<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM-10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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 Outstanding at November 11, 1997
- ---------------------------- --------------------------------
HOLLYWOOD CASINO CORPORATION 24,859,968 SHARES
HWCC-TUNICA, INC. 1,000 SHARES
Class
------------------------------
COMMON STOCK, $.0001 PAR VALUE
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
September 30, 1997 and for the three and nine month periods ended September 30,
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 HCT and the financial position of HCA as of September 30, 1997, and the
results of their operations for the three and nine month periods ended September
30, 1997 and 1996 and cash flows for the nine month periods ended September 30,
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 and nine month periods ended September 30, 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>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 44,049,000 $ 21,488,000
Accounts receivable, net of allowances of
$1,843,000 and $1,693,000, respectively 2,633,000 3,140,000
Inventories 1,377,000 1,620,000
Deferred income taxes 2,807,000 4,271,000
Prepaid expenses and other
current assets 1,648,000 1,691,000
Due from affiliates 7,570,000 7,641,000
------------ ------------
Total current assets 60,084,000 39,851,000
------------ ------------
Investment in unconsolidated affiliate 2,000,000 -
------------ ------------
Property and Equipment:
Land and land improvements 5,856,000 5,845,000
Buildings and improvements 119,515,000 119,501,000
Riverboats and barges 39,494,000 39,494,000
Operating equipment 69,698,000 69,713,000
Construction in progress 1,574,000 687,000
------------ ------------
236,137,000 235,240,000
Less - accumulated depreciation
and amortization (62,581,000) (49,740,000)
------------ ------------
Net property and equipment 173,556,000 185,500,000
------------ ------------
Other Assets:
Deferred financing costs 5,866,000 6,565,000
Notes receivable 10,000,000 10,000,000
Land rights 7,505,000 7,658,000
Due from affiliates, net of valuation allowance 28,000,000 36,597,000
Land held for sale, net of allowance 12,701,000 14,501,000
Other assets 5,920,000 7,413,000
------------ ------------
Total other assets 69,992,000 82,734,000
------------ ------------
$305,632,000 $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>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 8,251,000 $ 8,282,000
Accounts payable 3,020,000 5,407,000
Accrued liabilities -
Salaries and wages 5,578,000 3,531,000
Interest 11,593,000 4,734,000
Insurance 3,043,000 2,140,000
Other 5,184,000 5,101,000
Due to affiliates 250,000 2,534,000
Other current liabilities 2,265,000 1,945,000
------------- -------------
Total current liabilities 39,184,000 33,674,000
------------- -------------
Long-Term Debt 200,428,000 202,057,000
------------- -------------
Capital Lease Obligations 21,282,000 21,707,000
------------- -------------
Other Noncurrent Liabilities 5,608,000 5,503,000
------------- -------------
Commitments and Contingencies
Minority Interest in Limited Partnership 1,973,000 -
------------- -------------
Shareholders' Equity:
Common Stock:
Class A common stock, $.0001 par value
per share; 50,000,000 shares authorized;
24,860,000 and 24,760,000 shares issued
and outstanding, respectively 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 223,234,000 235,606,000
Accumulated deficit (186,079,000) (190,464,000)
------------- -------------
Total shareholders' equity 37,157,000 45,144,000
------------- -------------
$ 305,632,000 $ 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
SEPTEMBER 30,
---------------------------
1997 1996
------------ -------------
<S> <C> <C>
Revenues:
Casino $65,605,000 $124,724,000
Rooms 2,725,000 5,361,000
Food and beverage 7,501,000 15,973,000
Other 911,000 3,488,000
----------- ------------
76,742,000 149,546,000
Less - promotional allowances (6,903,000) (13,302,000)
----------- ------------
Net revenues 69,839,000 136,244,000
----------- ------------
Expenses:
Casino 44,647,000 99,002,000
Rooms 452,000 1,508,000
Food and beverage 2,279,000 6,054,000
Other 858,000 2,625,000
General and administrative 4,261,000 9,066,000
Management and consulting fees 300,000 -
Depreciation and amortization 4,778,000 10,161,000
Development 298,000 179,000
----------- ------------
Total expenses 57,873,000 128,595,000
----------- ------------
Income from operations 11,966,000 7,649,000
----------- ------------
Non-operating income (expenses):
Interest income 470,000 685,000
Interest expense, net of capitalized interest
of $534,000 in 1996 (7,570,000) (14,524,000)
Loss on disposal of assets - (635,000)
----------- ------------
Total non-operating expenses, net (7,100,000) (14,474,000)
----------- ------------
Income (loss) before income taxes and other item 4,866,000 (6,825,000)
Income tax provision (1,191,000) (1,596,000)
----------- ------------
Income (loss) before other item 3,675,000 (8,421,000)
Minority interest in earnings of Limited
Partnership (Note 1) (1,974,000) -
----------- ------------
Net income (loss) $ 1,701,000 $ (8,421,000)
=========== ============
Net income (loss) per common share $ 0.07 $ (0.34)
=========== ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
Revenues:
Casino $191,355,000 $374,609,000
Rooms 7,453,000 14,311,000
Food and beverage 21,223,000 46,868,000
Other 2,513,000 10,480,000
------------ ------------
222,544,000 446,268,000
Less - promotional allowances (18,934,000) (38,648,000)
------------ ------------
Net revenues 203,610,000 407,620,000
------------ ------------
Expenses:
Casino 129,628,000 301,894,000
Rooms 1,371,000 4,715,000
Food and beverage 6,688,000 15,796,000
Other 2,402,000 5,382,000
General and administrative 12,581,000 28,130,000
Management and consulting fees 3,627,000 -
Depreciation and amortization 14,638,000 31,797,000
Development 1,193,000 721,000
------------ ------------
Total expenses 172,128,000 388,435,000
------------ ------------
Income from operations 31,482,000 19,185,000
------------ ------------
Non-operating income (expenses):
Interest income 1,293,000 2,653,000
Interest expense, net of capitalized interest
of $1,006,000 in 1996 (22,766,000) (43,985,000)
Gain (loss) on disposal of assets 411,000 (658,000)
------------ ------------
Total non-operating expenses, net (21,062,000) (41,990,000)
------------ ------------
Income (loss) before income taxes and other item 10,420,000 (22,805,000)
Income tax provision (3,280,000) (526,000)
------------ ------------
Income (loss) before other item 7,140,000 (23,331,000)
Minority interest in earnings of
Limited Partnership (Note 1) (2,755,000) -
------------ ------------
Net income (loss) $ 4,385,000 $(23,331,000)
============ ============
Net income (loss) per common share $ 0.18 $ (0.94)
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 4,385,000 $(23,331,000)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization, including accretion of debt discount 15,301,000 32,375,000
(Gain) loss on disposal of assets (411,000) 658,000
Minority interest in earnings of limited partnership 2,755,000 -
Provision for doubtful accounts 537,000 2,224,000
Deferred income tax provision 2,673,000 85,000
Increase in accounts receivable (30,000) (1,014,000)
Increase in accounts payable and accrued expenses 7,505,000 6,271,000
Net change in other current assets and liabilities (221,000) (1,597,000)
Net change in other noncurrent assets and liabilities 143,000 (607,000)
----------- ------------
Net cash provided by operating activities 32,637,000 15,064,000
----------- ------------
INVESTING ACTIVITIES:
Net property and equipment additions (3,527,000) (48,651,000)
Collections on notes receivable - 9,361,000
Proceeds from sale of assets 4,454,000 2,699,000
Obligatory investments - (2,248,000)
Short-term investments - (2,000,000)
Investments in unconsolidated affiliates (2,000,000) -
Increase in cash from purchase of limited partnership interest 451,000 -
Decrease in cash restricted for construction projects - 29,642,000
----------- ------------
Net cash used in investing activities (622,000) (11,197,000)
----------- ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 700,000
Borrowings on credit facilities - 2,000,000
Deferred financing costs (24,000) (115,000)
Repayments of long-term debt (4,968,000) (5,898,000)
Payments on capital lease obligations (1,580,000) (1,910,000)
Limited partnership distributions (2,882,000) -
----------- ------------
Net cash used in financing activities (9,454,000) (5,223,000)
----------- ------------
Net increase (decrease) in cash and cash equivalents 22,561,000 (1,356,000)
Cash and cash equivalents at beginning of period 21,488,000 56,538,000
----------- ------------
Cash and cash equivalents at end of period $44,049,000 $ 55,182,000
=========== ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND BUSINESS
Hollywood Casino Corporation ("HCC" or the "Company"), is a Delaware
corporation which was organized and incorporated on November 5, 1990.
Approximately 53% of the issued and outstanding stock of HCC is owned by certain
general partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt,
Jr. and William D. Pratt and by other family members (collectively, the "Pratt
Family").
HCC owns all of the outstanding common stock of both Hollywood Casino -
Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an Illinois
corporation organized during 1990 which owns and operates a 32,100 square foot
riverboat gaming operation together with docking and other entertainment
facilities under the service mark Hollywood Casino(R) located in Aurora,
Illinois (the "Aurora Casino"). HCT is a Texas corporation formed by HCC during
1993 which owns and operates a 54,000 square foot gaming facility, adjacent
support facilities and a 506-room hotel complex under the service mark Hollywood
Casino(R) in northern Tunica County, Mississippi (the "Tunica Casino"). The
Aurora Casino and the Tunica Casino commenced operations in June 1993 and August
1994, respectively.
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.
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 for all periods during 1996; however the accompanying
consolidated balance sheet at December 31, 1996 does not include the assets or
liabilities of GBCC. 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.
Effective as of April 1, 1997, HCC acquired the general partnership interest
in Pratt Management, L.P. ("PML"), the limited partnership which holds the
management contract on the Aurora Casino, from PPI Corporation, a wholly owned
subsidiary of GBCC. For all periods subsequent to the acquisition date (April
1, 1997), PML is reflected as a consolidated subsidiary of HCC. The assets and
liabilities of PML were recorded at historical cost at the date of acquisition
with the difference between acquisition cost and the historical net book value
($12,747,000) recorded as a charge to paid-in capital. PML earns management
fees from the Aurora Casino and incurs operating and other expenses with respect
to its management thereof. As general partner, HCC receives 99% of the first
$84,000 of net income earned by PML each month together with 1% of any income
earned above such amount. The remaining limited partnership interest continues
to be held by a subsidiary of GBCC and is reflected in the accompanying
consolidated financial statements as a minority interest.
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.
8
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
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 24,950,000 and 24,926,000, respectively, for the
three and nine month periods ended September 30, 1997 and 24,720,000, for both
the three and nine month periods ended September 30, 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 have a material impact on its
present calculation of earnings per share.
The consolidated financial statements as of September 30, 1997 and for the
three and nine month periods ended September 30, 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 September 30, 1997, the results of its operations for the
three and nine month periods ended September 30, 1997 and 1996 and its cash
flows for the nine month periods ended September 30, 1997 and 1996.
9
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) SHORT-TERM CREDIT FACILITIES
HCT has a bank credit facility in the amount of $1,000,000 available through
August 15, 1998. No borrowings were outstanding under the credit facility at
either September 30, 1997 or 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.
(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>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Indebtedness of HCC:
12 3/4% Senior Secured Notes, due 2003, net
of discount of $8,464,000 and $9,127,000,
respectively (a) $201,536,000 $200,873,000
Promissory note to affiliate (Note 6) 3,594,000 -
Term note - 2,150,000
------------ ------------
205,130,000 203,023,000
------------ ------------
Indebtedness of HCA:
Promissory note to bank (b) 899,000 2,472,000
Equipment loans 690,000 1,472,000
------------ ------------
1,589,000 3,944,000
------------ ------------
Indebtedness of HCT:
Equipment loans 1,144,000 1,401,000
------------ ------------
Total indebtedness 207,863,000 208,368,000
Less - current maturities (7,435,000) (6,311,000)
------------ ------------
Total long-term debt $200,428,000 $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
10
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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 September 30, 1997 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1997 (three months) $ 3,507,000
1998 6,666,000
1999 6,031,000
2000 6,059,000
2001 5,833,000
Thereafter 188,231,000
------------
Total $216,327,000
============
</TABLE>
11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Interest paid, net of capitalized interest, amounted to $15,244,000 and
$40,162,000, respectively, during the nine month periods ended September 30,
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 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 leased certain gaming and other equipment under capital lease
agreements which provided for interest at rates ranging up to 13 1/4% per annum
and which expired during 1997.
The original cost of HCA's parking garages is included in buildings in the
accompanying consolidated balance sheets at both September 30, 1997 and December
31, 1996 in the amount of $27,358,000. Assets under capital leases with an
original cost of $7,260,000 are included in operating equipment in the
accompanying consolidated balance sheets at both September 30, 1997 and December
31, 1996. Amortization expense with respect to these assets amounted to
$489,000 and $702,000, respectively, during the three month periods ended
September 30, 1997 and 1996 and $1,612,000 and $2,012,000, respectively during
the nine month periods ended September 30, 1997 and 1996.
12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Future minimum lease payments under capital lease obligations as of
September 30, 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 (three months) $ 983,000
1998 2,494,000
1999 2,457,000
2000 2,483,000
2001 2,532,000
Thereafter 26,719,000
------------
Total minimum lease payments 37,668,000
Less amount representing interest (15,570,000)
------------
Present value of future
minimum lease payments 22,098,000
Current capital lease obligation (816,000)
------------
Long-term capital lease obligation $ 21,282,000
============
</TABLE>
(5) INCOME TAXES
Components of HCC's provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Current:
Federal $ - $ (72,000) $ - $ (72,000)
State (250,000) (1,341,000) (607,000) (369,000)
Deferred:
Federal (928,000) - (2,534,000) -
State (13,000) (183,000) (139,000) (85,000)
----------- ----------- ------------ ---------
$(1,191,000) $(1,596,000) $ (3,280,000) $(526,000)
=========== =========== ============ =========
</TABLE>
Federal and state tax payments of $469,000 and $214,000 were made by HCC
during the nine month periods ended September 30, 1997 and 1996, respectively.
Federal and state income tax provisions or benefits are based upon
estimates of the results of operations for the current period and reflect the
nondeductibility for income tax purposes of certain items, including certain
amortization, meals and entertainment and other expenses. Quarterly income tax
provisions or benefits are determined by applying the resulting effective income
tax rate to the results of operations for the quarter.
13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
At September 30, 1997, HCC and its subsidiaries have tax net operating loss
carryforwards ("NOL's") totaling approximately $6,000,000, none of which begin
to expire until the year 2010. Additionally, HCC and its subsidiaries have
various tax credits available totaling approximately $311,000, 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, valuation allowances
have been established which result in net deferred tax assets of $3,753,000 and
$6,513,000 at September 30, 1997 and December 31, 1996, respectively.
The ultimate recognition of the current amount of net deferred tax assets
is dependent on HCC and its subsidiaries' ability to generate approximately
$11,000,000 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.
14
<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>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,060,000 $ 6,746,000
Allowance for doubtful accounts 9,426,000 7,316,000
Investment and jobs tax credits 311,000 213,000
Basis in limited partnership 2,890,000 -
Other liabilities and accruals 2,129,000 3,179,000
Benefits accrual 1,708,000 1,704,000
Other 1,063,000 750,000
----------- -----------
Total deferred tax assets 19,587,000 19,908,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization (5,697,000) (4,395,000)
Amortization of note discount (1,156,000) (2,628,000)
----------- -----------
Total deferred tax liabilities (6,853,000) (7,023,000)
----------- -----------
Net deferred tax asset 12,734,000 12,885,000
Valuation allowance (8,981,000) (6,372,000)
----------- -----------
$ 3,753,000 $ 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 had advanced funds to GBCC totaling $6,750,000 and $7,750,000 as of
September 30, 1997 and December 31, 1996, respectively. Included in the balance
at December 31, 1996 was a $1,000,000, 14% note receivable from PML which,
together with the related interest, is now eliminated in consolidation as a
result of HCC's acquisition of the general partnership interest in PML. 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. An additional $250,000 note is due on demand, or if no demand
is made, on April 1, 1998 and bears interest at the rate of 14% per annum,
payable semiannually. Interest receivable amounting to $602,000 and $323,000 is
included in due from affiliates in the accompanying consolidated balance sheets
at September 30, 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 accrued on loans and
advances to GBCC
15
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
amounted to $237,000 and $739,000, respectively, during the three and nine month
periods ended September 30, 1997.
In connection with its acquisition of the general partnership interest in
PML (see Note 1), 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 below) and $350,000 accrued interest due from GBCC to PPI
Corporation. The $3,800,000 note is payable in monthly installments of $83,000,
including interest at the rate of 14% per annum, commencing on May 1, 1997, with
additional quarterly variable principal payments commencing on July 1, 1997 in
an amount equal to the general partner's share of quarterly cash distributions,
as defined, from PML. HCC incurred interest expense with respect to the note
amounting to $129,000 and $260,000 during the three and nine month periods ended
September 30, 1997, respectively. Interest payable of $41,000 to GBCC is
included in interest payable in the accompanying consolidated balance sheet at
September 30, 1997.
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. reduced the maturity value of the notes
to $98,353,000 at December 31, 1996. During the second quarter of 1997, HCC
assigned $13,750,000 undiscounted principal amount of the PPI Funding Notes to
PPI Corporation as consideration, in part, for HCC's acquisition of the general
partnership interest in PML. Such assignment reduced the maturity value of the
notes to $84,603,000. 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
September 30, 1997 and December 31, 1996, HCC provided valuation allowances in
the amounts of $24,049,000 and $18,741,000, respectively, to reduce the
outstanding principal balance on the PPI Funding Notes to their estimated
realizable values of $28,000,000 and $35,597,000, respectively. Management
anticipates that the remaining balance will be realized through a combination of
additional asset acquisitions from GBCC and its subsidiaries and repayments from
GBCC.
Pursuant to a management agreement, HCA pays PML 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).
16
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
HCA incurred such fees totaling $2,727,000 during the three month period ended
March 31, 1997. Unpaid fees amounting to $2,096,000 were included in amounts due
to affiliates in the accompanying consolidated balance sheet at December 31,
1996. Subsequent to March 31, 1997, PML is included in the consolidated
financial statements of HCC; accordingly, both HCA's management fee expense and
fees payable to PML are eliminated in consolidation.
Pursuant to a ten-year consulting agreement with GBCC, HCT incurs a monthly
consulting fee of $100,000. Such fees amounted to $300,000 and $900,000,
respectively, for the three and nine month periods ended September 30, 1997.
Various subsidiaries of GBCC provide services to HCA, HCT and, since
April 1, 1997, to PML including certain administrative and marketing services.
Total charges during the three and nine month periods ended September 30, 1997
amounted to $163,000 and $720,000, respectively. Unpaid fees amounting to
$91,000 and $128,000 are included in due to affiliates in the accompanying
consolidated balance sheets at September 30, 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
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 and nine month periods ended September 30, 1997 amounted to
$162,000 and $406,000, respectively. Unpaid charges amounting to $48,000 and
$30,000 are included in due to affiliates in the accompanying consolidated
balance sheets at September 30, 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 and nine month
periods ended September 30, 1997 amounted to $18,000 and $73,000, respectively.
Unpaid charges amounting to $57,000 and $51,000 are included in due to
affiliates in the accompanying consolidated balance sheets at September 30,
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 $439,000 and $1,402,000, respectively, for the three and nine
month periods ended September 30, 1997. In connection with such allocated costs
and fees, receivables in the amount of $129,000 and $203,000 are included in due
from affiliates in the accompanying consolidated balance sheets at September 30,
1997 and December 31, 1996, respectively.
17
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
charter by third parties. The aircraft was sold during the first quarter of
1997. Subsequent to the sale, HCC has occasionally chartered aircraft from the
maintenance company. Charter fees, expenses and commissions totaled $12,000 and
$154,000, respectively, during the three month periods ended September 30, 1997
and 1996 and $268,000 and $424,000, respectively, during the nine month periods
ended September 30, 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 September 30, 1997 and 1996, HCT expensed
$1,047,000 and $879,000, respectively, in connection with the ground lease. Such
expenses amounted to $3,015,000 and $2,611,000, respectively, during the nine
month periods ended September 30, 1997 and 1996.
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.
18
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 February 1998 with the final payment due in
August 2000. All principal payments received are to be applied first to the
Series A note. In connection with the loans, HCC received warrants to acquire
up to a 10% equity interest in the gaming company at any time between November
15, 1998 and November 15, 2000 at an exercise price of $500,000 per 1/2%
interest. Under the terms of the loan agreement, the gaming company may require
HCC to exercise warrants to acquire a 5% equity interest on November 15, 1998 at
a cost not to exceed $5,000,000 payable through the reduction of the outstanding
principal balance and, to the extent applicable, the forgiveness of accrued
interest on the Series B note.
(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 $940,000 and $787,000, respectively, at September 30, 1997 and
December 31, 1996.
19
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(10) SUPPLEMENTAL CASH FLOW INFORMATION
During the second quarter of 1997, HCC issued 100,000 shares of its common
stock in exchange for a $10,000,000 loan commitment from unrelated third
parties. The commitment fee was valued at $375,000, the fair market value of
the stock on the date of its issuance, and has been fully amortized as of
September 30, 1997.
Also during the second quarter of 1997, HCC acquired the general
partnership interest in PML (see Notes 1 and 6). The purchase price included the
assignment of certain receivables from GBCC and the issuance of a note to GBCC.
In connection with the acquisition, certain liabilities were assumed as follows:
<TABLE>
<CAPTION>
<S> <C>
Assignment of PPI Funding Notes $(7,597,000)
Assignment of interest receivable (350,000)
Note issued (3,800,000)
Charge to paid-in capital (Note 1) 12,747,000
-----------
Net liabilities assumed $ 1,000,000
===========
</TABLE>
(11) RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 consolidated financial
statements to conform to the 1997 consolidated financial statement presentation.
20
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,667,000 $ 9,034,000
Accounts receivable, net of allowances
of $986,000 and $1,071,000, respectively 1,548,000 1,895,000
Inventories 776,000 948,000
Deferred income taxes 1,538,000 1,421,000
Due from affiliates 11,000 1,046,000
Prepaid expenses and other current assets 685,000 854,000
------------ ------------
Total current assets 18,225,000 15,198,000
------------ ------------
Property and Equipment:
Land improvements 2,796,000 2,786,000
Buildings and improvements 46,186,000 46,247,000
Riverboats 36,970,000 36,970,000
Operating equipment 32,090,000 30,766,000
Construction in progress 230,000 276,000
------------ ------------
118,272,000 117,045,000
Less - accumulated depreciation and amortization (32,420,000) (26,814,000)
------------ ------------
Net property and equipment 85,852,000 90,231,000
------------ ------------
Other Assets 2,108,000 2,020,000
------------ ------------
$106,185,000 $107,449,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
21
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 7,405,000 $ 6,456,000
Accounts payable 1,729,000 2,131,000
Accrued liabilities -
Salaries and wages 2,655,000 2,117,000
Interest 2,689,000 1,315,000
Gaming and other taxes 813,000 497,000
Insurance 1,682,000 1,054,000
Other 1,270,000 1,351,000
Due to affiliates 2,090,000 2,278,000
Other current liabilities 1,297,000 1,200,000
------------ ------------
Total current liabilities 21,630,000 18,399,000
------------ ------------
Long-Term Debt 34,007,000 37,267,000
------------ ------------
Capital Lease Obligations 21,282,000 21,707,000
------------ ------------
Other Noncurrent Liabilities 3,655,000 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 1,055,000 3,477,000
------------ ------------
Total shareholder's equity 25,611,000 28,033,000
------------ ------------
$106,185,000 $107,449,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
22
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Casino $40,099,000 $37,609,000
Food and beverage 3,642,000 3,487,000
Other 573,000 1,231,000
----------- -----------
44,314,000 42,327,000
Less - promotional allowances (2,573,000) (2,995,000)
----------- -----------
Net revenues 41,741,000 39,332,000
----------- -----------
Expenses:
Casino 26,554,000 26,916,000
Food and beverage 1,160,000 1,531,000
Other 470,000 472,000
General and administrative 3,895,000 3,706,000
Depreciation and amortization 1,880,000 1,902,000
----------- -----------
Total expenses 33,959,000 34,527,000
----------- -----------
Income from operations 7,782,000 4,805,000
----------- -----------
Non-operating income (expense):
Interest income 44,000 27,000
Interest expense (1,719,000) (1,729,000)
----------- -----------
Total non-operating expenses, net (1,675,000) (1,702,000)
----------- -----------
Income before income taxes 6,107,000 3,103,000
Income tax provision (2,213,000) (1,195,000)
----------- -----------
Net income $ 3,894,000 $ 1,908,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
23
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Casino $116,335,000 $121,343,000
Food and beverage 10,404,000 10,281,000
Other 1,442,000 3,368,000
------------ ------------
128,181,000 134,992,000
Less - promotional allowances (7,159,000) (8,906,000)
------------ ------------
Net revenues 121,022,000 126,086,000
------------ ------------
Expenses:
Casino 76,918,000 82,864,000
Food and beverage 3,560,000 3,315,000
Other 1,286,000 504,000
General and administrative 10,673,000 11,089,000
Depreciation and amortization 5,606,000 6,993,000
------------ ------------
Total expenses 98,043,000 104,765,000
------------ ------------
Income from operations 22,979,000 21,321,000
------------ ------------
Non-operating income (expense):
Interest income 120,000 148,000
Interest expense (5,225,000) (4,906,000)
------------ ------------
Total non-operating expenses, net (5,105,000) (4,758,000)
------------ ------------
Income before income taxes 17,874,000 16,563,000
Income tax provision (6,697,000) (6,081,000)
------------ ------------
Net income $ 11,177,000 $ 10,482,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
24
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 11,177,000 $ 10,482,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,606,000 6,993,000
Provision for doubtful accounts 155,000 270,000
Deferred income tax provision 1,495,000 595,000
Decrease in receivables 192,000 104,000
Increase in accounts payable and accrued liabilities 2,373,000 2,820,000
Net change in affiliate accounts 847,000 (946,000)
Net change in other current assets and liabilities 438,000 379,000
Net change in other assets and liabilities (88,000) (412,000)
------------ ------------
Net cash provided by operating activities 22,195,000 20,285,000
------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions (1,227,000) (8,615,000)
Decrease in cash restricted for construction projects - 1,955,000
------------ ------------
Net cash used in investing activities (1,227,000) (6,660,000)
------------ ------------
FINANCING ACTIVITIES:
Repayments of debt (2,355,000) (2,123,000)
Payments on capital lease obligations (381,000) (485,000)
Dividends (13,599,000) (10,040,000)
------------ ------------
Net cash used in financing activities (16,355,000) (12,648,000)
------------ ------------
Net increase in cash and cash equivalents 4,633,000 977,000
Cash and cash equivalents at beginning of period 9,034,000 8,996,000
------------ ------------
Cash and cash equivalents at end of period $ 13,667,000 $ 9,973,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
25
<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 was renewed in July 1997
for a period of one year.
The Aurora Casino consists of two, four-level riverboats having a combined
casino space of approximately 32,000 square feet and a four-level pavilion and
docking facility which houses ticketing, food service, passenger waiting, and
various administrative functions. The Aurora Casino also includes two parking
structures with approximately 1,300 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 Indiana which serve the Chicago area
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
26
<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 September 30, 1997 and for the three and
nine month periods ended September 30, 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 September 30, 1997, the
results of its operations for the three and nine month periods ended September
30, 1997 and 1996 and its cash flows for the nine month periods ended September
30, 1997 and 1996. Operating results for the three and nine month periods ended
September 30, 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>
SEPTEMBER 30, 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) 899,000 2,472,000
Equipment loans (c) 690,000 1,472,000
----------- -----------
Total indebtedness 40,596,000 42,951,000
Less - current maturities (6,589,000) (5,684,000)
----------- -----------
Total long-term debt $34,007,000 $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.
(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.
27
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(c) HCA financed the purchase of certain equipment from vendors through the
issuance of note obligations totaling $2,985,000. The promissory notes are
payable in monthly installments, including interest at the approximate rate
of 12 1/4% per annum, and mature at various dates in 1998.
As of September 30, 1997, future maturities of long-term debt are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 (three months) $ 3,326,000
1998 5,763,000
1999 5,000,000
2000 5,000,000
2001 5,000,000
Thereafter 16,507,000
-----------
$40,596,000
===========
</TABLE>
Interest paid for the nine month periods ended September 30, 1997 and 1996
amounted to $3,851,000 and $3,311,000, 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 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.
28
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
HCA also leases certain equipment under capital lease agreements which
provide for interest at the rate of 11.2% and expire at various dates through
1998. Assets under capital lease agreements with an original cost of
$27,358,000 and $2,446,000 are included in buildings and improvements and in
operating equipment, respectively, in the accompanying balance sheets at both
September 30, 1997 and December 31, 1996. Amortization expense with respect to
these assets amounted to $225,000 and $822,000, respectively, during the three
and nine month periods ended September 30, 1997 and $311,000 and $837,000,
respectively, during the three and nine month periods ended September 30, 1996.
Future minimum lease payments under capital lease obligations as of
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 (three months) $ 983,000
1998 2,494,000
1999 2,457,000
2000 2,483,000
2001 2,532,000
Thereafter 26,719,000
------------
Total minimum lease payments 37,668,000
Less amount representing interest (15,570,000)
------------
Present value of future minimum lease payments 22,098,000
Current capital lease obligation (816,000)
------------
Long-term capital lease obligation $ 21,282,000
============
</TABLE>
(4) INCOME TAXES
HCA's provision for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current:
Federal $(1,709,000) $ (723,000) $(4,617,000) $(5,185,000)
State (234,000) (41,000) (585,000) (301,000)
Deferred:
Federal (257,000) (407,000) (1,356,000) (562,000)
State (13,000) (24,000) (139,000) (33,000)
----------- ----------- ----------- -----------
$(2,213,000) $(1,195,000) $(6,697,000) $(6,081,000)
=========== =========== =========== ===========
</TABLE>
29
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
HCA is included in HCC's consolidated federal income tax return. Pursuant
to agreements between HCC and HCA, HCA's current provision for federal income
taxes is based on the amount of tax which would be provided if a separate
federal income tax return were filed. HCA paid federal income taxes amounting
$3,591,000 and $5,924,000, respectively, and state income taxes amounting to
$469,000 and $28,000, respectively, during the nine month periods ended
September 30, 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 September 30, 1997
and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 371,000 $ 375,000
Other liabilities and reserves 1,288,000 1,130,000
----------- -----------
Total deferred tax assets 1,659,000 1,505,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization (3,777,000) (2,127,000)
----------- -----------
Net deferred tax liability $(2,118,000) $ (622,000)
=========== ===========
</TABLE>
30
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Receivables and payables in connection with the aforementioned tax
allocation agreements at September 30, 1997 and December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ -----------
<S> <C> <C>
Deferred tax assets $ 1,374,000 $ 1,421,000
Due (to) from affiliates (23,000) 1,002,000
Deferred tax liabilities (3,265,000) (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 $2,668,000 and $2,339,000, respectively, during the three month periods
ended September 30, 1997 and 1996 and $6,840,000 and $6,810,000, respectively,
during the nine month periods ended September 30, 1997 and 1996. Management and
incentive fees payable at September 30, 1997 and December 31, 1996 were
$1,898,000 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 and $3,730,000, respectively, for each of
the three and nine month periods ended September 30, 1997 and 1996. Interest
payable to HCC on such notes amounted to $2,293,000 and $1,050,000 at September
30, 1997 and December 31, 1996, respectively, 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 September 30, 1997 and 1996, such transactions totaled $109,000
and $294,000, respectively. Such transactions totaled $359,000 and $785,000,
respectively, during the nine month periods ended September 30, 1997 and 1996.
At September 30, 1997 and December 31, 1996, HCA had payables amounting to
$98,000 and $138,000, respectively, in connection with such charges.
31
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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 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.
32
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,168,000 $ 9,321,000
Accounts receivable, net of allowances of
$857,000 and $622,000, respectively 1,231,000 1,363,000
Inventories 601,000 672,000
Deferred income taxes 1,847,000 953,000
Prepaid expenses and other current assets 954,000 854,000
------------ ------------
Total current assets 17,801,000 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 73,422,000 73,348,000
Barges 2,524,000 2,524,000
Operating equipment 36,973,000 35,724,000
Construction in progress 1,344,000 412,000
------------ ------------
117,323,000 115,068,000
Less - accumulated depreciation and
amortization (29,771,000) (22,275,000)
------------ ------------
Net property and equipment 87,552,000 92,793,000
------------ ------------
Other Assets:
Land rights 7,505,000 7,658,000
Other assets 2,806,000 3,006,000
------------ ------------
Total other assets 10,311,000 10,664,000
------------ ------------
$117,664,000 $116,620,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
33
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 316,000 $ 1,511,000
Accounts payable 1,252,000 2,797,000
Accrued liabilities -
Salaries and wages 2,066,000 1,254,000
Interest 476,000 2,262,000
Gaming and other taxes 970,000 813,000
Insurance 1,360,000 1,063,000
Other 1,656,000 1,745,000
Other current liabilities 831,000 831,000
------------ ------------
Total current liabilities 8,927,000 12,276,000
------------ ------------
Long-Term Debt 84,873,000 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 (10,773,000) (15,427,000)
------------ ------------
Total shareholder's equity 23,864,000 19,210,000
------------ ------------
$117,664,000 $116,620,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
34
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Casino $25,506,000 $21,295,000
Rooms 2,725,000 1,544,000
Food and beverage 3,859,000 2,954,000
Other 324,000 261,000
----------- -----------
32,414,000 26,054,000
Less - promotional allowances (4,330,000) (2,845,000)
----------- -----------
Net revenues 28,084,000 23,209,000
----------- -----------
Expenses:
Casino 18,093,000 15,821,000
Rooms 452,000 465,000
Food and beverage 1,119,000 918,000
Other 389,000 324,000
General and administrative 1,545,000 1,585,000
Depreciation and amortization 2,377,000 2,767,000
----------- -----------
Total expenses 23,975,000 21,880,000
----------- -----------
Income from operations 4,109,000 1,329,000
----------- -----------
Non-operating income (expenses):
Interest income 55,000 122,000
Interest expense, net of capitalized
interest of $534,000 in 1996 (2,722,000) (2,210,000)
Loss on disposal of assets - (10,000)
----------- -----------
Total non-operating expenses, net (2,667,000) (2,098,000)
----------- -----------
Income (loss) before income taxes 1,442,000 (769,000)
Income tax benefit - -
----------- -----------
Net income (loss) $ 1,442,000 $ (769,000)
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
35
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
Revenues:
Casino $ 75,020,000 $64,531,000
Rooms 7,453,000 3,204,000
Food and beverage 10,819,000 8,894,000
Other 900,000 843,000
------------ -----------
94,192,000 77,472,000
Less - promotional allowances (11,775,000) (8,126,000)
------------ -----------
Net revenues 82,417,000 69,346,000
------------ -----------
Expenses:
Casino 52,710,000 49,787,000
Rooms 1,371,000 1,071,000
Food and beverage 3,128,000 2,732,000
Other 1,074,000 958,000
General and administrative 4,425,000 4,479,000
Depreciation and amortization 7,808,000 8,108,000
------------ -----------
Total expenses 70,516,000 67,135,000
------------ -----------
Income from operations 11,901,000 2,211,000
------------ -----------
Non-operating income (expenses):
Interest income 160,000 806,000
Interest expense, net of capitalized
interest of $1,006,000 in 1996 (8,252,000) (7,316,000)
Loss on disposal of assets - (45,000)
------------ -----------
Total non-operating expenses, net (8,092,000) (6,555,000)
------------ -----------
Income (loss) before income taxes 3,809,000 (4,344,000)
Income tax benefit 845,000 -
------------ -----------
Net income (loss) $ 4,654,000 $(4,344,000)
============ ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
36
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 4,654,000 $ (4,344,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 7,808,000 8,108,000
Loss on sale of assets - 45,000
Provision for doubtful accounts 382,000 392,000
Deferred income tax benefit (1,338,000) -
Increase in accounts receivable (250,000) (465,000)
(Decrease) increase in accounts payable
and accrued expenses (2,154,000) 3,983,000
Net change in other current assets and
liabilities (29,000) (894,000)
Net change in other noncurrent assets and
liabilities 485,000 (2,000)
----------- ------------
Net cash provided by operating activities 9,558,000 6,823,000
----------- ------------
INVESTING ACTIVITIES:
Net property and equipment additions (2,255,000) (32,758,000)
Investment in unconsolidated affiliate (2,000,000) -
Proceeds from the sale of assets - 105,000
Decrease in cash restricted for construction
projects - 27,687,000
----------- ------------
Net cash used in investing activities (4,255,000) (4,966,000)
----------- ------------
FINANCING ACTIVITIES:
Repayments of long-term debt (257,000) (1,367,000)
Payments on capital lease obligations (1,199,000) (1,425,000)
----------- ------------
Net cash used in financing activities (1,456,000) (2,792,000)
----------- ------------
Net increase (decrease) in cash and cash
equivalents 3,847,000 (935,000)
Cash and cash equivalents at beginning
of period 9,321,000 11,529,000
----------- ------------
Cash and cash equivalents at end of period $13,168,000 $ 10,594,000
=========== ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
37
<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 18, 1999.
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 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.
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 September 30, 1997 and for the three and
nine month periods ended September 30, 1997 and 1996 have been prepared by HCT
without audit. In the opinion of management,
38
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
these consolidated financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the financial
position of HCT as of September 30, 1997, the results of its operations for the
three and nine month periods ended September 30, 1997 and 1996 and cash flows
for the nine month periods ended September 30, 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>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Promissory notes to HCC (a) $84,045,000 $84,045,000
Equipment loans (b) 1,144,000 1,401,000
----------- -----------
Total indebtedness 85,189,000 85,446,000
Less - current maturities (316,000) (312,000)
----------- -----------
Total long-term debt $84,873,000 $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
39
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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) The loans outstanding are payable monthly including interest at effective
rates ranging from 12.3% to 12.9% per annum and are due in 2000.
Scheduled payments of long-term debt as of September 30, 1997 are set forth
below:
<TABLE>
<S> <C>
1997 (three months) $ 55,000
1998 354,000
1999 400,000
2000 335,000
2001 -
Thereafter 84,045,000
-----------
Total $85,189,000
===========
</TABLE>
Interest paid, net of amounts capitalized, amounted to $10,038,000 and
$4,578,000, respectively, during the nine month periods ended September 30, 1997
and 1996.
(3) CAPITAL LEASES
HCT leased certain gaming and other equipment under capital lease
agreements which provided for interest at rates ranging up to 13 1/4% per annum
and which expired 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 September 30, 1997 and December 31, 1996.
Amortization expense for the three month periods ended September 30, 1997 and
1996 was $264,000 and $391,000, respectively. Such expense amounted to $790,000
and $1,175,000, respectively, for the nine month periods ended September 30,
1997 and 1996. Accumulated amortization at September 30, 1997 and December 31,
1996 with respect to these assets amounted to $4,361,000 and $3,571,000,
respectively. No future payment obligations exist with respect to such capital
leases.
40
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) INCOME TAXES
Components of HCT's benefit for income taxes for the three and nine month
periods ended September 30, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Benefit in lieu of (provision for)
federal income taxes:
Current $(136,000) $ 169,000 $ (679,000) $ 1,796,000
Deferred (505,000) 140,000 (320,000) (292,000)
Valuation allowance 641,000 (309,000) 1,844,000 (1,504,000)
--------- --------- ---------- -----------
$ - $ - $ 845,000 $ -
========= ========= ========== ===========
</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 federal
income taxes of $494,000 during the nine month period ended September 30, 1997;
no federal taxes were paid during the nine month period ended September 30,
1996. HCT paid no state income taxes during either of the nine month periods
ended September 30, 1997 or 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 $14,600,000, which do not begin to expire until the year 2010.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", requires that the tax benefit of such NOL's, together with the tax
benefit of deferred tax assets resulting from temporary differences, be recorded
as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such deferred tax assets is more likely than
not, a valuation allowance should be recorded. Based on the taxable income
earned by HCT during the first three quarters of 1997 and the expectation of
future taxable income, management believes that it is more likely than not that
at least a portion of the NOL's and deferred tax assets will be utilized.
Accordingly, a valuation allowance has been established which has resulted in
the recording of net deferred tax assets of $2,375,000 and $1,037,000 at
September 30, 1997 and December 31, 1996, respectively.
41
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The ultimate recognition of the current amount of deferred tax assets is
dependent on HCT's ability to generate approximately $7,000,000 of taxable
income for federal income tax purposes prior to the expiration dates of the
NOL's and the reversal of other temporary differences.
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>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,965,000 $ 6,138,000
Alternative minimum tax credit
carryforward 494,000 -
Allowance for doubtful accounts 291,000 211,000
Other liabilities and accruals 1,064,000 809,000
----------- -----------
Total deferred tax assets 6,814,000 7,158,000
Deferred tax liabilities:
Depreciation and amortization (1,830,000) (1,668,000)
----------- -----------
Net deferred tax asset 4,984,000 5,490,000
Valuation allowance (2,609,000) (4,453,000)
----------- -----------
$ 2,375,000 $ 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>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Deferred income taxes $1,847,000 $953,000
Other noncurrent assets 528,000 84,000
</TABLE>
42
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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 during each of the three month periods ended September 30,
1997 and 1996 and $900,000 during each of the nine month periods ended September
30, 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 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 $162,000 and $97,000, respectively,
for the three month periods ended September 30, 1997 and 1996 and $406,000 and
$409,000, respectively, for the nine month periods ended September 30, 1997 and
1996. At September 30, 1997 and December 31, 1996, HCT had payables of $48,000
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 September 30, 1997 and 1996, fees charged to HCT by
GBHC totaled $82,000 and $203,000, respectively. Such charges amounted to
$422,000 and $490,000, respectively, during the nine month periods ended
September 30, 1997 and 1996. At September 30, 1997 and December 31, 1996, HCT
had payables of $52,000 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 September
30, 1997 and 1996, such charges amounted to $116,000 and $146,000, respectively;
for the nine month periods ended September 30, 1997 and 1996, such charges
amounted to $331,000 and $397,000, respectively. At September 30, 1997 and
December 31, 1996, HCT had payables of $36,000 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,
43
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 September 30, 1997 and
1996, HCT expensed $1,047,000 and $879,000, respectively, in connection with the
ground lease. Such expense totaled $3,015,000 and $2,611,000, respectively,
during the nine month periods ended September 30, 1997 and 1996.
CREDIT FACILITY
- ---------------
HCT has a bank credit facility in the amount of $1,000,000 available through
August 15, 1998. No borrowings were outstanding under the credit facility at
either September 30, 1997 or 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.
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
44
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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. Accumulated amortization of such land rights
amounted to $940,000 and $787,000, respectively, at September 30, 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.
45
<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.
46
<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 three and nine month periods ended September 30, 1996, however,
the operations of GBCC are included in the consolidated results of operations of
HCC. The following tables set forth the pro forma loss before income taxes for
the three and nine month periods ended September 30, 1996 of HCC and its
subsidiaries, exclusive of GBCC and its subsidiaries (the "HCC Group"), on a
basis comparable to the like periods ended September 30, 1997. Except for 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 SEPTEMBER 30, 1996
THREE MONTHS ------------------------------------------------------
ENDED HCC GBCC AND ADJUSTMENTS/ FORM 10-Q
SEPTEMBER 30 1997 GROUP SUBSIDIARIES ELIMINATIONS PRESENTATION
------------------ -------- ------------ ------------ ------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Casino $65,605 $58,904 $65,820 $ - $124,724
Rooms 2,725 1,544 3,817 - 5,361
Food and beverage 7,501 6,441 9,532 - 15,973
Other 911 1,686 4,690 (2,888) 3,488
------- ------- ------- ------- --------
76,742 68,575 83,859 (2,888) 149,546
Less - promotional allowances (6,903) (5,840) (7,462) - (13,302)
------- ------- ------- ------- --------
Net revenues 69,839 62,735 76,397 (2,888) 136,244
------- ------- ------- ------- --------
Expenses:
Casino 44,647 42,737 56,265 - 99,002
Rooms 452 465 1,043 - 1,508
Food and beverage 2,279 2,449 3,605 - 6,054
Other 858 884 1,741 - 2,625
General and administrative 4,261 4,774 4,532 (240) 9,066
Management and consulting fees 300 2,639 - (2,639) -
Depreciation and amortization 4,778 4,981 5,189 (9) 10,161
Development 298 179 - - 179
------- ------- ------- ------- --------
Total expenses 57,873 59,108 72,375 (2,888) 128,595
------- ------- ------- ------- --------
Income from operations 11,966 3,627 4,022 - 7,649
Interest expense, net (7,100) (6,391) (9,611) 2,163 (13,839)
Gain (loss) on disposal of assets - (10) (625) - (635)
------- ------- ------- ------- --------
Income (loss) before income taxes
and other item $ 4,866 $(2,774) $(6,214) $ 2,163 $ (6,825)
======= ======= ======= ======= ========
</TABLE>
Net revenues of the HCC Group for the three month period ended September 30,
1997 were $69.8 million, an 11.3% increase from the $62.7 million during the
same period of 1996. The increase includes an increase in net revenues at the
Aurora Casino of $2.4 million and an increase in net revenues at the Tunica
Casino of $4.9 million.
47
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Operating expenses decreased by $1.2 million to $57.9 million during the
three month period ended September 30, 1997 from $59.1 million during the same
period of 1996. Consequently, overall income from operations for the HCC Group
increased by $8.3 million (229.9%) during the third quarter of 1997 compared to
the same period of 1996. The third quarter 1997 results include the operations
of Pratt Management, L.P. ("PML"), the limited partnership which holds the
management contract on the Aurora Casino. HCC acquired the general partnership
interest in PML as of April 1, 1997. PML's income from operations amounted to
$2.2 million during the third quarter of 1997. Income from operations after
management fees at the Aurora Casino increased by $3 million to $7.8 million
during the three month period ended September 30, 1997 compared with the same
period of 1996 despite increased competition in its market. Income from
operations after consulting fees at the Tunica Casino increased by $2.8 million
to $4.1 million primarily attributable to the opening of its new hotel tower.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
NINE MONTHS -----------------------------------------------------
ENDED HCC GBCC AND ADJUSTMENTS/ FORM 10-Q
SEPTEMBER 30, 1997 GROUP SUBSIDIARIES ELIMINATIONS PRESENTATION
------------------- --------- ------------- ------------ ------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Casino $191,355 $185,874 $188,735 $ - $374,609
Rooms 7,453 3,204 11,107 - 14,311
Food and beverage 21,223 19,175 27,693 - 46,868
Other 2,513 4,682 14,253 (8,455) 10,480
-------- -------- -------- ------- --------
222,544 212,935 241,788 (8,455) 446,268
Less - promotional allowances (18,934) (17,032) (21,616) - (38,648)
-------- -------- -------- ------- --------
Net revenues 203,610 195,903 220,172 (8,455) 407,620
-------- -------- -------- ------- --------
Expenses:
Casino 129,628 132,651 169,243 - 301,894
Rooms 1,371 1,071 3,644 - 4,715
Food and beverage 6,688 6,047 9,749 - 15,796
Other 2,402 1,609 3,773 - 5,382
General and administrative 12,581 14,061 14,789 (720) 28,130
Management and consulting fees 3,627 7,710 - (7,710) -
Depreciation and amortization 14,638 16,034 15,790 (27) 31,797
Development 1,193 721 - - 721
-------- -------- -------- ------- --------
Total expenses 172,128 179,904 216,988 (8,457) 388,435
-------- -------- -------- ------- --------
Income from operations 31,482 15,999 3,184 2 19,185
Interest expense, net (21,473) (19,419) (28,248) 6,335 (41,332)
Gain (loss) on disposal of assets 411 (46) (612) - (658)
-------- -------- -------- ------- --------
Income (loss) before income taxes
and other item $ 10,420 $ (3,466) $(25,676) $ 6,337 $(22,805)
======== ======== ======== ======= ========
</TABLE>
Net revenues of the HCC Group for the nine month period ended September 30,
1997 were $203.6 million, a 3.9% increase from the $195.9 million during the
same period of 1996. The increase
48
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
includes a decrease in net revenues at the Aurora Casino of $5.1 million more
than offset by an increase in net revenues at the Tunica Casino of $13.1
million.
Operating expenses decreased by $7.8 million to $172.1 million during the
nine month period ended September 30, 1997 from $179.9 million during the same
period of 1996. Consequently, overall income from operations for the HCC Group
(including $3.3 million generated by PML) increased by $15.5 million (96.8%)
during the first three quarters of 1997 compared to the same period of 1996.
Income from operations after management fees at the Aurora Casino increased by
$1.7 million during the nine month period ended September 30, 1997 compared with
1996. Income from operations after consulting fees at the Tunica Casino
increased by $9.7 million to $11.9 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, amounted to $10.4 million and $29.8 million, respectively, for the three
and nine month periods ended September 30, 1997 compared to $7.1 million and
$28.1 million, respectively, during the 1996 periods. Such increases have
resulted despite increased competition from the opening in northern Indiana of
three riverboat gaming operations during June 1996 and a fourth operation in
April 1997 which more than doubled gaming capacity in the Chicago area. The new
facilities have added approximately 7,600 gaming positions to the Chicago area;
the existing Illinois riverboats in the Chicago area have only 5,800 gaming
positions. The Chicago area riverboats in general, and the Aurora Casino in
particular, have continued to adjust and respond to this increased competition
as demonstrated by the Aurora Casino's increase in net revenue during the third
quarter of 1997 compared to the same period in 1996. The third quarter 1996
period was also negatively impacted by severe local flooding in July 1996 which
caused the cancellation of several cruises and, as a result of extensive damage
in the surrounding area, reduced casino volume during the remainder of the third
quarter.
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating data
for the Aurora Casino's operations for the three and nine month periods ended
September 30, 1997 and 1996.
49
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------------
1997 1996 1997 1996
------------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 11,795,000 $ 11,752,000 $ 35,762,000 $ 39,395,000
Slot machines 27,721,000 25,857,000 79,824,000 81,948,000
Poker revenues 583,000 - 749,000 -
------------ ------------ -------------- --------------
Total $ 40,099,000 $ 37,609,000 $ 116,335,000 $ 121,343,000
============ ============ ============== ==============
TABLE GAMES:
Gross wagering (drop) (1) $ 68,041,000 $ 71,976,000 $ 203,362,000 $ 232,510,000
Hold percentage (2) 17.3% 16.3% 17.6% 16.9%
SLOT MACHINES:
Gross wagering (handle) (1) $469,040,000 $458,688,000 $1,405,199,000 $1,470,898,000
Hold percentage (2) 5.9% 5.6% 5.7% 5.6%
- -----------------------
</TABLE>
(1) Gross wagering consists of the total value of chips purchased for table
games ("drop") and coins wagered in slot machines ("handle").
(2) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
Total gross wagering at the Aurora Casino as measured by table drop and slot
machine handle increased $6.4 million (1.2%) during the third quarter of 1997
compared to the third quarter of 1996, but decreased by $94.8 million (5.6%)
during the nine month period ended September 30, 1997 from the comparable 1996
period. The third quarter increase reflects the Aurora Casino's adjustment to
the increased competition (the comparable 1996 period includes operations
subsequent to the opening of three of the four new Indiana riverboat operations)
as well as the impact of local flooding in 1996. The nine month decrease in
casino wagering continues to reflect the significance of the additional gaming
competition in the Chicago market area from the Indiana gaming operations.
However, the Illinois-based 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. The Aurora Casino's year to date
decrease in gross wagering compares favorably with the decrease in gross
wagering for the two Joliet, Illinois riverboat operators which, based on
information published by the Illinois Gaming Board, suffered a combined decrease
in gross wagering of 20.4% during the nine month period ended September 30, 1997
compared to the same period in 1996. Accordingly, the Aurora Casino's location
and resulting customer base west of Chicago together with the success of its
facility improvements program, including the completion of a new 500-space
parking garage facility during September 1996, have helped maintain patron
volume.
50
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
REVENUES
Casino revenues increased $2.5 million (6.6%) during the third quarter, but
decreased $5 million (4.1%) during the nine month period ended September 30,
1997 compared to the same periods of 1996. Table game revenues increased
slightly (0.4%) during the third quarter, but decreased $3.6 million (9.2%)
during the first nine months of 1997 compared to the 1996 periods as decreases
in drop of 5.5% and 12.5%, respectively, were partially offset by increases in
the table game hold percentage. The 2.3% increase and 4.5% decrease in slot
machine handle during the third quarter and first nine months of 1997,
respectively, were also impacted by increases in the slot hold percentage,
resulting in a three month slot machine revenue increase of $1.9 million (7.2%)
and a nine month slot machine revenue decrease of $2.1 million (2.6%),
respectively, compared to the same periods of 1996. Casino revenues were also
impacted by the introduction of poker during the second quarter of 1997 which
generated revenues amounting to $583,000 and $749,000, respectively, for the
three and nine month periods ended September 30, 1997.
Food and beverage revenues at the Aurora Casino did not change significantly
during the three or nine month periods ended September 30, 1997 compared to the
same periods of 1996. Other revenues decreased by $658,000 (53.5%) and $1.9
million (57.2%), respectively, during the three and nine month periods ended
September 30, 1997 compared to the 1996 periods 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 61% and 60.4%, respectively, during the three and nine month
periods ended September 30, 1997 compared to 63.5% and 65.3%, respectively,
during the like periods of 1996. The decreases from the prior year periods
reflect decreases in promotional activity with respect to parking as noted
previously.
DEPARTMENTAL EXPENSES
Casino expenses did not change significantly during the third quarter, but
decreased by $5.9 million (7.2%) during the nine month period ended September
30, 1997 compared to the 1996 periods. In spite of the 6.6% third quarter
increase in casino revenues, casino expenses remained constant reflecting
management's efforts to control personnel costs and improve profitability. The
nine month decrease reflects the year to date decrease in casino revenues
together with decreased promotional activities and reduced staffing levels.
Food and beverage expenses decreased $371,000 (24.2%) during the third
quarter of 1997 reducing the year to date increase in such expenses to $245,000
(7.4%). Reduced allocations to the casino department during the first half of
1997 began to increase in the third quarter as revenues rebounded. Other
expenses did not change significantly during the third quarter of 1997 and
increased $782,000 during the first nine months 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.
51
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
TUNICA CASINO
GENERAL
Income from operations at the Tunica Casino, adjusted to exclude consulting
fees payable to a subsidiary of GBCC, amounted to $4.4 million and $12.8
million, respectively, for the three and nine month periods ended September 30,
1997 compared to $1.6 million and $3.1 million during the same periods of 1996.
The increases are 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 owns
two casinos in the cluster of gaming facilities where the Tunica Casino is
located, has closed its smaller facility while continuing its efforts to sell
the property. A significant number of new hotel rooms are also currently under
construction in the Tunica market.
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating data
relating to the operations of the Tunica facility for the three and nine month
periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------------
1997 1996 1997 1996
------------- ------------- ------------------ --------------
<S> <C> <C> <C> <C>
CASINO REVENUES:
Table games $ 3,145,000 $ 4,082,000 $ 11,561,000 $ 12,013,000
Slot machines 22,066,000 16,946,000 62,644,000 51,706,000
Poker revenues 295,000 267,000 815,000 812,000
------------ ------------ -------------- ------------
Total $ 25,506,000 $ 21,295,000 $ 75,020,000 $ 64,531,000
============ ============ ============== ============
TABLE GAMES:
Gross wagering (drop) (1) $ 20,285,000 $ 19,279,000 $ 59,754,000 $ 61,709,000
Hold percentage (2) 15.5% 21.2% 19.3% 19.5%
SLOT MACHINES:
Gross wagering (handle) (1) $426,450,000 $312,587,000 $1,217,502,000 $984,715,000
Hold percentage (2) 5.2% 5.4% 5.1% 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 $114.9 million (34.6%) and $230.8 million
(22.1%), respectively, during the three and nine month periods ended September
30, 1997 compared to the same periods in 1996. The additional patron volume is
directly attributable to the hotel expansion completed in September 1996. Slot
machine handle
52
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
during the third quarter and first nine months of 1997 increased by $113.9
million (36.4%) and $232.8 million (23.6%), respectively. Table game drop showed
an increase of $1 million (5.2%) during the third quarter of 1997 reversing a
trend of lower table game volume primarily due to promotional activities
directed toward the table games patron.
REVENUES
Casino revenues increased $4.2 million (19.8%) and $10.5 million (16.3%),
respectively, during the three and nine month periods ended September 30, 1997
compared to the 1996 periods. Despite the increase in table game drop, table
game revenues decreased 23% during the third quarter of 1997 due to a
significant decline in the hold percentage for that period compared to the 1996
period. Slot machine revenue growth of 30.2% and 21.2% for the three and nine
month periods ended September 30, 1997, respectively, reflects the significant
increase in slot machine gross wagering partially offset by slight decreases in
the slot machine hold percentages during the 1997 periods compared to 1996.
Rooms revenue increased $1.2 million (76.5%) and $4.2 million (132.6%),
respectively, during the three and nine month periods ended September 30, 1997
compared to the same periods in 1996. These increases result from the opening
of the Tunica Casino's new 352-room hotel tower during September 1996. Hotel
occupancy rates have decreased slightly as a result of the additional room
capacity, declining from nearly 100% in both the third quarter and first three
quarters of 1996 to approximately 98% and 94%, respectively, during the three
and nine month periods ended September 30, 1997. Food and beverage revenues
increased $905,000 (30.6%) and $1.9 million (21.6%), respectively, during the
third quarter and first nine months of 1997 compared to the same periods in
1996. These increases are principally the result of additional patron volume,
increased marketing efforts, and the opening of a new casual dining outlet.
Other revenues increased by 24.1% and 6.8%, respectively, during the 1997
periods compared to 1996 due to increased patron volume with respect to such
ancillary services as telephones, cable television and vending machines.
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 $1.5 million and $3.6 million
during the 1997 periods, such allowances, as a percentage of rooms, food and
beverage and other revenues, increased slightly to 62.7% from 59.8% during the
three month period ended September 30, 1997 compared to 1996, and decreased
slightly to 61.4% from 62.8% during the first three quarters of 1997 compared to
the same period of 1996. The dollar increases in promotional allowances during
both the three and nine month periods are largely attributable to the increased
availability of rooms for promotional activities. The third quarter percentage
increase is the result of higher complimentary food and beverage costs due to
increased marketing efforts. The nine month overall percentage decrease
demonstrates the success of such marketing efforts in generating additional
revenues.
DEPARTMENTAL EXPENSES
Casino expenses increased $2.3 million (14.4%) and $2.9 million (5.9%)
during the three and nine month periods ended September 30, 1997 compared to the
same periods of 1996 due to increased patron volume.
53
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Rooms expense decreased slightly during the third quarter of 1997, but
showed an increase of $300,000 (28%) during the nine month period ended
September 30, 1997 compared to the same periods of 1996. Increased patron
volume resulting from the Tunica Casino's new hotel tower was offset during the
third quarter by increased promotional activity, the cost of which is allocated
to the casino department.
Food and beverage expense increased $201,000 (21.9%) and $396,000 (14.5%),
respectively, during the third quarter and first nine months of 1997 compared to
the same periods in 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 $65,000
(20.1%) and $116,000 (12.1%), respectively, during the 1997 periods compared to
the prior year due to increased costs associated with merchandise sales and
lounge 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
- ---------------------
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the HCC Group decreased by $513,000
(10.7%) and $1.5 million (10.5%), respectively, during the third quarter and
first nine months of 1997 compared to the same periods in 1996. Such expenses
at the Aurora Casino (net of management fees) decreased by 10.2% and 10.4%,
respectively, for the three and nine month periods ended September 30, 1997 from
the prior year periods as a result of management's efforts to control costs.
The Tunica Casino achieved cost reductions in this area of 3.1% and 1.5% (net of
consulting fees) for the three and nine month periods ended September 30, 1997
compared to the prior year as a result of management's cost containment efforts.
The remaining corporate general and administrative expense decreases of 14.5%
and 15.8% for the three and nine month periods, respectively, result from
reductions in corporate overhead costs, primarily in travel costs and
professional fees.
MANAGEMENT AND CONSULTING FEES
The decrease in management and consulting fees during the 1997 periods is
primarily attributable to the acquisition by HCC of the general partnership
interest in PML. PML is now included in the consolidated results of operations
of HCC; consequently, management fees earned from the Aurora Casino subsequent
to April 1, 1997 have been eliminated in consolidation.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $203,000 (4.1%) and $1.4
million (8.7%), respectively, during the three and nine month periods ended
September 30, 1997 compared to the 1996 periods. 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.
54
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 $119,000 (66.5%) and $472,000 (65.5%),
respectively, during the three and nine month periods ended September 30, 1997
compared to the 1996 periods primarily as a result of costs incurred with
respect to HCC's efforts in obtaining a gaming site in Louisiana. In October
1997, HCC entered into a preliminary agreement with two partners to develop a
hotel and casino complex on the Red River in Shreveport, Louisiana subject to
approval of the Louisiana Gaming Control Board.
INTEREST
Interest income decreased $106,000 (18.4%) and $574,000 (30.7%),
respectively, for the three and nine month periods ended September 30, 1997
compared to the same periods of 1996. The decreases result from interest earned
during 1996 on cash restricted for construction projects; such cash was spent on
construction during 1996 and is no longer available for investment purposes.
Interest expense increased $603,000 (8.7%) and $1.5 million (7.0%),
respectively, during the three and nine month periods ended September 30, 1997
compared to the prior year periods 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 and to the capitalization of
interest at the Tunica Casino with respect to construction of its new hotel
tower during the 1996 periods.
GAIN (LOSS) ON DISPOSAL OF ASSETS
The 1997 gain 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 $6 million, none of which begin to expire until
the year 2010. Additionally, HCC and its subsidiaries have various tax credits
available totaling approximately $311,000, 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 $3.8 million and $6.5 million as of
September 30, 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 net deferred tax assets will be dependent on HCC and its subsidiaries'
ability to generate approximately $11 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.
55
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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
approximate 80% ownership of GBCC. GBCC's principal sources of liquidity and
capital resources were 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 $22.2 million
of cash flow from operations during the first nine months of 1997 after
deducting the payment of $7 million of management fees. The Tunica Casino
provided $9.6 million of cash from operations during the first three quarters of
1997 after deducting the payment of $900,000 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 nine
months of 1997 included costs to pursue development opportunities ($1.2 million)
and corporate overhead costs ($5.2 million).
56
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
During the first nine months of 1997, cash flow from operations together
with proceeds from the sale of assets were used by HCC to fund capital
expenditures of $3.5 million, to make a $2 million contribution toward
construction of a golf course to benefit the Tunica Casino, to repay third party
indebtedness and make payments under capital lease obligations of $5 million and
$1.6 million, respectively, and to pay distributions amounting to $2.9 million
to GBCC as limited partner in PML.
FINANCING ACTIVITIES
During October 1995, HCC completed the refinancing of certain outstanding
indebtedness through a public offering of $210 million of 12 3/4% Senior Secured
Notes due November 1, 2003, discounted to yield 13 3/4% per annum (the "HCC
Refinancing"). In addition to refinancing existing debt, proceeds from the HCC
Refinancing were used to 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.
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 September 30, 1997, HCT has a $1 million bank credit facility available
through August 15, 1998 on which no borrowings were outstanding. Borrowings on
the line of credit accrue interest at the rate of prime plus 1 1/2% per annum.
57
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Effective as of April 1, 1997, HCC acquired from PPI Corporation, 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 PPI Corporation. Annual
principal and interest payments by HCC on the $3.8 million note approximate the
general partner's share of partnership distributions now being made to HCC.
As of September 30, 1997, HCC's scheduled maturities of long-term debt and
payments under capital leases during the remainder of 1997 are approximately
$3.5 million and $983,000, respectively.
CAPITAL EXPENDITURES AND OTHER INVESTING ACTIVITIES
Capital expenditures at the Aurora Casino during the first three quarters
of 1997 were $1.2 million; management anticipates spending $1.8 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 three quarters
of 1997 amounted to $2.3 million; management anticipates spending $420,000
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 February 1998 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 including the
aforementioned Shreveport, Louisiana joint venture project. As presently
contemplated, HCC would contribute its proportionate share of approximately
$37.5 million as an equity investment in the venture with the remaining
construction and preopening costs (estimated at $100 million) to come from non-
recourse project financing. HCC intends to finance any future ventures with
cash flow from operations, together with third party financing, including non-
recourse project financing.
58
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
59
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrants did not file any reports on Form 8-K during the quarter
ended September 30, 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: November 12, 1997 By: /s/ John C. Hull
------------------- ---------------------------
John C. Hull
Corporate Controller and
Principal Accounting Officer
HWCC - TUNICA, INC.
Date: November 12, 1997 By: /s/ John C. Hull
------------------- ---------------------------
John C. Hull
Principal Accounting Officer
60
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HOLLYWOOD CASINO CORPORATION AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<NAME> HOLLYWOOD CASINO CORPORATION
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 44,049 44,049
<SECURITIES> 0 0
<RECEIVABLES> 4,476 4,476
<ALLOWANCES> 1,843 1,843
<INVENTORY> 1,377 1,377
<CURRENT-ASSETS> 60,084 60,084
<PP&E> 236,137 236,137
<DEPRECIATION> 62,581 62,581
<TOTAL-ASSETS> 305,632 305,632
<CURRENT-LIABILITIES> 39,184 39,184
<BONDS> 221,710 221,710
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 37,155 37,155
<TOTAL-LIABILITY-AND-EQUITY> 305,632 305,632
<SALES> 0 0
<TOTAL-REVENUES> 69,839 203,610
<CGS> 0 0
<TOTAL-COSTS> 48,034 139,552
<OTHER-EXPENSES> 11,611 34,383
<LOSS-PROVISION> 202 537
<INTEREST-EXPENSE> 7,100 21,473
<INCOME-PRETAX> 2,892 7,665
<INCOME-TAX> 1,191 3,280
<INCOME-CONTINUING> 1,701 4,385
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> 1,701 4,385
<EPS-PRIMARY> 0.07 0.18
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HWCC - TUNICA, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000927801
<NAME> HWCC - TUNICA INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
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<SECURITIES> 0 0
<RECEIVABLES> 2,088 2,088
<ALLOWANCES> 857 857
<INVENTORY> 601 601
<CURRENT-ASSETS> 17,801 17,801
<PP&E> 117,323 117,323
<DEPRECIATION> 29,771 29,771
<TOTAL-ASSETS> 117,664 117,664
<CURRENT-LIABILITIES> 8,927 8,927
<BONDS> 84,873 84,873
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0 0
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<TOTAL-LIABILITY-AND-EQUITY> 117,664 117,664
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<TOTAL-REVENUES> 28,084 82,417
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<TOTAL-COSTS> 19,911 57,901
<OTHER-EXPENSES> 3,922 12,233
<LOSS-PROVISION> 142 382
<INTEREST-EXPENSE> 2,667 8,092
<INCOME-PRETAX> 1,442 3,809
<INCOME-TAX> 0 (845)
<INCOME-CONTINUING> 1,442 4,654
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,442 4,654
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