<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 JUNE 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 August 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 Puerto Rico, and is actively pursuing potential gaming
opportunities in domestic and foreign jurisdictions where gaming is legalized or
is being actively considered. Approximately 47% of HCC's outstanding common
shares are listed and traded on the NASDAQ under the symbol HWCC. The remaining
outstanding HCC common shares are owned by certain general partnerships and
trusts controlled by Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt
and by other family members (collectively, the "Pratt Family").
HCC owns all of the outstanding common stock of both Hollywood Casino
- - Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an Illinois
corporation organized by the Pratt Family during 1990 for the purpose of
developing and owning the Aurora Casino. HCT is a Texas corporation formed by
HCC during 1993 to acquire and complete the Tunica Casino. HCC also owns
approximately 80% of the common stock of Pratt Hotel Corporation ("PHC"), a
Delaware corporation, whose principal assets are the Sands and management and
consulting agreements on the Aurora Casino and the Tunica Casino, respectively.
The remaining PHC common stock is listed and traded on the American Stock
Exchange under the symbol PHC. The Sands is not affiliated with the Sands Hotel
and Casino in Las Vegas, Nevada.
As further discussed in the Notes to Consolidated Financial
Statements, HCC issued $210,000,000 of 12 3/4% Senior Secured Notes (the "Senior
Secured Notes") due November 1, 2003, discounted to yield 13 3/4% per annum,
through a public offering in October 1995. The Senior Secured Notes are
unconditionally guaranteed on a senior secured basis by HCT and by certain
future subsidiaries of HCC. The Senior Secured Notes are secured by, among
other things, (i) substantially all of the assets of HCT, (ii) a first mortgage
limited to approximately $39 million on substantially all of the assets of HCA
and (iii) a pledge of the capital stock of certain subsidiaries of HCC including
HCA and HCT. Accordingly, the financial statements of HCA and HCT are also
included herein.
The consolidated financial statements and the financial statements as
of June 30, 1996 and for the three and six month periods ended June 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 the
financial position of HCA and HCT as of June 30, 1996, the results of their
operations for the three and six month periods ended June 30, 1996 and 1995 and
their cash flows for the six month periods ended June 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 six month periods ended June 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>
JUNE 30, DECEMBER 31,
1996 1995
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 50,643,000 $ 56,538,000
Accounts receivable, net of allowances of
$17,339,000 and $17,675,000, respectively 14,173,000 16,410,000
Inventories 5,340,000 5,815,000
Notes receivable 9,168,000 -
Prepaid expenses 4,036,000 3,340,000
Deferred income taxes 10,149,000 10,585,000
Refundable deposits and other
current assets 2,253,000 1,307,000
------------- -------------
Total current assets 95,762,000 93,995,000
------------- -------------
Property and Equipment:
Land 61,578,000 61,643,000
Buildings and improvements 256,081,000 255,646,000
Riverboats and barges 39,494,000 39,491,000
Operating equipment 151,752,000 149,019,000
Construction in progress 33,754,000 7,432,000
------------- -------------
542,659,000 513,231,000
Less - accumulated depreciation
and amortization (197,504,000) (179,073,000)
------------- -------------
Net property and equipment 345,155,000 334,158,000
------------- -------------
Cash Restricted for Construction Projects 16,622,000 29,874,000
------------- -------------
Other Assets:
Obligatory investments 5,565,000 5,521,000
Deferred financing costs 15,199,000 16,136,000
Notes receivable 10,000,000 19,222,000
Land rights 7,793,000 7,962,000
Other assets 9,309,000 7,762,000
------------- -------------
Total other assets 47,866,000 56,603,000
------------- -------------
$ 505,405,000 $ 514,630,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
3
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------------- --------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 7,798,000 $ 9,325,000
Short-term credit facilities 2,000,000 -
Accounts payable 20,337,000 14,027,000
Accrued liabilities -
Salaries and wages 7,739,000 8,278,000
Interest 15,918,000 16,964,000
Insurance 4,946,000 4,319,000
Other 17,547,000 14,763,000
Other current liabilities 4,320,000 4,844,000
------------- -------------
Total current liabilities 80,605,000 72,520,000
------------- -------------
Long-Term Debt 475,364,000 476,829,000
------------- -------------
Capital Lease Obligations 9,714,000 10,693,000
------------- -------------
Other Noncurrent Liabilities 11,865,000 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 (150,081,000) (135,171,000)
------------- -------------
Total shareholders' deficit (72,143,000) (57,233,000)
------------- -------------
$ 505,405,000 $ 514,630,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Casino $127,395,000 $121,893,000
Rooms 4,600,000 4,633,000
Food and beverage 15,670,000 12,136,000
Other 3,288,000 2,768,000
------------ ------------
150,953,000 141,430,000
Less - promotional allowances (12,844,000) (9,910,000)
------------ ------------
Net revenues 138,109,000 131,520,000
------------ ------------
Expenses:
Casino 97,973,000 81,578,000
Rooms 1,616,000 1,890,000
Food and beverage 5,456,000 4,953,000
Other 1,988,000 1,753,000
General and administrative 14,857,000 13,722,000
Depreciation and amortization 11,041,000 10,177,000
Development 345,000 1,061,000
------------ ------------
Total expenses 133,276,000 115,134,000
------------ ------------
Income from operations 4,833,000 16,386,000
------------ ------------
Non-operating income (expenses):
Interest income 949,000 837,000
Interest expense, net of capitalized interest
of $391,000 and $193,000, respectively (14,390,000) (13,302,000)
Loss on assets held for sale (20,000) (358,000)
------------ ------------
Total non-operating expenses, net (13,461,000) (12,823,000)
------------ ------------
(Loss) income before income taxes (8,628,000) 3,563,000
Income tax benefit (provision) 378,000 (437,000)
------------ ------------
Net (loss) income $ (8,250,000) $ 3,126,000
============ ============
Net (loss) income per common share $(.33) $.13
============ ============
</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>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Casino $249,885,000 $241,466,000
Rooms 8,950,000 8,745,000
Food and beverage 30,895,000 24,899,000
Other 6,705,000 5,110,000
------------ ------------
296,435,000 280,220,000
Less - promotional allowances (25,346,000) (20,032,000)
------------ ------------
Net revenues 271,089,000 260,188,000
------------ ------------
Expenses:
Casino 190,895,000 162,831,000
Rooms 3,081,000 3,624,000
Food and beverage 10,701,000 9,782,000
Other 3,717,000 3,416,000
General and administrative 29,268,000 27,981,000
Depreciation and amortization 21,636,000 19,858,000
Development 542,000 2,289,000
------------ ------------
Total expenses 259,840,000 229,781,000
------------ ------------
Income from operations 11,249,000 30,407,000
------------ ------------
Non-operating income (expenses):
Interest income 1,968,000 1,653,000
Interest expense, net of capitalized
interest of $472,000 and $354,000,
respectively (29,161,000) (26,753,000)
Loss on assets held for sale (36,000) (425,000)
------------ ------------
Total non-operating expenses, net (27,229,000) (25,525,000)
------------ ------------
(Loss) income before income taxes
and extraordinary item (15,980,000) 4,882,000
Income tax benefit (provision) 1,070,000 (441,000)
------------ ------------
(Loss) income before extraordinary item (14,910,000) 4,441,000
Extraordinary item - loss on early
extinguishment of debt - (72,000)
------------ ------------
Net (loss) income $(14,910,000) $ 4,369,000
============ ============
Net (loss) income per common share:
(Loss) income before extraordinary item $(.60) $.18
Extraordinary item - -
------------ ------------
Net (loss) income per common share $(.60) $.18
============ ============
</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>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $(14,910,000) $ 4,369,000
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 22,015,000 20,089,000
Loss on sale of assets 36,000 425,000
Provision for doubtful accounts 1,343,000 1,892,000
Deferred income tax benefit (98,000) (741,000)
Decrease (increase) in accounts receivable 894,000 (2,741,000)
Net increase in accounts payable and accrued expenses 8,336,000 7,980,000
Net change in other current assets and liabilities (1,747,000) 1,192,000
Net change in other noncurrent assets and liabilities (507,000) (1,361,000)
------------ ------------
Net cash provided by operating activities 15,362,000 31,176,000
------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions (30,748,000) (36,146,000)
Collections on notes receivable 54,000 51,000
Proceeds from dispositions of assets 53,000 100,000
Obligatory investments (1,432,000) (1,315,000)
Investments in unconsolidated affiliates - (1,005,000)
Decrease in cash restricted for construction projects 13,252,000 -
------------ ------------
Net cash used in investing activities (18,821,000) (38,315,000)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 5,000,000
Borrowings on credit facilities 2,000,000 2,000,000
Deferred financing costs (86,000) (185,000)
Repayments of long-term debt (3,112,000) (8,883,000)
Payments on capital lease obligations (1,238,000) (1,135,000)
------------ ------------
Net cash used in financing activities (2,436,000) (3,203,000)
------------ ------------
Net decrease in cash and cash equivalents (5,895,000) (10,342,000)
Cash and cash equivalents at beginning of period 56,538,000 66,491,000
------------ ------------
Cash and cash equivalents at end of period $ 50,643,000 $ 56,149,000
============ ============
</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 154-room hotel complex under the service mark Hollywood
Casino(R) in northern Tunica County, Mississippi (the "Tunica Casino"). The
Aurora Casino and the Tunica Casino commenced operations in June 1993 and August
1994, respectively.
HCC also owns approximately 80% of the common stock of Pratt Hotel
Corporation ("PHC"), also a Delaware corporation. PHC's principal assets are the
Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"), which is
wholly owned by a PHC subsidiary, and management and consulting contracts with
the Aurora Casino and the Tunica Casino, respectively. PHC's other operations in
the United States and Puerto Rico, including various ventures in which PHC has
an interest, are managed by PHC or its subsidiaries.
A previously announced proposal for PHC to make a cash tender offer for
the approximately one million outstanding shares of its common stock not already
owned by HCC was rescinded during the second quarter of 1996.
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
8
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
recoverable. As a result of its review, HCC does not believe that any material
impairment currently exists related to its long-lived assets.
Net (loss) income per common share for all periods is calculated by
dividing the net (loss) income by the weighted average number of shares of
common stock and common stock equivalents outstanding. All common stock
equivalents are excluded from the calculation of net loss per share for periods
during which a loss was incurred as the effect of their inclusion would be
antidilutive. Common stock equivalents are included in the calculation of net
income per share for periods during which income was realized. The weighted
average number of shares of common stock and common stock equivalents
outstanding used for earnings per share calculation purposes was 24,720,000 for
each of the three and six month periods ended June 30, 1996 and 24,855,000 and
24,853,000, respectively, for the three and six month periods ended June 30,
1995.
The consolidated financial statements as of June 30, 1996 and for the
three and six month periods ended June 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 June 30, 1996, the results of its operations for the three and six
month periods ended June 30, 1996 and 1995 and its cash flows for the six month
periods ended June 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 June 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.
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.
Additionally, the indentures with respect to PHC's 1994 refinancing contain
certain cross-default provisions.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Indebtedness of HCC:
12 3/4% Senior Secured Notes, due 2003, net
of discount of $9,533,000 and $9,912,000,
respectively (a) $200,467,000 $200,088,000
Term note, due 1996 2,225,000 2,300,000
------------ ------------
202,692,000 202,388,000
------------ ------------
Indebtedness of HCA:
Promissory note to bank (b) 3,461,000 4,402,000
Equipment loans 1,956,000 2,412,000
------------ ------------
5,417,000 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 3,069,000 3,342,000
------------ ------------
273,069,000 273,342,000
------------ ------------
Total indebtedness 481,178,000 483,911,000
Less - current maturities (5,814,000) (7,082,000)
------------ ------------
Total long-term debt $475,364,000 $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
10
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
to refinancing existing debt, proceeds from the HCC Refinancing were
used to fund development and construction of the "Adventure Slots"
attraction, a themed gaming area at the Tunica Casino, and are being
used to finance construction of an approximately 350-room hotel tower
and related amenities at the Tunica Casino, to fund HCA's required
contribution of $4,000,000 for construction of a new 500-space parking
garage (see Note 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 June 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 the issuer, in whole
11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
or in part, on or after January 15, 1999 at stated redemption prices
ranging up to 104.08% of par plus accrued interest.
The indenture for the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of certain
subsidiaries of PHC to pay dividends to PHC, to merge, consolidate or
sell substantially all of their assets or to incur additional
indebtedness beyond certain limitations. In addition, the indenture
requires the maintenance of certain cash balances and, commencing in
1994, requires that a minimum of $7,000,000 be expended for property
and fixture renewals, replacements and betterments at the Sands,
subject to increases of five percent per annum thereafter. The
indenture also certain cross-default provisions with respect to the
PRT Funding Notes in (d) below.
(d) On February 17, 1994, a subsidiary of PHC issued $85,000,000 of
unsecured senior notes due April 15, 2004 (the "PRT Funding Notes").
Interest on the PRT Funding Notes accrues at the rate of 11 5/8% per
annum, payable semiannually commencing October 15, 1994. The PRT
Funding Notes are redeemable at the option of the issuer, in whole or
in part, on or after April 15, 1999 at stated redemption prices
ranging up to 104.36% of par plus accrued interest. The indenture for
the PRT Funding Notes contains various provisions which, among other
things, restrict the ability of certain subsidiaries of PHC to pay
dividends to PHC, to merge, consolidate or sell substantially all of
their assets or to incur additional indebtedness beyond certain
limitations. The indenture also contains certain cross default
provisions with respect to the 10 7/8% First Mortgage Notes described
in (c) above.
Scheduled payments of long-term debt as of June 30, 1996 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1996 (six months) $ 3,978,000
1997 9,152,000
1998 11,199,000
1999 10,479,000
2000 10,515,000
Thereafter 445,388,000
------------
Total $490,711,000
============
</TABLE>
Interest paid, net of capitalized interest, amounted to $30,242,000 and
$25,427,000, respectively, during the six month periods ended June 30, 1996 and
1995.
(4) CAPITAL LEASES
HCA leases its existing parking garage under a capital lease agreement with
an initial term of 30 years and the right to extend the term to a maximum of 99
years. Rental payments during the first 20 years will equal the City of Aurora's
financing costs related to its $10,000,000 general obligation bond issue used to
finance the construction of the parking garage. The general obligation bond
issue includes interest at rates between 7% and 7 5/8% per annum. In addition,
HCA is responsible for additional rent, consisting of costs
12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
such as real estate taxes, maintenance costs and insurance premiums, arising out
of its operation of the parking garage. HCA also leases certain equipment under
capital lease agreements which provide for interest at rates between 11.2% and
14.6% and expire at various dates through 2011. HCT leases certain gaming and
other equipment under capital lease agreements which provide for interest at
rates ranging up to 13 1/4% per annum and which expire during 1997.
The $10,000,000 original cost of HCA's parking garage is included in
buildings in the accompanying consolidated balance sheets at June 30, 1996 and
December 31, 1995. Assets under capital leases with an original cost of
$7,214,000 and $7,342,000, are included in operating equipment in the
accompanying consolidated balance sheets at June 30, 1996 and December 31, 1995,
respectively. Amortization expense with respect to these assets amounted to
$652,000 and $659,000, respectively, during the three month periods ended June
30, 1996 and 1995 and $1,310,000 and $1,318,000, respectively, during the six
month periods ended June 30, 1996 and 1995.
Future minimum lease payments under capital lease obligations as of
June 30, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 (six months) $ 1,453,000
1997 2,263,000
1998 1,013,000
1999 980,000
2000 1,007,000
Thereafter 12,411,000
-----------
Total minimum lease payments 19,127,000
Less amount representing interest (7,429,000)
-----------
Present value of future
minimum lease payments 11,698,000
Current capital lease obligations (1,984,000)
-----------
Long-term capital lease obligations $ 9,714,000
===========
</TABLE>
13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
(5) INCOME TAXES
Components of HCC's benefit (provision) for income taxes consist of the
following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -------------------------
1996 1995 1996 1995
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Current:
Federal $ - $ - $ - $ (432,000)
State 347,000 (601,000) 972,000 (750,000)
Deferred:
Federal - - - 450,000
State 31,000 164,000 98,000 291,000
--------- ---------- ----------- ---------
$ 378,000 $ (437,000) $ 1,070,000 $(441,000)
========= ========== =========== =========
</TABLE>
Total state and federal income taxes paid by HCC for the six month periods
ended June 30, 1996 and 1995 amounted to $121,000 and $501,000, respectively.
Federal and state income tax provisions or benefits are based upon
estimates of the results of operations for the current annual period and reflect
the nondeductibility for income tax purposes of certain items, including certain
amortization, meals and entertainment and other expenses. Quarterly income tax
provisions or benefits are determined by applying the resulting effective income
tax rate to the results of operations for the quarter.
HCC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $84,000,000, of which approximately $67,000,000
do not begin to expire until the year 2003. Additionally, HCC and its
subsidiaries have various tax credits available totaling approximately
$3,000,000, many of which expire by the year 2002. Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109")
requires that the tax benefit of such NOL's and credit carryforwards be recorded
as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such NOL's is more likely than not, a
valuation allowance should be recorded. Based on the profitable operations of
the Aurora Casino since its opening in June 1993, and the profitable operations
of the Tunica Casino during 1995 (exclusive of the extraordinary loss resulting
from the early extinguishment of debt), management believes that it is more
likely than not that future consolidated taxable income will be sufficient to
utilize at least a portion of the NOL's and tax credits. Accordingly, a
valuation allowance has been established which resulted in the recording of a
net deferred tax asset of $8,050,000 at both June 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.
14
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Sales by HCC or existing stockholders of common stock, or securities
convertible into common stock, or purchases of shares of publicly-held common
stock of PHC by a five percent stockholder, as defined in the Internal Revenue
Code of 1986, as amended (the "Code"), can cause a "change of control", as
defined in Section 382 of the Code, which would limit the ability of HCC or its
subsidiaries to utilize these loss carryforwards in later tax periods. Should
such a change of control occur, the amount of loss carryforwards available for
use in any one year would most likely be substantially reduced. Future treasury
regulations, administrative rulings or court decisions may also effect HCC's
utilization of its loss carryforwards.
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 28,429,000 $ 25,316,000
Allowance for doubtful accounts 7,679,000 7,251,000
Investment and jobs tax credits 3,384,000 4,417,000
Equity losses of unconsolidated
subsidiaries and joint ventures 3,251,000 3,166,000
Other liabilities and accruals 3,897,000 3,741,000
Benefits accrual 1,591,000 1,479,000
Write off excess of cost of
investment 1,543,000 1,543,000
Other 2.305,000 2,276,000
------------ ------------
Total deferred tax assets 52,079,000 49,189,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (10,436,000) (10,227,000)
Amortization of note discount (3,396,000) (4,042,000)
Other (633,000) (657,000)
------------ ------------
Total deferred tax liabilities (14,465,000) (14,926,000)
------------ ------------
Net deferred tax asset 37,614,000 34,263,000
Valuation allowance (29,564,000) (26,213,000)
------------ ------------
$ 8,050,000 $ 8,050,000
============ ============
</TABLE>
(6) TRANSACTIONS WITH RELATED PARTIES
PHC operates the Holiday Inn located at the north entrance of the
Dallas/Fort Worth Airport ("DFW North") which is owned by Metroplex Hotel
Limited ("Metroplex"), a partnership controlled by certain members of the Pratt
Family. During the six month periods ended June 30, 1996 and 1995, PHC made
payments for property improvements under the hotel operating agreement totaling
$1,614,000 and $325,000, respectively. PHC is also obligated by the hotel
operating agreement to make minimum rental payments equal
15
<PAGE>
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 June 30, 1996 and 1995 and $264,000 and $267,000, respectively,
during the six month periods ended June 30, 1996 and 1995. PHC recorded the
note receivable from Metroplex at acquisition cost, which management believes
does not exceed the estimated realizable value of the underlying collateral.
The note is included in notes receivable in the accompanying consolidated
balance sheets. Payments from Metroplex, including interest at the rate of 9
1/2% per annum, are due monthly with the remaining principal balance of
$13,418,000 due May 31, 1997.
On June 7, 1996, Metroplex entered into a contract for the sale of the
hotel which is anticipated to close in September 1996. Upon consummation of the
sale, PHC will recover its $6,750,000 acquisition cost of the underlying
indebtedness together with payments made for property improvements in 1996 and
1995 expected to aggregate $2,500,000.
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 June 30, 1996
and 1995 totaled $167,000 and $159,000, respectively. Such amounts totaled
$270,000 and $241,000, respectively, during the six month periods ended June 30,
1996 and 1995.
(7) COMMITMENTS AND CONTINGENCIES
HCT has entered into a ground lease covering 70 acres of land on which the
Tunica Casino was constructed. The ground lease is for an initial term of five
years from the opening date of the facility and, at the option of HCT, may be
renewed for nine additional five-year periods. Obligations under the ground
lease during the initial term include both minimum monthly fixed payments and
percentage rent, which in the aggregate will be the greater of 4% of Gross
Revenues, as defined, or $1,100,000 per year. HCT is responsible for all
operating and other expenses of the property in accordance with the lease terms.
HCT prepaid the first year fixed rental payments; such amount, together with all
rental payments made during the construction period, were taken as a credit
against rent payments as they became due during the first year of operations.
During the three and six month periods ended June 30, 1996, HCT expensed
$829,000 and $1,732,000, respectively, in connection with the ground lease. Such
amounts totaled $897,000 and $1,786,000, respectively, during the three and six
month periods ended June 30, 1995.
HCA has agreed with the City of Aurora and the Aurora Metropolitan
Exposition, Auditorium and Office Building Authority ("ACCA") to the joint
construction by HCA and ACCA of a new five-story, approximately 500-space
parking garage directly across the street from, and connected by a climate-
controlled tunnel to, the Aurora Casino's Pavilion. The garage will provide
additional parking for patrons of the Aurora Casino and will contain
approximately 1,500 square feet of retail space. HCA and ACCA will also
renovate ACCA's existing North Island Center banquet and meeting facilities,
including its food service facilities.
16
<PAGE>
Construction commenced in September 1995 and the project is scheduled to be
completed in August 1996. Total cost of the project is budgeted at approximately
$14,500,000. ACCA financed a portion of the construction costs through an
$11,500,000, 7.5% industrial revenue bond issue which yielded proceeds of
approximately $10,500,000. HCA has committed to fund all remaining construction
costs; the payment of such commitment, subject to a maximum of $3,500,000, has
been guaranteed by HCC. HCA has agreed to escrow $400,000 per month, beginning
in September 1995, towards satisfaction of its obligations under the agreement.
HCA has additionally agreed to make payments to ACCA during construction equal
to the financing costs that will be due in July 1996 relating to the ACCA
industrial revenue bond issue. Such escrow and financing payments have been
included in cash restricted for construction projects in the accompanying
consolidated balance sheets at June 30, 1996 and December 31, 1995. When
complete, the project will be owned by ACCA and operated by HCA pursuant to a 30
year lease with ACCA. HCA will have the right to extend the lease for up to 20
additional years. Rental payments during the first 15 years will equal ACCA's
debt service costs related to the industrial revenue bond issue. In addition,
HCA will pay ACCA base rent equal to $15,000 per month, subject to a credit of
up to $615,000 for improvements made to ACCA's North Island Center banquet and
meeting facilities. In addition, HCA will be responsible for additional rent,
consisting of costs such as any real estate taxes, maintenance costs, insurance
premiums and utilities. The lease will be treated as a capital lease for
financial reporting purposes.
HCA has committed to the city of Aurora that it will provide a minimum of
$2,000,000 in connection with HCA's construction of certain portions of an
Aurora riverwalk and other related improvements and amenities. As of June 30,
1996, HCA has spent approximately $1,451,000 toward such improvements. The
remaining improvements are to be completed within eight months of completion of
the parking facility described in the preceding paragraph.
(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. 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. The lawsuit seeks, among other things,
cancellation of all of HCC's registrations using the Hollywood Casino name in
connection with casino services and affirmation of PHII's right to use Planet
Hollywood marks in providing present and future entertainment services,
including hotel and casino services. PHII also seeks payment in the amount of
profits derived by HCC from its alleged infringement together with other
unspecified damages and court costs.
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
vigorously. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of the uncertainties
described above.
17
<PAGE>
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 $652,000 and $483,000, respectively, at June 30, 1996 and December
31, 1995.
(11) SUPPLEMENTAL CASH FLOW INFORMATION
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) RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 consolidated financial
statements to conform to the 1996 consolidated financial statement presentation.
18
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 9,884,000 $ 8,996,000
Accounts receivable, net of allowances
of $1,024,000 and $866,000, respectively 2,081,000 2,681,000
Inventories 387,000 460,000
Prepaid expenses and other current assets 2,226,000 1,721,000
------------ ------------
Total current assets 14,578,000 13,858,000
------------ ------------
Property and Equipment:
Land improvements 2,772,000 2,756,000
Buildings and improvements 26,615,000 26,615,000
Riverboats 36,970,000 36,967,000
Operating equipment 28,356,000 27,082,000
Construction in progress 647,000 348,000
------------ ------------
95,360,000 93,768,000
Less - accumulated depreciation and amortization (23,071,000) (17,980,000)
------------ ------------
Net property and equipment 72,289,000 75,788,000
------------ ------------
Cash Restricted for Construction Project 4,281,000 1,955,000
------------ ------------
Other Assets 1,912,000 1,578,000
------------ ------------
$ 93,060,000 $ 93,179,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
19
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 3,309,000 $ 3,376,000
Accounts payable 1,781,000 2,136,000
Accrued liabilities -
Salaries and wages 1,773,000 1,805,000
Interest 1,136,000 1,120,000
Gaming and other taxes 674,000 920,000
Insurance 1,325,000 773,000
Other 2,159,000 1,670,000
Due to affiliates 1,335,000 2,305,000
Other current liabilities 1,029,000 743,000
----------- -----------
Total current liabilities 14,521,000 14,848,000
----------- -----------
Long-Term Debt 41,400,000 42,959,000
----------- -----------
Capital Lease Obligations 9,466,000 9,494,000
----------- -----------
Other Noncurrent Liabilities 643,000 329,000
----------- -----------
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 2,474,000 993,000
----------- -----------
Total shareholder's equity 27,030,000 25,549,000
----------- -----------
$93,060,000 $93,179,000
=========== ===========
</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)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Casino $41,567,000 $33,712,000
Food and beverage 3,481,000 2,504,000
Other 1,074,000 1,118,000
----------- -----------
46,122,000 37,334,000
Less - promotional allowances (3,083,000) (2,128,000)
----------- -----------
Net revenues 43,039,000 35,206,000
----------- -----------
Expenses:
Casino 25,310,000 20,267,000
Food and beverage 1,294,000 1,540,000
Other 307,000 395,000
General and administrative 5,545,000 5,046,000
Depreciation and amortization 2,569,000 2,252,000
----------- -----------
Total expenses 35,025,000 29,500,000
----------- -----------
Income from operations 8,014,000 5,706,000
----------- -----------
Non-operating income (expense):
Interest income 59,000 82,000
Interest expense, net of capitalized
interest of $193,000 in 1995 (1,577,000) (1,557,000)
----------- -----------
Total non-operating expenses, net (1,518,000) (1,475,000)
----------- -----------
Income before income taxes 6,496,000 4,231,000
Income tax provision (2,358,000) (1,537,000)
----------- -----------
Net income $ 4,138,000 $ 2,694,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
21
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Casino $83,734,000 $67,532,000
Food and beverage 6,794,000 4,856,000
Other 2,137,000 2,090,000
----------- -----------
92,665,000 74,478,000
Less - promotional allowances (5,911,000) (4,161,000)
----------- -----------
Net revenues 86,754,000 70,317,000
----------- -----------
Expenses:
Casino 49,456,000 39,267,000
Food and beverage 2,669,000 2,941,000
Other 594,000 658,000
General and administrative 12,428,000 11,296,000
Depreciation and amortization 5,091,000 4,134,000
----------- -----------
Total expenses 70,238,000 58,296,000
----------- -----------
Income from operations 16,516,000 12,021,000
----------- -----------
Non-operating income (expense):
Interest income 121,000 202,000
Interest expense, net of capitalized
interest of $354,000 in 1995 (3,177,000) (3,030,000)
----------- -----------
Total non-operating expenses, net (3,056,000) (2,828,000)
----------- -----------
Income before income taxes 13,460,000 9,193,000
Income tax provision (4,886,000) (3,336,000)
----------- -----------
Net income $ 8,574,000 $ 5,857,000
=========== ===========
</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 CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1996 1995
-------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,574,000 $ 5,857,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,091,000 4,134,000
Provision for doubtful accounts 197,000 152,000
Deferred income tax provision 164,000 389,000
Decrease (increase) in receivables 403,000 (212,000)
Increase in accounts payable and accrued
liabilities 424,000 4,771,000
Decrease in due to affiliates (970,000) (1,140,000)
Net change in other current assets and
liabilities 4,000 1,512,000
Net change in other assets and liabilities (334,000) (264,000)
----------- ------------
Net cash provided by operating activities 13,553,000 15,199,000
----------- ------------
INVESTING ACTIVITIES:
Net property and equipment additions (1,592,000) (23,258,000)
Increase in cash restricted for
construction projects (2,326,000) -
----------- ------------
Net cash used in investing activities (3,918,000) (23,258,000)
----------- ------------
FINANCING ACTIVITIES:
Proceeds from issuance of debt - 5,000,000
Repayments of debt (1,397,000) (280,000)
Payments on capital lease obligations (257,000) (391,000)
Capital contributions - 2,000,000
Dividends (7,093,000) (2,592,000)
----------- ------------
Net cash (used in) provided by
financing activities (8,747,000) 3,737,000
----------- ------------
Net increase (decrease) in cash and
cash equivalents 888,000 (4,322,000)
Cash and cash equivalents at beginning
of period 8,996,000 10,987,000
----------- ------------
Cash and cash equivalents at end of
period $ 9,884,000 $ 6,665,000
=========== ============
</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)
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 a six-level
parking structure with approximately 840 parking spaces. HCA was responsible for
the design and construction of the parking garage; however, the City of Aurora
owns the facility and leases it to HCA under a long-term lease agreement. The
lease is treated as a capital lease for financial reporting purposes
(see Note 3).
HCA estimates that a significant amount of the Aurora Casino's revenues 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
24
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
recoverable. As a result of its review, HCA does not believe that any material
impairment currently exists related to its long-lived assets.
The financial statements as of June 30, 1996 and for the three and six
month periods ended June 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 June 30, 1996, the results of
its operations for the three and six month periods ended June 30, 1996 and 1995
and its cash flows for the six month periods ended June 30, 1996 and 1995.
Operating results for the three and six month periods ended June 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>
JUNE 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) 3,461,000 4,402,000
Equipment loans (c) 1,956,000 2,412,000
----------- -----------
Total indebtedness 44,424,000 45,821,000
Less current maturities (3,024,000) (2,862,000)
----------- -----------
Total long-term debt $41,400,000 $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.
25
<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 June 30, 1996, future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 (six months) $ 1,473,000
1997 5,684,000
1998 5,760,000
1999 5,000,000
2000 5,000,000
Thereafter 21,507,000
-----------
$44,424,000
===========
</TABLE>
Interest paid, net of amounts capitalized, for the six month periods ended
June 30, 1996 and 1995 amounted to $3,161,000 and $2,981,000, respectively.
(3) CAPITAL LEASES
HCA leases its existing parking garage under a capital lease agreement with
an initial term of 30 years and the right to extend the term to a maximum of 99
years. Rental payments during the first 20 years will equal the City of Aurora's
financing costs related to its $10,000,000 general obligation bond issue used to
finance the construction of the parking garage. The general obligation bond
issue includes interest at rates between 7% and 7 5/8% per annum. In addition,
HCA is responsible for additional rent, consisting of costs such as real estate
taxes, maintenance costs and insurance premiums, arising out of its operation of
the parking garage. HCA also leases certain equipment under capital lease
agreements which provide for interest at rates between 11.2% and 14.6% and
expire at various dates through 2011. Assets under capital lease agreements with
an original cost of $10,000,000 and $2,329,000 are included in buildings and
improvements and in operating equipment, respectively, in the accompanying
balance sheets at both June 30, 1996 and December 31, 1995. Amortization expense
with respect to these assets amounted to $263,000 during each of the three month
periods ended June 30, 1996 and 1995 and $526,000 during each of the six month
periods ended June 30, 1996 and 1995.
26
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Future minimum lease payments under capital lease obligations as of June
30, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 (six months) $ 617,000
1997 1,008,000
1998 1,013,000
1999 980,000
2000 1,007,000
Thereafter 12,411,000
-----------
Total minimum lease payments 17,036,000
Less amount representing interest (7,285,000)
-----------
Present value of future minimum lease payments 9,751,000
Current capital lease obligations (285,000)
-----------
Long-term capital lease obligations $ 9,466,000
===========
</TABLE>
(4) INCOME TAXES
Components of HCA's provision for income taxes consist of the
following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------------
1996 1995 1996 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Current:
Federal $(2,169,000) $(1,066,000) $(4,462,000) $(2,785,000)
State (129,000) (64,000) (260,000) (162,000)
Deferred:
Federal (59,000) (385,000) (155,000) (368,000)
State (1,000) (22,000) (9,000) (21,000)
----------- ----------- ----------- -----------
$(2,358,000) $(1,537,000) $(4,886,000) $(3,336,000)
=========== =========== =========== ===========
</TABLE>
HCA is included in HCC's consolidated federal income tax return. Pursuant
to agreements between HCC and HCA, HCA's current provision for federal income
taxes is based on the amount of tax which would be provided if a separate
federal income tax return were filed. HCA paid federal taxes totaling $4,693,000
and $1,776,000, respectively, during the six month periods ended June 30, 1996
and 1995. State taxes totaling $28,000 were paid during the six month period
ended June 30, 1996; no state taxes were paid during the six month period ended
June 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
27
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
purposes and differences in the timing of deductions taken between tax and
financial reporting purposes for the amortization of preopening costs and other
accruals.
The components of HCA's net deferred tax asset at June 30, 1996 and
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
--------- ------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 372,000 $ 314,000
Other liabilities and reserves 593,000 451,000
--------- ---------
Total deferred tax assets 965,000 765,000
--------- ---------
Deferred tax liabilities:
Depreciation and amortization (643,000) (329,000)
--------- ---------
Net deferred tax asset $ 322,000 $ 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 June 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.
Receivables and payables in connection with the aforementioned tax
allocation agreements at June 30, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
<S> <C> <C>
Other current assets $1,368,000 $ 976,000
Other noncurrent liabilities (620,000) (311,000)
</TABLE>
Included in other current assets at June 30, 1996 and December 31, 1995 are
current taxes receivable under the tax allocation agreement totaling $407,000
and $238,000, respectively. All other amounts set forth above represent deferred
tax receivables and payables.
28
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
(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 $1,528,000 and
$1,243,000, respectively, during the three month periods ended June 30, 1996 and
1995 and $4,471,000 and $3,872,000, respectively, during the six month periods
ended June 30, 1996 and 1995. Management and incentive fees payable at June 30,
1996 and December 31, 1995 were $1,087,000 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 $1,244,000 and
$1,365,000, respectively, for the three month periods ended June 30, 1996 and
1995 and $2,487,000 and $2,746,000, respectively, for the six month periods
ended June 30, 1996 and 1995. Interest payable to HCC on such notes amounted to
$1,050,000 and $1,022,000, respectively, at June 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 June 30, 1996 and 1995,
such transactions totaled $382,000 and $476,000, respectively. Such transactions
totaled $703,000 and $995,000, respectively, during the six month periods ended
June 30, 1996 and 1995. At June 30, 1996 and December 31, 1995, HCA had payables
amounting to $247,000 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.
(6) COMMITMENTS AND CONTINGENCIES
HCA has agreed with the City of Aurora and the Aurora Metropolitan
Exposition, Auditorium and Office Building Authority ("ACCA") to the joint
construction by HCA and ACCA of a new five-story, approximately 500-space
parking garage directly across the street from, and connected by a climate-
controlled tunnel to, the Aurora Casino's Pavilion. The garage will provide
additional parking for patrons of the Aurora Casino and will contain
approximately 1,500 square feet of retail space. HCA and ACCA will also
renovate ACCA's existing North Island Center banquet and meeting facilities,
including its food service facilities. Construction commenced in September 1995
and the project is scheduled to be completed in August 1996. Total cost of the
project is budgeted at approximately $14,500,000. ACCA financed a portion of
the construction costs through an $11,500,000, 7.5% industrial revenue bond
issue which yielded proceeds of approximately $10,500,000. HCA committed to
fund all remaining construction costs and escrowed $400,000 per month, beginning
in September 1995, toward satisfaction of its obligations under the agreement.
HCA
29
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
also 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 have been included in cash restricted for
construction project in the accompanying balance sheets at June 30, 1996 and
December 31, 1995. When complete, the project will be owned by ACCA and
operated by HCA pursuant to a 30 year lease with ACCA. HCA will have the right
to extend the lease for up to 20 additional years. Rental payments during the
first 15 years will equal ACCA's debt service costs related to the industrial
revenue bond issue. In addition, HCA will pay ACCA base rent equal to $15,000
per month, subject to a credit of up to $615,000 for improvements made to ACCA's
North Island Center banquet and meeting facilities. In addition, HCA will be
responsible for additional rent, consisting of costs such as any real estate
taxes, maintenance costs, insurance premiums and utilities. The lease will be
treated as a capital lease for financial reporting purposes.
HCA has committed to the City of Aurora that it will provide a minimum of
$2,000,000 in connection with HCA's construction of certain portions of the
Aurora riverwalk and other related improvements and amenities. As of June 30,
1996, HCA has spent approximately $1,451,000 toward such improvements. The
remaining improvements are to be completed within eight months of completion of
the parking facility described in the preceding paragraph.
(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. PHII alleges, among other things, that HCC and HCA have, in
opening and operating their Hollywood Casino concept, infringed on PHII's
trademark, services mark and trade dress and have engaged in unfair competition
and deceptive trade practices. The lawsuit seeks, among other things,
cancellation of all of HCC's registrations using the Hollywood Casino name in
connection with casino services and affirmation of PHII's right to use Planet
Hollywood marks in providing present and future entertainment services,
including hotel and casino services. PHII also seeks payment in the amount of
profits derived by HCC from its alleged infringement together with other
unspecified damages and court costs.
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
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.
30
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
(8) SUPPLEMENTAL CASH FLOW INFORMATION
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).
31
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 9,505,000 $ 11,529,000
Accounts receivable, net of allowances of
$557,000 and $313,000, respectively 1,201,000 1,428,000
Inventories 772,000 883,000
Deferred income taxes 348,000 488,000
Prepaid expenses and other current assets 829,000 705,000
------------ ------------
Total current assets 12,655,000 15,033,000
------------ ------------
Property and Equipment:
Land and improvements 2,956,000 3,037,000
Buildings 44,050,000 44,048,000
Barges 2,524,000 2,524,000
Operating equipment 26,796,000 26,360,000
Construction in progress 27,862,000 4,504,000
------------ ------------
104,188,000 80,473,000
Less - accumulated depreciation and (17,202,000) (12,178,000)
amortization ------------ ------------
Net property and equipment 86,986,000 68,295,000
------------ ------------
Cash Restricted for Construction Project 12,341,000 27,919,000
------------ ------------
Other Assets:
Land rights 7,793,000 7,962,000
Other assets 3,283,000 3,031,000
------------ ------------
Total other assets 11,076,000 10,993,000
------------ ------------
$123,058,000 $122,240,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
32
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt and capital
lease obligations $ 1,699,000 $ 3,096,000
Accounts payable 8,497,000 2,128,000
Accrued liabilities -
Salaries and wages 1,739,000 1,486,000
Interest 2,262,000 2,203,000
Gaming and other taxes 869,000 519,000
Insurance 825,000 1,207,000
Other 2,552,000 2,373,000
Other current liabilities 458,000 470,000
------------ ------------
Total current liabilities 18,901,000 13,482,000
------------ ------------
Long-Term Debt 84,045,000 84,045,000
------------ ------------
Capital Lease Obligations 248,000 1,199,000
------------ ------------
Other Noncurrent Liabilities 13,000 88,000
------------ ------------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value
per share; 100,000 shares authorized;
1,000 shares issued and outstanding - -
Additional paid-in capital 34,637,000 34,637,000
Accumulated deficit (14,786,000) (11,211,000)
------------ ------------
Total shareholder's equity 19,851,000 23,426,000
------------ ------------
$123,058,000 $122,240,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
33
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
--------------------------
<S> <C> <C>
Revenues:
Casino $20,518,000 $21,721,000
Rooms 834,000 812,000
Food and beverage 2,978,000 1,958,000
Other 303,000 274,000
----------- -----------
24,633,000 24,765,000
Less - promotional allowances (2,726,000) (1,558,000)
----------- -----------
Net revenues 21,907,000 23,207,000
----------- -----------
Expenses:
Casino 15,795,000 12,808,000
Rooms 432,000 635,000
Food and beverage 994,000 1,000,000
Other 330,000 230,000
General and administrative 2,556,000 2,302,000
Depreciation and amortization 2,824,000 2,568,000
----------- -----------
Total expenses 22,931,000 19,543,000
----------- -----------
(Loss) income from operations (1,024,000) 3,664,000
----------- -----------
Non-operating income (expenses):
Interest income 265,000 73,000
Interest expense, net of
capitalized
interest of $391,000 in 1996 (2,380,000) (2,586,000)
Loss on assets held for sale (19,000) (360,000)
----------- -----------
Total non-operating expense, net (2,134,000) (2,873,000)
----------- -----------
(Loss) income before income taxes (3,158,000) 791,000
Income tax benefit - -
----------- -----------
Net (loss) income $(3,158,000) $ 791,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these statements.
34
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Casino $43,236,000 $43,598,000
Rooms 1,660,000 1,534,000
Food and beverage 5,940,000 4,501,000
Other 582,000 511,000
----------- -----------
51,418,000 50,144,000
Less - promotional allowances (5,281,000) (3,517,000)
----------- -----------
Net revenues 46,137,000 46,627,000
----------- -----------
Expenses:
Casino 31,458,000 25,323,000
Rooms 941,000 1,285,000
Food and beverage 1,983,000 1,838,000
Other 620,000 436,000
General and administrative 4,912,000 4,628,000
Depreciation and amortization 5,341,000 5,027,000
----------- -----------
Total expenses 45,255,000 38,537,000
----------- -----------
Income from operations 882,000 8,090,000
----------- -----------
Non-operating income (expenses):
Interest income 684,000 142,000
Interest expense, net of capitalized
interest of $472,000 in 1996 (5,106,000) (5,389,000)
Loss on assets held for sale (35,000) (360,000)
----------- -----------
Total non-operating expense, net (4,457,000) (5,607,000)
----------- -----------
(Loss) income before income taxes and
extraordinary item (3,575,000) 2,483,000
Income tax benefit - -
----------- -----------
(Loss) income before extraordinary item (3,575,000) 2,483,000
Extraordinary item:
Loss on early extinguishment
of debt - (72,000)
----------- -----------
Net (loss) income $(3,575,000) $ 2,411,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these statements.
35
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (3,575,000) $ 2,411,000
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Extraordinary item - 72,000
Depreciation and amortization 5,341,000 5,027,000
Loss on assets held for sale 35,000 360,000
Deferred income tax benefit - (129,000)
Provision for doubtful accounts 252,000 203,000
Increase in accounts receivable (25,000) (378,000)
Increase in accounts payable and accrued expenses 6,828,000 3,158,000
Net change in other current assets and liabilities (25,000) 160,000
Net change in other noncurrent assets and liabilities (293,000) (436,000)
------------ -----------
Net cash provided by operating activities 8,538,000 10,448,000
------------ -----------
INVESTING ACTIVITIES:
Net property and equipment additions (23,845,000) (2,399,000)
Proceeds from dispositions of assets 53,000 100,000
Decrease in cash restricted for construction projects 15,578,000 -
------------ -----------
Net cash used in investing activities (8,214,000) (2,299,000)
------------ -----------
FINANCING ACTIVITIES:
Repayments of long-term debt (1,367,000) (8,278,000)
Payments on capital lease obligations (981,000) (744,000)
------------ -----------
Net cash used in financing activities (2,348,000) (9,022,000)
------------ -----------
Net decrease in cash and cash equivalents (2,024,000) (873,000)
Cash and cash equivalents at beginning of period 11,529,000 12,660,000
------------ -----------
Cash and cash equivalents at end of period $ 9,505,000 $11,787,000
============ ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these statements.
36
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
HWCC - Tunica, Inc. ("HCT") is a Texas corporation and a wholly owned
subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware corporation. HCT
was incorporated in December 1993 for the purpose of acquiring and completing a
gaming facility in northern Tunica County, Mississippi approximately 27 miles
southwest of Memphis, Tennessee. The completed facility (the "Tunica Casino")
which currently includes a casino with 54,000 square feet of gaming space, a
154-room hotel and related amenities, commenced operations on August 8, 1994
under the service mark Hollywood Casino(R). HCT's gaming license has been
renewed by the Mississippi Gaming Commission through October 17, 1997.
HCT estimates that a significant amount of the Tunica Casino's revenues 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 financial statements as of June 30, 1996 and for the three and six
month periods ended June 30, 1996 and 1995 have been prepared by HCT without
audit. In the opinion of management, these financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of HCT as of June 30, 1996, the results of
its operations for the three and six month periods ended June 30, 1996 and 1995
and its cash flows for the six month periods ended June 30, 1996 and 1995.
37
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
(2) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of HCT's assets are pledged in connection with its long-
term indebtedness. Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 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 an approximately 350-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 balance sheets at June 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.
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.
38
<PAGE>
(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 June 30, 1996 are $84,045,000 in
2003.
Interest paid, net of amounts capitalized, amounted to $5,046,000 and
$3,929,000, respectively, during the six month periods ended June 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 $4,885,000 and $5,013,000 are included in operating equipment in the
accompanying balance sheets at June 30, 1996 and December 31, 1995,
respectively. Amortization expense was $389,000 and $396,000, respectively, for
the three month periods ended June 30, 1996 and 1995 and $784,000 and $792,000,
respectively, for the six month periods ended June 30, 1996 and 1995.
Accumulated amortization at June 30, 1996 and December 31, 1995 with respect to
these assets amounted to $2,915,000 and $2,174,000, respectively.
Future minimum lease payments under capital lease obligations as of June
30, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 (six months) $ 836,000
1997 1,255,000
-----------
Total minimum lease payments 2,091,000
Less amount representing interest (144,000)
-----------
Present value of future minimum
lease payments 1,947,000
Current capital lease obligation (1,699,000)
-----------
Long-term capital lease obligation $ 248,000
===========
</TABLE>
39
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
(4) INCOME TAXES
Components of HCT's benefit for income taxes for the three and six month
periods ended June 30, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Benefit in lieu of (provision for)
federal income taxes:
Current $ - $ 51,000 $ - $(129,000)
Deferred - (51,000) 129,000
-------- -------- -------- ---------
$ - $ - $ - $ -
======== ======== ======== =========
</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 six month periods ended June 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 $16,000,000, 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 June 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.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The components of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,511,000 $ 3,884,000
Allowance for doubtful accounts 189,000 106,000
Other liabilities and accruals 530,000 758,000
----------- -----------
Total deferred tax assets 6,230,000 4,748,000
Deferred tax liabilities:
Depreciation and amortization (998,000) (711,000)
----------- -----------
Net deferred tax asset 5,232,000 4,037,000
Valuation allowance (4,195,000) (3,000,000)
----------- -----------
$ 1,037,000 $ 1,037,000
=========== ===========
</TABLE>
Receivables and payables in connection with HCT's federal income taxes
are included in the accompanying financial statements as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
<S> <C> <C>
Deferred income taxes $348,000 $488,000
Other noncurrent assets 689,000 549,000
</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 June 30,
1996 and 1995 and $600,000 for each of the six month periods ended June 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
41
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
fee of $30,000 a month. HCT also reimburses ACSC for its direct costs and
expenses incurred under this agreement. Total charges incurred under such
agreement amounted to $191,000 and $109,000, respectively, for the three month
periods ended June 30, 1996 and 1995, and $312,000 and $258,000, respectively,
for the six month periods ended June 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 June 30, 1996 and 1995, fees charged to HCT by
GBHC totaled $94,000 and $70,000, respectively. Such fees totaled $287,000 and
$228,000, respectively, during the six month periods ended June 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 balance sheets as of June 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 $129,000
and $39,000, respectively, for the three month periods ended June 30, 1996 and
1995, and $251,000 and $91,000, respectively, for the six month periods ended
June 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 June 30, 1996 and 1995, HCT expensed $829,000 and $897,000,
respectively, in connection with the ground lease. Such expense totaled
$1,732,000 and $1,786,000, respectively, during the six month periods ended June
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, one of HCC's
subsidiaries and a member of the Pratt Family. PHII alleges, among other things,
that HCC has, in opening and operating its Hollywood Casino concept, infringed
on PHII's trademark, service mark and trade dress and have engaged
42
<PAGE>
HWCC - TUNICA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
in unfair competition and deceptive trade practices. The lawsuit seeks, among
other things, cancellation of all of HCC's registrations using the Hollywood
Casino name in connection with casino services and affirmation of PHII's right
to use Planet Hollywood marks in providing present and future entertainment
services, including hotel and casino services. PHII also seeks payment in the
amount of profits derived by HCC from its alleged infringement together with
other unspecified damages and court costs.
Given the uncertainties inherent in litigation, no assurance can be given
that HCC will prevail in this litigation; however, HCC believes that PHII's
claims are without merit and intends to defend its position vigorously. The
accompanying 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 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 $652,000 and $483,000, respectively, at June 30, 1996 and December
31, 1995.
(9) RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements
to conform to the 1996 financial statement presentation.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Casino revenues $62,085,000 $55,433,000 $126,970,000 $111,130,000
Other departmental revenues 8,845,000 6,830,000 17,390,000 13,758,000
Less - promotional allowances (5,809,000) (3,686,000) (11,192,000) (7,678,000)
----------- ----------- ------------ ------------
Net revenues 65,121,000 58,577,000 133,168,000 117,210,000
----------- ----------- ------------ ------------
Casino expenses 41,105,000 33,075,000 80,914,000 64,590,000
Other departmental expenses 3,424,000 3,845,000 6,866,000 7,186,000
General and administrative expenses 10,076,000 8,841,000 21,421,000 18,801,000
Depreciation and amortization 5,704,000 5,025,000 11,053,000 9,570,000
Development expenses 345,000 1,061,000 542,000 2,289,000
----------- ----------- ------------ ------------
Total expenses 60,654,000 51,847,000 120,796,000 102,436,000
----------- ----------- ------------ ------------
Income from operations $ 4,467,000 $ 6,730,000 $ 12,372,000 $ 14,774,000
=========== =========== ============ ============
</TABLE>
Net revenues of the HCC Group for the three and six month periods ended
June 30, 1996 were $65.1 million and $133.2 million, respectively, an increase
of $6.5 million (11.2%) and $16 million (13.6%), respectively, from $58.6
million and $117.2 million during the same periods of 1995. The increases
included increases in net revenues at the Aurora Casino of $7.8 million and
$16.4 million, respectively, during the second quarter and first six months of
1996 compared to the same periods of 1995 partially offset by decreases at the
Tunica Casino of $1.3 million and $490,000, respectively, during the same
periods. As explained below, the 1995 expansion of one of the Aurora Casino's
two riverboats contributed significantly to the 1996 increase in revenues.
Operating expenses increased by $8.8 million and $18.4 million,
respectively, during the three and six month periods ended June 30, 1996 from
$51.8 million and $102.4 million, respectively, during the same periods of 1995,
more than offsetting the increase in net revenues. Consequently, overall income
from operations for the HCC Group declined (33.6% and 16.3%) during the second
quarter and first six months
44
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
of 1996 compared to same periods of 1995. As a result of the aforementioned
expansion, income from operations after management fees at the Aurora Casino
improved by $2.3 million and $4.5 million, respectively, during the three and
six month periods ended June 30, 1996 compared with 1995; income from operations
after consulting fees at the Tunica Casino declined by $4.7 million and $7.2
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 $9.5 million and $21 million,
respectively, for the three and six month periods ended June 30, 1996 compared
to $6.9 million and $15.9 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%.
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating
data for the Aurora Casino's operations for the three and six month periods
ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 13,390,000 $ 13,102,000 $ 27,643,000 $ 27,961,000
Slot machines 28,177,000 20,610,000 56,091,000 39,571,000
------------ ------------ -------------- ------------
Total $ 41,567,000 $ 33,712,000 $ 83,734,000 $ 67,532,000
============ ============ ============== ============
TABLE GAMES:
Gross wagering (drop) (1) $ 76,852,000 $ 73,760,000 $ 160,534,000 $149,882,000
Hold percentages (2):
HCA 17.4% 17.8% 17.2% 18.7%
Other Chicago-area (3) 18.5% 18.5% 19.5% 19.1%
SLOT MACHINES:
Gross wagering (handle) (1) $507,036,000 $330,464,000 $1,012,210,000 $628,926,000
Hold percentages (2):
HCA 5.6% 6.2% 5.5% 6.3%
Other Chicago-area (3) 5.7% 5.9% 5.7% 5.9%
</TABLE>
_______________________
45
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(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 $179.7 million (44.4%) and $393.9 million (50.6%),
respectively, during the three and six month periods ended June 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 Aurora Casino's increases in table drop and slot machine handle
continued into the second quarter of 1996 resulting in increases of 7.1% and
60.9%, respectively, during the six month period ended June 30, 1996 over the
same period of 1995. These increases compare favorably with the increases in
table drop and slot machine handle for other Chicago-area riverboat operators of
.6% and 19.6%, respectively. The resulting increase in market share reflects the
success of the Aurora Casino's aforementioned expansion project in generating
additional casino wagering.
REVENUES
Overall, casino revenues increased $7.9 million (23.3%) and $16.2 million
(24%), respectively, during the three and six month periods ended June 30, 1996
compared to the same periods of 1995. Table games revenue changed slightly,
increasing by $288,000 (2.2%) and decreasing by $318,000 (1.1%), respectively,
during the second quarter and first six months of 1996 compared to the same
periods of 1995 as the 4.2% and 7.1% increases in drop were offset by decreases
in the table game hold percentages to 17.4% and 17.2%, respectively, in 1996
from 17.8% and 18.7%, respectively, in 1995. The $176.6 million (53.4%) and
$383.3 million (60.9%) increases in slot machine handle during the second
quarter and first six months of 1996, respectively, were partially offset by
declines in the slot hold percentages, resulting in 1996 slot machine revenue
increases of $7.6 million (36.7%) and $16.5 million (41.7%), respectively,
compared to the 1995 periods.
Food and beverage revenues at the Aurora Casino increased by $977,000 (39%)
and $1.9 million (39.9%), respectively, during the three and six month periods
ended June 30, 1996 compared to the same periods of 1995 due to 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. Other revenues did
not change significantly during the three and six month periods ended June 30,
1996 compared to the same periods of 1995.
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 67.7% and 66.2%, respectively, during the three and six
month
46
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
periods ended June 30, 1996 and 58.8% and 59.9%, respectively, during the three
and six month periods ended June 30, 1995. The increase from the prior year
reflects the increase in dining promotional activities.
DEPARTMENTAL EXPENSES
Casino expenses increased by $5 million (24.9%) and $10.2 million (25.9%),
respectively, during the three and six month periods ended June 30, 1996 over
the same periods of 1995. Such increases reflect increases of similar magnitude
in casino revenues together with increased promotional activities.
Food and beverage expenses decreased $246,000 (16%) and $272,000 (9.2%),
respectively, during the three and six month periods ended June 30, 1996
compared to the same periods of 1995 due to increased allocation of food and
beverage costs to the casino department resulting from the increase in
promotional activities discussed above. Although other revenues did not change
significantly between the 1996 and 1995 periods, other expenses decreased
$88,000 (22.3%) and $64,000 (9.7%), respectively, during the second quarter and
first six months of 1996 compared to 1995. Such decreases reflect improved
operating margins, primarily in retail merchandise sold. 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 sustained a net loss from operations, adjusted to exclude
consulting fees payable to a subsidiary of PHC, totaling $724,000 during the
second quarter of 1996 compared to income from operations of $4 million during
the same period in 1995. For the six month period ended June 30, 1996, income
from operations at the Tunica Casino amounted to $1.5 million compared to $8.7
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 April 1996. The additional competition has resulted
in increased marketing and promotional expenditures to protect market share.
In July 1996, a new casino and hotel property opened north of the Tunica
Casino and closer to the primary gaming patron market of Memphis, Tennessee
which may intensify competitive pressures in the Tunica market.
47
<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 six
month periods ended June 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASINO REVENUES:
Table games $ 3,412,000 $ 3,982,000 $ 7,931,000 $ 9,297,000
Slot machines 16,826,000 17,426,000 34,760,000 33,633,000
Poker revenues 280,000 313,000 545,000 668,000
------------ ------------ ------------ ------------
Total $ 20,518,000 $ 21,721,000 $ 43,236,000 $ 43,598,000
============ ============ ============ ============
TABLE GAMES:
Gross wagering (drop) (1) $ 20,943,000 $ 17,962,000 $ 42,430,000 $ 40,042,000
Hold percentage (2) 16.3% 22.2% 18.7% 23.2%
SLOT MACHINES:
Gross wagering (handle) (1) $335,650,000 $341,347,000 $672,128,000 $658,718,000
Hold percentage (2) 5.0% 5.1% 5.2% 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 slightly (.8%) during the three month period
ended June 30, 1996 and increased slightly (2.3%) during the six month period
ended June 30, 1996 as compared to the comparable 1995 periods. During the
second quarter of 1996, a decrease in slot machine handle of $5.7 million (1.7%)
was partially offset by a an increase in table game drop of $3 million (16.6%).
Table game drop and slot machine handle experienced increases of $2.4 million
(6%) and $13.4 million (2%), respectively, during the six month period ended
June 30, 1996 as compared to 1995.
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 quarter by the opening in April 1996 of a fourth casino in the
immediate vicinity of the Tunica Casino.
48
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
REVENUES
Casino revenues decreased $1.2 million (5.5%) during the three month period
ended June 30, 1996 compared to the same period of 1995 bringing the six month
period ended June 30, 1996 in line with the prior year. Increases in table game
drop could not overcome the decreases in hold percentages to 16.3% and 18.7%,
respectively, during the second quarter and first six months of 1996 compared to
22.2% and 23.2%, respectively, during the same periods of 1995. The decline in
slot machine revenue during the second quarter of 1996 compared to 1995 reflects
slight decreases in both slot machine gross wagering and the slot machine hold
percentages.
Rooms revenues did not change significantly during the second quarter of
1996, but increased $126,000 (8.2%) during the six month period ended June 30,
1996 compared to the same period of 1995. Occupancy rates increased from an
average of approximately 94.3% in the first half of 1995 to approximately 99.5%
in the first half of 1996. Additional rooms have and will continue to become
available in August 1996 as the Tunica Casino completes its approximately 350-
room hotel tower. Food and beverage revenues increased $1 million (52.1%) and
$1.4 million (32%), respectively, during the second quarter and first six months
of 1996 compared to the corresponding periods in 1995 due to increased
promotional activity related to the opening of the "Adventure Slots" attraction
and the advent of additional competition. Other revenues increased $29,000
(10.6%) and $71,000 (13.9%), respectively, during the second quarter and first
six months of 1996 compared to 1995 due to improved sales volume in the retail
outlets.
Promotional allowances represent the estimated value of goods and
services provided free of charge to casino customers under various marketing
programs. These allowances, as a percentage of rooms, food and beverage and
other revenues, increased to 66.2% and 64.5%, respectively, during the second
quarter and first six months of 1996 compared to 51.2% and 53.7%, respectively,
during the same periods in 1995. This change is primarily a result of the
increased use of complimentaries and other promotional activities with respect
to both the opening of the "Adventure Slots" attraction and in response to
increased competition from the opening of the fourth casino discussed above.
DEPARTMENTAL EXPENSES
Casino expenses increased $3 million (23.3%) and $6.1 million (24.2%),
respectively, during the three and six month periods ended June 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 "Adventure Slots" attraction, resulting in increased allocations
of rooms and food and beverage expenses to the casino department.
Rooms expense decreased $203,000 (32%) and $344,000 (26.8%), respectively,
during the three and six month periods ended June 30, 1996 compared to the same
periods of 1995 due to increased allocations to the casino department with
respect to promotional activities as discussed above, combined with reductions
in certain operating expenses.
Food and beverage expense did not change significantly during the second
quarter of 1996 but increased $145,000 (7.9%) during the six month period ended
June 30, 1996 compared to the same periods of 1995. Increased patron volume
during the first quarter of 1996 associated with the opening of the "Adventure
Slots" attraction was partially offset by increased promotional activity, the
cost of which was allocated to the casino
49
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
department. Other expenses increased $100,000 (43.5%) and $184,000 (42.2%),
respectively, during the three and six month periods in 1996 compared to the
same periods in 1995 due to increased costs associated with entertainment and
increased retail sales. Rooms, food and beverage and other departmental
expenses are, for the most part, ancillary to the casino operation.
Accordingly, these departments are not expected to contribute significantly to
income from operations.
PHC GROUP
- ---------
GENERAL
The PHC Group's primary sources of revenues are the operations of the Sands
and management and consulting fees earned from the Aurora Casino and the Tunica
Casino. Results of operations for the Aurora Casino, on which such management
fees are based, were discussed above as part of the HCC Group. Since January
1994, the PHC Group has earned a fixed consulting fee from the Tunica Casino of
$100,000 per month. The PHC Group has reduced its losses from noncasino hotels
during recent years through the sale of certain owned properties and the
termination of management contracts on certain managed properties.
The PHC Group's net revenues decreased to $75.1 million and $143.5 million,
respectively, during the second quarter and first six months of 1996 from $74.8
million and $148 million, respectively, for the second quarter and first six
months of 1995 resulting in income for operations of $366,000 during the second
quarter of 1996 and a loss from operations of $1.1 million during the six month
period ended June 30, 1996. These results compare to income from operations of
$9.7 million and $15.7 million, respectively, during the 1995 periods. This
decline in operating results is attributable to decreases experienced at the
Sands as discussed below.
The Sands sustained losses from operations of $1.1 million and $5.2
million, respectively, for the three and six month periods ended June 30, 1996
compared to income from operations of $8.6 million and $12.4 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 hold percentages, resulted in three and six month declines in net
revenues of .4% and 3.9%, respectively, (to $70.5 million and $133.2 million in
1996 from $70.8 million and $138.6 million in 1995). In addition, marketing and
advertising costs increased by $7.3 million and $9.5 million (52.8% and 32.2%),
respectively, during the second quarter and first six months of 1996 compared to
the same periods of 1995 in response to competitive pressures.
50
<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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 20,405 $ 24,582 $ 40,580 $ 47,543
Slot machines 43,830 40,841 80,271 80,578
Other (1) 1,075 1,037 2,064 2,215
-------- -------- -------- --------
Total $ 65,310 $ 66,460 $122,915 $130,336
======== ======== ======== ========
TABLE GAMES:
Gross Wagering
(Drop) (2) $148,995 $150,722 $283,383 $293,310
======== ======== ======== ========
Hold Percentages: (3)
Sands 13.7% 16.3% 14.3% 16.2%
Atlantic City Casino
Gaming Industry 15.2% 15.9% 15.8% 15.9%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $536,139 $468,469 $975,519 $938,286
======== ======== ======== ========
Hold Percentage:(3)
Sands (4) 8.2% 8.7% 8.2% 8.6%
</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 $1.7 million (1.1%) and $9.9 million
(3.4%), respectively, during the three and six month periods ended June 30, 1996
compared with the same periods of 1995. The Sands' decreases compare with
increases of 7.4% and 5.6% 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 7.9% and 8% during the three and six month
51
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
periods ended June 30, 1996 from 8.5% and 8.7% during the same periods of 1995.
Table game drop throughout the six 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.
Slot machine handle increased $67.7 million (14.4%) and $37.2 million (4%)
during the three and six month periods ended June 30, 1996 compared with the
same periods of 1995. The Sands' increases compare with 7.2% and 7.4%
increases in slot machine handle for all other Atlantic City casinos. As a
result, the Sands' market share increased to 6.5% from 6.1% during the second
quarter of 1996 compared to the same period in 1995; however, its market share
decreased to 6.3% from 6.5% during the six months ended June 30, 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
programs, which have resulted in significant increases in the number of bus and
drive-in patrons for the six months ended June 30, 1996 compared to 1995. The
Sands' average number of slot machines increased 1.4% during the first six
months of 1996 compared to an increase of 8.3% 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 107,000
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 $1.2 million (1.7%) and $7.4 million (5.7%),
respectively, for the three and six month periods ended June 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 six month
periods ended June 30, 1996 compared with 1995. Food and beverage revenues
increased $1.5 million (20%) and $2.6 million (16.9%), respectively, for the
three and six month periods ended June 30, 1996 compared with the prior year
periods primarily as a result of the opening of the Epic Buffet at the Sands
during the third quarter of 1995. Other revenues increased $787,000 (26%) and
$2 million (28.1%), respectively, during the three and six month periods ended
June 30, 1996 compared to the 1995 periods as a result of an increase in theater
entertainment revenue at the Sands and increased management fees earned from 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 57.7% and 58%, respectively, during the three and
six month periods ended June 30, 1996 from 59.1% and 59.9% during the second
quarter and first six months of 1995. Such decreases are primarily attributable
to increases in other types of marketing programs in lieu of promotional
allowances.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands increased $8.4 million (17.2%) and $11.7
million (12%), respectively, during the three and six month periods ended June
30, 1996 compared with 1995. These increases are primarily due to the expansion
of various marketing programs, particularly coin incentive programs, in
52
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 decreased $71,000 (5.7%) and $199,000 (8.5%), respectively,
during the second quarter and first six months of 1996 as compared to the same
periods of 1995 primarily due to increased allocation of rooms expense to casino
expense at the Sands as a result of an increase in casino marketing activities
relating to rooms. Food and beverage expense increased by $755,000 (31.3%) and
$1 million (20.9%), respectively, during the three and six month periods ended
June 30, 1996 compared to the same periods in 1995. Increased costs at the
Sands associated with the Epic Buffet were partially offset by increases in the
casino's food and beverage marketing programs, the costs of which are allocated
to the casino department. Other expenses increased $201,000 (18.6%) and
$150,000 (6.5%), respectively, during the three and six month periods ended June
30, 1996 compared with 1995 as increases in costs related to theater
entertainment at the Sands were partially offset by increased allocations to the
casino department, particularly during the first quarter of 1996.
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.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $1.1 million (8.3%) during
the second quarter of 1996 resulting in a six month increase of $1.3 million
(4.6%) as compared with the same periods of 1995. Such increases are primarily
due to increased payroll expenses at the Tunica Casino and increased corporate
administrative costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $864,000 (8.5%) and $1.8
million (9%), respectively, during the three and six month periods ended June
30, 1996 compared to the 1995 periods primarily due to the expansion of the
riverboat at the Aurora Casino during the second quarter of 1995 and the
addition of the "Adventure Slots" attraction at the Tunica Casino during the
first quarter of 1996.
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 $716,000 (67.5%) and $1.7 million (76.3%),
respectively, during the three and six month periods ended June 30, 1996
compared to 1995 primarily as a result of an overall decrease in suitable venues
and projects.
53
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST
Interest income increased $112,000 (13.4%) and $315,000 (19.1%),
respectively, for the three and six month periods ended June 30, 1996 compared
to 1995 as a result of interest earned on proceeds from the HCC Refinancing, as
defined below, which are reserved for specific construction projects.
Interest expense increased $1.1 million (8.2%) and $2.4 million (9%),
respectively, during the three and six month periods ended June 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.
INCOME TAX BENEFIT (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 $67 million do not begin to expire until the
year 2003. Additionally, HCC and its subsidiaries have various tax credits
available totaling approximately $3 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 June 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.
54
<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
$13.6 million of cash flow from operations during the six month period ended
June 30, 1996 after deducting the payment of $5.6 million of management fees to
the PHC Group. The Tunica Casino provided $8.5 million of cash from operations
during the six month period ended June 30, 1996 after deducting the payment of
$600,000 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 six month period ended June 30, 1996, cash flow from operations,
together with cash proceeds from the 1995 debt issue discussed below and
existing cash, were used by the HCC Group to fund capital expenditures of
approximately $25.5 million, to repay third party indebtedness of approximately
$2.8 million and to make payments under capital lease obligations of $1.2
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 million. Due to the availability of such net
operating loss and tax credit carryforwards, management presently does not
anticipate HCC and its subsidiaries being required to make significant tax
payments in the near future. As noted below, the HCC Group has assigned
intercompany obligations to the PHC Group in consideration for net operating
losses of the PHC Group utilized by the HCC Group.
55
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
FINANCING ACTIVITIES
During October 1995, the HCC Group completed the refinancing of certain
outstanding indebtedness through a public offering of $210 million of 12 3/4%
Senior Secured Notes due November 1, 2003, discounted to yield 13 3/4% per annum
(the "HCC Refinancing"). In addition to refinancing existing debt, proceeds
from the HCC Refinancing were used to fund development and construction of the
"Adventure Slots" attraction and are being used to finance construction of an
approximately 350-room hotel tower and related amenities 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 may make additional loans to the PHC Group of up to $10
million. During July and August 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 semiannually.
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
56
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
for tax net operating losses of the PHC Group utilized by the HCC Group.
Because the financial coverage tests were not met, interest was not paid on the
February 17, 1996 interest payment date.
As of June 30, 1996, the HCC Group's scheduled maturities of long-term debt
and payments under capital leases during the remainder of 1996 are approximately
$3.7 million and $1.5 million, respectively.
CAPITAL EXPENDITURES AND OTHER INVESTING ACTIVITIES
Capital expenditures at the Aurora Casino for the first six months of 1996
were approximately $1.6 million and management anticipates spending $4.7 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, the completion of an additional dining outlet in the Pavilion and
other departmental expenditures.
HCA has agreed with the City of Aurora and the Aurora Metropolitan
Exposition, Auditorium and Office Building Authority ("ACCA") to the joint
construction by HCA and ACCA of a new five-story, approximately 500-space
parking garage directly across the street from, and connected by a climate-
controlled tunnel to, the Aurora Casino's Pavilion. The garage will provide
additional parking for patrons of the Aurora Casino and will contain
approximately 1,500 square feet of retail space. HCA and ACCA will also renovate
ACCA's existing North Island Center banquet and meeting facilities, including
its food service facilities. Construction commenced in September 1995 and the
project is scheduled to be completed in August 1996. Total costs of the project
are budgeted at approximately $14.5 million. ACCA financed a portion of the
construction costs through an $11.5 million, 7.5% industrial revenue bond issue
which yielded proceeds of approximately $10.5 million. HCA committed to fund all
remaining construction costs and escrowed $400,000 per month, beginning in
September 1995, towards satisfaction of its obligations under the agreement. As
of June 30, 1996, $4.3 million was held in escrow for such purposes and is
included in Cash Restricted for Construction Projects in the consolidated
financial statements. 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. When complete, the project will be owned by
ACCA and operated by HCA pursuant to a 30-year lease with ACCA. HCA will have
the right to extend the lease for up to 20 additional years.
HCA has committed to the City that it will provide a minimum of $2 million
in connection with HCA's construction of certain portions of the Aurora
riverwalk and other related improvements and amenities. As of June 30, 1996, HCA
has spent approximately $1.5 million toward such improvements. The remaining
improvements are to be completed within eight months of completion of the
parking facility described in the previous paragraph.
Capital expenditures at the Tunica Casino for the first six months of 1996
amounted to $23.8 million. Of such expenditures, $20.4 million has been spent
toward the construction of an adjacent eight-story hotel tower, including
approximately 350 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 approximately
$4.9 million 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 $9.7 million toward
completion of the aforementioned hotel tower during the third quarter of 1996.
57
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Tunica Casino 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 $1.8 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
During the first six months of 1996, the PHC Group's net cash used in
operating activities (after net interest expense and income taxes) amounted to
$715,000. 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 six month period ended June 30,
1996 amounted to $5.6 million. During 1994, the PHC Group entered into a
consulting agreement with HCT with respect to the Tunica Casino which provides
for the payment of $1.2 million annually by the Tunica Casino to the subsidiary
for consulting services and for reimbursement of direct costs and expenses
incurred.
The Sands' earnings before depreciation, interest, amortization, taxes and
intercompany management fees have been sufficient to meet its debt service
obligations (other than certain maturities of principal that have been
refinanced) and to fund a substantial portion of its capital expenditures.
Historically, the Sands has also used short-term borrowings to fund seasonal
cash needs and has used long-term borrowings for certain capital projects.
The PHC Group utilized existing cash together with borrowings on GBHC's
short-term credit facility during the six month period ended June 30, 1996 to
meet its operating needs, to fund capital additions ($5.3 million) and to make
obligatory investments at the Sands ($1.4 million).
In prior years, PHC's hotel operations required substantial infusions of
operating funds; however, the disposition of all but three of its hotel
properties has greatly reduced the cash required to fund hotel operations. In
connection with a certain hotel property which PHC operates pursuant to an
operating agreement with an
58
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
affiliate, PHC is obligated to make minimum rental payments equal to the
principal and interest payments on the underlying indebtedness attributable to
the property.
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 six months of 1996, the PHC Group
repaid long-term indebtedness of $273,000. Scheduled maturities of long-term
debt during the remainder of 1996 are $280,000.
As of April 30, 1996, GBHC extended $2 million of its bank line of credit
until April 30, 1997. As of June 30, 1996, $2 million was outstanding under the
line of credit.
During July and August 1996, the PHC Group borrowed $6.5 million from HCC
which accrues interest at the rate of 13 3/4% per annum payable semiannually.
During the second quarter of 1996, HCC rescinded its previously announced
proposal which provided for PHC to make a cash tender offer for the
approximately one million outstanding shares of PHC common stock not already
owned by HCC.
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.
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Property and equipment additions during the first six months of 1996
totaled $5.3 million, of which capital expenditures at the Sands amounted to
approximately $3.7 million. Additional capital expenditures by the PHC Group
during the first six months of 1996 included approximately $1.6 million of
property improvements at a non-casino hotel property it operates under an
agreement with Metroplex Hotel Limited (see Note 5 of Notes to Consolidated
Financial Statements of HCC). Management anticipates capital expenditures during
the remainder of 1996 will be approximately $2.8 million at the Sands. Projects
currently planned during the remainder of 1996 include substantial upgrades and
improvements to all rooms at the Sands, including its higher-end suite product.
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 six months of 1996 totaled $1.4
million and are anticipated to be approximately $1.8 million during the
remainder of 1996.
PHC has agreed to contribute up to $3.9 million, approximately $2.5 million
of which has been paid as of June 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 six month period ended June
30, 1996; management does not anticipate making any such contributions during
the remainder of 1996. Such contributions are in recognition of PHC's partner
having agreed to make $5 million in principal reductions on the underlying
mortgage note on the facility of which $4 million have been made to date.
59
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrants did not file any reports on Form 8-K during the quarter ended
June 30, 1996.
EXHIBITS
- --------
10.1 -- Employment Agreement dated May 1, 1996 by and between HCC and Edward T.
Pratt III.
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: August 12, 1996 By: /s/ John C. Hull
--------------------------- -----------------------------------
John C. Hull
Corporate Controller and
Principal Accounting Officer
HWCC - TUNICA, INC.
Date: August 12, 1996 By: /s/ John C. Hull
--------------------------- ------------------------------------
John C. Hull
Principal Accounting Officer
60
<PAGE>
EXHIBIT 10.1
-------------------------------------------------
Dated: May 1, 1996
-------------------------------------------------
EMPLOYMENT AGREEMENT
- by and between -
HOLLYWOOD CASINO CORPORATION
- and -
EDWARD T. PRATT III
-------------------------------------------------
<PAGE>
-------------------------------------------------
TABLE OF CONTENTS
-------------------------------------------------
Page
----
RECITALS.................................................................1
1. DEFINITIONS................................................ 2
2. PRIOR EMPLOYMENT........................................... 4
3. BASIC EMPLOYMENT AGREEMENT................................. 4
4. DUTIES OF EMPLOYEE......................................... 4
5. ACCEPTANCE OF EMPLOYMENT................................... 5
6. TERM....................................................... 5
7. SPECIAL TERMINATION PROVISIONS............................. 5
8. COMPENSATION TO EMPLOYEE................................... 7
(a) Base Salary........................................ 7
(b) Base Salary Adjustment............................. 7
(c) Incentive Bonus.................................... 8
(d) Employee Benefit Plans............................. 8
(e) Expense Reimbursement.............................. 9
(f) Licensing Expenses................................. 9
(g) Vacations and Holidays............................. 9
9. LICENSING REQUIREMENTS..................................... 10
10. CONFIDENTIALITY............................................ 11
11. RESTRICTIVE COVENANT....................................... 12
12. BEST EVIDENCE.............................................. 13
13. SUCCESSION................................................. 13
14. ASSIGNMENT................................................. 13
15. AMENDMENT OR MODIFICATION.................................. 14
16. GOVERNING LAW.............................................. 14
17. NOTICES.................................................... 14
18. INTERPRETATION............................................. 15
i
<PAGE>
19. SEVERABILITY.............................................. 15
20. DISPUTE RESOLUTION........................................ 15
21. WAIVER.................................................... 15
22. PAROL..................................................... 16
EXECUTION PAGE....................................................... 17
ii
<PAGE>
-----------------------------------
EMPLOYMENT AGREEMENT
-----------------------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
the 1st day of May, 1996, by and between HOLLYWOOD CASINO CORPORATION, a
Delaware corporation ("Employer"), and EDWARD T. PRATT III ("Employee").
W I T N E S S E T H:
-------------------
WHEREAS, Employer is a corporation, duly organized and existing under the
laws of the State of Delaware, which develops and/or operates land-based,
riverboat and dockside casinos and related support facilities in emerging and
established gaming jurisdictions and which has a need for qualified,
experienced personnel;
WHEREAS, Employee is an adult individual currently residing at 17423 Woods
Edge Drive, Dallas, Texas 75287;
WHEREAS, Employee has represented and warranted to Employer that Employee
possesses sufficient qualifications and expertise in order to fulfill the
terms of the employment stated in this Agreement; and
WHEREAS, Employer is willing to employ Employee, and Employee is desirous
of accepting employment from Employer, under the terms and pursuant to the
conditions set forth herein.
NOW, THEREFORE, for and in consideration of the foregoing recitals, and in
consideration of the mutual covenants, agreements,
1
<PAGE>
understandings, undertakings, representations, warranties and promises
hereinafter set forth, and intending to be legally bound thereby, Employer and
Employee do hereby covenant and agree as follows:
1. DEFINITIONS. As used in this Agreement, the words and terms
-----------
hereinafter defined have the respective meanings ascribed to them herein,
unless a different meaning clearly appears from the context:
(a) "Cause" - means (i) the conviction of Employee of a felony by a
-----
court of competent jurisdiction; (ii) the indictment of Employee by
a state or federal grand jury of competent jurisdiction for
embezzlement or misappropriation of Employer's funds or for any act
of dishonesty or lack of fidelity towards Employer; (iii) a decree
of a court of competent jurisdiction that Employee is not mentally
competent or is unable to handle his own affairs; (iv) the written
confession by Employee of any act of dishonesty towards Employer or
any embezzlement or misappropriation of Employer's funds; (v) the
payment (or, by the operation solely of the effect of a deductible,
the failure of payment) by a surety or insurer of a claim under a
fidelity bond issued to the benefit of Employer reimbursing Employer
for a loss due to the wrongful act or wrongful omission to act of
Employee (the occurrence of which shall cause Employee to be
indebted to Employer for the greater of either (A) the loss incurred
by Employer or (B) the sums paid by Employer to Employee pursuant to
this Agreement); (vi) Employee's breach of the restrictive covenant
set forth in Paragraph 11 of this Agreement, or (vii) Employee's
failure to maintain in force and in good standing any and all
licenses, permits and/or approvals required of Employee by the
relevant governmental authorities for the discharge of the
obligations of Employee under this Agreement, provided that should
Employee's required licenses, permits and/or approvals be suspended
pending a final license, permit or approval revocation
determination, this
2
<PAGE>
Agreement shall not terminate but any compensation which would
otherwise be paid by Employer to Employee under Paragraph 8 of this
Agreement shall be suspended and accrued pending the final
resolution of such final license, permit and/or approval revocation
determination, and, in the event such final resolution of such final
license, permit and/or approval revocation determination does not
revoke Employee's licenses, permits and/or approvals, any
compensation which has been so suspended and accrued shall be paid
by Employer to Employee, provided, however, that Employee's
disability due to illness or accident or any other mental or
physical incapacity shall not constitute "Cause" as defined herein.
(b) "Complete Disability" - means the inability of Employee, due to
-------------------
illness or accident or other mental or physical incapacity, to
perform his obligations under this Agreement for a period of three
hundred sixty (360) calendar days in the aggregate over a period of
five hundred (500) consecutive calendar days, such "Complete
Disability" to become effective upon the expiration of such three
hundred sixtieth (360th) day.
(c) "Confidential Information" - means any information in any form,
------------------------
regardless of the medium or media by which such information is
recorded or communicated, that is in the possession of Employer
being neither in the public domain nor routinely available to third
parties, and if directly or indirectly disclosed to Employer's
competitors (i) would assist such competitors in competing against
Employer, (ii) would diminish or eliminate any competitive advantage
now enjoyed by Employer,(iii) would cause financial injury or loss
to Employer, or (iv) would reveal proprietary information or trade
secrets of Employer.
(d) "Effective Date" - means May 1, 1996.
--------------
(e) "Employee" - means Edward T. Pratt III.
--------
(f) "Employer" - means Hollywood Casino Corporation, a Delaware
--------
corporation.
3
<PAGE>
(g) "Employer's Affiliates" - means any parent, subsidiary,
---------------------
affiliate or other legal entity of Employer.
(h) "Prior Employment" - means any prior employment Employee has had
----------------
with either Employer or Employer's Affiliates.
2. PRIOR EMPLOYMENT. This Agreement supersedes and replaces any and
----------------
all prior employment agreements, whether written or oral, by and between
Employee, on the one side, and Employer or Employer's Affiliates, on the other
side. From and after the Effective Date, Employee shall be the employee of
Employer under the terms and pursuant to the conditions set forth in this
Agreement.
3. BASIC EMPLOYMENT AGREEMENT. Subject to the terms and pursuant to
--------------------------
the conditions hereinafter set forth, Employer hereby employs Employee during
the Term hereinafter specified to serve in a managerial or executive capacity,
under a title and with such duties not inconsistent with those set forth in
Paragraph 4 of this Agreement, as the same may be modified and/or assigned to
Employee by Employer from time to time. Notwithstanding the foregoing,
Employer and Employee hereby covenant and agree that, in the absence of mutual
consent of both Employer and Employee, Employee shall not be assigned duties
by Employer which would require that Employee maintain his principal place of
residence or primary place of employment outside of the greater metropolitan
area of Dallas, Texas.
4. DUTIES OF EMPLOYEE. Employee shall perform such duties assigned to
------------------
Employee by Employer as are generally associated with the duties of President
and Chief Operating Officer of Employer, or
4
<PAGE>
such similar duties as may be assigned to Employee by the Chairman of the
Board of Directors of Employer, including but not limited to (i) the efficient
and continuous operation of Employer and Employer's Affiliates; (ii) the
preparation of relevant budgets and allocation of relevant funds; (iii) the
selection and delegation of duties and responsibilities of subordinates; (iv)
the direction, review and oversight of all operations and programs under
Employee's supervision; and (v) such other and further duties specifically
related to such duties as assigned by Employer to Employee. In the
performance of his duties hereunder, Employee shall report directly to the
Chairman of the Board/Chief Executive Officer and the Board of Directors of
Employer. Notwithstanding the foregoing, Employee shall devote such time to
Employer's Affiliates as required by Employer, provided such duties are not
inconsistent with Employee's primary duties to Employer hereunder.
5. ACCEPTANCE OF EMPLOYMENT. Employee hereby unconditionally accepts
------------------------
the employment set forth hereunder, under the terms and pursuant to the
conditions set forth in this Agreement. Employee hereby covenants and agrees
that, during the Term of this Agreement, Employee will devote the whole of his
normal and customary working time and best efforts solely to the performance
of Employee's duties under this Agreement.
6. TERM. The term of this Agreement shall commence on May 1, 1996 and
----
expire on 12:00 p.m. on April 30, 2000 (the "Term"), unless sooner terminated
as provided herein.
7. SPECIAL TERMINATION PROVISIONS. Notwithstanding the provisions of
------------------------------
Paragraph 6 above, this Agreement and all parties'
5
<PAGE>
rights and obligations hereunder shall terminate upon the occurrence of any of
the following events:
(a) the death of Employee; provided, however, that any and all
-------- -------
employee benefits due and owing to Employee shall be paid to the
spouse of Employee in the event of such death;
(b) the giving of written notice from Employer to Employee of the
termination of this Agreement upon the Complete Disability of
Employee; provided, however, that a termination pursuant to this
Paragraph 7(b) shall not affect Employee's vesting or continued
rights in any stock option plan set forth in Paragraph 8(c) of this
Agreement;
(c) the giving of written notice by Employer to Employee of the
termination of this Agreement upon the discharge of Employee for
Cause;
(d) the giving of written notice by Employer to Employee of the
termination of this Agreement without Cause; provided, however,
-------- -------
that, if Employer gives Employee written notice of termination of
this Agreement without Cause, such notice must be accompanied by
Employer's written tender to Employee of Employer's commitment to
continue to pay to Employee the compensation set forth in Paragraph
8(a) of this Agreement; and/or
(e) a Change of Control (as defined in that certain Indenture dated
as of October 17, 1995, among Employer, HWCC-Tunica, Inc. and
Shawmut Bank, National Association (now Fleet National Bank) as
Trustee); provided, however, that, in the event of such Change of
-----------------
Control, Employer shall be obligated to pay to Employee an amount
(the "Severance Amount") equal to the aggregate compensation which
would have been paid by Employer to Employee under Paragraph 8(a) of
this Agreement during the period (the "Severance Period") from the
date of termination to the later to occur of the expiration date of
this Agreement or thirty-six (36) months from the date of
termination assuming that such termination had not occurred.
Employee shall have the right, exercisable by written notice to
Employer, to elect to have the Severance Amount paid by
6
<PAGE>
Employer to Employee in (i) a lump sum payment not later than the
date of occurrence of the Change of Control or (ii) equal monthly
installments during the Severance Period.
8. COMPENSATION TO EMPLOYEE. For and in complete consideration for
------------------------
Employee's full and faithful performance of his duties under this Agreement,
Employer hereby covenants and agrees to pay to Employee, and Employee hereby
covenants and agrees to accept from Employer, the following items of
compensation:
(a) Base Salary. Employer hereby covenants and agrees to pay to
-----------
Employee, and Employee hereby covenants and agrees to accept from Employer, an
annual base salary of Four Hundred Twenty-Five Thousand and No/100 Dollars
($425,000.00), effective January 1, 1996, payable in such equal regular
installments as is Employer's custom and usage. Such base salary shall be
exclusive of and in addition to any other benefits which Employer, in its sole
discretion, may make available to Employee, including, but not limited to, any
pension plans, bonus plans, retirement plans, company life insurance plan,
medical and/or hospitalization plans, or any and all other benefit plans which
may from time to time be in available to executive officers of Employer
generally during the Term of this Agreement.
(b) Base Salary Adjustment. The base salary prescribed in Paragraph
----------------------
8(a) above may be adjusted at such time and in such manner as the Compensation
Committee of the Board of Directors of Employer may determine in accordance
with the executive
7
<PAGE>
compensation policy of Employer then in effect; provided, however, that such
-------- -------
base salary shall never be less than $425,000 per annum.
(c) Incentive Bonus. Employee shall be eligible to receive one or
---------------
more incentive compensation bonuses based upon such performance and other
criteria as Employer shall determine in its sole discretion. After the
Effective Date of this Agreement, Employer will implement an incentive bonus
program in which Employee will participate and which will be used to determine
Employee's incentive bonus. The incentive bonus shall be payable by Employer
to Employee no later than the first day of March of the year following the
calendar year for which the incentive bonus is accrued (or in accordance with
the terms of any applicable incentive bonus program), and, where applicable,
shall be prorated based upon the number of days Employee was employed by
Employer during such calendar year. Any incentive bonus shall be in addition
to Employee's participation in any and all profit sharing plans, bonus
participation plans, stock options or other incentive compensation to which
Employee is entitled to participate or receive.
(d) Employee Benefit Plans. Employer hereby covenants and agrees
----------------------
that it shall include Employee, if otherwise eligible, in any pension plans,
retirement plans, company life insurance plans, medical and/or hospitalization
plans, and/or any and all other benefit plans which may be placed in effect by
Employer during the Term of this Agreement.
(e) Expense Reimbursement. During the Term of this Agreement,
---------------------
Employer shall either pay directly or reimburse Employee
8
<PAGE>
for Employee's reasonable expenses incurred for the benefit of Employer in
accordance with Employer's general policy regarding reimbursement, as the same
may be amended, modified or changed from time to time. Such reimbursable
expenses shall include, but are not limited to, reasonable entertainment and
promotional expenses, gift and travel expenses, dues and expenses of
membership in clubs, professional societies and fraternal organizations, and
the like. Prior to reimbursement, Employee shall provide Employer with
sufficient detailed invoices of such expenses in accordance with the then
applicable guidelines of the Internal Revenue Service so as to permit Employer
to claim a deduction of such expenses.
(f) Licensing Expenses. Employer hereby covenants and agrees that
------------------
Employer shall pay all licensing fees and expenses incurred by Employee in
securing and maintaining such licenses and permits required of Employee in
order to perform his duties under this Agreement.
(g) Vacations and Holidays. Commencing as of the Effective Date of
----------------------
this Agreement, Employee shall be entitled to (i) annual paid vacation leave
in accordance with Employer's standard policy therefor, to be taken at such
times as selected by Employee and approved by Employer, and (ii) the following
paid holidays (or, at Employer's option, an equivalent number of paid days
off): New Year's Day, Dr. Martin Luther King, Jr.'s Birthday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
9. LICENSING REQUIREMENTS. (a) Employer and Employee hereby
----------------------
covenant and agree that this Agreement may be subject to the approval of (i)
the New Jersey Casino Control
9
<PAGE>
Commission (the "CCC") pursuant to the provisions of the New Jersey Casino
Control Act, as amended (the "New Jersey Gaming Act"), and the regulations
promulgated thereunder, (ii) the Illinois Gaming Board (the "IGB") pursuant to
the provisions of the Illinois Riverboat Gambling Act, as amended (the
"Illinois Gaming Act"), and the regulations promulgated thereunder and/or
(iii) the Mississippi Gaming Commission (the "MGC") pursuant to the provisions
of the Mississippi Gaming Control Act, as amended (the "Mississippi Gaming
Act"), and the regulations promulgated thereunder. If this Agreement is
required by the New Jersey Gaming Act, the Illinois Gaming Act and/or the
Mississippi Gaming Act and the regulations promulgated thereunder to be
approved by the CCC, the IGB and/or the MGC, as applicable, but is not so
approved by any such gaming regulatory authority, this Agreement shall
immediately terminate and shall be null and void and of no further force or
effect; provided, however, should this Agreement be required to be approved
but is not so approved by the CCC, the IGB and/or the MGC, Employer and
Employee hereby covenant and agree that, with the exception of the provisions
of Paragraph 8 of this Agreement, this Agreement shall be modified and amended
so as to receive the appropriate approval from the CCC, the IGB and/or the
MGC.
(b) Employer and Employee hereby covenant and agree that, in order for
Employee to discharge the duties required under this Agreement, Employee shall
hold any necessary and appropriate casino key employee license (the "License")
in gaming jurisdictions in which Employer or Employer's Affiliates may now or
hereafter maintain casino operations. In the event that any applicable
10
<PAGE>
gaming regulatory authority (the "Authority") objects to the renewal of
Employee's License or refuses to renew Employee's License, Employer, at
Employer's sole cost and expense, shall promptly defend such action and shall
take such reasonable steps as may be required to either remove the Authority's
objections or secure the Authority's approval. Notwithstanding the foregoing,
if the source of the Authority's objections or the Authority's refusal to
renew Employee's License arise as a result of any of the events described in
Paragraph 1(a) of this Agreement, Employer's obligations under this Paragraph
9 shall not be operative and Employee shall promptly reimburse Employer upon
demand for any expenses incurred by Employer pursuant to this Paragraph 9.
10. CONFIDENTIALITY. Employee hereby warrants, covenants and agrees
---------------
that, without the prior express written approval of Employer, Employee shall
hold in the strictest confidence and shall not disclose to any person, firm,
corporation or other entity, any and all of Employer's Confidential
Information, including, but not limited to, (i) information, letters,
photographs, graphs, samples, or computer software of a confidential nature;
(ii) information or other documents concerning Employer's business, customers
or suppliers; (iii) Employer's marketing methods, files and credit and
collection techniques and files; or (iv) Employer's trade secrets, technical
information, design, process, procedure, improvement and other "know-how" or
information not of a public nature, regardless of how such information came
into the custody of Employee. The warranty, covenant and agreement set forth
in this Paragraph 10 shall not expire, shall survive this Agreement and shall
be binding
11
<PAGE>
upon Employee without regard to the passage of time or other events.
11. RESTRICTIVE COVENANT. Employee hereby covenants and agrees that,
--------------------
during the Term of this Agreement or until April 30, 2000, if Employer
terminates Employee pursuant to Paragraph 7(d) above and is continuing to make
payments to Employee as provided therein, Employee shall not directly or
indirectly, either as a principal, agent, employee, employer, consultant,
partner, shareholder of a closely held corporation or shareholder in excess of
five percent (5%) of a publicly traded corporation, corporate officer or
director, or in any other individual or representative capacity, engage or
otherwise participate in any manner or fashion in any business that is in
competition in any manner whatsoever with the principal business activity of
Employer or Employer's Affiliates, in or about any state in which Employer or
Employer's Affiliates are licensed to conduct casino operations (the
"Operating States"), including without limitation any waterways which are
wholly within the Operating States, which are partly within the Operating
States and partly without the Operating States, or which form a boundary
between the Operating States and any other state or body public. Employee
hereby further acknowledges and agrees that the restrictive covenant contained
in this Paragraph 11 is reasonable as to duration, terms and geographical area
and that the same protects the legitimate interests of Employer and Employer's
Affiliates, imposes no undue hardship on Employee and is not injurious to the
public. Notwithstanding anything express or implied herein to the contrary,
12
<PAGE>
the restrictive covenant contained in this Paragraph 11 shall not apply in the
event of the termination of this Agreement due to a Change of Control.
12. BEST EVIDENCE. This Agreement shall be executed in original and
-------------
"Xerox" or photostatic copies and each copy bearing original signatures in ink
shall be deemed an original.
13. SUCCESSION. This Agreement shall be binding upon and inure to the
----------
benefit of Employer and Employee and their respective successors and assigns.
14. ASSIGNMENT. Employee shall not assign this Agreement or delegate
----------
his duties hereunder without the express written prior consent of Employer
thereto. Any purported assignment by Employee in violation of this Paragraph
14 shall be null and void and of no force or effect. Employer shall have the
right to assign this Agreement freely; provided, however, that in the event of
such an assignment by Employer and the assignee subsequently defaults under
the terms of this Agreement, Employer shall remain liable for compliance with
the terms of Paragraph 8 of this Agreement.
15. AMENDMENT OR MODIFICATION. This Agreement may not be amended,
-------------------------
modified, changed or altered except by a writing signed by both Employer and
Employee.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Texas in effect on the Effective Date
of this Agreement.
17. NOTICES. Any and all notices required under this Agreement shall be
-------
in writing and shall either hand-delivered;
13
<PAGE>
mailed by certified mail, return receipt requested; or sent via telecopier
addressed to:
TO EMPLOYER: Chairman of the Board
-----------
Hollywood Casino Corporation
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
WITH COPY TO: General Counsel
------------ Hollywood Casino Corporation
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
TO EMPLOYEE: Edward T. Pratt III
----------- 17423 Woods Edge Drive
Dallas, Texas 75287
All notices hand-delivered shall be deemed delivered as of the date actually
delivered. All notices mailed shall be deemed delivered as of three (3)
business days after the date postmarked. All notices sent via telecopier
shall be deemed delivered as of the next business day following the date of
the confirmation of delivery. Any changes in any of the addresses listed
herein shall be made by notice as provided in this Paragraph 17.
18. INTERPRETATION. The preamble recitals to this Agreement are
--------------
incorporated into and made a part of this Agreement. Titles of paragraphs are
for convenience only and are not to be considered a part of this Agreement.
19. SEVERABILITY. In the event any one or more provisions of this
------------
Agreement is declared judicially void or otherwise unenforceable, the
remainder of this Agreement shall survive and such provision(s) shall be
deemed modified or amended so as to fulfill the intent of the parties hereto.
14
<PAGE>
20. DISPUTE RESOLUTION. Except for equitable actions seeking to enforce
------------------
the provisions of Paragraphs 10 and 11 of this Agreement, jurisdiction and
venue for which is hereby granted to Dallas County, Texas, any and all claims,
disputes or controversies arising between the parties hereto regarding any of
the terms of this Agreement or the breach thereof, on the written demand of
either of the parties hereto, shall be submitted to and be determined by final
and binding arbitration held in Dallas, Texas, in accordance with the
Employment Dispute Resolution Rules of the American Arbitration Association.
This Agreement to arbitrate shall be specifically enforceable in any court of
competent jurisdiction.
21. WAIVER. None of the terms of this Agreement, including this
------
Paragraph 21, or any term, right or remedy hereunder shall be deemed waived
unless such waiver is in writing and signed by the party to be charged
therewith and in no event by reason of any failure to assert or delay in
asserting any such term, right or remedy or similar term, right or remedy
hereunder.
22. PAROL. This Agreement constitutes the entire agreement between
-----
Employer and Employee with respect to the subject matter hereto and this
Agreement supersedes any prior understandings, agreements or undertakings by
and between Employer and Employee with respect to the subject matter hereof.
15
<PAGE>
IN WITNESS WHERE AND INTENDING TO BE LEGALLY BOUND THEREBY, the parties hereto
have executed and delivered this Agreement as of the year and date first above
written.
EMPLOYER:
ATTEST: HOLLYWOOD CASINO CORPORATION, a
Delaware corporation
/s/ William D. Pratt By:/s/ Jack E. Pratt
------------------------------ -------------------------------
Name: William D. Pratt Name: Jack E. Pratt
Title: Secretary Title: Chairman of the Board
& Chief Executive Officer
EMPLOYEE:
/s/ Edward T. Pratt III
-----------------------
EDWARD T. PRATT III
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HOLLYWOOD CASINO CORPORATION AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000888245
<NAME> HOLLYWOOD CASINO CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 50,643 50,643
<SECURITIES> 0 0
<RECEIVABLES> 31,512 31,512
<ALLOWANCES> 17,339 17,339
<INVENTORY> 5,340 5,340
<CURRENT-ASSETS> 95,762 95,762
<PP&E> 542,659 542,659
<DEPRECIATION> 197,504 197,504
<TOTAL-ASSETS> 505,405 505,405
<CURRENT-LIABILITIES> 80,605 80,605
<BONDS> 485,078 485,078
0 0
0 0
<COMMON> 2 2
<OTHER-SE> (72,145) (72,145)
<TOTAL-LIABILITY-AND-EQUITY> 505,405 505,405
<SALES> 0 0
<TOTAL-REVENUES> 138,109 271,089
<CGS> 0 0
<TOTAL-COSTS> 106,517 207,051
<OTHER-EXPENSES> 26,263 51,482
<LOSS-PROVISION> 516 1,343
<INTEREST-EXPENSE> 13,441 27,193
<INCOME-PRETAX> (8,628) (15,980)
<INCOME-TAX> (378) (1,070)
<INCOME-CONTINUING> (8,250) (14,910)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,250) (14,910)
<EPS-PRIMARY> (.33) (.60)
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HWCC-TUNICA, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000927801
<NAME> HWCC-TUNICA, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 9,505 9,505
<SECURITIES> 0 0
<RECEIVABLES> 1,758 1,758
<ALLOWANCES> 557 557
<INVENTORY> 772 772
<CURRENT-ASSETS> 12,655 12,655
<PP&E> 104,188 104,188
<DEPRECIATION> 17,202 17,202
<TOTAL-ASSETS> 123,058 123,058
<CURRENT-LIABILITIES> 18,901 18,901
<BONDS> 84,293 84,293
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 19,851 19,851
<TOTAL-LIABILITY-AND-EQUITY> 123,058 123,058
<SALES> 0 0
<TOTAL-REVENUES> 21,907 46,137
<CGS> 0 0
<TOTAL-COSTS> 17,438 34,750
<OTHER-EXPENSES> 5,399 10,288
<LOSS-PROVISION> 113 252
<INTEREST-EXPENSE> 2,115 4,422
<INCOME-PRETAX> (3,158) (3,575)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,158) (3,575)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,158) (3,575)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
