,000 66,491,000
------------ ------------
Cash and cash equivalents at end of period $ 59,860,000 $ 54,650,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND BUSINESS
Hollywood Casino Corporation ("HCC" or the "Company"), is a Delaware
corporation which was organized and incorporated on November 5, 1990.
Approximately 53% of the issued and outstanding stock of HCC is owned by certain
general partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt,
Jr. and William D. Pratt and by other family members (collectively, the "Pratt
Family").
HCC owns all of the outstanding common stock of both Hollywood Casino -
Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an Illinois
corporation organized during 1990 which owns and operates a 32,100 square foot
riverboat gaming operation together with docking and other entertainment
facilities under the service mark Hollywood Casino(R) located in Aurora,
Illinois (the "Aurora Casino"). HCT is a Texas corporation formed by HCC during
1993 which owns and operates a 54,000 square foot gaming facility, adjacent
support facilities and a 154-room hotel complex under the service mark Hollywood
Casino(R) in northern Tunica County, Mississippi (the "Tunica Casino"). The
Aurora Casino and the Tunica Casino commenced operations in June 1993 and August
1994, respectively.
HCC also owns approximately 80% of the common stock of Pratt Hotel Corporation
("PHC"), also a Delaware corporation. PHC's principal assets are the Sands
Hotel and Casino in Atlantic City, New Jersey (the "Sands"), which is wholly
owned by a PHC subsidiary, and management and consulting contracts with the
Aurora Casino and the Tunica Casino, respectively. PHC's other operations in
the United States and Puerto Rico, including various ventures in which PHC has
an interest, are managed by PHC or its subsidiaries.
On March 29, 1996, HCC and PHC announced a proposal which provides for PHC to
make a cash tender offer for the approximately one million outstanding shares of
PHC common stock not already owned by HCC and for a "cash out" merger with
respect to any PHC shares outstanding after completion of the cash tender offer.
Funding for the proposed transactions will be provided by HCC. An offering and
merger price of $3.25 per share has been proposed, subject to receipt by HCC of
a fairness opinion from an independent financial advisor.
The Company estimates that its three gaming operations derive a significant
amount of their gaming revenues from patrons living in areas surrounding the
sites where the Company's gaming operations are located. Competition within the
Company's gaming markets is intense and management believes that this
competition will continue in the future.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to 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 reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
HCC is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of such
accrued liabilities based on an evaluation of the merits of individual claims
and historical claims experience; accordingly, HCC's ultimate liability may
differ from the amounts accrued.
7
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
During the fourth quarter of 1995, HCC adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets" ("SFAS 121"). SFAS 121 requires, among other things, that an
entity review its long-lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable. As a result of its review, HCC does
not believe that any material impairment currently exists related to its long-
lived assets.
Net (loss) income per common share for all periods is calculated by dividing
the net (loss) income by the weighted average number of shares of common stock
and common stock equivalents outstanding. All common stock equivalents are
excluded from the calculation of net loss per share for periods during which a
loss was incurred as the effect of their inclusion would be antidilutive.
Common stock equivalents are included in the calculation of net income per share
for periods during which income was realized. The weighted average number of
shares of common stock and common stock equivalents outstanding used for
earnings per share calculation purposes was 24,720,000 and 24,850,000,
respectively, for the three month periods ended March 31, 1996 and 1995.
The consolidated financial statements as of March 31, 1996 and for the three
month periods ended March 31, 1996 and 1995 have been prepared by HCC without
audit. In the opinion of management, these consolidated financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the consolidated financial position of HCC as of
March 31, 1996, and the results of its operations and cash flows for the three
month periods ended March 31, 1996 and 1995.
(2) SHORT-TERM CREDIT FACILITIES
A subsidiary of PHC is presently renegotiating a bank line of credit in the
amount of $5,000,000 which expired on April 30, 1996. As of March 31, 1996,
$2,000,000 was outstanding under the line of credit; no such borrowings were
outstanding at December 31, 1995. Borrowings under the line of credit are
guaranteed to the extent of $2,000,000 by another subsidiary of PHC.
8
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of HCC's assets are pledged in connection with HCC's long-
term indebtedness; HCC is not obligated for PHC's indebtedness. The indenture
to HCC's Senior Secured Notes, as defined below, does not contain cross-default
provisions with respect to PHC's indebtedness. Substantially all of PHC's
assets are pledged in connection with PHC's long-term indebtedness.
Additionally, the indentures with respect to PHC's 1994 refinancing contain
certain cross-default provisions.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Indebtedness of HCC:
12 3/4% Senior Secured Notes, due 2003, net
of discount of $9,726,000 and $9,912,000,
respectively (a) $200,274,000 $200,088,000
Term note, due 1996 2,263,000 2,300,000
------------ ------------
202,537,000 202,388,000
------------ ------------
Indebtedness of HCA:
Promissory note (b) 3,938,000 4,402,000
Equipment loans 2,187,000 2,412,000
------------ ------------
6,125,000 6,814,000
------------ ------------
Indebtedness of HCT:
Equipment loans 466,000 1,367,000
------------ ------------
PHC indebtedness for which HCC is not obligated:
10 7/8% first mortgage notes, due 2004 (c) 185,000,000 185,000,000
11 5/8% senior notes, due 2004 (d) 85,000,000 85,000,000
Other 3,205,000 3,342,000
------------ ------------
273,205,000 273,342,000
------------ ------------
Total indebtedness 482,333,000 483,911,000
Less - current maturities (6,234,000) (7,082,000)
------------ ------------
Total long-term debt $476,099,000 $476,829,000
============ ============
</TABLE>
- - --------------------
(a) During October 1995, HCC completed the refinancing of certain outstanding
indebtedness through a public offering of $210,000,000 of 12 3/4% Senior
Secured Notes (the "Senior Secured Notes") due November 1, 2003, discounted
to yield 13 3/4% per annum (the "HCC Refinancing"). In addition
9
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
to refinancing existing debt, proceeds from the HCC Refinancing were used
to fund development and construction of the "Adventure Slots" attraction, a
themed gaming area at the Tunica Casino, and are being used to finance
construction of an approximately 350-room hotel tower and related amenities
at the Tunica Casino, to fund HCA's required contribution of $4,000,000 for
construction of a new 500-space parking garage (see Note 8), and, to the
extent available, for working capital purposes. The unexpended construction
funds are included in cash restricted for construction projects in the
accompanying consolidated balance sheets at March 31, 1996 and December 31,
1995. Interest on the Senior Secured Notes is payable semiannually on May
1 and November 1 of each year commencing on May 1, 1996.
The Senior Secured Notes are unconditionally guaranteed on a senior secured
basis by HCT and may be guaranteed by certain future subsidiaries of HCC.
Neither HCA nor PHC and its subsidiaries are guarantors. The Senior Secured
Notes and related guarantees are secured by, among other things, (i)
substantially all of the assets of HCT and future guarantors, (ii) a first
mortgage limited to approximately $39 million on substantially all of the
assets of HCA, (iii) a pledge of the capital stock of certain subsidiaries
of HCC and (iv) the collateral assignment of any future management
contracts entered into by HCC.
The Senior Secured Notes are redeemable at the option of HCC any time on or
after November 1, 1999 at 106.375% of the then outstanding principal
amount, decreasing to 103.1875% and 100%, respectively, on November 1, 2000
and 2001. Commencing with the November 1, 1997 interest payment date and at
each subsequent interest payment date, HCC will be required to make an
offer to purchase not more than $2,500,000 in principal amount of the
Senior Secured Notes at a price of 106.375% of the principal amount
tendered.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT or any future guarantor; and enter
into transactions with certain affiliates.
(b) During February 1995, HCA entered into a $5,000,000 bank promissory note
agreement. The note accrues interest at the bank's prime lending rate plus
1% per annum. Interest only was payable during the first six months.
Commencing September 1, 1995, principal and interest are payable monthly
based on a 30-month amortization schedule with the final payment due on
February 1, 1998.
(c) On February 17, 1994, a subsidiary of PHC issued $185,000,000 of non-
recourse first mortgage notes due January 15, 2004 (the "10 7/8% First
Mortgage Notes") and collateralized by a first mortgage on the Sands.
Interest on the notes accrues at the rate of 10 7/8% per annum, payable
semiannually commencing July 15, 1994. Interest only is payable during the
first three years. Commencing on July 15, 1997, semiannual principal
payments of $2,500,000 will become due on each interest payment date. The
10 7/8% First Mortgage Notes are redeemable at the option of the issuer, in
whole
10
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
or in part, on or after January 15, 1999 at stated redemption prices
ranging up to 104.08% of par plus accrued interest.
The indenture for the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of certain
subsidiaries of PHC to pay dividends to PHC, to merge, consolidate or sell
substantially all of their assets or to incur additional indebtedness
beyond certain limitations. In addition, the indenture requires the
maintenance of certain cash balances and, commencing in 1994, requires that
a minimum of $7,000,000 be expended for property and fixture renewals,
replacements and betterments at the Sands, subject to increases of five
percent per annum thereafter. The indenture also contains certain cross-
default provisions with respect to the PRT Funding Notes described in (d)
below.
(d) On February 17, 1994, a subsidiary of PHC issued $85,000,000 of unsecured
senior notes due April 15, 2004 (the "PRT Funding Notes"). Interest on
the PRT Funding Notes accrues at the rate of 11 5/8% per annum, payable
semiannually commencing October 15, 1994. The PRT Funding Notes are
redeemable at the option of the issuer, in whole or in part, on or after
April 15, 1999 at stated redemption prices ranging up to 104.36% of par
plus accrued interest. The indenture for the PRT Funding Notes contains
various provisions which, among other things, restrict the ability of
certain subsidiaries of PHC to pay dividends to PHC, to merge, consolidate
or sell substantially all of their assets or to incur additional
indebtedness beyond certain limitations. The indenture also contains
certain cross default provisions with respect to the 10 7/8% First Mortgage
Notes described in (c) above.
Scheduled payments of long-term debt as of March 31, 1996 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1996 (nine months) $ 5,318,000
1997 9,147,000
1998 11,212,000
1999 10,479,000
2000 10,515,000
Thereafter 445,388,000
------------
Total $492,059,000
============
</TABLE>
Interest paid, net of capitalized interest, amounted to $10,472,000
and $19,893,000, respectively, during the three month periods ended March 31,
1996 and 1995.
(4) CAPITAL LEASES
HCA leases its existing parking garage under a capital lease agreement
with an initial term of 30 years and the right to extend the term to a maximum
of 99 years. Rental payments during the first 20 years will equal the City of
Aurora's financing costs related to its $10,000,000 general obligation bond
issue used to finance the construction of the parking garage. The general
obligation bond issue includes interest at rates between 7% and 7 5/8% per
annum. In addition, HCA is responsible for additional rent, consisting of costs
11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
such as real estate taxes, maintenance costs and insurance premiums, arising out
of its operation of the parking garage. HCA also leases certain equipment under
capital lease agreements which provide for interest at rates between 11.2% and
14.6% and expire at various dates through 2011. HCT leases certain gaming and
other equipment under capital lease agreements which provide for interest at
rates ranging up to 13 1/4% per annum and which expire during 1997.
The $10,000,000 original cost of HCA's parking garage is included in
buildings in the accompanying consolidated balance sheets at March 31, 1996 and
December 31, 1995. Assets under capital leases with an original cost of
$7,288,000 and $7,342,000, are included in operating equipment in the
accompanying consolidated balance sheets at March 31, 1996 and December 31,
1995, respectively. Amortization expense with respect to these assets amounted
to $658,000 and $659,000, respectively, during the three month periods ended
March 31, 1996 and 1995.
Future minimum lease payments under capital lease obligations as of
March 31, 1996 were as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 (nine months) $ 2,380,000
1997 2,263,000
1998 1,013,000
1999 980,000
2000 1,007,000
Thereafter 12,411,000
-----------
Total minimum lease payments 20,054,000
Less amount representing interest (7,862,000)
-----------
Present value of future
minimum lease payments 12,192,000
Current capital lease obligation (1,981,000)
-----------
Long-term capital lease obligation $10,211,000
===========
</TABLE>
12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) INCOME TAXES
Components of HCC's benefit (provision) for income taxes consisted of the
following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current:
Federal $ - $(432,000)
State 625,000 (149,000)
Deferred:
Federal - 450,000
State 67,000 127,000
-------- ---------
$692,000 $ (4,000)
======== =========
</TABLE>
Total state and federal income taxes paid by HCC for the three month
periods ended March 31, 1996 and 1995 amounted to $25,000 and $190,000,
respectively.
Federal and state income tax provisions or benefits are based upon
estimates of the results of operations for the current annual period and reflect
the nondeductibility for income tax purposes of certain items, including certain
amortization, meals and entertainment and other expenses. Quarterly income tax
provisions or benefits are determined by applying the resulting effective income
tax rate to the results of operations for the quarter.
HCC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $79,000,000, of which approximately $62,000,000
do not begin to expire until the year 2003. Additionally, HCC and its
subsidiaries have various tax credits available totaling approximately
$4,000,000, many of which expire by the year 2002. Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109")
requires that the tax benefit of such NOL's and credit carryforwards be recorded
as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such NOL's is more likely than not, a
valuation allowance should be recorded. Based on the profitable operations of
the Aurora Casino since its opening in June 1993, and the profitable operations
of the Tunica Casino during 1995 (exclusive of the extraordinary loss resulting
from the early extinguishment of debt), management believes that it is more
likely than not that future consolidated taxable income will be sufficient to
utilize at least a portion of the NOL's and tax credits. Accordingly, a
valuation allowance has been established which resulted in the recording of a
net deferred tax asset of $8,050,000 at both March 31, 1996 and December 31,
1995.
The ultimate recognition of this amount of NOL's and tax credits is
dependent on HCC and its subsidiaries' ability to generate approximately $23
million of taxable income for federal tax purposes prior to the expiration dates
of the NOL's and tax credit carryforwards.
13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Sales by HCC or existing stockholders of common stock, or securities
convertible into common stock, or purchases of shares of publicly-held common
stock of PHC by a five percent stockholder, as defined in the Internal Revenue
Code of 1986, as amended (the "Code"), can cause a "change of control", as
defined in Section 382 of the Code, which would limit the ability of HCC or its
subsidiaries to utilize these loss carryforwards in later tax periods. Should
such a change of control occur, the amount of loss carryforwards available for
use in any one year would most likely be substantially reduced. Future treasury
regulations, administrative rulings or court decisions may also effect HCC's
utilization of its loss carryforwards.
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 26,774,000 $ 25,316,000
Allowance for doubtful accounts 7,500,000 7,251,000
Investment and jobs tax credits 4,417,000 4,417,000
Equity losses of unconsolidated
subsidiaries and joint ventures 3,282,000 3,166,000
Other liabilities and accruals 3,864,000 3,741,000
Benefits accrual 1,535,000 1,479,000
Write off excess of cost of
investment 1,543,000 1,543,000
Other 2,188,000 2,276,000
------------ ------------
Total deferred tax assets 51,103,000 49,189,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (10,296,000) (10,227,000)
Amortization of note discount (3,733,000) (4,042,000)
Other (645,000) (657,000)
------------ ------------
Total deferred tax liabilities (14,674,000) (14,926,000)
------------ ------------
Net deferred tax asset 36,429,000 34,263,000
Valuation allowance (28,379,000) (26,213,000)
------------ ------------
$ 8,050,000 $ 8,050,000
============ ============
</TABLE>
(6) TRANSACTIONS WITH RELATED PARTIES
PHC operates the Holiday Inn located at the north entrance of the
Dallas/Fort Worth Airport ("DFW North") which is owned by Metroplex Hotel
Limited ("Metroplex"), a partnership controlled by certain members of the Pratt
Family. During the three month period ended March 31, 1996, PHC made payments
for property improvements under the hotel operating agreement totaling $885,000;
no such payments were
14
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
made during the three month period ended March 31, 1995. PHC is also obligated
by the hotel operating agreement to make minimum rental payments equal to
Metroplex's principal and interest payments on the underlying indebtedness of
this hotel. During February 1994, PHC utilized funds borrowed from HCC to
purchase such underlying indebtedness with a principal balance of $13,756,000
from third parties at a cost of $6,750,000 and subject to third party
indebtedness amounting to $2,706,000. The required minimum rental payments (net
of debt service receipts ) amounted to $131,000 and $134,000, respectively,
during the three month periods ended March 31, 1996 and 1995. PHC recorded the
note receivable from Metroplex at acquisition cost, which management believes
does not exceed the estimated realizable value of the underlying collateral.
The note is included in notes receivable in the accompanying consolidated
balance sheets. Payments from Metroplex, including interest at the rate of
9 1/2% per annum, are due monthly with the remaining principal balance of
$13,533,000 due May 31, 1996.
On May 9, 1996, Metroplex entered into a contract for the sale of the
hotel subject to a 30-day inspection period by the buyer. Upon consummation of
the sale, PHC will recover its $6,750,000 acquisition cost of the underlying
indebtedness together with payments made for property improvements in 1995 and
1996 expected to aggregate $2,435,000. In the event that the sale is not
completed, it is anticipated that PHC's note from Metroplex will be extended on
similar terms prior to maturity; accordingly the note has been included in
noncurrent assets in the accompanying consolidated balance sheets at March 31,
1996 and December 31, 1995.
In September 1994, a subsidiary of HCC entered into an agreement with
an entity owned by a member of the Pratt Family to manage the operation and
maintenance of a Company-owned aircraft and to make such aircraft available for
charters by third parties. Expenses and commissions charged by the management
company under the agreement during the three month periods ended March 31, 1996
and 1995 totaled $103,000 and $82,000, respectively.
(7) COMMITMENTS AND CONTINGENCIES
HCT has entered into a ground lease covering 70 acres of land on which
the Tunica Casino was constructed. The ground lease is for an initial term of
five years from the opening date of the facility and, at the option of HCT, may
be renewed for nine additional five-year periods. Obligations under the ground
lease during the initial term include both minimum monthly fixed payments and
percentage rent, which in the aggregate will be the greater of 4% of Gross
Revenues, as defined, or $1,100,000 per year. HCT is responsible for all
operating and other expenses of the property in accordance with the lease terms.
HCT prepaid the first year fixed rental payments; such amount, together with all
rental payments made during the construction period, were taken as a credit
against rent payments as they became due during the first year of operations.
During the three month periods ended March 31, 1996 and 1995, HCT expensed
$903,000 and $889,000, respectively, in connection with the ground lease.
HCA has agreed with the City of Aurora and the Aurora Metropolitan
Exposition, Auditorium and Office Building Authority ("ACCA") to the joint
construction by HCA and ACCA of a new five-story, approximately 500-space
parking garage directly across the street from, and connected by a climate-
controlled tunnel to, the Aurora Casino's Pavilion. The garage will provide
additional parking for patrons of the Aurora
15
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Casino and will contain approximately 1,500 square feet of retail space. HCA
and ACCA will also renovate ACCA's existing North Island Center banquet and
meeting facilities, including its food service facilities. Construction
commenced in September 1995 and the project is scheduled to be completed by July
1996. Total cost of the project is budgeted at approximately $14,500,000. ACCA
financed a portion of the construction costs through an $11,500,000, 7.5%
industrial revenue bond issue which yielded proceeds of approximately
$10,500,000. HCA has committed to fund all remaining construction costs; the
payment of such commitment, subject to a maximum of $3,500,000, has been
guaranteed by HCC. HCA has agreed to escrow $400,000 per month, beginning in
September 1995, towards satisfaction of its obligations under the agreement.
HCA has additionally agreed to make payments to ACCA during construction equal
to the financing costs that will be due in July 1996 relating to the ACCA
industrial revenue bond issue. Such escrow and financing payments have been
included in cash restricted for construction projects in the accompanying
consolidated balance sheets at March 31, 1996 and December 31, 1995. When
complete, the project will be owned by ACCA and operated by HCA pursuant to a 30
year lease with ACCA. HCA will have the right to extend the lease for up to 20
additional years. Rental payments during the first 15 years will equal ACCA's
debt service costs related to the industrial revenue bond issue. In addition,
HCA will pay ACCA base rent equal to $15,000 per month, subject to a credit of
up to $615,000 for improvements made to ACCA's North Island Center banquet and
meeting facilities. In addition, HCA will be responsible for additional rent,
consisting of costs such as any real estate taxes, maintenance costs, insurance
premiums and utilities. The lease will be treated as a capital lease for
financial reporting purposes.
HCA has committed to the city of Aurora that it will provide a minimum
of $2,000,000 in connection with HCA's construction of certain portions of an
Aurora riverwalk and other related improvements and amenities. As of March 31,
1996, HCA has spent approximately $1,451,000 toward such improvements. The
remaining improvements are to be completed within eight months of completion of
the parking facility described in the preceding paragraph.
HCC and its subsidiaries are parties in various legal proceedings with
respect to the conduct of casino and hotel operations. Although a possible
range of loss cannot be estimated, in the opinion of management, based upon the
advice of counsel, settlement or resolution of these proceedings should not have
a material adverse impact on the consolidated financial position or results of
operations of HCC and its subsidiaries.
(8) THIRD PARTY NOTES RECEIVABLE
During November 1995, HCC used a portion of the proceeds from the HCC
Refinancing to loan $10,000,000 to an unaffiliated gaming company in the form of
two $5,000,000 notes (Series A and Series B). The loans earn interest at the
rate of prime plus one percent per annum and are payable in quarterly
installments of principal and interest commencing in November 1997 with the
final payment due in August 2000. All principal payments received are to be
applied first to the Series A note. In connection with the loans, HCC received
warrants to acquire up to a 10% equity interest in the gaming company at any
time between November 15, 1998 and November 15, 2000 at an exercise price of
$500,000 per 1/2% interest. Under the terms of the loan agreement, the gaming
company may require HCC to exercise warrants to acquire a 5% equity interest on
November 15, 1998 at a cost not to exceed $5,000,000 payable through the
reduction
16
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
of the outstanding principal balance and, to the extent applicable, the
forgiveness of accrued interest on the Series B note.
(9) LAND RIGHTS
Land rights are being amortized on a straight-line basis over a 25-
year period representing the estimated useful life of the Tunica facility, which
is less than the term of the ground lease including renewals (see Note 7); such
amortization commenced with the opening of the Tunica Casino. Management
presently intends to renew the ground lease at least through the estimated 25-
year useful life of the facility. Accumulated amortization of such land rights
amounted to $567,000 and $483,000, respectively, at March 31, 1996 and December
31, 1995.
(10) RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 consolidated
financial statements to conform to the 1996 consolidated financial statement
presentation.
17
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 14,528,000 $ 8,996,000
Accounts receivable, net of allowances
of $948,000 and $866,000, respectively 2,225,000 2,681,000
Inventories 409,000 460,000
Prepaid expenses and other current assets 1,460,000 1,721,000
------------ ------------
Total current assets 18,622,000 13,858,000
------------ ------------
Property and Equipment:
Land improvements 2,763,000 2,756,000
Buildings and improvements 26,615,000 26,615,000
Riverboats 36,970,000 36,967,000
Operating equipment 27,542,000 27,082,000
Construction in progress 578,000 348,000
------------ ------------
94,468,000 93,768,000
Less - accumulated depreciation and amortization (20,502,000) (17,980,000)
------------ ------------
Net property and equipment 73,966,000 75,788,000
------------ ------------
Cash Restricted for Construction Project 3,368,000 1,955,000
------------ ------------
Other Assets 1,734,000 1,578,000
------------ ------------
$ 97,690,000 $ 93,179,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
18
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 3,283,000 $ 3,376,000
Accounts payable 1,671,000 2,136,000
Accrued liabilities -
Salaries and wages 2,251,000 1,805,000
Interest 2,533,000 1,120,000
Gaming and other taxes 986,000 920,000
Insurance 1,120,000 773,000
Other 1,943,000 1,670,000
Due to affiliates 4,316,000 2,305,000
Other current liabilities 971,000 743,000
----------- -----------
Total current liabilities 19,074,000 14,848,000
----------- -----------
Long-Term Debt 42,185,000 42,959,000
----------- -----------
Capital Lease Obligations 9,480,000 9,494,000
----------- -----------
Other Noncurrent Liabilities 519,000 329,000
----------- -----------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value per share;
2,000,000 shares authorized; 1,501,000
shares issued and outstanding 15,000 15,000
Additional paid-in capital 24,541,000 24,541,000
Retained earnings 1,876,000 993,000
----------- -----------
Total shareholder's equity 26,432,000 25,549,000
----------- -----------
$97,690,000 $93,179,000
----------- ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
19
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Casino $42,167,000 $33,820,000
Food and beverage 3,313,000 2,352,000
Other 1,063,000 972,000
----------- -----------
46,543,000 37,144,000
Less - promotional allowances (2,828,000) (2,033,000)
----------- -----------
Net revenues 43,715,000 35,111,000
----------- -----------
Expenses:
Casino 24,146,000 19,000,000
Food and beverage 1,375,000 1,401,000
Other 287,000 263,000
General and administrative 6,883,000 6,250,000
Depreciation and amortization 2,522,000 1,882,000
----------- -----------
Total expenses 35,213,000 28,796,000
----------- -----------
Income from operations 8,502,000 6,315,000
----------- -----------
Non-operating income (expense):
Interest income 62,000 120,000
Interest expense, net of capitalized
interest of $161,000 in 1995 (1,600,000) (1,473,000)
----------- -----------
Total non-operating expenses, net (1,538,000) (1,353,000)
----------- -----------
Income before income taxes 6,964,000 4,962,000
Income tax provision (2,528,000) (1,799,000)
----------- -----------
Net income $ 4,436,000 $ 3,163,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
20
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,436,000 $ 3,163,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,522,000 1,882,000
Provision for doubtful accounts 121,000 20,000
Deferred income tax provision 104,000 18,000
Decrease in receivables 335,000 123,000
Increase in accounts payable and accrued
liabilities 2,080,000 2,681,000
Increase in due to affiliates 2,011,000 1,257,000
Net change in other current assets and
liabilities 626,000 733,000
Net change in other assets and liabilities (156,000) (15,000)
----------- -----------
Net cash provided by operating activities 12,079,000 9,862,000
----------- -----------
INVESTING ACTIVITIES:
Net property and equipment additions (700,000) (8,330,000)
Increase in cash restricted for construction
projects (1,413,000) -
----------- -----------
Net cash used in investing activities (2,113,000) (8,330,000)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of debt - 4,250,000
Repayments of debt (689,000) (116,000)
Payments on capital lease obligations (192,000) (192,000)
Dividends (3,553,000) (1,576,000)
----------- -----------
Net cash (used in) provided by financing
activities (4,434,000) 2,366,000
----------- -----------
Net increase in cash and cash equivalents 5,532,000 3,898,000
Cash and cash equivalents at beginning of
period 8,996,000 10,987,000
----------- -----------
Cash and cash equivalents at end of period $14,528,000 $14,885,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
21
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND BUSINESS
Hollywood Casino - Aurora, Inc. ("HCA") is an Illinois corporation and
a wholly owned subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware
corporation. HCA was organized and incorporated during December 1990 by certain
relatives of Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt
(collectively, the "Pratt Family") for the purpose of developing and holding the
ownership interest in a riverboat gaming operation located in Aurora, Illinois
(the "Aurora Casino"). In May 1992, HCC, which was then wholly owned by
members of the Pratt Family or by certain general partnerships and trusts
controlled by the Pratt Family, acquired all of the outstanding stock of HCA
through the issuance of HCC stock. HCC also owns approximately 80% of Pratt
Hotel Corporation ("PHC"), a Delaware corporation which owns the entity with
which HCA has a management services contract.
On June 17, 1993, the Illinois Gaming Board (the "IGB") issued HCA a
temporary operating permit and the Aurora Casino commenced operations. The IGB
issued HCA an owner's license on July 20, 1993 pursuant to the Illinois
Riverboat Gambling Act. The initial owner's license expires in July 1996 and
HCA has filed for renewal of its license; management anticipates that such
renewal will be approved.
The Aurora Casino consists of two, four-level riverboats having a
combined casino space of approximately 32,000 square feet and a four-level
pavilion and docking facility which houses ticketing, food service, passenger
waiting, and various administrative functions. The Aurora Casino also includes
a six-level parking structure with approximately 840 parking spaces. HCA was
responsible for the design and construction of the parking garage; however, the
City of Aurora owns the facility and leases it to HCA under a long-term lease
agreement. The lease is treated as a capital lease for financial reporting
purposes (see Note 3).
HCA estimates that a significant amount of the Aurora Casino's
revenues are derived from patrons living in the Chicago area and surrounding
northern and western suburbs. The Aurora Casino faces intense competition from
other riverboat gaming operations in Illinois and management believes that this
competition will continue in the future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to 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 reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HCA is self insured for a portion of its general liability, certain
health care and other liability exposures. Accrued insurance includes estimates
of such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCA's ultimate liability
may differ from the amounts accrued.
During the fourth quarter of 1995, HCA adopted the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" ("SFAS 121"). SFAS 121 requires, among other
things, that an entity review its long-lived assets and certain related
intangibles for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be fully
22
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
recoverable. As a result of its review, HCA does not believe that any material
impairment currently exists related to its long-lived assets.
The financial statements as of March 31, 1996 and for the three month
periods ended March 31, 1996 and 1995 have been prepared by HCA without audit.
In the opinion of management, these financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of HCA as of March 31, 1996, the results of its
operations and its cash flows for the three month periods ended March 31, 1996
and 1995. Operating results for the three month periods ended March 31, 1996
are not necessarily indicative of the results that may be achieved for the year
ended December 31, 1996.
(2) LONG-TERM DEBT AND PLEDGE OF ASSETS
HCA's long-term indebtedness consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------ -------------
<S> <C> <C>
12 3/4% Promissory Note to HCC, due on
November 1, 2003 (a) $39,007,000 $39,007,000
Promissory note to bank (b) 3,938,000 4,402,000
Equipment loans (c) 2,187,000 2,412,000
----------- -----------
Total indebtedness 45,132,000 45,821,000
Less current maturities (2,947,000) (2,862,000)
----------- -----------
Total long-term debt $42,185,000 $42,959,000
=========== ===========
</TABLE>
(a) The intercompany note accrues interest at the rate of 12 3/4% per annum
payable semiannually on October 15 and April 15 of each year commencing
April 15, 1996 and requires semiannual principal repayments of $2,500,000
commencing October 15, 1997 with the balance of the note due November 1,
2003. The note is pledged as security with respect to HCC's 12 3/4% Senior
Secured Notes due in 2003. HCA is not a guarantor of HCC's indebtedness;
however, the indebtedness is secured, in part, by a first mortgage limited
to approximately $39 million on substantially all of the assets of HCA and
by a pledge of the capital stock of HCA. The 12 3/4% intercompany note
replaced a previous 14% intercompany note to HCC as a result of HCC's
refinancing of its outstanding indebtedness during October 1995.
(b) During February 1995, HCA entered into a $5,000,000 bank promissory note
agreement. The note accrues interest at the bank's prime lending rate plus
1% per annum. Interest only was payable during
23
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
the first six months. Commencing September 1, 1995, principal and interest
are payable monthly based on a 30-month amortization schedule with the
final payment due on February 1, 1998.
(c) HCA financed the purchase of certain equipment from vendors through the
issuance of note obligations totaling $2,985,000. The promissory notes are
payable in monthly installments, including interest at the approximate rate
of 12 1/4% per annum, and mature at various dates in 1998.
As of March 31, 1996, future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 (nine months) $ 2,173,000
1997 5,679,000
1998 5,773,000
1999 5,000,000
2000 5,000,000
Thereafter 21,507,000
-----------
$45,132,000
===========
</TABLE>
Interest paid, net of amounts capitalized, for the three month period
ended March 31, 1996 amounted to $186,000. No interest was paid, net of amounts
capitalized, during the three month period ended March 31, 1995.
(3) CAPITAL LEASES
HCA leases its existing parking garage under a capital lease agreement
with an initial term of 30 years and the right to extend the term to a maximum
of 99 years. Rental payments during the first 20 years will equal the City of
Aurora's financing costs related to its $10,000,000 general obligation bond
issue used to finance the construction of the parking garage. The general
obligation bond issue includes interest at rates between 7% and 7 5/8% per
annum. In addition, HCA is responsible for additional rent, consisting of costs
such as real estate taxes, maintenance costs and insurance premiums, arising out
of its operation of the parking garage. HCA also leases certain equipment under
capital lease agreements which provide for interest at rates between 11.2% and
14.6% and expire at various dates through 2011. Assets under capital lease
agreements with an original cost of $10,000,000 and $2,329,000 are included in
buildings and improvements and in operating equipment, respectively, in the
accompanying balance sheets at both March 31, 1996 and December 31, 1995.
Amortization expense with respect to these assets amounted to $263,000 during
each of the three month periods ended March 31,1996 and 1995.
24
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Future minimum lease payments under capital lease obligations as of
March 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 (nine months) $ 1,042,000
1997 1,008,000
1998 1,013,000
1999 980,000
2000 1,007,000
Thereafter 12,411,000
-----------
Total minimum lease payments 17,461,000
Less amount representing interest (7,645,000)
-----------
Present value of future minimum lease payments 9,816,000
Current capital lease obligation (336,000)
-----------
Long-term capital lease obligation $ 9,480,000
===========
</TABLE>
(4) INCOME TAXES
Components of HCA's provision for income taxes consist of the
following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current:
Federal $(2,293,000) $(1,719,000)
State (131,000) (98,000)
Deferred:
Federal (96,000) 17,000
State (8,000) 1,000
----------- -----------
$(2,528,000) $(1,799,000)
=========== ===========
</TABLE>
HCA is included in HCC's consolidated federal income tax return.
Pursuant to agreements between HCC and HCA, HCA's current provision for federal
income taxes is based on the amount of tax which would be provided if a separate
federal income tax return were filed. HCA paid no federal or state taxes during
the three month periods ended March 31, 1996 and 1995. Deferred taxes are
computed based on the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities, using
enacted tax rates.
Deferred income taxes result primarily from the use of the allowance
method rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal income tax
25
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
purposes and differences in the timing of deductions taken between tax and
financial reporting purposes for the amortization of preopening costs and other
accruals.
The components of HCA's net deferred tax asset at March 31, 1996 and
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---------- -------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 344,000 $ 314,000
Other liabilities and reserves 476,000 451,000
--------- ---------
Total deferred tax assets 820,000 765,000
--------- ---------
Deferred tax liabilities:
Depreciation and amortization (720,000) (329,000)
--------- ---------
Net deferred tax asset $ 100,000 $ 436,000
========= =========
</TABLE>
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", requires that the tax benefit of deferred tax assets resulting
from temporary differences be recorded as an asset and, to the extent that
management can not assess that the utilization of all or a portion of such
deferred tax assets is more likely than not, a valuation allowance should be
recorded. The net deferred tax asset has been reflected in the accompanying
balance sheets at March 31, 1996 and December 31, 1995 with no reduction for
valuation allowances as management believes that it is more likely than not that
future earnings will be sufficient to utilize such tax benefits.
26
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Receivables and payables in connection with the aforementioned tax
allocation agreements at March 31, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Other current assets $ 836,000 $ 976,000
Other current liabilities (2,055,000) -
Other noncurrent liabilities (500,000) (311,000)
</TABLE>
Other current liabilities at March 31, 1996 represents current taxes
payable under the tax allocation agreement. Included in other current assets at
December 31, 1995 are current taxes receivable under the tax allocation
agreement totaling $238,000. All other amounts set forth above represent
deferred tax receivables and payables.
(5) TRANSACTIONS WITH RELATED PARTIES
HCA pays base management and incentive fees to Pratt Management, L.P.
("PML"), a limited partnership wholly owned by PHC, pursuant to a management
services contract. The base management fee is equal to 5% of operating revenues
(as defined in the management services contract) subject to a maximum of
$5,500,000 in any consecutive twelve month period. The incentive fee is equal
to 10% of gross operating profit (as defined in the management services
agreement to generally include all revenues less expenses other than
depreciation, interest, amortization and taxes). HCA incurred such fees
totaling $2,943,000 and $2,629,000, respectively during the three month periods
ended March 31, 1996 and 1995. Management and incentive fees payable at March
31, 1996 and December 31, 1995 were $2,061,000 and $2,177,000, respectively.
HCA incurred interest with respect to its 12 3/4% and 14% promissory
notes payable to HCC (see Note 2). Such interest amounted to $1,243,000 and
$1,365,000, respectively, for the three month periods ended March 31, 1996 and
1995. Interest payable to HCC on such notes amounted to $2,266,000 and
$1,022,000, respectively, at March 31, 1996 and December 31, 1995 and is
included in accrued interest payable in the accompanying balance sheets.
HCA has acquired computer software and hardware and has been allocated
certain expenses, including legal, financing, insurance and payroll expenses
from HCC and its subsidiaries. During the three month periods ended March 31,
1996 and 1995, such transactions totaled $321,000 and $519,000, respectively.
At March 31, 1996 and December 31, 1995, HCA had payables amounting to $208,000
and $130,000, respectively, in connection with such charges.
27
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
During the first quarter of 1995, HCA sold certain memorabilia items
as well as property and equipment to another HCC subsidiary at an aggregate
price of $171,000. The selling price represents HCA's basis in such items.
(6) COMMITMENTS AND CONTINGENCIES
HCA has agreed with the City of Aurora and the Aurora Metropolitan
Exposition, Auditorium and Office Building Authority ("ACCA") to the joint
construction by HCA and ACCA of a new five-story, approximately 500-space
parking garage directly across the street from, and connected by a climate-
controlled tunnel to, the Aurora Casino's Pavilion. The garage will provide
additional parking for patrons of the Aurora Casino and will contain
approximately 1,500 square feet of retail space. HCA and ACCA will also
renovate ACCA's existing North Island Center banquet and meeting facilities,
including its food service facilities. Construction commenced in September 1995
and the project is scheduled to be completed by July 1996. Total cost of the
project is budgeted at approximately $14,500,000. ACCA financed a portion of
the construction costs through an $11,500,000, 7.5% industrial revenue bond
issue which yielded proceeds of approximately $10,500,000. HCA has committed to
fund all remaining construction costs and has agreed to escrow $400,000 per
month, beginning in September 1995, toward satisfaction of its obligations under
the agreement. HCA has additionally agreed to make payments to ACCA during
construction equal to the financing costs that will be due in July 1996 relating
to the ACCA industrial revenue bond issue. Such escrow and financing payments
have been included in cash restricted for construction project in the
accompanying balance sheets at March 31, 1996 and December 31, 1995. When
complete, the project will be owned by ACCA and operated by HCA pursuant to a 30
year lease with ACCA. HCA will have the right to extend the lease for up to 20
additional years. Rental payments during the first 15 years will equal ACCA's
debt service costs related to the industrial revenue bond issue. In addition,
HCA will pay ACCA base rent equal to $15,000 per month, subject to a credit of
up to $615,000 for improvements made to ACCA's North Island Center banquet and
meeting facilities. In addition, HCA will be responsible for additional rent,
consisting of costs such as any real estate taxes, maintenance costs, insurance
premiums and utilities. The lease will be treated as a capital lease for
financial reporting purposes.
HCA has committed to the City of Aurora that it will provide a minimum
of $2,000,000 in connection with HCA's construction of certain portions of the
Aurora riverwalk and other related improvements and amenities. As of March 31,
1996, HCA has spent approximately $1,451,000 toward such improvements. The
remaining improvements are to be completed within eight months of completion of
the parking facility described in the preceding paragraph.
HCA is a party in various legal proceedings with respect to the
conduct of casino operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of the proceedings should not have a material adverse
impact on the financial position or results of operations of HCA.
28
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,430,000 $ 11,529,000
Accounts receivable, net of allowances of
$446,000 and $313,000, respectively 1,445,000 1,428,000
Inventories 794,000 883,000
Deferred income taxes 962,000 993,000
Prepaid expenses and other current assets 911,000 705,000
------------ ------------
Total current assets 17,542,000 15,538,000
------------ ------------
Property and Equipment:
Land and improvements 2,956,000 3,037,000
Buildings 44,048,000 44,048,000
Barges 2,524,000 2,524,000
Operating equipment 26,436,000 26,360,000
Construction in progress 11,846,000 4,504,000
------------ ------------
87,810,000 80,473,000
Less - accumulated depreciation and amortization (14,541,000) (12,178,000)
------------ ------------
Net property and equipment 73,269,000 68,295,000
------------ ------------
Cash Restricted for Construction Project 23,099,000 27,919,000
------------ ------------
Other Assets:
Land rights 7,878,000 7,962,000
Other assets 2,607,000 2,526,000
------------ ------------
Total other assets 10,485,000 10,488,000
------------ ------------
$124,395,000 $122,240,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
29
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 2,111,000 $ 3,096,000
Accounts payable 3,889,000 2,128,000
Accrued liabilities -
Salaries and wages 1,233,000 1,486,000
Interest 4,881,000 2,203,000
Gaming and other taxes 631,000 519,000
Insurance 972,000 1,207,000
Other 2,368,000 2,373,000
Other current liabilities 472,000 470,000
------------ ------------
Total current liabilities 16,557,000 13,482,000
------------ ------------
Long-Term Debt 84,045,000 84,045,000
------------ ------------
Capital Lease Obligations 731,000 1,199,000
------------ ------------
Other Noncurrent Liabilities 53,000 88,000
------------ ------------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value
per share; 100,000 shares authorized;
1,000 shares issued and outstanding - -
Additional paid-in capital 34,637,000 34,637,000
Accumulated deficit (11,628,000) (11,211,000)
------------ ------------
Total shareholder's equity 23,009,000 23,426,000
------------ ------------
$124,395,000 $122,240,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
30
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Casino $22,718,000 $21,877,000
Rooms 826,000 722,000
Food and beverage 2,962,000 2,543,000
Other 279,000 237,000
----------- -----------
26,785,000 25,379,000
Less - promotional allowances (2,555,000) (1,959,000)
----------- -----------
Net revenues 24,230,000 23,420,000
----------- -----------
Expenses:
Casino 15,663,000 12,515,000
Rooms 509,000 650,000
Food and beverage 989,000 838,000
Other 290,000 206,000
General and administrative 2,372,000 2,326,000
Depreciation and amortization 2,517,000 2,459,000
----------- -----------
Total expenses 22,340,000 18,994,000
----------- -----------
Income from operations 1,890,000 4,426,000
----------- -----------
Non-operating income (expenses):
Interest income 419,000 69,000
Interest expense, net of capitalized
interest of $81,000 in 1996 (2,726,000) (2,803,000)
----------- -----------
Total non-operating expenses, net (2,307,000) (2,734,000)
----------- -----------
(Loss) income before income taxes and
extraordinary item (417,000) 1,692,000
Income tax benefit - -
----------- -----------
(Loss) income before extraordinary item (417,000) 1,692,000
Extraordinary item:
Loss on early extinguishment
of debt - (72,000)
----------- -----------
Net (loss) income $ (417,000) $ 1,620,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these statements.
31
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (417,000) $ 1,620,000
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Extraordinary item - 72,000
Depreciation and amortization 2,517,000 2,459,000
Deferred income tax provision (benefit) 406,000 (180,000)
Provision for doubtful accounts 139,000 76,000
Increase in accounts receivable (156,000) (139,000)
Increase (decrease) in accounts payable
and accrued expenses 4,058,000 (923,000)
Net change in other current assets and
liabilities (521,000) 60,000
Net change in other noncurrent assets and
liabilities (138,000) (166,000)
----------- -----------
Net cash provided by operating activities 5,888,000 2,879,000
----------- -----------
INVESTING ACTIVITIES:
Net property and equipment additions (7,354,000) (705,000)
Decrease in cash restricted for construction
projects 4,820,000 -
----------- -----------
Net cash used in investing activities (2,534,000) (705,000)
----------- -----------
FINANCING ACTIVITIES:
Repayments of long-term debt (901,000) (7,425,000)
Payments on capital lease obligations (552,000) (366,000)
----------- -----------
Net cash used in financing activities (1,453,000) (7,791,000)
----------- -----------
Net increase (decrease) in cash and cash
equivalents 1,901,000 (5,617,000)
Cash and cash equivalents at beginning of
period 11,529,000 12,660,000
----------- -----------
Cash and cash equivalents at end of period $13,430,000 $ 7,043,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these statements.
32
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
HWCC - Tunica, Inc. ("HCT") is a Texas corporation and a wholly owned
subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware corporation. HCT
was incorporated in December 1993 for the purpose of acquiring and completing a
gaming facility in northern Tunica County, Mississippi approximately 27 miles
southwest of Memphis, Tennessee. The completed facility (the "Tunica Casino")
which currently includes a casino with 54,000 square feet of gaming space, a
154-room hotel and related amenities, commenced operations on August 8, 1994
under the service mark Hollywood Casino(R). HCT's gaming license has been
renewed by the Mississippi Gaming Commission through October 17, 1997.
HCT estimates that a significant amount of the Tunica Casino's
revenues are derived from patrons living in the Memphis, Tennessee area,
northern Mississippi and eastern Arkansas. The Tunica Casino faces intense
competition from other casinos operating in northern Tunica County and
management believes that competition will continue in the future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to 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 reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HCT is self insured for a portion of its general liability, certain
health care and other liability exposures. Accrued insurance includes estimates
of such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCT's ultimate liability
may differ from the amounts accrued.
During the fourth quarter of 1995, HCT adopted the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" ("SFAS 121"). SFAS 121 requires, among other
things, that an entity review its long-lived assets and certain related
intangibles for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. As a result of its
review, HCT does not believe that any material impairment currently exists
related to its long-lived assets.
The financial statements as of March 31, 1996 and for the three month
periods ended March 31, 1996 and 1995 have been prepared by HCT without audit.
In the opinion of management, these financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of HCT as of March 31, 1996, and the results of its
operations and cash flows for the three month periods ended March 31, 1996 and
1995.
33
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of HCT's assets are pledged in connection with its
long-term indebtedness. Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Promissory notes to HCC (a) $84,045,000 $84,045,000
Equipment loans (b) 466,000 1,367,000
----------- -----------
Total indebtedness 84,511,000 85,412,000
Less - current maturities (466,000) (1,367,000)
----------- -----------
Total long-term debt $84,045,000 $84,045,000
=========== ===========
</TABLE>
- - --------------------
(a) During October 1995, HCC loaned $54,045,000 to HCT to repay its outstanding
mortgage indebtedness, together with the associated call premium and
certain accrued interest thereon, and loaned an additional $30,000,000 to
HCT to be used to finance construction of an approximately 350-room hotel
tower and related amenities and to fund development and construction of a
themed gaming area, the "Adventure Slots" attraction. Such intercompany
loans were made with a portion of the note proceeds from HCC's issue of
$210,000,000 of 12 3/4% Senior Secured Notes (the "Senior Secured Notes")
due November 1, 2003, discounted to yield 13 3/4% per annum. The
unexpended portion of the construction loan is included in cash restricted
for construction projects in the accompanying balance sheets at March 31,
1996 and December 31, 1995. Interest on the loans from HCC accrues at the
rate of 12 3/4% per annum and is payable semiannually on April 15 and
October 15 of each year commencing on April 15, 1996. The Senior Secured
Notes are unconditionally guaranteed on a senior secured basis by HCT and
by certain future subsidiaries of HCC. The Senior Secured Notes and
related guarantees are secured by, among other things, (i) substantially
all of the assets of HCT and other future guarantors, (ii) a first mortgage
limited to approximately $39 million on substantially all of the assets of
another gaming facility operated by a wholly owned subsidiary of HCC, (iii)
a pledge of the capital stock of HCT and certain other subsidiaries of HCC
and (iv) the collateral assignment of any future management contracts
entered into by HCC.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC, HCT and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT or any future guarantor; and enter
into transactions with certain affiliates.
34
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(b) HCT financed the purchase of certain equipment from vendors through the
issuance of note obligations totaling $5,169,000. One of these notes,
bearing interest at the rate of 12 1/2% per annum, was repaid during the
second quarter of 1995. The remaining note is payable in monthly
installments, including interest at the rate of 12 3/4% per annum, and
matures in June 1996.
Scheduled payments of long-term debt as of March 31, 1996 are $466,000
in 1996 and $84,045,000 in 2003.
Interest paid, net of amounts capitalized, amounted to $47,000 and
$3,846,000, respectively, during the three month periods ended March 31, 1996
and 1995.
(3) CAPITAL LEASES
HCT leases certain gaming and other equipment under capital lease
agreements which provide for interest at rates ranging up to 13 1/4% per annum
and which expire during 1997. Assets under capital leases with an original cost
of $4,959,000 and $5,013,000 are included in operating equipment in the
accompanying balance sheets at March 31, 1996 and December 31, 1995,
respectively. Amortization expense for the three month periods ended March 31,
1996 and 1995 was $395,000 and $396,000, respectively. Accumulated amortization
at March 31, 1996 and December 31, 1995 with respect to these assets amounted to
$2,552,000 and $2,174,000, respectively.
Future minimum lease payments under capital lease obligations as of
March 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 (nine months) $ 1,338,000
1997 1,255,000
-----------
Total minimum lease payments 2,593,000
Less amount representing interest (217,000)
-----------
Present value of future minimum
lease payments 2,376,000
Current capital lease obligation (1,645,000)
-----------
Long-term capital lease obligation $ 731,000
===========
</TABLE>
35
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) INCOME TAXES
Components of HCT's benefit for income taxes for the three month
periods ended March 31, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Benefit in lieu of (provision for)
federal income taxes:
Current $ 406,000 $(180,000)
Deferred (406,000) 180,000
--------- ---------
$ - $ -
========= =========
</TABLE>
State income taxes have not been provided for since a credit for state
gaming taxes based on gross revenues is allowed to offset income taxes incurred.
The credit is the lesser of total gaming taxes paid or the state income tax,
with no credit carryforward permitted.
HCT is included in HCC's consolidated federal income tax return.
HCT's provision for federal income taxes is based on the amount of tax which
would be provided if a separate federal income tax return were filed. HCT paid
no state or federal income taxes during either of the three month periods ended
March 31, 1996 and 1995.
Deferred income taxes result primarily from the use of the allowance
method rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal income tax purposes and
differences in the timing of deductions taken between tax and financial
reporting purposes for the amortization of preopening costs and other accruals.
HCT has tax net operating loss carryforwards ("NOL's") totaling
approximately $11,000,000, which do not expire until the years 2009 and 2010.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", requires that the tax benefit of such NOL's, together with the tax
benefit of deferred tax assets resulting from temporary differences, be recorded
as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such deferred tax assets is more likely than
not, a valuation allowance should be recorded. Based on the profitable
operations of HCT in 1995, exclusive of the extraordinary loss resulting from
the early extinguishment of debt, management believes that it is more likely
than not that future taxable income will be sufficient to utilize at least a
portion of the NOL's and deferred tax assets. Accordingly, a valuation
allowance has been established which has resulted in the recording of net
deferred tax assets of $1,037,000 at both March 31, 1996 and December 31, 1995.
The ultimate recognition of this amount of deferred tax assets is dependent on
HCT's ability to generate approximately $3 million of taxable income for federal
income tax purposes prior to the expiration dates of the NOL's and the reversal
of other temporary differences.
36
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,290,000 $ 3,884,000
Allowance for doubtful accounts 151,000 106,000
Other liabilities and accruals 584,000 758,000
----------- -----------
Total deferred tax assets 5,025,000 4,748,000
Deferred tax liabilities:
Depreciation and amortization (842,000) (711,000)
----------- -----------
Net deferred tax asset 4,183,000 4,037,000
Valuation allowance (3,146,000) (3,000,000)
----------- -----------
$ 1,037,000 $ 1,037,000
=========== ===========
</TABLE>
Receivables and payables in connection with HCT's federal income taxes
are included in the accompanying financial statements as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Deferred income taxes $962,000 $993,000
Other noncurrent assets 75,000 44,000
</TABLE>
(5) TRANSACTIONS WITH RELATED PARTIES
Pursuant to a ten-year consulting agreement with Pratt Casino
Corporation, an affiliated company, HCT incurs a monthly consulting fee of
$100,000. Such fees amounted to $300,000, respectively, for each of the three
month periods ended March 31, 1996 and 1995.
HCT and Advanced Casino Systems Corporation ("ACSC"), an affiliated
company, entered into a Computer Services Agreement dated as of January 1, 1994.
The agreement has a term of three years and provides, among other things, that
ACSC will sell HCT computer hardware and information systems equipment and will
license or sublicense to HCT computer software necessary to operate HCT's
casino, hotel and related facilities and business operations. HCT pays ACSC for
such equipment and licenses such software at amounts and on terms and conditions
that ACSC provides to unrelated third parties as well as a fixed license
37
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
fee of $30,000 a month. HCT also reimburses ACSC for its direct costs and
expenses incurred under this agreement. Total charges incurred under such
agreement amounted to $121,000 and $149,000, respectively, for the three month
periods ended March 31, 1996 and 1995.
Greate Bay Hotel and Casino, Inc. ("GBHC"), an affiliated company which
owns and operates the Sands Hotel and Casino in Atlantic City, New Jersey,
performs certain administrative and marketing services on behalf of HCT. During
the three month periods ended March 31, 1996 and 1995, fees charged to HCT by
GBHC totaled $193,000 and $158,000, respectively.
During the first quarter of 1995, HCT purchased certain memorabilia
items as well as property and equipment from another HCC subsidiary at an
aggregate cost of $171,000. The acquisition cost represents the affiliate's
basis in such items. The assets acquired are included in property and equipment
($23,000) and other assets ($148,000) in the accompanying balance sheets as of
March 31,1996 and December 31, 1995.
HCT is charged for certain legal, accounting, and other expenses
incurred by PHC and HCC that relate to HCT's business. For the three month
periods ended March 31, 1996 and 1995, such charges amounted to $122,000 and
$52,000, respectively.
(6) COMMITMENTS AND CONTINGENCIES
HCT entered into a ground lease covering 70 acres of land on which the
Tunica Casino was constructed. The ground lease is for an initial term of five
years from the opening date of the facility and, at HCT's option, may be renewed
for nine additional five-year periods. Obligations under the ground lease
during the initial term include both minimum monthly fixed payments and
percentage rent, which in the aggregate will be the greater of 4% of Gross
Revenues, as defined, or $1,100,000 per year. HCT is responsible for all
operating and other expenses of the property in accordance with the lease terms.
HCT prepaid the first year fixed rental payments; such amount, together with all
rental payments made during the construction period, were taken as a credit
against rent payments as they became due during the first year of operations.
For the three month periods ended March 31, 1996 and 1995, HCT expensed $903,000
and $889,000, respectively, in connection with the ground lease.
HCT is a party in various legal proceedings with respect to the conduct
of casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of the proceedings should not have a material adverse
impact on the financial position or results of operations of HCT.
(7) LAND RIGHTS
Land rights are being amortized on a straight-line basis over a 25-
year period representing the estimated useful life of the facility, which is
less than the term of the ground lease including renewals (see Note 6); such
amortization commenced with the opening of the Tunica Casino. Management
presently intends to renew the ground lease at least through the estimated 25-
year useful life of the facility. Accumulated amortization of
38
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
such land rights amounted to $567,000 and $483,000, respectively, at March 31,
1996 and December 31, 1995.
(8) RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial
statements to conform to the 1996 financial statement presentation.
39
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Because HCC and the HCC subsidiaries that own and operate the Aurora
Casino and the Tunica Casino are not obligated for PHC's indebtedness and
because PHC and its subsidiaries are restricted in their ability to pay or
advance funds to HCC and its subsidiaries, management's discussion and analysis
of HCC's financial condition and results of operations is divided into separate
analyses of: (i) HCC, including all of its subsidiaries other than PHC and its
subsidiaries (the "HCC Group") and (ii) PHC and its subsidiaries which includes
the Sands (the "PHC Group").
RESULTS OF OPERATIONS
HCC GROUP
- - ---------
Selected financial information of the HCC Group is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Casino revenues $64,885,000 $55,697,000
Other departmental revenues 8,545,000 6,928,000
Less - promotional allowances (5,383,000) (3,992,000)
----------- -----------
Net revenues 68,047,000 58,633,000
----------- -----------
Casino expenses 39,809,000 31,436,000
Other departmental expenses 3,442,000 3,354,000
General and administrative expenses 11,345,000 9,768,000
Depreciation and amortization 5,349,000 4,545,000
Development expenses 197,000 1,553,000
----------- -----------
Total expenses 60,142,000 50,656,000
----------- -----------
Income from operations $ 7,905,000 $ 7,977,000
=========== ===========
</TABLE>
Net revenues of the HCC Group for the three month period ended March
31, 1996 were $68 million, an increase of $9.4 million (16.1%) from the $58.6
million during the same period of 1995. The increase included increases in net
revenues at the Aurora Casino and Tunica Casino of $8.6 million and $810,000,
respectively, during the first quarter of 1996 compared to the same period of
1995. As explained below, the 1995 expansion of one of the Aurora Casino's two
riverboats contributed significantly to the 1996 first quarter increase in
revenues.
Operating expenses increased by $9.5 million to $60.1 million during
the three month period ended March 31, 1996 from $50.7 million during the same
period of 1995 offsetting the increase in net revenues. Consequently, overall
income from operations for the HCC Group was slightly lower (.9%) during the
first quarter of 1996 compared to same period of 1995. As a result of the
aforementioned expansion, income from
40
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
operations after management fees at the Aurora Casino improved by $2.2 million
during the three month period ended March 31, 1996 compared with 1995; income
from operations after consulting fees at the Tunica Casino declined by $2.5
million to $1.9 million as a result of increased competition in its market.
AURORA CASINO
GENERAL
Income from operations at the Aurora Casino, adjusted to exclude
management fees payable to a subsidiary of PHC, amounted to $11.4 million for
the three month period ended March 31, 1996 compared to $8.9 million during the
1995 period. During the second quarter of 1995, the expansion of one of the
Aurora Casino's two existing riverboats was completed, increasing gaming space
by approximately 10,000 square feet and slot machine capacity by 34%.
GAMING OPERATIONS
The following table sets forth certain unaudited financial and
operating data for the Aurora Casino's operations for the three month periods
ended March 31, 1996 and 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
REVENUES:
Table games $ 14,253,000 $ 14,859,000
Slot machines 27,914,000 18,961,000
------------ ------------
Total $ 42,167,000 $ 33,820,000
============ ============
TABLE GAMES:
Gross wagering (drop) (1) $ 83,682,000 $ 76,122,000
Hold percentages (2):
HCA 17.0% 19.5%
Other Chicago-area (3) 20.4% 19.7%
SLOT MACHINES:
Gross wagering (handle) (1) $505,174,000 $298,463,000
Hold percentages (2):
HCA 5.5% 6.4%
Other Chicago-area (3) 5.7% 6.0%
</TABLE>
___________________
(1) Gross wagering consists of the total value of chips purchased for table
games ("drop") and coins wagered in slot machines ("handle").
(2) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
41
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(3) Comprised of Empress and DPD/Harrah's Casinos located in Joliet, Illinois
and Grand Victoria's Casino located in Elgin, Illinois. Percentages have
been calculated based on information published by the Illinois Gaming
Board.
Total gross wagering at the Aurora Casino as measured by table drop
and slot machine handle increased $214.3 million (57.2%) during the three month
period ended March 31, 1996 compared to the 1995 period. The overall increase in
casino wagering reflects the expanded gaming space, as well as the continuing
refinement of the Aurora Casino's marketing strategy, including the growth of
its database of Chicago area patrons and the growth in membership of its patron
recognition casino players' card program which identifies higher value patrons.
The Aurora Casino's increases in table drop and slot machine handle of
9.9% and 69.3%, respectively, during the three month period ended March 31, 1996
over the same period in 1995 compare favorably with the increases in table drop
and slot machine handle for other Chicago-area riverboat operators of 3.1% and
26.6%, respectively. The resulting increase in market share reflects the
success of the Aurora Casino's aforementioned expansion project in generating
additional casino wagering.
REVENUES
Overall, casino revenues increased $8.3 million (24.7%) during the
three month period ended March 31, 1996 compared to the same period of 1995.
Table games revenue decreased $606,000 (4.1%) during the first quarter of 1996
compared to the same period of 1995 as the 9.9% increase in drop was more than
offset by the decrease in the table game hold percentage to 17% in 1996 from
19.5% in 1995. The 69.3% increase in slot machine handle during the first
quarter of 1996 was partially offset by a decline in the slot hold percentage,
resulting in a first quarter 1996 slot machine revenue increase of $9 million
(47.2%) compared to the first quarter of 1995.
Food and beverage revenues at the Aurora Casino increased by $961,000
(40.9%) during the three month period ended March 31, 1996 compared to the same
period of 1995 due to increases in patron volume at the Epic Buffet and other
food outlets as the result of increased promotional activity.
Other revenues increased by $91,000 (9.4%) during the three month
period ended March 31, 1996 compared to the same period of 1995 primarily as the
result of an increase in valet revenue as the result of increased promotional
activity.
Promotional allowances represent the estimated value of goods and
services provided free of charge to casino customers under various marketing
programs. These allowances, as a percentage of food and beverage and other
revenues at the Aurora Casino, were 64.6% and 61.2%, respectively, during the
three month periods ended March 31, 1996 and 1995. The increase from the prior
year reflects the increase in promotional activity as described above.
42
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
DEPARTMENTAL EXPENSES
Casino expenses increased by $5.1 million (27.1%) during the three
month period ended March 31, 1996 over the same period of 1995. Such increase
reflects an increase of similar magnitude in casino revenues together with
increased promotional activities and higher tax rates.
Food and beverage expenses did not change significantly during the
three month period ended March 31, 1996 compared to the same period of 1995.
Other expenses increased $24,000 (9.1%) during the first quarter of 1996
compared to 1995 primarily due to increased entertainment expenses related to
star shows. Food and beverage and other services to casino patrons are, for the
most part, ancillary to the casino operation. Accordingly, these departments are
not expected to contribute significantly to income from operations.
TUNICA CASINO
GENERAL
Income from operations at the Tunica Casino, adjusted to exclude
consulting fees payable to a subsidiary of PHC, amounted to $2.2 million for the
three month period ended March 31 1996 compared to $4.7 million during the same
period of 1995. The decrease results primarily from increased competition in
the Tunica market characterized by increased marketing and promotional
activities.
GAMING OPERATIONS
The following table sets forth certain unaudited financial and
operating data relating to the operations of the Tunica facility for the three
month periods ended March 31, 1996 and 1995. Published local and state-wide
industry information is limited in both detail and availability; accordingly,
comparable data for other casino operators is unavailable.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASINO REVENUES:
Table games $ 4,519,000 $ 5,315,000
Slot machines 17,934,000 16,207,000
Poker revenues 265,000 355,000
------------ ------------
Total $ 22,718,000 $ 21,877,000
============ ============
TABLE GAMES:
Gross wagering (drop) (1) $ 21,487,000 $ 22,080,000
Hold percentage (2) 21.0% 24.1%
SLOT MACHINES:
Gross wagering (handle) (1) $336,478,000 $317,371,000
Hold percentage (2) 5.3% 5.1%
</TABLE>
43
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
- - -------------------
(1)(2) See corresponding notes to the table at "Aurora Casino - Gaming
Operations" above.
Total gross wagering at the Tunica Casino as measured by table game
drop and slot machine handle increased $18.5 million (5.5%) during the three
month period ended March 31, 1996 compared to the 1995 period. Slot machine
handle increased by $19.1 million (6%) despite an 8.2% decrease in the average
number of slot machines during the first quarter of 1996 compared to the same
period in 1995. However, table drop showed a slight decrease of $593,000 (2.7%)
in 1996 compared to the 1995 period.
During the first quarter of 1996, the Tunica Casino opened its new
"Adventure Slots" attraction, a highly themed area of the casino floor which
features interactive memorabilia displays and entertainment. Although a
significant portion of the casino's slot machine capacity was removed from the
casino floor during the first six weeks of 1996 for construction of this new
attraction, increased patron volume subsequent to its mid-February opening
resulted in an overall increase in slot machine handle of 6% for the first
quarter of 1996 compared to the same period of 1995.
REVENUES
Casino revenues increased $841,000 (3.8%) during the three month
period ended March 31, 1996 compared to the same period of 1995. Table game
revenues suffered from a decrease in the hold percentage to 21% during the first
quarter of 1996 compared to 24.1% during the same period of 1995. Slot machine
revenue growth reflects the significant increase in slot machine gross wagering
as discussed above, together with a slight increase in the slot machine hold
percentage to 5.3% during the first quarter of 1996 compared to 5.1% during the
same period of 1995.
Rooms revenues increased $104,000 (14.4%) during the three month
period ended March 31, 1996 compared to the same period of 1995. Occupancy
rates increased from an average of approximately 91% in the first quarter of
1995 to approximately 98% in the first quarter of 1996. Food and beverage
revenues increased $419,000 (16.5%) during the first quarter of 1996 compared to
the first quarter of 1995 due to increased promotional activity related to the
opening of the "Adventure Slots" attraction. Other revenues increased $42,000
(17.7%) during the first quarter of 1996 compared to 1995 due to improved sales
volume in the retail outlets.
Promotional allowances represent the estimated value of goods and
services provided free of charge to casino customers under various marketing
programs. These allowances, as a percentage of rooms, food and beverage and
other revenues, increased to 62.8% during the first quarter of 1996 compared to
55.9% during the first quarter of 1995. This change is primarily a result of
the increased use of complimentaries and other promotional activities with
respect to the opening of the "Adventure Slots" attraction.
DEPARTMENTAL EXPENSES
Casino expenses increased $3.1 million (25.2%) during the three month
period ended March 31, 1996 compared to the same period of 1995. Marketing and
promotional activities increased in connection with the opening of the
"Adventure Slots" attraction, resulting in increased allocation of rooms and
food and beverage expenses to the casino department.
44
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Rooms expense decreased $141,000 (21.7%) during the three month period
ended March 31, 1996 compared to the same period of 1995 due to increased
promotional activity as discussed above, combined with a reduction of cleaning
supplies expense.
Food and beverage expense increased $151,000 (18%) during the three
month period ended March 31, 1996 compared to the same period of 1995 primarily
due to increased patron volume associated with the opening of the "Adventure
Slots" attraction. Such increases were partially offset by increased
promotional activity, the costs of which were allocated to the casino
department. Other expenses increased $84,000 (40.8%) during the three month
period ended March 31, 1996 compared to the same period of 1995 due to increased
costs associated with theater entertainment. Rooms, food and beverage and other
departmental expenses are, for the most part, ancillary to the casino operation.
Accordingly, these departments are not expected to contribute significantly to
income from operations.
PHC GROUP
- - ---------
GENERAL
The PHC Group's primary sources of revenues are the operations of the
Sands and management and consulting fees earned from the Aurora Casino and the
Tunica Casino. Results of operations for the Aurora Casino, on which such
management fees are based, were discussed above as part of the HCC Group. Since
January 1994, the PHC Group has earned a fixed consulting fee from the Tunica
Casino of $100,000 per month. The PHC Group has reduced its losses from
noncasino hotels during recent years through the sale of certain owned
properties and the termination of management contracts on certain managed
properties.
The PHC Group's net revenues decreased to $68.4 million during the
first quarter of 1996 from $73.2 million for the first quarter of 1995 resulting
in a loss from operations of $1.5 million in 1996 compared to income from
operations of $6 million during 1995. This decline in operating results is
attributable to decreases experienced at the Sands as discussed below.
The Sands sustained a loss from operations of $5.1 million for the
three month period ended March 31, 1996 compared to income from operations of
$2.5 million for the same period of 1995. Operating results were adversely
affected by record winter snowstorms in January, two additional weekend
snowstorms in February and the advent of both unprecedented and highly
aggressive marketing programs instituted by certain other Atlantic City casinos
seeking to increase their market share. These factors, together with declines
in both the table games and slot hold percentages, combined to produce a 7.6%
decline in net revenues (from $67.8 million in 1995 to $62.7 million in 1996).
In addition, marketing and advertising costs increased by $2.7 million (16.8%)
during the first quarter of 1996 compared to the same period of 1995 in response
to competitive pressures.
45
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
GAMING OPERATIONS
The following table sets forth certain unaudited financial and
operating data relating to the Sands' operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1996 1995
------------ ------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C>
REVENUES:
Table games $ 20,175 $ 22,961
Slot machines 36,441 39,737
Other (1) 989 1,178
-------- --------
Total $ 57,605 $ 63,876
======== ========
TABLE GAMES:
Gross Wagering (Drop) (2) $134,388 $142,588
======== ========
Hold Percentages: (3)
Sands 15.0% 16.1%
Atlantic City Casino
Gaming Industry 16.5% 15.9%
SLOT MACHINES:
Gross Wagering (Handle) (2) $439,380 $469,817
======== ========
Hold Percentage:(3)
Sands (4) 8.3% 8.5%
</TABLE>
___________________
(1) Consists of revenues from poker ($651,000 and $841,000, respectively, for
the three month periods ended March 31, 1996 and 1995) and simulcast horse
racing wagering ($338,000 and $337,000, respectively, for the three month
periods ended March 31, 1996 and 1995).
(2) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (collectively, the "drop") and
coins wagered in slot machines ("handle").
(3) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
(4) The Sands' hold percentage with respect to slot machines is reflected on an
accrual basis. Comparable data for the Atlantic City gaming industry is
not available.
Table games drop at the Sands declined $8.2 million (5.8%) during the
three month period ended March 31, 1996 compared with the same period of 1995.
The Sands' decrease compares with an increase of 3.6% in table drop for all
other Atlantic City casinos during the same period. As a result, the Sands'
table game market share (expressed as a percentage of the Atlantic City industry
aggregate table game drop)
46
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
decreased to 8.2% during the three month period ended March 31, 1996 from 9%
during the same period of 1995. The Sands' table game drop decrease is largely
attributable to an increase in competitive pressures in the rated table market
segment, of which a significant portion is in the "high end" and mid-market
segments.
Slot machine handle decreased $30.4 million (6.5%) during the three
month period ended March 31, 1996 compared with the same period of 1995. The
Sands' decrease in slot machine handle compares with a 7.5% increase in handle
for all other Atlantic City casinos. The decrease experienced by the Sands is a
result of the same competitive pressures resulting from casino expansions and
aggressive marketing campaigns at other properties as discussed above with
respect to table games, particularly in the "high-end" slot segment. The Sands'
average number of slot machines increased 1.2% during the first quarter of 1996
compared to an increase of 7.4% for all other Atlantic City casinos. The greater
percentage increase in the number of slot machines for other Atlantic City
casinos reflects, in part, expansions of certain facilities during the first
quarter of 1996, which resulted in an overall increase of approximately 33,000
square feet of casino space in Atlantic City compared to the 1995 first quarter.
The Sands' decrease in table games drop and slot machine handle also
reflects, in part, a return to pre-expansion market shares. The Sands increased
the size of its casino in 1994 and posted higher than industry increases in
casino wagering during the last half of 1994 and early 1995. During the first
quarter of 1995, for example, the Sands' increases in table games drop and slot
machine handle over the same period of 1994 were 16.8% and 33.5%, respectively,
compared with increases of 5.1% and 25%, respectively, for all other Atlantic
City casinos. The Sands' table game market share increased to 9% in the first
quarter of 1995 from 8.1% in the first quarter of 1994. As other casinos
complete new expansions, the Sands' previous market share gains are being
offset.
REVENUES
Casino revenues at the Sands, including poker and simulcast horse
racing wagering revenues, decreased by $6.3 million (9.8%) for the three month
period ended March 31, 1996 compared with the same period of 1995. Casino
revenues were negatively impacted by the loss of market share as discussed
previously and by decreases in both the table games and slot machine hold
percentages at the Sands during the 1996 period compared to the 1995 period.
Rooms revenue did not change significantly during the three month
period ended March 31, 1996 compared with 1995. Food and beverage revenues
increased $1.1 million (13.8%) for the three month period ended March 31, 1996
compared with the prior year period primarily as a result of the opening of the
Epic Buffet at the Sands during the third quarter of 1995. Other revenues
increased $1.2 million (29.5%) during the three month period ended March 31,
1996 compared to the 1995 period as a result of an increase in theater
entertainment revenue at the Sands and increased management fees earned from
Hollywood Casino - Aurora, Inc., an HCC subsidiary managed by PHC.
Promotional allowances represent the estimated value of goods and
services provided free of charge to casino customers under various marketing
programs. As a percentage of rooms, food and beverage and other revenues at the
Sands, these allowances decreased to 58.3% during the three month period ended
March 31, 1996 from 60.8% during the first quarter of 1995. Such decrease is
primarily attributable to an increase in other types of marketing programs not
associated with promotional allowances being used in lieu of complimentaries.
47
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
DEPARTMENTAL EXPENSES
Casino expenses at the Sands increased $3.4 million (6.8%) during the
three month period ended March 31, 1996 compared with 1995. This increase is
primarily due to increased costs with respect to marketing activities, which
resulted in higher allocations of rooms, food and beverage and other expenses to
casino expense.
Rooms expense decreased $128,000 (11.8%) during the first quarter of
1996 as compared to the first quarter of 1995 primarily due to increased
allocation of rooms expense to casino expense at the Sands as a result of an
increase in casino marketing activities relating to rooms. Food and beverage
expense increased by $291,000 (11.2%) during the three month period ended March
31, 1996 compared to the same period in 1995. Increased costs at the Sands
associated with the Epic Buffet were partially offset by increases in the
casino's food and beverage marketing programs, the costs of which are allocated
to the casino department. Other expenses decreased $51,000 (4.2%) during the
three month period ended March 31, 1996 compared with 1995 as increases in costs
related to theater entertainment at the Sands were offset by increased
allocations to the casino department.
OTHER CONSOLIDATED ITEMS
- - ------------------------
The operating expenses of HCC, exclusive of the Aurora Casino, the
Tunica Casino and the Sands, consist primarily of general and administrative
expenses and expenses incurred in connection with the pursuit of additional
gaming venues.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $914,000 (9.4%) during
the three month period ended March 31, 1996 compared to the 1995 period
primarily due to the expansion of the riverboat at the Aurora Casino during the
second quarter of 1995.
DEVELOPMENT EXPENSES
Development expenses represent costs incurred in connection with HCC's
pursuit of potential gaming opportunities in jurisdictions where gaming has not
been legalized. Such costs decreased by $1 million (84%) during the three month
period ended March 31, 1996 compared to 1995 primarily as a result of an overall
decrease in suitable venues and projects.
INTEREST
Interest income increased $203,000 (24.9%) for the three month period
ended March 31, 1996 compared with the same period of 1995. The increase results
from interest earned on cash restricted for construction projects during the
first quarter of 1996.
48
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest expense increased $1.3 million (9.8%) during the three month
period ended March 31, 1996 compared to the prior year period. Substantially all
of the interest expense increase was experienced by the HCC Group and is
attributable to interest incurred on $210 million of Senior Secured Notes issued
during October 1995, partially offset by the elimination of interest from the
retirement of previously outstanding debt.
INCOME TAX BENEFIT (PROVISION)
HCC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $79 million, which do not begin to expire until
1998 and of which approximately $62 million do not begin to expire until the
year 2003. Additionally, HCC and its subsidiaries have various tax credits
available totaling approximately $4 million, many of which expire by the year
2002.
Based on the operating results of the Aurora Casino and the Tunica
Casino since commencement of their operations, management believes that it is
more likely than not that future consolidated taxable income will be sufficient
to utilize at least a portion of the NOL's, tax credits and other deferred tax
assets resulting from temporary differences. Accordingly, under the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", the consolidated balance sheets reflect the recording of a net deferred
tax asset of $8.1 million as of March 31, 1996 and December 31, 1995. Subject to
a "change of control" as discussed below not occurring, the ultimate recognition
of this amount of deferred tax assets will be dependent on HCC and its
subsidiaries' ability to generate approximately $23 million of taxable income
for federal tax purposes prior to the expiration dates of the NOL's and tax
credit carryforwards and the reversal of other temporary differences.
NET OPERATING LOSS CARRYFORWARDS
Sales by HCC or existing stockholders of common stock, or securities
convertible into common stock, or purchases of shares of publicly-held common
stock of PHC by a five percent stockholder, as defined in the Internal Revenue
Code of 1986, as amended (the "Code"), can cause a "change of control", as
defined in Section 382 of the Code, which would limit the ability of HCC or its
subsidiaries to utilize these loss carryforwards in later tax periods. Should
such a change of control occur, the amount of loss carryforwards available for
use in any one year would most likely be substantially reduced. Future treasury
regulations, administrative rulings or court decisions may also effect HCC's
future utilization of its loss carryforwards.
INFLATION
Management believes that in the near term, modest inflation, together
with increased competition within the gaming industry for qualified and
experienced personnel, will continue to cause increases in operating expenses,
particularly labor and employee benefits costs.
SEASONALITY
Historically, the Sands' operations have been highly seasonal in
nature, with the peak activity occurring from May to September. Consequently,
the results of HCC's operations for the first and fourth quarters are
traditionally less profitable than the other quarters of the fiscal year.
Furthermore, the Aurora Casino has also experienced seasonality, but to a lesser
degree than the Sands, and management believes that seasonality may also cause
fluctuations in reported results at the Tunica Casino. In addition, the
operations of the Aurora
49
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Casino, the Tunica Casino, and the Sands may fluctuate significantly due to a
number of factors, including chance. Such seasonality and fluctuations may
materially affect HCC's casino revenues and overall profitability.
LIQUIDITY AND CAPITAL RESOURCES
Since their openings on June 17, 1993 and August 8, 1994,
respectively, the Aurora Casino and the Tunica Casino have become the principal
sources of liquidity and capital resources for HCC. Prior to the commencement of
operations of the Aurora facility, HCC's principal business activities were
limited to its approximate 80% ownership of PHC. PHC's principal sources of
liquidity and capital resources for the last several years have been cash flow
from the Sands, proceeds from debt financings and proceeds from asset sales.
HCC GROUP
- - ---------
OPERATING ACTIVITIES
The operations of the Aurora Casino continue to be the HCC Group's
primary source of liquidity and capital resources, having contributed
approximately $12.1 million of cash flow from operations during the three month
period ended March 31, 1996 after deducting the payment of $3.1 million of
management fees to the PHC Group. The Tunica Casino provided $5.9 million of
cash from operations during the three month period ended March 31, 1996 after
deducting the payment of $300,000 of consulting fees to the PHC Group. The HCC
Group's other sources of funds include interest income earned on temporary
investments. In addition to operating expenses at the Aurora Casino and the
Tunica Casino, uses of operating cash by the HCC Group consisted primarily of
corporate overhead costs.
During the three month period ended March 31, 1996, cash flow from
operations, together with existing cash, were used by the HCC Group to fund
capital expenditures of approximately $8.1 million, to repay third party
indebtedness of approximately $1.6 million and to make payments under capital
lease obligations of $744,000.
The HCC Group files its federal income tax return on a consolidated
basis with the PHC Group. On such a consolidated basis, HCC and PHC have tax net
operating loss carryforwards totaling approximately $79 million and tax credits
available totaling approximately $4 million. Due to the availability of such net
operating loss and tax credit carryforwards, management presently does not
anticipate HCC and its subsidiaries being required to make significant tax
payments in the near future. As noted below, the HCC Group has assigned
intercompany obligations to the PHC Group in consideration for net operating
losses of the PHC Group utilized by the HCC Group.
FINANCING ACTIVITIES
During October 1995, the HCC Group completed the refinancing of
certain outstanding indebtedness through a public offering of $210 million of
12 3/4% Senior Secured Notes due November 1, 2003, discounted to yield 13 3/4%
per annum (the "HCC Refinancing"). In addition to refinancing existing debt,
proceeds from the HCC Refinancing were used to fund development and construction
of the "Adventure Slots" attraction, and are being used to finance construction
of an approximately 350-room hotel tower and related amenities
50
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
at the Tunica Casino, to fund HCA's required contribution of $4 million for
construction of a new 500-space parking garage, and, to the extent available,
for working capital purposes. Interest on the Senior Secured Notes is payable
semiannually on May 1 and November 1 of each year commencing on May 1, 1996.
The Senior Secured Notes are unconditionally guaranteed on a senior secured
basis by HCT and by certain future subsidiaries of HCC. Neither HCA nor PHC and
its subsidiaries are guarantors. The Senior Secured Notes and related
guarantees are secured by, among other things, (i) substantially all of the
assets of HCT and future guarantors, (ii) a first mortgage limited to
approximately $39 million on substantially all of the assets of HCA, (iii) a
pledge of the capital stock of certain subsidiaries of HCC and (iv) the
collateral assignment of any future management contracts entered into by HCC.
The Senior Secured Notes are redeemable at the option of HCC any time
on or after November 1, 1999 at 106.375% of the then outstanding principal
amount, decreasing to 103.1875% and 100%, respectively, on November 1, 2000 and
2001. Commencing with the November 1, 1997 interest payment date and at each
subsequent interest payment date, HCC will be required to make an offer to
purchase not more than $2.5 million in principal amount of the Senior Secured
Notes at a price of 106.375% of the principal amount tendered.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC and certain defined subsidiaries to, among other
things, pay dividends or make other restricted payments; incur additional
indebtedness or issue preferred stock; create liens; create dividend or other
payment restrictions affecting certain defined subsidiaries; enter into mergers
or consolidations or make sales of all or substantially all assets of HCC, HCT
or any future guarantor; and enter into transactions with certain affiliates.
During 1995, HCA obtained a $5 million unsecured bank promissory note
with respect to its riverboat expansion project. Principal payments are based on
a 30-month amortization with the final payment due in February 1998.
In connection with a recapitalization of the PHC Group discussed
below, HCC exchanged $38.8 million principal amount of 15 1/2% notes issued by a
PHC subsidiary for $40.5 million discounted principal amount of new deferred
interest notes issued by another subsidiary of PHC. As a result, HCC's cash
interest income generated by its investment activities has been substantially
reduced. The PHC Group repaid $5.5 million of such indebtedness during 1995.
Also in connection with the PHC Group recapitalization, HCC loaned $15 million
on a junior subordinated basis to the PHC Group at 14 5/8% interest (the "Junior
Subordinated Notes"); payment of principle and interest on this loan is subject
to certain members of the PHC Group meeting certain financial coverage and other
payment restriction tests. During 1994, HCC assigned $6.3 million principal
amount of the Junior Subordinated Notes to the PHC Group in consideration for
tax net operating losses of the PHC Group utilized by the HCC Group. Because the
financial coverage tests were not met, interest was not paid on the February 17,
1996 interest payment date.
As of March 31, 1996, the HCC Group's scheduled maturities of long-
term debt and payments under capital leases during the remainder of 1996 are
approximately $4.9 million and $2.4 million, respectively.
CAPITAL EXPENDITURES AND OTHER INVESTING ACTIVITIES
Capital expenditures at the Aurora Casino for the first quarter of
1996 were approximately $700,000 and management anticipates spending $4.8
million during the remainder of 1996; major projects include
51
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
construction of a pedestrian bridge to improve access from the existing parking
garage to the Pavilion, the completion of an additional dining outlet in the
Pavilion and other departmental expenditures.
HCA has agreed with the City of Aurora and the Aurora Metropolitan
Exposition, Auditorium and Office Building Authority ("ACCA") to the joint
construction by HCA and ACCA of a new five-story, approximately 500-space
parking garage directly across the street from, and connected by a climate-
controlled tunnel to, the Aurora Casino's Pavilion. The garage will provide
additional parking for patrons of the Aurora Casino and will contain
approximately 1,500 square feet of retail space. HCA and ACCA will also renovate
ACCA's existing North Island Center banquet and meeting facilities, including
its food service facilities. Construction commenced in September 1995 and the
project is scheduled to be completed by July 1996. Total costs of the project
are budgeted at approximately $14.5 million. ACCA financed a portion of the
construction costs through an $11.5 million, 7.5% industrial revenue bond issue
which yielded proceeds of approximately $10.5 million. HCA has committed to fund
all remaining construction costs and has agreed to escrow $400,000 per month,
beginning in September 1995, towards satisfaction of its obligations under the
agreement. HCA has additionally agreed to make payments to ACCA construction
equal to the financing costs relating to the ACCA industrial revenue bond issue
that will be due in July 1996. When complete, the project will be owned by ACCA
and operated by HCA pursuant to a 30-year lease with ACCA. HCA will have the
right to extend the lease for up to 20 additional years.
HCA has committed to the City that it will provide a minimum of $2
million in connection with HCA's construction of certain portions of the Aurora
riverwalk and other related improvements and amenities. As of March 31, 1996,
HCA has spent approximately $1.5 million toward such improvements. The remaining
improvements are to be completed within eight months of completion of the
parking facility described in the previous paragraph.
Capital expenditures at the Tunica Casino for the first quarter of
1996 amounted to $7.4 million. Of the first quarter expenditures, $5.5 million
was spent on the partial construction of an adjacent eight-story, approximately
350-room hotel tower, including additional banquet space, an enclosed
pool/atrium and a showroom and $1.6 million was spent on the construction of the
"Adventure Slots" attraction. Planned expenditures for the Tunica facility's
ongoing capital improvement program for the remainder of 1996 are approximately
$6.8 million and include new signage for the casino entrance, the addition of a
golf course in conjunction with two other casino operators, the expansion of
certain food and beverage outlets, and the renovation of certain slot machine
areas. Management also anticipates spending an additional $24 million toward
completion of the aforementioned hotel tower during the second and third
quarters of 1996.
During November 1995, HCC used a portion of the proceeds from the HCC
Refinancing to loan $10 million to an unaffiliated gaming company in the form of
two $5 million notes (Series A and Series B). The loans earn interest at the
rate of prime plus one percent per annum and are payable in quarterly
installments of principal and interest commencing in November 1997 with the
final payment due in August 2000. All principal payments received are to be
applied first to the Series A note. In connection with the loans, HCC received
warrants to acquire up to a 10% equity interest in the gaming company at any
time between November 15, 1998 and November 15, 2000 at an exercise price of
$500,000 per 1/2% interest. Under the terms of the loan agreement, the gaming
company may require HCC to exercise warrants to acquire a 5% equity interest on
November 15, 1998 at a cost not to exceed $5 million, payable through the
reduction of the outstanding principal balance and, to the extent applicable,
the forgiveness of accrued interest on the Series B note.
52
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
HCC has committed to provide funding for a proposed tender offer and
"cash out" merger announced by PHC in March 1996. See "The PHC Group--Financing
Activities" below.
HCC is pursuing several potential gaming opportunities. HCC intends to
finance any future ventures with cash flow from operations, together with
private, public or bank financing, which might include non-recourse project
financing.
SUMMARY
Management anticipates that the HCC Group's funding requirements for
the next twelve months will be satisfied by existing cash and cash generated by
the Aurora and Tunica Casinos.
THE PHC GROUP
- - -------------
OPERATING ACTIVITIES
During the first quarter of 1996, the PHC Group's net cash used in
operating activities (after net interest expense and income taxes) amounted to
$4 million. The PHC Group receives a base management fee equal to 5% of
operating revenues (as defined in the management agreement) subject to a maximum
of $5.5 million annually, and an incentive fee equal to 10% of gross operating
profit (as defined in the management agreement) from the operation of the Aurora
Casino. Management fees received during the first quarter of 1996 amounted to
$3.1 million. During 1994, the PHC Group entered into a consulting agreement
with HCT with respect to the Tunica Casino which provides for the payment of
$1.2 million annually by the Tunica Casino to the subsidiary for consulting
services and for reimbursement of direct costs and expenses incurred.
The Sands' earnings before depreciation, interest, amortization, taxes
and intercompany management fees have been sufficient to meet its debt service
obligations (other than certain maturities of principal that have been
refinanced) and to fund a substantial portion of its capital expenditures.
Historically, the Sands has also used short-term borrowings to fund seasonal
cash needs and has used long-term borrowings for certain capital projects.
The PHC Group utilized existing cash together with borrowings on the
short-term credit facility during the three month period ended March 31, 1996 to
meet its operating needs, to fund capital additions ($2 million) and to make
obligatory investments at the Sands ($762,000).
In prior years, PHC's hotel operations required substantial infusions
of operating funds; however, the disposition of all but three of its hotel
properties has greatly reduced the cash required to fund hotel operations. In
connection with a certain hotel property which PHC operates pursuant to an
operating agreement with an affiliate, PHC is obligated to make minimum rental
payments equal to the principal and interest payments on the underlying
indebtedness attributable to the property.
Effective December 31, 1994, HCC began compensating the PHC Group for
the use of PHC's available tax net operating loss carryforwards. For the year
ended December 31, 1994, such payment was effected through the assignment to PHC
of $6.3 million principal amount of the 14 5/8% junior subordinated notes
53
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
issued by HCC to a subsidiary of PHC together with $1.9 million of accrued
interest thereon. No such compensation was required during either 1995 or the
first quarter of 1996 as a result of losses sustained by HCC in 1995 with
respect to the refinancing of its outstanding indebtedness.
FINANCING ACTIVITIES
During February 1994, the PHC Group completed the refinancing of
virtually all of its casino-related outstanding debt. The refinancing was
completed through a public offering of $270 million of debt securities
consisting of $185 million of 10 7/8% First Mortgage Notes due January 15, 2004
and $85 million of 11 5/8% PRT Funding Notes due April 15, 2004. Proceeds from
the debt offerings were used, in part, to refinance outstanding mortgage notes
on the Sands and other indebtedness scheduled to mature in 1994, to repay $58.4
million of the other publicly held indebtedness and to provide partial funding
for an expansion of gaming space at the Sands. During the first quarter of 1996,
the PHC Group repaid long-term indebtedness of $136,000. Scheduled maturities of
long-term debt during the remainder of 1996 are $416,000.
GBHC is presently renegotiating a $5 million bank line of credit which
expired on April 30, 1996. As of March 31, 1996, $2 million was outstanding
under the line of credit.
On March 29, 1996, HCC and PHC announced a proposal which provides for
PHC to make a cash tender offer for the approximately one million outstanding
shares of PHC common stock not already owned by HCC and for a "cash out" merger
with respect to any PHC shares outstanding after completion of the cash tender
offer. Funding for the proposed transactions will be provided by HCC. An
offering and merger price of $3.25 per share has been proposed, subject to
receipt by HCC of a fairness opinion from an independent financial advisor. The
Board of Directors of PHC has appointed a Special Committee consisting of its
independent directors to evaluate the HCC proposal. The Special Committee and
its advisors are currently evaluating HCC's proposal.
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Property and equipment additions during the first quarter of 1996
totaled $2 million, of which capital expenditures at the Sands amounted to
approximately $1.1 million. Additional capital expenditures by the PHC Group
during the first quarter of 1996 included approximately $885,000 of property
improvements at a non-casino hotel property it operates under an agreement with
Metroplex Hotel Limited (see Note 5 of Notes to Consolidated Financial
Statements). Management anticipates capital expenditures during the remainder of
1996 will be approximately $5 million at the Sands. Projects currently planned
during the remainder of 1996 include substantial upgrades and improvements to
all rooms at the Sands, including its higher-end suite product and the purchase
of additional gaming equipment. Anticipated capital expenditures under the
operating agreement with Metroplex Hotel Limited during the remainder of 1996
are estimated to be $800,000.
The Sands is required by the New Jersey Casino Control Act to make
certain investments with the Casino Reinvestment Development Authority, a
governmental agency which administers the statutorily mandated investments made
by casino licensees. Deposit requirements for the first quarter of 1996 totaled
$762,000 and are anticipated to be approximately $2.6 million during the
remainder of 1996.
PHC has also agreed to contribute up to $3.9 million, approximately
$2.5 million of which has been paid as of March 31, 1996, as an additional
investment in an unconsolidated hotel partnership to refurbish the hotel
54
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
facility in Orlando, Florida. No such payments were required during the three
month period ended March 31, 1996; anticipated contributions during the
remainder of 1996 toward such commitment are approximately $1.2 million. Such
contributions are in recognition of PHC's partner having agreed to make $5
million in principal reductions on the underlying mortgage note on the facility
of which $4 million have been made to date.
SUMMARY
Management anticipates that the PHC Group's funding requirements for
the next twelve months will be satisfied by (i) existing cash, (ii) cash
generated by the Sands' operations, (iii) management fees from the Aurora
Casino, (iv) consulting fees from the Tunica Casino and (v) management fees from
remaining hotel operations.
55
<PAGE>
PART II: OTHER INFORMATION
- - ---------------------------
The Registrants did not file any reports on Form 8-K during the
quarter ended March 31, 1996. The Registrants filed their Annual Report on Form
10-K for the year ended December 31, 1995 with the Securities and Exchange
Commission on March 29, 1996.
SIGNATURES
- - ----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
each of the Registrants has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HOLLYWOOD CASINO CORPORATION
Date: May 13, 1996 By: /s/ John C. Hull
-------------- ----------------------------------
John C. Hull
Corporate Controller and
Principal Accounting Officer
HWCC - TUNICA, INC.
Date: May 13, 1996 By: /s/ John C. Hull
-------------- ----------------------------------
John C. Hull
Principal Accounting Officer
56
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HOLLYWOOD CASINO CORPORATION AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000888245
<NAME> HOLLYWOOD CASINO CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 59,860
<SECURITIES> 0
<RECEIVABLES> 33,951
<ALLOWANCES> 18,343
<INVENTORY> 5,540
<CURRENT-ASSETS> 95,872
<PP&E> 523,332
<DEPRECIATION> 188,647
<TOTAL-ASSETS> 513,706
<CURRENT-LIABILITIES> 79,575
<BONDS> 486,310
0
0
<COMMON> 2
<OTHER-SE> (63,895)
<TOTAL-LIABILITY-AND-EQUITY> 513,706
<SALES> 0
<TOTAL-REVENUES> 132,980
<CGS> 0
<TOTAL-COSTS> 100,534
<OTHER-EXPENSES> 25,219
<LOSS-PROVISION> 827
<INTEREST-EXPENSE> 13,752
<INCOME-PRETAX> (7,352)
<INCOME-TAX> (692)
<INCOME-CONTINUING> (6,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,600)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HWCC-TUNICA, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000927801
<NAME> HWCC-TUNICA, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 13,430
<SECURITIES> 0
<RECEIVABLES> 1,891
<ALLOWANCES> 446
<INVENTORY> 794
<CURRENT-ASSETS> 17,542
<PP&E> 87,810
<DEPRECIATION> 14,541
<TOTAL-ASSETS> 124,395
<CURRENT-LIABILITIES> 16,557
<BONDS> 84,776
0
0
<COMMON> 0
<OTHER-SE> 23,009
<TOTAL-LIABILITY-AND-EQUITY> 124,395
<SALES> 0
<TOTAL-REVENUES> 24,230
<CGS> 0
<TOTAL-COSTS> 17,312
<OTHER-EXPENSES> 4,889
<LOSS-PROVISION> 139
<INTEREST-EXPENSE> 2,307
<INCOME-PRETAX> (417)
<INCOME-TAX> 0
<INCOME-CONTINUING> (417)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (417)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
