<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM-10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
-----------------------------------------------
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) (972) 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.
Registrant Class Outstanding at May 12, 1997
- --------------------------- ---------------------- ---------------------------
Hollywood Casino Common Stock, 24,859,968 Shares
Corporation $.0001 par value 1,000 Shares
HWCC-Tunica, Inc. Common Stock,
$.01 par value
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 under the
service mark Hollywood Casino(R). Through its subsidiaries, HCC currently owns
and operates a riverboat gaming facility located in Aurora, Illinois (the
"Aurora Casino") and a casino and hotel complex in Tunica County, Mississippi
(the "Tunica Casino"); 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 National Market tier of the Nasdaq Stock Market
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. Prior to December
31, 1996, HCC also owned approximately 80% of the common stock of Greate Bay
Casino Corporation ("GBCC"), a Delaware corporation, whose principal assets are
the Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands") and
management and consulting agreements on the Aurora Casino and the Tunica Casino,
respectively. On December 31, 1996, HCC distributed the common stock of GBCC
owned by HCC to its shareholders. As a result of the dividend, GBCC is no
longer a subsidiary of HCC.
As further discussed in the Notes to Consolidated Financial
Statements, HCC issued $210,000,000 of 12 3/4% Senior Secured Notes (the "Senior
Secured Notes") due November 1, 2003, discounted to yield 13 3/4% per annum,
through a public offering in October 1995. The Senior Secured Notes are
unconditionally guaranteed on a senior secured basis by HCT and by certain
future subsidiaries of HCC. The Senior Secured Notes are secured by, among other
things, (i) substantially all of the assets of HCT, (ii) a first mortgage
limited to approximately $39 million on substantially all of the assets of HCA
and (iii) a pledge of the capital stock of certain subsidiaries of HCC including
HCA and HCT. Accordingly, the financial statements of HCA and HCT are also
included herein.
The consolidated financial statements and the financial statements as
of March 31, 1997 and for the three month periods ended March 31, 1997 and 1996
have been prepared by HCC, HCA and HCT without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, these consolidated financial statements and financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the consolidated financial position of HCC and the
financial position of HCA and HCT as of March 31, 1997, and the results of their
operations and cash flows for the three month periods ended March 31, 1997 and
1996.
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 1996 Annual Report on Form 10-K.
Historically, the Aurora Casino has experienced some degree of
seasonality and management believes that seasonality may also cause fluctuations
in reported results at the Tunica Casino. Consequently, the results of
operations for the three month period ended March 31, 1997 are not necessarily
indicative of the operating results to be reported for the full year.
2
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 33,030,000 $ 21,488,000
Accounts receivable, net of allowances of
$1,614,000 and $1,693,000, respectively 2,749,000 3,140,000
Inventories 1,459,000 1,620,000
Deferred income taxes 3,818,000 4,271,000
Prepaid expenses and other
current assets 1,704,000 1,691,000
Due from affiliates 7,872,000 7,641,000
------------ ------------
Total current assets 50,632,000 39,851,000
------------ ------------
Investment in unconsolidated affiliate 2,000,000 -
------------ ------------
Property and Equipment:
Land and land improvements 5,853,000 5,845,000
Buildings and improvements 119,661,000 119,501,000
Riverboats and barges 39,494,000 39,494,000
Operating equipment 67,891,000 69,713,000
Construction in progress 683,000 687,000
------------ ------------
233,582,000 235,240,000
Less - accumulated depreciation
and amortization (53,924,000) (49,740,000)
------------ ------------
Net property and equipment 179,658,000 185,500,000
------------ ------------
Other Assets:
Deferred financing costs 6,345,000 6,565,000
Notes receivable 10,000,000 10,000,000
Land rights 7,607,000 7,658,000
Due from affiliates, net of valuation allowance 36,597,000 36,597,000
Land held for sale, net of allowance 14,501,000 14,501,000
Other assets 7,283,000 7,413,000
------------ ------------
Total other assets 82,333,000 82,734,000
------------ ------------
$314,623,000 $308,085,000
============ ============
</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' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 7,389,000 $ 8,282,000
Short-term credit facilities 1,000,000 -
Accounts payable 3,764,000 5,407,000
Accrued liabilities -
Salaries and wages 4,576,000 3,531,000
Interest 11,570,000 4,734,000
Insurance 2,300,000 2,140,000
Other 4,744,000 5,179,000
Due to affiliates 2,708,000 2,534,000
Other current liabilities 2,740,000 1,867,000
------------- -------------
Total current liabilities 40,791,000 33,674,000
------------- -------------
Long-Term Debt 199,718,000 202,057,000
------------- -------------
Capital Lease Obligations 21,563,000 21,707,000
------------- -------------
Other Noncurrent Liabilities 5,916,000 5,503,000
------------- -------------
Commitments and Contingencies
Shareholders' Equity:
Common Stock:
Class A common stock, $.0001 par value per
share; 50,000,000 shares authorized;
24,760,000 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 235,606,000 235,606,000
Accumulated deficit (188,973,000) (190,464,000)
------------- -------------
Total shareholders' equity 46,635,000 45,144,000
------------- -------------
$ 314,623,000 $ 308,085,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1997 1996
------------------- -------------
<S> <C> <C>
Revenues:
Casino $ 63,535,000 $122,490,000
Rooms 2,175,000 4,350,000
Food and beverage 6,714,000 15,225,000
Other 822,000 3,552,000
------------ ------------
73,246,000 145,617,000
Less - promotional allowances (5,776,000) (12,502,000)
------------ ------------
Net revenues 67,470,000 133,115,000
------------ ------------
Expenses:
Casino 42,471,000 98,843,000
Rooms 458,000 1,500,000
Food and beverage 2,208,000 4,758,000
Other 773,000 1,259,000
General and administrative 4,051,000 9,412,000
Management and consulting fees 3,027,000 -
Depreciation and amortization 4,916,000 10,595,000
Development 305,000 197,000
------------ ------------
Total expenses 58,209,000 126,564,000
------------ ------------
Income from operations 9,261,000 6,551,000
------------ ------------
Non-operating income (expenses):
Interest income 405,000 1,019,000
Interest expense, net of capitalized
interest of $81,000 in 1996 (7,569,000) (14,921,000)
Gain (loss) on disposal of assets 415,000 (1,000)
------------ ------------
Total non-operating expenses, net (6,749,000) (13,903,000)
------------ ------------
Income (loss) before income taxes 2,512,000 (7,352,000)
Income tax (provision) benefit (1,021,000) 692,000
------------ ------------
Net income (loss) $ 1,491,000 $ (6,660,000)
============ ============
Net income (loss) per common share $.06 $(.27)
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,491,000 $ (6,660,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization, including
accretion of debt discount 5,130,000 10,781,000
(Gain) loss on disposal of assets (415,000) 1,000
Provision for doubtful accounts 161,000 827,000
Deferred income tax benefit 871,000 (67,000)
Decrease (increase) in accounts receivable 230,000 (25,000)
Net increase in accounts payable and accrued
expenses 5,963,000 6,633,000
Net change in other current assets and
liabilities 964,000 46,000
Net change in other noncurrent assets and
liabilities 72,000 (179,000)
----------- ------------
Net cash provided by operating activities 14,467,000 11,357,000
----------- ------------
INVESTING ACTIVITIES:
Net property and equipment additions (972,000) (10,166,000)
Collections on notes receivable - 27,000
Proceeds from sale of assets 2,658,000 38,000
Obligatory investments - (762,000)
Investments in unconsolidated affiliates (2,000,000) -
Decrease in cash restricted for construction
projects - 3,407,000
----------- ------------
Net cash used in investing activities (314,000) (7,456,000)
----------- ------------
FINANCING ACTIVITIES:
Borrowings on credit facilities 1,000,000 2,000,000
Deferred financing costs (21,000) (71,000)
Repayments of long-term debt (3,015,000) (1,764,000)
Payments on capital lease obligations (575,000) (744,000)
----------- ------------
Net cash used in financing activities (2,611,000) (579,000)
----------- ------------
Net increase in cash and cash equivalents 11,542,000 3,322,000
Cash and cash equivalents at beginning
of period 21,488,000 56,538,000
----------- ------------
Cash and cash equivalents at end of
period $33,030,000 $ 59,860,000
=========== ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization and Business
Hollywood Casino Corporation ("HCC" or the "Company"), is a Delaware
corporation which was organized and incorporated on November 5, 1990.
Approximately 53% of the issued and outstanding stock of HCC is owned by certain
general partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt,
Jr. and William D. Pratt and by other family members (collectively, the "Pratt
Family").
HCC owns all of the outstanding common stock of both Hollywood Casino -
Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an Illinois
corporation organized during 1990 which owns and operates a 32,100 square foot
riverboat gaming operation together with docking and other entertainment
facilities under the service mark Hollywood Casino(R) located in Aurora,
Illinois (the "Aurora Casino"). HCT is a Texas corporation formed by HCC during
1993 which owns and operates a 54,000 square foot gaming facility, adjacent
support facilities and a 506-room hotel complex under the service mark Hollywood
Casino(R) in northern Tunica County, Mississippi (the "Tunica Casino"). The
Aurora Casino and the Tunica Casino commenced operations in June 1993 and August
1994, respectively.
The accompanying consolidated financial statements also reflect HCT's
initial one-third investment in Tunica Golf Course LLC under the equity method
of accounting. This limited liability company was organized in 1996 to develop
and operate a golf course to be used by patrons of the Tunica Casino and other
participating casino/hotel properties. The golf course is presently scheduled
for completion in 1998.
Prior to December 31, 1996, HCC also owned approximately 80% of the common
stock of Greate Bay Casino Corporation ("GBCC"), also a Delaware corporation.
On December 31, 1996, HCC distributed to its shareholders the common stock of
GBCC owned by HCC. As a result of the dividend, GBCC is no longer a subsidiary
of HCC. The accompanying consolidated financial statements include GBCC's
operations and cash flows through the date of disposition (December 31, 1996).
GBCC's principal assets are the Sands Hotel and Casino in Atlantic City, New
Jersey (the "Sands") and management and consulting contracts with the Aurora
Casino and the Tunica Casino, respectively. GBCC's other operations in the
United States and Puerto Rico, including various ventures in which GBCC has an
interest, are managed by GBCC or its subsidiaries.
The Company estimates that its two gaming operations derive a significant
amount of their gaming revenues from patrons living in areas surrounding the
sites where the Company's gaming operations are located. Competition within the
Company's gaming markets is intense and management believes that this
competition will continue in the future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HCC is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCC's ultimate liability
may differ from the amounts accrued.
7
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" 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. During 1996, certain real property held as
potential gaming development sites in Texas was offered for sale; consequently,
management conducted a review to determine its estimate of net realizable value
with respect to these properties. As a result of its review, HCC recorded a
valuation allowance in the amount of $3,400,000 related to its long-lived
assets.
Net income (loss) per common share for all periods is calculated by
dividing the net income (loss) by the weighted average number of shares of
common stock and common stock equivalents outstanding. Common stock equivalents
are included in the calculation of net income per share for periods during which
income was realized. 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. The weighted average
number of shares of common stock and common stock equivalents outstanding used
for earnings per share calculation purposes was 24,980,000 and 24,720,000,
respectively, for the three month periods ended March 31, 1997 and 1996.
The Financial Accounting Standards Board has issued a new standard,
"Earnings per Share" ("SFAS 128"). SFAS 128 provides for revisions to the
current method of calculating earnings per share and for the disclosure of
certain information about the capital structure of the reporting entity. SFAS
128 will become effective on December 15, 1997; early adoption is not permitted.
HCC does not believe the new pronouncement will impact its present calculation
of earnings per share.
The consolidated financial statements as of March 31, 1997 and for the
three month periods ended March 31, 1997 and 1996 have been prepared by HCC
without audit. In the opinion of management, these consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
HCC as of March 31, 1997, and the results of its operations and cash flows for
the three month periods ended March 31, 1997 and 1996.
(2) Short-Term Credit Facilities
As of March 31, 1997, HCT had $1,000,000 outstanding under a bank credit
facility of the same amount available through August 15, 1997; no such
borrowings were outstanding at December 31, 1996. Borrowings under the line of
credit accrue interest at the bank's prime lending rate plus 1 1/2% per annum.
The line of credit agreement requires the maintenance of certain financial
ratios and balances in addition to the provision of certain financial reports.
8
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(3) Long-Term Debt and Pledge of Assets
Substantially all of HCC's assets are pledged in connection with HCC's
long-term indebtedness.
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Indebtedness of HCC:
12 3/4% Senior Secured Notes, due 2003, net
of discount of $8,913,000 and $9,127,000,
respectively (a) $201,087,000 $200,873,000
Term note - 2,150,000
------------ ------------
201,087,000 203,023,000
------------ ------------
Indebtedness of HCA:
Promissory note to bank (b) 1,958,000 2,472,000
Equipment loans 1,220,000 1,472,000
------------ ------------
3,178,000 3,944,000
------------ ------------
Indebtedness of HCT:
Equipment loans 1,302,000 1,401,000
------------ ------------
Total indebtedness 205,567,000 208,368,000
Less - current maturities (5,849,000) (6,311,000)
------------ ------------
Total long-term debt $199,718,000 $202,057,000
============ ============
</TABLE>
- ---------------------------
(a) During October 1995, HCC completed the refinancing of certain outstanding
indebtedness through a public offering of $210,000,000 of 12 3/4% Senior
Secured Notes (the "Senior Secured Notes") due November 1, 2003, discounted
to yield 13 3/4% per annum (the "HCC Refinancing"). In addition to
refinancing existing debt, proceeds from the HCC Refinancing were used to
finance construction of a 352-room hotel tower and related amenities and to
fund development and construction of a themed gaming area at the Tunica
Casino; to fund HCA's required contribution of $4,000,000 for construction
of a new 500-space parking garage (see Note 4); 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 may be guaranteed by certain future subsidiaries of HCC.
HCA is not a guarantor. 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
9
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
Scheduled payments of long-term debt as of March 31, 1997 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1997 (nine months) $ 5,130,000
1998 6,114,000
1999 5,401,000
2000 5,335,000
2001 5,000,000
Thereafter 187,500,000
------------
Total $214,480,000
============
</TABLE>
Interest paid, net of capitalized interest, amounted to $519,000 and
$10,472,000, respectively, during the three month periods ended March 31, 1997
and 1996.
(4) Capital Leases
HCA leases two parking garages under capital lease agreements. The first
such lease has an initial term of 30 years commencing in June 1993 with the
right to extend the term to a maximum of 99 years. Rental payments during the
first 20 years 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
10
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
general obligation bond issue includes interest at rates between 7% and 7 5/8%
per annum. In September 1996, HCA and the Aurora Metropolitan Exposition,
Auditorium and Office Building Authority ("ACCA") completed the joint
construction of a new five-story, approximately 500-space parking garage
directly across the street from, and connected by a climate-controlled tunnel
to, the Aurora Casino's Pavilion. The garage provides additional parking for
patrons of the Aurora Casino and contains approximately 1,500 square feet of
retail space. ACCA financed a portion of the construction costs through an
$11,500,000, 7.5% industrial revenue bond issue which yielded proceeds of
approximately $10,500,000. HCA funded all remaining construction costs and
escrowed a total of $3,500,000 at the rate of $400,000 per month beginning in
September 1995 towards satisfaction of its obligations under the agreement. HCA
additionally agreed to make payments to ACCA during construction equal to the
financing costs due in July 1996 relating to the ACCA industrial revenue bond
issue. The facility is owned by ACCA and operated by HCA pursuant to a 30 year
lease with the right to extend the lease for up to 20 additional years. Rental
payments during the first 15 years equal ACCA's debt service costs related to
the industrial revenue bond issue. In addition, HCA pays ACCA base rent equal
to $15,000 per month, subject to a credit of $615,000 at the rate of $10,000 per
month for improvements made to ACCA's North Island Center banquet and meeting
facilities. HCA is also responsible for additional rent, consisting of costs
such as real estate taxes, maintenance costs, insurance premiums and utilities,
arising out of its operation of both parking garages.
HCA also leases certain equipment under capital lease agreements which
provide for interest at the rate of 11.2% and expire at various dates through
1998. HCT leases certain gaming and other equipment under capital lease
agreements which provide for interest at rates ranging up to 13 1/4% per annum
and which expire during 1997.
The original cost of HCA's parking garages is included in buildings in
the accompanying consolidated balance sheets at both March 31, 1997 and December
31, 1996 in the amount of $27,476,000. Assets under capital leases with an
original cost of $11,957,000 are included in operating equipment in the
accompanying consolidated balance sheets at both March 31, 1997 and December 31,
1996. Amortization expense with respect to these assets amounted to $832,000
and $658,000, respectively, during the three month periods ended March 31, 1997
and 1996.
11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Future minimum lease payments under capital lease obligations as of
March 31, 1997 were as follows:
<TABLE>
<S> <C>
1997 (nine months) $ 2,856,000
1998 2,494,000
1999 2,457,000
2000 2,483,000
2001 2,532,000
Thereafter 26,719,000
------------
Total minimum lease payments 39,541,000
Less amount representing interest (16,438,000)
------------
Present value of future
minimum lease payments 23,103,000
Current capital lease obligation (1,540,000)
------------
Long-term capital lease obligation $ 21,563,000
------------
</TABLE>
(5) Income Taxes
Components of HCC's (provision) benefit for income taxes consisted of the
following:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Current:
Federal $ - $ -
State (150,000) 625,000
Deferred:
Federal (801,000) -
State (70,000) 67,000
------------ ------------
$ (1,021,000) $ 692,000
============ ============
</TABLE>
No state or federal income taxes were paid by HCC during the three
month period ended March 31, 1997; payments of $25,000 were made during the
three month period ended March 31, 1996.
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
12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
provisions or benefits are determined by applying the resulting effective income
tax rate to the results of operations for the quarter.
At March 31, 1997, HCC and its subsidiaries have tax net operating
loss carryforwards ("NOL's") totaling approximately $14,750,000, none of which
begin to expire until the year 2010. Additionally, HCC and its subsidiaries
have various tax credits available totaling approximately $213,000, none of
which begin to expire until the year 2008. 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, 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 NOL's and deferred tax assets is more
likely than not, a valuation allowance should be recorded. Management believes
that it is more likely than not that future consolidated taxable income of HCC
(primarily from the Aurora Casino and the Tunica Casino) will be sufficient to
utilize at least a portion of the net deferred tax assets. Accordingly, a
valuation allowance has been established which resulted in the recording of net
deferred tax assets of $5,618,000 and $6,513,000 at March 31, 1997 and December
31, 1996, respectively.
The ultimate recognition of the current amount of NOL's and tax
credits is dependent on HCC and its subsidiaries' ability to generate
approximately $16,500,000 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 can cause a
"change of control", as defined in Section 382 of the Internal Revenue Code of
1986, as amended, 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 Internal Revenue Service is currently examining the consolidated
Federal income tax returns of HCC for the years 1993 and 1994. Management
believes that the results of such examination will not have a material adverse
effect on the consolidated financial position of HCC.
13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,016,000 $ 6,746,000
Allowance for doubtful accounts 8,053,000 7,316,000
Investment and jobs tax credits 213,000 213,000
Other liabilities and accruals 3,109,000 3,179,000
Benefits accrual 1,705,000 1,704,000
Other 799,000 750,000
----------- -----------
Total deferred tax assets 18,895,000 19,908,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization (4,691,000) (4,395,000)
Amortization of note discount (2,190,000) (2,628,000)
----------- -----------
Total deferred tax liabilities (6,881,000) (7,023,000)
----------- -----------
Net deferred tax asset 12,014,000 12,885,000
Valuation allowance (6,372,000) (6,372,000)
----------- -----------
$ 5,642,000 $ 6,513,000
=========== ===========
</TABLE>
(6) Transactions with Related Parties
As a result of the distribution by HCC of the GBCC common stock it
owned, GBCC is no longer a consolidated subsidiary. Accordingly, transactions
between HCC and GBCC and its subsidiaries which previously eliminated in
consolidation are now considered transactions with affiliates.
HCC has advanced funds to GBCC totaling $7,750,000 as of both March
31, 1997 and December 31, 1996. Of the amounts advanced, $1,000,000, which is
not due until April 1, 1998, is classified as noncurrent in the accompanying
consolidated balance sheets. In addition, $250,000 is due on demand, or if no
demand is made, on April 1, 1998. Such borrowings from HCC bear interest at the
rate of 14% per annum, payable semiannually. During the third quarter of 1996,
GBCC borrowed $6,500,000 from HCC on a demand basis with interest at the rate of
13 3/4% per annum payable quarterly commencing October 1, 1996. Interest
receivable amounting to $590,000 and $323,000 is included in due from affiliates
in the accompanying consolidated balance sheets at March 31, 1997 and December
31, 1996, respectively. The payment of principal and interest to HCC on such
borrowings is subject to the approval of the New Jersey Casino Control
Commission. Interest income earned on loans and advances to GBCC amounted to
$267,000 during the three month period ended March 31, 1997.
14
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On February 17, 1994, PPI Funding Corp., a subsidiary of GBCC, issued
$40,524,000 discounted principal amount of new deferred interest notes (the "PPI
Funding Notes") to HCC in exchange for $38,779,000 principal amount of 15 1/2%
unsecured notes (the "PCPI Notes") held by HCC and issued by PCPI Funding Corp.,
another subsidiary of GBCC. The increased principal amount of the new notes
included a call premium on the exchange ($1,745,000) equal to 4 1/2% of the
principal amount of PCPI Notes exchanged; such premium was also paid to third
party holders of $58,364,000 principal amount of PCPI Notes concurrently
redeemed. The PPI Funding Notes were discounted to yield interest at the rate
of 14 7/8% per annum and had an original face value of $110,636,000. Subsequent
principal payments by PPI Funding Corp. have reduced the maturity value of the
notes to $98,353,000. Payment of interest is deferred through February 17,
2001 at which time interest will become payable semiannually, with the unpaid
principal balance due on February 17, 2006. The PPI Funding Notes are
collateralized by a pledge of all of the common stock of a subsidiary of GBCC.
It was anticipated that HCC's primary method of collection with
respect to the PPI Funding Notes would be through the utilization of NOL's of
GBCC. As GBCC is no longer a consolidated subsidiary for federal income tax
purposes, this means of collection is no longer available to HCC. Accordingly,
at March 31, 1997 and December 31, 1996, HCC has provided valuation allowances
in the amounts of $20,723,000 and $18,741,000, respectively, to reduce the
outstanding principal balance on the PPI Funding Notes to an estimated
realizable value. Management anticipates that the remaining net balance of
$35,597,000, which is included in noncurrent due from affiliates on the
accompanying consolidated balance sheets at both March 31, 1997 and December 31,
1996 will be realized through a combination of asset acquisitions from GBCC and
its subsidiaries (see Note 11) and repayments from GBCC.
Pursuant to a management agreement, HCA pays to Pratt Management, L.P.
("PML"), a limited partnership wholly owned through 1996 by GBCC (see Note 11),
a base management fee equal to 5% of the Aurora Casino's operating revenues (as
defined in the agreement) subject to a maximum of $5,500,000 annually, and an
incentive fee equal to 10% of gross operating profit (as defined in the
agreement to generally include all revenues, less expenses other than
depreciation, interest, amortization and taxes). HCA incurred such fees totaling
$2,727,000 during the three month period ended March 31, 1997. Unpaid fees
amounting to $2,109,000 and $2,096,000, respectively, are included in amounts
due to affiliates in the accompanying consolidated balance sheets at March 31,
1997 and December 31, 1996. Pursuant to a ten-year consulting agreement with
GBCC, HCT incurs a monthly consulting fee of $100,000. Such fees amounted to
$300,000 for the three month period ended March 31, 1997.
Various subsidiaries of GBCC provide services to HCA and HCT including
certain administrative and marketing services. Total charges during the three
month period ended March 31, 1997 amounted to $268,000. Unpaid fees amounting
to $343,000 and $128,000 are included in due to affiliates in the accompanying
consolidated balance sheets at March 31, 1997 and December 31, 1996,
respectively.
HCT and Advanced Casino Systems Corporation ("ACSC"), a subsidiary of
GBCC, entered into a Computer Services Agreement dated as of January 1, 1994 and
renewed through December 31, 1999. The agreement 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
15
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
casino hotel and related facilities and business operations. HCT pays ACSC for
such equipment and licenses such software at amounts and on terms and conditions
that ACSC provides to unrelated third parties as well as a fixed license fee of
$33,600 per month ($30,000 prior to January 1, 1997). HCT also reimburses ACSC
for its direct costs and expenses incurred under this agreement. Total charges
during the three month period ended March 31, 1997 amounted to $111,000. Unpaid
charges amounting to $34,000 and $30,000 are included in due to affiliates in
the accompanying consolidated balance sheets at March 31, 1997 and December 31,
1996, respectively.
HCA also receives certain computer-related services from ACSC
including hardware, software and operator support. HCA reimburses ACSC for its
direct costs and any expenses incurred. Total charges during the three month
period ended March 31, 1997 amounted to $43,000. Unpaid charges amounting to
$44,000 and $51,000 are included in due to affiliates in the accompanying
consolidated balance sheets at March 31, 1997 and December 31, 1996,
respectively.
GBCC and its subsidiaries share certain general and administrative
costs with HCC. Net allocated costs and fees charged to GBCC and its
subsidiaries by HCC amounted to $686,000 for the three month period ended March
31, 1997. In connection with such allocated costs and fees, receivables in the
amount to of $476,000 and $203,000 are included in due from affiliates in the
accompanying consolidated balance sheets at March 31, 1997 and December 31,
1996, respectively.
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. The aircraft was sold during the first quarter of
1997. Subsequent to the sale, HCC has also chartered aircraft from the
maintenance company. Expenses and commissions charged by the maintenance company
under the agreement, together with charter fees, totaled $253,000 and $103,000,
respectively, during the three month periods ended March 31, 1997 and 1996.
(7) Commitments and Contingencies
Ground Lease
- ------------
HCT entered into a ground lease covering 70 acres of land on which the
Tunica Casino was constructed. The ground lease is for an initial term of five
years from the opening date of the facility and, at the option of HCT, may be
renewed for nine additional five-year periods. Obligations under the ground
lease during the initial term include both minimum monthly fixed payments and
percentage rent, which in the aggregate will be the greater of 4% of Gross
Revenues, as defined, or $1,100,000 per year. HCT is responsible for all
operating and other expenses of the property in accordance with the lease terms.
During the three month periods ended March 31, 1997 and 1996, HCT expensed
$928,000 and $903,000, respectively, in connection with the ground lease.
16
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Planet Hollywood Litigation
- ---------------------------
Planet Hollywood International, Inc., a Delaware corporation, and
Planet Hollywood (Region IV), Inc., a Minnesota corporation (collectively,
"PHII"), filed a complaint in the United States District Court for the Northern
District of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a
member of the Pratt Family (collectively, the "Original Hollywood Defendants").
The Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with
the Court on January 21, 1997, an amendment to their complaint which, among
other things, added HCT (together with the Original Hollywood Defendants, the
"Hollywood Defendants") and GBCC as defendants. The Original Hollywood
Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with
the Court on February 20, 1997, answers and counterclaims to such amended
complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be
given that the Hollywood Defendants will prevail in this litigation; however,
the Hollywood Defendants believe that PHII's claims are without merit and intend
to defend their position and pursue their counterclaims vigorously. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
Other Litigation
- ----------------
HCC and its subsidiaries are parties in various legal proceedings with
respect to the conduct of casino and hotel operations. Although a possible
range of loss cannot be estimated, in the opinion of management, based upon the
advice of counsel, settlement or resolution of these proceedings should not have
a material adverse impact on the consolidated financial position or results of
operations of HCC and its subsidiaries.
(8) Third Party Notes Receivable
During November 1995, HCC 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
17
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
(9) Land rights
Land rights are being amortized on a straight-line basis over a 40-
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 40-
year useful life of the facility. Accumulated amortization of such land rights
amounted to $838,000 and $787,000, respectively, at March 31, 1997 and December
31, 1996.
(10) Reclassifications
Certain reclassifications have been made to the 1996 consolidated
financial statements to conform to the 1997 consolidated financial statement
presentation. Such reclassifications include the reallocation of certain costs
among the various operating departments and general and administrative expenses
resulting from the completion of a comprehensive internal review during 1996 of
departmental allocations. Management believes that such reclassifications better
reflect the matching of costs with the associated revenues.
(11) Subsequent Event
Effective as of April 1, 1997, HCC acquired the general partnership
interest in Pratt Management, L.P. ("PML"), the limited partnership owned by
subsidiaries of GBCC which holds the management contract on the Aurora Casino.
PML earns management fees from the Aurora Casino and incurs operating and other
expenses with respect to its management thereof. As general partner, HCC will
receive 99% of the first $84,000 of net income earned by the partnership each
month and 1% of any income earned above such amount. HCC issued a five-year
note in the original amount of $3,800,000 and assigned $13,750,000 undiscounted
principal amount of PPI Funding Notes (see Note 6) and $350,000 accrued interest
due from GBCC to a GBCC subsidiary in exchange for the general partnership
interest.
HCC further intends to enter into negotiations during 1997 to acquire
the capital stock of ACSC, a company engaged in the development, installation
and servicing of computer software related to the gaming industry, which is
currently wholly-owned by a subsidiary of GBCC. ACSC installed and continues to
service certain gaming software applications at the Company's Aurora and Tunica
casinos (see Note 6).
18
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 11,397,000 $ 9,034,000
Accounts receivable, net of allowances
of $869,000 and $1,071,000, respectively 1,577,000 1,895,000
Inventories 876,000 948,000
Deferred income taxes 1,349,000 1,421,000
Due from affiliates 85,000 1,046,000
Prepaid expenses and other current assets 488,000 854,000
------------ ------------
Total current assets 15,772,000 15,198,000
------------ ------------
Property and Equipment:
Land improvements 2,793,000 2,786,000
Buildings and improvements 46,335,000 46,247,000
Riverboats 36,970,000 36,970,000
Operating equipment 31,189,000 30,766,000
Construction in progress 232,000 276,000
------------ ------------
117,519,000 117,045,000
Less - accumulated depreciation and amortization (28,667,000) (26,814,000)
------------ ------------
Net property and equipment 88,852,000 90,231,000
------------ ------------
Other Assets 2,047,000 2,020,000
------------ ------------
$106,671,000 $107,449,000
============ ============
</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>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 6,360,000 $ 6,456,000
Accounts payable 909,000 2,131,000
Accrued liabilities -
Salaries and wages 2,626,000 2,117,000
Interest 2,701,000 1,315,000
Gaming and other taxes 750,000 497,000
Insurance 1,336,000 1,054,000
Other 1,044,000 1,351,000
Due to affiliates 2,493,000 2,278,000
Other current liabilities 1,591,000 1,200,000
------------ ------------
Total current liabilities 19,810,000 18,399,000
------------ ------------
Long-Term Debt 36,634,000 37,267,000
------------ ------------
Capital Lease Obligations 21,563,000 21,707,000
------------ ------------
Other Noncurrent Liabilities 2,655,000 2,043,000
------------ ------------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value per share;
2,000,000 shares authorized; 1,501,000
shares issued and outstanding 15,000 15,000
Additional paid-in capital 24,541,000 24,541,000
Retained earnings 1,453,000 3,477,000
------------ ------------
Total shareholder's equity 26,009,000 28,033,000
------------ ------------
$106,671,000 $107,449,000
============ ============
</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
March 31,
-------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Revenues:
Casino $ 38,859,000 $ 42,167,000
Food and beverage 3,316,000 3,313,000
Other 415,000 1,063,000
-------------- --------------
42,590,000 46,543,000
Less - promotional allowances (2,240,000) (2,828,000)
-------------- --------------
Net revenues 40,350,000 43,715,000
-------------- --------------
Expenses:
Casino 25,639,000 27,395,000
Food and beverage 1,200,000 902,000
Other 401,000 10,000
General and administrative 4,033,000 4,384,000
Depreciation and amortization 1,853,000 2,522,000
-------------- --------------
Total expenses 33,126,000 35,213,000
-------------- --------------
Income from operations 7,224,000 8,502,000
-------------- --------------
Non-operating income (expense):
Interest income 36,000 62,000
Interest expense (1,762,000) (1,600,000)
-------------- --------------
Total non-operating expenses, net (1,726,000) (1,538,000)
-------------- --------------
Income before income taxes 5,498,000 6,964,000
Income tax provision (2,067,000) (2,528,000)
-------------- --------------
Net income $ 3,431,000 $ 4,436,000
============== ==============
</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 CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,431,000 $ 4,436,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,853,000 2,522,000
Provision for doubtful accounts 44,000 121,000
Deferred income tax provision 682,000 104,000
Decrease in receivables 274,000 292,000
Increase in accounts payable and accrued liabilities 901,000 1,842,000
Net change in affiliate accounts 1,176,000 2,289,000
Net change in other current assets and liabilities 831,000 651,000
Net change in other assets and liabilities (27,000) (172,000)
------------ ------------
Net cash provided by operating activities 9,165,000 12,085,000
------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions (474,000) (706,000)
Increase in cash restricted for construction projects - (1,413,000)
------------ ------------
Net cash used in investing activities (474,000) (2,119,000)
------------ ------------
FINANCING ACTIVITIES:
Repayments of debt (766,000) (689,000)
Payments on capital lease obligations (107,000) (192,000)
Dividends (5,455,000) (3,553,000)
------------ ------------
Net cash (used in) provided by financing activities (6,328,000) (4,434,000)
------------ ------------
Net increase in cash and cash equivalents 2,363,000 5,532,000
Cash and cash equivalents at beginning of period 9,034,000 8,996,000
------------ ------------
Cash and cash equivalents at end of period $ 11,397,000 $ 14,528,000
============ ============
</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)
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. Prior to December 31, 1996, HCC also owned approximately
80% of Greate Bay Casino Corporation ("GBCC"), a Delaware corporation which,
prior to April 1, 1997, owned the entity with which HCA has a management
services contract and which continues to have an ownership interest in such
entity.
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. HCA's current owner's license expires in July 1997 and
HCA has filed for renewal of its license; management anticipates that such
renewal will be approved.
The Aurora Casino consists of two, four-level riverboats having a combined
casino space of approximately 32,000 square feet and a four-level pavilion and
docking facility which houses ticketing, food service, passenger waiting, and
various administrative functions. The Aurora Casino also includes two parking
structures with approximately 1,300 parking spaces. HCA was responsible for the
design and construction of the parking garages; however, it leases the
facilities under long-term lease agreements. The leases are treated as capital
leases for financial reporting purposes (see Note 3).
HCA estimates that a significant amount of the Aurora Casino's revenues are
derived from patrons living in the Chicago area and surrounding northern and
western suburbs. The Aurora Casino faces intense competition from other
riverboat gaming operations in Illinois and management believes that this
competition will continue in the future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HCA is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of such
accrued liabilities based on an evaluation of the merits of individual claims
and historical claims experience; accordingly, HCA's ultimate liability may
differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" 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
23
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
may not be fully recoverable. As a result of its review, HCA does not believe
that any material impairment currently exists related to its long-lived assets.
The financial statements as of March 31, 1997 and for the three month
periods ended March 31, 1997 and 1996 have been prepared by HCA without audit.
In the opinion of management, these financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of HCA as of March 31, 1997, the results of its
operations and its cash flows for the three month periods ended March 31, 1997
and 1996. Operating results for the three month periods ended March 31, 1997 are
not necessarily indicative of the results that may be achieved for the year
ended December 31, 1997.
(2) Long-Term Debt and Pledge of Assets
HCA's long-term indebtedness consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -----------
<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) 1,958,000 2,472,000
Equipment loans (c) 1,220,000 1,472,000
----------- -----------
Total indebtedness 42,185,000 42,951,000
Less - current maturities (5,551,000) (5,684,000)
----------- -----------
Total long-term debt $36,634,000 $37,267,000
=========== ===========
</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 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
24
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
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) HCA financed the purchase of certain equipment from vendors through the
issuance of note obligations totaling $2,985,000. The promissory notes are
payable in monthly installments, including interest at the approximate rate
of 12 1/4% per annum, and mature at various dates in 1998.
As of March 31, 1997, future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1997 (nine months) $ 4,918,000
1998 5,760,000
1999 5,000,000
2000 5,000,000
2001 5,000,000
Thereafter 16,507,000
------------
$ 42,185,000
============
</TABLE>
Interest paid for the three month periods ended March 31, 1997 and 1996
amounted to $376,000 and $186,000, respectively.
(3) Capital Leases
HCA leases two parking garages under capital lease agreements. The first
such lease has an initial term of 30 years commencing in June 1993 with the
right to extend the term to a maximum of 99 years. Rental payments during the
first 20 years equal the City of Aurora's financing costs related to its
$10,000,000 general obligation bond issue used to finance the construction of
the parking garage. The general obligation bond issue includes interest at rates
between 7% and 7 5/8% per annum. In September 1996, HCA and the Aurora
Metropolitan Exposition, Auditorium and Office Building Authority ("ACCA")
completed the joint construction of a new five-story, approximately 500-space
parking garage directly across the street from, and connected by a climate-
controlled tunnel to, the Aurora Casino's Pavilion. The garage provides
additional parking for patrons of the Aurora Casino and contains approximately
1,500 square feet of retail space. ACCA financed a portion of the construction
costs through an $11,500,000, 7.5% industrial revenue bond issue which yielded
proceeds of approximately $10,500,000. HCA funded all remaining construction
costs and escrowed a total of $3,500,000 at the rate of $400,000 per month
beginning in September 1995 toward satisfaction of its obligations under the
agreement. HCA additionally agreed to make payments to ACCA during construction
equal to the financing costs due in July 1996 relating to the ACCA industrial
revenue bond issue. The facility is owned by ACCA and operated by HCA pursuant
to a 30 year lease with the right to extend the lease for up to 20 additional
years. Rental payments during the first 15 years equal ACCA's debt service costs
related to the industrial revenue bond issue. In addition, HCA pays ACCA base
rent equal to $15,000 per month, subject to a credit of $615,000 at the rate of
$10,000 per month for improvements made to ACCA's North
25
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Island Center banquet and meeting facilities. HCA is also responsible for
additional rent, consisting of costs such as real estate taxes, maintenance
costs, insurance premiums and utilities, arising out of its operation of both
parking garages.
HCA also leases certain equipment under capital lease agreements which
provide for interest at the rate of 11.2% and expire at various dates through
1998. Assets under capital lease agreements with an original cost of $27,476,000
and $7,143,000 are included in buildings and improvements and in operating
equipment, respectively, in the accompanying balance sheets at both March 31,
1997 and December 31, 1996. Amortization expense with respect to these assets
amounted to $381,000 and $263,000 during the three month periods ended March 31,
1997 and 1996, respectively.
Future minimum lease payments under capital lease obligations as of March
31, 1997 are as follows:
<TABLE>
<S> <C>
1997 (nine months) $ 2,103,000
1998 2,494,000
1999 2,457,000
2000 2,483,000
2001 2,532,000
Thereafter 26,719,000
-------------
Total minimum lease payments 38,788,000
Less amount representing interest (16,416,000)
-------------
Present value of future minimum lease payments 22,372,000
Current capital lease obligation (809,000)
-------------
Long-term capital lease obligation $ 21,563,000
=============
</TABLE>
(4) Income Taxes
Components of HCA's provision for income taxes consist of the following:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Current:
Federal $ (1,235,000) $ (2,293,000)
State (150,000) (131,000)
Deferred:
Federal (612,000) (96,000)
State (70,000) (8,000)
------------ ------------
$ (2,067,000) $ (2,528,000)
============ ============
</TABLE>
26
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
HCA is included in HCC's consolidated federal income tax return. Pursuant
to agreements between HCC and HCA, HCA's current provision for federal income
taxes is based on the amount of tax which would be provided if a separate
federal income tax return were filed. HCA paid no federal or state taxes during
the three month periods ended March 31, 1997 and 1996. Deferred taxes are
computed based on the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities, using
enacted tax rates.
Deferred income taxes result primarily from the use of the allowance method
rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal income tax purposes and
differences in the timing of deductions taken between tax and financial
reporting purposes for the amortization of preopening costs and other accruals.
The Internal Revenue Service is currently examining the consolidated
Federal income tax returns of HCC for the years 1993 and 1994. Management
believes that the results of such examination will not have a material adverse
effect on the financial position of HCA.
The components of HCA's net deferred tax liability at March 31, 1997 and
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 327,000 $ 375,000
Other liabilities and reserves 1,109,000 1,130,000
------------- -------------
Total deferred tax assets 1,436,000 1,505,000
------------- -------------
Deferred tax liabilities:
Depreciation and amortization (2,740,000) (2,127,000)
------------- -------------
Net deferred tax liability $ (1,304,000) $ (622,000)
============= =============
</TABLE>
27
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Receivables and payables in connection with the aforementioned tax
allocation agreements at March 31, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets $ 1,206,000 $ 1,421,000
Due (to) from affiliates (232,000) 1,002,000
Deferred tax liabilities (2,345,000) (2,043,000)
</TABLE>
(5) Transactions with Related Parties
Pursuant to a management services agreement, HCA pays base management and
incentive fees to Pratt Management, L.P. ("PML"), a limited partnership which,
prior to April 1, 1997, was wholly owned by GBCC. Effective as of April 1, 1997,
HCC acquired the general partnership interest in PML. The base management fee is
equal to 5% of operating revenues (as defined in the agreement) 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 agreement to
generally include all revenues less expenses other than depreciation, interest,
amortization and taxes). HCA incurred such fees totaling $2,727,000 and
$2,943,000, respectively during the three month periods ended March 31, 1997 and
1996. Management and incentive fees payable at March 31, 1997 and December 31,
1996 were $2,109,000 and $2,096,000, respectively.
HCA incurred interest with respect to its promissory note payable to HCC
(see Note 2) amounting to $1,243,000 for each of the three month periods ended
March 31, 1997 and 1996. Interest payable to HCC on such notes amounted to
$2,293,000 and $1,050,000, respectively, at March 31, 1997 and December 31, 1996
and is included in accrued interest payable in the accompanying balance sheets.
HCA has acquired computer software and hardware from GBCC and has been
allocated certain other expenses from HCC and GBCC. During the three month
periods ended March 31, 1997 and 1996, such transactions totaled $131,000 and
$321,000, respectively. At March 31, 1997 and December 31, 1996, HCA had
payables amounting to $67,000 and $138,000, respectively, in connection with
such charges.
(6) Litigation
Planet Hollywood Litigation
- ---------------------------
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of
the Pratt Family (collectively, the "Original Hollywood Defendants"). The
Original Hollywood
28
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Defendants filed with the Court on September 18, 1996 an answer to PHII's
lawsuit, along with numerous counterclaims against PHII, Robert Earl and Keith
Barish (collectively, the "PHII Defendants"). PHII filed with the Court on
January 21, 1997, an amendment to their complaint which, among other things,
added the HCC subsidiary which owns and operates a casino in Tunica County,
Mississippi, HWCC-Tunica, Inc. ("HCT" together with the Original Hollywood
Defendants, the "Hollywood Defendants"), and GBCC as defendants. The Original
Hollywood Defendants filed with the Court on February 4, 1997, and GBCC and HCT
filed with the Court on February 20, 1997, answers and counterclaims to such
amended complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend to
defend their position and pursue their counterclaims vigorously. The
accompanying financial statements do not include any adjustments that might
result from the outcome of the uncertainties described above.
Other Litigation
- ----------------
HCA is a party in various legal proceedings with respect to the conduct of
casino operations. Although a possible range of loss can not be estimated, in
the opinion of management, based upon the advice of counsel, settlement or
resolution of the proceedings should not have a material adverse impact on the
financial position or results of operations of HCA.
(7) Reclassifications
Certain reclassifications have been made to the 1996 financial statements
to conform to the 1997 financial statement presentation. Such reclassifications
include the reallocation of certain costs among the various operating
departments and general and administrative expenses resulting from the
completion of a comprehensive internal review during 1996 of departmental
allocations. Management believes that such reclassifications better reflect the
matching of costs with the associated revenues.
29
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 11,142,000 $ 9,321,000
Accounts receivable, net of allowances of
$745,000 and $622,000, respectively 1,319,000 1,363,000
Inventories 583,000 672,000
Deferred income taxes 1,008,000 953,000
Prepaid expenses and other current assets 1,071,000 854,000
------------- -------------
Total current assets 15,123,000 13,163,000
------------- -------------
Investment in Tunica Golf Course, LLC 2,000,000 -
------------- -------------
Property and Equipment:
Land and improvements 3,060,000 3,060,000
Buildings 73,420,000 73,348,000
Barges 2,524,000 2,524,000
Operating equipment 36,113,000 35,724,000
Construction in progress 449,000 412,000
------------- -------------
115,566,000 115,068,000
Less - accumulated depreciation and amortization (24,922,000) (22,275,000)
------------- -------------
Net property and equipment 90,644,000 92,793,000
------------- -------------
Other Assets:
Land rights 7,607,000 7,658,000
Other assets 2,906,000 3,006,000
------------- -------------
Total other assets 10,513,000 10,664,000
------------- -------------
$ 118,280,000 $ 116,620,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
30
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,028,000 $ 1,511,000
Short-term credit facility 1,000,000 -
Accounts payable 2,953,000 2,797,000
Accrued liabilities -
Salaries and wages 1,677,000 1,254,000
Interest 1,375,000 2,262,000
Gaming and other taxes 937,000 813,000
Insurance 938,000 1,063,000
Other 1,625,000 1,824,000
Other current liabilities 1,056,000 752,000
------------ ------------
Total current liabilities 12,589,000 12,276,000
------------ ------------
Long-Term Debt 85,050,000 85,134,000
------------ ------------
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 (13,996,000) (15,427,000)
------------ ------------
Total shareholder's equity 20,641,000 19,210,000
------------ ------------
$118,280,000 $116,620,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
31
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Casino $ 24,676,000 $ 22,718,000
Rooms 2,175,000 826,000
Food and beverage 3,398,000 2,962,000
Other 266,000 279,000
------------- -------------
30,515,000 26,785,000
Less - promotional allowances (3,536,000) (2,555,000)
------------- -------------
Net revenues 26,979,000 24,230,000
------------- -------------
Expenses:
Casino 16,832,000 16,954,000
Rooms 458,000 321,000
Food and beverage 1,008,000 905,000
Other 331,000 299,000
General and administrative 1,446,000 1,328,000
Depreciation and amortization 2,751,000 2,517,000
------------- -------------
Total expenses 22,826,000 22,324,000
------------- -------------
Income from operations 4,153,000 1,906,000
------------- -------------
Non-operating income (expenses):
Interest income 51,000 419,000
Interest expense, net of capitalized
interest of $81,000 in 1996 (2,773,000) (2,726,000)
Loss on disposal of assets - (16,000)
------------- -------------
Total non-operating expenses, net (2,722,000) (2,323,000)
------------- -------------
Income (loss) before income taxes 1,431,000 (417,000)
Income tax provision - -
------------- -------------
Net income (loss) $ 1,431,000 $ (417,000)
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
32
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1996
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,431,000 $ (417,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 2,751,000 2,517,000
Deferred income tax provision (benefit) - 406,000
Loss on sale of assets - 16,000
Provision for doubtful accounts 117,000 139,000
Increase in accounts receivable (73,000) (156,000)
(Decrease) increase in accounts payable
and accrued expenses (508,000) 4,317,000
Net change in other current assets and
liabilities 176,000 (780,000)
Net change in other noncurrent assets and
liabilities (8,000) (138,000)
----------- -----------
Net cash provided by operating activities 3,886,000 5,904,000
----------- -----------
INVESTING ACTIVITIES:
Net property and equipment additions (498,000) (7,393,000)
Investment in unconsolidated affiliate (2,000,000) -
Proceeds from the sale of assets - 23,000
Decrease in cash restricted for construction
projects - 4,820,000
----------- -----------
Net cash used in investing activities (2,498,000) (2,550,000)
----------- -----------
FINANCING ACTIVITIES:
Borrowings on credit facility 1,000,000 -
Repayments of long-term debt (99,000) (901,000)
Payments on capital lease obligations (468,000) (552,000)
----------- -----------
Net cash provided by (used in) financing
activities 433,000 (1,453,000)
----------- -----------
Net increase in cash and cash equivalents 1,821,000 1,901,000
Cash and cash equivalents at beginning
of period 9,321,000 11,529,000
----------- -----------
Cash and cash equivalents at end of period $11,142,000 $13,430,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
33
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization, Business and Basis of Presentation
HWCC - Tunica, Inc. ("HCT") is a Texas corporation and a wholly owned
subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware corporation. HCT
was incorporated in December 1993 for the purpose of acquiring and completing a
gaming facility in northern Tunica County, Mississippi approximately 27 miles
southwest of Memphis, Tennessee. The completed facility (the "Tunica Casino")
which currently includes a casino with 54,000 square feet of gaming space, 506
hotel rooms and suites and related amenities, commenced operations on August 8,
1994 under the service mark Hollywood Casino(R). HCT's gaming license has been
renewed by the Mississippi Gaming Commission through October 17, 1997.
The accompanying consolidated financial statements include the accounts of
HCT and its wholly owned subsidiary, HWCC-Golf Course Partners, Inc. ("Golf").
All significant intercompany balances have been eliminated in consolidation.
Golf, a Delaware corporation, was formed in 1996 to own an initial one-third
interest in Tunica Golf Course LLC, a limited liability company organized to
develop and operate a golf course to be used by patrons of the Tunica Casino and
other participating casino/hotel properties. The golf course is presently
scheduled for completion in 1998. Golf's investment in Tunica Golf Course, LLC
is accounted for under the equity method of accounting.
HCT estimates that a significant amount of the Tunica Casino's revenues
are derived from patrons living in the Memphis, Tennessee area, northern
Mississippi and 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.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" requires, among other things, that an entity
review its long-lived assets and certain related intangibles for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. As a result of its review, HCT does not believe
that any material impairment currently exists related to its long-lived assets.
The financial statements as of March 31, 1997 and for the three month
periods ended March 31, 1997 and 1996 have been prepared by HCT without audit.
In the opinion of management, these
34
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial position
of HCT as of March 31, 1997, and the results of its operations and cash flows
for the three month periods ended March 31, 1997 and 1996.
(2) Long-Term Debt and Pledge of Assets
Substantially all of HCT's assets are pledged in connection with its
long-term indebtedness. Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -----------
<S> <C> <C>
Promissory notes to HCC (a) $84,045,000 $84,045,000
Equipment loans (b) 1,302,000 1,401,000
----------- -----------
Total indebtedness 85,347,000 85,446,000
Less - current maturities (297,000) (312,000)
----------- -----------
Total long-term debt $85,050,000 $85,134,000
=========== ===========
- ---------------------------
</TABLE>
(a) During October 1995, HCC loaned $54,045,000 to HCT to repay its outstanding
mortgage indebtedness, together with the associated call premium and
certain accrued interest thereon, and loaned an additional $30,000,000 to
HCT to be used to finance construction of a 352-room hotel tower and
related amenities and to fund development and construction of a themed
gaming area. 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. 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. 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
35
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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) The loans outstanding are payable monthly including interest at rates
ranging from 12 1/2% to 12 3/4% per annum and are due in 2000.
Scheduled payments of long-term debt as of March 31, 1997 are set forth below:
<TABLE>
<S> <C>
1997 (nine months) $ 213,000
1998 354,000
1999 400,000
2000 335,000
2001 -
Thereafter 84,045,000
-----------
Total $85,347,000
===========
</TABLE>
Interest paid, net of amounts capitalized, amounted to $3,660,000 and
$47,000, respectively, during the three month periods ended March 31, 1997 and
1996.
(3) Capital Leases
HCT leases certain gaming and other equipment under capital lease
agreements which provide for interest at rates ranging up to 13 1/4% per annum
and which expire during 1997. Assets under capital leases with an original cost
of $4,814,000 are included in operating equipment in the accompanying
consolidated balance sheets at both March 31, 1997 and December 31, 1996.
Amortization expense for the three month periods ended March 31, 1997 and 1996
was $451,000 and $395,000, respectively. Accumulated amortization at March 31,
1997 and December 31, 1996 with respect to these assets amounted to $4,022,000
and $3,571,000, respectively.
Future minimum lease payments under capital lease obligations as of
March 31, 1997 are $753,000 in 1997 of which $22,000 represents interest,
resulting in a current capital lease obligation of $731,000.
36
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(4) Income Taxes
Components of HCT's benefit for income taxes for the three month periods
ended March 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Benefit in lieu of (provision for)
federal income taxes:
Current $ - $ 406,000
Deferred - (406,000)
--------- ---------
$ - $ -
========= =========
</TABLE>
State income taxes have not been provided for since a credit for state
gaming taxes based on gross revenues is allowed to offset income taxes incurred.
The credit is the lesser of total gaming taxes paid or the state income tax,
with no credit carryforward permitted.
HCT is included in HCC's consolidated federal income tax return. HCT's
provision for federal income taxes is based on the amount of tax which would be
provided if a separate federal income tax return were filed. HCT paid no state
or federal income taxes during either of the three month periods ended March 31,
1997 and 1996.
Deferred income taxes result primarily from the use of the allowance
method rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal income tax purposes and
differences in the timing of deductions taken between tax and financial
reporting purposes for the amortization of preopening costs and other accruals.
HCT has tax net operating loss carryforwards ("NOL's") totaling
approximately $17,000,000, which do not begin to expire until the year 2009.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", requires that the tax benefit of such NOL's, together with the tax
benefit of deferred tax assets resulting from temporary differences, be recorded
as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such deferred tax assets is more likely than
not, a valuation allowance should be recorded. Based on the anticipation of
taxable income in the near future, management believes that it is more likely
than not that future taxable income will be sufficient to utilize at least a
portion of the NOL's and deferred tax assets. Accordingly, a valuation
allowance has been established which has resulted in the recording of net
deferred tax assets of $1,037,000 at both March 31, 1997 and December 31, 1996.
The ultimate recognition of this amount of deferred tax assets is dependent on
HCT's ability to generate approximately $3,000,000 of taxable income for federal
income tax purposes prior to the expiration dates of the NOL's and the reversal
of other temporary differences.
37
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Internal Revenue Service is currently examining the consolidated
Federal income tax returns of HCC for the years 1993 and 1994. Management
believes that the results of such examination will not have a material adverse
effect on the consolidated financial position of HCT.
The components of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,830,000 $ 6,138,000
Allowance for doubtful accounts 253,000 211,000
Other liabilities and accruals 741,000 809,000
----------- -----------
Total deferred tax assets 6,824,000 7,158,000
Deferred tax liabilities:
Depreciation and amortization (1,829,000) (1,668,000)
----------- -----------
Net deferred tax asset 4,995,000 5,490,000
Valuation allowance (3,958,000) (4,453,000)
----------- -----------
$ 1,037,000 $ 1,037,000
=========== ===========
</TABLE>
Receivables and payables in connection with HCT's federal income taxes are
included in the accompanying financial statements as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Deferred income taxes $1,008,000 $953,000
Other noncurrent assets 29,000 84,000
</TABLE>
(5) Transactions with Related Parties
Pursuant to a ten-year consulting agreement with Pratt Casino Corporation,
an affiliated company, HCT incurs a monthly consulting fee of $100,000. Such
fees amounted to $300,000, respectively, for each of the three month periods
ended March 31, 1997 and 1996.
HCT and Advanced Casino Systems Corporation ("ACSC"), an affiliated
company, entered into a Computer Services Agreement dated as of January 1, 1994
and renewed through December 31, 1999. The agreement provides, among other
things, that ACSC will sell HCT computer hardware and information
38
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
systems equipment and will license or sublicense to HCT computer software
necessary to operate HCT's casino, hotel and related facilities and business
operations. HCT pays ACSC for such equipment and licenses such software at
amounts and on terms and conditions that ACSC provides to unrelated third
parties as well as a fixed license fee of $33,600 per month ($30,000 prior to
January 1, 1997). HCT also reimburses ACSC for its direct costs and expenses
incurred under this agreement. Total charges incurred under such agreement
amounted to $111,000 and $121,000, respectively, for the three month periods
ended March 31, 1997 and 1996. At March 31, 1997 and December 31, 1996, HCC had
payables of $34,000 and $30,000, respectively, included in accounts payable with
respect to such charges.
Greate Bay Hotel and Casino, Inc. ("GBHC"), an affiliated company which
owns and operates the Sands Hotel and Casino in Atlantic City, New Jersey,
performs certain administrative and marketing services on behalf of HCT. During
the three month periods ended March 31, 1997 and 1996, fees charged to HCT by
GBHC totaled $182,000 and $193,000, respectively. At March 31, 1997 and
December 31, 1996, HCT had payables of $281,000 and $99,000, respectively,
included in accounts payable with respect to such charges.
HCT is charged for certain legal, accounting, and other expenses
incurred by HCC that relate to HCT's business. For the three month periods
ended March 31, 1997 and 1996, such charges amounted to $96,000 and $122,000,
respectively. At March 31, 1997 and December 31, 1996, HCT had payables of
$86,000 and $226,000, respectively, included in accounts payable with respect to
such charges.
(6) Commitments and Contingencies
Ground Lease
- ------------
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.
For the three month periods ended March 31, 1997 and 1996, HCT expensed $928,000
and $903,000, respectively, in connection with the ground lease.
Credit Facility
- ---------------
As of March 31, 1997, HCT had $1,000,000 outstanding under a bank credit
facility of the same amount available through August 15, 1997; no such
borrowings were outstanding at December 31, 1996. Borrowings under the line of
credit accrue interest at the bank's prime lending rate plus 1 1/2% per annum.
The line of credit agreement requires the maintenance of certain financial
ratios and balances in addition to the provision of certain financial reports.
39
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Planet Hollywood Litigation
- ---------------------------
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, the wholly owned
subsidiary of HCC which owns and operates a casino in Aurora, Illinois and a
member of the Pratt Family (collectively, the "Original Hollywood Defendants").
The Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with the
Court on January 21, 1997, an amendment to their complaint which, among other
things, added HCT (together with the Original Hollywood Defendants, the
"Hollywood Defendants") and Greate Bay Casino Corporation ("GBCC"), an
affiliated company, as defendants. The Original Hollywood Defendants filed with
the Court on February 4, 1997, and GBCC and HCT filed with the Court on February
20, 1997, answers and counterclaims to such amended complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend to
defend their position and pursue their counterclaims vigorously. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
Other
- -----
HCT is a party in various legal proceedings with respect to the conduct
of casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of the proceedings should not have a material adverse
impact on the consolidated financial position or results of operations of HCT.
(7) Land rights
Land rights are being amortized on a straight-line basis over a 40-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
40-year useful life of the facility.
40
<PAGE>
HWCC-TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Accumulated amortization of such land rights amounted to $838,000 and $787,000,
respectively, at March 31, 1997 and December 31, 1996.
(8) Reclassifications
Certain reclassifications have been made to the consolidated 1996 financial
statements to conform to the 1997 consolidated financial statement presentation.
Such reclassifications include the reallocation of certain costs among the
various operating departments and general and administrative expenses resulting
from the completion of a comprehensive internal review during 1996 of the
departmental allocations. Management believes that such reclassifications better
reflect the matching of costs with the associated revenues.
41
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
about the business, financial condition and prospects of the Company. The actual
results could differ materially from those indicated by the forward-looking
statements because of various competition, economic conditions, tax regulations,
state regulations applicable to the gaming industry in general or the Company in
particular, and other risks indicated in the Company's filings with the
Securities and Exchange Commission. Such risks and uncertainties are beyond
management's ability to control and, in many cases, can not be predicted by
management. When used in this Quarterly Report on Form 10-Q, the word
"believes", "estimates", "anticipates" and similar expressions as they relate to
the Company or its management are intended to identify forward-looking
statements.
42
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
On December 31, 1996, HCC distributed to its shareholders the common stock
of GBCC owned by HCC. As a result of the dividend, GBCC is no longer a
subsidiary of HCC. For the quarter ended March 31, 1996, however, the operations
of GBCC are included in the consolidated results of operations of HCC. The
following table sets forth the pro forma income (loss) before income taxes for
the quarter ended March 31, 1996 of HCC and its subsidiaries, exclusive of GBCC
and its subsidiaries (the "HCC Group"), on a basis comparable to the quarter
ended March 31, 1997. Other than this presentation, the impact of GBCC's
exclusion from the 1997 results of operations will not be addressed in the
discussion which follows.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996
Three Months --------------------------------------------------------------
Ended HCC GBCC and Adjustments/ Form 10-Q
March 31, 1997 Group Subsidiaries Eliminations Presentation
-------------- ---------- ------------- ------------ ------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Casino $ 63,535 $ 64,885 $ 57,605 $ - $ 122,490
Rooms 2,175 826 3,524 - 4,350
Food and beverage 6,714 6,275 8,950 - 15,225
Other 822 1,444 5,598 (3,490) 3,552
-------------- ---------- ------------- --------------- --------------
73,246 73,430 75,677 (3,490) 145,617
Less - promotional allowances (5,776) (5,383) (7,119) - (12,502)
-------------- ---------- ------------- --------------- --------------
Net revenues 67,470 68,047 68,558 (3,490) 133,115
-------------- ---------- ------------- --------------- --------------
Expenses:
Casino 42,471 44,349 54,494 - 98,843
Rooms 458 321 1,179 - 1,500
Food and beverage 2,208 1,807 2,951 - 4,758
Other 773 301 958 - 1,259
General and administrative 4,051 4,575 5,077 (240) 9,412
Management and consulting fees 3,027 3,243 - (3,243) -
Depreciation and amortization 4,916 5,349 5,255 (9) 10,595
Development 305 197 - - 197
-------------- ---------- ------------- --------------- --------------
Total expenses 58,209 60,142 69,914 (3,492) 126,564
-------------- ---------- ------------- --------------- --------------
Income from operations 9,261 7,905 (1,356) 2 6,551
Interest expense, net (7,164) (6,684) (9,286) 2,068 (13,902)
Gain (loss) on disposal of assets 415 (16) 15 - (1)
-------------- ---------- ------------- --------------- -------------
Income (loss) before income taxes $ 2,512 $ 1,205 $ (10,627) $ 2,070 $ (7,352)
============== ========== ============== ================ ==============
</TABLE>
Net revenues of the HCC Group for the three month period ended March
31, 1997 were $67.5 million, a slight decrease (.8%) from the $68 million during
the same period of 1996. The decrease reflects a decrease in net revenues at
the Aurora Casino of $3.4 million partially offset by an increase in net
revenues at the Tunica Casino of $2.7 million.
43
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Operating expenses decreased by $1.9 million to $58.2 million during the
three month period ended March 31, 1997 from $60.1 million during the same
period of 1996. Consequently, overall income from operations for the HCC Group
increased by $1.4 million (17.2%) during the first quarter of 1997 compared to
the same period of 1996. Income from operations after management fees at the
Aurora Casino decreased by $1.3 million during the three month period ended
March 31, 1997 compared with 1996 as a result of increased competition in its
market; income from operations after consulting fees at the Tunica Casino
increased by $2.2 million to $4.2 million primarily attributable to the opening
of its new hotel tower.
Aurora Casino
General
Income from operations at the Aurora Casino, adjusted to exclude management
fees payable to a subsidiary of GBCC, amounted to $10 million for the three
month period ended March 31, 1997 compared to $11.4 million during the 1996
period. The decline is primarily attributable to increased competition from the
opening of three riverboat gaming operations in northern Indiana during June
1996 which increased gaming capacity in the Chicago area by approximately 89%.
The Indiana facilities are more convenient to certain areas within the Chicago
market, primarily the south side of Chicago, and have served to reduce patronage
to the Aurora Casino from those areas.
Gaming Operations
The following table sets forth certain unaudited financial and operating
data for the Aurora Casino's operations for the three month periods ended March
31, 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Table games $ 12,334,000 $ 14,253,000
Slot machines 26,525,000 27,914,000
------------ ------------
Total $ 38,859,000 $ 42,167,000
============ ============
Table games:
Gross wagering (drop) (1) $ 69,685,000 $ 83,682,000
Hold percentages (2):
HCA 17.7% 17.0%
Other Chicago-area (3) 18.1% 20.4%
Slot machines:
Gross wagering (handle) (1) $470,657,000 $505,174,000
Hold percentages (2):
HCA 5.6% 5.5%
Other Chicago-area (3) 5.7% 5.7%
</TABLE>
44
<PAGE>
HOLLYWOOD CASING 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 decreased $48.5 million (8.2%) during the three month period
ended March 31, 1997 compared to the 1996 period. The overall decrease in casino
wagering reflects the aforementioned addition of significant gaming capacity in
the Chicago market area from newly opened Indiana gaming operations.
The Aurora Casino's decreases in table drop and slot machine handle of
16.7% and 6.8%, respectively, during the three month period ended March 31, 1997
from the same period in 1996 compare favorably with the decreases in table drop
and slot machine handle for other Chicago-area riverboat operators of 20.2% and
16.8%, respectively. The resulting increase in market share reflects the success
of the Aurora Casino's capital improvements program, including the completion of
a new 500-space parking garage facility during September 1996, in maintaining
patron volume. The Chicago-area riverboat operators located closer to the new
Indiana facilities and which drew a greater percentage of their customers from
areas now more conveniently served by the Indiana facilities suffered a greater
loss of patronage than the Aurora Casino.
Revenues
Overall, casino revenues decreased $3.3 million (7.8%) during the three
month period ended March 31, 1997 compared to the same period of 1996. Table
game revenues decreased $1.9 million (13.5%) during the first quarter of 1997
compared to the same period of 1996 as the 16.7% decrease in drop was partially
offset by the increase in the table game hold percentage to 17.7% in 1997 from
17% in 1996. The 6.8% decrease in slot machine handle during the first quarter
of 1997 was partially offset by an increase in the slot hold percentage,
resulting in a first quarter 1997 slot machine revenue decrease of $1.4 million
(5%) compared to the first quarter of 1996.
Food and beverage revenues at the Aurora Casino did not change
significantly during the three month period ended March 31, 1997 compared to the
same period of 1996. Other revenues decreased by $648,000 (61%) during the three
month period ended March 31, 1997 compared to the same period of 1996 primarily
due to the elimination of garage and valet parking revenues for competitive
reasons.
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 60% and 64.6%, respectively, during the three
45
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
month periods ended March 31, 1997 and 1996. The decrease from the prior year
reflects the decrease in promotional activity with respect to parking noted
previously.
Departmental Expenses
Casino expenses decreased by $1.8 million (6.4%) during the three month
period ended March 31, 1997 over the same period of 1996 reflecting the decrease
of similar magnitude in casino revenues together with decreased promotional
activities and reduced staffing levels.
Food and beverage expenses increased $298,000 (33%) during the three month
period ended March 31, 1997 compared to the same period of 1996 as a result of
additional allocations to the casino department. Other expenses increased
$391,000 (3,910%) during the first quarter of 1997 compared to 1996 reflecting
an extremely low amount of such costs during the 1996 period as a result of
allocations made to other departments. Food and beverage and other services to
casino patrons are, for the most part, ancillary to the casino operation.
Accordingly, these departments are not expected to contribute significantly to
income from operations.
Tunica Casino
General
Income from operations at the Tunica Casino, adjusted to exclude consulting
fees payable to a subsidiary of GBCC, amounted to $4.5 million for the three
month period ended March 31, 1997 compared to $2.2 million during the same
period of 1996. The increase is primarily attributable to the opening of the
Tunica Casino's new 352-room hotel tower in September 1996 which increased room
capacity by over 225% and added luxury suites, meeting space and other
amenities. The Tunica market has experienced significant growth over the past
few years with increased competition as a consequence. Harrah's Entertainment,
Inc., which currently operates two casinos in the cluster of gaming facilities
where the Tunica Casino is located, recently announced plans to close its
smaller facility while continuing its efforts to sell the property. Also, Grand
Gaming Corp. has delayed its planned construction of additional hotel rooms
originally scheduled to open in early 1997.
Gaming Operations
The following table sets forth certain unaudited financial and operating
data relating to the operations of the Tunica facility for the three month
periods ended March 31, 1997 and 1996. Published local and
46
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
state-wide industry information is limited in both detail and availability;
accordingly, comparable data for other casino operators is unavailable.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Casino Revenues:
Table games $ 4,364,000 $ 4,519,000
Slot machines 20,057,000 17,934,000
Poker revenues 255,000 265,000
------------- -------------
Total $ 24,676,000 $ 22,718,000
============= =============
Table games:
Gross wagering (drop) (1) $ 20,388,000 $ 21,487,000
Hold percentage (2) 21.4% 21.0%
Slot machines:
Gross wagering (handle) (1) $ 383,804,000 $ 336,478,000
Hold percentage (2) 5.2% 5.3%
</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 increased $46.2 million (12.9%) during the three month
period ended March 31, 1997 compared to the 1996 period during which the Tunica
Casino opened its new "Adventure Slots" attraction, a highly themed area of the
casino floor which features interactive memorabilia displays and entertainment.
Slot machine handle during the first quarter of 1997 increased by $47.3 million
(14.1%); however, table game drop showed a decrease of $1.1 million (5.1%) in
1997 compared to the 1996 period.
Revenues
Casino revenues increased $2 million (8.6%) during the three month period
ended March 31, 1997 compared to the same period of 1996. Table game revenues
suffered from the 5.1% decline in wagering; however, an increase in the hold
percentage to 21.4% during the first quarter of 1997 compared to 21% during the
same period of 1996 resulted in table game revenues declining by only 3.4%. Slot
machine revenue growth reflects the significant increase in slot machine gross
wagering as discussed above, partially offset by a slight decrease in the slot
machine hold percentage to 5.2% during the first quarter of 1997 compared to
5.3% during the same period of 1996.
Rooms revenue increased $1.3 million (163.3%) during the three month
period ended March 31, 1997 compared to the same period of 1996. This increase
results from the opening of the Tunica Casino's new 352-room hotel tower during
the third quarter of 1996. Hotel occupancy rates have decreased as a result of
the additional room capacity, declining from an average of approximately 98% in
the first quarter
47
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
of 1996 to approximately 88% in the first quarter of 1997. Food and beverage
revenues increased $436,000 (14.7%) during the first quarter of 1997 compared to
the first quarter of 1996 due to increased patron volume as reflected in the
increase in gross wagering and attributable to a large degree to the opening of
the new hotel tower. Other revenues did not change significantly during the
first quarter of 1997 compared to 1996.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
Although promotional allowances increased by nearly $1 million during the 1997
period, such allowances, as a percentage of rooms, food and beverage and other
revenues, decreased to 60.6% during the first quarter of 1997 compared to 62.8%
during the first quarter of 1996. The dollar increase in promotional allowances
reflects the increased availability of rooms for promotional activities while
the percentage decrease demonstrates the success of the Tunica Casino's programs
in generating additional revenues. The 1997 percentage decrease also results
from a disproportionately high use of hotel and food and beverage
complimentaries during the 1996 period as part of the Tunica Casino's
promotional activities with respect to the opening of the "Adventure Slots"
attraction.
Departmental Expenses
Casino expenses did not change significantly during the three month period
ended March 31, 1997 compared to the same period of 1996. In spite of increased
casino volume, marketing and promotional activities were significantly reduced
compared to the first quarter of 1996 when the "Adventure Slots" attraction
opened.
Rooms expense increased $137,000 (42.7%) during the three month period
ended March 31, 1997 compared to the same period of 1996 due to the Tunica
Casino's new hotel tower, offset somewhat by increased promotional activity, the
cost of which is allocated to the casino department.
Food and beverage expense increased $103,000 (11.4%) during the three month
period ended March 31, 1997 compared to the same period of 1996 primarily due to
increased patron volume associated with the opening of the new hotel tower and
additional dining outlets. Such increases were partially offset by increased
promotional activity, the cost of which is allocated to the casino department.
Other expenses increased $32,000 (10.7%) during the three month period ended
March 31, 1997 compared to the same period of 1996 due to increased costs
associated with merchandise sales and theater entertainment. Rooms, food and
beverage and other departmental expenses are, for the most part, ancillary to
the casino operation. Accordingly, these departments are not expected to
contribute significantly to income from operations.
Other HCC Group Items
- ---------------------
Management and Consulting Fees
The decrease in management and consulting fees during the 1997 period
reflects the decline in revenues at the Aurora Casino on which management fees
are based.
48
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
General and Administrative
General and administrative expenses for the HCC Group decreased by $524,000
(11.5%) during the first quarter of 1997 compared to the same period in 1996.
Such expenses at the Aurora Casino and the Tunica Casino did not change
significantly during the respective first quarter periods. The decrease in
general and administrative expenses results from reductions in corporate
overhead costs, primarily in salaries and professional fees.
Depreciation and Amortization
Depreciation and amortization expense decreased $433,000 (8.1%) during the
three month period ended March 31, 1997 compared to the 1996 period. Although
completion of a parking garage at the Aurora Casino and a new hotel tower at the
Tunica Casino during the third quarter of 1996 significantly increased the
amount of depreciable assets, the revision in estimated useful lives of
buildings and certain operating equipment effective October 1, 1996 resulted in
an overall decrease in depreciation and amortization.
Development Expenses
Development expenses represent costs incurred in connection with HCC's
pursuit of potential gaming opportunities in jurisdictions where gaming has not
been legalized. Such costs increased by $108,000 (54.8%) during the three month
period ended March 31, 1997 compared to 1996 primarily as a result of costs
incurred with respect to HCC's successful efforts in being awarded the last
available gaming license in Louisiana.
Interest
Interest income decreased $252,000 (38.3%) for the three month period ended
March 31, 1997 compared with the same period of 1996. The decrease results from
interest earned on cash restricted for construction projects during the first
quarter of 1996; such cash was spent during 1996 in connection with construction
projects.
Interest expense increased $228,000 (3.1%) during the three month period
ended March 31, 1997 compared to the prior year period primarily due to
additional interest incurred with respect to the new parking garage at the
Aurora Casino which is treated as a capital lease for financial reporting
purposes.
Gain (Loss) on Disposal of Assets
The gain during the first quarter of 1997 resulted from the sale of a
company-owned aircraft.
Income Tax (Provision) Benefit
HCC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $14.8 million, none of which begin to expire
until the year 2010. Additionally, HCC and
49
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
its subsidiaries have various tax credits available totaling approximately
$200,000, which do not begin to expire until the year 2008.
Management believes that it is more likely than not that future
consolidated taxable income of HCC (primarily from the Aurora Casino and the
Tunica Casino) 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 net deferred tax assets of $5.6 million and $6.5 million as of
March 31, 1997 and December 31, 1996, respectively. In the absence of a "change
of control" as discussed below, the ultimate recognition of the current amount
of deferred tax assets will be dependent on HCC and its subsidiaries' ability to
generate approximately $16.5 million of taxable income for federal tax purposes
prior to the expiration dates of the NOL's and tax credit carryforwards and the
reversal of other temporary differences.
Net Operating Loss Carryforwards
Sales by HCC or existing stockholders of common stock, or securities
convertible into common stock, can cause a "change of control", as defined in
Section 382 of the Internal Revenue Code of 1986, as amended, which would limit
the ability of HCC or its subsidiaries to utilize these loss carryforwards in
later tax periods. Should such a change of control occur, the amount of loss
carryforwards available for use in any one year would most likely be
substantially reduced. Future treasury regulations, administrative rulings or
court decisions may also effect HCC's future utilization of its loss
carryforwards.
Inflation
Management believes that in the near term, modest inflation, together with
increased competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
Seasonality
Historically, the Aurora Casino's operations have experienced some
seasonality, 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, management believes that seasonality may also cause fluctuations in
reported results at the Tunica Casino. In addition, the operations of the Aurora
Casino and the Tunica Casino 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 activity was its
50
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
approximate 80% ownership of GBCC. GBCC'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.
Operating Activities
The operations of the Aurora Casino continue to be HCC's primary source of
liquidity and capital resources, having contributed approximately $9.2 million
of cash flow from operations during the first quarter of 1997 after deducting
the payment of $2.7 million of management fees to GBCC. The Tunica Casino
provided $3.9 million of cash from operations during the first quarter of 1997
after deducting the payment of $300,000 of consulting fees to GBCC. HCC's other
sources of funds have historically included the repayment of principal and
interest on intercompany loans made to GBCC and interest income earned on
temporary investments. In addition to operating expenses at the Aurora Casino
and the Tunica Casino, uses of operating cash by HCC during the first three
months of 1997 included costs to pursue development opportunities ($305,000) and
corporate overhead costs ($1.6 million).
During the first quarter of 1997, cash flow from operations, together with
borrowings of $1 million on a line of credit, proceeds from the sale of an
airplane and existing cash, was used by HCC to fund capital expenditures of
$972,000, to make a $2 million contribution toward construction of a golf course
to benefit the Tunica Casino, to repay third party indebtedness of $3 million
and to make payments under capital lease obligations of $575,000.
HCC has tax net operating loss carryforwards totaling approximately $14.8
million and tax credits available totaling approximately $200,000. 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.
Financing Activities
During October 1995, HCC completed the refinancing of its 14% Senior Notes
and 13 1/2% First Mortgage Notes 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 finance construction of a
352-room hotel tower and related amenities and to fund development and
construction of the "Adventure Slots" attraction, a themed gaming area, at the
Tunica Casino; to fund HCA's required contribution of $4 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 GBCC 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.
51
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Senior Secured Notes are redeemable at the option of HCC any time on or
after November 1, 1999 at 106.375% of the then outstanding principal amount,
decreasing to 103.1875% and 100%, respectively, on November 1, 2000 and 2001.
Commencing with the November 1, 1997 interest payment date and at each
subsequent interest payment date, HCC will be required to make an offer to
purchase not more than $2.5 million in principal amount of the Senior Secured
Notes at a price of 106.375% of the principal amount tendered.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC and certain defined subsidiaries to, among other
things, pay dividends or make other restricted payments; incur additional
indebtedness or issue preferred stock; create liens; create dividend or other
payment restrictions affecting certain defined subsidiaries; enter into mergers
or consolidations or make sales of all or substantially all assets of HCC, HCT
or any future guarantor; and enter into transactions with certain affiliates.
During 1995, HCA obtained a $5 million unsecured bank promissory note with
respect to its riverboat expansion project. Principal payments are based on a
30-month amortization with the final payment due in February 1998.
At December 31, 1996, HCT had a $1 million bank credit facility available
through August 15, 1997. Borrowings on the line of credit accrue interest at the
rate of prime plus 1 1/2% per annum. During the first quarter of 1997, HCT
borrowed $1 million on this credit facility.
Effective as of April 1, 1997, HCC acquired from a GBCC subsidiary the
general partnership interest in the limited partnership which holds the Aurora
management agreement. The acquisition price for the general partnership interest
included a note in the amount of $3.8 million and the assignment of $13.75
million undiscounted principal amount of PPI Funding Notes and $350,000 accrued
interest due from GBCC to a GBCC subsidiary. Annual principal and interest
payments by HCC on the $3.8 million note will approximate the general partner's
share of annual partnership distributions which will now be made to HCC.
In connection with the refinancing of GBCC's casino related debt
obligations in 1994, HCC loaned $15 million on a junior subordinated basis to a
GBCC subsidiary at 14 5/8% interest (the "Junior Subordinated Notes"); payment
of principal and interest on this loan is subject to certain subsidiaries of
GBCC meeting certain financial coverage and other payment restriction tests. As
of December 31, 1996, HCC had assigned the entire principal amount of the Junior
Subordinated Notes together with accrued interest thereon to GBCC in
consideration for tax net operating losses of GBCC utilized by HCC in 1994 ($6.3
million principal and $1.9 million interest) and as a capital contribution in
connection with the distribution of GBCC stock to HCC's shareholders ($8.7
million principal and $1.8 million interest).
As of March 31, 1997, HCC's scheduled maturities of long-term debt and
payments under capital leases during the remainder of 1997 are approximately
$5.1 million and $2.9 million, respectively.
52
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Capital Expenditures and Other Investing Activities
Capital expenditures at the Aurora Casino during the first quarter of 1997
were approximately $474,000; management anticipates spending $2.8 million during
the remainder of 1997 primarily for its ongoing capital improvements program
with no major projects currently scheduled.
Capital expenditures at the Tunica Casino during the first quarter of 1997
amounted to $498,000; management anticipates spending $1.9 million during the
remainder of 1997 primarily for its ongoing program of capital improvements.
HCT entered into an agreement with two other casino operators during 1996
providing for the joint construction and ownership of a golf course.
Contributions by HCT to the limited liability corporation formed to develop and
operate the golf course amounted to $2 million during the first quarter of 1997.
No additional contributions are currently anticipated.
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 ventures with cash flow from operations, together with
private, public or bank financing, which might include non-recourse project
financing.
Summary
Other than cash requirements with respect to specific projects for which
project financing would be obtained, management anticipates that HCC's funding
requirements for the next twelve months will be satisfied by existing cash and
cash generated by the Aurora and Tunica Casinos.
53
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrants did not file any reports on Form 8-K during the quarter
ended March 31, 1997. The Registrants filed their Annual Report on Form 10-K for
the year ended December 31, 1996 with the Securities and Exchange Commission on
March 31, 1997.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each
of the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD CASINO CORPORATION
Date: May 13, 1997 By: /s/ John C. Hull
------------------------ ---------------------------
John C. Hull
Corporate Controller and
Principal Accounting Officer
HWCC - TUNICA, INC.
Date: May 13, 1997 By: /s/ John C. Hull
------------------------ ---------------------------
John C. Hull
Principal Accounting Officer
54
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HOLLYWOOD CASINO CORPORATION AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
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<NAME> HOLLYWOOD CASINO CORPORATION
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<CURRENT-LIABILITIES> 40,791
<BONDS> 221,281
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<COMMON> 2
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<TOTAL-LIABILITY-AND-EQUITY> 314,623
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<TOTAL-REVENUES> 67,470
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<OTHER-EXPENSES> 11,884
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
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<NAME> HOLLYWOOD CASINO CORPORATION
<MULTIPLIER> 1,000
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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<NAME> HWCC-TUNICA INC.
<MULTIPLIER> 1,000
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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