<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 SEPTEMBER 30, 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 November 12, 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 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 September 30, 1996 and for the three and nine month periods ended September
30, 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 HCT and the financial position of HCA as of September 30, 1996, the
results of their operations for the three and nine month periods ended September
30, 1996 and 1995 and their cash flows for the nine month periods ended
September 30, 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 and nine month periods ended September 30,
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>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 55,182,000 $ 56,538,000
Short-term investment 2,000,000 -
Accounts receivable, net of allowances of
$16,873,000 and $17,675,000, respectively 15,154,000 16,410,000
Inventories 5,075,000 5,837,000
Prepaid expenses 4,112,000 3,530,000
Deferred income taxes 7,705,000 10,585,000
Refundable deposits and other
current assets 1,901,000 950,000
------------- -------------
Total current assets 91,129,000 93,850,000
------------- -------------
Property and Equipment:
Land 62,450,000 61,643,000
Buildings and improvements 302,732,000 255,646,000
Riverboats and barges 39,494,000 39,491,000
Operating equipment 157,788,000 149,051,000
Construction in progress 5,020,000 7,378,000
------------- -------------
567,484,000 513,209,000
Less - accumulated depreciation
and amortization (203,789,000) (179,073,000)
------------- -------------
Net property and equipment 363,695,000 334,136,000
------------- -------------
Cash Restricted for Construction Projects 232,000 29,874,000
------------- -------------
Other Assets:
Obligatory investments 5,999,000 5,521,000
Deferred financing costs 14,718,000 16,136,000
Notes receivable 10,000,000 19,222,000
Land rights 7,709,000 7,962,000
Other assets 9,906,000 7,762,000
------------- -------------
Total other assets 48,332,000 56,603,000
------------- -------------
$ 503,388,000 $ 514,463,000
============= =============
</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>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- --------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 10,149,000 $ 9,325,000
Short-term credit facilities 2,000,000 -
Accounts payable 13,884,000 14,054,000
Accrued liabilities -
Salaries and wages 10,326,000 9,593,000
Interest 20,373,000 16,964,000
Insurance 5,096,000 4,319,000
Other 11,970,000 10,767,000
Other current liabilities 6,693,000 7,331,000
------------- -------------
Total current liabilities 80,491,000 72,353,000
------------- -------------
Long-Term Debt 471,261,000 476,829,000
------------- -------------
Capital Lease Obligations 22,098,000 10,693,000
------------- -------------
Other Noncurrent Liabilities 10,102,000 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 (158,502,000) (135,171,000)
------------- -------------
Total shareholders' deficit (80,564,000) (57,233,000)
------------- -------------
$ 503,388,000 $ 514,463,000
============= =============
</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
SEPTEMBER 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Casino $124,724,000 $136,020,000
Rooms 5,361,000 4,795,000
Food and beverage 15,973,000 16,287,000
Other 3,488,000 3,527,000
------------ ------------
149,546,000 160,629,000
Less - promotional allowances (13,302,000) (13,231,000)
------------ ------------
Net revenues 136,244,000 147,398,000
------------ ------------
Expenses:
Casino 98,977,000 97,837,000
Rooms 1,508,000 1,472,000
Food and beverage 6,054,000 5,370,000
Other 2,625,000 1,360,000
General and administrative 9,091,000 9,013,000
Depreciation and amortization 10,161,000 10,614,000
Development 179,000 980,000
------------ ------------
Total expenses 128,595,000 126,646,000
------------ ------------
Income from operations 7,649,000 20,752,000
------------ ------------
Non-operating income (expenses):
Interest income 685,000 788,000
Interest expense, net of capitalized interest
of $534,000 in 1996 (14,524,000) (13,738,000)
Loss on assets held for sale (635,000) (74,000)
------------ ------------
Total non-operating expense, net (14,474,000) (13,024,000)
------------ ------------
(Loss) income before income taxes (6,825,000) 7,728,000
Income tax provision (1,596,000) (584,000)
------------ ------------
Net (loss) income $ (8,421,000) $ 7,144,000
============ ============
Net (loss) income per common share $(.34) $.29
============ ============
</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 OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1995
---------------------------
<S> <C> <C>
Revenues:
Casino $374,609,000 $377,486,000
Rooms 14,311,000 13,540,000
Food and beverage 46,868,000 41,186,000
Other 10,480,000 8,937,000
------------ ------------
446,268,000 441,149,000
Less - promotional allowances (38,648,000) (33,263,000)
------------ ------------
Net revenues 407,620,000 407,886,000
------------ ------------
Expenses:
Casino 302,584,000 271,583,000
Rooms 4,424,000 4,936,000
Food and beverage 15,310,000 14,053,000
Other 5,382,000 3,864,000
General and administrative 28,217,000 28,250,000
Depreciation and amortization 31,797,000 30,472,000
Development 721,000 3,269,000
------------ ------------
Total expenses 388,435,000 356,427,000
------------ ------------
Income from operations 19,185,000 51,459,000
------------ ------------
Non-operating income (expenses):
Interest income 2,653,000 2,441,000
Interest expense, net of capitalized interest
of $1,006,000 and $354,000, respectively (43,985,000) (40,791,000)
Loss on assets held for sale (658,000) (499,000)
------------ ------------
Total non-operating expense, net (41,990,000) (38,849,000)
------------ ------------
(Loss) income before income taxes and extraordinary item (22,805,000) 12,610,000
Income tax provision (526,000) (1,025,000)
------------ ------------
(Loss) income before extraordinary item (23,331,000) 11,585,000
Extraordinary item - loss on early extinguishment of debt - (72,000)
------------ ------------
Net (loss) income $(23,331,000) $ 11,513,000
------------ ============
Net (loss) income per common share:
(Loss) income before extraordinary item $(.94) $.46
Extraordinary item - -
------------ ------------
Net (loss) income per common share $(.94) $.46
============ ============
</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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $(23,331,000) $ 11,513,000
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 32,375,000 30,825,000
Loss on sale of assets 658,000 499,000
Provision for doubtful accounts 2,224,000 2,871,000
Deferred income tax benefit 85,000 (930,000)
Increase in accounts receivable (1,014,000) (2,994,000)
Net increase (decrease) in accounts payable and
accrued expenses 6,171,000 (1,359,000)
Net change in other current assets and liabilities (1,497,000) 2,601,000
Net change in other noncurrent assets and liabilities (607,000) (1,638,000)
------------ ------------
Net cash provided by operating activities 15,064,000 41,460,000
------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions (48,651,000) (47,624,000)
Collections on notes receivable 9,361,000 77,000
Proceeds from dispositions of assets 2,699,000 236,000
Obligatory investments (2,248,000) (2,102,000)
Short-term investment (2,000,000) -
Investments in unconsolidated affiliates - (1,125,000)
Net change in cash restricted for construction projects 29,642,000 (613,000)
------------ ------------
Net cash used in investing activities (11,197,000) (51,151,000)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 700,000 5,000,000
Borrowings on credit facilities 2,000,000 -
Deferred financing costs (115,000) (723,000)
Repayments of long-term debt (5,898,000) (9,933,000)
Payments on capital lease obligations (1,910,000) (1,731,000)
------------ ------------
Net cash used in financing activities (5,223,000) (7,387,000)
------------ ------------
Net decrease in cash and cash equivalents (1,356,000) (17,078,000)
Cash and cash equivalents at beginning of period 56,538,000 66,491,000
------------ ------------
Cash and cash equivalents at end of period $ 55,182,000 $ 49,413,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7
<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 506-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, including various ventures in which PHC has an interest, are
managed by PHC or its subsidiaries.
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.
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.
8
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 for
each of the three and nine month periods ended September 30, 1996 and 24,856,000
and 24,854,000, respectively, for the three and nine month periods ended
September 30, 1995.
The consolidated financial statements as of September 30, 1996 and for the
three and nine month periods ended September 30, 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 September 30, 1996, the results of its operations for the
three and nine month periods ended September 30, 1996 and 1995 and its cash
flows for the nine month periods ended September 30, 1996 and 1995.
(2) SHORT-TERM CREDIT FACILITIES
As of April 30, 1996, a subsidiary of PHC extended $2,000,000 of its bank
line of credit until April 30, 1997. As of September 30, 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 accrue interest at the
bank's prime rate plus 3/4% per annum payable monthly and are guaranteed by
another subsidiary of PHC. Additionally, the guarantor has pledged a certificate
of deposit in the face amount of $2,000,000 as collateral for the line of
credit; such deposit is presented as a short-term investment in the accompanying
consolidated financial statements.
9
<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.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- ------------
<S> <C> <C>
Indebtedness of HCC:
12 3/4% Senior Secured Notes, due 2003, net
of discount of $9,334,000 and $9,912,000,
respectively (a) $200,666,000 $200,088,000
Term note, due 1997 2,188,000 2,300,000
------------ ------------
202,854,000 202,388,000
------------ ------------
Indebtedness of HCA:
Promissory note to bank (b) 2,973,000 4,402,000
Equipment loans 1,718,000 2,412,000
------------ ------------
4,691,000 6,814,000
------------ ------------
Indebtedness of HCT:
Equipment loans - 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 1,742,000 3,342,000
------------ ------------
271,742,000 273,342,000
------------ ------------
Total indebtedness 479,287,000 483,911,000
Less - current maturities (8,026,000) (7,082,000)
------------ ------------
Total long-term debt $471,261,000 $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 to
refinancing existing debt, proceeds from the HCC Refinancing were used to
finance
10
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
construction of a 352-room hotel tower and related amenities and to fund
development and construction of the "Adventure Slots" attraction, a themed
gaming area, 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 7);
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 September 30,
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
11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
the issuer, in whole 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.
(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 September 30, 1996 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1996 (three months) $ 841,000
1997 10,961,000
1998 10,829,000
1999 10,074,000
2000 10,079,000
Thereafter 445,837,000
------------
Total $488,621,000
============
</TABLE>
Interest paid, net of capitalized interest, amounted to $40,162,000 and
$46,490,000, respectively, during the nine month periods ended September 30,
1996 and 1995.
(4) CAPITAL LEASES
HCA leases two parking garages under capital lease agreements. The first
such lease has an initial term of 30 years commencing in June 1993 with 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 September 1996, HCA and the Aurora
Metropolitan Exposition, Auditorium and Office Building Authority
12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
("ACCA") completed the joint construction 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 provides
additional parking for patrons of the Aurora Casino and contains approximately
1,500 square feet of retail space. 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 funded all remaining construction
costs and escrowed $400,000 per month, beginning in September 1995, towards
satisfaction of its obligations under the agreement. HCA additionally agreed to
make payments to ACCA during construction equal to the financing costs due in
July 1996 relating to the ACCA industrial revenue bond issue. Such escrow and
financing payments were included in cash restricted for construction projects in
the accompanying consolidated balance sheet at December 31, 1995. The facility
is owned by ACCA and operated by HCA pursuant to a 30-year lease with 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. HCA is also responsible for
additional rent, consisting of costs such as real estate taxes, maintenance
costs, insurance premiums and utilities, arising out of its operation of both
parking garages.
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 1998. 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 original cost of HCA's parking garages is included in buildings in the
accompanying consolidated balance sheets at September 30, 1996 and December 31,
1995 in the amounts of $27,476,000 and $10,000,000, respectively. Assets under
capital leases with an original cost of $7,143,000 and $7,342,000, are included
in operating equipment in the accompanying consolidated balance sheets at
September 30, 1996 and December 31, 1995, respectively. Amortization expense
with respect to assets under capital leases amounted to $702,000 and $658,000,
respectively, during the three month periods ended September 30, 1996 and 1995
and $2,012,000 and $1,976,000, respectively, during the nine month periods ended
September 30, 1996 and 1995.
13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Future minimum lease payments under capital lease obligations as of
September 30, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 (three months) $ 1,156,000
1997 3,744,000
1998 2,494,000
1999 2,457,000
2000 2,483,000
Thereafter 29,251,000
------------
Total minimum lease payments 41,585,000
Less amount representing interest (17,364,000)
------------
Present value of future
minimum lease payments 24,221,000
Current capital lease obligations (2,123,000)
------------
Long-term capital lease obligations $ 22,098,000
------------
</TABLE>
(5) INCOME TAXES
Components of HCC's provision for income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1996 1995 1996 1995
----------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Current:
Federal $ (72,000) $ - $ (72,000) $ (432,000)
State (1,341,000) (773,000) (369,000) (1,523,000)
Deferred:
Federal - - - 450,000
State (183,000) 189,000 (85,000) 480,000
----------- ------------ ------------ -----------
$(1,596,000) $ (584,000) $ (526,000) $(1,025,000)
=========== ============ ============ ===========
</TABLE>
Total state and federal income taxes paid by HCC for the nine month periods
ended September 30, 1996 and 1995 amounted to $214,000 and $617,000,
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
14
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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") for federal tax purposes totaling approximately $84,000,000, of which
approximately $69,000,000 do not begin to expire until the year 2003.
Additionally, HCC and its subsidiaries have various tax credits available
totaling approximately $3,600,000, 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 September 30, 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.
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.
15
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 30,883,000 $ 25,316,000
Allowance for doubtful accounts 7,393,000 7,251,000
Investment and jobs tax credits 3,598,000 4,417,000
Equity losses of unconsolidated
subsidiaries and joint ventures 3,336,000 3,166,000
Other liabilities and accruals 4,993,000 3,741,000
Benefits accrual 1,647,000 1,479,000
Write off excess of cost of
investment 1,543,000 1,543,000
Other 3,186,000 2,276,000
------------ ------------
Total deferred tax assets 56,579,000 49,189,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (11,464,000) (10,227,000)
Amortization of note discount (3,029,000) (4,042,000)
Other (543,000) (657,000)
------------ ------------
Total deferred tax liabilities (15,036,000) (14,926,000)
------------ ------------
Net deferred tax asset 41,543,000 34,263,000
Valuation allowance (33,493,000) (26,213,000)
------------ ------------
$ 8,050,000 $ 8,050,000
============ ============
</TABLE>
(6) TRANSACTIONS WITH RELATED PARTIES
PHC operated, prior to its sale in September 1996, the Holiday Inn located
at the north entrance of the Dallas/Fort Worth Airport ("DFW North") which was
owned by Metroplex Hotel Limited ("Metroplex"), a partnership controlled by
certain members of the Pratt Family. During 1996 and 1995, PHC made payments for
property improvements under the hotel operating agreement totaling $2,581,000.
PHC was 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 $133,000 during each of the three
month periods ended September 30, 1996 and 1995 and $398,000, during each of the
nine month periods ended September 30, 1996 and 1995. PHC recorded the note
receivable from Metroplex, which accrued interest at the rate of 9 1/2% per
annum, at acquisition cost;
16
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
such note was included in notes receivable in the accompanying consolidated
balance sheet at December 31, 1995.
Upon the sale of the hotel by Metroplex, PHC received proceeds sufficient
to repay the third party indebtedness of $1,873,000, recover its $6,750,000
acquisition cost of the underlying indebtedness, recover $2,581,000 of its total
investment in property improvements and receive additional cash of approximately
$775,000.
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 September 30,
1996 and 1995 totaled $154,000 and $125,000, respectively. Such amounts totaled
$424,000 and $366,000, respectively, during the nine month periods ended
September 30, 1996 and 1995.
(7) 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 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 and nine month periods ended September 30, 1996, HCT expensed
$879,000 and $2,611,000, respectively, in connection with the ground lease. Such
amounts totaled $962,000 and $2,748,000, respectively, during the three and nine
month periods ended September 30, 1995.
(8) LITIGATION
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a lawsuit in the United States District Court for the Northern District of
Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of the
Pratt Family (collectively, the "Hollywood Defendants"). The Hollywood
Defendants filed with the Court on September 18, 1996 as answer to PHII's
lawsuit, along with numerous counterclaims against PHII, Robert Earl and Keith
Barish (collectively, the "PHII Defendants").
In its lawsuit, PHII alleges, among other things, that HCC and HCA have, in
opening and operating their Hollywood Casino concept, infringed on PHII's
trademark, service mark and trade dress and have engaged in unfair competition
and deceptive trade practices. In their counterclaims, the Hollywood Defendants
allege, among other things, that the PHII Defendants have, through use of their
mark in
17
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
connection with casino services, infringed on certain of HCC's service marks and
trade dress and have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be given
that HCC and HCA will prevail in this litigation; however, HCC and HCA believe
that PHII's claims are without merit and intend to defend their position and
pursue their counterclaims vigorously. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
the uncertainties described above.
HCC and its subsidiaries are also 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.
(9) THIRD PARTY NOTES RECEIVABLE
During November 1995, HCC loaned $10,000,000 of the proceeds from the HCC
Refinancing 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 of the outstanding principal
balance and, to the extent applicable, the forgiveness of accrued interest on
the Series B note.
(10) 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 $736,000 and $483,000, respectively, at September 30, 1996 and
December 31, 1995.
(11) SUPPLEMENTAL CASH FLOW INFORMATION
During the period ended September 30, 1996, HCA entered into a capital
lease obligation in the original amount of $13,195,000 with respect to a second
parking garage (see Note 4). Additional escrowed construction and financing
costs totaling $4,281,000 were capitalized as part of the cost of the facility.
18
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
During the second quarter of 1995, HCA acquired certain equipment at a cost
of $2,485,000 under financing agreements with a third party vendor (see Note 3).
(12) SUBSEQUENT EVENTS
During the fourth quarter of 1996, an unconsolidated partnership in which
PHC holds a 50% interest entered into a contract for the sale of a hotel in
Orlando, Florida subject to a 21-day inspection period by the buyer. Upon
completion of the sale, PHC will be required to pay approximately $2,300,000 to
retire its share of the underlying indebtedness on the property.
Also during the fourth quarter of 1996, another unconsolidated partnership
in which a PHC subsidiary holds a 50% interest entered into an agreement for the
sale of a casino/hotel in San Juan, Puerto Rico owned by the partnership and
managed by a PHC subsidiary. PHC will receive a fee with respect to the
termination of its management agreement; however, no significant gain or loss is
anticipated with respect to the sale transaction.
(13) RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 consolidated financial
statements to conform to the 1996 consolidated financial statement presentation.
Such reclassifications include the reallocation of certain costs among the
various operating departments and general and administrative expenses resulting
from the completion of a comprehensive internal review of departmental
allocations. Management believes that such reclassifications better reflect the
matching of costs with the associated revenues.
19
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 9,973,000 $ 8,996,000
Accounts receivable, net of allowances
of $1,025,000 and $866,000, respectively 2,239,000 2,613,000
Inventories 398,000 482,000
Deferred income taxes 1,434,000 765,000
Due from affiliates 984,000 322,000
Prepaid expenses and other current assets 918,000 719,000
------------ ------------
Total current assets 15,946,000 13,897,000
------------ ------------
Property and Equipment:
Land improvements 2,780,000 2,756,000
Buildings and improvements 45,411,000 26,615,000
Riverboats 36,970,000 36,967,000
Operating equipment 30,163,000 27,114,000
Construction in progress 232,000 294,000
------------ ------------
115,556,000 93,746,000
Less - accumulated depreciation and amortization (24,973,000) (17,980,000)
------------ ------------
Net property and equipment 90,583,000 75,766,000
------------ ------------
Cash Restricted for Construction Project - 1,955,000
------------ ------------
Other Assets 1,988,000 1,578,000
------------ ------------
$108,517,000 $ 93,196,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
20
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 3,723,000 $ 3,376,000
Accounts payable 2,006,000 2,288,000
Accrued liabilities -
Salaries and wages 2,697,000 1,868,000
Interest 2,715,000 1,120,000
Gaming and other taxes 502,000 920,000
Insurance 1,392,000 773,000
Other 1,358,000 881,000
Due to affiliates 2,040,000 2,324,000
Other current liabilities 1,809,000 1,315,000
------------ -----------
Total current liabilities 18,242,000 14,865,000
------------ -----------
Long-Term Debt 40,595,000 42,959,000
------------ -----------
Capital Lease Obligations 22,098,000 9,494,000
------------ -----------
Deferred income taxes 1,591,000 329,000
------------ -----------
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 1,435,000 993,000
------------ -----------
Total shareholder's equity 25,991,000 25,549,000
------------ -----------
$108,517,000 $93,196,000
------------ ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
21
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Casino $37,609,000 $40,185,000
Food and beverage 3,487,000 3,487,000
Other 1,231,000 1,564,000
----------- -----------
42,327,000 45,236,000
Less - promotional allowances (2,995,000) (3,271,000)
----------- -----------
Net revenues 39,332,000 41,965,000
----------- -----------
Expenses:
Casino 26,916,000 26,374,000
Food and beverage 1,531,000 1,173,000
Other 472,000 172,000
General and administrative 3,706,000 4,144,000
Depreciation and amortization 1,902,000 2,504,000
----------- -----------
Total expenses 34,527,000 34,367,000
----------- -----------
Income from operations 4,805,000 7,598,000
----------- -----------
Non-operating income (expense):
Interest income 27,000 35,000
Interest expense (1,729,000) (1,780,000)
----------- -----------
Total non-operating expense, net (1,702,000) (1,745,000)
----------- -----------
Income before income taxes 3,103,000 5,853,000
Income tax provision (1,195,000) (2,340,000)
----------- -----------
Net income $ 1,908,000 $ 3,513,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
22
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenues:
Casino $121,343,000 $107,717,000
Food and beverage 10,281,000 8,343,000
Other 3,368,000 3,654,000
------------ ------------
134,992,000 119,714,000
Less - promotional allowances (8,906,000) (7,432,000)
------------ ------------
Net revenues 126,086,000 112,282,000
------------ ------------
Expenses:
Casino 82,864,000 70,906,000
Food and beverage 3,315,000 3,574,000
Other 504,000 379,000
General and administrative 11,089,000 11,101,000
Depreciation and amortization 6,993,000 6,638,000
------------ ------------
Total expenses 104,765,000 92,598,000
------------ ------------
Income from operations 21,321,000 19,684,000
------------ ------------
Non-operating income (expense):
Interest income 148,000 237,000
Interest expense, net of capitalized
interest of $354,000 in 1995 (4,906,000) (4,810,000)
Loss on sale of assets - (65,000)
------------ ------------
Total non-operating expense, net (4,758,000) (4,638,000)
------------ ------------
Income before income taxes 16,563,000 15,046,000
Income tax provision (6,081,000) (5,676,000)
------------ ------------
Net income $ 10,482,000 $ 9,370,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
23
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 10,482,000 $ 9,370,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on sale of assets - 65,000
Depreciation and amortization 6,993,000 6,638,000
Provision for doubtful accounts 270,000 264,000
Deferred income tax provision 595,000 481,000
Decrease (increase) in receivables 104,000 (567,000)
Increase in accounts payable and accrued liabilities 2,820,000 2,727,000
(Decrease) increase in due to affiliates (946,000) 94,000
Net change in other current assets and liabilities 379,000 2,652,000
Net change in other assets and liabilities (412,000) (474,000)
------------ ------------
Net cash provided by operating activities 20,285,000 21,250,000
------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions (8,615,000) (27,433,000)
Net change in cash restricted for construction projects 1,955,000 (613,000)
------------ ------------
Net cash used in investing activities (6,660,000) (28,046,000)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of debt - 5,000,000
Repayments of debt (2,123,000) (544,000)
Payments on capital lease obligations (485,000) (597,000)
Capital contributions - 6,000,000
Dividends (10,040,000) (5,334,000)
------------ ------------
Net cash (used in) provided by financing activities (12,648,000) 4,525,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 977,000 (2,271,000)
Cash and cash equivalents at beginning of period 8,996,000 10,987,000
------------ ------------
Cash and cash equivalents at end of period $ 9,973,000 $ 8,716,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
24
<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; such license was renewed in July 1996 by the IGB for a
period of one year.
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 two parking
structures with approximately 1,340 parking spaces which are leased by HCA under
long-term lease agreements. The leases are treated as capital leases for
financial reporting purposes (see Note 3).
HCA estimates that a significant amount of the Aurora Casino's revenues is
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 recoverable. As a result of its review, HCA does
not believe that any material impairment currently exists related to its long-
lived assets.
25
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The financial statements as of September 30, 1996 and for the three and
nine month periods ended September 30, 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 September 30, 1996, the
results of its operations for the three and nine month periods ended September
30, 1996 and 1995 and its cash flows for the nine month periods ended September
30, 1996 and 1995. Operating results for the three and nine month periods ended
September 30, 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>
SEPTEMBER 30, 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) 2,973,000 4,402,000
Equipment loans (c) 1,718,000 2,412,000
----------- -----------
Total indebtedness 43,698,000 45,821,000
Less current maturities (3,103,000) (2,862,000)
----------- -----------
Total long-term debt $40,595,000 $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 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.
26
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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 September 30, 1996, future maturities of long-term debt are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1996 (three months) $ 746,000
1997 5,684,000
1998 5,761,000
1999 5,000,000
2000 5,000,000
Thereafter 21,507,000
-----------
$43,698,000
===========
</TABLE>
Interest paid, net of amounts capitalized, for the nine month periods ended
September 30, 1996 and 1995 amounted to $3,311,000 and $3,187,000, respectively.
(3) CAPITAL LEASES
HCA leases two parking garages under capital lease agreements. The first
such lease has an initial term of 30 years commencing in June 1993 with 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 September 1996, HCA and the Aurora
Metropolitan Exposition, Auditorium and Office Building Authority ("ACCA")
completed the joint construction 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 provides
additional parking for patrons of the Aurora Casino and contains approximately
1,500 square feet of retail space. 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 funded all remaining construction
costs and escrowed $400,000 per month, beginning in September 1995, towards
satisfaction of its obligations under the agreement. HCA additionally agreed to
make payments to ACCA during construction equal to the financing costs due in
July 1996 relating to the ACCA industrial revenue bond issue. Such escrow and
financing payments were included in cash restricted for construction projects in
the accompanying balance sheet at December 31, 1995. The facility is owned by
ACCA and operated by HCA pursuant to a 30-year lease with 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. HCA is also responsible for
additional rent, consisting of costs such as real estate taxes, maintenance
costs, insurance premiums and utilities, arising out of its operation of both
parking garages.
27
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 1998.
The original cost of HCA's parking garages is included in buildings and
improvements in the accompanying balance sheets at September 30, 1996 and
December 31, 1995 in the amount of $27,476,000 and $10,000,000, respectively.
Assets under capital leases with an original cost of $2,329,000 are included in
operating equipment in the accompanying balance sheets at September 30, 1996 and
December 31, 1995. Amortization expense with respect to assets under capital
leases amounted to $311,000 and $262,000, respectively, during each of the three
month periods ended September 30, 1996 and 1995 and $837,000 and $788,000,
respectively, during each of the nine month periods ended September 30, 1996 and
1995.
Future minimum lease payments under capital lease obligations as of
September 30, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 (three months) $ 821,000
1997 2,489,000
1998 2,494,000
1999 2,457,000
2000 2,483,000
Thereafter 29,251,000
------------
Total minimum lease payments 39,995,000
Less amount representing interest (17,277,000)
------------
Present value of future minimum
lease payments 22,718,000
Current capital lease obligations (620,000)
------------
Long-term capital lease obligations $ 22,098,000
============
</TABLE>
(4) INCOME TAXES
Components of HCA's provision for income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current:
Federal $ (723,000) $(2,135,000) $(5,185,000) $(4,920,000)
State (41,000) (113,000) (301,000) (275,000)
Deferred:
Federal (407,000) (87,000) (562,000) (455,000)
State (24,000) (5,000) (33,000) (26,000)
----------- ----------- ----------- -----------
$(1,195,000) $(2,340,000) $(6,081,000) $(5,676,000)
=========== =========== =========== ===========
</TABLE>
28
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 federal taxes totaling $5,924,000
and $2,940,000, respectively, during the nine month periods ended September 30,
1996 and 1995. State taxes totaling $28,000 and $100,000, respectively, were
paid during the nine month periods ended September 30, 1996 and 1995. State
income tax refunds totaling $182,000 were received during the nine month period
ended September 30, 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 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 (liability) asset are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 372,000 $ 314,000
Other liabilities and reserves 1,062,000 451,000
----------- ---------
Total deferred tax assets 1,434,000 765,000
----------- ---------
Deferred tax liabilities:
Depreciation and amortization (1,591,000) (329,000)
----------- ---------
Net deferred tax (liability) asset $ (157,000) $ 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
September 30, 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.
29
<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 September 30, 1996 and December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Deferred income tax assets $ 1,355,000 $ 739,000
Due from affiliates 973,000 237,000
Deferred income tax liabilities (1,489,000) (311,000)
</TABLE>
(5) TRANSACTIONS WITH RELATED PARTIES
Pursuant to a management services contract, HCA pays base management and
incentive fees to Pratt Management, L.P. ("PML"), a limited partnership wholly
owned by PHC. 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 $2,339,000 and
$2,716,000, respectively, during the three month periods ended September 30,
1996 and 1995 and $6,810,000 and $6,588,000, respectively, during the nine month
periods ended September 30, 1996 and 1995. Management and incentive fees payable
at September 30, 1996 and December 31, 1995 were $1,864,000 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
$1,395,000, respectively, for the three month periods ended September 30, 1996
and 1995 and $3,730,000 and $4,141,000, respectively, for the nine month periods
ended September 30, 1996 and 1995. Interest payable to HCC on such notes
amounted to $2,293,000 and $1,022,000, respectively, at September 30, 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 and payroll expenses from HCC and
its subsidiaries. During the three month periods ended September 30, 1996 and
1995, such transactions totaled $294,000 and $152,000, respectively. Such
transactions totaled $785,000 and $1,047,000, respectively, during the nine
month periods ended September 30, 1996 and 1995. At September 30, 1996 and
December 31, 1995, HCA had payables amounting to $177,000 and $130,000,
respectively, in connection with such charges.
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.
30
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) LITIGATION
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a lawsuit in the United States District Court for the Northern District of
Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of the
Pratt Family (collectively, the "Hollywood Defendants"). The Hollywood
Defendants filed with the Court on September 18, 1996 as answer to PHII's
lawsuit, along with numerous counterclaims against PHII, Robert Earl and Keith
Barish (collectively, the "PHII Defendants").
In its lawsuit, PHII alleges, among other things, that HCC and HCA have, in
opening and operating their Hollywood Casino concept, infringed on PHII's
trademark, service mark and trade dress and have engaged in unfair competition
and deceptive trade practices. In their counterclaims, the Hollywood Defendants
allege, among other things, that the PHII Defendants have, through use of their
mark in connection with casino services, infringed on certain of HCC's service
marks and trade dress and have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be given
that HCC and HCA will prevail in this litigation; however, HCC and HCA believe
that PHII's claims are without merit and intend to defend their position and
pursue their counterclaims vigorously. The accompanying financial statements do
not include any adjustments that might result from the outcome of the
uncertainties described above.
HCA is also 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.
(7) SUPPLEMENTAL CASH FLOW INFORMATION
During the period ended September 30, 1996, HCA entered into a capital
lease obligation in the original amount of $13,195,000 with respect to a second
parking garage (see Note 3). Additional escrowed construction and financing
costs totaling $4,281,000 were capitalized as part of the cost of the facility.
During the second quarter of 1995, HCA acquired certain equipment at a cost
of $2,485,000 under financing agreements with a third party vendor (see Note 2).
(8) RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements
to conform to the 1996 financial statement presentation. Such reclassifications
include the reallocation of certain costs among the various operating
departments and general and administrative expenses resulting from the
completion of a comprehensive internal review of department allocations.
Management believes that such reclassifications better reflect the matching of
costs with the associated revenues.
31
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 10,594,000 $ 11,529,000
Accounts receivable, net of allowances of
$560,000 and $313,000, respectively 1,501,000 1,428,000
Inventories 653,000 883,000
Deferred income taxes 386,000 488,000
Prepaid expenses and other current assets 911,000 705,000
------------ ------------
Total current assets 14,045,000 15,033,000
------------ ------------
Property and Equipment:
Land and improvements 2,956,000 3,037,000
Buildings 71,907,000 44,048,000
Barges 2,524,000 2,524,000
Operating equipment 33,807,000 26,360,000
Construction in progress 1,595,000 4,504,000
------------ ------------
112,789,000 80,473,000
Less - accumulated depreciation and amortization (19,582,000) (12,178,000)
------------ ------------
Net property and equipment 93,207,000 68,295,000
------------ ------------
Cash Restricted for Construction Project 232,000 27,919,000
------------ ------------
Other Assets:
Land rights 7,709,000 7,962,000
Other assets 3,393,000 3,031,000
------------ ------------
Total other assets 11,102,000 10,993,000
------------ ------------
$118,586,000 $122,240,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
32
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt and capital
lease obligations $ 1,503,000 $ 3,096,000
Accounts payable 2,985,000 2,128,000
Accrued liabilities -
Salaries and wages 2,008,000 1,630,000
Interest 4,941,000 2,203,000
Gaming and other taxes 867,000 519,000
Insurance 684,000 1,207,000
Other 1,688,000 1,603,000
Other current liabilities 783,000 1,096,000
------------ ------------
Total current liabilities 15,459,000 13,482,000
------------ ------------
Long-Term Debt 84,045,000 84,045,000
------------ ------------
Capital Lease Obligations - 1,199,000
------------ ------------
Other Noncurrent Liabilities - 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 (15,555,000) (11,211,000)
------------ ------------
Total shareholder's equity 19,082,000 23,426,000
------------ ------------
$118,586,000 $122,240,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
33
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Casino $21,295,000 $23,600,000
Rooms 1,544,000 857,000
Food and beverage 2,954,000 2,514,000
Other 261,000 293,000
----------- -----------
26,054,000 27,264,000
Less - promotional allowances (2,845,000) (2,047,000)
----------- -----------
Net revenues 23,209,000 25,217,000
----------- -----------
Expenses:
Casino 15,821,000 15,465,000
Rooms 465,000 376,000
Food and beverage 918,000 694,000
Other 324,000 353,000
General and administrative 1,585,000 1,544,000
Depreciation and amortization 2,767,000 2,800,000
----------- -----------
Total expenses 21,880,000 21,232,000
----------- -----------
Income from operations 1,329,000 3,985,000
----------- -----------
Non-operating income (expenses):
Interest income 122,000 109,000
Interest expense, net of capitalized
interest of $534,000 in 1996 (2,210,000) (2,639,000)
Loss on assets held for sale (10,000) (130,000)
----------- -----------
Total non-operating expense, net (2,098,000) (2,660,000)
----------- -----------
(Loss) income before income taxes (769,000) 1,325,000
Income taxes - -
----------- -----------
Net (loss) income $ (769,000) $ 1,325,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
34
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Casino $64,531,000 $67,198,000
Rooms 3,204,000 2,391,000
Food and beverage 8,894,000 7,015,000
Other 843,000 804,000
----------- -----------
77,472,000 77,408,000
Less - promotional allowances (8,126,000) (5,564,000)
----------- -----------
Net revenues 69,346,000 71,844,000
----------- -----------
Expenses:
Casino 50,564,000 43,617,000
Rooms 780,000 1,210,000
Food and beverage 2,246,000 1,978,000
Other 958,000 800,000
General and administrative 4,479,000 4,337,000
Depreciation and amortization 8,108,000 7,827,000
----------- -----------
Total expenses 67,135,000 59,769,000
----------- -----------
Income from operations 2,211,000 12,075,000
----------- -----------
Non-operating income (expenses):
Interest income 806,000 251,000
Interest expense, net of capitalized
interest of $1,006,000 in 1996 (7,316,000) (8,028,000)
Loss on assets held for sale (45,000) (490,000)
----------- -----------
Total non-operating expense, net (6,555,000) (8,267,000)
----------- -----------
(Loss) income before income taxes and
extraordinary item (4,344,000) 3,808,000
Income taxes - -
----------- -----------
(Loss) income before extraordinary item (4,344,000) 3,808,000
Extraordinary item:
Loss on early extinguishment of debt - (72,000)
----------- -----------
Net (loss) income $(4,344,000) $ 3,736,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
35
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (4,344,000) $ 3,736,000
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Extraordinary item - 72,000
Depreciation and amortization 8,108,000 7,827,000
Loss on assets held for sale 45,000 490,000
Deferred income tax benefit - (7,000)
Provision for doubtful accounts 392,000 344,000
Increase in accounts receivable (465,000) (1,080,000)
Increase in accounts payable and accrued expenses 3,883,000 233,000
Net change in other current assets and liabilities (794,000) 538,000
Net change in other noncurrent assets and liabilities (2,000) (909,000)
------------ ------------
Net cash provided by operating activities 6,823,000 11,244,000
------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions (32,758,000) (3,679,000)
Proceeds from dispositions of assets 105,000 180,000
Decrease in cash restricted for construction projects 27,687,000 -
------------ ------------
Net cash used in investing activities (4,966,000) (3,499,000)
------------ ------------
FINANCING ACTIVITIES:
Repayments of long-term debt (1,367,000) (8,910,000)
Payments on capital lease obligations (1,425,000) (1,134,000)
------------ ------------
Net cash used in financing activities (2,792,000) (10,044,000)
------------ ------------
Net decrease in cash and cash equivalents (935,000) (2,299,000)
Cash and cash equivalents at beginning of period 11,529,000 12,660,000
------------ ------------
Cash and cash equivalents at end of period $ 10,594,000 $ 10,361,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
36
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED 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, 506
hotel rooms and suites 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.
The accompanying consolidated financial statements include the accounts of
HCT and its wholly owned subsidiary, HWCC-Golf Course Partners, Inc. ("Golf").
Golf, a Delaware corporation, was formed in 1996 to own an interest in as yet
undeveloped golf course to be used by patrons of the Tunica Casino and other
participating casino/hotel properties. All significant intercompany balances
have been eliminated in consolidation.
HCT estimates that a significant amount of the Tunica Casino's revenues is
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 consolidated financial statements as of September 30, 1996 and for the
three and nine month periods ended September 30, 1996 and 1995 have been
prepared by HCT without audit. In the opinion of management, these consolidated
financial statements contain all adjustments (consisting of only normal
37
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
recurring adjustments) necessary to present fairly the consolidated financial
position of HCT as of September 30, 1996, the results of its operations for the
three and nine month periods ended September 30, 1996 and 1995 and its cash
flows for the nine month periods ended September 30, 1996 and 1995.
(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>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ -------------
<S> <C> <C>
Promissory notes to HCC (a) $84,045,000 $84,045,000
Equipment loans (b) - 1,367,000
----------- -----------
Total indebtedness 84,045,000 85,412,000
Less - current maturities - (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 (i) finance construction of a 352-room hotel tower and related
amenities and (ii) 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 consolidated balance sheets at September 30, 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.
38
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
(b) HCT financed the purchase of certain equipment from vendors through the
issuance of note obligations totaling $5,169,000. These notes accrued
interest at rates ranging from 12 1/2% to 12 3/4% per annum and have been
repaid.
Scheduled payments of long-term debt as of September 30, 1996 are
$84,045,000 in 2003.
Interest paid, net of amounts capitalized, amounted to $4,578,000 and
$8,609,000, respectively, during the nine month periods ended September 30, 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 $4,814,000 and $5,013,000 are included in operating equipment in the
accompanying consolidated balance sheets at September 30, 1996 and December 31,
1995, respectively. Amortization expense was $391,000 and $396,000,
respectively, for the three month periods ended September 30, 1996 and 1995 and
$1,175,000 and $1,188,000, respectively, for the nine month periods ended
September 30, 1996 and 1995. Accumulated amortization at September 30, 1996 and
December 31, 1995 with respect to these assets amounted to $3,247,000 and
$2,174,000, respectively.
Future minimum lease payments under capital lease obligations as of
September 30, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 (three months) $ 335,000
1997 1,255,000
-----------
Total minimum lease payments 1,590,000
Less amount representing interest (87,000)
-----------
Present value of future minimum
lease payments 1,503,000
Current capital lease obligation (1,503,000)
-----------
Long-term capital lease obligation $ -
===========
</TABLE>
39
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) INCOME TAXES
Components of HCT's benefit for income taxes for the three and nine month
periods ended September 30, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1996 1995 1996 1995
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Benefit in lieu of (provision for)
federal income taxes:
Current $ - $ 190,000 $ - $ 61,000
Deferred - (190,000) - (61,000)
-------- --------- -------- ---------
$ - $ - $ - $ -
======== ========= ======== =========
</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 nine month periods ended September
30, 1996 or 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 $17,000,000, which do not begin to expire until the year 2009.
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 September 30, 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.
40
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,680,000 $ 3,884,000
Allowance for doubtful accounts 190,000 106,000
Other liabilities and accruals 837,000 758,000
----------- -----------
Total deferred tax assets 6,707,000 4,748,000
Deferred tax liabilities:
Depreciation and amortization (1,164,000) (711,000)
----------- -----------
Net deferred tax asset 5,543,000 4,037,000
Valuation allowance (4,506,000) (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 consolidated financial statements as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Deferred income taxes $386,000 $488,000
Other noncurrent assets 651,000 549,000
</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 for each of the three month periods ended September
30, 1996 and 1995 and $900,000 for each of the nine month periods ended
September 30, 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 fee of
$30,000 a month. HCT also reimburses ACSC for its direct costs and expenses
41
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
incurred under this agreement. Total charges incurred under such agreement
amounted to $97,000 and $171,000, respectively, for the three month periods
ended September 30, 1996 and 1995, and $409,000 and $429,000, respectively, for
the nine month periods ended September 30, 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 September 30, 1996 and 1995, fees charged to HCT
by GBHC totaled $203,000 and $70,000, respectively. Such fees totaled $490,000
and $298,000, respectively, during the nine month periods ended September 30,
1996 and 1995.
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 consolidated balance sheets as of
September 30, 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. Such charges amounted to $146,000
and $205,000, respectively, for the three month periods ended September 30, 1996
and 1995, and $397,000 and $432,000, respectively, for the nine month periods
ended September 30, 1996 and 1995.
(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 September 30, 1996 and 1995, HCT expensed $879,000 and
$962,000, respectively, in connection with the ground lease. Such expense
totaled $2,611,000 and $2,748,000, respectively, during the nine month periods
ended September 30, 1996 and 1995.
(7) LITIGATION
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a lawsuit in the United States District Court for the Northern District of
Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of the
Pratt Family (collectively, the "Hollywood Defendants"). The Hollywood
Defendants filed with the
42
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Court on September 18, 1996 as answer to PHII's lawsuit, along with numerous
counterclaims against PHII, Robert Earl and Keith Barish (collectively, the
"PHII Defendants").
In its lawsuit, PHII alleges, among other things, that HCC and HCA have, in
opening and operating their Hollywood Casino concept, infringed on PHII's
trademark, service mark and trade dress and have engaged in unfair competition
and deceptive trade practices. In their counterclaims, the Hollywood Defendants
allege, among other things, that the PHII Defendants have, through use of their
mark in connection with casino services, infringed on certain of HCC's service
marks and trade dress and have engaged in unfair competition.
Although HCT is not a named party in this legislation, the lawsuit seeks,
among other things, cancellation of all of HCC's registrations using the
Hollywood Casino name in connection with casino services. Given the
uncertainties inherent in litigation, no assurance can be given that HCC and HCA
will prevail in this litigation; however, HCC and HCA believe that PHII's claims
are without merit and intend to defend their position and pursue their
counterclaims vigorously. The accompanying consolidated financial statements do
not include any adjustments that might result from the outcome of the
uncertainties described above.
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 consolidated financial position or results of operations of HCT.
(8) 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 such land rights
amounted to $736,000 and $483,000, respectively, at September 30, 1996 and
December 31, 1995.
(9) RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated 1995 financial
statements to conform to the 1996 consolidated financial statement presentation.
Such reclassifications include the reallocation of certain costs among the
various operating departments and general and administrative expenses resulting
from the completion of a comprehensive internal review of departmental
allocations. Management believes that such reclassifications better reflect the
matching of costs with the associated revenues.
43
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Casino revenues $58,904 $63,785 $185,874 $174,915
Other departmental revenues 9,671 8,762 27,061 22,520
Less - promotional allowances (5,840) (5,318) (17,032) (12,996)
------- ------- -------- --------
Net revenues 62,735 67,229 195,903 184,439
------- ------- -------- --------
Casino expenses 42,737 41,839 133,428 114,523
Other departmental expenses 3,798 2,700 7,950 7,901
General and administrative expenses 7,413 7,330 21,771 20,022
Depreciation and amortization 4,981 5,510 16,034 15,080
Development expenses 179 980 721 3,269
------- ------- -------- --------
Total expenses 59,108 58,359 179,904 160,795
------- ------- -------- --------
Income from operations $ 3,627 $ 8,870 $ 15,999 $ 23,644
======= ======= -------- ========
</TABLE>
Net revenues of the HCC Group for the three and nine month periods ended
September 30, 1996 were $62.7 million and $195.9 million, respectively, a
decrease of $4.5 million (6.7%) and an increase of $11.5 million (6.2%),
respectively, from $67.2 million and $184.4 million during the same periods of
1995. The changes included a decrease in net revenues at the Aurora Casino of
$2.6 million during the third quarter and an increase of $13.8 million during
the first nine months of 1996 compared to the same periods of 1995 together with
decreases at the Tunica Casino of $2 million and $2.5 million, respectively,
during the same periods. As explained below, the 1995 expansion of one of the
Aurora Casino's two riverboats contributed significantly to the nine month 1996
increase in revenues. Area flooding and the opening of three riverboat gaming
operations in northern Indiana during the third quarter of 1996 had a negative
impact on the Aurora Casino's revenues.
44
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Operating expenses increased by $749,000 and $19.1 million, respectively,
during the three and nine month periods ended September 30, 1996 from $58.4
million and $160.8 million, respectively, during the same periods of 1995.
Consequently, overall income from operations for the HCC Group declined (59.1%
and 32.3%) during the third quarter and first nine months of 1996 compared to
same periods of 1995. Income from operations after management fees at the Aurora
Casino declined by $2.8 million during the three month period ended September
30, 1996 compared with 1995 as a result of the aforementioned factors; however,
for the nine month period of 1996, income from operations continued to show an
increase of $1.6 million over the prior year period. Income from operations
after consulting fees at the Tunica Casino declined by $2.7 million and $9.9
million, respectively, primarily 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 $7.1 million and $28.1 million,
respectively, for the three and nine month periods ended September 30, 1996
compared to $10.3 million and $26.3 million, respectively, during the 1995
periods. 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%. The increase
in space generated significant increases in gross wagering and revenues during
the first half of 1996 compared to the first half of 1995. Both the third
quarters of 1996 and 1995 reflect operations with expanded gaming capacity;
however, the 1996 period was negatively impacted by the opening of three gaming
facilities in northern Indiana during June and severe local flooding in July.
While the flooding only caused minor damage to the Aurora Casino, several
cruises had to be cancelled and the surrounding area suffered extensive damage
which reduced casino volume during the remainder of the third quarter.
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 for the Aurora Casino's operations for the three and nine month periods
ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------------
1996 1995 1996 1995
------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 11,752,000 $ 15,167,000 $ 39,395,000 $ 43,128,000
Slot machines 25,857,000 25,018,000 81,948,000 64,589,000
------------ ------------ -------------- --------------
Total $ 37,609,000 $ 40,185,000 $ 121,343,000 $ 107,717,000
============ ============ ============== ==============
TABLE GAMES:
Gross wagering (drop) (1) $ 71,976,000 $ 87,289,000 $ 232,510,000 $ 237,171,000
Hold percentages (2):
HCA 16.3% 17.4% 16.9% 18.2%
Other Chicago-area (3) 18.4% 18.6% 19.2% 18.9%
SLOT MACHINES:
Gross wagering (handle) (1) $458,688,000 $440,189,000 $1,470,898,000 $1,069,115,000
Hold percentages (2):
HCA 5.6% 5.7% 5.6% 6.0%
Other Chicago-area (3) 5.7% 6.0% 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".
(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 $3.2 million (.6%) and $397.1 million (30.4%),
respectively, during the three and nine month periods ended September 30, 1996
compared to the 1995 periods. 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 third quarter
increase was minimal as a result of the previously discussed Indiana competition
and local flooding.
46
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Aurora Casino's increase in slot machine handle continued into the
third quarter of 1996 resulting in an increase of 37.6% during the nine month
period ended September 30, 1996 over the same period of 1995. This increase
compares favorably with the increase in slot machine handle for other Chicago-
area riverboat operators of 9.1%. The resulting increase in market share
reflects the success of the Aurora Casino's aforementioned expansion project in
generating additional casino wagering. Table game drop decreased by 17.5% during
the third quarter of 1996 resulting in a nine month decline of 2% compared to
the same periods in 1995. The decrease in table game drop compares with
decreases of 23.2% and 7.5%, respectively, for other Chicago-area riverboat
operators during the third quarter and first nine months of 1996 and reflects
the impact of the flooding and additional competition from Indiana riverboats.
REVENUES
Overall, casino revenues decreased during the third quarter of 1996 by $2.6
million (6.4%) yet continued to show an increase for the nine month period ended
September 30, 1996 of $13.6 million (12.6%) compared to the same periods of
1995. Table games revenue decreased by $3.4 million (22.5%) and by $3.7 million
(8.7%), respectively, during the third quarter and first nine months of 1996
compared to the same periods of 1995 as the 17.5% and 2% decreases in drop were
compounded by decreases in the table game hold percentages to 16.3% and 16.9%,
respectively, in 1996 from 17.4% and 18.2%, respectively, in 1995. The $18.5
million (4.2%) and $401.8 million (37.6%) increases in slot machine handle
during the third quarter and first nine months of 1996, respectively, were
partially offset by declines in the slot hold percentages, resulting in 1996
slot machine revenue increases of $839,000 (3.4%) and $17.4 million (26.9%),
respectively, compared to the 1995 periods.
Food and beverage revenues at the Aurora Casino were unchanged for the
three month period and increased by $1.9 million (23.2%) during the nine month
period ended September 30, 1996 compared to the same periods of 1995. Increases
in patron volume at the Epic Buffet and other food outlets as the result of the
expansion of gaming space and increased promotional activity experienced during
the first half of the year were offset during the third quarter by the effects
of flooding and increased competition. Other revenues decreased by $333,000
(21.3%) and $286,000 (7.8%), respectively, during the three and nine month
periods ended September 30, 1996 compared to the same periods of 1995 due to the
elimination of garage and valet parking fees during the third quarter in
response to competitive pressures.
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 63.5% and 65.3%, respectively, during the three and nine
month periods ended September 30, 1996 and 64.8% and 61.9%, respectively, during
the three and nine month periods ended September 30, 1995. The nine month
increase from the prior year reflects the increase in dining promotional
activities, partially offset by the elimination of complimentary parking fees
during the third quarter.
47
<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 $542,000 (2.1%) and $12 million (16.9%),
respectively, during the three and nine month periods ended September 30, 1996
over the same periods of 1995. Such increases reflect increases in slot wagering
together with increased promotional activities, particularly during the first
half of 1996.
Food and beverage expenses increased $358,000 (30.5%) during the three
month period ended September 30, 1996 compared to the same periods of 1995
reducing the nine month decrease to $259,000 (7.2%). The third quarter increase
reflects increased payroll and food costs which partially offset increased
allocations of food and beverage costs to the casino department during the first
six months of 1996. Other expenses increased $300,000 (174.4%) and $125,000
(33%), respectively, during the third quarter and first nine months of 1996
compared to 1995. Such increases reflect increases in entertainment expenses.
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
The Tunica Casino earned income from operations, adjusted to exclude
consulting fees payable to a subsidiary of PHC, totaling $1.6 million during the
third quarter of 1996 compared to $4.3 million during the same period in 1995.
For the nine month period ended September 30, 1996, income from operations at
the Tunica Casino amounted to $3.1 million compared to $13 million during the
same period of 1995. The decreases result primarily from increased competition
in the Tunica market as evidenced by the opening of new casinos in December 1995
and in April and July 1996. The additional competition has resulted in increased
marketing and promotional expenditures to protect market share.
48
<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 operations of the Tunica facility for the three and nine
month periods ended September 30, 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
CASINO REVENUES:
Table games $ 4,082,000 $ 4,363,000 $ 12,013,000 $ 13,660,000
Slot machines 16,946,000 18,936,000 51,706,000 52,569,000
Poker revenues 267,000 301,000 812,000 969,000
------------ ------------ ------------ --------------
Total $ 21,295,000 $ 23,600,000 $ 64,531,000 $ 67,198,000
============ ============ ============ ==============
TABLE GAMES:
Gross wagering (drop) (1) $ 19,277,000 $ 20,937,000 $ 61,707,000 $ 60,978,000
Hold percentage (2) 21.2% 20.8% 19.5% 22.4%
SLOT MACHINES:
Gross wagering (handle) (1) $312,587,000 $363,588,000 $984,715,000 $1,022,306,000
Hold percentage (2) 5.4% 5.2% 5.3% 5.1%
</TABLE>
_________________________________
(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 decreased 13.7% and 3.4%, respectively, during the three
and nine month periods ended September 30, 1996 as compared to the comparable
1995 periods. During the third quarter of 1996, a decrease in slot machine
handle of $51 million (14%) was compounded by a decrease in table game drop of
$1.7 million (7.9%). The decrease in slot machine handle of $37.6 million (3.7%)
during the nine month period ended September 30, 1996 as compared to 1995 was
partially offset by a slight increase (1.2%) in table game drop.
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. Such increase was offset
during the second and third quarters by the opening in April 1996 of a fourth
casino in the immediate vicinity of the Tunica Casino and the opening in July
1996 of a new casino north of the Tunica Casino and closer to its primary gaming
market of Memphis, Tennessee.
49
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
REVENUES
Casino revenues decreased $2.3 million (9.8%) and $2.7 million (4%),
respectively, during the three and nine month periods ended September 30, 1996
compared to the same periods of 1995. Improved table game hold percentages
during the third quarter (21.2%) were not sufficient to offset the decrease in
table game drop of 7.9%, negatively impacting the nine-month results. The
decline in slot machine revenue during the third quarter and first nine months
of 1996 compared to the same periods in 1995 reflects decreases in slot machine
gross wagering partially offset by improved hold percentages to 5.4% and 5.3%,
respectively, during the three and nine month periods ended September 30, 1996
from 5.2% and 5.1%, respectively, during the corresponding 1995 periods.
Rooms revenues increased $687,000 (80.2%) and $813,000 (34%), respectively,
during the three and nine month periods ended September 30, 1996 compared to the
same periods of 1995. The addition of 352 hotel rooms in August 1996
significantly increased volume in rooms and food and beverage services. Food and
beverage revenues increased $440,000 (17.5%) and $1.9 million (26.8%),
respectively, during the third quarter and first nine months of 1996 compared to
the corresponding periods in 1995 due to increased promotional activity related
to the opening of the new hotel tower and the "Adventure Slots" attraction.
Other revenues decreased $32,000 (10.9%) during the third quarter of 1996
compared to 1995 bringing year to date totals in line with the prior year.
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 59.8% and 62.8%, respectively, during the third quarter
and first nine months of 1996 compared to 55.9% and 54.5%, respectively, during
the same periods in 1995. Such increases are primarily the result of increased
use of complimentaries and other promotional activities with respect to the
opening of both the new hotel tower during the third quarter of 1996 and the
"Adventure Slots" attraction during the first quarter of 1996, as well as in
response to increased competition from the opening of additional casinos as
discussed above.
DEPARTMENTAL EXPENSES
Casino expenses increased $356,000 (2.3%) and $6.9 million (15.9%),
respectively, during the three and nine month periods ended September 30, 1996
compared to the same periods of 1995. Marketing and promotional activities
increased in connection with the advent of additional competition and the
opening of the new hotel tower and the "Adventure Slots" attraction, resulting
in increased allocations of rooms and food and beverage expenses to the casino
department.
Rooms expense increased $89,000 (23.7%) during the third quarter of 1996
compared to the same period in 1995 as costs associated with the operation of an
additional 352 hotel rooms more than offset increased allocations to the casino
department for promotional activities. For the nine month period ended September
30, 1996, rooms expense decreased $430,000 (35.5%) compared to the same period
of 1995 due to increased allocations to the casino department resulting from
promotional activities as discussed above, combined with reductions in certain
operating expenses.
Food and beverage expense increased $224,000 (32.3%) and $268,000 (13.5%),
respectively, during the three and nine month periods ended September 30, 1996
compared to the same periods of 1995 as
50
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
increased patron volume was partially offset by the allocation of promotional
activity costs to the casino department. Other expenses decreased $29,000
(8.2%) and increased $158,000 (19.8%), respectively, during the three and nine
month periods in 1996 compared to the same periods in 1995. Decreased salary
costs and equipment rental during the third quarter partially offset the year to
date increases in costs associated with entertainment and increased retail
sales.
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 disposition of certain hotel properties.
The PHC Group's net revenues decreased to $76.4 million and $220.2 million,
respectively, during the third quarter and first nine months of 1996 from $83.4
million and $231.7 million, respectively, for the third quarter and first nine
months of 1995 resulting in income from operations of $4 million and $3.2
million, respectively, during the third quarter and first nine months of 1996.
These results compare to income from operations of $11.9 million and $27.9
million, respectively, during the 1995 periods. The decline in operating results
is attributable to decreases experienced at the Sands as discussed below .
The Sands earned income from operations of $2.5 million and sustained a
loss from operations of $2.4 million, respectively, for the three and nine month
periods ended September 30, 1996 compared to income from operations of $9.6
million and $22.2 million, respectively, reported for the 1995 periods.
Operating results were adversely affected by the advent of unprecedented and
highly aggressive marketing programs instituted by certain other Atlantic City
casinos seeking to increase their market share together with record winter
snowstorms in January and weekend snowstorms in February. These factors, as well
as declines in both the table games and slot machine hold percentages, resulted
in three and nine month declines in net revenues of 8.3% and 5.5%, respectively,
(to $71.7 million and $205.2 million in 1996 from $78.2 million and $217.1
million in 1995). In addition, marketing and advertising costs increased by $1.2
million and $10.7 million (7% and 22.8%), respectively, during the third quarter
and first nine months of 1996 compared to the same periods of 1995 in response
to competitive pressures.
51
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 21,170 $ 24,978 $ 61,750 $ 72,521
Slot machines 43,663 46,038 123,934 126,616
Other (1) 987 1,219 3,051 3,434
-------- -------- ---------- ----------
Total $ 65,820 $ 72,235 $ 188,735 $ 202,571
======== ======== ========== ==========
TABLE GAMES:
Gross Wagering
(Drop) (2) $161,052 $170,245 $ 444,435 $ 463,555
======== ======== ========== ==========
Hold Percentages: (3)
Sands 13.1% 14.7% 13.9% 15.6%
Atlantic City Casino
Gaming Industry 15.2% 15.7% 15.5% 15.9%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $535,346 $521,596 $1,510,865 $1,459,882
======== ======== ========== ==========
Hold Percentage:(3)
Sands (4) 8.2% 8.8% 8.2% 8.7%
</TABLE>
____________________________
(1) Consists of revenues from poker and simulcast horse racing wagering.
(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 $9.2 million (5.4%) and $19.1
million (4.1%), respectively, during the three and nine month periods ended
September 30, 1996 compared with the same periods of 1995. The Sands' decreases
compare with increases of 6.6% and 5.9% in table drop for all other Atlantic
City casinos during the same periods. As a result, the Sands' table game market
share (expressed as a percentage of the Atlantic City industry aggregate table
game drop) decreased to 7.6% and 7.9%, respectively, during the three and nine
month periods ended September 30, 1996 from 8.5% and 8.6%,
52
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
respectively, during the same periods of 1995. Table game drop throughout the
nine month period was adversely impacted by the increase in competitive
pressures in the rated table market segment, of which a significant portion was
in the "high end" and mid-market segments. The third quarter of 1996 also saw a
decline in the unrated table market segment as expansions at competing
properties, construction on roadways into the city and other factors all served
to reduce unrated table play at the Sands.
Slot machine handle increased $13.8 million (2.6%) and $51 million (3.5%),
respectively, during the three and nine month periods ended September 30, 1996
compared with the same periods of 1995. The Sands' increases compare with 2.4%
and 5.5% increases in slot machine handle for all other Atlantic City casinos.
As a result, the Sands' maintained its market share of 6% during the third
quarter of 1996 compared to 1995; however, its market share decreased slightly
to 6.2% from 6.3% during the nine months ended September 1996 compared to the
same period in 1995. The increases in slot machine handle are largely
attributable to increases in marketing programs, such as coin incentive and
direct marketing programs, which have resulted in significant increases in the
number of bus patrons for the nine months ended September 30, 1996 compared to
1995. The Sands' average number of slot machines increased .9% during the first
nine months of 1996 compared to an increase of 9.2% 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 1996 which resulted in an overall increase of approximately 118,000
square feet of casino space and further contributed to the Sands' decline in
market share.
REVENUES
Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, decreased by $6.4 million (8.9%) and $13.8 million (6.8%),
respectively, for the three and nine month periods ended September 30, 1996
compared with the same periods of 1995. Casino revenues were negatively impacted
by the decline in table game wagering as discussed previously and by decreases
in both the table games and slot machine hold percentages at the Sands during
the 1996 periods compared to the 1995 periods.
Rooms revenue did not change significantly during the three and nine month
periods ended September 30, 1996 compared with 1995. Food and beverage revenues
decreased $754,000 (7.3%) for the three month period ended September 30, 1996
compared with the 1995 period primarily due to the decline in patron volume at
the Sands; such revenues increased $1.9 million (7.2%) for the nine month period
ended September 30, 1996 compared with the prior year period primarily as a
result of the opening of the Sands' Epic Buffet during the third quarter of
1995. Other revenues decreased $202,000 (4.1%) during the three month period
ended September 30, 1996 and increased $1.8 million (14.6%) during the nine
month period ended September 30, 1996 compared to the same periods in 1995.
Increases in theater entertainment revenue at the Sands in 1996 were offset
during the third quarter by a decrease in management fees earned with respect to
the Aurora Casino.
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 55.8% and 56.8%, respectively, during the three and nine
month periods ended September 30, 1996 from 57.1% and 58.3% during the third
quarter and first nine months of 1995. Such decreases are primarily attributable
to increases in other types of marketing programs in lieu of promotional
allowances.
53
<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 remained flat during the third quarter of 1996
compared to 1995 and increased $12.1 million (7.7%) during the nine month period
ended September 30, 1996 compared to the same period in 1995. The nine month
increase is primarily due to the expansion of various marketing programs,
particularly coin incentive programs, in response to competitive pressures. The
additional costs of such programs result in greater allocation of rooms, food
and beverage and other expenses to casino expense.
Rooms expense did not change significantly during the third quarter or
first nine months of 1996 compared to the same periods in 1995. Food and
beverage expense did not change significantly during the three month period
ended September 30, 1996 compared to the three month period ended September 30,
1995. The increase of $1.2 million (14.7%) in food and beverage expense during
the nine month period ended September 30, 1996 compared to the same period in
1995 reflects increased costs associated with the Epic Buffet which were
partially offset by increases in marketing programs, the costs of which are
allocated to the casino department. Other expenses increased $838,000 (92.8%)
and $1 million (38.5%), respectively, during the three and nine month periods
ended September 30, 1996 compared with the same periods in 1995 as increases in
theater entertainment costs at the Sands were partially 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 development expenses incurred in connection with the pursuit of additional
gaming venues. Neither general and administrative expenses nor depreciation and
amortization expense changed significantly during the third quarter or first
nine months of 1996 compared with the same periods of 1995. Other items with
significant changes are discussed below.
DEVELOPMENT EXPENSES
Development expenses represent costs incurred in connection with HCC's
pursuit of potential gaming opportunities in jurisdictions where additional
gaming licenses may be available as well as in those where gaming has not been
legalized. Such costs decreased by $801,000 (81.7%) and $2.5 million (77.9%),
respectively, during the three and nine month periods ended September 30, 1996
compared to 1995 primarily as a result of an overall decrease in prospective
venues and projects.
INTEREST
Interest income decreased $103,000 (13.1%) during the third quarter of 1996
reducing the nine month increase to $212,000 (8.7%) compared to the same periods
in 1995. The nine month increase resulted from interest earned on proceeds from
the HCC Refinancing, as defined below, which were reserved for specific
construction projects. Most of these proceeds were spent during the first half
of 1996, which together with the overall decline in cash generated from
operations at the Sands, reduced the amount of cash available for temporary cash
investment purposes in the third quarter of 1996 compared to the same period in
1995.
54
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest expense increased $786,000 (5.7%) and $3.2 million (7.8%),
respectively, during the three and nine month periods ended September 30, 1996
compared to the prior year periods. 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. Such increases were partially offset by the
increased capitalization of interest on construction projects ($534,000 and
$652,000, respectively, during the three and nine month periods ended September
30, 1996).
INCOME TAX PROVISION
HCC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $84 million, which do not begin to expire until
1998 and of which approximately $69 million do not begin to expire until the
year 2003. Additionally, HCC and its subsidiaries have various tax credits
available totaling approximately $3.6 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 September 30, 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.
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.
55
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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
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
$20.3 million of cash flow from operations during the nine month period ended
September 30, 1996 after deducting the payment of $7.1 million of management
fees to the PHC Group. The Tunica Casino provided $6.8 million of cash from
operations during the nine month period ended September 30, 1996 after deducting
the payment of $900,000 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 and development costs.
During the nine month period ended September 30, 1996, cash flow from
operations, together with $29.6 million of cash proceeds from the 1995 debt
issue discussed below and existing cash, were used by the HCC Group to fund
capital expenditures of approximately $41.5 million, to repay third party
indebtedness of approximately $3.6 million, to make payments under capital lease
obligations of $1.9 million and to make net advances to the PHC Group of $1.7
million.
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 $84 million and tax credits
available totaling approximately $3.6 million. Due to the availability of such
net operating loss and tax credit carryforwards, management presently does not
anticipate HCC and its
56
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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, to finance construction of a 352-room hotel tower
and related amenities 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.
In accordance with certain provisions under the indenture to the Senior
Secured Notes, HCC is currently permitted to make additional loans to the PHC
Group of up to $10 million. During the third quarter of 1996, HCC loaned $6.5
million to the PHC Group for working capital purposes at the Sands. Such loans
to the PHC Group accrue interest at the rate of 13 3/4% per annum payable
quarterly commencing October 1, 1996. Also during the third quarter of 1996, the
PHC Group repaid $4.8 million it previously borrowed from HCC with respect to
the purchase of the underlying indebtedness of a non-casino hotel property it
operated (see "The PHC Group" below).
57
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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. 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 and August
1996 interest payment dates.
As of September 30, 1996, the HCC Group's scheduled maturities of long-term
debt and payments under capital leases during the remainder of 1996 are
approximately $784,000 and $1.2 million, respectively.
CAPITAL EXPENDITURES AND OTHER INVESTING ACTIVITIES
In September 1996, HCA and the Aurora Metropolitan Exposition, Auditorium
and Office Building Authority ("ACCA") completed the joint construction 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 provides additional parking for patrons of the Aurora
Casino and contains approximately 1,500 square feet of retail space. 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 funded all remaining construction costs and escrowed $400,000 per
month, beginning in September 1995, towards satisfaction of its obligations
under the agreement. HCA also agreed to make payments to ACCA during
construction equal to the financing costs relating to the ACCA industrial
revenue bond issue due in July 1996.
Other capital expenditures at the Aurora Casino for the first nine months
of 1996 were approximately $8.6 million and management anticipates spending $1.4
million during the remainder of 1996; major projects include construction of a
pedestrian bridge to improve access from the existing parking garage to the
Pavilion and other departmental expenditures.
Capital expenditures at the Tunica Casino for the first nine months of 1996
amounted to $32.8 million. Of such expenditures, $30 million was spent toward
the construction of an adjacent eight-story hotel tower, including 352
additional rooms, additional banquet space, an enclosed pool/atrium and a
showroom and $2 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
58
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
approximately $600,000 and include new signage for the casino entrance, the
expansion of certain food and beverage outlets and the renovation of certain
slot machine areas. Management also anticipates spending an additional $3
million to complete the aforementioned hotel tower and related amenities during
the fourth quarter of 1996.
HCT has entered into a partnership agreement providing for the joint
construction and ownership of a golf course in conjunction with two other casino
operators. Management estimates that its contributions to the partnership will
aggregate $1.9 million.
During November 1995, HCC loaned $10 million of the proceeds from the HCC
Refinancing 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.
HCC is pursuing several potential gaming opportunities. HCC intends to
finance any future gaming ventures with cash flow from operations, together with
private, public or bank financing, including non-recourse project financing.
THE PHC GROUP
- -------------
OPERATING ACTIVITIES
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 nine month period ended September
30, 1996 amounted to $7.1 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.
During the first nine months of 1996, the PHC Group's net cash used in
operating activities (after net interest expense and income taxes) amounted to
$5.9 million compared with cash provided by operating activities of $23.6
million during the same period of 1995. The change in net cash from operating
activities
59
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
compared to 1995 resulted primarily from a decline in operating cash flow
generated by the Sands. The Sands sustained an operating cash flow deficit of
$10.6 million for the nine months ended September 30, 1996 compared to net cash
generated from operations of $13.4 million during the 1995 period, resulting in
an aggregate decline in operating cash flow of $24 million and a decline in
working capital of $25.4 million compared to September 30, 1995. The PHC Group
utilized existing cash together with proceeds from the repayment of an
outstanding note receivable, borrowings on GBHC's short-term credit facility and
net borrowings from HCC during the nine month period ended September 30, 1996 to
meet its operating needs, to fund capital additions ($7.2 million) and to make
obligatory investments at the Sands ($2.2 million).
In prior years, PHC's hotel operations required substantial infusions of
operating funds; however, the disposition of substantially all of its hotel
properties has greatly reduced the cash required to fund hotel operations (see
"Capital Expenditures and Other Investments" below).
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 nine months of 1996, the PHC
Group repaid long-term indebtedness of $422,000. Scheduled maturities of long-
term debt during the remainder of 1996 are $57,000. Commencing in July 1997,
semiannual principal payments of $2.5 million will become due with respect to
the 10 7/8% First Mortgage Notes.
As of April 30, 1996, GBHC extended $2 million of its bank line of credit
until April 30, 1997. As of September 30, 1996, $2 million was outstanding under
the line of credit.
During the third quarter of 1996, the PHC Group borrowed $6.5 million from
HCC which accrues interest at the rate of 13 3/4% per annum payable quarterly
commencing October 1, 1996. PHC loaned such funds to GBHC on similar terms. Also
during the third quarter of 1996, the PHC Group repaid $4.8 million it
previously borrowed from HCC with respect to the purchase of the underlying
indebtedness of a non-casino hotel property it operated (see below).
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Property and equipment additions during the first nine months of 1996
totaled $7.2 million, of which capital expenditures at the Sands amounted to
approximately $4.7 million. Expenditures by the PHC Group during the first nine
months of 1996 of approximately $2.6 million for property improvements at a non-
casino hotel property it operated under an agreement with Metroplex Hotel
Limited (see Note 6 of Notes to Consolidated Financial Statements of HCC) were
repaid in September 1996 upon the sale of the hotel. Management anticipates
capital expenditures during the remainder of 1996 will be approximately
60
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
$1 million at the Sands. Projects currently planned during the remainder of
1996 include additional upgrades and improvements to rooms at the Sands,
including its higher-end suite product, and other departmental expenditures.
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 nine months of 1996 totaled $2.2
million and are anticipated to be approximately $800,000 during the remainder of
1996.
PHC agreed to contribute up to $3.9 million, approximately $2.5 million of
which has been paid as of September 30, 1996, as an additional investment in an
unconsolidated hotel partnership to refurbish the hotel facility in Orlando,
Florida. No such payments were required during the nine month period ended
September 30, 1996. Such contributions were 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 has been made to date. During
October 1996, the partnership entered into a contract for the sale of the hotel
facility. Upon completion of the sale, it is anticipated that PHC will be
required to pay approximately $2.3 million to retire its share of the underlying
indebtedness on the property.
Also during the fourth quarter of 1996, another unconsolidated partnership
in which a PHC subsidiary holds a 50% interest entered into a contract for the
sale of a casino/hotel in San Juan, Puerto Rico owned by the partnership and
managed by a PHC subsidiary. Under terms of the sales agreement, the PHC
subsidiary will receive a fee with respect to the termination of its management
agreement.
SUMMARY
As previously discussed, the Sands sustained a significant cash flow
deficit from operations during the nine month period ended September 30, 1996
and required additional cash from affiliate borrowings and its line of credit to
meet its financial obligations.
In order to fund its future cash requirements, including debt service and
obligatory investments, the Sands will need to achieve substantially improved
operating results or rely on additional borrowings from affiliates. It appears
that absent any further material deterioration of operating results, the Sands
will be able to rely on borrowings from affiliates to meet its obligations in
the near term; however, its long-term financial viability is dependent on a
substantial improvement in operating results of the Sands as its affiliates have
certain limitations on their ability to provide ongoing financial support.
During the third quarter of 1996, PHC engaged a major Wall Street
investment banking firm as its financial advisor to explore strategic
transactions regarding the Sands including, among other things, the potential
consummation of strategic alliances including joint ventures for the possible
expansion of the Sands.
61
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrants did not file any reports on Form 8-K during the quarter ended
September 30, 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: November 12, 1996 By: /s/ John C. Hull
------------------- -----------------------------
John C. Hull
Corporate Controller and
Principal Accounting Officer
HWCC - TUNICA, INC.
Date: November 12, 1996 By: /s/ John C. Hull
------------------- ----------------------------
John C. Hull
Principal Accounting Officer
62
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<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
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<NAME> HOLLYWOOD CASINO CORPORATION
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<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 55,182 55,182
<SECURITIES> 0 0
<RECEIVABLES> 32,027 32,027
<ALLOWANCES> 16,873 16,873
<INVENTORY> 5,075 5,075
<CURRENT-ASSETS> 91,129 91,129
<PP&E> 567,484 567,484
<DEPRECIATION> 203,789 203,789
<TOTAL-ASSETS> 503,388 503,388
<CURRENT-LIABILITIES> 80,491 80,491
<BONDS> 493,359 493,359
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0 0
<COMMON> 2 2
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<TOTAL-LIABILITY-AND-EQUITY> 503,388 503,388
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<INCOME-PRETAX> (6,825) (22,805)
<INCOME-TAX> 1,596 526
<INCOME-CONTINUING> (8,421) (23,331)
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<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
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<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
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<RECEIVABLES> 2,061 2,061
<ALLOWANCES> 560 560
<INVENTORY> 653 653
<CURRENT-ASSETS> 14,045 14,045
<PP&E> 112,789 112,789
<DEPRECIATION> 19,582 19,582
<TOTAL-ASSETS> 118,586 118,586
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<INTEREST-EXPENSE> 2,088 6,510
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